Letter of credit discrepancies that stop payment, and which ones a buyer can waive

A letter of credit is often described as a guarantee of payment. What it guarantees is that a bank will pay against documents that comply with the credit. The goods are not the subject of the promise. If the documents comply, the bank pays even if the buyer has changed their mind. If they do not, the bank's obligation falls away even if the goods arrived perfectly.

A discrepancy is any way in which your documents fail to comply. It is the single mechanism by which a credit stops being a guarantee.

The rules the bank is applying#

Most credits are issued subject to UCP 600, the International Chamber of Commerce's rules for documentary credits, published in 2007 and used worldwide. Four of its provisions decide most outcomes.

How closely wording must match. The description of the goods on your commercial invoice has to correspond with the description in the credit. That one document is held to the credit's own words. In every other document the goods may be described in general terms, provided nothing there conflicts with the credit. Data across the set need not be identical, but it must not conflict.

How long you have to present. Where a credit calls for an original transport document and says nothing about a presentation period, you have 21 calendar days after the shipment date, and never later than the credit's expiry date. Exporters lose credits to this rule without reading it, because the credit does not mention it.

What a refusal has to look like. A refusing bank must send a single notice, no later than the close of the fifth banking day following the day of presentation, stating that it is refusing, listing every discrepancy it relies on, and saying what it is doing with the documents. A bank that misses the deadline, or drips discrepancies out over several messages, is precluded from claiming your documents do not comply. Note the date on any refusal you receive.

What the bank does not do. It does not investigate. It reads what you sent against what the credit asked for, and it has never seen your goods.

The discrepancies that come up#

Most refusals fall into six groups: presentation or shipment after a date the credit set; an invoice description that departs from the credit's wording; documents that contradict each other on quantity, weight, marks, ports or value; transport document problems such as a missing on-board notation or the wrong consignee; amounts or currency outside what the credit allows; and missing documents, originals or signatures. The shorthand a bank writes on the note maps each group to the phrase you will see.

Which ones you can still fix#

Correctable, being a document problem with time remaining. Wording, arithmetic, a missing signature, a missing copy, an inconsistency between two documents. You correct the document and present again. A corrected presentation is a fresh one, and if the presentation period and the credit validity hold, the bank examines it as normal.

Not correctable, being a timing or shipment problem. Late shipment, expired credit, presentation period exhausted. No document fixes a date that has passed.

What a waiver really is#

For the second group the only route to payment is a waiver. The issuing bank asks your buyer whether they will accept the documents despite the discrepancy, which transfers the decision from the bank to the buyer.

That is fine when the buyer wants the goods. They waive it, sometimes without much thought, and you are paid a few days late. It is not fine when circumstances have changed. If the market price has fallen, or the buyer's own customer has cancelled, or the relationship has cooled, the discrepancy is a lawful reason to refuse or to reopen the price. If they refuse, the bank holds the documents at your disposal and you have a container at a foreign port with no payment obligation behind it.

The commercial risk in a letter of credit is not that the bank refuses. It is that a small paperwork error hands your buyer an option they did not pay for.

Waiver is not the only route#

Where a waiver stalls or the buyer is lukewarm, three other routes exist, and a good bank will walk you through them rather than leaving you with a single yes or no.

Amend the credit itself, if there is still time. If the true problem is that the credit's terms no longer match the shipment, your buyer can instruct their bank to issue a formal amendment, bringing the credit to what actually happened rather than asking them to overlook the gap. Every party to the credit has to agree, which is why this only works with days to spare, not hours.

Negotiate on a collection basis. Where the buyer will not waive but still wants the goods, the issuing bank can forward your discrepant documents for handling as a documentary collection instead of under the credit, releasing them against payment or acceptance the way a DP or DA transaction would. You lose the bank's payment undertaking, but you keep a route to payment that does not depend on a formal waiver being signed.

Ask for a telex release or a trust arrangement where the buyer needs the goods urgently and is willing to commit before the paperwork is settled — an issuing bank can release the shipping documents against the buyer's undertaking to pay once the discrepancy is resolved, though this shifts trust back onto the buyer and is a bank-by-bank practice rather than a right under the credit.

None of these three is available if the buyer has genuinely decided not to pay. They exist for the far more common case where the buyer wants the deal but the waiver process is slow, and going straight to your buyer with the concrete alternative usually moves faster than waiting on the banks to propose one.

Reading the credit before you accept it#

The cheapest place to deal with all of this is when the credit arrives, before you start production. Read it as a list of things you will have to prove, and test each one against your own operation.

Confirm you can ship by the latest shipment date and present within the window that follows it. Confirm the named body will issue the certificate the credit calls for, and that you can obtain the number of originals it stipulates. Put the credit's goods description next to the invoice you intend to raise and check it word for word. Confirm the delivery term and the value are the ones you quoted, because the whole set has to agree.

Have anything you cannot meet amended then, by asking the buyer to instruct their bank. An amendment before shipment is an administrative request. The same issue after shipment is a favour you are asking from someone who no longer needs to grant it.