LEGAL VIEWPOINT: What is Uniform Customs and Practice (UCP)? Part II By Dr AbdelGadir Warsama Ghalin, Legal Counsel

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Dr AbdelGadir Warsama Ghalib, Legal Counsel

In the last article, we gave a general info to explain what is “UCP 600”, herein, we proceed to highlight the following points.

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The Uniform Customs and Practice for Documentary Credits, UCP 600, are rules that apply to any documentary 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.

In UCP 600, credit means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation.

In this context, to “honour”, means, to pay at sight if the credit is available by sight payment. Or, to incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment. Or, to accept a bill of exchange (draft) drawn by the beneficiary and pay at maturity if the credit is available by acceptance.

In UCP 600, there is reference to credits and contracts. In this respect, 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. Consequently, the undertaking of a bank to honour, to negotiate or to fulfill any other obligation under the credit is not subject to claims or defenses by the applicant resulting from its relationships with the issuing bank or the beneficiary.

A beneficiary can in no case avail itself of the contractual relationships existing between banks or between the applicant and the issuing bank. 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.

In UCP 600, there is also reference to documents and goods, including services or performance. Banks only deal with documents and not with goods, services or performance to which the documents may relate. This is the cornerstone issue for documentary credits as banks deal with documents only.

In UCP 600, a credit must state the bank with which it is available or whether it is available with any bank. A credit available with a nominated bank is also available with the issuing bank. Also, a credit must state whether it is available by sight payment, deferred payment, acceptance or negotiation. A credit must not be issued available by a draft drawn on the applicant. 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.

The place of the bank with which the credit is available is the place for presentation. The place for presentation under a credit available with any bank is that of any bank. A place for presentation other than that of the issuing bank is in addition to the place of the issuing bank. Except as provided in the rules, a presentation by or on behalf of the beneficiary must be made on or before the expiry date.

In UCP 600, the Issuing Bank Undertaking is there, 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 sight payment, deferred payment or acceptance with the issuing bank; or sight payment with a nominated bank and that nominated bank does not pay; or 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; or 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 and negotiation with a nominated bank and that nominated bank does not negotiate.

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