An Easy Way to Ensure Exporters Get Paid

A frequently asked question under a letter of credit is whether there is a foolproof way to ensure the exporter gets paid. There is,and it can be done very easily.

In the letter of credit there is a field for the presentation period and it usually states "within 21 days after date of shipment." This means that once the goods have been shipped,the exporter should present the bill of lading and other shipping documents to the negotiating bank within 21 days. This is so that the importer can receive the shipping documents quickly through the issuing bank to clear the goods from customs in a speedy manner.

Instead,the exporter should ask the importer to stipulate "until expiry date" instead of the usual "within 21 days after date of shipment." The exporter should inform the importer that he will present shipping documents quickly to the negotiating bank after shipment of the goods.

Discrepancies

When the exporter presents shipping documents to the negotiating bank and the shipping documents are sent to the issuing bank,regardless of how many different discrepancies are pointed out by the issuing bank in a refusal of payment notice,the exporter can receive the documents and "cure" them of all discrepancies. It can then re-present the documents to the negotiating bank within the expiry date. There will not be a discrepancy notice of "late presentation" once the documents are re-presented after the discrepancies noted by the issuing bank have been resolved or "cured."

When the cured documents reach the issuing bank,the bank has no choice but to accept the shipping documents as compliant and make payment under the letter of credit. The usual "late presentation" discrepancy notice is not possible because the presentation period in this letter of credit is "until expiry date."

Stipulating the presentation period as "until expiry date" allows the exporter to re-present the revised documents as many times as needed until the expiry date and there is never a "late presentation" discrepancy notice from the issuing bank.

Simple and Complex Letters of Credit

The simplicity or complexity of the text of the letter of credit differs from country to country based on local practice. When the letter of credit is simple,a discrepancy notice from the issuing bank is rare. When the letter of credit is complex,there are more points on which discrepancy notices can be sent by the issuing bank.

Although the exporter tries his best to compose the shipping documents and obtain documents from carriers and insurance companies that comply perfectly with the terms and conditions of the letter of credit,this is not easily done. Human error also enters the picture and even after careful preparation of all the required documents,it is not uncommon for an issuing bank to point to a discrepancy which did not appear to the exporter or the negotiating bank.

In most cases,despite the discrepancies pointed out by the issuing bank,the importer approves the discrepancies and makes payment through the issuing bank. Thus the discrepancy notices are not a stumbling block to trade between the exporter and the importer. However,this situation depends on the graces of the importer and the assumption that the time required is good for the exporter and the importer.

In order for the letter of credit to be a sure means of payment for the exporter,it is necessary to have the presentation period stipulated as "until expiry date" so that when the issuing bank sends discrepancy notices,the documents may be returned and revised by the exporter and then re-presented to the negotiating bank.

The author has spent his life litigating the issue of notices of discrepancies from the issuing bank. Neither the issuing bank nor the negotiating bank is responsible for the status of the shipped goods. The goods are simply beyond the control of the banks. Even with a thorough examination of the shipping documents,the banks cannot ascertain whether there is any problem with the quality and quantity of the goods or whether the goods have actually been shipped. Such issues are left to the lawyers handling cases of fraudulent letters of credit after the fact. The examination of shipping documents by the issuing bank and the negotiating bank are simple examinations of documents as to whether they comply with the terms and conditions of the letter of credit. There is no intention of ascertaining the possibility of fraud by examining shipping documents.

Better than Litigation?

Instead of litigating whether the discrepancy notices by the issuing banks are valid or not,it is much better to simply cure the shipping documents based on the discrepancies pointed out by the issuing bank. The whole point of sending discrepancy notices is not to escape payment on the part of the issuing bank but to give the exporter the opportunity to cure the shipping documents and re-present them to the issuing bank to receive payment. Letters of credit are a means of ensuring payment to the exporter and this should be the interpretation of any discrepancy notice from the issuing bank.

The contents of the letter of credit to be received by the exporter must be to the satisfaction of the exporter to allow goods to be shipped to a buyer in another country with the assurance of payment under a letter of credit. Thus when the exporter asks the importer to stipulate the presentation period as "until expiry date" so as to facilitate the return of discrepant documents and re-present revised documents,there would be no reason for the importer to resist such a request. The exporter will at this time also assure the importer that he will send the shipping documents through the negotiating bank as soon as shipment is made to ensure that the said shipping documents are received by the importer to ensure speedy clearance of goods at customs.

General Letter of Credit and Standby Letter of Credit

At this juncture,it would be useful to compare the general letter of credit with the standby letter of credit when they are used in international trade to ensure payment by the importer to the exporter. General letters of credit are used rather than standby letters of credit for most trade transactions. But for the import of oil in large amounts,standby letters of credit are often used.

Unlike the general letter of credit where the bill of lading and other shipping documents are presented to the negotiating bank for payment,the standby letter of credit requires the presentation of a default statement composed by the exporter and simply stating that the importer has failed to fulfill his contractual obligation. In this case a failure would mean that the importer had not made payment despite the fact that the importer had received the oil shipped to him.

As there is only the default statement to be presented by the exporter,claim for payment can be made also by SWIFT message through the exporter's bank. Under such circumstances,there is no discrepancy notice on the part of the issuing bank. And even if the issuing bank finds some wording in the default statement not to its liking,another default statement can be re-presented to the issuing bank until the lapse of the expiry date. There is no presentation period in the standby letter of credit.

By comparing the mechanism of the claim under a standby letter of credit and the general letter of credit,it occurred to the author that by simply stipulating "until expiry date" for the presentation period field in the letter of credit,the late presentation discrepancy notice can be avoided.

Using a standby letter of credit in trade transactions instead of the general letter of credit can sometimes be a good substitute as there is no discrepancy notice by the issuing bank in claims made under a standby letter of credit.

The Best Kind of General Letters of Credit