The UCP 600 Rules

All letters of credit should be issued subject to a set of rules established by the International Chamber of Commerce, and known officially as The Uniform Customs and Practice for Documentary Credits (ICC Publication 600). The current version is  "UCP 600"

This discussion is intended to summarize and clarify the articles that comprise UCP 600. Partial quotes are made in this section. The complete UCP 500 is available from the International Chamber of Commerce (http://www.iccwbo.org).

Art. 1 Application of UCP

This article states that all letters of credit, including standbys, are issued subject to UCP 500 provided that the L/C specifically indicates this to be the case. Great care should be taken to avoid accepting Credits that are not issued subject to UCP 500.

Art. 2 Meaning of Credit

The expressions Documentary Credit(s) and Standby Letter(s) of Credit are referred to as Credit(s). A Credit is "any arrangement, however named or described, whereby a bank (the 'issuing bank') acting at the request of and on the instructions of a customer (the 'applicant') or on its own behalf,

(i) is to make payment to or to the order of a third party (the 'beneficiary'), or is to accept and pay bills of exchange (Drafts) drawn by the beneficiary, or

(ii) authorises another bank to effect such payment, or to accept and pay such bills of exchange (Drafts), or

(iii) authorises another bank to negotiate, against stipulated document(s), provided that the terms and conditions of the Credit are complied with.

For the purpose of these Articles, branches of a bank in different countries are considered another bank."

Essentially what this article is saying that a Credit is any instrument issued by a bank subject to UCP 500 that contains a conditional undertaking to effect payment provided that its terms and conditions have been complied with.

Art. 3 Credits v. Contracts

"Credits, by their nature are separate transactions from the sales or other contract(s) on which they may be based..."

(a) This article makes a distinct difference between the Credit itself and any underlying contract to which the transaction is connected. Banks are not concerned with any underlying contracts, and an applicant cannot prevent a bank from paying on a Credit simply because the applicant asserts that the underlying contract has been broken or not fulfilled.

(b) There may be various contractual relationships which exist between banks or between the applicant and the issuing bank. Beneficiaries may not avail themselves of such relationships (see Art. 4).

Art. 4 Documents v. Goods/Services/Performance

"In Credit operations all parties concerned deal with documents, and not with goods, services and/or other performances to which the documents may relate."

For example: A Credit calls for shipment of "5 blade ceiling fans," and the applicant (buyer) learns that the beneficiary shipped "4 blade ceiling fans." The applicant cannot instruct the bank to deny payment. So long as the documents being submitted describe the goods as "5 blade ceiling fans," the bank is obligated to pay (assuming all other terms and conditions were complied with). Likewise, if a Standby Credit contains a clause that requires the beneficiary to submit a statement certifying that "The applicant is in default under their contract #1234 dated May 15, 1996," then the applicant is precluded from instructing the bank to deny payment simply on the basis that they (the applicant) asserts that they were not in default.

Art. 5 Instructions to Issue/Amend Credits

(a) "Instructions for the issuance of a Credit, the Credit itself, instructions for an amendment thereto, and the amendment itself, must be complete and precise."

(i) In order to avoid confusion and detail Credits should not include excessive detail, i.e., the merchandise description should be brief and not a long "shopping list." An acceptable description would be "Hardware items as per buyer's purchase order no. 2334." An unacceptable description would be a listing of all the various items covered in the purchase order. Excessive detail does not add to the protection of the applicant, and could detract from the beneficiary(ies) ability to collect.

(ii) Also, a Credit should not be issued by making reference to the terms and conditions of a previous Credit.

(b) The Credit must state precisely the documents that are to be presented.

Art. 6 Revocable v. Irrevocable Credits

"A Credit may be either (i) revocable or (ii) irrevocable"

(See Art. 8 for definition of a revocable Credit.) All Credits issued should be irrevocable. This is so as to prevent the applicant from canceling or amending the Credit without the permission of the beneficiary. It is preferable for the Credit to state whether it is revocable or irrevocable. However, in the absence of wording to the contrary, all letters of credit are considered to be irrevocable.

Art. 7 Advising Bank's Liability

"A Credit may be advised to a Beneficiary through another bank (the Advising Bank') without engagement on the part of the Advising Bank...."

(a)(b) Issuing banks usually transmit Credits via a correspondent bank. The correspondent bank may act in the role of either an advising bank or as a confirming bank. The advising bank's responsibility is limited to taking reasonable care to ensure the authenticity of the Credit. If they are unable to verify authenticity they must notify the issuing bank right away. Should the advising bank choose to advise an "unauthenticated" Credit, they must so indicate on their cover letter to the beneficiary.

This responsibility on the part of an advising bank is very important. Unfortunately, there have been numerous documented cases of "bogus" letters of credit being issued, and then "advised" or "confirmed" by yet another "bogus" bank in the beneficiary's country. This is just one good reason to arrange for letters of credit to be advised/confirmed by the beneficiary(ies) bank whenever possible.

Art. 8 Revocation of a Credit

(a) "A revocable Credit may be amended or canceled by the issuing bank at any moment and without prior notice to the Beneficiary."

(b) (i)(ii) In the rare case where a revocable Credit has been issued, the Issuing (opening) bank must reimburse the paying or accepting bank for any drawings that were made in compliance with the terms of the Credit prior to receiving any notice of cancellation.

Art. 9 Liability of Issuing and Confirming Banks

"An irrevocable Credit constitutes a definite undertaking of the Issuing Bank...."

(a) An irrevocable Credit is a conditional undertaking to make payment provided that the required documents are submitted in compliance with the terms and conditions of the Credit. These undertakings include an agreement to:

(i) pay sight Credits at Sight. This means that the issuing bank must effect payment (or reimburse the negotiating/nominated bank) within seven banking days of receipt of documents (see Art. 13 b) that are in compliance with the terms of the Credit.

(ii) pay deferred Credits on their maturity date

(iii) (if the Credit provides for Acceptance):

(A) accept Draft(s) drawn on the Issuing Bank and pay them at maturity, or

(B) accept Draft(s) drawn on the Issuing Bank and pay at maturity drafts that were originally intended to be drawn on another drawee bank that was stipulated in the original Credit. This situation might arise if the Issuing Bank's correspondent was designated as the drawee bank but declined to accept Draft(s) due to lack of availability under the Issuing Bank's line of credit. Bear in mind that an advising bank has no obligation to pay or accept drafts drawn on them.

(iv) pay without recourse to drawers and/or bona fide holders (under freely negotiable credits) for Draft(s) and documents presented in compliance with the terms of the Credit. A freely negotiable Credit means that the beneficiary may present documents to any bank of his/her own choosing. (Also see Art. 10 b.: "Negotiation means the giving of value [i.e., paying or accepting] for Draft(s) and/or documents by the bank authorised to negotiate. Mere examination of the documents without giving value does not constitute a negotiation.)"

(b) This section deals with confirmation of letters of credit. When one bank confirms another banks' Credit, at the request of the Issuing Bank, the Confirming Bank undertakes in addition to the Issuing Bank and provided that the documents are in compliance with the Credit the following obligations:

(i) pay sight Credits at Sight. This means that the confirming bank must effect payment within seven banking days of receipt of documents (see Art. 13 b) that are in compliance with the terms of the Credit.

(ii) pay deferred Credits on their maturity date (in) (if the Credit provides for Acceptance):

(A) accept Draft(s) drawn on the Confirming Bank and pay them at maturity, or

(B) accept Draft(s) drawn on the Confinning Bank and pay at maturity drafts that were originally intended to be drawn on another drawee bank that was stipulated in the original Credit. This situation might arise if the Drawee Bank failed to pay sight drafts or pay accepted drafts at maturity. (Generally speaking, the confirming bank will require that drafts be drawn on themselves and not a third party drawee bank.)

(iv) pay without recourse to drawers and/or bona fide holders (under freely negotiable credits) for Draft(s) and documents presented in compliance with the terms of the Credit.

(c) (i) If a bank is requested to confirm a Credit by the Issuing Bank, but is unwilling to do so, then they must so notify the Issuing Bank without delay.

(ii) If the Advising Bank hasdeclined to confirm the Credit it may still advise the Credit to the Beneficiary unless the Issuing Bank has prohibited such an action.

(d) (i) An irrevocable Credit cannot be amended or canceled without the agreement of the Issuing Bank, the Confirming Bank (if any), and the Beneficiary. The only minor exception is covered under Transferable Credits, Article 48 D.

(ii) An Issuing Bank is bound by any amendments as soon as it has issued them. A Confirming Bank is likewise bound from the moment that it extends its confirmation to any amendment. However, a Confirming Bank may decline to extend its confirmation to an amendment, and, if they do so, they must inform the Issuing Bank and the Beneficiary without delay.

(iii) An amendment does not become effective until the Beneficiary accepts the amendment. Acceptance may be in writing. If the Beneficiary does not accept the amendment in writing but subsequently presents documents, then at that time the amendment will become effective. If the beneficiary wishes to reject the amendment they should do so in writing prior to presenting documents for payment.

(iv) If there is more than one amendment covered in the same amendment advice, the Beneficiary must accept or reject all amendments in that particular advice.

Art. 10 Types of Credit

(a) "All Credits must clearly indicate whether they are available by sight payment, by deferred payment, by acceptance or negotiation."

(b) (i) All Credits must designate (nominate) which bank is authorized to pay, accept, negotiate etc. drafts drawn under the Credit. If the Credit is "freely negotiable" then any bank of the Beneficiary(ies) choosing is considered to be the Nominated Bank. The only exception is if the Issuing Bank restricts availability to itself. Documents must be presented to the Issuing, Confirming, or Nominated Bank.

(ii) Negotiation means that the bank to whom documents are presented has paid or accepted the draft(s), and therefore has given value to the Beneficiary. A simple document examination without giving value is not regarded as a negotiation. A bank that has simply examined documents may not avail themselves of the protections that apply to Negotiating banks.

(c) Essentially what this article is saying is that a Nominated bank has no obligation to pay/accept draft(s) unless they have also added their confirmation.

(d) Once an Issuing Bank has designated a Nominated, Negotiating or Confirming Bank then they (the Issuing Bank) is obligated to reimburse that bank provided that all terms and conditions of the Credit have been complied with.

Art. 11 Teletransmitted and Pre-Advised Credits

"When an Issuing Bank instructs an Advising Bank by an authenticated teletransmiss ion to advise a Credit or an amendment to a Credit, the teletransmission will be considered to be the operative instrument...."

(a) (i) Most Credits are transmitted electronically either by telex or through an interbank telecommunication system known as SWIFT. When Credits are transmitted in this way the telecommunication itself becomes the actual Credit or "operative instrument." Should the Issuing Bank send a Mail confirmation, the Advising Bank is under no obligation to compare the two instruments to ensure that they are identical.

(ii) Sometimes, the Issuing Bank will send a brief telex/S WIFT message to the Advising Bank to let them know the "brief details" of the Credit, and to advise that "full or complete" details will follow by mail. The Issuing Bank must send the actual Credit by mail without delay. The "pre-advice" is not the Operative Instrument.

(b) "If a bank uses the services of an Advising Bank to have the Credit advised to the Beneficiary, it must also use the services of the same bank for advising an amendment(s)."

(c) Once an Issuing Bank has issued a pre-advice it must issue the operative instrument without delay unless the pre-advice indicates that the Issuing Bank may choose not to issue the Credit. Should the latter happen, the "beneficiary" should exercise extreme caution before taking any action to begin production or otherwise act as if the Credit were on its way.

Art. 12 Incomplete or Unclear Instructions

"If incomplete or unclear instructions are received to advise, confirm or amend a Credit, the bank requested to act on such instructions may give preliminary notification to the Beneficiary only and without responsibility...."

If an advising or confirming bank receives an original Credit or amendment that is unclear they may pass it on to the beneficiary provided that the advising/ confirming bank notifies the beneficiary that they are doing so "for information purposes only." Such an advice is done without responsibility of the advising/confirming bank. The advising bank must, without delay, request clarification from the Issuing Bank who in turn must also respond in a rapid manner.

Art. 13 Standard for Examination of Documents

(a) "Banks must examine all documents stipulated in the Credit with reasonable care, to ascertain whether or not they appear, on their face, to be in compliance with the Credit.... Documents not stipulated in the Credit will not be examined by banks."

(b) "The Issuing bank, the Confirming bank, if any, or a Nominated Bank acting on their behalf, shall each have a reasonable amount of time not to exceed seven banking days following the date of receipt of the documents to examine the documents and determine whether to take up or refuse the documents and to inform the party from which it received the documents accordingly."

(c) If a Credit contains conditions without stating the document(s) to be presented in compliance therewith, banks will consider such conditions as not stated and will disregard them.

Art. 14 Discrepant Documents

(a) "When the Issuing Bank authorises another bank to pay, incur a deferred payment undertaking, accept Draft(s), or negotiate against documents which appear on their face to be in compliance with the terms and conditions of the Credit, the Issuing Bank and the Confirming Bank, if any, are bound:

(i) to reimburse the Nominated Bank which has paid, incurred a deferred payment undertaking, accepted Draft(s), or negotiated

(ii) to take up the documents."

(b) "...If the documents appear on their face not to be in compliance with all the terms and conditions of the Credit, such banks may refuse to take up the documents."

(c) "If the Issuing Bank determines that the documents appear on their face not to be in compliance with the terms and conditions of the Credit, it may in its sole judgment approach the Applicant for a waiver of the discrepancy..."

d) "If the Issuing and/or Confirming Bank, if any, or a Nominated Bank...decides to refuse the documents, it must give notice without delay, but no later than the close of the seventh day following the day of receipt of the documents. Such notice shall be given to the bank from which it received the documents, or to the Beneficiary if it received the documents from him."

"Such notice must state all discrepancies in respect of which the bank refuses the documents and must also state whether it is holding the documents at the disposal of, or is returning them to the presenter."

(e) "If the Issuing and/or Confirming Bank, if any, fails to act in accordance with the provisions of this article and/or fails to hold the documents at the disposal of, or return them to the presenter, the Issuing and/or Confirming Bank, of any, shall be precluded from claiming that the documents are not in compliance with the terms and conditions of the Credit."

(f) "If the remitting (presenting) bank draws the attention of the Issuing and/or Confirming bank, if any, to any discrepancy(ies) in the document(s) or advises such banks that it has paid, accepted drafts (etc.) under reserve..., the Issuing and/or Confirming Bank, if any, shall not be relieved from any of their liabilities under any provision of this article...."

Art. 15 Disclaimer on Effectiveness of Documents

"Banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any document(s)...."

Essentially what this article states is that Banks assume no liability or responsibility for anything contained in the documents themselves or to the goods or services to which they may refer.

Art. 16 Disclaimer on the Teletransmission of Documents

"Banks accept no liabifity for responsibility for the consequences arising out of delay and/or loss in transit of any message(s), letters(s) or documents, or for delay, mutilation or other error(s) arising in the transmission of any telecommunication. Banks assume no liability or responsibility for errors in translation and/or interpretation of technical terms, and reserve the right to transmit Credit terms without translating them."

Art. 17 Force Majeure

Under this article "Banks accept no liability or responsibility for consequences arising out of the interruption of their business by Acts of God, riots ...." There is a very important condition in this article that states that if a Bank is forced to close due to "force majeure", and should the Credit expire during the interruption of business, then the Bank is under no obligation to pay or accept drafts presented subsequent to the bank reopening.

Art. 18 Disclaimer for Acts of an Instructed Party

(a) When a bank requests one of its correspondent banks to "give effect to the instructions of the Applicant" they do so "for the account of and at the risk of such Applicant."

(b) Banks assume no responsibility should their correspondent bank fail to carry out their instructions.

(c) (1) When a bank is instructed to perform services by an applicant, a beneficiary, or one of its correspondent banks, or any other party, then the instructing party is responsible for paying the bank's fees and charges.

(ii) If a Credit stipulates that another party (usually the beneficiary) is responsible for the Bank's fees and, if that party fails to pay those fees, then the "instructing party remains ultimately responsible for the payment thereof." The most common example is where a bank issues a Credit and stipulates that the Advising/Confirming Bank's charges are for account of the Beneficiary. If the Beneficiary fails to pay those charges then the Issuing Bank is obliged to pay the fees themselves.

(d) "The Applicant shall be bound by and liable to indemnify the banks against all obligations and responsibilities imposed by foreign laws and usages.

Art. 19 Bank-to-Bank Reimbursement Arrangements

(a) When an Issuing Bank transmits a Credit through a correspondent bank with which they do not have an account, the Issuing Bank will frequently indicate the name of a Reimbursing Bank. The Issuing Bank maintains an account with the Reimbursing Bank and authorises them to honor reimbursement claim(s) from the Nominated Bank that negotiates the draft(s) drawn under the Credit. This section simply states that the Issuing Bank must provide authorization instructions to the Reimbursing Bank in a timely manner. The bank that requests reimbursement is called the Claiming Bank.

(b) "Issuing Banks shall not require a Claiming Bank to supply a certificate of compliance with the terms and conditions to the Reimbursing Bank."

(c) If the Reimbursing Bank fails to pay the Claiming Bank then the Issuing Bank is still obligated to pay the Claiming Bank provided that all terms and conditions of the Credit have been complied with.

(d) "The Issuing Bank shall be responsible to the Claiming Bank for any loss of interest if reimbursement is not provided by the Reimbursing Bank on first demand, or as otherwise specified in the Credit, or mutually agreed, as the case may be."

(e) Generally speaking the Reimbursing Bank's charges are paid by the Issuing Bank. However, if the Issuing Bank intends for the Beneficiary or some other party to pay these charges then this must be indicated in the original Credit and in the reimbursement instructions. In such a case the Reimbursing Bank's charges will be deducted from the payment to the Claiming Bank. In the event that the Credit is not drawn under the Reimbursing Bank's charges remain for the account of the Issuing Bank.

DOCUMENTS

Art. 20 Ambiguity as to Issuers of Documents

(a) "Terms such as 'first class,' 'well known,' 'qualified,' 'official,' 'competent,' 'local,' and the like shall not be used to describe the issuers of any document(s) to be presented under a Credit. If such terms are incorporated into the Credit, banks will accept the relative document(s) as presented, provided that it appears on its face to be in compliance with the other terms and conditions of the Credit and not to have been issued by the Beneficiary."

(b) Unless the Credit stipulates otherwise, banks will accept documents as originals that seem to have been produced:

(i) by "Xerox" machines or the like.

(ii) carbon copies provided that they are marked as originals and signed (see Art. 37 a, ii). A signature may be manual or artificial including a facsimile signature, stamp, symbol, etc.

(c) (i) "Unless otherwise stipulated in the Credit, banks will accept as copy(ies) either labeled copy or not marked as an original -- a copy(ies) need not be signed.

(ii) "Credits that require multiple documents such as 'duplicate,' 'two-fold,' 'two copies,' and the like, will be satisfied by the presentation of one original and the remaining number in copies except where the document itself indicates otherwise."

(d) For documents that are required to be visaed, validated, certified, etc., banks will accept such documents so long as they bear a "signature, mark, stamp, or label on such document that on its face appears to satisfy the above condition."

Art. 21 Unspecified Issuers or Contents of Documents

"When documents other than transport documents, insurance documents and commercial invoices are called for, the Credit should stipulate by whom such documents are to be issued and their wording or data content. If the Credit does not so stipulate, banks will accept such documents as presented, provided that their data content is not inconsistent with any other stipulated document presented."

Art. 22 Issuance Date of Documents v. Credit Date

Documents may be presented showing an issuance date prior to the issuance date of the Credit unless the Credit stipulates otherwise.

Art. 23 Transport Documents

A bill of lading serves three distinct purposes:

• A contract between the shipper and carrier to transport goods

• A receipt by the carrier for the goods being shipped

• Transfers title (ownership) of the goods represented by it

(a) This article covers all the requirements for the "traditional" Ocean Bill of Lading. Included in its requirements are that the Bills of Lading:

i) appear to have been signed by the carrier, the master or their agent

ii) indicate that the goods have been loaded "on Board" a named vessel including the date of loading. Note: An "on Board" date is not proof that the vessel has actually sailed. The "on Board" notation may be preprinted but must be initialed or counter-signed by the carrier or their agent. If the bill of lading indicates that the goods have been received at a point other than the port of loading, then the bill of lading must include the name of the port stipulated on the credit as well as the named vessel. This could occur when receipt takes place at an inland point.

(b) Transshipment means that the goods are going to be transported on more than one conveyance.

(c) So long as the Bill of Lading covers the entire ocean shipment then banks may accept it unless the Credit prohibits transshipment.

(d) "Even if the Credit prohibits transshipment, banks will accept a bill of lading which:

i) indicates that transshipment will take place as long as the relevant cargo is shipped in containers, trailers, or LASH barges as evidenced by the B/L provided that the entire ocean carriage is covered by one and the same bill of lading, and/or

ii) incorporates clauses that the carrier has the right to transship.

Art. 24 Non-Negotiable Sea Waybill

This article is the same as for Ocean Bills of Lading except that it covers those cases where the Credit calls for a non-negotiable Sea Waybill. The main difference between a negotiable Bill of Lading and a non-negotiable document is the way that the B/L is consigned. A negotiable Bit is consigned "to the order of' a named party. It may be to the order of the shipper, the Issuing Bank, or simply "to order." In any event, title is passed by surrender of a properly endorsed original bill of lading.

A non-negotiable bill of lading has a "straight/direct" consignment to a named party. The consignment would be "to xxx," and title is passed by surrender of either an original or non-negotiable copy of the Bit or Waybill.

Art. 25 Charter Party Bill of Lading

A charter party bill of lading is one where a shipper has contracted with a shipping line to charter a vessel for the movement of cargo. Ships are frequently chartered for the purpose of transporting commodities such as oil. The Credit:

(a) (i) must stipulate that Charter Party Bills of Lading are acceptable

(b) If the Credit calls for the goods to be shipped "Freight prepaid" then the transport document must clearly so indicate. If the goods are being shipped by a courier (e.g., Airborne, FedEx) then banks will accept such documents provided that the document clearly indicates whether the courier charges are prepaid or collect.

(c) If the Credit calls for the goods to be shipped "Freight prepaid" but the transport document contains words such as "freight to be prepaid" or "freight prepayable," then banks will reject such documents.

(d) Sometimes transport documents make reference to charges other than freight such as Container Charges Yard (CCY). Banks will accept transport documents indicating such charges provided that the Credit does not specifically prohibit them.

Art. 29 Courier and Postal Receipts

Small or lightweight shipments are frequently sent via courier such as Airborne, Federal Express, DHL etc. Banks will accept such transport documents provided that:

(a) (i) Appear to have been stamped or otherwise authenticated and dated in the place stipulated in the Credit, and

(ii) meet all other conditions of the Credit

(b) (i) appear to indicate the name of the courier service, and is signed or otherwise authenticated. Unless the Credit stipulates a particular courier service, banks will accept any courier, and

(ii) indicate a pick-up date, and (iii) meet all other conditions of the Credit.

Art. 30 Transport Documents issued by Freight Forwarders

Sometimes a Freight Forwarder receives cargo from several different shippers and consolidates them into a single container shipment. When this occurs, the forwarder issues a document referred to as a Forwarders Cargo Receipt. Banks will accept such documents when called for in the Credit provided that:

(a) the Forwarder's name as a carrier or multimodal transport operator is indicated on the face of the document, and has been signed or authenticated by the forwarder, or

(b) the name of the carrier or multimodal transport operator is indicated on the face of the document and has been signed by the forwarder as the named agent.

Art. 31 "On deck," "Shipper's Load and Count," Name of Consignor

Unless the Credit states otherwise banks will accept transport documents that fall within the following parameters:

(a) Unless the Credit specifically permits it, banks will not accept ocean transport documents that indicate that the goods will be carried "on deck." However, banks may accept documents that indicate that the goods may be carried "on deck," and/or

(ii) bear a clause such as "shipper's load and count" or "said by the shipper to contain" or similar words to that effect, and/or

(iii) indicate a consignor other than the beneficiary. Frequently a freight forwarded or warehouse operator will be shown as the shipper. This is also a preferred technique by users of transferable letters of credit (Article 48).

Art. 32 Clean Transport Documents

A clean transport document is one that does not indicate any defect in the goods such as "used" or "damaged." Unless the Credit specifically permits such shipments, banks will reject a transport document that indicates any defect in the goods being shipped.

If the Credit has a requirement for a "clean on board" document then banks will consider the transport document to be in order provided it meets the requirement of this article and articles 23, 23, 25, 26, 27, 28, or 30.

Art. 33 Freight Payable/Prepaid Transport Documents

All letters of credit that require presentation of a transport document must indicate whether the freight has been prepaid or is being sent "freight collect."

(a) Unless the Credit stipulates otherwise, or is inconsistent with other documents (such as the commercial invoice), banks will accept documents indicating that the goods are being shipped "freight collect".

(b) If the Credit calls for the goods to be shipped "Freight prepaid" then the transport document must clearly so indicate. If the goods are being shipped by a courier (e.g., Airborne, FedEx) then banks will accept such documents provided that the document clearly indicates whether the courier charges are prepaid or collect.

(c) If the Credit calls for the goods to be shipped "Freight prepaid" but the transport document contains words such as "freight to be prepaid" or "freight prepayable," then banks will reject such documents.

(d) Sometimes transport documents make reference to charges other than freight such as Container Charges Yard (CCY). Banks will accept transport documents indicating such charges provided that the Credit does not specifically prohibit them.

Art. 34 Insurance Documents

Marine insurance is a contract between the insurance company and the shipper, consignee or party having an insurable interest in the merchandise whereby the insurance company agrees, in consideration of a specified premium, to make good any loss or damage to the party insured, not exceeding the sum insured, that may come to the merchandise during the voyage specified, arising from perils enumerated in the policy.

(a) "Insurance documents must appear on their face to be issued by Insurance companies or underwriters or agents."

(b) "If the insurance document indicates that it has been issued in more than original, all the originals must be presented unless specifically authonsed in the Credit."

(c) "Cover notes issued by brokers will not be accepted unless specifically authorised in the Credit." (A "cover note" is an acknowledgment by an insurance carrier that a policy has been issued. It is not the actual policy itself.)

(d) Sometimes insurance companies will issue pre-signed policies to an exporter which become valid once the shipper has countersigned the policy. This is known as an "open cover" policy. Banks will accept such a document. Even though the "Credit specifically calls for an insurance certificate or a declaration under open cover, banks will accept, in lieu thereof, an insurance policy."

(e) Banks will reject an insurance document that is issued after the "on board" date or "taking in charge" as indicated on the transport document unless the Credit stipulates otherwise.

(1) (i) "Unless otherwise stipulated in the Credit, the insurance document must be expressed in the same currency as the Credit."

(ii) The insurance document must be an in an amount at least equal to the CIF (Cost, Insurance & Freight) or CIP (Carriage and insurance paid to [destination] value plus 10%. If the CIF or CIP value cannot be determined "from the documents on their face" then banks will accept an insurance document that has a value of at least 110% of the amount being drawn under the Credit or the gross amount of the invoice being submitted whichever is greater.

Art. 35 Type of Insurance Cover

(a) "Credits should stipulate the type of insurance required and, if any, the additional risks which are to be covered. Imprecise terms such as 'usual risks' or 'customary risks' shall not be used. If they are used, banks will accept insurance documents as presented, without responsibility for any risks not being covered."

(b) "Failing specific stipulations in the Credit, banks will accept insurance documents as presented, without responsibility for any risks not being covered."

(c) "Unless otherwise stipulated in the Credit, banks will accept an insurance document which indicates that it is subject to a franchise or an excess (deductible)."

Art. 36 All Risk Insurance Cover

Frequently a Credit requires that the Insurance document cover "all risks." Banks will accept an insurance document that bears an "all risks" clause or notation even though the insurance document contains wording elsewhere that certain risks are excluded.

Art. 37 Commercial Invoice

(a) This is the only document where the merchandise description must correspond exactly with that indicated in the Credit. Even the slightest deviation can be cause for rejection. (e.g., The Credit had a merchandise

(iii) indicates the place of shipment and destination called for in the Credit, and

(iv) meets all other conditions called for in the Credit

(b) Domestic transport documents usually do not indicate if there is more than one original. Therefore, unless the document states that there is more than one original, banks will accept these transport documents even if they are not marked as original.

(c) Transshipment means unloading and reloading from one conveyance to another such as from Rail to a truck.

(d) Banks will accept "inland" documents that indicate transshipment even though the Credit prohibits transshipments provided that the transport document covers the entire carriage of the goods.

Art. 38 Other Documents

This article covers weight certificates on transport documents other than by sea. Banks will accept a weight stamp that appears to have been superimposed on the transport document unless the Credit stipulates that the weight certificate must be a separate document.

Art. 39 Miscellaneous Documents

Allowances in Credit Amount, Quantity and Unit Price

(a) Sometimes an L/C will refer to the amount or the quantity as "about," "approximately," "circa." When this happens, the amount or quantity may be up to 10% more or less than the amount or quantity (including unit prices) stated in the Credit.

(b) Banks will accept documents which show that the quantity of goods being shipped has a variance of 5% more or less than that stipulated in the Credit unless:

(i) it would cause the amount of the drawing to exceed the available balance under the Credit, or

(ii) the Credit prohibits any increase or decrease in quantity, or

(iii) the Credit specifies the quantity in terms of a stated number of packing units or individual items. e.g., L/C calls for 5,000 gallons of Orange Juice valued at $100,000. Unless specifically prohibited, banks will accept documents showing the amount of product within a range of 4,750 gallons up to 5,250 gallons. Note: The amount being drawn could be reduced to $95,000 (for 4,750 gallons), but could not exceed $100,000 even though between 5,000 and 5,250 gallons were shipped. L/C calls for 5,000 cartons of Orange Juice. Banks will reject documents which indicated a shipment of either less than or more than 5,000 cartons. (Exception: Banks will accept documents for less than 5,000 cartons if the Credit allowed for partial shipments).

(c) Unless a Credit stipulates otherwise, or unless article 39(a) or (b) applies, banks will accept documents with an amount up to 5% less than the amount of the Credit. However, if the Credit calls for a specific quantity or unit price, then the full quantity must be shipped and the unit price must not be reduced. e.g., L/C calls for a shipment of Orange Juice totaling $100,000. The L/C prohibits partial shipments. Banks will accept documents with an amount between $95,000 and $100,000. L/C calls for a shipment of a shipment of 5,000 cartons of Orange Juice totaling $100,000. Partial shipments are prohibited. Banks will accept documents totaling between $95,000 and $100,000 provided that the invoices still indicate that 5,000 cartons have been shipped.

Art. 40 Partial Shipments/Drawings

(a) "Partial shipments are allowed, unless the Credit stipulates otherwise.

(b) Sometimes a shipper may load goods on the same carrier at different times or even different ports. So long as the transport documents indicate that the goods were all shipped on the same carrier, for the same journey, and show the same destination, then a bank may not treat these as partial shipments.

(c) Sometimes goods are shipped by mail or courier and there is more than one box shipped. So long as the postal/courier receipts all have the same date, then a bank may not treat these as partial shipments.

Art. 41 Installment Shipments/Drawings

Sometimes a Credit will allow for drawings and/or shipments to be mad within specific time periods. If a shipper (beneficiary) fails to make a drawing and/or shipment within a specified time frame then the entire L/C ceases to be available for any future drawings.

Art. 42 Expiry dates and Place for Presentation of Documents

(a) "All Credits must stipulate an expiry date and a place for presentation of documents for payment..." Freely negotiable L/C's need not indicate a place for presentation because, by their very nature, the beneficiary is free to present documents to the bank of his/her choosing.

(b) Unless the expiry date has been extended (Art. 44[a]), then documents must be presented on or before the expiry date. For this reason, it is preferable for the beneficiary to have the L/C expire in their country as opposed to the issuing bank's country.

(c) While banks disapprove of this practice, it is possible that an L/C may show an expiry date such as "for one month" or "for six months," etc. In such a case the "one month," "six month" clock starts ticking on the day the Credit is issued.

Note: Sometimes documents are presented on or before the expiry date, and are subsequently found to contain discrepancies. On occasion, the beneficiary must re-present corrected documents. If the corrected documents are submitted after the expiry date then a new discrepancy wifi exist of "late presentation." For this reason it is highly advisable to present documents at least seven days prior to the expiry date of the Credit.

Art. 43 Limitation on the Expiry Date

(a) "... every Credit which calls for a transport document(s) should also stipulate a specified period of time after the date of shipment during which presentation must be made... If no such period of time is stipulated banks will not accept documents presented to them late than 21 Icalendarl days after the date of shipment. In any event, documents must be presented not later than the expiry date of the Credit."

(b) Where Article 40(b) applies the date of shipment will be considered to be the date of the latest transport document.

Art. 44 Extension of Expiry Date

(a) "If the expiry date of the Credit and/or last day of the period for presentation of documents... is closed other than those referred to in Article 17 Isic. Interruption of business by Acts of God, Force Majeure], the stipulated expiry date [and date for presentation of documents after shipping date]... shall be extended to the first following day that on which such bank is open." e.g., If the Credit expires on a Saturday or Sunday then the expiry date is automatically extended to Monday. If the Monday is a bank holiday then the expiry date is extended to the Tuesday.

(b) Even though the expiry date may have extended by virtue of 44(a) this does not extend the latest shipping date. If the L/C does not stipulate a latest shipping date then the expiry date on the credit (or any subsequent amendments) is considered to be the latest shipping date. e.g., An L/C is issued with an expiry date of Saturday August 24, 1996, but does not stipulate a latest shipping date. Documents could be presented as late as Monday August 26, 1996; however, the latest shipping date could be no later than Saturday August 24, 1996.

(c) When a bank is presented with documents within the provisions of Art. 44(a) then they must make a certification to that effect to the opening bank. The reason for this is that banks around the world have different business days. Unless the presenting bank made this certification the opening bank might reject the documents on the basis of "expired credit."

Art. 45. Hours of Presentation

"Banks are under no obligation to accept presentation of documents outside their banking hours." The definition of "banking hours" will vary from bank to bank. It would be very rare for a bank to accept documents prior to 9:00 a.m. or after 5:00 p.m. This can be very critical if the beneficiary is presenting documents on the expiry date.

Art. 46. General Expressions as to Dates

(a) "Unless otherwise stipulated in the Credit, the expression 'shipment' used in stipulating an earliest and/or latest date for shipment will (include) the expressions such as 'loading on board,' 'dispatch,' 'accepted for carriage,'.., and the like."

(b) Banks will disregard terms in a Credit such as "prompt," "as soon as possible," etc.

(c) "If the expressions 'on or about' are used with relation to date, banks will interpret them as a stipulation that shipment is to be made during the period from 5 days before to 5 days after the specified date, both end days included." e.g., If the Credit calls for a shipping date "on or about May 10, 1996," banks will accept a transport document indicating that the goods were "taken in charge" anywhere between May 5 and May 15 (both days included).

Art. 47 Date terminology for Periods of Shipment

(a) When Credits refer to dates such as "from X date to Y date" and the like then banks will interpret that to mean that both "X" and "Y" dates are included. e.g., The Credit states that shipments may be made "between July 1, 1996, and July 20, 1996." Banks will accept transport documents showing a "taking in charge" date as early as July 1 and as late as July 20.

(b) If the word "after" is used then that date will be excluded. e.g., The L/C states that shipments "may not be made after July 20, 1996." Banks will accept a transport document dated July 20, but will reject one dated July 21, 1996.

(c) "The terms 'first half, 'second half of a month shall be construed as the 1st to the 15th, and the 16th to the last day of such month, all dates inclusive." e.g., a Credit stipulates that goods must be shipped "during the first half of February." Banks will accept transport documents showing a "taking in charge" date up to and including February 15th.

(d) "The terms 'beginning', 'middle', or 'end' of a month shall be construed respectively as the 1st to the 10th, the 11th to the 20th, and the 21st to the last day of such month, all dates inclusive."

Art. 48 Transferable Credit

A transferable credit is one under which the beneficiary may request that the credit be made available to a third party. A credit is considered transferable only if it is expressly designated as "transferable" by the issuing bank. The need for a transferable letter of credit arises when, for example, a broker or middleman is the beneficiary of a letter of credit. The third party from whom the broker is acquiring the goods is also requiring a letter of credit.

If the broker is unable or unwilling to obtain a new letter of credit from his/her bank then one alternative is to take the original L/C and transfer all or part of it to a third party. This third party then "steps into the shoes" of the original beneficiary and enjoys all the protection (and responsibilities) of the Credit as if it were issued in their favor in the first place. Transferable Credits offer the advantage to the first beneficiary of being able to provide the protection of a letter of credit to their vendor without tying up their own lines of credit with their financial institution. However, transferable credits need to be carefully understood (especially as to their limitations) in order to get the most benefit from them.

(a) This simply states that a transferable credit is one under which the beneficiary (AKA First Beneficiary) may request a bank that is authorised to "pay, incur a deferred payment undertaking, accept, or negotiate to transfer the Credit to one or more second beneficiary(ies)." If the Credit is freely negotiable then the transferring bank must be specifically designated as such. e.g., If a bank advises a freely negotiable transferable L/C and the beneficiary wishes to transfer it, then he/she should only bring it to the bank that has been designated as the transferring bank. If no such bank has been designated then an amendment needs to be issued so as to designate a transferring bank.

(b) A Credit can only be transferred if it is expressly designated as such. Words such as "divisible", "assignable," etc., do not make a Credit transferable.

(c) "The Transferring bank shall be under no obligation to effect such transfer except to the extent and in the manner expressly consented to by such bank." This clause exists because frequently beneficiaries will request that a bank effect a transfer which is not in strict compliance with the other provisions of article 48. e.g., An original L/C calls for On Board Ocean Bills of Lading to be submitted. The beneficiary requests that the transferred L/C change the transport document to a "Truck bill of lading." The transferring bank is under no obligation to make such a change.

(d) Generally speaking, when a Credit is transferred, the second beneficiary is entitled to be notified of any subsequent amendments. To be unaware of amendments could place the transferee in a precarious position so far as their ability to submit documents in conformance with the Credit. However, should the first beneficiary desire not to have the transferee notified of any amendments (and assuming that the transferring bank was willing to do so) then the second beneficiary (transferee) must be so notified at the time the L/C is first transferred.

(e) Occasionally a first beneficiary will transfer the Credit to more than one transferee. (This is not to be confused with transferring a credit more than once which is prohibited. See Art. 48 g.) If the Credit is amended then all transferees must be notified (unless Art. 48 d applied). If one or more second beneficiaries rejects an amendment, then for them the Credit remains unamended. However, the Credit is amended for the other second beneficiary(ies) if they do accept such amendments. Because of the complexities that can arise when there is more than one transferee, banks have the right to refuse to issue such a transfer.

(f) Transfer fees and related costs are paid by the first beneficiary. Banks are under no obligation to effect a transfer until their fees have been paid.

(g) Unless the Credit stipulates otherwise, a Credit can be transferred down "on level" only, e.g., a transferable L/C is issued in favor of Company A who instructs the bank to transfer the Credit to Company B. Company B is prohibited from requesting the transferring bank to transfer the Credit to Company C.

(h) When a Credit is transferred, the original terms and conditions must be adhered to by the second beneficiary with the following exceptions:

• the amount of the transfer may be less than the original Credit unit prices may be reduced. e.g., the original Credit called for 1,000 widgets at $100 each for a total of $100,000. The transferred Credit could call for 1,000 widgets at $80 each totaling $80,000.

• the expiry date may be shortened up so as to allow sufficient time for the first beneficiary to present their substituted invoices at the time of negotiation.

• the latest date for presentation of documents by the transferee (in accordance with Art. 43) may also be shortened. e.g., The original L/C called for documents to be presented within 15 days of the "on Board" date on the B/L. The transferred L/C could require that documents be presented within 10 days of the B/L.

• the period for shipment may also be shortened up from the original L/C Any of the above may be reduced or curtailed.

(i) This permits the first beneficiary to substitute his/her own invoices and draft(s) for that of the transferee provided that they do not exceed the allowable amount under the Credit. At this point in time the transferee's invoices are removed and are replaced by those of the first beneficiary. At the time of payment the second beneficiary is paid the amount of their invoices and the first beneficiary is paid the difference between his invoices and that of the transferee. However, if the first beneficiary fails to submit substitute invoices then the transferring bank has the right to submit, as originals, the documents that have been presented by the transferee.

(ii) Unless the original Credit designates a place for presentation or negotiation of documents, then the first beneficiary may direct that payment or negotiation may be effected to the second beneficiary at a financial institution in their city. This does not interfere with the rights of the first beneficiary to substitute their own invoices and draft(s).

Note: Frequently a first beneficiary wishes to "hide" the identity of the buyer and/or the second beneficiary so as to prevent the two parties from dealing directly with each other in the future.

Art. 49 Assignment of Proceeds

Sometimes a third party vendor requests some assurance of payment from a beneficiary. However, unless the Credit is transferable, the beneficiary may not be in a position to provide a letter of credit to a third party vendor. Under those circumstances the beneficiary may request the paying/negotiating/confirming bank to "assign" all or part of the proceeds to a third party. Unlike a transferee, an assignee is entirely dependent on the beneficiary to perform in order to receive payment. In addition, an assignee is not entitled to receive any notification of amendments or even cancellation of the credit. The main advantage to an assignee is that they will be assured that payment will be made directly to them instead of to the first beneficiary. 

Edited by Michael Dennis