The UCP 600 has come into effect from July 1,
2007 onwards and UCP 600 has a number of substantial changes that affect not
only how banks will determine compliance, but also how contracts for sales
utilizing Letter of Credits should be written. Some of the new articles in UCP
600 have adopted practices in International Standard Banking Practices (ISBP)
and followed principles of International Standby Practices (ISP 98), besides
providing new articles in examination, documentation and other aspects for
issuing the letters of credits for banks involved in foreign exchange.
"UCP" is the common reference for the Uniform
Customs and Practice for Documentary Credits. The objective of the UCP is to
create a set of contractual rules that would establish uniformity to
conflicting national regulations.
The Uniform Customs and Practices (UCP) for
Documentary Credits were first issued in 1933 by the International Chamber of
Commerce. The purpose was to overcome conflicting national laws on letters of
credit as well as to bring about uniformity in banking practices. The rules
have been revised a number of times. The recent revision, UCP 600, took more
than three years of consultation and the Consulting Group, which comprised more
than 40 representatives from 26 countries proposed changes to the various
drafts. During its 24-25 October 2006 meeting, the ICC Commission on Banking
Technique and Practice approved new UCP 600 rules for documentary credits.
UCP 600, which came into effect on July 1, 2007,
incorporates a number of changes from the UCP 500 that was followed by banks
for more than a decade till June 2006. These changes include:
A reduction in the number of articles from 49 to 39
New articles on "Definitions" and "Interpretations" providing more clarity and
precision in the rules
A definitive description of negotiation as "purchase" of drafts of documents
The replacement of the phrase "reasonable time" for acceptance or refusal of
documents by a maximum period of five banking days
New provisions allow for the discounting of deferred payment credits
Banks can now accept an insurance document that contains reference to any
Some of the important changes in UCP 600 and
their implication for banks in handling letter of credit transactions are
UCP 600 does not apply by default to letters of
credit issued after July 1st 2007. A statement needs to be incorporated into
the credit (LC), and preferably also into the sales contract that expressly
states it is subject to these rules. Article 1 of UCP 600 also leaves open the
possibility for either party to exclude the application of any part of UCP 600
as long as the exclusion is stipulated in the credit.
One of the most important changes in UCP 600 is
the exclusion of any verbiage regarding revocable letters of credit, which can
be amended or canceled at any time without notice to the seller. .Actually,
Article 2 explicitly defines a credit 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."
Article 3 states that "A credit is
irrevocable even if there is no indication to that effect." and Article 10
makes it clear that "a credit can neither be amended nor cancelled without the
agreement of the issuing bank, the confirming bank, if any, and the
beneficiary" (seller).Therefore, it is prudent for the seller to stipulate in
the sales contract that the "buyer will open an irrevocable letter of credit",
and to check that the buyer's credit does, in fact, either describe itself as
"irrevocable" or state that it incorporates UCP 600 (without exclusion).
The earlier UCP 500 did not include a section
defining the various terms used in the rules. UCP 600 has rectified this in
order to enable more consistent interpretation. It also has included an article
that clarifies types of signatures that are acceptable, as well as terms used
to describe LC issuers, and other terms, like "prompt", "immediately", "as soon
as possible", which will be disregarded under the new rules. A new section of
Definitions and Interpretations has been introduced in the UCP 600. This
includes definitions of "Advising bank", "Applicant", "Banking day",
"Beneficiary", "Complying presentation", "Confirmation", "Confirming bank",
"Credit", "Honour", "Issuing bank", "Negotiation", "Nominated bank",
In addition to that, the following terms are now
clearly defined : "singular/plural", "irrevocable", "signatures",
"legalizations", "Branches of a bank", "Terms describing issuer of a document",
"Prompt etc", "on or about", "to", "until", "till", "from", "between",
"before", "from", "after", "first half", "second half", "beginning", "middle",
Banks have been known to make credits available
by drafts drawn on applicants, believing that the obligation to accept and pay
will fall directly on the applicant and not the issuing bank. UCP 600
specifically retains the same position as that of UCP 500 but in more forceful
terms, that a credit 'must not' be issued in terms that make it available by a
draft drawn on an applicant. That does not prevent an issuing bank calling for
such a draft as part of the documents required. A credit must now also state an
expiry date for presentation and any dates stated for honour or negotiation
will be deemed to be an expiry date for presentation.
The discounting of deferred payment credits before maturity is expressly
recognized in an attempt to resolve concerns arising out of a court case in
which the Court held that where a confirming bank discounted its own deferred
payment undertaking and fraud in the documents was established prior to the
maturity date, the issuing bank was not obliged to reimburse the confirming
bank. Articles 7 and 8 establish a definite undertaking by issuing and
confirming banks to reimburse on maturity whether or not the nominated bank
prepaid or purchased its own acceptance or deferred payment undertaking before
expressly provides authority from an issuing bank to a nominated bank to
discount (prepay or purchase) a draft that it has accepted or a deferred
payment undertaking that it has given.
At present an advising bank only has to verify the apparent authenticity of the
credit that it has advised. Under art 9(b) it has to certify that the document
that it advises to the beneficiary is the same document that it received. The
obligation is also extended to any second advising bank.
The position under article 9(d)(iii) of UCP 500 has been maintained in Article
10 under UCP 600. Article 10 now deals exclusively with amendments and article
10(c) provides: '… The beneficiary should give notification of acceptance or
rejection of an amendment. If the beneficiary fails to give such notification,
a presentation that complies with the credit and to any not yet accepted
amendment will be deemed to be notification of acceptance by the beneficiary of
such amendment. As of that moment, the credit will be amended.' Thus, a
beneficiary is deemed to have given notice of acceptance of a proposed
amendment upon presentation of compliant documents.
Under UCP 500, banks have a "reasonable time … not to exceed seven banking
days" in which to honor or dishonor documents. UCP 600 shortens the period to a
maximum of five "banking days". However, Article 2 defines a banking day as "a
day on which a bank is regularly open at the place at which an act subject to
these rules is to be performed."
The previous LC rules required documents that were "on their face" inconsistent
with one another to be rejected as discrepant.. Article 14(d) provides the
standard for examination of documents generally. It seeks to resolve the
problem of inconsistency in data by clarifying that there is no need for a
mirror image but rather: 'Data in a document, when read in context with the
credit, the documents itself and international standard banking practice, need
not be identical to, but must not conflict with, data in that document or any
other stipulated document.'
Regarding addresses on the various documents, Article 14 indicates that they do
not have to exactly match as long as the country is the same. The only
exception is when addresses appear as part of the consignee or notify party
details on a transport document, in which case they must be the same as stated
in the credit.
The standard for examining documents has also been in focus. This is reflected
in article 14, and here are a few examples from that: Banks now only have 5
banking days to accept or refuse documents. This replaces the "Reasonable time
not exceeding 7 banking days".The period for presentation (usually 21 days)
only applies to original transport documents. This means that if only a copy or
no transport document is required by the credit, and a period for presentation
is requested, then the credit should expressly state that the document should
be presented within a certain period of time from a defined moment or event.
Addresses of beneficiaries and applicants need no longer be as mentioned in the
documentary credit. They must however be within the same country. Contact
details (Like phone and fax numbers) may be disregarded - and if stated they
need not be as in the credit. An exception to this is where the address and the
contact details are used in transport documents as part of the consignee or
notify party. In that case they must be as stated in the credit.
Under UCP 600, Banks should disregard all non-documentary requirements. This
means that any requirement in the credit that is not specifically part of a
required document will be ignored by the bank in determining conformity.
The buyer wants the product delivered and the LC paid only if the product is
shipped on a vessel carrying a specific classification. It is not enough, under
UCP 600, for the buyer to state the requirement in the LC. He must actually
require that the bank receive a copy of the vessel's certification certificate.
In the case of documents other than transport/insurance documents or commercial
invoices, art 14(f) states: 'banks will accept the document as presented if its
content appears to fulfill the function of the required document and otherwise
complies with sub
Article 14(d).' Both sub-articles provide an element of subjectivity and so the
onus will be on the applicant and issuing bank to ensure that the credit
specifically deals with anything that is specifically required.
Under UCP 500 it was not apparent when an issuing or nominated bank had to
start the settlement process. Under UCP 600 it is clear that this begins when
the bank determines that a presentation is compliant.
Under UCP 500 a bank which refuses documents has the option of holding them at
the presenter's disposal or handling them in accordance with the presenter's
prior instructions, such as to return them. Problems can arise where a bank
serves a refusal notice and at the same time seeks instructions from the
applicant to release documents on obtaining a waiver of discrepancies. That can
be particularly disadvantageous where the beneficiary wants to be consulted
before the bank acts on the applicant's waiver, for example, if the market goes
up. It is also inconsistent with the only two options available under UCP 500.
Article 16 now encompasses additional options designed to avoid banks sitting
on discrepant documents and issues relating to forced waivers.
The options (which are alternatives) are as
hold documents pending further instructions from the presenter; or
hold 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; or return the documents; or act in accordance with
instructions previously received from the presenter. There is no provision for
payment under reserve or indemnity.
There was considerable confusion under UCP 500 regarding the definition of
"original documents". Article 17 of the new rules attempts to define original
documents with more precision. An original document will be any of the
"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. OR any document that appears to be written, typed, perforated
or stamped by the document issuer's. OR any document that appears to be on the
document issuer's original stationery OR any document that states it is
original, unless the statement appears not to apply to the document presented."
Many of those were of course defined/interpreted in the UCP 500 as well, but
for the first time they are placed together for a far better overview.
The transport articles have been redrafted under advice of a group of
"transport experts". The requirement that a bill of lading must show that goods
are shipped on board a named vessel has been made much simpler which will
hopefully lead to less confusion. The option that a "Multimodal transport
operator" can sign a multimodal transport document has been removed. The
background is that this option was not utilized. It is now acceptable that a
"Charterer" (or a named agent on behalf of the charterer) can sign a Charter
Party Bill of Lading. If an agent signs on behalf of a "Master" on a Charter
Party Bill of Lading then the name of the master need not appear from the
The articles of UCP 500 relating to transport
documents have been revamped to resolve confusion over the identification of
carriers and agents. Under UCP 600 a generic set of rules generally applies to
all transport documents (other than charterparty bills of lading). These
include the following:
The document must indicate the name of the carrier and be signed by: (a) the
carrier or named agent for or on behalf of the carrier; or (b) the master or
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 of an agent must indicate whether the agent has signed for or on
behalf of the carrier for or on behalf of the master.
There is no need to name the master.
In the case of charterparty bills of lading :
These no longer need to indicate the name of the carrier.
They may now also be signed by the charterer, although it is difficult to
envisage a situation where an FOB buyer/ applicant would wish to rely on a bill
of lading signed by the seller/beneficiary and vice versa in the case of a CIF
Transport documents also no longer need to bear the clause 'clean' in order to
comply with any credits that require a document to be 'clean on board'.
Documents providing for wider coverage than stipulated in a credit will be
acceptable. Banks will also be able to accept an insurance document that
contains reference to any exclusion clause. For the insurance documents the
following has been changed: "Proxies" can now sign on behalf of the insurance
company or underwriter. Percentage to be covered will be understood as a
"minimum" coverage required. The document may contain reference to any
"exclusion clause". The risks must be covered at least between the shipment
points stipulated in the credit.
Despite suggestions for an option to allow a grace period of five banking days
after a bank reopens for the presentation of documents, the position remains as
it was under UCP 500 -i.e. banks will not honour or negotiate under a credit
that expired during the force majeure event.
The eUCP was developed to accommodate the electronic presentation of documents.
At present it features as a supplement, amended to identify its relationship
with UCP 600 on the basis that many articles are not affected by the
presentation of the electronic equivalent of paper documents.
Traditionally, SWIFT groups all its MT standards changes in one annual
standards release, usually in October or November. In 2007, this will be on 27
October. In other words, the 1 July 2007 effective date of the UCP 600 does not
coincide with the implementation date of SWIFT's Standards Release 2007.The
'SWIFT UCP 600 Guidelines' provide guidance to banks on how to use today's
category 7 standards in compliance with UCP 600.This means that the only way to
let the ICC and SWIFT 'live' dates coincide and to publish how the UCP 600
affects category 7 standards was by issuing 'SWIFT UCP 600 Guidelines' that
financial institutions can start using as soon as the UCP 600 rules go 'live'.
All guidelines are based on the use of narrative text in existing fields. This
should ensure a seamless transition to the new rules.
The November 2006 SWIFT release caters for the UCP 600 using today's existing
category 7 messages. A new mandatory field 40E Applicable Rules contains codes
to indicate adherence to specific rules. Other changes as described below will
be implemented in October 2007. The SWIFT UCP 600 Guidelines will be reflected
in the official Standards Release 2007 documentation (Standards Release Guide
and User Handbook) of 27 October 2007.
Field 31D "Date and Place of Expiry" of the MT 700, 705, 710, 720 and 740 The
definition of this field should be interpreted as follows: "This field
specifies the latest date for presentation under the documentary credit and the
place where documents may be presented." This guideline does not change the
usage of this field.
Field 41a "Available With... By..." of the MT 700, 705, 710 and 720 The
definition of this field should be interpreted as follows: "This field
identifies the bank with which the documentary credit is available (the place
for presentation) and an indication of how the credit is available." This
guideline does not change the usage of this field.
Field 31D "Date and Place of Expiry" of the MT 740 The following usage rule
should be added: "This field should not be used to specify the latest date for
presentation of a reimbursement claim or an expiry date for the reimbursement
Field 72 "Sender to Receiver Information" of the MT 740 The following usage
rule should be added: "Any latest date for a reimbursement claim or an expiry
date for the reimbursement authorization should be indicated in this field and
not in field 31D.
Field 31E "New Date of Expiry" of the MT 747 The following usage rule should be
added: "This field should not be used to specify a new latest date for
presentation of a reimbursement claim or a new expiry date for the
Field 72 "Sender to Receiver Information" of the MT 747 The following usage
rule should be added: "Any new latest date for a reimbursement claim or a new
expiry date for the reimbursement authorization should be indicated in this
field and not in field 31E."
Any details regarding the disposal of documents
for which the two existing code words "HOLD" and "RETURN" in field 77B
"Disposal of Documents" of the MT 734 Notice of Refusal cannot be used, must
reflect the content of article 16.c of UCP 600 as follows:
The code word "NOTIFY", to signify 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."
The code word "PREVINST", to signify that "The bank is acting in accordance
with instructions previously received from the presenter."
Because the contents (including code words) of field 77B "Disposal of
Documents" of the MT 734 are not centrally validated (i.e., checked) by SWIFT
Net, users may start using the above codes as of 1 July 2007 (live date of UCP
600). Alternatively, field 77B may contain a narrative text, reflecting the
content of article 16.c of UCP 600
The documentary letter of credit (credit) is an important and well-established
instrument for securing payments in international trade. However, to ensure
smooth processing it is vital for exporters /beneficiaries to fulfill the terms
and conditions of the credit exactly and to present complying documents to the
bank. Even minor discrepancies or errors can result in the honouring of the
documents being delayed or prevented altogether. It is always important to
check the credit very carefully as soon as customers receive it to ensure that
it conforms to the underlying contract and that the terms and conditions can be
met. If necessary it is possible to have the credit amended accordingly.Banks
have to educate their customers in this regard.
The following checklist would help customers to adhere to the terms and
conditions of the credit and to prepare complying documents.
If the credit stipulates a latest date of dispatch: were the goods shipped in
Can the deadline for presenting the documents to the bank be met?(Under UCP 600
Art. 14 c this is 21 days after the date of shipment, unless the credit states
otherwise and an original transport document is required)
Are all documents presented in the prescribed number (originals and copies)?
Does the invoice amount match the credit amount, i.e. is it not higher or lower
or within the permitted tolerances? (UCP 600 Art. 30)
Is the supplied quantity consistent with the credit? (UCP 600 Art. 30)
Are the terms of delivery (e.g. INCOTERMS 2000) consistent with the credit?
Does the credit prohibit partial shipments?
Does the credit prohibit transshipment?
Are the markings, weights, quantity, type and dimensions of the packages
consistent throughout the documents?
Are the descriptions of goods, services and performance consistent throughout
If documents are required to be presented in a particular language: Is this
document obtainable in the required language?
With billions of dollars in trade each year
reliant on letters of credit, it is essential to maintain a clear set of ground
rules governing the rights and obligations of the parties involved. UCP 600, in
its leaner form, has sought to reduce the scope for misinterpretation and
misapplication, primarily by placing the onus on the issuer to be precise in
its terms. It is not, however, a complete code and is subject to wider
international standard banking practice and will not be without its own