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Significance of Article 14 of UCP 600 in International Trade Finance.

Significance of Article 14 of UCP 600 in International Trade Finance

Trade and Business

By Moses Kulaba

trade shipInternational letters of Credit transactions are very important in promoting International trade, however in fulfilling  this noble endeavor banks are obliged to abide by strict regulations and standards of practice as approved by the Chamber of Commerce. This article cites some of the relevant authorities explaining the essence and significance of Article 14 of the Uniform Customs Practice (UCP) 600 in dealing with International letters of credit transactions

The Uniform customs Practice (UCP) is a standard practice devised by the International Chamber of Commerce (ICC) in 1933 to regulate the duties and obligations of Banks in dealing with International letters of credit transactions. The UCP 600 contains specified rules relating to the application, opening, advising, confirming, negotiating and reimbursement of documentary credits by compliant Banks as well as the standard requirements imposed on transport documents[1]

Article 14 of the UCP 600 deals with the standards for examination of documents and from the wording and phraseology of the contents of this article suggest that it embodies the doctrine of strict compliance rule.  The banks are under obligation to observe strict compliance of the documents tendered before and terms of the credit before effecting payment. The Banks are entitled to reject documents which do not strictly conform to or with the terms of the Credit[2] and there is no room for documents which are almost the same or which will do just as well to be entertained.

The significance of Article 14 is that it seeks to protect both the interests of the importer and exporter as parties to an international business transaction.  The principal reason for the importer opening a documentary credit is to give performance to an underlying contract of sale while giving both parties a degree of financial protection. Through a letter of credit the importer receives goods in exchange for payment. It is therefore necessary that documents that underlie such a transaction are subjected to rigorous scrutiny and the requirements for compliance should be exceptional.

The second essence of this article is that it protects the interests of the bankers as parties to the international trade transaction and shields them from liability which may arise from fraudulent acts by parties to the international trade transaction. The purpose for this requirement for strict compliance is based on the fact or an understanding that the advising bank is a special agent of the issuing bank and the later are special agents of the buyer; if such agent who has limited authority acts outside his authority (in banking terminology: His authority (in banking terminology; his mandate) the principal is entitled to disown the act of the agent, who cannot recover from him and has to bear the commercial risk of the transaction. In a falling market a buyer is easily tempted to reject documents which the bank accepted, on the ground that they do not strictly conform with the terms of the credit. The banks are normally experts in finance and not in goods. It has normally no expert knowledge of the usages and practices of a particular trade[3]. For more information read: http://www.gepc.or.tz/?p=457