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Common Mistakes in Commercial Letters of Credit

letters of credit.jpgCommercial letters of credit can be valuable tools for communicating assurance of payment, for securing assets and contracts, and for achieving mutual benefit for both parties to a sales import or export agreement. However, many submitted letters of credit suffer from fatal defects. It is important to understand some of the most common mistakes and errors in securing commercial letters of credit, as well as how to avoid making them.

Lack of Documentation

Many letters of credit presented fail due to want of documentation. Commercial letters of credit require the procuring and delivery of a variety of documents, each with requirements within. Documentation required for a particular transaction may vary, but in general include a complete commercial invoice (with a description of merchandise, price, and buyer and seller information), the bill of lading, the accompanying warranty or warranties of title, and a letter of indemnity. One of the most commonly forgotten or mistaken requirements: the signatures as stipulated by the letter of credit on invoices or statements.

To Avoid:

Carefully review the application's terms and conditions and keep track of what documentation may need to be supplied by a third party. The help of a business attorney can help ensure documentation requirements are met.

Inconsistencies in Documentation

Documentation for letters of credit is reviewed by multiple parties on more than one occasion during the process. One of the most important elements noted in these reviews is internal consistency. It is common for commercial letters of credit to be defective due to an inconsistency within the documentation. For instance, inconsistencies in the description of goods sold, port locations of loading and destination, discrepancies of general information like volume or quantity, and discordant totals between invoice and draft amounts can all cause a failure of a commercial letter of credit.

To Avoid:

Insist on a high level of specificity, and double-check documentation for internal consistency, especially after changes are made to one or more documents. To ensure that the documentation is correct and consistent, consider consulting with legal counsel prior to application for a letter of credit.

Expiry of Time

Even if documentation existence and content requirements are met, an application or grant for a letter of credit can suffer from a third deficiency, one of timing. For example, documentation can become defective if it expires prior to the conclusion of the letter of credit process. Similarly, time limits buried within the terms or conditions of the application for a letter of credit can cause the application to be rendered invalid if requirements are not met within the stated timeline.

To Avoid:

Track deadlines carefully, and ask for a copy of the application to be faxed to you so that you can more easily look through the terms or conditions imposing time limits. If contact with third parties is necessary to complete the process, allow ample time to receive third parties' responses (and even a little extra, to ward against unexpected difficulties). If time limits confine your use of letters of credit or you find yourself unable to comply, an experienced business lawyer can assist you.

While business owners can navigate the letter of credit process alone, the help of a qualified business attorney can help with the avoidance of errors, making the process simpler, quicker, more efficient, and less stressful. If you are considering using letters of credit, contact our skilled San Jose business lawyers today for assistance.

Source:

https://www.crfonline.org/orc/cro/cro-9-1.html

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