UCP500. (International Affairs Section).(credit market standards review)(Brief Article)

This fourth Commentary on UCP500 examines Articles 6 and 8 and Articles 7 and 12.

Articles 6 and 8

Virtually all credits are irrevocable, and I have only seen revocable credits deliberately used in one somewhat unusual set of circumstances. The reason is obvious-- only by obtaining an irrevocable credit can a seller enjoy the security which was no doubt one of the major reasons for trading on letter of credit terms in the first place. However, irrevocable does not mean the credit cannot be amended or cancelled, only that it cannot be amended or cancelled by one party alone. UCP500 contains one important difference compared with the previous version of UCP, namely that in those rare instances of credits failing to indicate whether they are revocable or irrevocable, now the rule is that they are irrevocable.

Jumping to Article 8 in order to avoid reverting later to the largely academic question of revocable credits, such credits may be amended or cancelled at any time without notice. However, an issuing bank--and by extension its applicant customer--remains liable to reimburse if conforming documents have already been honored before notice of amendment or cancellation has been received by any authorized negotiating bank.

Articles 7 and 12

Applicants and issuing banks are normally domiciled in a different country from that of the beneficiary, and consequently, issuing banks normally use a bank (or their own branch if they leave one) located in the beneficiary's country to "advise" the credit to the beneficiary. An advising bank may elect to undertake a variety of additional functions, which will be discussed in a later commentary. Alternatively, it may decline to act at all, in which case it must inform the issuing bank accordingly. For example, one can understand that since the September 11 events in the U.S., many Western banks may be unwilling to have anything whatsoever to do with credits issued by banks in certain countries.

However, when a bank does agree to act as advising bank--clearly in the vast majority of circumstances--Article 7 (and Article 12 when applicable) sets out its minimum duties, in particular, that it must check with reasonable care that the credit it is advising appears to be genuine. Otherwise, it could be held guilty of negligence and misrepresentation, for example, if it advised one of the bogus letters of credit so commonly seen emanating from West Africa. Beware, however, if you do receive one of these scams, because the accompanying letter of advice purporting to come from a reputable advising bank is probably also bogus. If it cannot establish the authenticity of the credit, the advising bank must notify the issuing bank without delay. It may, at its discretion, elect to advise the credit to the beneficiary, but must inform the beneficiary that it has been unable to authenticate the credit. Difficulties in authenticating credits were ...