Trade Finance — Part 2 - Letter of credit - Uniform Customs and Practice for Documentary Credits (UCP) 600
Trade rules : UCP 600
Consist of : 39 Articles
Effective date : 1 July 2007
Issued by : ICC
Is it first release : No, it is the sixth revision to the trade finance UCP rules
Is it government organization : No, it is private international organization
Why : Global uniform clear concise trade rules world over
Whom : For bankers, lawyers, importers, and exporters, transport executives, educators, and everyone involved in letter of credit transactions worldwide.
What this article is about — Short introduction about what each article speaks about
“Yoyo” failed to present the document to nominated bank before expiry date of the SBLC. Due date was 11 July 2020.
Now what? 🤷♀️
Will he loose on all his blood and sweat and hours of toiling?🤞
Let’s find out?
I have tried to note down all the 39 articles in very concise form with elaborating only few of them here. For those interested in understanding the detail interpretation please go through website provided in the reference to this article and refer UCP 600.
The 39 articles try to provide clarity on issues like :
1. By when documents should be presented
2. Should it be original documents
3. What if bank is closed on the day of the presentation
4. First half of the month means what period
5. Period of shipment says “between” does it means both dates are included?
6. What if bank is closed due to war/strikes in the zone?
7. Is bank part of the sales contract between parties?
8. Credit is available with which bank, any branch of it? or the one mentioned on the credit document?
9. Middle of the month means?
10. Whether bank deal with goods/services mentioned in the credit?
11.Who should bear the charges?
12. Is there standard period of presentation days?
13.What if you provide excess documents then mentioned in the credit document?
14. Should clean be mentioned on the transport document?
And so on….
Article 1 Application Clause
🔹If your document mentions UCP 600, then these rules are binding on all parties thereto unless expressly modified or excluded by the credit.
Article 2 Definition Clause
🔹This clause provides definition of basic terms in the credit document.
1)Advising bank - Advises on behalf of the issuing bank
2)Applicant - The person who applies credit document to be issued. For instance in trading of goods it will be Buyer.
3)Banking day -Day on which a bank is regularly open at the place at which an act subject to these rules is to be performed.
4)Beneficiary party- in whose favor a credit is issued.
5)Confirmation- means a definite undertaking of the confirming bank, in addition to that of the issuing bank, to honor or negotiate a complying presentation
6)Confirming bank- means the bank that adds its confirmation to a credit upon the issuing bank’s authorization or request.
7)Credit- Any arrangement/definite undertaking of the issuing bank to honour a complying presentation
8)Honour can be
a) Pay at sight — Sight payment
b) Pay deferred — Pay at maturity date
c) Accept bill of exchange -Pay at maturity date
9)Issuing bank -Bank that issues a credit at the request of an applicant or on its own behalf
10)Nominated Bank -Bank with which the credit is available
11)Presentation -Delivery of the documents to issuing/nominated bank
12)Presenter -Beneficiary/person that makes presentation
Article 3 Interpretations
🔹A credit is irrevocable unless mentioned otherwise
🔹Modes of signature that are acceptable, handwritten, etc.
🔹Branches of a bank in different countries are considered to be separate banks.
🔹Date for period of shipment words like to, until, till, from, between include the dates mentioned
🔹Date for period of shipment words like “before” and “after” means exclude the date mentioned
🔹Maturity date — if include from/after shall exclude the date mentioned
🔹First half 1–15 inclusive of both the date, Second half 16-end of the month date both date inclusive
🔹Beginning of month 1–10 both date inclusive, middle 11–20 both date inclusive and end 21- last date of the month end both date inclusive
Article 4 Credits v. Contracts
🔹Credit (LC) by its nature is a separate transaction from the sale or other contract on which it may be based.
🔹Banks are in no way concerned with or bound by such contract, even if any reference whatsoever to it is included in the credit.
🔹An 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.
🔹Basically, bank has no relation to your transaction. What matters for bank is only financing document related to it.
Article 5 Documents v. Goods, Services or Performance
🔹Banks deal with documents and not with goods, services or performance to which the documents may relate.
Article 6 Availability, Expiry Date and Place for Presentation
🔹A credit must state the bank with which it is available.
🔹A credit must state whether it is available by sight payment, deferred payment, acceptance or negotiation.
🔹A credit must state an expiry date for presentation.
🔹The place of the bank with which the credit is available is the place for presentation.
For instance , if it is written “Bank of India, Ichalkaranji” then you cannot go to Bank of India, Kolhapur or any other place where in bank has its branches. It has to be strictly presented at Ichalkaranji branch of Bank of India.
Article 7 Issuing Bank Undertaking
Article 8 Confirming Bank Undertaking
Article 9 Advising of Credits and Amendments
Article 10 Amendments
Article 11 Teletransmitted and Pre-Advised Credits and Amendments
Article 12 Nomination
Article 13 Bank-to-Bank Reimbursement Arrangements
Article 14 Standard for Examination of Documents
🔹It prescribes the rules to read the SBLC and the documents submitted along with guidance if nothing is mentioned on the credit.
🔹Presentation days not later then 21 days After the date of shipment unless but in any event not later than the expiry date of the credit
🔹Description of goods on credit document and invoice should match.
🔹A document presented but not required by the credit will be disregarded and may be returned to the presenter.
🔹A document may be dated prior to the issuance date of the credit, but must not be dated later than its date of presentation
Article 15 Complying Presentation
🔹Nominated/confirming/issuing determines that a presentation is complying, it must honour/forward the documents further.
🔹It means if the documents are presented and are in order then the same shall be forwarded by the party(confirming bank, nominated bank, issuing bank) further as required for honouring of the credit on due date.
Article 16 Discrepant Documents, Waiver and Notice
Article 17 Original Documents and Copies
🔹At least one original of each document stipulated in the credit must be presented.
🔹A bank shall treat as an original any document bearing an apparently original signature, mark, stamp, or label of the issuer of the document, unless the document itself indicates that it is not an original.
🔹If a credit requires presentation of copies of documents, presentation of either originals or copies is permitted.
🔹If a credit requires presentation of multiple documents by using terms such as “in duplicate”, “in two fold” or “in two copies”, this will be satisfied by the presentation of at least one original and the remaining number in copies, except when the document itself indicates otherwise.
Article 18 Commercial Invoice
🔹Issued by beneficiary in the name of applicant
🔹Same currency as credit
🔹Need not be signed
🔹The description of the goods, services or performance in a commercial invoice must correspond with that appearing in the credit.
Article 19 Transport Document Covering at Least Two Different Modes of Transport
Article 20 Bill of Lading
Article 21 Non-Negotiable Sea Waybill
Article 22 Charter Party Bill of Lading
Article 23 Air Transport Document
Article 24 Road, Rail or Inland Waterway Transport Documents
Article 25 Courier Receipt, Post Receipt or Certificate of Posting
Article 26 On Deck”, “Shipper’s Load and Count”, “Said by Shipper to Contain” and Charges Additional to Freight
Article 27 Clean Transport Document
🔹The word “clean” need not appear on a transport document, even if a credit has a requirement for that transport document to be clean on board
Article 28 Insurance Document and Coverage
🔹This clause provides guidance when the goods are supposedly under insurance. Then the clause should be read.
🔹For instance when a credit requires insurance against “all risks” and an insurance document is presented containing any “all risks” notation or clause, whether or not bearing the heading “all risks”, the insurance document will be accepted without regard to any risks stated to be excluded.
Article 29 Expiry date of a Credit
🔹What if your last day of presentation is falls on a day when the bank to which presentation is to be made is closed for reasons other than those referred to in article 36.
🔹Expiry is extended to the first following banking day.
*Exception article 36 (like strikes/act of gods/wars,etc)
*Doesn’t apply for SHIPMENT DATE.
Article 30 Tolerance in Credit Amount, Quantity and Unit Prices
🔹Here you can specify the tolerance level with respect to amount, quantity and prices.
🔹Generally every SBLC have it to be kept at 5%/10% by the banks as specified in UCP norms.
Article 31 Partial drawings or shipments
🔹The clause gives guidance on shipment in parts and the related drawings by presentation of the documents.
Article 32 Instalment Drawings or Shipments
Article 33 A bank has no obligation to accept a presentation outside of its banking hours.
Article 34 to 35 Disclaimer on bank’s assumes on liability for _Effectiveness of Documents _Transmission and Translation
Article 36
🔹Bank has no liability for interruption of its business by Acts of God, riots, civil commotions, insurrections, wars, acts of terrorism, or by any strikes or lockouts or any other causes beyond its control.
🔹A bank will not, upon resumption of its business, honour or negotiate under a credit that expired during such interruption of its business
Article 37 Disclaimer for Acts of an Instructed Party
🔹What if acts which needs to be performed by the party are delegated who owns the responsibility is specified here.
🔹For instance, An issuing bank or advising bank assumes no liability or responsibility should the instructions it transmits to another bank not be carried out, even if it has taken the initiative in the choice of that other bank.
Article 38 Transferable Credits
🔹The clause specifies more information when the SBLC contains transferable clauses.
🔹What is transferable credit?
🔹Transferable credit means a credit that specifically states it is “transferable”. A transferable credit may be made available in whole or in part to another beneficiary (“second beneficiary”) at the request of the beneficiary (“first beneficiary”). For instance in our example, Yoyo (Seller) may ask for transferable SBLC to be issued by the Xoxo (Buyer) bank and ask to add “Zozo”(Second beneficiary- added by Yoyo). However, for nominated bank to transfer the credit, “Yoyo” will have to instruct them to transfer only on his instruction bank will transfer.
Article 39 Assignment of Proceeds
🔹The fact that a credit is not stated to be transferable shall not affect the right of the beneficiary to assign any proceeds to which it may be or may become entitled under the credit, in accordance with the provisions of applicable law.
🔹This article relates only to the assignment of proceeds and not to the assignment of the right to perform under the credit.
Q&A Session✌
Yoyo can present the document till 13th July 2020 though the expiry date was 11th July 2020.😊 As per Article 29 UCP 600, if the expiry date for presentation of document falls on the day when bank is closed then the due date is automatically shifted to first following banking day i.e., 13th July 2020 in our case.
It sounds so easy here, practical application is damn challenging and when you are dealing in insane amounts “millions/billions” these clauses come as a helping hand. Trust me it does.
1. By when documents should be presented
💡On or before LC expiry date mentioned on the credit document (Article 6 Availability, Expiry Date and Place for Presentation)
2. Should it be original documents
💡Depends what you have written on the credit document negotiated and accepted during your dealing. (Article 17 Original Documents and Copies)
3. What if bank is closed on the day of the presentation
💡Present the document on the first following banking day (Article 29 UCP 600)
4. First half of the month means what period
💡1–15th of the month is consider as first half of the month for the credit document (Article 3 Interpretations)
5. Period of shipment says “between” does it means both dates are included?
💡Yes (Article 3 Interpretations)
6. What if bank is closed due to war/strikes in the zone?
💡As per article 36 UCP 600,
“A bank assumes no liability or responsibility for the consequences arising out of the interruption of its business by Acts of God, riots, civil commotions, insurrections, wars, acts of terrorism, or by any strikes or lockouts or any other causes beyond its control.
💡A bank will not, upon resumption of its business, honour or negotiate under a credit that expired during such interruption of its business”
7. Is bank part of the sales contract between parties?
💡BIG NO. As per article 4, Banks are in no way concerned with or bound by such contract, even if any reference whatsoever to it is included in the credit.
8. Credit is available with which bank, any branch of it? or the one mentioned on the credit document?
💡The credit will be strictly available with the bank mentioned on the credit document. Do remember each bank branch is different for the credit document. Hence, the branch location mentioned is of as much importance as other information. (Article 6 -Availability, Expiry Date and Place for Presentation)
9. Middle of the month means?
💡11–20 of the month both dates inclusive (Article 3 — Interpretations)
10. Whether bank deal with goods/services mentioned in the credit?
💡Bank deal with documents and not with goods, services or performance to which the documents may relate.
11.Who should bear the charges?
💡These should be mentioned on the credit document. If not then it will be borne as per UCP 600 norms.(Article 37 Disclaimer for Acts of an Instructed Party)
12. Is there standard period for presentation of documents?
💡21 days after the date of shipment(Article 14 Standard for Examination of Documents)
13.What if you provide excess documents then mentioned in the credit document?
💡The excess document will be disregarded and may be returned to the presenter.(Article 14 Standard for Examination of Documents)
14. Should clean be mentioned on the transport document?
💡It need not appear on a transport document, even if a credit has a requirement for that transport document to be clean on board.(Article 27 Clean Transport Document)
No matter how much clarity you offer there is always a way for vagueness, How? that’s what we call human intelligence(haha just for fun). Practically, every people gauze, interpret wording differently. Though so much clarity is there while practical application, it really keeps you on your toes due to the complexity of the overall flow of the transaction, amounts involved, different stakeholders involved, etc. Hence, it is very important to know your purpose of SBLC and then accordingly walk through the article most relevant to your arena.
Below are the trade finance related other articles for quick understanding the basics.
A. Relevance of trade finance in short do read :
https://medium.com/@nilutjain/business-trade-finance-relevance-b901e29649c4
B. Trade Finance — Part 1 Introduction — Simple Mechanism of Letter of credit — Do read
https://medium.com/@nilutjain/trade-finance-part-1-introduction-simple-mechanism-of-letter-of-credit-c30117412632
Thank you✔👍
References :
1. ICC — https://iccwbo.org
