Letter of Credit Forum

Hello Bombay Flyer
In all matters of trade – ‘the devil is in the detail’ and I can only offer you a broad answer which is ignorant of this detail: so, bear that in mind.

However close the credit and the sales agreement might appear, they are always two separate contracts. At law, if you like, the beneficiary is not the seller. The beneficiary has rights and responsibilities that can and do operate separately from the rights and responsibilities the seller has. The same is true of the issuing bank, the applicant and the buyer.

As there is no connection, we can start by saying that there is nothing wrong with the way you have set up you agreement. One party may be the buyer and an unrelated party may be the applicant, but, commercially we need to create a connection that the law does not allow: in the real world, both contracts relate to the same endeavour.
The way I would ask you to ‘see’ the connection between these two unconnected contracts is as follows;

The sales contract is your RIGHT to be paid.
The credit is the MECHANISM of payment.

Accordingly, if the credit were to fail on you, it would not mean that you have lost the right to be paid – only that you have lost the opportunity to be paid by means of the credit.
My first advice to you then is to make sure that the sales contract contains MORE THAN ONE payment mechanism.

If the credit fails, the sales contract must establish a default mechanism which does not present barriers. For example – the sales contract could state “Payment in full by irrevocable confirmed documentary credit (etc) or by telegraphic transfer on or before the 1st of December”. If the credit fails, we know the 1st of December will come about at some future point. At that moment, your mechanism of payment becomes the telegraphic transfer of funds. Of course, come the 1st of December, how you will get the buyer to cooperate is another challenge, but it will prevent people deliberately frustrating you by stretching out arguments around the credit, presentation, discrepancies and so on – which is always the risk if the sales contract only contemplates one payment mechanism. Credits are not only used to facilitate payment: credits are also used to frustrate payment.

When you have this in place, now turn your attention to making the credit work for you without needing this default.
In this regard – make sure ALL of the documents are within your control. Do not, for example, accept a credit calling for a transport document unless you pay the freight charges – that is, don’t use an L/C for FOB if the L/C calls for a bill of lading . If you do not pay the carrier, don’t become reliant on that carrier’s documentation.

Do not allow the credit to be drawn up calling for any document generated in the destination country – ‘shipment’ from origin should be the last event the credit requires.

Draw up the papers (particularly those issued by carriers) in such a manner that you will have the right to stop the cargo’s release should you need to – e.g. should the credit fail or you feel exposed (your bankers will guide you further in this.)
Speak with you bankers; with them, go over a standard application form. Look at the field (or ‘tag’) numbers on the application form and decide which of those fields require YOUR answer. Then relay your wording to theses fields to the applicant – don’t let the applicant alone decide what goes into the credit wording.

Get a draft copy of the MT700 first: again, check the wording, be sure of the timing and the documents, and correct any mistakes before they find their way into the finished MT700.

Get the credit confirmed by a bank of your choice.

All business is risk management. There is no ‘no-risk’ business opportunity. Even when you get all matters aligned, things can and do go wrong: just find the time ‘this side’ of the negotiation to do your homework and put yourself in a place where disappointment is less likely to arise.

There is so much more – ‘the devil is in the detail’ – and others will chip in their thoughts I am sure.
I wish you well with this

Cheers

phill

“...in the kingdom of the blind; what you see is what you get...”