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Another Basic Problem with
a Letter of Credit
By Steven Kozack, Covering Credit

International Credit Articles
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Review of a L/C

A client recently asked us to review a letter of credit they had received from a first time buyer located in the Middle East. In a brief discussion, we learned that the seller [our client] had not sent any instructions to the buyer about what terms and conditions should be included in [and excluded from] the letter of credit. We found that the L/C was to be advised rather than confirmed, contained unlawful boycott language involving our company doing business with Israel, and contained some "unique" terms and conditions.

To resolve the problem we started with an overview of letters of credit. We explained the essential elements of a letter of credit included:

  • A payment commitment made by the bank issuing the L/C

  • To pay the seller/beneficiary a specific amount of money

  • Provided the seller is able to present the specific documents listed in the L/C to a specified person and/or place, and

  • Provided the seller can do so within a specified time frame.

We asked our client to think of a L/C as an unconditional promise not to pay the seller unless the documents are exactly as required in the L/C and presented within the time limits described in the L/C.

We provided an outline of the instructions that our client [the seller] would typically give to the buyer or buyer's bank providing instructions on what terms the L/C can and cannot contain.

We contacted the buyer by fax, and informed them of the amendments that would be required in order for "us" to release the merchandise ordered for shipment. We reduced the number of documents required, simplified the documentation requirements for our client, required that the boycott language be removed, and asked that the L/C be confirmed rather than advised given the political instability in the region.

Was this overkill? We don't think it was. Why not? Because with letters of credit if you don't get it right the first time you might not get another chance, and that means you might not get paid.

Reprinted with permission from the Covering Credit Newsletter 7/24/02 Edition © 2002 All Rights Reserved

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