As you are aware that Foreign Trade means as International Trade, is the exchange of money (capital), men (people), material (goods) and services between countries. It a trade outside boarders of a country, in which applicable international rules and regulations are involved. Foreign Trade has serious implications in economy of a country, generally traders of one country trade with entities established in other countries by expanding their base of transactions and disposing their over production in international market. The international trade is also very important for development of a country, because you cannot trade with yourselves only in this world ignoring others.

A country full of minerals or being rich in minerals and raw materials may lack on technological front and is unable to utilize its resources and hence required foreign technology and consultancy to use its resources properly. The companies established in one country trade with entities of other countries to sale their production excess of domestic market to earn more profit and through this they will strengthen their country Foreign Exchange Resources.

After globalization all world became a small village, through use of various types of technologies, we can trade with companies situated in other parts of the world. The emergence of e-commerce companies fills the gap between the world markets with the locals of a country. Now we have various types of options with us, while we are going for any type of purchasing in the market. We can by a product kept in the US market by using e-commerce market, while sitting in our home.

In a Foreign Trader, goods, services, people, money crosses the countries International Boundaries. This increases the cost of operations as well as various types of risks. Foreign Trade calls for a number of formalities, procedures, rules and regulations that are absent in Domestic Trading. We know that without foreign trade a country would not able to dispose off its excess produce for profit, nor obtain what it needs most and are not available domestically. Foreign Trade involves Export of goods, services, people, capital and import of the same from other countries. Through foreign trade a country earns foreign exchange by utilizing for payment for imports.

Foreign Trade is the lifeblood of countries, corporations and individuals.

Once “Adam Smith” said in his book “Modern theory of foreign trade”- “it is the maxim of every master of a family, never to attempt to make at home what it will cost him more to make than to buy. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better to buy it of them with some part of the produce of our own country, employed in such a way in which we have some advantage.”

It means that if production of a product in your country is costly than procurement of the same from other countries, then it is a wise decision to procure the same products from other countries in exchange of any product of your country, that needed by other importing country.

International trade carries more risks than domestic trade, but the advantages are said to be outweigh the risks associated with it. Organizations gravitate towards international trade business with four major objectives;

1. Expansion of sales;

2. Acquisition of resources;

3. Diversification of markets;

4. Diversification of sources of supply.

One of the critical issues in an International Trade is that the buyer and seller must agree upon during negotiations is the manner of settlement of dues against the goods purchased or services provided. There is no “one size fits for all” formula that can applied on all types of International Trade. Since there are various risks involved in International Trade, such as risk of non-payment, delay in payment, unwillingness or delay in releasing goods or payment, insolvency of buyer or closure of business operations, change in specifications of goods loaded for export and documentary risks.

Instruments such as bank guarantees and letters of credits are useful instruments for the settlement in International Trade.

The payment methods can be divided into two parts;

1. First part covers trade operations where shipping documents are not routed through commercial banks;

2. Second part covers, where shipping documents are routed through commercial banks.

When commercial banking system is not used, the shipping documents (or export bills) are dispatched directly by the buyer to the seller. The goods are consigned directly to the buyer to enable it to take delivery of the consignment. The commercial banking system is used only for the remittance of the proceeds. Transaction of this type are often taken recourse to where the settlement is under;

1. Advance Payment;

2. Open Account or

3. Through Escrow Account.


Generally, sake of more security the shipping documents and drafts are routed by seller through banks to the buyer bank, these banks act as intermediaries. This methos offers greater safety than, when documents directly sent to the buyer. The buyer and the seller at the initial stage of their negotiations mutually agreed this method of settlement and this become an integral part of the agreement between them.

The following are some of the commonly used methods of settlement where banks act ads intermediaries, facilitating domestic and international trade;

1. Bills for collection (payable at sight or on demand);

2. Bills for collection (acceptance or usance);

3. Banker’s Acceptance;

4. Deferred Payment;

5. Letter of Credits;

6. Bank Guarantee or Payment Guarantee;

7. Standby Letter of Credit (SBLC).


A Documentary Letter of Credit also called as Letter of Credit (LC) is a form of writing undertaking by bank on behalf of a buyer (or in the international trade -an importer) that the payment will be made by the bank for goods and services supplied by the seller, provided the terms and conditions of the Documentary Credit are complied with.

A “LC” is a direct undertaking by the issuing bank (generally bank of the importer or buyer) to the seller or the exporter. The Letter of Credit during the years become a most trusted method of settlement of claims in International Trade.

A Documentary Letter of Credit or LC is an irrevocable, written undertaking by a commercial bank, issued at the request of the buyer (applicant) in favor of the seller (the beneficiary), to the effect that payment for certain goods or services will be made against a complying presentation of documents.

Article 2 of UCP 600 – defines a LC “Any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honor a complying presentation.”

The integrity and creditworthiness of the buyer, though good but not absolute, are replaced by those of the LC issuing bank. The issuing bank, thus, replaces the buyer’s assurance of payment with its own undertaking to pay against complying presentation of documents-irrespective of whether the buyer or the importer pays or not. Since the assurance of payment is offered by an independent and third party, especially by institutions such as internationally reputed commercial banks, LC offers better security to both the buyer and the seller in terms of performance or payment.

Please Note That: an LC assures the importer that the payment will be released only if the seller (beneficiary) presents documents exactly as specified in the credit. It simultaneously guarantees the exporter that payment will be made, provided however, that the documents presented are in total compliance with the terms of the credit.

Letter of Credit (LC) operations are guided by well-defined internationally recognized, widely accepted sets of rules, practices and procedures.


A significant function of the ICC is the preparation and promotion of its uniform rules of practice. The ICC’s aim is to provide a codification of international practice occasionally selecting the best practice after ample debate and consideration. The ICC rules of practice are designed by bankers and merchants and not by legislatures with political and local considerations. The rules accordingly demonstrate the needs, customs and practices of business. Because the rules are incorporated voluntarily into contracts, the rules are flexible while providing a stable base for international review, including judicial scrutiny.

International revision is thus facilitated permitting the incorporation of the changing practices of the commercial parties. ICC, which was established in 1919, had as its primary objective facilitating the flow of international trade at a time when nationalism and protectionism threatened the easing of world trade.

It was in that spirit that the UCP were first introduced – to alleviate the confusion caused by individual countries’ promoting their own national rules on letter of credit practice. The aim was to create a set of contractual rules that would establish uniformity in practice, so that there would be less need to cope with often conflicting national regulations. The universal acceptance of the UCP by practitioners in countries with widely divergent economic and judicial systems is a testament to the rules’ success.

As you are aware that the operation of documentary credits worldwide is based on the International Chambers of Commerce (ICC) publication titled Uniform Customs and Practice for Documentary Credits (UCP). The UCP and documentary go to hand in hand, the article on UCP being the foundation and guiding principles. Documentary Credits operates under a deceptively simple premise termed as “Complying Presentation”. The world of documentary credits is supposed to be in black and white, operating under what is known as “the doctrine of strict compliance”. If a presentation complies strictly with the terms of credit payment is supposed to be assured.

The rules that govern the operations of letters of credit are codified in documents called “UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTRY CREDITS(UCP)”. The UCP is a universal recognized set of rules governing the use of Documentary Credits in International Trade. Banking Associations and Individual Banks in more than 160 countries and territories throughout the world have adopted the UCP. First Published in 1933 by the ICC and revised versions were issued in 1951,1962,1974 and 1983(UCP 400) and in 1994 (UCP500) and then replaced by UCP 600 with effect from 1st July,2007.

Uniform Customs and Practice For Documentary Credits (UCP)

The articles of UCP 600 are applicable to both domestic and international letters of credit provided that the documents clearly state on their face that these are subject to the UCP, ICC Publication No. 600.


The Uniform Customs and Practice for Documentary Credits, Publication 600, also known as UCP600 is the latest revision of Uniform Customs and Practice that came into effect on July 1, 2007, replacing the UCP500 after a gap of 14 years.

UCP600 was the result of three years of extensive research and analysis by the Commission on Banking Technique and Practice – a body within the International Chamber of Commerce.

UCP600 goes hand in hand with the International Standard Banking Practice for the Examination of Documents under Documentary Credits (ISBP), ICC Publication 745, which assists in comprehending if a document complies with the terms of Letters of Credit.

UCP600 contains a set of 39 articles that helps interpret credits that are issued and governed by it. Nevertheless, there are certain exceptions to these rules that can be brought about by express modification or exclusion.


The UCP has no statutory validation in any country or state. If has no legal status. These are merely a set of rules, not laws. The UCP can at best as termed as “Codified, Standardized best practices or code of conducts” for the operations of Letters of Credit. It has helped the international trade to bridge the differences between countries through standardization of procedures and practices.

The UCP has received worldwide acceptance, its rules have been tested in courts of law and various arbitration proceedings, case laws and judicial pronouncements are available that make a reference to UCP articles. Over the years the articles of UCP acquire status of quasi -legal -status.


According to Article 1 of UCP 600, the rules are “binding on all parties unless expressly modified or excluded by the credit”. It means that parties to the agreement may not enforced to follow UCP 600 terms and conditions and they are free to choose their own. Any condition in a particular LC that changes a provision of the UCP effectively modifies the application of the UCP.


The expression “parties to a credit” has very serious implications in documentary credit operations. The expression “parties to a credit” has not defined clearly any where in the UCP.

Article 10(a) of UCP 600- state that “Except as otherwise provided in Article 38, a credit can neither be amended nor cancelled without agreement of the issuing bank, the confirming bank, if any and the beneficiary”.

From above we can derive that below mentioned are the parties in a Documentary Credit;

1. The issuing bank;

2. The confirming bank and;

3. The beneficiary.

From above it is clear that “Applicant /Buyer/Importer “is not a party to a credit. This is in spite of fact that the applicant is the one that initiates the process of the issue of a credit or amendment to a credit. The advising bank, the second advising bank and the reimbursing bank (different from the issuing bank) are also not parties to a credit. The advising or second advising bank may be considered as a party only in cases, where it is a confirming bank.

The definition of “Parties to a Credit”, therefore includes only those that have express obligations under the credit and non-other.

An applicant is not included as a party on the basis of following reasons;

1. A Letter of Credit is a direct undertaking of the issuing bank to the beneficiary. No third party shares its commitment or is involved in operations.

2. A confirming bank enters the scene only if it confirms that credit. On confirmation, it adds its own undertaking in addition to that of the issuing bank. Consequently, it honors or negotiates ” without recourse”.

3. Because a LC is a direct commitment of the issuing bank, the UCP and the ISBP (International Standard Banking Practices) have ruled that an LC should not be issued making it “available by a draft on the applicant”. For in later instance, the very availability of the credit would become subject to the draft’s acceptance by the applicant, which cannot be allowed to happen. The independence principal is at work here.

4. The issuing bank must decide, based on the documents presented before it to accept or issue LC or not to issue. In case of any deficiency in the document it will approach the beneficiary for a waiver. The response of buyer (applicant) does not affect the decision of bank for issue of LC.

5. Accordingly, an applicant has no effective right or obligation in documentary credit operations towards honoring, paying against or refusing documents. Under provisions of UCP, the final decision rests with the confirming bank or issuing bank. Technically speaking an issuing bank may pay against documents even if the applicant happens to (or has reasons to) reject them.

6. The beneficiary is a party to the credit because as far as an LC is in the nature of a contract between the issuing bank and itself. This is why LC cannot be amended without an express acceptance from the beneficiary.


The ISBPs for the examination of documents under Documentary Credits (ISBP), an ICC Publication, complements the UCP. The present version of the ISBP 745 could be said to have come into effect from 1st July,2013. If has brought into one place some of the frequently occurring areas of confusion, has codified them, and has framed some practical standards for use in documentary credit operations. The ISBP goes a long way in reducing discrepancies in documents and consequent interruption in international trade.


1. CLEAN LETTER OF CREDIT- the term “Clean” refers to an instrument (LC) that does not call either financial document or commercial document. Uniform Rules for Collection, ICC Publication no. 552 defines a “Clean” document as a one that is “Financial Document that is not accompanied by any commercial document”. Clean LC were used to raise credit or cash while away from home. With the development of technology, the Clean LC has disappeared from the scene now.

A clean letter of credit does not lay down any condition as regards making the payment. Further, it does not contain any condition for acceptance of bill of exchange drawn by exporter upon the importer. It is clean in the sense that there is no condition for payment to be made.

2. DOCUMENTARY LETTER OF CREDIT – When a LC is issued in conjunction with financial or commercial documents or both it is termed as “documentary letter of credit”. This term is often shortened to assume various forms, e.g., “Documentary Credit”, “Doccredit”, or a much shorter term “Credit”. With the increase in international trade and commerce the documentary letter of credit has gained popularity worldwide, more so when risk perception increases.

A documentary letter of credit specifies the various documents which are required to be produced by the exporter to the importer. Normally, the documents specified in the documentary letter of credit are commercial invoice, bill of lading, insurance policy, consular invoice, certificate of origin, certificate of quality analysis, packing list, document of title to goods, bill of exchange, etc. The payment is made by the negotiating bank to exporter against this letter of credit when a full set of documents specified in the letter of credit is handed over by the exporter.

3. REVOCABLE AND IRREVOCABLE LETTER OF CREDIT- The revocable letter of credit can be withdrawn by the opener (importer) or opening bank (importer’s bank) at any time. Withdrawal can be affected without notice to the exporter. Revocable letter of credit, therefore, does not sufficiently protect the interest of the exporter in getting his payment.

The irrevocable letter of credit is just the opposite of revocable letter of credit. The irrevocable letter of credit cannot be withdrawn without prior permission and intimation of the exporter. Through irrevocable letter of credit, the opening bank gives definite guarantee to exporter ensuring payment of exports. However, conditions specified in the letter of credit should be satisfied by the exporter. Generally, exporter prefers irrevocable letter of credit as it protects the exporter.

4. ASSIGNABLE AND NON-ASSIGNABLE LETTER OF CREDIT- An assignable letter of credit is transferable while a non-assignable letter of credit is not transferable. Assignable letter of credit means a letter of credit which can be easily transferred by the exporter with its rights in favor of any person. Therefore, exporter can assign this letter of credit to any person.

A non-assignable letter of credit cannot be transferred in favor of any person. Only the beneficiary who is named in the letter alone can get the payment.

5. REVOLVING LETTER OF CREDIT- Revolving letter of credit is used when the export transaction between the same parties is regular and continuous. Credit can be availed against one and the same letter of credit for all subsequent export transactions. There is no need to open a separate letter of credit for every export transaction again and again.

6. CONFIRMED LETTER OF CREDIT- The opening bank appoints a banker in the exporter’s country which is known to the exporter. Through such bank, the confirmation of credit is made by the opening bank. Exporter can draw the bill of exchange on such confirming bank. So, any letter of credit which confirms credit is known as confirmed letter of credit.

7. BACK-TO-BACK LETTER OF CREDIT- Merchant exporter purchases goods from the manufacturer for the purpose of export. Such exporter requests opening bank to open the letter of credit in favor of such manufacturer or supplier. The manufacturer or supplier gets the money directly from the importer. This letter of credit helps the exporter to get goods for export on credit basis.

8. WITH OR WITHOUT RECOURSE LETTER OF CREDIT- In with recourse letter of credit, the paying bank can hold the exporter responsible for recovery of payment if the importer fails to reimburse it to the paying bank. Exporter, then will have to refund all the money he has received along with interest to paying bank in such an eventuality.

In case of without recourse letter of credit, the exporter cannot be held responsible if the importer does not reimburse the paying bank. In such an eventuality, the paying bank has the recourse to the importer only.

9. RED CLAUSE AND GREEN CLAUSE LETTER OF CREDIT– Under the red clause letter of credit, the exporter can get advance money from the negotiating bank. This gives an authority to the negotiating bank to extend credit and lend advance money to exporter. A red clause letter of credit is printed in red.

Green clause letter of credit provides an arrangement for the storage of goods at the port. Pre-shipment finance and storage facility are available to the exporter.

10. RESTRICTED LETTER OF CREDIT- The importer may insist that shipping documents be negotiated (transferred) through a specified bank only. Any letter of credit with such a restriction is known as restricted letter of credit.

11. TRAVELING LETTER OF CREDIT -A traveling letter of credit enables the exporter to travel abroad and draw the money specified from the bank. All banks honor all the cheques or bill drawn upon.

12. OMNIBUS LETTER OF CREDIT –Reputed exporters can get omnibus letter of credit. This letter of credit allows the exporter to draw the money from bank in lump sum against the security of general lien on goods.

CONCLUSION: from above discussion we know that a Documentary Credit is an instrument for the settlement of international trade. The LCs are the most preferred instrument for buyers and sellers in settlement of their dues in foreign trade. It is safe and secure instruments involves commercial banks as surety for performance of LC. A bank of international repute being an independent body gives written commitment to pay the seller or exporter or beneficiary on behalf of buyer /importer on presentation of all documents as required in Documentary Credit. The LCs reduce various types of risks involved in international trade and help in promoting safe and trusted international business transactions. Though LC is a good instrument for International Trade, but note that it cannot reduce foreign exchange fluctuation risks or other legal risks. There may be fraud on the part of beneficiary, the buyer may stop payment to the beneficiary on the basis of legal decree, the issuing or confirming bank may decline the payment citing deficiencies in the documents presented. There may be other risks, but over all in a prudent business environment the Documentary Letter of Credit is the most trusted instrument for settlement of International Trade Obligations.

Foot Notes;

ICC Uniform Customs and Practice for Documentary Credits

Article 1 Application of UCP

Article 2 Definitions

Article 3 Interpretations

Article 4 Credits v. Contracts

Article 5 Documents v. Goods, Services or Performance

Article 6 Availability, Expiry Date and Place for Presentation

Article 7 Issuing Bank Undertaking

Article 8 Confirming Bank Undertaking

Article 9 Advising of Credits and Amendments

Article 10 Amendments

Article 11 Teletransmitted and Pre-Advised Credits and Amendments

Article 12 Nomination

Article 13 Bank-to-Bank Reimbursement Arrangements

Article 14 Standard for Examination of Documents

Article 15 Complying Presentation

Article 16 Discrepant Documents, Waiver and Notice

Article 17 Original Documents and Copies

Article 18 Commercial Invoice

Article 19 Transport Document Covering At least Two Different Modes of Transport

Article 20 Bill of Lading

Article 21 Non-Negotiable Sea Waybill

Article 22 Charter Party Bill of Lading

Article 23 Air Transport Document

Article 24 Road, Rail or Inland Waterway Transport Documents

Article 25 Courier Receipt, Post Receipt or Certificate of Posting

Article 26 “On Deck”, “Shipper’s Load and Count”, “Said by Shipper to Contain” and Charges Additional to Freight

Article 27 Clean Transport Document

Article 28 Insurance Document and Coverage

Article 29 Extension of Expiry Date or Last Day for Presentation

Article 30 Tolerance in Credit Amount, Quantity and Unit Prices

Article 31 Partial Drawings or Shipments

Article 32 Instalment Drawings or Shipments

Article 33 Hours of Presentation

Article 34 Disclaimer on Effectiveness of Documents

Article 35 Disclaimer on Transmission and Translation

Article 36 Force Majeure

Article 37 Disclaimer for Acts of an Instructed Party

Article 38 Transferable Credits

Article 39 Assignment of Proceeds

Supplement to UCP 600 for Electronic Presentation Introduction eUCP Version 2.0

Article e1 Scope of the eUCP

Article e2 Relationship of the eUCP to the UCP

Article e3 Definitions

Article e4 Electronic Records and Paper Documents Goods, Services or Performance

Article e5 Format

Article e6 Presentation

Article e7 Examination

Article e8 Notice of Refusal

Article e9 Originals and Copies

Article e10 Date of Issuance

Article e11 Transport

Article e12 Data Corruption of an Electronic Record

Article e13 Additional Disclaimer of Liability for Presentation of Electronic Records under eUCP

Article e14 Force Majeure.


Under the eUCP, presentations can be either all electronic records or a mixture of some paper documents and some electronic records. In order to accommodate the presentation of paper documents and electronic records, it was necessary to create some rules that add additional requirements for paper documents presented under an eUCP credit beyond the requirements that one would normally find under a paper-based UCP credit.





DISCLAIMER: the article produced here is only for knowledge and information of readers. the article has prepared on the basis of available information at the time of preparation. The views expressed here are the personal views of the author and same should not be considered as professional advice. In case of necessity do consult with professionals.

Author Bio

Qualification: CS
Location: MUMBAI, Maharashtra, India
Member Since: 25 Aug 2018 | Total Posts: 370
A Qualified Company Secretary, LLB , AIII , Bsc( Maths) BHU, Certification in Insurance Risk Management ( ICSI-III) have completed Limited Insolvency Examination and having more than 20 years of experience in the field of Secretarial Practice, Project Finance, Direct Taxes ,GST, Accounts & F View Full Profile

My Published Posts

Join Taxguru’s Network for Latest updates on Income Tax, GST, Company Law, Corporate Laws and other related subjects.

Join us on Whatsapp

taxguru on whatsapp GROUP LINK

Join us on Whatsapp

taxguru on whatsapp GROUP LINK

Join us on Whatsapp

taxguru on whatsapp GROUP LINK

Join us on Whatsapp

taxguru on whatsapp GROUP LINK

Join us on Whatsapp

taxguru on whatsapp GROUP LINK

Join us on Whatsapp

taxguru on whatsapp GROUP LINK

Join us on Whatsapp

taxguru on whatsapp GROUP LINK

Join us on Whatsapp

taxguru on whatsapp GROUP LINK

Join us on Whatsapp

taxguru on whatsapp GROUP LINK

Join us on Whatsapp

taxguru on whatsapp GROUP LINK

Join us on Telegram

taxguru on telegram GROUP LINK

Download our App


More Under Corporate Law

Leave a Comment

Your email address will not be published. Required fields are marked *

Search Posts by Date

November 2023