An LC pays against documents, not against goods. From a real 26,500-tonne mineral sands import — the six clauses that decide whether the machine pays you, or the seller's paperwork.
Many buyers believe that if they pay by letter of credit, they are protected. The bank checks the documents, the documents match, the money moves. Done.
This belief costs importers real money every year.
Here is the uncomfortable reality: a letter of credit is a machine that pays against documents — not against goods. If the documents presented comply with the credit, the bank pays. Whether the cargo in the containers matches those documents is somebody else's problem. And if your sale contract doesn't control how those documents get made, the LC becomes a conveyor belt that moves your money to the seller while the paperwork quietly lies to you.
I recently ran the full contract risk control for a Chinese state-owned trading group's first bulk-commodity import — mineral sands from an Australian mining supplier, two consignments totaling 26,500 tonnes, paid by LC. The seller's draft sale contract went through multiple rounds of redlining. The final annotated version carried 55 comments.
Most of those comments were about the letter of credit and the documents behind it.
This article walks through the six issues that mattered most. If you buy from China on LC terms, these are the clauses that decide whether the machine pays you — or pays out against paper that was never worth the ink.
The seller's draft required the letter of credit to be issued by a "Tier 1 bank."
Sounds rigorous. It means nothing. "Tier 1 bank" appears in a lot of trade finance conversations, but it has no settled legal or regulatory definition — every bank that calls itself tier-one has a story for why it belongs. When the LC eventually issues, you may find it comes from a bank you have never heard of, in a jurisdiction where enforcing your rights means flying someone in and waiting years.
The fix is one line: name the issuing bank. Not a category — a name, agreed before the contract is signed, with the buyer's right to approve any substitute. If the seller wants flexibility, agree on a shortlist of named banks.
A bank's identity is not a formality. It is the counterparty you will be dealing with for the life of the credit — and, if something goes wrong, the institution whose documentary decisions you will be arguing about.
Most sale contracts have a "Documents" or "Documentation" clause: a list of papers the seller must provide — commercial invoice, packing list, bill of lading, certificate of origin, insurance policy, and so on.
Here is the trap: the contract's documents list and the letter of credit's required documents are two different things unless you weld them together. If the contract says the seller must provide a weight certificate, but the LC doesn't require one for payment, the seller can collect against a file of papers that skips exactly the certificate you cared about.
The seller's draft in our case had precisely this gap. The fix we pressed for: an express provision that the documents listed in the Documentation clause of the contract are the documents required for presentation under the letter of credit. One sentence. Without it, your contract's document requirements are decorative.
The most important single improvement we made to the draft: requiring that the negotiating documents under the LC must include third-party certificates of weight, moisture content, and mineral content.
Think about what this does. A bulk mineral shipment cannot be inspected piece by piece — nobody weighs 8,500 tonnes by hand, and nobody assays a whole vessel. The buyer's entire picture of what is being paid for comes from certificates: a surveyor's weight report, a moisture analysis, an assay of mineral content. If those certificates are not required as LC presentation documents, the seller can present an invoice, a bill of lading, and a packing list — all self-generated — and the bank must pay.
With the certificates locked into the LC, payment can only be triggered against independent verification of the cargo. The machine still pays against documents — but now the documents cannot lie about the three numbers that matter: how much, how wet, and what's in it.
Requiring third-party certificates raises the next question immediately: who is the third party?
If the seller appoints the inspection company and pays its fee, the "independent" surveyor works for the seller — repeat business goes to whoever keeps the reports convenient. In our case the seller's draft appointed its own inspector. The redline pushed for buyer participation in selecting and paying the surveyor, or at minimum a requirement that any appointed inspection body be internationally recognized.
Buyers who have never shipped bulk cargo assume a certificate is a certificate. It isn't. The same vessel can produce very different numbers depending on sampling method, draft survey procedure, and whose interests the surveyor keeps in mind. In bulk commodity trades this is not a theoretical risk — quality and quantity disputes are the single most common source of claims, and the inspection chain is where they are won or lost.
If the seller resists buyer involvement in the inspection appointment, ask yourself why. A supplier confident in its cargo has nothing to fear from an independent surveyor.
The draft allowed a plus-or-minus 10% tolerance on quantity. Tolerance clauses exist for genuine operational reasons — vessels can't be loaded to the gram — but the width of the band is a pure commercial term, and 10% is on the high side for international bulk trades.
Run the arithmetic. On a mid-sized shipment, ten percent of quantity is not a rounding error; it is hundreds of tonnes of price exposure, swinging either way, decided by whoever controls the weighing. Combined with a seller-appointed surveyor, a wide tolerance means the seller can deliver — and be paid for — materially less cargo than you imagined, entirely within the four corners of compliant documents.
We flagged and narrowed it. The right width depends on the commodity and the trade; the right process is to treat tolerance as a negotiated commercial point, not accept the number that appears in the first draft.
This one is for anyone who has ever stared at a demurrage invoice and wondered how it got so large.
Bulk sale contracts borrow their shipping vocabulary from charterparties, including the Notice of Readiness (NOR) — the vessel's formal notice that it is ready to load or discharge, which starts the laytime clock. When laytime runs out, demurrage starts running, billed daily.
The seller's draft let the vessel tender NOR "whether in port or not" (WIPON) and "whether in berth or not" (WIBON). Read those words slowly: the clock can start while the ship is still at anchor outside the port — in congestion, in weather, in a queue of forty vessels. Under a WIPON clause, the buyer can be paying demurrage on a ship that has not entered the harbor.
We struck WIPON/WIBON and required that NOR become valid only when the vessel is in berth and in all respects ready to load or discharge. Now the clock starts when loading can actually begin — which is the only version of events the buyer should ever be asked to pay for.
If your contract says "whether in port or not" anywhere near the NOR clause, you have signed up to pay for port congestion. That is the seller's shipping problem, not your purchase.
Notice what these six issues have in common. None of them is about whether the LC "works" — the machine works perfectly. Every one of them is about what the documents are allowed to say before the machine pays.
A letter of credit protects the payment flow. It does not protect the transaction substance. The substance is protected — or not — by the contract around the LC: the inspection appointments, the certificate requirements, the tolerances, the shipping terms. That is where the real risk control lives, and it is also where most buyers, focused on getting the LC "right," spend the least attention.
If you are negotiating an LC-backed purchase from a Chinese supplier, run this checklist before you sign:
None of this requires hostility toward the seller. Every one of these clauses can be framed as "making the payment mechanics precise" — which is a conversation any professional supplier can have. The ones who can't are telling you something.
If you'd like a second pair of eyes on a contract before you sign it — or a full review of the document set around an LC-backed deal — that is exactly the work this office does. You can also read the full anonymized case behind this article: the mineral sands import where all 55 comments came from.
This article is general information, not legal advice, and does not create an attorney–client relationship. Outcomes vary by case; nothing here is a guarantee of results.
Send the contract and document set before you sign. We'll tell you which of these six is hiding in your draft — and what one or two changes would buy you the most protection.
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