Working with a Letter of Credit: UCP 600 and Discrepancies

A letter of credit (L/C) is a powerful tool for exporters who want payment security, but that security only works when the documents comply exactly with the credit’s terms. In practice, most payment delays come from paperwork, not from the goods. This guide covers what you need to know when working with a letter of credit: the UCP 600 rules, document compliance, common discrepancies, the key dates and confirmed credits.

How a letter of credit works

A letter of credit is a payment undertaking given to the seller (the beneficiary) by the buyer’s bank (the issuing bank) at the buyer’s (the applicant’s) request. The bank undertakes to pay, to accept a time draft or to pay at a deferred date, provided the required documents are presented on time and in line with the terms.

A typical flow looks like this:

Buyer and seller agree in the sales contract that payment will be by letter of credit.
The buyer asks its bank to issue the credit.
The credit is advised to the seller through a bank in the seller’s country (the advising bank).
The seller ships the goods and prepares the required documents.
The documents are presented to the bank, which examines them.
If the documents comply, payment is made; the documents go to the buyer, who collects the goods.

The core principle: banks deal in documents, not goods. Even if the goods are perfect, a bank can be released from its obligation to pay if the documents do not comply.

What is UCP 600?

UCP 600 is the International Chamber of Commerce’s (ICC) set of uniform rules for documentary credits, and the vast majority of letters of credit worldwide are issued subject to it. If the credit refers to UCP 600, the transaction is governed by those rules. Where the credit’s own terms expressly differ from UCP 600, the credit’s terms prevail.

A few UCP 600 rules everyone working with letters of credit should know:

A credit is irrevocable even if it does not say so.
Banks have a maximum of five banking days following the day of presentation to examine the documents.
Data in the documents need not be identical, but it must not conflict with other documents or with the credit.
The description of the goods in the commercial invoice must correspond with the description in the credit; other documents may describe the goods in general terms that do not conflict.

Detailed guidance on how documents are examined in practice is set out in the ICC’s International Standard Banking Practice publication (ISBP).

Document compliance: what is a “complying presentation”?

A complying presentation means documents that comply with the terms of the credit, the applicable UCP 600 rules and international standard banking practice. Commonly required documents:

Commercial invoice: Usually issued by the beneficiary in the name of the applicant; amount, currency and description of goods must match the credit.
Transport document: A bill of lading (B/L) for sea, an air waybill for air, a CMR note for road. Port or airport of loading, place of discharge and shipment date must match the credit.
Insurance document: A policy or certificate if the credit asks for one. Unless the credit says otherwise, cover must be at least 110% of the CIF or CIP value, and the insurance must be effective no later than the shipment date.
Other documents such as a packing list, certificate of origin, or analysis or inspection certificate.

A practical tip: when the credit arrives, read it line by line before you start production or shipment. If there is a condition you cannot meet (a document you cannot obtain, an unrealistic shipment date), ask the buyer for an amendment. That is far harder to sort out after shipment.

Common discrepancies

The issues that most often lead banks to refuse documents:

Late shipment: The shipment date on the transport document is after the latest shipment date in the credit.
Late presentation or expired credit: Documents presented after the presentation period or after the credit has expired.
Inconsistent data: Weights, package counts, marks or addresses that conflict between the invoice, bill of lading and packing list.
Description mismatch: The invoice description of the goods does not correspond with the credit.
Overdrawing: The invoice amount exceeds the credit amount.
Claused transport document: A bill of lading with a notation declaring the goods or packaging defective.
Missing or incorrect documents: A required document is missing, there are too few originals, or a required signature or endorsement is absent.
Prohibited partial shipment or transhipment: Partial shipment or transhipment despite the credit prohibiting it.
Insurance shortfalls: Insufficient insured value or required risks not covered. Plan cover details with your insurer in advance; see our cargo insurance page.

If the bank finds discrepancies, it sends the beneficiary a single notice of refusal listing all of them. The buyer may then waive the discrepancies, but that is entirely at the buyer’s discretion and your payment security is weakened. The real goal is a complying presentation the first time.

Latest shipment date and presentation period

Pay particular attention to three dates in the credit:

Latest shipment date: The goods must be shipped by this date, as evidenced by the shipment date on the transport document.
Presentation period: Unless the credit states otherwise, presentations including original transport documents must be made no later than 21 calendar days after the shipment date, and in any case before the credit expires.
Expiry date: The last date (and place) on which documents can be presented.

If the expiry date falls on a day the bank is closed, UCP 600 extends the expiry date and the last day for presentation to the next banking day. The latest shipment date is not extended for that reason.

Also, when “about” or “approximately” is used with the credit amount, quantity or unit price, a tolerance of up to 10% applies. Where the quantity is not stated in packing units or individual items, a 5% tolerance on quantity is allowed, provided the credit amount is not exceeded.

Aligning these dates with your transport plan is critical. Allow for possible vessel delays, and share the credit’s dates with your forwarder when planning sea freight.

Confirmed letters of credit

A letter of credit on its own carries only the issuing bank’s undertaking. If you are concerned about the issuing bank’s financial strength, or about political and transfer risk in the buyer’s country, you can ask for the credit to be confirmed by a bank in your country or another bank you trust.

Under a confirmed letter of credit, the confirming bank independently undertakes to pay against a complying presentation. As a result:

The risk of the issuing bank not paying, and
Foreign exchange transfer and political risks in the buyer’s country

largely shift to the confirming bank. Confirmation has a cost, and the contract should state clearly who pays it. Confirmation does not remove the risk of discrepancies; the documents must still comply fully.

Frequently asked questions

Does the bank check the goods under a letter of credit?

No. Banks examine only the documents. If you need assurance on quality or quantity, the credit can require an independent inspection certificate.

If the documents are found discrepant, is payment lost?

Not necessarily. If time allows, documents can be corrected and re-presented, or the buyer may waive the discrepancies. In that case, though, payment depends largely on the buyer rather than the bank.

What if the credit does not state a presentation period?

Under UCP 600, presentations including original transport documents must be made no later than 21 calendar days after shipment and before the credit expires.

Do I always need a confirmed letter of credit?

No. If the issuing bank is strong and country risk is low, an unconfirmed credit may be enough. Where risk is high, confirmation significantly strengthens your payment security.

Medius builds your transport plan around the credit’s shipment and presentation dates and works with you to make sure transport documents are issued in line with the credit terms. Use our Incoterms selector to settle delivery terms, or review the process with us through our logistics consulting service.