New set of rules applicable to letters of credit: UCP 600

The Uniform Customs Practice for Documentary Credits (“UCP”), first issued in 1933 by the International Chamber of Commerce (“ICC”), is the worldwide accepted set of rules governing the use of letters of credit (also known as documentary credits) in international commerce. The UCP applies to any letter of credit unless provided otherwise in such letter.

Generally, a letter of credit contains an irrevocable undertaking on the part of the issuing bank to honor (pay) an agreed credit on behalf of the purchaser, upon a presentation by the seller that complies with the terms and conditions of the credit.

Since UCP 500 became effective in January 1, 1994, new developments in transport, insurance and electronic commerce have rendered outdated such version of the rules.

After more than three years of reviewing and drafting, a valuable update of these important foreign exchange rules will finally come into effect on July 1, 2007[i].

This new set of rules, named UCP 600, incorporates the following significant changes to UCP 500:

(i)          A reduction in the number of articles from 49 to 39.

(ii)         New “Definitions” and “Interpretations” sections containing terms such as “honor” and “negotiation”, aimed at making the rules more precise by clarifying ambiguous terms.

(iii)       A 5 banking day term is provided for banks to accept or refuse documents. This replaces the “Reasonable time not exceeding 7 banking days” contained in UCP 500.

(iv)        A set of rules which make much more transparent the responsibilities of the parties to the documentary credit transaction.

(v)         Re-drafted transport articles aimed at resolving confusion over the identification of carriers and agents.

(vi)        A new provision concerning addresses of the beneficiary and the applicant.

(vii)      An expanded discussion of what “original documents” means.

(viii)     A new procedure for notice of refusal.

(ix)       The 12 Articles of the eUCP (ICC’s supplement to the UCP governing presentation of documents in electronic or part-electronic form).

Bank issuers of letters of credit are expected to review their policies and procedures in order to ensure that they administer the letters of credit according to the new rules.

The release of the new UCP 600 will introduce changes for all those involved in international trading. Since documentary credit exists to ensure successful transactions, failure to understand the applicable rules could well jeopardize any deal.

The Uniform Customs Practice for Documentary Credits (“UCP”), first issued in 1933 by the International Chamber of Commerce (“ICC”), is the worldwide accepted set of rules governing the use of letters of credit (also known as documentary credits) in international commerce. The UCP applies to any letter of credit unless provided otherwise in such letter.

Generally, a letter of credit contains an irrevocable undertaking on the part of the issuing bank to honor (pay) an agreed credit on behalf of the purchaser, upon a presentation by the seller that complies with the terms and conditions of the credit.

Since UCP 500 became effective in January 1, 1994, new developments in transport, insurance and electronic commerce have rendered outdated such version of the rules.

After more than three years of reviewing and drafting, a valuable update of these important foreign exchange rules will finally come into effect on July 1, 2007[i].

This new set of rules, named UCP 600, incorporates the following significant changes to UCP 500:

(i)    A reduction in the number of articles from 49 to 39.

(ii)   New “Definitions” and “Interpretations” sections containing terms such as “honor” and “negotiation”, aimed at making the rules more precise by clarifying ambiguous terms.

(iii)   A 5 banking day term is provided for banks to accept or refuse documents. This replaces the “Reasonable time not exceeding 7 banking days” contained in UCP 500.

(iv)   A set of rules which make much more transparent the responsibilities of the parties to the documentary credit transaction.

(v)   Re-drafted transport articles aimed at resolving confusion over the identification of carriers and agents.

(vi)   A new provision concerning addresses of the beneficiary and the applicant.

(vii)  An expanded discussion of what “original documents” means.

(viii)  A new procedure for notice of refusal.

(ix)  The 12 Articles of the eUCP (ICC’s supplement to the UCP governing presentation of documents in electronic or part-electronic form).

Bank issuers of letters of credit are expected to review their policies and procedures in order to ensure that they administer the letters of credit according to the new rules.

The release of the new UCP 600 will introduce changes for all those involved in international trading. Since documentary credit exists to ensure successful transactions, failure to understand the applicable rules could well jeopardize any deal.