Unit 8 Payment in International Sales

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Unit 8 Payment in International Sales

• Text I Documentary Credits
• -To understand the definition and the operation
  of letters of credit in a commercial transaction
• Text II The Doctrine of Strict Compliance
• -To learn the doctrine of strict compliance in
  the operation of letters of credit in a
  commercial transaction
• Typical Sentence Patterns Contract (III)

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Text I Documentary Credits

• Useful expressions pay sb. at sight, upon
  receipt of required documents, within the
  prescribed time, in regard to, follow (terms and
  conditions) to the letter, in order, coincide
  with, with full liability, mode of payment,
  (buyer) claim shipment from Carrier
• Terms documentary L/C (pl. letters of credit or
  credits), independence rule, (some documents
  prepared by Seller) air waybill, marine B/L,
  insurance certificate, certificate of inspection,
  certificate of origin, (banks involved) issuing
  bank, advising bank, confirming bank, negotiating
  bank, (types of L/C) revocable L/C, irrevocable
  L/C, revolving L/C, red clause L/C, transferable
  L/C, back-to-back L/C
• Proper names UCP 500

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Questions based on Text I

1. What is the significance of UCP drafted by ICC?
2. How is a documentary credit defined?
3. What is the relationship of a credit to its
   underlying sales contract?
4. What are the typical documents a seller must
   prepare in order to get paid?
5. Identify the 4 types of L/Cs revocable L/C,
   irrevocable L/C, advised L/C, confirmed L/C.

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Questions (continued)

• 6. Try to understand the operation of letters of
  credit in a commercial transaction through the
  example given in the text.
• 7. What are the benefits of documentary credits?

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Terms

• letter of credit (also credit, L/C pl. credits,
  letters of credit)
• -It is defined as a conditional undertaking by a
  bank, issued in accordance with the instructions
  of the account party, addressed to or in favor of
  the beneficiary. The bank promises to pay,
  accept, or negotiate the beneficiarys draft up
  to a certain sum of money, in the stated
  currency, within the prescribed time limit, upon
  the presentation of stipulated documents.
• In an L/C transaction, the promise of an
  internationally recognized bank is substituted
  for that of the buyer.
• documentary L/C ?????

6
Terms

• bill of exchange (AmE draft)
• -(Bills of Exchange Act 1882, UK) an
  unconditional order in writing addressed by one
  person to another, signed by the person giving
  it, requiring (ordering) the person to whom it is
  addressed to pay on demand or at a fixed and
  determinable (which can be exactly decided)
  future time a sum certain in money to, or to the
  order of, a specified (exactly described) person
  or bearer
• It must name the person drawing it (the
  drawer), the person paying it (the drawee) and
  the person to whom it is to be paid (the payee).
• An international draft is an order from the
  seller to the buyer or buyers bank to pay the
  seller upon the delivery of goods or the
  presentation of shipping documents. Thus the
  seller is both the drawer and the payee. The
  drawee is either the buyer or its bank, depending
  on the arrangements made for payment.

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Terms

• acceptance ??
• -the act of a person on whom a bill of exchange
  is drawn (the drawee) in writing on the face of
  the bill the word accepted and his signature,
  so binding himself to pay the value of the bill
  when it is due
• honor ????? (opposite dishonor)
• -to pay a check or draft when it becomes due
• negotiate ????????
• -to discount (sell at a discount) a bill of
  exchange or cheque, or to transfer ownership of
  any of these to another to reach an agreement
  about money

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Terms

• discount ????????
• -a sum of money allowed for immediate payment of
  a sum due at a later date
• If the sum is secured by a bill of exchange,
  the party who buys the bill and receives the
  discount is said to discount the bill
• independence rule / principle ?????
• -The obligation of the issuing bank to honor the
  beneficiarys draft under a letter of credit is
  not dependent on the contract of sale between the
  buyer and seller the obligation of the bank to
  honor drafts is conditional solely upon the
  beneficiarys doing exactly what is requested in
  the L/C.

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Three separate and independent relationships in a
typical L/C transaction

1. An underlying sale of goods contract between
   buyer and seller
2. An agreement between a bank and its customer in
   which the bank undertakes to issue a credit
3. The banks resulting engagement to pay the
   beneficiary provided that certain documents
   presented to the bank conform with the terms and
   conditions of the credit issued on its customers
   behalf

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Terms

• issuing bank ??? (buyers bank)
• -It issues the L/C in favor of Seller
  (beneficiary) when accepting the application of
  Buyer (applicant, account party). The application
  for the L/C forms a contract between the buyer
  and its bank, with the buyer agreeing to
  reimburse the bank for any sums properly paid out
  according to the terms of the L/C.
• advising bank ??? (in sellers place)
• -After the L/C is issued, it will be sent to the
  seller via a foreign correspondent bank located
  in the sellers country. This bank is known as
  the advising bank responsible for informing or
  advising the seller that an L/C has been issued
  in its favor and the L/C is available for the
  seller. The advising bank is not liable on the
  L/C and makes no promise to pay the seller.

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Terms

• confirming bank ??? (in sellers place)
• -In certain instances, the credit of the issuing
  bank may be insufficient to assure payment. The
  seller may want to include as part of the sales
  contract that the buyer will furnish an L/C
  confirmed by a bank in the sellers country. The
  confirming bank is liable on the L/C. If it pays
  for documents presented in order, it is entitled
  to reimbursement from the issuing bank. If the
  documents are not in order, it generally cannot
  seek reimbursement from the bank.
• A confirmed credit is far more expensive than
  one that is unconfirmed because two banks are
  exposed to the risk of the transaction. These
  costs must be weighed by the parties in
  determining the level of acceptable risk in the
  transaction.

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Terms

• negotiating bank ??? (in sellers place)
• -Once the seller knows that he is able to meet
  the terms of the L/C, he is ready to prepare the
  draft and shipping documents and present them to
  a negotiating bank in his city to be forwarded to
  the issuing bank. The UCP permits the issuing
  bank to nominate a negotiating bank. If not,
  the documents may be negotiated through the
  advising bank or another bank of the sellers
  choice. The negotiating bank is responsible for
  transmitting the documents to the issuing bank.
  In the event that the issuing bank dishonors a
  draft and rejects discrepant documents, the UCP
  requires that the issuing bank give immediate
  notice by telecommunication to the negotiating
  bank describing the discrepancies.

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Terms

• revocable L/C ??????
• irrevocable L/C ???????
• -According to UCP 500, credits may be either
  revocable or irrevocable, but in the absence of
  such indication the credit shall be deemed to be
  irrevocable.
• revolving L/C ?????
• red clause L/C ?????,??????
• transferable L/C ??????
• back-to-back L/C ??????

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Terms

• standby letter of credit ?????
• -The standby letter of credit can be used to
  guarantee that a party will fulfill obligations
  under a service contract, construction contract,
  or sales contract. It can also be used to insure
  the repayment of a loan. Standby credits function
  as performance guaranty. Unlike a regular letter
  of credit in which the beneficiary of the credit
  is the seller, a standby credit is issued in
  favor of the buyer to guarantee the sellers
  performance.

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Proper names

• Uniform Customs and Practice for Documentary
  Credits (UCP) ?????????
• -a set of standardized rules for issuing and
  handling letters of credits, drafted and
  published by the ICC with the assistance of the
  international banking community
• It establishes the legal format of credits,
  sets out rules by which banks process credits
  transactions, and defines the rights and
  responsibilities of all parties to the credit.
• It was first introduced in the early 1930s,
  with the latest revision (UCP No. 500) published
  in 1993. The UCP is in use in virtually every
  nation of the world.
• The UCP governs letters of credit only if its
  provisions are incorporated into the credits by
  reference.

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Operation of documentary credits

• Buyer and Seller concludes a sales contract
  calling for payment under an L/C.
• Buyer files an application with the issuing bank
  asking it to issue an L/C.
• The issuing bank issues an L/C in favor of Seller
  in accordance with the application by Buyer and
  transfers the L/C to Seller via Sellers local
  bank (advising bank or confirming bank).
• Seller checks the terms of the L/C against the
  terms of the sales contract, and if the L/C is as
  required by Seller, Seller shall ship the goods.

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Operation (continued)

• 5. Seller obtains the shipping documents after
  shipment and present the shipping documents and
  the draft to the negotiating bank in its city to
  be forwarded to the issuing bank.
• 6. The negotiating bank checks the draft and
  documents and pays Seller if the documents
  presented by Seller are in good order.
• 7. The negotiating bank sends the draft and
  documents to the issuing bank for reimbursement
  and the issuing bank informs Buyer for payment of
  the goods.
• 8. Buyer pays for the goods and gets the
  documents upon payment, and can claim the goods
  from the carrier by the documents.

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Text II The Doctrine of Strict Compliance

• Useful expressions under the L/C, comply with,
  conform with / to, (seller) present / tender
  documents to the bank, with reasonable care, on
  the face, compliance of A with B, assume (no)
  liability / responsibility for, without regard to
  (prep.), (bank) pay against documents, on the
  part of sb., be oblige to do sth., have no regard
  to (prep.), despite the fact that, there is no
  room for, allow for, margin of error, tolerance
  of ?, in general terms
• Terms doctrine of strict compliance, mandate,
  waiver (of discrepancy), de minimis principle

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Questions based on text II

1. What does the doctrine of strict compliance
   require of the paying bank?
2. What is the time limit for the bank to examine
   the documents tendered by Seller?
3. Who has the burden of proving the bank pays the
   beneficiary in excess of its mandate?
4. What documents can be deemed original ones?

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Questions (continued)

• 5. When does the bank apply to Buyer for a waiver
  of discrepancy?
• 6. How do you understand the de minimis principle
  in L/C transactions?
• 7. Which document must contain the exact
  description of goods in strict compliance with
  that in the L/C?

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Terms

• doctrine of strict compliance ??????
• -the terms of the documents presented to the
  issuing bank must strictly conform to the
  requirements of the L/C
• Even a small discrepancy can cause the bank to
  reject the documents. If the issuing bank pays
  against documents that contain a discrepancy,
  then the bank cannot seek reimbursement from the
  account party, its customer.
• mandate (?)????
• waiver ??,??,?????
• -the intentional, voluntary act of relinquishing
  a known right, claim or privilege
• de minimis principle ????????