EQUAL PAY FOR EQUAL QUALITY

QUESTION

L/C and required documents when importing scrap metals (car batteries)

Dear All,

I am new to International Trade and arranging Letters of Credit (previous business deals were either local or with overseas partners found on the basis of strong personal recommendations).

I am now trying to arrange the purchase (import) of scrap car batteries from overseas with a contact from the Internet and I’m exploring the most secure and fair manner of arranging payment.

Since the quality of these scrap metals (including composition, level of corrosion, ratio of plastic/non-metalic vs lead components) is important in the determination of their price, I was wondering what is the right way to structure a L/C and what documents to base it on.

From this forum and other resources, I understand that the L/C are abstract from facts and purely based on documents; I also belive the Bill of Landing, and Customs declarations are the most common docs on which they are based.

However, does either of these documents contain details about the goods? I mean, will a Bill of Landing or a Customs Certificate give the assay (chemical composition) or at least the split of metalic vs non-metalic components?

If this is not the case, how to structure a L/C so that it is not redeemable by the beneficiary until the delivery of goods with quality as described in the Sale Contract?

Many thanks for your guidance, and apologies for the basic nature of this query!

Rgds,
Igor

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ANSWER

Equal Pay for Equal Quality

Dear Igor,

Documents required under a credit normally consist of Commercial Invoice, Transport Documents (B/L, AWB…), Packing List, Certificate of Origin, Certificate. of Quality/Quantity, Insurance Policy/Certificate, Certificate of Inspection… Customs Declaration is not a common document required in the credit.

Goods description in Bill of Lading may be shown in general terms not in conflict with that stated in the credit. Details of goods are normally stated in invoice, certificate of quality, certificate of inspection … corresponding to that in the credit.

Except the documents like Inspection Certificate, Analysis Cerificate, Survey Report … that may be required to be issued by a third party like SGS or manufacturer, it is not difficult for the beneficiary to issue the documents with goods description corresponding to that in the credit. I mean it is possible that the quality of goods described in the document may be complying with that in the credit, but the quality of the goods actually shipped may be not.

You may already know that banks deal with documents and not with goods, services or performance to which the documents may relate (Article 5 UCP 600) and that a credit by its nature is a separate transaction from the sale or other contract on which it may be based. Banks are in no way concerned with or bound by such contract, even if any reference whatsoever to it is included in the credit (Article 4). The issuing bank is obligated to honour if the documents presented are complying,. Disputes in connection with the quality of the goods (if any) shall be settled between the seller and the buyer in accordance with the sale contract provisions.

You ask how to structure a L/C so that it is not redeemable by the beneficiary until the delivery of goods with quality as described in the Sale Contract.

There are many solutions for “equal pay for equal quality” such as incorporating in the credit stop-payment clause or soft clauses. However, as a banker always respecting and observing UCP I do not want to encourage you to use such clauses.

A better solution for your problem is KYC (Know Your Customer). Find out whether the seller is reliable.

Another solution for your problem is that in description of goods, the credit should clearly state specification, the quality of the goods and that in documents required, the credit should require
Inspection Certificate or Analysis Certifcate or similar certificate to be issued by a reliable and prestigious third party at (i) loading port or (ii) destination port. Inspection at destination port is better but I do not think a wise seller will easily accept this requirement.

Best regards,

Mr. Old Man