UCP500: This fifth commentary on UCP500 examines Article 9. (International Affairs Section).(Brief Article)

Article 9

When companies trading internationally agree on contracts to buy and sell goods on letter of credit (L/C) terms, there may be several reasons for doing so. For example, the regulatory regime in one country or the other may require L/Cs to be used, or buyer and seller may have little track record of doing business together and may each derive comfort from the existence of an L/C, or perhaps the deal is so large that neither party will risk proceeding without the security an L/C represents. Article 9 defines the nature of the commitment given by banks, and it is worth mentioning that the wording in the current revision of UCP is stronger than before in order, as the Preface to UCP500 says, to "enhance the integrity and reliability of the Documentary Credit undertaking."

The primary liability for payment--subject always to compliant documents being presented within the stipulated expiry period--rests with the issuing bank. This liability applies whether the L/C provides for payment at sight or at a future date (see Article 2 of UCP500 and my first commentary). If a bill of exchange or draft is required under un L/C, it should be drawn on a bank, not on the applicant for the L/C, and even if an L/C does call for a draft on the applicant, the obligation of the issuing bank to make payment is not reduced.

However, the beneficiary is still left with two major risks. First, might the government of the issuing bank's country impose regulations preventing payment, irrespective of a compliant presentation under the L/C? Second, how secure is the issuing bank itself, which may be unknown to the beneficiary?

These are serious problems: any change of regulations would apply to all banks in the issuing bank's country, including subsidiaries and branches of well-known western banks; also it is difficult for a beneficiary to run a check on the financial standing and integrity of a bank on the other side of the world. The solution to these problems is for the L/C to be confirmed by the beneficiary's own bank, or at least by a bank in the beneficiary's country (usually the advising bank--see Article 7 of UCP500 and my last commentary). In this way, both the "country" risk and "bank" risk are moved from the applicant's sphere of operation to that of the beneficiary.

Article 9 makes clear that when a bank has added its confirmation to an L/C issued by another bank, it undertakes full liability for payment--whether at sight or at a future date--of compliant presentations made to it, the confirming bank. Its undertaking is additional to and independent from that of the issuing bank, so that the beneficiary need not worry if the issuing bank goes bust (or the applicant, of course), or if the overseas government imposes restrictions on payment--but make sure to get your ...