Standby Letters of Credit (SBLCs) mimic independent guarantees and were mainly issued by US banks predominantly during the time when issuance of guarantees seldom occurred in the US. Although US banks were never prohibited from issuing independent guarantees, in 1996, the US Office of the Comptroller of the Currency expressly permitted them to do so.      

Three years later, the OCC permitted US banks to issue dependent financial undertakings, although hereto, they had been able to do so in connection with other banking transactions in which they were involved. ISP98 was promulgated by the Institute of International Banking Law & Practice, endorsed by the ICC (ICC Pub. 590), and US banks started issuing their standbys subject to ISP98. 

Banks in much of the rest of the world gradually did the same as knowledge of the rules grew. Prior to ISP98, despite its limitations, UCP was used extensively for issuance of standbys since it reinforced the independence and documentary character of letters of credit. But UCP was never intended to govern standby letter of credit practice

UCP 600 and Standby Letters of Credit

UCP 600 Article 1 (Application of UCP) states in part: “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.”

The word “any” implies that a standby of any form, i.e. performance, advance payment, bid bond/tender bond, financial, etc, could be issued subject to UCP 600. The 2007 UCP revision made few changes relevant to standbys while carrying over the intent of UCP 500.

1. UCP 600 Article 34 includes the words “services or other performance” to address the specific nature of a standby letter of credit and be consistent with the phrase “goods, services or other performance” used throughout UCP 600.
2. UCP 600 sub-Article 14 (c) states, “A presentation including one or more original transport documents subject to articles 19, 20, 21, 22, 23, 24 or 25 must be made by or on behalf of the beneficiary not later than 21 calendar days after the date of shipment as described in these rules, but in any event not later than the expiry date of the credit.”
   • This was an important change in the 2007 revision. ISBP 821 (2023) further clarifies this. ISBP 821 A6 (a) states, “When a credit requires the presentation of a copy of a transport document covered by UCP 600 articles 19-25, the relevant article is not applicable, as these articles only apply to original transport documents. A copy of a transport document is to be examined only to the extent expressly stated in the credit, otherwise according to UCP 600 sub-article 14 (f).”
   • In fact, even before UCP 600, it was long established that the 21-day presentation period rule was not applicable to standbys. The ICC Banking Commission in its Opinion R168 (1987-1988) refused to apply the 21-day presentation period rule to a standby under UCP 400: “The commission decided that under a standby credit Article 47 (a) of UCP 400 does not apply, particularly where it is only a copy document which is, therefore, not a transport document.” During the 2007 revision process, some previously issued ICC opinions, such as this one, were thought to merit incorporation in the UCP rules.

Why UCP 600 is not suitable for Standby Issuance

Unlike ISP98, which was drafted for standby LCs and therefore caters to the myriad specific situations surrounding standby LCs, UCP only accommodates issuance of standby LCs. There are no provisions in UCP to cover situations like extend or pay, requests that the beneficiary issue its own undertaking to another (counter undertakings), and the like.

It should be noted that the word “standby” appears only once in the text of the UCP 600 rules. Only a few UCP 600 articles apply to standbys and some articles are inappropriate or otherwise incompatible with standby practice, tend to work contrary to the intentions of the parties, and, if applied, cause confusion in their interpretation and application. UCP 600 Article 1 aptly uses the phrase “to the extent applicable …” to signal this.

Examples of UCP 600 articles and topics that do not align with standby practice and tend to cause confusion include

1. Consistency of data across documents

UCP 600 sub-Article 14 (d) states, “Data in a document, when read in context with the credit, the document itself and international standard banking practice, need not be identical to, but must not conflict with, data in that document, any other stipulated document or the credit.” Documents requested to be presented under commercial LCs would normally relate to a shipment and therefore, are expected not to conflict with each other.

The same cannot be said about standbys. Documents under a typical standby need not necessarily be free of conflict. This is because the documents may relate to different underlying obligations. In case of default, documents, in fact, may be expected to be inconsistent with one another; a mix of documents requiring performance together with those indicating default. To avoid confusion, this article requires attention.

2. Force Majeure

UCP 600 Article 36 states, “A bank assumes no liability or responsibility for the consequences arising out of the interruption of its business by Acts of God, riots, civil commotions, insurrections, wars, acts of terrorism, or by any strikes or lockouts or any other causes beyond its control. A bank will not, upon resumption of its business, honour or negotiate under a credit that expired during such interruption of its business.”

The default position of UCP is that the beneficiary bears the risk of its inability to draw within the prescribed time due to a force majeure event. It fits reasonably well for a commercial LC where the beneficiary (usually the seller) controls the goods – it holds the documents of title – and therefore, the discrepancy is probably waived.

This UCP position, however, is opposite to standby practice in that standby beneficiaries are likely unwilling to bear the risk of forfeiture of their rights due to closure of a solvent issuer. It is due to this reason that this UCP article is invariably omitted from standbys issued under UCP 600. Text which has been used to modify the article might look like the following (which is in line with treatment under ISP98):

“Article 36 under UCP 600 is modified as follows: If the Letter of Credit expires while the place for presentation is closed due to events described in said Article, the expiry date of this Letter of Credit shall be automatically extended without amendment to a date thirty (30) calendar days after the place for presentation reopens for business.”

3. Closure when the expiration date is on a business day

UCP 600 Article 29 allows for extension of a credit’s expiry date and last day for presentation to the first following banking day (unless it is force majeure situation), if these dates fall on a day when the bank to which presentation is to be made is ordinarily closed (e.g., a weekend day). 

This rule does not apply to latest date of shipment and other dates specified in the credit. This provision is logical for commercial letters of credit which usually require presentation of documents that are linked to, and reflect delivery of, goods or services. It makes sense to omit the “latest shipment date” from the provisions of this article, as it has a material impact on the buyer who might not be able to secure possession of the goods at the expected time. Non-timely receipt of the goods could potentially result in the buyer not being able to sell the goods. For instance, shipment of seasonal goods or perishable items.

In addition to an expiry date, standbys sometimes contain deadlines for presentation of demands in instalments, for instance. Where such deadlines are present in a standby, there is no reason not to extend these dates, and the extension should apply to them as well.

For example, assume a standby requires presentation of a first instalment on a Sunday (when the issuer is closed), and therefore presentation is attempted on the next banking day. Under UCP 600 this would be a discrepancy (which departs from standby practice) since the scope of the extension rules only applies to expiry dates and not to other deadlines.

4. Partial drawings

There is no distinction in UCP between a drawing for less than the full amount and multiple drawings in situations when there is a drawing for less than the full amount. A drawing for less than the full amount would be unwelcome in most cases of a commercial LC where partial shipments are prohibited.

In standby practice, a prohibition of partial drawings means that only one drawing is permitted which must be in the full amount. Use of the term ‘multiple drawings prohibited’ means that only one drawing is permitted which can be for less than the full amount.

A standby LC issued under UCP must expressly exclude the relevant UCP 600 Article 31 (Partial Drawings or Shipments) and insert suitable replacement text to avoid confusion. Text for such modification might state:

“Partial and multiple drawings are allowed hereunder. The amount that may be drawn by beneficiary under this Letter of Credit shall be automatically reduced by the amount of any payments made through Issuing Bank referencing this Letter of Credit.”

5. Instalment drawings or shipments

UCP 600 Article 32 contains a suitable provision for commercial letter of credits on this matter. It provides that if a letter of credit specifies instalment payments, and if an instalment is not drawn, the credit ceases to be available for that and any subsequent instalments.

The rationale behind this provision is touched upon in the ICC’s COMMENTARY ON UCP 600, “The view of the Drafting Group and the majority of ICC national committees … was that by including a specific schedule in the credit there is a definite requirement for either a drawing to be made or goods to be shipped within a specific period. Failure on the part of the beneficiary to do so could result in a financial or other risk to the applicant. Therefore, there was a need for a penalty if the beneficiary does not comply with the instalment schedule.”

For a commercial credit, failure to draw would generally mean that the beneficiary has failed to make a required shipment. However, the same may not be applicable for a standby. A standby supporting an obligation to pay (e.g., rent to be paid every month) in instalments would normally be drawn upon when there is a failure to make a direct payment.

The UCP rule, if applied, would mean that the credit ceases to be available if it is not drawn as per the instalment schedule. This departs from general standby practice and defeats the whole purpose of having a standby as a secondary payment vehicle. It is for this reason that this article must be excluded or modified in a standby issued subject to UCP 600.

It should be noted that ISBP 821 Paragraph C16 (a)(i) elaborates on the phrase “given period” that is used in this article. It states, “Given periods are a sequence of dates or timelines that determine a start date and end date for each instalment.” It gives an example of an instance where this standard could be applied. ISBP 821 Paragraph C16 (b) (i) further provides:

“When a credit indicates a drawing or shipment schedule by only indicating a number of latest dates, and not given periods (as referred to in paragraph C16) (a) (i)): i. this is not an instalment schedule as envisaged by UCP 600, and article 32 will not apply. …”

6. Transferable credits

Treatment of transferable credits under UCP 600 departs considerably from what is expected in standby practice. 

Multiple transfers 

Whereas it is common practice to have standbys transferred multiple times, it is not allowed for in UCP 600 unless explicitly modified. UCP600 sub-Article 38 (d) states in part, “A transferred credit cannot be transferred at the request of a second beneficiary to any subsequent beneficiary. The first beneficiary is not to be considered a subsequent beneficiary.”

An example of a standby which requires transfer multiple times is when the beneficiary may be an indenture trustee who could be replaced numerous times over the life of the standby. A clause to modify UCP 600’s default provision could state:

“This Letter of Credit is transferable without charge any number of times, but only in the amount of the full unutilized balance hereof and not in part and with the approval of the Account Party which consent shall not be unreasonably withheld, conditioned or delayed.”

Partial transfers

Unlike commercial letters of credit, standby LCs rarely require partial transfers and therefore ISP98 does not specifically allow for partial transfer. In a commercial letter of credit, there might be multiple suppliers and/or the original beneficiary may retain the right to draw whereas a typical standby would involve transfer of the entire right to draw.

Standby credits issued subject to UCP 600 likely contain detailed clauses which modify the UCP rules. ISP98 rules on transfer of a standby are very comprehensive and therefore rarely require modification unless there are exceptional circumstances

7. Return of dishonoured documents

Unlike documents called for in commercial LCs which have importance themselves such as a bill of lading which could be a document of title and is required to collect goods from the carrier, documents presented under a standby LC typically have no intrinsic value.

Failure to dispose of them as requested by the presenter does not have any material impact. ISP98 Rule 5.07 aligns with this practice. Under UCP 600 sub-Article 16 (f), failure to follow disposal instructions would mean that the issuing bank “shall be precluded from claiming that the documents do not constitute a complying presentation.”

To address matters not covered by the UCP, some standbys issued subject to these rules – especially in the US – expressly state that those matters shall be governed in accordance with the laws of the issuer’s country. I have seen standbys from the US with this clause or similar:

“Unless otherwise expressly stated herein, this Letter of Credit is subject to the Uniform Customs and Practice for Documentary Credits (“UCP”), 2007 Revision, International Chamber of Commerce Publication No. 600. Matters not covered by the UCP shall be governed and construed in accordance with the laws of … .”

Today, ISP98 is largely considered the preferred set of rules for standbys. However, a small number of standbys in the US and other parts of the world continue to be issued subject to UCP600. This can predominantly be attributed to:

1. Bankers’ familiarity with UCP and therefore preference for the UCP current version, particularly for a “simple” standby such as a financial standby which is payable on presentation of a demand;
2. Inertia;
3. A reluctance by government agencies to amend their mandated forms;
4. So-called “power beneficiaries” who insist on UCP. In my experience, some Swiss entities prefer UCP over ISP98. One particular beneficiary I have come across is a Switzerland-based company selling fertiliser. Also, from my experience I know that a big bank (as beneficiary) in Australia chooses UCP over ISP.
5. Bankers and other standby users in some countries consider ISP98 to be too complicated and therefore uptake of ISP98 has been stunted in certain countries. For instance, some specialists consider the ISP98 rules “to be the most complicated guidelines ever published by the ICC” which explains why the publication of an “official commentary” seemed to be necessary

Nonetheless, adoption of ISP98 has grown over the years and continues to do so at a fast pace.

Why Standbys are still referenced in UCP 600

Even though UCP is not suitable for issuance of standby LCs and suggestions were made by several ICC National Committees during the 2007 revision process to delete reference to standbys, it remained. The UCP 600 drafting group felt that there were still a significant number of standbys that continued to be issued under UCP 600.

It also contended that even if the reference to standbys was removed, banks would continue to issue standbys subject to UCP 600. UCP, not being law, could not prohibit issuance of a standby subject to its rules anyway. Viewed a different way, nothing prevents a bank from issuing a commercial LC subject to ISP98, but why would anyone do so?

Unless very carefully drafted, standbys issued under UCP are susceptible to misinterpretation and could cause considerable uncertainty, and ambiguity, and hence be very problematic. ICC Opinion R303 (1998/99) – issued when UCP 500 was in force, but still applicable to UCP 600 – cautions that: “Care is needed in the use of standbys in a commercial setting, for which additional training may be necessary. Moreover, use of the UCP with a standby imposes additional questions which must be duly considered.”

A comment made in DOCUMENTARY CREDITS UCP 500 AND 400 COMPARED (ICC Publication No 511) advises that ICC National Committees (NCs) “must acknowledge that not all the Articles in the UCP apply to a Commercial Credit or to a Standby Credit and that a majority of the Articles do not apply to the Standby Credit. It is recognized that the parties to the Credit may wish to exclude certain Articles of the UCP from a specific type of Credit …” 

With the exception of the ICC Banking Commission’s stance on the UCP transport articles’ applicability for a standby (Opinion R168 issued under UCP 400 and equally applicable to UCP600), UCP does not give any guidance as to which articles are to not apply to a standby.

Standbys, by their nature, are very flexible and could be applied to transactions that require presentation of commercial documents e.g., transport documents, insurance documents, etc. Therefore, it becomes very difficult, if not impossible, to generalise the applicability of the articles.

Another comment contained in DOCUMENTARY CREDITS UCP 500 AND 400 COMPARED (ICC Publication No 511) disclosed that during this revision process, “NCs commented the possibility of identifying the individual articles applicable to the Standby Credit. It was decided that this request could not be met.”

In the transition from UCP 500 to UCP 600, no major changes were made to better suit the UCP rules for standbys. It is a very tight rope to walk when it comes to handling standbys issued subject to UCP. Utmost care and consideration must be taken when contemplating issuance of a standby subject to UCP and UCP standbys should be handled by experienced practitioners. 

The post The role of UCP in Standby Letters of Credit transactions appeared first on Trade Finance Global.

Therefore, where a situation demands and parties are in agreement, the rules may be amended to deviate from the default provisions or add to the rules to bring more precision. 

The variation of Incoterms, if agreed to by parties, is reflected in the sales contract. 

Letter of credit (LC) specialists, inter alia, should have an understanding of these variations to make sure that the terms of the LC reflect these variations. 

For instance, the status of freight charges to collect which transport documents routinely are required to show; similarly the insurance document with regards to the insured value and the type of cover. 

Also, some banks collateralise imported goods and therefore have an interest in the goods. 

The applicant submits the sales contract with their LC opening request which is reviewed by LC specialists. 

LC specialists must ensure that their bank’s interests are protected.

Variants in Incoterms® rules

Incoterms 2020 states: 

Caution with variants of Incoterms® rules

Sometimes the parties want to alter an Incoterms® rule. 

The Incoterms® 2020 rules do not prohibit such alteration, but there are dangers in so doing. 

In order to avoid any unwelcome surprises, the parties would need to make the intended effect of such alterations extremely clear in their contract. 

Thus, for example, if the allocation of costs in the Incoterms® 2020 rules is altered in the contract, the parties should also clearly state whether they intend to vary the point at which delivery is made and the risk transfers to the buyer. 

In the rules, (both Incoterms 2020 & Incoterms 2010), the words “Unless otherwise agreed …” appear several times in the context of cost allocation. 

Incoterms 2000 discusses ‘variants’ succinctly. 

Unlike 2020 or 2010, examples of those variants and their usage in the shipping industry are also addressed. 

The most common reason for alterations/variations is triggered by the need to change the allocation of costs in contrast to what INCOTERMS prescribes as applicable local customs at the place or port are typically the reason for this change.

Incoterms Variations Process

Discussed here are some commonly used variants which are still occurring with Incoterms 2020. 

EXW <place> <loaded> 

Allowing the buyer or buyer-nominated personnel to access the seller’s premises and use its equipment to load the goods opens up an array of issues and risks for the seller. 

Owing to the above, it is more practical for the seller to load the goods and this variant caters for those situations. 

‘Delivery’ in ex-works occurs when the seller places the goods at the disposal of the buyer. 

The seller bears the risk of loss or damage to the goods until such time ‘delivery’ takes place. 

With EXW <place> <loaded>, it puts the obligation on the seller to load the goods on the buyer’s collecting vehicle. 

However, it is unclear as to when ‘delivery’ happens. 

Therefore, it is important to clearly express the intentions of the parties by suffixing the desired wording. 

For example, if the parties do not want to change the risk allocation, they could add after the word ‘loaded’ the words ‘at buyer’s risk’ or even more precise wording such as ‘at buyer’s risk after the seller’s notice that goods have been placed at the disposal of the buyer’. 

FCA< <place> <variant> 

When FCA is used instead of FOB (which is unsuitable for containerised shipment) the point of delivery is shifted from the ship to an inland point in or outside the port area in the country of shipment. 

A number of charges arise in connection with handling and storage of the goods in cargo terminals called terminal handling charges (THC) which buyers anecdotally do not wish to accept. 

This explains why parties continue to use the inappropriate FOB incoterm. 

An FCA variant can solve this problem: FCA <place> <THC for sellers account> or FCA <place> <50% of THC for sellers account> if parties wish to divide the costs.

DAP <place> <cleared> 

In addition to the usual obligations of a DAP sale, the seller is also responsible for import clearance which is specifically excluded from the original DAP Incoterm.

DDP <place of destination> <VAT unpaid> or DDP <place of destination> <VAT excluded>

The seller bears the costs of import clearance but without accounting for VAT. 

The use of this variant is justified by the difficulties that the seller has in recovering tax paid on the value of merchandise in the country of destination. 

FOB < port> <variant> 

Incoterms do not recognise many specific terms used by the shipping industry for instance terms used with maritime transport stowed/trimmed/lashed/dunnaged, etc, and therefore do not have any reference of costs arising out of such operations. 

Parties, therefore, seek more precision by adding those words to the Incoterm. 

• FOB <port> <stowed> 

Under which the seller is also responsible for the correct placing of the goods in the cargo space. 

• FOB <port> <trimmed> 

Under which the seller is responsible for the levelling of the cargo. 

• FOB <port> <stowed and trimmed> 

Under which the seller is responsible for the correct placing of the goods in the cargo space and also levelling the cargo during or shortly after loading so that it is evenly distributed in each hold and throughout the entire ship. 

This process applies to dry bulk cargoes to ensure the stability and structural strength of the vessel. 

• FOB [(SLSD) stowed, lashed, secured, and dunnaged] load port terms. 

Under which the seller is responsible for the correct placing of the goods in the cargo space, ensuring that the goods are held in position (by ropes, wires, chains, traps, etc), and dunnaged, (i.e. timber or other material placed among the cargo for separation and protection from damage). 

Generally, using these variants shifts the expenses for stowing and trimming to the seller. 

If parties agree on a variant in their contract of sale by adding “stowed, secured, trimmed”, then the costs for the buyer would most likely be understood to begin only when the goods were safely stowed/secured/trimmed, as set out in the contract, and passage of risk would likewise be delayed.

Again in this regard, it is not clear whether variants refer not only to functions and costs, but also to risks, and intend that both go hand in hand. 

Clarifications similar to those suggested for EXW would then be appropriate. For example, “stowed and trimmed but at buyer’s risk after the goods have been placed on board” or similar. 

CIF <port> <variant>

• CIF <port> <Institute cargo clauses (a) insurance> 

The minimum insurance cover in case of CIF sale is risks covered under institute cargo clauses (C) which is a “bare-bones” cover. 

In a CIF sale, delivery occurs at the seller’s side and risk transfers at the seller’s end of the main carriage. 

The buyer may therefore ask for a higher cover (i.e institute cargo clauses (A)) so as to be able to recover losses should the ship fail to reach the destination. 

If agreed to between the parties, this can be amended and the variation noted in the sales contract will override the default provision of the rules. 

This variant, unlike others, does not present any complications since it does not introduce changes to the ‘delivery’ and ‘risk transfer’ clauses of the CIF incoterm. 

• CIF <port> <landed> 

This variant places responsibility with the seller for the unloading costs, including lighterage and wharfage charges or fees included in the sea freight which the seller has to pay. 

B9 (c) of CIF rules is altered in this instance. 

• CIF <port> <undischarged> or <free out> 

This variant limits the seller’s obligation to those that are to be affected inside the ship’s hold in the port of discharge. 

Costs of unloading should be borne by the buyer. 

• CIF <port> <out-turn> or <landed weight> 

Particularly used in the oil trading industry, this variant results in the seller bearing any loss arising out of transportation (i.e., evaporation, sludge, accumulation, spillage) and therefore the buyer pays for the weight of goods received (landed weight) and not the weight that is shown on the bill of lading at the load port. 

For the avoidance of doubt, it is advisable to expressly state that no changes are intended to ‘transfer of risk’ and ‘delivery’ clauses of Incoterms.

Pitfalls 

‘Transfer of risk’ and ‘delivery’ which are two key reasons for litigation are very well defined in Incoterms leaving very little to no room for interpretation. 

Contracts which use Incoterm variants are often ill-conceived, lack necessary detail, and are therefore prone to costly litigation, defeating the whole purpose of altering the rules in the first place. 

In international sales contracts, parties have to deal with different legal systems should any disputes arise. 

In the absence of a well-drafted contract, the use of Incoterms variants often results in an unpleasant outcome (i.e., not what the contracting parties had intended). 

Proceed with caution 

Contracting parties should be well aware that by incorporating trade term variants in their contracts, they are operating outside the scope of the Incoterms rules and contracting at their own risk. 

The ICC does not give any guidance on variants which depart from the rules, leaving it to the parties to clarify the content of such deviations. 

The ICC cautions that there are dangers in doing so and advocates for the need to use express contractual terms which are extremely clear and explain their intentions to avoid any unwelcome surprises. 

Contracting parties should therefore thoroughly consider why variation is needed and use variations sparingly, limiting them to occasions where customs applicable at the place or port are amply clear in their application. 

This article was published on Documentary Credit World.

The post Motivations and rationale for variation of Incoterms® rules appeared first on Trade Finance Global.

Modifications and exclusions explained

In the LC parlance, altering the envisaged intent of rules or practices either by rewording the rules or by stating that a particular rule or subset of rules do not apply, is loosely termed modification and exclusion. 

UCP 600 allows for exclusions or modification of the rules much like UCP 500. The phrase “…unless expressly modified or excluded…” in Article 1 of UCP 600 affects every other article of UCP 600, meaning that any article of the rules could be modified or excluded.

This made the phrase “…unless otherwise stipulated in the credit”, which appeared in many articles of UCP 500, redundant and they were, therefore, eliminated in UCP 600. The drafting group of UCP 600 opined that it significantly improved the style and readability of the rules.

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An example would be a situation where the transit time of a shipment is very short, for instance, 15 days. If an LC allowed for the default maximum presentation period of 21 days (Article 14 ( c ) of UCP 600), and the seller indeed takes 21 days to present the documents to the nominated bank, the goods will have arrived at the destination much earlier than the documents, likely leading to demurrage. This is one of many situations that would necessitate modification of rules.

Demurrage and spreadsheets: why it might be time to get rid of your spreadsheets

One such message standard is the MT 7 series, which is used for LC’s and guarantees. MT 700 is used for the issuance of LC’s and has designated fields with preset meanings. For example, Field 48, which is an optional field, is used for setting presentation period – setting it to a value other than 21 modifies the default position of 21 days as per article 14(C) of UCP 600.

While modifying the value in a specific field may also result in the modification of the default position of UCP 600, more often than not Field 47A (additional conditions) and 46A (documents required) carry this burden. On the other hand, exclusion of an article requires express notation in the LC stating that an article is excluded. 

PODCAST: The evolution of SWIFT

The modifications and exclusions listed below are some examples but is by no means an exhaustive list:

• A clause which we often see is “Should any terms or conditions stipulated in this credit be contradictory to or inconsistent with that of UCP 600, the relative UCP 600 provision(s) is/are deemed expressly modified and/or excluded”. This is a classic case of the statement that we often hear from the LC community “When the LC is silent UCP speaks and vice versa”. This clause, when inserted in the LC, excludes or modifies any provision in UCP 600 that is inconsistent with the LC terms. However, the ICC banking commission does not recommend the use of this clause as it deems it unnecessary to emphasize the wording in Article 1 of UCP 600.  Refer ICC opinion [R716/ TA.704rev]
• Inserting a clause in additional conditions “all documents must be presented through beneficiary’s bank”. Changes the default position of article 6(a) of UCP 600 thereby eliminating the beneficiary’s option of presenting documents directly to the issuing bank.
• Exclusion of Article 7(c) & 12(b) of UCP 600: by doing this the issuing bank is nullifying its undertaking to pay the nominating bank (confirming bank in the case that the nominating bank is the confirming bank as well) upon presentation of complying documents. Banks would generally not choose to act upon their nomination in these cases. There is a much simpler way of achieving the same outcome: by making the LC available ‘ONLY’ at the issuing bank’s counter. 
• Exclusion of Article 10(c) of UCP 600: Article 10(c) talks about the notification of acceptance of the amendment(s). The default position is that the beneficiary should either communicate their acceptance or rejection of an amendment by express notification or by the presentation of documents that comply with the credit. Until this happens, the credit retains its terms and conditions. Exclusions of this rule will require suitable wording in the LC that specifies the basis on which the acceptance or rejection is to be determined.
• Exclusion of Article 10(f) of UCP 600: While this article reads that any amendment which says that it comes into force unless rejected by the beneficiary within a certain time shall be disregarded in practice, banks have been excluding this rule. This puts the onus on the advising bank not only to promptly deliver the amendment to the beneficiary but also to revert the outcome back to the issuing bank. This becomes more complex in the case of transferable credits.
• Exclusion of Sub-article 14(f) of UCP 600: The exclusion of this article without inserting any other wording in lieu would make the LC unworkable. The nominated bank should clarify with the issuing bank and make sure that they understand to what and how the documents are to be reviewed. The nominated bank would be very hesitant to act on their nomination due to the associated ambiguity.
• The default position of UCP 600 as per article 14(g) is that documents not called for by the LC if presented, are returned at the cost of the presenter but are silent about the treatment of those documents in the context of the sanctions clause. Some banks explicitly state that unrequested documents, if present, will still undergo the sanctions process. Article 14(g) is excluded.
• Inserting a clause in additional conditions “Documents dated prior to LC issuance date not acceptable” changes the default position of UCP 600 Article 14(i) which allows for the presentation of documents dated prior to the issuance date of the LC. 
• Article 14(k) of UCP 600 has to be excluded If the importer wants to make sure that the other party they are dealing with is indeed the seller who will supply the goods.
• There are instances where the importer requires manually signed invoices for regulatory reasons (particularly LCs issued by countries in the Indian sub-continent). Such an LC, in field  46A of MT 700 section specifically states “Manually signed….invoices” and has to exclude 18(a)(iv) of UCP 600 and Article C10 of ISBP 745 for this clause to be effective.
• Exclusion of Article 18(b) of UCP 600: there are occasions where the issuing bank(s)/applicant do not wish to face the possibility of an invoice being issued for a greater value although the nominated/confirming bank has not honoured or negotiated for a higher amount than that of the LC. It is in these situations that article 18(b) must be excluded.

SWIFT Messaging Types – Use of structured messages across the Transaction Life Cycle

The pitfalls of modifications and exclusion

It’s not very hard for an issuing bank to get things wrong, so any LC with modifications or exclusion could be unworkable or require amendment if not drafted with the utmost care.

While some advising banks check the workability of the LC before advising it to the beneficiary, not all banks do.  As per Article 9(b) of UCP 600, the advising bank is under no obligation to check the workability of the LC.

The only obligation of an advising bank is to satisfy itself of the apparent authenticity of the credit or amendment received and that the advice to the beneficiary (or the second advising bank) reflects the terms and conditions of the credit or amendment received. That puts the onus on the nominated bank and the beneficiary to ensure that the LC is workable and that the beneficiary can present the required documents in the required form. 

Conclusion

While UCP 600 allows for the modification and exclusion of articles, doing so can result in an increase in discrepancies. Taking note of the fact that such exclusions are the subject of queries by the national committees.

ICC released a general statement in this regard, the ICC official Opinion R634 (TA.638rev), which reads that it is not as simple as making a statement in the credit that an article or sub-article is excluded or doesn’t apply. Often a new condition has to be inserted in the credit to compensate for the exclusion. It was recommended that banks keep the number of modifications and exclusions to a minimum. The last line above has also once again been emphasized in ICC official Opinion R716  [TA. 704rev]. 

While the ICC has done some work to discourage this practice of exclusions that make LC’s ambiguous and unworkable, clearly it is not enough. The number of questions raised and opinions sought from ICC is a testament to this fact. 

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