When is a Letter of Credit not a Letter of Credit?

OK, a very strange question.

You have received a letter of credit and now have a guarantee that you will be paid if you prepare and present complying documents to the bank, right?

Let us paint a brief picture….

An engineering company has received a letter of credit in their favour for a high value piece of machinery.

The credit  has been issued by a little-known bank in an emerging market, but has been confirmed by a first class European bank.

A delay in receipt of a vital component of the finished goods means that shipment will be effected 5 days after the Latest Shipment Date specified in the credit.

The applicant is desperate to receive the goods and undertakes to the beneficiary by email to accept the discrepancy of ‘late shipment’ when documents are presented to the bank.

Sound familiar? What would you do…….?

Having come across this scenario several times recently, it is worrying that exporting companies suddenly become complacent just because they have obtained a ‘confirmed’ letter of credit and will suddenly lose track of rational thought when something goes wrong.

It is absolutely vital to understand that you MUST comply with ALL terms and conditions of the credit in order for the bank to honour its obligation as issuing or confirming bank.

Once a bank identifies discrepancies in documents, it is no longer obligated to honour or negotiate.

The mere ‘promise’ of the applicant to honour discrepancies in the case as described, should not be taken lightly as the exporter would effectively be instructing the bank to handle documents on a ‘collection’ basis only.

What if the applicant changes his mind?

Remember why you requested a letter of credit in the first place!

If in any doubt, insist on an amendment to the credit before shipping the goods.


Learn more about our Letter of Credit Training Courses

2017-02-03T08:16:54+00:00 May 22nd, 2014|