| Party | Role |
|---|---|
| Applicant (the buyer) | Asks its bank to issue the credit and sets the documents it requires |
| Issuing bank | Issues the credit and undertakes to pay against a complying presentation |
| Beneficiary (the seller) | Ships the cargo and presents the required documents |
| Advising bank | Tells the seller the credit is genuine and passes it on |
| Confirming bank | Adds its own undertaking to pay, so the seller also relies on that bank |
A general description of the parties. The exact obligations are set by the credit and by UCP 600.
At sight and usance
A credit at sight pays when a complying presentation is made, within the bank's examination period. A usance credit pays at a later agreed date, for example a number of days after the shipping date, so the buyer gets credit terms and the seller waits for payment. Ore contracts often specify an irrevocable credit at sight because the seller can ship and be paid soon after the documents are accepted.
Banks pay against documents, not cargo
Under UCP 600, a bank examines the documents to see whether they appear on their face to be a complying presentation. It does not inspect the ore. A credit that only asks for an invoice and a bill of lading therefore does not protect a buyer against a cargo that fails its assay. If quality matters, the credit must require an independent inspection certificate that states the assay and weight, and it must say who issues it.
The same logic protects the seller: if the documents are exactly as the credit requires, the bank must pay even if the buyer later disputes the quality. The price of that protection is the discipline of meeting the documentary requirements to the letter.
Why discrepancies are the main risk
A bank has a maximum of five banking days after presentation to decide whether the documents comply, and if it refuses it must say so and list the discrepancies. A small mismatch, such as a different cargo description, quantity or date between the invoice and the bill of lading, can be treated as a discrepancy and delay payment. Sellers should check the draft credit before shipment and ask for any term they cannot meet to be amended.
What a buyer and a seller should check first
- The credit is irrevocable and issued by a bank you can identify and, where needed, confirmed by a bank you trust.
- The documents required match what the seller can actually produce, in particular the inspection and assay certificates and who issues them.
- The latest shipment date, the expiry date and the presentation period leave enough time for loading and document preparation.
- The goods description, quantity, price and Incoterm in the credit match the sales contract exactly.
- Who pays the bank charges, and for confirmation if it is used.
Frequently asked questions
What is a letter of credit at sight?
A credit under which the bank pays when the seller presents complying documents, instead of at a later date. A usance credit pays at a later agreed date.
Does a letter of credit guarantee the quality of the ore?
No. The bank checks documents, not the cargo. The credit should require an independent inspection certificate that states the assay and weight.
How long does a bank have to examine documents?
Up to five banking days following the day of presentation under UCP 600 Article 14(b).
What happens if the documents have a discrepancy?
The bank may refuse the presentation and must notify the presenter of the discrepancies. The seller can correct and re-present within the credit's time limits, or the buyer can agree to waive the discrepancies.
Why do ore buyers prefer a letter of credit to paying in advance?
Because payment is released only against shipping documents, including independent certificates, instead of before the cargo exists or has been inspected.
Sources
- ICC Documentary Credit Insight: reactions to UCP 600
- Skrine: banks' duty in examining documents presented under UCP 600
- Trade Finance Global: UCP 600 infographic
Specifications published by index providers are revised over time. Where a figure comes from a pricing notice, confirm the version currently in force with the publisher before you use it in a contract. Corrections are welcome.