Article 4 UCP (entitled "Credits v. Contracts") confirms (as did Article 3 UCP 500), that a "A credit by its nature is a separate transaction from the sale or other contract on which it may be based." In this regard there is no change to the UCP 500: a letter of credit is not a contract to the benefit of a third party; under no circumstances can the beneficiary avail itself of the relation between applicant and issuing Bank.
Article 5 UCP 600 repeats the motto of Article 4 UCP 500 with stylistic modifications as follows: "Banks deal with documents and not with goods, services or performance to which the documents may relate." The UCP 600 omit that this applies to "all parties concerned" as had been previously included in the UCP 00. The reason is that the beneficiary not only deals with documents but also with the underlying transaction. This clarification is however ambiguous since the beneficiary cannot avail himself of claims and obligations arising from the underlying transaction.
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credits v contracts
Hello admin Firstly – great site: I appreciate what you are doing.
A credit by its nature is a separate transaction from the sale or other contract on which it may be based."
So – “it’s all about the documents, not the goods...” We hear this all the time and the intention is clear and sound. But my question is really this: as the credit runs separately from the sales contract, why would the credit concern itself with the commercial term employed by the buyer and seller, given that the commercial term ‘talks’ directly to the cargo and not the paper? In what way is a bank’s position stronger for knowing the commercial term, which regulates the relationship between the seller and buyer and has no bearing on the relationship between the beneficiary and the applicant?
In asking bankers this question, often reference is made to the bankers need to verify the freight position – is it freight pre-paid or collect etc, but this argument would only hold true if the banker knew the understanding of the commercial term employed by the parties: for example, one cannot make the leap of faith and assume that Incoterms applies all the time – even when Incoterms is stated, there is much more to it than this. Further, by example, a US applicant could be using the commercial term expressed “FOB” in accordance with any one of the UCC definitions in mind which could easily be either prepaid or collect (in terms of freight). So, in summary, (if you care to comment) the question is “In what way is the credit a stronger document for the inclusion of a commercial term?” Alternatively, in what way would a credit be weaker if the commercail term was unknown - given that the 'freight' position is already declared elsewhere.
I would really appreciate your thoughts on this.
cheers
phill doran
one hill at a time, please