Letter Of Credit, Invoice, Discrepancy

LETTERS OF CREDIT: STRICT COMPLIANCE

Banks are often accused of being nit-picky and overzealous when they examine documents against a letter of credit. It seems they want every “t” crossed and every “i” dotted. Would you believe one exporter did not get paid because of a simple apostrophe?

The United States remains one of the few countries that employs the imperial measurement system. As if that doesn’t generate enough confusion, it becomes even worse when Americans use abbreviations, which make no logical sense to the rest of the world.

HOW BIG WAS THAT T.V.?

The merchandise description in one letter of credit stated, “Shipment of TV sets with 24” screens.” The description on the invoice presented stated, “Shipment of TV sets with 24’ screens,” and the bank rejected the documents because of this discrepancy. In the United States an apostrophe and quotation marks have different meanings when used to signify a unit of measure. An apostrophe designates feet. Quotation marks designate inches.

In an earlier blog, we related the story of Holstein cows, 24 months pregnant. The use of a dash makes a significant difference between 24 months and 2-4 months.

IMPLICATIONS OF "DISCREPANCIES"

Is a bank too nick-picky to note these discrepancies? Probably not, because of the implications. The burden of accuracy falls on the preparer of the documents. Before they are sent to the bank for examination, the preparer must understand and follow the requirements of the letter of credit as well as the rules stipulated in the UCP 600.

Letter Of Credit, Shipment Date, Applicant, Negotiate Documents

LETTER OF CREDIT REQUIRED A LATEST SHIPPING DATE

A US importer applied to a New York bank for a letter of credit for candy from a supplier in Greece. The letter of credit stipulated a shipment date which would insure arrival of the candy in time for a particular Greek festival.

LETTER OF CREDIT PAYMENT REFUSED

Unfortunately, the supplier dispatched the candy one day after the latest date allowed for shipment. When the issuing bank noted this discrepancy, they contacted the applicant for approval to pay, but the applicant declined because the late shipment meant missing the festival date. The Greek bank was notified that payment had been refused.

Since the Greek bank had negotiated the documents and already paid the supplier, they were now the sweet owner of the candy and promptly contacted the New York bank for assistance in finding a new buyer for it.

"NEGOTIATING" A LETTER OF CREDIT

Let’s clarify the technical term “negotiate.” According the UCP, “Negotiation means the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank” (Article 2).

In other words, a bank other than the issuing bank may purchase the beneficiary’s documents before the issuing bank receives the documents and consents to payment. This provides an advantage for the beneficiary who receives the money faster. It also provides income to the negotiating bank by collecting fee income plus a fee to compensate them for the cost of “float,” or interest on the money, which they paid but have not yet collected from the issuing bank.

The negotiating bank, however, takes the risk of the issuing bank not paying. In this story, why the negotiating bank chose to purchase discrepant documents remains unclear. Apparently, unable or unwilling to recover the payment from the beneficiary, they solicited the issuing bank’s assistance in the matter.

CREATING A NEW MARKET FOR THE CANDY

Fortunately, the story ends well. The New York bank discovered an agent who was willing to sell the candy for a 20% commission. He traveled the country and successfully established ecstatic buyers for the candy. After he kept 20%, the New York bank remitted over $143,000 more than the draft amount to the Greek bank and the agent launched a new market for the candy.

Thank you to Jim Harrington for another entertaining story.