In every letter of credit (LC), the issuing bank plays a central role — it is the bank that opens the LC on behalf of the importer. Article 7 of UCP 600 sets out the commitments and responsibilities of the issuing bank, ensuring exporters have confidence that payment will be made if documents comply.
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What Does Article 7 of UCP 600 Say?
Article 7 establishes that:
1. Irrevocable Undertaking
• Once an LC is issued, the issuing bank is bound to honor it.
• The bank cannot cancel or modify the LC without the agreement of all parties.
2. Payment Obligation
• The issuing bank must honor a complying presentation by:
• Sight payment.
• Deferred payment (at maturity).
• Acceptance of a draft.
3. Reimbursement
• If another bank (nominated or confirming) makes payment, the issuing bank must reimburse that bank promptly.
4. Scope of Undertaking
• The bank’s obligation applies only when documents comply strictly with LC terms.
• The bank is not concerned with goods, services, or performance (as reinforced in Article 5).
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Breaking Down Article 7
1. Irrevocable Commitment
• Importer cannot ask to cancel or amend the LC unilaterally.
• Exporter has assurance of payment if documents comply.
2. Bank’s Payment Duty
• Issuing bank must honor the LC at the agreed method of availability (sight, deferred, acceptance).
• Even if the importer defaults, the bank must pay.
3. Reimbursement of Nominated Banks
• If a nominated bank (like Standard Chartered Dhaka) pays the exporter, the issuing bank (say HSBC London) must reimburse it.
• This maintains trust between banks in global trade.
4. Condition: Complying Presentation
• The bank’s obligation exists only if documents meet the exact LC requirements.
• No room for approximation or “close enough.”
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Practical Trade Example
A Bangladeshi exporter ships garments to a buyer in Germany.
• The buyer’s bank (Deutsche Bank) issues an LC, available by sight payment.
• Exporter presents all required documents to the nominated bank in Dhaka.
✔ If documents comply: Deutsche Bank must pay — even if the buyer later refuses to accept the goods.
❌ If documents have discrepancies: Deutsche Bank can refuse payment, as its undertaking applies only to a complying presentation.
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Why Article 7 Matters
• Provides exporters with payment security — the core purpose of an LC.
• Ensures that once issued, an LC cannot be arbitrarily cancelled.
• Strengthens global trust in LCs as a reliable payment mechanism.
• Protects nominated banks that act in good faith by requiring reimbursement.
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Final Thoughts
Article 7 is the heart of the UCP 600 framework. It defines the issuing bank’s binding obligation, making letters of credit a trustworthy instrument in international trade. Exporters know they will be paid if they present documents correctly, while banks gain clarity on their exact role in the LC chain.