What happens if my L/C doesn’t agree with the shipping terms?

What happens if my L/C doesn’t agree with the shipping terms?
A Letter of Credit should reflect exactly the terms of the sales contract between the buyer and seller of goods.There are several terms that are commonplace to those that are experienced in the issuance and maintenance of letters of credit that may not be obvious to those with an untrained eye. It can be an expensive mistake to expect the goods to be shipped CIF (Cost Insurance and Freight) only to receive a letter of credit that confirms the terms as FOB (free on boards), leaving you with the cost of freight and insurance should you not notice the error.

Obtaining an amendment to a letter of credit is a relatively uncomplicated matter but it can be both costly and time consuming. Once a letter of credit is received by your firm, the first thing to be done is to satisfy yourself that it provides you with sufficient security to start to manufacture/prepare the goods for shipment. Is it confirmed by a bank? Are you content with the credibility of the bank that has added its confirmation?

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Once you are satisfied, the L/C needs to be checked very carefully against the sales contract whether it is a long-standing relationship or not. If the L/C has been issued by a different bank to the one normally used by your customer, it pays to be sure that you are happy with the reason he has changed bankers. Is there a credit issue or some other related matter with his usual bank? Some investigation will usually unearth a perfectly innocent explanation.

The Letter of Credit needs to be checked very carefully to minimize risk
If checking over the L/C reveals a discrepancy from what has been agreed, the first step is to contact the confirming bank to ensure that no error has been made by them. If that is the case, it is a relatively simple task for them to put it right. If there is no error, the sales contract needs to be checked again to make sure that the difference is not caused by some ambiguity in the terms. These precautions should be done quickly as the letter of credit will have an expiry date that doesn’t allow for any unscheduled delay in the shipment.If everything appears in order at your end, then your client needs to understand if there is a simple error or if it is a more fundamental problem with the understanding of the point at issue. It could be the shipping terms, it may be the specification of the goods, it could be that the goods are to be shipped by air while you had assumed they would be shipped by boat (which is far less expensive).

If there needs to be an amendment to the L/C it needs to be agreed who is at fault and who will pay the amendment fee since neither party will willingly add to their cost.

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late shipment is the most common discrepancies in documents
One of the most common discrepancies in documents included in a letter of credit transactions is late shipment. This is because although it is considered common knowledge that goods must be shipped within three weeks of the bill of lading date that is not always made clear in the L/C.The bill of lading is the document issued by the shipping company when it takes over responsibility for the goods from the shipper. There needs to be a “shipped on board” stamp with a date to ensure that the goods were loaded onto a vessel promptly but in any event within three weeks of the bill of lading date.

A discrepancy of documents in a letter of credit transaction can be painful to all parties since the buyer cannot unload his goods at the port and the seller cannot be paid. The Financial Institution standing in the middle of the transaction must avoid becoming an arbitrator since all it has to do is comply with the terms of the L/C.

That financial institution often referred to as the confirming bank has a responsibility to ensure that both sides are treated fairly and in accordance with the terms of the International Chamber of Commerce guidelines. Those guidelines cover just about every eventuality but one of the most important factors a confirming bank faces is ambiguity of interpretation in the terms of the L/C. If a clause is unclear it is beholden upon the confirming bank to contact the issuing bank to obtain clarification.

Letter of credit shipping should be a simple process but as the terms become more complicated, there is a propensity towards issues particularly if one party to the transaction is less experienced than the other.

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”