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Copyright © International Chamber of Commerce (ICC). All rights reserved.
( Source of the document: ICC Digital Library )
The application should give a complete description of the documents that the buyer feels will provide adequate evidence of the seller’s compliance with the sales contract. The documents required should reflect essential terms of the sales contract, such as price, delivery and description of the goods, and include any documents that the buyer/applicant needs from the seller in order to clear customs, resell the goods and so forth. The buyer will want to know that the goods are insured, that they will be delivered on time and that freight costs are allocated in accordance with the sales agreement. By completing the application carefully, the buyer can be certain that those concerns are adequately addressed. The application will also specify the terms of the buyer/applicant’s reimbursement obligation, as the bank will ask the buyer/applicant to reimburse the bank when the issuing bank pays the seller. Normally, the letter of credit should ask the seller to present to the bank a draft (see chapter VI, section 4), an invoice (see chapter XI, section 2), a transport document (see chapter I, section 2.b) issued by the international carrier (see chapter I, section 2.a and chapter II, section 3) and other documents (see chapter XI).
Occasionally, the buyer is not the customer of a bank that issues letters of credit or does not have sufficient credit to satisfy a letter of credit issuer that the issuer will be able to obtain reimbursement from the buyer/applicant when the issuer honours the beneficiary/seller’s request for payment. In that case, buyers seek the financial strength of a third party to apply for the credit. That third party is often a smaller bank with which the buyer has a relationship or might be the buyer’s corporate parent, a relative of the buyer’s principals or a merchant, factor or finance company that secures credit for others for a fee (see Illustration 7-2).
If the buyer or the seller discovers problems with the credit’s terms and conditions, there should be a prompt request for an amendment. Requests for amendments can be initiated by any party, but under UCP 600 article 10(a) no amendment can bind the issuer and the beneficiary unless they agree to it. Usually, the issuer will want the buyer’s agreement to the amendment so that the amendment does not impair the bank’s reimbursement claim against the buyer. If there is a confirming bank in the transaction (see chapter X), that bank is not bound by an amendment unless it agrees to it. The procedures for amending credits are covered in detail by the UCP (see UCP 600 art. 10; see also Illustration 7-4).
When all of the necessary amendments have been received, the seller/beneficiary will release the order for fulfilment. While the shipping department is preparing the goods for shipment, the seller’s credit department begins the critical task of preparing a draft (see chapter VI, section 4) and/or the other documents that the seller must present to the issuing bank (or some other bank nominated by the issuer) in order to satisfy the credit’s documentary conditions. One of those documents will be the transport document (see chapter XI, section 2). A second will be the seller/beneficiary’s invoice (see chapter I, section 2). There will probably be additional documents, all of them specified in the letter of credit as documentary conditions. When the documents are ready and compliant, the seller will present them, through the bank where the credit is stated to be available, to the issuer, which will honour its credit obligation.