Documentary Credit

DOCUMENTARY CREDIT
A short description
DEFINITIONS
A Documentary Credit is an undertaking by the issuing Bank
to pay the beneficiary a stipulated amount if the latter fulfils
the terms and conditions of the credit.
A Documentary Credit is a separate transaction from the sales

or other contracts on which it may be based.
Banks are not concerned with or bound by underlying

contracts even if any reference to such contract is included in
the Credit.
Banks deal with documents, and not with goods, services and/
or performances to which the documents may relate.
PURPOSE
To make it easier for the parties to buy/sell goods and/

or services by:
guaranteeing the seller his payment against

presentation of documents in accordance with the
terms & conditions of the L/C, e.g. that goods or
services agreed upon have been shipped/performed.
giving the buyer a reasonable security that the seller

has fulfilled its part of the agreement before payment is
made
BACKGROUND
Uniform Rules for Documentary Credits have existed

since the beginning of the 20th century
The basic idea is that the Issuing Bank pays as soon as

it is informed about the shipment of the goods.
The main information carrier was and still is paper.
The development of the Transport and the Banking

Industries has influenced the revision of the UCO for
Documentary Credit issued by ICC (International
Chamber of Commerce).
THE TRANSACTION
Seller - Beneficiary Buyer -Applicant
The Advising Bank The Issuing Bank

THE TRANSACTION
1. Contract

THE TRANSACTION
1. Contract
2. D/C
Application

THE TRANSACTION
1. Contract
2. D/C
Application
3. Issuance of D/C
THE TRANSACTION
1. Contract
4. D/C - 2. D/C
Advice Application
3. Issuance of D/C
THE TRANSACTION
1. Contract
5. Shipment
4. D/C - 2. D/C
6. Documents
Advice Application
3. Issuance of D/C
THE TRANSACTION
1. Contract
5. Shipment
4. D/C - 2. D/C
6. Documents
Advice Application
7. Documents
3. Issuance of D/C
THE TRANSACTION
1. Contract
5. Shipment
4. D/C - 2. D/C
6. Documents 8. Documents
Advice Application
7. Documents
3. Issuance of D/C
WHERE IS THE RISK?
1. If discrepancies in the documents the risk is on ...

WHERE IS THE RISK?
2. If unconfirmed D/C and the docs

are clean, the risk is on ...

WHERE IS THE RISK?
3. If confirmed by the
Advising Bank and the 2. If unconfirmed D/C and the docs
docs are clean, the risk is are clean, the risk is on ...
on ...

WHO APPROVES THE DOCS?
If discrepancies in
the documents ...
If payable/negotiable at
If payable at the
advising bank
Issuing Bank ...
= Nominated Bank
The Issuing Bank

The Advising Bank
UNCONFIRMED DOCUMENTARY CREDIT
PAYABLE/NEGOTIABLE AT THE BANK
The beneficiary has the commercial and the

political risk on the Issuing Bank until the payable
bank is reimbursed for the payment under the D/C.
Payable means in principle that the bank shall have

immediate access to the funds from the Issuing
Bank
Negotiable means mostly that the bank must wait

for reimbursement until the documents have
WHEN TO ASK FOR A D/C?
Commercial Risk Political Risk
Unknown counterpart Political unstable countries
Financial weak counterpart Financial weak countries

Unknown counterpart
Special designed goods
Seasonal goods
DOCUMENTARY CREDIT - RISK COVER
Company
Financial Commercial
Risk
Exchange Political
TERMS OF THE D/C
The Credit to be issued on ..... at Transshipment allowed
the latest...
Shipment from ....
Issuing Bank
Who pays the bank charges and
Payable/negotiable at X-Bank courier service
Currency/amount Confirmed/uncorfirmed
Validity period At sight - deferred payment
Shipment period Goods description
Partial Shipments allowed Document specification
Terms of delivery - INCO-terms

2000
TERMS OF D/C (CONTD)
The term & conditions shall be simple and not be

designed as an obstacle for payment
Documents to be presented shall only be those

needed for the Buyer to import the goods and to give
him reasonable safety against fraud
Unknown Sellers could be controlled through third

party inspection and/or performance bonds.
D/C - PROS & CONS FOR THE BUYER
Advantages Disadvantages
Opportunity to control the High costs

delivery time
A need for credit line in the
A way to avoid advance Issuing Bank
payment
Not possible yo withdraw
Facilitate business with from the deal
certain markets
ICC UCP govern the banks

TIME LIMITS
If a time period ends on a holiday ....
.... then the validity is extended until the next

following banking day
If the last date for presentation of documents (the 21

days rule) is on next following banking day.
The latest day for shipment will not be prolonged

QUANTITIES
The word ”About” in connection with amount or quantity = +/- 10% deviation is
allowed
+/- 5% deviation is allowed for the goods if the quantity is given in weight, cubic
measure or length
If the quantity is given in number of units no deviation is allowed- for example ”1.000 pcs at 25 kg each”.
Up to 5% negative deviation of the amount is acceptable if:
the above mentioned is not applicable
full quantity is shipped
the unit price, if given, has been used

MOST COMMON DISCREPANCIES
The D/C has expired ”Notify address” in transport

documents not as per D/C
Late shipment
Transport documents erroneously
Late presentation of documents consigned
Goods description not as per Documents not legalised

D/C
Contradictory information in the
”On board” notation not correct documents
”Notify address” in transport

documents not as per D/C
INVOICE
Issued by the Beneficiary and made out in the name of the

Applicant
Goods description corresponding with that appearing in the

D/C
In the currency of the D/C
If a trade term is part of the goods description in the credit the

invoice must state the term specified
Shipping marks required in the credit should correspond with

the shipping marks in the documents.
INSURANCE POLICY
Dated the same day, at the latest, as the transport

document
Same currency as the D/C
If nothing else is given in the D/C, it must cover at least

110% of the CIF/CIP value of the goods
Cover from point to point of discharge or final destination.
An insurance document may contain reference to any

exclusion clause.
BILL OF LADING
”On-board” notification
Consigned as per D/C
Goods loaded on deck not allowed
Signed by the carrier or the captain or their agents
”Full set”
Shipping marks
”Feeder” - ocean vessel/on board notation/transhipment

LAW VS . RULES & REGULATIONS
ICC’s rules are no laws
Local law overrides UCP
Most lawyers are of the opinion that the laws of the

country, where the D/C is payable, prevails. But you
can never be sure!
Most courts take ICC’s rules in strong consideration

before they judge

Documentary Credit

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DOCUMENTARY CREDIT

A Documentary Credit is a separate transaction from the sales

Banks are not concerned with or bound by underlying

To make it easier for the parties to buy/sell goods and/

guaranteeing the seller his payment against

giving the buyer a reasonable security that the seller

Uniform Rules for Documentary Credits have existed

The basic idea is that the Issuing Bank pays as soon as

The main information carrier was and still is paper.

The development of the Transport and the Banking

Seller - Beneficiary Buyer -Applicant

The Advising Bank The Issuing Bank

Seller - Beneficiary Buyer -Applicant

The Advising Bank The Issuing Bank

Seller - Beneficiary Buyer -Applicant

The Advising Bank The Issuing Bank

Seller - Beneficiary Buyer -Applicant

Seller - Beneficiary Buyer -Applicant

Seller - Beneficiary Buyer -Applicant

Seller - Beneficiary Buyer -Applicant

Seller - Beneficiary Buyer -Applicant

1. If discrepancies in the documents the risk is on ...

Seller - Beneficiary Buyer -Applicant

The Advising Bank The Issuing Bank

1. If discrepancies in the documents the risk is on ...

Seller - Beneficiary Buyer -Applicant

2. If unconfirmed D/C and the docs

The Advising Bank The Issuing Bank

1. If discrepancies in the documents the risk is on ...

Seller - Beneficiary Buyer -Applicant

The Advising Bank The Issuing Bank

Seller - Beneficiary Buyer -Applicant

The Issuing Bank

The beneficiary has the commercial and the

Payable means in principle that the bank shall have

Negotiable means mostly that the bank must wait

Commercial Risk Political Risk

Unknown counterpart Political unstable countries

Financial weak counterpart Financial weak countries

Validity period At sight - deferred payment

Shipment period Goods description

Partial Shipments allowed Document specification

Terms of delivery - INCO-terms

The term & conditions shall be simple and not be

Documents to be presented shall only be those

Unknown Sellers could be controlled through third

Opportunity to control the High costs

ICC UCP govern the banks

.... then the validity is extended until the next

If the last date for presentation of documents (the 21

The latest day for shipment will not be prolonged

Up to 5% negative deviation of the amount is acceptable if:

the above mentioned is not applicable

full quantity is shipped

the unit price, if given, has been used

The D/C has expired ”Notify address” in transport

Goods description not as per Documents not legalised

”Notify address” in transport

Issued by the Beneficiary and made out in the name of the