BUYING SCRAP ON LC: HOW TO PAY ONLY FOR WHAT YOU GET

QUESTION

Dear Mr. Old Man,

I’m new to international trade and arranging Letters of Credit (L/C). My previous transactions were either local or based on strong personal recommendations with overseas partners.

Now, I’m looking to import used car batteries (scrap metal) through a contact I found online, and I want to ensure that payment is arranged in the most secure and fair way possible.

Since the price of this type of scrap depends significantly on quality—such as chemical composition, corrosion levels, and the ratio of plastic or non-metallic materials to lead—I want to know how best to structure an L/C to reflect these concerns.

I understand that L/Cs are document-based instruments, abstract from the actual goods. Common documents include the Bill of Lading and Customs Declaration. But do these documents actually describe the quality of the goods in detail? For example, do they include the chemical composition or the ratio of metallic to non-metallic components?

If not, how can I structure an L/C so that the beneficiary (seller) cannot be paid until the goods are proven to meet the quality agreed in the sales contract?

Many thanks for your guidance, and apologies if this is a basic question.

Best regards,

Igor

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ANSWER

Dear Igor,

Thank you for your thoughtful question—and welcome to the world of international trade and letters of credit (L/C). Your caution and attention to detail are well-placed, especially when dealing with goods like scrap car batteries, where quality significantly affects price.

Documents Commonly Required Under an L/C:

Typical documents required under an L/C include:

• Commercial Invoice
• Transport Documents (e.g., Bill of Lading or Air Waybill)
• Packing List
• Certificate of Origin
• Certificate of Quality/Quantity
• Insurance Certificate/Policy
• Inspection or Analysis Certificate

Please note: Customs Declarations are generally not required under L/Cs.

What Documents Contain Goods Details?

• The Bill of Lading typically includes a general description of the goods but not detailed quality specifications.
• Specific information such as chemical composition, percentage of metal vs. non-metal, or corrosion level is usually found in:
  • Inspection Certificate
  • Analysis Report
  • Certificate of Quality

These should ideally be issued by an independent third party (e.g., SGS, Intertek) or the manufacturer, depending on your comfort level and the seller’s reliability.

However, be aware that it is possible for the seller to issue certain documents themselves. While those documents may match the L/C on paper, they might not reflect the actual quality of the goods received. This is why banks deal with documents—not goods or performance (UCP 600 Articles 4 and 5).

Structuring the L/C to Protect Your Interests:

You’re right to ask: how can I structure the L/C to ensure the seller is paid only when the goods delivered meet the agreed quality?

Here are some practical suggestions:

1. Keep Goods Description in the L/C Concise

Avoid including lengthy or overly detailed product specifications in the L/C, as this increases the risk of document rejection due to minor wording mismatches.

Instead, include essential details (e.g., “Used car batteries, drained, non-rechargeable, Lead content approx. xx%”), and then add a clause like:

“Other terms and specifications as per Sales Contract No. 123 dated [dd/mm/yyyy], not forming part of this credit.”

2. Require Third-Party Certification

To verify quality, include a requirement in the L/C for:

2. Inspection Certificate
3. Analysis Report

Issued by a trusted third party (e.g., SGS) at the port of loading or ideally at destination.

Note: Many sellers may resist inspection at destination, as it delays payment and adds risk on their side.

3. Don’t Rely on “Soft Clauses” or Stop-Payment Clauses

While these may seem appealing, they are generally discouraged in L/C practice and often not enforceable under UCP rules. A bank’s obligation is to pay against compliant documents—not actual performance.

4. Know Your Counterparty (KYC)

Due diligence on the seller is key. An L/C is not a substitute for trust. If you’re buying from a new contact found online, consider a small trial shipment or request trade references before committing.

Final Thoughts:

Your question highlights a common concern in international trade: balancing payment security with goods quality assurance. A well-structured L/C, combined with reliable third-party verification and seller due diligence, is the best route to “equal pay for equal quality.”

All the best in your new ventures!

Kind regards,

Mr. Old Man