UNIFORM RULES


ISBP                  UCP 600                 URC 522                     STANDBY LC

International Standard Banking Practice for the Examination of Documents under Documentary Credits subject to UCP 600 (ISBP)

Important Issues:

  • The terms of a credit are independent of the underlying transaction even if a credit expressly refers to that transaction (1).
  • The applicant bears the risk of any ambiguity in its instructions to issue or amend a credit (2).
  • A credit should not call for documents that are to be issued and/ or counter-signed by the applicant. If a credit carries such a condition, the beneficiary must seek amendment or comply with it. This ISBP clarification is helpful to the exporter in LC negotiation and LC examination as part of compliance management.  The exporter must use the amendment remedy for correcting defective LCs as part of export-LC management.(4)
  • The use of generally accepted abbreviations, for example ‘ltd‘ instead of ‘Limited‘ ‘Co’ instead of ‘Company’ ‘Kgs’ or ‘Kos’ instead of ‘Kilos’, ‘Ind’ instead of ‘Industry’ ‘mfr’ instead of ‘manufacture’ or ‘mt’ instead of ‘metric tons’  or vice versa does not make a document discrepant.(6)
  • Corrections and alterations on documents not prepared by the exporters (LC beneficiary) must be authenticated by the issuer or by his agent on his behalf.(9)
  • Corrections and alterations on the documents prepared by the exporter except drafts, which have not been legalized, or the like need not be authenticated.(10)
  • The use of multiple type style or font sizes or handwriting in the same document does not, by itself, signify a correction or alteration.(11)
  • Where a document contains more than one correction or alteration, either each correction must be authenticated separately or one authentication must be linked to all corrections in an appropriate way (12).
  • Drafts, transport documents and insurance documents must be dated even if a credit does not expressly require so.(13)
  • Any document, including a certificate of analysis, inspection certificate and pre-shipment inspection certificate, may be dated after the date of shipment. However, if a credit requires a document evidencing a pre-shipment event (e.g,pre-shipment inspection certificate), the document must, either by its title or content, indicate that the event( eg, inspection) took place prior to or on the date of the inspection. However , documents must not indicate that they were issued after the date they are presented.(14)
  • A document indicating a date of preparation and a later date of signing is deemed to be issued on the date of signing.(15)
  • Dates can be expressed in different format. However, to avoid confusion, the ISBP recommends that the name of the month be used instead of the number.(18)
  • Copies of transport documents are not deemed to be ‘transport documents’ for the purpose of UCP600 article 19-25 and sub article 14(c ).(20)
  • An LC stating ‘shipping document’ refers not only to transport documents but to all documents required by the credit, except drafts.(21a)
  • An LC that says ‘stale documents acceptable’ refers to documents presented later than 21 calendar days after the date of shipment but within the expiry date for presentation as stated in the credit.(21b)
  • If an LC stipulates “third-party documents acceptable”, it refers to all documents that a party other than the beneficiary may issue, including invoices but excluding drafts.(21c)
  • Detailed mathematical calculations in documents will not be checked by banks. Banks are only obliged to check total values against the credit & other required documents.( 24)
  • In the case of a multiple-page documents, the signature, if required, can be anywhere on the document unless the LC of the document itself indicates where a signature or endorsement should (27)
  • Documents issued in more than one original can be marked ‘original’, ‘duplicate’ or ‘triplicate’. None of these markings will disqualify a document as an original.(28)
  • The number of originals to be presented must be at least the number required by the credit, the UCP 600 or, where the document itself states how many originals have been issued, the number stated on the document.(29)
  • If an LC stipulates “one copy of invoice”, a copy of the invoice can be presented, even though the practice is to accept an original. On the other hand, “Invoice”, “invoice in one copy” or “one invoice” indicates a requirement for an original invoice.(30)
  • Even if not stated in the LC, drafts, certificates and declarations must be signed. Transport documents & insurance documents must be signed in accordance with the provision of UCP 600.(37)
  • A signature need not be handwritten. However a photocopy of signed document does not qualify as a signed original document.(39)
  • The invoice can show a deduction covering advance payment, discount, etc., even if it is not stated in the credit.(60)
  • When an LC calls for a marine or ocean bill of lading, it is not necessary to write or print the world “marine” or “ocean” on the bill of lading if it shows port-to-port shipment (92).
  • If a transport document bears pre-printed “shipped on board” bill of lading is presented, its issuance date will be deemed to be the date of shipment unless it bears a separate dated on board notation, in which event the date of the on board notation will be deemed to be the date of shipment whether or not the on board date is before or after the issuance date of the bill of lading.(96)
  • If a credit gives a geographical area or range of ports of loading or discharge ( eg “any European Port”), the bill of lading must indicate the name of the actual port of loading or discharge, which must be within the geographical area or range stated in the credit.(100).
  • Clauses or notations on bill of lading, which do not expressly declare a defective condition of the goods and/ or packing for example, “packaging may not be sufficient for the sea journey” do not constitute a discrepancy.(106)
  • If the word “clean” has been deleted on the bill of lading, the document will not be considered unclean or claused unless it specifically bears a clause or notation declaring that the goods or packaging are defective(107)
  • Air-transport documents should not be issued “ to order” or “to order of” a named party because they are not documents of title.(143)
  • The insurance document must cover the risks defined in the credit. Even though a credit may be explicit with regard to risks to be covered, there may be reference to exclusion clauses in the document. If a credit require “all risk” coverage, this is satisfied by the presentation of an insurance document evidencing any “all risk” clause  notation, even if it is stated that certain risks are excluded.(173)
  • The certificate of origin may show the consignor or exporter as a party other than the beneficiary of the credit or the shipper on the Transport document.(185).

Gist of provisions under various articles of UCP 600:

1) ARTICLE 1- APPLICATION OF UCP:

UCP contains rules that apply to a documentary credit when the text of the credit expressly indicates that it is subject to these rules.

2) ARTICLE 2 – DEFINITIONS:  Certain terms are defined, so that they provide references when

such terms are used in the articles.

“Banking day” means a day on which a bank is regularly open at the place at which an act subject to these rules is to be performed.

“Advising bank” means the bank that advises the credit at the request of the issuing bank.

“Beneficiary” means the party in whose favour a credit is issued.

3) ARTICLE 3 – INTERPRETATIONS:

– A credit is irrevocable even if there is no indication to this effect.

– For determining maturity date, the words “from” and “after” exclude the date mentioned.

– For determining a period of shipment, the words “from” and “after” have different meanings

“From” includes the date mentioned.

“After” excludes the date mentioned.

4) ARTICLE 4 – CREDIT VS CONTARCTS: 

Credits are separate transactions from sale or other contracts on which it may be based. Banks are in no way concerned with or bound by such contract even if some reference to it is included in the credit. Independence Principle – L/C is a separate transaction from the underlying contract. Banks should discourage any attempt to include contract as integral part of L/C.

5)  ARTICLE 5 – DOCUMENTS VS GOODS SERVICES, PERFORMANCE:  Banks deal with documents and not with goods, services or performance to which the documents may relate.

6) ARTICLE 6 – AVAILABILITY, EXPIRY DATE,PLACE OF PRESENTATION :

The Article deals with Expiry date, Last day for presentation of documents and Place for presentation.

7) ARTICLE 7 – ISSUING BANK UNDERTAKING: An issuing Bank is irrevocably bound to honour as of the time it issues the credit documents presented to it and if they constitute a complying presentation.

8) ARTICLE 8 – CONFIRMING BANK UNDERTAKING:

The article deals with confirming banks undertaking in respect of the Letter of Credit and Documents.

 9) ARTICLE 9 – ADVISING OF CREDITS, AMENDMENTS:

A bank utilizing the services of an advising bank or second advising bank to advise a credit must use the same bank to advise any amendments thereto

10) ARTICLE 10 –  AMENDMENTS:

Except as otherwise provided by Article 38, a credit can neither be amended nor cancelled without the agreement of the issuing bank, the confirming bank if any and the beneficiary

11) ARTICLE 11 –  TELETRANSMITTED CREDITS:

An authenticated tele-transmission of credit or amendment will be deemed to be the operative credit or amendment and any subsequent mail confirmation shall be disregarded.

 

12) ARTICLE 12 – NOMINATION:

Nomination does not obligate nominated bank to honour. By nominating a bank to accept a draft or incur a deferred payment undertaking, an issuing bank authorizes that nominated bank to prepay or  purchase a draft accepted or a deferred payment undertaking incurred by that nominated bank.

13) ARTICLE 13 – BANK TO BANK RE-IMBURSMENT ARRANGENT:

If a credit states that reimbursement is to be obtained by a nominated bank (“claiming bank”) claiming on another party (“reimbursing bank”), the credit must state if the reimbursement is subject to the ICC rules for bank-to-bank reimbursements in effect on the date of issuance of the credit. If a credit does not state that reimbursement is subject to the ICC rules for bank-to-bank reimbursements, the rules mentioned under the Article to be apllied.

 14) ARTICLE 14 – STANDARD FOR EXAMINATION OF DOCUMENTS:

A nominated bank must examine documents on their face to determine compliance. Other than the commercial invoice, description of goods, services or performance, may be stated in general terms. Disregard documents not required by L/C and may be returned. Disregard non-documentary condition. Documents may be dated prior to issuance date of LC, but not later than date of presentation.

A nominated bank acting on its nomination, a confirming bank, if any and the issuing bank shall have a maximum of 5 banking days following the day of presentation to determine if a presentation is complying. The period is not curtailed or otherwise affected by the occurrence on or after the date of presentation of any expiry date or last date for presentation.

Presentation Period : Presentation including an original transport document must be made not later than 21 calendar days after date of shipment. Transport document – Subject to Articles 19-25. Data in a document must not conflict with data in that document, other stipulated documents or the L/C.

15) ARTICLE 15 – COMPLYING PRESENTATION:

a)when an issuing bank determines that a presentation is complying, it must honour

b)When a confirming bank determines that a presentation is complying it must honour or negotiate and forward the documents to the issuing bank

c)when a nominating bank determines that a presentation is complying and honours or negotiates it must forward the documents to the confirming bank or the issuing bank.

16) ARTICLE 16 –  DISCREPANT DOCUMENTS, WAIVER AND NOTICE:

If the nominated bank, a confirming bank or the issuing bank decides to refuse to honour or negotiate it must give a notice in terms of Article 16c to the presenter by telecommunication or other expeditious means no later than the close of the fifth banking day following the day of presentation.

17) ARTICLE 17 – ORIGINAL DOCS AND COPIES:

At least one original of each document stipulated in the credit must be presented. A bank shall treat as an original any document bearing an apparently original signature, mark, stamp, or label of the issuer of the document; unless the document itself indicates that it is not an original.

18) ARTICLE 18 -COMERCIAL INVOICE:

Invoice amount in excess of L/C – May be accepted by the nominated bank, but must not be honoured or negotiated in excess of L/C amount Issued by beneficiary. Invoices must be made out in the name of applicant, and need not be signed (except as provided in article 38 – Transferable L/C).  Description of goods, services or performance must correspond with L/C description. Must be in the same currency as L/C.

19) ARTICLE 19 – TRANSPORT DOC COVERING ATLEAST TWO DIFF MODES:

Must appear to indicate name of carrier and is Signed by carrier, master or named agent. If signed by agent, need to specify for whom – carrier or master – it is signed.

20) ARTICLE 20 – BILL OF LADING:

21) ARTICLE 21 – NON-NEGOTIABLE SEA WAY BILL:

Must appear to indicate name of carrier. Should be signed by carrier, master or named agent.

If signed by master, name of master is not necessary. If signed by agent, need to specify for whom, carrier or master – it is signed.

22) ARTICLE 22 – CHARTER PARTY BILL OF LADING:

B/L should contain indication that it is subject to a charter party. Should be signed by master, owner, charterer or named agent.

If signed by master, or owner, or charterer, their names are not necessary.

If signed by agent, need to specify for whom master,owner or charterer – it is signed.

Agent signing for owner or charterer must indicate name of owner or charterer.

Port of discharge may be shown as a range of ports, or geographical area, as stated in L/C (ISBP 106)

e.g. L/C calls for shipment to Asian ports.

23) ARTICLE 23 – AIR TRANSPORT DOCUMENTS:

Must appear to indicate name of carrier. Signed by carrier or named agent . If signed by agent, need to indicate that agent has signed for or on behalf of carrier. Must indicate date of issuance, which will be deemed to be the date of shipment. Specific notation of actual date of shipment, even not called for in the credit, will be deemed to be the date of shipment.

24) ARTICLE 24 – RAIL ROAD INLAND WATERWAY TRANSPORT:

For rail transport document, if it does not identify the carrier, any signature or stamp of railway company is accepted as being signed by the carrier (ISBP – 172). Transport document marked “duplicate” is accepted as

an original. Transport document will be accepted as original whether marked as an original or not (also applicable to inland waterway transport).  Road transport document marked for consignor or shipper

or bear no marking for whom the document has been prepared – is the original.

25) ARTICLE 25 – COURIER RECEIPT,POST RECEIPT:

A courier receipt, however named, evidencing receipt of goods for transport, must appear to, indicate the name of the courier service and be stamped or signed by the named courier service at the place from which the credit states the goods are to be shipped; and  indicate a date of pick-up or of receipt or wording to this effect. This date will be deemed to be the date of shipment.

26)ARTICLE 26 – “ON DOCK”, “SHIPPERS LOAD AND COUNT”:

A transport document must not indicate that the goods are or will be loaded on deck. A clause on a transport document stating that the goods may be loaded on deck is acceptable. A transport document bearing a clause such as “shipper’s load and count” and “said by shipper to contain” is acceptable. A transport document may bear a reference, by stamp or otherwise, to charges additional to the freight.

 27) ARTICLE 27 – CLEAN TRANSPORT DOCUMENT:

A bank will accept only a clean transport document. A clean transport document is one bearing no clause or notation expressly declaring a defective condition of the goods or their packaging. The word clean need not appear on a transport document even if a credit has a requirement for that transport document to be ‘clean on board’.

28) ARTICLE 28 – INSURANCE DOC. AND COVERAGE:

Insurance document must be issued and signed by insurance company or underwriter or agent. Original of insurance document must be presented. Cover notes will not be accepted.The insurance should be effective from the date of shipment and must be issued in the same currency as the credit. If there is no indication in the credit of the insurance coverage required, the amount of insurance coverage must be at least 110%of the CIF or CIP value of the goods and if this value cannot be determined from the documents, the amount of insurance coverage must be calculated on the basis of the amount for which honour or negotiation is requested or the gross value of the goods as shown on the invoice, whichever is greater. When a credit requires insurance against ‘all risks’ and an insurance document is presented containing any ‘all risks’ notation or clause whether or not bearing the heading ‘all risk as’ the insurance document will be accepted without regard to any risks stated to be excluded.

29) ARTICLE 29 – EXTENSION OF EXPIRY DATE OR LAST DATE OF PRSENTATION:

If the expiry date of the credit or the last day for presentation falls on a day when the bank is closed  for  reason other than ‘force majeure’, the expiry date will be extended to the first following day on which such bank is open but the latest date of shipment will not be extended for the aforesaid reason. If presentation is made on the first following banking day, a nominated bank must provide the issuing or confirming bank with a statement on its covering schedule that the presentation was made within the time limits extended in accordance with Article 29a.

30) ARTICLE 30 – TOLERENCE IN CREDIT AMOUNT, QUANTITY AND UNIT PRICE:

The words “about” or “approximately” used in connection with the amount of the credit or the quantity or the unit price stated in the credit are to be construed as allowing a tolerance not to exceed 10% more or 10% less than the amount, the quantity or the unit price to which they refer. A tolerance not to exceed 5% more or 5% less than the quantity of the goods is allowed, provided the credit does not state the quantity in terms of a stipulated number of packing units or individual items and the total amount of the drawings does not exceed the amount of the credit.

31) ARTICLE 31 – PARTIAL DRAWING OR SHIPMENT:

Partial drawings or shipments are allowed. Presentation of multiple sets of transport docs evidencing shipment on the same means of conveyance (e.g. vessel, aircraft) from different ports/places on different dates and for the same journey to the same destination are not partial shipment. Take latest of the shipment dates as date of shipment. Presentation of multiple sets of transport docs evidencing shipment on more than one means of conveyance within the same mode of transport (e.g. shipment by truck) will be regarded as partial shipment, even if shipped on the same day for the same destination (ISBP 89).

32) ARTICLE 32 –  INSTALMENT DRAWING OR SHIPMENT:

If a drawing or shipment by instalments within given periods is stipulated in the credit and any instalment is not drawn or shipped within the period allowed for that instalment, the credit ceases to be available for that and any subsequent instalment.

 33) ARTICLE 33 –  HOURS OF PRESENTATION:

A bank has no obligation to accept a presentation outside of its banking hours.

34) ARTICLE  34 –  DISCLAIMER ON EFFECTIVENESS OF DOCS:

A Bank assumes no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification, or legal effect of any document etc.

35) ARTICLE 35 – DISCLAIMER ON TRANSMISSION AND TRANSLATION:

A bank assumes no liability or responsibility for the consequences arising out of delay, loss in transit, mutilation or other errors arising in the transmission of any messages or delivery of letters or documents, when such messages, letters or documents are transmitted or sent according to the requirements stated in the credit, or when the bank may have taken the initiative in the choice of the delivery service in the absence of such instructions in the credit.

36) ARTICLE 36 – FORCE MAJEUR:

A bank assumes no liability or responsibility for the consequences arising out of the interruption of its business by Acts of God, riots, civil commotions, insurrections, wars, acts of terrorism, or by any strikes or lockouts or any other causes beyond its control.  A bank will not, upon resumption of its business, honour or negotiate under a credit that expired during such interruption of its business.

 37) ARTICLE 37 –  DISCLAIMER  FOR ACTS OF AN INSTRUCTED PARTY:

Bank instructing another bank to perform services is liable for that bank’s charges. Issuing bank is liable for charges that cannot be collected or deducted from the proceeds.

38) ARTICLE 38 – TRANSFERABLE CREDITS :

An L/C may be made available by the transferring bank to a second beneficiary. Transferred credit must accurately reflect the terms and conditions of the credit, including confirmation. Second beneficiary’s documents may be sent to issuing bank if first beneficiary fails, on first demand, to:

Present its invoice (and draft, if any), or

Rectify discrepancies in its invoice (where such discrepancies did not exist in second beneficiary’s invoice).

Banks are not obliged to effect transfer. All charges relating to the transfer are for the account of first beneficiary. If L/C allows partial drawings or shipments, it can be transferred in part to more than one second beneficiary. Transferred L/C cannot be transferred to any subsequent beneficiary. Must determine the handling of subsequent amendments. Rejection of an amendment by one or more second beneficiary does

not invalidate the acceptance by any other second beneficiary.

Allowable changes:

– credit amount – unit price – expiry date – period for presentation

– latest shipment date – percentage of insurance coverage

First beneficiary’s name may be substituted for that of the applicant

Honour or negotiation of transferred L/C may be in the second beneficiary’s country.

39) ARTICLE 39  –  ASSIGNMENT OF PROCEEDS.

The fact that a credit is not stated to be transferable shall not affect the right of the beneficiary to assign any proceeds to which it may be or may become entitled under the credit, in accordance with the provisions of applicable law. This article relates only to the assignment of proceeds and not to the assignment of the right to perform under the credit.

Gist of provisions under Uniform Rules for Collections (ICC Brochure URC 522):

Article 1:

The Article deals with the application of URC 522. These Rules apply where they are shown to be incorporated into the text of the Collection Instruction.   Banks understand the distinction between a collection which is made up of the actual documents themselves and the instruction from the party who originates the collection. Every collection must be accompanied by such a collection instruction and the application of these Rules must be shown on that document.  The Article makes it obligatory for the Bank that receives he collection to advise the sender if it is unable either to handle a collection as a whole or to handle any instruction. Failure to carry out this obligation may jeopardise the position of the Bank subsequently and, therefore, this requirement must not be forgotten. It is important to stress that once the Bank advises that it is unable to handle the collection or cannot carry out an instruction, it may at its discretion return the documents to the sender without any further action.

Article 2:

The article deals with the definitions of collection, documents in collections and documentary collections. It is to be noted that the definition indicates clearly that collections covered by these Rules are those that are handled by Banks.

Article 3:

The article gives details of parties to a collection i.e.

1- the “principal” who is the party entrusting the handling of a collection to a bank;

2-the “remitting bank” which is the bank to which the principal has entrusted the handling of           a collection;

3- the “collecting bank” which is any bank, other than the remitting bank, involved in processing the collection;

4- the “presenting bank” which is the collecting bank making presentation to the drawee.

Article 4:  This article deals with Collection Instructions.

All documents sent for collection must be accompanied by a collection instruction indicating that the collection is subject to URC 522 and giving complete and precise instructions. Banks are only permitted to act upon the instructions given in such collection instruction, and in accordance with these Rules.

Article 5: This article gives details about Presentation of documents.

Article 6: The article deals with type of documents i.e. presentation/acceptance

In the case of documents payable at sight the presenting bank must make presentation for payment without delay. In the case of documents payable at a tenor other than sight the presenting bank must, where acceptance is called for, make presentation for acceptance without delay, and where payment is called for, make presentation for payment not later than the appropriate maturity date.

Article 7: Article deals with how the documents will be released.

Article 8: Article deals with creation of documents.

Where the remitting bank instructs that either the collecting bank or the drawee is to create documents (bills of exchange, promissory notes, trust receipts, letters of undertaking or other documents) that were not included in the collection, the form and wording of such documents shall be provided by the remitting bank, otherwise the collecting bank shall not be liable or responsible for the form and wording of any such document provided by the collecting bank and/or the drawee.

Article 9: Banks will act in good faith and exercise reasonable care.

Article 10:  This article deals with  Documents vis a vis Goods, Services and Performances.

Article 11:  Disclaimer for Acts of an Instructed Party.

Article 12:  Disclaimer on documents received.

Article 13:  Disclaimer  on effectiveness of documents.

Article 14:  Disclaimer on Delays, Loss in Transit and Translation.

Article 15: Force Majeure.

Banks assume no liability or responsibility for consequences arising out of the interruption of their business by Acts of God, riots, civil commotions, insurrections, wars, or any other causes beyond their control or by strikes or lockouts.

Article 16:  Regarding Payment without delay.

Article 17:  Regarding payment in local currency.

Article 18:  Regarding payment in foreign currency.

Article 19: Regarding partial payments.

Article 20: Regarding interest.

Article 21: Regarding charges and expenses.

Article 22:  Regarding Acceptance

The presenting bank is responsible for seeing that the form of the acceptance of a bill of exchange appears to be complete and correct, but is not responsible for the genuineness of any signature or for the authority of any signatory to sign the acceptance.

Article 23:  Regarding Promissory Notes  and other Instruments:

The presenting bank is not responsible for the genuineness of any signature or for the authority of any signatory to sign a promissory note, receipt, or other instruments.

Article 24: Regarding Protest.

Article 25: Regarding Case of need.

Article 26: Regarding Advices.

 

Standby Letter of Credit – SBLC

SBLC is a guarantee of payment issued by a bank on behalf of a client that is used as “payment of last resort” should the client fail to fulfill a contractual commitment with a third party. Standby letters of credit are created as a sign of good faith in business transactions, and are proof of a buyer’s credit quality and repayment abilities.

Standby letters of credit are often used in international trade transactions, such as the purchase of goods from another country. The seller will ask for a standby letter of credit, which can be cashed on demand if the buyer fails to make payment by the date specified in the contract.

Countries like US and Japan do not recognize guarantees Hence standby LCs were issued to substitute guarantees in those countries.

The Documentary Letters of credit enable the seller to obtain payment due to him from the buyer or his bankers, when he (the seller) has fulfilled his part in the commercial contract and evidenced this fact by presenting stipulated documents. Whereas, SBLC is intended to cover a “Non-Performance” (default) situation,  instead of a “Performance” situation.

The Uniform Customs and Practices for Documentary Credits (UCPDC) recognise this sort of arrangements since its first reference to Standby LC in UCP publication 400 in 1983.

UCP 600 – Article 1 relating to the Application of UCP reads as under:

The Uniform Customs and Practice for Documentary Credits, 2007 Revision, ICC Publication no. 600 (“UCP”) are rules that apply to any documentary credit (“credit”) (including, to the extent to which they may be applicable, any standby letter of credit) when the text of the credit expressly indicates that it is subject to these rules. They are binding on all parties thereto unless expressly modified or excluded by the credit.

The ICC has adopted the International Standby Practices (ISP98) as separate rules for standby letters of credit and implemented from 01st Jan 1999.

In view of the foregoing, SBLC can be issued subject to UCP 600 or ISP 98 of ICC .

Standby L/C can perform the functions of various guarantees like advance payment guarantee, performance guarantee etc by suitably amending the wording. It can also be used to secure payment for outstanding invoice under ‘Account Sales’ or ‘Open account’ system. They are particularly used in International Oil Trade. SBLC is independent of the underlying contract and provides the beneficiary the same degree of protection as bank guarantee.

Mechanism under SBLC:

Let us understand how SBLC can work and can be issued. Following are the stages for a typical SBLC:

  1. Sale Contract between an Exporter (Beneficiary) and Importer (Principal) is established.
  2. The Importer /Principal applies for a SBLC to his banker i.e. Issuing Bank.
  3. Issuing Bank opens the SBLC and advises SBLC through an Advising bank who usually is its correcpondent Bank.
  4. Advising bank advises the SBLC to the beneficiary/Exporter after authenticating the same.
  5. Exporter ships the goods and sends the export set of documents the Importer.
  6. The Importers takes delivery of the goods

8  Importer remits the invoice amount to the exporter in terms of the Sale contract.

  1. In case of default of payment by the importer, the exporter can fall back upon the SBLC and invoke the payment under SBLC, through his bankers.
  2. The Issuing bank makes the payment to the beneficiary through his bankers in terms of the SBLC.

Common types of  Stand by Letter of Credit:

  1. Performance Standby L C.
  2. Advance payment Standby LC.
  3. Bid Bond / Tender Bond Standby LC.
  4. Financial Standby LC.
  5. Commercial Standby LC.

Reserve Bank of India has permitted AD Banks to open SBLC on behalf of their importer constituents for imports into India for goods, import of which is permissible under the Foreign Trade Policy. (AP Dir 84 dated 3rd March 2003). Detailed guidelines for issuance of such stand-by letters of credit are issued by the FEDAI. (SPL-16 / Standby LC / 2003 dated 01st April 2003 and further modifications).

Applicability of Rules:

Depending upon the SBLC issued under UCP or ISP, respective rules i.e. UCP 600 or ISP 98 will be applicable to the SBLC.