Letter of credit and the inspection certificate: bank checks

A bank that handles a letter of credit (documentary credit) pays against documents, not against the cargo. It checks whether the documents presented comply with the terms of the credit and with each other. The inspection certificate is one of those documents, and a small mismatch in it can stop payment of a whole cargo.

What the bank checks, and what it does not

Under UCP 600, the ICC rules that most documentary credits are issued under, banks deal with documents and not with goods, services or performance (article 5). The bank examines a presentation on the basis of the documents alone and decides whether they appear on their face to be a complying presentation (article 14). If they do, the issuing bank must honour (article 7).

Four rules from article 14 matter most for the paperwork around a cargo:

• Time. A bank has a maximum of five banking days after presentation to decide whether a presentation complies.
• Presentation period. A presentation that includes original transport documents must be made within 21 calendar days after the date of shipment, and never later than the credit's expiry date.
• No conflict. Data need not be identical across documents, but must not conflict with data in the same document, in any other stipulated document or in the credit.
• Documents the credit does not describe. If a credit asks for a document other than a transport document, insurance document or commercial invoice, without saying who issues it or what it contains, the bank accepts it as presented if its content appears to fulfil the function of the document.

A bank that refuses a presentation must say so in a notice listing each discrepancy (article 16). A discrepancy is the bank's ground for refusing; it is not a finding about the goods.

Why the inspection certificate is asked for

Neither buyer nor bank sees the cargo. The credit therefore asks for independent evidence of quality, quantity or condition, next to the commercial invoice, the transport document and the insurance document. The buyer's CIF contract usually lists those documents, and the credit copies the list. What the certificate is, and how it differs from a report or an analysis, is covered in inspection certificate and inspection report and certificate of analysis versus certificate of quality.

How the certificate is treated

UCP 600 gives only the general standard. The detailed reading of certificates comes from the ICC's International Standard Banking Practice. ISBP 745 (2013) was replaced by ISBP 821 (2023). The points below follow the ISBP 745 text, in particular paragraphs A11(b) and A12(a) to (c) on documents in general and Q1 to Q11 on certificates of analysis, inspection and similar documents; check the current ISBP 821 wording before you rely on a particular point.

• Content. The data must not conflict with the credit's requirements. A certificate may say that only a sample was tested, may show a larger quantity than the credit does, and may list more hold or tank numbers than the bill of lading. If the credit is silent on content, cautionary statements are allowed provided they do not conflict with the credit or another stipulated document.
• "As per" statements. A date may be given by reference to another document in the presentation, such as a bill of lading number, and that satisfies a dating requirement.
• Date. A certificate of analysis or inspection may be dated after the shipment date. If the credit asks for a pre-shipment certificate, the document must show, by title, content or issue date, that the event took place on or before shipment.
• Issuer. The entity named in the credit must issue it. If none is named, any entity may, including the beneficiary. If the credit calls the issuer independent, official, qualified or similar, anyone except the beneficiary will do; that rule is in UCP 600 article 3 itself, and ISBP 745 repeats it.
• Function and consignee. A signed document that certifies the outcome of the required action meets the requirement whatever its title, and a consignee shown on it must not conflict with the transport document.

Discrepancies that stop payment

From the ICC's own guidance on common errors, the recurring causes are missing signatures, issuers other than the one the credit names, wrong credit references, and details that differ between documents: names, goods description, quantity, shipment information. On a bulk cargo the usual ones around the certificate are these:

1. Wrong issuer or name. The certificate is issued by a party other than the one the credit names, or the name is spelled differently.
2. Quantity or description conflict. The certificate says 24,950 tonnes and the bill says 25,000. UCP 600 article 30(b) allows a tolerance of five per cent more or less on quantity, provided the credit does not state the quantity as a stipulated number of packing units or individual items and the total of the drawings does not exceed the credit amount. A bulk parcel is not stated in packing units, so 24,950 against 25,000 tonnes is inside that tolerance as far as the quantity drawn is concerned, but the tolerance does not make two documents that state different figures consistent, so the conflict is still a point a bank can raise.
3. Dates. A pre-shipment certificate issued without showing the event was before shipment.
4. Vessel, bill of lading or credit number. A different vessel name, a wrong bill number or a missing credit reference.
5. Remarks. The credit asks for a clean bill or clean certificate and the document carries remarks that contradict the credit's requirement. The Swedish Club notes that a credit may require a clean bill, which is why shippers press for one. See mate's receipt versus bill of lading.
6. Missing signature. ISBP 745 describes the certificate as a signed document.

How a surveyor avoids creating a discrepancy

• Ask for the credit, or at least the certificate clause, before you write. Copy the certificate wording the credit asks for, not a summary of it.
• Use the issuer name exactly as the credit states it.
• Take vessel, bill of lading and contract numbers from the documents, not from memory.
• State the quantity and the method that produced it, for example a shore tank measurement or weighbridge, or a draught survey where no other method exists, and avoid figures the bill does not support.
• Date the certificate and state the date or time of the inspection it certifies.
• Sign it. An unsigned certificate is not a certificate.
• If the credit's requirement is wrong, for example a pre-shipment certificate for a check that can only happen after loading, tell the client before you issue it. A change to the credit has to come through an amendment, so raise it early.

Practical rule

Compare your draft certificate line by line with the credit clause and with the bill of lading before you release it: issuer name, vessel, quantity, date, description. Any line that differs, even by a comma, goes back to the client before it goes to the bank.

From nomination to certificate

Many discrepancies are transcription differences between documents, and FOSS (Field Operational Services System) cannot remove discrepancies as such. It covers the document flow from nomination to certificate: a value is entered once, offline on board if needed, and the documents are generated from that entry, which removes one class of copying error. All calculation methods as used in the sector are built in, and an audit log shows who entered what. See how FOSS supports the flow.