Understanding the UCP600

by Buddy Baker

Executive Summary
• The UCP600 provides a global standard set of practices for letters of credit.
• Anyone engaged in international trade, whether selling goods, buying goods, or providing financing,
needs to be familiar with the UCP600.
• While the UCP is designed for use with commercial letters of credit, it is often used for standby letters
of credit, a reliable type of bank guarantee.
• The most important principles of letters of credit set down in the UCP are the independence principle,
and the principle that banks deal in documents, not goods.
• The UCP defines the responsibilities of banks involved in handling letters of credit and provides rules
for examining documents they call for; documents must strictly comply in order to trigger the issuing
and confirming banks’ payment obligation, but if documents do not strictly comply, the banks must
themselves follow strict rules for refusing payment.
• Parties who have used the UCP to govern their standby letters of credit and bank guarantees in the
past should seriously consider using the International Standby Practices instead.

Introduction
In May 2003, the Banking Commission of the International Chamber of Commerce (ICC) began revising the
international rules for letters of credit, known as the Uniform Customs and Practice for Documentary Credits.
The process took three and a half years. The ICC published the new rules in their publication number 600,
commonly referred to as the “UCP600,” and set the effective date as July 1, 2007. This article describes the
UCP rules and their revisions, some of the limitations of the UCP, what was not revised, and what managers
need to know in order to avoid being tripped up by the UCP600.

What the UCP Is

Firstly, it is important to establish what the UCP is, what it does, and whom it affects, and also what the UCP
is not. The UCP is often thought to be a law, but it is not. On the other hand, to say it is simply a publication
does not do it justice. The UCP can be characterized as a rulebook that reflects practice. Because the UCP
is not a law, its use is voluntary. The power of the UCP lies in its universal adoption by banks all over the
world and incorporation into their letters of credit. Every player agrees to play by the same rules.
The UCP is concerned with documentary credits, commonly referred to as “letters of credit.” The UCP
is focused on “commercial” letters of credit, the traditional letters of credit that are used as a vehicle for
payment in international trade, but the UCP is also used in the realm of standby letters of credit and bank
guarantees. Anyone engaged in international trade, whether selling goods, buying goods, or providing
financing, should become familiar with the UCP.
As it is not a law, the UCP only applies to letters of credit that actually state that they are subject to it.
Furthermore, individual rules provided by the UCP may be excluded or altered by the terms of a letter of
credit. For example, it is not uncommon for a letter of credit to state that it is subject to the UCP600 except
for the provisions in article 35 regarding lost documents.
The most important principles set down in the UCP are the independence principle and the principle
that banks deal only in documents. These principles have existed in every UCP over the years, and are
fundamental to the nature of letters of credit. A letter of credit involves three parties: the applicant for the
letter of credit (the bank’s customer—typically the buyer of goods described in the letter of credit); the
beneficiary of the letter of credit (the party to be paid—typically the seller of the goods); and the issuing
bank. The independence principle is found in article 4 of the UCP600, which states, “A credit by its nature
is a separate transaction from the sale or any other contract on which it may be based.” Simply put, this
means that a bank that has issued a letter of credit is not, and cannot, be concerned with whether or not the

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beneficiary has met its obligations under the underlying contract between the beneficiary and the applicant,
for example, whether the seller has actually shipped the goods the buyer ordered. All the bank cares about is
whether the documents comply, which is stated in article 5: “Banks deal with documents and not with goods,
services or performance to which the documents may relate.”

Figure 1. How letters of credit work

Why the UCP500 Was Revised

As has already been described, the UCP is intended to reflect practice, not to change practice. As such, the
UCP needs to be revised periodically as practice changes. Historically, the UCP has been revised about
every 10 years since its first publication by the ICC in 1933. The UCP500 (ICC publication number 500) was
published in 1993, so the ICC took a look as early as 1999 at completing a revision by 2003. The fact is that
the UCP500 was actually working pretty well, so revision was deferred for a while, and, when it was finally
launched, focused mainly on the problems people had been having.
Probably the biggest concern with the UCP500 was the fact that the discrepancy rate that banks were
experiencing was in the region of 75%. In other words, exporters presenting documents under letters of
credit were getting the documents right only 25% of the time. While the overwhelming majority of letters
of credit get paid despite discrepancies in the documentation, the issuing bank’s, and, if there is one ,
the confirming bank’s obligation to pay ceases if documents fail to comply. The job security of bankers
who work with letters of credit depends on exporters viewing them as dependable, so this was viewed as
problematic. The fact is that the UCP500 itself had been drafted with an objective of reducing discrepancy
rates, which had been similarly high under the UCP400. That it failed to meet this objective was an issue
to be considered: How might the UCP600 be worded to remove requirements that exporters had difficulty
complying with, either because they were confusing or because they were difficult requirements to satisfy?

Figure 2. How confirmed letters of credit work

Other matters that concerned the drafting committee included:
1. seven particular articles in the UCP500 were generating repeated requests for clarification;
2. consternation among bankers that several court rulings involving letters of credit had been decided
incorrectly, in their view;
3. a disturbing practice that was emerging among steamship companies of incorporating language in their
transport documents that disclaimed liability for delivering goods to the wrong party.

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The first two could presumably be resolved through better wording, while the third called for a new rule as
there was nothing in the UCP500 to say how banks should deal with such disclaimers.

The Major Changes

Ultimately, although the UCP600 went through 15 drafts and generated over 5,000 comments from national
committees all over the world, very few “real changes” (to content, rather than just for clarification) were
made. Many possible real changes were proposed and debated, but, in most cases, the debate served to
reinforce the fact that the rule in the UCP500 was still the best rule. The UCP600 made only three major
changes to the UCP500:
• The amount of time banks are allowed to take to examine documents was shortened to five days.
• A new rule was included to standardize practice regarding the addresses of the applicant and
beneficiary.
• The practice of holding refused documents pending receipt of waiver of discrepancies by the applicant
was recognized.
We will now examine each of these major changes in turn.
Versions of the UCP prior to the UCP500 simply gave banks a “reasonable time” to examine documents and
identify discrepancies. The UCP500 effected a major change by placing an outside limit on what should be
considered reasonable. It spoke of a “reasonable time, not to exceed seven banking days.” The problem
was that this allowed arguments over whether shorter time limits were reasonable when, for example, the
documents were simple. In some cases, these arguments went to court, and the rulings by judges and juries
showed a lack of understanding of how letters of credit are processed. The Banking Commission attempted
to set the record straight by publishing a position paper describing the process of examining documents,
waiving discrepancies, and refusing documents, but the problem did not go away. The drafters of the
UCP600 have therefore removed the reasonable-time concept altogether, and replaced it with a simple time
limit of five banking days.
Secondly, the issue of whether or not the addresses of the applicant and beneficiary stated in a letter of
credit needed to match the addresses of the buyer and seller in invoices was ambiguous in the UCP500.
The requirement was that invoices “must appear on their face to be issued by the Beneficiary… and must
be made out in the name of the Applicant.” Many banks interpreted this to mean that the addresses needed
to match, but this was not a standard interpretation. In 2002, the ICC published the book, International
Standard Banking Practice for the Examination of Documents under Documentary Credits, as a companion
1
to the UCP500. The book is a compilation of 200 paragraphs giving guidance on how to interpret various
parts of the UCP500. The ISBP contained a rule stating that the addresses of the applicant and beneficiary
did not need to match those in the documents, as long as they were in the same countries. This rule was
then incorporated into the UCP600.
The third major change dealt with the banks’ long-standing problem of what to do when an applicant decides
to pay for documents that the bank has already refused, due to discrepancies. It was fairly plain under
the UCP500 that refused documents were the property of the beneficiary, and therefore could not be
released without the beneficiary’s permission. But, if goods were sitting in port and the applicant wanted to
pay, most banks would release the documents without permission, sending a message to the presenting
bank stating that refusal would be rescinded and the documents would be released, unless the presenting
bank communicated the beneficiary’s objection within some stated number of days. The thought was that
beneficiaries want to be paid, so who would object? Some banks started putting language in their letters
of credit to cover this, thereby altering the rule in the UCP500, but the language was not standard and
beneficiaries were often confused and concerned. Adoption of this practice as a standard in the UCP600
solves the problem. Unless a beneficiary provides contrary instructions, a bank that has refused documents
is now permitted to later rescind its refusal.
All three major changes can be viewed as “payment friendly,” and therefore meant to encourage
beneficiaries to use letters of credit.

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Some of the Minor Changes
A few minor changes are worth noting. Firstly, the UCP600 now states that a letter of credit that is available
by deferred payment implicitly authorizes the bank it is available with to discount, i.e., to pay immediately,
with interest deducted from payment, if requested to do so by the beneficiary. This is a reaction to the legal
case of Banco Santander vs. Bayfern Limited. In that case, Banco Santander discounted a letter of credit
that was available by deferred payment, 180 days after shipment. It was subsequently discovered that the
documents were forged. A court ruled that the issuing bank did not have to reimburse Santander as the
letter of credit had not called for drafts and Santander, therefore, discounted the payment at its own risk.
Many banks felt that this decision made an undesirable distinction between letters of credit that are available
by deferred payment and those that are available by acceptance of time drafts. The new language in the
UCP600 is expected to erase the distinction in the minds of the courts, and promote financing of deferred
payment letters of credit. As the law itself was not changed, only time will tell if this change results in the
desired effect.
A rather subtle change in the UCP600 concerns inconsistent data in the documents. Inconsistent data
was probably the single most common discrepancy under the UCP500. As part of the effort to decrease
discrepancies, there was talk about dropping the requirement that data be consistent at all. Ultimately, it was
decided that inconsistent documents would cause too many problems for importers, who need to use these
documents to get goods through customs and for other regulatory purposes. The change was tempered to
state that data in the documents must not conflict. This is another case where time will show whether the
change results in any real difference in the discrepancy rate.
An interesting change has taken place in the use of the term “bill of lading.” The UCP600 reserves use of
the term for transport documents that cover port-to-port shipment. In other words, there is no such thing
as a “combined transport bill of lading” anymore. When goods are to be shipped using multiple means of
conveyance, the letter of credit should call for a multimodal or combined transport document.
This is not a complete list of the changes made to the UCP500 by the UCP600, but most of the remaining
changes were merely rewording of rules. Of course, these edits may have great value in reducing confusion
and discrepancies. In many cases, it was the banks that did not understand the intent of some of the rules
in the UCP500, and clearer wording should also avoid banks making mistakes. For example, if documents
do not strictly comply, the issuing and confirming banks may refuse payment, but must themselves follow
strict rules for refusing payment. These rules were often violated under the UCP500, resulting in lawsuits,
and, subsequently, pleas to the Banking Commission to provide clarification. The UCP600 has revised the
previous wording to be more straightforward.

Unresolved Problems
Another lawsuit that gave rise to revised language in the UCP600 was Glencore vs. Bank of China. This
case had to do with how banks determine whether a document is to be treated as an original or as a copy.
The court gave a completely literal interpretation to the UCP500, which was not what the drafters actually
intended. The Banking Commission issued a position paper to clarify the actual practice and then cleaned up
the language in the UCP600. The bottom line is that the UCP600 allows multiple ways to convert copies into
2
originals, such as by adding an original signature or by rubber-stamping the word “Original” onto the copy.
What the drafters failed to do, however, was to discuss documents that are created electronically and bear
scanned signatures, a growing practice. High-quality scanners and color laser printers are making it easier
for crooks to forge documents that look very legitimate, including scans of authorized signatures. While most
bankers feel that they cannot be held accountable for the illegitimate use of a scanned signature, it would
have been helpful if the UCP600 had simply stated that scanned signatures are acceptable.
Ironically, the issue of whether banks should accept transport documents in which the carrier disclaims
liability for delivering goods to the wrong party—one of the biggest reasons banks had called for the UCP500
to be revised—was not addressed at all in the UCP600. The carrier that had initially generated all the furor
was Maersk Lines and, around the time the revision process started, they announced that they would
remove this disclaimer from their transport documents. Nonetheless, the danger persists that other carriers

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will use such language, and we still have nothing in the UCP600 that would allow banks to consider this a
discrepancy.

When to Use the ISP Instead

A change that was discussed, but not made, was the statement in article 1 that the UCP may be cited
as the governing rules in standby letters of credit, and will then be applied to the extent applicable. This
is somewhat problematic, in that it is not clear which rules might be inapplicable. Nonetheless, the same
statement appeared in earlier UCPs and thereby encouraged banks to use the UCP as the rules for standby
letters of credit. This has proven quite valuable in the years since the standby letter of credit was invented.
As standby letters of credit depend on the independence principle and the principle that banks deal only
in documents, invoking the UCP makes it very clear that these principles apply. For lack of a set of rules
like the UCP to incorporate, standbys would suffer the same problem as demand guarantees, where courts
often call into question their independent nature, and require or allow banks to somehow determine actual
compliance with the underlying contract before paying. That standbys have become so popular in a wide
3
variety of contexts is due in large part to the UCP.
Nonetheless, the UCP is not designed for standbys. Over the years, banks, and their lawyers, had adopted
the habit of excluding various articles of the UCP from their standbys, and writing in other rules. This made
for some long and legalistic standbys and nonstandard practices. Finally, in 1998, the ICC embraced a set
of rules developed by the Institute of International Banking Law and Practice specifically for standbys, and
published it as ICC publication number 590. This set of rules is commonly referred to as “ISP98,” or simply
“ISP.”
The ISP has a different attitude from the UCP. Firstly, it assumes that documents presented under a standby
have no intrinsic value. This is as opposed to commercial letters of credit, for which the UCP is designed,
where documents very often include title documents, insurance certificates, and customs documentation
that a buyer of goods needs in order to claim goods, file claims under insurance, and clear customs. The
UCP also has strict rules for what banks are to do with these documents if they are refused. Such documents
should not be called for by a standby letter of credit, where drawings are usually made because a default has
taken place and are not expected to ever be presented.
The ISP also assumes applicants will not waive discrepancies and so is much less strict about what
data documents must contain. The UCP, in contrast, has extensive rules for what data various types of
documents must contain, and, as has been discussed, the result is that documents fail to comply more than
75% of the time. Under the ISP, the documents essentially only need to contain whatever data the standby
explicitly calls for, and the data need not even be consistent between documents. Recall that inconsistent
data is the number one cause of discrepancies under the UCP.
One more major difference is the impact of force majeure, i.e., an unplanned closure of the bank where
the beneficiary is to present documents due to an act of God, a terrorist attack, etc. Under the UCP, if a
beneficiary is unable to present documents because of such a closure and the letter of credit expires, it is
simply the beneficiary’s tough luck. Hopefully, the applicant will still want the goods and will authorize the
bank to waive the discrepancies. This is the article most commonly excluded in standbys issued subject to
the UCP, and the ISP recognizes the practice of allowing the beneficiary to present documents within 30
days of when the bank reopens.
The ISP is a fairer set of rules for standbys, and is based on the way they work and the purposes for which
they are used. Using it avoids the need to exclude UCP articles and write replacement rules into letters of
credit.
Nonetheless, until 1998, when the ICC published the ISP, the UCP500 was the only game in town and
people were used to it. Applicants, beneficiaries, and banks continued to use the UCP500 rather than learn
a new set of rules. Now that the UCP600 has replaced the UCP500, it is hoped that all of these parties, who
have to switch rules in any event, will decide to go with the ISP.

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Revision Test
To assess your understanding of the way the UCP works, answer the following multiple-choice questions.
Select your answers and then compare your choices with the correct answers, listed at the end of this
section.
1. Which is the best description of the UCP?
a. A set of general guidelines that each party to a letter of credit may comply with if they choose.
b. A set of rules that a bank may include in a letter of credit the bank issues if the bank wishes to,
but which all parties must adhere to if so included.
c. A law that governs all letters of credit.
d. The bar code that appears on the packaging of most consumer products.
2. What happens if a confirming bank fails to examine documents before the end of the fifth day following
presentation?
a. The confirmation ceases to exist and the bank must forward the documents to the issuing bank
for payment.
b. If the documents have no discrepancies, the confirming bank may owe past due interest for
“wrongful dishonor,” but, if the documents do have discrepancies, nothing much happens as their
obligation is only to honor compliant documents.
c. The confirming bank must send a notice of refusal stating the reasons the bank was unable to
examine the documents within the five-day time frame.
d. The confirming bank becomes obligated to pay even if the documents contain discrepancies.
3. If a UCP600 letter of credit calls for presentation of a multimodal transport document, which of the
following is true?
a. The multimodal transport document must be marked “clean on board.”
b. The letter of credit must specify a place of dispatch, a port of loading, a port of discharge, and a
final destination.
c. The letter of credit must specify a place of dispatch and a final destination, but must not specify a
port of loading or a port of discharge.
d. None of the above.
4. Which of the following is true?
a. Under UCP600, banks no longer have to worry about documents being consistent with each
other.
b. Bills of lading with language that calls into question the delivery of goods against surrender of an
original bill of lading were acceptable under UCP500, but not under UCP600.
c. When talking about letters of credit, the expression “banks examine documents on their face”
means that banks examine the front of documents but not the back.
d. Under UCP600, an issuing bank is permitted to refuse documents but then change their minds
and rescind their refusal.
5. A letter of credit is issued calling for shipment from Long Beach, CA, partial shipments allowed. An
amendment is made, changing the port of loading to Los Angeles, CA, but curtailing the latest shipping
date by a month. Which of the following is true?
a. The beneficiary must now ship from Los Angeles.
b. The beneficiary may continue to ship from Long Beach, but, if the beneficiary does so, it will be
deemed to constitute rejection of the amendment.
c. The beneficiary may now ship from Los Angeles, but, if the beneficiary does so, it will be deemed
that the beneficiary has accepted the amendment, including the earlier deadline for shipments.
d. The beneficiary may accept the change in ports and reject the change in the latest shipping date,
as long as the beneficiary does so expressly, either before or upon presentation of documents.
6. Under UCP600, if a bank is closed for unplanned reasons (force majeure), what happens to letters of
credit that expire before the bank reopens?
a. The bank will pay for compliant documents that were presented before the day the bank closed,
even though they were not examined until after the bank reopened.
b. The bank will accept presentation of documents within 30 calendar days after they reopen, as
long as they are all dated prior to the expiration dates of the respective letters of credit.
c. If the beneficiary presented documents X days before the day the bank closed, they will be
allowed 5-X days after the bank reopens to correct discrepancies.

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 d. All of the above.
7. When an issuing bank decides to refuse documents due to discrepancies under a letter of credit they
made subject to UCP600, which of the following are the bank required to do?
a. Contact the applicant and see whether the applicant will grant a waiver of the discrepancies.
b. Notify the presenter of the documents of every discrepancy on which the refusal is based.
c. Notify the presenter either that they are holding the documents at the disposal of the presenter or
that they are returning them.
d. Send notice of refusal “immediately” upon deciding to refuse the documents.
Answers: 1b, 2d, 3d, 4d, 5c, 6a, 7b.

Conclusion
Anyone engaged in international trade, whether selling goods, buying goods, or providing financing must
be familiar with the latest rules governing letters of credit. An understanding of what was changed and why
gives some insights into how the latest UCP works, its strengths, and its limitations.

Making It Happen
The obvious first step toward understanding the UCP600 is to obtain and read the document itself. In leaflet
form, the UCP600 is only seven pages long. Many banks provide copies to their regular customers, but
a copy can always be purchased from ICC Publishing. It is also recommended to pick up the companion
book, International Standard Banking Practice for the Examination of Documents under Documentary
Credits, (the ISBP). Simply reading the UCP and ISBP may generate many questions of interpretation, so it
is good to attend a class on letters of credit and the UCP. Such classes are offered by banks, various credit
management associations such as the FCIB, and a number of independent consultants who offer training
programs. Classes range from one-hour teleconferences and webinars, to multi-day workshops. Although
a one-hour teleconference may sound appealing in terms of time commitment and travel expenses, it is not
possible to cover the UCP in any depth in such a limited time. If your goal is merely to get a feel for how
letters of credit work, this may suffice, but anyone actually handling letters of credit, especially individuals
who are preparing and presenting documents and collecting payment, should attend a full-day or multi-day
class.

More Info
Books:
• Baker, Walter (Buddy), and John Dolan. Users’ Handbook for Documentary Credits under UCP600.
Publication number 694. Paris: International Chamber of Commerce, 2008.
• Byrne, James E. The Comparison of UCP600 & UCP500. Montgomery Village, MD: Institute of
International Banking Law & Practice, 2007.
• Katz, Ron (ed). Insights into UCP600-Collected Articles from DCI 2003 to 2008. Publication number
682. Paris: International Chamber of Commerce, 2008.

Websites:
• Association of Executives in Finance, Credit, & International Business (FCIB): www.FCIBglobal.com
• ICC Business Bookstore: www.iccbooksusa.com
• Institute of International Banking Law & Practice: www.iiblp.org
• International Chamber of Commerce Commission on Banking Technique & Practice: www.iccwbo.org/
policy/banking
• International Financial Services Association: www.ifsaonline.org

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Notes
1
… there are only 3 major changes made to the UCP500 by the UCP600 … All three … can be viewed as
“payment friendly.”
2
… it would have been helpful if the UCP600 had simply stated that scanned signatures are acceptable.
3
The ISP is a fairer set of rules for standbys and is based on the way they work and the purposes for which
they are used.

See Also
Best Practice
• Countering Supply Chain Risk
• Essentials for Export Success: Understanding How Risks and Relationships Lead to Rewards
• Exporting Against Letters of Credit
• Reducing Costs through Production and Supply Chain Management
Checklists
• Building an Efficient Credit and Collection Accounts System
• Building an Electronic Invoicing System
• Choosing the Right Payment Policy
• Efficient Invoicing Procedures
• Practical Purchasing Procedures

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