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Decades ago individual countries were following their own international rules in respect of
letter of credit practice rules. This caused confusion in international trader. To alleviate this,
International Chamber of Commerce (ICC) came out with a set of contractual rules relating to
LC practice in the year 1933. The objective was to establish uniformity across countries in the
practice. These rules are called ‘ Uniform Customs and Practice for Documentary Credits ‘,
commonly known as ‘ UCPDC. ‘

Subsequently the rules were revised 6 times by ICC. The 6 th revision, which is the current one, is
known as the “ Uniform customs and Practice for Documentary Credits, 2007 revision, ICC
Publication No. 600 (UCP) “, which came into force with effect from 01st July 2007.

In order to subject a Documentary Credit (Letter of Credit) to the UCP rules, the relevant
number of the UCP rules should be expressly indicated in the text of the Documentary Credit
(Letter of Credit). Hence the current version of UCP Rules will be applicable only if the
Documentary Credit specifically states that it is subject to ‘ The Uniform Customs and Practice
for Documentary Credits, 2007 Version, ICC Publication No.600(UCP)’. Where the credit is
subject to UCP 600, all parties thereto are bound by UCP 600 Rules. At the same time it is open
to the parties to have a LC worded in such a way that certain UCP Rules are expressly modified
or excluded with regard to that particular LC.

As regards UCP 600, it can be made applicable to Standby Letter of Credit (SLBC) also to the
relevant extent.

While previous version (UCP 500) contained 49 articles, the current revision (UCP 600) contains
39 articles only. Based on their relevance, the 39 Articles can be grouped as under:

--> Articles 1 to 6: Applicability of UCP, terminology used & basic principles of LC.

--> Articles 7 to 17: Roles & responsibilities of various banks and rules related to handling of

--> Articles 18 to 28: Content requirements for documents.

--> Articles 29 to 37: Miscellaneous provisions.

--> Articles 38 & 39: Principles related to transfers & assignments of proceeds.

We will now examine some important articles of the current version of the credit (UCPDC 600).

Article 1 : This article expresses the indication within a credit that it is subject to UCP 600, which
means that the letter of credit (documentary credit) is subject to UCPDC 600 version and is
governed by the norms prescribed therein. While opening/issuing LC, this shall expressly be
shown in the text of the LC. It may be noted that this article indicates that it is applicable to
Standby Letter of Credit (SBLC) also.

Article 3 : If the credit is revocable it has to be mentioned in the credit. If nothing is mentioned,
all such credits shall be treated as irrevocable.

Article 4 : A credit by its nature is a separate transaction from the sale or other contract on
which it is based.

Article 5 : Banks deal with documents and not with goods/services/performance to which the
documents may relate.

Article 14 : The nominated bank, confirming bank (if any) & issuing bank each can take a
maximum of 5 banking days for verification of documents.

Article 29 : If the expiry date of a credit or the last day for presentation falls on a day when the
bank to which presentation is to be made is closed for reasons other than those referred to in
article 36, the expiry date or last day for presentation will be extended to the first following
banking day. However the latest date for shipment will not be extended as a result of this

Article 36 : A bank assumes no liability or responsibility for the consequences arising out of the
interruptions 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. Hence a bank
will not upon resumption of its business, honor or negotiate under a credit that expired during
such interruption of its business.

Article 38 : This article indicates that a documentary credit can be transferred only if it
specifically states that it is ‘transferable’.

For further details on all the 39 Articles of UCP 600, please refer to the ICC Publications on

Let us now understand what is LC & different types of LCs.

A Letter of Credit (LC) is an instrument issued by a bank, at the request of an applicant (buyer),
in which the bank promises / undertakes to make payment of a specified amount to the named
beneficiary (seller) provided the seller submits documents as per the terms and conditions
stipulated in the credit.

1.Back-to-Back LC : This type of LC refers to two LCs used together to help a seller finance
purchase of equipment / goods /services from a sub-contractor/sub-supplier.
2. Transferable LC : A transferable LC permits the beneficiary (seller) of the LC to make part or
all of the credit available to another party, thereby creating a second beneficiary. The party that
initially accepts the transferable LC from the bank is referred to as the first beneficiary. The
transfer clause shall expressly be shown in the text of the LC, without which the credit will not
become eligible for transfer. An LC once transferred cannot be further transferred
(fully/partially) to a new beneficiary.

3. Red Clause LC : This is an LC that gives the beneficiary the added security of getting pre-
shipment finance from the advising bank. The LC bears a clause in red letters that instructs the
bank to extend pres-shipment finance to the beneficiary.

4. Standby LC (SBLC/SLOC) : A standby LC is used by banks in some countries where there is

restriction to issue LCS or Guarantees. In fact SBLCs act as a substitute for performance or
financial guarantees. The seller will ask for SBLC, which can be cashed on demand if the buyer
fails to make payment by the date specified in the contract.

5. Revolving LC : A revolving Letter of Credit is a kind of documentary credit issued by banks in

which the beneficiary is allowed to use a determined amount continuously over a specified
period, at specific intervals. It can either be issued on a reducing balance basis or by way of
reinstating the original limit once the payment of the particular LC opened is paid.



Incoterms are a set of three-letter standard trade terms most commonly used in International
contracts for sale of goods. Latest version Incoterms 2010 came into force with effect from 1 st
January 2011 with standard sets of three letter terms & conditions with an intention to create a
universal set of trade terms for use of all countries. It is mandatory to show the appropriate
Incoterm in the valid contract and in the LC established based on the valid contract. Incoterm is
designed to explain the contractual rights & obligations of the seller and the buyer in sale of
goods. Incoterms state which party to the sale contract has the obligation to make carriage or
insurance arrangements.

The number of terms in the current version of Incoterms 2010 is 11, which are as follows.

Rules for Any Mode of Transport:

• CIP : Carriage & Insurance Paid [named place of destination]

• CPT : Carriage Paid To [named place of destination]

• DAP : Delivered At Place [named place of destination]

• DAT : Delivered At Terminal [named terminal at port or place of destination]

• DDP : Delivered Duty Paid [named place of destination]

• EXW : Ex Works [named place of delivery]

• FCA : Free Carrier [named place of delivery]

Needless to mention, for Multimodal Transporting also the above Incoterms are to be used.

Rules for Sea & Inland Waterway Transport:

• CFR : Cost & Freight [name port of destination]

• CIF : Cost, Insurance & Freight [named port of destination]

• FAS : Free Alongside Ship [named port of shipment]

• FOB : Free On Board [named loading port/port of shipment]

Summary of Costs & Delivery obligations of the above 11 Incoterms is as shown hereunder.

• E : Seller not included any transport expenses in the invoice.

• F : Seller has included transportation costs up to the main port/airport of loading.

• C : Seller has included transportation costs up to the main port/airport of destination.

• D : Seller has included all the costs usually up to the buyer’s premises.