Drafts under documentary credits: still relevant?


A draft is a common feature of a documentary credit. However, it is very often a cause of discrepancies due to incorrect or inadequate data being shown. For example, the absence of key information, such as a date relating to the date of shipment, or date of a document or an event from which a maturity date may be determined from the face of the draft, is an area where a discrepancy is commonly identified. 

It is the issuing bank, and not the applicant, that usually specifies a requirement for a draft by the pre-printed wording on its documentary credit application form (paper or online).

There are no specific rules concerning the form and issuance of a draft.

However, in order to be considered a bill of exchange (or, more commonly, a draft), the presented document must conform to the following definition: 

"A bill of exchange is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specified person, or to bearer."

When a draft is required as evidence of the amount due under a documentary credit, it must be drawn on a bank. A credit may indicate this requirement by stating the actual name of a bank, or it may indicate the applicable (drawee) bank by the role that it is performing, i.e., "Issuing Bank", "Nominated Bank", etc.

With the exception of a documentary credit that is available by acceptance, each bank should ask itself as to whether a draft is as relevant today as it was, say, 5 or 10 years ago. This is especially so when a documentary credit is available by payment or by negotiation on a sight basis, and as we try to move away from paper based transactions.

In fact, it is arguable whether a draft should ever be required under a documentary credit. Maybe the credit itself should provide the risk mitigation, financial undertaking and settlement conditions?  We are aware of a growing number of advocates around the world supporting this position.

UCP 600 incorporates rules defining the undertaking of the issuing and confirming bank to honour. Why utilise a credit available by acceptance when there is a perfectly acceptable alternative in making the credit available by deferred payment?

It would be no surprise if this issue were, at some stage, raised to the ICC Banking Commission for discussion and guidance as to future handling.

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