How to handle "non-documentary conditions" in letters of credit?

A letter of credit is a conditional bank guarantee, whereby the bank (issuing bank), at the request and on the instructions of the buyer (applicant), undertakes to pay a sum of money to the seller (beneficiary) immediately or at a future date. The condition for the seller (beneficiary) to receive this money is to submit to the bank (negotiating bank) the documents specified in the letter of credit.

In daily operational practice, we often encounter some "non-documentary conditions". For instance, in the "additional conditions", there are clauses such as: "Factory Inspection To Be Final"; "The Goods Should Be Made in China", etc.

According to Article 13(c) of the UCP500 (Uniform Customs and Practice for Documentary Credits) issued by the International Chamber of Commerce (ICC): "If a credit contains conditions without stating the document(s) to be presented in compliance therewith, banks will deem such conditions as not stated and will disregard them."

Moreover, Article 21 of UCP500 states: "When documents other than transport documents, insurance documents and commercial invoices are called for, the credit should stipulate by whom such documents are to be issued and their wording or data content. If the credit does not so stipulate, banks will accept such documents as presented, provided that their data content is not inconsistent with any other stipulated document."

From this, we can see that for conditions that do not specify a required document, they can be disregarded. Conversely, if a document is required, it must be presented. According to the ICC's Position Paper No. 3, issued on September 1, 1994, which provides a correct interpretation of Article 13(c) regarding "non-documentary conditions", it states that if a credit condition is clearly linked to a stipulated document in the credit, this condition cannot be considered a non-documentary condition.

For example: "Beneficiary to intimate one set of non-negotiable documents directly to applicant immediately on shipment and beneficiary’s certificate to this effect must accompany the documents." Such a document must be presented and cannot be regarded as a "non-documentary condition".

Another example: a credit condition states the goods originate from China without requiring a certificate of origin. Such a "China origin" statement alone can be considered a "non-documentary condition", and according to Article 13(c) of UCP500, it would be disregarded. However, if the same credit also requires a certificate of origin, then it is no longer a "non-documentary condition", because the certificate of origin must indicate "China origin".

In summary, for "non-documentary conditions", we should adopt appropriate measures based on the situation:

1. If the "DOCUMENTS REQUIRED" clearly requires an inspection certificate, then the clause "Factory Inspection To Be Final" in the "ADDITIONAL CONDITIONS" must be reflected in the inspection certificate. That is, a certificate signed by "Factory" must be submitted to the bank as a negotiating document.

2. If the "DOCUMENTS REQUIRED" does not require an inspection certificate, then the term mentioned in the inquiry letter qualifies as a non-documentary condition under Article 13(c) of UCP500 and can be disregarded.

3. When a credit condition is clearly linked to a stipulated document, it cannot be simply treated as a "non-documentary condition". Instead, a document that complies with this condition must be issued.

Therefore, if the beneficiary receives a credit containing non-documentary conditions and it is convenient to issue the relevant document, it should comply as much as possible. If difficulties arise in issuing the document, the beneficiary should contact the applicant in a timely manner to either make the condition documentary or simply request its deletion. For non-documentary conditions that truly cannot be cancelled, the beneficiary should, based on UCP500 and practical circumstances, handle them properly, state on the corresponding documents that the required actions have been taken, to avoid disputes during document presentation and ensure timely payment collection.