v INTRODUCTION
v SALIENT PROVISIONS OF UCP
OPENING OF L/C IS BASED ON UCP
UCP GUIDES NEGOTIATION OF DOCUMENTS
v DOCTRINE OF STRICT COMPLIANCE
BANKS DEAL IN DOCUMENTS, NOT IN GOODS DOCUMENTS SHOULD BE NON-DISCREPANT
v TIME FOR EXAMINATION
v TIME FOR PAYMENT
v OPTION IN CASE DOCUMENTS ARE DISCREPANT
v FAILURE OF ISSUING BANK TO COMMUNICATE DECISION
v CHECK YOUR UNDERSTANDING
v REVIEW QUESTIONS
INTRODUCTION
Exporter and importer reside in different nations. Each nation has its own laws. Contract in a country is not only governed by the law of the land but also commercial practices of that country. Apart from Indian laws, the international commercial practices have certain bearing on the export-import contracts. In order to guard against confusion and misunderstanding, opening and negotiation of letter of credit are governed by ”Uniform Customs & Practice for Documentary Credits” commonly known as UCP. The International Chamber of Commerce, Paris has prepared the document ”Uniform Customs & Practice for Documentary Credits”.
These have been revised from time to time and brought up to date. Presently, they are applied in almost all the countries, including India. The latest in the line of revisions is UCP 500 (w.e.f. 1st January 1994), which updates and consolidates the previous UCP400.
Salient Provisions of UCP
UCP is a document, which is used by the bank in the negotiation of letter of credit. The salient provisions of UCP are:
(A) Opening of L/C is based on UCP
At the time of opening of letter of credit, the provisions of UCP guide opening bank. UCP is a bible to banks for negotiation of export-import documents.
Every exporter wants to enjoy payment before the physical possession and title to goods is passed on to the importer. This becomes possible when the importer opens letter of credit in favor of exporter through the medium of bank. Based on the application of the importer, bank opens the letter of credit in favour of the exporter. By opening a letter of credit, opening bank makes a commitment to the exporter to make payment once the documents contained in the letter of credit are presented and, on scrutiny, found to be in order. Correct opening of letter of credit can ensure successful completion of transaction. So, the opening bank takes utmost care at the time of opening letter of credit. After scrutiny of the application form, the opening bank opens the letter of credit, subject to the provisions of UCP. (B) UCP guides Negotiation of Documents
When documents are presented to the negotiating bank for payment, it makes payment, provided the documents are in accordance with the terms of letter of credit, strictly. Beneficiary also can present the documents, directly, to the opening bank and can claim payment. Opening bank makes reimbursement to the negotiating bank, provided the documents are in order. Whether the documents are in order or not, banks decide based on the provisions of UCP.
(C) Doctrine of Strict Compliance
The operation of letter of credit as a mode of payment is based on the principle of “Doctrine of strict compliance”. Under this principle, banks have to make the decision in respect of payment, based on documents presented to them. Banks have the right to reject the payment if any document is not in strict conformity with what is asked for in the letter of credit. The banks follow international standard banking practices to determine whether the documents stipulated under the letter of credit are in compliance with the terms and conditions of L/C or not. The standard banking practices are published in Uniform Customs and Documentary Practices, which are published by the International Chamber of Commerce, Paris.
(D) Banks deal in Documents, not in Goods
Though letter of credit is based on the sale/purchase contract, the letter of credit transaction is independent of the physical transaction of goods.
Article 3 of General Provisions and Definitions states:
“Credits, by their nature are separate transactions from the sales or other contracts on which they may be based and banks are in no way concerned with or bound by such contracts”.
Banks do not deal in goods; they deal in documents only. There is no minor or major discrepancy in documents. Any discrepancy makes the documents liable for rejection. The Supreme Court has reconfirmed this principle in United Commercial Bank Vs Bank of India and others.
(E) Documents should be Non-discrepant
The documents are considered to be discrepant when the documents presented are not in compliance with the terms and conditions of letter of credit or the documents are inconsistent with each other. If any document is missing or there is spelling mistake in any document or shipment has been made after the date mentioned in letter of credit, all these illustrate discrepancies in documents. In case the beneficiary tenders any additional documents other than those mentioned in letter of credit, bank refuses to examine additional documents for scrutiny.
(F) Time for Examination
Issuing bank has seven banking days, following the day receipt of documents, to examine the documents and communicate its decision to the negotiating bank or beneficiary that presents the documents for payment. These seven banking days are counted following the day of receipt of documents.
(G) Time for Payment
Issuing Bank makes payment within the seven banking days from the date of receipt of documents provided the documents are as specified and comply with the terms and conditions of letter of credit.
(H) Option in Case Documents are Discrepant
In case, documents are found discrepant, the issuing bank may, in its sole judgment and risk, approach the applicant of letter of credit to waive the discrepancy/discrepancies and seek necessary amendment to the credit. In other words, if the discrepant document is acceptable to the applicant, he requests the bank to amend the letter of credit and, soon after amendment, the documents would be as per the terms of letter of credit. Within the period of seven banking days, the entire exercise of approaching the applicant, getting his approval for amendment and communicating the final decision to the presenting bank or beneficiary has to be completed. This is only an option to the issuing bank. The issuing bank is at full liberty to reject the documents when they are found not to be in accordance with the terms of the credit. The issuing bank has to use the most expeditious mode of communication to give notice to the presenting bank or beneficiary, but in any case the rejection is to be communicated within the stipulated period of seven banking days. Such notice must state all the discrepancies in the documents.
(I) Failure of Issuing Bank to Communicate Decision
In case, issuing bank fails to examine the documents or communicate the decision within the stipulated period of seven banking days, the issuing bank is precluded to reject the documents and is bound to make the payment to the presenter of documents.
CHECK YOUR UNDERSTANDING
State whether the following statements are TRUE or FALSE.
1. Uniform customs and practices for Documentary credits govern opening and negotiation of letters of credit.
2. Issuing bank makes the payment when documents are discrepant.
3. Issuing Bank is precluded from rejecting the documents and is bound to make payment within seven banking days from the day following the receipt of documents, though it has not examined the documents.
Answers
1. True 2. False 3. True
REVIEW QUESTIONS
1. Describe the salient provisions of “Uniform customs & practices for documentary credits”? 2. Describe “Doctrine of Strict Compliance” in the context of Documentary Letter of Credit?
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