The terms of payment DOCUMENTARY CREDIT Dr Katalin

The terms of payment DOCUMENTARY CREDIT Dr. Katalin Csekő

Classification of methods of payment independent ↓ advantageous to the SELLER risky for the buyer dependent ↓ advantageous to the BUYER risky for the seller ↓ payment in advance ↓ open account documentary credit documentary collection The seller does not want to suffer double default: ü To be out of the possession of the goods; ü Not to receive the value of the goods; The buyer wants to have a control on the goods before paying the price of them;

Documentary Credit 1. ü ü ü Usage set up by the International Chamber of Commerce; The latest version: UCP 600; The predecessor is the Commercial letter of credit (CL/C); The electronic form has already been introduced; Term: An irrevocable promise of payment undertaken by a bank on the behalf of its own as to the terms of its own to a named beneficiary; Payment will be effected by the bank, provided: ü the stipulated documents are submitted without any discrepancy: full compliance with each other and with terms of documentary credit itself; ü within the expiry date, at the nominated or issuing bank;

Documentary Credit 2. The principles 1. Principle of independence = the payment under the documentary credit is completely separated from the underlying transactions; The involved banks deal only with documents and never with the good itself; 2. Principle of strict compliance= the issuing and confirming bank is obliged to pay if there is no discrepancy in the documents=when they are letter by letter of the same and identical with the terms & conditions of the doc. credit; 3. Principle of fraud exemption=the issuing and the confirming bank can reject the payment only in case of fraud, fraudulency in the transaction, or of forged documents, BUT in the possession of a valid decision of a court in competence;

Documentary Credit 3. The issuance 1. The Buyer= The applicant gives order to his bank= issuing bank to issue a documentary credit= to undertake an irrevocable promise to pay to the seller=beneficiary; 2. The buyer concludes a contract of reimbursement and lays a coverage for the value of the goods + banking charges; 3. The Buyer’s bank= issuer issues the doc. credit, which is a contract including the promise of payment and send it as a SWIFT message to the seller’s bank =advising bank; 4. Advising bank= a bank which has been nominated by the issuer to give a notice upon the issuance towards the seller; 5. Involved banks can be nominated to other functions such as: confirmation, negotiation, paying;

Documentary Credit 3. Details of the order to issue ü ü ü Type of Credit: irrevocable ( or revocable; confirmed; freely negotiable); Name, and address of the beneficiary; Name and address of the applicant, buyer; The total amount of the documentary credit; Unit price; The quantity of goods; Delivery term as to Incoterms 2000/2010; Delivery time; Expiry date and place; The (brief) description of the goods; The specific type and the required copies of documents; Transhipment; Partial shipment;

Documentary Credit 4. The Honor 1. Seller = the beneficiary performs = delivers the goods, and acquires all documents of the performance such as commercial invoice, weight list, ocean bill of lading, certificate of origin; 2. Seller forwards the documents stipulated by the doc. credit to the advising bank in order to present them to the issuing bank for payment; 3. The issuing bank receives the documents check them word by word (or letter by letter) in 5 banking working days and declares whether or not they are in the best order If the presentation is in full compliance with the terms and condition of the doc. credit and within the expiry and honors: ü Pay at sight; ü Pays at deferred time e. g. at 60 days on board; ü Accepts a bill of exchange drawn upon the issuer;

Documentary Credit 5. Functions of banks ü ü Advising bank: has a „postman” function, but has to check the authenticity of the doc. Credit; Confirming bank: adds the confirmation of its own to a credit, on issuing bank’s request=undertakes to pay in its own name; Negotiating bank: „purchases” as nominated bank drafts, (drawn on a bank other than the nominated bank, commonly on the issuer and the confirmer) and gives money in advance for complying documents, discounting interests + banking charges due from the date of payment until the negotiating bank receives reimbursement from the issuing bank; Paying bank: nominated bank for payment, a bank with which the credit is available;

Documentary credit 6. Types of the credit ü ü ü ü ü Irrevocable (revocable)= can not be unilaterally modified or cancelled, Confirmed; At sight= after checking it the bank pays; Deferred=after checking it the bank pays…. . days after (commonly) from on board time; Acceptance=after checking the issuer or confirmer accepts a bill of exchange drawn upon the bank and pays on the due date of the B/E; it is a specific form of the deferred type; Back to back; Transferable; Red clause; Revolving;