The features of documentary credits
Learning objectives This chapter looks at the different types of features and conditions that can be seen in documentary credits. By the end of this chapter, you should be able to: ◆◆ identify the different types of features and the data that is required to appear in a documentary credit; and ◆◆ understand the requirements, scope and application of these features and conditions.
Some features and conditions are fundamental to all documentary credits; others, by means of the insertion of clauses or a recognised form of wording, provide a speciality function. A number of these characteristics are provided for within UCP 600 and ISP98, but others have gained acceptance under the umbrella of international standard banking practice. This chapter looks at those features and conditions that are more commonly encountered when handling documentary credits.
20.2 Revocable documentary credits
A revocable documentary credit may be amended or cancelled by the issuing bank at any time and without prior notice to, or with the consent of, the beneficiary.
As a consequence, revocable documentary credits are rarely used and are not covered in UCP 600. Among other things, UCP 600, article 3, presumes that documentary credits are irrevocable.
When a revocable documentary credit is issued, it needs to state specifically that it is revocable, and incorporate the terms and conditions that will apply to the revocability.
It should be noted that a revocable documentary credit offers no security of payment to a beneficiary and may not be considered a fair exchange for the goods, services or performance to be provided by a beneficiary.
An issuing bank remains liable to reimburse a nominated bank for any honour or negotiation made before it received notice that the documentary credit had been revoked. This includes a liability to reimburse such bank for any deferred payment undertaking incurred before it received a revocation notice.
20.2.1 Managing risk under a revocable documentary credit
When a revocable documentary credit is issued, an issuing bank should restrict honour or negotiation to a single nominated bank – that is the advising bank. This means that, in the event of an amendment or the need for a cancellation notice, the issuing bank can communicate clearly and directly with a specific bank, reducing the chances of error. It also removes the possibility of another nominated bank acting under the revocable documentary credit, while unaware of any amendment or cancellation notice, in circumstances under which it was available with any bank.
If a request for cancellation is received from an applicant, the issuing bank should inform the applicant that it remains liable for any honour or negotiation made by the nominated bank prior to its receipt of the cancellation notice. Ideally, the applicant should be so advised at the time
The issuing bank must advise the advising bank of the cancellation without delay. At the same time, it should also request the advising bank to confirm its receipt of the message and/or the details of any honour or negotiation that it has undertaken prior to the receipt of the cancellation notice.
Source: Guide to Documentary Credits By Gary Coller
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