UCP, Letter Of Credit

LETTER OF CREDIT RULES

The rules for Letters of Credit, the UCP (Uniform Customs and Practices for Documentary Credits), states, “The description of the goods, services or performance in a commercial invoice must correspond with that in the credit” (Article 18 c). Banks typically have interpreted this to mean a verbatim description, letter for letter, and punctuation for punctuation, in accordance with the letter of credit.

The UCP further provides, “In documents other than the commercial invoice, the description of the goods, services or performance, if stated, may be in general terms not conflicting with their description in the credit” (Article 14 e).

APPLES, ORANGES AND FRUIT

Note the use of the words, “not conflicting.” If a letter of credit states “Apples” as the merchandise description, then the invoice must read “Apples.” Other documents, such as the bill of lading, may state “Fruit,” and be considered acceptable because "Fruit" does not conflict with “Apples.”

A bill of lading which states, “Oranges” does conflict and is unacceptable. Interpretation of this policy is more difficult for a banker who has no knowledge of the merchandise or if the merchandise is highly technical.

In recent years I have seen documents prepared by freight forwarders showing all documents, not just the invoice, with the merchandise description identical to the letter of credit. Undoubtedly, this safe method leaves no need on the part of the bank to interpret the description from document to document.

An uncertain bank will take the safe, conservative approach, and ask for replacement documents, refuse payment, or obtain a waiver of the discrepancy from the applicant, if the documents do not strictly match the letter of credit.

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.