Case Study: When Payment Terms Collapsed a Deal — The LC That Never Worked

How a misstructured payment clause and incompatible banking procedures nearly killed a procurement deal between a UK supplier and an Iraqi buyer.

Background

A UK equipment supplier agreed to provide specialised industrial machinery to an Iraqi private-sector client.

The contract required payment via Letter of Credit (LC) — a standard request from Iraqi buyers who want security.

Simple on paper.

Disastrous in practice.

The parties signed the contract without:

• checking LC issuance capabilities

• confirming whether the buyer’s bank could issue an international LC

• aligning the LC terms with the supplier’s bank

• confirming whether the supplier accepted LCs at all

• adapting for sanctions filters, SWIFT delays, or compliance flags

• preparing fallback payment mechanisms

Everyone assumed “LC is standard” — and moved on.

This assumption cost them six weeks.

The Legal Issue

When the buyer attempted to open the Letter of Credit:

• The Iraqi bank flagged the supplier’s name through sanctions filters

• The UK bank rejected the LC wording as non-compliant

• The LC required documents the supplier couldn’t legally obtain

• The LC confirmation fees were far higher than expected

• The timeline exceeded the contract’s delivery deadline

• The supplier refused to begin manufacturing without a compliant LC

• The buyer refused to amend the LC unless the supplier “trusted them”

The contract had one fatal flaw:

It mandated a Letter of Credit without specifying the LC structure, timelines, alternative methods, or revision mechanisms.

So neither side was legally in breach — yet the deal was stuck.

CARMA Group’s Intervention

1. LC Diagnostic Review

We analysed:

• LC wording

• issuing bank capability

• confirmation requirements

• compliance risks

• supplier bank acceptance

• required shipping documents

• documentary conditions that would trigger rejection

We identified the core failure:

The LC was structured like a domestic Asia–Asia trade, not a UK–Iraq transaction.

2. Contract Restructuring

We amended the contract with:

• a clear LC template

• fixed timelines for issuance

• mandatory pre-approval of LC wording

• alternative payment method clauses (SBLC or 30/70 split)

• defined documentary evidence requirements

• a fallback mechanism if the LC failed compliance checks

For the first time, both sides had a legally workable path.

3. Banking Coordination

We engaged:

• the Iraqi issuing bank

• the UK correspondent bank

• the supplier’s relationship manager

• the compliance teams on both sides

We identified:

• alternative banks able to issue LCs that UK banks accept

• how to remove the problematic compliance wording

• how to simplify documentary requirements

• which clauses would be rejected automatically

• the fee structure that both sides could tolerate

We built an LC structure that was actually executable.

4. Commercial Negotiation

We negotiated a revised payment plan:

• 20% deposit

• 40% via simplified LC

• 40% on arrival and inspection

This balanced trust, risk, and cash flow for both sides.

Outcome

• The LC was successfully issued and accepted

• Manufacturing resumed

• Shipment delivered on the revised timeline

• Both parties avoided breach claims and litigation

• The supplier adopted the new LC structure for future Iraq deals

• The buyer retained commercial credibility

Most importantly:

A broken contract was replaced with a structure that matched real banking capability.

Key Lessons

1. Payment mechanisms must reflect banking reality — not assumptions.

2. LC clauses should never be generic in UK–Iraq trade.

3. Compliance and sanctions checks derail deals more often than legal disputes.

4. Fallback payment mechanisms prevent deadlock.

5. Legal drafting must align with operational and banking capability.

Bottom Line

CARMA Group bridges legal, commercial, and banking realities so cross-border deals don’t collapse under impractical payment terms.