UCP 600 Article 7 Issuing Bank Undertaking: Explained Simply

UCP 600 Article 7: The Issuing Bank's Core Promise

An expert analysis of the irrevocable undertaking that underpins Letters of Credit in international trade.

key Key Thesis: The Unconditional Promise

UCP 600 Article 7 establishes the issuing bank's absolute and irrevocable commitment to "honor" a "complying presentation." This means if the documents presented by the seller (beneficiary) match the Letter of Credit (LC) terms perfectly, the bank *must* pay. This promise is independent of the actual sales contract, the quality of the goods, or any disputes between the buyer and seller. It is the bedrock of trust in the entire system.

gavel The Issuing Bank's Undertaking (Article 7)

The core of Article 7 is the bank's pledge to honor. This isn't just a vague promise; it's a specific set of actions the bank commits to upon receiving compliant documents:

paymentsPay at Sight

The bank pays immediately upon determining the documents are compliant.

event_availableIncur Deferred Payment

The bank promises to pay on a specified future date (e.g., 90 days after shipment).

drawAccept a Draft

The bank accepts a bill of exchange, creating a binding obligation to pay it at maturity.

Actionable Advice: For beneficiaries (sellers), this means your primary focus should be on preparing 100% compliant documents. Your payment depends on it, not on whether the buyer is happy with the goods.

file_present The Autonomy Principle (Articles 4 & 5)

This is the most critical concept to grasp. The Letter of Credit is separate from the sales contract. Article 5 states bluntly: "Banks deal with documents and not with goods, services or performance."

The bank's role is to be a document checker, not a goods inspector or a contract mediator. Even if the buyer claims the goods are defective, the bank must pay if the documents are in order.

Practical Tip: A buyer's recourse for faulty goods is to sue the seller under the sales contract, not to instruct the bank to withhold payment under the LC. The LC payment is a separate legal obligation.

plagiarism The Duty to Examine Documents (Article 14)

Banks are given a maximum of five banking days following the day of presentation to examine documents. Their examination is based on one standard: do the documents, "on their face," constitute a complying presentation?

"On their face" means reviewing all data within the documents for consistency with the LC, UCP 600, and international standard banking practice. They do not investigate "behind" the documents.

Example: If an LC requires an "Inspection Certificate" and the beneficiary provides a "Certificate of Analysis," the bank can accept it if the data within fulfills the function of an inspection and doesn't conflict with other documents. The title of the document is less important than its content.

rule_folder Consequences of Discrepancies (Article 16)

If the bank finds even one discrepancy, it can refuse to honor the presentation. A discrepancy is any failure to comply with the LC's terms.

If refusing, the bank must issue a single notice to the presenter. This notice must be timely (within the 5 banking days) and must list every single discrepancy. Vague reasons like "documents unclean" are not acceptable.

Actionable Advice: If you receive a refusal notice, check it carefully. If the bank missed the 5-day deadline or failed to list all discrepancies, they may be "precluded" from claiming the documents are non-compliant and may still have to pay.

assured_workload Reimbursement for Nominated Banks (Article 7(c))

This article protects a "nominated bank" (a bank, often in the seller's country, authorized to pay, accept drafts, or negotiate). If a nominated bank honors a complying presentation on behalf of the issuing bank, the issuing bank must reimburse them.

This undertaking exists even if the documents are lost in transit between the nominated bank and the issuing bank. The risk of loss passes to the issuing bank once a complying presentation is made to the nominated bank.

flag Key Takeaway: Documents are Everything

Article 7 transforms a Letter of Credit from a simple payment instruction into a powerful financial instrument. Its strength lies in its rigid, predictable framework. For all parties involved—buyers, sellers, and banks—the lesson is clear: the entire transaction hinges on the accuracy and compliance of the presented documents. Master the documents, and you master the Letter of Credit process.

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