UCP 600 (Uniform Customs and Practice for Documentary Credits, 2007 Revision) is the latest version of the internationally recognized rules established by the International Chamber of Commerce (ICC) for governing the issuance and use of letters of credit (L/C). UCP 600 is widely used in international trade to standardize and simplify the processes involved in documentary credits.
Key Features of UCP 600
- Scope and Applicability
- Applies to all documentary credits where the rules are explicitly incorporated in the credit.
- Governs both commercial credits and standby credits, unless stated otherwise.
- Definitions and Interpretations
- Provides clear definitions for terms such as “banking day,” “honor,” and “negotiation” to reduce ambiguities.
- Contains 39 articles that define the obligations and responsibilities of the involved parties (issuing bank, confirming bank, beneficiary).
- Obligations of Banks
- Banks deal with documents, not goods, services, or performances.
- The issuing bank and confirming bank have an independent obligation to honor the credit if the documents comply with the terms of the credit.
- Standard for Examination of Documents
- Documents must be examined within 5 banking days following the day of presentation.
- Banks are required to act in good faith and with reasonable care when determining compliance.
- Presentation of Documents
- Documents must strictly comply with the terms and conditions of the credit. This is known as the “strict compliance” principle.
- A discrepancy in the documents can lead to rejection unless waived by the applicant or rectified by the beneficiary.
- Discrepancies and Rejections
- If documents do not comply, the bank must notify the presenter, specifying the discrepancies.
- Rejection must occur within the examination period, and the bank must state whether it is holding the documents pending further instructions or returning them.
- Force Majeure
- UCP 600 includes provisions for force majeure, protecting banks from obligations during extraordinary circumstances like war or natural disasters.
- Independence Principle
- The credit is independent of the underlying sales contract or other agreements between the applicant and beneficiary.
- Rules on Partial Shipments and Transshipment
- Provides clarity on acceptable shipping arrangements unless explicitly prohibited in the terms of the credit.
Advantages of UCP 600
- Standardization: Provides a uniform framework for documentary credits, reducing misunderstandings in international trade.
- Clarity: Reduces ambiguities through precise definitions and rules.
- Efficiency: Simplifies the process of examining and processing documents.
Common Parties in a UCP 600 Transaction
- Applicant: The buyer/importer who requests the issuance of the L/C.
- Beneficiary: The seller/exporter in whose favor the L/C is issued.
- Issuing Bank: The bank that issues the L/C at the request of the applicant.
- Advising Bank: The bank that advises the beneficiary about the issuance of the L/C.
- Confirming Bank (if applicable): A bank that adds its guarantee to the credit, ensuring payment.
- Nominated Bank: The bank authorized to pay, accept, or negotiate under the L/C.
