ISP vs UCP

In 1998, the International Chamber of Commerce endorsed a new set of rules called the International Standby Practices or 'ISP98', designed to specifically cover standby letters of credit and demand guarantees. Companies using standby letters of credit now have to make a choice regarding whether they want their standbys made subject to these new rules or to the UCP500, which continues to be in use for all types of letters of credit.

Let's see what are the major differences between these two sets of rules, as they regard standby letters of credit, to assist in making this choice.

Major Differences Between the ISP and the UCP

* The UCP was designed for letters of credit whose primary purpose is to serve as a medium of payment.

The ISP was designed for letters of credit whose primary purpose is to provide credit assurance.

• The UCP makes an assumption that the documents required under a letter of credit have commercial value and that the applicant will authorize payment even when there are discrepancies.
  

The ISP assumes the documents are merely pieces of paper and that the reason for a drawing is probably that there is a dispute between the applicant and beneficiary or the applicant has gone bankrupt; therefore, the likely impact of discrepancies is that payment will not be made. The ISP implicitly supports the maxim, “Pay first; litigate later.

• The ISP is much more liberal about checking documents. For example, the ISP states,

An issuer or nominated person is required to examine documents for inconsistency with each other only to the extent provided in the standby. (ISP 4.03)

In complete contrast, the UCP states, Documents which appear on their face to be inconsistent with one another will be considered as not appearing on their face to be in compliance with the terms and conditions of the Credit. (UCP 13(a))

Furthermore, the UCP has 18 articles defining the required content of various documents. The ISP specifically indicates none of the requirements from the UCP should be applied; each document should be examined simply for the required content indicated in the letter of credit.

• The ISP is more liberal about when documents must be presented. The ISP states,If on the last business day for presentation, the place for presentation stated in the standby is for any reason closed and presentation is not made timely because of the closure, then the last day for presentation is automatically extended to the day occurring thirty calendar days after the place for presentation re-opens for business, unless the standby otherwise provides.” (ISP 3.14)
  

• In contrast, the UCP states, Banks assume no liability or responsibility for the consequences arising out of the interruption of their business by Acts of God, riots, civil commotions, insurrections, wars or other causes beyond their control, or by any strikes or lockouts. Unless specifically authorized, banks will not, upon resumption of their business, pay, incur a deferred payment undertaking, accept Draft(s) or negotiate under Credits which expired during such interruption of their business.” (UCP 17)
  

Furthermore, there is no requirement, as in the UCP, that documents must be presented within a certain number of days after being issued (see UCP 43(a) regarding “the 21-day rule”).

• The UCP is more concerned about getting original documents. In the UCP, if an L/C calls for a document in one or more copies, one must be an original. (UCP 20(c)(ii)) If the same language is used on an L/C subject to the ISP, the documents may all be copies, although originals may be presented in lieu of copies. (ISP 4.15(e)(ii)
  

• The ISP sets down a number of rules thought to apply to all letters of credit, but never stated in the UCP, e.g., what happens when someone loses an L/C (ISP 3.12), that documents must be in the language of the L/C (ISP 4.04), what happens if the issuer moves (ISP 3.14(b)), what happens if a beneficiary changes their name or becomes bankrupt (ISP 6.12). Thus, the ISP is, arguably, more complete than the UCP.
  

• The ISP contains a number of articles addressing matters that are specific to standby practice, e.g., certain undesirable terms (ISP 1.10), “extend-or-pay” situations (ISP 3.09), and rules for counter-guarantees (ISP 4.21).
  

• The ISP allows L/Cs to be transferred multiple times, but always in their entirety. The UCP allows L/Cs to be transferred only once, though in portions if desired.