Letter of credit

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Letters of credit issued by most banks around the world are subject to the UCP The conventions under the UCP were first adopted by the International Chamber of Commerce in and have subsequently been revised many times since then. Federal laws and some state laws, also govern letters of credit. Strict versus substantial compliance Under the UCP issuing banks are obligated to make payment under letters of credit when conforming documents bill of lading, packing list, invoice, certificates, etc.

The documents are to be in strict compliance with the terms stated on the letter of credit.

Generally, rulings in legal cases, revolving around the issue of payment when discrepant documents are presented, have come down on the side of strict compliance rather than substantial compliance. However, strict compliance does not demand oppressive perfectionism such as the misspelling of a word. A typical discrepancy, which would fall under the strict compliance rule, is that the invoice does not describe the goods exactly as specified in the terms of the letter of credit.

In practical terms this means that issuing banks make payments under letters of credit based on the examination of documents, not on the examination of the goods. The letter of credit does not protect the applicant from paying for the shipment of defective merchandise.

Types of Documentary Credit – a Comprehensive Guide

The applicant cannot wait until the goods arrive, examine the goods, and then approve payment under the letter of credit. If, after examination, the documents are found to be conforming, then the negotiating bank will courier the draft to the US reimbursing bank or send a telex or SWIFT transmission claim and courier the documents to the foreign issuing bank.

Return the documents to the exporter for correction, if possible and time permitting. Send the documents to the issuing bank on an approval basis.

Cable the issuing bank for authority to pay. The US negotiating bank is accepting a higher level of risk on negotiable credits because payment will not be made until the documents arrive at the issuing bank, and if discrepancies are found and the issuing bank may demand return of the funds.

This rarely happens, but is theoretically possible.

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Since the letter of credit is the legal obligation of the issuing bank, the decision to honor payment upon document issuer s option documentary non- documentary rests with the issuing bank or its designated negotiating bank. If the presented documents are not in compliance with the terms and conditions of the letter of credit, the documents may be sent to the issuing bank on an approval basis. The limit of this issuer s option documentary non- documentary time is seven banking days under the UCP rules.

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The time within which the issuing bank must give notice of discrepancies is the lesser of a reasonable time or seven banking days. Where the terms and conditions of the letter of credit are straightforward and uncomplicated, the reasonable time period would be much less than the seven days. The issuing bank may contact the applicant to determine if the applicant wants to waive the discrepancies and make payment under the letter of credit.

If the applicant decides not to waive the discrepancies, the consequences can be complicated. Since the exporter retains title to the goods, the exporter may have to arrange for disposal of the goods, clear customs, and pay demurrage charges.

The latest shipment date, and, The presentation period.

The buyer will always have more issuer s option documentary non- documentary over its bank than a seller in sending a SWIFT or telex follow-up to the foreign bank. In addition, a fax to the buyer will be much cheaper than having the bank follow-up with a SWIFT or telex, since the bank will charge for this service as well.

Preventing discrepancies In order to prevent discrepancies from occurring when documents are presented under the letter of credit, the exporter should take the following steps as soon as the sale is concluded, but before the letter of credit is opened.

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Fax the buyer the terms of the letter of credit, which should conform to the underlying contract of sale between the exporter and importer. After the buyer completes the letter of credit application, which it will take to its bank, the exporter should also ask that the buyer fax a copy of the letter of credit application to the exporter for its review. It is much cheaper to change the terms of the proposed letter of credit BEFORE it is issued; after it is issued the buyer has to pay additional fees for amendments to change the terms of the letter of credit.

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The exporter should make sure that the description of the merchandise as it appears in the letter of credit is stated exactly the same as on the invoice. The exporter should request at least a day period in which to present documents after the shipping date. Since late presentation is one of the most common discrepancies, this simple request should alleviate the possibility of a late presentation.

issuer s option documentary non- documentary

Not only does a day or more period allow the exporter some extra time in putting together the documents, it also allows for time to make the needed corrections to discrepancies after the negotiating bank discovers discrepancies. A day period is essential for transferable letters of credit since the process of presenting documents by both the first and second beneficiaries can be time consuming.

In order to assist the exporter in reviewing the documents when compared to the terms of the letter of credit, we have put together the following list of areas where typical discrepancies occur.

The exporter should have a detail oriented person within the company do this examination and not rely exclusively on the bank or freight forwarder to catch discrepancies. Although drafts are similar to checks, they do not possess any special characteristics such as micro encoding.

The easiest method of preparing drafts is to use your PC word processing program or have your bank prepare it for you.

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  • The range of documents that may be requested by the applicant is vast, and varies considerably by country and commodity.
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The draft is correctly drawn if: 1. Amount in words is identical with amount in figures.

Letter of credit

The draft bears the appropriate endorsement if the payee is the exporter. The exporter signs the draft. All names are correctly spelled. The amount of the draft correlates to the invoice.

Invoice 1. The merchandise is described exactly as in the letter of credit; the merchandise description must be consistent with the packing list and bill of lading. All documents must be consistent with each other.

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Shipping container descriptions quantity, weight, and measurement on the invoice must correlate with the bill of lading, packing list, and other appropriate documents if required. Insurance Documents 1. Under UCP Article This article should be read in detail to understand its implications. It lists the marks and numbers of packages and quantities in accordance with the other documents.

It is dated on or before the date of shipment or indicates that coverage is established as of the date of shipment.

The amount of the insurance premium agrees with that appearing on the invoice, if listed. This area is one where discrepancies commonly occur.