What Are The Soft Terms In A Credit?

- Jan 31, 2019 -

What are the "soft terms" in a credit?


(The news from Singapore UNL Shipping & Logistics Pte Ltd ).


Among the payment methods in international trade, documentary letter of credit is the most widely used and has been regarded as a safe way of transaction.Therefore, although China's export trade is also accepted in the international application of a variety of payment methods, but the main way of collection is still documentary letter of credit.Therefore, we should further study the terms of the documentary credit, especially the soft terms, which is conducive to foreign trade operation and safe collection of foreign exchange.

Soft clauses in l/c (Soft Clause), also known as the "trap" Clause (Pitfall Clause), refers to the irrevocable l/c to add a Clause, the exporter can't delivery on time, according to the terms and conditions of the applicant (the buyer) or the issuing bank has unilaterally terminate the payment responsibility initiative, namely the buyer full control of the whole transaction, the beneficiary of the people in that position, whether or not totally depends on the buyer's willingness to payment.

Soft terms, on the other hand, is refers to the applicant (importer) when applying for open the l/c, deliberately set a number of covert "trap" clause, so that in the l/c beneficiary (exporters) in completely passive situation, while the applicant or the issuing bank may at any time will be the beneficiary as to trap and citing discrepant docs, terminate the responsibility of payment under the l/c.

Common soft clauses can be roughly classified into four types:

1. Clauses of revocable letter of credit in disguised form

When the issuing bank fails to meet certain conditions (such as not receiving the other party's remittance, letter of credit or letter of guarantee, etc.), it can unilaterally terminate its payment guarantee liability at any time by using terms.

2. Non-operative clause

The credit does not take effect after it has been issued, unless otherwise advised by the issuing bank or advised by an amendment;

3. The applicant has the final say

The letter of credit contains some clauses which cannot be carried out according to the normal procedure without the instruction of the applicant.If the shipment needs to be notified by the applicant, the means of transport and port of departure or port of destination should be confirmed by the applicant;

4. Zero letter of credit

Letters of credit are issued without amount and can only be credited by amendment or increments without actual cash payment.Typically, a soft term letter of credit with an unenforceable clause can also be summarized as "no".That is to say, the opening of the l/c will not take effect, no amendment will be issued, no certificate or receipt will be issued by the issuer, no inspection will be conducted, and the name of the vessel will not be notified to the shipping company, etc., often accompanied by the requirement for the exporter to pay 5% or more of the performance fee in advance, many of which are already stipulated in the contract.

Let's take a look at the specific "soft terms" :

Inspection certificate or shipping receipt issued and signed by the authorized person of the importer or the applicant, whose seal should be confirmed by the issuing bank.

These terms and conditions are extremely unfavorable to the beneficiary (exporter), as the importer or his authorized person will not be able to issue the inspection certificate or shipping receipt unless he/she performs them, which will inevitably affect the shipment.

However, even if the importer inspects and issues a certificate or a shipping receipt, the documents may not be in conformity if not certified by the issuing bank.A certain domestic three-capital enterprise will make a good set of documents to the bank of communications shantou branch for negotiation, after the bank audit, found that its inspection certificate is not required by the terms of the letter of credit by the issuing bank to verify.After the enterprise is informed, hope to send the certificate to foreign importer again, ask its requirement to open letter of credit to prove, but because go back and forth time is long, if send again after sending, send back can affect to hand in sheet time again, so, have to with document not agree with send to open letter of credit abroad.Because this client is old client, it is the travelling merchant with better credit standing, so, final still collected money for goods to come, be regarded as lucky.

Inspection certificate is issued and signed by the importer and countersigned by the beneficiary.At the same time, its seal shall be consistent with the records held by the advising bank.

This kind of clause is very disadvantageous to the beneficiary because the initiative is already in the other party's hands.At the same time, it not only affects the negotiation time and causes document discrepancy, but also affects the relationship between Banks and enterprises.Therefore, the beneficiary should inform the importer to amend or delete the l/c through the issuing bank's letter or call so that the beneficiary can operate safely and receive the exchange in time.

The certificate of inspection is issued and signed by and their seal must be confirmed by the advising bank.

This clause is also unfavourable to the beneficiary, and the issuing bank has not sent the signature to the advising bank, making it impossible for the advising bank to confirm.In addition, according to the provisions of ucp600, the advising bank shall abide by the principle of reasonable care, check the apparent authenticity of the letter of credit it has notified, in order to protect the rights and interests of the beneficiary, and have no obligation to examine and verify the seal of the so-and-so importer.

The instrument should be issued on the beneficiary's name letter, indicating full name and address.

There are different interpretations of this clause.Some people think that the invoice issued in the name of the beneficiary on the letter, its address on the line.But also somebody thinks, it is to issue bill on beneficiary beneficiary's letter paper namely, the full name that should hit beneficiary beneficiary name and address also on its bill, cannot hit a address only.Recently, a company made documents according to the first opinion, that is, only with the address, but the foreign issuing bank raised the discrepancy.In the opinion of the author, this clause is still unclear, and foreign issuing bank should be consulted for clarification in order to correctly prepare documents.

5. The shipping receipt shall be issued and signed by the importer or the authorized person of the importer and its seal shall be consistent with the file record of the issuing bank.

As for these clauses, the beneficiary is not sure whether its seal is consistent or not. Therefore, the exporter should amend or delete them through the issuing bank by letter or cable, so as to receive the exchange safely and timely.

A hand-signed shipping receipt issued by the authorized person of the importer.The seal must be in conformity with the records of the issuing bank's bill center.

The beneficiary is not sure whether his seal is in compliance with this clause.Accordingly, should check change.

The shipping receipt issued and signed by the authorized person of the importer must conform to the record held by the issuing bank.

For this clause, the beneficiary also cannot be sure that the signature and stamp on the shipping receipt are consistent with the record held by the issuing bank.Accordingly, should consult revise.

These are non - normal terms and should not be accepted by exporters.As is known to all, due to the applicant or authorized person of the applicant is not only the inspection certificate issued by this clause violated the relevant import and export commodity inspection required by a third party independent trade party, a qualified, authoritative professional inspection institutions to carry out the practice, but also violates the article 4 of the uniform custom and practice for documentary credit no. 600: "in the l/c business, all parties concerned deal with documents and not related to the documents of goods services or other activities."

According to the usual practice, the bank does not involve in the transaction or participate in the transaction, the above clause, the signature of the authorized representative of the issuer must be confirmed by the bank (issuing bank) or the notifying bank, etc., which means the bank is involved in the transaction and violates the international trade practice.Therefore, it is obvious that the applicant colluded with the issuing bank to defraud the exporter.

Assuming that the goods delivered by the enterprise are completely consistent with the provisions of the contract and the representative authorized by the applicant has issued the inspection certificate, as long as the applicant colludes with the bank and instructs the bank to deny that the representative is approved by the bank, then the enterprise cannot obtain the payment for goods from the bank.Therefore, in order to protect the rights and interests of the exporter, it is necessary to strengthen the examination and verification of the l/c terms, especially the soft terms, so as to find out the problems at an early stage and timely contact the importer through the issuing bank to amend or delete the letters or telegrams, paving the way for smooth shipment of goods and safe and timely collection of foreign exchange.

Other soft terms

In addition, the l/c will not take effect for the time being. When the l/c will take effect will be notified by the bank.The letter of credit stipulates that the applicant or its designated signatory shall inspect the goods and sign the certificate of quality inspection before payment or entry into force.The letter of credit stipulates a number of preconditions for the payment and acceptance of the bank, such as the payment after the customs clearance of the goods and the payment after the receipt of other Banks.The name of the vessel, the date of shipment and the port of loading and unloading shall be subject to the applicant's revised notice.The terms and conditions of the l/c contradict each other and the beneficiary can't reach a simple agreement in any case.However, a credit with the above terms is not necessarily a "soft term" credit.

In practice, due to the different trading habits and frequent practices between the parties, some requirements for other parties, belong to the "soft terms", for the other party is not, but the terms required by the normal practice.Therefore, it is necessary to judge whether a "soft clause" is a "soft clause" based on the trading habits and practices of the parties, rather than simply draw a conclusion.Some of the major "soft clause" phenomena mentioned above are only used as a reference for judgment.

How do you avoid "soft terms"?

Want above all careful examine and verify.Do early detection of "soft terms."In the course of trade, upon receipt of the L/C, the buyer shall immediately check with the contract to see if the terms are consistent with the contract and whether it can be done.After discovering the problem, we should immediately contact the applicant to amend the l/c. We should not wait until we have done half of the work before we find that the situation is not good. At that time, the goods are already on board and it is too late.

The second is to try to ask the other side of the customer from a number of large, reputable bank opening.Since these Banks are generally mindful of their reputation and take the issue of "soft terms" very seriously, the risks are relatively small.

Thirdly, when signing the contract, we should strive for the client's agreement to have the commodity inspected by the commodity inspection authorities of our country.If we can get the commodity inspection carried out by China's commodity inspection authorities, it will not only be convenient for our enterprises, but also the initiative in our hands.

The most important thing is the examination and verification, which includes the examination and verification of the previous documents and the prepared documents. The examination and verification will be updated later.

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