1. Chapter 11 Payment of Goods
Nancy Tu

2. Vocabulary about International Payment
Draft/ bill of exchange / bill, promissory note, check, money order(汇款单)
drawer, drawee, payer, payee, title, issue, holder/ bearer, negotiable, endorsement, sight, a sight draft, a time/ usance draft, presentation, acceptance, payment, dishonor, protest, recourse, a notary public(公证人), certified to pay(保付), legal entity, indebtedness(欠债), mortgage(抵押), insolvency(无力偿付债务 ), default(违约), claim
consignment, documentary collection, principal, submit, the remitting bank(汇出行，托收行，寄单行), the collecting bank(代收行), a collection order, cash-on-delivery, at maturity

3. Learning Objectives
After the completion of this chapter, you will be able to:
learn how to fill in and use the three basic payment instruments: draft, promissory note and check;
learn three basic payment methods: remittance, collection and L/C;
learn the advantages and disadvantages of the above payment methods;
learn the procedure of making international payment through the above methods;
learn several most common payment terms.

4. Section One Means of payment in international trade
In trade, the most frequently used means of payment include currencies and bills. Unlike in domestic trade, in practice, international sellers often take certain bills as instrument of payment in international trade, as follows:
Bill of exchange
Promissory Note
Check / Cheque

5. 1. Draft or Bill of Exchange
What is a draft or Bill of Exchange?
(unconditional order?)
A bill of exchange, also called draft, is defined as “ an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable future time, a sum certain in money, to or to the order of a specified person, or to bearer.

6. What are the basic contents of a draft?
( 7 items)
Date and place of issue
Time of payment
Name of payee
Currency and amount
Credit reference
Name of drawee / payer
Drawer’s name and signature

7. There are many types of drafts
There are many types of drafts. Can you name some and give brief explanations on those drafts?
Commercial bill and Banker’s Bill
Clean bill and Documentary bill
Sight (or Demand) Bill and Time ( or Usance) Bill
Commercial Acceptance Bill and Banker’s Acceptance Bill

8. What is a common process of using a sight draft?
( issuance, presentation, payment )
What is a common process of using a time draft?
(issuance, presentation, acceptance & payment)
What is endorsement? What are the three kinds of endorsements? ( restrictively, demonstrative, blank )

9. Exchange Hongkong,
for US$ 100, April 2, 2006
At 60 days’ sight, pay Jim Green or order the sum of US Dollars One Hundred Thousand only.
To: Helen Brown
3 Flower Road
Hong Kong
For ABC company: Samuel Smith
Signature

10. 2 Promissory Note What is a promissory note? (unconditional promise?)
A promissory note is an unconditional promise in writing made by one person to another signed by the maker, engaging to pay, on demand or at a fixed or determinable future time, a sum certain in money, to, or to the order, of a specified person or to bearer.

11. Two types of promissory note:
commercial promissory note (issued by ?)
banker’s promissory note (issued by ?)
time or sight note?

12. Basic contents of a promissory note:
say “ Promissory Note”
unconditional promise of payment
currency and amount
name of payee
date and place of issue
drawer’s signature

13. The difference between draft and note?
Note: two parties ---- drawer and payee
Draft: three parties ---- drawer, payer / drawee & payee
Note: drawer = payer (not necessary to make acceptance for time note)
Draft: drawer maybe payee drawee = payer (must make acceptance for time draft)

14. Promissory Note New York,
for US$2, April 1, 2005
At 30 days after date we promise to pay to the order of ABC Company the sum of two thousand US Dollars only.
For ABC International Pte. Ltd. China
Signature

15. 3 Check What is a check? (unconditional order)
How does a check differ from a draft?
( a special draft : drawee: a bank ; a sight draft)
What are the different types of checks?
( title, crossed check, confirmed check)

16. Check for USD 10, London,
May 5,2005
Pay to the order of James Smith the sum of ten thousand US Dollars only.
To: Bank of China,
Beijing, China
For China National
Art & Craft Import & Export Co.
Signature

17. Case analysis: fill in the following information of a draft
Background: 上海宏生贸易公司在到银行结汇之前,于2007年5月31日按信用证之规定, 向澳大利亚银行阿德莱分行开具汇票。

18. Requirements: fill in the following information
Name of bank
Date of drawing
Amount in figure
Number
Amount in Words
Name of drawer

19. 1 Drawn under 1 ADELAIDE L/C No. NY05F0303976 dated 2 .
Payable with % per annum 7,586.00
No Exchange for Shanghai, China
At ****** sight of this [ ]of Exchange (Second of exchange being unpaid)

20. pay to the order of SHANGHAI GRAND LIFE TRADING CO.
the sum of ONLY.
To. BANK OF AUSTRALIA,
ADELAIDE 6
KEYS

21. 1 Drawn under ADELAIDE L/C No. NY05F0303976 dated .
BANK OF AUSTRALIA
Drawn under ADELAIDE
L/C No. NY05F
dated
Payable with % per annum 7,586.00
No Exchange for Shanghai, China
At ****** sight of this [ ]of Exchange (Second of exchange being unpaid)
May 31, 2007
USD7,586.00
FIRST

22. pay to the order of SHANGHAI GRAND LIFE TRADING CO. the sum of .ONLY.
To. BANK OF AUSTRALIA,
ADELAIDE .
SENVEN THOUSAND FIVE HUNDRED AND EIGHTY-SIX
SHANGHAI GRAND LIFE TRADING CO.

23. Section Two Modes of International Payment
In international trade, both the exporters and the importers face risks in export or import transactions because they will inevitably experience the possibility that the other party may not fulfill the contract.
In order to prevent such risks, different methods of payment have been developed, i.e.:
remittance
collection
L/C

24. Brief introductions to three payment methods
Remittance
Remittance by airmail (M/T)
Telegraphic Transfer (T/T)
Remittance by Banker’s Demand Draft ( D/D)
Collection
Document against Payment (D/P)
Document against Acceptance (D/A)
Letter of Credit

25. Remittance (T/T) funds Contract 3 7 Remitter Beneficiary
Remitting Bank
Paying Bank 1 2 4 5 6

26. Collection ( D/P at Sight)
Payer or Importer
Contract
Principal or Exporter
funds 5 4 3 1 7 2
Collecting Bank
Remitting Bank 6

27. The Letter of Credit
Why can the documentary credit solve the possible problems arising from the distrust between the exporter and the importer?
L/C’s objective is to facilitate international payment by means of the creditworthiness of the bank. This method of payment offers security to both the seller and the buyer. The former has the security to get paid provided he presents impeccable (无缺点的) documents while the latter has the security to get the goods required through the documents he stipulates in the credit. This bilateral security is the unique and characteristic feature of the letter of credit.

28. What is a documentary credit?
A documentary credit is the written promise of a bank, undertaken on behalf of a buyer, to pay a seller the amount specified in the credit provided the seller complies with the terms and conditions set forth in the credit.
What are the two issues involved in a documentary credit?
the presentation of documents that evidence title to goods shipped by the seller
payment

29. The Major Contents of the L/C Parties to the Transaction
What are the major contents of an L/C?
Parties to the Transaction
What are the four parties to a bank documentary L/C transaction?
What does each party do in that transaction?
the buyer
the issuing bank
the advising bank
the seller

30. 1 The Buyer (Importer/Applicant) 2 The Issuing Bank
Details on Procedure
1 The Buyer (Importer/Applicant)
What about the wording in a documentary credit?
2 The Issuing Bank
What will the issuing bank do upon receiving the buyer’s application?
3 The Advising Bank
What will the advising bank do upon receipt of the L/C from the issuing bank?
What is the confirming bank, paying bank and negotiating bank?

31. 3.5 The Advising Bank and the issuing bank
4 The Seller
What should the seller do upon receipt of the L/C advice?
Why shouldn’t the seller accept provisions of the L/C that specify documents such as acceptance reports, progress reports?
3.5 The Advising Bank and the issuing bank
Is the issuing bank also the paying bank?

32. Letter of Credit 2 Importer (Applicant) Issuing Bank Reimbursing Bank
Exporter (Beneficiary)
Advising Bank
Confirming Bank
Negotiation Bank
Paying/ Accepting Bank 9 10 1 3 7 8 4 5 6

33. notes
Sales contract is established between the exporter and the importer, agreeing to settle the payment by L/C.
Based on the sales contract, the importer (the applicant) fills in an application form and requests his banker (the issuing bank) to issue a credit in favor of the exporter (the beneficiary). It is the importer’s duty to make the application form consistent with the sales contract.

34. The importer’s bank will examine the creditworthiness of the buyer before it considers issuing the documentary credit. If the applicant is a new customer to the bank, he may need to pay a deposit margin up to 20% of the credit amount. Having been issued, the credit is then passed on to the exporter’s bank who represents the beneficiary in his country.

35. The exporter’s bank is expected to pass the documentary credit to the beneficiary after verification of the genuineness of the credit as:
Advising bank/ Transmitting bank – When the exporter’s bank assumes no payment undertaking upon himself. Or
Confirming bank – When the bank adds his own confirmation on the credit while advising or transmitting the credit at the authorization or request of the issuing bank.

36. On receiving the documentary credit, the exporter should check the terms and conditions of the credit against the sales contract to ensure that everything agrees with the credit requirement. If there is a discrepancy, the beneficiary may have the option to accept it as it stands or to persuade the applicant to have it amended so as to be in line with the contract, for these two documents are independent of each other from the legal point of view.

37. After shipment is made and shipping documents are obtained, the exporter will prepare other documents according to the L/C requirements. These documents are to be presented to:
The negotiation bank – If the credit is a negotiable L/C, payment should be effected to the beneficiary by negotiation. When the advising bank gives value for the documents, the advising bank becomes the negotiation bank.

38. The paying bank – If the credit is a payment credit, payment should be effected to the beneficiary by either sight or deferred payment. When the advising bank is the nominated bank, it will become the paying bank after payment is effected.
The accepting bank – If the credit is accepting credit, payment should be effected by acceptance and payment after the payment is effected by acceptance.

39. After receiving the documents from the beneficiary, the negotiating bank / paying bank / accepting bank will check the documents against the terms and conditions of the credit. If all are proper, the above said bank will effect payment by negotiation/ payment/ acceptance.
After payment is effected, the negotiating bank/ paying bank/ accepting bank will forward the documents to the reimbursing bank to claim reimbursement. If no reimbursing bank is nominated in the credit or the reimbursing bank fails to make the compensation, the reimbursement will be effected by the issuing bank.

40. Having received the documents forwarded from the overseas nominated bank, the reimbursing bank or the issuing bank will make reimbursement. Although the reimbursing bank is not required to make reimbursement against correct documents, the issuing bank will check the documents when making compensation.
The issuing bank will notify the importer of the arrival of documents and require the latter to get ready to make payments.
Documents will be released to the importer against his payment.

41. Conformity with the Documentary Credit
What is the meaning of “ banks deal in documents and not goods in the L/C procedures”?
The banks are only concerned with the documents representing the goods instead of the underlying contracts.
They have no legal obligation whether the goods comply with the contract.
They will be considered as having fulfilled their responsibility so long as all the documents comply with the stipulations of the credit.
If the importer finds any problems with the goods, e.g. poor quality, he has to contact or even take legal action against the exporter instead of the bank so long as the documents are “proper” on their face.

42. How to Handle Documentary Discrepancies
What methods can the exporter adopt to get paid when discrepancies are found in the documents presented to the bank?
Correct the discrepancies and resubmit the documents and drafts within the validity of the L/C.
Request the importer to waive(不再坚持) discrepancies if they do not materially affect the shipment.
Provide a documentary discrepancy guarantee if, unwilling to waiting for the waiver, the exporter is confident that the importer will accept the discrepancy.
Submit the documents on collection basis.

43. Case Analysis: find out the following information from a sample L/C
Case Analysis: find out the following information from a sample L/C. （P16～P19 of the doc I’ve given you）
Issuing Bank & Advising Bank
type of L/C
L/C No. & date of issue
applicant
date of expiry
place of expiry
beneficiary
amount
negotiation bank
information about draft
partial shipment
transshipment
port of loading
port of destination
description of goods
latest delivery date
documents required

44. Types of letters of credit(P342 ~P346)
Clean Credit and Documentary Credit
What is a clean credit?
What is a documentary credit?
Revocable Credit and Irrevocable Credit
What is a revocable credit?
What is an irrevocable credit?
Which is of advantage to the seller and why?
What is the difference in the stipulations of this aspect between UCP 400 and UCP500?

45. Confirmed Credit and Unconfirmed Credit
What is the difference between a confirmed credit and an unconfirmed credit?
What should you do if you have some doubts about the issuing bank and its standing?
Sight Credit and Usance Credit
What is a sight credit?
What is a usance credit?
What can the beneficiary do if he wishes to get payment before the maturity of a usance draft.

46. Transferable Credit and Non-transferable Credit
What is a transferable documentary credit?
How to use the transferable credit?
How many times can the transferable credit be transferred?
If the L/C is transferred, is the first beneficiary still responsible for fulfilling the contract?
Revolving Credit
What is a revolving credit?
Under what circumstances will a revolving credit be used?
What is the difference between a cumulative and non-cumulative revolving credit?

47. Red Clause Credit( Anticipatory L/C)
Standby Credit
What is a standby credit?
In what cases will it be used?
Red Clause Credit( Anticipatory L/C)
What is a red clause credit?
What does the red clause state?
What are the advantages and disadvantages of using this credit?

48. Reciprocal L/C Back to Back Credit What is a reciprocal L/C?
What are the features of this credit?
Why is this type of credit used?
Back to Back Credit
What is a back to back credit?
Why are banks not willing to open a back-to-back L/C?
What will the banks do if they are required to open a back-to-back credit?

49. Homework Review chapter 11 & focus on the use of draft and L/C
Do exercises P353 ~ P263
Group Work: Try to explain in your own words how to make payment by Remittance, Collection & L/C in international trade.