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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)
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
Questions based on Text I
1.
What is the significance of UCP drafted by ICC?
2.
How is a documentary credit defined?
3.
4.
5.
What is the relationship of a credit to its
underlying sales contract?
What are the typical documents a seller must
prepare in order to get paid?
Identify the 4 types of L/Cs: revocable L/C,
irrevocable L/C, advised L/C, confirmed L/C.
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?
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 beneficiary’s 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 跟单信用证
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 buyer’s 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.
Terms
acceptance 承兑
-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 承兑并支付 （opposite: dishonor）
-to pay a check or draft when it becomes due
negotiate 议付、转让、贴现
-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
Terms
discount 贴现、贴水、折扣
-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 独立性原则
-The obligation of the issuing bank to honor the
beneficiary’s 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
beneficiary’s doing exactly what is requested in the
L/C.
Three separate and independent relationships
in a typical L/C transaction
1.
2.
3.
An underlying sale of goods contract between buyer
and seller
An agreement between a bank and its customer in
which the bank undertakes to issue a credit
The bank’s 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 customer’s
behalf
Terms
issuing bank 开证行 (buyer’s 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 通知行 (in seller’s place)
-After the L/C is issued, it will be sent to the
seller via a foreign correspondent bank located in
the seller’s 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.
Terms
confirming bank 保兑行 (in seller’s 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 seller’s 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.
Terms
negotiating bank 议付行 (in seller’s 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 seller’s 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.
Terms
revocable L/C 可撤销信用证
irrevocable L/C 不可撤销信用证
-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 循环信用证
red clause L/C 预支信用证，红条款信用证
transferable L/C 可转让信用证
back-to-back L/C 背对背信用证
Terms
standby letter of credit 备用信用证
-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 seller’s performance.
Proper names
Uniform Customs and Practice for Documentary
Credits (UCP) 《跟单信用证统一惯例》
-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
Operation of documentary credits
1. Buyer and Seller concludes a sales contract calling
for payment under an L/C.
2. Buyer files an application with the issuing bank
asking it to issue an L/C.
3. 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 Seller’s local bank
(advising bank or confirming bank).
4. 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.
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.
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
Questions based on text II
1.
2.
3.
4.
What does the doctrine of strict compliance
require of the paying bank?
What is the time limit for the bank to examine
the documents tendered by Seller?
Who has the burden of proving the bank pays
the beneficiary in excess of its mandate?
What documents can be deemed original ones?
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?
Terms
doctrine of strict compliance 严格相符原则
-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 （商）支付命令
waiver 放弃，弃权，弃权声明书
-the intentional, voluntary act of relinquishing a
known right, claim or privilege
de minimis principle 法不干涉琐事原则