Documentary credits are considered one of the most important means used in settling international trade operations. Unlike other payment methods, where the importer pays the value of the contracted goods in advance, as is the case of the advance payment, and is exposed to the possibility that the exporter will not ship those goods, or they do not conform to the contracted specifications.
Where the exporter ships the goods and sends the documents directly to the importer, as is the case in the open account, to release the goods and expose him to the possibility that the importer will not transfer the value of those goods.
Where the exporter ships the goods to the importer and submits documents to his bank to obtain their value, as is the case in documentary collections, and exposes him to the possibility of the importer refusing to receive the documents and thus not paying the value of those documents.
Documentary credits protect the interests of both the importer and the beneficiary exporter from exposure to the aforementioned risks, because the payment of the value of the documents to the beneficiary is in exchange for his presentation of all the documents stipulated in the credit, which must constitute a matching presentation.
It is clear from this:
The status of the beneficiary in the documentary credit is better than it is in the means of advance payment, but he may be exposed to the risk of non-payment in the case of submitting documents with disputes, meaning that the documents presented do not constitute an identical presentation, in the event that the importer refuses to accept those disputes, and therefore the beneficiary will miss the protection and guarantees gained from the credit and then expose it to the risks that exist in other means of payment “open account / collections”.
Accordingly, the beneficiary must be fully conversant with the uniform customs and practices of documentary credits issued by the International Chamber of Commerce in Paris, which govern the work of documentary credits, so that he can prepare the documents in a way that enables him to avoid the aforementioned risks.
As for the situation of the customer requesting the issuance of the credit, he must be certain that the payment of the value of the documents to the beneficiary, the documents include a bill of loading that proves the transfer of ownership of the goods from the beneficiary.
However, the customer requesting the issuance of the credit might be exposed to receiving goods that do not conform to the specifications contracted with the beneficiary, and since the banks deal only in documents and do not deal in goods, what is the situation of the customer requesting the issuance of credit in this case?
The customer requesting the issuance of the credit, in this case, has the right to address the beneficiary to re-supply or ship goods that conform to the specifications, with that source bearing the consequences of that in terms of expenses and fines (expenses of stopping the activity, a fine for delays related to the supply of goods), and if the exporter refuses that procedure, the customer requesting the credit issuance has the right to escalate the matter to the authorities Judicial, the texts of the contract must include this in order to exercise his rights.