INTRODUCTION

The Uniform Customs and Practice (UCP) is the primary source for letter of credit (LC) transaction.
Prior to the publication of the UCP, the rules in LC originating from trade customs and practices were
not unanimously applied by traders. The International Chamber of Commerce (ICC) whose function is
to harmonize the various trade customs practiced in LC, had initiated to compile those rules and
published them under one specific reference and named it as the UCP. The UCP is always been
updated in order to serve current market needs in regards to LC issues. Thus far, there is no specific
statute regulated for LC. The UCP, though customary in nature and has no legal effect, has been
adopted by more than 175 countries. Currently, it is unlikely to find the LC transactions, which is not
governed by the UCP. Compared to the previous versions, the latest version of the UCP 600 is
comprehensive and offers modification to the preceding LC rules. These rules are focusing on the
significant issues in LC such as bankers’ autonomy, revocable and irrevocable LC, strict compliance,
notice of refusal and fraud.

MEANING

Letter of credit (LC) is claimed to be the most famous and common method of payment in
international trade. Due to its characteristics, which provides security and facilitate trade between
exporter and importer, LC is frequently used and always referred to as a ‘life-blood of international
trade and commerce.

LC serves as an important tool to overcome the problems of trustworthiness between exporter and
importer. The role and function of LC is to provide efficient payment by using the bank as a reliable
paymaster to advance payment. The exporter will be automatically paid once he has presented to
the bank documents which are strictly complying the LC requirements, whereas the importer does
not have to pay should the exporter’s documents contain discrepancies and non-compliance with the
description of the goods in the underlying sale contract.

LC transaction is governed by the Uniform Customs and Practice for Documentary Credit (UCP). The
UCP contains a compilation of rules, which are originated from ancient traders’ practices. Previously,
these rules were not formally published. In order to avoid ambiguity and divergent practices, the
International Chamber of Commerce (ICC) had taken a reasonable effort to gather those practices
and codified them under one reference and published it in a form of rules, named the UCP. The first
edition of the UCP was published in UCP 1933. The latest revision is version 600, which is
implemented on 1st July, 2007.

The Uniform Customs & Practice for Documentary Credits (UCP 600) is a set of rules agreed
by the International Chamber of Commerce, which apply to finance institutions which issue
Letters of Credit – financial instruments helping companies finance trade. Many banks and
lenders are subject to this regulation, which aims to standardise international trade, reduce the
risks of trading goods and services, and govern trade.
The UCP 600 (“Uniform Customs & Practice for Documentary Credits”) is the official
publication which is issued by the International Chamber of Commerce (ICC). It is a set of 39
articles on issuing and using Letters of Credit, which applies to 175 countries around the world.

Is the UCP 600 legally binding?

The UCP 600 rules are voluntarily incorporated into contracts and have to be specifically outlined in
trade finance contracts in order to apply. They also allow flexibility for the international parties
involved.

Credits that are issued and governed by UCP 600 will be interpreted in line with the entire set of 39
articles contained in UCP 600. However, exceptions to the rules can be made by express modification
or exclusion.

The UCP 600 are the most successful rules ever developed in relation to trade and most Letters of
Credit are subject to them.

PURPOSE OF UCP 600

The UCP 600 replaced the UCP 500 on the 1st July 2007. It was brought about to standardize a set of
rules aiming to benefit all parties during a trade finance transaction. UCP 600 was created by
industry experts, and mandated by the Banking Commission, rather than through legislation. The
first UCP was created in 1933 and has been revised by the ICC up to the point of the UCP 600.

### Detailed Analysis of Provisions under UCP 600

Principle of Autonomy: Article 5

• Concept:
• The principle of autonomy establishes that an LC is a separate contract from the
underlying sale contract. This means the obligations of the issuing,
confirming, and negotiating banks are limited strictly to the handling of
documents.
• Bank's Role:
• Banks deal exclusively with documents and are not involved in disputes
concerning the goods or services being traded. Their duty is to ensure
that the documents presented comply with the terms of the LC.
• Any dispute between the importer and exporter regarding the underlying
contract does not impact the bank's obligation to honor the LC if the
documents are in order.
• Implication:
• This separation helps maintain the reliability and predictability of LCs as a
payment mechanism, ensuring that the bank’s payment obligation is
unaffected by external disputes.
• Previously, the UCP did not clearly state that banks are the sole parties dealing
with documents. UCP 600 explicitly delineates this, avoiding the broader
term "people" and focusing on banks.

All Credits Are Irrevocable: Article 3

 • Current Practice (UCP 600):
• Article 3 of UCP 600 states that all credits are irrevocable unless
explicitly stated otherwise, providing a more secure framework for
beneficiaries.
• Irrevocable LCs cannot be amended or canceled without the consent of
all parties involved, thus offering greater security and predictability in
international trade transactions.
• Despite the default irrevocability, Article 1 of UCP 600 allows for
revocable LCs if explicitly modified or excluded by the credit terms.

Strict Compliance: Article 14(D), (E), (J), Article 18(C)

• Requirement:
• Exporters must present documents that strictly comply with the terms
of the LC to receive payment. Non-compliance leads to rejection by the
bank.
• Changes in UCP 600:
• Less Rigid Compliance: UCP 600 relaxes the strict compliance
requirement by stating that data in documents need not be identical
but must not conflict with the LC terms or other documents. This
change aims to reduce the high rejection rate of documents under LCs.
• Addresses and Descriptions: The addresses of the beneficiary and
applicant need only be consistent with those in the LC and located in
the same country, reducing the risk of rejection due to minor
discrepancies.
• Commercial Invoice: The requirement for strict compliance is
maintained for the commercial invoice, which must correspond exactly
with the LC terms. This ensures that the core financial document
remains accurate and reliable.

Notice of Refusal: Article 16

• Bank's Duty:
• If documents presented under the LC do not comply, the bank must
issue a notice of refusal. This notice must be given by
telecommunication or another expeditious means within five banking
days of receiving the documents.
• Specific Requirements:
 • The notice must include a statement of refusal and list each
discrepancy found. It must also specify what will be done with the
documents, choosing from options such as holding them at the bank’s
disposal or returning them to the presenter.
• Failure to provide a proper notice of refusal within the stipulated time
precludes the bank from rejecting the documents later.
• Conditional Refusal:
• UCP 600 introduces the concept of conditional refusal, allowing banks
to provide a more detailed and specific notice, thereby reducing
disputes over the reasons for rejection.

Fraud in LC

• Current State:
• Fraud remains a significant issue in LC transactions, with no specific
provisions in the UCP to address it. Instead, fraud is managed under
national laws, which vary in effectiveness and consistency.
• Issues:
• National laws often lack the technical specificity required to handle LC
fraud comprehensively, leading to difficulties in prosecution and
punishment of fraudsters.
• Fraud exceptions generally recognize fraud in documents but not fraud
related to the goods, limiting the scope of legal recourse.
• Recommendation:
• Future revisions of the UCP should include explicit provisions for fraud,
potentially modeled on the UCC Article 5 or PRC Rules, which
acknowledge fraud in the goods as an exception to the principle of
autonomy.