UCP 500. (International Affairs Section).

This second commentary on UCP500 takes us right to the heart of the letter of credit principle and raison d'etre as set out in the first sentence of Article 3a.

Article 3

Article 3a states that "Credits... are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s) ..." As basic principles go, none can be more fundamental to the letter of credit system than Article 3a. The underlying transaction or sales contract between the buyer and seller will typically specify that a letter of credit is to be opened and may go into some detail as to the required terms and conditions. The resultant credit, however, is separate from that sales contract and will operate independently in accordance with its own terms. This principle is often referred to as "the autonomy of the credit," and it is this autonomy/independence of the credit and also of the banks, which are parties to the credit, that enables transactions to take place which otherwise might not be possible. By acting as independent paymasters, trusted by both buyer and seller alike, banks through the letter of credit system can facilitat e international trade which would otherwise be considered too risky by one party or the other.

In order to help them to maintain their independence from the sales contract, as a general rule, banks will not be drawn into examining or advising on any aspect of the underlying transaction between buyer and seller. A reference to the sales contract in the credit may well be accepted by the bank to assist in identifying the transaction, but not if it is included in such a way as to imply that the bank has knowledge of the terms of the sales contract and is in some way guaranteeing or supervising performance.

Consequently, if there is a mismatch between the terms of the sales contract and the terms of the letter of credit, something has to be amended, or payment will be put at risk. As the seller, you cannot claim that payment should be made because there is a mistake in the credit; likewise as the buyer, you cannot claim that payment should not be made because there is a mistake in the sales contract. It is the job of the buyer and seller, not of the bank, to make sure that there is no mismatch.

There are instances however, usually limited to high value, one-off, special shipments, where a bank may be willing to become involved in the details of the underlying contract if it is proposing to finance the deal, probably relying on the goods as security for its lending. These situations are very much the exception rather than the rule.

The remainder of Article 3a and the whole ...