Everything you need to know about Letters of Credit

The global benchmark for documentary credits expertise

Certificate for Documentary Credit Specialists (CDCS)

Trusted by over 30,000 trade finance professionals across 112 countries

CDCS sets the standard for excellence in the industry

Thisisajointlyproduced publicationbetweenthe BAFT(BankersAssociation forFinancingandTrade)and TradeFinanceGlobal(TFG)

THANKSTO

BAFTandTFGwouldliketoextend aspecialthankyoutoallauthors, editors,expertsandcontributors fortheproductionofthispublication.

AUTHORS

DaveMeynell PradeepTaneja

EDITORS

DeepeshPatel

ScottStevenson

EXPERTS

BAFTCommercial

LettersofCredit

WorkingGroup

CONTRIBUTORS

BrianCanup

CarterHoffman

LAYOUTDESIGN

NigelTeoh

TradeFinanceGlobalisthetradingname ofTFGPublishingLtd

Nopartofthispublicationmaybereproduced inwholeorpartwithoutpermissionfromthe publisher Theviewsexpressedhereinarethose ofTradeFinanceGlobalandBAFT Although BAFTandTFGhavemadeeveryefforttoensure theaccuracyofthispublication,neitherthey noranycontributorcanacceptanylegal responsibilitywhatsoeverfortheconsequences thatmayarisefromanyopinionsoradvice given Thispublicationisnotasubstituteforany professionaladviceanddoesnotsupersede theguidelinesoftheInternationalChamber ofCommerce(ICC)’sUniformCustomsand PracticeforDocumentaryCredits(UCP600)

Documentarycredits(LettersofCredit):

Whyuseadocumentarycredit: Riskmitigationandbenefits

Partiesinvolved

Ensuringcredit-compliant presentationsofdocuments

AUTHORS

DavidMeynell

Founder TradeLCAdvisory

DavidMeynellisthefounderofTradeLCAdvisory,anadvisoryand consultancyservice,andtheco-ownerofwwwtradefinancetraining, anonlinetrainingplatformforallaspectsoftradefinance

HepreviouslyworkedforDeutscheBankforover30yearsinanumber ofinternationallocations,culminatingasGlobalHeadTradeProduct ManagementforFinancialInstitutions.

DavidisSeniorTechnicalAdvisorfortheICCBankingCommissionandformer ChiefExaminerfortheLIBFCertificateinInternationalTradeFinance(CITF®)

PradeepTaneja

Founder ChairmanofICCBahrain TradeFinanceForum

PradeepTanejaisthefoundingmemberandChairmanofICC BahrainTradeFinanceForum,BoardmemberandCo-Chairman ofICCBahrain

PradeepretiredasGroupHeadofTradeTechnicalServiceswith BankABC,Bahrainandnowhashisownconsultingfirm,Taneja GlobalTradeConsultingWLL

EDITORS

DeepeshPatel EditorialDirector TradeFinanceGlobal(TFG)

DeepeshPatelisEditorialDirectoratTradeFinanceGlobal(TFG) Inthis role,DeepeshleadseffortsindevelopingTFG’sbrand,relationshipsand strategicdirectioninkeymarkets,includingtheUK,US,Singapore,Dubai andHongKong.

Deepeshregularlychairsandspeaksatinternationalindustryeventswith theWTO,BCR,Excred,TXF,TheEconomistandReuters,aswellasindustry associationsincludingICC,FCI,ITFA,ICISAandBAFT.

ScottStevenson SeniorVicePresident,Trade BAFT

ScottStevensonistheSeniorVicePresidentofTradeatBAFT Stevenson leadstheassociation’strade-focusedpolicy,practices,andeducation initiatives,andsupportsitstrade-relatedcouncilsandcommittees

PriortojoiningBAFT,StevensonwasasenioradvisorforAFCapitalPartners, whichprovidedexpertiseinemergingmarketstructuredandproject financefordevelopmentbankinginstitutions Fortwoyears,heconsulted developmentbanksandexportcreditagenciesfollowinga17-yearcareer attheInternationalFinanceCorporation(IFC)andWorldBankGroupin varioustradeandinvestmentprojectleadershiproles

DanielleAustin Member,CommercialLetters ofCreditCommittee,BAFT

Member,CommercialLetters ofCreditCommittee,BAFT

Member,CommercialLetters ofCreditCommittee,BAFT VicePresident,GoldmanSachs Manager-ExportTradeFinance Solutions,UmpquaBank

NormandGirard,CDCS Chair,CommercialLettersof CreditCommittee,BAFT Director-GlobalTrade Operations,BMO

GlennRansier

BrianCanup AssistantEditor TradeFinanceGlobal(TFG)

CONTRIBUTORS

CarterHoffman ResearchAssociate TradeFinanceGlobal(TFG)

BuddyBaker

LettersofCredit,theengine behindinternationaltrade FOREWORD

Intheever-evolvingworld ofglobaltrade,theroleof traditionaldocumentarytrade instrumentslikeLettersof Credit(LCs),alsoknownas DocumentaryCredits,becomes increasinglypivotal Aswe navigatethroughcomplex macroeconomicterrainsand geopoliticaluncertainties,LCs providetheindustrywith securityandtrustin internationaltransactions.

Interestratesremainhigh acrossmanyeconomies, accesstofinanceisbecoming moredifficultformany corporates,andmultiple conflictsareleadingtoarise inshippingcostsandsupply chainshortages

Morethan50countries, accountingforoverhalfof theworld’spopulation,will haveelectionsin2024.This geopoliticalvolatilitycould createsignificantproblemsfor theworldofinternationaltrade

Buttheworldhasundergone manychangesbeforeandone ofthemaintoolsusedfortrade duringtimesofturmoilhas been,andalwayswillbe,the LetterofCredit

Itisimportanttobreakdown suchavitalcomponentof internationaltrade,whichiswhy TradeFinanceGlobal(TFG)and BAFT(BankersAssociationfor FinanceandTrade)put togetherthisguidetotryto demystifyLCs.Wewantmore peopletoutilisethetooland continuetobreakdownthe barriersofinternationaltrade

Thecontinuedrelevance ofLCsishighlightedby theirincreasingadoption, asdocumentedbythe InternationalChamberof Commerce's(ICC)2023 TradeRegister.

Thisuptickinusageisnot merelyareflectionofgrowing tradevolumesbutalsoan

indicationofthetrustplaced inLCsbybusinessesseeking tonavigatetheuncertainties ofinternationalmarkets.

Thedatapointsmentionedby theICC’sTradeRegisterpoint toabroadertrendofreliance onformalisedtradefinance mechanismstosecure transactionsinalandscape markedbyfluctuating economicpoliciesand tradetensions

Thisguideiscraftedto provideacomprehensive understandingofLCs,from theirhistoricaloriginstotheir modern-dayapplication. Itaimstodemystifythe technicalitiesofLCs,offering insightsintotheiroperational framework,legalunderpinnings, andpracticalusageintrade finance.

Whetheryouareaseasoned financeprofessionalornew totradefinance,TFGandBAFT

hopethatthisguidewillhelp younavigatetheinternational tradeworld.

TFGandBAFTarethrilledto launchthisLCguideatthe BAFT2024InternationalTrade andPaymentsConference inWashingtonD.C.Wewant tothankDavidMeynelland PradeepTanejafortheirhelpin writingthisguide,andtheBAFT LetterofCreditCommitteefor providingtheirexpertiseand guidanceduringtheprocess

SCOTTSTEVENSON SeniorVicePresident,Trade BAFT

DEEPESHPATEL EditorialDirector TradeFinanceGlobal(TFG)

Documentarycredits(LettersofCredit): definitionandpurpose

Definition

Documentarycredits arepaymentinstruments thatconstituteadefinite undertakingoftheissuer (“theissuingbank”)on theinstructionofthebuyer (“applicant”)topayacertain specifiedamounttoaseller (“thebeneficiary”)atsightor onafuturedeterminabledate (“thematuritydate”)provided thatdocumentsstipulatedin thedocumentarycreditare presentedincompliance withthestatedtermsand conditions

Theissuingbankissuesthe documentarycreditonbehalf ofitscustomer(“theapplicant”) oronitsownbehalf.

Theseundertakingsareknown as“documentarycredits”,as theyspecifythedocuments thatmustbepresentedinorder forthecredittobehonoured.

Thesearealsoknownas“letters ofcredit”(LCs)astheywere originallyissuedinaphysical documentformaddressedto thebeneficiarywiththeissuing bank’sundertakingtopayupon receiptofcomplying documents.

Thereareseveralcriticalfeatures ofdocumentarycredits:

Irrevocability:documentarycreditsconstituteanirrevocable undertakingoftheissuertopay,meaningthat,onceissued, thecreditcannotberevokedorchangedbytheissuingbank. Acreditcanonlybeamendedorcancelledwiththeconsent oftheissuingbank,thebeneficiary,andtheconfirmingbank (ifany).

Documentarynature:documentarycreditsaredocumentary innatureandanypaymentundertakingscontainedinthem areconditionaluponreceiptofdocumentsasstatedinthe termsandconditionsofthecredit.

Compliance:documentarycreditsaresettledonlywhenthe documentspresentedbyoronbehalfofthebeneficiary complywiththetermsandconditionsofthedocumentary credit.Therefore,toobtainpaymentunderadocumentary credit,thebeneficiarymustpresentdocumentswhichcomply witheachcredit’sterms&conditions Ifthedocuments containeddonotcomply(alsoknownasdiscrepancies),an issuingbankmayrefusetohonourandisonlyobligatedtopay ifthenon-complyingdocumentsarecorrectedandmade compliantbeforethecreditexpires,oriftheapplicantwaives thediscrepanciesandtheissuingbankalsoagrees towaiveanydiscrepancy(ies)

Paymentmechanism:documentarycreditsconstitute apaymentmechanismdesignedtofacilitatethesettlement ofanunderlyingtradetransactionwherebytheapplicant (thebuyer)receivesthegoodsorservices,andthebeneficiary (theseller)obtainspaymentviathecreditwhichwould thensatisfytheapplicant’spaymentobligationsagainstthe underlyingsalesorothercontractonwhichitmaybebased

Independenceandautonomy:documentarycreditsconstitute anindependentundertakingoftheissuingbankandthe confirmingbank(ifany)separatefromtheunderlyingsale orothercontractonwhichitmaybebased.Theprincipleof autonomyisarticulatedwithintheICCUniformCustomsand PracticeforDocumentaryCredits2007Revision(“UCP600”) andisupheldthroughouttheworld.

DocumentaryCredits–Process

Thepurposeofadocumentarycreditistoprovidea mechanismorarrangement tofacilitatethesettlementof aninternationalordomestic tradetransactionbyuseof abankundertaking

Itshouldbenotedthatbanks onlydealwithdocuments andnotwithgoods,services orperformancetowhich thedocumentsmayrelate

Thetermsandconditionsof adocumentarycreditformthe basisuponwhichtheapplicant mustreimburseanissuingbank

whenacomplyingpresentation ismade.

Documentarycreditsassurethe beneficiaryofpaymentaslong astheypresenttherequisite complyingdocumentstothe nominatedbank,theconfirming bank(ifany),ortheissuing bank

2 Whyuseadocumentarycredit: Riskmitigationandbenefits Riskmitigation

Internationaltradetransactions ofteninvolvebuyersandsellers residingincountrieswith differentlegalsystems, currencies,marketpractices, customs,trade,andexchange controlregulations

Buyerscanfacechallenges inevaluatingthecredibilityof foreignsuppliersandhaveto beartherisksassociatedwith thesellerfailingtofulfilits contractualobligations This canincludenon-deliveryor delayeddeliveryofthegoods orgoodsthatdonotmeetthe qualitystandardsagreedupon inthecontract.

Giventhechallengeof remedyingtheseissuesina foreignandunfamiliarlegal system,buyersnaturallyprefer tocommittomakingpayment onlyafterreceivingthegoods totheirsatisfaction.

Likewise,sellersmustbearthe riskofnon-paymentand,ifthat occurs,wouldneedtotake legalactionagainstthebuyer inthebuyer’scountry.This meansthatsellersnaturally prefertoreceivepayment beforemakingashipment

Thisdynamic,wherebuyers onlywanttopayafterdelivery, butsellerswanttoreceive paymentbeforeshipping, createsanimbalanceinthe system

Documentarycreditsprovide amechanismtoaddressand helpresolvetheseconflicting interests.

UCP600andInternational StandardBankingPractice (ISBP)publication821govern documentarycreditsand providetherulesandpractice fortheexaminationof documents.

Assuch,whentraders dealunderthetermsof adocumentarycredit,there isareducedlikelihood ofmisunderstandingor misinterpretation,which helpstominimisetherisk ofunforeseendisputes

Toavailuponthebenefit Rofthedocumentarycredit mechanism,itisvitalforthe

beneficiarytoclearlystate thetermsandconditionsofthe documentarycredit,including whichdocumentsareneeded andwhichpartyshouldissue them

Likewise,thebeneficiary mustsubmitthedocuments stipulatedinthedocumentary credit’stermsandconditions.

Benefits

Thebenefitsofdocumentary creditsdifferdependingon whichsideofthetransaction apartyfindsthemselveson. Forthebuyerinaninternational transaction(ie,theapplicant), theprimarybenefitsare assurancethat:

Thecreditisindependent ofthesalescontract andininstanceswherea presentationcomplieswith thecredit,theissuingbank isobligatedtopay Inthe eventtheydonotpay,for whateverreason,theseller canstillrelyonthesales contractfromitsbuyer.

Adocumentarycredit cannotbecancelled oramendedwithout beneficiaryagreement sinceadocumentary creditis,bydefinition, irrevocable

Thesellerwillsubmitthe documentsrequiredbythe creditwhichshouldallow forcustomsclearance needs

Theissuingbankwill examinethesubmitted documentsforcompliance withthetermsand conditionsofthecredit beforepaymentismade

Forthesellerinan internationaltransaction (i.e.,thebeneficiary), theprimarybenefitsofa documentarycreditarethat:

Inmostcases,theywillonly needtomakepayment aftertheshipmenthas beenmade. Theriskofpaymentunder thesalescontractshifts fromthebuyertothe issuingbank(whichmay haveacreditratingwhich exceedstheapplicant’s).

Theissuing,confirming ornominatedbankwhich agreedtoactuponits nomination,ifthereisone, willmakepaymentupon presentationtothemof complyingdocuments.

Thereisthepossibility offurtherrecoursetoa confirmingbank.(Thisis usefulifthesellerhas concernsregardingthe political,orlegallandscape forthebuyer’scountryor thecreditratingofthe issuingbank).

Partiesinvolved

Severaldistinctentitiescan bepartiestoadocumentary credit.Somemustbepresent, whileothersareoptionaland onlyaddedtomeetcertain goalsorrequirementsforthe specificinteraction.This chapterhighlightsthepossible partiesindocumentarycredits.

Theapplicant

Theapplicantisusually thebuyerofthegoodswho requests(orappliesto) theissuingbanktoissue adocumentarycrediton itsbehalf.

Initsapplication,theapplicant detailsthedocumentsrequired underthedocumentarycredit alongwithapplicableterms andconditions Eventhough theapplicantinitiatesthe request,itisnotapartyto thedocumentarycreditsince acreditisabankundertaking.

Theissuingbankissuesthe documentarycreditasper theapplicant’srequest Theissuingbank

Theissuingbankirrevocably undertakestopaythe beneficiaryuponreceiptof thenecessarydocumentsas determinedbythetermsand conditionsofthedocumentary credit.

Thebeneficiaryisthepartyin whosefavourthedocumentary creditisissued Itisgenerally thesellerinaninternational tradetransaction

1stBeneficiary

Theconfirmingbank

Aconfirmingbankcanprovide anirrevocableundertakinginadditiontothatofthe issuingbank-tohonour thedocumentarycredit

Thenominatedbank

Theadvisingbank

Thismeansthatitagrees topayatsight,ortoincura deferredpaymentundertaking, ortoacceptabillofexchange (dependingontheavailability ofthecredit)onreceiptof compliantdocumentsas stipulatedinthedocumentary credit’stermsandconditions. Anadvisingbankreceivesthe documentarycreditfromthe issuingbankandadvisesthe beneficiaryonestablishingits authenticity

Byadvisingthedocumentary credit,theadvisingbankverifies thatthedocumentarycredit isauthenticandprovides assurancethattheadvice accuratelyreflectstheterms andconditionsofthe documentarycreditas received.Unlesstheadvising bankhasconfirmedthe documentarycredit,it assumesnofurtherliability orresponsibility

Theissuingbankcan authoriseanotherbank,called thenominatedbank,topay apresenteratsight,toaccept abillofexchange,orto incuradeferredpayment undertakingtopayat maturity

Nominationbytheissuingbank onlyimposesobligationson thenominatedbankifithas confirmedthedocumentary creditorexpresslyagreed andcommunicatedtothe beneficiarythatitwillacton itsnomination.

Thereimbursingbank

Thereimbursingbankis anotherparty-usuallythe issuingbank’scorrespondent bank,withwhichtheissuing bankmaintainsanaccount inthecurrencyofthe documentarycredit.

Thedocumentarycreditwill stipulatethenameofthe reimbursingbankonwhich thenominatedbankorthe confirmingbank(thenknown as“claimingbank”)should makeareimbursementclaim.

Theissuingbankauthorisesthe reimbursingbanktohonour areimbursementclaimfrom theclaimingbank.

Thereimbursement authorisationisoftensubject totheICCUniformRulesfor Bank-to-BankReimbursements underDocumentaryCredits (URR725).Ifnotsoindicated inthecredit,reimbursement issubjecttoUCP600article13 (Bank-to-BankReimbursement Arrangements)

Insomecases,thebeneficiary isanintermediarytraderthat sourcesthegoodsfromanother supplierandmayrequestits buyertoarrangeatransferable documentarycredit.Theissuing bankwouldthennominatea transferringbanktotransfer thedocumentarycredit.

Thebeneficiary(“first beneficiary”)willrequestthe transferringbanktotransferthe documentarycreditinwhole orinparttoitsownsupplier (i.e.,“secondbeneficiary”).

Foratransfertooccur,the documentarycreditmust explicitlystatethatitis transferable.

Thetransferringbank

4 Typesofcredit

Thereareseveraltypesof documentarycredits,each withitsowncharacteristics.

Sightcredits

Withsightcredits,the nominatedbank(actingon itsnomination),theconfirming bank,ortheissuingbankeffects paymentuponpresentationof thedocuments(alsocalled“at sight”),provideddocuments complywiththetermsand conditionsofthedocumentary credit.

Usancecredits Mixedpayment credits

Underusancecredits,the issuingbankundertakes tohonouracompliant presentationatafuturedate (knownasthe“maturitydate”) Therearetwotypesofusance credits:

Acceptancecredits: Adocumentary creditstipulatingthe presentationofabillof exchange(“draft”)which thebankwillacceptand payatmaturitytothe beneficiary

Deferredpaymentcredits: Sameasacceptance credits,exceptthatthey donotrequirethe presentationofadraft 1 2

Practitionersusemixed paymentcreditswhenapartial amountispayableatsight whiletheremainderispayable atafuturedate(ordates)as perthedocumentarycredit terms

Sincethesecreditscomprisea mixofsightandusancecredits, theyareknownasmixed paymentcredits.

Negotiationcredits

Anegotiationcreditisthe purchasebythenominated bankofdrafts(drawnona bankotherthanthenominated bank)and/ordocumentsunder

acomplyingpresentation, byadvancingoragreeing toadvancefundstothe beneficiaryonorbefore thebankingdayonwhich reimbursementisdueto thenominatedbank

Confirmedcredits

Confirmedcreditsarethose thatalsobeartheconfirming bank’sirrevocableundertaking (inadditiontothatofthe issuingbank)tohonouror negotiate,withoutrecourse, documentscomplyingwiththe termsandconditionsofthe credit

Transferablecredits

Ifthebeneficiary(ie,the“first beneficiary”)ofadocumentary creditisanintermediarytrader thatprocuresthegoodsfrom anothersource,theymay requestthebuyertoprovide atransferablecredit,which thefirstbeneficiarycanthen transfertoitssupplier(ie, the“secondbeneficiary”) Atransferabledocumentary creditmustexpresslystatethat itistransferableandprovide thenameofthenominated bankorthebankauthorised totransfer

Totransferthecredit,thefirst beneficiarywillrequestthatthe nominatedorauthorisedbank transferthedocumentarycredit tothesecondbeneficiaryin wholeorinpart

Thefirstbeneficiarycanrequest transfertomultiplesecond beneficiaries,providedthe documentarycreditallowsfor partialshipments However, thesecondbeneficiarycannot transferthedocumentarycredit toanothersubsequent beneficiary.

UnderUCP600,thetransfer mustbeeffectedontheexisting termsandconditionsexcept fortheamount,theunitprice ifgiven,theexpirydate,and thelatestdateofshipment orperiodforpresentation, allofwhichcanbereduced. Furthermore,thenameof thefirstbeneficiarycanbe substitutedwiththeapplicant's

Ifthedocumentarycredit requiresthepresentationof aninsurancedocument,the amountorthepercentage ofinsurancecanbeincreased toprovidecoverasinitially requiredunderthe documentarycredit.

Thefirstbeneficiaryhasthe righttoprovideitsinvoicein substitutionofthesecond beneficiary’sinvoiceanddraw forthedifferenceinamount, ifany.However,ifitfails toprovideitsinvoice,the transferringbankcanforward documentsreceivedfromthe secondbeneficiarytothe issuingbank

Back-to-backcredits

Back-to-backdocumentary creditsservethesamepurpose astransferablecredits.

However,insteadoftransferring theoriginaldocumentarycredit toitssupplier,thebeneficiary requeststhatitsbankissuea newoneinfavourofitssupplier. Practitionerscallthesebackto-backcredits,asbanksissue themonthebackofanoriginal documentarycredit

Aback-to-backcreditis separateandindependent fromtheoriginaldocumentary credit.Whiletheissuingbankof theback-to-backdocumentary creditmusthonouracomplying presentationreceivedunder itsdocumentarycredit,the paymentundertheoriginalis contingentontheabilityofthe beneficiaryoftheoriginal documentarycredittoprovide documentsincompliancewith thetermsandconditions

Instalmentcredits

Instalmentcreditsstipulatea shipmentschedulewithspecific quantitiesordatesbywhichthe goodswillbeshipped.

Auniquefeatureofthese creditsisthatifoneinstalment isnotshippedwithinthe stipulatedperiod,theentire creditisnolongeravailablefor anysubsequentinstalments (notjustforthatspecific instalment)

Revolvingcredits

Whenbuyersplacerepeat orderswiththesamesellersfor thesamegoodsatthesame priceandwiththesameterms andconditions,insteadof issuinganewcrediteverytime, theycanagreewiththeir supplierstoissuerevolving credits

Thesecreditsare'revolved’eitherautomaticallyorthrough anoticeofreinstatementfrom

theissuingbank-underthe termsandconditionsofthe existingdrawing.

Thepartiescanagreeto stipulatethenumberoftimes, themaximumamount,orthe latestdateuptowhicha revolvingcreditwill automaticallybereinstated.

Advancepayment credits

Typically,documentary creditsprovidepaymentsto thebeneficiaryatthepostshipmentstageupon presentationofdocuments complyingwiththetermsand conditions However,itis possibletoprovideadvance paymenttothebeneficiaryat thepre-shipmentstagein anticipationofthebeneficiary presentingdocumentsafter shippingthegoods

Toaccomplishthis,thecredit allowsthebeneficiarytodraw foruptoaspecifiedamount bysimplypresentingareceipt. Theamountofanyadvance paymentmustthenbe deductedfrominvoice amountsasgoodsare shipped.

Financierscanprovidepreshipmentfinancethroughtwo typesofadvancepayment credits:

1

Redclause documentarycredits: Thesecreditscontain aclauseauthorisingthe nominatedbanktoextend anadvancepaymentto thebeneficiary. Thebank canreleaseasetvalueat thepre-shipmentstage tohelpthebeneficiary procuretherawmaterial, process,manufacture, pack,andexportthe goods.Theadvance

2

paymentissettledlaterby thesubmissionofcreditcompliantdocumentsby thebeneficiarycovering therelevantshipmentof goods

Bankshistoricallytyped thisclauseinredinkwhen creditswereissuedin letterform.

Greenclause documentarycredits: Thesecreditsaresimilar toredclausedocumentary credits.However,in additiontoextending advancepaymentto thebeneficiaryatthe pre-shipmentstage,green clausedocumentary creditsalsoinclude additionalcoverageof pre-shipmentwarehousing andinsurancecosts.

Standbylettersof credit

Standbylettersofcredit(SBLCs) areusedforavarietyof purposes,suchastosupportan applicant’sperformance obligations(performance standby),tosupportan applicant’sbidinatender(bidbondstandby),toguaranteean applicant’sfinancialobligations tothebeneficiary,whichcan alsobeabank(financial standby),ortoguaranteethe performanceofacommercial contract(advancepayment guarantee)

PractitionersalsouseSBLCs tosupportopenaccount transactionswhereaseller shipsthegoodsdirectlyto thebuyer,andthebuyeris expectedtomakethepayment directlytotheseller Ifthebuyer failstopaywhendue,the beneficiarycandrawonthe SBLC.

Generally,standbycreditsare notexpectedtobedrawnon, hencethename SBLCsareakin toguaranteessince,inthecase oftheapplicant’sdefaultor non-fulfilmentofitscontractual obligations,thebeneficiaryof anSBLCcandrawunderthe SBLCbyclaimingontheissuing bankortheconfirmingbankas perthetermsandconditionsof theSBLC

Typically,thebeneficiary’s claimmustbesupportedby documentssuchasits statementconfirmingthe applicant’sdefault,copiesof unpaidinvoices,orcopiesof transportdocumentsas requiredintheSBLC.

Althoughmanydocumentary creditsareoftenissuedsubject toUCP600,UCP600haslimited applicabilitytoSBLCsasnot allarticlesofUCP600apply toSBLCs.TheInternational StandbyPracticesof1998 (“ISP98”)(ICCpublicationno 590)providesaseparateand exclusivesetofrulesgoverning SBLCsissuedsubjecttoISP98

5 Rules,practice,andlaw

Issuingadocumentarycreditis notalwaysasimpleformalityor anactthatcanbecompleted inastandardorrecurring manner Itoftenrequires attentiontodetailbythe corporatepartiesand,more importantly,tocontainprecise wordingwithasingle interpretation.

Documentarycreditsare transactionsprepared accordingtothespecific requirementsnotifiedbyan applicant,andsuchprovisions shouldnotberestrictedtothe nameofadocumentbutalso extendtothedatacontentfor thatdocumentand,where appropriate,thenameofan issuer

Anapplicantshouldensure thattheinstructionsitprovides toitsbankforissuingany documentarycreditmeetthe requirementsforspecifying theappropriatedocumentary obligations Thiswillenable thesmoothimportationofthe goodsandprovideasuitable levelofassuranceregarding thequality,standardandtype ofgoodspurchased

Thecontentofthesales contract,proformainvoice,or purchaseorderagreedwith thesellershould,where appropriate,adheretothese instructions However,banks willdiscourageanyattempt bytheapplicanttoinclude,as anintegralpartofthecredit,

copiesoftheunderlying contract,proformainvoice, orthelike.Mostdocumentary creditapplicationforms incorporateachoiceofthe maintypesofdocumentsunder thetermsandconditions For example,theyofteninclude invoices,transportdocuments, insurancedocuments,packing lists,andweightlists.

Applicantsarestrongly encouragedtoprovidethe nameofanentityrequiredto issueeachdocumentandits datacontent.

ThecontentoftheUCP600 comprises:

Framework

Structureofandobligations underdocumentarycredits

Pre-advice,nomination, reimbursement,standard forexaminationof documents,discrepant documents,waiverand notice,originals,andInvoice

Transportdocuments

Insurancedocuments

TheUCP600doesnotindicate whichdocumentsorunder whatcircumstancesparties mustpresentunder adocumentarycredit

Thesedecisionsarelefttothe applicantandbeneficiaryto determine However,anissuing bankmayinsistoncertain documentsbeingpresented fromalocalregulatory perspectiveorduetoits internalpolicy

ISBP821

ICCrulesincludetheUniform CustomsandPracticefor DocumentaryCredits, introducedtoalleviate disparitiesbetweennational lawsondocumentarycredit practice TheICCpublishedthe currentversion,UCP600,in 2007.TheICCdonotrequire banksorcountriestoindicate adherencetoanysetofrulesas allICCrules,includingUCP600, arebasedontheprinciplethat theywillapplyifthecreditis statedtobesubjecttothem UCP600

Extension,tolerance,partial drawingorshipment, instalments,disclaimers, andforcemajeure

Overtheyears,theICCBanking Commissionhasbecomea leadingglobalrule-making bodyforthebankingindustry, producinguniversallyaccepted rulesandguidelinesfor internationalbankingpractice

Transferablecreditsand assignmentofproceeds

TheInternationalStandard BankingPracticeforthe ExaminationofDocuments underDocumentaryCredits (ISBP821)reflectstheexisting practice.Ithasevolvedinto

ISBP821

TheInternationalStandard BankingPracticeforthe ExaminationofDocuments underDocumentaryCredits (ISBP821)reflectstheexisting practice Ithasevolvedinto anecessarycompanion totheUCPfordetermining complianceofdocuments withthetermsofdocumentary credits

Itisimportanttonotethat theISBPdoesnotamendthe UCP600.Instead,itexplains howdocumentarycredit practitionersapplypractices expressedintheUCP600 TheISBPandtheUCPshould

bereadinconjunction, notinisolation.

IncorporatingtheISBPinto thetermsofadocumentary creditisinappropriate,asthe requirementtofollowagreed practicesisalreadyimplicit withinUCP600.

Appliedcorrectly,theISBPhelps reducethelargepercentage ofdocumentsrefusedfor discrepanciesonthefirst presentationtoabank.

TheISBPpublicationoutlines standardpracticegloballyand encompassesanintelligent checklistofproceduresfor documentcheckerstoexamine documentspresentedunder

documentarycredits.Theintent istoexplainhowpractices articulatedinUCP600are appliedbydocumentarycredit practitioners,thusproviding aframeworkunderwhicha beneficiarymayprepareits documentstoastandardthat canbeacceptedglobally.

ThecontentoftheISBP821 comprises:

Preliminaryconsiderations

Generalprinciples

Draftsandcalculation ofmaturitydate Invoices

Transportdocument coveringatleasttwo differentmodesoftransport (multimodalorcombined transportdocument)

Billoflading

Non-negotiableseawaybill

Charterpartybilloflading

Airtransportdocument

Road,rail,orinland waterwaytransport documents

Insurancedocumentsand coverage

Certificateoforigin

Packinglist,note,orslip (packinglist)

WeightList,note,orslip (weightlist)

Beneficiary’scertificate

Analysis,inspection,health, phytosanitary,quantity, quality,andother certificates(certificate)

Undermostdocumentary credits,thecorporateparties involvedaredomiciledin differentcountries Forthis reason,documentarycredits subjecttotheUCP600donot

statewhichparticular jurisdictionwouldapplyinthe eventofanyissuesordisputes

However,consideringthat mostdocumentarycreditsare issuedsubjecttotheUCP600, auniformapproachisalready inplace.Thisdramatically reducesanyvariancescaused bydivergentnationallaws

6 Financialcrime,fraud, andsanctions

Bymakingavailabletotheir clientsanarrayoftradefinance productsdesignedtofacilitate internationaltrade,bankshave becomeaccustomedtothe needforpracticaltoolsand processesthatmanageand mitigateoperationaland documentaryrisk.Fraudand, tovaryingdegrees,sanction regulationshavealsorequired closemonitoringwiththe inherentcreationofspecific practices,processes,and technologicalaids.

Recently,financialcrimehas takencentrestagetothe extentofanincreased andcollaborativefocuson combatingtheissue.Itcan significantlynegativelyimpact individuals,companies,andthe economyofcountries.

Fraudis,andalwayswillbe, apotentialriskintradefinance transactions However,whileit iscrucialtoidentifyfraudulent transactions,theyimpactonly atinypercentageofglobal tradefinancevolumes

TheICCFinancialCrimeRisk andPolicyGroupdescribes financialcrimeaslaundering money,financingterrorismand providingweaponsfor prohibiteduses,breaking sanctions,financialfraud, financialcrimessuchastax evasion,andotherpredicative offencesrelatedtotrade productsandotherfinancial services.

Manyinternationalbodieshave beenestablishedtocombat suchcrime,withpartoftheir focusonprovidingtoolsto helppreventandidentify suspecttransactions.Onan organisationallevel,thereare severalthingsthatfirmscando tohelpmitigatetheirexposure tofinancialcrimeandthe resultingimplications.

Allcompaniesshouldmaintain internalguidelinesadvising staffonthecompliance requirementsforhandling tradefinancetransactions

Akeyelementshouldbe identifyingandhandling transactionscoveringdual-use goods,whicharegoodsthat canbeusedforbothcivil andmilitarypurposes

Operationsdepartments arenotgenerallyrequired toinvestigatecommercial transactionsthatfalloutside theirscopeofbusinessor thetypeoftransactionbeing handled However,theyshould beawareofthebusinessof theircounterpartiesand usualtradingpatterns

Anorganisationcan occasionallyfinditselfina situationwithpotentiallegal implicationsandcostsandthe riskofirreparabledamageto itsreputation Reputational riskcanoftenhavefarmore significantconsequencesthan theimpositionofanyfinancial penalty

Fraud

Fraudulenttradetransactions haveoccurredsincetrading beganthousandsofyearsago Buyersandsellersmustknow thepotentialforfraudand havesafeguardsbuiltintotheir processesandprocedures. Thereisasayingthatall stakeholdersshouldconsider: “Ifitsoundstoogoodtobe true,itusuallyis”

LordDiplock(1907-1985), anEnglishjudge,referredto fraudinadocumentarycredit transactionas:“Documents thatcontain,expresslyor byimplication,material representationsoffactthat to[theissuer's]knowledge areuntrue.”

Aswithfinancialcrime, companiesmustadopt processes,proceduresand guidelinesforidentifying, escalating,andreporting fraudulenttransactionsto minimisepotentialfinancial loss.

Fortunately,fraudonlyimpacts atinyfractionoftradefinance transactionsduetothe safeguardsandriskmitigants inherentinICCrules,provided theyareusedandcomplied with.

Herearesomeexamplesof commonfraud-related scenarios:

Abuyerbelievesthatthe sellerhascommittedfraud andseekstopreventabank fromeffectingpaymentby obtainingacourtinjunction.

Fraudbasedoneither non-existentorpoor-quality goodsorfalsifyingoneor moredocumentswithin apresentationunder adocumentarycredit, standbycredit,or guarantee

Abankrefusestopay thebeneficiarybasedon allegedorprovenfraud.

Abankhaseffected payment,andarefund ofthepaymentisrequired duetofraud.

Fraudulentlyissuedbank undertakingssuchas documentarycredits, standbycredits,and guarantees.

Sanctions

Asanctionisameasure adoptedagainstacountry, regime,orindividualthat officialsbelieveisviolating internationallaw Sanctions arealsopoliticaltrade restrictionstomaintainor restoreinternationalpeace andsecurity

Sanctionsconcerningtrade financearefinancialortrade controlsthatcanbe(andare) imposedforpoliticalor economicreasonsbythe UnitedNations,theOfficeof ForeignAssetsControl(OFAC) intheUSA,theEuropeanUnion (EU)Council,andindividual countries

Themainobjectiveofa sanctionvariesaccordingto theapplicablecircumstances

Forexample,anarmsembargo andabanontheexportof certainitemsorrawmaterials couldbeaimedatsupporting apeaceprocessandrestricting thefinancingofweaponsby combatants Sanctionsarealso commonlyaimedatpreventing weaponsfromfallingintothe wronghands.

Severalotherexamplesof objectivesthatsanctionsmay seektoachieveare:

Achangeintheconductof aparticularcountry,regime, company,orindividual.

Placingpressureona country,regime,company, orindividualtocomplywith setobjectives

Asapunitivemeasurewhen peaceandsecurityare threatened.

Deterring,preventing, andsuppressingterrorist financingandterroristacts

Failuretocomplywithsanction regulationscanbeextremely costly,notonlyintermsofa monetaryfinebutalsodamage thereputationoftheconcerned parties

ICCBanking Commission

TheICCBankingCommission issuedaguidancepaperon usingsanctionsclausesin documentarycreditsin2010, updatedin2014 Thepaper dealswiththeuseofclauses concerningtrade,economic orfinancialsanctions,or embargoesintradefinance instruments(documentary andstandbylettersofcredit,

demandguarantees,and counter-guarantees)thatare subjecttotherulesdraftedby theICCBankingCommission.

Theissueofsanctions applyingtodocumentarycredit transactionshassurfaced severaltimes.Asstatedinthe paper,sanctionclauseshave becomeproblematicbecause theyleadtouncertaintyabout theirapplicationandcould defeattheindependent natureofsuchinstruments

ThepurposeoftheICC’s guidancepaperwasto highlightthisissueand recommendbestpractices inthatrespect

Owingtoaresurgencein usingsanctionsclausesin documentarycredits,theICC addressedthisissueagainand releasedanaddendumtothe guidancepaperinMay2020

Thekeymessagesinthis addendumarethat:

Sanctionsclausesshould notbeusedroutinely.

Anyclauseshouldbe draftedinclearterms accordingtothesample clause. 1

TheICCre-statesthe recommendationthat sanctionsclausesshould notbeusedundernormal circumstances.However,if oneistobeused,thensuch aclauseshouldbedraftedin

clearterms,restrictively,to limitthereferenceonlyto mandatorylawapplicableto thebank,accordingtothe followingsampleclause: “[notwithstandinganything tothecontraryinthe applicableICCRulesorinthis undertaking,]wedisclaim

liabilityfordelay,non-return ofdocuments,non-payment, orotheractionorinaction compelledbyrestrictive measures,counter-measures orsanctionslawsorregulations mandatorilyapplicabletousor to[ourcorrespondentbanksin] therelevanttransaction”

Ensuringcredit-compliant presentationsofdocuments

Tradedocumentshaveexisted sincethedawnofthewritten word,andarchaeologistshave recovered‘documents’inthe formofclaytabletsthatdate backmanythousandsofyears Withoutdocuments,thereisno documentarycredit,meaning thatasellerdoesnotgetpaid, andabuyerdoesnotgetits goods.

Allpartiesinvolvedinthetrade cycleneeddocumentation, albeitwithdiffering requirements,andeachtype ofdocumentservesadifferent purpose.

Therearemanydocument types,anditisessentialto understandtheintentofthe documentsrequiredunder adocumentarycredit.Most countrieshaveaminimum requirementforimportand exportdocumentation,and manyhavenumerousspecific anduniquerequirements Still, practitionersshouldbeaware ofandaccountfortheseinthe termsandconditionsofthe documentarycredit.

Poorlyprepareddocuments canseverelyimpacta transaction,leading(atbest) todelaysinsettlement.Global statisticsdiffer,butthe percentageofdocuments refusedbybanksonthefirst presentationrangesbetween 65%and80%

Discrepancies

Whilesomeofthemore commondiscrepanciesare duetotimingissues(expiry, shipment,andpresentation period),quiteafewderivefrom poorlyprepareddocuments orpresentations.Thesecan includeconflictingdata betweendocuments,missing documents,unauthenticated alterations,missing endorsements,goods descriptionsnotaccording tothedocumentarycredit, insurancedocumentsdated laterthanthetransport document,andmissingor incorrectshipped-on-board notations.

Asaresultofdiscrepanciesin apresentation,practitioners incuradditionalcostsbyway ofdiscrepancyfees(from thenominatedbankor issuingbank),expensesfor communicationssent,lost interest,andincreased administrativecosts.These willallleadtoareducedprofit marginonthetransaction Discrepancyfees,forexample, canbeexpensiveandoften rangefromtheequivalent ofUSD25toUSD500per presentation.

perceivedfinancialriskof theissuingbankorapplicant

Althoughanapplicantmay agreetoissueawaiverfor anydiscrepanciesfoundina presentation,theissuingbank isnotobligatedtoacceptit Theissuingbankmay continuetorefusetohonourthe presentationandwillbeentitled tosubsequentlyreturnthe documents.

Refusalscanleadtobanks makingnopaymentinsome transactions Thiscanbedue toaconfirmingbankorissuing bankrefusingtohonour ornegotiateowingtothe

Someapplicantswilluse discrepanciesinapresentation to'negotiate'adiscountwith therespectivebeneficiary inreturnfortheapplicant agreeingtoissueitswaiver.

Preparation ofdocuments

Abeneficiarymayissueany documentexceptwhere:

a) therulesstateotherwise,

b) thedocumentarycredit specifiesthenameofthe issuer,or

c) thedocumentarycredit referstothetypeofissueras anindependent,competent, qualified,orlocalcompany UCP600interpretsthisas anyissuerexceptthe beneficiary

Beneficiariescanavoid discrepanciesinpresentation bypayingmoreattention todetailandreducing unnecessarydatainthe documents Thisisachievedby carefullyconsideringwhetherto includeadditionalorredundant informationonadocumentand avoidinganythingthatcould callintodoubtthecompliance ofadocument Only incorporatingdatarequiredby thetermsandconditionsofthe documentarycreditortheICC ruleswillsignificantlyincrease thelikelihoodofapresentation beingfoundcompliant.

Ifinanydoubtastothe requirementsforthe completionofanydocument, alwayscontactthenominated bankandseektheirguidance. Fordocumentsnotissuedby thebeneficiary,providethe

relevantfreightforwarder, carrier(oritsagent),or insurancecompanywithacopy ofthedocumentarycreditto ensuretheycancomplywithits instructions Thisshouldhappen beforetheshipmentofthe goods.

Ifthereareanyissues,seekan amendmentfromtheapplicant andrefrainfromrelyingontheir statingthattheamendmentwill followorpresentingdocuments onthebasisthattheywill authorisesettlementdespite anydiscrepancy.Ifdocuments arediscrepant,thereisno undertakingfromtheissuing bankoranyconfirmingbank

ICCrules

Evenbeforecommencing thepreparationprocess,a beneficiaryshouldunderstand therules Inparticular,they shouldbeawareofand understandtheimplications ofthecontentofUCP600. Itisalsorecommended thatbeneficiarieshavean understandingofISBP821

Thefactthatthisaddressesthe examinationstagewillprovide theopportunitytounderstand theissuesthatbankdocument examinerswillfocuson

ISBP821additionallymakesit clearthatthepreparationof documentsshouldstartearly inthechain.Beforeissuing thedocumentarycredit,the

beneficiaryandtheapplicant shouldcarefullyconsider thedocumentsrequiredfor presentation,bywhomtheyare tobeissued,theirdatacontent, andthetimeframeinwhich theywillbepresented.

Asanexampleofthecontent ofISBP,thepublicationincludes referencestomisspellingsand typingerrors Thesecancause allsortsofproblemsand,ina worst-casescenario,willlead toarefusalofdocuments. However,notallmisspellings andtypingerrorsmakea documentdiscrepantiftheydo notaffectthemeaningorintent ofawordorsentence

Creatingachecklistthat providesguidelinesonthe basicrequirementsforthe morecommondocuments isworthwhiletoensure compliancewiththetermsand conditionsofadocumentary credit.Whileanall-inclusive checklistcoveringevery possibledocumentary requirementisnotfeasible, providingagenericone coveringthetypicaldocuments underadocumentarycredit andthestandardinformation withineachdocumentis possible.

Staffpreparingdocuments shouldstillthoroughlyreview thembeforetheirpresentation underthedocumentarycredit.

Handlingdocument discrepancies

Whenfirmspresentdocuments underadocumentarycredit, banksexaminethemagainst thetermsandconditionsof thedocumentarycreditbased onUCP600(providedthe documentarycreditissubject toit),internationalstandard bankingpractice,anddata betweenthedocuments themselves.

Ifthedocumentsdonot comply,theyarediscrepant

Indocumentarycredit operations,advisingdocument discrepanciesisthemost contentiousissueabank willfacewithitsclientsor anotherbank Itis,therefore, imperativethattherespective discrepanciesareofsuchdetail thatthepresenterisinnodoubt aboutthereasonfortherefusal. Abeneficiaryshouldalways seekclarificationifabank isunclearinitsrejectionof presenteddocuments

Whetherornotabankrefuses documentsisbasedonthe contentofthedocuments themselvesandtheir conformitytothedocumentary creditandUCP Ultimately,any discrepancyshouldstand onetest:“Wouldyoufeel comfortablejustifyingthat discrepancybeforeajudgein acourtoflaw?”Remember,at theendoftheday,acourtwill makethefinaljudgementif thepartiescannotamicably resolveadispute.

Clarityisthekey.Abankthat providesarefusalnoticestating “InvoicenotasperLC”tellsthe beneficiaryortheapplicant nothing Isthegoods descriptionwrong?Isarequired certificationmissing?Isthere someotherspecificissue? Arefusalnoticemustbeof sufficientdetailandclarityfor thepresenterofthedocuments tounderstanditwithout havingacopyoftheactual documentarycreditinfront ofthem.

Pre-requisites

Acoveringschedule accompanyingthedocuments shouldincludethepresenter's referencenumberandcontact detailsincaseofanyproblems Itshouldalsoinclude informationonhowandwhere tomakepayment,reference topaymentofcharges,and detailsofwhereandhowto sendthesettlementadvice

UCP600allowsbanksa maximumoffivebankingdays followingthepresentationday todetermineifapresentation iscomplying Itisimportant tonotethat,inmost circumstances,documentswill beexaminedbythenominated orconfirmingbankandthe issuingbank.Eachbankhasa maximumoffivebankingdays toexaminethedocuments

TheUCP600doesnotexpect bankstoneedthefullfive bankingdaystoexamine documents,althoughcertain circumstancesmayexistwhen thisisthecase Competition betweenbanksforbusiness typicallyensuresthatmost presentationsarereviewed within48hours,ifnotonthe dayofreceipt.

Obligationsofabank

Anominatedbankthathas agreedtoactonitsnomination, aconfirmingbank,oranissuing bankmustdeterminewhether thedocumentsarecompliant Eachbankmustdecidewhether ornottoissuearefusalnotice basedonitsexaminationofthe documents.However,itdoes notalwaysfollowthatabank thatidentifiesadiscrepancy willrefusethedocuments

Thebankmaynotconsider adiscrepancytowarranta refusal.Oneexampleofaminor differencewouldbeifthe documentarycreditrequired sixdocumentcopies,buta presenteronlyprovidedfive Inthiscase,thebankmayopt tomaketheadditionalcopy itselfratherthanrefusethe documents.

Inrespectofanissuingbank,it mustdecidewhetherornotto approachtheapplicantfor awaiverofdiscrepancies.

Approachingtheapplicantfor awaivercangiverisetofive differentresults:

1 2

Theapplicantagreesto waive,andtheissuing bankacceptsthewaiver Issuingbankhonours

Theapplicantagreesto waive,buttheissuingbank doesnotagreetoaccept thewaiver.Theissuing bankissuesarefusal noticeindicatingitis returningthedocumentsor seekingfurtherinstructions fortheirdisposalor handling.

3

4

Theapplicantdoesnot agreetowaive,andthe issuingbankissuesa refusalnoticeindicatingit isreturningthedocuments orseekingfurther instructionsfortheir disposalorhandling.

Theapplicanthasnot provideditswaiverof discrepancieswithinthe timeallowedbytheUCP 600(whichcanbenolater thanthecloseofthe5th bankingdayfollowingthe dayofpresentationunless thecreditsaysotherwise), sotheissuingbankrefuses thedocuments.

5

Theissuingbankwithdraws therequestforawaiver duetoanincorrectrefusal. (Thiswouldhappenifthe presenterprovidesavalid argumentforwithdrawing thediscrepancy for example,particular wordingofthe documentarycreditoran amendmentappearing withinadocument).

Issuesfor abeneficiary toconsider

Throughthisprocess,there areseveralissuesforthe beneficiarytoconsider Forexample,canitbesurethat thedocumentsarediscrepant? Hasthebankmisseda conditioninthedocumentary credit?Hasdatabeeninserted onadocumentbutnotseen?

Beneficiariesmustbeaware ofthecontentoftheUCP600, particularlyarticles3,14, and17-32,togetherwiththe practicesoutlinedinthe ISBP TheISBPisapublication which,bytitle,referstothe examinationofdocuments bybanksandhowtheyshould applythearticlesofUCP600 togivendocuments.

Usingreverselogic,ifa beneficiaryunderstands howabankwillexamineits documents,itshouldbeableto preparethemtothatstandard andavoidmanyproblems.

Optionsintheeventof discrepancies

Iftherearediscrepancies,three optionsexist:

Correctthediscrepancies byeitheramendingthe documentsorby replacement,

Requestthatthe nominatedbankor confirmingbanksends amessagetotheissuing bankseekingapproval tohonourornegotiate despitethediscrepancies thattheyhavefoundwhilst holdingthedocuments withthemor

Requestthatthe nominatedorconfirming bankforwardthe documentstotheissuing bankforsettlement

Inrespectofpoint3,theuseof termssuchas“onacollection basis”and“intrust”,are acceptablebetweenthe beneficiaryandthenominated bank,BUTSHOULDNOTbeused inanycommunicationstothe issuingbank,astheyimply thattherulesfordocumentary collectionsaretobeapplied ratherthantherulesfor documentarycredits.

Rememberthattherespective partiescouldavoidorresolve manydiscrepanciesthrough carefulattentiontodetailin thedocumentarycreditor amendmentapplication. Handledcorrectly,preparing andexaminingdocumentsis valuabletothebeneficiary, theapplicant,andtheindustry

Disputeresolution

Examiningdocumentsunder documentarycreditswilloften resultinadifferenceofopinion astowhetherthedocuments complyand,ifconsidered tobediscrepant,which discrepanciesareapplicable Inmostsituations,the discrepanciesareapparent andresultinnodisagreement betweentheconcernedparties.

Furthermore,althoughdisputes canarisebetweenanyinvolved parties,theycangenerally resolvesuchconflictsquickly, withoutreferraltoany arbitrationorlegalprocess. However,onoccasion,they mayinvolveathirdparty

Thechoiceofdisputeresolution willdependontheissues indispute.Moreover,itis notadvisabletoinclude areferencetoapreferred formofdisputeresolutionin adocumentarycreditwhen:

theremaybenodispute, buttheadditionofsuch aclausewillgiveafalse impressionregardingthe issuingbank(ie,thatthere isananticipationofa disputearising)

thedisputemaybe inappropriateforthe statedservice(eg,ICC DOCDEX,anamedcourtor jurisdiction,oranamed arbitrationtribunal)

Optionsintheeventof discrepancies

Confrontedbynumerousand oftencomplexproblemsin establishingdocumentary complianceandinterpreting rulesanddocumentcontent, partiesinvolvedintrade regularlyapproachthe InternationalChamberof Commerce(ICC)forguidance. Since1933,theICChas madeavailablesevenUCP publications,twobank-to-bank reimbursements(URR) publications,fiveISBP publications,andnumerous guidanceandbriefingpapers.

Inaddition,overthelastfew decades,theICCBanking Commissionhasdraftedand releasedhundredsofofficial opinionsinresponseto questionsposedbyparties involvedintradeactivities. TheICCarbitrationservice, DocumentaryDispute ResolutionExpertise(DOCDEX), hasalsoresolvedmany disputes

Optionsintheeventof discrepancies

Inresponsetorequestsfor clarificationandinterpretation forresolvingdisputessubmitted byindividuals,banks, corporates,logistics

companies,andlawfirms, theICCBankingCommission createdthe“OfficialICC BankingCommissionOpinions”. Thisresourceprovidesexpert interpretationandanalysisof itsrulesandtransactionsissued subjecttosuchICCrules, includingtheUCP600,which arethesubjectmatterofthe bulkofICCopinions.

CourtsoftenciteICCBanking CommissionOpinionstoassist indisputeresolutionandare consideredasignificant resourceforlawyers,bankers, judges,scholarsandother professionalsintheindustry. Theopinionsarenotbinding However,theyhavebeenused inevidenceincourtcasesfor manyyearstosupportthe positionofadefendantor plaintiff.

TheICCInternationalCentrefor Expertise(Centre)monitorsand handlestheprocess.

Courtsand arbitration

Unfortunately,thereare occasionswhenneitheran ICCopinionnorDOCDEXwill solvetheproblem.Insuch circumstances,theinvolved partiesmayturntothecourts, whichcanbeacostlyand time-consumingoptionandwill includeawiderangeofcosts relevanttothelegalprocess. Itisworthnotingthatoverthe years,manycourtshaveused thecontentofexistingICC opinionsandDOCDEX decisionsasthebasisfortheir deliberationsandconclusions.

ThepurposeofDOCDEXisto providepartieswithaspecific disputeresolutionprocedure thatleadstoanindependent, impartial,andpromptexpert decisioninsettlingdisputes

TheICClaunchedthisservicein 1997asanalternativedispute resolutionsystemforparties usingICCrulesrelatingtoletter ofcredittransactions However, ithasnowexpandedtocover allICCrules

Anarbitrationormediation serviceisfarmorelikelyto occurindisputesbetweena buyerandsellerrelatingtoa contractofsalethanadispute concerningthestatusof documentsundera documentarycreditandthe UCP.

ICCDOCDEX

10 Digitalisationandthefuture

TheUCP600,whilebeing invaluableinapaperworld, isnottobeintendedtobe appliedtotransactions involvingelectronicdocuments Overtime,traditionaltrade instrumentswillinevitablymove towardsamixedecosystem ofpaperanddigitaland, ultimately,toelectronic recordsalone.

Withthisinmind,theICC publishedtheeUCPVersion10 in2002toaddressthe presentationofelectronic recordsunderdocumentary credits.Theyissuedanupdate in2007knownasVersion1.1.To bringtherulesinlinewiththe changesinterminologyinUCP 600,theICCpublishedVersion 20in2019 Version20provides acompleteupdateoftherules toensureongoing“ecompliance”.

Thelatestupdate,Version21, publishedinJuly2023,aligns theeUCPwiththeUNCITRAL ModelLawonElectronic TransferableRecords(MLETR) regardingissuesofelectronic transferablerecords Furthermore,therulesalignwith theElectronicTradeDocuments Act(ETDA)introducedinthe UKinSeptember2023.

Itwasrecognisedatthe outsetthatthelikelyend oftheevolutiontoelectronic presentationswouldbe automatedcompliance checkingsystemsinthe documentarycreditfield.

Thisisalltooapparentwhen lookingatevolvingtec anddigitaltradefinan theadventoftheInter Things(IoT),Distribute Technology(DLT),Sm Contracts,ArtificialInt (AI),MachineLearning OpticalCharacterRec (OCR).

TheICCwillcontinuall thecontentoftheeUC ensureapplicability,w rulesprovidingmany inadvancingdocume creditsinadigitalenv andensuringthecont relevanceofthisvalua instrumentinmitigatin risk Theyhavealsopr severalguidesregard eUCP,includingguida buyersandsellersinh documentarycredits totherules.

TheeUCPfocusesont presentationofelectronic records,aloneorin combinationwithpaper documents,andnotonthe issuanceofaneUCPcredit. Thisdecisionwasbasedon thefactthattheindustry hasalreadyissuedelectronic documentarycreditsformany years.Inaddition,therewas concernthatanyrules surroundingissuancecould encumberpresentandevolving electronicissuancepractices whileendangeringtherules' technologicalneutrality Therulesarebasedonthe underlyingprinciplesintheUCP

Itisessentialtoconsider theimplicationsoftheeUCP whenissuingadocumentary creditthatwillprovidefor thepresentationofelectronic recordssolelyorincombination withtraditionalpaper documents Notdoingso couldnegatemanybenefits.

Forinstance,aswithcredits solelysubjecttoUCP600,an applicantmustensurethat anyrequestfortheissuance ofaneUCPcreditexpressly clarifiesanddeterminesthe appropriatedocumentary requirementsasagreedwith thebeneficiary.

ConcerninganeUCPcredit, anapplicantneedsto makeseveraladditional considerations.The fundamentalrequirement, fromwhichallelsewillevolve, istojointlyagreewiththe beneficiaryofthecreditthat presentationofelectronic recordswillbepermittedand todeterminewhichdocuments theycanhandleinthisway.

Duringthisdialogue,the beneficiarymustprovide reassurancethatitcanpresent anyrequiredelectronicrecords andthatsuchdocumentswill beinanacceptableformat. Beforefinalisingthestructure, theymustalsodeterminethat itsuitstheissuingand nominatedbanks

BAFT,theleadingglobalfinancialservicesassociationfor internationaltransactionbanking,helpsbridgesolutions acrossfinancialinstitutions,serviceprovidersandthe regulatorycommunitythatpromotesoundfinancialpractices enablinginnovation,efficiency,andcommercialgrowth. BAFTengagesonawiderangeoftopicsaffectingtransaction banking,includingtradefinance,payments,andcompliance.

www.baft.org

About the BAFT Letter of Credit Committee

The BAFT Letters of Credit working group is composed of members of the BAFT Commercial Letters of Credit Committee. The Committee focuses on issues and responds to questions that directly impact the processing environment related to commercial letters of credit. The committee provides comments on various ICC rules, practices, and queries related to commercial letters of credit operations.

The Commercial LC Committee also develops input, case study material, speakers, and oversight to the LC workshops as well as applicable participation in conference sessions on Trade. Additionally, the committee supervises and supports the ongoing work of the regional sub-committees: West Coast Letters of Credit, Southeast Letters of Credit, and Central Letters of Credit.

To learn more about the BAFT Trade Committees, visit www.baft.org/committees