From A to UCP

Key Documentary Credit concepts explained

Kim Sindberg

• Publisher: Books on Demand
• Year: 2016
• Print ISBN:
  9788771144475
• Edition: 1
• eBook ISBN:
  9788771709759
• Topic: Business
• Subtopic: Business General
• Index: Business

This book explains 34 key documentary credit concepts in a clear and simple manner. But not only that; also taking it out of its context – so that one can approach one concept when it is appropriate. The idea is to describe each of these concepts as short as possible (and present them in alphabetic order) – and primarily from the perspective of the documentary credit.

1: Introduction

I have worked with documentary credits for more than 20 years. I have often heard the phrase that it is simply amazing how one working with documentary credits can continue to learn; that there is always new topics, angles or questions that pop up. Although I do not disagree with that, I find something else even more amazing: That it simply is the same questions, topics and themes that are still being discussed after 20 years – and in fact more than that. I am sure the individual documentary credit officer, specialist or expert learn – and do get more knowledgeable as time goes by. It seems however that the collective experience within the documentary credit community really does not grow. Sometimes it even seems like it does the opposite: That these years the documentary knowledge disappears from the banks.

Here I will not elaborate on the reasons for that, only observe that this (as an example) can be verified when following the various discussions that goes on at the social media such as LinkedIn or Facebook. Some of the topics raised are so basic, and demonstrating that the person asking have had no structured training or background. This even applies to some of the Queries that are asked to the ICC Banking Commission, which indeed is very sad.

I of course always like a good discussion – and have the greatest sympathy for people who “dare” reach out to the masters for help; who “dare” to ask the silly questions. It does strike me however; how many times I have been answering the same questions.

One may argue that there are many books out there to answer the questions; and that is true. However – if one does not fully grasp the context it may be hard to identify the answer.

Let me explain: Many documentary credit books are structured based on the UCP 600; i.e. walking through the various articles; analysing and explaining them. In order to read such book one must (of course) have a basic understanding of the UCP.

Other books address the issue in a more holistic manner. One of the best (that I know) in this respect is “Documentary credits in practice” by Reinhard Längerich. It links all aspects of the documentary credit – and explains it in context. However; in order to get the full value from this approach, which in fact is rather complex, one must have a solid knowledge in advance.

This is the background on which this book has been written: An attempt to explain some key concepts of the documentary credit in a clear and simple manner. But not only that; also taking it out of its context – so that one can approach one concept when it is appropriate. The idea is to describe each of these concepts as short as possible (and present them in alphabetic order) – and primarily from the perspective of the documentary credit. In a few cases I have given a bit of a background – but in general the intention is to strip the concept down to its core!

It is my hope that this book will bridge the way to reading other textbooks – that will explain the concepts in a more holistic manner. I.e. that it will create an eagerness to understand and learn more… and above all cater for a more qualified discussion.

Kim Sindberg

Køge, April 2016

2: Documentary Credit Crash Course

Let us begin with a quick introduction to the documentary credit, just so that we are on the same page.

Many people consider the documentary credit to be complex, and only use it when it is absolutely necessary. There are many rules, and much “practice” surrounding the documentary credit, but the basic principles of the documentary credit instrument are fairly simple.

This chapter is aimed at providing a basic understanding of what a documentary credit is. The documentary credit described here is a basic one, covering a commercial transaction that involves the sale of goods or services between a buyer and a seller.

Basically, all documentary credits are issued subject to ICC rules for Uniform Customs and Practice for Documentary Credits. The latest version of those rules—the UCP 600— came in force 1 July 2007.

The UCP 600 is a mix of high-level information and very detailed requirements to the documents presented. It includes documentary credit rules on a conceptual level, e.g. explaining what a documentary credit is and the obligation of the parties involved, dictating requirements for the documents that are to be presented under the documentary credit such as explaining who must sign the transport document.

All articles are important for the banks dealing with documentary credits. For sellers and buyers, however, some have only limited relevance while others are essential for the transaction to go smoothly and end successfully for both parties. These are primarily the ones related to the examination of documents.

In that respect, another ICC publication must be mentioned: International Standard Banking Practice for the Examination of Documents under UCP 600 (2013), ICC publication No. 745 (the ISBP 745).

This publication attempts to capture a major part of what is “international standard banking practice,” mainly related to the examination of the documents. It works as a relevant and practical checklist for sellers, who create the documents to be presented under the documentary credit.

2.1: Documentary credit definition

The documentary credit is defined as follows:

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 presentation¹.

This includes the following elements:

• The documentary credit is issued by a bank – the issuing bank².

• The documentary credit is irrevocable, which means that once issued it can neither be amended nor cancelled without the agreement of the issuing bank, the confirming bank, if any and the seller.

• The documentary credit constitutes a definite undertaking, i.e. a promise.

• In order to evoke the obligation of the issuing bank, the seller or nominated bank must make a complying presentation by presenting documents that comply with the terms and conditions of the documentary credit UCP 600 and international standard banking practice.

• Once a complying presentation has been made, the issuing bank must honour. Basically, this means that issuing bank must effect payment as defined in the documentary credit.

2.2: Documentary credit functions

The documentary credit has three main functions:

Guarantee

The documentary credit serves as a (conditional)³ guarantee. This means that one or more banks, in the event the documentary credit is confirmed, issue an independent undertaking. The banks promise to pay a certain amount provided that the documents stipulated in the documentary credit are presented as required by the documentary credit.

The risk of non-payment by the buyer (applicant) is shifted to a bank (issuing bank and confirming bank, if any). Note that the involved banks are not concerned with issues that relate to the agreement between the buyer and seller or for that matter the goods.

Payment vehicle

The documentary credit also manages the flow of money. This means that the buyer does not initiate the payment as he normally would. Rather, the banks that are part of the documentary credit transaction manage payment. Ultimately, the issuing bank draws the relevant amount from the account of the buyer. The payment under the documentary credit satisfies as payment for the underlying transaction.

Financing instrument

The documentary credit is a very suitable means of financing and can be structured in a number of ways. A frequent method is to have the documentary credit available for acceptance upon a complying presentation with payment at a later date. This means that the buyer receives the documents when they arrive but may postpone payment until, for example, 90 days after the goods are shipped.

2.3: The independence principle

One of the core principles of the documentary credit instrument is that it is an independent undertaking.

UCP 600 article 4 distinguishes the commercial contract/agreement from the documentary credit, and makes it clear that the only basis for determining whether or not a bank is obligated to pay under a documentary credit is the documents presented. If they “comply,” the bank must pay; if they do not comply, the bank has the option to refuse to pay.

Further there is the principle that the buyer cannot refuse to pay based on the condition/quality of the goods. The obligation of the issuing bank depends solely on the documents presented.

In addition to evaluating a presentation of documents, a bank examines only the documents as they appear. The bank will not look to other sources, nor look beyond the documents, e.g., to check if the goods are in fact shipped on the vessel mentioned on the bill of lading.

2.4: The parties to the documentary credit transaction

There may be many parties in a documentary credit transaction i.e.:

Advising bank means the bank that advises the credit at the request of the issuing bank. More information about the advising bank in Chapter 3 Advising bank.

Applicant means the party on whose request the credit is issued⁴.

Beneficiary means the party in whose favour a credit is issued.

Confirming bank means the bank that adds its confirmation to a credit upon the issuing bank’s authorization or request.

More information about the confirming bank in Chapter 10 Confirming bank.

Issuing bank means the bank that issues a credit at the request of an applicant or on its own behalf.

More information about the issuing bank in Chapter 19 Issuing bank.

Nominated bank means the bank with which the credit is available or any bank in the case of a credit available with any bank.

More information about the nominated bank in Chapter 2 Nominated bank.

Presenter means a beneficiary, bank or other party that makes a presentation.

The applicant is usually the buyer, and the beneficiary is usually the seller.

From reading the above it may seem as if there are many banks involved. This need not be the case. Usually there are only two banks:

Buyers bank – the issuing bank is the bank that issues the documentary credit.

Sellers bank – can assume various roles and responsibilities: It can be advising bank which advises the documentary credit to the seller, the nominated bank if it is “invited” under the documentary credit to honour or negotiate, and/or the confirming bank which assumes the obligation to honour or negotiate provided the seller makes a compliant presentation.

It is important that the seller identifies the roles and responsibilities of the banks that are part of the documentary credit transaction.

2.5: Standard for examination of documents

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Table of contents

• Table of Contents
• 1: Introduction
• 2: Documentary Credit Crash Course
• 3: Advising bank
• 4: Amendments to the documentary credit
• 5: Assignment of proceeds
• 6: Availability
• 7: Back-to-back credit
• 8: Charter Party Bill of Lading
• 9: Collection basis
• 10: Confirming bank
• 11: Court interventions
• 12: Documents lost in transit
• 13: Drafts – Bills of exchange
• 14: Examination of documents
• 15: Franchise or excess (deductible)
• 16: Fraud in Trade Finance
• 17: Freight forwarders
• 18: Green clause documentary credit
• 19: Issuing bank
• 20: Language of documents
• 21: Movements (LCL, FCL, CY and CFS)
• 22: Nominated bank
• 23: On board notations
• 24: Original documents and copies
• 25: Red clause documentary credit
• 26: Refusing a presentation under a documentary credit
• 27: Revolving credits
• 28: Shipment
• 29: Signing of transport documents
• 30: Silent confirmations
• 31: SWIFT transportation fields
• 32: Title of documents
• 33: Trade terms
• 34: Transferable credit
• 35: Transport document issued “or order” versus “straight”
• Copyright