Documentary Credits in France: How It Works?

In cross-border trade, the most dangerous moment is not shipment. It is the quiet interval afterward, when goods are gone, the buyer is “reviewing,” and your invoice becomes a bargaining chip. The documentary credit (often called a letter of credit) was invented precisely to shrink that risk: the buyer arranges, at contract stage, for a bank to pay the seller against compliant documents proving shipment, insurance, and other agreed conditions.

In practice, the documentary credit is governed not only by the contract and general legal principles, but by the ICC Uniform Customs and Practice (UCP 600) (in force since July 1, 2007). And that is where the real lesson begins: banks pay documents, not goods. French courts repeat this relentlessly. A bank is not required to investigate performance of the sales contract; its duty is a formal check of the documents presented (Cass. com., 24 Nov. 1987, No. 86-16013).

That single principle explains both the strength and the frustration of the mechanism: if your documents are perfect, you are close to paid; if they are not, your cash flow can stall over a typographical detail.

1. Why Companies Still Choose It: Payment Security and Financing Leverage

A documentary credit is not just a payment tool; it is also a financing lever.

For the exporter, a bank undertaking—especially a confirmed one—can allow pre-shipment financing and receivables financing. If the credit is structured with a time draft, the bank may accept a bill of exchange, and the exporter can discount it. In short: you may convert “future payment” into cash today because a bank’s commitment is often more financeable than a buyer’s promise.

For the importer, the same mechanism can justify longer payment terms, because the exporter gains comfort from the bank’s undertaking.

But it is never “free.” The system is typically slow for the seller and expensive for the buyer, with layered fees (issuance, notification, confirmation, amendments, acceptance, currency operations). Its complexity also creates the most common failure point: documents that are almost right—but not right enough.

2. Choosing the Right Structure: Irrevocable, Confirmed, and the Fine Print That Decides Everything

Not all documentary credits are equal.

An irrevocable credit creates a firm undertaking by the issuing bank to pay if conditions are met; in modern practice under ICC rules, credits are typically treated as irrevocable. This can protect the seller even if the buyer later enters insolvency proceedings.

A confirmed credit goes further: a second bank (often in the seller’s country) adds its own undertaking. That added guarantee is powerful—but it also changes behavior. French case law shows the practical danger on the buyer side: where the confirming bank has paid on compliant documents, a professional importer cannot later claim surprise about the consequences of confirmation simply because it also paid the seller directly in parallel (Cass. com., 4 July 2006, No. 05-10529). In other words: professional parties are expected to understand the architecture they request.

And beware “irrevocable, but…” clauses. If the credit is made operational only after an additional condition is satisfied (for example, delivery of a separate performance guarantee), failure to satisfy that condition can justify refusal to pay (Cass. com., 22 Mar. 2011, No. 10-11945).

Finally, timing matters. Until the seller actually receives notice of the opened credit, it has no enforceable right against the bank (Cass. com., 3 June 2003, No. 00-16758). Sellers who ship “on trust” before formal notification often learn this too late.

3. The Golden Rule: Banks Examine Documents, and French Courts Enforce That Formalism

The documentary credit lives or dies by document compliance. The beneficiary must present exactly what the credit requires: invoice, transport document, insurance certificate, customs/administrative certificates, and any special attestations.

French decisions are unforgiving on discrepancies:

• A bank was held at fault for paying partially when the invoice amount did not match the precise amount required; it should have paid nothing in the presence of that non-compliance (Cass. com., 7 Jan. 2004, No. 01-02572).

• Missing essential elements on transport documents (such as proper receipt acknowledgment) can justify refusal to pay (Cass. com., 3 Mar. 2004, No. 01-16046).

• Even where compliance seems “mostly” present, incoherences between documents and the credit terms can validate refusal, especially when resolving them would require analyzing the underlying sales contract—a task banks are not required to perform (Cass. com., 28 Mar. 2006, No. 04-15682).

• A seemingly minor typo—one character wrong in an alphanumeric product reference—has been accepted as sufficient to refuse payment (Cass. com., 12 Mar. 2013, No. 11-22314).

• If the credit does not require a specific feature, the bank cannot invent it after the fact; for example, where the credit did not require an endorseable insurance certificate, that argument failed (Cass. com., 24 June 1997, No. 95-10259).

Speed is also part of the duty. Courts have treated excessive examination delay as potentially liability-triggering (CA Paris, 13 July 1988), while ICC rules set short review windows in working days.

This is why documentary credits can feel paradoxical: they are designed to reduce payment risk, yet their formalism creates a new risk—clerical error risk.

4. Fraud, Injunctions, and When Payment Can Be Stopped—Even Under an Irrevocable Credit

Many exporters believe an irrevocable credit is “untouchable.” It isn’t.

French case law recognizes that fraud discovered before payment can allow the buyer (the applicant) to oppose payment—particularly where forged documents are used to simulate compliance. In a deferred-payment credit, the buyer may be able to freeze payment upon discovering fraud during the deferral window (Cass. com., 25 Apr. 2006, No. 04-15817). More broadly, courts accept that fraud can justify blocking payment while the credit remains unrealized (Cass. com., 11 Oct. 2005, No. 04-11663).

French decisions also admit urgent interim measures to prevent payment where strong indications exist—such as inconsistent goods references or abnormal document structure—through fast judge-led proceedings (Cass. com., 19 Nov. 2013, No. 11-25131). And even where the credit is irrevocable, a buyer may seek a protective seizure to stop payment if it can establish fraud and circumstances threatening recovery (Cass. com., 16 Dec. 2008, No. 07-18729).

Two more practical points matter for collection strategy:

1. A bank can refuse to execute even if the buyer says it “waives discrepancies” (Cass. com., 20 June 2006, No. 04-19732). So you cannot always rely on the applicant to “fix it” once the bank has identified non-compliance.

2. Banks involved may assert set-off rights in certain situations—e.g., a confirming bank offsetting amounts where it is also a creditor of the beneficiary (Cass. com., 13 Mar. 2023, No. 20-23552), and a bank that validated documents paying after deduction of its own claim has been upheld (Cass. com., 15 Mar. 2023, No. 20-23522).

Finally, documentary credits sometimes generate unexpected criminal exposure: where discriminatory attestations were demanded in an international sale file, French criminal proceedings followed; even though the defendant was ultimately cleared on the specific facts, the case is a sober reminder that “document demands” can collide with French public policy rules (Cass. crim., 9 Nov. 2004, No. 03-87444).

5. When Things Go Wrong: A Practical Recovery Playbook for Exporters and Suppliers

A documentary credit is supposed to simplify getting paid. When it fails, it usually fails in one of four ways:

• No enforceable credit existed when you performed (shipment before formal notice; Cass. com., 3 June 2003).

• Documents were non-compliant, sometimes for microscopic reasons (Cass. com., 12 Mar. 2013).

• The credit was conditional, and the condition wasn’t met (Cass. com., 22 Mar. 2011).

• Payment is frozen due to suspected fraud, interim measures, or bank set-off dynamics (Cass. com., 25 Apr. 2006; Cass. com., 16 Dec. 2008; Cass. com., 15 Mar. 2023).

When that happens, the best creditors stop thinking of the file as “banking paperwork” and start treating it as a dispute that must be managed like any other high-stakes receivable:

• secure the entire document chain (credit text, amendments, SWIFT notices, presentation checklist, discrepancy notices);

• lock down shipping and insurance evidence;

• decide whether the path is cure-and-represent, negotiated waiver, or immediate legal pressure;

• where necessary, pivot to direct debtor recovery and cross-border enforcement tools.