Introduction
1. Relevant of the study
It is generally accepted that international trade transactions naturally carry more
risks than domestic ones due to differences in practice, culture, business processes, laws
and regulations. It is, therefore, important for traders to ensure that goods are dispatched
and payment is made complying with the contract provisions. One effective solution for
traders dealing with these risks has been documentary credit (D/C) or letter of credit (L/C).
Despite of its complexity in compliance and high cost, L/C still enjoys popularity due to its
safety with banks’ participation. It has been described as “the life blood of international
commerce” (D’Arcy, Murray & Cleave 2000, p. 166) and the importance of L/C in trade
transactions is evidenced by its global acceptance, with an estimated usage in excess of 1
trillion USD per annum (SITPRO Ltd, 2003).
For more than 70 years, the International Chamber of Commerce ICC has
formulated the so-called UCP-The Uniform Customs and Practice for Documentary
Credits. The first attempt to codify letter of credit practice started in 1929 when ICC
introduced its “Uniform Regulations and Commercial Documentary Credits”. Although the
failure to gain wide acceptance, these rules provided a foundation for further developments.
Then, in 1933, ICC issued “The Uniform Customs and Practice for Commercial
Documentary Credits” and this set of rules received formal acceptance in more than 40
countries all over the world. It is, however, not until the issue of UCP in 1962, that global
acceptance took place. Since then the rules has been regularly updated in 1974, 1983 (UCP

400), 1993 (UCP 500) and now we have the sixth Revision-UCP 600 which came into
effect in July 2007.
From the fact that the old revision-UCP 500 has reached a ten year cycle of usage
and during its lifetime, it was proved to be more and more outdated, over-complicated and
ambiguous which led to series of queries, commercial disputes, unjustified discrepancies
leading to documentary rejections. Indeed, under ICC’s estimate, there is up to a 70%
documentary non-compliance rate in letter of credit transactions (ICC Thailand, 2002). The
new 2007 Revision, therefore, should be made to improve its certainty and clarity, reduce
discrepancy problem and facilitate international trade activities using L/C product.

Literature review
1.1 What is UCP?
The Uniform Customs and Practice for Documentary Credits (UCP) is a set of rules
on the issuance and use of letters of credit. The UCP is utilised by bankers and commercial
parties in more than 175 countries. About 11-15% of international trade utilises letters of
credit, totalling over a trillion dollars (US) each year (SITPRO Ltd, 2003).
Historically, the commercial parties,
particularly banks, have developed the
techniques and methods for handling letters
of credit in international trade finance. This
practice has been standardized by the
International Chamber of Commerce - ICC by publishing the UCP in 1933 and
subsequently updating it throughout the years. Today, they have achieved almost universal
acceptance by practitioners in the countries worldwide.
It is important to note that The Uniforms and Practice for Documentary Credits
(UCP) is not law. It is private set of rules, which affects all the stakeholders involved in
letter of credit transactions if they choose to apply it. Stakeholders here refer to banks and
other institutions that issue, confirm or otherwise process L/Cs; buyers who cause L/Cs to
be issued; seller who look to L/Cs for payment; and service providers such as forwarders,
carriers, customs brokers who provide or use the documents that the credits stipulate.
Therefore, UCP is not a legal regime automatically applicable to all letters of credit. It is

just a voluntary self-regulatory rule system standardized by ICC when it is expressly
incorporated into the letter of credit.
Beside UCP, ICC Banking Commission also provides some other supplementary
publications specifying in more details the relationship between the banks themselves, i.e.
the rights and obligations of Advising, Confirming, Issuing and Nominated banks. The
latest up-to-date ones are ISBP 681 (International Standard banking Practice), eUCP 1.1
2007 (Supplementary to the Uniform Customs and Practices for Documentary Credits, for
Electronic Presentation), “Commentary on UCP 600”, ICC Banking Opinions and many

transaction has forced ICC to start a new revision process.
1.1.2. The born of UCP 600
The latest revision process started in 2003. A drafting group comprising nine people
together with a consulting group with forty-one members from more than 25 countries
were formed to develop proposed revisions for the ICC national committees worldwide. In
fact, it cannot be denied that no draft will satisfy everyone, thus the drafting committee
gave everyone an opportunity to express their own view by making comments.

After all the suggestions had
been considered, no matter how they
are minor or small, decision on the
new draft is taken by a voting system
and the final text of UCP 600 was
reached. The new revision replacing
the UCP 600 was approved by the
Banking Commission of the ICC at its
meeting in Paris on 25 October 2006
and had a commencement date of 1
July 2007. It is the fruit of more than
three years of work by the ICC's
Commission on Banking Technique
and Practice.
The main objective of the revision was to reduce documentary rejection by ensuring
transparence and clarity, limit potential disputes, seek to eliminate poor presentation by
beneficiaries and provide a clearer understanding of principles in UCP.
1.2 What is Documentary Credit?
Documentary credit (D/C) or Letters of Credit (L/C) has been a milestone of
international trade since the early 1900s. They continue to play a critical role in world trade
today. For any company entering the international market, letters of credit are a payment
mechanism, which help eliminate certain risks.

bank, once the goods arrive safely at the destination, and is confirmed to be what it is
supposed to be, this bank will give the money to the vendor. Usually, banks play the role of
the 3rd party since they are institutions recognized to be trustworthy for this sort of thing,
and they sometimes also obliged to convert the currency as well – one of bank’s main
functions. The bank will also charge a fee for the service and this is just one of the ways
banks make money in the field of international business.
However, traders should bear in mind that L/C is an independent agreement separated
from original sales contract. All parties in letter of credit transaction deal with documents,
not with goods which the documents refer. Thus, the Seller gets paid, not after the Buyer
has inspected the goods and approved them, but when the Seller presents certain documents
(typically a bill of lading evidencing shipment of the goods, an insurance policy for the
goods, commercial invoice, etc.) to his bank. The bank does not verify that the documents
presented are true, but only whether they “on their face” appear to be consistent with each
other and comply with the terms of the credit. After examination, the bank will pay the
Seller.
1.2.1. Classification
There are three basic ways to classify letters of credit including classification by
method of payment; by the manner in which the credit is issued and by other specific
features of the credit. Each type of credit has advantages and disadvantages for the buyer

and for the seller. Charges for each type will also vary. However, the more the banks
assume risk by guaranteeing payment, the more they will charge for providing the service.
Classification by reference to method of payment
Letter of credit may be by “sight” payment, by “deferred” payment, by “acceptance”
or by “negotiation”. All the credits must clearly state whether they available by sight
payment, deferred payment, by acceptance or by negotiation.
A “sight” credit is one in which an issuing bank authorizes a seller of goods to
present documents for payment, without a bill of exchange or with a bill of exchange
drawn on it payable at sight, to the bank issuing the credit or its correspondent and
undertakes to pay the seller, or reimburse its correspondent upon the correspondent paying

and conditions are fulfilled. Under UCP 600 all letter of credit are irrevocable.

Documentary Irrevocable letter of credit is the most common form of credit used
in international trade. Irrevocable credits may not be modified or canceled by the buyer.
The buyer's issuing bank must follow through with payment to the seller so long as the
seller complies with the conditions listed in the letter of credit. Changes in the credit must
be approved by both the buyer and the seller. If the documentary letter of credit does not
mention whether it is revocable or irrevocable, it automatically defaults to irrevocable.
There are two forms of irrevocable credits: Unconfirmed credit (the irrevocable
credit not confirmed by the advising bank) and Confirmed credit (the irrevocable
confirmed credit).
In an unconfirmed credit, the buyer's bank issuing the credit is the only party
responsible for payment to the seller. The seller's advising bank pays only after receiving
payment from the issuing bank. The seller's advising bank merely acts on behalf of the
issuing bank and, therefore, incurs no risk.
In a confirmed credit, the advising bank adds its guarantee to pay the seller to
that of the buyer's issuing bank. Once the advising bank reviews and confirms that all
documentary requirements are met, it will pay the seller. The advising bank will then look
to the issuing bank for payment. Confirmed Irrevocable letters of credit are used when
trading in a high-risk area where war or social, political, or financial instability are real
threats. Also common when the seller is unfamiliar with the bank issuing the letter of credit
or when the seller needs to use the confirmed letter of credit to obtain financing its bank to
fill the order. A confirmed credit is more expensive because the bank has added liability.
Classification by reference to other specific features of credit

Standby letter of Credit
This credit is a payment or performance guarantee used primarily in the United
States. They are often called non-performing letters of credit because they are only used as
a backup should the buyer fail to pay as agreed. Thus, a stand-by letter of credit allows the
customer to establish a link with the seller by showing that it can fulfill its payment

Red Clause letters of Credit provide the seller with cash prior to shipment to finance
production of the goods. A red clause L/C using the term “red” is derived from the
traditional practice of writing the clause identifying this option in red ink. Upon instruction
from the buyer, the issuing bank authorizes the confirming bank to make a cash advance to
the beneficiary against the beneficiary's written guarantee that the documents evidencing
shipment will be presented in compliance with the credit terms. In case the beneficiary fail
to ship the goods or meet the credit requirements, the paying bank looks to the issuing bank
to obtain reimbursement of the amount of the advance plus the interest charges on the
advance. The issuing bank then charges the account of the buyer--who may or may not
have received the goods.
Transferable letter of credit
“Transferable’, ‘transmissible” and “assignable” convey the same meaning referring
to the same type of credit. This kind of L/C allows the seller to transfer all or part of the
proceeds of the original letter of credit to a second beneficiary, usually the ultimate
supplier of the goods. The letter of credit must clearly state that it is transferable. This is a
common financing tactic for middlemen and is common in East Asia.
Revolving letter of credit
With a Revolving letter of credit, the issuing bank restores the credit to its original
amount once it has been used or drawn down. Usually, these arrangements limit the
number of times the buyer may draw down its line over a predetermined period. Revolving
letter of credit can revolve in relation to time or value. If the credit is time revolving, once
utilized it is re-instated for further regular shipments until the credit is fully drawn. If the

credit revolves in relation to value, once utilized and paid the value can be re-instated for
further drawings.
Freely negotiable letter of credit
L/Cs which state “this credit is not restricted to any bank for payment” or such similar
words and do not indicate any particular bank who is authorized to pay, negotiate or accept
are unrestricted or open credit.
Restricted negotiable letter of credit

with the issuing bank in order to request that a letter of credit be issued.
Step 3. The issuing Bank issues the letter of credit and sends it to the Advising bank
by telecommunication or registered mail in accordance with the Importer’s instructions. A
request may be included for the Advising bank to add its confirmation. The Advising Bank
is typically located in the country where the Exporter carries on busiess and may be the
Exporter’s bank but does not have be.

Step 4: The Advising bank will verify the letter of credit for authenticity and send a
copy to the Exporter. Figure 2 illustrates the typical transaction
Figure 2: Issuance of letter of credit
Step 5. The Exporter examines the letter of credit to ensures that it corresponds the
the terms and conditions in the purchase and sale agreement, documents stipulated in the
letter of credit can be produced and the terms and conditions of the letter of credit may be
fulfilled.
Step 6. If the Exporter is unable to comply with any terms and conditions of the L/C
or if the L/C differs from the purchase and sale agreement, the Exporter should notify the
Importer and request an amendment to the L/C.

Step 7. When all the parties agree to the amendment, they are incorporated into the
terms of the L/C and advised to the Exporter through the Advising bank. It is not
recommended that the Exporter does not make any shipments against the L/C until the
required amendment have been received.
Step 8: The Exporter arranges for shipment of the goods, prepares and/or obtain the
documents specified in the letter of credit and makes demand under the letter of credit by
presenting the documents within the stated period and before the expiry date to the
‘available with” bank. This may be the Advising/Confirming Bank. That bank check the
documents against the letter of credit and forwards them to the Issuing Bank. The drawing
is negotiated, paid or accepted as the case may be.
Step 9. The Issuing Bank examines the documents to ensure they comply with the
letter of credit terms and conditions. The issuing bank obtains payment from the Importer

A bank that at the request of the issuing bank, assures that drawings under the credit
will be honored (provided the terms and conditions of the credit have been met).
Advising bank
The party gives notification of the terms and conditions of a letter of credit to the
beneficiary (seller). The advising bank also takes reasonable care to check the apparent
authenticity of the letter of credit, which it advises.
Accepting bank
The bank named in a letter of credit on whom term drafts are drawn and who
indicates acceptance of the draft by dating and signing across its face, thereby incurring a
legal obligation to pay the amount of the draft at maturity.
Paying bank
The bank authorized in the letter of credit by the issuing bank to honor sight or
deferred payments under the terms specified in the credit. If this bank is the advising bank,
it has no obligation to honor documents; however, if this is a confirming bank, it is
obligated to pay against complying documents.
Drawee bank
The bank on which the drafts specified in the credit are drawn and from which
payment is expected.

Discounting bank
A bank, which discounts a draft for the beneficiary after it, has been accepted by an
accepting bank.
Negotiating bank
Bank, other than the issuing bank, which elects to "negotiate" (advance funds or give
value to the beneficiary) against presentation of complying documents.
Reimbursing bank
The bank authorized by the issuing bank to reimburse the drawee bank or other banks
submitting claims under the terms of the credit.
Presenting bank
The bank forwards the documents directly to the issuing bank to obtain settlement.

of Article 6 refer to revocable letters of credit. The limited usage of such instruments in
today’s letter of credit business led to the general viewpoint that there was no necessity to
remain in UCP 600. If an applicant or bank desire to use a revocable credit in the future,
they have two options: using the credit subject to UCP 600 and incorporate all the
conditions applicable to the revocability; or using the revocable credit subject to UCP 500
provided that all parties are in agreement to the usage of those rules.
Article 5 (Instruction to issue/ Amend Credits). This article is related to instructions to
issue and amend credits, which was seen as an article stated the obvious. Instructions for
the issuance of a credit and an amendment as well as the credit and the amendment
themselves must be surely complete and precise in order to make payment, acceptance or
negotiation. In addition, the absence of a specific rule in UCP 600 concerning the
instructions to issue and amend credits does not relieve Issuing banks from their duty of
care for the proper creation, completeness and content of their credit or any amendment (if
any).
Article 12 (Incomplete or Unclear Instructions) covered the issuance of preface
notification, by the Advising Bank, in the event a credit or an amendment was incomplete
or unclear in its terms. If a credit is received that is unworkable or incomplete, there is no
need for a rule to instruct Advising Bank that they should seek clarification or request a
complete message. Therefore, it is not necessary to provide a rule that the Issuing Bank
must give the appropriate information “without delay”. Similarly, the absence of a specific
rule in UCP 600 with regard to Incomplete and Unclear Instructions does not relieve the