The exporter should check the LC immediately on receipt – NOT later. Make sure that you are OK with all the terms. Are they as agreed with your counter-party? Do you understand all the terms absolutely clearly? Can you perform them within the time permitted by the LC? Can you identify the hidden land mines in the LC?
If your response to any of the above is a not an “yes”, then you may need to talk to us.
The following is an indicative check-list for examination of an LC by the beneficiary. If you do not fully comprehend the implications of each, do not grasp the importance of certain checks to your business operations, then – wherever you are – contact us immediately about a customised training course.
Protect yourself from possible delays or losses.
- Has the beneficiary’s name and address been correctly mentioned in the documentary credit instrument? Unless otherwise advised, banks will later be looking for exactly the same name to appear in at least the letterhead of the commercial invoice. (Refer Article 14.j, UCP 600).
- Is the applicant’s (buyer’s) name and address correct in all respects? Unless otherwise advised, banks will expect the commercial invoice to be addressed to this party only. (Refer Article 14.j, UCP 600).
- Is the tenor of the time draft – as stated in the credit – correct, i.e. the number of days from sight or date of invoice, transport document etc.? (Refer Article 43, 44, ISBP 745, Sections B1-B18).
- Is the currency in which invoices to be drawn, and payment to be received, correct? If there are exchange control regulations that affect methods of payment, that should be kept in mind while drawing up a sales / purchase contract. (Refer Article 18.a, UCP 600).
- Do the shipment, presentation and expiry dates provide sufficient time to the beneficiary to procure raw materials, manufacture the goods, arrange any pre-shipment inspection, shipment/dispatch and the production, certification, legalisation and presentation of documents? Does the interval between the expiration of shipment date and that of the credit give sufficient time to the exporter to prepare and submit the completed set of documents within the stipulated time?
- Are the place of expiry and availability of the credit satisfactory (both should preferably be at beneficiary’s place of business.)?
- Is shipment permitted from the place the beneficiary intends to effect shipment?
- Are the ports of loading and discharge as desired by the beneficiary and/or the importer? Shipment to a place other than that agreed to by the beneficiary may entail delay in delivery, additional and avoidable expenses. (Refer ISBP 745, Articles E7 to E10 for BLs, and corresponding articles for other modes of transport.)
- If the credit has not been confirmed, is an unconfirmed credit acceptable?
- Is the confirming bank located at the place of the beneficiary? If not, is this aspect of the credit acceptable to the beneficiary?
- If the credit is lacks a free negotiation clause, is a credit restricted to another bank acceptable?
- Can the documents required as per the terms of the credit be obtained by the beneficiary in the normal course of business (refer ISBP 745, Preliminary Considerations)? If not, is the beneficiary prepared to go to the trouble, possible expense and risk of obtaining them? Or, should these requirements be amended before the documents become due for submission?
- Is the description of the merchandise in the credit accurate but brief enough to copy from document to document without giving room for errors? What transport charges or (additional) customs duties will this particular description subject the transaction to? Does the credit allow for variation in the quantity or amount of the merchandise to be shipped? Does the buyer or seller need a licence to trade this merchandise? Do take care to satisfy that the item is not included in the list of sensitive, licensed, restricted or banned goods of the exporting as well as the importing country.
- Are the delivery terms correct? Do they refer to the correct ports or points of origin and destination? Do both the parties understand which standard or reference can be used to interpret the delivery terms? Do such delivery terms usually result in the production of the transport documents (if any) called for by the credit as proof of delivery? (Refer Incoterms Rules)
- Are the unit prices correct? Do they match the description of goods exactly?
- If special instructions are included, are they acceptable? Do they conform to the beneficiary’s requests for special financing features, shipment schedules, methods of modifications etc.? Are the special instructions excessive?
- If transhipment has been prohibited, can transhipment actually be avoided? If not, should an amendment be sought? (Refer concerned sub-Article in UCP 600 viz., 20.c, 21.c. 23.c etc. on ‘transhipment’ against relevant shipping document).
- If partial shipments have been prohibited, can the entire consignment be shipped in one shipment? Or, should partial shipment be insisted on as a term of the credit? (Refer UCP 600, Article 31).
- If the goods are hazardous and likely to require shipment on deck, has this been explicitly allowed by the credit? Does the insurance policy, under CIF terms, cover ‘on deck’ shipment? Also, does the LC allow ‘on deck’ shipment?
- If non-negotiable transport documents are specified, is the beneficiary willing to submit these?
- If a transport, insurance or inspection firm is named, is this firm acceptable to the beneficiary?
- Are freight charges ascribed to the proper party?
- If the seller is required to obtain insurance on behalf of the buyer, can he obtain it? Has the cost of insurance been included in amount payable?
- Are bank charges ascribed to the proper party(ies)? If the beneficiary is to absorb these, how much will they amount to, and are they acceptable?
- Do the letter of credit terms satisfy local laws pertaining to such transactions?
- Do the letter of credit terms contain unacceptable clauses (any clause calling for action by the beneficiary that is impossible to fulfil) for the beneficiary?
- Are the reimbursement clauses in the LC in your favour; could they have been improved further? Are they subject to URR 725?
- Does the LC state on its face that it is “Subject to ICC UCP 600” or words to similar effect?