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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