“Discrepancy Traps” in Letters of Credit: Should Beneficiaries Hold Their Ground?

Intro

From time to time, beneficiaries find themselves facing draft Letters of Credit containing conditions that appear unnecessary, impractical, or even deliberately risky. Are these merely poor drafting practices, or are they “discrepancy traps” waiting to happen?

 In the following exchange, Mr. Old Man shares his views on how sellers should respond when confronted with such LCs — and why standing firm before shipment is often the only sensible option.

Question

Dear Mr. Old Man,

Thank you for your insights. I fully agree with your views.

Recently, I had a lengthy discussion with an issuing bank (from the seller’s perspective) regarding similar conditions in a draft LC.

At times, I cannot help but suspect that some issuing banks deliberately include conditions that are designed to create discrepancies.

My advice to sellers is to hold their ground until a workable LC has been agreed upon.

What is your view on this?

Best regards,

Pieter

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Answer

Dear Pieter,

You are absolutely right to raise this concern.

In practice, there are indeed cases where issuing banks attempt to incorporate terms and conditions into an LC that function as pitfalls or “traps,” increasing the risk that the beneficiary may fail to make a complying presentation.

That said, once an LC is received, the beneficiary (seller) must carefully examine all its terms and conditions to determine whether there are any requirements that cannot reasonably be complied with. If such conditions exist, the beneficiary should insist on an amendment to remove or revise them before making any shipment.

Once goods are shipped under an unworkable LC, the beneficiary’s bargaining position is significantly weakened — often irreversibly.

In addition, it is prudent for the beneficiary to seek advice from their own bank regarding which banks in the buyer’s country are known to issue fair and workable LCs, and to request the buyer to apply for issuance through such banks.

In short, holding one’s ground at the LC stage is not being difficult — it is simply sound risk management.

Best regards,

Mr. Old Man