Drafts/Bills of Exchange In LC transactions
The International Chamber of Commerce (ICC) held its technical meeting in Tbilisi，Georgia，in October，and a segment of the meeting was called "Documentary Credit Practices: Controversy & Guidance". One of the topics discussed during this segment was "usage of drafts under documentary credits: is there a real need?"
In addition to that discussion，the ICC is working on a document titled "Drafts under Documentary Credits Guidance Paper." That document has been circulated for comments by the ICC National Committees，and the deadline was set for November 23，2018.
The purpose of this article is to present some of the comments made during the above-mentioned discussion，as well the recommendations in the ICC Guidance paper.
But first; a historical overview of the usage of these drafts in documentary credits:
There is no doubt that many letters of credit (LC) experts would happily get rid of drafts in documentary credits. Frankly，when you look at the history of the Uniform Customs Practice (UCP)，this is not an easy task. The "draft" has had its place in the UCP since the very first version; i.e. UCP 82. In that version the "draft" is even entangled with the obligation of the issuing bank. Article 9 opens as follows:
"When an irrevocable credit is opened in the form of a Commercial Letter of Credit，the Letter of Credit itself must include notification of the opening of an irrevocable credit and constitute the definite engagement by the issuing Bank towards the beneficiary and holder in good faith to honour all drafts issued by virtue of and in conformity with the clauses and conditions contained in the document. This document may be transmitted and/or notified by another Bank without engagement for the latter." [emphasis added].
This provision assumes that a draft is part of the presentation. This is also the case，for the next version of the UCP; i.e. the UCP 151. UCP 151 makes various references to drafts，especially article 5，which opens as follows:
"Irrevocable credits are definite undertakings by an issuing Bank and constitute the engagement of that Bank to the beneficiary or as the case may be，to the beneficiary and bona fide holders of drafts drawn thereunder that the provisions for payment，acceptance or negotiation contained in the credit，will be duly fulfilled provided that the documents or as the case may be，the documents and the drafts drawn thereunder comply with the terms and conditions of the credit." [emphasis added].
A similar provision is also in the following version of the UCP，namely the UCP 222. The opening of article 3 reads as follows:
"An irrevocable credit is a definite undertaking on the part of an issuing bank and constitutes the engagement of that bank to the beneficiary or，as the case may be，to the beneficiary and bona fide holders of drafts drawn and/or documents presented thereunder，that the provisions for payment，acceptance or negotiation contained in the credit will be duly fulfilled，provided that all the terms and conditions of the credit are complied with." [Emphasis added].
This signifies a major change，in that it takes into the equation the "documents presented" as an alternative to "drafts drawn". In effect this means that a presentation can be made without drafts. Or rather，the presentation of a draft is not mandatory.
In the next version of the UCP; i.e. UCP 290，again there is a change in the approach to the draft. Still the draft is linked to the undertaking of the issuing bank. However，the role of the draft clearly has been "downplayed." Here is a quote from article 3:
"An irrevocable credit constitutes a definite undertaking of the issuing bank，provided that the terms and conditions of the credit are complied with [...] to pay，or that payment will be made，if the credit provides for payment，whether against a draft or not" [Emphasis added].
In addition to the above，the rules take into account the draft in the definition of the documentary credit:
"For the purposes of such provisions，definitions and articles the expressions 'documentary credit(s)' and 'credit(s)' used therein mean any arrangement，however named or described,
whereby a bank (the issuing bank)，acting at the request and in accordance with the instructions of a customer (the applicant for the credit),
i. is to make payment to or to the order of a third party (the beneficiary)，or is to pay，accept or negotiate bills of exchange (drafts) drawn by the beneficiary，or
ii. authorizes such payments to be made or such drafts to be paid，accepted or negotiated by another bank，against stipulated documents，provided that the terms and conditions of the credit are complied with." [emphasis added].
As was the case in UCP 222 the provisions in UCP 290 introduce drafts as an alternative to "make payment". This means it is not mandatory to use the draft ¨C it is only a possible alternative.
UCP 400 seems to balance drafts more or less the same way as its predecessor. It is mentioned as an alternative and mentioned in the definition of a documentary credit and in the undertaking of the issuing bank，linked to the availability of the documentary credit. Limited to the situations where the documentary credit is available by acceptance or negotiation，the latter is balanced as follows in article 10(a)(iv):
"[...] if the credit provides for negotiation ¨C to pay without recourse to drawers and/or bona fide holders，draft(s) drawn by the beneficiary，at sight or at a tenor，on the applicant for the credit or any other drawee stipulated in the credit other than the issuing bank itself，or to provide for negotiation by another bank and to pay，as above，if such negotiation is not effected." [emphasis added].
UCP 500 included similar provisions as UCP 400，with minor drafting changes. The major change，in respect of drafts，was to clearly state the obligation of the confirming bank in addition to that of the issuing bank.
Additionally，when the UCP 500 came into force it was accompanied with the publication "Standard Documentary Credit Forms for the UCP 500." This offered examples of standard application forms for documentary credits. In respect to