In our previous post, we discussed Article 1 of UCP 600, which explained when and how the rules apply. Now, let’s dive into Article 2, which sets out the definitions of key terms used throughout UCP 600.
Think of Article 2 as the dictionary of UCP 600. It ensures that banks, exporters, and importers all speak the same language when handling letters of credit (LCs).
📖 Official Definitions from UCP 600 (Article 2)
Here are the key terms exactly as defined in Article 2, followed by simple explanations and examples.
1. Advising Bank
“The bank that advises the credit at the request of the issuing bank.”
Meaning:
The advising bank is usually located in the exporter’s country. Its job is to authenticate the letter of credit and forward it to the beneficiary. It does not take on payment responsibility unless it also confirms the credit.
Example:
A German bank issues an LC for a Bangladeshi exporter. A Dhaka-based bank acts as the advising bank, simply delivering the LC to the exporter.
2. Applicant
“The party on whose request the credit is issued.”
Meaning:
The applicant is the buyer/importer who applies to their bank for an LC to pay the exporter.
Example:
A French importer of garments is the applicant when requesting an LC from their bank.
3. Banking Day
“A day on which a bank is regularly open at the place at which an act subject to these rules is to be performed.”
Meaning:
A banking day is any day when the concerned bank is open for LC-related business. Weekends, holidays, or closures are not banking days.
Example:
If a bank closes on Friday and Saturday (as in Bangladesh), those days are not banking days for LC presentation.
4. Beneficiary
“The party in whose favour a credit is issued.”
Meaning:
The seller/exporter who will receive payment under the LC once all conditions are met.
Example:
The Bangladeshi exporter of textiles is the beneficiary of the LC issued by the German bank.
5. Complying Presentation
“A presentation that is in accordance with the terms and conditions of the credit, the applicable provisions of these rules and international standard banking practice (ISBP).”
Meaning:
A set of documents that fully meets all requirements of the LC.
Example:
If the LC requires a commercial invoice, packing list, bill of lading, and insurance policy, all must be presented correctly and without discrepancies.
6. Confirmation
“A definite undertaking of the confirming bank, in addition to that of the issuing bank, to honour or negotiate a complying presentation.”
Meaning:
When another bank (usually in the exporter’s country) guarantees payment under the LC, even if the issuing bank fails.
Example:
If the exporter doesn’t trust the buyer’s foreign bank, they may request their local bank to add confirmation.
7. Confirming Bank
“The bank that adds its confirmation to a credit upon the issuing bank’s authorization or request.”
Meaning:
The bank that guarantees payment to the exporter, in addition to the issuing bank’s obligation.
8. Credit
“Means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation.”
Meaning:
A credit (LC) is always irrevocable under UCP 600, meaning it cannot be cancelled without agreement of all parties.
9. Honour
“Means:
a. to pay at sight if the credit is available by sight payment,
b. to incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment, or
c. to accept a bill of exchange (“draft”) drawn by the beneficiary and pay at maturity if the credit is available by acceptance.”
Meaning:
Honour means the bank fulfilling its payment promise — either immediately (sight), later (deferred), or by accepting a draft.
10. Issuing Bank
“The bank that issues a credit at the request of an applicant or on its own behalf.”
Meaning:
The applicant’s bank that takes on the obligation to pay once documents are correctly presented.
11. Negotiation
“The purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank.”
Meaning:
Negotiation means the nominated bank buys the documents (and sometimes a draft) from the exporter before being reimbursed by the issuing bank.
12. Nominated Bank
“The bank with which the credit is available or any bank in the case of a credit available with any bank.”
Meaning:
The bank authorized to pay, accept, or negotiate under the LC. But it is not obliged unless it agrees.
13. Presentation
“Either the delivery of documents under a credit to the issuing bank or nominated bank or the documents so delivered.”
Meaning:
The act of submitting the required documents (like invoices, shipping documents) to the bank.
14. Presenter
“A beneficiary, bank or other party that makes a presentation.”
Meaning:
The person or entity delivering the documents — usually the beneficiary.
Why Article 2 Matters
Article 2 acts as the glossary of UCP 600. Without it, terms like “negotiation” or “honour” might be misinterpreted in different countries. This uniformity ensures:
- Less risk of disputes
- Smooth document handling
- Clear responsibilities among banks, importers, and exporters
Final Thoughts
Article 2 of UCP 600 is the foundation for understanding all later articles. Every party involved in letters of credit should be familiar with these definitions, because they determine rights, obligations, and processes under an LC.