Use of Drafts under Documentary Credits
A major outcome of the UCP consultation on the revision of "UCP 600" (finalised in 2017) was identification of a need for a greater understanding of documentary credit practices in the market. As such, it was agreed by the Executive Committee of the Banking Commission that more comprehensive guidance should be provided.
One feature of this consultation revealed that a number of ICC National Committees and practitioners questioned whether drafts should be required for presentation under any documentary credit. Furthermore, it was highlighted that sight drafts do not provide any benefit to a nominated bank or issuing bank.
Accordingly, a guidance paper was released on 8 January 2019 on this subject.
It was concluded that, in most circumstances, a UCP 600 documentary credit need not require a draft to be presented together with the stipulated documents.
As such, a number of recommendations were made:
Simple Documentary Credit format
When drafting ISBP 745 (International Standard Banking Practice for the Examination of Documents under UCP 600), it was recognised that a more methodical approach to the drafting of credits and/or amendments would act as a positive factor in avoiding many of the problems that can arise when examining documents.
Enhanced attention to detail, and reflection as to whether or not all requirements are actually necessary, will provide benefit to all involved parties.
With this in mind, the ICC Banking Commission released ‘Guidance Notes for Documentary Credit Formats' in April 2020, which provides clear and transparent recommendations in respect of the optimal approach required in order to achieve a straightforward, uncomplicated documentary credit format.
This paper highlights that a simple documentary credit is a value-added option in well-established relationships between an applicant and a beneficiary. As such, it provides guidance in respect of the optimal approach required in order to achieve a straightforward, uncomplicated documentary credit format.
ISBP 745 Guidance
ISBP 745 (International Standard Banking Practice for the Examination of Documents under Documentary Credits) reflects existing practice, whilst ICC Opinions reflect existing and evolving practice.
In order to reflect this, it is intended that a regular guidance be produced reflecting the previous ICC Opinions and indicating how they relate to ISBP 745 and UCP 600.
As an initial step, a Guidance memo on opinions and possible impact on ISBP 745 and UCP 600, covering all ICC Opinions since the introduction of ISBP 745 in July 2013, was published in January 2020.
Use of Sanction Clauses in Trade Finance-related instruments (and update)
The ICC Banking Commission originally issued a Guidance Paper on the use of Sanctions Clauses in 2010 which was updated in 2014. The paper deals with the use of clauses in relation to trade, economic or financial sanctions or embargos in trade finance instruments (documentary and standby letters of credit, demand guarantees and counter-guarantees) that are subject to the rules drafted by the ICC Banking Commission.
The issue of sanctions being applied upon a documentary credit transaction has surfaced on a number of occasions over the years. As stated in the paper, the use of sanction clauses had become a problematic issue in that they lead to uncertainty as to their application and could potentially defeat the independent nature of such instruments. The purpose of the Guidance Paper was to highlight this issue and recommend best practices in that respect.
Owing to recent resurgence in the use of sanctions clauses in documentary credits, the ICC decided to again address this issue and released an Addendum to the Guidance Paper in May 2020.
The key messages are stated as:
The ICC re-states the recommendation that sanctions clauses should not be used under normal circumstances. However, if one is to be used, then such a clause should be drafted in clear terms, restrictively, to limit the reference only to mandatory law applicable to the bank, as according to the following sample clause:
"[notwithstanding anything to the contrary in the applicable ICC Rules or in this undertaking,] We disclaim liability for delay, non-return of documents, non-payment, or other action or inaction compelled by restrictive measures, counter-measures or sanctions laws or regulations mandatorily applicable to us or to [our correspondent banks in] the relevant transaction."