UCP 600 Articles Explanation

UCP600 Article 1 Explanation – CDCS Guide: Application of Rules and Their Binding Nature

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Article 1: Application of UCP

Clause 1: “The Uniform Customs and Practice for Documentary Credits, 2007 Revision, ICC Publication no. 600 (‘UCP’) are rules that apply to any documentary credit (‘credit’) (including, to the extent to which they may be applicable, any standby letter of credit) when the text of the credit expressly indicates that it is subject to these rules.”

Explanation: This clause establishes that UCP600 rules are applicable to any documentary credit, including standby letters of credit, provided that the text of the credit explicitly states that it is subject to these rules. UCP600 is not automatically applied; it must be expressly mentioned in the credit’s text. This clause ensures that all parties involved in the credit are aware that the rules of UCP600 govern the transaction.

Example: Consider a buyer in India who requests a documentary credit from their bank to pay a seller in Germany for goods. If the credit document explicitly states, “This credit is subject to UCP600,” then all the rules and regulations under UCP600 will apply to the transaction. Both the buyer’s and seller’s banks, along with the parties themselves, are bound by these rules. It can also be stated like “This credit is subject to UCP LATEST VERSION” or “This credit is subject to UCPDC,” etc.

Clause 2: “They are binding on all parties thereto unless expressly modified or excluded by the credit.”

Explanation: This clause emphasizes that UCP600 rules are mandatory for all parties involved in the documentary credit, including the issuing bank, the advising bank, the beneficiary, and the applicant, unless the credit specifically modifies or excludes certain rules. This means that the parties cannot opt out of the UCP600 rules unless they have expressly stated any modifications or exclusions in the credit itself.

Example: In the same transaction between the Indian buyer and the German seller, if the credit document states, “This credit is subject to UCP600, except for Article 16,” then all the rules of UCP600 will apply except Article 16. The parties have the flexibility to modify or exclude certain parts of UCP600, but such modifications must be explicitly stated in the credit.

UCP600 Article 2 Explanation – CDCS Guide: Definitions

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1. Advising Bank

  • Clause: The bank that advises the credit at the request of the issuing bank.
  • Explanation: The advising bank serves as the intermediary between the issuing bank and the beneficiary. It is responsible for transmitting the credit and any amendments to the beneficiary without any obligation on its part.
  • Example: If Bank A (issuing bank) in the USA issues a letter of credit (LC) for a beneficiary in India, Bank A may request Bank B (advising bank) in India to advise the credit to the beneficiary. Bank B will inform the beneficiary of the LC details.

2. Applicant

  • Clause: The party on whose request the credit is issued.
  • Explanation: The applicant is the buyer in a trade transaction who requests the issuance of a letter of credit in favor of the seller (beneficiary).
  • Example: In an export-import transaction, an importer in India requests their bank to issue a letter of credit in favor of an exporter in China. The importer is the applicant.

3. Banking Day

  • Clause: A day on which a bank is regularly open at the place at which an act subject to these rules is to be performed.
  • Explanation: A banking day refers to any day when banks are open to conduct regular business. This is crucial in determining deadlines for presentations and payments under a letter of credit.
  • Example: If a presentation is due on January 1st, but this is a public holiday in the bank’s location, the presentation would be due on the next banking day.

4. Beneficiary

  • Clause: The party in whose favour a credit is issued.
  • Explanation: The beneficiary is the seller or exporter who will receive payment under the letter of credit once they comply with its terms.
  • Example: In a trade between a US buyer and an Indian seller, if the buyer issues an LC, the Indian seller is the beneficiary.

5. Complying Presentation

  • Clause: A presentation that is in accordance with the terms and conditions of the credit, the applicable provisions of these rules, and international standard banking practice.
  • Explanation: A complying presentation occurs when the beneficiary submits documents that fully meet the requirements set out in the letter of credit, ensuring that payment will be made.
  • Example: If an LC requires a commercial invoice and a bill of lading, a complying presentation will include these documents, exactly as specified.

6. Confirmation

  • Clause: A definite undertaking of the confirming bank, in addition to that of the issuing bank, to honour or negotiate a complying presentation.
  • Explanation: When a confirming bank adds its confirmation to a letter of credit, it takes on the responsibility to pay the beneficiary even if the issuing bank fails to do so. This adds extra security in the LC. Confirming bank generally located in the country of beneficiary however it can be in the different country also. When a beneficiary does not have confident on issuing bank or country of issuing bank due to sanction or political risk or any other reason, then beneficiary opt for confirmation.
  • Example: If a bank in Germany issues an LC, but the seller in India wants more security, a confirming bank in India might confirm the LC, guaranteeing payment.

7. Confirming Bank

  • Clause: The bank that adds its confirmation to a credit upon the issuing bank’s authorization or request.
  • Explanation: The confirming bank provides an additional level of assurance to the beneficiary by guaranteeing payment if the issuing bank fails to do so.
  • Example: An exporter in Brazil might require a confirming bank in their country to confirm an LC issued by a bank in Nigeria, ensuring that they will get paid.

8. Credit

  • Clause: Any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation.
  • Explanation: The term “credit” refers to the letter of credit itself, which is an irrevocable commitment from the issuing bank to pay the beneficiary if they comply with the terms.
  • Example: A bank issues an LC for $100,000 to a beneficiary; this document is the “credit” which guarantees payment upon compliance.

9. Honour

  • Clause:
    • a. To pay at sight if the credit is available by sight payment.
    • b. To incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment.
    • c. To accept a bill of exchange (“draft”) drawn by the beneficiary and pay at maturity if the credit is available by acceptance.
  • Explanation: Honour refers to the actions a bank must take under different types of letters of credit—paying immediately, deferring payment, or accepting a draft for future payment. Please refer “Available By” field in the LC.
  • Example:
    • a. Sight Payment: A beneficiary presents documents and is paid immediately.
    • b. Deferred Payment: Documents are presented, and payment is made after 90 days basis deferred payment undertaking. In deferred payment draft is not presented.
    • c. Acceptance: The bank accepts a draft and pays the beneficiary at maturity.

10. Issuing Bank

  • Clause: The bank that issues a credit at the request of an applicant or on its own behalf.
  • Explanation: The issuing bank is the financial institution that creates the letter of credit, committing to pay the beneficiary once they comply with the LC terms.
  • Example: A bank in Japan issues an LC to a US exporter; this bank is the issuing bank.

11. Negotiation

  • Clause: The purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank.
  • Explanation: Negotiation involves the nominated bank purchasing documents or drafts from the beneficiary before payment is due, essentially providing an advance.
  • Example: A bank in the UK buys a draft from a beneficiary in South Africa under a complying presentation and advances payment before the due date.

12. Nominated Bank

  • Clause: The bank with which the credit is available or any bank in the case of a credit available with any bank.
  • Explanation: The nominated bank is authorized by the issuing bank to handle the presentation of documents and make payments under the letter of credit. We need to refer “Available With” field in the LC.
  • Example: An LC issued in Canada might nominate a bank in Mexico to handle document presentations and payments.

13. Presentation

  • Clause: Either the delivery of documents under a credit to the issuing bank or nominated bank or the documents so delivered.
  • Explanation: Presentation refers to the submission of documents required by the letter of credit to the relevant bank for review and payment processing.
  • Example: A beneficiary submits the required commercial invoice and shipping documents to the nominated bank as a presentation under the LC.

14. Presenter

  • Clause: A beneficiary, bank, or other party that makes a presentation.
  • Explanation: The presenter is the entity that submits the documents under the letter of credit, which could be the beneficiary, a bank, or another involved party.
  • Example: A freight forwarder submits the required documents on behalf of the beneficiary to the issuing bank. Then freight forwarder is presenter.

UCP600 Article 3 Explanation – CDCS Guide: Interpretation

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Clause 1: Article Text: “Where applicable, words in the singular include the plural and in the plural include the singular.”

Explanation: This clause indicates that the interpretation of words in UCP600 should be flexible. If a term is mentioned in the singular, it should be understood to also encompass its plural form, and vice versa, unless the context explicitly requires otherwise.

Example: If a credit refers to “invoice,” it can be understood as referring to one or more invoices, depending on the situation.

Clause 2: Article Text: “A credit is irrevocable even if there is no indication to that effect.”

Explanation: All credits under UCP600 are automatically considered irrevocable, meaning they cannot be amended or canceled without the consent of the beneficiary. This holds true even if the credit document does not explicitly state that it is irrevocable.

Example: If a letter of credit issued by a bank does not mention whether it is revocable or irrevocable, it is to be treated as irrevocable by default.

Clause 3: Article Text: “A document may be signed by handwriting, facsimile signature, perforated signature, stamp, symbol or any other mechanical or electronic method of authentication.”

Explanation: This clause broadens the definition of a “signature” under UCP600. It allows for various forms of signatures, including electronic or mechanical methods, to authenticate documents, provided these are commonly accepted.

Example: An invoice signed with a stamp or an electronic signature is considered valid under UCP600.

Clause 4: Article Text: “A requirement for a document to be legalized, visaed, certified or similar will be satisfied by any signature, mark, stamp or label on the document which appears to satisfy that requirement.”

Explanation: When a document is required to be legalized, certified, or visaed, any apparent mark, stamp, or signature on that document that fulfills the requirement will be accepted as sufficient.

Example: If a bill of lading is required to be certified by a chamber of commerce, a stamp or seal that appears to come from the chamber will satisfy this requirement.

Clause 5: Article Text: “Branches of a bank in different countries are considered to be separate banks.”

Explanation: Under UCP600, each branch of a bank in different countries is treated as an independent entity. This means obligations or actions of one branch do not automatically bind another branch, even if they belong to the same banking institution.

Example: If a credit is issued by the New York branch of a bank, the London branch of the same bank is not bound to honor or amend that credit unless it explicitly agrees to do so.

Clause 6: Article Text: “Terms such as ‘first class’, ‘well known’, ‘qualified’, ‘independent’, ‘official’, ‘competent’ or ‘local’ used to describe the issuer of a document allow any issuer except the beneficiary to issue that document.”

Explanation: Descriptive terms like “first class” or “official” do not restrict the issuer to a specific entity. Any entity, except the beneficiary, that appears to fulfill the description can issue the required document.

Example: If a letter of credit requires a “first-class insurance company” to issue a certificate, any reputable insurance company, other than the beneficiary itself, can issue the certificate.

Clause 7: Article Text: “Unless required to be used in a document, words such as ‘prompt’, ‘immediately’ or ‘as soon as possible’ will be disregarded.”

Explanation: Vague terms such as “prompt” or “immediately” do not have specific deadlines associated with them and therefore are disregarded unless a document explicitly requires their interpretation.

Example: If a credit instructs a shipper to send goods “immediately,” without specifying a date, this term will not be interpreted as imposing a strict deadline under UCP600.

Clause 8: Article Text: “The expression ‘on or about’ or similar will be interpreted as a stipulation that an event is to occur during a period of five calendar days before until five calendar days after the specified date, both start and end dates included.”

Explanation: The phrase “on or about” is interpreted as a flexible time frame, allowing an event to happen within a window of five days before or after the specified date.

Example: If a shipment date is stated as “on or about 10th August,” it will be acceptable if the shipment occurs anytime between 5th August and 15th August.

Clause 9: Article Text: “The words ‘to’, ‘until’, ’till’, ‘from’ and ‘between’ when used to determine a period of shipment include the date or dates mentioned, and the words ‘before’ and ‘after’ exclude the date mentioned.”

Explanation: This clause clarifies how specific prepositions should be interpreted concerning dates. If a credit mentions a period “from 1st August to 10th August,” both the start and end dates are included. Conversely, if it says “before 10th August,” the 10th is excluded.

Example: If a letter of credit states “shipment from 1st August to 10th August,” the shipment can occur on either 1st August or 10th August, or any day in between. But if it states “shipment before 10th August,” the latest acceptable shipment date is 9th August.

Clause 10: Article Text: “The words ‘from’ and ‘after’ when used to determine a maturity date exclude the date mentioned.”

Explanation: When determining a maturity date, the terms “from” and “after” exclude the starting date.

Example: If a bill of exchange is payable 30 days “from 1st August,” the due date would be 31st August, excluding 1st August from the calculation.

Clause 11: Article Text: “The terms ‘first half’ and ‘second half’ of a month shall be construed respectively as the 1st to the 15th and the 16th to the last day of the month, all dates inclusive.”

Explanation: The term “first half” of a month refers to the period from the 1st to the 15th, while “second half” refers to the 16th to the last day, including all these dates.

Example: If a letter of credit requires shipment in the “first half of August,” it means the shipment should occur between 1st and 15th August.

Clause 12: Article Text: “The terms ‘beginning’, ‘middle’ and ‘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 the month, all dates inclusive.”

Explanation: The terms “beginning,” “middle,” and “end” of a month are clearly defined periods. “Beginning” is from the 1st to the 10th, “middle” from the 11th to the 20th, and “end” from the 21st to the last day.

Example: If a letter of credit specifies shipment in the “middle of August,” the acceptable shipment dates would be from 11th to 20th August.

UCP600 Article 4 Explanation – CDCS Guide: Credits vs. Contracts Explained

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Clause a:

Clause:
“A credit 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. Consequently, the undertaking of a bank to honour, to negotiate or to fulfil any other obligation under the credit is not subject to claims or defences by the applicant resulting from its relationships with the issuing bank or the beneficiary. A beneficiary can in no case avail itself of the contractual relationships existing between banks or between the applicant and the issuing bank.”

Explanation:
This clause emphasizes that a letter of credit (LC) is an independent and autonomous instrument, separate from the underlying contract of sale or any other agreement on which it might be based. The bank’s responsibility is confined to the LC terms alone and does not extend to the performance or enforcement of the underlying contract between the buyer (applicant) and the seller (beneficiary). Even if the LC references the contract, it does not bind the bank to the terms of that contract.

Example:
Suppose Company A (the buyer) in India enters into a contract to purchase goods from Company B (the seller) in Germany. Company A applies for a letter of credit from its bank to guarantee payment to Company B. If Company A later disputes the quality of the goods or any other aspect of the contract, this dispute does not affect the bank’s obligation to honor the letter of credit, provided that Company B presents compliant documents as per the LC. Company B cannot use the dispute between Company A and the issuing bank as a defense to refuse payment under the LC.

Clause b:

Clause:
“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.”

Explanation:
This clause advises issuing banks to discourage applicants (buyers) from including references to or copies of underlying contracts, proforma invoices, or similar documents within the letter of credit itself. This is because including such documents can create unnecessary complications and potentially obscure the clear, independent nature of the letter of credit. The focus should remain solely on the terms and conditions stipulated in the LC.

Example:
Company A requests its bank to issue an LC to Company B, and in doing so, Company A wants to include a copy of the contract between the two companies as part of the LC. The bank advises against this, explaining that including the contract might complicate the LC process and affect the independent nature of the LC. Instead, the bank focuses only on the essential documents required by the LC, such as the commercial invoice, bill of lading, and certificate of origin, ensuring the LC remains straightforward and separate from the underlying contract.

UCP600 Article 5 Explanation – CDCS Guide: The Role of Banks in Documentary Credits – Focusing on Documents vs. Goods and Services

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UCP600 Article 5: Explanation with Examples

Clause: “Documents v. Goods, Services or Performance
Banks deal with documents and not with goods, services or performance to which the documents may relate.”

Explanation: UCP600 Article 5 emphasizes that banks involved in the documentary credit process only examine and act upon the documents presented to them. They do not concern themselves with the actual goods, services, or performance referenced in those documents. The bank’s responsibility is to verify that the documents conform to the terms and conditions of the letter of credit (LC) and are presented in the correct form. The bank does not verify the quality, quantity, or condition of the goods or services mentioned in the documents.

This principle is fundamental to the documentary credit process, where the focus is on documents rather than the underlying transaction. It ensures that the bank’s role is confined to document verification, making the process more objective and straightforward.

Example: Imagine a company in India imports electronics from a supplier in China under a letter of credit. The supplier ships the goods and presents the shipping documents, such as the bill of lading, invoice, and packing list, to the bank for payment.

The bank reviews these documents to ensure they comply with the terms of the letter of credit. However, the bank does not physically inspect the electronics or verify whether they are functioning or in good condition. Even if the goods turn out to be defective, the bank’s obligation is limited to paying against the compliant documents, not the actual goods. If the documents are in order, the bank must make the payment, regardless of any issues with the goods themselves.

UCP600 Article 6 Explanations – CDCS Guide : Availability, Expiry Date, and Place for Presentation

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UCP600 Article 6: Detailed Explanation with Examples

Clause (a)

Clause:
“A credit must state the bank with which it is available or whether it is available with any bank. A credit available with a nominated bank is also available with the issuing bank.”

Explanation:
This clause requires that the letter of credit (LC) clearly specifies the bank where the credit is available. It could be available with a specific bank (nominated bank) or any bank. If the LC is available with a nominated bank, it also implies that it is available with the issuing bank.

Example:
Suppose an LC issued by ABC Bank in the USA states that it is available with XYZ Bank in the UK. This means that the beneficiary can present the documents to XYZ Bank for payment. However, the beneficiary can also present the documents to ABC Bank directly since the LC is also available with the issuing bank.

Clause (b)

Clause:
“A credit must state whether it is available by sight payment, deferred payment, acceptance, or negotiation.”

Explanation:
The LC must specify the method of payment. It could be one of the following:

  • Sight payment: Immediate payment upon presentation of complying documents.
  • Deferred payment: Payment at a later date, as specified in the LC. In deferred payment terms draft is not presented and instead of draft there will be deferred payment undertaking.
  • Acceptance: The issuing or nominated bank accepts a draft and commits to pay on the maturity date.
  • Negotiation: The nominated bank may purchase the documents (and drafts) and pay immediately, even before the maturity date.

Example:
An LC issued by DEF Bank in Germany specifies that it is available by sight payment. This means that when the beneficiary presents the required documents, the bank must pay them immediately upon verifying that the documents comply with the LC terms.

Clause (c)

Clause:
“A credit must not be issued available by a draft drawn on the applicant.”

Explanation:
The LC cannot require the beneficiary to draw a draft (a bill of exchange) on the applicant (the buyer). This is to ensure that the responsibility for payment lies with the bank and not with the buyer, making the LC a more secure instrument for the beneficiary.

Example:
If GHI Bank in Japan issues an LC for an exporter in India, the LC cannot require the exporter to draw a draft on the buyer in Japan. Instead, the draft must be drawn on the issuing bank (GHI Bank) or a nominated bank.

Clause (d) (i)

Clause:
“A credit must state an expiry date for presentation. An expiry date stated for honour or negotiation will be deemed to be an expiry date for presentation.”

Explanation:
The LC must include a specific expiry date by which the beneficiary must present the documents to the bank. If the expiry date is mentioned for honour (payment) or negotiation, it is considered the expiry date for the presentation of documents as well.

Example:
If an LC issued by JKL Bank in Canada states an expiry date of 31st August 2024 for negotiation, the beneficiary must present the documents by that date to receive payment. This is also considered the last date for presenting the documents, even if not explicitly stated.

Clause (d) (ii)

Clause:
“The place of the bank with which the credit is available is the place for presentation. The place for presentation under a credit available with any bank is that of any bank. A place for presentation other than that of the issuing bank is in addition to the place of the issuing bank.”

Explanation:
This clause clarifies that the place where the credit is available (e.g., a specific bank) is also the place where the documents must be presented. If the credit is available with any bank, documents can be presented at any bank. If the LC allows presentation at a place other than the issuing bank, that place is considered additional, not a replacement.

Example:
An LC issued by MNO Bank in the UAE states that it is available with PQR Bank in Singapore. The place for presentation of documents is PQR Bank in Singapore. However, the documents can also be presented at MNO Bank in the UAE.

Clause (e)

Clause:
“Except as provided in sub-article 29 (a), a presentation by or on behalf of the beneficiary must be made on or before the expiry date.”

Explanation:
The beneficiary or their representative must present the documents by the expiry date mentioned in the LC. If the presentation is made after the expiry date, it may be rejected unless it falls under the exceptions provided in Article 29(a).

Example:
An LC issued by RST Bank in Australia has an expiry date of 15th September 2024. The beneficiary must ensure that the documents are presented to the bank by this date. If the documents are presented on 16th September, they may be rejected.