Traps of Soft Clauses in Letters of Credit

L/C Monitor, Volume 2, Issue 8, August 2000

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These days, letters of credit may become very complex as more and more special terms and conditions are included in them. Some of the terms and conditions may seem unethical, or even difficult, if not impossible, to comply with. These special terms and conditions are commonly known as "soft clauses" in the industry. Some of them are the brainchild of certain creative bankers who try to help their importer customers upon request. There are many reasons behind this.

The Parties Become More Familiar With The UCP Articles
More seminars and workshops on letter of credit operations are now available to the traders, bankers, and freight forwarders who do the documentation for their shipper clients as well as handling their goods. After learning more about the UCP 500 (Uniform Customs and Practice for Documentary Credits, 1993 Revision, ICC Publication No. 500), which governs the letter of credit operations globally, importers are no longer satisfied with the standard terms and conditions provided by their bankers in the letter of credit application forms. They wish to create special terms and conditions in their letters of credit that will match their specific needs.
In a CIF transaction, to avoid "non documentary conditions," a certificate may be required that is worded as follows:
"Certificate in two copies issued by the document issuer evidencing that the carrying vessel in the bills of lading and the insurer in the insurance documents are not owned by a person whose country is hostile to the importing country."
The traps are first, that the carrier and the insurer may refuse to issue such certificate(s), and second, that the wording may be interpreted as follows:

the certificate is to be issued by the carrier and the insurer, both as the joint issuer in one and the same certificate, and
the carrier and the insurer are owned by the same legal person.

The Importer Wishes To Police the Trade with a Letter of Credit
In fact the sales and purchase contract is the right document to police the trade. The letter of credit is only a document to guarantee payment and nothing else. In the market, however, some importers may think that the letter of credit is a very effective tool to police the trade. As a result they add more and more special terms and conditions to their letters of credit to ensure that exporters comply with them fully before receiving payment.
An example is:
"Endorsement in the bill of lading by the master certifying that the goods are loaded on board the carrying vessel on sunny days."
The traps are:
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