The failure rate of first presentations of documents by exporters under letters of credit continues to be high, with banks quoting these rates at between 60% and 80%.
The reasons for these high levels are varied but will include the failure of the beneficiary to initially check the terms of the letter of credit to ensure workability and that the terms mirror those in the commercial contract/agreement. A general lack of adequate letter of credit training and understanding will also contribute to exporters struggling to present a complying set of documents under a letter of credit.
So it is a challenge, especially for the more inexperienced exporters to make sense of, and then collate and present complying documents, and to further exacerbate this issue, there have been a number of instances where late delivery by freight forwarders of the original transport document/s, to exporters, has resulted in their inability to meet the time constraints as laid down in the letter of credit.
Regular examples have involved exporters who have used “FOB …. port of loading” (for non-containerised goods by sea) or “FCA …. named place” (for any mode / modes of transport), Incoterms® 2010 , where quite appropriately the seller has loaded their goods on a means of conveyance provided by the buyer.
(Important note: The use of “EXW” is usually appropriate for domestic trade only and may cause issues where goods are exported – see our related article: Incoterms ® 2010 explained ).
Once legal delivery has occurred under the above Incoterms rules, it is of course the buyer’s responsibility to have arranged for the main contract of carriage, which will typically involve transport by either sea, air or multimodal (combined) transport methods and the procurement of a related transport document (full set of bills of lading, air waybill or multimodal transport document). Unfortunately, this is where the delays appear to have occurred, as the buyer’s agent has been in slow in obtaining the relevant transport document, failing to make these available to the exporter for presentation under the letter of credit in a timely fashion.
There is an additional risk that the buyer’s agent has failed to draft the transport document in accordance with the terms stipulated in the letter of credit and/or the UCP 600 rules applicable to that document.
- The exporter could consider one of the Incoterms rules which affords them the responsibility (and control) of arranging the main contract of carriage to an agreed place of destination in the buyer’s country. So either CFR …. port of destination (non-containerised goods by sea) or CPT….an agreed place of destination (any mode or modes of transport) may be an option. This would involve a fundamental change to the existing delivery terms with the buyers, but having arranged the main transport of the goods, the seller should now be able to obtain the requisite documents in a more timely manner and therefore be able to accelerate the presentation procedure.
- Change the requirement in the letter of credit from a transport document to a receipt of goods issued by the buyer’s freight forwarder on taking delivery of the goods at the seller’s premises. This is a possible solution, but in increasing instances, the issuing bank of the letter of credit will insist on requiring the presentation of a full set of original bills of lading, an original air waybill or multimodal transport document, with the issuing bank named as the consignee. This is often the case with letters of credit from the Middle East, Far East or Central Asia, as this will provide the issuing bank with the security that if the buyer (in a worst case scenario) is unable to pay when a complying set of documents is received, the bank will be able to take delivery of and potentially sell the goods to realise some value to help meet the bank’s obligations under the letter of credit.
- The exporter could initially ask for additional presentation days when they are negotiating with the buyer prior to the issuance of the letter of credit. Article 14c of UCP 600 indicates that presentation of documents must be made to the bank with whom the credit is available not later than 21 calendar days after the date of shipment, but in any event not later than the expiry date of the credit. Shorter periods for presentation (10, 14 days etc) are quite commonly called for, particularly in the case of short transit times, so exporters are advised to check this requirement carefully upon receipt of the credit. It is unusual to see more than 21 days permitted under the terms, but a longer period could be agreed upon if this did not cause issues regarding the goods arriving at the country of destination before the original documents, resulting in demurrage costs etc.
Timing issues can be a major factor in the presentation of discrepant documents and it is unfortunate to hear of these particular examples where the tardiness or inaccuracy of an overseas buyers agent has resulted in problems for the exporter. Some of the potential solutions as stated would help to resolve this problem, and enable the exporter to present a complying set of documents and get paid in a timely manner.