What is a letter of credit?Letter of credit refers to a written document issued by a bank to the exporter (seller) at the request of the importer (buyer) to guarantee payment responsibility. It is a common settlement method in international trade.The Soft Clause of a letter of credit refers to the restrictive clauses or some unclear or unclear terms specified in the letter of credit, which provide the issuing bank with a basis for exemption at any time and are very detrimental to the beneficiary.If these “soft terms” are not discovered in a timely manner during letter of credit transactions, it may face losses of “money and goods being sold out”.What are the common “soft terms” in 02?In international trade, letter of credit fraud often involves adding restrictive clauses set by the buyer (applicant) in the bank payment terms of the letter of credit, known as “soft clauses” in the letter of credit.In this way, the bank credit guarantee payment terms enjoyed by the seller have become determined by the buyer’s commercial credit for payment. The soft clauses in the letter of credit were originally added by the buyer to prevent fraud by the seller or to prevent the goods provided by the seller from not complying with the contract.However, once these soft terms are included in the letter of credit, an irrevocable letter of credit becomes a revocable letter of credit, which poses great harm to the seller. China’s export enterprises must attach great importance to the following types of soft clauses in letters of credit.01 Temporary ineffective clausesFor example, a letter of credit that requires separate notification from the issuing bank, obtaining relevant authorization letters, or approval from local relevant departments to become effective.02 Loss of Ownership ClauseFor example, 1/3 bill of lading for self delivery or air waybill.03 Provisions requiring cooperation from importers or their related partiesFor example, unconventional goods inspection reports, quality inspection certificates, and other terms that are subject to payment under other letters of credit.04 Conditional RestrictionsFor example, requiring specific routes, vessel age, or submitting specific types of transportation documents.05 Self contradictory clausesFor example, allowing the submission of intermodal bills of lading and prohibiting transshipment.How to avoid “soft clauses”?1. Carefully review the order, identify “soft terms” as early as possible, and promptly request changes.Choosing a reputable bank often provides greater security for large banks.Choose a buyer with good credit and use credit reports and other means to “know oneself and the other”.
