Letter Of Credit: Shipment Of One Cow (Partial Shipments Prohibited)

As we have discussed in various other blogs, letters of credit contain precise requirements that the beneficiary must meet in order to receive payment. The letter of credit must also state the specific documents needed to meet the requirements. Then, other conditions may exist such as whether partial shipments are allowed or not. If allowed, the beneficiary may make a partial shipment, present documents and get paid for the value of the goods shipped. Later he may make another shipment, present documents and receive payment, etc.

One beneficiary enjoys telling the story of the letter of credit he received for the shipment of “one live cow.” The letter of credit contained the condition that partial shipments were not allowed.

He thought this condition rather humorous since a partial shipment would be, well, utterly impossible!

Letter Of Credit Discrepancy Created A New Market For Greek Candy

Letter Of Credit, Shipment Date, Applicant, Negotiate Documents

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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.

Letter of Credit Non-payment Resulted in Paper Slippers Becoming a Tax Deduction

Letter Of Credit, Beneficiary, Applicant

LETTER OF CREDIT ISSUED FOR THE PAYMENT

A New York bank issued a letter of credit for the importation of paper slippers used in medical clinics and hospitals. The patients donned the disposable slippers as they strolled through sanitary areas of the hospital. The merchandise description on the letter of credit read as follows: “paper slippers with soles double-stitched.”

"DISCREPANCIES" IN THE DOCUMENTS

The documents presented by the beneficiary did not properly indicate double-stitched soles. The issuing bank inadvertently overlooked this requirement and honored the beneficiary’s request for payment.

When the applicant received the slippers and inspected the incorrect documents, he rejected them, demanding that the issuing bank refund their money. Since the bank had already paid the beneficiary, the bank became the unwilling owner of single-stitched paper slippers with little hope of selling them to recover their loss.

DONATE THE SLIPPERS

An official at the bank ingeniously suggested they donate the slippers to a Veterans Administration hospital and capture a tax deduction. The savings resulting from the tax deduction nearly compensated the bank for its loss.

Another lesson learned, thanks to Jim Harrington.

Does The Letter Of Credit Police The Transaction? Which Seems Better? New Or Reconditioned?

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.