Figure 7.1

Issuing a documentary credit

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Issuing a documentary credit

Learning objectives: 
In the context of this chapter, the words ‘customer’ and ‘applicant’ 
are interchangeable and reflect the status pre-issuance (customer) and
post-issuance (applicant).

This chapter describes the process performed by a bank from the time
of its receipt of an application form, as completed by its customer,
until a documentary credit is sent to an advising or confirming bank,
or the beneficiary directly, using SWIFT, telex or paper as the mode of
transmission.

By the end of this chapter, you should be able to understand:

◆◆ the process of determining whether a documentary credit
application form has been completed in a manner that is acceptable
to the bank, in terms of its content, bank policy and regulatory
requirements, and determining that the transaction falls within the
availability and terms of a credit facility granted to a customer;
◆◆ the risks associated with the issuance of a documentary credit;
◆◆ the choice between an advising bank or a confirming bank to
deliver a documentary credit to a named beneficiary; and
◆◆ that there is a need to ensure, among all other terms and conditions,
that the form of availability and location of the place of expiry is
commensurate to the settlement and reimbursement instructions
that will be provided to a nominated bank, if any.

7.1 Pre-issuance considerations

Before even looking at the content of a documentary credit application form,bank staff should be aware and have an understanding, of various aspects of documentary credit practice. These aspects include an understanding of the risks that an issuing bank faces when issuing a documentary credit, the
extent of the undertaking contained in a documentary credit and as detailed in UCP 600, article 7, and the need for the separation of the underlying sale contract, proforma invoice, etc, from the terms and conditions of a
documentary credit.

7.1.1 The risks applicable to an issuing bank

The risks faced by a bank that is willing to issue a documentary credit can be broadly summarised as follows.

◆◆ Applicant risk – the applicant may be unable to reimburse the bank for any payment or reimbursement that it is required to make in respect of a presentation that complies with the terms and conditions of the
documentary credit, or in respect of a presentation under which the applicant had previously issued a waiver of discrepancies and that waiver was acceptable to the bank.

◆◆ Financial crime – the transaction may be used to facilitate criminal activity (that is, money laundering, fraud against the bank and / or other entities, terrorist financing, etc).

◆◆ Errors in conveying the requirements of the customer – if the advice of the documentary credit or amendment that the beneficiary receives differs from the content of the application form that the
customer completed, the issuing bank is bound to the beneficiary in terms of the credit as issued. This is irrespective of any inability of the issuing bank to obtain reimbursement from the applicant, who may
refuse to reimburse the bank because of the failure to fully incorporate its instructions.

It may be noted that UCP 600, article 35, provides as follows.
A bank assumes no liability or responsibility for the consequences
arising out of delay, loss in transit, mutilation or other errors arising in
the transmission of any messages or delivery of letters or documents,
when such messages, letters or documents are transmitted or sent
according to the requirements stated in the credit, or when the bank
may have taken the initiative in the choice of the delivery service in the
absence of such instructions in the credit.

However, such ‘errors’ refer to a SWIFT or telex advice of a documentary credit or amendment being mutilated between the sending and receiving of the message, and do not include any errors made by an issuing bank in rekeying the data that its customer has provided.

◆◆ Errors in document examination or a failure to follow the requirements of UCP 600, article 16, when refusing documents – an issuing bank may make an error in determining the status of the documents, by considering the documents to be compliant when there is a clear and undeniable discrepancy. In these circumstances,
an issuing bank may find that the applicant will withdraw or cancel its authorisation for the bank to obtain reimbursement from its account(s).

Similarly, if an issuing bank determines that the documents are discrepant, but it issues a refusal notice that is not in conformity with the requirements of UCP 600, article 16, it may find itself precluded from claiming that the documents are discrepant. As a result, it will be required to honour what will be discrepant documents, and once
again will find itself in the hands of the applicant as to whether it may be reimbursed for the settlement made to the nominated bank or beneficiary.

The topic of refusal notices and preclusion is discussed further in Chapter 18.

7.1.2 The application of UCP 600, article 7
UCP 600, article 7, outlines the scope of the undertaking of an issuing
bank.
a. Provided 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;

An issuing bank is therefore irrevocably bound to honour a complying
presentation that is made to it, or to a nominated bank, as of the time
it issues a documentary credit. It is consequently imperative that the
documentary credit is vetted thoroughly before it is issued, because any
attempt by the issuing bank to correct an anomaly or error in its content,
by means of a subsequent communication, can be considered to be an
amendment, which will be subject to the consent of the beneficiary and a
confirming bank, if any.

However, if an error or omission were of such a nature that, without the
subsequent communication, the documentary credit would not be in a
workable form for the beneficiary, or any nominated or confirming bank,
it would not be an amendment, but would form an integral part of the
documentary credit issued in favour of the beneficiary.
UCP 600, sub-article 6(a), provides as follows.
UCP 600, sub-article 6(d)(ii), adds the following.
UCP 600, sub-article 7(a)(i)–(v), indicates that an issuing bank will honour
(pay, accept a draft or incur a deferred payment undertaking) when a
documentary credit is available with the issuing bank. It also indicates that
it will honour when a documentary credit is available with a nominated bank
and that bank does not act on its nomination at the time of presentation
to it of complying documents, or it does not pay on the maturity date – a
draft that it has accepted, or a deferred payment undertaking that it has
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.

UCP 600, sub-article 6(a), provides as follows.

a. … A credit available with a nominated bank is also available with the
issuing bank.
UCP 600, sub-article 6(d)(ii), adds the following.

ii. … A place for presentation other than that of the issuing bank is in
addition to the place of the issuing bank.

UCP 600, sub-article 7(a)(i)–(v), indicates that an issuing bank will honour (pay, accept a draft or incur a deferred payment undertaking) when a documentary credit is available with the issuing bank. It also indicates that
it will honour when a documentary credit is available with a nominated bank and that bank does not act on its nomination at the time of presentation to it of complying documents, or it does not pay on the maturity date – a
draft that it has accepted, or a deferred payment undertaking that it has incurred, or it fails to advance funds on that date when it had agreed to negotiate.

Primarily, an issuing bank provides an undertaking to a beneficiary to honour a complying presentation. UCP 600 also reflects the obligation of an issuing bank when a nominated bank has acted on its nomination and
honoured or negotiated, and is expecting to be reimbursed according to the terms and conditions of the documentary credit. This undertaking to reimburse and the independent undertaking that is given to a beneficiary is reflected in UCP 600 sub-article 7(c).

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.

7.1.3 The autonomy of a documentary credit

As discussed in Chapter 6, the autonomy of a documentary credit is of paramount importance for any issuing bank.
Issuing banks, as well as any other participating banks, have no concern with any conditions or agreements made between a buyer and seller in a sale contract, proforma invoice, etc, if such conditions or agreements are
not adequately reflected within the documentary credit application form and the documentary credit itself, or unless they are incorporated into the documentary credit as a result of an amendment to it – that is, should
the beneficiary (seller) find upon receipt of the documentary credit that its terms and conditions are not as previously agreed.

The whole concept of the autonomy of a documentary credit is adequately summed up by the content of UCP 600, article 5.

Banks deal with documents and not with goods, services or performance
to which the documents may relate.

The opening sentences of UCP 600, sub-article 4(a), are also relevant.

a. 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. …

Banks are not concerned with the content of any underlying sale contract, proforma invoice, etc, do not require sight of a copy of that document other than for internal bank policy or regulatory requirements, and do not expect an applicant to raise issues concerning the acceptability of documents if specific conditions of the sale contract, proforma invoice, etc, have not been adequately reflected within the documentary credit application form.

7.2.1 Receipt of the completed documentary credit application form

ISBP 745, ‘Preliminary Considerations’, paragraphs (iii)–(vii), place a responsibility on a customer to provide clear instructions to issue or amend a documentary credit and to understand the impact of certain provisions
of UCP 600.

Bank staff will be regularly called upon to discuss details of the application with a customer. Often, the information shown on the documentary credit application is not consistent with the documentation requested or is lacking in content or detail. The review of an application form should be completed so as to draw the attention of a customer to any such issues.

As mentioned in Chapter 6, application forms for the issuance of a documentary credit are generally delivered to the bank by mail (paper),telex, email or fax, or through a bank’s own front-end electronic system with the customer. Irrespective of the method of receipt, a bank must satisfy itself with regard to the authenticity of the application. The procedures for examining and approving an application form vary from bank to bank, but
it is reasonable to assume that these will include the bank’s own internal operational procedures.
When using front-end systems, banks often take a proactive role in establishing some basic wording for certain documents and conditions.

This can include standard conditions for an invoice, insurance and transport documents. However, the data to be completed should be no different whether the application form is in hard copy or electronic form.
When a customer has a preferred form of words for a documentary credit, either for one or more different suppliers or type of transaction, the bank or customer can usually create templates that avoid the need for a whole application form to be completed each time. The customer selects the appropriate template for the beneficiary or type of transaction, completes the remaining fields and submits it to the bank.

Some of the detailed checking procedures undertaken by a bank may be eliminated if the correct data, clauses and wording are stored with the customer. When a bank’s electronic system receives the application for
issuance, and, subject to the bank’s verification procedures, it can prepare the documentary credit in a form that is ready for approval, authentication and dispatch by SWIFT, telex, mail or courier.

There are two important aspects to be borne in mind:
◆◆ the security connected with the use of the electronic system at the customer’s premises is a major consideration, subject to individual arrangements and documentation between each bank and its customer;
and
◆◆ there is a danger that an unintended addition or deletion at either the customer’s or the bank’s end may go through undetected.
Once the documentary credit application is received, one or more of the following tasks are usually performed at the outset and will vary depending on the mode of delivery of the application form:
◆◆ recording and noting the time of receipt;
◆◆ allocating a unique reference number;
◆◆ determining the authenticity of the application;
◆◆ checking the customer facility availability;
◆◆ updating the bank’s liabilities;
◆◆ updating the customer liabilities;
◆◆ blocking funds / taking marginal deposits, if appropriate; and / or
◆◆ recovering charges.
Each bank will have its own operational guidelines and requirements.

7.2.2 Reviewing the documentary credit application form against an agreed credit facility

It is expected that prior to a customer completing a documentary credit application form it will already have an agreed credit facility in place. A credit facility will establish the maximum value of documentary credits that
may be outstanding at any one time.

Any utilisation appearing against the facility amount may include an amount for which documentary credits have been issued, but no presentation has been made. It may also include a remaining amount under one or
more documentary credit(s) for which a partial drawing has already been made and / or an amount in respect of payments due at a future date where a complying presentation has been made or where the applicant
had provided an acceptable waiver when discrepancies were found in documents presented under a documentary credit.

For a new transaction, bank staff must determine the maximum amount that may be drawn under the documentary credit, taking into account any tolerance that may be applicable, to assess whether or not there is sufficient availability within the unutilised portion of the facility. If the documentary credit is to be issued in a currency other than that of the facility, bank staff will need to apply the applicable internal conversion rate to assess whether the transaction may be accommodated.

In addition to the amount, the facility will also have an expiry date – that is, a date upon which the bank will consider whether to renew the facility on the same terms and conditions, or to provide increased or reduced
facilities, or to cancel it. The facility must be valid at the time of reviewing the documentary credit application form, otherwise reference should be made to the appropriate relationship manager and / or internal department
for approval.

Finally, the settlement terms indicated in a documentary credit application form must fall within the agreed parameters. For example, a facility will always accommodate a documentary credit that is available on a sight
basis. However, a documentary credit that is available at a future date, such as 120 days after the date of shipment, must fall within the maximum agreed period. Most banks will provide facilities with payment terms of up to 180 days’ sight, or 180 days after the date of shipment or another event,or after the date of another document, such as an invoice date.

In addition to these provisions, bank staff must follow internal policies and procedures relating to the recording of a liability against a facility and the internal approval process that may apply – that is, who must, or is allowed
to, approve the issuance of a documentary credit.

It should be noted that even though a facility may be in place, there is no obligation for a bank to utilise any sufficient remaining balance to issue a documentary credit or to approve a transaction that may go beyond an
agreed limit.

7.2.3 Reviewing a documentary credit application form against bank policy and regulatory requirements

Internal operational guidelines must be fully understood and applied to ensure that the issuance and any amendment of a documentary credit are in compliance with such guidelines.

Particular note must be taken of the following aspects:

◆◆ the nature of the goods or type of underlying transaction, for example most banks have policies with regard to the handling of documentary credits covering armaments, explosives, drugs, dual-use goods, etc;
◆◆ the requirement, if any, for import licences and approvals;
◆◆ compliance with other government or central bank requirements, including compliance to any sanction regulation to which the bank is subject;
◆◆ identification of transactions that fall outside the usual course of business for a customer; and
◆◆ the inherent potential for fraud, for example knowledge or lack of knowledge of the proposed beneficiary, particularly when the documentary credit amount is large.
It should not be forgotten that a documentary credit, when issued, carries the name of the issuing bank and bears its irrevocable undertaking to the beneficiary, and is independent of all considerations outside the
documentary credit. As a result, all applications should be examined to make sure that they comply with the issuing bank’s internal operational guidelines and applicable regulatory requirements.

7.3 Reviewing the content of a documentary credit application form

Fundamentally, an issuing bank is required to follow its customer’s instructions to the extent that the bank is in agreement and the content is not in breach of any regulatory requirements.

7.3.1 Error correction by a customer

If a customer has corrected its instructions, before or after discussion with the issuing bank, such correction should be authenticated by the initials or signature of the customer’s authorised signatory (or signatories). Where such a correction is made subsequent to an application sent electronically,
it is preferable to have a separate message confirming the correction.
Any correction or alteration made by the issuing bank as a result of discussions on the telephone should similarly be confirmed in a separate message.

7.3.2 Types of settlement

UCP 600, sub-article 6(b), requires as follows.
In UCP 600, article 2, sight payment, deferred payment and acceptance are mentioned in the context of the definition of ‘Honour’. An act of ‘honour’ is deemed to be final as far as the beneficiary or presenter of the documents is concerned.

It is often the case that a bank will be required to guide its customer in choosing the correct or appropriate method of settlement. It is also true to say that some banks have difficulty in understanding the fundamental
differences that apply to each of the four settlement types.

It should be noted that a customer and a proposed beneficiary may have different views on how a documentary credit should be payable. These issues should be resolved by clear and unambiguous language in the sale
contract, proforma invoice, etc. For example, an indication of a requirement for ‘settlement by documentary credit available at sight’ could mean a documentary credit that is available by sight payment or sight negotiation.
Similarly, a requirement for a documentary credit ‘payable 90 days after the date of shipment’ could mean a documentary credit that is available by deferred payment, acceptance or negotiation.

A documentary credit may be made available by honour (payment, acceptance or deferred payment) or negotiation with a named nominated bank or any bank, or be made available by honour (payment, acceptance
or deferred payment) with the issuing bank only. It should be noted that a documentary credit that is available with a named nominated bank or any bank is also available with the issuing bank.

Even though an issuing bank may issue a documentary credit that is available with a named nominated bank or any bank, a nominated bank is under no obligation to honour or negotiate. A bank that has added its
confirmation to a documentary credit will be required to honour or negotiate if a complying presentation is made to it or to another nominated bank and that other nominated bank does not honour or negotiate. An issuing bank
is liable in terms of its undertaking, to honour at sight or at maturity.

UCP 600, sub-article 12(a), offers the following guidance to a nominated bank.

a. Unless a nominated bank is the confirming bank, an authorization to
honour or negotiate does not impose any obligation on that nominated
bank to honour or negotiate, except when expressly agreed to by that
nominated bank and so communicated to the beneficiary.

7.3.2.1 Sight payment

When a documentary credit is issued available by ‘sight payment’, it means that settlement is due once a nominated bank or issuing bank has determined that the documents comply. Because payment is intended to
be immediate, the documentary credit should indicate that the nominated bank is authorised to claim reimbursement at the time of payment to the beneficiary by debiting an account of the issuing bank that is held with them, or by claiming reimbursement from a named reimbursing bank, or by claiming reimbursement from the issuing bank, by sending a SWIFT message with details of where the issuing bank is to remit the covering
funds.

A sight payment documentary credit may or may not require drafts to be presented. Because drafts may attract stamp duty in some countries, a documentary credit may be issued without a requirement for a draft. In
most cases, a draft should not be necessary for this type of settlement.

It should be noted that the requirement for a draft is usually a pre-printed condition on an issuing bank’s documentary credit application form and not a requirement that is usually indicated by a customer. Whether or not a draft is required is therefore within the control of each issuing bank. Because settlement by payment falls under the definition of ‘honour’, any payment should be effected without recourse to the beneficiary, unless the
nominated bank and beneficiary enter into a recourse agreement. Recourse is discussed in Chapter 17.

Given a choice, a beneficiary that requires payment on a sight basis would be well advised to specifically indicate in its sale contract, proforma invoice, etc, that the documentary credit is to be available with a nominated bank
(which may be its own bank) by ‘sight payment’.

7.3.2.2 Deferred payment

When a documentary credit is issued available by ‘deferred payment’, it means that:
◆◆ payment is not immediate;
◆◆ payment is at a time in the future, determinable in accordance with the terms and conditions of the documentary credit; and
◆◆ presentation of a draft is not required.
The date for payment, as defined in a documentary credit, will usually fall within a specific period after the date of shipment, or a specific period after the date of presentation or another defined event or date.
For a documentary credit that is available by deferred payment, the reimbursement instruction should indicate that a nominated bank is authorised to claim reimbursement, on the due date, by debiting an account of the issuing bank that is held with the nominated bank, or by claiming reimbursement from a named reimbursing bank, or by claiming reimbursement from the issuing bank, by sending a SWIFT message with
details of where the issuing bank is to remit the covering funds, or by instructing the issuing bank, at the time of sending the documents to the issuing bank, to remit funds to the correspondent of the nominated bank.
Because settlement by deferred payment falls under the definition of ‘honour’, the issuance of a deferred payment undertaking is made without recourse to the beneficiary. Recourse is discussed in Chapter 17.
Documentary credits available by deferred payment provide a means by which the beneficiary may be able to obtain finance by requesting the issuer of the deferred payment undertaking to prepay it.

UCP 600, sub-article 12(b), offers the following guidance.

b. By nominating a bank to accept a draft or incur a deferred payment
undertaking, an issuing bank authorizes that nominated bank to prepay
or purchase a draft accepted or a deferred payment undertaking incurred
by that nominated bank.

This position prevails unless there is wording to the contrary in the documentary credit.

7.3.2.3 Acceptance
When a documentary credit is issued available by ‘acceptance’, it means that:
◆◆ payment is not immediate;
◆◆ payment is at a time in the future, determinable in accordance with the terms and conditions of the documentary credit; and
◆◆ presentation of a draft is required.

The date for payment, as defined in a documentary credit, will usually fall within a specific period after the date of shipment, or a specific period after the date of presentation or another defined event or date.

For a documentary credit that is available by acceptance, the reimbursement instruction should indicate that a nominated bank is authorised to claim reimbursement, on the due date, by debiting an account of the issuing
bank that is held with the nominated bank, or by claiming reimbursement from a named reimbursing bank, or by claiming reimbursement from the issuing bank, by sending a SWIFT message with details of where the issuing
bank is to remit the covering funds, or by instructing the issuing bank, at the time of sending the documents to the issuing bank, to remit funds to the correspondent of the nominated bank.

Because settlement by acceptance falls under the definition of ‘honour’, the acceptance of a draft is made without recourse to the beneficiary. Recourse is discussed in Chapter 17.

Documentary credits available by acceptance provide a means by which the beneficiary may be able to obtain finance by discounting the accepted draft with the bank that accepted it, or with any other bank or financial
institution of its choice.

Recall that UCP 600, sub-article 12(b), provides as follows.

b. By nominating a bank to accept a draft or incur a deferred payment
undertaking, an issuing bank authorizes that nominated bank to prepay
or purchase a draft accepted or a deferred payment undertaking incurred
by that nominated bank.

Although this sub-article makes reference to the purchase of a draft, the bill of exchange laws or regulations that apply to the nominated bank will usually cover such an act and a nominated bank need not rely exclusively
on the content of the sub-article when looking to purchase a draft.

7.3.2.4 Negotiation

Negotiation is defined in UCP 600, article 2, as follows.

b. By nominating a bank to accept a draft or incur a deferred payment
undertaking, an issuing bank authorizes that nominated bank to prepay
or purchase a draft accepted or a deferred payment undertaking incurred
by that nominated bank.

When a documentary credit is issued available by ‘negotiation’, it means that:

◆◆ an advance may or may not be made immediately by a nominated bank;
◆◆ drafts may or may not be required for presentation; and
◆◆ settlement, if the documentary credit is not negotiated earlier, is made on receipt of documents by the issuing bank (sight) or the maturity date of the draft (usance).

When a draft is required, it is to be drawn on the issuing bank or reimbursing bank.

For a documentary credit that is available by negotiation on a sight basis, the reimbursement instruction should be that the issuing bank will remit proceeds in accordance with the instructions of the nominated bank upon
its receipt of a complying presentation.

This position is stated in ICC Opinion R666, which includes the following in its conclusion to an enquiry concerning a credit available by sight negotiation:

For a documentary credit that is available by negotiation on a future date (usance) basis, the reimbursement instruction should indicate that a nominated bank is authorised to claim reimbursement, on the due date,
by debiting an account of the issuing bank that is held with the nominated bank, or by claiming reimbursement from a named reimbursing bank, or by Negotiation means the purchase by the nominated bank of drafts (drawn
on a bank 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.

A letter of credit stated to be available with a nominated bank, by negotiation, should not include any reference to claiming reimbursement from a reimbursing bank or, indeed, any reference to the debiting of the issuing bank’s account held with the nominated bank. This form of structure is a payment letter of credit. A negotiation letter of credit should specify that the nominated bank is to send the documents to the issuing bank and, upon the issuing bank’s ascertaining that it complies with the terms and conditions of the credit, the issuing bank will reimburse in accordance with the instructions of the negotiating bank.

For a documentary credit that is available by negotiation on a future date (usance) basis, the reimbursement instruction should indicate that a nominated bank is authorised to claim reimbursement, on the due date,
by debiting an account of the issuing bank that is held with the nominated bank, or by claiming reimbursement from a named reimbursing bank, or by claiming reimbursement from the issuing bank, by sending a SWIFT message with details of where the issuing bank is to remit the covering funds, or by instructing the issuing bank to remit funds to the correspondent of the nominated bank at the time of sending the documents to the issuing bank.

In the case of an unconfirmed documentary credit, a nominated bank will normally negotiate on a with recourse basis to the beneficiary. A confirming bank negotiates without recourse to the beneficiary. Recourse is discussed
in Chapter 17.

Documentary credits available by negotiation provide a means by which the beneficiary may be able to obtain finance by requesting the nominated bank to negotiate – that is, to provide an advance of the proceeds earlier
than the date that settlement or reimbursement is due from the issuing bank, or to agree to effect settlement on such date.

7.3.3 The place and date of expiry

In addition to determining the manner by which settlement will be made and with whom the documentary credit is to be made available, it is important to align such conditions with the place at which the documentary credit
will expire.

The position adopted by UCP 600, article 6, is that the place of expiry and that of the bank(s) with which the documentary credit is available will be the same. Any deviation from this structure can have a significant impact
on a nominated bank or confirming bank, and ultimately on the beneficiary.

For example, a documentary credit that expires at the counters of the issuing bank, but is available with a nominated bank by payment, acceptance, deferred payment or negotiation does not provide for the expiry date to be a latest date for presentation of documents to that nominated bank by, or on behalf of, the beneficiary, as described in UCP 600, sub-article 6(d)(i).

i. A credit must state an expiry date for presentation. An expiry date
stated for honour or negotiation will be deemed to be an expiry date for
presentation

An expiry date that applies at the counters of the issuing bank requires that the issuing bank must receive the documents no later than that expiry date, subject to UCP 600, sub-article 29(a), not being applicable.

a. If the expiry date of a credit or the last day for presentation falls on
a day when the bank to which presentation is to be made is closed for
reasons other than those referred to in article 36, the expiry date or the
last day for presentation, as the case may be, will be extended to the first
following banking day.

It also requires that the documents must be presented to the issuing bank
within the applicable presentation period.

As another example, a documentary credit that expires in the country of the beneficiary, but which is available only with the issuing bank, allows for the beneficiary to present its documents to any bank in its country on
or before the expiry date. There is no nominated bank, and the issuing bank is the only bank authorised to pay, accept a draft or incur a deferred payment undertaking. Provided complying documents are presented to a
bank in the beneficiary’s country no later than the expiry date, the issuing bank will be required to honour that presentation even if received by them after the expiry date.

7.3.4 Inoperative documentary credits

It should be noted that there might be occasions when it is necessary for a documentary credit to be issued as ‘inoperative’ or ‘non-operative’. In these circumstances, the required practice is that the issuing bank clearly
indicates in the documentary credit the action that is to occur to make the credit operative.
Examples of clauses that have the effect of making a documentary credit inoperative include:

◆◆ ‘this documentary credit will become operative only upon the issuance of an amendment indicating that an import licence has been issued’; or
◆◆ ‘this documentary credit will become operative upon your [or the issuing bank’s] receipt of a performance guarantee in the following form … ’

7.3.5 The workability of a documentary credit

Examination of the application form and close liaison with the customer at this stage is key to the success of the entire documentary credit transaction.
Many of the problems that arise when documents are presented can be avoided if bank staff pay attention to detail and can anticipate problems that may occur before the documentary credit is issued.

To understand the items to be reviewed, examples of the fields of a documentary credit application form are referred to in each of the following sections, with some indications of any incorrect instructions.

7.3.5.1 Applicant and beneficiary details

The applicant and beneficiary details are important with regard to how documents will be made out (in the name of the applicant, or where the applicant is to be shown as the consignee or notify party on a transport
document) and for the correct delivery of the documentary credit to the beneficiary.

✓ Applicant name and address
European Dinner Service Gmbh
French Strasse 26
FRANKFURT
Germany

Beneficiary name and address ✗
Dinner World Inc
New York, USA

In this example, the details provided for the beneficiary would not be sufficient to ensure delivery of the documentary credit by an advising or confirming bank.

If necessary, other details such as phone or fax numbers may be included.

7.3.5.2 Documentary credit amount and tolerance, if any

Currency and amount
USD215,050.00
Tolerance
Plus / minus %

The customer has indicated that the amount of the documentary credit is to be USD215,050.00. This amount should agree with any calculation that would apply to quantity × unit price, as may be shown in the goods
description.

In section 7.3.5.5, for example, it will be seen that a quantity of 2,530 sets of dinner services have been ordered at a unit price of USD85 each. This calculation equals the amount of the documentary credit (2,530 × USD85
= USD215,050).

It may be that the amount of a documentary credit is to be subject to a ‘tolerance’. A tolerance is used when it may not be possible to ship an exact quantity of goods, for example 100MT, and a beneficiary may require
the option of shipping goods to a value above or below that figure. By inserting the percentage that will apply, the amount that may be drawn will fall between the upper and lower limits. When a tolerance is applied to an
amount and the goods description includes a quantity of goods, it is likely that the quantity should also be stated to be subject to the same tolerance. Similarly, if there is to be a tolerance to be applied against any stated unit price(s), specific reference to the tolerance should be shown against each unit price.

It should be noted that stating a tolerance against the amount of the documentary credit does not automatically apply it to the quantity or unit price, if any, and vice-versa.

UCP 600, article 30, provides rules regarding the interpretation of terms and the application of tolerances.

a. The words “about” or “approximately” used in connection with the
amount of the credit or the quantity or the unit price stated in the credit
are to be construed as allowing a tolerance not to exceed 10% more or
10% less than the amount, the quantity or the unit price to which they
refer.
b. A tolerance not to exceed 5% more or 5% less than the quantity of the
goods is allowed, provided the credit does not state the quantity in terms
of a stipulated number of packing units or individual items and the total
amount of the drawings does not exceed the amount of the credit.
c. Even when partial shipments are not allowed, a tolerance not to
exceed 5% less than the amount of the credit is allowed, provided that the
quantity of the goods, if stated in the credit, is shipped in full and a unit
price, if stated in the credit, is not reduced or that sub-article 30 (b) is
not applicable. This tolerance does not apply when the credit stipulates a
specific tolerance or uses the expressions referred to in sub-article 30 (a).

7.3.5.3 Partial shipments and transshipment

Whether partial shipments are to be allowed or not will often depend on the type and/or quantity of goods that are being shipped and the needs of the applicant. Allowing partial shipments offers greater flexibility to a
beneficiary when multiple goods are to be shipped or dispatched.

Because it is more than likely that transshipment will occur when goods are shipped in a container, or even in airfreight where airlines often do not cover the complete journey via one aircraft, transshipment should be
allowed. A customer should be referred to the transshipment provisions that appear in UCP 600, articles 19, 20, 21, 23 and 24, if a transport document, as indicated in the heading of one of these articles, is to be presented
under the documentary credit.

7.3.5.4 Shipment routing and latest shipment date or period

The documentary credit application form should mirror the requirements for Field 44A, E, F and B of the SWIFT MT700 message. In so doing, it will simplify the process of identifying the appropriate transport document.

For example, completion of three or four of the fields will always mean that a multimodal transport document should be presented. The required transport document should match the applicable Incoterm that has been
agreed upon in the sale contract, proforma invoice, etc (see Chapter 5).

Shipment from/to
Place of taking in charge / Dispatch from / Place of receipt:
Port of loading / Airport of departure: Any USA port
Port of discharge / Airport of destination: Hamburg
Place of final destination / For transportation to / Place of delivery:
Latest shipment date:
9 June 20XX

In this example, the goods are being shipped on a port-to-port basis, and a bill of lading or non-negotiable sea waybill should be the chosen transport document (or a charter party bill of lading, if a bulk cargo is being shipped).

If no latest shipment date is stated, the latest shipment date will default to the expiry date of the credit. It may be that a customer will indicate a shipment period or schedule instead of the latest shipment date (see section
7.3.5.16).

7.3.5.5 Goods description

It is not unusual for a customer to provide an excessive level of detail in respect of the goods description. While some will insist that an itemised breakdown of goods is included in the documentary credit, others are
prepared (following discussion with the bank) to accept a more general description, supported by a certification in the invoice such as ‘We certify that goods are in accordance with order number xx’, or ‘We certify goods
are in accordance with proforma invoice number xx dated xx’. Wherever possible, a bank should encourage a customer to adopt a more general description.

This was covered in UCP 500, sub-article 5(a), which stated that banks should ‘discourage any attempt to include excessive detail’. Although there is no equivalent clause in UCP 600, sub-article 4(b) does make the
following statement.

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.

A customer should be advised that its protection lies not in a lengthy goods description, but the documents that are requested to be presented, and the degree and type of data content to appear therein.

Description of goods and / or services and / or performance:
2,530 SETS ‘NEW YORK’ BRAND DINNER SERVICES @ USD85.00 PER
SET (EACH SET CONSISTING OF 5 X DINNER PLATES, 5 X SIDE PLATES,
5 X SAUCERS, 5 X CUPS, 5 X SOUP PLATES, 5 X DESERT DISHES) AS PER
PROFORMA INVOICE NO. DW67295 DATED JANUARY 20, 20XX CFR
HAMBURG INCOTERMS 2010

For this example, the goods description could remain as stated, or be shortened as follows.

2,530 SETS ‘NEW YORK’ BRAND DINNER SERVICES @ USD85.00 PER SET
CFR HAMBURG INCOTERMS 2010

This could be accompanied by a requirement that the invoice certify that the goods are ‘as per proforma invoice no. DW67295, dated January 20, 20XX’.

7.3.5.6 Documents required

The documents required is one of the most important areas of the application form as far as a customer is concerned, in terms of whether the detail given is either sufficiently comprehensive or too limited in name
and content. The content of the documents may provide the only form of security to a customer that the goods ordered are those that are received.

An application form will usually include the issuing bank’s pre-printed wording requiring the creation of documents such as a commercial invoice, packing list, weight list, insurance document and transport document.

An issuing bank may, as part of the credit facility agreement, require that the goods are consigned to it, or to its order, and this will be reflected in the pre-printed wording. The customer will be required to indicate whether
the transport document is to be marked ‘freight prepaid’ or ‘freight payable at destination’, in accordance with the agreed Incoterm.

Once a transport document has been selected (most banks will offer a choice of some, or all, from among bill of lading, air waybill, multimodal transport document or truck consignment note), a customer should ensure
that it is the most appropriate document for the routing that has been chosen. It may be that a documentary credit application form does not provide for the appropriate transport document, for example a multimodal
transport document, in which case the customer should separately indicate this requirement rather than select, for example, a bill of lading as the closest form of document.

If there is a requirement for the presentation of an insurance document, the risks to be covered should be clearly expressed. Most documentary credit application forms will include some basic reference to the usual clauses
that are applicable, but it is for the applicant to indicate whether these clauses – that is, Institute Cargo Clauses (A), (B), or (C), War Risks, Strikes Risks, etc – are appropriate, or whether different or additional clauses are
necessary, based upon local requirements or requirements that are specific to the nature of the goods being imported.

A customer should be advised against requesting insurance cover on an ‘all risks’ basis. Observe the content of UCP 600, sub-article 28(h), which indicates that, in such a circumstance, an insurance document indicating
any all risks coverage will be acceptable, even if there are stated exclusions.

h. When a credit requires insurance against “all risks” and an insurance
document is presented containing any “all risks” notation or clause,
whether or not bearing the heading “all risks”, the insurance document
will be accepted without regard to any risks stated to be excluded.

If the customer is to arrange insurance cover, the issuing bank may wish to see evidence, or at least receive the customer’s confirmation, that adequate insurance cover is in place. As part of the credit facility renewal
process, banks will often require sight of the insurance policy that the customer has taken out to ensure that the cover is commensurate to the documentary credits that are being issued, in particular, in terms of the
maximum amount of coverage that is available in the event of a claim.

UCP 600, article 28, contains some important sub-articles that address the minimum insured amount, risks to be covered or that can be excluded, and the use of terms that indicate less than the full amount of a claim will be
honoured.

For documents such as inspection certificates or analysis certificates, a customer should give careful thought to indicating either a specific name of an issuer for the document or the type of issuer, avoiding the use of
terminology such as ‘first class’, ‘well known’, ‘qualified’, ‘independent’, ‘official’, ‘competent’ or ‘local’, which will permit the issuance by any entity except the beneficiary (UCP 600, article 3). The requirements for such documents should indicate the basis under which any inspection or analysis is to occur – that is, the standard that is required or that the goods are to meet minimum (stated) specifications.

7.3.5.7 Additional conditions
There may be additional conditions that will apply to a documentary credit. For example, if the customer is responsible for insuring the goods, the customer will check the box against that requirement.

In a documentary credit, an issuing bank will often add its own conditions that apply to the transaction, such as details of any discrepancy fee or a sanctions clause.

Banks should avoid inserting data in this field that is directly linked to one of the documents in the ‘documents required’ field, such as providing details for the packing of the goods when the documents required field
merely mentions ‘Packing list’. In other words, a requirement for a specific document, by title, should be followed by the data that is to appear thereon and not be given as separate requirements. This will avoid the potential for
a non-documentary condition (see section 7.3.5.12).

7.3.5.8 Charges under the documentary credit

The customer will indicate who is responsible for the costs in its country and those that are incurred outside its country. The usual split is that the applicant will bear the costs of the issuing bank and the beneficiary, all
other costs.

7.3.5.9 Period for presentation
The ‘period for presentation’ is the period of time after the date of shipment within which the documents are to be presented to a nominated bank or issuing bank. In the absence of any specific period, the default of
21 calendar days under UCP 600, sub-article 14(c), will apply.

A customer should insert a period that is commensurate with the time that will be taken for the carriage of the goods, the urgency to gain possession of the documents and the type of goods that are being shipped. A period
of 21 calendar days may not be appropriate in all cases.

Although there is no specific rule in this respect, it is common for the latest shipment date plus the presentation period to equal the expiry date. For example, if the latest shipment date were 9 June 20XX and the presentation
period were 21 days, the expiry date would be 30 June 20XX.

7.3.5.10 Confirmation instructions

If the proposed beneficiary has requested that the documentary credit be confirmed by a bank local to it, or a bank of its choice, the instructions will appear here. An instruction stating ‘Confirm’ is a request for the advising bank to add its confirmation. An instruction stating ‘May add’ is an authorisation for the advising bank to add its confirmation, if requested to do so by the beneficiary, and is usually subject to the beneficiary paying the confirmation fee in advance.

An instruction stating ‘Without’ means that the documentary credit is to be advised without the confirmation of the advising bank.

7.3.5.11 Bank-to-bank instructions

Bank-to-bank instructions do not form part of the standard application form but is a key field in the documentary credit. The issuing bank will complete this field with instructions regarding the disposal of the documents and
instructions regarding reimbursement. If there is a reimbursing bank, the name will be indicated in Field 53a of the SWIFT MT700 message.

If the documentary credit is to be advised through a second advising bank, this information will be stated in Field 57a.

7.3.5.12 The need for conditions to be applied to documents

Any condition that is not associated with a document to be presented under a documentary credit should be identified. If such conditions are found, they should be rectified, in liaison with the customer, before the documentary credit is issued. Rectification is achieved by requesting a document to be presented that will indicate compliance with the condition, or for compliance to be indicated in a document already listed for presentation.

These are generally referred to as ‘non-documentary conditions’. UCP 600, sub-article 14(h), explains why a customer should be encouraged to act in this way and provide details of the document that is to evidence
compliance with the condition.

h. If a credit contains a condition without stipulating the document to
indicate compliance with the condition, banks will deem such condition
as not stated and will disregard it.

7.3.5.13 Ambiguous issuers of documents and lack of  precise data content

If an application form uses terms that are covered in UCP 600, article 3, bank staff should explain to the customer the interpretation(s) that will be applied unless more detail is provided as to their intentions.
For the purpose of these rules:

Where applicable, words in the singular include the plural and in the plural 
include the singular.
A credit is irrevocable even if there is no indication to that effect.
A document may be signed by handwriting, facsimile signature, 
perforated signature, stamp,symbol or any other mechanical or 
electronic method of authentication.
A requirement for a document to be legalized, visaed, certified or similar
will be satisfied by any signature, mark, stamp or label on the document
which appears to satisfy that requirement.
Branches of a bank in different countries are considered to be separate
banks.
Terms such as “first class”, “well known”, “qualified”, “independent”,
“official”, “competent” or “local” used to describe the issuer of a document
allow any issuer except the beneficiary to issue that document.
Unless required to be used in a document, words such as “prompt”,
“immediately” or “as soon as possible” will be disregarded.
The expression “on or about” or similar will be interpreted as a stipulation
that an event is to occur during a period of five calendar days before
until five calendar days after the specified date, both start and end dates
included.
The words “to”, “until”, “till”, “from” and “between” when used to determine
a period of shipment include the date or dates mentioned, and the words
“before” and “after” exclude the date mentioned.
The words “from” and “after” when used to determine a maturity date
exclude the date mentioned.
The terms “first half” and “second half” of a month shall be construed
respectively as the 1st to the 15th and the 16th to the last day of the
month, all dates inclusive.
The terms “beginning”, “middle” and “end” of a month shall be construed
respectively as the 1st to the 10th, the 11th to the 20th and the 21st to
the last day of the month, all dates inclusive.

7.3.5.14 Absence of the name of an issuer and/or the absence of any data content

UCP 600, sub-article 14(f), indicates as follows.

f. If a credit requires presentation of a document other than a transport
document, insurance document or commercial invoice, without stipulating
by whom the document is to be issued or its data content, banks will accept
the document as presented if its content appears to fulfil the function of
the required document and otherwise complies with sub-article 14 (d).

A customer should be advised to complete the documentary credit application form, wherever possible, with details of an issuer of a required document and the data content that is to appear within that document. This
is particularly relevant when a documentary credit requires the presentation of an inspection certificate, analysis certificate, etc – that is, a document that has significant value to a customer in providing an assessment of the
quality of the goods that are being shipped or dispatched.

7.3.5.15 Acceptable clauses regarding the condition of goods on a transport document

To those without specialist knowledge of a particular industry, certain clauses in transport documents might suggest that a carrier, master,owner or charterer, or their respective agents, have received the goods in
a defective or unacceptable condition. An example of this may be a clause such as ‘atmospheric rust’ shown on a bill of lading covering a shipment of iron bars. In fact, this clause would give no cause for concern to those
involved in the trade, because it is an acceptable status for such goods.

When a customer is engaged in a commodity that is often shipped with acceptable clauses relating to its condition, the acceptance of certain clauses that may appear on the transport document should be obtained.
These clauses should then be referenced in the documentary credit. Such clauses will modify the effect of the rule quoted in UCP 600, article 27.

A bank will only accept a clean transport document. A clean transport
document is one bearing no clause or notation expressly declaring a
defective condition of the goods or their packaging. …

7.3.5.16 Instalment shipments
If an application form requires the documentary credit to stipulate that shipment of goods should be made in accordance with a stated installment schedule, the exact needs with regard to delivery of the goods should be
ascertained. This will ensure that the documentary credit, when issued, accurately reflects these needs – particularly in respect of partial shipments and the continued availability of the documentary credit in the event of failure by the beneficiary to adhere to the installment schedule. This is covered in UCP 600, article 32.

If a drawing or shipment by installments within given periods is stipulated
in the credit and any installment is not drawn or shipped within the period
allowed for that installment, the credit ceases to be available for that and
any subsequent installment.

It should be noted that this article applies only when a documentary credit indicates a series of given periods, as opposed to a sequence of latest shipment dates. A given period has a start and an end date, and the dates
of each period should not overlap.

The matter is also covered in ISBP 745, paragraph C15.

7.3.5.17 Transferable credits

If an application form requires that the documentary credit is to be transferable, the customer should be made aware of the content of UCP 600, article 38. The definition of transferable credit is contained in UCP
600, sub-article 38(b).

b. For the purpose of this article:
Transferable credit means a credit that specifically states it is “transferable”.
A transferable credit may be made available in whole or in part to another
beneficiary (“second beneficiary”) at the request of the beneficiary (“first
beneficiary”).
Transferring bank means a nominated bank that transfers the credit or, in
a credit available with any bank, a bank that is specifically authorized by
the issuing bank to transfer and that transfers the credit. An issuing bank
may be a transferring bank.
Transferred credit means a credit that has been made available by the
transferring bank to a second beneficiary.

Transferable credits are covered in Chapter 19.

7.3.5.18 Abbreviations

If an application form indicates abbreviated terms or uses any form of non-standard lettering or numbering, such as horizontal or vertical lines, virgules ( / ) or mathematical symbols, commas, etc, the customer’s intention should be obtained unless this is absolutely clear. Additionally, consideration should be given to how such non-standard markings would appear when incorporated into the text of the credit, particularly if issued in SWIFT or telex formats.

ISBP 745, paragraph A2(a) and (b), provide a definition of the use of the virgule (also known as the solidus or the forward slash) and commas, respectively.

A2) a. Virgules (i.e., slash marks “/”) may result in different meanings
and should not be used as a substitute for a word. If, nevertheless,
a virgule is used and no context is apparent, this will allow the use
of one or more of the options. For example, a condition in a credit
stating “Red/Black/Blue” with no further clarification will mean only
Red or only Black or only Blue or any combination of them.
b. The use of a comma when indicating a range of data in a credit such
as ports of loading or discharge or countries of origin, may result
in different meanings and should not be used as a substitute for a
word. If, nevertheless, a comma is used and no context is apparent,
this will allow the use of one or more of the options. For example,
when a credit allows partial shipment and indicates the port of
loading information as “Hamburg, Rotterdam, Antwerp” with no
further clarification, this will mean only Hamburg or only Rotterdam
or only Antwerp or any combination of them.

7.3.5.19 Ambiguous terminology

The terms defined in ISBP 745, paragraph A19 (‘shipping documents’, ‘stale documents acceptable’, ‘third-party documents acceptable’, ‘thirdparty documents not acceptable’, ‘exporting country’, ‘shipping company’ and ‘documents acceptable as presented’) are not defined in UCP 600. If an application form uses these terms, a customer should be warned that it bears the risk of any ambiguity in its instructions (ISBP 745, ‘Preliminary
Considerations’, paragraph (v)). The customer should be encouraged to use different or more definitive terminology that provides clarity as to its meaning. If the customer insists on using the stated terms, it should be
advised that the meaning applied would be that provided under ISBP 745, paragraph A19.

7.3.5.20 Documents to be issued or countersigned by an applicant

A customer will sometimes attempt to keep control of the payment process by making it a condition of a documentary credit that it issues or sign one or more of the stipulated documents. The beneficiary and the customer may have both agreed to such a condition(s), and for this reason it is of no concern of the banks. However, two provisions attempt to reinforce the unacceptability of this practice and emphasise the consideration that should be made by the beneficiary.

ISP98, rule 4.10, provides as follows.

A standby should not 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.

ISBP 745, ‘Preliminary Considerations’, paragraph (vii), similarly provides the following.

vii. A credit or any amendment thereto should not require presentation
of a document that is to be issued, signed or countersigned by the
applicant. If, nevertheless, a credit or amendment is issued including
such a requirement, the beneficiary should consider the appropriateness
of such a requirement and determine its ability to comply with it, or seek
a suitable amendment.

Wherever possible, an issuing bank should resist any requirement for a document to be issued or signed by an applicant unless it knows that the requirement has been agreed with the beneficiary.

7.4 Selecting an advising bank and/or a confirming bank

Wherever possible, banks use their own branches, associate offices
or preferred correspondent banks to advise a documentary credit to a
beneficiary. The reasons are that:
◆◆ arrangements already exist for authentication of messages; and

◆◆ the lines of communication are well established, which enables the speedy resolution of any problems that may arise.

If the application form indicates an advising bank that does not fall within these parameters, the issuing bank will choose a routing in terms of its own operational guidelines under advice to, and with the consent of, the
customer.

An application form will usually include the name and location of an advising bank when a proposed beneficiary has indicated a preference for the bank through which the documentary credit is to be advised and the
documents to be presented.

If the chosen bank of the beneficiary is not a correspondent of the issuing bank, the credit may still be routed through that bank by means of the advising bank sending it to that bank. The bank of the beneficiary will be
known as a ‘second advising bank’.

UCP 600, sub-articles 37(a) and (b), act as a disclaimer when an issuing bank transmits instructions to another bank.

a. A bank utilizing the services of another bank for the purpose of giving
effect to the instructions of the applicant does so for the account and at
the risk of the applicant.
b. An issuing bank or advising bank assumes no liability or responsibility
should the instructions it transmits to another bank not be carried out,
even if it has taken the initiative in the choice of that other bank.

The advising of a documentary credit, and the role of an advising bank and a second advising bank, are covered in Chapter 9.

It can be that a beneficiary will require the confirmation of the credit by a bank local to it. Like an advising bank, the issuing bank must be in a correspondent banking relationship with a bank that will be asked to add
confirmation and have a credit facility in place to allow that confirmation to occur.

The establishment of a credit facility in the name of the issuing bank, confirmation of a documentary credit and the role of a confirming bank are covered in Chapter 10.

7.5 Documentary requirements for a domestic or local documentary credit

A domestic or local documentary credit will usually require minimal documents. In most cases, this will consist of a commercial invoice and a delivery note or receipt.

For a local transaction, it is common for the applicant to be required to sign for the goods, and this will be evidenced on a delivery note or receipt that is issued by the beneficiary or the applicant.

7.6 The issuance of a pre-advice of a documentary credit

A preliminary advice of a documentary credit, sometimes known as ‘brief details’ or a ‘pre-advice’, is very much a declining practice. Such advice was designed to provide early notice to a beneficiary that a documentary
credit had been issued and that full details, in letter form, were being forwarded by airmail or courier. UCP 600, sub-article 11(b), clearly sets out the issuing bank’s position if such a preliminary advice has been given.

b. A preliminary advice of the issuance of a credit or amendment (“preadvice”)
shall only be sent if the issuing bank is prepared to issue the
operative credit or amendment. An issuing bank that sends a pre-advice
is irrevocably committed to issue the operative credit or amendment,
without delay, in terms not inconsistent with the pre-advice.

With the widespread use of the SWIFT MT700 message, the issuance of documentary credits in letter form is rapidly declining and remains prevalent only for local or domestic transactions in which the applicant and
beneficiary is located in the same country.

7.7 Preparing a documentary credit

When bank staff have completed their internal procedures and processed the application form, the actual documentary credit is ready to be prepared.

If the application data is already captured in an electronic system, the bank staff need only complete the additional data fields required in order to produce the documentary credit. If, however, the application form is received by either mail or telex, it is usually necessary for all of the instructions to be keyed into the issuing bank’s system. In addition to the details supplied by the customer, the issuing bank will include reimbursement instructions and any other bank-to-bank information, such as how documents are to be forwarded and whether the advising bank or another bank is requested or authorised to add its confirmation before sending the documentary credit to the beneficiary.

The application for issuance and the actual documentary credit, as issued, must match and be in accordance with the instructions of the customer, and it is the responsibility of the issuing bank to ensure that this is the case before transmitting or sending the documentary credit to an advising bank or the beneficiary.

7.8 Transmitting a documentary credit
Recall that UCP 600, sub-article 7(b), provides as follows.

b. An issuing bank is irrevocably bound to honour as of the time it
issues the credit.

Once the documentary credit is prepared and the issuing bank’s internal release procedures are completed, the credit will be transmitted by SWIFT or telex, or delivered by mail or courier, to an advising bank or directly to
the beneficiary. A copy of the transmitted documentary credit will be made available to the customer in hard copy or electronic form, together with the issuing bank’s advice of charges, if applicable.

The applicant should be encouraged to read the documentary credit carefully, to ensure that it matches its instructions. If it does not, the applicant should advise the issuing bank without delay. However, and as
stated earlier in this chapter, if it does not match the instructions, any attempt to rectify the error may be considered an amendment that is subject to the consent of the beneficiary and the confirming bank, if any
(see section 7.1.2).

The vast majority of documentary credits are issued in SWIFT MT700 format, and the transmitted details are considered to be the operative credit. It is extremely rare for issuing banks to prepare a mail confirmation if details of the documentary credit have been transmitted in full.

Figure 7.1 illustrates a process for issuing a documentary credit. In the example provided, there is not only an advising bank, but also a second advising bank (see section 7.4). The process for issuing amendments is
identical, other than that the applicable SWIFT message type is MT707, instead of MT700.

Figure 7.1 Information flow chart

Figure 7.1

MT700 is the SWIFT message type generally used to convey the details of a documentary credit to an advising bank, with or without a request or authorisation for confirmation to be added. An MT799 message may also
be used when a formatted message, such as the MT700, is not appropriate.Both of these SWIFT message types are authenticated messages.

An MT199 is authenticated, but it is free format and can be used for anything, while an MT999 is an unauthenticated message type. A message establishing a documentary credit by telex must be authenticated, and often the issuing bank will have testing arrangements with the advising bank. If such direct testing arrangements do not exist, the issuing bank will send the message to a correspondent bank that has testing arrangements, with a request to pass on the documentary credit authenticated between such correspondent bank and the advising bank.

If the documentary credit is sent in hard copy form, the signature(s) appearing thereon can be authenticated against specimens held with the advising bank.

The issuing bank should not send a telex to the advising bank and its correspondent with a request to the advising bank to verify the test with the correspondent.

UCP 600, article 1, requires that the text of a documentary credit make express reference to the rules to which it is subject.

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 binding on
all parties thereto unless expressly modified or excluded by the credit.

To accommodate this, SWIFT has created the following code words to be used in Field 40E of the MT7 message series.
◆◆ For UCP 600: ‘UCPLATESTVERSION’
◆◆ For eUCP: ‘EUCPLATESTVERSION’
◆◆ For UCP 600 and URR 725: ‘UCPURRLATESTVERSION’
◆◆ For eUCP and URR 725: ‘EUCPURRLATESTVERSION’

For documentary credits issued by telex or mail, the documentary credit is to indicate ‘Subject to UCP 600’ or ‘Subject to the Uniform Customs and Practice for Documentary Credits, 2007 Revision, ICC Publication No. 600’,
or words of similar effect.

Figure 7.2 illustrates an MT700 message, based on some of the data and
examples discussed throughout this chapter.

Figure 7.2 Example of an MT700 message

Figure 7.2 Start
LOC:XX0015 INSWFT MSG-700 TRN:B0000-1000
{1:C02FUENXITWAXXX8395461056}
{2:81630765539623GHQULITXNCAX918400337629618469261B}
****************************************
FROM: FINANCING BANK, FRANKFURT, GERMANY
27: Sequence of Total
1/1
40A: Form of Documentary Credit
IRREVOCABLE
20: Documentary Credit Number
00/PP/1278
31C: Date of Issue
XX0331
40E: Applicable Rules
UCPLATESTVERSION
31D: Date and Place of Expiry
XX0630 USA
50: Applicant
EUROPEAN DINNER SERVICE GMBH
FRENCH STRASSE 26, FRANKFURT, GERMANY
59: Beneficiary
DINNER WORLD INC
295 EAST 750TH STREET, NEW YORK 001001, USA
32B: Currency Code, Amount
USD215050,00
41a: Available With ..By..
MANHATTAN TRADE FINANCE BANK, NEW YORK BY NEGOTIATION
42C: Drafts at…
SIGHT
42a: Drawee
ISSUING BANK
43P: Partial Shipments
ALLOWED
43T: Transhipment
ALLOWED
44E: Port of Loading/Airport of Departure
ANY USA PORT
44F: Port of Discharge/Airport of Destination
HAMBURG
44C: Latest Date of Shipment
XX0609
45A: Description of Goods and/or Services
2530 SETS ‘NEW YORK’ BRAND DINNER SERVICES @ USD85.00 PER SET (EACH SET CONSISTING OF 5 X DINNER
PLATES, 5 X SIDE PLATES, 5 X SAUCERS, 5 X CUPS, 5 X SOUP PLATES, 5 X DESERT DISHES) AS PER PROFORMA
INVOICE NO. DW67295 DATED JANUARY 20, 20XX CFR HAMBURG INCOTERMS 2010
46A: Documents Required
+COMMERCIAL INVOICE IN ONE ORIGINAL AND 3 COPIES
+PACKING LIST IN ONE ORIGINAL AND 3 COPIES
+FULL SET OF CLEAN ON BOARD OCEAN BILLS OF LADING ISSUED TO ORDER OF FINANCING BANK MARKED NOTIFY
APPLICANT AND FREIGHT PAID
+CERTIFICATE OF ORIGIN ISSUED BY NEW YORK CHAMBER OF COMMERCE INDICATING THAT THE GOODS ORIGINATED IN
USA
+SHIPMENT ADVICE ADDRESSED TO THE APPLICANT GIVING DETAILS OF SHIPMENT: INCLUDING NAME OF THE VESSEL,
DATE OF SHIPMENT, QUANTITY OF GOODS SHIPPED AND THEIR VALUE. THE SHIPMENT ADVICE IS TO BE ACCOMPANIED
BY A COPY OF A COURIER RECEIPT INDICATING THAT THE ADVICE WAS SENT BY COURIER SERVICE, TO THE
APPLICANT, NO LATER THAN 5 WORKING DAYS AFTER THE DATE OF SHIPMENT
+PRE-SHIPMENT INSPECTION CERTIFICATE ISSUED BY CREATIVE INSPECTION SERVICES INDICATING THAT THE GOODS
ARE BRAND NEW, FULLY MEET THE SPECIFICATIONS AS GIVEN TO THEM BY THE APPLICANT AND HAVE BEEN PACKED IN
PACKAGING SUITABLE FOR THEIR CARRIAGE TO HAMBURG PORT.
Continues overleaf
Questions
© ifs University College 2015 115
Questions
1. When a documentary credit is available with the issuing bank, which
type of settlement is not appropriate?
A. Payment
B. Deferred payment
C. Acceptance
D. Negotiation
2. For a documentary credit that is available with a nominated bank by
sight payment, which of the following reimbursement conditions would
not be appropriate?
A. ‘Please debit our account held with you.’
B. ‘We will remit proceeds in accordance with your instructions upon
receipt of complying documents.’
C. ‘Please claim reimbursement from ZZZ Bank, New York.’
D. ‘We will remit proceeds in accordance with your instructions upon
receipt of a SWIFT message confirming that you have received a
complying presentation.’
47A: Additional Conditions
+A DISCREPANCY FEE OF USD75 WILL BE DEDUCTED FROM THE PROCEEDS
FOR EACH SET OF DOCUMENTS PRESENTED WITH DISCREPANCIES
+INSURANCE WILL BE COVERED BY THE APPLICANT
71B: Charges
ALL CHARGES OUTSIDE GERMANY ARE FOR ACCOUNT OF THE BENEFICIARY
48: Period for Presentation
21
49: Confirmation Instructions
WITHOUT
78: Instructions to the Paying/Accepting/Negotiating Bank
DOCUMENTS MUST BE SENT TO US IN ONE LOT BY COURIER SERVICE. UPON RECEIPT OF DOCUMENTS THAT WE DETERMINE
COMPLY WITH THE TERMS AND CONDITIONS OF THIS CREDIT, WE SHALL EFFECT SETTLEMENT IN ACCORDANCE WITH YOUR
INSTRUCTIONS.
-} {5:MAC:00011100} {CHK:Y452FQ8273D9}

Figure 7.2 End.

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