Also published at https://www.doccredit.world/simple-documentary-credit-format/?ref=documentary-credit-world-newsletter
A few years ago, the ICC released a Guidance Paper which included recommendations for a simple documentary credit format. This was recently updated and made available, with other guidance, at https://iccwbo.org/news-publications/policies-reports/set-of-guidance-papers-on-recommended-principles-and-usages-around-ucp-600/
The Guidance Paper highlights that a simple documentary credit is a value-added option in well-established relationships between an applicant and a beneficiary. As such, the paper provides guidance in respect of the optimal approach required in order to achieve a straightforward, uncomplicated documentary credit format. In view of the fact that an Educational Project has been established by the ICC in respect of ISBP 821, it is likely that the paper will now be reviewed in order to ensure it still reflects current practice.
As stated in ISBP 821 Preliminary Considerations (iv), many of the problems that arise at the document examination stage could be avoided or resolved by the respective parties through careful attention to detail in the credit or amendment application and issuance of the credit or any amendment thereto.
Numerous ICC Opinions over the years have highlighted the difficulties and complications that can arise from poorly or badly drafted credits. Additionally, credits which contain excessive details and/or have included terms which only belong in an underlying agreement/contract have caused unintended consequences and payment delays. The applicant and beneficiary should carefully consider the documents required for presentation, by whom they are to be issued, their data content and the time frame in which they are to be presented. Documentary credits must not include wording that is ambiguous or subject to more than one interpretation, nor should they state conditions for which fulfilment cannot be ascertained from the face of a document.
Only documents that are absolutely essential (e.g. for customs clearance purposes) should be required by the credit. This is an absolute key issue as it would wipe out many of the discrepancies that are raised when documents are initially presented. Remember that banks deal with documents and not with goods, services or performance to which the documents may relate. Any issues with goods, services or performance are outside the scope of UCP 600. Document descriptions should be as simple as possible whilst still meeting any necessary contractual requirements.
For documents specifically mentioned in UCP 600 and/or ISBP 821, it is only necessary to state requirements that are not already mentioned in UCP 600/ISBP 821. For example, do not state "Full set clean on-board original multimodal bill of lading" - but simply "multimodal bill of lading".
For documents specifically mentioned in UCP 600 and/or ISBP 821, limit further requirements that modify or exclude articles or paragraphs to the necessary minimum. For example, consider whether the rather common requirement that the invoice be "signed" is necessary for the applicant or under any applicable law.
For documents not specifically mentioned in UCP 600 and/or ISBP 821, provide the name of the issuing entity and describe, in clear and precise wording, the required content.
It is strongly recommended that documentary requirements be limited to an invoice or transport document.
Any additional documents should be sent directly by the seller to the buyer, outside of the credit.
Basic considerations
To create a simple documentary credit format, it is crucial to incorporate clear guidelines and adhere to established market practices.
Clear and unambiguous language:
Use concise language to avoid ambiguities and misinterpretations.
Essential documents and data content:
Limit the documents to those absolutely essential, avoiding lengthy descriptions that provide little protection. Specify the documents required for presentation, who should issue them, their data content, and the timeframe for presentation. Avoid ambiguous or overly detailed requirements.
Description of goods:
Keep the goods description as short and concise as possible. Lengthy details actually provide little or no protection to an applicant in relation to the goods that will be received as banks do not verify the goods in any manner.
Additional conditions:
Only add additional conditions when absolutely necessary and carefully consider inclusion of requirements that modify or exclude articles and paragraphs in UCP 600 or ISBP 821 respectively, bearing in mind that such modification or exclusion may result in conflict with other UCP 600 stipulations or leave a gap.
Avoid adding requirements which are only intended to meet the administrative needs of the issuing bank. For example, clauses such as ‘all documents to indicate credit number and date, and name of issuing bank' or ‘copy of each document is to be presented for issuing bank's file' are to be avoided.
Compliance with UCP 600 and eUCP:
The documentary credit should explicitly state that it is subject to UCP 600 and, if applicable, eUCP Version 2.1 (or the applicable version at that time). This ensures uniformity and clarity in handling electronic records.
Avoid non-documentary conditions:
Ensure that the credit does not include conditions for which fulfilment cannot be ascertained from the face of a document. This prevents unintended consequences and payment delays.
Electronic presentation considerations:
If electronic records are to be presented, the credit should indicate the format of each electronic record and comply with eUCP Version 2.1. (or the applicable version at that time).
Applicant and beneficiary:
It is recommended to avoid, when possible, inserting additional details such as telephone number, e-mail address - these will already be known between the applicant and the beneficiary.
Amount of the documentary credit:
The amount should represent that which is payable to the beneficiary upon one or more complying presentations being made under the documentary credit.
Availability:
As stated in the ICC Guidance Paper on the use of drafts, it is recommended that the habit of requiring a draft for a documentary credit available at sight be curtailed, particularly sight drafts drawn on an issuing bank, confirming bank, or a bank nominated to pay, unless required for a specific commercial, regulatory or legal reason.
Furthermore, it is recommended that banks issue usance documentary credits available by deferred payment as an alternative to availability by acceptance or negotiation of a draft, unless there is a specific commercial, regulatory or legal reason to create a banker's acceptance.
Charges:
In a SWIFT MT700, this field is optional but strongly recommended for completion in order to avoid later confusion or misunderstanding. This field is to be used only to indicate charges that are for the beneficiary's account. Absence of this field means that all charges are for the applicant's account.
In circumstances when issuing bank charges are for account of the beneficiary, there should also be an indication of the actual amount or formula to be used in order to calculate the charges that are to be collected.