Documentary Credit

URC 522 Article 13: “Disclaimers on the Effectiveness of Documents” – Explanation

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“ARTICLE 13 DISCLAIMER ON EFFECTIVENESS OF DOCUMENTS”

This article of URC 522 (Uniform Rules for Collections) outlines the extent of a bank’s responsibility regarding the documents presented under a documentary credit. Here’s a detailed breakdown of each clause within Article 13, including explanations and examples:

Clause: “Banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any document(s)”

Explanation: Banks are not responsible for verifying whether the documents presented are properly formatted, complete, or legally effective. This means that the bank does not check if the documents comply with the required standards or if they have been correctly executed.

Example: Suppose a bank receives a bill of lading for a shipment. The bank is not liable if the bill of lading contains errors or if it was falsified, as long as the documents comply with the terms set out in the credit. If the bill of lading inaccurately describes the shipment or is forged, the bank will not be held accountable.

Clause: “nor do they assume any liability or responsibility for the general and/or particular conditions stipulated in the document(s) or superimposed thereon”

Explanation: Banks do not take responsibility for the specific terms or conditions mentioned in the documents or any additional conditions that might be added. They are only concerned with whether the documents comply with the credit terms, not with the details within those documents.

Example: If a sales contract stipulates certain conditions regarding the quality of goods, the bank will not be held liable if those conditions are not met. For instance, if the contract requires the goods to be of a specific quality and the actual goods do not meet this requirement, the bank is not responsible for any issues arising from this discrepancy.

Clause: “nor do they assume any liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any document(s)”

Explanation: Banks are not liable for verifying the physical characteristics of the goods described in the documents. This includes aspects such as quantity, weight, quality, and condition of the goods, as well as how they are packed and delivered.

Example: If the documents presented show a shipment of 1000 units of goods, but the actual shipment contains only 900 units, the bank will not be responsible for this discrepancy. The bank’s role is limited to processing the documents according to the credit terms, not inspecting or verifying the actual goods.

Clause: “nor for the good faith or acts and/or omissions, solvency, performance or standing of the consignors, the carriers, the forwarders, the consignees or the insurers of the goods, or any other person whomsoever”

Explanation: Banks do not assume responsibility for the reliability or performance of the parties involved in the transaction, including the consignors, carriers, forwarders, consignees, insurers, or any other parties. They are not liable for any actions or failures on the part of these parties.

Example: If a carrier fails to deliver the goods on time or if the consignee is unable to pay for the goods, the bank is not liable for these issues. The bank’s responsibility is solely to process and check the documents as per the credit terms, not to oversee the actions of other parties involved in the transaction.

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 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 7 Explanation – CDCS Guide: Issuing Bank Undertaking

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UCP600 Article 7 Explained

Clause (a)

Clause:
“Provided that the stipulated documents are presented to the nominated bank or to the issuing bank and that they constitute a complying presentation, the issuing bank must honour if the credit is available by:
i. sight payment, deferred payment, or acceptance with the issuing bank;
ii. sight payment with a nominated bank and that nominated bank does not pay;
iii. deferred payment with a nominated bank and that nominated bank does not incur its deferred payment undertaking or, having incurred its deferred payment undertaking, does not pay at maturity;
iv. acceptance with a nominated bank and that nominated bank does not accept a draft drawn on it or, having accepted a draft drawn on it, does not pay at maturity;
v. negotiation with a nominated bank and that nominated bank does not negotiate.”

Explanation:
This clause outlines the issuing bank’s obligation to honour a letter of credit when the beneficiary presents complying documents. If the credit is available by various methods (e.g., sight payment, deferred payment, acceptance, or negotiation), the issuing bank must honour the credit under the following circumstances:

  • If the credit is available with the issuing bank itself by sight payment, deferred payment, or acceptance.
  • If the credit is available with a nominated bank but that bank fails to pay, incur a deferred payment undertaking, accept a draft, or negotiate.

In simpler terms, the issuing bank guarantees payment to the beneficiary even if the nominated bank fails to perform its duties under the letter of credit.

Example:
A company in India sells goods to a buyer in the USA under a letter of credit issued by an Indian bank. The Indian bank (issuing bank) allows the credit to be available by negotiation with a U.S. bank (nominated bank). If the U.S. bank fails to negotiate the documents (i.e., doesn’t purchase or discount the draft), the Indian bank must still honour the payment to the beneficiary in India, provided the documents comply with the credit terms.

Clause (b)

Clause:
“An issuing bank is irrevocably bound to honour as of the time it issues the credit.”

Explanation:
Once the issuing bank issues a letter of credit, it is irrevocably bound to honour the credit as long as the beneficiary presents compliant documents. This means that the issuing bank cannot revoke or cancel its obligation once the credit is issued.

Example:
If an issuing bank in Japan issues a letter of credit on behalf of a buyer in Japan for goods purchased from a supplier in China, the bank cannot withdraw its commitment once the letter of credit is issued. As long as the Chinese supplier presents the required documents as per the credit terms, the Japanese bank must honour the payment.

Clause (c)

Clause:
“An issuing bank undertakes to reimburse a nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank. Reimbursement for the amount of a complying presentation under a credit available by acceptance or deferred payment is due at maturity, whether or not the nominated bank prepaid or purchased before maturity. An issuing bank’s undertaking to reimburse a nominated bank is independent of the issuing bank’s undertaking to the beneficiary.”

Explanation:
This clause states that if a nominated bank honours or negotiates a complying presentation and sends the documents to the issuing bank, the issuing bank must reimburse the nominated bank. If the credit is available by acceptance or deferred payment, the issuing bank must pay the nominated bank at maturity, regardless of whether the nominated bank prepaid or purchased the documents before maturity. The issuing bank’s obligation to reimburse the nominated bank is independent of its obligation to pay the beneficiary.

Example:
Suppose a French bank (issuing bank) issues a letter of credit available by deferred payment with a German bank (nominated bank). The German bank honours a complying presentation and forwards the documents to the French bank. The French bank must reimburse the German bank at maturity, even if the German bank had advanced payment to the beneficiary before the maturity date. This reimbursement obligation is separate from the French bank’s obligation to the beneficiary under the credit.

UCP600 Article 27 Explained: Clean Transport Documents in International Trade

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UCP600 Article 27: Clean Transport Documents

Article 27 of the UCP600 deals with the requirement for a clean transport document in the context of documentary credits. Here’s a breakdown of each clause along with examples for clarity:

Clause 1: Clean Transport Document Requirement

Text: “A bank will only accept a clean transport document.”

Explanation: This clause specifies that for a bank to honor a documentary credit, the transport document presented must be clean. A clean transport document is one that does not contain any clauses or notations that declare the goods or their packaging as defective.

Example: If a seller ships goods and the bill of lading (a type of transport document) states, “Goods are in damaged condition,” this would not be considered a clean transport document. The bank would refuse to accept this bill of lading under a documentary credit.

Clause 2: Definition of a Clean Transport Document

Text: “A clean transport document is one bearing no clause or notation expressly declaring a defective condition of the goods or their packaging.”

Explanation: This clause further clarifies what constitutes a clean transport document. It must be free from any remarks that explicitly state that the goods or their packaging are in a defective state.

Example: If the bill of lading states, “Packages are torn,” this notation indicates a defective condition of the packaging. Therefore, this bill of lading would not be considered clean and would not be accepted by the bank.

Clause 3: Absence of the Word “Clean”

Text: “The word ‘clean’ need not appear on a transport document, even if a credit has a requirement for that transport document to be ‘clean on board’.”

Explanation: This clause indicates that the transport document does not need to explicitly include the word “clean.” As long as there are no clauses or notations indicating a defective condition, the document is considered clean. This holds true even if the letter of credit specifies that the document must be “clean on board.”

Example: A bill of lading that does not contain the word “clean” but also does not include any negative remarks about the condition of the goods or their packaging would still be accepted. For instance, a bill of lading that states “Goods loaded on board” without any additional comments about defects is considered a clean transport document.

Summary

Understanding UCP600 Article 27 is crucial for exporters, importers, and banks involved in international trade. It ensures that the transport documents presented under a letter of credit accurately reflect the condition of the shipped goods, thus providing confidence and security to all parties involved. By requiring clean transport documents, banks help maintain the integrity of the trade finance process.

Additional Notes:

  • On Deck: Refers to the transportation of goods on the deck of a vessel. Transport documents should specify if goods are stowed on deck as it can affect the condition and risk associated with the goods.
  • Example: A bill of lading marked “on deck” indicates that goods are exposed to the elements, which might not be acceptable for certain types of shipments.
  • Shipper’s Load and Count: Indicates that the shipper is responsible for loading and counting the cargo. The carrier does not take responsibility for the quantity or condition of the goods loaded.
  • Example: A bill of lading with the notation “Shipper’s Load and Count” implies that any discrepancies in the number or condition of the goods are the shipper’s responsibility, not the carrier’s.