The Guide to Documentary Credits

.-~~~----. _. ,

...... 9_' ,~-

..
lnternatio naIl Fi n an :.ial

.-~FSA--o
S e rv i r. esl A ss oc iation

The Guide to Documentary Credits

3rd edition

Gary Collyer

CDCS

Published by its School of Finance, incorporated by Royal Charte.

;1

non-profit-making

registered

educational

c!:arity

The its School of Finance believes that the SOUI'CCS of information upon which the book is based are reliable and has made every effort to ensure the complete accuracy of the text. However, nei :her ifs Schoolof Finance, the author nor any contribt.tor can accept any legal responsibl.i.y whatsoever for consequences that may arise from any errors or omissions or any opinion or advice given,

All rights reserved. No part of this publication may be reproduced in any material form (in :1>Jc!,tlg photocopying or storing it in any medium by electronic means and whether 0: not trar.s.eru iy or incider-tally to some other use of this publication) without the prior written permlssior of the copyright owner except in accordance with the provisions of the Copyright. Designs ;'r,d Patents Act 1988 or under the terms of a licence issued by the Copyright Licensing Agell';y Ltd. Applications for the copyright owner's written permission to reproc.uce any part of this publication should be addressed to the publisher at the address below:

its School of Finance

IFS House 4-9 Burgate Lane Canterbury Kent CTI2XJ T 01227 818609 F 1227 784331 E customerservices@ifslearning,com

© ifs School of Finance 2007, with the exception of North

a' d South America wherein copyright lies with the International Financial Services Association 2007

Typeset by Kevin O'Connor P 'inted by Antony Rowe. Chippenham, Wiitshire' ISi~N:978-1-84516-617-S

5C h 001 0 f Fin Q ,'1 C e

• __ Ie,

osoorat ed by Royal Chon",

.... Intcrnational!FinanCial

.--IFSA-·---o
S e rv ice s Ass

I .

0 C i ct i (t

n
'

Contents

Acknowledgments Preface
Docur,: .'ltal) Credits - An Overview

vii xiii

1.1 1.2
1.3 1.4

Introduction and learning objectives Brief history Definition of documentary credit - a generiC understanding A basic documentary credit transaction Generic flow chart of a documentary credit transaction Questions

2 3
4
7

1.5
1.6 2

8 9

The Sales Agreement

2.1 2.2 2.3

2.4

Introduction and learning objectives Contract of sale Trade terms in foreign trade - lncoterrns Methods of payment Questions a.td documentary credits

10
II

13 22 33

2.5

ix

-'---

'I"

<,~

Contents

Documentary

Credits - T)rpest Uses and Characteristics

objeccives

35

3.1 3.2 3.3 3.4 3.5

4

Introduction and learning

36 37 79 84
III

Types cf documentary credit Types of payment Characteristics Questions '.""1 Cr'ldit Transactions - Roles and

I j
(

Parties to Documer. Responsibilities

113 ! 14

4.1' Introduction and learning objectives 4.2 4.3 4.4 4.5 4.6 4.7 5
Roles and responsibilities - applicant's side Roles and responsibilities - beneficiary's side Relationship of parties in respect of payment of conforming documents and non-payment of non-conforming documents Roles and responsibilities in reimbursement Roles and responsibilities illustrated Questions

..

I
j

116 140 14~ 146 14!. ;4"

IS'
,
I

I
i

i I
I J

!. .

Issuance and Amendments

5.1 5.2 5.3 5.4 5.5 6

Introduction and learning objective Associated activities in respect of issuance Issuanc:eof a documentary credit Amendments Questions Documents

152 154 162 166 168 169 170 172

tI,

'Transport

6.1 6.2
x

Introduction and\~rning objectives Characteristics of transport documents

.,----,-.~-------------.~~----------------:--------", --i- ..... "~,;.'.~~'" "

------"\"

-. .:

'r:
,\.
"

Contents

6.3 6.4 7

introduction to the processing of transport documents under documentary credits and UCP 600 Que ;::ons

187 257

Other Documents 7.1 7.2 7.3 7.4 Introduction and learning objectives Insurance documents Financial and commercial documents, and documents for official purposes Questions

259
260 260 275 299
301

i'

Presentation. Examination and Settlement/Rejection 8.1 8.2

8.3

Introduction and learning objectives Presentation Preliminary examination tasks and techniques Examination of documents Handling discrepant documents Settlement Electronic presentatlcns Quv.tions

302

304
307 311
340 354

8.4 8.5 8.6 8.7 8.8 9

369 376 379 379

380

Bank-to-Bank Reimbursements under Documentary Credits 9.1 lntroduction and learning objectives UCP and bank-to-bank reimbursements under documentary credits ICC Uniform Rules for Bank-to-Bonk Reimbursements Documentary Credits (URR 525) Problems Questions under

9.1
9.3 9.4 9.5

381

402
403

xi

C(ltJ1CtH~

10 Related Products 10.1 Introduction and learning objectives 10.2 Release of goods connected with documentary credits against indemnities issued or countersigned by banks 10.3 Letters of indemnity (LOis) 10.4 Assignment of proceeds, participation and syndication 10.5 Questions

405

406 406
41 '

41(:

II Risk Issues I 1.1 Introduction and learning objectives

11.2 Risks to the applicant I 1.3 Risks to the issuing bank 11.4 Risks to the beneficiary 11.5 Risksto the advis;:ig bank

419

420 420 4:L2

422

426
427

I 1.6 Risks to the nominated bank

11.7 Risks to the confirming bank 11.8 Risks to the reimbursing bank 11.9 General risks I 1.10 Questions

4:Ll

428
428 430

Recertification Guidelines
Bibliography 441

IndeA

445

xii
I

Preface

This third edition of The Guide to Documentary Credits has been substantially revised to reflect zhe introduction of the new UCP 600, which came into force in July 2007. The author, Gary Collyer, was chair of the UCP 600 Drafting Group and has therefore been directly involved in the process by which the new document has been revised and finalised. He is, therefore, a leading authority on the interpretation and application of UCP 600. While all of the chapters in this text have been amended. some have been substantially redrafted. Despite all of these char ges, however, some of the original content remains and the publishers would like formally to acknowledge the contributions of Lakshman Wickremeratne, Michael Rowe and Stephen Berrisford to the two previous editions of this text. Documentary credit specialists should be aware that there are constantly changing issuesthat have implications for documentary credit operations. These include new legal cases in various jurisdictions around the world, ICC DOCDEX De Jstcns, ICC Banking Commission Opinions and ICC Banking Commission De:ision Papers. It is advantageous for anyone working in documentary credit operations to keep him or her self up to date with these issues that impact ooerations. Below is a partial list of from where current information on these issues is available.

Website sources
• International Chamber of Commerce - www.iccwbo.org • DC PRO - www.dcprofessional.com • lnsxitute of International Banking Law and Practice - www.iiblp.org
xiii

Preface

+ International

+ i(5 School of Finance - www.ifslearning.com

Publication sources

Financial Services Association - www.ifsaonline.org

+ Documentary
+ ICC

+ ICC DClnsight

(avallao:e by subscription from the ICC - www.iccbooks.com)

Credit World (available by subscription - www.iiblp.org/dcw.asp)

publications of Official Opinions (available from the ICC - www.iccbooks. com) + Annual Survey of Letter of C -edit Law and Practice (available from the Institute of International Banking law and Practice - www.iiblp.org)

xiv

One

Documentary Credits - An

Overview

Chapter outline
I. 1 Introduction and learning objectives I. I. I Introduction 1.1.2 Learning objectives Brief history Definition of documentary credit - a generic understanding A basic documentary credit transaction Generic flow chart of a documentary credit transaction Questions

I .2 1.3 1.4 I .5 I .6

1.1

Introduction and learning objectives

1.1.1 Introduction
The aim of this chapter is to introduce the documentary credit specialist to the concept of a documentary credit by: • providing some background to its origins, by way of a brief history; • providing a generic meaning of the word 'credit' as an instrument used in trade; and • reviewing a generic flow chart for a documentary credit transaction. It should be noted that the different types of documentary credit are defined and explained in Chapter 3.

OOUIIJI<'JJlWY

CJcdJ[~

Jln

OVCIVJt'W

The different methods by which payment is made for goods is explained.in Section 2.4 of Chapter 2, under the heading'Methods of payment'. The different methods by which goods are transported is explained in Chapter 6. under the heading'Transport documents'. This publication is concerned with the useof documentary credits and standby letters of credit (,credits') as a meansof settlement for goods, services or pefc rrnance. Unless otherwise highlighted within this text, terms such as 'Jette" of credit' ('LC'), 'commercial credit' and 'documentary credit' ('DC') refer to an ·rrevocable documentary credit. For the sake of consistency, the term 'documentary credit' is used throughout this text and should be read in the context of the specific type of credit that is being discussed.

1.1.2

Learning objectives

The learning objectives for the documentary credit specialist are: • to enableyou to understand the term 'documentary credit' in its generic setting; and • to review a basic documentary credit transaction.

I .2

Brief history

The term 'letter of credit' was probably first used in connection with traveller's letters of credit, which were widely used in the eighteenth century. These were issued by banks, in the Western world, to provide their clients with a means of obtaining cash from overseas banks during the course of a client's foreign travel. This obviated the need to carry large sums of money upon a client's person and the attendant risks of robbery or loss. A prerequisite for the issuance of a traveller's letter of credit was a formal letter of introduction addressed to the issuing bank's correspondent or agent abroad. The letter of introduction would indicate that the dient was a valued c. stomer and request that the correspondent or agent provide any possible assistance.Copies of the letter of introduction were often sent to the issuing bank's corespondent or agent in advanceof the client's scheduled visit. The traveller's letter of credit addressed to a correspondent or age·t would be issued in the form of a letter. It indicated that, in consideration of the corespondent or agent paying cash to the named client, the issuing bank would honour bills of exchangedrawn by the correspondent or agent on the issuingbank for amounts paid plus the charges incurred by the correspondent or agent. The traveller's leccerof credit indicated a maximum amount availablethereunder and an expiry date. Eachcorrespondent or agent was required to indicate details of the
2

Definition

of JOCUrllenLary creJa - 0 gcrrcrK unJcrstunJrng

amount(s) paid and the daters), so that the next correspondent or agent to whom the client presented the credit would be able to ascertain the balance available to be drawn. The client always retained possession of the original credit. Documentary credit specialists should see the origin of a credit asa 'letter' that was provided by a bank (the 'issuing bank') to a correspondent or agent, upon which 'credit' was to be provided to a named client (the 'beneficiary'). This letter also described how the correspondent or agent was to obtain reimbursement from the issuing bank. This usually took the form of a bill of exchange, as indicated earlier. The documentary credit, in its modern form, developed from these modest beginnings in the mid nineteenth century. It first appeared, among banks in London in the I 840s, as a vehicle for effecting payment for foreign trade transactions. It may well be that, as a result of personal contacts made by travelling as described above, merchants were able to arrange for goods to be sent from abroad. The movement of goods from one country to another is more complicated than buying goods from within a local marketplace. Often, there are specific documents required for the transport of goods and payment has to be made across borders. In order to gain a global understanding, interpretation and application of documentary credit usage,the International Chamber of Commerce (ICC) developed and published its first version of the Uniform Customs and Practice for Documentary Credits (UCP) in 1933. UCP 600 is the current version of this publication and came into effect on I July 2007. These rules are supplemented by the publication of the ICC Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits (URR 525), the ICC Supplement to the Uniform Customs and Practice for Documentary Credit~ for Electronic Presentations (eUCP), version 1.1, and the ICC publication IntefllGtfCInal Standard Banking Practice for the Examination of Documents under Documentary Credits subject to UCP 600 (ISBP). AI! of these publications will be covered in some de:ail within this publication. It should be noted that, while the ICC Banking Commission Decision 'The Determination of an "Original" document in the context of UCP 500 sub-article 20(b)' (12 July (999) was specific to an article of UCP 500, part of its content has been incorporated into UCP 600, article 17, and is equally valid as a resource material for UCP 600. The 'Position Papers I, 2, 3,4 on UCP 500', issued by the ICC on I September 1994, have no application under UCP 600.

1.3 Definition of documentary credit - a generic understanding

A documentary credit, as an instrument of settlement of the payment obligation between buyer and seller, is also known in the following terms:
3

Documentary

Credits - An Overview

• letter of credit - t ecause a credit is issued by an issuing ban k and addressed to a beneficiary in the form of a 'letter', the term 'letter of credit' (or 'LC') is often used. This is probably the most-used form of terminology; • commercial credit - because a credit is issued by an issuing bank in settlement of a commercial transactio-i, the term 'commercial credit' IS used; • documentary credit - because a credit is issued by an issuing bank and requires the presentation of stipu'ated documents for determination of compliance therewith, the term 'documentary credit' ('DC') is used; • standby letter of credit - because a credit is issued by an issuing bank with the purpose that it is only to be used for settlement if there has been some form of default or is to act as a form of financial guarantee, the term 'standby letter of credit' is used. All four terms generically refer to the same product, which undertakes payment to the beneficiary provided that the documents stipulated in the credit are presented and that all terms and conditions of the credit are complied with. The generic understanding of the meaning of 'credit' UCf» 600, article 2, under the definition of 'Credit': C.r~i~;;:~~;.~y:arrangement,
·._Ie_.: ·.• ..

.:';,~/'''>i,,>~}-(S,r,'~'}'"'' ._. __

'---;-1

is accurately

encapsulated

in

however

named

or described,

that

is

irrev.-._Ocab., -~h~reby •..... ·.t.·_an .'_.; constitutes a definite undertaking bank~o,.hqn~ura complying presentation. A 'complying presentation' is defined in UCP 600, article 2:

of the issuing

Complying presentation means a presentation that is in accordance with the termsandconditk~1s of the credit, the applicable provisions of these rules and international standard banking practice. The key element to remember is that honour (ie, to pay at sight, to incur a deferred payment undertaking to pay at maturity, or to accept a bill of exchange, or 'draft', drawn by the beneficiary and pay at maturity) or negotiation is conditional upon the presentation of stipulated documents that are in accordance with the terms and conditions of the credit, t'-,e applicable provisions of UCP 600 and international standard banking practice. This key element is present in a credit irrespective of whether it is described as a .etter of credit, a commercial credit, a documentary credit or a standby credit.

1.4 A basic documentary credit transaction

An example of a basic documentary credit transaction is given below in its s.mplest and most common form, and a documentary credit specialist should note that variations thereof are explained in the later chapters of this book.
4

The structure, which covers the movement of goods, provision of services or other form of performance, is as follows. I The buyer (otherwise known as the 'applicant') completes a standard documentary credit application form made avai.able by their bankers, requesting that the bank (otherwise known as the 'issuing bmk') issue an irrevocable documentary credit in favour of the seller (otherwise known as the
'beneficiary ').

The application form, which is submitted to the issuing bank in electronic or paper form, :.~ould specify: • the documents that are to be presented; and • the terms and conditions that are to be complier' with by the beneficiary. It should be noted that, while each bank may maintain its own :'orm of documentary credit application, the fields to be completed 1:)' the applicant are fairly consistent across all banks and usually follow the SWIFT MT 700 structure. UCP 600, article 2 (,Definitions') provides the meaning of 'applicant', for the purpose of those rules, as 'the party on whose request the credit is issued', 2 The sell ;:r (otherwise known as the 'beneficiary') dispatches the goods as required, or provides the requisite services or performance, and presents the stipulated documents to the issuing bank, a confirming bank, if any, or a nominated bank (the nominated bank will be any bank if the credit is freely available). The terms of the documentary credit may include a requirement for a bill of exchange to be drawn on one of the above banks, in addition to the presentation of other stipulated documents. UCP 600, article 2 ('Definitions') provides the meaning o! 'beneficiary', for the purpose of those rules, as 'the party in whose favour a credit is issued', 3 The issuing bank issues its irrevocable documentary credit in favour of the beneficiary and, inso doing, incorporates that bank's irrevocab Ieand independent undertaking to pay the beneficiary, provided that: • all documents as stipulated in the documentary credit are presented; • all terms and conditions of the documentary credit are complied with. UCP 600, article 2 ('Definitions') provides the meaning of 'issuing bank', for the purpose of those rules, as 'the bank that issues a credit at the request of all applicant or on its own behalf', 4 The irrevocable undertaking ~ a documentary credit is independent of the goods, services or performance on which it may be based, including any contract, pro forma invoice, etc, issued in relation to tr.ose goods, services or performance, even if such reference is made in the documentary credit. An irrevocable undertaking is enforceable against the issuing bank even if the applicant is unable or unwilling to reimburse the issuing bank.
5

and

DOCI/IlJe/il(lry

(n'd/(s

!ill OVf'IVICW

UCP 600, article J. ('Definitions') provides the meaning of 'credit', for the purpose of those rules, as 'any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentat on'. UCP 600, sub-article 4(a) includes: '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.' 5 The advising bank - for a cross-border transaction, the issuing bank will usually request a bank in the beneficiary's country with which it has a correspondent banking relationship (otherwise known as the 'advising bank') to advise the documentary credit to the beneficiary. UCP 600, article 2 ('Definitions') provides the meaning of 'advising bank', for the purposE; of those rules, as 'the bank that advises the credit at the request of the issuing bank'. 6 The nominated bank -- a documentary credit may be made available for honour: (i) at the counters of the issuing bank; or for honour or negotiation: (ii)at the counters of a specific (named) nominated bank; or (iii)at the counters of 'any' bank in the case of a freely available credit, The nominated bank in (ii) is usually (but not necessarily) the advising bank. UCP 600, article 2 ('Definitions') provides the meaning of 'nominated bank', for the purpose of those rules, as 'the bank with which the credit is available or any bank in the case of a credit available with any bank'. 7 The confirming bank (which isoften, but need not be, the advisingand nominated bank) provides the beneficiary with an additional irrevocable and independent bank undertaking. separate from that of the issuing bank. If the docur+entary credit is confirmed. it may be made available for honour or negotiation at the counters of the confirming bank. UCP 600, article 2 ('Definitions') provides the meanings of 'contirming bank', for the purpose of those rules, as 'the bank that adds its confirmation to a credit upon the issuing bank's authorization or request' and of 'confirmation' as 'a definite undertaking (of the confirming bank, in additio;'1 to that of the issuing bank, to honour or negotiate a complying presentation'. 8 The goods - if a documentary credit covers the shipment of goods. the goods are dispatched according to the terms of the documentary credit. The evidence of shipment of goods is represented by the documents presented under the documentary credit and the applicant will invariably need these to obtain
6

be.

Celleric flow cliort

0/ "

(locwllf.'lIwry

ere/Ill [(iJ()SflCUOIl

clearance and delivery upon arrival. Payment is exchanged for documents in the documentary credit cycle provided that the stipulate :'documents are presented and that the terms and conditions of the credit are complied with. 9 The documents and payment - the nominated bank may honour or negotiate, provided that a complying presentation has been made, The nominated bank will, at the same time, dispatch documents to the issuing bank, which will effect reimburse ..ent according to the instructions of the nominated bank, provided that the issuing bank is satisfied that the c ocurnents represent a complying presentation. The issuing bank will then forward the documents, other than any bill of exchange that may have been required. to the applicant against pre-agreed settlement terms Often, arrangements within the: documentary credit provide for reimbursement to be obtained by the nominated bank claiming upon a third bank (otherwise known as the 'reimbursing bank') or by debiting the account of the issuing bank that is held with the nominated bank.

1.5 Generic flow chart of a documentary credit transaction

Figure 1.1 A documentary credit under which an advising and confirming bank is also the nominated bank
Seller (Beneficiary)
I. Contract
. ..)--

Buyer (Applicant)

s. Shipment!
Dispatch

»- GGood:l..(h
Delivery

8. Documents 9. Reimbursement

AdviSing! Confirming Bank

Issuing Bank

Documentary Credits - An Overview

I .6
2 3 4

Questions ----------------------------------------~-----

V,'hat is the instrument to which the letter of credit can be historically related? What is the key els.nent that acts as a prerequisite to trigger a payment in a usual documentary credit transaction? Name the three ICC publications/rules that act as a supplement to the UCP 600. Can you detail the procedural steps involved in a documentary credit issued in standard or common form?

Two

The Sales Agreement

)
>

Chapter outline
2. I Introduction and learning objectives 2.1. I Introduction 2.1.2 Learning objectives 2.2 Contract of sale 2.2. I Conclusion of the export contract 2.2.2 Form of the export contract 2.2.3 Agreements 2.2.4 Law and disputes 2.2.5 International sales law 2.2.6 Effective sales agreements 2.3 Trade terms in foreign trade ·-Incoterms and documentary credits 2.3.1 Introduction 2.3.2 The 13 Incoterms 2.3.3 An Incoterms case study 2.3.4 Implications of Incoterms 2000 for documentary credits 2.3.5 Electronic developments 2.4 Methods of payment 2.4.1 Methods of payment 2.4.2 Bills of exchange/promissory notes as instruments of negotiation and as instruments for avalisation or forfaiting in collections and documentary credits 2.4.3 The documentary credit as a method of payment and the autonomy of documentary credits (the independence principle) 2.5 Questions
9

Tile Soles

Ag(CCIllCIl(

2.1 Introduction and learning objectives

2. 1. 1 Introduction
The most basic agreement in international trade is the salesagreement between the seller and the buyer (this is often referred to asan 'export contract' or a 'foreign sales agreement'). All other agreements and procedures commonly used in international trade result from the performance of this contract or agreement. For example, the two most essential terms of the sales agreement are the seller's undertaking to provide the goods to the buyer and the buyer's undertaking to pay the price in return. In the context of an export sale, the first of these usually involves the conclusion of a contract with a carrier to transport the goods from the country of the seller to that of the buyer. The second undertaking makes it necessary for the buyer to arrange payment through the banking system. Note that payment mechanisms commonly employed on import/export transactions, including documentary credits. are briefly examined and compared later in this chapter. Other procedures related to the export sale and the payment operation sometimes include government requirements. such ascustoms procedures and exchange control regulations. A documentary credit is an L..,ldertakingseparate from the export agreement or other commercial transaction on which it may be based. This essential characteristic and its consequences will be covered in further detail in subsequent chapters, but in commercial - rather than legal - terms, documentary credits are issued to facilitate performance of the buyer's payment obligation to the seller. The need for a documentary credit in an import/export transaction arises from the creation and completion of an export agreement and/or other commercial transactions. Against this background, this chapter summarises some of the main features of export contracts and a number of the most frequently used ways in which payment may be effected under an export contract. The purpose is to give the documentary credit specialist a general understanding of the major principles applicable to export contracts and of the different ways in which the buyer's obligation to effect payment may be met.

2.1.2

Learning objectives

The learning objectives for the documentary credit specialist are: • to understand Wh0 is involved in the salesagreement and to appreciate that the agreement supersedes the payment obligation; • to understand why the salesagreement is important in order that the exchange of goods for money can be effected smoothly; • to obtain a dear understanding of Incoterms, as applicable to an international trade transaction; • to be able to compare the basic methods of payment; and
10 \

Contract of sale

• to understand when the documentary credit is a preferred method of payment and to understand the principle of the autonomy of a documental')' credit.

2.2 Contract of sale ----------.--------2.2.1 Conclusion of the export contract

Although trade is continuing to become more international in nature, there is still no general system of international commercial law applicable to export transactions. This means that the detailed provisions governing the conclusion. performance and enforcement of export contracts still differ from one country to another. in accordance with the different laws of each country. In general terms, the buyer and seller conclude a legally enforceable export contract by agreeing on the goods to be sold and the price to be paid for them. Usually, their agreement will, in addition, cover related items such as the time period for delivery. the method of payment and how the goods are to be delivered (the 'trade terms'). It may also specify what law is applicable to the contract and which court or arbitration system has jurisdiction to hear any claims in the event of a dispute.

2.2.2 Form of the export contract

Precise requirements for export contracts vary from one country to another, but, as a general principle, the determining factor is the agreement of the seller and buyer to sell and to buy. Accordingly, the import/export contract does not have to be a lengthy formal document in order to be legally enforceable. Characteristicalry, contracts of this type are concluded on the basis of an informal exchange of messages, including telephone conversations, faxes and emails. Often, the seller sends the buyer a pro forma invoice, indicating details of the goods and their unit prices, before the conclusion of the transaction.

2.2.3 Agreements
Export sales are usually concluded between professional buyers and sellers acting in the course of their business rather than between private individuals. In this situation, buyers and sellers frequently maintain their own set of standard conditions of sale and purchase, setting out the terms on which they normally conduct business. Typically, these are included by reference in the contracts. Problems sometimes arise when the buyer and seller send their standard conditions to each other during the pre-contract negotiations. It is then frequently undearwhich set of conditions (if either) applies to the transaction and whether the parties have effectively come to an agreement at all. In extreme cases, the uncertainty created
II

by this practice leads to a dispute that ends in court. In this event, the judge or arbitrator may decide that no contract was ever concluded because the buyer and seller failed to agree on the conditions applicable. More often, the judge or arbitrator will try to 'save' the contract by determining, for example. that one or the other set of conditions applies or that both sets of conditions apply, to the extent that they do not conflict.

2.2.4

Law and disputes

As mentioned above, there is still no supranational commercial legislation to cover all aspects of export contracts. As a result, in most cases, export contracts are governed
- at least in part - by the laws of the country of one ofthe parties involved. The buyer and seller may themselves agree which law is to apply by including a .;pecific provision in the sales contract. Otherwise, if a dispute occurs, the judge or arbitrator hearing the matter may have to decide this issue first, in order to determine wha; ri-les of law apply to the case. In this situation, judges and arbitrators characteristically resolve the issue by applying the law of the country that is most closely connected with the contract - for example, the country to which the goods are to be delivered. In many instances, a trade term applicable to the contract indicates the point at which delivery is to be made for legal purposes. For example, under CIF ('cost, insurance and freight') or FOB ('free on board') terms, the seller fulfils the delivery obligation when the goods are loaded on board a ship in the seller's country. Because the sales agreement is Signed only by the seller and the buyer, banks are not involved in the sales agreement.

2.2.5

International sales law

A number of attempts have been made to overcome the difficulties that exist with sales contracts by establishing international law for export sales. The latest of these is the 1980 UN Convention on Contracts for the International Sale of Goods (C1SG). It provides a standardised set of legal rules for import/export transactions but, although it has now been adopted by a number of major trading countries, it has yet to gain global ratification and application.

2.2.6

Effective sales agreement

It must be stressed that, in order for there to be a smooth exchange of goods for payment with minimum dispute between seller and buyer, the seller and buyer must resolve the following issues(in addition to goods and unit price): + the terms of delivery of the goods;
12

Trade terms in foreign trade - Incoterms and documentary

credits

• • • •

the point at which the risk in respect of goods passes from seller to buyer; who should clear goods through customs and up to what point; . who arranges for insurance for the carriage of goods and up to what point; what precise risks to goods need to be covered and specifically shown as covered on the insurance document; • what commercial documents are needed and what should be shown on them; and • whether any other documents (such as inspection certificates) zre needed and who is to issue such documents.

The most common method of minimising the risk of dispute arising in the sales contract is to incorporate Incoterms (see below). But it is not only important for the seller and the buyer to agree to trade terminology as covered by lncoterms: it is even more important for there to be a clear understand'ng on their application. It is only when these objectives have been achieved that an effective sales agreement is created.

2.3 Trade terms in foreign trade - Incoterms and documentary credits

2.3.1 Introduction

In order for trade to prosper, buyers and setters must be clear as to where their responsibilities under commercial contracts begin and end. Consequently, in respect of the transport of goods sold/purchased under these contracts, buyers and sellers will need to know who is responsible for the payment of carriage, insurance, loading! unloading costs, import/export taxes and other related disbursements. They will also need to have a clear indication of the point at which such responsibilities end. Failure to establish transparently the parameters of these responsibilities within the commercial contracts would make it difficultfor sellers to price their goods accurately and for buyers to calculate the full purchase costs. It would also increase the number of contractual disputes between buyers and sellers, which would have to be resolved by arbitration or through the courts, with all the cost implications of such actions. When looking at trade across national borders, you have the added problem that different countries have a variety of interpretations of the same contract wording under their own laws. Thus, in order for international trade to develop, it was necessary for a set of trade terms to be agreed and internationally accepted. As a result, the International Chamber of Commerce (ICC) designed International Commercial Terms, or 'lncoterrns', which were first published in 1936. There were, at that time, alternative trade terms that were used by some countries, but Incoterms are now the accepted international standard for trade terms referred to in commercial contracts.
13

The Safes Agreement

The latest version of lncoterms came into effect in january 2000 and is titled /ncoterms 2000. Full details can be found in ICC Publication No 560. It is worth mentioning here that Incoterms are confined to the rights and responsibilities of parties relating to delivery of goods sold under the contract of sale. They do not extend to other contracts, such as insurance, carriage and payment, although the implications of Incoterms used may have links to such contracts. An exarncle of this would be if the Incoterm CFR ('cost and freight') were to be incorporated in a contract - this would infer that carriage would be by sea and therefore that either bills of lading or sea waybill documentation would be needed. Taking this example a stage further, if payment were to be made under a documentary credit, the type of transport document called for by such a credit would have to comply with the Incoterm stated _ otherwise, at the very least, advising of that credit or payment thereunder may be delayed.

2.3.2

The 13 Incoterms

There are 13 lncoterms and each term sets out the obligations of the buyer and the seller in respect of that particular lncoterm. Any obligation that does not appear in a particular lncoterm must be the responsibility of the buyer unless the commercial contract states otherwise. lncoterms 2000 were designed to mirror changes in commercial practices that had occurred since the last revision in 1990. This included reference to electronic alternatives to paper documentation and also covered the major changes in responsibilities for parties dealing on FAS ('free alongside ship') and DEQ ('delivered ex quay') terms. For ease of understanding and structure, the 13 Incoterms are split into four groups. These are as follows. (i) Group E - the 'E' terms - comprises just one Incoterm, being FXYv, or 'ex works [named place]'. This term represents the least responsibility for the seller, who has only to make the goods available to the buyer at the seller's (ii) own or other agreed premises. Group F - the 'F' terms - covers three Incoterms, which are FCA, or 'free carrier [named place]', FAS, or 'free alongside ship [named port of shipment]', and FOB, or 'free on board [named port of shipment],. The seller's responsibility when using any of the 'F' terms is to deliver the goods to a carrier as designated by the buyer, cleared for export. Group C - the 'C' terms - covers four Incoterms: CFR, or 'cost and freight [named port of destination]': CIF, or 'cost, insurance and freight [named port of destination]'; CPT, or 'carriage paid to [named place of destination],; CIP. or 'carriage and insurance paid to [named place of destination],. Under all of the 'C' terms, the seller is responsible for arranging the contract of carriage, including the freight costs for delivering the goods, which have been cleared for export, to a named destination. Additionally, under the CIF

(iii)

14

-.------------~~----~---

Twe/c

tcrrns in {O(('lgJI

(Will'

ItJWLcfrtJS

alld d(J(wntllwfY

credits

(iv)
I

I
\
I

I
I
I

and CIP terms, the seller is required to arrange insurance of the goods and to pay the associated insurance premium. Group D - the '0' terms - incorporates the remaining five lncoterms, which are DAF, or 'delivered at frontier [named place]', DES, or 'delivered ex ship [named port of destination]', DEQ, or 'delivered ex quay [named port of destination]" DDU, or 'delivered duty unpaid [named place of destination]" and DDP, or 'delivered duty paid [named place of destination]'. The 'D' terms represent the greatest responsibility on the part of the seller, who is reqi.'red in all of the terms to deliver the goods, cleared for export, to the designated place of destination, bearing all costs and risks incurred during their transportation. Additionally, in the DEQ term, the seller assumes responsibility for unloading costs, and in the DDP term, the seller is responsible for arranging import customs clearance formalities and paying the associated costs.

It can be readily seen from the above Incoterm groupings that the obligations of the seller with regard to costs and delivery risks escalate from the minimum EXW to the maximum DDP. When incorporating an Incoterm into the sales contract, the parties should take care to ensure that the term selected is appropriate to the agreed point of delivery and the mode of transportation to be used. For example, FAS, FOB, CFR, CIF, DES and DEQ apply only if a ship represents the point of delivery, ie for transportation by sea or inland waterway. All of the other terms may be used as applicable for any mode of transportation.

2.3.3

An Incoterms case study

Perhaps the best way of understanding the implications of Incoterms 2000 is by considering a case study. Let us presume that Excro Ltd of Tettun Road, Denby, UK, is exporting/selling goods to Imcro Inc of Iowa Road, Miami, Florida, USA. Table 2. I explains the implications for both parties, where appropriate, of the different Incoterms that might be applied to such a sale. The various Incoterms are set out in ;i logical order, starting with that which imposes 'the least obligation on Excro Ltd and ending with that which imposes the most obligations.

L_

IS

The Solcs AWCemCfl[

Table2.1
Incotenn
"'-_ .. _--".,'

Incoterms case study

Standard Obligations of Excro ltd (Sellor)
ICC
--_
... "

- -_ .. ---

Responsibilities of Imcro Inc (Buyer)

Ex works [named place], eg 'Tettun Road Factory, Denby'

Abbreviations EXVV

~-

Free carrier FCA [named place], eg 'Denby Inland Container Depot'

. __ ._-_ .. ------------------------1 Make the goods available for collection Take delivery from Tettun Road. Make all arrangements at own from Tettun Road, Denby, by Imcro Inc, cost to take goods to own premises. It is in Imcro Inc's Once collected by Imcro Inc, all responsibility of Excro Ltd is ended. interests to arrange appropriate insurance (0 cover this journey. A commercial invoice or equ ivalcnt electronic messagewill be p rovided The obtaining of relevant export for Imcro Inc. and/or import licences, and also Goods will be suitably packa ged, the completion of any customs unless it is the norm for the goods formalities and payments for involved to be delivered unpacked, the export of the goods, are the res onsibili of Imcro Inc. -Make all arrangements at own Make the goods available to Denby Containers at the Inland Co ntainsr cost and risk to cover transport , Depot on the seller's means of of goods to own premises transport not unloaded. (No te: If from Denby Containers the goods were to have bee n made Inland Container Depot. It is available at the seller's prem ises, advisable to arrange appropriate delivery would be incomple te until insurance. the goods had been loaded onto the Imcro Inc should obtain any carrier's own transport.) import licence and perform any Advise delivery of the goods at Denby customs requirements necessary Containers to Imcro Inc. for the import of the goods, Complete export and custo ms including paying all costs, duties requirements, including obt aining any and taxes. export licence and paying any costs, duties and taxes, Supply buyer with commer dal invoice or its equivalent electronic message, I together with proof of deliv ery, to Denby Containers, eg multi mod" transport aocument. Goods will be suitably packaged unless it is the norm for the goods involved to be delivered unpacked.
c

l
j

16

......... ,,0,-,.,

........ ',--.

....

h(J(ic terlllS JIII(I/"l'~tl

[twit·

IIJ("['~tln' Will ,lo{lIlIwltwry

Ct('d'L~

Incoterm

Standard
ICC

I Obligations
I

of Excro ltd (Seller)

Abbre,i Yiations Free alongside FAS Complete export and customs IMake arrangements with a requirements, including obtaining any shipping cOr1pany for transport ship [named export licence and paying any costs, of goods by sea to USA. port of duties and taxes. Notify Excro Ltd ofthe day shipment], eg Supply buyer with commercial invoice and time on wh'ch delivery is 'Liverpool' or its equivalent electronic message, required at the p"rt of Liverpool together with proof of delivery, eg and the name of the nominated transport document. vessel. Deliver goods to the quayside ilrncro Inc is responsible for alongside the nominated vessel at the all risks from the quayside in port of Liverpool, after which the liverpool to the delivery of the seller's liability basically ends. goods to their final destination. Goods will be suitably packaged unless It is therefore advisable to it is the norm for the goods involved I arrange appropriate insurance. to be delivered unpacked. Imcro Inc should obtain any 'Iimport licence and perform any I customs requirements necessary for the import of the goods, including meeting all costs involved, duties and taxes, Free on board FOB As for FAS, but Excro Ltd's delivery for FAS, but with the [named port liability does not end until the goods exception of not being have crossed the ship'S rail and have responsible for the goods until of shipment], been loaded on board a named ship at ithey have crossed the ship's rail eg 'Liverpool' Liverpool. I in the port of Liverpool. Arrange and pay for transport of [lmcro Inc should obtain any CFR Cost and goods to Port of Miami. limport licence and perform any freight Loading and unloading costs should be [customs requirements necessary [named met if they form part of the charge for Ifor the import of the goods, port of destination] , carriage. including meeting all COSts Complete export and customs .involved, duties and taxes. eg 'Port of ,requirements, including obtaining any :It is in Imcro Inc's interests to Miami' export licence and paying any costs, [arrange and pay for insurance of duties and taxes. the goods from when they cross Advise Imcro Inc of delivery of the I the ship's rail in the UK port. goods on board the carrying vessel unloading costs are not and also details of the voyage. I covered by charge for carriage, I Supply lrncro Inc with a commercial [lmcro Inc must also pay these. I invoice or its electronic equivalent, ; ltogether with the relevant transport document, eg bill of lading. I Goods will be suitably packaged unless it is the norm for the goods involved I, to be delivered unpacked. Excro Ltd is free of liability (for

I(Buyer)
i

Responsibilities

~rImc~
.

Inc

'lAs

'I

I I

Ilf

have crossed the ship's rail in the UK ____ l·i~ns~u~r~an_c_e_p_u_r_p_o_s_es_)_o_n_c_e_t_h_e_g_O_O_d_S __ ort.

L_ I

17

____......~ ---_

....

__
..

...

..

The Sales Agreement rln-c-o-t-er-m-~~'-:~c-tan-c-d-:-a-r-d-Obiigati~~~ of Ex~ro ltd (Seller) 1~;~~~;;Sibilities ofl~cr;;.lnc ---

Abbre' viations I ------t-=-===-+-::--------c----- .----------:--,----------------1 Carriage paid CPT Similar to CFR, except that Excro ltd lrncro Inc should obtain any to [named must arrange and pay for transport to import licence and perform any place of the named place of destination. This customs requirements r.ecessary destination], might be an inland container depot I for the import of the goods. eg'Miami in Florida, as opposed to the Port of lincluding meeting all costs Container Miami. 'nvolved, duties and taxes. Depot' Excro ltd must advise Imcro Inc j'lt is in Imcro Inc's interests to I : of the name and address of the UK arrange and pay insurance for : ! carrier into whose custody the goods the goods from when they are I have been given, so that Imcro Inc can I delivered into the custody of the I arrange Insurance. carrier in the UK. Complete export and customs Ilf unloading costs at place of requirements, including obtaining any I destination are not covered by export licence:and paying any costs, the charge for carrage, Imcro duties and taxes. Inc must pay them. It must also Supply Imcro Inc with a commercial pay all costs of transport from invoice or its equivalent electronic 'ithe named place of destination message,together with the relevant to its own premises. transport document. Goods will be suitably packaged unless I it is the norm for the goods involved : to be delivered unp~cked. i CIF Cost, As for CFR, but in addition, Excro Ltd for CFR. but insurance risk insurance must insure the goods as far as the falls on Imcro Inc only once the and freight Port of Miami and supply the buyer goods have crossed the ship's [named I wit~ evidence of this, eg the insurance I rail at POrt of Miami.
I
'I

!As I
'I:

port of destination], eg 'Port of Miami' Carriage and CIP insurance paid to [named place of destination], eg'Miami Container c::::..::='----_---'-~ __ Depot'

\policy.

Similar to CPT, except that Excro Ltd must pay insurance charges during the carriage. The relevant insurance policy or document must be supplied to Imcro Inc.

[Similar to CPT, except ':hat pmcro Inc. does not have to

iarrange and pay insurance I charges. which are met by Excro Ltd.
1

L.__

__

___'_

___J

18

Trade

tCfIllS

III

foreign

trace -

IIICO[CrllIS

and

c!ocwtlcntory
II

credits

II~cotcrm

.... rSt.;~d~rd

Obligations '.
I

of Excro l.t d (Seller)

ICC

Respo';';;ibiliti;5-~I~cro Inc (Suyer)

----J

IAbbre-

I ~~~QOS Io~livered \at frontier i [named place I i

Thist~~m is no-;;;ally used when :The buyer shOUldobtain any import licence ('lid perform any Igoods are In transit overland across a customs requirements necessary Icontlnent and therefore would not be (or the import of the goods, an appropriate term to use in this case ;...,c/udingmeeting all costs study. ,Involved, duties and taxes . I.Where this term is applJCable, however, :.he seJ/er would arrange and pay for the \AII costs and risks from the t :transport of goods to a named point on I (rontier pOiI'[ are the buyer's ! the frontier of a country, which may be I responsibility, induding the costs the buyer's country but not neccssanly i o( unlooding the goods (rom the :arrivol means of transport at the I so. ;(rontier in order to take delivery. is in the interests of the seJler to insure the goods for the journe y ro the II It is in the interest of the buyer I,named place. to pay (or insurance o( the goods (rom the named place of delivery. ! Sufficient notice should be given to the [buyer of dispatch o(the goods, so that I I the latter can make arrangements to i Lake delivery o( them. :The seJ/er must supply a commercial I invoice or its electronic equivalent, together with a relevant transport document or delivery order to the buyer. arrange issue of any export licence and complete customs formalities (including payment o( all costs, duties and taxes). Goods wi/J be Suitably packaged unless it is the norm (or the goods involved to be delivered un acked._----:---::~ __ =:

---,-.--------

lit

Delivered ex ship [named port of destination 1, eg 'Port of Miami'

DES

-L

Similar to OF, except that Excro Ltd's liability does not cease until the goods have been placed at the disposal of I Imcro Inc on board a vessel at coe inarned port of destination. jTheoretically, Excro Ltd need not linsure the goods, but in practice, the ...LI s=--e__,_llc_::ec:_r w()u_l~e wise. to do so. _ .

Similar to OF: Imcro Inc's liability exists from the time at which goods are placed at its

disposal in the ramed destination.

PO~00'jf

.---.

19

The Sales Agreement of Imcra Inc Standard Obl;gatioM ",,';;Ud (Sclt;.:j-l-p~"bm"~ of (Buyer) ICC Abbreviations Deliver the goods on the quay or lrncro Inc shoul d obtain any Delivered ex DEQ wharf at the named port of destination import licence and perform any quay [named customs requir ements necessary and pay unloading costs. port of for the import of the goods, Supply Imcro Inc with a commercial destination] . invoice or its electronic equivalent, including meeti ng all costs eg 'Port of together with the transport document involved, duties and taxes. Miami' or delivery order. Accept delivery of goods at Arrange any export licence named port of destination. The buyer is lia ble for goods and and complete export customs requirements, including payment of costs from the time at which the costs, duties and taxes. goods are placed at its disposal Arrange and pay for contract of Ion the quay or wharf. carriage to the named port of destination. Advise Imcro Inc of the expected time of arrival of the vessel carrying the goods, so that arrangements can be I i made to take delivery. Theoretically, Excro Ltd need not insure the goods on their voyage, but in view of the seller's liability for the goods. such action would be unwise. Goods will be suitably packaged unless it is the norm for the goods involved to be delivered unpacked. ---------" Similar to CIP: Excro Ltd would need Imcro Inc should obtain any Delivered DDU I import licence and perform any to deliver the goods not unloaded duty unpaid to the named place in the importing [named \customs requir ernents necessary country and bear costs and risks for the import of the goods. place of involved in carrying the goods to the .including meeti ng all costs destination). eg'Miami named place of destination. involved, dutie s and taxes. Advise Imcro Inc of dispatch in lmcro Inc rnus t take delivery Container' Depot' sufficient time so that the buyer can of goods at named place of make arrangements to take delivery of 1 destination and is liable for all the goods. risks from ther , on. Arrange any export licence and complete export customs requirements, including payment of costs, duties and taxes. Supply a commercial invoice or its electronic equivalent, together with a relevant transport document or delivery order to Imcro Inc. Theoretically, Excro Ltd need not insure the goods on their voyage, but in view ofthe seller's liability for the [goods, such action would be unwise. \Goods will be suitably packaged unless it is the norm for the goods involved to be delivereQ_unpaSke.d'- _____ ~. _ Incotonn

I
I

20

Trade terms in (orelgn trade - rncoterms

(Jlld docurncll[ary

Incoterm

Delivered duty paid [named place of destination], eg'lowa Road Factory, Miami'

Standard ICC Abbreviations DDP

ObUgatio", of

.x.:,;;itd (S;,,;;)--

-l....
j
I

credits

'".b;O;.~ (Buyer)

of'~ .

lne

I addition. I

ILtd is responsible for all import requirements and payments in

-----

Similar to DDU, except that Excro

ISimilar to DDU,

except that Imcro Inc is not responsible for Iall import requ rements and I payments.

2.3.4

Implicationsof Incoterms 2000 for documentary credits

The case study encapsulates how responsibilities, and therefore costs, are transferred from the buyer to the seller and vice versa, depending upon the Incoterm used. When buyers agree commercial contracts with sellers, with payment due under a documentary credit, the parties must take into account the Incoterm being used. There is obviously no point in requesting an air waybill as one of the documents to be presented by a beneficiary under a documentary credit if the lncoterm clearly identifies that the mode of transport is by sea. Similarly, a buyer should not request an insurance doc.ment from the seller if it is not the seller's respcnsibility to insure the goods, eg under the CFR lncoterm. Such errors can only delay the issuance, advising or payment under a documentary credit and can also have a financial cost, in the form of additional bank charges, and possible impact on cash flow. They may also affect the viability of any future trading relationship between the seller and buyer. Sellers agree to payment under documentary credits because of the assurance from a bank that payment will be made, provided that documentation presented conforms with the requirements of the relevant documentary credit, irrespective of whether the buyer can afford to pay at that time. A seller should therefore, at the outset, carefully scrutinise the terms of a documentary credit, ensuring that it conforms with the Incoterm quoted in the commercial documentation and can therefore be met. Failure to do so, as mentioned above, can have damaging consequences.

2.3.5 Electronic developments

As will have been noticed,lncoterms
2000 covers electronic equivalents of documents in addition to the more traditional paper-based form. of initiatives and research into transferring trade documentation into electronic form in order to expedite transactions. These initiatives will surely come to fruition in the not-too-distant future.
21

As modern technology advances at an ever-increasing pace, there have been a number

"

"

Tile ~()Ie~ Agrn:IlH;Il(

2.4 Methods of payment

By agreeing to buy goods from the seller, the buyer undertakes to pay for them on delivery or as otherwise agreed in the sales contract. This payment obligation forms part of the sales contract itself. In order to perform its payment obligation towards the seller, the buyer concludes legally separate agreements with its bank, and this section provides an overview of the main methods of payment used for export sales.

2.4.1

Methods of payment

2.4.1.1 Advance payment

Abuyer may make payment to a seller in advance, before the goods are shipped. The reasons for adopting this method may be summarised as follows: • the seller may be unwilling to ship goods to the country of the buyer for reasons of country risk; • the buyer may wish to encourage the seller into a long-term trade relationship; • the seller may not have finance with which to buy or prepare the goods for shipment; • the buyer feels comfortable with its relationship with the seller and with both credit and country risk.

2.4.1.2 Open account

When business is conducted on open account terms, the seller dispatches goods to the buyer and, at the same time, sends the buyer an invoice (together with other appropriate documents) for payment on an agreed date or at the end of an agreed period. A typical example of an agreed period is for payment to be made at the end of the month following the month of shipment. The buyer makes arrangements to pay on the relevant date according to the terms of the agreement and, for this purpose, may use any appropriate payment method, such as an international bank transfer or cheque. Open account trading is most commonly used in situations in which the two companies concerned know each other well and have a long-established trading relationship. Sales, for example, between sellers and buyers in countries in Western Europe and the USA are often conducted on this basis. In some cases, sellers also use the procedure as a way to secure contracts with parties in a number of developing countries in which documentary credit terms have applied in the past. Open account trading offers several advantages: in particular, it is simple to administer and involves minimal banking fees or other costs. The system is particularly attractive to buyers because it affords tnem the opportunity of examining the goods before
22

Methods

of payment

they have to make payment. Sellers using open account methods obtain no security for payment and have to rely entirely on the creditworthiness and good faith of the buyer. This may be contrasted with the situation under documentary credits and documentary collections, in which the seller obtains the security of a bank undertaking or a bank retaining control of the documents relating to the merchandise. The only involvement by banks in open account trading is in the transfer of funds from buyer to seller.

2.4.1.3 Documentary collections

Under a documentary collection, the seller ships the goods to the buyer in the importing country. At the same time, it hands over to its own bank documents relating to the goods and their shipment. Examples of common documents are bills of lading, commercial invoices, cargo insurance documents and certificates of origin. The bank forwards these to a correspondent bank in the buyer's country, which may be the bankers of the buyer, to handle the documents in accordance with the instructions of the seller, as instructed by the seller's bank in its collection instruction. Under this procedure, the banks channel the documents, but they do not themselves give any payment undertaking. This solution offers less security than a documentary credit, but, in return, the costs are lower. The solution nonetheless gives the seller a measure of security for payment. The seller's interest is best served where the buyer is not able to obtain possession of the goods without the presentation of shipping documents that are sent through the banking system by the seller. The full security of a documentary collection applies only if the transport document is a negotiable bill of lading and/or if the goods are consigned to the bank in the importing country, with the consent of that bank. If the seller has agreed to supply the goods on short-term credit, it can stipulate that the documents be handed over against the buyer's acceptance of a bill of exchange or signature on a promissory note. The seller may be able to discount the bill or note in return for an immediate payment. The international rules governing collections are the ICC Uniform Rules for Collections, Publication No 522.

2.4.1.4 Documentary credits

Documentary credits constitute the main subject matter of this book and their features and operation are accordingly described in detail in other chapters. The documentary credit structure provides the seller with an independent bank undertaking of payment. The buyer, on the other hand. knows that payment will not be made unless the seller presents documentary evidence covering the goods and their shipment. The role of a documentary credit as a method of payment is discussed in Section 2.4.3 of this chapter.

23

I he ::'(/Ie~ AgreerllclI(

2.4.2 Bills of exchange/promissory notes as instruments of negotiation and as instruments for avalisation or forfaiting in . collections and documentary credits 2.4.2.1 Negotiable instruments

Negotiable instruments, such as bills of exchange (also known as 'drafts') and promissory notes, are a frequent feature of export sales throughout the world. They are employed both as a means of extending credit to the buyer - usually on a shortterm basis - and as a device to provide the seller with a negotiable security for payment. For example, a seller in one country may contract to ship machine parts to a buyer in another country. Payment is to take place 60 days from the date of shipment. The seller dispatches the goods and sends the buyer the shipping documents, which may include a bill of exchange drawn on the buyer payable to the seller at the end of the 60-day period and signed by the seller as drawer. The bill of exchange orders the drawee (the 'buyer') to pay the agreed sum on the stipulated date. The buyer evidences acceptance of the order to pay by endorsing it and returning it to the seller (the specific method of acceptance, ie signature on the front or back, the use of acceptance stamps and other information contained on the draft will be determined by local law or bank regulation). The buyer's acceptance constitutes an unconditional payment undertaking by the acceptor (the 'buyer') who is thereby obligated to pay the instrument at maturity independently of its obligations under the underlying salesagreement. The rights of the payee are fully negotiable and can be transferred to another person by endorsing and handing over the instrument. This means that the seller may be able to obtain an immediate payment before the maturity date by discounting the instrument with a bank or other institution that is willing to do so. The above practice is commonly employed in foreign trade and is frequently used for sales between countries in Asia. The discounting of bills is an important activity for many banks in that region. which offer trade-financing services. The banking facility offered may be referred to by such terms as a 'trade bills' or an 'acceptance bills' service. Although bills of exchange are the type of negotiable instrument most frequently encountered in international trade. promissory notes may also be used. These have a similar effect, but they are drawn up and signed directly by the person undertaking the obligation to pay. Such negotiable instruments provide a means whereby a payment undertaking can be detached from any underlying commercial or financial contract and issued in the form of an independent document that can be transferred from one person to another. Cheques, bills of exchange and promissory notes provide the main examples of negotiable instruments. The payment undertaking contained in these documents can also be guaranteed by a third party. such as a bank. Negotiable instruments - drafts

24

M(,tllod~ or poyt

lIet J!

in particular - playa key role in the payment mechanism under many documentary credits. This is because. in some cases. the credit is made available by acceptance or negotiation of a draft.

2.4.2.2

Legal framework

\
\

Negotiable instruments and the rights of parties to them are gcverned in most countries by detailed legislation. This varies from one country to another, although a set of international conventions drawn up in Geneva in the 1930s provide a common form for a large number of European systems. BntC'j., applies its own legislative rules. which have influenced other countries, the systems of which are based on English legal principles. In the USA, the Uniform Commercial Code provides detailed law on negotiable instruments. These sources provide the main sets of rules on negotiable instruments. In addition, the UN Commission on International Trade Law (UNCITRAL) has developed a model law for international negotiable instruments.

2.4.2.3

Formal requirements

Negotiable instruments have special legal effects that concern the rights and obligations of third parties. as well as the parties who originally created the instrument. For this reason, documents have to conform to strict formal requirements in order to be legally accepted as negotiable instruments. These requirements are established in national legislation and in the applicable international conventions. Typically, the requirements include written form. signature and the need for the payment undertaking or order to be expressed in unconditional terms.

2.4.2.4

Bills of exchange

Under a bill of exchange, the drawer writes and signs the bill instructing the drawee - a bank, in the case of bills under documentary credits - to pay a specified sum of money either to a third party or to the drawer (the 'payee'). The bill may either call for payment on presentation (a 'sight' draft) or on a specified future date or a determinable event (a 'tenor' or 'usance' draft). The payment order must be unconditional. A tenor draft may be presented to the drawee for acceptance. The drawee accepts the draft by signing either on the back or front, according to local custom and law. Acceptance constitutes an unconditional undertaking to pay the draft at maturity. The payee and subsequent holders can negotiate (discount) the bill. This means that they can sell their rights in the bill to a third party, who then becomes the holder. In return for making an immediate cash payment, the party buying the bill often pays a discounted amount, which is less than the face value of the bill. This difference between the amount paid and the full amount payable on the bill at a later date represents the buyer's interest charge, opportunity costs and assumption of risk.

25

Drafts are normally made payable to a particular party and, if so, are transferred by endorsement and delivery. (The latter is the legal term for the physical handing over of the document.) But they can also be made payable to bearer - that is, the person duly holding the bill at any particular time. In this event, they do not name the bearer and they are transferred by delivery alone.

2.4.2.5

Cheques and promissory notes

'\

The legal structure of a cheque is similar to that of a bill of exchange. Unlike a bill of exchange, however, a cheque must be drawn on a bank and it is payable upon presentation to that bank. A promissory note also has most of the same features as a bill of exchange. The essential difference is that it is not an order to another party to pay, but a direct promise of payment by the party who signs the note (the 'maker'). In the same way as the bill of exchange, it must be drawn up in unconditional terms.

2.4.2.6

Ava/s and guarantees

In some countries, a bank or other party can guarantee payment of a draft or promissory note by giving its 'aval'. By signing the note in this way on the back, the bank or other organisation commits itself unconditionally to pay should the maker or drawee default. The practice is well established by legislation in most European countries - in particular, those that have adopted the Geneva Convention - but there is no precise equivalent in legal systems based on English law. The benefit of an aval is transferred automatically when the note is negotiated. Accordingly, the use of an aval is a particularly convenient way of dealing with commercial paper underwritten by banks in the secondary markets. Each person in the chain can claim against previous holders and the drawer, if the draft is not honoured, whether or not it has been accepted. A party negotiating a draft thus acquires a right of recourse, in case of dishonour, against the party endorsing the draft and to previous endorsers. The mere drawing up of a bill of exchange does not oblige the drawee to pay. The drawee is bound by the bill only upon acceptance.

2.4.2.7

Holder in due course

A vital concept in enforcing payment under negotiable instruments is that of the holder in due course. As mentioned above, such instruments are legally separate from any underlying transaction. Holders acquire their right to claim payment from endorsement and delivery of the instrument. Their rights are not generally affected by disputes on the rights and wrongs of any commercial contract that led to the instrument being granted.

26

I J...

Mc(JlOds of !>QymclI(

To benefit fully. from the protection, the holder must be a holder in due course. This means that the holder must have taken the instrument in good faith without notice of any defect in its title. Under English law. for instance, the holder is fully protected only if, in addition, he or she gave valuable consideration - normally money payment - for the instrument. Suppose a thief steals a bill of exchange and forges an endorsement on it: under English law, the drawer anc' endorsers prior to the forged endorsement are no longer liable to subsequent holders. Later endorsers may still be liable to subsequent holders. Many other legal systems, including those covered by the Geneva Convention, consider that the chain of title is not broken by the forgery provided that the subsequent holder takes possession without notice of the theft.

2.4.2.8 Dishonour
All legal systems establish precise formalities to be observed in case of dishonour (ie non-payment). English law provides for notice to be given to all parties affected. Many other countries provide a procedure called 'protest'. Where this applies, the act of non-payment has to be officially established and stamped on the instrument by a public notary.

2.4.2.9 Forfaiting
The term 'forfaiting' describes the formal arrangement or agreement between a seller and a lender by means of which the seller is to receive payment for export receivables from the lender, without recourse on the seller against the security of bills of exchange avatised (guaranteed by a bank) acceptable to the lender. This device - also sometimes referred to as 'a forfait f,nancing' - has a number of applications. Its single greatest use is for the medium-term financing of exports of capital goods and equipment in cases in which official export credit support is not available. It provides a flexible means whereby a bank or other institution in the seller's country can extend credit to the buyer, backed by the guarantee of a bank in the importing country. Essentially, forfaiting works as follows . • The seller and buyer agree the terms of sale, including the granting of mediumterm credit to the buyer - eg over a period of five years with quarterly repayments. At the same time, the seller checks with the forfai:er - a bank or specialist institution in its own country - that finance will be available for the transaction . • The buyer accepts a series of drafts or signs a set of promissory notes corresponding to the instalment dates for repayment of the agreed credit. These bills or notes are guaranteed by the buyer's bank. This takes the form either of a separate guarantee or of a special endorsement on the bill or note, known as an aval, (Rights to payment under documentary credits are also sometimes accepted as security in forfaiting deals.)

27

TIle Sares Agreement

• The seller presents these bills or notes to the forfaiter. The latter buys them from the seller for an immediate discounted cash payment. The discounted sum received by the seller corresponds to the sale price agreed with the buyer. The difference between that amount and the total for which the bills or notes have been drawn up corresponds to the interest payment to be made by the buyer in return for being granted credit terms. The forfaiter makes its profit on the transaction out of the difference between the discounted price paid and the total sum payable to the forfaiter under the bills Or notes . • The forfaiter can either hold onto the bills or notes and present them for payment on the maturity dates, or sell them in the secondary markets that exist for trading in such instruments. An essential element of forfaiting is that the forfaiter buys the bills or notes from the seller without recourse to the seller. This means that the forfaiter and not the seller bears the loss if the buyer and the guaranteeing bank default or if, for any reascn, funds cannot be transferred out of the buyer's or guaranteeing bank's country. Moreover, the seller will have obtained a commitment from a forfaiter before concluding its deal with the buyer. Accordingly, the seller obtains a similar type of bank undertaking to that obtainable under a confirmed irrevocable documentary credit, but in a situation in which longer term credit is being granted to the buyer.

2.4.3 The documentary credit as a method of payment and the autonomy of documentary credits (the independence principle)
2.4.3.1 Method of payment

The principal four methods of payment outlined in Section 2.4.1 above may be summarised briefly as follows.

• Advance payment
The seiter does not dispatch goods before receiving payment. The buyer sends payment before goods are dispatched. The seller dispatches goods before receiving payment. The buyer pays after dispatch of goods and often after receipt of payment on the sale of goods. The seller dispatches goods before receiving payment. The huyer pays upon receipt of shipping documents covering the goods or on other terms. as stipulated in the collection instruction.

• Open account

• Documentary collection
-

In all of the above cases, either the buyer or seller has to depend upon the good faith and performance of the other for the smooth exchange of goods for payment. In contrast, the documentary credit provides the buyer and seller with independent assurance in the exchange of goods for payment. The seller has the irrevocable 28

Mcl/I()(h

ill j!UYJIICII(

undertaking of the issuing bank (and the separate irrevocable undertaking of the confirming bank, in the case of a confirmed documentary credit) that it will receive payment provided the following conditions are satisfied: • it presents the documents as stipulated in the documentary credit; and • the terms and conditions of the documentary credit are complied with. The issuing bank or confirming bank undertaking is addressed directly to the seller (beneficiary) and is a legally binding undertaking. The issuing bank or confirming bank effects payment without recourse to the seller (beneficiary), which means that the payment is final and that there can be no claim upon the seller (beneficiary) for refund or repayment. The buyer, as applicant of the documentary credit. has the undertaking of the issuing bank that no payment will be made under the documentary credit unless the beneficiary has: • presented the documents as stipulated in the documentary credit; and • complied with the terms and conditions of the documentary credit in the presentation of documents. The applicant's mandate to the issuing bank is on the above basis. In view of the comfort provided to both the beneficiary and the applicant by the independent undertaking of a bank, documentary credits are often a preferred method of payment in international trade.

2.4.3.2 The autonomy of documentary credits (the independence principle)

The autonomy of the documentary credit has been upheld in the courts of many countries. As a general rule. courts in most countries are reluctant to interfere with the concept of the autonomy of documentary credits and any party seeking to obtain an injunction preventing a bank from honouring its obligations under a documentary credit would have an onerous task in convincing the court of many matters - even including that there has been fraud and that the granting of an injunction is the correct course to follow in the circumstances. It will be seen that the autonomous nature of documentary credits is: • articulated in UCP 600; • made clear in the wording of the undertaking given by banks to a beneficiary in the documentary credit itself; and • repeatedly upheld in courts. The autonomy of documentary credits is evidenced in the following articles of UCP 600, the extracts and texts of which are shown below,

29

1--------- i Article 2 Definitions

I
"Credit" means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to nonour a complying presentation. "Complying presentation" means 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.
L__ __ ~ _

-I I

I
I
I I I

-------- -----------------------------------_j -

Attention is drawn to the definition of 'Complying presentation' and the fact that honour (ie to pay at sight, to incur a deferred payment undertaking and pay at maturity or to accept a draft drawn by the beneficlary and pay at maturity) or negotiation is made against a presentation that is in accordance with the terms and conditions of the documentary credit, the applicable provisions of UCP 600 and international standard banking practice. It should be emphasised that this is the basic condition of all documentary credits and there are no other conditions,

Ar:ticle:4_~ Credits v. Contracts

a?:~~cf~dit: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 _ bound by such contract, even if any reference whatsoever to or 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 isnotsublect.to claims or defences by the applicant resulting from its - relationships with the issuing bank or the beneficiary. A. beneflciarycan in no case avail itself of the contractual relationships existing between banks or between the applicant and the issuing bank. b. 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.
L __

-----------

--

---------------------------

Attention is drawn to sub-article 4(a) above, which provides indisputable evidence that sales and other contracts have nothing to do with the credit transaction, which is separate. Sub-article 4(a) also protects the independence of the issuing bank's undertaking further by indicating that such undertaking is not, in any way, affected by the applicant's relationship With either the issuing bank or the beneficiary, Sub-article 4(b) enforces the position that it should be the contents of the documentary credit to which the beneficiary is required to adhere and that any conditions in the
30

I L~ _ ____..

__ ...'-"

..
Methods of payment

sales or other contract that are pertinent to the actions of the beneflciary must be incorporated into the documentary credit and must not form part of any integral attachment.

Article 5 Documents v. Goods, Services or Performance

Banks deal with documents and not with goods, services or performance to which the documents may relate. Article 5 states. in simple and clear language, that 'banks deal with documents' and are not concerned with 'goods, services or performance to which the documents may relate'.
-.". "',

~icle

7 Issuing Bank Undertaking

~·"P,rovided 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. b. An issuing bank is irrevocably bound to honour as of the time it issues the credit. c. 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,

31

Tile Sales Agreement

.Artia"'~Jm.~Il".ing Bank
"A :'" __

;.,-' -~···-i~~~ti~}~,:·, \ :.-~::.,::. ;-.":":' -~

Undertaking

a.,Ptg':'ia~;~e,s~pulated documents are presented to the confirming b!lflk';Qr.;t~:any.othe:r nominated bank and that they constitute a complying :~!,.~--'i"., ;_-" '~..' .' ,.·{P~~~ip,Mt!a~confirming bank must: i.',,:h9n,?yr,if the credit is available by :::):~a;tEsightt!payment, deferred payment or acceptance with the ,'·'confirming bank; ': ':;,;b;:~s,ight!paymentwith another nominated bank and that nominated , . ,';,,("Y,:: ,_...,dOes not pay' ',';'payment with another nominated bank and that ,_ . -;,: atedbank does not incur its deferred payment undertaking :S:~. :;,';'i"g'5i,bcurred its deferred payment undertaking, does not '··(~Ft~~$it~~; .•,.4;;~.tri't,lIfity; ;,:?'::,"~:~;:d; ..;~~~,~~~,~"With another nominated ba~k and t~at norninatec , e'···,an!$;~~pot'accept a draft drawn on It or, having accepted a ,. .~ft:;draVin on it, does not pay at maturity; ,:f' if~~l9bAWit;hanother nominated bank and that nominated .'" '···;bankdoesnot negotiate, . . '. recourse, if the credit is available by negotiation ", ..... '-·"I"',r'lnfirn",in ... bank. };?,;;~f!,~~ji"t1:~·;;[!7.~~~:~~'~c':i"',""r.:a.vC)C:lhIV or negotiate as of the bound to honour 'H,;;;:;:~~t;:~::i~;~~;;;'~;~fl'~l"'ti,nn to the credit. undertakes to reimburse another nominated bank that m.~~p,tia1ted complying presentation and forwarded the a .l"'"nfirn'l ng bank. Reimbursement for the amount of a under a credit available by acceptance or deferred ;,at:"'matLlritv. whether or not another nominated bank r'>r-'lnll."rh"''tI''l'I· before maturity. A confirming bank's undertaking ..),/,~g.,~,1PJ~~~~~l~~ler nominated bank is independent of the confirming ' .. I"I..... lI'in tothe beneficiary. rf'h r-i""'tt. or requested by the issuing bank to confirm a to do so, it must inform the issuing bank ;,w.1mRVm:~~ay.;~{Id advise the credit without confirmation. may
"""~·i2t-j~C '. '.,
"-, '-;i',:;;:

c- _~ '~',~' ,

:Si'+~!

Note especially the reiteration of the liabilitiesof the issuing bank and the confirming bank: • to honour, provided that the stipulated documents are presented and that the terms and conditions of the documentary credit have been complied with (subarticles 7(a)(i-v), 8(a)(i)(a-e): and • for a confirming bank, to negotiate without recourse (sub-article 8(a)(ii».

32

Quesrions

2.5 Questions
2 3 What are the essential issuesupon which the buyer and seller should agree in a salesagreement? Why is it important that both buyers and sellers understand the three-letter Incoterm abbreviations used in their sale agreement? If they do not understand them, where and how would you direct them to find out? Are there any Incoterms that you do not fully understand? Who is not involved in a salesagreement? Can you recall the four methods of payment? Can you recall the basic features of each method? Can you recall the parties to a bill of exchange? What is an 'aval'? What is 'forfaiting'? Can you recall why documentary credits are a preferred method of payment in comparison to advance payment, open account or documentary collection? Can you quote the relevant UCP articles to beneficiaries and applicants that will show that you, as a documentary credit specialist, are not concerned with the salescontract/goods/services or performance? What are possibly the only grounds upon which courts should uphold an application for an injunction?

-4
5 6 7 8 9 10

11

12

33

Three

Documentary Credits - Types, Uses

and Characteristics

Chapter outline 3.1 Introduction and learning objectives 3.1.1 Introduction 3.1.2 Categorisation of documentary credits by type and characteristic 3.1.3 Learning objectives 3.2 Types of documentary credit 3.2.1 Introduction 3.2.2 Commercial documentary credits 3.2.3 Standby letters of credit 3.3 Types of payment 3.3.1 Availabilityand settlement methods 3.3.2 Assignment of proceeds 3.4 Characteristics 3.4.1 Introduction 3.4.2 Revocable documentary credit 3.4.3 Irrevocable documentary credit 3.4.4 Irrevocable confirmed documentary credit 3.4.5 Transferable documentary credit 3.4.6 Back-to-back (counter) documentary credit 3.4.7 Clean documentary credit 3.4.8 Advance payment (red clause) documentary credit 3.4.9 Revolving documentary credit and instalment drawings or shipments 3.4.10 Evergreen and annually renewable documentary credit 3.4.11 Documentary credits established under aid agreements 3.4.12 Inoperative documentary credit 3.5 Questions
35

Documcnwry

Credits - Typcs. Uses

alld

C/wrac[cmCics

3.1 Introduction
3.1.1 Introduction

and learning objectives

In Chapter 2, it was emphasised that, in contrast to other methods of payment, the documentary credit provides both the buyer and the seller with independent assurance in respect of the exchange of goods for payment. The parties involved in documentary credit operations are as follows. • The buyer of the goods or receiver of services or performance - also known as the 'importer', 'opener', 'applicant', 'accountee' or 'principal' (hereafter, the applicant). It is the applicant who requests a bank to establish a documentary credit in favour of the seller. • The buyer's bank (hereafter, the issuing bank) - also known as the 'opening bank' (the banker of the applicant) - issues the documentary credit in favour of the seller, thereby undertaking to honour in accordance with UCP 600, article

7.
• The seller (hereafter, the beneficiary) - also known as the 'exporter', in whose favour the issuing bank issues the documentary credit. • The advising bank is the bank to which the issuing bank sends the documentary credit and is the bank that advises the documentary credit to the beneficiary in accordance with UCP 600, article 9. • The nominated bank is the bank that is authorised by the issuing bank to honour (ie to pay at Sight, to incur a deferred payment undertaking and pay at maturity, or to accept a bill of exchange and pay at maturity) or to negotiate in accordance with UCP 600, sub-article 6(a). Note I In a freely available documentary credit, any bank may be a nominated bank. 2 The nominated bank is often the advising bank, although it is not necessarily so. • The confirming bank is the bank that, at the request of the issuing bank, provides its own undertaking, in addition to that of the issuing bank, to honour or negotiate under the documentary credit in accordance with UCP 600, article 8. • The reimbursing bank is the bank that. at the request of the issuing bank, is authorised to pay, or accept and pay, time drafts under a documentary credit in accordance with UCP 600, article 13. including, ifincorporated, the ICC Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits (URR 525).

36
.~

.,

_c

.c._ .•

~-~--

Types

()f d()(ulllclI(flry

creeli!

3.1.2 Categorisation of documentary credits by type,and characteristic

It may be inevitable that, for purposes of study, documentary credits are categorised into the types described in this chapter, but it must be noted that it is not infrequent that terms and conditions of one documentary credit include those of another 'type', Great care must be exercised to prevent assumptions being made simply on the basisof the type or characteristics of a documentary credit. The documentary credit specialist must always read the documentary credit as a whole document.

3. 1.3

Learning objectives

The learning objectives for the documentary credit specialist are: • to understand the primary characteristics of each type of documentary credit explained in this chapter; • to appreciate how the various types of documentary credit are used to satisfy the needs of an applicant and beneficiary; and • to understand how operational risks on special types of documentary credits may be controlled,

3.2 Types of documentary credit

3.2.1

Inuoduction

UCP 600, article 2, in defining 'Credit', draws no distinction between whether such definition refers to a documentary credit or a standby letter of credit, Under the definition, both fulfil the same basic purpose, ie to facilitate the finance of foreign trade by providing comfort to a beneficiary that payment will be forthcoming from an independent, trusted third party, provided that stipulated documents are presented according to the terms of the documentary credit, UCP 600 and international standard banking practice: while Simultaneously giving comfort to an applicant that such payment will only be made upon presentation of the stipulated documents that meet such conditions. The usage of a traditional commercial documentary credit is significantly different to that of a standby letter of credit. Nevertheless, the documentary credit specialist should carefully note that the obligation of the issuer of a commercial documentary credit is identical to the obligations of the issuer of a standby letter of credit in that both issuers pay: • against presentation of stipulated document(s); and • provided the terms and conditions are complied with.
37

In both instances, all issuer is not concerned goods, services or performances,

with anv uncierlying sales contract,

Commercial documentary credits are intended to serve as a means of payrrent for the delivery of goods or the provision of services or performance. Their ongin can be traced from their early use as a traveller's letter of credit to their present-day position in support of securing international trade transactions. To aid their development, in 1933, ICC published its first version of a set of international standards - the Uniform Customs and Practice for Documentary Credits (UCP). Revised versions of this publication were subsequently introduced in 195 ~, 1962, 1974, 1983, 1994 and the current version, UCP 600. that came into effect on I July 2007. The UCP enjoys global acceptance and. today, the vast majority of documentary credits are issued subject to its governance. UCP 600, article I states: The Uniform Customs and Practice for Documentary Credits, 2007 Revision, ICC Publication No. 600 (HUCP") 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. They are binding on all parties thereto unless expressly modified or excluded by the credit.
L_ ... _. ~_~_ .. "..

The impact of the 39 articles of UCP 600 on documentary credit parties and operations is covered in the relevant chapters and sections throughout this study text. The key distinguishing feature in usage between a commercial documentary credit and a standby letter of credit is that a commercial documentary credit is used as the principle payment mechanism if performance of the contract has occurred whereas a standby letter of credit is typically used as a contingency payment mechs nis n. which can be triggered if there has been some aspect of non-performance or def wit.

3.2.3

Standby letters of credit

Standby letters of credit are used to underwrite a wide variety of commercial and financial operations. They adopt the same basic forms as commercial documentary credits, but the intention is often that the beneficiary, in whose favour a standby letter of credit is issued, draws only in case of default on the transactior to which the standby letter of credit relates. Thus, unlike a commercial documentary credit, a standby letter of credit acts as a guarantee if there is a failure to perform a
38

.~».,

..

Types

or

dOClJrlICrlLary

crCc/I[

contractual undertaking. such as the obligation of the buyer to payor that of the seller to deliver. Standbyletters of credit were initially developed becausebanks in the USA had limited legal authority to issue guarantees. Today, except under- limited cucurnstances, the restriction on the issuanceof guarantees no longer exists. Standby letters of credit arc not le)~;dly distinct [rom demand gll;)r;)ntccs. which also require the prcscntauon of stipulated documents ;1I\U comphancc with the terms and conditions of the guarantee. The distinction is in practice and terminology

3.2.3.1

Types of standby letter of credit

Standbyletters of credit are extremely flexible and are therefore asuitable product for securing a wide range of payment scenarios. The following list provides a descriptive classification of the types most commonly used. • A 'performance standby' supports an obligation to perform other than to pay money and includes an obligation to pay for lossesarising from a default of the applicant in completion of the underlying tr-ansactions. • An 'advance-payment standby' supports an obligation to account for an advance payment made by the beneficiary to the applicant. • A 'bid-bond' or 'tender-bond standby' suppor-tsan obligation of the applicant to execute a contract if the applicant is awarded a bid. • A 'counter standby' supports the issuanceof a separate standby letter of credit or other undertaking by the beneficiary of the counter standby. • A 'financial standby' supports an obligation to pay money incluciing any instrument evidencing an obligation to repay borrowed money. • An 'insurance standby' supports an insurance or reinsurance obligation of the applicant. • A 'commercial standby' supports the obligations of an applicant to pay for goods or services in the event of non-payment by other methods. • A 'direct-pay standby' is intended to be the primary means of payment and mayor may not be linked to a default in performance or payment.

39

3.2.3.2

Sample commercial standby letter of credit

ISSUING BANK XYZ PLC LONDON International Sellers Ltd, 35th Floor, Two Ex •.' langeSquare, Connaught Place, Hong Kong 19 July xxx x Dear Sirs, We hereby issue our irrevocable standby letter of credit No '0y order of Buyers (UK) Ltd., 100 High Street, London EC4, for an amount of GBP 100,000.00 (one hundred thousand pounds) which expires at our counters on 31 December XXXX. This credit is availableby payment against presentation to us of the following , documents:
,

i. Your sight draft drawn on the Issuing Bank for the a.nount of your :" drawing. ii. Your certificate stating that you have made shipment of the required goods and have supplied the required documents to Buyers (UK) Ltd and have not been paid within 30 days of the invoice date. Partial drawings are allowed. All charges under this standby letter of credit are for account of the \ beneficiary. Except where otherwise expressly stated, this standby letter of credit is subject to the Uniform Customs and Practice for Documentary Credits (2007 Revision) ICC Publication No. 600. Pleasequote our reference number on any correspondence. Yours faithfully ISSUING BANK"X'(Z PLC

40

L·.·

t.

Types of documcntary crcdit

3.2.3.3

Standby letters of credit and UCP

In order to understand better the evolution of standby letters of credit, it is helpful to trace their relationship with the UCP. • The first reference to standby letter's of credit. in this context, was made by the ICC Banking Commission in March 1977, when it expressed its opinion that these fell within the UCP (then Publication No 290, 'General Provisions and Definitions', paragraph (b)) definition of a documentary credit and should therefore be subject to UCP. • The first reference to standby letters of credit in UCP itself was in Publication No 400 in 1983. The text of the comparative articles and a summary of the text of the reasoning follow.

Publication No 400 (1983)

Article I
These articles apply to all documentary credits, including, to the extent to which they may be applicable,standby letters of credit, and are binding on all partiesthereto unlessotherwise expresslyagreed.They shallbe incorporated into each documentary credit by wording in the credit indicating that such credit is issued subject to Uniform Customs and Practice for Document Credits, 1983 revision; ICC Publication No. 400.

Publication No 290 (1974)

General Provisions and Definitions
These provisions and definitions and the following articles apply to all documentary credits and are binding upon all parties thereto unless otherwise expressly agreed.

._J

Reasons
Extension of UCP to standby letters of credit
In March 1977, the ICC Banking Commission expressed its opinion that a standby letter of credit fell within the UCP (then Publication No 290, 'Genera: Provisionsand Definitions', paragraph (b)) definition of a documentary credit and should therefore be subject to UCP (ICC Publication No 371, P I I). Becausestandby letters of credit were being increasingly used in a growing number of countries and Publication No
41

371 may not have been known to all concerned with standby letters of credit, it was considered desirable to remove any doubt and to make it clear by wording in the UCP that the UCP applied to such letters of credit (see ICC Publication No 41 I, UCP 1974/1983 RevisionsCompared and ExpJained).

Further comment
Standby letters af credit
The role of the traditional documentary credit, issued at the request of the buyer in favour of the seller, has been to enable the seller to obtain payment, due to him, from the buyer when he, the seller, has fulfilled his pa-t in the commercial contract and 'evidenced' "(hisfact by presenting 'stipulated documents'. The role of the standby letter of credit is different, although it possesses all of the elements of a documentary credit subject to UC? It is often used in lieu of a performance guarantee, eg in respect of major construction contracts or major longterm sales. But it ma), sometimes be used for other purposes, such as a form of guarantee by, for example, a parent company for loans granted to a subsidiary. The standby letter of credit ensures payment if and when the subsidiary fails to repay the loan when due. Sometimes, on the other hand, a standby letter of credit may be issued in favour of the seller to ensure that, if payment is not received under some other pre-agreed method, it will be made under the standby letter of credit upon the seller fulfilling his part thereunder. The standby letter of credit may be issued at the request of the applicant directly in favour of the beneficiary or it may be issued in favour of a bank in the beneficiary's country, to cover a guarantee issued by that bank in favour of the beneficiary. Basically, however, the standby letter of credit is intended to cover a 'nonperformance' (default) situation rather than a 'performance' situati :n, as with the traditional documentary credit. This affects both the position of the lssuing bank and the type of documentation called for. Even if the applicant claims that he or she has 'performed', the bank must pay under the terms of the standby letter of credit if the specified documentation is presented - usually a sight draft on tr.e issuing bank, accompanied by a statement of claim issued by the beneficiary. (This position has been upheld in a number of cases in which the courts have ruled against an applicant seeking an injunction to prevent an issuing bank from honouring its undertaking.) Upon the implementation of UCP 500 in 1994, the following comment was made in ICC Publication No 5 I I, Documentary Credits UCP 500 and 400 Cornpored;

1
.1

Standby Credits and Bank Guarantees

- NCs commented on the Incorporation of the Standby Credit into the UCP 400 and its retention in UCP 500. It was agreed unanimously that the Standby Credit is not to be merged with the bank guarantee rules regulated by the ICC's Uniform Rules for Demand Guarantees (URDG), ICC Public.ations No. 458. While the

42

1y(Je~ of <ioculllclI«Jry credi:

Standby Credit is, from a legal viewpoint, equal to the demand guarantee, there are important differences between the two. The Standby Credit has developed into an all-purpose financial support instrument embracing a mud, wider range of uses than the normal demand guarantee. For this reason, and since the UCP is the most suitable and compatible set of rules with the basic ch '.ractE:r of the Standby Credit, the link between the Standby Credit and UCP was maintained. NCs commented on the possibility of identifying the lndlvidual Articles applicable to the Standby Credit. It was decided that this request could not be met. NCs must acknowledge that not all the Articles in the UCP apply to a Commercial Credit or to a Standby Credit and that the majority of the Articles do not apply to the Standby Credit. It is recognized that the parties to the Credit may wish to exclude certain Articles of the UCP from a specific type of Credit. If such is their desire, they should state this clearly in the terms and conditions of the Commercial Credit or the Standby Credit.

The documentary credit specialist should note the reference made to Uniform Rules for Demand Guarantees (URDG), ICC Publication No 458, and to the difference between a standby letter of credit and a normal demand guarantee. Nevertheless, it is not easy to distinguish a standby letter of credit from a demand guarantee. The documentary credit specialist should check the transaction to ascertain the exact set of international rules under which the instrument is, or is to be, issued. Demand guarantees subject to URDG are not, however, covered in the Certified Documentary Credit Specialist (CDCS) qualification and, as a result, are not covered in any detail in this text. The contents of this section provide a brief history of the incorporation of reference to standby letters of credit as an integral part of UCP and it will be seen that standby letters of credit may be issued under UCP 600. It should also be noted, however, that, because the functions under a standby letter of credit are different from those of a commercial documentary credit, many of the articles of UCP 600 (eg articles 18-32) have no practical application to a standby lettE''" of credit. It is for this reason that UCP 600. article I - Application of UCP - states the following (emphasis added): 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. They are all parties thereto unless expressly modified or excluded by the credit.
--"
"

=:'.
!

__

.__

------------------------------~-

.. ,-------_

The problem of the limited adequacy of UCP to standby letters of credit became more acute with their increasing development and the wide variety of uses that have
43

D'>cumentary Credits ~ Types. Uses and Characteristics arisen in more recenttimes. As a consequence, the need for separate rules to deal with problems specific: to standby letters of credit became increasingly apparent to the international banking community. In recognition of the need, the ICC obtained the approval of the international banking community for the introduction of separate rules for standby letters of credit. These rules are known as the International Standby Practices (ISP 98).

3.2.3.4

ISP 98

The documentary credit specialist should study these rules, which were implemented on I january 1999. ISP 98 reflects generally accepted practice, custom and usage specifically for standby letters of credit. While outside the USA a number of standby letters of credit continue to be issued subject to UCP, there is a growing awareness internationally that ISP 98 provides a more relevant framework for the standby product and, as a consequence, ISP98 has been increasingly used since its introduction. ISp, in line with UCp, has been drafted as a set of rules intended for use in daily practice. As may be expected, some of the rules in IS? 98 share a basic similarity with their counterpart in UC? and actually shaped some of the drafting of UCP 600, but the documentary credit specialist will note that a different style and approach has been adopted in the IS? 98 construction. This is due to the need for ISP 98 to gain the acceptance not only of the traditional parties to a documentary credit, but also of a broader range of those involved in standby letter of credit law and practice, including corporate treasurers and credit managers, rating agencies, government agencies and regulators, and members of the legal profession. There are a number of differences in substance between ISP98 and UCP 600. These differences are due to different practices or problems encountered in standby letter of credit use or the need for more precision in the wording of their articles. With regard to this latter difference, it should be borne in mind that a standby letter of credit is often only drawn under if there is a dispute in the performance of the underlying commercial contract and, as such, its wording, together with the governing rules, is likely to be subject to some robust legal scrutiny. These differences in substance, together with the structural approach, can be seen in the rules quoted below. The IS? 98 rules are grouped together under ten generic rule headings, as follow. I 2 3 4 5
44

!,

1
:~

General Provisions Obligations Presentation Examination Notice, Preclusion and Disposition of Documents

Types

01 documentary

crcdn.

6 7 8 9 10

Transfer, Assignment and Transfer by Operation of Law Cancellation Reimbursement Obligations Timing Syndication/Participation

General Provisions

As may be anticipated from the rule heading, the II rules grouped under this classification set the scene for the later rules. Rules 1.01-1.05 cover the scope, application and interpretation of the rules; rules I .06-1.08 establish general principles, with rules 1.09-1.11 providing the definitions of terminology that has been used. It should be noted that rule 1.09 (c) introduced, for the first time, a recognition of electronic presentations and the means to accommodate them by providing a definition of the terms 'electronic record', 'authenticate', 'electronic signature' and 'receipt'. As electronic presentations under documentary credits have moved from a prospect to a reality, this inclusion may be seen as being the harbinger of the supplement to UCP 600 for electronic presentations (eUCP - version 1.1), which is covered in Chapter 8 of this study text .

. ..,Sc;ope, Application, Definitions and Interpretation of these

.»

<~~.es .
.1.01

Scope and Application

a.' These Rules are intended to be applied to standby letters of credit (including performance, financial, and direct pay standby letters of credit). b. A standby letter of credit or other similar undertaking, however named or described, whether for domestic or international use, may be made subject to these Rules by express reference to them. ,c. An undertaking subject to these Rules may expressly modify or exclude their application. d. An undertaking subject to these Rules is hereinafter referred to as a

"standby" . 1.02 Relationship to Law and Other Rules

a. These Rules supplement the applicable law to the extent not prohibited by that law. b. These Rulessupersede conflicting provisions in any other rules of practice to which a standby letter of credit is also made subject.

45

DOCIUl'CIt[wy

C,,,<1,[\

-'YI"'~, U~,,~ wHI

CJ'w"dcrr~[jC',

1.03 Interpretative Principles

These Rules shall be interpreted as mercantile usage with regard for: a.integrity of standbys as reliable and efficient undertakings to pay; b. practice and terminology of banks and businesses in day-to-day transactions; c. consistency within the worldwide system of banking operations and commerce; and d. worldwide uniformity in their interpretation and application.

1.04 Effect of the Rules

Unless the context otherwise requires, or unless expressly modified or excluded, these Rules apply as terms and conditions incorporated into a standby. confirmation. advice, nomination, amendment. transfer, request for issuance, or other agreement of: i.~the issuer; ii, ·the beneficiary to the extent it uses the standby; iii, any advisor; iv. any confirmer; v.a,nyperson nominated in the standby who acts or agrees to act; and vi. the applicant who authorizes issuance of the standby or otherwise agrees .to the application of these Rules.

1.05' Exclusion of Matters Related to Due Issuance and Fraudulent '9r:~~~tfeDrawing

These Rules do not define or otherwise provide for: a~power or authority to issue a standby; .b~';foi-rrialrequirements for execution of a standby (e.g., a signed writing): or c. defenses to honour based on fraud, abuse. or similar matters. These matters are left to applicable law.

G~heral' Principles
1.06 Nature of Standbys

I. I
I

, I
I

L.

a. A standby is an irrevocable, independent, documentary, and binding undertaking when issued and need not so state. b, Because a standby is irrevocable, an issuer's cb'igations under a standby cannot be amended or cancelled by the issuer except as provided in the standby or as consented to by the person against whom the amendment or cancellation is asserted.

.. _ _.

.__ ._. ...

...... _

46

Types of doclJmenlory credil

---_._-_ .._-_

-_ _._--_._-------------.",..-,

c. Because a standby is independent, the enforceability of an issuer's obligations under a standby does not depend on: i. the issuer's right or ability to obtain reimbursement from the applicant; H. the beneficiary's right to obtain payment from the applicant; iii. a reference in the standby to any reimbursement agreement or underlying transaction; or iv. the issuer's knowledge of performance or breach of any reimbursement agreement or underlying transaction. d. Because a standby is documentary, an issuer's obligations depend on the presentation of documents and an examination of required documents on their face. e. Because a standby or amendment is binding when issued, it is enforceable against an issuer whether or not the applicant authorized its issuance, the issuer received a fee, or the beneficiary received or relied on the standby or the amendment.

1.07

Independence of the Issuer-Beneficiary Relationship

An issuer's obligations toward the beneficiary are not affected by the issuer's
rights and obligations toward the applicant under any applicable agreement, practice. or law.

1.08

Limits to Responsibilities

;·J\niSSLJeris not responsible for: a. performance or breach of any underlying transaction; b. accuracy, genuineness, or effect of any document presented under the standby; c_ action or omission of others even if the other person is chosen by the issuer or nominated person; or d. observance of law or practice other than that chosen in the standby or applicable at the place of issuance.

Terminology
1.09 Defined Terms
In addition to the meanings given in standard banking practice and applicable law, the following terms have or include the meanings indicated below: 47

Documentary Credits - Types. Uses and Characteristics

r-:::==""""'~""-""""""-'-"'------"--'~----'-

T'' "-''-'L ~-Defi~itions

~~----------......,

"

..;;;~'~pl!~~.~)$l~ person who applies for issuance of a standby or for . '," '.'whos,e'ai::i::ountit is issued, and includes (i) a person applying in its own "nar-ne.budor the account of another person or (ii) an issuer acting for its . own account . . ,,;:~~!,,!,~ci~,,a named person who is entitled to draw under a .standby. See RUle 1.11 (c)(ii). ,)",!.J~llusiness Day" means a day on which the place of business at which '~'to,,: .;:.~"~:" • ... ::':0the_;it,elevant act is to be performed is regularly open; and "Banking . .1;>~Y'.~,m~ans a day on which the relevant bank is regularly open at the :ii~~placej.at.which the relevant act is to be performed. ,·'!:~~Co"firrT'!er" is a person who, upon an issuer's nomination to do so, :-0) ····'adds·to·the issuer's undertaking its own undertaking to honour a standby . .~l:eRule 1.11 (c)(i). means, depending on the context, either a request to .<irre4r;astandby or a document that makes such request. ocument" means a draft, demand, document of title, investment ':'...;.),.;' ~ , ..seqJrity,invoice, certificate of default, or any other representation of c:':i';YfiCt;]a....y, right, or opinion, that upon presentation (whether in a paper :'/',:i:.,;qr,e,lectronic edium), is capable of being examined for compliance with m '!:i'('f~'ttleterrnsand conditions of a standby. ~;1;~~'f~~~~~!"g" means, depending on the context, either a demand -.,', presented or a demand honoured. ~CExpiration Date" means the latest day for a complying presentation . 'provided in a standby . . 'c;;:;/,~.~~f'SO"~~, a natural person, partnership, corporation, limited includes "~,':"li~Hitycompany, government agency, bank, trustee, and any other legal ',' ,.':9~',C;~lJIlTlercial association or entity. :i:f:1!:j*~~!!~~~tion'~ means, depending on the context, either the act of '.''-)·-'~'i~deliveringdocuments for examination under a standby or the documents ..;A,:;~;;~;i.,~~~l!~~red . ":3";~1"t'"!~!1ter" is a person who makes a presentation as or on behalf of a . >. beneficiary or nominated person . . ,;/:~ignature" includes any symbol executed or adopted by a person with ;.~~~k-B!~~entintent to authenticate a document. "~'b:'"CroS5 References "Amendmene~ - Rule 2.06 '~ce" - Rule 2.05 /i:,.'~proximately" ("About" or "Circa") - Rule 3.08 (f) .. '~ignment of Proceeds" - Rule 6.06 C~utomatic Amendment" - Rule 2.06 (a) "Copy" - Rule 4.1 5 (d) "Cover Instructions" - Rule 5.08 "Honour" - Rule 2.0 I
:J:_~ r..},".', ·~.~:-,,"'Jo.c;frA'-c-_ ~ ..;. .-.;t"

'~.q!,'h~~"
.". "

"

.. ,_._---.,

-.-

-~

-_.

,--

,,- .... - ..

~--,----~~-

48

'rYIj{'~II/ docwllcrl!ory
..

Ct cdJ!

"Issuer" - Rule 2.0 I '~Multiple Presentations" - Rule 3.08 (b) iiNominate" Person" - Rule 2.04 "Non-documentary Conditions" - Rule 4.11 '.'. i,'Origimil~1 - Rule 4.15 (b) & (c) "~Pal"tial Drawing" - Rule 3.08 (a) ."Standby" - Rule 1.0 I (d) . "Transfer" - Rule 6.0 I ,.}iTransferee Beneficiary" - Rule I, I I (c)(ii) "'i'Transfer by Operation of Law" - Rule 6.11 c. Electronic Presentations .'~ The following terms in a standby providing for or permitting electronic ··;X~;'.presentation shall have the following meanings unless the context "otherwise requires: ""Electronic Record" means: i, . a record (information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form); ii. communicated by electronic means to a system for receiving, storing, ""-'retransmitting, or otherwise processing information (data, text, . images, sounds, codes, computer programs, software, databases, and the like); and -i: ~ >\~"~'ii.L.capable of being authenticated and then examined for compliance with the terms and conditions of the standby. . •',iAuthenticate" means to verify an electronic record by generally , .: .'aq:eptedprocedure · or methodology in commercial practice: { the identity of a sender or source; and Ii. the integrity of or errors in the transmission of information content . .:,. . The criteria for assessing the integrity of information in an electronic record is whether the information has remained complete and unaltered, apart from the addition of any endorsement and any change which arises in the normal course of communication, storage and display. . "Electronic signature" means letters, characters, numbers, or other v-. ,iSyIDbols in electronic form, attached to or logically associated with an : '"electronic record that are executed or adopted by a party with present intent to authenticate an electronic record. ""Receipt" occurs when: i.. an electronic record enters in a form capable of being processed by .the information system designated in the standby; or ii. an issuer retrieves an electronic record sent to an information system other than that designated by the issuer.

.i·

'--------_._._--_

........

~J
49

Documentary

Credirs -

Types. Uses

and CllaroctNisUcs

1.10 -Redundant

;~ O~h~~isc U-nd~si;;bl~- ie-;";'-s-

a. A standby should not or need not state that it is: .L~.unc9nd,itional or abstract (if it does, it signifies merely that '.payment under it is conditioned solely on presentation of specified •documents); ii. ·absolute (if it does, it signifies merely that it is irrevocable); iiLprimary (if it does, it signifies merely that it is the independent obligation of the issuer); iv. payable from the Issuer-s own funds (if it does, it signifies merely that payment under it does not depend on the availability of applicant funds and is made to satisfy the issuer's own independent obligation); v. c1"an or payable on demand (if it does, it signifies merely that it is <";"paya_ble upon presentation of a written demand or other documents . ..specified in the standby). b.A~standbyshould not use the term "and/or" (if it does it means either or:bQth); c.TtlefoHowing terms have no single accepted meaning: L "and shall be disregarded:
>

-:J

.' "divisible" , ."fractionable" . . "indivisiblet" and .• "transmissible" . •·ii.:_~and·s-hall disregarded unless their context gives them meanhg: be .. Uassignable", ~'ev:ergreen" , ."reinstate". and "revolving" . 1.1 I Interpretation of these Rules

";;;~:~,"C;a~I~re" ,

a. These Rules are to be interpreted in the context of applicable standard practice. b. In these Rules, "standby letter of credit" refers to the type of independent undertaking for which these Rules were intended, whereas "standby" refers to an undertaking subjected to these Rules. c. Unless the contex: otherwise requires: l. "Issuer" includes a "conflrmer" as if the confirmer were a separate issuer and its confirmation were a separate standby issued for the account of the issuer; ii. "Beneflciary" includes a person to whom the named beneficiary has effectively transferred drawing rights (Utransferee beneficiary"): iii. "Incfuding' means "including but not limited to";
..... - ----_._. __...-._ ... - -'--~~j

50

_.

--------------------------~f~-'~

Documentary Credits - Types, Uses and Characteristics

J . Presentation
This heading precedes 14 rules that articulate the process of presentation. That this process features in only six of the UCP's articles provides an insight into the importance that ISP98 attaches to 'presentation' and the need for the utmost clarity and precision. This is evident in the followingrules 3.01-3.06, which clearly define what presentation is,where it has to occur, when it has to be made, how it has to be made and how it will be recognised.
r

\ r
I

!
!
f

I
I
I

I
54

!~

t;

Types of documentary credit

55

.-~-----------------------------------~---------~
·.....:·~-~f.-~r~~I...o..

lypcs

of

dOCUIJlCIi

[Qry cre(1! [

iv. ''A or B" means ''A or B or both"; "either A or B" means ''A or B. but not both": and ''A and B" means "both A and B"; . v. Words in the singular number include the plural, and in the plural include the singular; and vi. Words of the neuter gender include any gender. d. i. Use of the phrase "unless a standby otherwise states" or the like in a rule emphasizes that the text of the standby controls over the rule; ii. Absence of such a phrase in other rules does not imply that other rules have priority over the text of the standby; iii. Addition of the term "expressly" or "clearly" to the phrase "unless a standby otherwise states" or the like emphasizes that the rule should be excluded or modified only by wording in the standby that is specific and unambiguous; and iv. While the effect of all of these Rules may be varied by the text of the standby, variations of the effect of some of these Rules may disqualify the standby as an independent undertaking under applicable law. e. The phrase "stated in the standby" or the like refers to the actual text of a standby (whether as issued or effectively amended) whereas the phrase "provided in the standby" or the like refers to both the text of the standby and these Rules as incorporated.
~---.. ---------

..

_._._-_.

--

- ---------

--

_--

Obligations

There are seven rules included under this heading, which. as the title suggests, cover the obligations of the relevant parties involved in the issuance, confirmation. advice, nomination and amendment of a standby letter of credit. There are strong similarities in intent to be found in UCP 600 articles 2 and 6-11. but the documentary credit specialist will compare and note a number of differences including: • the introduction of the concept of 'timely', with rule 2.0 I (c) defining when an issuer acts in such a manner; • the obligations of the same issuing entity when operating from another location in a different capacity (rule 2.02); • the exclusion of a nominated person from binding the person making the nomination (rule 2.04 (c)); • the statement that the applicant is separate to the parties of the standby (rule 2.06 (c)(iii). The text of the rules is as follows.

51

Documentary

Credits - Types. Uses and Characteristics

'.'./

f.l. t,

52

~~~-------~

----------------------------------------------_.

Types o( documentary credit

53

Documentory

Credits - Typcs,

U5CS

(Jnd Clwroctcmtics

[." i. .,the be~eficia~~~~~~~~~~sent to th~-;~endme~~ for it to be binding; 11·;;"'il~;.t:he benefici~ry's consent must be made by an express communication

1!':':'~"':6~';~b~~~e::so:~1:~s~;~~~ya:~~d~:ns:~~~e~;

:~ea~:~~~:~:d~~~c~

"

l""':"~"H{.·
II'

~o~~~~~~;ni~~e;~:tt~q~ti~:~~~ ~~I;I~c:~:,~~:~:~~~;~~~'i~d1ng , ,<i):ontheIssuer, the confirmer, or the beneficiary. ':;,. . " .' ',' d>Consenttoonly part of an amendment is a rejection of the-entire" ,amendme'nt.:,:,~.-"j;/ -.

+~'

·_~r:l:~
;

2.07 ·.:,.Routing,o~ Amendments

-. ~"; _-.<.

~~~/.

a.' An,"issuer using another person to advise a standby must advise all :,' amendments to that person. ~,;" b.:Anan;lendmentor, cancellation of a standby does not affectthe is suer's. ;~:,,:,pblig'.ltion.:~o,:anominatedperson that has acted within t~*;scope of its '..: .:",,' ,norninationbefore receipt of notice of the amendment or.cancellation.': , c.f>jon-extension of anautomatically extendable (renewable»):tandby does" ' ' ,'>nqtaffectanissuer's obligation to a nominated person who -has acted, :.:".withinxhe;s~opeof its nomination before receipt of a '~9ti~eof, non- ' L}i. , exten.slon. ',';'it· ,.' ':",
· " ' ~ 0' _ ;. ,..'. . • '~'''';'' • ......, . • ~ , ,ft

J Presentation
This heading precedes 14 rules that articulate the process of presentation. That this process features in only six of the UCP's articles provides an insight into the importance that IS? 98 attaches to 'presentation' and the need for the utmost clarity and precision, This is evident in the followingrules 3,01-3,06, which clearly define what presentation is, where it has to occur, when it has to be made, how it has to be made and how it will be recognised.
,---------~.~~
".

----~ -

.....

_-"'"""

...

,,

'"

.._---_

...._---------------,

.. ,3.0 I, ,Complying Presentation

.",

~,:

Under a Standby

A standbyshould indicate the time, place and location Within that place, personto whom, and: medium in which presentation should be made. If. · so, presentation must be 'so made in order to comply. To the.extent.that sta~dby does not so indicate, presentation must be made in accordance with" 'these Rules in order to be complying.

3.02

What Constitutes a Presentation

..The receipt of.adocument

required by and presented under astandbY

"';,,'1

,!

1;<;;Orlst.j't.'~t~.,e p r.. ..E' ntation requiring exa~ination for comp~......c. e with...h.C............•• ... '.'.~'~ ... ·~.s .• i.a.'. ·'.r.' t ' '... m~:1~~~~~~~~:~ ~f:,he stan~~y e::~, Ifno~a:,of th~::_~UI~~~d~CU :nents'.-; \
54

Types

or documentary

credit

'---.~~-----~~----...._.,.---:-.,--,--,

,3.03

Identification of Standby,'

;':

;/::....,;~;,J
.' '1

.a:.~~~:~~~~ation

must identify the standby under which the pr:~~f'!tati~~~!.;;?::§\

...\ number of the standby and the name and lccatlon-of the issuer or: bY<} . attaching the original or a copy of the standby. . "::::"',' . Ifthe .issuer cannot determine from the face of a documentreceived that 'it should be processed under a standby or cannot identify'the standbyto . which it relates, presentation is deemed to havebeenmade~n.thedate' .\ of identification. '. ." ',' . . ' -;:·::·~"}','··;,L:-· "3.94 . Where and to Whom Complying Presentation Ma~~ :,1 . a.i;'To;comply, a presentation must be made at the place and any locationat '; ,,:thatplace indicated in the standby or provided in these Rules.': ,·.~i·"':, :">; : b.·lf~no place of presentation to the issuer is indicatedjnthe"sti~dby,"', ;. ".presentation to the issuer must be made at the place of business from'" .: ".:<:'~.which standby was issued. the "'. :":;}: " .. ' .,,' I ,:<c. lfa standby is confirmed, but no place for presentation is Indicated in the:':;(:·, I:'-:"confirmation, presentation for the purpose of obligating the.confirmer·':;··' I:;·i,':·:~(an,(tt,~~~ .·. issuerj.must be made at the place of business' of.th.e.co,nfirmer::i.::.: 1·::;.!:~fr:?ITl"'irichthe confirmation was issued or to the issuer, :<:;-;:~. ',',\}Y:,rt:;i:; 1 d:\ If no location at a place of.presentation is indicated (such as dePart~ent;,: ·.'fioor,room, station, mall stop, post office box, or other locatlon);", l::·t~presentation may be made to: ' ., ' .:" .)); 'i i. '. the general postal address indicated in the standby; ' ii.. any location at the place designated to receive deli,,:eries ~f mail or. :.. I '; ,documents; or '' l·jii·.·~ny· person at the place of presentation actuallyor:·apparentlY}f. . authorized to receive it. . ,--,.;:. '-",_.:... . /
I ..•..... .: : .

.A presentation may identify the standby by stating the complete reference:

;i~

..3;,o5:W~en
.-' •. ',.

"

!it

...•.

Timely Presentation Made

'.

' . "~":';"il",~

:'a:~,:A'presentation is timely if made at any time after ";',.i;;expir?on the expiration date., ' ,'.' .'-f ,q;;,e. presentation made afte r the cI ose of business atthe ""':,~-:fis'deemed to have been made on the next business
:,'!._',;' ,_' ~' .... ~-,:," ",_'" • ,;

~::_,:,~-_,:-*,",~ -,:'-'..."

',' .• '

">_-'

",'

-,

_'

;}3~06. Complying Medium of Presentation "

.'.

-.

issuance and'before>\ ". --,' "',:>.' {~. ..~} ~>'" ~'~~: place of pres~ntfotion {,'t:' J day. ., ":.:,:;:. Y>;J,
," -. '; _,", ,-,,,,~,,,-.,,~.:,.,
'.~ .•.. ,,-, ',",.'.:

~~:;*"

····'.!·_\-":_.,.i'··{·-···_''''"·''--r

'.

;:,:'. ':" .':

~:~:~(~:-:~.~->-'~~_:,.~~<

'..... .. '.a.·•·To c,o.m.· a docum.ent must be presented in the me.diwn.indicaiedln ..• •.. . ply, ·-.:·.':.· .•. ~ .·I ". ~ ' the standby. .':'. . ., ....:. '.·;~.i;• . : b., Where no medium is indicated, to complyadocument must be'presented" \1:' ", ;.', as a paper document, unless only a demand I')required; in whicb case:" . j~ .:.--.: a demand that is presented via SWIFT,tested telex. or other similar ';"'~( l .. 'authenticated means by a beneficiary that is a SWIFT participant· or a' .;-~ , bank c~~mplies;_~theJ'\'lise ~~,__ ._:
--< ~. """~:;

55

Documcnto'y

Credlt~ .- rypes. Uses ond CI/Oro(lcm[lc~

ii. a demand that is not presented as a paper document does not comply unlessthe issuer permits, in its sole discretion, the use'of that medium. c. A document is not presented asa paper document if it is communicated byelectroni ..: means even if the issuer or nominated person receiving it generates a paper document fror-i it. d. Where presentation in an electronic medium is indicated, to comply a document must be presented as an electronic record capable of being authenticated by the issuer or nominated person to whom it is presented. 3~07·. Separateness of Each Presentation a. Making a non-complying presentation, withdrawing a presentatior., or failing to make anyone of a number of scheduled or p(~'mitted presentations does not waive or otherwise prejudice the right to make ano~hertimely presentation or a timely re-presentation whether or not . the standby prohibits partial or multiple drawings or presentations. b,. Wrongful dishonour of a complying presentation does not. constitute dishonour of any other presentation under a standby or repudiation of .the standby. c.Honour of a non-complying presentation, with or without notice of its non-com~liance. does not waive requirements of a standby for other presentations.

..

._~·

._._ ...

Documentary credit specialists will note that rule 3.07 addresses the issue of the standalone nature of each presentation and the impact of such presentation on subsequent presentations or representations. This has been the subject of some conjecture in the past.

I
I
\ I

3.08 Partial Drawing and Multiple Drawings.

.-.-----.-... ---~
Presentations; Amount of
I,'

I
,

a. A presentation may be made for less than the full amount available ("partial drawing;'). b. More than one presentation ("multiple presentations") may be made. c. The statement "partial drawings prohibited" or a similar expression meansthat a presentation must be for the full amount available. d. The statement "multiple drawings prohibited" or a similar expression meansthat only one presentation may be made and honoured but that it may be for lessthan the full amount available, e. If a demand exceedsthe amount availableunder the standby,the drawing is discrepant. Any document other than the demand stating an amount In excessof the amount demanded is not discrepant for that reas:rn.

56

.. l,_

f.

Usc of "approximately", "about", "circa", or a similar word permits a tolerance not to exceed 10% more or I 0% less of the' amount to which such word refers, Extend or Pay

3.09

A beneficiary's request to extend the expiration date of the standby or. alternatively, to pay the amount availableunder It: a. is a presentation demanding payment under the standby,to be examined as such in accordance with these Rules;and b. implies that the beneficiary: 1. consents to the amendment to extend the expiry date to the date requested; Ii. requests the issuer to exercise its discretion to seek the approval of the applicant and to issuethat amendment; iii. upon issuanceof that amendment, retracts its demand for payment; and iv. consents to the maximum time available under these Rules for examination and notice of dishonour.

Rule3.09 addressesone of the more difficult problems with which issuersof standby letters of credit and guarantees have to contend. which is as follows: (a) beneficiariesand applicantsare in contact with eachother in order to resolve problems with the underlying contract and to extend the standby letter of credit or guarantee; in the meantime, while such discussionsare taking place, a beneficiary (With or without the knowledge of the applicant) makesa claim under the standby letter of credit or guarantee, in order to protect his or her position; upon receipt of notification of the claim from the issuer,the applicant often leavesthe issuer with the impression that there is no urgency with regard to the claim; but the issuer is anxious to examine the claim in the !igilt of the irrevocable undertaking given and this anxiety is heightened if there .s not much time remaining for the expiry of the standby letter of credit an r or guarantee.

(b)

(c)

(d)

The above circumstances often also cloud genuine claims made by beneficiaries and, further, a standby letter of credit or guarantee itself sometimes provides for the presentation of a payor extend demand, A documentary credit specialist may contrast the problem addressedin ISP 98 with the manner in which it is addressedin the Uniform Rules on Demand Guarantees (1992), ICC Publication No 458.

57

3.10

No Notice of Receipt of Presentation

An issuer is not required to notify the applicant of receipt of a presentation under the standby.

3.1 I Issuer Waiver and Applicant Consent to Waiver of Presentation Rules

a. In addition to other discretionary provisions in a standby or these Rules, an issuer may. in its sole discretion. without notice to or consent of the applicant and witaout effect on the applicant's obligations to the issuer, waive the follOWing Rules and any similar terms stated in the standby which are primarily for the issuer's benefit or operational convenience: i. treatment of documents received, at the request of the presenter, as having been presented at a later date (Rule 3.02); ii. identification of a presentation to the standby under which it is presented (Rule 3.03(a»; iii. where and to whom presentation is made (Rule 3.04(b), (c), and (dj), except the country of presentation stated in the standby; or iv. treatment of a presentation made after the close of business as if it were made on the next business day (Rule 3.0S(b». b. the following Rule but not similar terms stated in the standby: i. a required document dated after the date of its stated presentation (Rule 4.06); or Ii. the requirement that a document issued by the beneficiary be in the language of the standby (Rule 4.04). c. the following Rule relating to the operational integrity of the standby only in so far as the bank is in fact dealing with the true beneficiary: acceptance of a demand in an electronic medium (Rule 3.06(0». Waiver by the confirmer requires the consent of the issuer with respect to paragraphs (b) and (c) of this Rule

3.12

Original Standby Lost, Stolen, Mutilated or Destroyed

a. If an original standby is lost, stolen, mutilated or destroyed, the issuer need not replace it or waive any requirement that the original be presented under the standby. b. If the issuer agrees to replace an original standby or to waive a requirement fer its presentation, it may provide a replacement or copy to the beneficiary without affecting the applicant's obligations to the issuer to reimburse, but, if it does so, the issuer must mark the replacement or copy as such, TI~e issuer may, in its sole discretion, require indemnities satisfactory to it from the beneficiary and assurances from nominated persons that no payment has been made.
58

TYll(,s

of docllmentary

crl'dit

~
..

3.13

Expiration

Date on a Non-Business

Day

--------------------1

a. If the last day for presentation stated in a standby (whether stated to be the expiration date or the date by which documents must be received) is not a business day of the issuer or nominated person where presentation is to be made, then presentation made there on the first following business day shall be deemed timely. b. A nominated person to whom such a presentation is made must so notify the issuer. 3.14 Closure on a Business Day and Authorization Reasonable Place for Presentation of Another

a. If on the last business day for presentation the place for presentation stated in a standby is for any reason closed and presentation is not timely made because of the closure, then the last day for presentation is automatically extended to the day occurring thirty calendar days after the place for presentation re-opens for business, unless the standby otherwise provides. b. Upon or in anticipation of closure of the place of presentation, an issuer may authorize another reasonable place for presentation in the standby or in a communication received by the beneficiary. If it does so, then i. presentation must be made at that reasonable place; and ii. if the communication is received fewer than thirty calendar days before the last day for presentation and for that reason presentation I is not timely made, the last day for presentation is automatically extended to the day occurring thirty calendar days after the last day \ for presentation.

The problems that arise if the place for presentation is closed at the time at which presentation is to be made are dealt with in rules 3.13 and 3.14. While rule 3.13 compares with UCP 600, article 29, rule 3.14 has more application to UCP 600, article 36 (,Force Majeure'). The documentary credit specialist should be aware that, i01terms of UCP 600, article 36, banks need not honour their obligations under documentary credits upon resumption of business. This type of provision would not be equitable in default situations, which are the rationale for the issuance of standby letters of credit. Accordingly, the above rule makes provision for presentation to be made up to 30 calendar days after the issuer reopens for business. The documentary credit specialist should also note that it would be inappropriate to provide for extension by one day (as in rule 3.13) in force majeure circumstances and that the period of 30 days was taken as a period sufficient for third parties to be aware of resumption of business in such circumstances,

S9

DO("lJiIIClitmy

CJcrJJt\

IYI"".

u.,c.\ (/lid C/wr(lclcrdKs

4 Examination
The 21 rules falling under this heading are split between rules 4.01-4.15, which deal with the process of examination, and rules 4.16-4.21, which deal with the requirements of examination with regard to the various types of document presented under a standby letter of credit .

. -----4.0 I Examination for Compliance

····-·-···----------·----··-·· .. ··~----~I 1\,

a. Demands for honour of a standby must comply with the terms and conditions of the standby. b. Whether a presentation appears to comply is determined by examining the presentation on its face against the terms and conditions stated in the standby as interpreted and supplemented by these Rules which are to be read in the context of standard standby practice.

i
j

4.02

Non-ElGunination of Extraneous Documents

Documents presented which are not required by the standby need not be examined and, in any event, shall be disregarded for purposes of determining compliance of the presentation. They may without responsibility be returned to the presenter or passed on with the other documents presented.

4.03

Examination for Inconsistency

An issuer or nominated person is required to examine documents for inconsistency with each other only to the extent provided in the standby
l __ __ ~ ~_~L_._~

._.. _,...

A documentary credit specialist should compare rules 4.0 1-4.03 with UCP 600, subarticles 14(a), (d) and (g). Thewordingofrule4.0 I (b) - 'supplernentec by these rules which are to be read inthe context of standard standby practice' - should be especially noted. The incorporation into the rules of specific articles relating to the definition of terminology used (rule 1.09) and the meaning of certain terminology used within the rules themselves (rule I . I I) provides an indication of what represents 'standard standby practice'. This is also evidenced in rule 4.09. This intent to define more clearly what represents 'standard' practice hasbeen adopted by the ICC Banking Commission to supplement the understanding of 'international standard banking pI actice', as referred to in the definition of 'Complying presentation' in UCP 600, article 2, and in its publication, international Standard Banking Practice (ISBP), which was first introduced in 2003 and since revised in 2007. Documentary credit specialists will also note that rule 4.03 represents a distinct difference to the requirements of UCP 600, sub-article 14(d), with regard to the 60

Types of documentary

credit

examination of documents for inconsistency (not conflicting). This means that, unless otherwise specified in the standby letter of credit. a document examiner need only ascertain that the documents presented are those called for therein. These will be acceptable, notwithstanding that some of their content may differ from one to another.

~
1
1_

~nguag:

of~ocuments

The language0' all documents issued by the beneficiary is to be that of the standby.

The need for the languageof the documents issued by the beneficiary to be 'that of the standby' is required by rule 4.04. Given that there generally will be a relatively small number of documents for the beneficiary co present under the standby letter of credit, it is considered that this is not an unreasonable expectation. This position has also been taken up in the ICC publication International Standard Banking Practice (or the Examination of Documents under Documentary Credits, in relation to presentations under a commerciai documentary credit subject to UCP 600.

_~_c....__ ....._.

--,

4.05

Issuer of Documents

Any required document must be issued by the beneficiary unless the standby indicates that the document is to be issued by a third person or the document is of a type that standard standby practice requires to be issued by a third person.

!
I
\

4.06

Date of Documents

I I
I

The issuancedate of a required document may be earlier but not later than the date of its presentation.

4.07

Required Signature on a Document

a. A required document need not be signed unless the standby indicates that the document must be signed or the document is a type that standard standby practice requires be signed. b. A required signature may be made in any manner that corresponds to the medium in which the Signeddocument is presented. c. Unless a standby specifies: i. the name of a person who must sign a document, any Signature or authentication will be regarded as a complying signature. ii. the status of a person who must sign, no indication of status is necessary.

0':

d:__ I~_:~_t~~dbypecifies that a signature must be made by: s

61

D.)(umciltary Credits - Types. Uses and Characteristics

r-"~-~~-~-' -.--------- _,_-_. '-------'··---1 -_,-l. a named natural person without requiring that the signer's status be ! identified, a signature complies that appears to be that of the named I person; ii. a named legal person or government agency without identifying who is to sign on its behalf or its status. any signature complies that appears to have been made on behalf of the named legal person or government agency; or iii. a named natural person, legal person, cr government agency requiring the status of the signer be indicated, a signature complies which appea-s to be that of the named natural person, legal person, or government agency and indicates its status.

Documentary credit specialists will wish to compare the wording of rules 4.05-4.07 with their counterparts in UCP 600, particularly articles 3, 14 and 18. -----1

4.08

Demand Document Implied

If a standby does not specify any required document, it will still be deemed to require a documentary demand for payment.

4.09 .' Identical War-ding & Quotation

If a standby requires:

Mar-ks

a. a statement without specifying precise wording, then the wording in the document presented must appear to convey the same meaning as that required by the standby; b. specified wording by the use of quotation marks, blocked wording, or an attached exhibit or form, then typographical errors in spelling, punctuation, spacing, or the like that are apparent when read in context are not required to be duplicated and blank lines or spaces for data may be completed in any manner not inconsistent with the standby; or c. specified wording by the use of quotation marks, blocked wording, or an attached exhibit or form, and also provides that the specified wording be "exact" or "identical", then the wording In the documents presented. indudingtypographical errors in spelling, punctuation. spacing and the like, as well as blank lines and spaces for data. must be exactly reproduced.

4.10

Applicant Approval

A standby should nut specify that a required document be issued, signed, or counter-signed by the applicant. However, if the standby includes such a requirement, the issuer may not waive the requirement and is not responsible for the applicant's withholding of the document or signature. 62

Iypc\ of

dOl IJtIlCf)[WY

(f('r!,(

It will be noted that rule 4.10 seeks to reinforce the undesirable practice of incorporating a virtual inoperative requirement into the terms of a standby letter of credit and the position of tne issuer if such a requirement is nevertheless included. While this practice is equally discouraged when issuing commercial documentary credits, there is no specific provision made in UCP .._._ .. .._-_ ... -_ .. -~---.-.--.._-----, -------_-. __
.

_._

~-

4.1 1 Non-Documentary

Terms or Conditions

a. A standby term or condition which is non-documentary must be disregarded whether or not it affects the issuer's obligation to treat a presentation as complying or to treat the standby asissued,amended, or terminated. b. Termsor conditions are non-documentary if the standbydoes not require presentation of a document in which they are to be evidenced and if their fulfillment cannot be determined by the issuer from the issuer's own records or within the issuer's normal operations. c. Determinations from the issuer's own records or within the issuer's normal operations include determinations of: i. when, where, and how documents are presented or otherwise delivered to the issuer; ii. when, where, and how communications affecting the standby are sent or received by the issuer,beneficiary,cr any nominated person; iii. amounts transferred into or out of accounts with the issuer;and iv. amounts determinable from a published index (eg, if a standby provides for determining amounts of interest accruing according to published interest rates). d. An issuer need not re-compute a beneficiary's computations under a formula stated or referenced in a standby except to the extent that the standby so provides.

4.12

Formality of Statements

in Documents

a. A required statement need not be accompanied by a solemnity, officializaticn, or any other formality. b. If astandbyprovides for the addition of aformality to a required statement by the person makingit without specifyingform or content, the statement complies if it indicatesthat it was declared, averred, warranted, attested, sworn under oath, affirmed, certified, or the like. c. If a standby provides a statement to be witnessed by another person without specifyingform or content, the witnessed statement complies if it appearsto contain a signature of a person other than tne beneficiary with an indication that the person is acting as a witness. d. If a standby provides for a statement to be counter-signed, legalized, .. : visaed. or the like by a person other than the beneficiary acting in a governmental, judicial, corporate, or other representative capacity
.'_ ...
_-,,----

...

_.

--_

.-.-,.----~

-...

-_

..

,---_"----

..

'

',

~.:__-----------------,\,\

63

DIKUIIICII(I1IY

Clcdirs

·[Yllcs. USl'~

(J()(/

C/1(i{(IC(emUc.~

r--~ithout specir;:i~gf~;~ or content, th~statement ~o~-~Ii~~;f the signature of a person other than the beneficiary and indudes an indication of that person's representative capacity and the organization on whose behalf the person has acted.

!t'~~~-~i~;'--'\'
I
1

A documentary credit specialist will wish to compare the wording of rules 4.11 and

4.12 with their counterparts in UCP 600, particularly article 3 and sub-article 14(h).
-_ ..

__ ._------..,

4.13

No Responsibility to Identify Beneficiary

Except to the extent that a standby requires presentation of an electronic . record:

a.a person honouring a presentation has no obligat.ion to the applicant to

ascertain the identity of any person making a presentation or any assignee .of proceeds; h. payment to a named beneficiary, transferee, an acknowledged assignee, successor by operation of law, to an account or account number stated in /the:~tal)dby or in a cover instruction from the beneficiary or nominated . person fulfillsthe obligation under the standby to effect payment. 4.14 Name of Acquired or Merged Issuer or Confirmer

If.theissueror confirmer is reorganized, merged, 01" changes its name, any . reqJired :reference by name to the issuer or confirmer in the documents . presented may be to it or its successor. 4.15 Original. Copy and MUltiple Documents a.. ' A presented document must be an original. b.: Presentation of an electronic record, where an electronic presentation is .' . permitted Or required is deemed to be an "original". c. i. A presented document is deemed to be an "original" unless it appears on its face to have been reproduced from an original. ii. A document which appears to have been reproduced from an original is deemed to be an original if the signature or authentication appears to be original. d. A standby that requires presentation of a "copy" permits presentation of either an original or copy unless the standby states that only a copy be presented or otherwise addresses the disposition of all originals. e. If multiples of the same document are requested, only one must be an original unless: l, "duplicate originals" or "multiple originals" are requested in which case aU must be originals; or ii. "two copies", "two-fold", or the like are requested in which case either originals or copies may be presented.
.. ---.----.-

I I
\

-~~~----64

--_\

Rule 4.15 (a) stated, for the first time, a basic rule in documentary credit operations that original documents are required. This is now included in UCP 600, sub-article 17(a).

r-------··~-··..... .. -4.16 ..Demand for Payment

a. A demand for payment need not be separate from the beneficiary's stater-ent or other required document. b. Ifa separate demand is required. it must contain: i, a demand for payment from the beneficiary directed to the issuer or nominated person; ll, a date indicating when the demand was Issued; m. the amount demanded; and iv. the beneficiary's signature. c. A demand may be in the form of a draft or other instruction, order, or request to pay. If a standby requires presentation of a "draft" or "bill of exchange", that draft or bill of exchange need not be in negotiable form unless the standby so states.

4.17 Statement of Default or Other Drawing Event If a standby requires a statement, certificate, or other recital of a default or other drawing event and does not specify content, the document complies if it contains:
.3... a

representation to the effect that payment is due because a drawing :, event described in the standby has occurred; b. a date indicating when it was issued; and c. the beneficiary's signature. 4.18 Negotiable Documents

If a standby requires presentation of a document that is transferable by endorsement and delivery without stating whether, how, or to whom endorsement must be made, then the document may be presented without endorsement, or, if endorsed, the endorsement may be in blank and, in any event, the document may be issued or negotiated with or without recourse.

:.~:tan~:::e::i:::~::c::::::~:go,crnment
~O~::~:i:;:~::~:;:::~t
._, __ .... ......._ ...

-issued

order, an arbitration award, or the like, a document or a copy is deemed to agency, court, tribunal, or the like;
...... _

document. I acourt
._.J 6S

\ \

/)", 'II'H'I'("IY

()<·,I,(·.

IYI" .... 11·.,", in»! (/"'1",

("11\(1,',

ii. iii. iv. v.

suitably titled or named; signed; dated; and originally certified or authenticated by an official of a government agency, court, tribunal, or the like. Other Documents

4.20

a. If a standby requires a document other than one whose content is specified in these Rules without specifying the issuer, data content, or wording, a document complies if it appears to be appropriately titled or to serve the function of that type of document under standard standby practice. b. A document presented under a standby is to be examined in the context of standby practice under these Rules even if the document is of a type (such as a commercial invoice, transport documents, insurance documents or the like) for which the Uniform Customs and Practice for Documentary Credits contains detailed rules. 4.21 Request to Issue Separate Undertaking

If astandby requests that the beneficiary of the standby issueits own separate undertaking to another (whether or not the standby recites the text of that undertaking): a. the beneficiary receives no rights other than its rights to draw under the ..standby even if the issuer pays a fee to the beneficiary for issuing the separate undertaking; b. neither tile separate undertaking nor any documents presented under it need be presented to the issuer; and c. if originals or copies of the separate undertaking or documents presented under it are received by the issuer although not required to be presented as a condition to honour of the standby: i. the issuer need not examine, and, in any event, shall disregard their compliance or consistency with the standby, with the beneficiary's demand under the standby, or with the beneficiary's separate undertaking; and ii. the issuer may without responsibility return them to the presenter or forward them to the applicant with the presentation, Rules4.16-4.21 all refer to the types of document chat aloe regularly called for under standby letters of credit. A documentary credit specialist should compare these document types with those seen in commercial documentary credits and will note that such comparison will serve to provide a very clear insight into the difference in usagebetween standby letters of credit and commercial documentary credits.
66

5 Notke, Predu::;ioll

(II

HI Oi::'{)()~1 (rOil

or DoC!"

tWllt'.

The nine rules covered under this ilc;)din): SCI OLlI rho re-quirements and responsibilities if a presentation under a standby letter of credit is refused. A parallel can be drawn with

UCP 600, article 16. but some wording the rules' meaning and application.

IS <lgall1

included in order to provide precision in

i5.01--Ti~~I;N~ticc-~iDiShonou;··
\
I

.-_. --------~\

a. Notice of dishonour must be given within a time after presentation of documents which is not unreasonable. i, Notice given within three business days .s deemed to be not unreasonable and beyond seven business days is deemed to be unreasonable. ii. Whether the time within which notice is given is unreasonable does not depend upon an imminent deadline for presentation. iii. The time for calculatingwhen notice of dishonour must be :jiven begins on the businessday following the businessday of presentation. iv. Unless a standby otherwise expressly states a shortened time within which notice of dishonour must be given, the issuer hasno obligation to accelerate its examination of a presentation. b. i. The means by which a notice of dishonour is to be given is by telecommunication, if available, and, if not, by another available meanswhich allows for prompt notice. ii. If notice of dishonour is received within the time permitted for giving the notice, then it is deemed to have been given by prompt means. c. Notice of dishonour must be given to the person from whom the documents were received (whether the beneficiary, nominated person, or person other than a delivery person) except as otherwise requested by the presenter.

I
1

5.02
I

Statement

of Grounds for Dishonour

I
I

A notice of dishonour shall state all discrepancies upon which dishonour is based.

5.03

Failure to Give Timely Notice of Dishonour

I
I

I
I

a. Failure to give notice of a discrepancy in a notice of dishoncur within the time and by the means specified in the standby or these rules precludes assertion of that discrepancy in any document containing the discrepancy that is retained or re-presented, but does not preclude assertion of that discrepancy in any different presentation under the same or a separate standby. b. Failure to give notice of dishonour or acceptance or acknowledgment that a deferred payment undertaking has been incurred obligates the issuer to pay at maturity.
L_~ __ ~_ • . __ ._

67

Documentary

Cre~its.

fypcs. U~es and

C{)(JrtIC1NIS(ICS

5.04

Notice of Expiry

--------------l

Failure to give notice that a presentation was made after the expiranon date does not precludedishonour for that reason.

5.05 Issuer Request for Applicant Waiver Without Request by Presenter '
Ifthe issuer decides that a presentation does not comply and ifthe presenter does not otherwise instruct, the issuer may, in its sole discretion, request the applicant to waive non-compliance or otherwise to authorize honour within the time available for giving notice of dishonour but without extending it. Obtalning the applicant's waiver does not obligate the issuer to waive . noncompliance.
_,

'.-

5.06 ,lssuer:Request Presenter

for Applicant Waiver Upon Request of

. appliCant's

If.~fterreceipt of notice of dishonour, a presenter requests that the ;presenteddoc1,Jments be forwarded to the issuer or that the issuer seek the waiver: a. no person is obligated to forward the discrepant documents or seek the .~·~~ppli~nt·~)waiver: b. the presentation to the issuer remains subject to these Rules unless departure from them is expressly consented to by the presenter; and c. ifthe documents are forwarded or if a waiver is sought: i. the presenter is precluded from objecting to the discrepancies notified to it by the issuer; ii. the issuer is not relieved from examining the presentation under these Rules; iii. the issuer is not obligated to waive the discrepancy even if the applicant waives it; and iv.',tlieissuer must hold the documents until it receive, a response from the applicant or is requested by the presenter to return the documents, and if the issuer receives no such response or request within ten business days of its notice of dishonour, it may return the documents to the presenter. 5.07 Disposition of Documents

Dishonoured documents must be returned, held, or disposed of as reasonably instructed by the presenter. Failure to give notice of the disposition of documents in the notice of dishonour does not preclude the issuer from asserting any defense otherwise available to it against honour.
68

1YI)~"

"I d"'IIIlll'lItwy

rlcdrt

5.08

Cover InstructionsfTransmittal Lcttcr

a. Instructions accompanying a presentation made under a standby may be relied on to the extent that they are not contrary to the terms or conditions of the standby, the demand, or these Rules. b. Representations made by a nominated person accompanying a presentation may be relied upon to the extent that they are not contrary to che terms or conditions of a standby or these Rules. c. Notwithstanding receipt of instructions, an issuer or nominated person may pay, give notice, return the documents, or otherwise deal directly . with the presenter. d•. A statement in the cover letter that the documents arc discrepant does not relieve the issuer from examining the presentation for compliance. 5.09 Applicant Notice of Objection a. An applicant must timely object to an issuer's honour of a non-complying presentation by givingtimely notice by prompt means. b. An applicant acts timely if it objects to discrepancies by sending a notice to the issuer stating the discrepancies on which the objection is based . Within a time after the applicant's receipt of the documents which is not unreasonable. c.. Failur-eto give a timely notice of objection by prompt means precludes . assertion by the applicant against the issuer of any discrepancy or other matter apparent on the face of the documents received by the applicant, but does not preclude assertion of that objection to any different presentation under the same or a different standby.
L...-'-- __ ~. __ ~ __ _ .. .. .. __ .

I
\

I
!
I
\

Rule 2.0 I (c) defines when an issuer is deemed to act in a timely manner, ie 'within the time permitted for examining the presentation and giving notice of dishonour', Rule 5.0 I designates that this time should not be unreasonable, A documentary credit specialist will note the difference in wording between UCP 600 and that under ISP 98:
i.

ii.

II

iii.

three business days is never unreasonable; four to seven business days may be considered as not being unreasonable depending upon the complexity of a particular drawing or terms contained withinthe standby; and beyond seven business days will always be deemed to be unreasonable.

Compare with UCP 600, sub-article 14(b), which states:

69

Docult1cJllory
,----~~

Credrts ....Types, uses aud C/lOractcristies

-_------

I
1

---- __ -~--- .._.- _..... _ _. __ .. "_'-~-_--"-----, A norninaed bank acting on its nomination, a confirming bank, if any, and the issuing bank shall each have a maximum of five banking days following the day of presentation to determine if a presentation is complying. This period is not curtailed 0:" otherwise affected by the occurrence on or after the date of presentation of any expiry date or last day for presentation,

i
1
I

I
1
l

! I

I
1

It should also be noted that the wording of rule 5,04 serves to articulate the legal position that, once a standby letter of credit has expired, it is no longer valid for drawings and, as a consequence, the issuer ceases to be obligated under its terms, including its governing rules. Documentary credit specialists will note that rule 5.06 provides applicable responsibilities for the next step in the operational process following the issuer giving a notice of dishonour and that, in this respect, there is no similar provision in UCP, except for rule 5_06 (c)(iv), Similarly, outside the scope of UCP, rule 5.09 of ISP 98 recognises the fact that applicants sometimes raise objections or discrepancies after payment by the issuer. Rule 5.09 (a) and (c) uses the words 'timely notice'. which is defined in rule 5,0 I. The two paragraphs together indicate that any objections by the applicant should not be made after seven business days following presentation. In order to put such applicant's objections in a proper perspective, it is irr.portant to reiterate that it is the issuer alone who has to decide whether to honour a presentation in terms of its irrevocable, independent and binding undertaking.

Transfer,Assignment and Transfer by Operation of Law

There are 14 rules included under this heading. As the title implies, these are split into the three different procedures quoted. Rules 6.01-6.05 cover the transfer of drawing rights and their equivalent is found in UCP 600, article 38; rules 6.06-6.10 deal with the assignment of proceeds, as found under UCP 600, article 39; rules 6.11-6.14 provide rules should the beneficiary of the standby be transferred by operation of law to a successor, for which there is no equivalent in UCP.
-----'--1

6.0 I

Request to Transfer Drawing

Rights

Where a beneficiary requests that an issuer or nominated person honour a drawing from another person as if that person were the beneficiary, these rules on transfer of drawing rights ("transfer") apply, 6.02 When Drawing Rights are Transferable

a. A standby is not transferable unless it so states.

70

"fy/H'\

"I do,

1IIIII'II1i1l

Y , fl'dir

b. A standby that states that it is transferable without further. provision means that drawing rights: i. may be transferred in their entirety more than once; ii, may not be partially transferred; and iii. may not be transferred unless the issuer (including the confirmer) or another person specifically nominated in the standby agrees to and effects the transfer requested by the beneficiary.

6.03

Conditions to Transfer

An issuer of a transferable standby or a nominated person need not effect a transfer unless: a. it is satisfied as to the existence and authenticity of the original standby; and b. the beneficiary submits or fulfills: i. a request in a form acceptable to the issuer or nominated person including the effective date of the transfer and the name and address of the transferee; ii. the original standby; iii. verification of the Signature of the person signing for the beneficiary; iv. verification of the authority of the person signing for the beneficiary; v. payment of the transfer fee; and vi. any other reasonable requirements.

6.04

Effect of Transfer on Required Documents

Where there has been a transfer of drawing rights in their entirety: a. a draft or demand must be signed by the transferee beneficiary: and b. the name of the transferee beneficiary may be used in place of the name of the transferor beneficiary in any other required document.

6.05

Reimbursement for Payment Based on a Transfer

An issuer or nominated person paying under a transfer pursuant to Rule 6.03(a), (b)(i), and (b)(ii) is entitled to reimbursement as if it had made \

Lpayment to the beneficiary.,

---"~~-.-.'.--------------

_-

I
I

The above rules govern the transfer of a standby letter of credit and documentary credit specialists should be aware that their text differs Significantly to that of UCP 600, article 38, which is examined in some detail in Section 3.4.5 of this chapter. The prime differences to note are contained in rule 6.02 (b) (i) and (1':, which provides for the standby letter of credit to be transferred in its entirety more than once and prohibits partial transfer, unless otherwise stated in the terms of the standby letter of credit, These differences reflect the differences in usage between a standby letter of credit and a documentary credit.
71

6.06

Assignment of Proceeds

Wh~r:e.anissuer or nominated person is asked to acknowledge a benefi:iary's requeStto pay an assignee all or part of any proceeds of the beneficiary's drawing under the standby these rules on acknowledgment of an assignment of proceeds apply except where applicable law otherwir.e requires.

6.07

Request for Acknowledgment

a.:Y,:,less applicable law otherwise requires, an issuer or nominated person i.' 'is not obligated to give effect to an assigrrnent of proceeds which it "has not acknowledged; and .ii. is not obligated to acknowledge the assignment. b. If an assignment is acknowledged: ,;.L,tl:ieacknowledgment confers no rights with respect to the standby to . the assignee who is only entitled to the proceeds assigned, if any, and ',whose rights may be affected by amendment or cancellation; and ll. ' the rights of the assignee are subject to; (a) the existence of any net proceeds payable to the beneficiary by the person making the acknowledgment; ..(b) rights of nominated persons and transferee beneficiaries; (c) rights of other acknowledged assignees; and (d) any other rights or interests that may have priority under applicable

law. 6.08 .Conditions to Acknowledgment of Assignment of Proceeds

An issuer or nominated person may condition receipt of: its acknowledgment on

a.,: the original standby for examination or notation; b. verification of the Signature of the person signing for the beneficiarv; c. verification of the authority of the person signing for the beneficia ry; d. an irrevocable request signed by the beneficiary for acknowledgment of the assignment that includes statements, covenants, indemnities, and other provisions which may be contained in the issuer's or nominated person's required form requesting acknowledgment of assignment, such as: i; the identity of the affected drawings if the standby permits multiple drawings; ii. the full name, legal form, location, and mailing address of the beneficiary and the assignee; iii. details of any request affecting the method of payment or delivery of \ ,
72

~~e stan~y proceeds;

__

.L

••

__

'·

,_

.----

iv. limitation

on

partial

assignments the legality

and and

prohibition relative

of. successive priority of the

assignments; v. statements regarding

assignment; or vi. right of recovery by the issuer or nominated person of any proceeds received by the assignee that are recoverable from the beneficiary; e. payment of a fee for the acknowledgment; and f. fulfillment of other reasonable requirements.

6.09

Conflicting

Claims

to Proceeds

Ifthere are conflicting claims to proceeds, then payment to an acknowledged assignee may be suspended pending resolution of the conflict.

6.10

Reimbursement

for Payment

Based

on an Assignment

An issuer or nominated person paying under an acknowledged assignment pursuant to Rule 6.08(a) and (b) is entitled to reimbursement as if it had made payment to the beneficiary. If the beneficiary is a bank, the acknowledgment may be based solely upon an authenticated communication. The final words of rule 6.06. ie 'except where applicable law otherwise requires', are particularly important when dealing with assignment of proceeds, which is covered in Section 3.3.2 of this chapter. The ISP 98 rules provide greater detail than the corresponding UCP 600, article 39, with regard to the responsibilities and obligations of an issuer or nominated party when acknowledging assignment of proceeds requests.

6.11

Transferee

by Operation

of Law trustee, receiver, be designated by documents in its beneficiary, these

Where an heir, personal representative, liquidator, successor corporation, or similar person who claims to law to succeed to the interests of a beneficiary presents own r.arne as if it were the authorized transferee of the rules on transfer by operation of law apply.

6.12
\

Additional

Document

in Event of Drawing

in Successor's

II
\

Name A claimed successor may be treated as if it were an authorized transferee of a beneficiary's drawing rights in their entirety if it presents an additional document or documents which appear to be issued by a public official or representative (including a iudicial officer) and indicate:
..------------.---. ------.---------

1
73

!l__~~.--.---

---

>-

I)",

""WII('Ji

Y ( ""1,(,,

Irl"''',!

h,'"

'1/10/ (

I" !!", (""',1,,

"

a, that the claimed successor is the survivor of a merger, consolidation. or similar action of a corporation, limited liability company, or other similar organization; b. that the claimed successor is authorized or appointed to act on behalf of the named beneficiary or Its estate because of an insolvency proceeding; c. that the claimed successor is authorized or appointed to act on behalf of the named beneficiary because of death or incapacity; or d. that the name of the named beneficiary has been changed to that of the claimed successor.

6.13

Suspension of Obligations Upon Presentation by Successor

An issuer or nominated person which receives a presentat1cn ~'rom a

claimed successor which complies in all respects except for the name of the beneficiary: a, may request in a manner satisfactory as to form and substance: 1. a legal opinion; il, an additional document referred to in Rule 6, 12 (Additional Document in Event of Drawing in Successor's Name) from a public official; iii. statements, covenants, and indemnities regarding the status of the .claimed successor as Successor by operation of law; iv. payment of fees reasonably related to these determinations; and v. anything which may be required for a transfer under Rule 6.03 (Conditions to Transfer) or an acknowledgment of assignment of proceeds under Rule 6.08 (Conditions to Acknowledgment of Assignment of Proceeds); but such documentation shall not constitute a required document for purposes of expiry of the standby. b. Until the issuer or nominated person receives the requested documentation, its obligation to honour or give notice of dishonour is suspended, but any deadline for presentation of required documents is not thereby extended.

6.14 Reimbursement for Payment Based on a Transfer by Operation of Law

An issuer or nominated person paying under a transfer by operation of law pursuant to Rule 6.12 (Additional Document in Event of Drawing in Successor's Name) is entitled to reimbursement as if it had made payment to the beneficiary,

The above rules cover the scenario under which succession of the original beneficiary as named in the standby letter of credit occurs and documents are presented 74

_'_81"';"L ... _

by the party claiming to be the legzl!lydesignated successor of the named credit beneficiary. This scenario, with which many documentary credit practitioners will be familiar in practice, has no corresponding rule in UCP. Documents that are presented by a claimed successor,either under a standby letter of credit or commoci 11 documentary credit, will invariably be subjected to one or more of the validation mechanisms as described in rule 6.13 (a).

7 Cancellation
The following two rules cover cancellation of a standby letter of credit and, in particular, the need to obtain the beneficiary's consent to such and the issuer's right to validate such consent before treating the standby letter of credit as cancelled in its books.

7.01

When an Irrevocable Standby is Cancelled or Terminated

A beneficiary's rights under a standby may not be cancelled without its consent. Consent may be evidenced in writing or by an action such as return
of the original standby in a manner which implies that the beneficiary consents tocance1!ation. A beneficiary's consent to cancellation is irrevocable when communicated to the issuer.

7.02

Issuer's Discretion Regarding a Decision to Cancel

Before acceding to a beneficiary's authorization to cancel and treating the standby as cancelled for all purposes, an issuer may require in a manner satisfactory as to form and substance: a. the original standby; b. verification of the signature of the person signing for the beneficiary; c. verification of the authorization of the person signing for the beneficiary; d. a legal opinion; e. an irrevocable authority signed by the beneficiary for cancellation that includes statements, covenants, indemnities, and similar provisions contained in a required form; f. satisfaction that the obligation of any confirmer has been cancelled; g. satisfaction that there has not been a transfer or payment by any nominated person, and h. any other reasonable measure.

7S

:...;,,;a.....

.__ . __

Documentory

Credits

Types, Uses and CllOractensues

Documentary credit specialists will recognise that, given the nature of standby letter of credit usage, and the extend or pay practice <1S defined in rule 3.09, it is of vital importance that the issuer is able to determine with absolute certainty that the beneficiary has agreed to any request for cancellation of the standby letter of credit.

Reimbursement Obligations

The four rules collated under this heading cover the right to reimbursement not only of a nominated party from the issuer, but also of the issuer from the applicant. In this regard, rule 8.0 I (b) also builds into the rules obligations of the applicant, which will invariably be covered to differing degrees in a separate agreement or facility letter between the issuer and applicant,
.~------~--~------

-_ _--..

8.01

Right to Reimbursement

a.. Where payment is made against a complying presentation in accordance .. with these Rules, reimbursement must be made by: i.·· an applicant to an issuer requested to issue a standby; and ll. . an issuer to a person nominated to honour or otherwise give value. b. An appllcant must indemnify the issuer against all claims, obligations, and responsibilities (including attorney's fees) arising out of: ,i. . the imposition of law or practice other than that chosen in the standby or applicable at the place of issuance; :;:'n;{,t~eJraud, forgery, or illegalaction of others; or iiL,'theissuer's performance of the obligations of a conflrrner that .....wrongfully dishonours a confirmation. c. This Rule supplements any applicable agreement, course of dealing, practice, custom or usage providing for reimbursement or inderrnification on lesser or other grounds. 8.02 Charges for Fees and Costs

a. An applicant must pay the issuer's charges and re.mburse the issuer for .any charges that the issuer is obligated to pay to persons nominated with the applicant's consent to advise, confirm, honour, negotiate, transfer, or to issue a separate undertaking. b. An issuer is obligated to pay the charges of other persons: i. if they are payable in accordance with the terms of the standby; or ii. if they are the reasonable and customary fees and expenses of a person requested by the issuer to advise, honour, negotiate, transfer, or to issue a separate undertaking, and they are unrecovered and unrecoverable from the beneficiary or other presenter because no demand is made under the standby.
l__ _. ~ --_ _... ------------ -----

76

,
I

I I"·,

Types

or dowl1lerr(ory credit.
--

8.03

Refund of Reimbursement

-----------~-------

A nominated person that obtains reimbursement before the issuer timely dishonours the presentation must refund the reimbursement with interest if the issuer dishonours. The refund does not preclude the nominate:' person's wrongful dlshonou- claims.

8.04

Bank-to-Bank

Reimbursement

Any instruction or authorization to obtain reimbursement from another bank is subject to the International Chamber of Commerce standard rules for bank-to-bank reimbursements.
L__. ~_~ _

Rule 8.03 clearly states the responsibility of a nominated pally to refund to the issuer, with interest, any amounts obtained in reimbursement prior to receipt of a notice of dishonour, Documentary credit specialists will note that this places a greater onus on the nominated party than the equivalent provision of UCP 600: sub-article 16(g). It should also be noted that, by way of rule 8.04, ISP 98 adopts the incorporation of the ICC Rules for Bank-to-Bank Rcimbursemcnts into its terms without specific reference in the standby. These rules, together with their application, are covered in Chapter 9 of this study text.

Timing

There are five rules covered under this heading, which refer to aspects of timing in relation to the expiry date of a standby letter of credit. Documentary credit specialists will note the differences between the construction and wording of ISP 98 and UCP with regard to expiry and presentation. The separation of presentation, under Section 3, from expiry, in Section 9, of ISP 98 contrasts with their provisions under UCP 600, articles 6, 14,29 and 33.

19.0
I

Duration

of Standby

A standby must: a, contain an expiry date; or b. permit the issuer to terminate the standby upon reasonable prior notice or payment.

9.02

Effect of Expiration

on Nominated

Person

The rights ofa nominated person that acts within the scope of its nominati.on are not affected by the subsequent expiry of the standby.
--~---~--~--.~-~~-----~---------~-------•

I
J

77

9.03

Calculation of Time

a. A period of time within which an action must be taken under these Rules begins to run on the first business day following the business day when the action could have been undertaken at the place where the action should have been undertaken. b. An extension period starts on the calendar day following the stated expiry date even if either day falls on a day when the issuer is closed.

9.04

Time of Day of Expiration

If no time of day is stated for expiration, it occurs at the close of business at the place of presentation.

9.05

Retention of Standby

Retention of the original standby does not preserve any rights under the standby after the right to demand payment ceases.

.J

A further point that should be noted is the reinforcement, as provided in rule 9.05, of the fact that retention of the standby letter of credit by the beneficiary post-expiry does not preserve any rights to demand payment. This is to establish the position of a standby letter of credit, subject to IS? 98, where the laws of certain countries permit demands to be made against guarantees, in some cases long after their expiry date.

/0

Syndication/Participation

There are two rules under this final heading, which provide for circumstances under which a standby letter of credit is subject to either a syndication or participation. ----...
"~---'-"'-'--'"

-----· .. -·---·--l !

10.0I

Syndication

If a standby with more than one issuer does not state to whom presentation may be made, presentation may be made to any issuer with binding effect on all issuers.

10.02 Participation
a. Unless otherwise agreed between an applicant and an issuer, the issuer may sell participations in the issuer's rights against the appllcar t and any presenter and may disclose relevant applicant information in confidence to potential participants.
...1

78

Typ('~ of /JaymUlt

b. An issuer's sale of participations does not affect the obligations of the issuer under the standby or create any rights or obligations between the beneficiary and any participant.

'-1

A detailed explanation of participation and syndication is provided i:1Chapter 10 of this study text.

I I

II

3.3 Types of payment

3.3.1 Availability and settlement methods

II

3.3.1.1 Types of credit

UCP 600, sub-article 6(b) indicates the manner in which a documentary credit may be made available: . _. ._ -.-.....--- ····-·----1

r------ ... .._. _-'I

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

.J

Documentary credit specialists will note that, in this context, the 'types of credit' wording used in the article heading refers to the different options for how the documentary credit may be made available.

l
\
f

3.3.1.2 Settlement methods

Sight payment
'Sight payment' means that payment should be made when the presentation is seen or sighted. It also means that payment should be made on de:na ld. Because the terms of payment are immediate, the documentary credit would indicate a bank from which the beneficiary can expect to obtain such payment, ie a nominated bank. UCP 600, sub-article 12(a)provides that such a nominated bank d02S not necessarily have to accept its nomination by the issuingbank. Whether the nominated bank accepts such nomination depends upon a variety of factors, including the following: • • • • the relationship, if any,that the nominated bank has with the issuingbank; the standing of the issuingbank; the country from which the documentary credit has been issued; whether the nominated bank has a meansby which it can obtain reimbursement from the issuingbank.
79

I
II
I

J )O(lIlIt('lIrwy

CIC',iti,

IYlIt·'.! l-.r-,

'Iftd

( 1,,11(/, leI (\lll

The sight payment documentary credit n1ayor Illay not rCCjulI'e drafts to be presented, Becausedrafts may attract stamp duties, it may be issuedwithout requiring drafts to be presented. Documentary credit specialists should note that UCP 600, sub-article 12(a) specifically provides tnat the nominated bank has no obligation to honour or negotiate unless 'expressly agreed to by the norn.nater' bank and so communicated to the beneficiary ... '. The agreement of the nominated bank must be communicated to the beneficiary and, unless this has been done, the beneficiary should not place reliance on the nomination as a definitive obligation on the part of a nominated bank that has not confirmed the documentary credit. Unless the nominated bank is also the confirming bank, <.nysettlement received by the beneficiary may well be with recourse to the beneficiary.

Deferred payment
The terms and conditions of a documentary credit issuedon deferred payment terms are that: • payment is not immediate; • payment is at a time in the future, determinable in accordance with the documentary credit; and • a draft is not required to be presented. The future determinable date for payment, asdefined in the documentary credit, will usuallyfall within a specific period after the date of the transport document, a specific period after the date of presentation or other predefined event. Deferred payment documentary credits are also subject to the requirements of nomination described above. UCP 600 sub-article 12(b) states that. by making a documentary credit available with a nominated bank by deferred payment, the issuing bank is authorising the nominated bank to prepay or purchase a deferred payment undertaking incurred by that nominated bank, absent anything to the contrary in the documentary credit.

By acceptance
The terms and conditions of a documentary credit issued on acceptance terms are that: • payment is not immediate; • drafts are required to be presented; and • payment is on the maturity date of the draft. Acceptance documentary credits provide a means by which the beneficiary may be able to obtain finance by discounting the bank accepted draft. 80

UCP 600, sub-article 12(b) states that, by making ,1 documental), credit available with a nominated bank by acceptance, the issuing bank is authorising' the nominated bank to prepay or purchase a draft accepted by that nominated bank, absent anything to the contrary in the documentary credit. In the case of an unconfirmed documentary credit. the issuing bank is liable in terms of its undertaking to pay the draft at maturity. In the case of a confirmed documentary credit, the confirming bank undertakes to: • accept drafts not accepted by the stipulated drawee bank; • pay drafts accepted by the drawee bank and unpaid by the drawee bank at maturity; or • accept drafts drawn by the beneficiary on the confirming bank and to pay them at maturity.

By negotiation
'Negotiation' has been defined in UCP 600, article 2 in the following terms:

I II

Negotiation means the purchase by the nominated bank of drafts (drawn on abank 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.
1 •• ~' '_

The terms and conditions of a documentary credit issued on negotiation terms are that: • payment mayor may not be immediate; • drafts mayor may not be required for presentation; • payment, if the documentary credit is not negotiated earlier, is on receipt of documents by the issuing bank (sight) or the maturity date of the draft (usance). Negotiation documentary credits provide a means by which the beneficiary may be able to obtain finance by having the bank negotiate earlier than the date of payment. In the case of an unconfirmed negotiation documentary credit. the nominated bank will invariably negotiate on a with-recourse basis. In the case of a confirmed negotiation documentary credit, the confirming bank: • undertakes to negotiate by advancing funds immediately or by undertaking to advance funds on a future date; • undertakes. that such negotiation is according to the request of the beneficiary; and
81

• undertakes that the negotiation is on a without-recourse basis. Documentary credit specialistsshould be aware that the text of LJCP600, articles 6-8 are fundamental to the role of banks in documentary credit operations and so, accordingly, the key clements arc summarised below.

i
r

• Article 6

Availability. Expiry Date and Place for P"c~entation

Credits must indicate whether they arc available by sight payment, deferred payment, acceptance or negotiation. Documentary credit specialistsshould be aware that some documentary credits might show that they are available partly by sight payment and partly by acceptance of drafts or by deferred payment. In a freely available documentary credit, allY bank IS a nominated bank. Presentation must be made to an issuingbank, confirming bank, if any, or any other nominated bank. A documentary credit that is availablewith a nominated bank is also availablewith the issuingbank. An issuing bank undertakes to reimburse a nominated bank that has honoured or negotiated a complying presentation .

!I

• Article 7 -

Issuing Bank Undertaking

Undertaking of the issuingbank is:

for sight payment documentary credits - to pay at sight; for deferred payment documentary credits - to incur a deferred payment undertaking and pay at maturity; (or acceptance documentary credits • to accept a bill of exchange drawn by the beneficiary and pay at maturity; -1'> to honour if a nominated bank does not accept a bill of exchange drawn on it; or • to pay a bill of exchange if it has been accepted by a nominated bank but not paid at maturity; for negotiation documentary credits - to honour without recourse bills of exchange drawn by the beneficiary and/or documents : resented . Confirming Bank Undertaking

• Article 8

Undertaking of the confirming bank is: (or sight payment documentary credits - to pay at sight; for deferred payment documentary credits - to incur a deferred payment undertaking and pay at maturity; (or acceptance documentary credits • to accept a bill of exchange drawn by the beneficiary and pay at maturity; • to honour if a nominated bank does not accept a bill of exchange drawn on it; or • to pay a bill of exchange if it has been accepted by a nominated bank but not paid at maturity; (or negotiation credits - to negotiate without recourse bills of exchange drawn by the beneficiary and/or documents presented
82

7yil'"

of }WyIlIl'IIC

Documentary credit specialistscannot but farl to note the separate commitment of the confirming bank to the beneficiary. If a standby letter of credit is issuedsubject to ISP98, reference should be made to rules 2.0 I and 2.04.

3.3.2 Assignme~t of proceeds 3.3.2.1 Beckground

It should be noted that national law determines the extent and legal effect of assignmentof documentary credit proceeds. It is possible,in some cases,for the beneficiary to askthe bank payingthe documentary credit to reserve part of the proceeds to be paid to its own supplier. (This request is worded in the form of an irrevocable instruction.) The bank then tells the supplier that it has received irrevocable instructions to make the relevant payment to the supplier out of the documentary credit proceeds.

3.3.2.2 Extent of bank's responsibilities

The bank will not undertake any payment or guarantee obligation towards the thirdparty supplier and this is made clear in the bank's letter to that supplier. The bank merely acts as an agent for payment of the money received on behalf of the credit beneficiary. The bank should exercise care to word its letter so as to avoid any risk that it might be called on to pay the supplier if it does not have free use of the proceeds received from performance of the documentary credit. This situation would arise if, for instance, the proceeds were seized by a creditor of the beneficiary.

I
\

I
I
I

3.3.2.3 Extent of payment security

The ultimate supplier does not receive the same sort of payment security that it would have if it were itself the direct beneficiary of an irrevocable documentary credit or a transferred documentary credit. Its entitlement to payment depends, firstly, on the beneficiary making use of a presumption and. secondly, on the bank havingfree use of the reserved part of the proceeds.

I
I
I

3.3.2.4 Article 39 Assignment of Proceeds

The text of UCP 600, article 39 is as follows:

83

Doculltr!!1[ory Crcd,ls

Iypcs. Uses

11m/ ClWr<1c/{'rrSflcs

Ilr------Th~f~;;-~h;~ is not stated to be transferable shall not affect the right credit
!

of the beneficiary to assignany proceeds to which it may be or may become entitled under the credit. in accordance with the provisions of applicable law. This article relates only to the assignment of proceeds and not to the assignmentof the right to perform under the credit. ~~~~------------ - -- ----------------------

The beneficiary may assign its right to receive some, or all, of the proceeds to a third party - typically, a bank. The beneficiary may do this to give security for prefinancing or the issue of a back-to-back documentary credit, for instance. Such an assignment may take place whether or not the documentary credit is transferable and the procedures to be followed arc governed by the applicable law. The ISP 98 provides greater detail on assignment of proceeds and documentary credit specialistsare referred to rules 6.06--6.10 if a standby letter of credit is issued subject to those rules.

3.4 Characteristics
3.4.1 Introduction

Sections 3.2 and 3.3 of this chapter have looked at the types and uses of the documentary credit and the types of payment linked to them. These usesare extended, supplemented and dictated by a number of characteristics, some of which are fundamental to all documentary crcrlir-; issued and others th..t provide a speciality function by the insertion of clauses or of a recognised form of wording into the text of the documentary credit. A number of these characteristics are provided for within the UCP and ISP98 rules, but others have gained their standing under the umbrella of international standard banking practice. This section looks at those characteristics that are most commonly encountered in documentary credit operations.

3.4.2

Revocable documentary credit

3.4.2.1 Revocable documentary transaction

credits - background and

Revocabledocumentary credits arc rarely used and are not covered in UCP 600. The documentary credit specialist should, however, be aware of the functions of a revocable documentary credit. 84

C/hltlt[[ctisrtC~

The UCP 600 position is that the presumption is not on revocability, but on irrevocability (as shown in article 3 of UCP 600: 'A credit is irrevocable even if there is no indication to that effect'). A revocable documentary credit offers no security of payment to the beneficiary and, for this reason, may not be capable of being considered as a fair exchange for goods, services or performance provided by the beneficiary. The second key element is that a revocable documentary credit may be amended or cancelled by the issuingbank:

+ 'at any moment'; and + 'without prior notice to the

beneficiary'.

The third key element is that the issuingbank is liable to honour its obligations under a revocable documentary credit for any honour or negotiation made by another bank prior to receipt of notice of such revocation by a bank. This liability includes the liability to reimburse another bank in respect of any deferred payment undertaking entered into by such bank prior to receipt of notice. The documentary credit specialist must not only be aware of the above issues in respect of revocable documentary credits, but must also be aware of the operational safeguardsthat need to be followed.

3.4.2.2
(i) (ii)

Control of operational risks

The bank issuing a revocable documentary credit should ensure that it nominates a specific bank that is authorised to honour or negotiate. The issuingbank should restrict honour or negotiation to such a nominated bank.

The issuing bank

The above steps (i) and (ii) will ensure that, in the event of amendment or cancellation, the lines of communication are clear and direct, reducing the chances of error. (iii) Up on receipt of a request from the applicant for cancellation of the documentary credit, the issuingbank should make it clear in writing (if it did not do so at the time of issuance)that the applicant is liable for any obligation that the nominated bank has undertaken prior to its receipt of notice of cancellation. When the issuingbank advisesthe nominated bank of cancellation, it should request the latter to advise the issuingbank of: (a) confirmation of cancellation; and/or (b) any obligations already undertaken by the nominated bank up to receipt of notification of cancellation.

(iv)

Note: Banksshould not issuerevocable documentary credits that are alsotransferable

and should not confirm revocable documentary credits. 85

The nominated bank

(i) Upon receipt of a revocable documentary credit. the nominated bank must advise the beneficiary that it is subject to cancellation at any time without notice to the beneficiary and that such cancellation can be effected up to, and including. the time of presentation of documents. Upon receipt of a notice of cancellation from the issuingbank. the nominated bank must: (a) advisethe beneficiary of cancellation; or (b) advise and/or claim on the Issuing bank in respect of any obligations undertaken.

(ii)

3.4.3

Irrevocable d~cumentary credit

A definition of an irrevocable documentary credit may be derived from UCP 600, article 2: Credit means any arrangement, however named or described. that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation.

This irrevocable undertaking is further strengthened by the provisions of UCP 600, sub-article 10(a),which indicates that an irrevocable documentary credit cannot be amended or cancelledwithout the agreement of the issuingbank and the beneflciary, The beneficiary may therefore gain considerable comfort from the clear and unambiguous undertaking of the issuing bank. Similar comfort may be ga.ned from ISP98, rule 1.06 (a) and (b).

3.4.4

Irrevocable confirmed documentary

credit

A definition of an irrevocable confirmed documentary credit may be derived from UCP 600, article 2: ._-_--_
---_--

------_._------

Confirmation means a definite undertaking of the confirming bank, in addition to that of the issuing bank, to honour or negotiate a complying presentation.

This irrevocable undertaking is further strengthened by the provisions of UCP 600, sub-article I O(a),which indicatesthat the irrevocable documentary credit cannot be amended or cancelled without the agreement of the issuing bank, confirming bank and the beneficiary, The beneficiary may not be comfortable with the irrevocable 86

.~ ~.,Ot_

....

CIIOW((pris(lcs

undertaking of an issuing bank, which is often located in another country and may therefore require the undertaking of a bank in its own country, and this is the basic reason for the need (01' the confirmation of a documentary credit. The following matters should be noted: • the issuingbank must 'authorise or request' the confirming bank to confirm; • the confirming bank's undertaking is in addition to that of the issuing bank, so that the beneficiary has a double assuranceof payment: • the bank requested to confirm the documentary credit is not obligated to do so (UCP 600, sub-article 8(d)): + if the documentary credit has been confirmed. the confirming bank is not obligated to confirm amendments (UCP 600, sub-article 10(b)). The full text of UCP 600, articles 7 and B are quoted in Chapter 2 of this study text.

3.4.5

Transferable documentary credit

3.4.5. I Introduction
Unlike some of the other characteristics covered. transferable documentary credits are much more commonplace and problems connected with them are also seen more frequently. Accordingly, the operations relating to transferable documentary credits are shown in considerable detail in this section. Documentary credit specialistsshould review transferable credits in conjunction with back-co-back documentary credits, because there are many similarities and many differences in application between the workings of each.

3.4.5.2

Background

In its Simplest form, a documentary credit is issued in favour of the seller, who ships the goods and claims payment thereunder. This scenario is particularly applicable if the seller is the manufacturer or producer of the goods. In some cases, however, the buyer does business with an intermediary trader. who obtains the goods from another source or even several other sources. In this event. the intermediary trader will have to buy the goods before supplying them to the buyer. Typically, such intermediary traders ocerate on narrow margins: they do not carry stocks of goods and have limited working capital. Characteristically, therefore, the trader seeks a means of financing the purchases that does not place a burden on the trader's own resources. In the context of standby letters of credit, the underlying debt obligation is often sold, necessitating the transfer of the documentary credit to the new owner of the debt. Transferable documentary credits were devised as a response to these needs. The basic idea underlying this technique is that the documentary credit issued in favour
87

of the trader can be used as a means of paying the sources from which the trader obtains goods and ;'IS security for payment for such goods or for the tnnsfer of the credit undertaking to another bcncficiarv,

3.4.5.3 Transaction - basic features (used in a commercial transaction)

Under a transferable documentary credit, the final buyer instructs its bank to issue a documentary credit in transferable form in favour of the intermediary trader from whom the goods are bought (known as the 'first beneficiary'). This enables the intermediary trader to request the bank at which the documentary credit is available to transfer it in whole or in part to the trader's supplier (known as the 'second beneficiary'). If the trader is buying from several sources, the bank may be requested to transfer parts of the documentary credit to each such source. The value of the parts of the documentary credit transferred to the trader's suppliers represents the price that the trader is paying for the goods. The balance represents the trader's profit or 'margin'.

Advantages
This arrangement provides the trader's suppliers with security for payment because part of the documentary credit itself is transferred to each supplier. In this way, each supplier (second beneficiary) obtains the right to claim payment direct from the bank at which its portion of the documentary credit is available against presentation of conforming documents. Thus, the supplier obtains a large measure of control over the payment procedure, becauseit is able to ensure that the appropriate documents are presented within the time limits established in the transferred documentary credit. A transferable documentary credit is also a convenient solution for the trader. This is becauseit allows the trader to provide suppliers with the security of a documentary credit without having to use any part of the trader's own banking facilities.

Risks and costs

A transferable documentary credit involves extra risks and costs for the original applicant (the buyer to whom the goods are finally destined). In particular, the buyer accepts the risk of receiving goods from a third party, who may not be known to the buyer and with whom there may have been no previous businessdealings. Moreover, if a documentary credit is transferred, more people are involved, and the documents have to be examined and, invariably, mailed twice before they reach the issuingbank. This increasesthe risk of loss and error along the way, and the greater
flU

.r

Ci I{"

or(

rlls C/o

difficulties involved in controlling the operation carried out under a transferable documentary credit may also increase the risk of fraud. A large part of this risk ultimately falls on the original applicant, who undertakes to reimburse bank provided that a complying presentation has been made. the issuing

3.4.5.4

An overview of procedures

The detailed procedures applicable to transferable documentary credits are analysed below. This section highlights the main steps in ;"I transferable documentary credit operation by briefly summarising the progress of a characteristic transaction of this type. (It should be noted that the precise details would not bo the same in all cases.)

The applicant and the beneficiary conclude their individual ccntract, in which it is agreed that the applicant will request that its bank issue a documentary credit, in favour of the beneficiary, that is designated as transferable. credit, They should also agree on the other transport documents last date for shipment. details of the documentary to be presented, including

and other documents requests

expiry date and transferable

,
I

2 3 4
5

I
1

The buyer (applicant) documentary credit.

the issuance of an irrevocable

I I
1

The issuing bank transmits the documentary credit details to an advising bank in the trader's country and nominates the transferring bank. The advising bank advises the documentary credit to the first beneficiary, The first beneficiary requests that the bank authorised to transfer (which, in most cases, will be the advising bank) transfer part of the documentary credit to a supplier in the same country or in another country (second beneficiary). from whom the goods are to be obtained. makes the transfer. to fulfil its contract At the request of with the applicant.

The transferring

bank, if agreeable,

I
!

the first beneficiary, the transferring bank makes the transferred documentary credit available to the second beneficiary,

part of the

7 8 9

The transferred

part of the documentary

credit

is advised to the second

beneficiary. The second beneficiary ships the goods in accordance with the requirements of the documentary credit. The second beneficiary prepares and collates all of the documents stipulated in the original documentary credit issued in favour of the first beneficiary. The documents include the second beneficiary's draft, if called for. sends the documents bank receives the to the transferring documents: the bank. trader (first invoice, together with the second beneficiary's

10

The second beneficiary When the transferring

II

beneficiary) creates its own invoice and draft, if any, and makes the necessary presentation under the original transferable documentary credit to such transferring bank.

89