Some letter of credit accidents are caused by unreasonable terms of the letter of credit from the beginning. In the operation of the letter of credit, some terms seem harmless on the surface, but they are actually dangerous and need to be particularly vigilant. The common problem is the so-called “soft terms”.
“Soft terms” refer to certain terms in the letter of credit that may cause the beneficiary to suffer losses without fault. “Soft terms” is a common name in the foreign trade industry and there is no academic standard definition. Soft terms themselves do not violate the principles of UCP600, nor do they mean that they will definitely cause losses to the beneficiary. Its risks are potential and manifest in various forms.
For example, a typical soft term: one of the three original bills of lading is sent directly to the applicant of the letter of credit. We know that with an original bill of lading, you can pick up the goods. Once this term is executed, it means that the customer can pick up the goods directly before the bank negotiates the documents. If the customer deliberately defrauds or is not satisfied with the goods, he may deliberately find faults and refuse to redeem the bill, and the beneficiary of the letter of credit, that is, the exporter, will face the danger of losing both money and goods.
There are also some less obvious soft clauses. For example: the goods must be inspected by the issuer of the letter of credit, and the inspection report must be issued before shipment, and the inspection report is used as one of the documents for negotiation. The risk of this clause is that if the customer intends to breach the contract due to market changes before delivery, the inspection will be deliberately delayed, and the inspection report will not be issued, resulting in the inability to ship and submit documents for negotiation.
Although the manifestations of soft clauses are varied, they have a common feature, which is that the letter of credit loses the independence and irrevocability of execution to varying degrees. In other words, with a letter of credit with soft clauses, the customer can unilaterally abolish it in the actual execution process through various means.
Therefore, foreign trade salesmen should develop a keen eye and learn to identify “soft clauses”. There is a trick to this, which is to keep in mind two principles of irrevocable documentary letters of credit:
1. It is not possible for the customer to pick up the goods by himself before paying the bill.
2. After the letter of credit is issued, you can collect and handle all documents unilaterally without relying on the customer.
Anything that violates these two principles is basically a soft clause. Let’s give two more examples to reinforce the concept. For example:
1. The letter of credit stipulates that the bill of lading is not B/L (Bill of Loading), but FCR (FORWARDERS CERTIFICATE OF RECEIPT), a certificate of title (we will explain the various types of bills of lading in detail in the next chapter on international transportation). Under this clause, the customer may collude with the freight forwarding company to pick up the goods in advance.
2. The letter of credit stipulates that under FOB conditions, the applicant of the letter of credit shall notify the scheduled transportation route and voyage before shipment, and issue a booking notice issued by the applicant. Under this clause, the customer can fail to ship or fail to ship in time to obtain the bill of lading by not booking or not booking in time, resulting in major discrepancies when submitting the bill.
Similar clauses can be identified using the two principles mentioned above.