UCP600 explanation

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 26: On Deck, Shipper’s Load and Count, and Additional Charge

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Article 26: “On Deck”, “Shipper’s Load and Count”, “Said by Shipper to Contain” and Charges Additional to Freight

Clause (a): On Deck

Explanation: A transport document must not indicate that the goods are or will be loaded on deck. However, a clause stating that the goods may be loaded on deck is acceptable. This distinction is important because it affects the security and condition of the cargo during transit. Goods loaded on deck are exposed to weather conditions and have a higher risk of damage.

Example:

  1. Not Acceptable: A Bill of Lading (B/L) with the clause “Goods are loaded on deck” will be rejected under UCP600 because it clearly states that the goods are placed on deck.
  2. Acceptable: A B/L with the clause “Goods may be loaded on deck” is acceptable. This implies a possibility without confirmation, thus complying with UCP600 requirements.

Clause (b): Shipper’s Load and Count / Said by Shipper to Contain

Explanation: A transport document bearing clauses such as “shipper’s load and count” and “said by shipper to contain” is acceptable. These phrases indicate that the details regarding the cargo’s quantity and contents are provided by the shipper and have not been verified by the carrier.

Example:

  1. Shipper’s Load and Count: A B/L states, “Goods loaded and counted by shipper.” This means the carrier has not verified the number of packages or their condition; this responsibility lies with the shipper.
  2. Said by Shipper to Contain: A B/L with the clause “Said by shipper to contain 100 cartons of electronics” indicates that the carrier relies on the shipper’s declaration regarding the contents of the shipment.

Clause (c): Charges Additional to Freight

Explanation: A transport document may bear a reference, by stamp or otherwise, to charges additional to the freight. This clause means that the document can mention extra costs that are not included in the freight charges, such as handling fees, customs duties, or insurance.

Example: A B/L includes a stamped note, “Additional charges: $200 for customs clearance and $150 for insurance.” This indicates that these costs are separate from the freight charges and must be borne by the shipper or consignee as specified.