Documentary credits under UCP 600 and Swiss law

The structure of the documentary credit

A documentary credit, also called a letter of credit, is an undertaking by a bank to pay the seller of goods a stated sum against the presentation of stipulated documents within a stated period. The buyer, called the applicant, instructs its bank, the issuing bank, to issue the credit in favour of the seller, the beneficiary. The issuing bank usually transmits the credit through a correspondent in the seller's country, the advising bank. That correspondent may also add its own undertaking as confirming bank, in which case the seller holds two independent promises of payment, one from a bank it may not know in the buyer's country and one from a bank it trusts in its own. The credit may be available by payment at sight, by deferred payment at a fixed date after shipment or presentation, by acceptance of a bill of exchange or by negotiation. The documents typically include a commercial invoice, a full set of original bills of lading, an insurance certificate where the seller insures, a certificate of origin, certificates of quality and weight issued by an independent inspection company and, in the steel trade, the mill test certificate.¹

The economic logic is simple. The seller does not ship until it holds a bank's promise of payment. The buyer does not pay until the seller has presented documents that show shipment of the agreed goods on the agreed terms. The bank stands between them and deals only with documents. For a Lugano trader that buys from a mill in Turkey or India and sells to a buyer in Italy, the documentary credit appears twice. The trader asks its own bank to open a credit in favour of the mill and receives a credit from the buyer's bank in its own favour. The two credits must be matched in amount, dates and documents so that the documents presented by the mill under the first credit can be used, with the trader's own invoice substituted, for presentation under the second. Bankers call this a back-to-back structure, in which one credit is issued against the security of another. It is a common form of transactional finance for small traders. The bank that opens the purchase credit relies on the proceeds of the sale credit for repayment and takes the documents as security in the meantime.²

UCP 600: the rules of the game

Almost every documentary credit in international trade is issued subject to the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce. The current version, UCP 600, was approved by the ICC Banking Commission by 91 votes to none on 25 October 2006 and came into effect on 1 July 2007. It was the first comprehensive revision since UCP 500 of 1993, and the rules themselves go back to 1933.³ UCP 600 consists of 39 articles. The rules are contractual and apply only when the credit incorporates them (Art. 1 UCP 600), but the incorporation is so universal that the rules function as the common law of the documentary credit.

Five principles of UCP 600 govern the trader's daily work. The first is the independence of the credit: a credit is by its nature a transaction separate from the sale on which it may be based, and banks are in no way concerned with or bound by that contract (Art. 4 UCP 600). The second is that banks deal with documents and not with goods, services or performance (Art. 5 UCP 600). The third is the standard of examination. A presentation is complying if it is in accordance with the terms of the credit, the applicable provisions of the rules and international standard banking practice (Art. 2 UCP 600). Data in a document need not be identical to, but must not conflict with, data in the same document, any other stipulated document or the credit (Art. 14(d) UCP 600). The fourth is the time limit. Each bank has a maximum of five banking days following the day of presentation to determine whether a presentation is complying (Art. 14(b) UCP 600), a firm period that replaced the "reasonable time" of UCP 500.⁴ The fifth is preclusion. A bank that refuses documents must give a single notice stating each discrepancy, and if it fails to do so it is precluded from claiming that the documents do not constitute a complying presentation (Art. 16(c) and (f) UCP 600).⁵

Two further provisions are of particular interest to traders. Article 38 UCP 600 regulates the transferable credit, which allows a first beneficiary, typically an intermediary trader, to request the transferring bank to make the credit available to a second beneficiary, typically the supplier. The trader can substitute its own invoice for the supplier's and draw the difference between the two prices. The transferable credit is an alternative to the back-to-back structure that requires only one credit, but it reveals the identity of the end buyer and the supplier to each other unless the documents are carefully managed. Article 12(b) UCP 600 provides that, by nominating a bank to accept a draft or incur a deferred payment undertaking, the issuing bank authorizes that nominated bank to prepay or purchase the draft or the deferred payment undertaking. The ICC introduced this rule in 2006 to permit the discounting of deferred payment credits.⁶ It allows a trader that sells on deferred payment terms to obtain cash before maturity from the confirming or nominated bank.

Notes

1. Law.ch, "Dokumentenakkreditiv", https://law.ch/lawinfo/auftrag/besondere-auftragsarten/dokumentenakkreditiv/ (applicant, issuing bank, beneficiary, advising bank without payment obligation, confirming bank with an independent payment obligation; sight, deferred payment, acceptance and negotiation credits); Wolfsberg Group, ICC and BAFT, Trade Finance Principles, 2019 amendment, https://www.cbr.ru/Content/Document/File/84570/Trade%20Finance%20Principles%202019.pdf, glossary 24–26 (issuing, advising and confirming bank) and 33 (invoices and transport documents). The further documents listed in the text are examples of what a credit may stipulate. On the mill test certificate in the steel trade see Chapter F.I. ↩
2. Wolfsberg Group, ICC and BAFT, Trade Finance Principles (2019) (above), glossary 24 (back-to-back credit: "Documentary Credit issued against the security of another Documentary Credit (master credit)") and 31 (transferable credit). See also the practice described in Chapter F.II. ↩
3. ICC, "Banking Commission approves revised rules on documentary credits", press release of 25 October 2006, https://iccwbo.org/news-publications/news/banking-commission-approves-revised-rules-on-documentary-credits/. ↩
4. ICC, press release of 25 October 2006 (above) ("a firm period of five banking days"). ↩
5. ICC, UCP 600 , Arts. 2, 4, 5, 14 and 16. ↩
6. ICC, press release of 25 October 2006 (above) (new provisions permitting the discounting of deferred payment credits). ↩

For general information only. This article does not constitute legal or tax advice, does not replace advice on an individual case and creates no lawyer-client relationship. It reflects the legal position as of August 2025.