Checking letters of credit

Checks to be made by the seller

When entering into an international contract, the Letter of Credit form of payment is very often used.

The following are just a few tips to avoid problems and damages during the shipment. In particular, it is advisable to check that:

• The Letter of Credit is irrevocable and confirmed by the bank;
• The terms and amount are the same as what was ordered;
• All of the required documentation can be actually provided;
• The shipment can be made within the required time (the shipping date is the on board date on the policy, i.e. departure of the ship, not the date of loading at the plant);
• The delivery terms match the terms agreed in your contract.

After receipt of the Letter of Credit, if any of the terms do not match what was agreed, request the customer to amend it accordingly.

If the negotiation period of the Letter of Credit expires before potential boarding, seek an extension from the customer.

Generally, Letters of Credit are opened in accordance with publication 500 from the International Chamber of Commerce. This publication (available from your local Chamber of Commerce) may prove very important when dealing with the customer and the bank.

 

Checks to be made by the buyer

When entering into an international contract, the Letter of Credit form of payment is very often used.

The following are just a few tips to avoid problems and damages during the shipment. In particular, it is advisable to check that:

• The Letter of Credit is irrevocable and confirmed by the bank;
• The terms and amount are the same as what was ordered;
• All of the required documentation can be actually provided;
• The shipment can be made within the required time (the shipping date is the on board date on the policy, i.e. departure of the ship, not the date of loading at the plant);
• The delivery terms match the terms agreed in your contract.

After receipt of the Letter of Credit, if any of the terms do not match what was agreed, request the customer to amend it accordingly.

If the negotiation period of the Letter of Credit expires before potential boarding, request that the customer amends it.

Generally, Letters of Credit are opened in accordance with publication 500 from the International Chamber of Commerce. This publication (available from your local Chamber of Commerce) may prove very important when dealing with the customer and the bank.

Remember that a Letter of Credit negotiated with incorrect or incomplete documents does not guarantee your payment and your interests.

The Letter of Credit is a form of payment that gives a certain guarantee to the seller (of the right to be paid) rather than guaranteeing the buyer that the cargo shipped corresponds exactly to the quality and quantity ordered. Indeed, banks do not guarantee that what is described in the bill of lading actually corresponds to the cargo shipped, and shipping companies and forwarding agents do not examine the contents of packages or containers, but must accept as true what is declared by the exporter.

 

Insurance

Shipping companies, freight forwarders, carriers and port operators generally only cover their own liabilities in accordance with the contract of carriage (in maritime transport, the Bill of Lading). Generally, the liability of a freight forwarder covers a much smaller amount than the actual value of the cargo.

If the contract is subject to Incoterms 2020, the documentation regarding the share of the risk that must be covered by the buyer can be consulted. In any case, it is never appropriate to only cover part of the entire transport chain: the insurance should always cover the full journey from end to end.

To correctly determine the insurance cover for the cargo, it is important to know:

• Exact description of the cargo
• Packaging type
• Method of transport used
• Transport route, method of storage and preservation
• Value to be insured (general rule: value of the cargo plus the transport and insurance costs plus 10%)
• Particular dangers

Special Conditions – (Letter of Credit conditions)