Banking

UCP600 Article 9 Explanation – CDCS Guide: Advising of Credits and Amendments

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Clause a

Clause: A credit and any amendment may be advised to a beneficiary through an advising bank. An advising bank that is not a confirming bank advises the credit and any amendment without any undertaking to honour or negotiate.

Explanation: An advising bank acts as an intermediary that passes the credit and any amendments to the beneficiary. If the advising bank is not a confirming bank, it does not provide any guarantee or obligation to honor or negotiate the credit; it simply forwards the information received from the issuing bank to the beneficiary.

Example: Bank A (the issuing bank) issues a letter of credit for $100,000 to Beneficiary X. This credit is sent through Bank B (the advising bank). Bank B, which is not confirming the credit, forwards this letter of credit to Beneficiary X without any promise to pay the $100,000 itself.

Clause b

Clause: By advising the credit or amendment, the advising bank signifies that it has satisfied itself as to the apparent authenticity of the credit or amendment and that the advice accurately reflects the terms and conditions of the credit or amendment received.

Explanation: When the advising bank forwards the credit or amendment to the beneficiary, it indicates that it has verified the apparent authenticity of the document and confirms that the details provided to the beneficiary match those received from the issuing bank. However, advising bank does not verify genuineness of the LC. “Apparent authenticity” means that the letter of credit should appear to look authentic from the face. If LC is transmitted through swift then authenticity automatically verified by checking if it is received in MT700 format and in swift application as this application is secured.

Example: Bank B receives an amendment to the letter of credit from Bank A. Before advising Beneficiary X, Bank B checks the authenticity of the amendment and ensures that the details match those sent by Bank A. Once verified, Bank B advises Beneficiary X of the amendment.

Clause c

Clause: An advising bank may utilize the services of another bank (“second advising bank”) to advise the credit and any amendment to the beneficiary. By advising the credit or amendment, the second advising bank signifies that it has satisfied itself as to the apparent authenticity of the advice it has received and that the advice accurately reflects the terms and conditions of the credit or amendment received.

Explanation: An advising bank can use a second advising bank to forward the credit or amendment to the beneficiary. The second advising bank must also verify the authenticity of the document it received and ensure the details are accurate before advising the beneficiary.

Example: Bank A issues a credit and sends it to Bank B, which then uses Bank C (second advising bank) to advise Beneficiary X. Bank C verifies the authenticity of the document received from Bank B and advises Beneficiary X.

Clause d

Clause: A bank utilizing the services of an advising bank or second advising bank to advise a credit must use the same bank to advise any amendment thereto.

Explanation: If an issuing bank uses an advising bank or a second advising bank to advise a credit, it must use the same advising bank for any subsequent amendments to that credit to ensure consistency and reliability in communication.

Example: Bank A issues a credit through Bank B to Beneficiary X. Later, if there is an amendment, Bank A must again use Bank B to advise Beneficiary X of this amendment.

Clause e

Clause: If a bank is requested to advise a credit or amendment but elects not to do so, it must so inform, without delay, the bank from which the credit, amendment or advice has been received.

Explanation: If a bank chooses not to advise a credit or amendment, it must promptly notify the bank that sent the credit or amendment of its decision not to advise it. This ensures transparency and allows the issuing bank to take necessary actions. Please note here the word “immediately” is not defined anywhere about how long it means. So we need to consider this as soon as possible.

Example: Bank B receives a credit from Bank A but decides not to advise it to Beneficiary X. Bank B promptly informs Bank A of its decision not to advise the credit.

Clause f

Clause: If a bank is requested to advise a credit or amendment but cannot satisfy itself as to the apparent authenticity of the credit, the amendment or the advice, it must so inform, without delay, the bank from which the instructions appear to have been received. If the advising bank or second advising bank elects nonetheless to advise the credit or amendment, it must inform the beneficiary or second advising bank that it has not been able to satisfy itself as to the apparent authenticity of the credit, the amendment or the advice.

Explanation: If an advising bank cannot verify the authenticity of the credit or amendment, it must inform the bank that sent it. If the advising bank still decides to advise the credit or amendment, it must notify the beneficiary or second advising bank that it could not confirm the authenticity.

Example: Bank B receives a credit from Bank A but is unsure of its authenticity. Bank B informs Bank A of this uncertainty. If Bank B decides to advise the credit despite this, it must inform Beneficiary X that it could not verify the credit’s authenticity.

UCP600 Article 11 Explanations – CDCS Guide: Teletransmitted and Pre-Advised Credits and Amendments

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Clause a: Text: “An authenticated teletransmission of a credit or amendment will be deemed to be the operative credit or amendment, and any subsequent mail confirmation shall be disregarded. If a teletransmission states “full details to follow” (or words of similar effect), or states that the mail confirmation is to be the operative credit or amendment, then the teletransmission will not be deemed to be the operative credit or amendment. The issuing bank must then issue the operative credit or amendment without delay in terms not inconsistent with the teletransmission.”

Explanation: When a credit or an amendment is sent via authenticated teletransmission (e.g., SWIFT), it is considered the official and operative document. Any follow-up confirmation sent by mail should be ignored. However, if the teletransmission indicates that “full details to follow” or suggests that the mail confirmation will be the operative document, then the teletransmission is not considered operative. In such cases, the issuing bank must promptly issue the official credit or amendment, ensuring it aligns with the details in the teletransmission.

Example: A bank issues a letter of credit (L/C) via SWIFT message to the beneficiary, stating all the terms and conditions. This SWIFT message is the official L/C. If the message includes “full details to follow,” the SWIFT message is not operative. The bank must then send the official L/C via mail or another method, ensuring it matches the preliminary details in the SWIFT message.

Clause b: Text: “A preliminary advice of the issuance of a credit or amendment (“pre-advice”) shall only be sent if the issuing bank is prepared to issue the operative credit or amendment. An issuing bank that sends a pre-advice is irrevocably committed to issue the operative credit or amendment, without delay, in terms not inconsistent with the pre-advice.”

Explanation: A pre-advice is an advance notice about the issuance of a credit or an amendment. This should only be sent if the issuing bank is ready to issue the actual credit or amendment. Once a pre-advice is sent, the issuing bank is irrevocably bound to issue the operative credit or amendment promptly and in accordance with the terms mentioned in the pre-advice.

Example: A bank sends a pre-advice to a beneficiary stating that a letter of credit will be issued for a certain amount with specific terms. The bank is then obligated to issue the actual L/C promptly, ensuring it matches the terms outlined in the pre-advice. If the pre-advice states a credit amount of $100,000, the final L/C must also be for $100,000 with consistent terms.

UCP600 Article 12 Explanation – CDCS Guide: Nomination

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Clause a

Text:
“Unless a nominated bank is the confirming bank, an authorization to honour or negotiate does not impose any obligation on that nominated bank to honour or negotiate, except when expressly agreed to by that nominated bank and so communicated to the beneficiary.”

Explanation:
This clause means that if a bank is nominated to honour or negotiate a letter of credit (L/C) but is not a confirming bank, it is not automatically obliged to honour or negotiate unless it has agreed to do so and has informed the beneficiary. A confirming bank is one that adds its confirmation to the credit, thereby confirming bank is bound to honor or negotiate the documents if the terms of the L/C are met.

Example:
A beneficiary receives an L/C from Bank A, which nominates Bank B to honour or negotiate (this happens when LC is restricted to bank B). However, Bank B has not added its confirmation to the L/C. In this case, Bank B is not obligated to pay the beneficiary unless it has expressly agreed to do so and communicated this to the beneficiary.

Clause b

Text:
“By nominating a bank to accept a draft or incur a deferred payment undertaking, an issuing bank authorizes that nominated bank to prepay or purchase a draft accepted or a deferred payment undertaking incurred by that nominated bank.”

Explanation:
When an issuing bank nominates another bank to accept a draft or take on a deferred payment undertaking, it is giving that nominated bank the authority to prepay or purchase the accepted draft or the deferred payment undertaking. This means the nominated bank can advance funds based on the draft or deferred payment undertaking.

Example:
Bank A issues an L/C and nominates Bank B to accept drafts (this happens when LC is restricted to bank B). In time of advising the LC Bank B communicates the beneficiary that they will prepay against presentation of complied documents. The beneficiary then presents a draft along with other documents as per LC, Bank B can then decide to prepay the draft amount to the beneficiary or purchase the draft, providing immediate funds to the beneficiary.

Clause c

Text:
“Receipt or examination and forwarding of documents by a nominated bank that is not a confirming bank does not make that nominated bank liable to honour or negotiate, nor does it constitute honour or negotiation.”

Explanation:
If a nominated bank that is not a confirming bank receives, examines, and forwards documents under the L/C, it is not liable to honour or negotiate the credit. Simply handling the documents does not mean the nominated bank has undertaken the responsibility to pay the beneficiary.

Example:
Bank A issues an L/C and nominates Bank B. The beneficiary submits documents to Bank B, which then examines and forwards them to Bank A. Since Bank B is not a confirming bank, it is not obligated to pay the beneficiary; it is merely acting as an intermediary in the document handling process.

UCP600 Article 16 Explanation – CDCS Guide: Discrepant Documents, Waiver, and Notice

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Clause a: Refusal to Honour or Negotiate

Clause: When a nominated bank acting on its nomination, a confirming bank, if any, or the issuing bank determines that a presentation does not comply, it may refuse to honour or negotiate.

Explanation: If any bank involved in the letter of credit transaction (nominated, confirming, or issuing) finds that the documents presented do not meet the terms and conditions of the credit, they have the right to refuse payment or negotiation.

Example: A seller presents documents to the confirming bank, but the documents indicate that the goods were shipped on a later date than specified in the letter of credit. The confirming bank, upon noticing this discrepancy, can refuse to pay the seller.

Clause b: Waiver of Discrepancies

Clause: When an issuing bank determines that a presentation does not comply, it may in its sole judgment approach the applicant for a waiver of the discrepancies. This does not, however, extend the period mentioned in sub-article 14 (b).

Explanation: The issuing bank, upon finding discrepancies, may ask the applicant (the buyer) if they are willing to accept the discrepancies and waive them. However, this process must be completed within the timeframe specified in Article 14(b).

Example: A letter of credit requires a certificate of origin from the chamber of commerce. The seller submits a certificate issued by beneficiary. The issuing bank contacts the buyer to see if they will accept this discrepancy. The buyer agrees, and the issuing bank proceeds with the acceptance or payment. However, if issuing bank wants they may not approach applicant for waiver.

Clause c: Notice of Refusal

Clause: When a nominated bank acting on its nomination, a confirming bank, if any, or the issuing bank decides to refuse to honour or negotiate, it must give a single notice to that effect to the presenter. The notice must state: i. that the bank is refusing to honour or negotiate; and ii. each discrepancy in respect of which the bank refuses to honour or negotiate; and iii. a) that the bank is holding the documents pending further instructions from the presenter; or b) 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; or c) that the bank is returning the documents; or d) that the bank is acting in accordance with instructions previously received from the presenter.

Explanation: If a bank decides to refuse the documents, it must inform the presenter (usually the bank from where documents received) in one comprehensive notice. This notice must detail the refusal, list all discrepancies, and state what the bank will do with the documents. Incase issuing bank forgets something to mention in the refusal notice and then sends a second message to presenter stating that this is the additional information related to the refusal notice sent earlier. In this case second message will be disregarded.

Example: A seller presents documents to the nominated bank, but they do not comply with the letter of credit terms. The nominated bank sends a single notice to the seller stating that they are refusing the documents because the insurance policy is missing, and informs the seller that they are holding the documents pending further instructions.

Clause d: Notice Timeline

Clause: The notice required in sub-article 16 (c) must be given by telecommunication or, if that is not possible, by other expeditious means no later than the close of the fifth banking day following the day of presentation.

Explanation: The bank must send the notice of refusal promptly, no later than five banking days after the documents are presented. This notice must be communicated quickly, preferably through electronic means.

Example: A seller submits documents to the issuing bank on Monday. By the next Monday, the issuing bank must send a notice of refusal if they find discrepancies.

Clause e: Return of Documents

Clause: A nominated bank acting on its nomination, a confirming bank, if any, or the issuing bank may, after providing notice required by sub-article 16 (c) (iii) (a) or (b), return the documents to the presenter at any time.

Explanation: After informing the presenter of the discrepancies and what they intend to do with the documents (holding or seeking a waiver), the bank may return the documents to the presenter at any time.

Example: After sending a notice of refusal and informing the seller that the documents are being held pending further instructions, the issuing bank decides to return the documents to the seller after two days. Issuing bank can do this.

Clause f: Consequences of Failure to Act

Clause: If an issuing bank or a confirming bank fails to act in accordance with the provisions of this article, it shall be precluded from claiming that the documents do not constitute a complying presentation.

Explanation: If the issuing or confirming bank does not follow the proper procedure for refusing documents as outlined in Article 16, they lose the right to assert that the documents are non-compliant.

Example: The issuing bank fails to notify the seller of discrepancies within five banking days. As a result, the issuing bank cannot later claim that the documents are non-compliant and must honour the presentation.

Clause g: Refund and Interest

Clause: When an issuing bank refuses to honour or a confirming bank refuses to honour or negotiate and has given notice to that effect in accordance with this article, it shall then be entitled to claim a refund, with interest, of any reimbursement made.

Explanation: If the issuing or confirming bank properly refuses the documents and has already reimbursed the nominated bank, they are entitled to get their money back along with any interest accrued.

Example: The issuing bank refuses the documents due to discrepancies and notifies the presenting bank properly. If the issuing bank had reimbursed the confirming bank before getting the documents, it can now claim that amount back with interest.

UCP600 Article 17 Explanation: Original Documents and Copies

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Clause a

Clause: At least one original of each document stipulated in the credit must be presented.

Explanation: This clause mandates that for any document required by a letter of credit, at least one of the documents presented must be an original. This ensures authenticity and originality in the transaction.

Example: If a letter of credit requires an invoice, a bill of lading, and a packing list, at least one original of each of these documents must be submitted to fulfill the requirements.

Clause b

Clause: A bank shall treat as an original any document bearing an apparently original signature, mark, stamp, or label of the issuer of the document, unless the document itself indicates that it is not an original.

Explanation: This clause states that banks will consider a document as an original if it has what appears to be an original signature, mark, stamp, or label. However, if the document explicitly states it is not an original, the bank will not treat it as such.

Example: A bill of lading with an original shipping company’s stamp and signature will be treated as an original by the bank unless it has a note saying “Copy”.

Clause c

Clause: Unless a document indicates otherwise, a bank will also accept a document as original if it: i. appears to be written, typed, perforated or stamped by the document issuer’s hand; or ii. appears to be on the document issuer’s original stationery; or iii. states that it is original, unless the statement appears not to apply to the document presented.

Explanation: This clause details three additional criteria under which a document can be accepted as original. If it looks handwritten, typed, perforated, or stamped by the issuer, is on the issuer’s original stationery, or claims to be original (unless context suggests otherwise), it will be considered original by the bank.

Example: i. A certificate of origin typed and stamped by the Chamber of Commerce will be accepted as an original. ii. A commercial invoice on the supplier’s letterhead stationery will be accepted as original. iii. A document that states “This is an original document” will be accepted as such, provided there are no conflicting indications.

Clause d

Clause: If a credit requires presentation of copies of documents, presentation of either originals or copies is permitted.

Explanation: If a letter of credit asks for copies of documents, you can present either original documents or copies. The requirement for copies does not restrict you to only submitting copies; originals are also acceptable.

Example: If the credit requires a copy of the inspection certificate, you can submit either the original inspection certificate or a copy of it.

Clause e

Clause: If a credit requires presentation of multiple documents by using terms such as “in duplicate”, “in two fold” or “in two copies”, this will be satisfied by the presentation of at least one original and the remaining number in copies, except when the document itself indicates otherwise.

Explanation: When a credit demands multiple copies of a document (e.g., in duplicate or two copies), it is sufficient to present one original and the rest as copies unless the document specifically requires all to be originals.

Example: If the credit asks for a commercial invoice in duplicate, presenting one original commercial invoice and one copy will satisfy this requirement, unless the commercial invoice explicitly states that both must be originals.

By understanding each clause in UCP600 Article 17, parties involved in international trade can ensure they comply with documentary credit requirements, thus facilitating smoother and more efficient transactions.

UCP600 Article 38 Explanation: Transferable Credits

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Clause (a)

Clause: A bank is under no obligation to transfer a credit except to the extent and in the manner expressly consented to by that bank.

Explanation: This clause means that a bank can choose whether or not to transfer a credit. The transfer will only occur if the bank agrees to it and follows the terms and conditions specified by the bank.

Example: Company A receives a transferable letter of credit from their buyer. Company A requests Bank X to transfer the credit to Company B. Bank X reviews the request and agrees to transfer the credit according to their internal policies and the terms of the original credit.

Clause (b)

Clause: For the purpose of this article:

  • Transferable credit means a credit that specifically states it is “transferable”. A transferable credit may be made available in whole or in part to another beneficiary (“second beneficiary”) at the request of the beneficiary (“first beneficiary”).
  • Transferring bank means a nominated bank that transfers the credit or, in a credit available with any bank, a bank that is specifically authorized by the issuing bank to transfer and that transfers the credit. An issuing bank may be a transferring bank.
  • Transferred credit means a credit that has been made available by the transferring bank to a second beneficiary.

Explanation: This clause defines the key terms used in Article 38. A transferable credit explicitly states that it can be transferred, allowing the first beneficiary to request its transfer to a second beneficiary. The transferring bank is the one authorized to transfer the credit, and the transferred credit is the result of this transfer process.

Example: Company A (first beneficiary) receives a transferable credit and requests Bank X (transferring bank) to transfer it to Company B (second beneficiary). Bank X, having the authorization from the issuing bank, completes the transfer, creating a transferred credit for Company B.

Clause (c)

Clause: Unless otherwise agreed at the time of transfer, all charges (such as commissions, fees, costs or expenses) incurred in respect of a transfer must be paid by the first beneficiary.

Explanation: By default, the first beneficiary is responsible for paying all costs associated with the transfer of the credit, unless an alternative arrangement is made.

Example: Company A asks Bank X to transfer the credit to Company B. Bank X informs Company A of the transfer fee. Unless Company A and Bank X agree otherwise, Company A is responsible for paying this fee.

Clause (d)

Clause: A credit may be transferred in part to more than one second beneficiary provided partial drawings or shipments are allowed. A transferred credit cannot be transferred at the request of a second beneficiary to any subsequent beneficiary. The first beneficiary is not considered to be a subsequent beneficiary.

Explanation: A transferable credit can be divided and transferred to multiple second beneficiaries if the credit permits partial shipments. However, once transferred, the second beneficiary cannot further transfer the credit. The first beneficiary can transfer portions to different second beneficiaries but cannot transfer again beyond that.

Example: Company A receives a transferable credit and requests Bank X to transfer it to Company B and Company C, as partial shipments are allowed. Company B and Company C cannot transfer the credit further.

Clause (e)

Clause: Any request for transfer must indicate if and under what conditions amendments may be advised to the second beneficiary. The transferred credit must clearly indicate those conditions.

Explanation: When requesting a transfer, the first beneficiary must specify whether and how amendments to the credit will be communicated to the second beneficiary. These conditions must be clearly stated in the transferred credit.

Example: Company A requests Bank X to transfer the credit to Company B and specifies that any amendments will be communicated directly to Company B. The transferred credit issued to Company B includes this condition.

Clause (f)

Clause: If a credit is transferred to more than one second beneficiary, rejection of an amendment by one or more second beneficiary does not invalidate the acceptance by any other second beneficiary, with respect to which the transferred credit will be amended accordingly. For any second beneficiary that rejected the amendment, the transferred credit will remain unamended.

Explanation: If multiple second beneficiaries are involved, and one or more reject an amendment while others accept it, the amendment is valid for those who accept it. For those who reject it, the original terms remain unchanged.

Example: Company A transfers a credit to Company B and Company C. An amendment is proposed. Company B accepts, but Company C rejects it. The amendment applies to Company B’s part of the credit, while Company C’s part remains unchanged.

Clause (g)

Clause: The transferred credit must accurately reflect the terms and conditions of the credit, including confirmation, if any, with the exception of:

  • the amount of the credit,
  • any unit price stated therein,
  • the expiry date,
  • the period for presentation, or
  • the latest shipment date or given period for shipment, any or all of which may be reduced or curtailed. The percentage for which insurance cover must be effected may be increased to provide the amount of cover stipulated in the credit or these articles. The name of the first beneficiary may be substituted for that of the applicant in the credit. If the name of the applicant is specifically required by the credit to appear in any document other than the invoice, such requirement must be reflected in the transferred credit.

Explanation: The transferred credit must match the original credit’s terms, with exceptions for reducing the credit amount, unit price, expiry date, presentation period, and shipment date. Insurance cover percentage may be increased. The first beneficiary’s name can replace the applicant’s name in the credit, except when the applicant’s name is required on documents other than the invoice.

Example: Company A requests Bank X to transfer a $100,000 credit to Company B. Bank X reduces the credit amount to $80,000 and the expiry date by one month. The transferred credit reflects these changes but retains other original terms.

Calculation of Insurance Percentage

The insurance percentage typically covers the value of the goods plus an additional amount (often 10%) to protect against unforeseen events. Here’s how it works:

For the first beneficiary:

  • LC Value: $100,000
  • Insurance Coverage: 110% of $100,000 = $110,000

For the second beneficiary:

  • Transferred LC Value: $80,000
  • Insurance Coverage: 110% of $80,000 = $88,000

Clause (h)

Clause: The first beneficiary has the right to substitute its own invoice and draft, if any, for those of a second beneficiary for an amount not in excess of that stipulated in the credit, and upon such substitution the first beneficiary can draw under the credit for the difference, if any, between its invoice and the invoice of a second beneficiary.

Explanation: The first beneficiary can replace the second beneficiary’s invoice and draft with their own, provided the amount does not exceed the credit limit. The first beneficiary can then draw the difference between their invoice and the second beneficiary’s invoice under the credit.

Example: Company A (first beneficiary) transfers a $100,000 credit to Company B (second beneficiary). Company B presents an invoice for $80,000. Company A substitutes Company B’s invoice with its own for $100,000 and draws the $20,000 difference under the credit.

Clause (i)

Clause: If the first beneficiary is to present its own invoice and draft, if any, but fails to do so on first demand, or if the invoices presented by the first beneficiary create discrepancies that did not exist in the presentation made by the second beneficiary and the first beneficiary fails to correct them on first demand, the transferring bank has the right to present the documents as received from the second beneficiary to the issuing bank, without further responsibility to the first beneficiary.

Explanation: First beneficiary must present their invoice and draft but fails to do so or correct discrepancies, the transferring bank can submit the second beneficiary’s documents to the issuing bank without further obligations to the first beneficiary.

Example: Company A (first beneficiary) must present its invoice but fails to do so. Company B (second beneficiary) submits their documents to Bank X (transferring bank). Bank X sends Company B’s documents to the issuing bank without further responsibility to Company A.

Clause (j)

Clause: The first beneficiary may, in its request for transfer, indicate that honour or negotiation is to be effected to a second beneficiary at the place to which the credit has been transferred, up to and including the expiry date of the credit. This is without prejudice to the right of the first beneficiary in accordance with sub-article 38 (h).

Explanation: The first beneficiary can specify that honouring or negotiating the credit should occur at the location to which the credit is transferred, up to the credit’s expiry date. This does not affect the first beneficiary’s rights under clause 38(h).

Example: Company A (first beneficiary) requests Bank X to transfer the credit to Company B (second beneficiary) and specifies that negotiation should take place at Company B’s location. This arrangement is valid until the credit expires.

Clause (k)

Clause: Presentation of documents by or on behalf of a second beneficiary must be made to the transferring bank.

Explanation: The second beneficiary or their representative must present all required documents to the transferring bank, not directly to the issuing bank.

Example: Company B (second beneficiary) must submit all documents to Bank X (transferring bank) rather than the issuing bank. Bank X will then handle the documents and present them to the issuing bank.