A TRICKY WAY TO VOID A LETTER OF CREDIT. PART 1
04/08/2010
Dishonest importers can use this method in an attempt to cancel the deal and make the beneficiary create a discrepancy in the letter of credit.
This trick can be used by the buyer when he sees that the market price for the product he has ordered and paid for by a letter of credit is falling and he will have serious losses on the deal. We analyse the following situation: Companies A and B are dealing with a seasonal product, it can be fish and seafood, fruits and vegetables, etc. Before the season starts both companies had a discussion about the possible market price, analyse the prices from the past season, possible supply and demand etc. and the overseas buyer A places a large order with an exporter B. The importer (Company A) opens an irrevocable letter of credit for the whole contract permitting part shipments. Each lot of the product should be shipped not later than the dates stated in the letter of credit.
So the new season starts and the supplier begins the shipments to the buyer. Unfortunately the market went in another direction than the importer predicted. The product was oversupplied and the market prices went sharply down. The importer sees that if he takes the remaining contracted quantities of the product he will face serious financial losses.
If the buyer is an honest company that cares about its reputation it will either take the remaining products and face the losses or it will try to negotiate with the supplier the possible solutions of the problem. In many cases both companies could find a way out of the difficult situation and minimise the losses. It is very possible that such cooperation will just strengthen their relations.
It is another story if the buyer is a tricky and dishonest firm. Then he will try to create a situation where the seller will breach the terms of the letter of credit that will make it void. Of course, the easiest way is to try to find the discrepancies in the export documents and based on them reject the shipment. The problem is that if the seller is careful with his paperwork it will be difficult for the buyer to find any mistakes.
