[Direct answer]In the Beijing area, soft clauses in letters of credit refer to provisions in the letter of credit that are controlled by the applicant or his designated party, making the beneficiary's ability to receive payment dependent on the other party's will. Typical situations include: the letter of credit taking effect under certain conditions, requiring the applicant's notification before it can take effect; the port of loading, ship name, shipping company, or shipping period being designated or notified by the applicant; the inspection certificate and sample confirmation letter needing to be issued and signed by the applicant; and payment being conditional on the applicant confirming the quality of the goods or the arrival of the goods. The greatest risk of soft clauses is that they transform the independent payment guarantee of the letter of credit into reliance on the buyer's credit. Once the buyer delays, refuses to cooperate, or uses this as a means to reduce the price, the seller may be refused payment due to non-conforming documents or failure to meet the conditions. According to the International Chamber of Commerce's Uniform Customs and Practice for Documentary Credits (UCP600, effective July 1, 2007), banks handle documents only, reviewing whether the documents and the documents themselves are consistent, and do not assume responsibility for the goods or the parties' actions. Therefore, the risks brought by soft clauses are usually borne by the beneficiary. In foreign transactions, it is best to avoid accepting soft clauses, and if necessary, request their deletion or modification.

I. Problem background and typical scenarios

Letters of credit replace commercial credit with bank credit. The original intention is to ensure that exporters receive payments, but in practice, many disputes arise precisely from soft clauses. Common situations include: Exporters, in order to secure orders as soon as possible, ignore clauses in the letter of credit requiring the buyer to specify a shipping company or that the inspection certificate must be signed by the buyer's representative. After shipment, they are refused payment because they cannot obtain documents that meet the requirements; some letters of credit stipulate that the goods cannot be shipped until the applicant confirms that the samples are qualified, and the applicant's failure to confirm results in the goods being held up; and some stipulate that the letter of credit takes effect after receiving amendments, but the amendments never arrive. Banks review the documents for formal compliance according to UCP600, but they are not obligated to review whether the applicant cooperated or whether the goods met the requirements. As a result, beneficiaries bear substantial risks. When handling such cross-border settlement disputes, courts distinguish between the independence of letters of credit and the fraud exception, and review whether the parties constitute fraud and whether payment should be suspended. Understanding the identification methods and remedial paths of soft clauses is particularly important for exporters.

II. Key points of contention

First, the boundaries between soft clauses and normal trading conditions, and how to determine whether the applicant controls the clauses. Second, the scope of the bank's review and the principle of document conformity. Third, the allocation of responsibilities when the applicant unreasonably refuses to cooperate and leads to a refusal to pay. Fourth, the identification standards for letter of credit fraud and the application conditions for suspending payment. Fifth, the relationship between breach of contract under the underlying contract and refusal to pay under the letter of credit, and the recourse path.

III. Professional analysis by Henglue Lawyers

Henglue Lawyers believe that the essence of the risk of soft clauses is that the control of payment conditions is transferred to the buyer, so the approach should be three steps: identification, negotiation, and substitution. In terms of identification, after receiving the L/C, check each clause one by one: whether the effectiveness is conditional, whether the issuing subject of the documents is controlled by the applicant, whether the shipping arrangements are specified by the applicant, and whether the payment is subject to the applicant's confirmation. Any clause that hands over the initiative of payment to the other party should be paid special attention to. In terms of negotiation, try to delete or modify such clauses as much as possible, for example, changing the applicant's issuance of inspection certificates to a mutually agreed third-party inspection agency, changing the designated shipping company to the beneficiary's own choice of shipping schedule, and changing the conditional effectiveness to irrevocable and unconditional effectiveness. In terms of substitution, if the buyer insists on retaining the clauses, the beneficiary can request advance payment, guarantee, or export credit insurance to diversify the risk. It should be noted that the L/C is independent of the underlying transaction, and the bank only reviews the documents. Even if the buyer refuses to confirm unreasonably, it is generally difficult for the beneficiary to require the bank to pay. However, if the buyer constitutes L/C fraud, the beneficiary can claim suspension of payment according to the "Provisions of the Supreme People's Court on Several Issues Concerning the Trial of L/C Disputes" (implemented on January 1, 2006). In practice, it is difficult to provide evidence for such claims. Based on the experience of our team in handling foreign settlement and cross-border disputes, the benefits of reviewing the L/C clauses in advance are far greater than those of seeking remedies afterwards. Therefore, after receiving the L/C, it is necessary to entrust professionals to review it as soon as possible. The specific handling should be based on the L/C text, the underlying contract, and the current effective laws and regulations as well as judicial rulings.

IV. Practical suggestions and legal basis

Action list: First, after receiving the letter of credit, review each clause to determine whether there are any soft clauses; Second, delete or modify clauses requiring conditional effectiveness or applicant-controlled documents; Third, stipulate that the inspection matters shall be conducted by a mutually recognized third-party institution; Fourth, if necessary, require prepayment, guarantees, or export credit insurance; Fifth, fully preserve the letter of credit, amendment letters, correspondence, and documents to retain evidence for potential payment disputes. For matters involving foreign affairs and cross-border transactions, reference can be made to the relevant regulations and guidelines.Financial and cross-border affairsAndBusiness and contract disputes in enterprisesLegal basis: The Uniform Customs and Practice for Documentary Credits (UCP600, effective July 1, 2007) issued by the International Chamber of Commerce regarding the independence of letters of credit and the review of documents; Articles 8, 9, and 10 of the "Interpretation of the Supreme People's Court on Several Issues Concerning the Trial of Letter of Credit Disputes" (effective January 1, 2006); and the relevant provisions on contracts and guarantees in the Civil Code of the People's Republic of China (effective January 1, 2021). The specific application shall be subject to the currently effective laws, regulations, and judicial rulings.

5. Henglu Law Firm's Advice

Firstly, the essence of soft clauses is to give the buyer the initiative in payment, and they must be identified before issuing the letter of credit. Secondly, banks only review documents, and the quality of the goods and the buyer's cooperation are not within the scope of the bank's review. Thirdly, the fraud exception is an exceptional remedy with a high burden of proof, and it cannot replace preventive measures. Fourthly, after receiving the letter of credit, it should be reviewed as soon as possible, and any amendments should be processed through the bank and the records should be kept. For matters involving foreign affairs and cross-border transactions, they can be handled throughFinancial and cross-border affairsWe provide a comprehensive solution for services, which includes the integration of contracts and transaction termsBusiness and contract disputes in enterprisesAndSpecial servicesEvaluate them together.

VI. Frequently Asked Questions

Q1: What is the difference between soft clauses and normal trade conditions?

The elements of the soft clauses are controlled by the applicant or his/her designated party, and whether the beneficiary can receive the payment depends on the actions of the other party, such as the issuance and signing of the inspection certificate by the applicant; normal trading conditions are determined by objective and verifiable facts, such as the shipping period, the type and number of documents, etc.

Q2: Will the bank review whether the soft clauses are reasonable?

No. According to the Uniform Customs and Practice for Documentary Credits (UCP600, effective July 1, 2007), banks only review whether the documents are consistent on the surface and whether the terms are fair. They have no obligation to check whether the applicant is cooperative, so the beneficiary bears the substantive risk.

Q3: What should I do if the buyer refuses to issue an inspection certificate, resulting in a payment refusal?

You can first negotiate with the buyer to request amendments to the letter of credit or the issuance of a separate certificate; if the negotiation fails, you can pursue breach of contract liability according to the underlying contract, and if the letter of credit involves fraud, you can claim to suspend payment in accordance with relevant regulations, but you must have sufficient evidence and raise the claim in litigation.

Q4: Can we ask the buyer to delete the soft clauses?

During the negotiation, the exporter can propose and request the buyer to amend the letter of credit, or request that the inspection certificate be issued by a third-party institution acceptable to both parties. Whether this can be achieved depends on the bargaining power of both parties. The exporter should clarify the document requirements before signing the contract and applying for the letter of credit.

Q5: Can export credit insurance cover the risks of soft clauses?

Export credit insurance typically covers commercial credit risks and political risks. However, whether it covers payment refusal caused by the buyer's lack of cooperation depends on the specific provisions of the insurance policy. Before purchasing the insurance, you should carefully check the coverage scope and exclusion clauses to avoid mistakenly believing that you will automatically receive compensation.

The above Q&A is mainly based on the judicial practice in the Beijing area. There may be differences in the adjudication standards in different regions. It is recommended to consult a professional lawyer based on the specific circumstances of the case.

If you are currently facing similar problems, it is recommended that you consult a professional lawyer as soon as possible with the relevant evidence, so as to avoid missing the statutory time limit. →Financial capital legal services·Beijing Henglu Law Firm

Disclaimer: This article is compiled based on current effective laws and regulations and publicly available adjudication rules, and is for general reference only. It does not constitute a formal legal opinion on specific cases. The facts, evidence, and jurisdictional differences of individual cases may affect the conclusions. If you encounter disputes, please consult a practicing lawyer in time.