Following Documentary Credit Uniform Customs and Practice
Documentary Credit (D/C) can be defined as “an arrangement whereby a bank (issuing bank) acting at the request and on the instructions of a customer (applicant) or on its own behalf, authorizes another bank (advising or confirming bank) to make payment to or to the order of a third party or to accept and pay its drafts, or to negotiate against stipulated documents provided shipping and other documents (if any) conform to the terms and conditions of the credit”. Since the 1890s, various customs, traditions and practices for documentary credits have grown up in international commerce, either as conventions or unwritten rules. As it is difficult to prove such usage, in 1933, the International Chamber of Commerce (ICC) in Paris established The Universal Commercial Code (UCC) which served as the basis for the current rules and regulations for the use of D/Cs. In 1939, the International Chamber of Commerce (ICC) issued a revised set of the Uniform Customs and Practice for Documentary Credits, known as UCP 600 which came into effect on July 1, 2007.
UCP 600 applies to any documentary credit which is “irrevocable” or “confirmed”, including all types of documentary credits, such as: stand-by letters of credit, demand guarantees, collections and payments by document. UCP 600 is the only uniform set of rules which can be used to interpret and solve the disputes arising out of documentary credits. With limited exceptions, it applies to documentary credits (irrevocable and confirmed) issued, amended or confirmed on or after 1 July 2007, irrespective of place or date of issuance or payment, governing rights and obligations of issuing banks, confirming banks and applicants and beneficiaries.
UCP 600 consists of 39 Articles and 6 Appendices and provides guidance to banks that issue and process D/Cs. Most D/C transactions require a standard set of documents and any additional documents such as Letters of Credit Insurance and Indian Regulatory documents like Shipping Bill, Advance Authorisation Certificate and Certificate of Origin may be required depending on the country of origin and destination.
UCP 600 contains rules regarding indemnity, documents as must requirements and documents as non-must requirements. It also lists documents and points of observation which the advising or confirming bank must look out for, and demands that all drafts must pass the test of “Drawees Only Clause” and that all documents must be sighted. The ‘Documents as Evidence’ rule under UCP 600 states that documents presented under a D/C must be examined for major discrepancies instead of for minor discrepancies, within the stipulated time period.
UCP 600 defines an indemnity, which is a contract between the beneficiary and applicant, that the beneficiary shall be repaid in the event that the applicant does not honour its obligation under the D/C. The indemnity is an agreement between the issuing bank and the advising bank, on the one hand, and the applicant, on the other hand, in order to fulfil their obligations towards the beneficiary in case of dishonour of the credit terms.
UCP 600 also establishes a time limit for the processing of documents and the handling of claims. Issuing banks and beneficiaries must process documents within a ‘reasonable time’. For example, UCP 600 states that if the documents are in order, then the issuing bank must honour them within five banking days of the presentation.
The use of UCP 600 in the world of documentary credits helps reduce potential misunderstandings and conflict, as well as create greater confidence in international trade by providing a standard set of rules for all parties in the transaction. It is important for any parties involved in international trade to familiarise themselves with the rules of UCP 600 if they wish to use a documentary credit to process their payments.
