Trading To The Letter

Many international shippers find themselves in a difficult position when they must secure payment from buyers after a sale of goods. Often, international sale of goods transactions are secured through a Letter of Credit (LC). The LC serves to facilitate prompt payment for goods purchased. Parties to the LC include the seller, buyer, buyer's bank (issuing bank), and seller's bank (receiving bank).

For the seller/shipper, issues arise when the buyer refuses payment. When the seller demands payment, the buyer often directs attention to the LC, citing a lack of LC compliance with banking standards. Banks which have not adequately ensured they will be reimbursed by their customer (the buyer), have narrowly applied LC principles to deny payment. These decisions have been upheld by courts on the grounds that the seller has not strictly complied with the terms of the LC. For the seller, a comprehensive way to secure payment is to take preventative action.

Control the Process

When negotiating with the buyer, the seller should attempt to persuade the buyer to use a bank of the seller's choice to issue the LC. The seller should conduct due diligence, discussing with its own bank, preferably a bank with a substantial international presence, what corresponding bank it uses in the country of the buyer. If the buyer can have the LC issued by that corresponding bank, the process can proceed more expeditiously.

Confirming the LC

If the seller does not have confidence in the bank of the buyer's choice, or if there is any question about the political stability of the foreign country where the issuing bank is located, then the LC should be confirmed by a U.S. bank. When a U.S. bank confirms an LC issued by a foreign bank, it takes upon itself the payment obligation. Thus, if a U.S. bank confirmed an LC, and subsequently, for political or economic reasons, the foreign bank could not reimburse the U.S. bank, the U.S. bank must pay the beneficiary under the LC.

There is a charge for confirmation, which becomes more expensive in proportion to how big a risk the U.S. bank believes it is taking in confirming the LC. There are some situations where the risk may appear so high that a U.S. bank will not agree to confirm. If the bank refuses to confirm because of political instability, advise the client to try to have the LC issued outside the politically unstable area, in a country such as Switzerland. The question of who pays the U.S. bank's confirmation charges is negotiable, but if not negotiated in advance, the bank will generally charge the beneficiary for this service.

Keeping Documents Simple

The seller should negotiate with the buyer prior to the issuance of the LC exactly what documents must be presented to the bank for payment under the LC. The seller's priority must be have as few documents as possible, to have as simple a description as possible, and to be sure that all documents called for by the LC can in fact be produced. Cases have occurred where one of the documents is a certificate supposed to be issued by the foreign government, which was simply never produced. Another problem can by created if the LC requires a document to be signed by someone under the control of the buyer. The document may not be signed by the right person, or may not be signed at all.

Almost all LC's require production of a commercial invoice and a transport bill of lading. With respect to the commercial invoice, the LC will typically state the description of the goods which must be found in the invoice. If the goods are not described exactly the same way, the seller may not be paid. In one case where payment was denied, the LC required for the commercial invoice to describe the goods as "100% Acrylic Yarn." When the invoices were presented to the bank, they described the goods as "Imported Acrylic Yarn." Even though the packing list attached to the invoice described the goods as 100% Acrylic Yarn, the court upheld the bank's refusal to pay under the LC because the documents did not strictly comply with the requirements of the LC. Courtaulds North America, Inc. v. North Carolina National Bank, 528 F.2d 802 (4th Cir. 1975).

Even if the documents do not comply exactly, the buyer will agree to waive any discrepancies in the documents, and, if the bank agrees, the payment will occur. However, an issuer bank has no duty to amend a letter of credit upon the request of a customer and a beneficiary. See AMF Head Sports Wear v. Ray Scott's All-Am. Sports Club, 448 F. Supp. 222 (1978); See Also Leaseamerica Corp. v. Northwest Bank Duluth, N.A., 940 F.2d 345 (8th Cir. 1991).

To prevent denial of payment, sellers should understand the following:

• Documents must be accurate.
• If there is a mistake or a problem with the documents which the LC requires to be presented, the seller/beneficiary should not ship goods until the LC has been amended. Further, no amendment can take place unless the issuing bank, the confirming bank, if any, and the seller, agree to it.
• A prudent seller will not let the buyer take possession of the goods until he has been paid under the LC. If there are discrepancies in the documents preventing payment of the LC, a buyer in possession of the goods has much less incentive to waive discrepancies so the seller can be paid.
  

Meeting the deadlines

Every LC has three important dates: (1) the date by which goods must be shipped; (2) the date by which documents must be presented; (3) and the expiry date for the LC. A seller should make sure that each of these dates can be met, and should allow a large margin for error. After the LC has been issued, if the seller learns that the date for shipping goods cannot be met, he should not ship any goods until he obtains an amendment to the LC permitting later shipment.

For more information on how to prevent trade disputes, please contact me, Sheheryar Sardar, Esq., at 631.838.0178 or sardar@sardarlawfirm.com. Please visit www.sardarlawfirm.com.