Transcript Payment Modalities

DOCUMENTARY CREDITS
International Payment for Sale of Goods/Services
MEANS OF PAYMENT
Cash in Advance
Open Account
Collection
Documentary Credit
CASH IN ADVANCE
Buyer pays prior to shipment of
the goods or services
Expensive and risky
Not uncommon when goods or
services are specialized
Advantage to seller: immediate use
of funds
Disadvantages to buyer: (1) ties up
capital prior to receipt of G/S, (2)
no assurance that he will get what
was expected
OPEN ACCOUNT
Arrangement whereby goods are
manufactured and delivered prior
to payment
Payment is at some specified
future date w/out buyer issuing
any negotiable instrument to seller
Seller may be able to discount
“open account receivables”
Advantage to buyer: pays after
goods are received/inspected
Disadvantages to seller: (1)
releases title without being paid,
(2) ties up his capital until
payment is received from buyer
COLLECTION
Arrangement whereby goods
are shipped, relevant bill of
exchange (draft) drawn
against buyer, and draft as
well as documents are sent
to seller’s bank for collection
in buyer’s domicile
Normally title to goods does
not pass until draft is paid
Seller ships the goods, gets the
transport docs and draws a draft
Submits documents to seller’s bank
(remitting bank) for collection
Remitting bank sends draft and
documents, with collection letter, to a
correspondent bank (Collecting bank)
in place of buyer
Collecting bank notifies buyer of draft
and documents
Buyer pays draft and gets all
documents necessary to obtain goods
PROS AND CONS FOR SELLER
For seller, the means of
payment is inexpensive and
uncomplicated
Documents of title etc are
not released to buyer until
payment is made
In event of non-payment,
seller may arrange to have
goods released, warehoused
or sent back
Seller ships goods without an
unconditional promise to pay
No guarantee of payment
Ties up capital until funds are
received
PROS AND CONS FOR BUYER
Payment is deferred until the
goods arrive
Default on draft would lead to
liability on the draft and on the
contract
PAYMENT AGAINST DOCUMENTS
The contract of sale must contain
the “payment against
documents” term.
Seller insists that buyer pay against
the documents, generally prior
to delivery and inspection.
Normally the term will not be
implied.
Need negotiable bill of lading.
STEPS ONE AND TWO
Seller packs the goods and
prepares the invoice.
Seller delivers the goods to the
carrier.
The carrier issues a negotiable
bill of lading to the seller or
a person the seller
designates by endorsement.
Negotiable bill of lading
assures that:
The buyer can get the goods
only after he has paid the
bank;
The collecting banks have
control over the goods and
can control the delivery by
the carrier.
STEPS THREE AND FOUR
Seller attaches a “draft,” an invoice
and other documents required by
the contract of sale to the
negotiable bill of lading.
The seller endorses the draft and the
bill of lading to the seller’s bank.
Seller’s bank then sends all
documents to the buyer’s bank
through customary bank channels
A “draft” is a payable on demand
instrument; it contains the price
the buyer must pay and is payable
to the seller’s order.
Customary bank channels usually
involve several intermediary
banks.
Seller’s bank deals with documents
for “collection only.” Seller is not
given provisional credit to his
account.
STEP FIVE
Buyer’s bank will notify buyer of arrival of documents.
Bank will demand that buyer honor the draft, that is, pay it.
Buyer can examine the documents to see if they conform to contract of sale.
UCP 600
UCP refers to the Uniform Customs and Practices for Documentary Credits
Published by the International Chamber of Commerce (ICC)
ICC also publishes Incoterms
UCP is written into virtually every letter of credit worldwide, but other
national systems, e.g. US have their own law: Article 5 of the Uniform
Commercial Code
Within EU trade letters of credit have less important role than multi-regional
transactions
UCP 600
UCP 600 replaces UCP 500 dating from 1993
UCP 600 became effective 1 July 2007
No retroactive application: that is, credits issued prior to 1 July 2007 are governed
by UCP 500
Main reasons for change:
Commercial practice changes
Disputes over how to interpret rules
Disclaimers in Bills of Lading caused confusion
70% of DC rejected for discrepancies
Banks charge discrepant fees
Often unjustified
KEY CHANGES
Rules are better organised and easier to read
Elimination of revocable credits
New time period for banks to examine documents - 5 days from presentation
of documents [Art. 14b]
Addition of definition section [Art. 2]
Clearer rules for how to deal with documents, including lengthy list of
transport documents
Concept of “Original” clarified [Art. 17b]
DOCUMENTARY CREDIT
Credit means “any arrangement, however named, that is
irrevocable and thereby constitutes a definite
undertaking of the issuing bank to honour a complying
presentation
Credits are separate transactions from the sale or any
other contract; this is called the independence principle.
ISSUING A D/C
K of
Sale
Seller
Buyer
Advice
of D/C
D/C
application
Issuing Bank
Advising Bank
D/C
BASIC LEGAL PRINCIPLES
Independence.
Strict Compliance with documentary
examination
But Note UCP 600 defines
complying presentation in Article 2
less rigidly
Obligation of applicant to pay
issuing bank also is unrelated
to payment of the D/C.
If
Beneficiary
presents
complying [legal term subject
to interpretation] documents,
then bank has unconditional
obligation to pay
TYPES OF BANKS
Issuing Bank acts on behalf of the buyer and “issues” the credit
Advising Bank is a bank chosen to advise the seller of the D/C;
that bank usually is located in seller’s country.
Advising Bank undertakes the transmission of the D/C; bank
must check apparent authenticity of credit. UCP Art 7(a).
Advising bank has no commitment to pay.
Advising Bank may, but is under no obligation to, become a
Confirming Bank and thereby undertake direct obligation to pay
the seller.
HOW PAYABLE
Sight
Deferred
Acceptance
Negotiation
TYPES OF BANKS [CONT’D]
“Confirming” – bank that adds it s confirmation to pay upon issuing bank’s
authorisation or request.
“Nominated” – the bank with which the credit is available; may have
obligation to pay.
Others: “collecting” and “negotiating.”
Four:
Issuing Bank
Advising Bank
Nominated Bank
Confirming Bank
ISSUING BANKS’ ROLE
Review terms and conditions of D/C to determine
compliance with bank policy and local law.
Must make certain there are no non-documentary
conditions.
Must make certain the production of a document does
not depend on performance of 3 rd party not controlled
by the beneficiary
Strive for clarity
Standard: complying presentation [Art. 14]
BENEFICIARY
Review D/C to make sure it appears valid and that the type and
terms are those specified in the K of sale so that seller can
comply with the terms.
No payment of interest, charges etc. not called for in K of sale.
Other matters; shipping and expiration dates indicated in D/C;
needs adequate time to comply.
Beneficiary/Seller should present the required docs to the bank
promptly and make sure that they accord with D/C terms and
conditions.
BANK’S ROLE
Examine the documents and the D/C.
Under UCP 500, doctrine was strict compliance. But UCP 600
uses term presentation of documents that constitute a
“complying presentation”, implying a more flexible standard.
If there are no discrepancies, the bank pays.
Confirming Bank can honor the D/C and pay beneficiary
directly; Confirming Bank gets paid by Issuing Bank; that bank is
reimbursed by Applicant.
WHAT CREDIT SAYS
States bank where it is available
Must state whether available by
Sight payment
Deferred payment
Acceptance or negotiation
Credit must not be issued by draft drawn on applicant
State an expiration date
DISCREPANCIES
Banks have several options to deal with non-conforming
documents:
(1) return them for correction,
(2) request applicant to waive the discrepancy and
pay,
(3) require the beneficiary to indemnify the
paying bank if the issuing bank or another bank refuses
to reimburse for settlement, or
(4) reject the D/C.
HOW THE SELLER GETS PAID
When the D/C is issued and
confirmed, the seller does
the following:
Seller takes the documents to
the bank where the credit is
available.
Provided all conditions are
met, the bank pays or
promises to pay .
Packs the goods.
Delivers to carrier.
Gets all necessary documents.
All done beforehand.
RISK ALLOCATION: SELLER
Seller has independent promise to pay from at least one
bank.
Seller need only present conforming documents to get
paid.
The banks never see the goods.
Seller’s risk is limited to banks’ insolvency.
If bank refuses to pay, seller has legal claim against that
bank.
HONOR & DISHONOR
Banks “honor” the D/C if they pay on matching documents.
Banks dishonor if they refuse to pay.
Dishonor may be rightful or wrongful.
A rightful dishonor involves document discrepancy.
A wrongful dishonor means that the documents “complied” with the D/C,
but the bank rejected and did not pay.
Dishonor requires bank to notify the parties of the dishonor.
If the notification requirements are followed, the banks do not have any
liability on the D/C, if the rejection was justified.
WRONGFUL DISHONOR
If the beneficiary produces documents that comply or the bank fails to properly notify
the beneficiary of discrepancies, then the bank has a definite obligation to pay.
Failure to pay under these circumstances is a “wrongful dishonor”.
The UCP does not deal with that issue; therefore it falls to national law governing that
event.
Under English law, see Belgian Grain v. Coc & Co. Ltd. [beneficiary may recover amount
of D/C plus interest; alternatively, may claim damages (e.g. difference between re-sale
of goods and amount owed under D/C.)
American approach is found at UCC Rev. Art. 5-111 where beneficiary, or person
entitled to honor, recovers credit, plus incidental damages as defined under UCC Art.
2-710, plus attorney’s fees.
TRANSFER AND ASSIGNMENT
Beneficiary may transfer rights
in D/C by two means:
Assignment of right of
proceeds
A transferable D/C allows the
beneficiary the ability to
request the bank authorized to
pay, to make the D/C available
in whole or part to another
beneficiary
Transfer of rights to perform
under the D/C
Accomplished through a
transferring bank
GOVERNING LAW
Determined by choice of law in D/C as between the parties to the D/C.
If no choice of law, then it is the place of performance of the D/C: where
payment against the documents takes place.
In confirmed letter of credit, that place is jurisdiction of seller’s bank.
UCP 600 is norm in International Payment System since it is named in the
D/C, and it generally provides the governing law via contract principles, but it
does not cover all issues.
National law will cover, for example: statute of limitations, fraud,
interpretation of “force majeure”.
FRAUD
When bank is entitled not to pay on presentation of
conforming documents is fraud
Exception deviates from autonomy of independence
rule
Fraud usually will relate to documents themselves, since
the documents on their face are in compliance
Allegation of fraud is normally raised by buyer
FRAUD: 3 CIRCUMSTANCES
(1) If buyer merely alleges fraud or bank simply suspects it, bank should pay,
especially on irrevocable credit
Bank cannot rely on uncorroborated statement of buyer
(2) Bank has unambiguous evidence of fraud but cannot link that fraud with
beneficiary, the bank pays (United City Merchants (Investments) Ltd v. Royal
Bank of Canada [1983] 1 A.C. 168) but this position remains doubtful
Article 34 disclaimer on genuineness of documents provides bank protection.
(3) positive proof of fraud and the beneficiary knew of it, bank must refuse
to honor the D/C
Evidence of fraud for courts is clear and unambiguous, for example, in issuing
an injunction to prevent payment
STANDBY CREDIT AS
INDEPENDENT GUARANTEE
Used in the event buyer does not pay as required under
K
If ordinary language is used, bank pays on written
request of creditor (plus sometimes with an invoice)
without recourse to legal procedure or to obtain consent
of person making the K with the bank
The bank then has recourse against the debtor
Cost of Standby credits are lower than D/C, thereby
explaining demand for this product