Soft Clauses in Letter of Credit: Strategies for Identification and Avoidance

A letter of credit is a written payment guarantee issued by a bank at the request of an importer (buyer) to an exporter (seller), serving as a common settlement method in international trade.

Soft clauses are restrictive or ambiguous terms in letters of credit that may cause losses to the beneficiary.

Common soft clauses include:

(1) Non-immediate effect clauses: Such as L/Cs requiring separate bank notification, authorization documents, or local regulatory approval to become effective.
(2) Loss of cargo control clauses: For example, 1/3 original B/L sent directly by beneficiary,Air Transportationbills of lading, etc.
(3) Importer-dependent clauses: Such as requiring non-standard factory inspection reports or quality certificates.
(4) Conditional restriction clauses: Like specifying particular shipping routes, vessel age limits, or special transport documents.
(5) Contradictory clauses: For instance, allowing combined transport B/L while prohibiting transshipment.

To mitigate risks from soft clauses, consider these strategies:

(1) Carefully review documents: Identify soft clauses early and request changes promptly.
(2) Choose reputable banks: Major, well-known banks are less likely to include beneficiary-unfavorable terms.
(3) Select creditworthy buyers: Verify buyer credibility and performance capability through credit reports.