Introduction
1. Relevant of the study
It is generally accepted that international trade transactions naturally carry more
risks than domestic ones due to differences in practice, culture, business processes, laws
and regulations. It is, therefore, important for traders to ensure that goods are dispatched
and payment is made complying with the contract provisions. One effective solution for
traders dealing with these risks has been documentary credit (D/C) or letter of credit
(L/C). Despite of its complexity in compliance and high cost, L/C still enjoys popularity
due to its safety with banks’ participation. It has been described as “the life blood of
international commerce” (D’Arcy, Murray & Cleave 2000, p. 166) and the importance of
L/C in trade transactions is evidenced by its global acceptance, with an estimated usage
in excess of 1 trillion USD per annum (SITPRO Ltd, 2003).
For more than 70 years, the International Chamber of Commerce ICC has
formulated the so-called UCP-The Uniform Customs and Practice for Documentary
Credits. The first attempt to codify letter of credit practice started in 1929 when ICC
introduced its “Uniform Regulations and Commercial Documentary Credits”. Although
the failure to gain wide acceptance, these rules provided a foundation for further
developments. Then, in 1933, ICC issued “The Uniform Customs and Practice for
Commercial Documentary Credits” and this set of rules received formal acceptance in
more than 40 countries all over the world. It is, however, not until the issue of UCP in
1962, that global acceptance took place. Since then the rules has been regularly updated
in 1974, 1983 (UCP 400), 1993 (UCP 500) and now we have the sixth Revision-UCP 600
which came into effect in July 2007.
From the fact that the old revision-UCP 500 has reached a ten year cycle of
usage and during its lifetime, it was proved to be more and more outdated, overcomplicated and ambiguous which led to series of queries, commercial disputes,
unjustified discrepancies leading to documentary rejections. Indeed, under ICC’s
estimate, there is up to a 70% documentary non-compliance rate in letter of credit
transactions (ICC Thailand, 2002). The new 2007 Revision, therefore, should be made to
improve its certainty and clarity, reduce discrepancy problem and facilitate international
trade activities using L/C product.
2. Aims of the study
This study, “An analysis of key changes in UCP 600 compared to UCP 500
and Recommendations for better application”, aims to consider the differences from
UCP 500 to UCP 600. The research questions posed in this study are: “Where the rules
have been amended?” and “Which results in a potential changes in practice?”. Basing on
the findings, this study will draw recommendations for parties involved in L/C
transaction in applying the new revision UCP 600 before reaching the conclusion.
3. Research methodology
The thesis relies on relevant literature, associated rules, articles, available
statistics and employs method of comparison, analysis, arguments and synthesis. Data for
the study was collected from various sources including reference books, magazines,
articles, reports, new letters and the Internet.
4. Object and scope of the study
Objects of the thesis are the two recent versions: UCP 500_1993 Revision and
UCP 600 having commencement date of 1 July 2007. To have an in-depth understanding
and appropriate application, associated rules that may have impact on these two revisions
have been used as reference documents.
5. Structure of the study
To achieve the above objectives, the study is divided into 3 chapters
Chapter I: “Literature review”, provides an in-depth background that covers all
theoretical issues relevant to UCP set of rules and documentary letter of credit.
Chapter II: “Key changes under UCP 600 in comparison to UCP 500”, points out
structural changes as well as key changes in UCP 600 in comparison with UCP 500. An
evaluation of improvements and remaining problems is also discussed in this chapter.
Chapter III: “Recommendations for better UCP 600 application”, based on the
findings, the chapter will put an end to the study with recommendations for main parties
involved in letter of credit transaction to suggest the best way in applying the new UCP
600.
Chapter I
Literature review
1.1 What is UCP?
The Uniform Customs and Practice for Documentary Credits (UCP) is a set of rules
on the issuance and use of letters of credit. The UCP is utilised by bankers and
commercial parties in more than 175 countries. About 11-15% of international trade
utilises letters of credit, totalling over a trillion dollars (US) each year (SITPRO Ltd,
2003).
Historically, the commercial parties,
particularly banks, have developed the
techniques and methods for handling
letters of credit in international trade
finance.
This
practice
has
been
standardized by the International Chamber of Commerce - ICC by publishing the UCP in
1933 and subsequently updating it throughout the years. Today, they have achieved
almost universal acceptance by practitioners in the countries worldwide.
It is important to note that The Uniforms and Practice for Documentary Credits
(UCP) is not law. It is private set of rules, which affects all the stakeholders involved in
letter of credit transactions if they choose to apply it. Stakeholders here refer to banks and
other institutions that issue, confirm or otherwise process L/Cs; buyers who cause L/Cs
to be issued; seller who look to L/Cs for payment; and service providers such as
forwarders, carriers, customs brokers who provide or use the documents that the credits
stipulate. Therefore, UCP is not a legal regime automatically applicable to all letters of
credit. It is just a voluntary self-regulatory rule system standardized by ICC when it is
expressly incorporated into the letter of credit.
Beside UCP, ICC Banking Commission also provides some other supplementary
publications specifying in more details the relationship between the banks themselves, i.e.
the rights and obligations of Advising, Confirming, Issuing and Nominated banks. The
latest up-to-date ones are ISBP 681 (International Standard banking Practice), eUCP 1.1
2007 (Supplementary to the Uniform Customs and Practices for Documentary Credits,
for Electronic Presentation), “Commentary on UCP 600”, ICC Banking Opinions and
many guide books for Documentary Operation as well.
1.1.1 The born of UCP 500
The considerable increase in litigation
under documentary credits and the fact that up to
50% of documents are rejected when first
presented to Banks led to ICC’s authorization of
the revision in November 1989 of UCP
Publication
No.
400
published
in
1983.
International judicial decisions and technological
innovations
were
considered
origins
and
foundation for the content of new revision. The
stated aim of this revision was to address
developments in the banking, transport and
insurance industries. It also sought to improve
the drafting of the UCP 400 in order to facilitate
consistent application and interpretation of UCP rules. A Working Group (WG) including
international banking experts, legal professors and banking lawyers was formed to draft
the proposed revision. After 4 years, with the tireless effort of WB, the final draft –UCP
500, 1993 Revision – was reached and came into effect since January 1st 1994.
In comparison with the earlier revision UCP 400, UCP 500 is more concise and
updated with 49 articles. It was divided into seven sections, which were lettered from A
to G and headed in turn: General Provisions and Definitions; Form and Notification of
Credits; Liabilities and Responsibilities; Documents; Miscellaneous Provisions,
Transferable Credit and finally Assignment of Proceeds.
After ten year of usage, UCP 500 has revealed lots of weaknesses due to the
advance in fields of global logistics and technologies which needed to be incorporated in
L/Cs. In addition, there was a high proportion of documentary rejection under UCP 500.
Seventy percent documentary discrepancy in letter of credit transaction is the statistic
collected by ICC Thailand in 2002. This fact together with the increasing demand in
international trade transaction has forced ICC to start a new revision process.
1.1.2. The born of UCP 600
The latest revision process started in 2003. A drafting group comprising nine people
together with a consulting group with forty-one members from more than 25 countries
were formed to develop proposed revisions for the ICC national committees worldwide.
In fact, it cannot be denied that no draft will satisfy everyone, thus the drafting committee
gave everyone an opportunity to express their own view by making comments.
After all the suggestions had
been considered, no matter how they
are minor or small, decision on the
new draft is taken by a voting system
and the final text of UCP 600 was
reached. The new revision replacing
the UCP 600 was approved by the
Banking Commission of the ICC at its
meeting in Paris on 25 October 2006
and had a commencement date of 1
July 2007. It is the fruit of more than
three years of work by the ICC's
Commission on Banking Technique
and Practice.
The main objective of the revision was to reduce documentary rejection by ensuring
transparence and clarity, limit potential disputes, seek to eliminate poor presentation by
beneficiaries and provide a clearer understanding of principles in UCP.
1.2 What is Documentary Credit?
Documentary credit (D/C) or Letters of Credit (L/C) has been a milestone of
international trade since the early 1900s. They continue to play a critical role in world
trade today. For any company entering the international market, letters of credit are a
payment mechanism, which help eliminate certain risks.
A letter of credit is a document issued mostly by a financial institution which
usually provides an irrevocable payment undertaking (it can also be revocable,
confirmed, unconfirmed, transferable or others e.g. back to back, revolving but is most
commonly irrevocable/confirmed) to a beneficiary against complying documents as
stated in the letter of credit. Letter of credit is abbreviated as an LC or L/C, and often is
referred to as a documentary credit, abbreviated as DC or D/C, documentary letter of
credit, or simply as credit (as in the UCP 500 and UCP 600). Once the beneficiary or a
presenting bank acting on its behalf, makes a presentation to the issuing bank or
confirming bank, if any, within the expiry date of the LC, comprising documents
complying with the terms and conditions of the LC, the applicable UCP and international
standard banking practice, the issuing bank or confirming bank, if any, is obliged to
honour irrespective of any instructions from the applicant to the contrary. In other words,
the obligation to honour (usually payment) is shifted from the applicant to the issuing
bank or confirming bank, if any. Non-banks can also issue letters of credit however
parties must balance potential risks.
Source: the free encyclopedia Wikipedia
Letter of credit is also defined by TD bank financial group as “a written instrument
issued by a bank at the request of its customers, the Importer (Buyer), whereby the bank
promises to pay the Exporter (Beneficiary) for goods or services provided that the
Exporter presents all documents called for, exactly as stipulated in the letter of credit, and
meet all other terms and conditions set out in the letter of credit. A letter of credit is also
commonly referred to as a Documentary Credit or Commercial Credit.”
In principle, letters of credit are commonly used to reduce credit risk to sellers in
both domestic and international sales arrangements. It is issued to substitute the bank's
credit worthiness for that of the customer. Basically, if you are an importer, you don't
want to send the money before you get the goods. On the contrary, the exporter does not
want to send the goods to you, unless they get their money. Therefore, an LC is a
statement of issuing bank, which tells that the buyer has the money, they gave the money
to issuing bank, once the goods arrive safely at the destination, and is confirmed to be
what it is supposed to be, this bank will give the money to the vendor. Usually, banks
play the role of the 3rd party since they are institutions recognized to be trustworthy for
this sort of thing, and they sometimes also obliged to convert the currency as well – one
of bank’s main functions. The bank will also charge a fee for the service and this is just
one of the ways banks make money in the field of international business.
However, traders should bear in mind that L/C is an independent agreement
separated from original sales contract. All parties in letter of credit transaction deal with
documents, not with goods which the documents refer. Thus, the Seller gets paid, not
after the Buyer has inspected the goods and approved them, but when the Seller presents
certain documents (typically a bill of lading evidencing shipment of the goods, an
insurance policy for the goods, commercial invoice, etc.) to his bank. The bank does not
verify that the documents presented are true, but only whether they “on their face” appear
to be consistent with each other and comply with the terms of the credit. After
examination, the bank will pay the Seller.
1.2.1. Classification
There are three basic ways to classify letters of credit including classification by
method of payment; by the manner in which the credit is issued and by other specific
features of the credit. Each type of credit has advantages and disadvantages for the buyer
and for the seller. Charges for each type will also vary. However, the more the banks
assume risk by guaranteeing payment, the more they will charge for providing the
service.
Classification by reference to method of payment
Letter of credit may be by “sight” payment, by “deferred” payment, by
“acceptance” or by “negotiation”. All the credits must clearly state whether they available
by sight payment, deferred payment, by acceptance or by negotiation.
A “sight” credit is one in which an issuing bank authorizes a seller of goods to
present documents for payment, without a bill of exchange or with a bill of exchange
drawn on it payable at sight, to the bank issuing the credit or its correspondent and
undertakes to pay the seller, or reimburse its correspondent upon the correspondent
paying the seller, against the documents presented.
A “deferred payment” credit or ussance credit follows the normal form as to
payment against documents, except that the paying bank is not called upon to pay until
some specific later date. The paying bank is, however, required to pass the documents to
its principal and may find itself under promise to pay in the future, having lost the
security of the documents. Moreover a confirming bank that makes payment to the
beneficiary before the deferred payment date without obtaining the authority of the
issuing bank does so as its peril. If , before the date for payment, it is proved that the
documents have been presented fraudulently the confirming bank cannot recover a
indemnity from the issuing bank and must pursue a claim against the beneficiary or
another fraudulent party.
An “acceptance” credit is one which a bank authorizes a seller of goods to draw a
bill of exchange on it or its correspondent in the country of the seller, and undertakes
either to the seller or an intermediary bank to accept and pay at maturity a bill drawn o it
or to pay a bill which has not been accepted by the bank on which it is drawn. It is
possible to stipulate in a credit that the issuing bank will pay a bill of exchange drawn on
the buyer in the event of non-acceptance by the buyer, but this is discouraged by the
UCP, which states that a credit should not be issued available by bills of exchange drawn
on the applicant (buyer).
A “negotiation” credit is, strictly speaking, one that authorizes the beneficiary to
draw on the issuing bank and to negotiate the draft with the intermediary bank advising
the credit or with his own or some other banks. The issuing bank’s obligation is to pay
without recourse to the drawer. The benefit of a negotiation credit is that the seller ca
discount the bills of exchange prior to the maturity date.
Classification by reference to the manner of which the credit is issued
Documentary letters of credit can be either Revocable or Irrevocable, although the
former is extremely rare. Irrevocable letters of credit can be Confirmed or Not
Confirmed.
Documentary Revocable credit may be modified or even canceled by the buyer
without the agreement of all the parties. Therefore, they are generally unacceptable to the
seller. The issuing bank gives a binding undertaking t the beneficiary provided all terms
and conditions are fulfilled. Under UCP 600 all letter of credit are irrevocable.
Documentary Irrevocable letter of credit is the most common form of credit used
in international trade. Irrevocable credits may not be modified or canceled by the buyer.
The buyer's issuing bank must follow through with payment to the seller so long as the
seller complies with the conditions listed in the letter of credit. Changes in the credit must
be approved by both the buyer and the seller. If the documentary letter of credit does not
mention whether it is revocable or irrevocable, it automatically defaults to irrevocable.
There are two forms of irrevocable credits: Unconfirmed credit (the
irrevocable credit not confirmed by the advising bank) and Confirmed credit (the
irrevocable confirmed credit).
In an unconfirmed credit, the buyer's bank issuing the credit is the only
party responsible for payment to the seller. The seller's advising bank pays only after
receiving payment from the issuing bank. The seller's advising bank merely acts on
behalf of the issuing bank and, therefore, incurs no risk.
In a confirmed credit, the advising bank adds its guarantee to pay the seller
to that of the buyer's issuing bank. Once the advising bank reviews and confirms that all
documentary requirements are met, it will pay the seller. The advising bank will then
look to the issuing bank for payment. Confirmed Irrevocable letters of credit are used
when trading in a high-risk area where war or social, political, or financial instability are
real threats. Also common when the seller is unfamiliar with the bank issuing the letter of
credit or when the seller needs to use the confirmed letter of credit to obtain financing its
bank to fill the order. A confirmed credit is more expensive because the bank has added
liability.
Classification by reference to other specific features of credit
Standby letter of Credit
This credit is a payment or performance guarantee used primarily in the United
States. They are often called non-performing letters of credit because they are only used
as a backup should the buyer fail to pay as agreed. Thus, a stand-by letter of credit allows
the customer to establish a link with the seller by showing that it can fulfill its payment
commitments. Standby letters of credit are commonly used to assure the refund of
advance payments; support the obligation of a successful-bidder to accept a contract and
to perform under the terms of the contract; back up bonds issued by insurance companies;
and stand behind a monetary obligation under a promissory note or another like
commitment (rental payments, etc.). The beneficiary to a standby letter of credit can cash
it on demand. Stand-by letters of credit are generally less complicated and involve far
less documentation requirements than irrevocable letters of credit. If the seller performs
his other obligation, there will be no need for the buyer to draw against the standby letter
of credit, which supports the obligation.
Back-to-Back letter of Credit
Back-to-back L/C is a type of L/C issued in case of intermediary trade. When one
L/C is issued as security to obtain the issuance of the second L/C covering the same
transaction, and when all terms and conditions and terms of both credits are identical,
excepts for amounts and dates in the second L/C which must be smaller and earlier, the
arrangement is defined as a back-to-back L/C. It is usually requested by middle persons
who do not have sufficient credit available at their banks to open their own L/Cs to the
ultimate suppliers. Under back-to-back L/C, the middleman will ask a bank to issue a
second L/C in favor of the ultimate suppliers, while using the L/C issued by the buyer as
collateral.
Figure 1:
Back-to-back letter of credit transaction
Many banks are reluctant to issue back-to-back letters of credit due to the level of
risk to which they are exposed, whereas a transferable credit will not expose them to risk
higher than that under the original credit.
Green clause L/C
A clause in a letter of credit enabling the seller to receive pre-shipment advances
against a collateral represented by, for example, warehouse receipts/warrants. It is
commonly used in the export of agricultural commodities, where the company may raise
funds to harvest new crops for export by pledging available stocks as collateral.
Red Clause letter of credit
Red Clause letters of Credit provide the seller with cash prior to shipment to finance
production of the goods. A red clause L/C using the term “red” is derived from the
traditional practice of writing the clause identifying this option in red ink. Upon
instruction from the buyer, the issuing bank authorizes the confirming bank to make a
cash advance to the beneficiary against the beneficiary's written guarantee that the
documents evidencing shipment will be presented in compliance with the credit terms. In
case the beneficiary fail to ship the goods or meet the credit requirements, the paying
bank looks to the issuing bank to obtain reimbursement of the amount of the advance plus
the interest charges on the advance. The issuing bank then charges the account of the
buyer--who may or may not have received the goods.
Transferable letter of credit
“Transferable’, ‘transmissible” and “assignable” convey the same meaning referring
to the same type of credit. This kind of L/C allows the seller to transfer all or part of the
proceeds of the original letter of credit to a second beneficiary, usually the ultimate
supplier of the goods. The letter of credit must clearly state that it is transferable. This is a
common financing tactic for middlemen and is common in East Asia.
Revolving letter of credit
With a Revolving letter of credit, the issuing bank restores the credit to its original
amount once it has been used or drawn down. Usually, these arrangements limit the
number of times the buyer may draw down its line over a predetermined period.
Revolving letter of credit can revolve in relation to time or value. If the credit is time
revolving, once utilized it is re-instated for further regular shipments until the credit is
fully drawn. If the credit revolves in relation to value, once utilized and paid the value
can be re-instated for further drawings.
Freely negotiable letter of credit
L/Cs which state “this credit is not restricted to any bank for payment” or such
similar words and do not indicate any particular bank who is authorized to pay, negotiate
or accept are unrestricted or open credit.
Restricted negotiable letter of credit
When any specific bank is authorized to pay, negotiate or accept, the credit is called
restricted or special credit.
1.2.2. The mechanics of letter of credit transaction
The mechanics of the letter of credit transaction can be quite complex and has been
standardized by a set of rules published by the International Chamber of Commerce
(ICC) under the Uniform Customs and Practice for Documentary Credits (UCP).
The basic letter of credit transaction has two sides: an import side (the buyer) and an
export side (the seller). Both sides ordinarily have a bank, which makes a total four
parties to the transaction. The bank on the importer or the buyer’s bank normally issues
the letter of credit, which obligates the bank to honour upon the receipt of the specified
documents. Letter of credit rules typically describe the importer as the applicant and the
applicant’s bank as the issuing bank or the issuer of the letter of credit. The fees differ
significantly from market to market and from customer to customer . Indeed, better
customers paying much less. Alternatively, the bank on the exporter or seller’s bank
plays a different role. The seller hopes to receive the funds offered by the letter of credit
as payment for shipment, and is thus identified as the “beneficiary” of the letter of credit.
Because the beneficiary and applicant ordinarily are in different countries, the beneficiary
often has its own bank oversea and then forwards the documents to seek payment from
the issuer when the seller ships goods. The beneficiary’s bank normally assumes one of
two roles: if it only ‘advises’ the beneficiary of the issuance of letter of credit, it just
processes the documents and has no direct liability on the letter of credit; besides, it
might “confirm” the letter of credit, in which case beneficiary’s bank directly obligates
itself on the letter of credit, pays the beneficiary directly, and then forwards the
documents to the issuer for reimbursement.
The following is the basic set of steps used in a letter of credit transaction. Specific
letter of credit transactions follow somewhat different procedures.
Step 1. An Importer {Buyer) and Exporter (Seller) agree on a purchase and sale of
goods where payments is made by letter of credit.
Step 2. The Importer completes an application requesting its bank (issuing bank) to
issue a L/C in favor of the Exporter provided that the Importer must have a line of credit
with the issuing bank in order to request that a letter of credit be issued.
Step 3. The issuing Bank issues the letter of credit and sends it to the Advising bank
by telecommunication or registered mail in accordance with the Importer’s instructions.
A request may be included for the Advising bank to add its confirmation. The Advising
Bank is typically located in the country where the Exporter carries on busiess and may be
the Exporter’s bank but does not have be.
Step 4: The Advising bank will verify the letter of credit for authenticity and send a
copy to the Exporter. Figure 2 illustrates the typical transaction
Figure 2:
Issuance of letter of credit
Step 5. The Exporter examines the letter of credit to ensures that it corresponds the
the terms and conditions in the purchase and sale agreement, documents stipulated in the
letter of credit can be produced and the terms and conditions of the letter of credit may be
fulfilled.
Step 6. If the Exporter is unable to comply with any terms and conditions of the L/C
or if the L/C differs from the purchase and sale agreement, the Exporter should notify the
Importer and request an amendment to the L/C.
Step 7. When all the parties agree to the amendment, they are incorporated into the
terms of the L/C and advised to the Exporter through the Advising bank. It is not
recommended that the Exporter does not make any shipments against the L/C until the
required amendment have been received.
Step 8: The Exporter arranges for shipment of the goods, prepares and/or obtain the
documents specified in the letter of credit and makes demand under the letter of credit by
presenting the documents within the stated period and before the expiry date to the
‘available with” bank. This may be the Advising/Confirming Bank. That bank check the
documents against the letter of credit and forwards them to the Issuing Bank. The
drawing is negotiated, paid or accepted as the case may be.
Step 9. The Issuing Bank examines the documents to ensure they comply with the
letter of credit terms and conditions. The issuing bank obtains payment from the Importer
for payment already to make the “available with” or the Confirming bank.
Step 10. Documents are delivered to the Importer to allow them to take possession
of the goods from the transport company. The trade cycle is complete as the Importer has
received its goods and the Exporter has obtained payment. Figure 3 will illustrate the
payment process.
Figure 3: Payment under a letter of credit
1.2.3. Parties involved in a letter of credit transaction
In the process of a letter of credit transaction, there are essentially five parties
involved: importer, exporter, importer’s banks, exporter’s banks and service providers. In
general, except for importer, exporter and service provider, there are nine functions
concerning letter of credit transaction, which banks can undertake. It does not mean that
each documentary credit transaction requires all those actions. It depends on requirements
of the sales agreement, relationship between importer and seller as well as relationship
between the two parties in commercial contract and their banks to choose or skip some
certain phases without affecting the principles of original sales arrangement.
Applicant
The party who applies to the opening (issuing) bank for the issuance of a letter of
credit. Normally, it is the buyer or importer.
Beneficiary
The party in whose favor the letter of credit has been established. The beneficiary is
the party who demands payment under the letter of credit.
Service providers
Service providers in letter of credit transaction include forwarders, carriers, customs
brokers who provide or use documents that credits stipulate.
Issuing bank (Opening Bank)
The bank issues the letter of credit on behalf of the applicant.
Confirming bank
A bank that at the request of the issuing bank, assures that drawings under the credit
will be honored (provided the terms and conditions of the credit have been met).
Advising bank
The party gives notification of the terms and conditions of a letter of credit to the
beneficiary (seller). The advising bank also takes reasonable care to check the apparent
authenticity of the letter of credit, which it advises.
Accepting bank
The bank named in a letter of credit on whom term drafts are drawn and who
indicates acceptance of the draft by dating and signing across its face, thereby incurring a
legal obligation to pay the amount of the draft at maturity.
Paying bank
The bank authorized in the letter of credit by the issuing bank to honor sight or
deferred payments under the terms specified in the credit. If this bank is the advising
bank, it has no obligation to honor documents; however, if this is a confirming bank, it is
obligated to pay against complying documents.
Drawee bank
The bank on which the drafts specified in the credit are drawn and from which
payment is expected.
Discounting bank
A bank, which discounts a draft for the beneficiary after it, has been accepted by an
accepting bank.
Negotiating bank
Bank, other than the issuing bank, which elects to "negotiate" (advance funds or
give value to the beneficiary) against presentation of complying documents.
Reimbursing bank
The bank authorized by the issuing bank to reimburse the drawee bank or other
banks submitting claims under the terms of the credit.
Presenting bank
The bank forwards the documents directly to the issuing bank to obtain settlement.
Transferring bank
A bank authorized by the issuing bank as specified in the credit that can transfer the
issuing bank's documentary credit from one beneficiary to another at the request of the
first beneficiary.
Chapter 2
Key Changes under UCP 600 compared
to UCP 500
2.1. Changes in Structure of UCP 600 compared to UCP
500
The new rules UCP 600 is more concise than its predecessors with 39 articles as
opposed to 49 articles in UCP 500. It is not divided into the same seven sections as the
UCP 500, which were lettered from A to G and headed in turn: General Provisions and
Definitions, Form and Notification of Credits, Liabilities and Responsibilities,
Documents, Miscellaneous Provisions, Transferable Credit and finally Assignment of
Proceeds.
Despite the fact that the UCP 600 does not expressly follow this allocation of
Articles by subject- master, it is still possible to divide those Articles up. The framework
of the UCP 600, which provides specific background on General Provisions and
Definitions, is stipulated in article 1-5. Article 6-13 specify the structure of a
documentary credit and obligations of parties under documentary credits including
issuance, advising, confirmation, amendments, availability and nomination. The next six
articles from Article 14 to 18 and article 28 look at two difference aspects including the
compliance of the documents and the definition of an original document. Requirements
of the UCP 600 regarding transport documents, standard for checking documents as well
as insurance provisions are itemized in articles 19-27. From Article 29-37, these nine
rules cover solutions for potential problems arisen during the process of the sales contract
implementation, which includes extension, tolerance, partial shipment, installments,
disclaimers, force majeure. The two remaining articles regulate the transferable credits
and assignment of proceeds.
2.1.1. UCP 500 articles not included in UCP 600
There are 5 articles of UCP 500 that have not covered in UCP 600. Article 8 and
part of Article 6 refer to revocable letters of credit. The limited usage of such instruments
in today’s letter of credit business led to the general viewpoint that there was no necessity
to remain in UCP 600. If an applicant or bank desire to use a revocable credit in the
future, they have two options: using the credit subject to UCP 600 and incorporate all the
conditions applicable to the revocability; or using the revocable credit subject to UCP
500 provided that all parties are in agreement to the usage of those rules.
Article 5 (Instruction to issue/ Amend Credits). This article is related to instructions
to issue and amend credits, which was seen as an article stated the obvious. Instructions
for the issuance of a credit and an amendment as well as the credit and the amendment
themselves must be surely complete and precise in order to make payment, acceptance or
negotiation. In addition, the absence of a specific rule in UCP 600 concerning the
instructions to issue and amend credits does not relieve Issuing banks from their duty of
care for the proper creation, completeness and content of their credit or any amendment
(if any).
Article 12 (Incomplete or Unclear Instructions) covered the issuance of preface
notification, by the Advising Bank, in the event a credit or an amendment was incomplete
or unclear in its terms. If a credit is received that is unworkable or incomplete, there is no
need for a rule to instruct Advising Bank that they should seek clarification or request a
complete message. Therefore, it is not necessary to provide a rule that the Issuing Bank
must give the appropriate information “without delay”. Similarly, the absence of a
specific rule in UCP 600 with regard to Incomplete and Unclear Instructions does not
relieve the Issuing Bank for their duty of care for the proper creation, completeness ad
content of their credit or any Amendment too.
Finally, Article 38 under the heading “Other Documents” was removed at a very
early stage of the revision process. The usage of this article’s content was considered
marginal because the basic for the issuance of any credit is that it will specify the type of
document that is required for the presentation and its content. If a condition such as a
verification of certification of weight is required, the the credit should specify the form
and documents in which such information is to present.
In addition, there are some content of 12 articles consisting of article 2, 6, 9, 10, 20,
22, 30, 31, 35, 36, 46, 47 that were moved or merged with other articles in UCP 600. The
rationale behind those changes will be explained further more in the following chapter
focusing on analyzing the changes in one-by-one articles.
2.1.2. New articles for UCP 600
There are 6 articles that are not found in UCP 500. They are Article 2 (Definitions),
Article 3 (Interpretations), Article 9 (Advising of Credits and Amendments), Article 12
(Nomination), Article 15 (Complying Presentation) and Article 17 (original documents
and Copies). Each of these will be covered right after in the subsequent section.
2.2. key Changes under UCp 600 compared to UCP 500
2.2.1. Changes application method
The UCP 500 provided that it applied to all documentary credits where
“incorporated into the text of the credit”. Courts, however, would generally found that
this provision was not forceful enough and these rules would apply when expressly stated
or by implication. The UCP 600 more clearly states that it applies only “when the text of
the credit expressly indicates that it is subject to these rules”.
More significantly, with regard to modification and exclusion of its terms, UCP 500
only provided that its terms applied “unless otherwise expressly stipulated”. In contract,
the UCP 600 clearly stipulates that the rules applied “unless expressly modified or
excluded by the credit”. It opens to exporters and importers to modify or exclude the
provisions of UCP 600 expressly and thus they can even continue with the provisions of
UCP 500 if they choose. The application of UCP 600 give more contractual freedom and
autonomy to parties because if there is an express exclusion of UCP 600 and parties
include their own provisions, any conflict between the express provisions and UCP 600
will be resolved in favor of the former instead of UCP 600 rules.
2.2.2. Changes in Definitions and interpretations
The big difference between UCP 500 and UCP 600 is the precision of the language
in the new rules makes them easier to read and understand, especially for people whose
daily life is not concerned with L/C world. Article 2 (Definitions) and Article 3
(Interpretations) provide general background on series of expressions which are
considered the international language of the L/C world.
UCP 600 introduces in Article 2 the following new definitions: Advising Bank,
Applicant, Banking day, Beneficiary, Complying Presentation, Confirming Bank,
Honour, Issuing Bank, Negotiation, Nominated Bank, Presentation and Presenter which
are absent in UCP 500. Other definitions found in UCP 500 also moved to this Article
with several modifications making them more clearly and precise such as “Credit” and
“Confirmation”. UCP 600 defines credit in Article 2 as “any arrangement, however
named or described, that is irrevocable and thereby constitutes a definite undertaking of
the issuing bank to honour a complying presentation” This simple definition is an
improvement on the earlier definition and uses new term such as Honour and Complying
Presentation which are also defined in this Article.
“Honour” is considered a new word in the documentary credit banking language
that is borrowed from the US law. It is used to group together three types of payment
known to trade-finance namely “ to pay at sight if the credit is available by sight
payment”; or “ to incur a deferred payment undertaking and pay at maturity if the credit
is available by deferred payment”; or “to accept a Bill of exchange (draft) drawn by the
Beneficiary and paying at maturity if the credit is available by acceptance”. All these
actions are merged under one concept –“Honour”. Accordingly, instead of speaking of
paying at sight or at maturity or incurring a deferred payment or negotiation, now under
UCP 600 we would only speak of honour or negotiation. The term “Honour’ covers three
types of payment methods that are already in practice. In addition, definition of honour
helps us to distinguish a payment under negotiation credit from an honour.
The expression “Complying presentation’ is also a modification of what UCP 500
says “in compliance with the terms and conditions of the credit”. This alternative concept
not only means a presentation that is in accordance with the terms and conditions of the
credit but also is considered the applicable provisions of the rules and international
standard banking practice.
Among new definitions, the most remarkable one, which received lots of critical
attention, is “Negotiation”. From the definition of UCP 500 identifying “negotiation
means the giving of value for draft(s) and/or documents to the bank authorized to
negotiate”, different interpretations were given but overall consensus on the meaning of
“negotiation’ has not reached. A number of banks failed to understand the meaning of the
term in connection with the L/C transaction because the phrase “giving of value” may be
interpreted as either making immediate payment or undertaking an obligation to make
payment. The new UCP redefines “negotiations in Article 2 as “the purchase by the
nominated bank of draft (drawn on a bank other than the nominated bank) and/or
documents under a complying presentation, by advancing or agreeing to reimbursement
funds to the beneficiary on or before the banking day on which reimbursement is due to
the nominated bank”. The language of this new definition is clearer and more specific
than the old one. This is a kind of prepayment by the Nominated Bank if the credit is
available by negotiation. Once, the Nominated Bank has negotiated (prepaid) the credit
against complying presentation, the Issuing Bank has obligation to reimburse the
nominated bank under Article 7 of UCP 600. Negotiation credit may use time bills and if
the nominated bank agrees to negotiate, the exporter can get paid before maturity date.
In Banking day definition, there are two points: a day that “bank is regularly open”
and “at the place at which an act subject to the rules is to be performed”. A bank may
regularly open Mondays to Saturdays but its trade department is only open Mondays to
Fridays. Thus, in this context, a banking day would be any day between Monday to
Friday. National holidays would be a day on which a bank regularly be open.
UCP 600 has a new article named “Interpretations” which contains all sub-articles
in UCP 500 relating to interpretation. They are Singed; Legalized; Branches; First-class;
Prompt; On or About; To and Until; From and after; First half and second haft;
Beginning, middle and end. Besides, UCP 600 added two new interpretations on Single
or Plural and the default position of irrevocable letter of credit.
2.2.3. Changes in types of credit
As mentioned, there is a significant change in UCP 600 in terms of L/C
classification. UCP 500 provided that a L/C could be either irrevocable or revocable. If it
was silent, it is would be assumed to be irrevocable. UCP 600 also remains the same
preference for the irrevocable credit. However, it goes in more details by making it
clearer that an irrevocable letter of credit is deemed as the default status: “A letter of
credit is irrevocable even if there is no indication o that effect”. Accordingly, it continues
to expressly provide that a credit cannot be cancelled without the agreement of the seller.
In spite of the fact that the parties can still open a revocable letter of credit, they will need
to ensure that those terms in the UCP 600 that are inconsistent with a revocable credit are
expressly deleted or amended.
In terms of availability of L/C, there are four types of credits in UCP 600. They are
sight payment credit, deferred payment credit, acceptance credit and negotiation credit.
The Article 6b identifies that a credit must state whether it is available by sight payment,
deferred payment, acceptance or negotiation. Once an L/C is issued in any one of the
above methods, it is an authorization to honour or negotiate. However, Article 12(a)
states clearly that an authorization to honour or negotiate does not impose any
implication of the Nominated Bank to honour or negotiate, unless that Nominated Bank
expressly agrees to do so. If it agrees to undertake any one of the two methods of
payment, payment should be at maturity. Nevertheless, Article 12(b) enables the
Nominated Bank to prepay. Previously, only Confirming Bank can make prepayment and
Nominated Bank is just allowed to incur a deferred payment undertaking. Now,
Nominated bank is authorized both to incur such an undertaking and to make
prepayment. This would give banks more additional concern. On the other hand, with this
stipulation, not only negotiation credits but also acceptance and deferred payment credits
can be negotiated or prepaid by Nominated Bank.
2.2.4. Changes in time required for examination of documents
Under the UCP 500, the procedure set out under Article 13(b) is that a bank must
complete its examination of the documents in a “reasonable time not exceeding seven
banking days” and “without delay”. The question has arisen that how reasonable time is
for the banks to discover a discrepancy. For example, the bank informed the seller of
discrepancies six days after the presentation of the documents, and the seller argued that
this was not a “reasonable time”. Although the bank is enabled to consult the applicant
before it reaches decision, the time spent on the process does not reach the ultimate dead
line of seven days. Therefore, it was suggested that the reference to “a reasonable time
not exceeding seven banking days” should be replaced by a fixed time limit; and five or
just three days were thought to be adequate. The UCP 600 now stipulates a fixed period
of five banking days for bankers’ examination process and refusal of documents. This
new regulation, beside the advantage of reducing time for banks to process documents,
has revealed its short-coming. Indeed, the fixed period of “five banking days” will make
bank use automatically five banking days even if they may pay earlier since there is no
breach if they choose to take advantage of the full five-day period.
2.2.5. Changes in addresses of of beneficiaries and applicants
The UCP 600 under Article 14(j) states when addresses of beneficiaries and
applicants must be the same as in the credit. This article allows address of the seller and
or buyer on the invoice need no longer be as mentioned in the documentary credit. It
must, however, in the same country. Contact details such as phone, fax numbers may be
disregarded and if stated they need not as in the credit. An exception to this is when the
address and the contact details are used in the transport documents as part of the
consignee or notify party. In that case, they must be as stated in the L/C. This would give
some advantage to trading parties when Back-to-Back or transferable L/C is used in
transactions having intermediary involved.
2.2.6. Changes in refusal notice
There are two points in UCP 600 that should be pay attention to regarding the
refusal notice. UCP 600 states that refusal notice must state that the bank is refusing to
negotiate or honuor (sub-Article 16(c) (i)) while UCP 500 implies such a requirement.
Besides, UCP 600 allows refusal notice to state that “the issuing bank is holding the
documents until it receives a waiver from the applicant and agrees to accept it, or receives
further instructions from the presenter prior to agreeing to accept a waiver” while under
UCP 500, it is not allowed. This article allows seller to provide instructions on how the
discrepant documents should be dealt with when Issuing Bank rejects them. This, to some
extents, would give the seller some control over the discrepancies especially when
dealing with high value contract.
2.2.7. Changes in transport documents
The transport articles of UCP 600 are covered by articles 19-25. When UCP 500
was born, the transport articles increased from two articles (one covering sea and the rest
covering all other forms of transports) to individual transport articles covering the more
poplar means of shipment or despatch. UCP 500 articles 23-29 sought to standardize the
way in which the individual requirements would be expressed and to bring some
commonality to their structure. With UCP 600, this process went even further to not only
look at changes in transport industry practices but also at common standards for signing
parties and authority, requirements for on board notations and transhipment provisions.
In general. reference to “unless otherwise stipulated in the credit” no longer
appears in the articles. Transport documents, except Charter Party Bills of Lading and
Courier Receipts, Post Receipts or Certificates of Posting, must indicate the name of the
carrier (in the same manner as was required under UCP 500). The transport articles no
longer make reference to “on its face” (except for one place in sub-article 14(a)).
A consistent and standard style for signing transport documents should indicate the
name of the carrier and be signed by the carrier or a named agent for or on behalf of the
carrier, or the master or a named agent for or on behalf of the master. Any signature by
the carrier, master or agent must be identified as that of the carrier, master or agent. Any
signature by an agent must indicate whether the agent has signed for or on behalf of the
carrier or the master. Where an agent signs for or on behalf of the master under articles
19- 22, there is no longer any need to add the name of the master. These articles no
longer make reference to vessels propelled by sail, yet they add reference to “at the place
stated in the credit” or “at the port of loading stated in the credit” to reflect that the bank
needs to be able to ascertain, from the transport document, that the goods have been taken
in charge, dispatched or shipped on board at the place or port stated in the credit
Each transport article in UCP 500 contained reference to “in all other respects meets
the stipulations of the credit”. With UCP 600, this is not repeated in the transport articles
as the principle is captured in the definition of “Complying presentation” in article 2.
2.2.8. Changes in some other articles
Discount of deferred payment undertaking under Article 7c, 8c and 12
Nomination of a bank includes authorizing a bank to prepay or purchase. This has
also been included in Article 7 Issuing Bank Undertaking and Article 8 Confirming Bank
Undertaking.
Sub-Article 7 (c) provides the reimbursement undertaking for the issuing Bank. It
stipulates that when the nominated bank has acted and the issuing bank must reimburse
when a complying presentation is made. Next, it continues emphasizes that
reimbursement is due at maturity, under an acceptance or deferred payment credit,
whether or not the nominated bank has prepaid or purchased. Lastly, it focuses on the
obligations of the issuing bank undertaking in relation to nominated bank (to reimburse
where they act) and a beneficiary (where they may present documents directly or
nominated bank does not act). Sub-article 8(c) showing reimbursement obligation of
confirming bank to any nominated bank (if any) is exactly the same text as that which
appears in sub-article 7(c), except the word “confirming” replaces ‘issuing”.
Article 12 - Nomination adds a new concept specifying the ability of a nominated
bank to pre-pay or purchase under an acceptance or deferred payment credit. It states ‘By
nominating a bank to accept a draft or incur a deferred payment undertaking, an issuing
bank authorizes that nominated bank to prepay or purchase a draft accepted or a deferred
payment undertaking incurred by that nominated bank’. This represents a major change
in scope of the UCP. Previously, UCP has not
involved in the area of financing.
However, due to recent court cases (including Banco Santander Vs. Banque Paribas,
Canada Bank Vs. Credit Lyonnais), under sub-article (b), UCP 600 provides that when a
documentary credit is available with a nominated bank by acceptance or deferred
payment, such issuance includes an authority for nominated bank to prepay or purchase,
providing that the nominated bank agrees to accept a draft or incur a deferred payment
undertaking. Now, the courts will now recognize the issuance of such a documentary
credit conveys an explicit authority to discount. This article provides an authority for the
nominated bank prepay or purchase, not an obligation to do so.
Discrepant documents, Waiver and Notice under article 16
This article describes the requirements for banks when they determine that the
presentation does not comply. An issuing bank may still approach an applicant for waiver
of any discrepancies, prior to sending a refusal notice. Sub-article (c) outlines the
structure of a required refusal notice. Sub-article (c) (iii) provides four options regarding
the status of documents while under UCP 500, only two actions of banks are mentioned
when sending notice, which are holding the documents pending further instructions from
the presenter or returning documents. The two added options for banks to dealing with
discrepancies are holding the documents until receiving a waiver from the applicant, or
receiving further instructions from the presenter prior to agreeing to accept a waiver; and
acting in accordance with instructions previously received from the presenter.
Original documents and copies under article 17
In this article, sub-article (b) and (c) have been taken from ICC Decision paper
publicized in 1999. Sub-article (b) describes how a document is an original and subarticle (c) defines how a document may be created as an original. Sub-article (a)
emphasizes that when a credit requires a document in the singular then this document
must be presented as an original. Sub-article (d) provides that originals may be presented
when copies are requested. This situation arises where a beneficiary may be required to
present a document in four copies. To meet this requirement, the beneficiary may create
one original invoice and then photocopy it three times or print four copies and sign each
one manually.
Insurance documents under article 28
Previously in UCP 500 Article 34 Insurance Documents; Article 35 Types of
Insurance Cover; Article 36 All Risks Insurance Cover. In this article, insurance
document must be issued and signed by an insurance company, an underwriter or their
agents or their proxies. Cover notes will not be accepted (previously cover notes issued
by brokers). The Insurance document must indicate that risks are covered at least between
the place of taking in charge or shipment as stated in the credit and the place of discharge
or final destination as stated in the credit. Amount of insurance coverage must be at least
110% of the CIF or CIP value of the goods. An insurance document may contain
reference to any exclusion clause.
Partial drawings or shipments under article 31
Partial shipments occur when the goods are loaded in more than one vessel, aircraft,
truck, ect. It should be noted that partial shipments could not be considered through the
number of transport documents that are issued. On the other hand, if it is only one
transport document is presented, it does not necessarily reflect that a partial shipment has
not occurred. When the goods are loaded in the same vessel for the same journey or
destination, it will not be regarded as a partial shipment, even when separate bills of
lading are issued covering the loading of goods on different date. For example, the credit
covers shipment of 50MT of rice and partial shipment is not allowed. Bills of lading
covering in the same vessel are issued as followed: 127 May-20MT, 28 May-20MT and
28May-10MT. Sub-article (b) indicates that the latest bills of lading (29 May) will be
considered as the date of shipment. Therefore, when a credit requires shipment by truck
and does not allow partial shipment, the beneficiary must ensure that the goods are
capable of being loaded in the truck. If more than one truck is needed, if will considered
as being a partial shipment even if they are leave on the same day for the same
destination.
Disclaimer on transmission under article 35
This article includes a new rule with regard to the loss of documents in transit
between a nominated bank and the confirming bank or issuing bank. The basis for this
rule is to avoid the situation when an issuing bank states that “we will reimburse the
nominated bank upon receipt of documents” and if the documents are not received, they
will have no liability to reimburse.
When a beneficiary presents documents that the nominated bank finds to comply
with the terms and conditions of the credit, the confirming or issuing bank must honour
or negotiate regardless of the nominated bank honours or negotiates, or the documents are
sent to the confirming bank, issuing bank or lost in transit.
2.3. Improvements and remaining problems under UCP 600
2.3.1. UCP 600’s improvements
After ten year of usage, UCP 500 has revealed lots of weaknesses and led to a high
proportion of documentary rejection. Seventy percent documentary discrepancy in letter
of credit transaction is the statistic collected by ICC Thailand in 2002. This fact along
with the increasing demand in international trade transaction have forced ICC to start the
revision process in 2003 and UCP 600 was born three years later. Right from the drafting
time, UCP 600 has received lost of comments, which are not merely from the LC
community. That is to say, UCP 600 rules are the fruit of the tireless efforts and constant
innovation of ICC Commission on Banking Technique and Practice (Banking
Commission) in general as well as the Drafting Group from twenty-six countries all over
the world in particular. The most significant achievements of UCP 600 are concise and
complete content, logic structure and easily understandable language in comparison with
its predecessor UCP 500.
In terms of content, UCP 600 has constituted by 39 articles as opposed to 49 articles
in UCP 500. The reduction in the number of articles does not means that UCP 600 rules
do not cover full aspects in L/C transaction as stipulated in UCP 500. On the contrary, by
being moved unnecessary articles and added essential provisions, 39 articles has provided
a more comprehensive content to avoid discrepancies in documentary presentation due to
inadequate stipulations.
Along with the conciseness, there are significant changes in the structure. Unlike
UCP 500, UCP 600 is not divided into seven sections, which were lettered from A to G
and headed in turn: General Provisions and Definition, Form and Notification of Credits,
Liabilities and Responsibilities, Documents, Miscellaneous Provisions, Transferable
Credit and finally Assignment of Proceeds anymore. Instead of allocating articles by
subject-master, UCP 600 just numbers articles from 1 to 39. Besides, order of certain
articles as well as sub-articles has been changed to meet the requirement that provisions
concerning the same effect and the same content are placed together. For example, under
UCP 500, provisions regarding “General Expression as to Dates for Shipment” and
“Dates Terminologies for Periods of Shipment” stipulated in Article 46 and 47
respectively are now moved to UCP 600 Article 3 stipulating Interpretations. Next,
Article 14 named “Standard for Examination of Documents” in UCP 600 contains all
requirements for Documents issued and presented, which were previously allocated in
series of articles including Article 13 (Standard for Examination of Documents), Article
21(Unspecified Issuers or Content of Documents), Article 22 (Issuance Date of
Documents v. Credits) and finally Article 43 (Limitation on the Expiry Date). In addition,
there are many other sight modifications in terms of structure making the new draft more
systematically and logic.
With the regard to language, UCP 600 has achieved a considerable progress when
using precise, explicable definitions as well as interpretations making the set of rules
easier to understand and follow, even for people whose everyday life do not have a close
relation with the L/C world. In addition, the clear language also helps to reduce
arguments and disputes relating to the way to interpret and apply these rules in practice.
UCP 600 introduces in Article 2 a number of definitions, most of which are newly added
(namely Advising Bank, Issuing Bank, Confirming Bank, Nominated Bank, Negotiation,
Honour, Banking Day, Complying Presentation, ect); or modified in a more simply way
such as “Credit” definition. Interpretations on terms or words appearing frequently in
letters of credit also explained more clearly and sufficiently in Article 3 under UCP 600.
2.3.2. Remaining problems in UCP 600
In fact, no rule can satisfy everyone, especially for internationally applied ones like
UCP, the draft UCP 600 is also not an exception. Despite the Drafting Committee gave
everyone opportunities to express their own point of view, the final draft is reached
subject to a “yes” or “no” voting system, solely based on the content of that draft. If the
majority vote is positive, then the UCP will take effect. As the result, there are several
shortcomings in the content of the new revision, which continue to cause concern for
stakeholders involved in L/C transaction.
Instructions to documentary discrepancies under Transferable Credits
There is no article found in UCP 600 giving instructions to deal with documentary
discrepancies as to Transferable Credits. Or, at least, there should be a provision stating
that all the documentary discrepancies under Transferable Credit transaction would be
handled as for non-transferable L/C, in particular, making a reference to Article 16 under
UCP 600. The absence of such position may lead to the failure in achieving the uniform
in dealing with this problem between banks, countries or between different cases that is
contrary to the spirit of UCP rules.
Description of goods
Next, there are some issues remain unresolved relating the description of goods on
the commercial invoice. The problem with the description of the goods on the
commercial invoice is the level of accuracy demanded by the UCP rules, and this mainly
leads to documentary discrepancies in L/C transaction. In fact, there is no change in the
content of the provision on commercial invoice, except for the change in position from
Article 37 in UCP 500 to article 18 in UCP 600. It states “The description of the goods,
services or performance in the commercial invoice must correspond to that appearing in
the credit”. From the exporter’s point of view, one of the most crucial steps is the
presentation of documents to receiving bank to get payment. However, banks will decide
whether payment is made or not, mainly basing on checking documents presented by the
exporter, not by specifying goods. Among many required documents, commercial invoice
is the most vital one because there are a number of parties who rely on it to perform their
duties. Banks do not expect the description of goods to be laid out exactly as shown in the
L/C, but the data elements contained in the invoice must be match to the L/C. In other
words, the sequence or the order of the details may different. The problem lies in the
way banks understand the word “correspond”. For example, a spelling error between
commercial invoice and letter of credit, regardless of how minor ad irrelevant this error
may be, still enables banks opportunities to reject documents presented and decide to
dishonour. In addition, trend of “inventing discrepancies” now becomes a commonplace
with banks who want to utilize the cash flow of the exporters. This due to the fact that reexamination of documents represented not only creates a considerable fees but also
causes longer settlement periods since no funds are transferred until the documents are
re-examined and finally accepted. This situation will make negative impact on the
exporter’s cash flow and even increase the rate of documentation error.
Confirmed letter of credit
There are two points of caution need to be made. First, while the UCP 600 clearly
favour irrevocable over revocable credits, there is no similar assumption in favour of
confirmed credits. From a seller’s perspective, of course, a confirmed credit brings the
advantages of “a definite undertaking of the confirming bank, in addition to that of the
issuing bank”: Thus, “confirmation” is defined in Article 2 without assuming that all
credits will be confirmed where they do not say otherwise. Consequently, if a seller wants
to impose upon his buyer an obligation to organize the opening of a confirmed letter of
credit, he must impose such an obligation in the sale contract (e.g. “Payment by
irrevocable letter of credit to be confirmed by first class bank acceptable to the
Sellers…”) and – when he receives the letter of credit – to make sure that it has been
confirmed by an acceptable confirming bank.
Secondly, going back to revocable credits, although the UCP 600 have been clearly
in favour of irrevocable credits, the new Rules have not made it impossible for revocable
credits to be opened. It must be remembered that Article 1 of the UCP 600 allows parties
to credits (and the parties who first generate the credit are, of course, the buyer as
applicant and the issuing bank) to modify or exclude any part of the Rules. It is
consequently still possible for a buyer to apply for the opening of a revocable credit and
there is nothing in the UCP 600 which makes that credit inoperable. Therefore, it remains
prudent for sellers to continue to stipulate in their sale contracts that the buyer will open
an irrevocable letter of credit – and, of course, to make sure when the credit arrives that it
incorporates UCP 600 or expressly describes itself as irrevocable.
Instruction to clear and complete letter of credit
The UCP 500 had contained, in Article 5, helpful advice to buyers when applying
for the opening of a letter of credit: to give complete and precise instructions to the
issuing bank, to avoid excessive detail in those instructions, and to avoid opening one
credit by referring to instructions given in an earlier one. There is now no equivalent of
Article 5 in the UCP 600. This is together with a general move in the new UCP Rules
towards retaining only those Articles which actually impose a duty or lay down a
principle, omitting Articles which simply set out best practice. Does the omission of the
old Article 5 mean that the advice there given is any less helpful to the smooth running of
credits? The answer is that this advice is still worth. Instructions need to be clear without
being too detailed. In fact, the more detail in the letter of credit, the more likely it will
become a mechanism for delaying rather than facilitating payment. However, traders
must remember that banks do not look at the commercial value of the documents. For
instance, a credit requiring simply an “Inspection Certificate” would be satisfied by an
Inspection Certificate recording the goods to be unfit for human consumption. In this
situation, bank has no right to refuse such “Inspection Certificate” because there is no
provision in the L/C stipulating how the quality of goods must be. Therefore, the credit
must call for “An Inspection Certificate confirming the goods are fit for human
consumption” or “An Inspection Certificate confirming that goods comply with the
following specifications … ” if the credit is to protect the buyer.
Standard for examination of documents
The last but not the least is the problem concerning the standard for examination of
documents. The undertaking of bank to pay under a letter of credit transaction lies on the
documentary compliance. Then, standard for deciding complying presentation is based on
a combination of different definitions given by UCP rules. Article 2 defines that
“Complying presentation means a presentation that is in accordance with the terms and
conditions of the credit, the applicable provisions of these rules and the standard banking
practice”. There is nothing in the article means that international banking practice is
necessarily the ISBP alone. Even when L/C clearly refers to ISBP, this publication still
stops in “guideline” status and lack of real authority. Moreover, it would be possible for
any bank to develop its own “standards”. As the result, the uniformity of UCP rules
would be break-downed and risks in international payment would increase.
Additionally, the expression “on their face” in relation to the checking of documents
for compliance has been remained, despite the fact that the “no” votes had overcome the
“yes” opinion. This expression has created arguments because of its unclear meaning, not
only in English but also in other language. For instance, there is no equivalent concept in
the French language. It appears that the ICC Drafting Group has ignored the demand for
change to this article despite of the obvious difficulties in implementing its requirements.
Chapter III
Recommendations for better UCP 600
application
It is clearly that the UCP set of rules has been standardized by ICC to affect parties
involved in documentary credit transaction. The word “parties” here mainly refer to
banks and other institutions that issue, confirm or otherwise process them; buyers or
applicants who cause L/C to be issued and finally sellers or beneficiaries who look to L/C
for payment. To ensure a letter of credit is workable, trouble-free and provides security of
payment, it is essential to take simple and effective precautions at the start. Wellpreparation for all steps relating to L/C will help to reduce discrepancies and associated
unplanned costs for parties, especially the exporters. Statistics have shown that well in
excess of fifty percent of documents presented by exporters to banks for payment under
letters of credit are rejected on first presentation. This can cause expensive delays for
both the exporter and the importer and may even result in a lesser payment or no payment
at all. A great many of those rejections could be avoided if more care was taken to ensure
that the documents called for in the credit are properly completed.
3.1.
Recommendations
for
exporters
involved
in
L/C
transaction
In principle, it is for the exporter to provide the definitive “yes” or “no” as to
whether a letter of credit and required documents are in a workable form. It is imperative
that, upon receipt of the credit or amendment, a full review is undertaken to ensure that
the conditions meet those agreed or envisaged. Exporters should follow four key steps to
ensure payment when receiving a letter of credit issued in the favour of themselves which
include checking detailed content on receipt of the letter; preparing documents for
presentation to the bank; presenting documents to the banks without delay and within the
expiry date and transport documents time limit; and finally dealing with discrepancies.
3.1.1. Checking detailed content on receipt of the letter
First of all, exporters should make sure that the letter of credit states it is subject to
the 2007 revision of the Uniform Customs and Practice for Documentary Credits (UCP)
of the International Chamber of Commerce (here referred current revision UCP 600). He
also recommended to recognize the authenticity of the credit. If exporter is still unclear as
to what the wording of the credit implies, he should check what UCP 600 has to say on
the point and with its bank. Normally, credits are sent through an Advising or a
Confirming bank. Any departure from this routine should be viewed with suspicion, for
example if it comes to the exporter direct from overseas or if he do not recognize the
Advising or Confirming bank, he need check its authenticity with his own bank.
According to UCP 600 Article 9(b), the Advising bank shows its satisfaction by advising
the credit with the apparent authenticity. If he receives an unexpected credit from a buyer
unknown to him, even under cover of a well-known bank, he should check with the bank
to ensure that everything is in order - particularly if it calls for goods to be shipped direct
to the buyer. Exporter should bear in mind, as mentioned, that over half of credit
documents are rejected on first presentation to the banks. The main reason for this is
matters that could have been put right. Therefore, making the key checks on the day the
credit arrives, consulting other departments accordingly and carrying out the following
detailed checks immediately afterwards will enable difficulties to be recognized in better
time to take action.
Type of credit issued
Exporter should be sure that the type of credit issued gives him the level of
payment security, which he sought. In principle, an irrevocable credit carries only the
undertaking of importers’ bank in their country while an irrevocable and confirmed one
carries the extra and separate undertaking of a second bank in most countries. A bank
may not state it but credits issued under UCP 600 should be irrevocable if there is no
reference to other stipulations.
Then, exporter need make sure that he will be paid at the time and place he planned.
The credit may specify payment some time after shipment or after documents and/or
drafts have been deemed compliant by the paying bank (Nominated or Issuing bank).
Additional delays and other problems may arise if payment/acceptance is to take place
abroad. If he is not expecting payment to be made abroad but are prepared to consider it,
he need be sure that he understands the position, i.e. that he responsible for postal delays
in presenting documents overseas within the time limits set by the credit. It also gives less
time for replacing non-compliant documents with compliant ones. Under UCP 600,
whether a credit is available by sight payment, deferred payment, acceptance or
negotiation, a credit can be available with any bank.
If the credit has been sent electronically to a bank ("Teletransmitted”), exporter has
to check that it provides details of the credit that he can act upon and that is not just a preadvice. Unless it says otherwise, and provided it refer to UCP 600, the Teletransmitted
credit can be taken as the operative and safely acted upon one as well as overrides any
later mailed advice. Unless a pre-advice states otherwise, the Issuing bank is bound to
follow up the pre-advice by issuing the credit.
Company names, addresses and other details
Exporters need ensure that both his company name, address and full title and those
of the importers are correct and consistent with all other documents. All details should be
correctly spelt and consistently reproduced on all the documents. Following UCP 600
Article 14(j), addresses need not be the same as stated in the credit, but must be within
the same country as the respective addresses mentioned - except when the. Applicant's
contact details appear as part of the consignee or notify party details on a transport
document.
Goods description
Descriptions in the L/C should be brief and correspond with the invoice (UCP 600
Article 18(c)). Details in other documents do not need to be identical to, but should not
conflict, with that stated in the invoice and credit (UCP 600 Article 14(d) and (e)).
The value of the credit
Exporter has to examine whether the credit allows for any kind of extra agreed
costs such as freight or inspection fees; planned variation up to a ±10% variation in the
amount stated of the credit, quantity or the unit price (under Article 30(a) of UCP 600) or
other unplanned variations. UCP 600 Article 30(b) allows a tolerance of ±5% provided a
stipulate number of packing units or individual items is not stated in and the total amount
of the drawings does not exceed the credit.
Expiry date and transport document time limit
It is important for exporter to be sure that he can produce the goods, ship them,
assemble the documents required and deliver them to the bank, all by the expiry date and
within the time limit for presentation of transport documents. The bank has no discretion
under UCP 600 and is not in a position to treat as compliant either documents presented
after expiry dates or documents not completely in order. The presentation of documents
must be completed within 21 days of the date of shipment evidenced by the transport
document, unless the credit curtails or extends the period - a credit will more frequently
curtail the period. The expiry date stipulated in the credit must be adhered to and it is not
overridden by the 21-day rule. It might be in the exporter’ interest to ask for an extension
on the 21 days if it falls within the validity of the contract.
If an alteration or extension is required, exporter may contact the buyer without
further delay and then ensure that any necessary amendments are received in time .If an
import licence must be extended, this can take some time. If the licence cannot be
extended and a new one has to be obtained the delay may well go beyond the expiry date
of the credit. Then, he should also contact the Advising bank. It is unlikely that the
Advising bank would make an error or omission. Under UCP 600 an Advising bank
signifies by advising a credit, that the advice accurately reflects the terms and conditions
of the credit. At an early stage, it will be in his best interests to send a copy of the credit
to his forwarder or whoever will obtain the transport documents. Similarly with his
insurers if insurance is to be covered by him. Telephone instructions alone may easily
result in misspellings or other errors and consequent rejection by the bank, or even a
wrong type of transport or insurance document may be provided.
Other charges and costs
Exporter must check that only those bank charges he agreed to pay are stated to be
for his account and carefully control over bank reimbursing charges with a credit not
expressed in sterling.
Delivery terms
The terms of delivery must be the same as the exporter quoted (e.g. FOB, CIF, CIP)
and match the price properly. Exporter will need to specify if he want the delivery terms
to form part of the credit terms. For example, if he quoted “£10,000 FOB Haiphong –
Incoterms 2000” and the credit states “£10,000 CIF Hong Kong –Incoterms 2000” he will
naturally not be able to recover the freight and insurance. The paying bank will refuse
documents if the exporter exceed the credit amount or alter any unit price quoted in the
credit. Inconsistent delivery terms are discrepancies and the L/C will be rejected.
In addition, exporters should make sure whether partial shipments are expressly
prohibited or not. If not, they are still allowed under UCP 600 Article 31(a).
Required transport documents
Transport documents may include “On deck" and “Claused”. “On deck” is a clause
stating goods may be loaded on deck is acceptable, but it must not state that goods are or
will be loaded on deck (UCP 600 Article 26(a)). “Claused" transport documents is
stipulated under article 27 of UCP 600. This provision states that banks will only accept
clean transport documents (i.e. bearing no clause or notation expressly declaring a
defective condition of the goods or packaging). The places of acceptance and delivery
and, if a bill of lading is called for, the ports of loading and discharge should be checked the UCP 600 transport articles (Articles 19-24) are precise on this point. Transport
documents may be issued by any party, including freight forwarders, other than a carrier,
owner, master or charterer (see UCP 600 Article 14(l)).
In certain circumstances, "Intended vessels" and "intended ports of loading" are
acceptable as stipulated under UCP 600 Articles 20 and 21 sections (a)(ii) and (iii).
"Received for carriage" or "received for shipment" documents are not acceptable under
UCP 600. For Road, Rail and Inland Waterway the transport document can indicate the
date of receipt for shipment, dispatch or carriage (UCP 600 Article 24). For Courier and
Post, a courier receipt may indicate a date of pickup, and a post receipt or certificate of
posting can indicate a date of receipt for transport (UCP 600 Article 25)
The prohibition of transhipment is inappropriate. Under UCP 600 Articles 19-24
(the transport articles), transport documents indicating goods may or will be transshipped
provided the entire carriage is covered by one and the same document, even if the credit
prohibits transhipment.
Insurance documents
Exporter has to make sure that he can obtain insurance cover for the risks specified
and provide the right type of insurance document, for example if the credit calls for a
policy rather than a certificate. Cover notes are not acceptable. If "all risks" is stipulated,
banks will accept any "all risks" notation or clauses on insurance documents (UCP 600
Article 28(h)). Exporter need bear in mind that "all risk" does not mean all risk in reality.
If he is not asked to arrange marine insurance, for example on Incoterms CFR or CPT
sales, he has consider obtaining "seller's interest" or other suitable cover for his own
account, if available, outside the terms of the credit.
3.1.2. Preparing documents for presentation to the Bank
It is exporter’s responsibility to ensure that documents presented in the credit are
presented as separate documents. For example, if a packing list and weight list are
required and he has a combined packing and weight list, two original copies of this
document will need to be presented. He must have the correct number of originals and/or
copies of each and they carry the information called for. They do not conflict, for
example, the shipping marks, quantities/weights, transport details, references, and in
general terms the descriptions, must tally so that they clearly relate on their face to the
same shipment.
The description of goods must be correct. They may be described in general terms
(not conflicting with the credit) in all documents except the invoice, where the exact
contract description should be reproduced
Contract details should preferably not be repeated in full in transport documents and
some carriers will refuse to enter more than the minimum necessary information. This
may cause a discrepancy if the information conflicts with that in the credit or other
documents.
Documents is required to authenticate where necessary. Import regulations in some
countries still make it essential to sign manually and possibly witness documents and any
alterations or additions to them. Any restrictions in the credit should be catered for, for
example if short form bills of lading are prohibited.
Transport Document
Type of transport document may cover sea, air, road, rail, inland waterway,
multimodal, courier or postal despatches. The document should indicate some certain
details such as the name of the carrier and be signed by the carrier, master (for sea
shipments) or named agent; the goods have been dispatched, taken in charge or shipped
on board (as appropriate) at the place stated in the credit; the place of dispatch, taken in
charge, ports of loading and discharge, and/or the final destination (as appropriate) stated
in the credit.
Date of issuance is deemed the date of dispatch, taking in charge or shipment,
unless otherwise indicated. The name of consignor can be different from beneficiary and
the name of consignee can differ from buyer as well.
Insurance Document
Insurance documents must be in correct type, e.g. a certificate or policy, and
number of documents as stipulated in the credit and correct amount stated for insured
coverage. The amount must be at least 110% of the CIF or CIP value of the goods (UCP
600 Article 28(f)(ii)). In addition, currency and risk covered in insurance documents
should be the same as in the credit.
Date of insurance document need to be no later than date of shipment - unless cover
takes effect from date of shipment (UCP 600 Article 28(e)). If necessary, endorsed is also
presented to be exact as required by the credit.
Invoice
Invoice must not contain merchandise not called for in the credit, even if they are
stated to be free of charge. Invoices, which list no-charge goods or samples not included
in the credit, will be refused
In this document, heading must containing the name of export company and it must
made out in name of Applicant, expressed and spelt exactly as in the credit
Description of goods, including import licence or pro-forma details, price, terms of
delivery, and any no-charge goods or samples should be worded and spelt exactly as set
out in the credit. Clauses or statements word for word identically must be spelt and the
use of any foreign language must be specified.
The value of invoice cannot more than the credit permits and the same as any bill of
exchange. Under certain conditions exporters may be able to under draw by up to 5%.
Quantity with ± 5% tolerance is sometimes permitted. Alternatively, the credit may
permit a specific variation, e.g. an 'about' amount is equivalent to a ± 10% tolerance
(under Article 30(a) and (b) of UCP 600).
Other Documents
Other kinds of required documents, if any, should have correct issuer and correct
wording or content to avoid unnecessary wording, which might confuse the bank checker.
They are also required to clearly relate to the goods invoiced. Tele-transmissions to the
Applicant and/or insurer must correctly set out, addressed and dated. Certificates to cover
any other credit requirement is only important where a specific certificate is called for
(under UCP 600 Article 14(h)). Moreover, they have to be signed, authenticated or
endorsed as necessary. Exporters should not enclose any documents not required by the
credit in any way.
3.1.3. Presenting documents to the bank without delay and within the expiry
date and transport document time limit
All documents must be completed and delivered to the bank by close of business on
the expiry date and within the presentation of transport documentation time limit,
whichever is earlier; or, if the bank is normally closed on that day, on the next business
day. Exporter is required to obtain a time/dated receipt where appropriate and check the
transport document presentation time limit very carefully. Presentation must be
completed within 21 days of the date of shipment, unless the credit specifies a different
period. This may well be earlier than the expiry date of the credit itself or any specified
"last date for presentation/negotiation" (Article 14 of UCP 600). The import licence
expiry date is equally important and it may not be possible to extend this. If any
discrepancies are found and they can be put right, the corrected documents must still be
presented to the bank by the original expiry date and within the time permitted from date
of shipment evidenced by the transport document.
Exporter need check and send any specified documents to the Applicant if required
to do so under the terms of the credit, enclosing a copy of his documents schedule as sent
with his credit documents when making presentation to the bank for payment.
3.1.4. Dealing with discrepancies
Unless exporters can correct discrepancies in time, he will lose his right to payment
under the credit and all the cost and effort to obtain security will have been wasted.
If this case occurs, exporters have to correct the documents within the original
expiry date and within the period allowed after the shipment evidenced by the transport
document. The Issuing bank may approach the Applicant for a waiver of the discrepancy
(UCP 600 Article 16(b)) which is not normally done at the request of the exporter. Then,
exporter should ask the paying bank to contact the Issuing bank for authority to
honour/negotiate the documents despite the discrepancies.
An indemnity, either exporter’s own undertaking or one issued by or joined-in by
his bank, may be acceptable. In such a case exporters are paid promptly but are still at
risk and if the Issuing bank decides not to pay, the money must be repaid to the paying
bank with interest. Indemnities which are often casually issued and financial directors are
frequently unaware that a massive contingent liability is building up. If an indemnity is
decided upon, try to arrange a validity of six months maximum)
The bank may offer to pay under reserve. This has the same practical effect as
payment under an indemnity though without the paperwork, but there is normally no time
limit applicable. Money received has to be paid back with interest if the Issuing bank
rejects the discrepant document. Documents can be sent on an "approval basis" (also
called "in trust" or "on collection") to the Issuing bank under the protection of the credit.
With documents "on collection" the Remitting bank (paying bank) should be requested to
instruct the issuing bank that release of the documents to the buyer is to be only against
payment being authorized in accordance with the credit terms.
If the transport document involved is a full set of negotiable bills of lading, these
measures normally retain exporter’s control over the goods as the buyer cannot take
delivery without the documents, which are still in exporter’s control. However, in other
circumstances, the buyer can obtain the goods without the presentation of documents.
Nevertheless, the buyer is in effect being asked whether, after all, they still want the
goods and is prepared to accept the discrepancies in the documents. They are quite free to
refuse.
3.2.
Recommendations
for
importers
involved
in
L/C
transaction
Importers are party who buy goods and open a letter of credit at their bank to ensure
payment for the exporters. If exporters’ main concern is how to present complying
documents to obtain payment, importers have to do with how to receive the right goods
with the right quality and quantity. Therefore, there are two main steps that importers
should pay attention to when dealing with letter of credit transaction. The first one is to
arrange for the letter of credit and the second is to complete the application form.
3.2.1. Arranging for the Letter of Credit
When negotiating the order or sales contract with suppliers, importers should only
be thinking of using a letter of credit if their country's exchange control regulations
require it or if the supplier insists on it as the means of payment. Otherwise, importers
should try to avoid the procedure because it can quite often cause problems for both their
company and supplier.
If a letter of credit is unavoidable, importers should check with their bank that they
are prepared to issue a letter of credit for the value of the intended transaction on the
terms of settlement proposed (i.e. "at sight" or at a later date) and check whether it is to
be confirmed by a bank in the Beneficiary's (supplier) country. Importers need make sure
that they can obtain any necessary import licence; pay import deposits and Customs duty
on time. It is recommended that importers check whether forward exchange cover or a
foreign currency account is advisable for credits not in his currency and consult other
departments in their company to ensure that the terms of the sales contract and credit
meet their requirements
Then, importers should obtain a copy of his bank's application form for opening a
letter of credit to see how their supplier's instructions can best be entered onto the form.
In the absence of pre-arranged instructions, he may try to discuss the sales contract and
any requirements for the credit and complete the form with the supplier's representative.
If a representative cannot visit, then read the sales contract very carefully and apply the
conditions to their bank's form as appropriate. Consulting bank is the best solution when
importers have any doubts whatsoever, as UCP 600 requires that bank will issue the
credit according to importers’ instructions. One principle importers should bear in mind
is that the L/C should be kept simple and refer to rather than recreate the sales contract.
For example, it is preferable to state, “goods provided as per sales contract [number]”
rather than reproduce the full goods description.
Before requesting to issue a letter of credit, importers should agree with their
supplier on following points.
Method of Issue
Electronic teletransmission will avoid any possibility of delay. Where the
Beneficiary merely requires advance notification of a credit to come and there is no
immediate urgency to ship goods and present documents, an electronic pre-advice with
the effective credit following by airmail is sufficient. Under UCP 600 Article 11(b) the
pre-advice must be followed by the operative credit unless the pre-advice says otherwise.
Pre-advice is rarely used due to the near universal use of SWIFT.
Agreement on which party paying the arisen charges and other costs involved in L/C
transaction
Charges in L/C transaction here may include fees for issuing (and possibly
confirming) the credit; amendments and/or extensions; and subsequent payment charges.
Unless importers specify otherwise, all those charges will be payable by them as the
Applicant (opener), including those in the Beneficiary's country. If the credit is in a
foreign currency, he should check with his bank on the matter of reimbursing commission
as well as on the matter of which type of letter of credit and its terms that is suitable for
both parties.
If there is any special provision, such as a transferable letter of credit, it is useful for
importers to make sure they fully understand any special requirements (see UCP 600
Article 38 regarding transferable credits)
Required documents
In general, importer is party who stipulates which documents under letter of credit
need to call for. The documents called for should fulfill the requirements stated in the
sales contract. Among them, importers may choose which need to be sent direct to them.
The paying bank will ignore requirements in the credit where a supporting document is
not specified as described in UCP 600 Article 14(h).
UCP 600 clearly defines what banks will accept as meeting the requirements for the
transport document importers call for. Available transports are sea, air, road, rail, inland
waterway, multimodal, courier or postal dispatches. Therefore, importers have to include
the type of transport document that will be used and who will issue it. He should also
decide whether the goods are packed in a container and a freight forwarder's groupage
service for small consignments are acceptable. Do not state, "short form transport
documents are not acceptable", if import regulations permit them. If importers want to
require an "on board" notation to be properly authenticated, stipulate this in the credit.
Through container transport, importers should specify the place of dispatch and the
place of delivery, without specifying ports of loading or discharge. Do not prohibit
transhipment when the goods are being shipped in container or by air.
The expiry date of the letter of credit
Exporters must allow time for their supplier as the Beneficiary to receive the credit;
obtain or manufacture goods; complete arrangements for packaging and transport; and
assemble documents prior to presentation. Issuing bank charges are normally levied on a
quarterly basis, so an expiry date of 3 months from issue or a multiple thereof will be
normal in most cases. If the validity proves too short, this will likely involve amendments
and also lead to delay in despatch. Importers should not work to the supplier's "Ex
Works" date, but allow further time for shipment, inspection or consular work,
assembling documents and presenting them to the bank. It is important that importers
have the names, full addresses, telephone, email and fax details of the people responsible
for the handling of letter of credit operations for both importers themselves and the
supplier.
Importers should give their bank clear and precise instructions and avoid
unnecessary requirements. If a latest shipment/despatch date is to be quoted, this should
precede the expiry date by the number of days allowed for presentation of documents. If a
latest shipment/despatch date is not indicated, it will be taken to be the same as the expiry
date.
Other issues
In order to help control interest costs with bank, importers may be able to ask them
to instruct the overseas bank to notify the Issuing bank on the day they pay the supplier.
In the knowledge that the overseas bank has checked and found documents to be in order,
importers can then decide whether to pay their bank before it receives them. Request all
documents to be sent from the overseas bank by fastest means, preferably registered
express mail or courier service. Even if this costs more, it can be much less than
demurrage and/or other costs caused by delayed documents
Importers should always ask bank to telephone them on the day they receive the
documents; give their bank the name and contact details of the right person to contact. If
possible, arrange to collect the documents rather than having them posted. If importers
still in doubt about any terms or documents, contact the supplier and refer to their bank
for advice before asking bank to open the credit.
As soon as receiving a copy of the credit from their bank, importers need check it
carefully and in particular watch for any additions or omissions to the original
instructions, which may not be workable for the supplier.
3.2.2. Completing the Application Form
After preparing for all requirements in letter of credit, importers should pay
attention to how to fulfill their bank’s application form to meet all requirements discussed
above. A sample of application form is included below which may assist importers in
completing their own bank's form.
To help importers fulfill the letter of credit applicant from correctly, introductions
and guides for each item will be mentioned one-by-one.
.
Figure 4: Sample of letter of credit application form
Applicant is the customer or the importer at whose request the bank is to issue the
credit. Correct company title and full address should be entered in this section. It is
important that this be completed and accurate in every detail.
Beneficiary refers to the supplier, or exporter, in whose favour the credit is to be
issued. Full and exact details should be entered in the same way as for the applicant.
Currency and Amount are the amount should be expressed in figures and words
ensuring that both are expressed in the same and correct currency. In the event of a
variation in amount being permitted, this should be expressed in the appropriate terms,
e.g. "£1,000 - 3% more or less”. Care should be taken with both importer and exporter’s
exact requirements. Variation can be ambiguous: there may be a tolerance in the unit
price, quantity of goods and credit amount by the use of 'about' and similar wording - e.g.
"10% more or 10% less". Importers should bear in mind that UCP 600 Article 30(c)
allows a tolerance of 5% less in the amount of the drawing, even if the credit prohibits
partial shipments, provided that any stated quantity of goods is shipped in full and that
any stated unit price is not reduced. This provision for short-drawing allows for overestimating freight charges at the time of concluding the sales contract months before
actual dispatch.
Expiry: The expiry date must allow time for the Beneficiary to receive the credit,
producer manufacture goods, complete arrangements for packaging and transport, etc.
and to assemble documents prior to presentation under the credit. The place of expiry
should be the country of the Beneficiary. UCP 600 does not require a place of expiry, the
place of the bank where the credit is available is the place of presentation (UCP600
Article 6(d)(ii)). Bank applications forms may no longer require the 'country' to be
included for the Expiry Date information. However, importers may wish to assist the
Beneficiary in payment be agreeing to informhisr bank (the Issuing bank) that the credit
will be available at a specified nominated bank (usually the Advising bank) or indeed any
bank.
Availability: The availability of the credit will depend upon the terms agreed,
normally by means of sight payment with documents accompanied by sight draft.
Alternatively, settlement may be by means of acceptance, when drafts will be drawn at a
term (or ussance) or 60 days from the date of shipment. In the event of a deferred
payment being arranged no draft will be called for and settlement will be stipulated at a
specified or determinable future date. As the Issuing bank will have correspondent
banking relationships in the Beneficiary's country, the choice of correspondent should be
left to them. If the Beneficiary insists on a bank other than the Issuing bank's choice as
Advising bank, this can lead to delay and additional costs.
Documents and Presentation Period: Unless specific documents are required by
government regulations, only documents essential to the banking transaction should be
stipulated. Essential documents are: transport documents; commercial invoice; and
possibly insurance. All other documents can be sent direct to importer and, if necessary, a
statement to this effect should be added to the credit. UCP 600 stipulates that the
presentation of documents must be completed within 21 days of the date of shipment
evidenced by the transport document - unless the credit curtails or extends the period
depending on circumstances. Whatever period is selected does not alter the requirement
for documents to be presented within the validity of the credit.
Transport Documents: Transport may be by sea, air, road, rail, inland waterway,
multimodal, courier or postal dispatches which are stipulated under UCP 600 Articles 1924. Specialist advice should be sought from a local freight forwarder, carrier or his agent
regarding the different types of transport involved. Thought should be given to the
advantages of stipulating a non-negotiable sea waybill instead of the traditional bill of
lading. In such circumstances, the appropriate wording would be: "A full set of 1/1 on
board non-negotiable sea waybills stipulating goods to be released at destination to the
importer (consignee) and claused to the effect that the shipper has surrendered the right to
change the name of the delivery party during the course of transit". Normal practice for
defining bills of lading would be: "A full set of on board marine bills of lading issued to
order and blank endorsed marked 'freight paid' (if CFR or CIF) or freight payable at
destination (if FOB) and notify (name and full address of consignee)". For despatches by
air the wording would be "Air Waybill (original No.3 for shipper) evidencing goods
consigned to (name and full address of consignee)" marked "freight paid" or "freight
payable at destination" indicating flight number and date of despatch". In some cases
house bills of lading or house air waybills (HAWBs) may also be used against a letter of
credit.
Importers: International road transport is covered by another non-negotiable
document (as is the air waybill) known as the CMR note. A forwarder's certificate or
receipt for transport (FCR or FCT) is only acceptable if specifically stipulated in the
credit. Railway authorities belonging to the rail international convention use the CIM
consignment note. It is obviously very important that importer and the supplier should
agree on the exact method of carriage, as it is essential that importers give their bank
precise details as to what is to appear on the credit.
Commercial Invoice: Details should be kept as simple as possible. Where they are
required to be signed, certified or legalised, precise instructions should be given.
Insurance: If insurance is to be covered by the supplier - i.e. under CIF or CIP then a Certificate of Insurance should be called for covering the necessary risks - e.g.
London Institute Cargo Clauses 'A'.
Other Documents: Documents other than the above should be avoided or arranged
to be sent direct outside the credit. However it is often necessary to provide Weight
Notes, Packing Lists, Certificates of Origin (issued by either the beneficiary or by a
Chamber of Commerce and certified or legalised depending upon country regulations)
and Inspection Certificates (usually issued by independent bodies to indicate that the
goods shipped are as described and of the right quantity and quality, and possibly price).
In the event a condition is stated in the credit e.g. "Goods to be shipped on a vessel not
more than 20 years old" without the requirement of a document to substantiate this, banks
will ignore it (under UCP 600 Article 14(h) on non-documentary conditions). Great care
should be taken to ensure that all required documents are stipulated.
Insurance Effected: If the supplier is covering the insurance then a certificate will
be presented. If importers are covering the insurance then this should be indicated here.
Goods: This should be kept as simple as possible to avoid both actual and
typographical errors. A simple description may also avoid dishonour under the credit if
certain items unstated in a general description of goods are not available at the time of
shipment and need to be replaced by others.
Incoterms: The advantages of referring to the appropriate term from ICC Incoterms
2000 should be remembered. The 'traditional' terms for breakbulk - i.e. non-containerized
cargoes - are FOB, CFR and CIF.
Transport Details: Ports and airports of shipment or despatch are best left in
general terms such as "any port" or "any airport" to avoid difficulties. If a latest
shipment/despatch date is to be quoted and precedes the expiry date, it should be by no
more than the number of days allowed for presentation of documents. If no latest
shipment/despatch date is indicated it will be taken to be the same as the expiry date
Part Shipment/Transhipment: Part shipments should normally be allowed
particularly in view of short drawings within the tolerance allowed. Credits relating to
container shipments should not prohibit transhipment and it is not always possible to
despatch goods by air without transhipment.
Special Conditions/Other Instructions: Bank charges and who is responsible for
payment of these should be entered here. It is normal banking practice for the beneficiary
to pay all banking charges in his country and for Applicant to pay those on
his own - unless agreed otherwise. If reference to charges is omitted banks will assume
that all bank charges are for importers account as the Applicant. If confirmation by the
Advising bank is required, this should also be entered here. An additional charge will be
made and it should be agreed as to who pays this charge. Any other specific instructions
such as 'credit to be transferable' should be entered, as appropriate
3.3.
Recommendations
for
banks
involved
in
L/C
transaction
Among many banks who may involved in letter of credit transaction, the four banks
including Issuing bank, Advising Bank, Confirming bank and Nominated bank play an
important role in governing letter of credit transaction. Therefore, those banks’
responsibilities and obligations are mainly discussed in UCP set of rules.
3.3.1. Recommendations for issuing bank
For issuing an LC, the issuing bank should discourage any attempt by the applicant
to include, as an integral part of the credit, copies of the underlying contract, proforma
invoice and the like ( UCP 600, article 4b). The issuing bank is irrevocably bound by an
amendment as of the time it issues the amendment (UCP 600, article 10b). A credit or
amendment should not stipulate that the advising to a beneficiary is conditional upon the
receipt by the advising bank or second advising bank of its charges (UCP 600, article
37c).
The issuing bank that sends a pre-advice of the amendment is irrevocably
committed to issue the operative credit or amendment, without delay, in terms not
inconsistent with the pre-advice (UCP 600, article 11b).
UCP 600, Article 7a also stipulates that the issuing bank has an obligation to pay
when a compliance presentation has been made either to it – or to the nominated or
confirming bank. For example, a compliant presentation is made to the nominated bank –
and that bank chooses not to act on its nomination but simply forwards the documents to
the issuing bank – but the documents are lost in transit between the nominated bank and
the issuing bank. The issuing bank is required to honor even if the documents are lost in
transit.
An issuing bank is irrevocably bound to honor as of the time it issues the credit as
described in UCP 600, article 7b so that the banker must know when his responsibility
starts.
For examination of the complying presentation to determine whether to honor or not
the issuing bank is required to follow the standard for examination of documents as
codified in article 14. Article 14 guides what to accept, what to disregard.
When the issuing bank determines that the presentation is complying it must honor
(article 15 a). When the issuing bank determines that a presentation does not comply it
may in its sole judgment approach the applicant for a waiver of the discrepancies (article
16 b). When the issuing bank decides to refuse to honor it must give a single notice to
that effect to the presenter. The notice must contain the information as prescribed by the
Article 16c and must be given by telecommunication or, if that is not possible, by other
th
expeditious means, not later than the close of the 5 banking day following the day of
presentation (article 16d).
An issuing bank undertakes to reimburse a nominated bank that has honored or
negotiated a complying presentation and forwarded the documents to the issuing bank.
The reimbursement is due at maturity whether or not the nominated bank prepaid or
purchased before maturity in case of credits available by deferred payment undertaking or
by acceptance (article 7c). If a credit states that charges are for the account of the
beneficiary and charges cannot be collected or deducted from proceeds, the issuing bank
remains liable for payment of charges under UCP 600 Article 37.
3.3.2. Recommendations for advising bank
The advising of a L/C and amendment is governed by article 9 of UCP 600. This
article highlights a number of requirements that must be followed and these will form the
basis of any L/C, and any amendment thereto, that is advised by advising bank in
beneficiary’s favor. Where the credit is advised without confirmation, there is no
undertaking to honor (pay at sight, accept a draft and pay at maturity or incur a deferred
payment undertaking and pay at maturity) or negotiate. Unless an advising bank advises
to the contrary, in the advice of the credit or amendment, they will have satisfied
themselves as to the apparent authenticity of the message received. The advice of the
credit or amendment, which advising bank will provide to importers, will accurately
reflect the terms and conditions of the credit or amendment received in beneficiary’s
favor.
Similar to UCP 500, under UCP 600, advising bank is not obliged to advise any L/C
or amendment. In this event, they must inform the issuing bank of their decision without
delay. The UCP 600 does not require that advising bank advise the beneficiary of their
refusal to advise a credit or amendment. Subject to the reason(s) for such a refusal, if it
should happen, they may be in a position to advise the reason(s) to beneficiary. The
following information is intended to be a summary of certain provisions of UCP 600 nor
any of its subsidiaries makes any representation or warranty as to the completeness or
accuracy of the information. Before taking any action related to UCP 600, we
recommend that beneficiary obtain advice from his legal counsel. The information
contained herein is not intended to, and should not be used as a replacement for, legal
advice provided by his own legal counsel.
3.3.3. Recommendations for confirming bank
The confirmation of a L/C is now governed by its own article in UCP 600 –
article 8. As in the case under UCP 500, the confirming bank’s ability to confirm any
L/C will be subject to there being an appropriate confirmation facility in place for the
issuing bank. This would cover criteria such as the amount, expiry and tenor of the
payment period, and, in some cases, the underlying goods.
Article 8 refers to the confirming bank honoring or negotiating provided the
stipulated documents are presented to them, and their determining that the presentation
constitutes a complying presentation.
Sub-article 8 (a) (ii) states that where a credit is available with a confirming
bank by negotiation, the confirming bank negotiates on a without recourse basis;
Sub-article 8 (b) now defines the time when the confirming bank is
irrevocably bound by its confirmation – at the time it adds its confirmation. Therefore, as
of the moment that confirming bank provide their advice of the L/C, with their
confirmation, sub-article 8 (b) has been invoked. In addition, if they be requested to add
their confirmation and they are unable to do so, they are required to advise the issuing
bank without delay of our decision/reason(s). They may be in a position to advise
beneficiary of their reasons(s) for such action. In the event that they decline to confirm,
they may advise the credit without their confirmation.
3.3.4. Recommendations for nominated bank
Nominated bank means the bank that is authorized to honor (pay at sight,
accept a draft and pay at maturity, or incur a deferred payment undertaking and pay at
maturity) or negotiate the beneficiary’s documents upon their determining that the
documents are complying. For a nominated bank acting on their behalf, it is necessary
that the L/C be restricted for payment, acceptance, deferred payment or negotiation at the
counters of their branch where beneficiary has a relationship. Alternatively, the credit
may be advised through nominated bank or any other bank with the statement that it is
available with any bank. Their ability to handle documents under a credit that has been
advised through another bank will be subject to their having a banking relationship with
the issuing bank.
Article 12 of UCP 600 is specifically entitled “nomination” and covers
aspects related to that nomination such as: the receipt, examination and forwarding of
documents to an issuing bank does not constitute honor or negotiation and, unless they
have added their confirmation, there is no obligation to honor or negotiate. As a
nominated bank that has not confirmed the credit, they may agree to act beyond the role
envisaged when expressly agreed to by themselves and communicated to beneficiary.
Probably most importantly, that where an issuing bank issues a credit available with them
by acceptance or deferred payment, they are authorized (subject to credit criteria) to
prepay or purchase subject to complying documents being presented.
Conclusion
The letter of credit continues to remain an important instrument in finance that is
particularly suited to the international business transaction. In addition, globalization has
been a common trend in almost all the economies so that business transaction across
border is now more and more developed. Therefore, it is vital that the rules governing
such transactions are acceptable to traders and financiers all over the world.
It cannot be denied the success of this ICC set of rules which has been evidenced by
the universal acceptance in more than 175 countries worldwide. Now, with the birth of
UCP 600, it is obvious that these rules are more in line with modern day practices and the
changing pattern of trade. Indeed, UCP 600 has been appreciated by the improvements on
its earlier revision in many extents such as language, structure and content, which may
contribute to the level of non-complying presentation reduction. However, UCP 600 is
neither intended to give a precise answer to each and every problem arising in practice
nor universal remedy for all the issues leading to documentary rejections which UCP 500
had not solved yet. As a result, those concerned with international trade, whether in
banking, commerce and industry, transport or insurance, should not act like robots. While
taking full advantage of the overall guidance given by UCP, they should still apply their
own intelligence and experience for the solution of the occasional problem. It will be
better if they can avoid the problem ever arising by the early use of common-sense.
Bankers, for example, as experts in this method of payment, could help their customers
and themselves by timely advice the applicant so that he gives instructions to produce a
workable credit, and to the beneficiary as well, so that he knows precisely what he has to
do to get payment under the credit.
In fact, UCP set of rules need to be supplemented by staff training programs, with
the constant readiness on the part of those who have the knowledge to impart it, and a
matching willingness on the part of all concerned to receive it and act on it.
While time will tell whether documentary rejections are reduced, traders are advised
to make their sale contracts clear and specific in relation to the letter of credit
requirements to minimize the chance of rejections. A suggestion is that strict compliance
and
reasonable
care
for
conforming
documents
remain
essential.
REFERENCES
1. -----2003, International Standard Banking Practice (ISBP) for examination of
documents under documentary Credits, ICC Publishing , S.A., Paris.
2. -----2006, ICC Uniform Customs and Practice for documentary Credit: 2007
Revision, ICC Services, Paris.
3. Bergami, 2007, Will the UCP 600 provide solutions to letter of credit in
transactions?, International review of business research papers.
Website:
http://www.bizresearchpapers.com/Bergami.pdf
4. Bergami,
2007,
UCP
600:
Letter
of
credit
revised.
Website:
http://www.melbournecentre.com.au/Finsia_MCFS/2007/Roberto_Bergami_fin
al.pdf
5. Collyer, 2007, UCP 600-Correct Application and Interpretation. Website:
www.felaban.com/memorias_congreso_clade2007/conf_gari_collier.ppt
6. Collyer, G 2006, “The original of the UCP revision”, Coastline Solutions.
Website: http://www.coastlinesolutions.com/news0.htm.
7. Christensen, 2007, Comments to “Commentary on UCP 600”. Website:
http://www.besttradesolution.com/index.html
8. Christensen, 2006, UCP 600 is made by bankers- Is it helpful to traders?, LC
VIEWS
Newsletter
No.75.
http://www.lcviews.com/ucp_600_is_made_by_bankersis_it_helpful_to_traders.htm
Website:
9. Credit Research Foundation, 1999, Understanding and using letter of credit,
Part I. Website: http://www.crfonline.org/orc/cro/cro-9-1.html
10. Research Foundation, 1999, Understanding and using letter of credit, Part II.
Website: http://www.crfonline.org/orc/cro/cro-9-2.html
11. D’Arcy,L, Murray, C & Cleave, B 2000, Schmitthoff’s export trade: The law
and practice of international trade,10th edn, Sweet & Maxwell, London.
12. Duc, Nguyen Huu, 2007, Ban ve van de chiet khau trong giao dich thu tin dung.
Retrieved Sep 22, 2007. Website: http://thanhai.wordpress.com/2007/09/22/banv%E1%BB%81-v%E1%BA%A5n-d%E1%BB%81-chi%E1%BA%BFtkh%E1%BA%A5u-trong-giao-d%E1%BB%8Bch-th%C6%B0-tind%E1%BB%A5ng/
13. Dharmawadene,
2007,
Introduction
to
UCP
600.
Website:
www.tfab.org/files/Introduction%20To%20UCP%20600.pdf
14. FTU forum, 2008, LC co quy dinh chiet khau. Website: http://ftuforum.net/forums/showthread.php?t=11819&page=3
15. Hue, Bui Thi, 2007, UCP 600 – Ban quy tac thuc hanh thong nhat moi ve thu tin
dung.
Retrieved
Apr
16,
2007.
Website:
www.centralbank.vn/vn/tintuc/tcnh/nguyendinhtrung/tin/tapchi_2007_04_16_0
90455.doc?tin=349
16. Jia Hao, 2007, Comparing UCP 500 and UCP 600, LC VIEWS newsletter
No.90. Website: http://www.lcviews.com/Comparing.htm
17. Thailand 2002, Examination of documents waiver of discrepancies and notice
under
UCP
500,
ICC
Thailand,
Website:
http://www.iccthailand.or.th/article2.asp?id=9>
18. International Chamber of Commerce 1993, Uniform Customs and Practice for
Documentary Credit, ICC Publishing , S.A., Paris.
19. Letter
of
credit
forum,
Letters
of
credit.
Website:
http://letterofcreditforum.com/forum/2
20. Lajzerowicz,
2007,
UCP
500
and
UCP
600-an
update.
Website:
http://www.itic-insure.com/publications/intermediary/200709_intermediary_pg5.php
21. Mann.J, 2000, The role of letter of credit in payment transaction. Website:
http://papers.ssrn.com/paper.taf?abstract_id=214633Richardson. G, 2008, LCs
Letters
of
credit.
Website:
http://www.witiger.com/internationalbusiness/LCs.htm
22. Manne.W, 2007, The new UCP 600-Changes from UCP 500. Website:
http://www.tuckerlaw.com/visit/The%20new%20UCP%20600%20BWM%20Pr
esentation.pdf
23. Nawar
LLB,
UCP
600
-
Some
highlights.
Website:
http://www.aclsrilanka.com/downlaods/nawas_ucp_600.pdf
24. SITPRO
Ltd,
2007,
Letter
of
credits:
http://www.sitpro.org.uk/trade/lettcredintro.pdf
An
introduction.
Website:
25. Smith. R & Butter. R, Commodities finance-Impact of UCP 600-A guideline to
the
new
rules.
Website:
http://www.reedsmith.com/_db/_documents/UCP600__Booklet_Complete.pdf
26. The Institute of Bankers, 2008, Documentary Credits – UCP 600. Website:
http://www.ibp.org.pk/DC-UCP-600.pdf
27. Tien Nguyen Nhu. (2007), “Chung tu chuyen cho hang hoa bang duong bien va
nhung van ve can quan tam theo quy dinh cua UCP600”, Journal of Tap chi
hang
hai
Vietnam.
Received
Aug17,
2007.
Website:
http://www.saga.vn/Kinhtehockinhdoanh/Thuongmai/5695.saga
28. Tien, Nguyen Nhu, 2007, Huong dan ap dung UCP 600. Website:
http://cnqtdn.googlepages.com/ucp600
29. TD
Bank
group,
2003,
A
guide
to
letters
of
credit.
Website:
http://www.tdsecurities.com/tds/pdfs/TDS3.3.6.1PDF1.pdf
30. “UCP
600
&
UCP
500
compared”,
2007.
Website:
http://thanhai.files.wordpress.com/2007/09/ucp600vsucp500.pdf
31. Wikipedia, 2008, Letters of credit. Retrieved May 27. 2008. Website:
http://en.wikipedia.org/wiki/Letter_of_credit
APPENDIX
Appendix 1: Destination table UCP 500-UCP 600
Appendix 2: Sample of letter of credit application form
Table of content
ACKNOWLEDGEMENTS ............................................ ERROR! BOOKMARK NOT DEFINED.
ABSTRACT ....................................................................................................................... II
LIST OF ABBREVIATION................................................................................................... III
LIST OF FIGURES .............................................................................................................IV
INTRODUCTION .......................................................................................................... 0
1. RELEVANT OF THE STUDY .......................................................................................... 0
2. AIMS OF THE STUDY ................................................................................................... 1
3. RESEARCH METHODOLOGY ........................................................................................ 1
4. OBJECT AND SCOPE OF THE STUDY ............................................................................ 2
5. STRUCTURE OF THE STUDY ........................................................................................ 2
CHAPTER I: LITERATURE REVIEW ..................................................................... 3
1.1 WHAT IS UCP? ........................................................................................................... 3
1.1.1 The born of UCP 500 ....................................................................................... 4
1.1.2. The born of UCP 600 ...................................................................................... 5
1.2 WHAT IS DOCUMENTARY CREDIT? ............................................................................ 6
1.2.1. Classification ................................................................................................... 8
1.2.2. The mechanics of letter of credit transaction ................................................ 15
1.2.3. Parties involved in a letter of credit transaction........................................... 20
CHAPTER 2: KEY CHANGES UNDER UCP 600 COMPARED TO UCP 500 .. 23
2.1. CHANGES IN STRUCTURE OF UCP 600 COMPARED TO UCP 500 ............................. 23
2.1.1. UCP 500 articles not included in UCP 600 .................................................. 24
2.1.2. New articles for UCP 600 ............................................................................. 25
2.2. KEY CHANGES UNDER UCP 600 COMPARED TO UCP 500 ....................................... 26
2.2.1. Changes application method ......................................................................... 26
2.2.2. Changes in Definitions and interpretations .................................................. 26
2.2.3. Changes in types of credit ............................................................................. 29
2.2.4. Changes in time required for examination of documents ............................. 30
2.2.5. Changes in addresses of of beneficiaries and applicants ............................. 31
2.2.6. Changes in refusal notice .............................................................................. 31
2.2.7. Changes in transport documents ................................................................... 32
2.2.8. Changes in some other articles ..................................................................... 33
2.3. IMPROVEMENTS AND REMAINING PROBLEMS UNDER UCP 600 ............................... 36
2.3.1. UCP 600’s improvements .............................................................................. 36
2.3.2. Remaining problems in UCP 600 .................................................................. 38
CHAPTER III............................................................................................................... 43
RECOMMENDATIONS FOR BETTER UCP 600 APPLICATION ..................... 43
3.1. RECOMMENDATIONS FOR EXPORTERS INVOLVED IN L/C TRANSACTION................. 43
3.1.1. Checking detailed content on receipt of the letter......................................... 44
3.1.2. Preparing documents for presentation to the Bank ...................................... 49
3.1.3. Presenting documents to the bank without delay and within the expiry
date and transport document time limit .................................................................. 52
3.1.4. Dealing with discrepancies ........................................................................... 53
3.2. RECOMMENDATIONS FOR IMPORTERS INVOLVED IN L/C TRANSACTION ................. 54
3.2.1. Arranging for the Letter of Credit ................................................................. 54
3.2.2. Completing the Application Form ................................................................. 59
3.3. RECOMMENDATIONS FOR BANKS INVOLVED IN L/C TRANSACTION ........................ 65
3.3.1. Recommendations for issuing bank ............................................................... 65
3.3.2. Recommendations for advising bank............................................................. 67
3.3.3. Recommendations for confirming bank......................................................... 68
3.3.4. Recommendations for nominated bank ......................................................... 69
CONCLUSION ............................................................................................................. 69
REFERENCES .................................................................................................................
APPENDIX .......................................................................................................................
APPENDIX 1: DESTINATION TABLE UCP 500-UCP 600 ......................................................
APPENDIX 2: SAMPLE OF LETTER OF CREDIT APPLICATION FORM ......................................
Abstract
Letters of credit (L/Cs) or documentary credits (D/Cs) remain an
important tool for financing and settling international trade transactions. They
enjoy wide acceptance in the trading community because they are considered
to carry low financial risk.
L/Cs are subject to a specific rules that were first standardized by the
International Chamber of Commerce (ICC) in 1933 and updated on a regular
basis. In the October 2006, the ICC announced that a new revision of these
rules, the so-called ICC Uniform Customs and Practice for Documentary
Credits, 2007 Revision, UCP 600, which became effective from 1 July 2007.
In this study, a background to the UCP rules as well as documentary
credit are firstly provided, followed by the analysis of the key changes under
UCP 600 compared to its earlier revision-UCP 500. Basing on the findings, an
evaluation on the UCP 600’s improvements and remaining problems will be
mentioned. The thesis concludes with the recommendations for main
stakeholders involved in L/C transaction to appropriately apply the new UCP
600.
List of abbreviation
AWB
: Airway bill
B/L
: Bill of Lading
D/C
: Documentary credit
eUCP
: Supplementary to the Uniform Customs and Practice for
Documentary Credits for Electronic Presentation.
ICC
: International Chamber of Commerce
ISBP
: International Standard Banking Practice for Examination of
Documents Under Documentary Credit
Incoterms
: International Commercial Terms
ISP
: International Standard Practice
L/C
: Letter of credit
UCP
: Uniform Customs and Practice for Documentary Credits
URR
:
Uniform
Rules
Documentary Credit
WG
: Working Group
for
Bank-to-Bank
Reimbursements
Under
List of figures
Figure 1: Back – to – back of credit transaction ............................................................ 14
Figure 2: Issuance of letter of credit .............................................................................. 19
Figure 3: Payment under a letter of credit ...................................................................... 20
Figure 4: Sample of letter of credit application form.................................................... 62
TABLE OF CONTENT
ACKNOWLEDGEMENTS ............................................................................................... i
ABSTRACT .................................................................................................................... ii
LIST OF ABBREVIATION ............................................................................................ iii
LIST OF FIGURES ........................................................................................................ iv
INTRODUCTION ....................................................................................................... 1
1. RELEVANT OF THE STUDY ..................................................................................... 1
2. AIMS OF THE STUDY ............................................................................................... 2
3. RESEARCH METHODOLOGY .................................................................................. 2
4. OBJECT AND SCOPE OF THE STUDY ..................................................................... 3
5. STRUCTURE OF THE STUDY ................................................................................... 3
CHAPTER I: LITERATURE REVIEW .................................................................. 4
1.1. WHAT IS UCP? ........................................................................................................ 4
1.1.1. The born of UCP 500 .................................................................................... 5
1.1.2. The born of UCP 600 .................................................................................... 6
1.2. WHAT IS DOCUMENTARY CREDIT? .................................................................... 7
1.2.1. Classification .............................................................................................. 10
1.2.2. The mechanics of letter of credit transaction ............................................. 16
1.2.3. Parties involved in a letter of credit transaction ........................................ 21
CHAPTER 2: KEY CHANGES UNDER UCP 600 COMPARED TO UCP 500 24
2.1. CHANGES IN STRUCTURE OF UCP 600 COMPARED TO UCP 500.................... 24
2.1.1. UCP 500 articles not included in UCP 600 ............................................... 25
2.1.2. New articles UCP 600 ................................................................................ 26
2.2. KEY CHANGES UNDER UCP 600 COMPARED TO UCP 500 .............................. 27
2.2.1. Changes application method ...................................................................... 27
2.2.2. Changes in Defintions and interpretations ................................................. 27
2.2.3. Changes in types of credit ......................................................................... 30
2.2.4. Changes in time required for examination of documents ........................... 31
2.2.5. Changes in addresses of beneficiaries and applicants .......................................... 32
2.2.6. Changes in refusal notice ...................................................................................... 32
2.2.7. Changes in transport documents ........................................................................... 33
2.2.8. Changes in some other articles ....................................................................... 34
2.3. IMPROVEMENTS AND REMAINING PROBLEMS UNDER UCP 600 .................. 38
2.3.1. UCP 600’s improvements ........................................................................... 38
2.3.2. Remaining problems in UCP 600 ............................................................... 40
CHAPTER III ............................................................................................................ 45
RECOMMENDATIONS FOR BETTER UCP 600 APPLICATION .................. 45
3.1. RECOMMENDATIONS FOR EXPORTERS INVOLVED IN L/C TRANSACTION . 45
3.1.1. Checking detailed content on receipt of the letter ...................................... 46
3.1.2. Preparing documents for presentation to the Bank .................................. 52
3.1.3. Presenting documents to the bank without delay and within the expiry
date and transport document time limit ................................................................ 55
3.1.4. Dealing with descrepancies ........................................................................ 55
3.2. RECOMMENDATIONS FOR IMPORTERS INVOLVED IN L/C TRANSACTION . 57
3.2.1. Arranging for the Letter of Credit ........................................................... 57
3.2.2. Completing the Application Form ............................................................ 61
3.3. RECOMMENDATIONS FOR BANKS INVOLVED IN L/C TRANSACTION ......... 67
3.3.1. Recommendations for issuing bank ............................................................ 67
3.3.2. Recommendations for advising bank ......................................................... 69
3.3.3. Recommendations for confirming bank ...................................................... 70
3.3.4. Recommendations for nominated bank....................................................... 71
CONCLUSION .......................................................................................................... 72
REFERENCES
APPENDIX
APPENDIX 1: DESTINATION TABLE UCP 500 – UCP 600
APPENDIX 2 : SAMPLE OF LETTER OF CREDIT APPLICATION FROM