Letter of Credit and the use of Certificate of Inspection
As noted in my previous post, Letter of Credit does not guarantee the quantity and quality of goods shipped! You, the Buyer / importer must realize that when Shipping Documents arrive to your bank, the bank will examine the documents, but does not itself guarantee the quality and quantity of goods shipped! That is not part of their inherent responsibility under the Letter of Credit financing. So what can an importer do to make sure he will receive the count as well as the quality of goods he ordered based on seeing the goods in the supplier’s / exporter’s warehouse or showroom?
To guarantee yourself not only the quantity but also the quality of the goods shipped, you should employ the use of a document called Certificate of Inspection, which you, the Buyer / importer must request as part of the Special Conditions at the time of having your bank issue the Letter of Credit in favor of the Seller / Supplier’s Bank.
Without this document, your bank could simply pay the draft, release the shipping documents to you, you would take them to your Customhouse Broker to clear US Customs only to find out thereafter that your order is short on count and instead of “blue you received green!”
Certificate of Inspection is an instrument where you request an inspection of the shipment prior to the goods being packed and loaded on board of a carrier that is to transport them to the destination / the country of importation. The purpose of the inspection is to check that the goods shipped are in compliance of the order and the inspection process may be based on specific instructions from you the Buyer that you had provided the Seller and the Inspector with prior to the completion of the order, clearly instructing the Inspector as to what he is to scrutinize and certify.
This inspection is typically done in the shipper’s or supplier’s warehouse at the country of origin. Upon performing the inspection the inspector signs the Certificate of Inspection and the form is attached with the rest of the Shipping Documents accompanying the shipment.
If the Certificate of Inspection document was specified under the Special Conditions of the Letter of Credit but the document is not enclosed with the rest of the shipping documents upon arrival of your order at destination, your bank isn’t obligated to pay the draft and the Letter of Credit contract becomes void.
Naturally in such a a situation a seller would probably negotiate with you a discount on the cost of the goods shipped so that he would not have to pay for the goods to be shipped back to the point of origin at his cost, a scenario under which the Seller would most likely suffer a loss. Certificate of Inspection is a very useful tool especially when ordering from suppliers whom you have had no prior experience buying from, otherwise ordering from suppliers who do not offer testimonials of other happy customers that you can check, especially in situations where your order is not intended to be a repeat order, could become a risky business venture.