Commerce department international trade

Risk 1: Non-payment—Payment Guarantee

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Risk 1: Non-paymentPayment Guarantee

For the exporter there is one major risk: not being paid. A payment guarantee simply commits the bank to pay if the buyer defaults. The payment guarantee is usually for 100% of the contract price.

Risk 2: RevocationTender Guarantee

Procurement contracts, especially at government level, are put up for tender or bid. An exporter may well bid on a contract to supply goods or materials to a government department or agency. Invariably this department asks for a tender guarantee (or bid bond). If the would-be exporter withdraws his tender, then the tender guarantee is forfeit. This guards the department against the risk of a project falling behind because a tender is withdrawn.44 A normal figure for a tender guarantee is between 1.5% and 5% of the contract price.

Risk 3: Non-PerformancePerformance Guarantee

If you are selling goods on an FOB basis, you are unlikely to meet the performance guarantee. If, however, you offer services as well as goods, the performance guarantee can be important. It simply says that if you work badly or not at all, then the guarantor will pay, within stated limits, the costs of your failure to perform. A normal figure for a performance guarantee is between 5% and 10% of the contract price.

Risk 4: Losing PrepaymentPrepayment Guarantee

Manufacturers often ask for an advance payment, especially if items are custom-made for the buyer. Making this prepayment is a risk for the buyer until the items arrive in working order. The advance pay­ment guarantee promises the buyer that the bank will return advance payments if the exporter fails to deliver. The guarantee is normally for 100% of the prepayment, decreasing as deliveries are made.

In most guarantees, the bank agrees to pay "on first demand" and "without demur or objection" (or a similar wording). This promise can be taken literally: the moment that the beneficiary demands payment under the guarantee, the bank will pay. (Naturally the bank will immediately withdraw the money it has paid from the account of the principal.) Such guarantees are called "demand guarantees": there are no serious, objective conditions the beneficiary must meet before claiming payment of the guar­antee. This can quickly lead to abuse, and many court cases arise from demand guarantees. Let's take a typical scenario.

44 Under the laws of many countries that derive their legal thinking from England, an offer can be withdrawn at any time before acceptance. See Chapter 4, Section 3 for more information.
Scenario: Esperanza Trading, the buyer, asks Big Bank to issue a payment guarantee in favor of Office Enterprises, the exporter. The bank complies. Two days after the agreed payment date, Esperanza Trading has not yet paid. Office Enterprises accordingly asks the bank to pay the money. The bank first notifies Esperanza Trading that it is about to pay. Esperanza says that the goods were defective and tells the bank to withhold payment. The bank looks again at the text of the guarantee: "We undertake to pay you on your first written demand without cavil or demur...." The bank says it will pay, regardless of the quality of the goods. Angrily, Verbena Trading asks a judge for an injunction (= an order forbidding something) to forbid the bank from , making payment. Judges normally refuse to grant such injunctions. A I demand guarantee is exactly that—a guarantee paid on demand.

The problem of a beneficiary falsely or improperly demanding payment is also a serious one. If the bank has agreed to pay, it will pay unless there is evidence of blatant fraud. If demand guarantees are so risky, perhaps a conditional guarantee would be preferable.

A conditional guarantee contains serious, objective conditions that must be met before payment by the bank is possible. These conditions cannot refer to the condition of delivered goods—the bank has no way of evaluating such things. The ICC tried in two pamphlets. Uniform Rules for Contract Guarantees (1978) and Model Forms for Issuing Contract Guarantees (1982) to set up objective conditions that a bank might find workable. It suggested three. The bank would pay if the claim were supported by:

♦ A decision of the court of first instance (a decision by a judge);

♦ An arbitral award (a decision by a court of arbitration);

♦ The approval of the Principal in writing to the claim.

It is not likely that any beneficiary would agree to objective conditions as harsh as this—and so most bank guarantees are of the "demand" kind. In fact, because guarantees run into trouble so often, and because they are expensive to set up, few exporters ask for them as security for payment: the letter of credit is much preferred.45

The most recent thinking on demand guarantees suggests a "counter-guarantee" that works like this. If I, as exporter, demand payment of a guarantee issued by the buyer's bank for, let's say SIOO.OOO, I must at the same time post a countcrguarantee, also for SIOO.OOO in favor of the buyer. The buyer can collect this money if it can be proved that I collected the original guarantee improperly. For details, see ICC Publication No. 458, Uniform Rules for Demand Guarantees.


Stand and Deliver

Below is the first part of a payment guarantee issued in standard bank form. Study it, and then answer the questions.

Payment Guarantee No. 76542/92

Reference is made to the order No. WEX 344 K placed with you as suppliers by Multi-Import for the supply of integrated circuits.

According to the conditions of this order, the Buyer has to furnish a payment guarantee in the amount of USD 600,000. By order of the Buyer, we, Big Bank of Euroland, hereby establish this guarantee and undertake irrevocably to pay to you without demur or objection any outstanding amount not exceeding USD 600,000

say United States Dollar six hundred thousand only

upon your first written demand stating that the Buyer has failed to effect the outstanding payment at maturity. Our liability under this guarantee will expire as soon as this document is returned to us, latest however, by 31st December 1996.

1. Who is the principal? □ SELLER □ BUYER □ BANK

2. Who is the guarantor? □ SELLER □ BUYER □BANK

3. Who is the beneficiary? □ SELLER □ BUYER 3BANK

4. Is this a "demand" guarantee? □ YES □ NO

5. If the buyer fails to pay, is payment secure? □ YES □ NO

What You Should Know

1. Export credit insurance covers the risk of non-payment.

2. Guarantees are designed to reduce contractual risks.

3. The payment guarantee reduces the risk of non-payment. The tender guarantee reduces the risk of the revocation of an offer; the performance guarantee reduces the risk of non-performance or inadequate performance by the exporter; the advance payment guarantee reduces the risk of losing prepayments.

4. If a bank issues a "demand guarantee," it must pay the guarantee sum on first demand without question. Since most payment guarantees are of this type, they are dangerous for the principal (the buyer) and are seldom used; the letter of credit is far more common.

2.4. LETTER OF CREDIT (p.87)

Letters of credit are issued in many forms for many purposes. Some offer first class security for the exporter: some are little belter than a personal check. What letter of credit terms should the exporter try to negotiate?


Most Lellers of credit are irrevocable—they cannot be withdrawn. Exporters prefer the letter of credit to be confirmed (i.e., payable by a local bank on first presentation of correct shipping documents) and payable at sight (i.e., payable immediately).

Hầu hết L/C thuộc loại không hủy ngang – nghĩa là bên mua không thể thay đổi. Nhà xuất khẩu thường đề nghị L/C xác nhận (nghĩa là ngân hàng ở nước xuất khẩu chịu trách nhiệm thanh toán ngay khi xuất trình bộ chứng từ hợp lệ lần đầu) và có thể trả ngay.


The ideal type of payment from the epxorter’s point of view is the irrevocable confirmed, at-sight letter of credit. The first attempt to standardize them was made in 1933 when the International Chamber of Commerce issued the Uniform Customs and Practice for Documentary Credits (UCP). Parties to a contract can agree to use the UCP rules, and many do. Typically a contract stipulates

Phương thức thanh toán lý tưởng đối với nhà XK là L/C không hủy ngang, xác nhận và trả ngay. Vào năm 1933 ICC lần đầu tiên đã tiêu chuẩn hóa bằng UCP.

Các bên ký kết hợp đồng có thể thỏa thuận sử dụng UCP, và có nhiều người đã làm như thế. Tiêu biểu một hợp đồng có thể quy định:

The Buyer, on receipt of the Confirmation of Order from the Seller, shall at least 20 days prior to the date of delivery open a confirmed, irrevocable letter of credit. This credit shall be subject to Uniform Customs and Practice for Documentary Credits, 2006 Revision, ICC Publication No. 600.

20% of the credit shall be available against the Seller’s draft accompanied by invoice; the remaining 80% shall be available against the Seller’s draft accompanied by the shipping documents.

Bên mua, ngay khi nhận được thư chấp nhận đơn đặt hàng của bên bán, trong thời hạn tối thiểu 20 ngày trước ngày giao hàng, phải mở L/C không thể hủy ngang, xác nhận.

L/C này theo đúng UCP 600, ấn hành năm 2006.

20% sẽ được thanh toán ngay khi bên bán xuất trình hối phiếu kèm với hóa đơn; 80% còn lại sẽ được thanh toán ngay khi bên Bán xuất hối phiếu kèm theo bộ chứng từ.

A letter of credit is a binding agreement by a bank to pay a certain sum of money when the exporter presents the necesiary documents to the bank. In a supermarket purchase, goods are exchanged for money; in a letter of credit situation documents are exchanged for money—that is why letters of credit are formally called documentary credits. The letter of credit is issued by an issuing bank at the request of the buyer. The issuing bank is in the country of the buyer, so it normnlly instructs a bank in the country of the exporter- the advising bank- to advise the exporter that the letter of credit has been opened. The advising bank will also handle all the necessary paperwork when the exporter tries to collect payment.

The process of issuing a letter of credit takes place as follows

- Exporter and buyer sign a contract

- The buyer asks a local bank to open a letter of credit

- The issuing bank asks a bank in the exporter’s country to advise the exporter that the letter of credit has been opened

- The advising bank advises the exporter that the letter of credit has been opened.

- In the next step, the exporter ships the goods. When the exporter passes the goods to the carrier, he receives shipping documents.

- He presents these documents to the bank as evidence that the goods have been shipped.

- The advising bank checks the correctness of the documents and sets the payment procedure in motion. The payment procedure depends on the type of credit: sometimes the advising bank merely sends the documents to the issuing bank and acts as a channel for payment; in other cases, the advising (or confirming) bank pays immediately “over the counter.”

- The advising bank notifies the issuing bank that the credit has been presented and forwards the shipping documents

- The issuing bank transfers necessary funds to the advising bank.

Two principles serve tomake the letter of credit safer:: (autonomy, and (b) strict compliance.

Autonomy (p.90)

The letter of credit is an agreement by a bank to pay money against documents: it is a separate agreement from the sales contract and is unconnected with it. The ICC Uniform Custom and Practice for Documentary Credits (UCP) makes this clear:

Credits, by their nature, are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s) even if any reference whatsoever to such contract(s) is included in the credit … In credit operations all parties concerned deal in documents, and not in goods, services and/or other performances to which the documents may relate.

This means that the bank is obliged to pay—whatever the disputes between the buyer and the exporter. For example, in one leading case, Discount Records bought phonograph records from an exporter. Payment was by letter of credit issued by Barclays Bank. The exporter delivered a mix of cassettes, eight-track cartridges and other non-contractual goods. Discount Records tried to get an injunction to stop Barclays from paying under the letter of credit. The court refused.

A Ietter of credit is like a bill of exchange given for the price of goods. It ranks as cash and must be honored. No set off or counterclaim is allowed to detract from it. The exporter will be paid—although later action in the courts may oblige him to make good any damage he has caused the buyer.

Strict Compliance

The buyer also has a safeguard: the bank will pay only if the shipping documents are exactly in line with the buyer's instructions. For example, let's say an FOB sales contract agrees that the exporter can deposit the goods in a warehouse if the ship arrives late and that this counts as delivery. This agreement has no direct bearing on the letter of credit: if the letter of credit requires a bill of lading and makes no mention of a warehouse receipt, then the bank simply cannot pay against a warehouse receipt.

Banks must follow their instructions strictly, as is shown in another landmark case. Dawson bought vanilla beans from Indonesia. Dawson instructed an American bank to open a letter of credit. One of the required shipping documents was a certificate of quality issued “by experts." The bank paid the exporter. The beans, when they arrived, were rubbish. The certificate of quality was signed, however, by only one "expert." Thus, because the bank had not strictly followed the instructions from Dawson, it could not collect from Dawson the money it had paid to the exporter—an expensive mistake for the bank.

How often do banks refuse payment? According to Bradgate, "over 50% of documents presented to banks under documentary credit transactions are rejected on first presentation". Figures quoted to the author by banks in some African countries go much higher: some banks report rejecting 90% of first applications for payment under letter of credit.

What happens when a bank refuses to pay under a letter of credit?

First the bank will cite a "discrepancy," some aspect of the documentation that is not in line with the terms of the credit. A checklist of commonly cited discrepancies makes depressing reading.

Once the bank has indicated the discrepancies, the exporter can proceed in one of three ways:

- Provide the missing paperwork or correct errors;

- Ask the buyer to instruct the bank to change the terms of the Ietter of credit- i.e., to issue an amendrnent;

- Ask the bank to process the letter of credit with the discrepancies but to pay only when (and if) the issuing bank permits payment.

If, as often happens, the letter of credit is near its expiry date. There may be no time for the exporter to provide the missing prices. In this case, the exporter (or the advising bank) must contact the buyer asking the buyer to instruct the issuing bank to extend the date of the credit. Whenever an amendment is necessary, the purpose of the letter of credit is largely defeated-—the buyer is now firmly in control of payment. Extra bank costs are a further burden on the exporter. In general, the exporter is advised to exercise scrupulous care in providing the documentation called for by the letter of credit.

Discrepancies Reported by Banks (p.92)

Problems with the Letter of Credit

* Documents required by the credit are missing.

* Documents required to be signed are not signed.

* The credit amount is exceeded.

* The credit has expired. -

* Documents are not presented within the required time.

* Shipment was short.

* Shipment was late.

Problems with the Bill of Lading

* The bill of lading is "unclean"—it has comments on it relating to damage to or other deficiencies in the goods.

* A marine bill or lading is required, but the bill does not state that the goods were "shipped on board" a named vessel.

* The bill of lading shows shipment between ports other than those specified in the credit.

* The bill of lading shows that the goods were shipped on deck. This is normally forbidden unless the credit expressly allows ii.

* The bill of ladding offers no evidence that freight was paid by the exporter (if this was required).

* There is no endorsement (if endorsement is necessary).

Problems with Insurance

* The insurance document is not of the type specified in the credit (e.g., a certificate of insurance is produced while the credit calls for a policy).

* The insurance risks are not those specified in the credit. This is forbidden unless the credit expressly allows it.

* The sum insured is below the figure required.

* Insurance cover does not begin on or before the date of the transport document.

Inconsistencies among the Documents

* Discription of the goods on the invoice and in the credit are differrent.

* Weights differ beetween two documents.

* Marks and numbers differ between two documents.

THE LETTER OF CREDIT: Confirmed and Unconfirmed

The mechanism of the simplest letter of credit is this:

- Buyer instructs an Issuing Bank to issue a Letter of Credit in favor of the SELLER.
Because the advising bank is normally in the buyer’s country, the exporter likes the issuing bank to instruct the advising bank in the exporter’s own country to make actual payments under the letter of credit.

- Buyer instructs an Issuing Bank to instruct an Advising Bank to pay under a Ltter of Credit in favor of the SELLER.

If the advising bank knows the exporter well, it may pay all of the value of the credit “over the counter.” But such payments are always made with recourse. With recourse? Let’s say that the issuing bank finds a problem with the documents and refuses to send funds to the advising bank to cover payment; in that case, the advising bank has recourse to the exporter. In plain words: the advising bank gets its money back from the exporter. A confirming bank is in a different position. It is asked to confirm the credit.

  • Buyer instructs an Issuing Bank to instruct a Confirming Bank to pay under a Letter of Credit in favor of the SELLER.

Under this arrangement, the bank in the exporter’s country confirms the credit. A confirming bank has an absolute obligation to pay the exporter according to the terms of the credit. If the credit is payable at sight, the bank pays must pay at sight without recourse. What happens, though, if the bank pays the exporter, and the issuing bank finds something wrong with the documents? Then the confirming bank- not the exporter- has a problem: it has paid the money to the exporter and has no way of recovering it. Exporters prefer this arrangement for obvious reasons; among the traditional trading nations of the world, it is the norm.

Unfortunately, problems can arise when very small banks or banks in countries with severe foreign currency shortages try to instruct a bank in the exporter’s country to confirm a letter of credit. Let’s say the Frudge and Gurgle Bank in Nonamia asks Superbank International in New York to confirm a letter of credit in favor of an American exporter of computers. If Superbank advises the exporter that the letter of credit has been opened, and confirms the credit, then Superbank must pay the exporter as soon as the computers leave New York bound for Nonamia.

What happens when Superbank forwards the documents to Fudge and Gurgle and asks for funds to cover the payment? Perhaps nothing at all. Or perhaps there is a delay of months or even years before the funds arrive. For this reason, banks are sometimes reluctant to confirm letters of credit, especially those from obscure banks. Or they may ask for “reconfirmation”: in our example, Fudge and Gurgle must find a well-known bank to confirm to Superbank that funds will be transferred- if not by Fudge and Gurgle, then by the “reconfirming bank.” The costs of such reconfirmation can be high.
How can the exporter be sure that the letter of credit is confirmed by the bank in his own country? When the text of the letter of credit arrives, it comes with a covering letter.

The stand-by letter of credit should also be mentioned at this stage. This originated in the U.S. because banking law in some states forbids banks to issue payment guarantees. Under a payment guarantee a bank agrees to pay if the buyer fails to do so. The stand-by letter of credit is set up in exactly the same way: the buyer agrees to pay in the normal way- if the payment is not made, the exporter can be apid under the stand-by letter of credit.


When a letter of credit is issued, the terms under which it can be paid are stated. UCP offers four choices, the first of which is clearly preferable for the exporter.


In this variation, the exporter presents the necessary documents to the paying bank (normally a confirming bank); the bank checks the documents. If they are in order, the bank pays the full face value of the letter of credit. This is usually what the exporter wants. Theo thể loại này, nhà XK xuất trình các chứng từ cần thiết cho ngân hàng thanh toán (thường là ngân hàng xác nhận); ngân hàng này sẽ kiểm tra chứng từ. Nếu các chứng từ sắp xếp đúng thứ tự và đúng các chi tiết, ngân hàng sẽ thanh toán toàn bộ giá trị ghi trên tín dụng thư. Đây chính là loại mà nhà XK mong đợi.


In settlement by deferred payment, the letter of credit is not payable until a number of days (180 days perhaps) after delivery. Payment is safe, but it delayed. The letter of credit cannot be paid, but it has an obvious value: if the exporter needs ready money, he can realize some part of this value- probably most of it. The exact figure he can discuss with any bank. On the face of it, this arrangement is less advantageous for the exporter than settlement by payment, but circumstances may make such a deal necessary. THANH TOÁN TRẢ CHẬM. Thanh toán bằng phương thức trả chậm là loại LC phải chờ đến một số ngày (180 ngày) sau khi giao hàng chẳng hạn. Thanh toán như thế an toàn nhưng thường phải mất thời gian chờ đợi. LC chưa thanh toán nhưng nó vẫn có giá trị: nếu nhà XK cần tiền ngay, anh ta có thể có được một phần giá trị - có khi được cả toàn bộ. Con số chính xác là bao nhiêu còn tùy vào khả năng thuyết phục của anh ta. Nhìn thoáng qua, cách thu xếp này ít có lợi cho nhà XK hơn so với thanh toán ngay, nhưng có một số hoàn cảnh cần thiết phải thanh toán chậm.


The procedure takes place as follows:

- The seller presents to the accepting bank the documents and a bill of exchange (time draft) drawn usually on the buyer.

- The accepting bank agrees to pay the bill when it matures.

- If the seller needs money immediately, he can exchange the letter of credit for cash (at a discount) with any agreeable bank.

So far the bank has paid cash to the exporter against the documents. Another approach is to use a bill of exchange. A bill of exchange is like a check (cheque); it allows the beneficiary (the exporter) to make a draft for a given sum of money on me buyer. In international trade, this bill of exchange is usually a time draft — it can be collected only after a certain date. That is obviously a danger for the exporter. Accordingly the accepting bank will “accept” the bill of exchange and agree to pay it at full face value when it falls due. A bill of exchange that is accepted can be “negotiated,” i.e., sols at a discount to any bank if the exporter needs ready money.


The seller presents to the negotiating bank the documents and a bill of exchange drawn usually on the buyer.

The negotiating bank negotiates the bill (i.e., pays it at a discount)

In this final method of settlement, the bank with whom the exporter deals is called the negotiating bank. In settlement by negotiation a bill of exchange again allows the exporter to make a draft on the buyer, but this bill must be negotiated- the advising (or other) bank has no authority to pay it at its full face value. This kind of settlement is the least satisfactory for the exporter, and in practice it is rarity.

The Letter of Credit and Its Associated Documentation

There are no rules as to what documents a letter of credit may or rnay not require. The bank must simply check that the documents specified in the letter of credit are in perfect order—it does not question the necessary or value of the documents—nor is it interested in the question of why the buyer wanted a particular document presented in a particular form. The bank is scrupulous, however, in checking that the documents are correct; this is the doctrine of strict compliance.'

The letter of credit contains a list of the documents that the exporter must present. Each document should be carefully and correctly named— "Marine Bill of Lading" not simply "BL" or “Bill of Lading."

The number of originals and the number of copies required should be stipulated. For example, "3/3 Marine Bill of Lading" means that the exponer must produce three originals and three copies of the marine bill of lading. Unless the letter of credit expressly states otherwise, the bank expects all documents to be originals. (It is "sometimes difficult with modern documentation to decide what is an Original and what is a copy. Any document which is authenticated and which states that it is an original is usually accepted.)

The ICC suggests that documents are listed in a certain order:

  • Commercial invoice

  • Transport document

  • Insurance document

  • Other documents such as: certificate of origin, certificate of analysis, packing list, weight list, phytosanitary cerrificate. etc.

Let us now look at each of these documents, in a little more detail to see what the banks are looking for.
Commercial Invoice

A commercial invoice must be made out to the applicant for the letter of credit (normally the buyer), unless otherwise stated in the letter of credit.

The description of the goods on the invoice must conform with the description in the letter of credit. To avoid conflicts in description, it is good practice to keep the description in the letter of credit as short as reasonably possible. The amount shown on the invoice should not be more than the amount permitted by the letter of credit: if it is, the bank may refuse to accept the invoice. Sometimes the buyer requires that an invoice must be certified or notarized; if so, the lener of credit should state exactly what is meant, for example, what. kind of certification made by whom. The following is an example of a commercial invoice using the SITPRO (United Kingdom Simplification of International Trade Procedures Board) standard form.

Transport Document

When the exporter passes over the goods to the carrier, the carrier issues a transport document appropriate for the particular means of transport involved. The main types are:

• Sea transport: Marine bill of lading (or sea waybill's)

• Air transport: Air waybill

• Rail transport: Railway consignment note

• Road transport: Road consignment note

• Combined transport: Combined transport bill of lading

The letter of credit should state the type of document required. If alternative means of transport or partial shipments are allowed perhaps by different modes of transport, the letter of credit should have the words "or" (or "and/or") between the names of the transport documents.

• e.g.: "Marine Bill of Lading and/or Road Consignment Note."

Some special problems associated with particular transport documents can be briefly highlighted here.

Shipment by Sea: Some types of sea transport are not allowable

unless the parties agree on them and letter of credit is worded accordingly. In particular, transport on the deck of a ship or in a pure sailing ship are not allowed. Thus, if the bank sees from a marine bill of lading that transport will take place on deck, and if the letter of credit does not allow this, the bank will reject the shipping document.

Often a marine bill of lading—which is negotiable (sellable) document -is not necessary: usually the buyer does not plan to resell the goods during- shipment. In this case, the carrier often issues a sea waybill, which is similar to the familiar road or rail consignment note.

Shipment by Air: The form of the air waybill (air consignment note) has been standardized by IATA. (International Air Transport Association). The air waybill is issued in three originals and nine copies. Only the second original goes to the consignee (the buyer).

Sometimes a letter of credit calls for "a full set of original air waybills"; this is obviously a mistake—(he exporter cannot provide the complete set; The bank, however, will follow the wording of the letter of credit exactly and refuse an "incomplete set” of waybills. Another incorrect requirement is that the air waybill show the date of the flight: a correctly completed waybill cannot show this information —but again the bank must insist on strict compliance.

Shipment by Rail: As with the air waybill, letters of credit calling for a rail consignrnent note occasionally make impossible demands. The "original consignment note" does not come into the possession or the exporter, so a letter of credit demanding the original is certain to cause delay in payment.

The Insurance Document

If shipment is made on CIF or CIP terms, the letter of credit will call for an insurance policy or certificate. The exact risks to insured are also normally stated. (If shipment is under Incotcrms other man CIF or CIP, the buyer may still ask the exporter to arrange some aspects of the insurance for him. In such cases, the letter of credit calls for documents to prove that the exporter has taken the agreed steps.)

Unless the letter of credit states otherwise, insurance coverase on a CIF or CIP shipment must be for 110% of the CIF (or CIP) value of the goods; if it is not, banks often refuse the insurance document.

Other Documents

Certificate of Origin: By-far the most common of the "Other documents" is the certificate of origin. This is required for imports into the buyer's country under a preferential tariff or other agreement. Procedures for obtaining certificates of origin vary from country to counntry.

A Chamber of Commerce or carrier can advise you.

Certificate of Inspection: Many countries, for example Indonesia, have found that the passage of imported goods through their own customs is easier il" the soods are inspected and valued in the country of the exporter. A number of international inspection companies, specialize in: such work." The Societe Generate de Surveillance (SGS) is one example. If SGS inspection is required, the parties should make a note of this effect in their conract and adjust in the delivery schedule to allow time for inspeciion. Obviously the details on the inspection certificate must correspond exactly with the details in the transport document and the commercial invoice. Discrepancies will almost certainly delay in payment.

Special Requirements: Many countries require containers to be fumigated before shipment; others have special requirements about packaging material: for certain kinds of products — foodstuff in particular – a health inspection is necessary; some African countries place severe restrictions on the import or export of wildlife or wildlife products. These are only examples—the list is endless. In each case the exporter and the buyer should issue it. The details must appear in the letter of credit: vague requirements such as "appropriate wildlife certificates” are likely to cause delay in payment- the bank and the exporter may have different views on what is “appropriate”.


Prompt paymenr of the letter of credit depends on the exporter presenting correct documentation. Remember- up to 90% of the applications for payment are rejected because of discrepancies.

Negotiating the Terms of a Letter of Credit

It is one of the buyer's main duties to provide the letter of credit. In fact, if an agreed letter of credit is not issued on time, the exporter often has the right to cancel the contract because of a fundamental breach by the buyer.

Unfortunately, many exporters pay little attention to the exact terms of the letter of credit until it is too late. Usually exporters leave it to the buyer to apply to his house bank for a letter of credit: the buyer provides the bank with outline information about the deal, and leaves the bank to draft the letter of credit as it sees fit. This procedure meets the interests of the buyer and the bank, but it often leaves the exporter with serious headaches. How can the exporter best protect his interests?

The first step is for exporter and buyer to agree exactly what documentation is required. Some items are discretionary, for instance the nature of the transport document or the terms of insurance. Other items are a matter of government regulation: the phytosanitary certificate or certificate of origin, for example. The two parties may have to talk to their Chambers of Commerce, to their banks or to the carrier to establish the complete list. The first step then is Agreement.

Once the list of documents has been agreed. Step 2 is incorporation of the list into the contract. There are many ways of doing this, one of which is particularly effective. The ICC has published a form that the buyer can use to apply for a letter of credit. In addition to the form, the ICC has offered detailed notes on how to complete it. The exporter and the buyer can complete this application form during their negotiations, and append a copy of the form to their contract. This form can then be passed to the bank as Specification of the required letter of credit. Thus, the credit, when issued, should be exactly as agreed by the parties with no nasty surprises for the exporter. We will discuss the form in detail when we have mentioned the remaining two steps.

The verification step is an obvious precaution: as soon as the exporter receives advice that the letter of credit has been opened, he should check that it complies with the agreernent he negotiated with the buyer. The danger here is that when the bank drafts the letter of credit, it lists documents or makes requirements that the exporter either does not understand or has not agreed to. Immediate discussion with the advising/confirming bank is essential since amendments are always time consuming. If the problem is spotted early enough, however, payment should not be delayed.

And finally Compliance. It cannot be said often enough that timely payment depends on exact compliance by the exporter with the terms of the credit.


AGREEMENT. The exporter and the buyer discuss and list all required documentation.

INCORPORATION. The list is corporated into the contract.

SPECIFICATION. The buyer applies for the letter of credit specifying the agreed documentation.

VERIFICATION. The exporter checks the credit to see that required documentation isas agreed.

COMPLIANCE. The exporter rigorously checks documentation and submits it to the bank.

Let us then turn to the form used to apply for a letter of credit. In practice, most banks have a form of their own, but it seldom differs widely from the ICC standard.

Segment 1: Applicant

The full name and address of the applicant (buyer), including normally the buyer’s account number with the issuing bank.

Segment 2: Issuing bank

The name of the issuing bank. This can be left blank. If you obtain an application form from a bank, the name is often preprinted.

Segment 3: Application Date/ Date of this application.

The date on which the application form is submitted to the bank. In negotiationg your contract, you can leave this blank.

Segment 4: Date and Place of Expiry

All credits stipulate an expiry date: i.e., the last date for presentation of documents to the bank. This should be carefully negotiated. The buyer will want an early date to save bank charges; the exporter will want enough time after delivery to present the documents and to correct any discrepancies that may be discovered by the bank. A “stale” (expired) letter of credit will not be paid without an amendment.

This timing decision should obviously be coordinated with the other timing decisions on the credit: Segment 14, latest date for shipment, and Segment 18, the period allowed after shipment for presentation of documents to the bank.

The place of expiry is often “At the counters of the confirming bank.

Segment 1: Beneficiary

The full name and address of the beneficiary- the exporter in most cases. (The buyer is normally suspicious of anyone other than the exporter being named as beneficiary.) In addition to the postal address, telephone, telex and fax numbers are sometimes included, especially if Segment 6 requests teletransmission.

Segment 6: Method of Issue

 Issue by (air)mail  Issue by teletransmission (which shall be the operative credit instrument)  With brief advice by teletransmission.

This segment deals with the method of issuing the letter of credit. In effect there are two choices: issue by mail and issue by teletransmission (normally telex). The choice depends on the time available to the parties: issue by mail is likely to be much slower than issue by telex. If the exporter wants the best of both worlds, he can cross two boxes: Issue by mail and Brief advice by teletransmission. The “brief advice” is a notification by telex that the credit has been issued and is on its way by mail. On this advice, the exporter might, perhaps, begin preparations for delivery.
Segment 7: Transfer of the Credit

A transferable credit is one which allows the first beneficiary (the exporter) to request the confirming bank to pay a third party. The effect is that the buyer will not necessarily know who is the actual supplier of the goods- will it be ythe exporter of the as yet unknown third party. In principle a letter of credit is not “transferable,” but it can be made so by crossing the appropriate box.

Segment 8: Confirmation

This is a crucial issue for the exporter. Will the bank in his country merely handle the paperwork, or will it make payment itself and recover the funds from the buyer’s bank? Exporters greatly prefer confirmation.

Segment 9: Amount

The amount of the credit should be expressed both in figures and in words. The currency of the credit should be stated using the ISO (International Standards Organization) currency code, e.g., USD for United States dollars, GBP for pounds sterling, or DEM for deutsche mark.

It is sometimes difficult to know exactly what the final invoice figure will be. Accordingly, many credits use words such as "about" or “aporoximately." In this case actual payment can be 10% more or 10% less than the stated amount. (See UCP Article 39.) Another common phrase is "up to" or "not exceeding." This is useful when partial shipment (and therefore partial payment) is not allowed, but when the final invoice may be for considerably less than the stated amount of the credit.

It is sometimes the case that some part of the contract price is to be paid by letter of credit and the rest by some other means—prepayment perhaps, or perhaps the buyer will retain a part of the price until the warranty period is over. In this case, the application should state (in Segment 19) what percentage of the invoice price is covered by the credit.

Segment 10: Partial Shipment

In principle, partiat shipments are allowed unless the “not allowed” box is crossed. You should distinguish carefully between partial shipments and shipment in installments. Shipment in installments means that an agreed schedule has been set up (e.g., three equai shipments in March. August and October 2007.) This schedule should be noted in ''Additional Instructions" (Segment 19). A partial shipment is simply an incomplete shipment with some part of the goods to follow later. Unless the buyer has some clear reason for wishing all the goods to arrive together, partial shipment should be "allowed."

Segment 11: Transshipment

Transshipment means moving the goods from one conveyance to another. Container transport ("combined transport) obviously presumes transshipment. It is only when goods travel by sea under a sea. waybill or marine bill of lading that it makes sense to forbid transshipment- and even then there would have to be special reasons for the prohibition: extreme fragility of the goods would be one example. Normally transshipment is allowed.

Segment 12: Availability

Credit available wilh

 by sight payment  by acceptance  by negotiation

 by deferred payment

against the documents detailed herein

 and beneficiary's draft at …

on ……
"Credit available with..."— this is sometimes followed by the name of the advising bank chosen by the exporter. More often it is left blank. In this case, the issuing bank is free to decide which bank will act for it in the exporter'scountry.

The various types of payment are discussed above. For the exporter, "by sight payment" is most advantageous: as soon as the bank has "sight" of the documents, i.e.. as soon as the exporter presents them, it pays.

Sometimes, though not often, the beneficiary (exporter) must make a draft on the bank to collect the money. In this case the box "and beneficiary’s draft is crossed, the word "at" is followed by "sight" (or possibly some number of days); the word "on" is followed by "nominated bank."
Segment 13: Insurance Covered by the Buyer

 insurance will be covered by us
This box is "for infonnation only"—it simpiy clarifies that insurance is taken care of "by us," i.e., by the buyer. The box is normally checked when the delivery terrn is FOB, CFR or some other term where the exporter is not required to present an insurance document.
Segment 14: Transport Information

Loading on board/ dispatch, taking in charge at/ from

not later than for transportation to:
This segment includes the "dispatch from...for transportation to..." information and the latest date of shipment.

In stating where the goods will travel from and where they will travel to, the parties should agree precise places—harbors, airports, and so on.

Generalized references such as "US East Coast Port" are sometimes used. After "no later than," the parties should enter a final delivery date. If they do not , then the date of expiry of the credit is. taken to be the final delivery date. Sometimes the formula "nor later than" does noc adequately state the agreed delivery time. In that case, the words should be deleted and others substituted, such as "during May 2007" or "not before 20th May 2007 and not after 28th June 2007."

This timing decision should be coordinated with the other timing decisions on the credit Segment 4; dare of expiry, and Segment 18, the period allowed after shipment for presentation of documents to the bank.

Segment 15: Description of the Goods

Goods (brief description without excessive detail) .
The goods description should be kept as brief as possible. The more complicated the description, the more chance there is of a discrepancy with some other document—the inspection certificate or the commercial invoice, for example. .

Quantities are sometimes stated in specific terms: "30 x 8-gallon drums," for example. In this case the bank checks the documents to ensure that the exact quantity has been shipped. If the terms are less specific (“50 tons of grade 3 sand," tor example), then the bank allows a tolerance or 5% either way unless the credit expressly excludes all tolerances. Even more vague, the credit may state the quantity as "about 50 tons” or “nearly 50 tons." In this case the bank allows a 10% tolerance before refusing payment.

To date, use of the Standard International Trade Classification Code of the Harmonized System Code which allocate code numbers to specific products is rare in letters of credit.
Segment 16: Incoterm(s)

 FOB  CFR  CIF  Other terms: …….
Three boxes here specify the most common terms or trade: FOB, CFR and CIF. In each case, the name of a place must be added in parenrtheses. If any Incoterm is used, it should be given in full. For details see Section 6 above.

Segment 17: Documents

The application form leaves the space where documents are to be listed without a heading of any sort. (The reason tor this omission is not clear.)

Documents should be listed in the recommended order. If there is not enough space, additional pages may be added.

• Commercial Invoice

• Transport Document

• Insurance Document

• Further documents

Segment 18: Presentation Period

After the transport document is issued (i.e.. after the goods are shipped, the exporter needs sometime to collect the required documents, to prepare them and to present them to the bank. Most buyers fix a maximum time between shipment and presentation. If this box is left empty, the UCP (Article 43) automatically allows 21 days, and that may be taken a a normal figure.

This timing decision should be coordinated with other timing decisions: Segment 4, date of delivery, and Segment 14, latest date for shipment.
Segment 19: Additional Instructions
Typical "additional instructions" include a statement of the percentage of

the invoice price covered by the credit if this is less than 100% (addinonal to Segment 9), or the delivery schedule if delivery is in installments (additional to Segment 14).

Segment 20: Authorization to Debit

We authorize you to debit our account
This segment is the buyer's responsibility alone. Normally nothing is added here. If, however, the buyer's account number is not mentioned under "applicant" in Segment 1, it may be stated after the word "account."
Segment 21: Signature

Name, stamp and authorized signature(s) of the applicant
The buyer signs and stamps the form.
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