Simple Documentary Credit Format

The ICC released a Guidance Paper in June 2022 which included recommendations for a simple documentary credit format. This was subsequently updated and made available with other guidance.

The Guidance Paper posits that use of a simple documentary credit is advantageous in well-established relationships between an applicant and a beneficiary. As such, the paper offers “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 recently been established by the ICC regarding ISBP, it is likely that the paper will 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.”

This observation is formulated based on numerous ICC Opinions over the years demonstrating the difficulties and complications that can arise from poorly drafted credits. Additionally, credits containing excessive details and/or including terms which only belong in an underlying agreement/contract have caused unintended consequences and payment delays. Applicants and beneficiaries alike should carefully consider what documents are truly needed for presentation, by whom they are to be issued, their data content, and the timeframe in which they must be presented. Documentary credits must not include wording that is ambiguous or susceptible to more than one interpretation, nor should they contain conditions for which fulfilment cannot be determined from the face of a document.

Only documents that are absolutely essential, such as those needed for customs clearance purposes, should be required for presentation by the credit. Abiding by this principle alone would prevent many discrepancies from ever being raised when documents are initially presented. Remember that banks deal with documents and not with the goods, services, or performance to which the documents may relate. Any concerns with goods, services or performance are outside the scope of UCP 600. Document descriptions should be as simple as possible whilst still satisfying any necessary contractual requirements.

For documents specifically referenced in UCP 600 and/or ISBP 821, it is only necessary to state requirements that are unaccounted for 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”. Another example, instead of specifying “insurance policy or certificate”, it is sufficient to state “Insurance document”.

Additionally for document types already treated in UCP 600 and/or ISBP 821, consider whether further requirements that modify or exclude UCP articles or ISBP paragraphs are really necessary. For example, consider whether the rather common requirement that the invoice be “signed” is necessary for the applicant or under any applicable law. Another example, instead of stating “Transport document must not contain any clauses or notations expressly declaring a defective condition of the goods or packaging”, consider whether this is actually needed. Including this requirement is redundant unless a specific deviation from UCP 600 is intended.

As for documents not specifically addressed in the rules and/or Practices, credits should stipulate what is expected: 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 for Building a Simple Credit

To create a simple documentary credit format, it is crucial to incorporate clear guidelines and adhere to established market practices.

Clear and unambiguous wording:

Use concise wording to avoid ambiguities and misinterpretations.

Core documents and data content:

Limit required documents to those absolutely essential, avoiding lengthy descriptions that provide scant protection or benefit. Specify the documents required for presentation, who should issue them, their data content, and the timeframe for presentation. Avoid vague 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 insert additional conditions when absolutely necessary and carefully evaluate inclusion of requirements that modify or exclude UCP articles and/or ISBP paragraphs, bearing in mind that such alterations may result in conflict with other UCP 600 stipulations or unwittingly leave a gap.

Avoid adding requirements which are only intended to meet the administrative needs of the issuing bank. After all, the credit is for the needs of the applicant and beneficiary. 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 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.

Electronic presentation considerations:

If electronic records are to be presented, the credit should indicate the format of each electronic record and comply with the current eUCP Version in place.

Avoid non-documentary conditions:

Ensure that the credit does not include conditions for which fulfilment cannot be determined from the face of a document. This can prevent various unintended consequences and payment delays.

Applicant and beneficiary contact details:

It is recommended to avoid, when possible, inserting into the credit additional details such as telephone number and e-mail address - applicant and beneficiary already have contact information for each other.

Amount of the documentary credit:

The amount should represent that which is payable to the beneficiary upon one or more complying presentations 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 specific justification for creating a banker’s acceptance.

Charges:

In a SWIFT MT700, field 71D (Charges) is optional but strongly recommended for completion in order to reduce the possibility of 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 the 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.