Letter of Credit Documents: Discrepancies and How to Avoid Them

What a documentary credit actually promises

A letter of credit is a bank's undertaking to pay against documents, not against goods. The bank never sees the cargo. It examines the documents presented, on their face, against the terms of the credit — and if they comply, it pays regardless of what actually happened to the shipment.

That is the source of both its value and its difficulty. The seller gets a bank's payment obligation instead of a buyer's. In exchange, payment depends entirely on producing documents that comply exactly, and a document set that describes a perfect shipment imperfectly will be rejected.

Examination is governed by UCP 600, the ICC's uniform rules, supplemented by international standard banking practice. Banks have a defined period to examine a presentation and must give a single notice of refusal stating every discrepancy relied on. Compliance is assessed on the face of the documents — commercial reasonableness is not the test.

The discrepancies that recur

A substantial proportion of presentations are rejected on first attempt, and the reasons cluster tightly. Almost none of them are about goods that were not shipped; they are about documents that do not say what the credit required.

• Documents presented after the presentation period, or after the credit's expiry
• Shipment effected after the latest shipment date stated in the credit
• Goods description on the invoice not corresponding to the description in the credit
• Invoice issued to a party other than the applicant, or for an amount exceeding the credit
• Amount drawn exceeding the credit value, or outside any stated tolerance
• Transport document not evidencing shipment as required — missing an on-board notation, or the wrong document type
• Bill of Lading claused, evidencing defective condition of the goods or packaging
• Incomplete set of originals presented where the credit requires a full set
• Insurance certificate for less than the required percentage, in the wrong currency, or dated after shipment
• Documents inconsistent with each other — weights, quantities, marks or party names that conflict
• A required document simply not presented
• Certificates not signed, not dated, or issued by a party other than the one specified

The consistency rule

Under UCP 600, data in one document need not be identical to data in another, but it must not conflict with it. That distinction does a great deal of work and is widely misunderstood in both directions.

It means an invoice describing 'cotton knitted T-shirts, men's, 180gsm' and a Bill of Lading describing 'textiles' are not automatically discrepant — the B/L may use a general description. It also means a packing list showing 400 cartons and a Bill of Lading showing 380 is discrepant, because those statements conflict.

The invoice is the exception. The goods description on the commercial invoice must correspond with the description in the credit, which is a stricter test than not conflicting. This is why the invoice description is the single field most worth getting exactly right.

Reading the credit before you ship

Every avoidable discrepancy is decided before the goods move. The moment to read the credit properly is when it is received, not when the documents are being assembled.

• Check that every document the credit requires can actually be obtained — chambers, authorities and inspection bodies have lead times
• Check the latest shipment date against your realistic production and booking schedule, not the best case
• Check the presentation period and the expiry date, and where the credit expires — at your counters or the issuing bank's
• Check whether partial shipment and transhipment are permitted; if not, and your routing involves transhipment, that is a problem now
• Check the goods description you must reproduce on the invoice, word for word
• Check the required transport document type and whether an on-board notation is required
• Check the number of originals required and to whom the document must be consigned
• Check insurance requirements: percentage, currency, risks covered and who must be named
• Check who must issue and sign each certificate, and in what form
• Request an amendment immediately for anything you cannot comply with — before shipment, not after

Preparing the set

The documents must comply with the credit and be consistent with each other. Working from a single reviewed source of shipment facts is what makes the second half achievable.

When documents are discrepant anyway

If a discrepancy is found, the issuing bank may refuse and hold the documents at the presenter's disposal, and payment becomes discretionary — the applicant may waive the discrepancy, or may not. That is a commercial negotiation conducted from a weak position, with the goods already shipped.

The options are limited and none are good. Correct and re-present if time remains before expiry. Seek the applicant's waiver. Present on an approval or collection basis, giving up the credit's protection. Or, where the relationship allows, ship on different terms next time.

The asymmetry is the point: a discrepancy costs the seller its payment security for what is often a formatting error. That is why the effort belongs at the preparation stage, where a careful hour is worth more than a week of negotiation afterwards.