International Law

China Letters Of Credit. What Do You Know?

By Dan

Got a call the other day from a very successful and reputable company referred to us by their domestic attorney. Seems this company had done an international deal (of no small size) via a letter of credit and they had not gotten paid. They were looking for our assistance and though we were eventually able to get them paid, it was actually due far more to the honesty of the foreign company than to the letter of credit, which had been done all wrong and which almost certainly would not have given them any recourse.  

This got me to thinking about letters of credit, which is actually one of my least favorite subjects. It is one of my least favorite subjects because they are really complicated and because people do not realize how complicated they are they have become a somewhat depressing trap for the unwary. 

Just by way of an example. I have a very honest friend/client here in town who when he first came to the United States, worked with a less than reputable company. This company once gave a letter of credit to a product supplier and then after receiving perfectly fine product, blocked the release of the letter of credit because one number on the letter of credit differed from the number on the invoice with which it was supposed to correspond. My friend attended the bank meeting at which his company refused to release the funds on this technicality and he loves telling this story for two reasons. One, he decided right then and there to quit the company and two, he refuses to do business by letter of credit.

It amazes me how many people think they understand letters of credit when they really have no clue. People, these things are really complicated. So complicated in fact, that we funnel all of our letter of credit issues through one attorney in our firm, because he is the only one who truly understands them. 

Here are the extreme basics, which should constitute just enough to let you know that unless you really know what you are doing with these or unless you retain someone who does, they have the potential to be more dangerous than helpful. 

1.  There are basically two kinds of letters of credit. An irrevocable letter of credit and a revocable letter of credit. The big difference between the two is that a revocable letter of credit can be modified pretty much at the will of either party. In other words, your counter-party can usually modify these so that you do NOT get paid. Did you know that? 

2.  There are fake letters of credit out there and those are of no value at all. If you are going to sell based on a letter of credit, at least make sure it really does come from a reputable bank. Have you been doing that?

3.  Read the terms of the letter of credit and make darn sure that you will be able to do everything necessary to comply with them.  Did I say EVERYTHING?  

For more on letters of credit and other methods of securing payment, I urge you to check out Laurel Delaney's article, "Methods of Payment: Terms, Conditions and Alternative Financing Sources For Export Sales." 

Letters of credit absolutely do have their place in international transactions and they make a lot of sense under certain circumstances. Just please use with some caution. 

Full post as published by China Law Blog on June 15, 2010 (boomark / email).