Eastern Mediterranean University BANK406 Corporate Banking Law and Practice CHP 6

Payment in International Sales ● The seller requires more certain method of payment than the ones used in domestic trade. If the seller has confidence in the honesty and solvency of the buyer he would require more simple and direct ways for payment. ● Payment systems; 1)Prepayment 2)Open-account 3)Collection 4)Letter of Credit

Bills of Exchange (Foreign Draft) ● It can be defined as ‘a written, unconditional order by one party (the drawer) to another (the drawee) to pay a certain sum, either immediately (a sight bill) or on a fixed date (a time bill) for payment of goods and/or services received.’ ● Bill should be accepted by the person whom it is addressed. This person should write accepted on its face and sign it ; which means that he undertakes to pay the bill and he is liable as acceptor. If a bank accepts, it becomes banker acceptance, others are trade acceptance.

Bills of Exchange (cont.) ● Bill of exchange is a negotiable instrument. It can be transferred by indorsement and delivery. Any holder who indorses the bill to another party becomes liable on it as a party to the bill. As a result, the holder of the bill has right of action against the acceptor, the drawer and all other prior parties to the bill. This right of action can be used if the acceptor refuses to make payment when the document is presented at the proper time. * It should be noted that simplicity of transfer of bill of exchange makes it invaluable in international trade transactions.

Direct Payment ● In direct payment, payment made straight to the actual payee, without sending it through an intermediary or a third party. The seller prefers this way if he has confidence in the solvency of the buyer. -In Telegraphic Transfer the buyer’s bank communicates with a bank in the seller’s country instructing it to pay the seller. -In Banker’s Draft the buyer obtains an order from his bank, drawn on a bank in the seller’s country and naming the seller as payee.

Collection ● After the goods have been sent, the seller instructs his bank to make arrangements through a bank in buyer’s country to collect payment from the buyer on a bill of exchange drawn on him by the seller. - The bill of exchange may be sent to the bank accompanied by the documents relating to the goods, which the bank will hand to the buyer when he pays on the bill of exchange. This is known as documentary remittance. If the bill of exchange is sent without the documents attached, it is known as clean remittance. * The remitting bank must comply with the seller’s instructions and it is liable for consequences of any failure.

Letter of Credit ● The L/C is the most used payment system in international trade. The buyer instructs his bank (issuing bank) to open a credit in the seller’s name through a correspondent bank in the seller’s country. The correspondent bank notifies the seller of the opening of the credit, on which the seller may draw only on presentation of the correct shipping documents to the bank. * In this case the bank is responsible to pay the seller, this is one of the reason of why L/C is most used payment system in int. trade since parties do not know each other. The bank is putting his prestige to pay which is higher than any individual. ● Rules applied to documentary credits are called ‘Uniform Customs and Practice for Documentary Credits’

Types of Letter of Credit ● Revocable and Irrevocable Credits; A revocable credit is the one which the buyer can cancel or modify it. An irrevocable credit cannot be cancelled or modified. An irrevocable credit more secure method for the seller and the majority of L/C’s are irrevocable ● Confirmed and Unconfirmed Credits; If a L/C is promised to be paid by 2 banks (issuing bank and correspondent bank), this credit is called confirmed credits. On the other hand in unconfirmed credit, the correspondent bank does not take any obligation and it only notifies the seller of the opening of the credit.

● Revolving Credits; This type of credit is employed when buyer and seller deal regularly with one another or have arranged to deal over a period. It eliminates the need of setting up separate documentary credit for every transaction. ● Back to Back Credits; The seller, unless he is a manufacturer, may require his buyer to set up a credit in his favor and then use this credit to support a second credit, which he opens in favor of his own supplier. The second or further credits will naturally differ from the first in respect of the price and periods for which the credit is valid.

● Red Clause Credits; In order to pay his supplier the seller is allowed to draw on the credit before shipment of the goods. This type depends to a large extent on the integrity of the seller. ● Deferred Payment; Normal form as to payment against documents except that the paying bank is not called upon to pay until some time later, that is payment is going to take place after the shipment of the goods. ● Standby Credit; A standby letter of credit is a guarantee of payment issued by a bank on behalf of a client that is used as "payment of last resort" should the client fail to fulfill a contractual commitment with a third party.

● The relationship between the parties in L/C; The buyer, who arranges for the credit to be opened, will have a contractual relationship with the issuing banker (his agent). The issuing bank will appoint a correspondent bank as its own agent in the seller’s country. There will be no privity of contract between the buyer and correspondent bank. Correspondent bank has to comply with the issuing bank’s instruction. ● The opening of the credit;.The credit opened by the buyer must be of the agreed type or the seller will be able to reject the contract. If he accepts the credit as opened, we can say that he gave up his right to reject the contract.. The credit should be opened in good time and the correspondent bank must inform the seller that the credit is opened.. The date on which the goods are to shipped is important in relation to the time of opening the credit because the seller cannot be sure whether the buyer is serious or not until he is advised that the credit is opened

● The Tender of Documents; The buyer instructs issuing bank about the documents which the seller is to present to the bank in order to be allowed to draw on the credit. The bank will allow to the seller to draw only if the documents are in strict compliance with these instructions and a bank, which accepts documents that do not comply, will be liable to the buyer. This is the rule of strict compliance. The bank is not a dealer of the goods, only deals with the documents. ● Short-circuiting; The seller’s duty is to present the documents to the bank and is not entitled to short-circuit the documents by presenting the documents directly to the buyer and demanding payment from him. Short-circuit is an invalid tender as it means the seller is failed to comply with the terms of credit

● Expiry of Credit; The expiry date of credit must be expressly stipulated and it is not possible to extend the expiry date of credit. Documents presented before the expiry date showing shipment after the last date for shipment will not be accepted as well. ● Assignment and Transfer of Credits; A transferable credit may be transferred once only and it is possible if the buyer instructs the issuing bank and the bank expresses that the credit is transferable. The seller can affect the transfer after receiving the credit by requesting from the bank to transfer the credit to a named second beneficiary (usually his own supplier) and in this case the first beneficiary drops out which may prevent the buyer discovering the source of goods. The price and the period of validity of the credit will naturally differ from the original credit.

● Application by the buyer to the bank for L/C; Letter of credit is based on the contract for the sale of goods. As a principle arranging for payment is the duty of the buyer. The buyer fills up a printed form of application supplied by his bank and this form includes terms and conditions on which bank is to issue the credit. Additionally it specifies the documents against which the bank may make payment. All credits must clearly indicate whether they are available by sight payment, by deferred payment, by acceptance or by negotiation. Credit must also nominate the bank, which is authorized to pay or to accept drafts or to negotiate, unless the credit allows negotiation by any bank.