|The problem for exporters|
At the heart of the problem is the very limited discretion available to banks in the matching of the terms and conditions of the credit against the documents presented. They must do this in a very literal way, with little room for the exercise of judgement.
For example, suppose that a letter of credit calls for goods described as "Potassium chlorate crystals, minimum purity 99%". However the exporter presents a commercial invoice referring to the goods as "Potassium chlorate crystals, 99.95% purity".
Common sense would suggest that this consignment will be acceptable to the buyer! However some banks do not feel able to make this assumption, and will reject the documents on the grounds of a discrepancy in the goods description.
There are numerous cases of apparently trivial variations between the terms of the credit and the documents (or between one document and another document) causing documents to be rejected. Hence exporters must learn to check documents before submission, using the same criteria that will be applied by the banks themselves.
Another source of problems is the failure of the letter of credit to anticipate some aspect of the transaction. For example a common requirement on a credit is for presentation of a 'clean on-board bill of lading' - a document supplied by the shipping company attesting that the goods were received in apparently good condition, and were loaded in the ship's hold. However if the goods are hazardous or flammable, they will be put on the deck of the ship instead of the hold, and the bill of lading will be marked 'on deck'. This is not an on-board bill of lading, so the documents must be rejected by the bank.
To avoid such problems, exporters need an understanding of the different types of commercial document (transport document, insurance document etc.) and the things on each document that may matter to a bank in the context of presentation under a letter of credit.