ARTICLE 4

CREDIT VS CONTRACT
 The flow chart of documentary credit operation(1)
(1)

Exporter Importer
1 Contract
Term of payment:
Documentary Credit
Beneficiary 2 Buyer applies L/C according to Contract Applicant

3. LC Issuing Bank undertakes to exporter that

it would pay independent of whether applicant
4 Advise is bankrupt or not, provided documents 2 Apply
presented by exporter comply with terms and
conditions of LC.

3Documentary credit

3 Independent bank’s credit backing & clear-cut

Advising payment promise. Reduce/eliminate commercial
risk. Reduce exchange & political risks. Financing Issuing
Bank to both seller and buyer. Expand sources of supply Bank
Understanding of the concept

1. bank’s irrevocable undertaking

2. Three contracts
3. About complying presentation
INDEPENDENCE PRINCIPLE
3 contracts
Commercial
Exporter Importer
contract

Buyer and seller must not

LC transaction interfere in Bank’s decision
refers to this on whether documents
contract. comply with LC
LC application
contract contract
Once opened, LC is
independent of other
Bank’s standard for contracts, i.e.
examining documents commercial contract
is LC, not other Issuing and application
contracts. bank though LC is opened
on them.

Importer fills in application in strict accordance with commercial contract

Issuing bank opens LC in strict accordance with application.
 Article 4 : Credits v. Contracts
a. A credit by its nature is a separate transaction from the sale or other
contract on which it may be based.
Banks are in no way concerned with or bound by such contract, even if
any reference whatsoever to it is included in the credit. Consequently,
the undertaking of a bank to honor, to negotiate or to fulfill any other
obligation under the credit is not subject to claims or defenses by
the applicant resulting from its relationships with the issuing bank
or the beneficiary.
beneficiary can in no case avail itself of the contractual relationships
existing between banks or between the applicant and the issuing bank.

Field 45A Description of goods and services

10000 Men's Shirt as per proforma Invoice no 976 dated 20th March
2020
 Overview of UCP 600 Article 4
Article 4 - Credits v. Contracts
Independence Principle - L/C is a separate transaction from the underlying contract
b. An issuing bank should discourage any attempt by the applicant to include, as an
integral
NEW part of the credit, copies of the underlying contract, pro forma invoice and
the like.

Discouraged ?? L/C
C ontract No.123

Details as per Contract

No.123, which is
appended and forms an
integral part of the credit.
 Article 4 COMMENTARY

How should the nominated bank act if they receive a letter of credit which
has a copy of the underlying contract as an integral part of the credit?

Answer:
Ideally, they should revert to the issuing bank requesting the removal of this
condition and referring them to the contents of article 4. If the nominated bank is
willing to act under the credit i.e., review the documents against that contract,
then they need take no further action. The rule is designed to protect a
nominated bank that does not wish to (or should not) be burdened with
additional, and often unnecessary, examination requirements.
Banks should discourage any attempt to include contract as integral part of L/C