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, Confirming Bank, Issuing Bank, UCP

LETTER OF CREDIT WAS PAID BY THE BANK This insightful story, told by Jim Harrington, concerns a company that builds equipment for manufacturing cans used in the food and beverage industry. The manufacturer received a letter of credit to pay for a shipment of one machine. Since the documents complied with the terms of the letter of credit, the confirming bank in the Unites States made payment and sent the documents to the issuing bank in Brazil. The issuing bank in Brazil inspected the documents and also honored the payment.

BUYER CLAIMED IT WAS A USED MACHINE, NOT NEW

When the goods arrived in Brazil, the buyer discovered that the vintage machine, manufactured in the 1920s, did not meet the conditions of the contract, which indicated a new machine.

BANKS DEAL IN DOCUMENTS, NOT IN GOODS

When the buyer complained to the issuing bank in Brazil, the bank explained that they deal in documents, not in goods, and that the buyer had no claim against the bank because the documents complied with the terms of the Letter of Credit. As a courtesy, the issuing bank sent a message to the confirming bank, which in turn contacted the beneficiary to inform him of the mistake. Upon checking his records, the beneficiary discovered that through a computer error, a reconditioned machine left their warehouse instead of a new machine.

A GOOD DEAL FOR THE BUYER

The beneficiary contacted the buyer in Brazil with an offer to return the used machine in exchange for a new one, or alternatively, accept a credit of $100,000 and keep the old machine. Upon careful thought, the buyer determined that the more stringent manufacturing specs in the 1920s made the reconditioned machine of better quality than a new one, so he decided to keep the old one and accepted the $100,000 credit.

LETTER OF CREDIT RULES WERE FOLLOWED

The rules for processing letters of credit (UCP) clearly indicate that with a letter of credit, “Banks deal with documents and not with the goods, services or performance to which the documents may relate” (Article 5). Any disputes regarding the goods are handled directly between the buyer and seller, properly leaving the bank as an independent paymaster.