Surecomp® has announced the completion of successful electronic bills of lading (eBL) transactions, bringing together multiple parties via its collaborative trade finance platform, RIVO. 

Following initial transactions processed in September last year, this second phase focused on streamlining the entire eBL workflow to enhance efficiency and transparency, demonstrating how an error-free process can reduce transaction processing time to just one hour.

Surecomp conducted two separate pilot transactions concurrently, with MSC Mediterranean Shipping Company (MSC), the world’s largest shipping company, acting as the carrier generating the eBL in both cases. 

The first transaction also included MAN Truck and Bus, Commerzbank AG, and Bangkok Bank, while the second involved Voith, another German corporate, Bayerische Landesbank, and Indonesian bank PT Bank BTPN Tbk (Bank BTPN).

Using an integration with the WaveBL platform to efficiently generate the digital Bill of Lading—a document typically presented under a Letter of Credit (LC)—the eBL was then attached to the LC transaction in RIVO. Demonstrating a smooth transition from the physical to the digital realm, the document was centrally accessible and transferable to all parties: the beneficiary, advising bank, issuing bank, and applicant. 

The entire process took only one hour to complete. With live status updates verified simultaneously on the WaveBL platform throughout the process, the clean documents were presented under an electronically issued Letter of Credit (eUCP LC).

This secure and seamless eBL ownership transfer via RIVO will facilitate bank adoption. Having also partnered with other leading eBL solution providers in the market, Surecomp is integrating more providers into RIVO.

By eliminating the need for separate onboarding and training for each one, banks can use RIVO as a centralised hub to access all their eBL providers in the same workflow, seamlessly connecting their eBLs to the LCs.

Ofer Ein Bar, VP Financial Institutions at WaveBL, said, “The WaveBL platform issues thousands of electronic Bills of Lading worldwide every day. Some of the largest global shipping companies already trust us to lead the trade revolution. We are confident in our partnership with Surecomp. The success of this transaction will accelerate banks’ adoption of electronic trade documents, marking a significant step toward global trade digitalization.”

“We were able to prove how centralizing the eBL management on RIVO can significantly enhance the process efficiency and operational stability,” said Enno-Burghard Weitzel, Surecomp’s Chief Solutions Officer. “Aggregating digital documents from various platforms represents a significant departure from the traditional, time-consuming paper-based processes that often take days or even weeks. Fostering eBL adoption by banks using RIVO to centralize the workflow, Surecomp remains committed to pioneering trade finance innovation, and the success of this eBL under LC marks a substantial leap forward in digitizing global trade.”

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The global trade finance gap expanded to $2.5 trillion in 2022, and it looks like that number is only going to get bigger in the years to come. 

To inject more liquidity into the trade finance space and make it easier for businesses to get the funding they need to grow internationally, many financiers are looking towards the emerging concept of trade finance as an asset class.

Do trade finance assets really have a place in investment portfolios? What role do regulations and rating agencies play in helping to safeguard and standardise this emerging area? 

To understand more about how trade finance assets can fit into a broader investment strategy and learn more about future trends that could shape this investment class, Deepesh Patel spoke with Bertrand de Comminges, Managing Director and Global Head of Trade Finance Investments at Santander Alternative Investments at the Trade and Investment Forum is organised by BCR in partnership with ITFA.

Increasing attractiveness of trade finance as an asset class

Trade finance as an asset class is gaining traction among diversified investment portfolios for several compelling reasons. 

Primarily, it represents a direct link to the real economy, providing a tangible connection to everyday goods and services, and enhancing understanding and comfort among investors. 

Moreover, recent regulatory changes have prompted a shift from a predominantly bank-driven market to one that is more inclusive of private and institutional investors. This transformation –  driven by the need for capital efficiency among banks – opens the door for alternative investors and makes trade finance assets an appealing option for those seeking reliable investment alternatives. 

De Comminges said, “Trade finance is enormously more stable than many other asset classes. The performance is phenomenal and it’s been phenomenal for many decades. The banks know this and that’s why they’ve kept this market private between themselves and their clients.”

However, interest is now increasing among institutional and retail investors for trade finance assets, influenced by a growing educational push that helps these investors understand and become comfortable with the asset class. 

This makes enhanced transparency and data sharing even more vital to meet the requirements of diverse investors, such as pension funds, life insurance companies, and private debt funds.

De Comminges said, “It is important to understand that the requirements from the different institutional investors are not all the same. They are subject to different regulations in their industries and the country they operate from. That’s where the trade finance industry needs to come together to raise transparency on data sharing.”

Trade finance is becoming increasingly attractive as an asset class due to its inherent stability, linkage to the real economy, regulatory evolution, and significant educational efforts aimed at broadening investor participation. 

And yet, the trade finance gap continues to grow.

The $2.5 trillion dollar trade finance gap

Despite significant progress in the field, the trade finance gap remains a substantial challenge, particularly impacting micro, small, and medium enterprises (MSMEs). 

De Comminges said, “At the end of the day, it’s a question of trust.” 

In transactions where counterparties do not or cannot trust one another, they often demand upfront payments or secure payments through mechanisms such as cash, credit cards, or more complex instruments like letters of credit or guarantees. 

These more complex instruments require bank involvement on both the buyer’s and seller’s sides, adding layers of complexity and cost.

The complexity is further compounded by regulatory requirements, which vary widely across different jurisdictions, making standardisation difficult and often leading to increased transaction costs and reduced accessibility for MSMEs. 

De Comminges said, “You need to accommodate the trade finance solution to each one of the jurisdictions. Trade happens, and trade happens everywhere in the world, every single minute of the day. That’s where the gap grows.”

The ongoing need for customised solutions to meet diverse regulatory standards and the high costs associated with financial services for MSMEs continue to prevent the closure of this significant gap in the global trade finance market.

The need for transparency

Accompanying the shift from private to public markets is a need for greater transparency across the trade finance space, which will facilitate the access and understanding crucial for developing trade finance into a viable asset class.

Transparency builds trust among participants and is the linchpin that will enable trade finance to mature from a niche market dominated by a few key players into a globally recognised and accessible asset class. This shift is crucial for the future expansion and health of the trade finance industry, providing a structured and secure investment alternative that attracts a diverse pool of investors.

Currently, trade finance is marked by its operations within the confines of private market relationships dominated by big banks that hold large volumes of trade finance assets on their balance sheets, typically shielded from broader public scrutiny.

However, the movement towards a public market structure demands full disclosure and transparency to fulfil regulatory requirements and enable rating agencies to appropriately assess and rate these assets. 

De Comminges said, “As with any market, if you want me to invest in this asset then I need to have data so I can understand the asset. In the context of trade finance, you’re moving from a private relationship into a public market, which is not that easy to do.”

Accurate and standardised ratings will be critical as they help investors gauge the risk and potential returns on investments in trade finance assets, comparing them favourably against other asset classes in money market funds (MMFs).

Looking forward, the push for transparency is likely to continue shaping the trade finance industry by fostering growth and acceptance of trade finance as an asset class. 

As more data becomes available and educational efforts increase, a broader spectrum of investors will likely feel more comfortable engaging with trade finance. 

This trend will help close the current trade finance gap and ensure the sustained growth of trade finance markets. Maybe one day it will even lead to a trade finance ticker on platforms like the Bloomberg terminal. 

That would signal mainstream acceptance.

De Comminges added, “I can only see growth. If you work with the right counterparties, trade finance as an asset class will always keep growing.”

In this current era of global economic uncertainty—defined by rising interest rates, geopolitical conflict, and working capital challenges—financial institutions that do not adapt put themselves at risk of falling behind. For the banking sector, payment efficiency is paramount, with healthy trade activity, appropriate use of working capital and the diversification of supply chains all crucial. As financial institutions prioritise each of those areas, they will funnel their focus into innovations in the payments sphere.

The three most exciting payments and global-banking related trends over the year ahead: the impact of ISO 20022, the digitisation of cross-border payments and the adoption of artificial intelligence. 

ISO 20022

Taking center stage in the global economic arena is ISO 20022, the open global standard for financial information, prepared by ISO Technical Committee TC68 Financial Services. Previously, the financial services industry used vastly different information formats, many of which were unstructured. 

ISO 20022 has significant impacts on the financial industry by improving data quality, efficiency, interoperability, and overall innovation. As more organisations adopt this standard, its benefits are expected to grow exponentially, shaping the future of financial messaging and transactions. This will become the new standard in global banking and will have a wide swath of impacts from improving risk management, compliance monitoring, and enhancing decision-making processes. 

The use of rich and structured data will continue to lead to the automation of the processes that surround cross-border payments and increase the level of reporting to banks and their customers, providing valuable insights to their business.  

Speaking a common language across all payment systems globally will hopefully lead to interoperability between local payment rails and further increase capabilities to pay beneficiaries locally with less friction and fees.  

Domestic payment rails within Europe, Canada, Australia, New Zealand, and many other countries have already adopted ISO 20022 standards. The US Fedwire system is one of the last to convert and is currently scheduled for March 2025. 

Regional and local banks may not be as prepared as they need to be so it’s imperative they are ready on time and on deadline. These new capabilities will enable the cross-border payments industry to implement and maintain a messaging standard across both Swift and market infrastructures in a more synchronous and seamless process. 

Once ISO is adopted, the global payments landscape and cross-border ecosystem will be enhanced, helping pave the way for new financial technologies to help meet evolving market demands and customer needs.

Digitisation of Cross-Border Payments

Cross-border payments are a highly competitive space, and the digitisation of these payments has only increased the level of competition. At FNBO, we find that what our customers value most is efficiency, visibility and transparency.  

Customers should no longer endure uncertainty regarding the real-time status of their payment or potential fee deductions, nor should they encounter delays of multiple days before funds are available to the beneficiary.

According to the 2023 McKinsey Global Payments Report, cross-border payment flows reached about $150 trillion in 2022, a 13% increase in a single year. This growth is predicted to continue at rapid rates over the next five years. I would venture to say that, by 2030—and perhaps even significantly sooner—the cross-border payments landscape will look totally different from the landscape of today.

It will also be increasingly important for companies to understand rails that are available—whether that be from innovation stemming from Swift, new fintech offerings, or even governments finding ways to move money faster and without friction.  

There are consistently new providers tapping into existing rails, such as credit cards, or even creating their own closed network to compete with the traditional ways of moving money in hopes of bringing speed, reduced fees, and reduced fraud when making cross-border payments. With continued innovation, it is not far-fetched to initiate a traditional domestic payment that could credit a foreign beneficiary using their local payment system.  

AI Adoption

Finally, a great challenge—and even greater opportunity—will be learning and figuring out how new AI platforms can be implemented to help build efficiencies and operations. As of today, the larger institutions have implemented AI in processes such as document checking of letters of credit. In the years to come, AI adoption will massively expand across institutions small and large as well as services simple and complex.

According to a survey from The Economist Intelligence Unit, 77% of bankers believe that the ability to unlock the value of AI will be the difference between the success or failure of banks. Financial institutions must embrace this new technology and adapt to the ever-changing landscape. 

Meanwhile, the issue of fraud is particularly double-sided: while AI can help catch and stop fraud, it can also perpetuate it. The institutions that focus on this issue of fraud and determine the best practices and procedures to effectively identify and prevent fraud with accuracy and precision will position themselves for success in the AI-dominated landscape to come. 

The payments industry is ever-evolving, and financial institutions that are able to stay ahead and become early adopters are the ones that will see long term success and stability as we enter the new era of global banking and payments. 

Pacific International Lines (PIL) has become a member of the non-profit organisation, Digital Container Shipping Association (DCSA), to promote standardisation and digital innovation in the container shipping industry.

DCSA’s founding members include 9 of the 10 largest container shipping companies globally, covering about 70% of the world’s container trade. The association was established to speed up digitalisation through the standardisation and harmonisation of data standards, aiming to create an interoperable framework that reduces friction, cost and improves the customer experience.

PIL and DCSA will work together on the development, alignment, and validation of digitalisation standards to boost adoption across the industry.

DCSA standards seek to meet requirements such as paperless trade, cargo visibility, port call optimisation, and equipment management. Having uniform and interoperable data standards and legal conditions across international jurisdictions and platforms will greatly improve delivery schedules. They will also enhance communication and transactions among regulators, banks, insurers, carriers, customers, and stakeholders involved in international trade.

PIL has initiated several digitalisation projects, including implementing an electronic bill of lading (eBL) to shorten delivery times, enhance operational efficiency, and provide customers with a seamless experience. 

An eBL facilitates easier document creation, approval, distribution, and tracking, while reducing potential fraud and removing the risk of losing paper documents during transit.

Mr Lars Kastrup, CEO of PIL, said, “PIL has been actively undertaking digitalisation initiatives and we are pleased to join DCSA to accelerate our journey while growing the industry’s digitalisation capabilities. Digitalisation not only increases efficiency and reduces costs, it also cuts down on our carbon footprint and simplifies transactions for all stakeholders.”

“Complementing our participation in DCSA, PIL has also been working to incorporate standardisation and governance in our data and processes to enhance the way we work and optimise efficiency. For digitalisation to succeed, we need to work together for industry-wide adoption. These comprehensive digital capabilities will help equip international shipping to be more sustainable and future-ready.”

Mr Thomas Bagge, CEO of DCSA, said, “We are thrilled to welcome PIL to DCSA. As we continue our collaboration with industry partners to advance the digitalisation of the container shipping industry, PIL’s participation represents another significant milestone.

“Over the past five years, DCSA and its members have created a digital foundation that allows for the industry to improve the customer experience, reduce cost and help the industry shift towards a more sustainable future.

“We are looking forward to continuing our work with PIL and our other partners to help realise our vision of a fully digitised supply chain.”

DCSA aims to promote sustainability practices, foster interoperability and efficiency across the industry, enhance customer experiences, and unlock valuable insights from data. The goal of DCSA is to achieve this by producing standards that benefit all parties involved in international trade and to secure the broadest adoption of these standards.

Shifting from the transfer of physical paper bills of lading could save $6.5 billion in direct costs for stakeholders, enable $30-40 billion in annual global trade growth and ensure the long-term sustainability of international trade.

Singapore, April 1, 2024—IFC and DBS Bank Limited (DBS) have signed a US$500 million facility under IFC’s Global Trade Liquidity Program (GTLP). The facility aims to promote capital and trade flows in emerging markets across Asia, Africa, the Middle East and Latin America, help bridge the record US$2.5 trillion global trade finance gap and accelerate economic progress across these regions.

The facility includes IFC and DBS sharing the risk equally on a portfolio of trade-related assets of up to US$500 million. This enhances DBS’ capacity to support more trade financing – such as Letters of Credit – with faster turnaround time to businesses trading with emerging markets counterparts, while better managing risk. 

Emerging markets play an important role in achieving a low-carbon future. To accelerate the decarbonisation of trade flows across emerging markets, 20 percent of the facility will be allocated to climate-eligible trade transactions, such as the trading of renewable energy equipment, energy efficient equipment and climate-smart agriculture certified commodities. 

The facility is part of IFC’s GTLP – a product designed to provide a countercyclical solution to the lack of trade financing in emerging markets by helping banks grow their credit limits, manage risk and support trade across developing markets which are often under-served. It is IFC’s first GTLP with a Southeast Asian bank and the first long-term investment project between IFC and DBS. 

“As our trade finance exposure to emerging markets continues to grow at pace, we constantly seek innovative ways to support our clients’ evolving requirements. These include a greater focus on strengthening supply chain resilience, diversifying business models, establishing new markets, and capitalising on the significant increase in emerging markets trading and infrastructure activities,” said Sriram Muthukrishnan, Group Head of Global Transaction Services Product Management, DBS Bank. “This partnership with IFC enables us to support more clients with much-needed trade financing, catalyse opportunities for emerging markets businesses, and foster a more secure and sustainable global trade ecosystem. 

Despite the critical role trade finance plays in economic progress, persistent trade finance gaps remain across emerging markets, exacerbated in recent years by heightened economic uncertainty. Small and medium-sized enterprises (SMEs) – which are direct beneficiaries of the financing – are particularly impacted, limiting their ability to participate in global commerce.

“In today’s interconnected world, the importance of supply chains cannot be overstated, as they are the foundation upon which successful businesses and thriving economies are built,” said Nathalie Louat, Director of Trade and Supply Chain Finance at IFC. “We believe that IFC’s partnership with DBS will unlock opportunities for more businesses to reach new markets and expand their operations, fostering economic growth.” 

In 2023, IFC signed a Memorandum of Understanding (MOU) with Enterprise Singapore (EnterpriseSG) to catalyse financing for Singapore enterprises in emerging markets. This is the first financing engagement facilitated under that MOU

“Enterprise Singapore is committed to supporting the growth of Singapore enterprises globally by providing new financing solutions, and IFC has been a key partner in this effort. Last year, we signed an MOU with IFC to catalyse financing for our enterprises in emerging markets. We are glad to see that this has culminated in this collaboration between DBS and IFC,” said Geoffrey Yeo, Assistant Chief Executive Officer of Enterprise Singapore. “DBS has been an active financing partner in supporting Singapore enterprises’ overseas expansion. We hope to facilitate more of such collaborations in the future.”  

Since inception, GTLP has – through global and regional banks – supported more than 400 financial institutions in 69 emerging market countries with over $53 billion in global trade volume.

This year represents a remarkable milestone in the lifetime of the international rules for standby letters of credit: ISP98. Although I come from Eastern Europe, a region where the use of standby letters of credit (SBLC) is limited, I deal with relevant issues related to standby rules and practices very often as an international trade finance trainer and consultant. 

I see expanding the use of standbys nowadays and also increasing reliance on ISP98 as the set of governing rules for SBLCs issued outside its main domain, the US.  

Use of standby letters of credit 

It is a well-known fact that standby letters of credit instrument originated in the US where it is used very widely in situations where we Europeans would utilise a demand guarantee. There is also a unique type of standby, called “direct pay” (i.e., payable when the underlying payment obligation is due without regard to a default) which does not have an equivalent in demand guarantee practice. 

In general, in the US, users have a choice to make standbys governed by ISP98 or UCP 600. Demand guarantees are rarely used in the US; if they are, it is mostly in the context of international transactions. 

In my region, we may choose between a demand guarantee and an SBLC. Understandably, the first choice would be a demand guarantee, often subject to URDG 758, or silent as to governing rules and subject to applicable law alone. 

An SBLC could be used if so requested by the client. Standbys are often used to secure the payment obligation of a buyer in relation to its overseas open account trade or similar payment obligations. Such relatively simple standbys are frequently made subject to UCP 600. 

Banks in Central and Eastern Europe also issue and receive other, more complicated standbys, direct and counter-standbys. This is usually the case when the underlying transaction relates to the Americas. Most of these standbys would be subject to ISP98.

As an international trainer active in many regions of Europe, Asia, and Africa, I see increasing interest in ISP98, above all in the Middle East over the past five years. Users want to know about the differences among the available rules, what practical impact the chosen rules have (or might have) on the relevant instrument and how it is processed. 

Consequently, many of my courses focus on differences among URDG 758, UCP 600, and ISP98 and provide detailed practical analysis and comparison. In this article, I only intend to discuss the main aspects to consider when choosing governing rules and some observations about ISP98.

The choice of governing rules

UCP 600 is the least suitable set of rules for a security instrument such as a demand guarantee or standby letter of credit. Firstly, the UCP rules are not designed to deal with any of the relevant issues such as indirect schemes (issuance of a local undertaking backed by an incoming counter-undertaking), extend or pay demands, extensions, or reductions. 

In many other cases, the UCP rules cover situations inadequately, such as transfers. Nevertheless, some still opt for UCP 600 for standbys! It is most commonly for a quite simple commercial standby (Also referred to as a “payment standby“ as it secures a payment obligation of the buyer to pay for delivered goods or services). 

For such standbys, which are usually issued for short periods of time and only call for a demand with a statement of payment default (and possibly a copy of an unpaid invoice, sometimes also a copy of a transport document), the deficiencies of UCP 600 are well known and can be easily remedied in the wording of the standby.

It is true that there are several ICC Official Opinions which deal with UCP 500 and UCP 600 matters in relation to their use with standbys, so many of the problems are known and can be avoided.

However, for more complex security undertakings and counter-undertakings, the use of UCP 600 presents problems and should be completely ruled out.

Consequently, the choice is between a demand guarantee subject to URDG 758 or a standby letter of credit subject to ISP98. What are the main concerns for users when considering these governing rules?

Another thing to consider is the cultural and historical aspects, which could be reasons to choose one instrument and rule type. Setting this aside, let us focus on more technical features.

The overall backing of the rules is very important and plays a significant role in the perceived suitability of the rules. It is essential for the rules themselves to be clear and easy to understand. 

However, what if there is a dispute, who will provide the answer? 

Who will guide users and where can they learn about the rules so they can become comfortable using them?

UDRG 758 are rules created by the ICC and thus are supported by them with its vast infrastructure of publications such as ISDGP, and various expert books, in addition to the ICC Official Opinions and DOCDEX cases. 

The ICC national committees provide many trainings on URDG 758; and many books, articles, and studies provide information about the rules. Education is a key to the success of any rule.

Does ISP98 enjoy such a supportive infrastructure?

I see that there is confusion about the ISP98. They were created by the Institute of International Banking Law & Practice, Inc. (IIBLP) which holds the copyright to ISP98, however, they were also approved by the ICC Banking Commission and published as ICC Publication No. 590.

But they are not ICC rules. Consequently, ICC is not mandated to publish any ICC Opinions on ISP98-related issues, however, IIBLP is.

IIBLP produced “The Official Commentary on ISP98” and other very detailed publications dealing with standbys and other undertakings such as demand guarantees. Additionally, the standby industry benefitted greatly from the excellent practical tool with explanatory endnotes – the freely available collection of ISP98 Model Forms. They provide any user with comprehensive know-how related to the most common types of standbys and clauses.

Bankers Association for Finance and Trade (BAFT) has its own Standby Letters of Credit/Guarantees Committee which serves as another valuable resource.

ICC’s DOCDEX system is also available to standby letters of credit subject to ISP98 (or any other trade finance transaction) if so chosen by parties for settling disputes. Leading qualifications on documentary credits (CDCS), demand guarantees (CDGS), and standby LCs (CSGP) include questions on ISP98 and training material. 

As it does for other practice rule sets, ICC Academy has a course on ISP98. Many local and international institutions (including many ICC national committees) conduct training on standbys and demand guarantees which include sessions on ISP98, 

Therefore, in my view, there is a strong base supporting ISP98 and anyone who wants to learn about the rules can do so.

ISP98: Present day and the future

1. Is ISP98 up-to-date? 

Interestingly, people recently seem to be concerned whether ISP98 is still a modern set of rules suitable for today´s practice. It is true that the rules were created in 1998 and there has been no revision of them. 

At that time, UCP 500 and URDG 458 were in place and both UCP and URDG subsequently went through significant overhaul. So the question is certainly relevant to ask but, it seems that ISP98 has not been revised as there was no need to do so. 

There are only a few court cases which would relate to the ISP98 rules themselves. When I ask my US colleagues about court cases or issues related to SBLCs, they always lead me to UCP cases or when the standby was not issued subject to any set of practice rules. It seems there are no noticeable issues with ISP98.

Nevertheless, I think that a profound look at the rules might be still beneficial. While I also do not think there are any provisions which need to be fixed, ISP98 does use some phrases and concepts which have been re-addressed in UCP and URDG. Therefore, nowadays, when we make a comparison between the rules this might cause some degree of confusion.

For instance, ISP98 Rule 5.01 (Timely Notice of Dishonour) refers to “unreasonable” time. This reflects UCP 500 Article 13 “a reasonable time not to exceed seven banking days” and URDG 458 Article 10(a) “reasonable time within which to examine a demand”. Both UCP 600 and URDG 758 abandoned the “reasonable time” concept and fixed the period to be in any case up to “five banking (business) days. 

ISP98 Rule 4.03 (Examination for Inconsistency) uses the word “inconsistency” which corresponds to UCP 500 Article 13(a) and URDG 458 Article 9 wording. Both UCP 600 and URDG 758 dropped the concept of “no inconsistency” and replaced it with “no conflict”. Under both UCP 600 and URDG 758 “inconsistency” in data is allowed; only “conflict” is not. 

ISP98 Rule 4.03 states:

“An issuer or nominated person is required to examine documents for inconsistency with each other only to the extent provided in the standby.”

Consequently, in my view, in the context of ISP98, the word “inconsistency” is interchangeable with “conflict”. So the rule effectively says: 

“An issuer or nominated person is required to examine documents for inconsistency (or conflict) with each other only to the extent provided in the standby”. (added by the author).

I am not suggesting that an ISP98 revision is needed. But I think that a discussion about possible updates based on the experience of using the rules within the last 25 years might be very fruitful. 

2. Is ISP98 widely recognised by judges to ensure accurate judgements?

I have heard concerns about the proper interpretation of ISP98 by courts in jurisdictions other than the US. Evidently, outside the US, it is presumed there is a lower knowledge base about ISP98. In any event, in case of a dispute, it is incumbent on the parties involved to bring relevant interpretative authorities to the table. 

Most certainly, a knowledgeable court witness, an expert on the matter, would be employed. Courts regularly decide on very technical matters for which they themselves do not have relevant deep knowledge.

As mentioned, there are very few court cases on standbys and demand guarantees. Most of the disputes seem to be related to general aspects of the law such as fraud, abuse, and sanctions where the rules themselves play a minor role, if any.

If there is a dispute about a technical aspect of an SBLC or a demand guarantee it is often due to bad issuance, wrong or ambiguous wording of the instrument, so again, the rules themselves are not the root cause. 

3. What are the main challenges for ISP98 users? 

In countries outside the Americas, where the SBLC is widespread, the preeminent challenge is the lack of knowledge and practice. As argued above, the absence of theoretical knowledge can be relatively easily dealt with, however, the lack of practice is a real drawback.  

The SBLC, due to limited use, is seen as an additional trade finance product. In the past, standby letters of credit were processed by documentary credit personnel in many banks. 

However, with the recent changes in relevant Swift messages, namely, the remake of MT760 to cover both standbys and demand guarantees, many banks shifted standbys to their guarantee departments. 

I see that many of these guarantee personnel struggle with some well-established SBLC concepts. For instance, the concept of “confirmation”, “nomination” and the role of the “nominated bank”, “automatic evergreen extension clauses”, reimbursing nominated (confirming) bank, place of presentation being with the nominated bank not necessarily only at my counters, etc. 

Consequently, one must first fully grasp these LC aspects of standbys, which are strange even to a guarantee practitioner. Those impacted need to plunge themselves deeper into the rules.

Deep knowledge of URDG 758 (and UCP 600) is certainly an advantage. 

Some differences between the rules are well known (e.g. different treatment of “force majeure” or “no conflict in data”); others are less evident (e.g. ISP98 Rule 3.06 (b) allows presentation via SWIFT (ie. electronic form in this format) if only a demand is presented and the beneficiary is a SWIFT participant or a bank. In the case of a URDG 758 guarantee, such a presentation would have to be expressly allowed.

There are some SBLC practices which might cause problems, if not properly thought through and then drafted. I recall some intensive discussions about confirmation, evergreen extension clauses in case of a confirmed standby, extension clauses in cases of a counter-standby and the local standby. 

Requests to issue a demand guarantee against a counter-standby or the other way around are particularly challenging. 

One should also realise that ISP98 treats a counter-standby and a local standby (or any other undertaking issued as instructed) as completely separate and independent from each other. 

UDRG 758 sets the same rule in its Article 5 but then modifies the rule by Article 21 (Currency of payment) and Article 26 (Force majeure) (See also the provision of ISDGP Paragraph 108).

In my view, the biggest challenge is the lack of practice, experience, and the resulting lack of confidence. This is understandable and true with all other instruments and rules which we do not deal with on a daily basis. 

My general advice would be:

• Centralise your demand guarantee/standby letter of credit operations;
• Find an internal champion (or champions) for each product, rules, etc. to accrue the relevant expertise and share it with others;
• Collect your cases, create internal tools, and build up your know-how base;
• Use your correspondent bank network wisely;
• Spend on education with practical focus.

The more I learn about ISP98, the more I admire them and the mastermind behind them, Professor James E. Byrne. They are indeed a masterpiece of rule making and remain fully relevant after 25 years since their creation. I wish them the very best in the coming 25 years!

This article was originally published in Documentary Credit World (DCW), published by the Institute of International Banking Law & Practice.

In a world where global trade is constantly shaped by shifting economic conditions and geopolitical uncertainties, Letters of Credit stand out as a reliable source of security and trust. With interest rates remaining “higher-for-longer” and financial access tightening for businesses worldwide – coupled with increasing logistics costs, supply chain challenges and geopolitical instability – the need for clear guidance on Documentary Credits has never been more critical.

While Letters of Credit are one of the most vital tools used in international trade, their complexity can create confusion among many practitioners. Recognising the need to demystify this essential trade finance instrument, TFG and BAFT have come together to craft a guide that not only clarifies the basics of Letters of Credit but also breaks down further intricacies of when to use certain documents. 

The aim is to broaden the understanding and use of this tool, removing barriers and fostering a more inclusive global trade environment. The guide is the result of a collaborative effort, drawing on the insights and experiences of industry veterans. Special thanks go to David Meynell, Pradeep Taneja, Deepesh Patel and Scott Stevenson for their contributions, and to the BAFT Commercial Letters of Credit Working Group, who have made this publication possible.

Deepesh Patel, Editorial Director, Trade Finance Global said, “Letters of Credit are a vital tool for businesses to manage risk and facilitate trade. There is a strong demand for these financial instruments across many industries all around the world, and these financial guarantees remain crucial during times of uncertainty, changing trade corridors and risk. 

“TFG are very excited to publish this important guide with BAFT at the Trade & Payments conference. We continue to break down the barriers in trade, treasury and payments, which is why we’ve launched this educational guide, for free. We want to thank all of the contributors, and especially BAFT for their help in producing this guide. We expect this guide to serve as a focal point for trade finance practitioners for years to come.”

“As the leading global forum for the transaction banking industry and their clients, BAFT is pleased to collaborate with TFG in the publication of this Documentary/Letter of Credit Guide,” said Scott Stevenson, senior vice president of trade, BAFT. 

“Documentary credits can be complex financial instruments involving multiple parties and intricate terms and conditions. This guide provides clarity and helps all parties, both banks and their corporate and SME clients, understand their rights, obligations and the procedures to follow. Overall this guide is a valuable tool for promoting transparency, efficiency, compliance, and trust in international trade transactions, thereby facilitating smoother and more secure trade relationships between parties across borders.”

To download the guide, please visit the link here.

If its advocates are to be believed, the technology known as Generative Artificial Intelligence (GenAI) will in due course transform nearly everything we do in the modern world today. And to an extent, since the advent of ChatGPT by OpenAI in November 2022 it already has: entire industries are now managed differently including education, coding and research.

There are as many, if not more examples of where the hype has exceeded the reality of the (lack of) value added. And of course, there have been dangers released in the latest technical revolution, such as breaches of personal privacy, generation of misinformation and malign use by bad actors and autocratic governments (not to mention the threat of the robot apocalypse).

But what about the impact on trade finance?

It’s trade finance, but not as we know it

There are many experiments and implementations of GenAI in trade finance in its very young life that have failed to deliver on the hype. And many more that have actually created unintended and impactful consequences.

The potential of large language models (LLMs) and the capacity for GenAI to reference dramatic amounts of data in milliseconds – as well as learning new ideas and self-improving via supervised or unsupervised machine learning – provides for a significant amount of upside in the trade finance space. 

However, it will be a journey of discovery where caution and baby steps will be required, rather than massive leaps forward. 

Time to clarify: What is an LLM?

Let’s start with some basics. 

While LLMs and GenAI are closely related, they are not exactly the same. GenAI encompasses any AI technique that can create new content, not just language. This includes generating images, music, code, or other creative outputs. It has a focus on creation and prediction: Its primary goal is to produce original content based on existing patterns and data.

LLMs generate and understand human language, based on massive text datasets to process, comprehend, and respond to language in various forms. Under the hood of an LLM lies a complex system, not unlike the human brain. 

At their core, LLMs are a massive neural network trained on vast amounts of text data. Think of this network as a web of interconnected nodes, each representing a concept or piece of information. 

When you feed a prompt or question to the LLM, it activates relevant nodes in this network, forming pathways based on statistical relationships learned from the data.

Data extraction from PDF documents

The industry is rightly focused on eliminating paper from trade finance operations. In reality, this has largely been achieved by banks, accelerated by COVID-19, as the majority of the industry processes transactions based on images of paper documents. 

The effort to replace the underlying paper with data points is gathering speed thanks to Herculean efforts by multilaterals, associations and advocates in the private sector leading to legislation supporting standards creation and the use of electronic documents.

Today’s reality is that most banks still process PDF images of documents. And today’s reality is that GenAI can assist existing solutions and achieve 95-100% success rates in data extraction.

Yes, including unusual documents, complex tables, handwritten information, stamps, images – and more. And yes, including invoices, possibly the least standardised trade finance and factoring document. And any shortfall in performance is quickly closed by model uptraining, as more documents are processed.

Learn, baby, learn

One of the most interesting use cases for LLMs in trade finance is education. This spans several levels. 

Commercial activities like assessing potential investors/participants in a trade distribution deal or onboarding suppliers to a payables finance facility can be sped up significantly. This is not much more complicated than inputting relatively basic prompts to a GenAI frontend today. 

Furthermore, reactive glossary-type services, when a transaction is progressing or a deal is closing, will become the norm. No more use of the “help” or phone-a-friend, information relevant to the process will be intuitively available to be consumed or ignored.

Finally, as trade finance operators’ activities are elevated to decision-making only, rather than partially processing and data entry, the ability to learn from the tech will increase. 

Automated narrative generation for discrepancies under Letters of Credit (LC) or potential financial crime risks will assist users to become better document checkers and compliance professionals – potentially the perfect on-the-job learning and the new version of classroom learning. 

Interestingly, this is where LLMs are potentially more useful: Gen AI does not necessarily care whether its output is “correct” or not. It simply reflects the majority view after assessing a large amount of data. LLM, however, is more specific to learning.

Compliance: “No-one likes it but it has to be done” … so let the machines do it!

Here is where it gets really interesting. As an example, excessive Sanctions hits in trade finance processing have long been a major issue for trade finance lenders. The number of hits generated versus the actual risk of a bank entertaining a transaction with a Sanctioned entity is a worsening problem, not one which is becoming easier to handle. 

Until GenAI. 

Counterparty risk assessment, understanding ultimate beneficial ownership, entity resolution, assessment of true dual-use goods risk and many other practical use cases will be – and are being – revolutionised by GenAI, due to the ability to search and distil information from vast amounts of sources. 

Difficult processes like KYCC/KYCS at a client level, or AML red flag assessment at a transaction level will become significantly easier and much more well-informed thanks to the application of these new techniques. 

Document examination under LC … err, not yet

As promised, it’s time for the reality check. There are certainly very real risks that GenAI impinges on privacy and ethics. Oversight of AI models that utilise GenAI is important to mitigate the risk of model bias and unsupervised learning drift.

One less worrying example of where GenAI has been proven to be less than useful is in the automation of LC document checking under the Uniform Customs and Practice for Documentary Credits (UCP) 600. 

When assessing a check for a potential discrepancy the large language model cannot distinguish between an established rule and what participants in discussions and debates might regard as customary practice or decisions made according to a rule.

In fact, GenAI is so far off getting this right, that there is a level of validation to the theory that machines may never learn “common sense” and thereafter self-awareness.

The time has come, but to walk, not run

Interestingly document checking against LC terms can be achieved relatively accurately by non-GenAI technology. Maybe this is the harbinger of an all-machine smackdown battle in future, as GenAI gets better at distinguishing content across billions of data points. 

But for the time being it is safe to say that, while there are plenty of constraints, errors and risks, there are many and growing numbers of use cases for GenAI and LLM in trade finance. And the transformative power is significant. 

In addition, the ability of technology to empower and assist human activity is exciting. A future where the mundane aspects of managing trade and supply chain finance are managed by bots with minimal error rates, while people learn from the AI and make decisions is closer than we think.

Standby Letters of Credit (SBLCs) mimic independent guarantees and were mainly issued by US banks predominantly during the time when issuance of guarantees seldom occurred in the US. Although US banks were never prohibited from issuing independent guarantees, in 1996, the US Office of the Comptroller of the Currency expressly permitted them to do so.      

Three years later, the OCC permitted US banks to issue dependent financial undertakings, although hereto, they had been able to do so in connection with other banking transactions in which they were involved. ISP98 was promulgated by the Institute of International Banking Law & Practice, endorsed by the ICC (ICC Pub. 590), and US banks started issuing their standbys subject to ISP98. 

Banks in much of the rest of the world gradually did the same as knowledge of the rules grew. Prior to ISP98, despite its limitations, UCP was used extensively for issuance of standbys since it reinforced the independence and documentary character of letters of credit. But UCP was never intended to govern standby letter of credit practice

UCP 600 and Standby Letters of Credit

UCP 600 Article 1 (Application of UCP) states in part: “The Uniform Customs and Practice for Documentary Credits, 2007 Revision, ICC Publication No. 600 (“UCP”) are rules that apply to any documentary credit (“credit”) (including, to the extent to which they may be applicable, any standby letter of credit) when the text of the credit expressly indicates that it is subject to these rules.”

The word “any” implies that a standby of any form, i.e. performance, advance payment, bid bond/tender bond, financial, etc, could be issued subject to UCP 600. The 2007 UCP revision made few changes relevant to standbys while carrying over the intent of UCP 500.

1. UCP 600 Article 34 includes the words “services or other performance” to address the specific nature of a standby letter of credit and be consistent with the phrase “goods, services or other performance” used throughout UCP 600.
2. UCP 600 sub-Article 14 (c) states, “A presentation including one or more original transport documents subject to articles 19, 20, 21, 22, 23, 24 or 25 must be made by or on behalf of the beneficiary not later than 21 calendar days after the date of shipment as described in these rules, but in any event not later than the expiry date of the credit.”
   • This was an important change in the 2007 revision. ISBP 821 (2023) further clarifies this. ISBP 821 A6 (a) states, “When a credit requires the presentation of a copy of a transport document covered by UCP 600 articles 19-25, the relevant article is not applicable, as these articles only apply to original transport documents. A copy of a transport document is to be examined only to the extent expressly stated in the credit, otherwise according to UCP 600 sub-article 14 (f).”
   • In fact, even before UCP 600, it was long established that the 21-day presentation period rule was not applicable to standbys. The ICC Banking Commission in its Opinion R168 (1987-1988) refused to apply the 21-day presentation period rule to a standby under UCP 400: “The commission decided that under a standby credit Article 47 (a) of UCP 400 does not apply, particularly where it is only a copy document which is, therefore, not a transport document.” During the 2007 revision process, some previously issued ICC opinions, such as this one, were thought to merit incorporation in the UCP rules.

Why UCP 600 is not suitable for Standby Issuance

Unlike ISP98, which was drafted for standby LCs and therefore caters to the myriad specific situations surrounding standby LCs, UCP only accommodates issuance of standby LCs. There are no provisions in UCP to cover situations like extend or pay, requests that the beneficiary issue its own undertaking to another (counter undertakings), and the like.

It should be noted that the word “standby” appears only once in the text of the UCP 600 rules. Only a few UCP 600 articles apply to standbys and some articles are inappropriate or otherwise incompatible with standby practice, tend to work contrary to the intentions of the parties, and, if applied, cause confusion in their interpretation and application. UCP 600 Article 1 aptly uses the phrase “to the extent applicable …” to signal this.

Examples of UCP 600 articles and topics that do not align with standby practice and tend to cause confusion include

1. Consistency of data across documents

UCP 600 sub-Article 14 (d) states, “Data in a document, when read in context with the credit, the document itself and international standard banking practice, need not be identical to, but must not conflict with, data in that document, any other stipulated document or the credit.” Documents requested to be presented under commercial LCs would normally relate to a shipment and therefore, are expected not to conflict with each other.

The same cannot be said about standbys. Documents under a typical standby need not necessarily be free of conflict. This is because the documents may relate to different underlying obligations. In case of default, documents, in fact, may be expected to be inconsistent with one another; a mix of documents requiring performance together with those indicating default. To avoid confusion, this article requires attention.

2. Force Majeure

UCP 600 Article 36 states, “A bank assumes no liability or responsibility for the consequences arising out of the interruption of its business by Acts of God, riots, civil commotions, insurrections, wars, acts of terrorism, or by any strikes or lockouts or any other causes beyond its control. A bank will not, upon resumption of its business, honour or negotiate under a credit that expired during such interruption of its business.”

The default position of UCP is that the beneficiary bears the risk of its inability to draw within the prescribed time due to a force majeure event. It fits reasonably well for a commercial LC where the beneficiary (usually the seller) controls the goods – it holds the documents of title – and therefore, the discrepancy is probably waived.

This UCP position, however, is opposite to standby practice in that standby beneficiaries are likely unwilling to bear the risk of forfeiture of their rights due to closure of a solvent issuer. It is due to this reason that this UCP article is invariably omitted from standbys issued under UCP 600. Text which has been used to modify the article might look like the following (which is in line with treatment under ISP98):

“Article 36 under UCP 600 is modified as follows: If the Letter of Credit expires while the place for presentation is closed due to events described in said Article, the expiry date of this Letter of Credit shall be automatically extended without amendment to a date thirty (30) calendar days after the place for presentation reopens for business.”

3. Closure when the expiration date is on a business day

UCP 600 Article 29 allows for extension of a credit’s expiry date and last day for presentation to the first following banking day (unless it is force majeure situation), if these dates fall on a day when the bank to which presentation is to be made is ordinarily closed (e.g., a weekend day). 

This rule does not apply to latest date of shipment and other dates specified in the credit. This provision is logical for commercial letters of credit which usually require presentation of documents that are linked to, and reflect delivery of, goods or services. It makes sense to omit the “latest shipment date” from the provisions of this article, as it has a material impact on the buyer who might not be able to secure possession of the goods at the expected time. Non-timely receipt of the goods could potentially result in the buyer not being able to sell the goods. For instance, shipment of seasonal goods or perishable items.

In addition to an expiry date, standbys sometimes contain deadlines for presentation of demands in instalments, for instance. Where such deadlines are present in a standby, there is no reason not to extend these dates, and the extension should apply to them as well.

For example, assume a standby requires presentation of a first instalment on a Sunday (when the issuer is closed), and therefore presentation is attempted on the next banking day. Under UCP 600 this would be a discrepancy (which departs from standby practice) since the scope of the extension rules only applies to expiry dates and not to other deadlines.

4. Partial drawings

There is no distinction in UCP between a drawing for less than the full amount and multiple drawings in situations when there is a drawing for less than the full amount. A drawing for less than the full amount would be unwelcome in most cases of a commercial LC where partial shipments are prohibited.

In standby practice, a prohibition of partial drawings means that only one drawing is permitted which must be in the full amount. Use of the term ‘multiple drawings prohibited’ means that only one drawing is permitted which can be for less than the full amount.

A standby LC issued under UCP must expressly exclude the relevant UCP 600 Article 31 (Partial Drawings or Shipments) and insert suitable replacement text to avoid confusion. Text for such modification might state:

“Partial and multiple drawings are allowed hereunder. The amount that may be drawn by beneficiary under this Letter of Credit shall be automatically reduced by the amount of any payments made through Issuing Bank referencing this Letter of Credit.”

5. Instalment drawings or shipments

UCP 600 Article 32 contains a suitable provision for commercial letter of credits on this matter. It provides that if a letter of credit specifies instalment payments, and if an instalment is not drawn, the credit ceases to be available for that and any subsequent instalments.

The rationale behind this provision is touched upon in the ICC’s COMMENTARY ON UCP 600, “The view of the Drafting Group and the majority of ICC national committees … was that by including a specific schedule in the credit there is a definite requirement for either a drawing to be made or goods to be shipped within a specific period. Failure on the part of the beneficiary to do so could result in a financial or other risk to the applicant. Therefore, there was a need for a penalty if the beneficiary does not comply with the instalment schedule.”

For a commercial credit, failure to draw would generally mean that the beneficiary has failed to make a required shipment. However, the same may not be applicable for a standby. A standby supporting an obligation to pay (e.g., rent to be paid every month) in instalments would normally be drawn upon when there is a failure to make a direct payment.

The UCP rule, if applied, would mean that the credit ceases to be available if it is not drawn as per the instalment schedule. This departs from general standby practice and defeats the whole purpose of having a standby as a secondary payment vehicle. It is for this reason that this article must be excluded or modified in a standby issued subject to UCP 600.

It should be noted that ISBP 821 Paragraph C16 (a)(i) elaborates on the phrase “given period” that is used in this article. It states, “Given periods are a sequence of dates or timelines that determine a start date and end date for each instalment.” It gives an example of an instance where this standard could be applied. ISBP 821 Paragraph C16 (b) (i) further provides:

“When a credit indicates a drawing or shipment schedule by only indicating a number of latest dates, and not given periods (as referred to in paragraph C16) (a) (i)): i. this is not an instalment schedule as envisaged by UCP 600, and article 32 will not apply. …”

6. Transferable credits

Treatment of transferable credits under UCP 600 departs considerably from what is expected in standby practice. 

Multiple transfers 

Whereas it is common practice to have standbys transferred multiple times, it is not allowed for in UCP 600 unless explicitly modified. UCP600 sub-Article 38 (d) states in part, “A transferred credit cannot be transferred at the request of a second beneficiary to any subsequent beneficiary. The first beneficiary is not to be considered a subsequent beneficiary.”

An example of a standby which requires transfer multiple times is when the beneficiary may be an indenture trustee who could be replaced numerous times over the life of the standby. A clause to modify UCP 600’s default provision could state:

“This Letter of Credit is transferable without charge any number of times, but only in the amount of the full unutilized balance hereof and not in part and with the approval of the Account Party which consent shall not be unreasonably withheld, conditioned or delayed.”

Partial transfers

Unlike commercial letters of credit, standby LCs rarely require partial transfers and therefore ISP98 does not specifically allow for partial transfer. In a commercial letter of credit, there might be multiple suppliers and/or the original beneficiary may retain the right to draw whereas a typical standby would involve transfer of the entire right to draw.

Standby credits issued subject to UCP 600 likely contain detailed clauses which modify the UCP rules. ISP98 rules on transfer of a standby are very comprehensive and therefore rarely require modification unless there are exceptional circumstances

7. Return of dishonoured documents

Unlike documents called for in commercial LCs which have importance themselves such as a bill of lading which could be a document of title and is required to collect goods from the carrier, documents presented under a standby LC typically have no intrinsic value.

Failure to dispose of them as requested by the presenter does not have any material impact. ISP98 Rule 5.07 aligns with this practice. Under UCP 600 sub-Article 16 (f), failure to follow disposal instructions would mean that the issuing bank “shall be precluded from claiming that the documents do not constitute a complying presentation.”

To address matters not covered by the UCP, some standbys issued subject to these rules – especially in the US – expressly state that those matters shall be governed in accordance with the laws of the issuer’s country. I have seen standbys from the US with this clause or similar:

“Unless otherwise expressly stated herein, this Letter of Credit is subject to the Uniform Customs and Practice for Documentary Credits (“UCP”), 2007 Revision, International Chamber of Commerce Publication No. 600. Matters not covered by the UCP shall be governed and construed in accordance with the laws of … .”

Today, ISP98 is largely considered the preferred set of rules for standbys. However, a small number of standbys in the US and other parts of the world continue to be issued subject to UCP600. This can predominantly be attributed to:

1. Bankers’ familiarity with UCP and therefore preference for the UCP current version, particularly for a “simple” standby such as a financial standby which is payable on presentation of a demand;
2. Inertia;
3. A reluctance by government agencies to amend their mandated forms;
4. So-called “power beneficiaries” who insist on UCP. In my experience, some Swiss entities prefer UCP over ISP98. One particular beneficiary I have come across is a Switzerland-based company selling fertiliser. Also, from my experience I know that a big bank (as beneficiary) in Australia chooses UCP over ISP.
5. Bankers and other standby users in some countries consider ISP98 to be too complicated and therefore uptake of ISP98 has been stunted in certain countries. For instance, some specialists consider the ISP98 rules “to be the most complicated guidelines ever published by the ICC” which explains why the publication of an “official commentary” seemed to be necessary

Nonetheless, adoption of ISP98 has grown over the years and continues to do so at a fast pace.

Why Standbys are still referenced in UCP 600

Even though UCP is not suitable for issuance of standby LCs and suggestions were made by several ICC National Committees during the 2007 revision process to delete reference to standbys, it remained. The UCP 600 drafting group felt that there were still a significant number of standbys that continued to be issued under UCP 600.

It also contended that even if the reference to standbys was removed, banks would continue to issue standbys subject to UCP 600. UCP, not being law, could not prohibit issuance of a standby subject to its rules anyway. Viewed a different way, nothing prevents a bank from issuing a commercial LC subject to ISP98, but why would anyone do so?

Unless very carefully drafted, standbys issued under UCP are susceptible to misinterpretation and could cause considerable uncertainty, and ambiguity, and hence be very problematic. ICC Opinion R303 (1998/99) – issued when UCP 500 was in force, but still applicable to UCP 600 – cautions that: “Care is needed in the use of standbys in a commercial setting, for which additional training may be necessary. Moreover, use of the UCP with a standby imposes additional questions which must be duly considered.”

A comment made in DOCUMENTARY CREDITS UCP 500 AND 400 COMPARED (ICC Publication No 511) advises that ICC National Committees (NCs) “must acknowledge that not all the Articles in the UCP apply to a Commercial Credit or to a Standby Credit and that a majority of the Articles do not apply to the Standby Credit. It is recognized that the parties to the Credit may wish to exclude certain Articles of the UCP from a specific type of Credit …” 

With the exception of the ICC Banking Commission’s stance on the UCP transport articles’ applicability for a standby (Opinion R168 issued under UCP 400 and equally applicable to UCP600), UCP does not give any guidance as to which articles are to not apply to a standby.

Standbys, by their nature, are very flexible and could be applied to transactions that require presentation of commercial documents e.g., transport documents, insurance documents, etc. Therefore, it becomes very difficult, if not impossible, to generalise the applicability of the articles.

Another comment contained in DOCUMENTARY CREDITS UCP 500 AND 400 COMPARED (ICC Publication No 511) disclosed that during this revision process, “NCs commented the possibility of identifying the individual articles applicable to the Standby Credit. It was decided that this request could not be met.”

In the transition from UCP 500 to UCP 600, no major changes were made to better suit the UCP rules for standbys. It is a very tight rope to walk when it comes to handling standbys issued subject to UCP. Utmost care and consideration must be taken when contemplating issuance of a standby subject to UCP and UCP standbys should be handled by experienced practitioners. 

It is against this background that this essay examines the legal intricacies involved in the use of letters of credit. 

Applicability of the ICC Uniform Customs and Practice for Documentary Credits (UCP 600)

In its circular dated June 25, 2007, the Central Bank of Nigeria (CBN) informed importers that the UCP 600 was to become operational the next month and all letters of credit are subject to the UCP 600. 

Hence, it seems that even if parties do not incorporate the UCP 600 in their contract, it would apply all the same if the goods are being imported to Nigeria. As a result, it is advisable that importers who intend to ship goods to Nigeria ensure that the letters of credit meet the standards stipulated in the UCP 600.

Issuing Bank situated in Nigeria is responsible for errors of Confirming Bank abroad

Case laws reveal that the confirming bank abroad is considered an agent of the issuing bank in Nigeria. Hence, the issuing bank in Nigeria can be liable for errors or negligence of the confirming bank abroad. This was the position of the court in the case of NASARALAI ENTERPRISES LTD. v. ARAB BANK NIGERIA LTD. (1986) LPELR-SC.138/1985. 

Similarly, in the case of Akinsanya v. United Bank for Africa LTD. (1986) LPELR-SC.95/1985, the court held that where the confirming bank abroad acts on defective documents which occasions loss for the buyer, the buyer could make a claim against the issuing bank and the issuing bank can refuse to reimburse the confirming bank abroad.

In the case, the court repeatedly noted that the confirming bank abroad is an agent of the issuing bank. These decisions solidify the point that the confirming bank is an agent of the issuing bank.

An error by the Bank can be waived by the Importer impliedly

In the case of NASARALAI ENTERPRISES LTD. v. ARAB BANK NIGERIA LTD. (1986) LPELR-SC.138/1985, the Supreme Court of Nigeria held that the respondent bank in the suit was negligent on the basis that inconsistencies in the letter of credit were not detected. 

However, the court held that the importer was not entitled to a remedy. The court made this decision on the basis that the importer had waived his right when he ordered that the bank should debit his account after he confirmed that the ship had left the dock in the exporting country. 

The appropriate Court with jurisdiction on disputes relating to Letters of Credit

In Nigeria, the jurisdiction of the court is of utmost importance in the pursuit of a court action. Without jurisdiction, an appellate court would nullify the decision of a trial court no matter the decision. As a result, it is important that an importer or bank institutes a suit at the appropriate court conferred with jurisdiction.

Section 251(1)(d) of the Nigerian Constitution provides that the Federal High Court has exclusive jurisdiction on matters that relate to banking. However, the section further provides that ‘’this paragraph shall not apply to any dispute between an individual customer and his bank in respect of transactions between the individual customer and the bank’’.

In addition, section 251(1)(g) of the Nigerian Constitution further provides that the Federal High Court has exclusive jurisdiction on admiralty matters and matters that border on carriage by sea. These provisions seem to confer jurisdiction on the Federal High Court in light of the fact that letters of credit seem to fall within the scope of banking, admiralty and carriage by sea.

However, Nigerian courts have held that State High Courts are the courts with jurisdiction on matters that border on letters of credit. In the case of NASARALAI ENTERPRISES LTD. V. ARAB BANK NIGERIA LTD. (1986) LPELR-SC.138/1985, the court held that the State High Court and not the Federal High Court is the court with jurisdiction on issues that border on letter of credit. 

As such, it would be wrong to institute such an action before the Federal High Court. In reaching its conclusion, the court noted that letters of credit are not within the scope of admiralty matters. The court noted that parties in a letter of credit deal in documents and not goods. As such, a State High Court is the appropriate court to institute an action in which a letter of credit is the subject of dispute. 

However, this recommendation should be adopted with caution as there are a few cases in which the federal high court has adjudicated on disputes that border on letters of credit. Particularly, in the case of FBN PLC V. J.O. IMASUEN AND SONS NIGERIA LTD (2013) LPELR-CA/B/151/2006, the Court of Appeal adjudicated on an appeal which emanated from the federal high court and a letter of credit was the main subject of dispute. 

While the issue of jurisdiction was not raised by the parties and not discussed by the court, the fact that the case was not upturned on the basis of lack of jurisdiction speaks to the fact that the federal high court could have jurisdiction on the matter.

Whether a Letter of Credit can be cancelled

As a result of a number of factors, parties may desire to cancel a letter of credit. In the case of U.B.N. Ltd v Okwara (1998) 1 NWLR (Pt. 532) pg 118 @ 126 Para H, the court held that a letter of credit can and may be cancelled at the stage of processing. However, it cannot be cancelled when the credit has been issued and forwarded to the confirming bank. Hence, it is advised that an importer that seeks to cancel a letter of credit should do so before it is issued forwarded to the confirming bank. 

How to determine whether a Letter of Credit is confirmed or unconfirmed

In the case of FBN PLC V. J.O. IMASUEN AND SONS NIGERIA LTD (2013) LPELR-CA/B/151/2006, the Court of Appeal held that a letter of credit is confirmed or unconfirmed depending on the role played by the correspondent bank. Where the issuing bank merely instructs the correspondent bank to notify the seller that the letter of credit has been opened and that the correspondent bank should accept documents on behalf of the issuing bank, the letter of credit is unconfirmed and the correspondent bank is an advising banker. 

However, if the correspondent bank proceeds to confirm the credit i.e “adds to the promise of the issuing banker an undertaking of its own to accept or negotiate a draft or to pay the amount of credit to the seller against conforming documents, the correspondent banker becomes a confirming banker and the commercial credit is a confirmed credit”.

Confirmation and stamping

The case of FBN PLC V. J.O. IMASUEN AND SONS NIGERIA LTD (2013) LPELR-CA/B/151/2006 reveals that it is important that a letter of credit is confirmed by the correspondent bank in order that it is enforceable. Hence, where a Nigerian exports goods and a letter of credit is issued by a bank on the instruction of the importer, it is advised that the Nigerian exporter insists that the letter of credit is confirmed by the correspondent Nigerian bank. 

The court further held that stamping of a letter of credit by the Nigerian bank does not amount to confirmation of the letter of credit. The court held that the stamping only showed that the confirming bank had received the letter of credit. More so, the court held that First Bank – which was the Nigerian bank against whom the letter of credit was sought to be enforced – was only notifying the respondent that the letter of credit has been issued. 

The fact that the appellant forwarded the letter of credit to the respondent and stamped same does not imply that the letter of credit was confirmed.

In addition, amendment made to a letter of credit by the importer should be forwarded to the confirming bank and not to the exporter alone. As such, this essay advises that a Nigerian exporter should ensure that the correspondent Nigerian bank has received the amendment made to the letter of credit in order to have the provisions of the amended version enforceable. 

Furthermore, letters of credit must be routed through the bank and must comply with all relevant guidelines. In paragraph 15 of its circular dated 30 April, 2014, the Central Bank of Nigeria has directed that banks must not endorse or pay on documents that do not comply with the routing requirement.

Stamp duties: Letters of Credit to be stamped before execution

Section 12 of the Stamp Duties Act provides that every instrument first executed in Nigeria shall be stamped on or before its first execution. Furthermore, section 44 of the Stamp Duties Act provides that a bill of lading – which is defined to include letters of credit – must be stamped before execution. 

Section 44(2) further provides that it is an offence to make or execute a bill of lading not duly stamped. As such, it is advisable that an exporter that intends to ship goods to Nigeria insists that it is stamped before it is executed. Nevertheless, section 23 provides that an unstamped or insufficiently stamped document may be stamped within 40 days of the first execution. If beyond 40 days, the stamp duty and a penalty shall be paid. 

Furthermore, section 40 provides that a bill of exchange – which is defined to include a letter of credit – which is made outside of Nigeria shall be stamped before it is presented for payment in Nigeria.