Q. A new supplier in the Far East has asked to be paid under a letter of credit. We have only sold on letters of credit before and know it is easy to make errors; now, as buyers we are worried that discrepant documents may delay the delivery of goods. What do we need to be aware of?

A. There are, inevitably, occasions when despite all an importer’s efforts to ensure that a letter of credit is workable and despite all the beneficiary’s efforts to comply with its requirements, documents are presented which the banks feel are not in conformity with their terms. Sometimes the reasons given may appear trivial but the banks involved in a letter of credit are in an unenviable position in such circumstances. If your bank (the issuing bank) receives a fax, email or telex message from another bank responsible for payment under the credit your bank is likely to contact you by telephone or fax advising of the discrepancies and asking you for a decision, ie will you accept the discrepancies. Of course your decision will depend on what the discrepancies are. If they are deemed irrelevant you should be completely safe in authorising the bank to ignore them. If they appear important then refuse to accept the discrepancies without further details – if you are not comfortable with the errors you can refuse acceptance, this will of course mean goods will arrive in the UK without paperwork, leading to potential delays and storage charges. You could talk to the bank about accepting the discrepancies “under reserve”, which means the paperwork is forwarded to you, the beneficiary is paid but if you have serious problems or concerns then the “under reserve” option permits the bank to recover the money from the beneficiary. Ensure that this guarantee or reserve is extended to the issuing bank and yourself and is not just applicable to the bank outlaying payment. Alternatively, the seller could take the risk of acceptance by instructing the bank to “send the documents forward on collection”. This actually means that the beneficiary has opted to set aside the letter of credit. With the letter of credit closed the only obligation left for the importer is to settle any outstanding bank charges. Paperwork will arrive in the UK and you will be asked to accept the errors or not; payment is not made to the beneficiary until so instructed by the importer.

 

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