Topic 7 - International Sales Transactions Flashcards
(222 cards)
1
Q
What is an FOB contract?
A
A Free on Board (FOB) contract requires the seller to deliver goods on board a vessel nominated by the buyer, with risk transferring when the goods cross the ship’s rail.
2
Q
What are the seller’s main duties in an FOB contract?
A
Deliver goods on board the vessel, ensure conformity to contract terms, obtain export clearance, and provide necessary documents.
3
Q
When does risk pass to the buyer in an FOB contract?
A
Risk passes when the goods cross the rail of the nominated vessel.
4
Q
Who is responsible for freight and insurance in an FOB contract?
A
The buyer is responsible for arranging and paying for freight and insurance.
5
Q
What is a CIF contract?
A
A Cost, Insurance, and Freight (CIF) contract requires the seller to arrange shipping, insurance, and freight to the destination port.
6
Q
When does risk transfer to the buyer in a CIF contract?
A
Risk transfers upon shipment, but the seller bears the cost of transport.
7
Q
What are the key documents in a CIF contract?
A
A bill of lading, insurance certificate, and commercial invoice.
8
Q
How do FOB and CIF contracts differ in terms of cost allocation?
A
In FOB, the buyer pays for freight and insurance, whereas in CIF, the seller includes these costs in the contract price.
9
Q
What is a “string transaction” in international sales?
A
A series of sales where the goods are resold multiple times while in transit, using negotiable documents.
10
Q
What case distinguished FOB from CIF contracts?
A
Pyrene v Scindia (1954).
11
Q
What is a bill of lading?
A
A document serving as a receipt, evidence of carriage, and a document of title.
12
Q
What functions does a bill of lading serve?
A
It acts as proof of shipment, a contract of carriage, and a negotiable instrument.
13
Q
What is strict compliance in documentary sales?
A
Documents must exactly conform to contract terms for banks to process payments, i.e. a perfect tender.
14
Q
What case reinforced strict compliance in trade documents?
A
JH Rayner v Hambro Bank (1943).
15
Q
What is an instance of the importance of documentary compliance in CIF contracts?
A
The seller’s obligation is fulfilled by presenting correct documents, even if goods are lost at sea, as in Manbré Saccharine Co Ltd v Corn Products Ltd (1919).
16
Q
How does a seller retain control in a CIF sale?
A
By holding the bill of lading until payment is received.
17
Q
What happens if documents in a CIF sale do not match the contract?
A
The buyer may reject the documents and refuse payment.
18
Q
Why is a bill of lading crucial in financing?
A
It allows buyers to obtain goods and serves as collateral for bank credit.
19
Q
What does the Carriage of Goods by Sea Act 1992 regulate?
A
The rights of buyers to sue carriers when holding bills of lading.
20
Q
How do bills of lading facilitate “string sales”?
A
They allow goods to be traded while in transit.
21
Q
Why is financing important in international trade?
A
It reduces the risk that a seller will not receive payment and that a buyer will pay and not receive goods.
22
Q
What role do banks play in trade finance?
A
Banks facilitate risk reduction and provide the funds to finance trade.
23
Q
What international standard governs documentary credits?
A
UCP 600 (Uniform Customs and Practice for Documentary Credits).
24
Q
What risk does a seller face in international trade?
A
Non-payment by the buyer.
25
What risk does a buyer face in international trade?
Non-delivery or receiving defective goods.
26
What is the function of a trade guarantee?
It ensures payment to the seller even if the buyer defaults.
27
What are two common forms of trade finance?
Letters of credit and documentary collections.
28
What is the principle of autonomy in documentary credits?
The letter of credit is independent of the underlying sales contract.
29
How do banks ensure fairness in financing trade?
By focusing only on document compliance, not contract disputes.
30
What case confirmed the autonomy of letters of credit?
United City Merchants v Royal Bank of Canada (1983).
31
What is a documentary credit?
A payment mechanism where a bank guarantees payment to the seller upon presentation of conforming documents.
32
What are the steps in a documentary credit transaction?
Buyer requests a bank to issue credit → bank notifies seller → seller presents documents → bank verifies compliance → payment is made.
33
What is the difference between confirmed and unconfirmed credits?
Confirmed credits involve a second bank guaranteeing payment; unconfirmed credits do not.
34
What is an irrevocable letter of credit?
A credit that cannot be amended or canceled without the agreement of all parties.
35
Why do banks insist on strict compliance in letters of credit?
To maintain trust and avoid disputes over payment.
36
What is the fraud exception in documentary credits?
Banks may refuse payment if fraud is clearly proven.
37
What case established the fraud exception principle?
Edward Owen Engineering v Barclays Bank (1978).
38
What rule does UCP 600 Article 14 establish?
Banks may accept minor discrepancies that do not affect document validity.
39
How does UCP 600 affect strict compliance?
It slightly relaxes the requirement by allowing minor variations.
40
What is a standby letter of credit?
A credit that functions as a guarantee, only payable if the buyer defaults.
41
How do banks mitigate risk in documentary credits?
By only paying when documents strictly conform.
42
What are trade credit insurance policies?
Policies protecting exporters from buyer default.
43
What is a red clause letter of credit?
A credit that allows the seller to draw funds in advance of shipment.
44
Why do importers prefer letters of credit?
They ensure goods meet specifications before payment.
45
What is forfaiting in trade finance?
Selling trade receivables to a third party at a discount.
46
What is a bank guarantee in trade finance?
A promise by a bank to cover a buyer’s payment obligations.
47
What is the key legal principle behind trade finance?
The autonomy of financial instruments from the underlying contract.
48
What role do correspondent banks play in trade finance?
They facilitate transactions between banks in different countries.
49
What is open account trading?
A trade arrangement where the buyer pays after receiving the goods.
50
What is the main disadvantage of open account trading?
Higher risk of non-payment for the seller.
51
What are the two main ways to identify a sale as international in character?
First, by the movement of goods across national borders; second, by the location of the parties’ places of business in different states. The second approach is more widely accepted and is the basis of the CISG.
52
Why is the location-based test for international sales preferred over the goods-movement test?
Because it better reflects legal complexity—cross-border obligations, different legal systems, and enforcement challenges—even if the goods themselves do not move between countries.
53
What legal instrument plays a central role in defining international sales contracts and when does it apply?
The United Nations Convention on Contracts for the International Sale of Goods (CISG) applies when the parties have places of business in different contracting states, unless excluded.
54
What is the significance of Incoterms in international sale contracts?
Incoterms® 2020, when incorporated into a contract, standardize delivery obligations, allocation of costs, and risk transfer between seller and buyer. They support predictability and reduce disputes.
55
What legal challenge arises in the shift toward paperless trade, particularly regarding documents of title?
Under English law, electronic documents are not currently recognized as documents of title, which complicates their use in place of bills of lading for transferring possession or ownership.
56
What are the differences between dispatch contracts and arrival contracts in export sales?
In dispatch contracts, the seller’s responsibility ends when goods are handed over to the carrier; in arrival contracts, the seller must ensure goods reach a specified destination, bearing the transit risk.
57
Why does an export sale pose special legal risks to the seller?
Due to difficulty checking buyer credit, unfamiliar legal systems, enforcement abroad, currency fluctuations, political risk, and the complex logistics of cross-border transactions.
58
What are the main drivers behind the global trend toward electronic export procedures?
Cost reduction, process efficiency, speed, environmental concerns, and improved security—especially accelerated by technological advances and COVID-19 disruptions.
59
How can trade terms like “EXW” or “FOB” affect the delivery point and allocation of risk?
Trade terms can be both price terms and delivery terms. If the contract is silent, the quoted term determines the delivery point and thus the point at which risk transfers to the buyer.
60
What are the seller’s main duties in a strict f.o.b. contract?
To place conforming goods on board the buyer-nominated vessel at the named port of shipment within the contract period, and to provide documents enabling the buyer to obtain possession from the carrier (para 34.01).
61
Who is responsible for nominating the vessel in a strict f.o.b. contract, and what happens if they fail to do so in time?
The buyer is usually responsible. Failure to nominate in time can amount to repudiation, entitling the seller to terminate and claim damages (paras 34.04–34.05).
62
When can a buyer make a substitute nomination of a vessel in a strict f.o.b. contract?
If done in time and the new nomination is effective. However, the original nomination remains binding if the substitution fails (para 34.06).
63
Does s 32(3) of the Sale of Goods Act 1979 apply to f.o.b. contracts?
Yes. The seller must give notice enabling the buyer to insure the goods, but this duty is fulfilled if the buyer already has sufficient information (para 34.07).
64
When does property in the goods typically pass under a strict f.o.b. contract?
When the goods are placed on board the nominated vessel, unless the seller has reserved the right of disposal by retaining the bill of lading (paras 34.13–34.15).
65
At what point does risk pass to the buyer under a strict f.o.b. contract?
Risk passes on shipment, even if the seller has retained the bill of lading or property has not yet passed (para 34.16).
66
What is the significance of appropriation in f.o.b. and c.i.f. contracts?
Appropriation identifies the goods to the contract. Without it, the seller cannot tender valid shipping documents or transfer property (paras 34.25, 34.34, 34.36).
67
What documents must the seller tender under a c.i.f. contract?
A bill of lading evidencing shipment, a policy of insurance, and a commercial invoice (para 34.20(a)).
68
Who bears the risk of loss or damage to goods shipped under a c.i.f. contract?
The buyer bears the risk from the time of shipment, even if property has not passed (paras 34.30–34.31).
69
Can the buyer reject documents under a c.i.f. contract if they are nonconforming?
Yes. The buyer can reject defective documents and, if not cured in time, treat the contract as repudiated (para 34.26, 34.39).
70
Can a buyer reject the goods even if the c.i.f. documents are in order?
Yes, if the goods on arrival are not in conformity with the contract at the time of shipment (para 34.42).
71
What happens if the goods are lost after the buyer has accepted the documents in a c.i.f. sale?
The risk is on the buyer, who must seek redress from the insurer or carrier (para 34.32).
72
Can a buyer justify wrongful rejection of documents using a later-discovered defect in the goods?
No, under English law (Gill & Duffus SA v Berger & Co Inc (No 2), the buyer’s rejection of documents is final unless the seller has affirmed the contract and the goods are then rejected lawfully (paras 34.40–34.41). Lord Diplock’s analysis is open to objection; Goff LJ's view is preferred.
73
In what circumstances can a buyer recover full damages despite accepting nonconforming goods?
Where the defect in the documents was concealed, preventing the buyer from exercising the right to reject—e.g., as in Kwei Tek Chao (paras 34.43–34.44).
74
What are the seller’s main options when unsure of the buyer’s creditworthiness in international trade?
The seller may require advance payment, use a float held by the seller, or rely on third-party guarantees such as documentary credits or suretyships (35.01).
75
What is a documentary bill?
A bill of exchange accompanied by shipping documents, payable in exchange for those documents (35.04).
76
Why do sellers typically avoid sending shipping documents directly to buyers?
To prevent fraud and wrongful retention of title; sellers usually use banks to control document release upon payment (35.05–35.06).
77
What is the core purpose of a documentary credit?
To ensure that the seller receives payment from a bank regardless of disputes with the buyer (35.08).
78
What is the UCP, and which version is currently in use?
The Uniform Customs and Practice for Documentary Credits; UCP 600 is the current version since July 2007 (35.09).
79
How does a documentary credit differ from a standby credit?
A documentary credit entails a primary obligation by the issuing bank to pay on document presentation; a standby credit is invoked only on the buyer's default (35.09).
80
What is the benefit of eUCP?
It allows for electronic presentation of documents, improving efficiency and reducing discrepancies (35.10).
81
Who is the "issuing bank" in a documentary credit?
The bank that issues the credit at the buyer's request (35.12).
82
What is a “complying presentation” under UCP 600?
One that conforms to the terms of the credit, UCP rules, and standard banking practice (35.13).
83
Why might buyers resist using letters of credit?
Due to high banking costs and bureaucratic procedures; cheaper alternatives may exist (35.16).
84
What is the current trend regarding the use of letters of credit?
There has been a gradual global decline in use due to fintech innovations and other alternatives (35.17).
85
What are the main stages in opening a documentary credit?
Application by buyer, notification to seller, nomination of bank, and presentation of documents (35.18–35.24).
86
What is the difference between confirmed and unconfirmed credits?
Confirmed credits have a second bank guaranteeing payment; unconfirmed credits do not (35.23–35.24, 35.29).
87
What is a revocable credit?
A credit that can be canceled or amended by the issuing bank without notice to the seller (35.26).
88
What was the issue in Banco Santander SA v Bayfern Ltd?
Whether a confirming bank could recover payment after discovering fraud in a deferred credit without authority to negotiate early (35.30).
89
What is a deferred payment credit?
Under a deferred payment credit, payment is made not on presentation of documents or by acceptance of a draft but after expiry of a stated period from shipment or bill of lading date or from presentation (eg 60 days after sight), the documents being meanwhile released to the buyer.
90
What did UCP 600 change in response to Banco Santander?
Article 12(b) clarified that nominated banks may prepay or purchase deferred payment undertakings (35.31).
91
What is a negotiation credit?
A credit allowing a bank to purchase drafts/documents and present them in its own right (35.33–35.34).
92
What is the legal status of UCP 600 under English law?
It is a set of contractual terms, not binding unless incorporated into the contract (35.42–35.46).
93
What is the doctrine of autonomy in letters of credit?
Banks deal only with documents, not with the underlying sales contract or goods (35.52).
94
When can a bank refuse to honour a letter of credit despite document compliance?
When there is fraud, illegality, or a misrepresentation known to the bank (35.55–35.56).
95
Is the issuing bank acting as agent for the buyer in a credit transaction?
No, the bank acts as a principal with an independent obligation to the seller (35.58).
96
What is the strict compliance rule?
The presented documents must exactly match the credit terms; any discrepancy can invalidate payment (35.68–35.69).
97
What did the Bulgrains case demonstrate?
A: Even small discrepancies in names on documents can lead to rejection under strict compliance (35.68).
98
What is the effect of Article 14(d) and (e) of UCP 600 on strict compliance?
They soften the rule slightly by allowing general descriptions if there is no conflict (35.70).
99
What protection does Article 17(b) of UCP 600 give for document originality?
A document is treated as original if it appears to be signed or marked, unless it states it’s not original (35.65).
100
What is a negotiating credit?
A letter of credit that gives anyone purchasing the seller's drafts in good faith the right to demand payment from the issuing bank, or if the credit was confirmed, the confirming bank.
101
What are the main ways in which a seller may arrange for payment in international trade?
Options include advance payment, a float deposit, concurrent conditions (delivery/payment on shipment), credit arrangements, and third-party payment undertakings like guarantees or letters of credit. The third party's obligation may be primary (e.g., under a documentary credit) or secondary (e.g., suretyship). (35.01)
102
What forms can seller-provided credit take in international sales?
The seller may offer open account terms, payment by term bill of exchange, documentary credit, instalment payments (with or without reservation of title), or consignment where the buyer holds goods as bailee. (35.02)
103
What topics does G&M Chapter 35 focus on after introductory remarks?
The chapter primarily addresses documentary credits, then concludes with demand guarantees, performance bonds, standby credits, and mechanisms for raising finance by sellers and buyers.
104
What is a ‘documentary bill’ in international trade?
A documentary bill is a bill of exchange accompanied by shipping documents, requiring acceptance or payment in exchange for those documents—contrasted with a ‘clean’ bill, which has no accompanying documents. (35.04)
105
What are the consequences if a buyer retains a bill of lading without paying or accepting the bill of exchange?
The property in the goods does not pass; wrongful retention is conversion. If the buyer sells the goods, further conversion may occur, though the sub-buyer might obtain title via nemo dat exceptions (e.g., Factors Act or SGA 1979). (35.05)
106
How can the seller protect against buyer fraud in handling shipping documents?
The seller typically uses bank collection: the remitting bank sends documents to a collecting bank in the buyer’s country with instructions to release only on payment or acceptance, minimizing fraud risks. (35.06)
107
Why is a bill of exchange not fully secure for the seller?
Even if payment is to be made against documents, by that time the seller has already shipped goods. If the bill is dishonoured, the seller is left with the burden of recovering or reselling the goods. (35.07)
108
What is the primary purpose of a documentary credit?
To provide the seller with assurance of payment regardless of disputes under the sale contract, shifting the non-payment risk from seller to buyer via bank involvement. (35.08)
109
What is UCP 600 and why is it important?
UCP 600 is the ICC’s set of rules governing documentary credits. It replaced UCP 500 and, together with eUCP, governs the operation and presentation of documents in letter of credit transactions. (35.09)
110
What are the advantages of eUCP (electronic presentation)?
It simplifies and automates document presentation, reduces discrepancies, allows direct submission to issuing banks, and supports transition to a fully electronic trade environment. (35.10)
111
What role does the International Standard Banking Practice (ISBP) play?
ISBP complements UCP 600 by standardizing document examination practices, improving consistency in bank assessments of compliance. (35.11)
112
What is a documentary credit in legal terms?
It is a bank’s autonomous promise to pay the seller upon proper document presentation, independent of disputes in the underlying sale contract. (35.12)
113
How is the letter of credit independent of the sales contract?
The bank’s obligation exists regardless of buyer-seller disputes. It is purely documentary and arises solely under the terms of the credit. (35.13)
114
Why is this independence principle critical?
It ensures that the seller has a reliable and quick method of payment without being caught in disputes over performance of the sale contract. (35.14)
115
What is the buyer’s typical role in initiating a documentary credit?
The buyer requests its bank (the issuing bank) to open the credit in favor of the seller and agrees to reimburse the bank upon payment or negotiation. (35.15)
116
What is the role of the advising bank in a letter of credit?
The advising bank’s function is to authenticate and transmit the credit to the seller without incurring a payment obligation unless it also confirms the credit. (35.16)
117
What does ‘confirmation’ of a credit mean?
Confirmation is a separate and independent undertaking by the advising bank (now also a confirming bank) to pay the seller, provided the seller complies with the credit terms. (35.17)
118
What happens if the seller presents non-compliant documents?
The bank may reject them, and the seller risks delayed or denied payment. The principle of strict compliance governs, meaning the documents must match the credit exactly. (35.18)
119
Can minor discrepancies in documents result in non-payment?
Yes. Even trivial differences, such as spelling errors or formatting issues, may lead to rejection due to the strict compliance requirement. (35.19)
120
What is the purpose of the strict compliance doctrine?
To provide certainty and protect banks from having to investigate the underlying transaction; they rely solely on documentary conformity. (35.20)
121
How have courts responded to overly rigid interpretations of compliance?
Some courts have adopted a more commercial approach, tolerating minor non-prejudicial discrepancies, especially if the credit refers to ISBP or includes a tolerance clause. (35.21)
122
What is the 'materiality' test in document examination?
It assesses whether a discrepancy affects the document’s commercial function or deceives the bank; minor, non-misleading errors might be overlooked. (35.22)
123
Do banks have discretion to waive discrepancies?
Yes. An issuing or confirming bank may, but is not obliged to, waive discrepancies. However, if they reject, they must notify the presenter promptly and explain why. (35.23)
124
What obligations arise if a bank rejects documents?
The bank must give timely and detailed notice of rejection, stating all discrepancies. Failure to do so may result in the bank being precluded from raising further objections. (35.24)
125
What is the seller’s risk if documents are rejected?
The seller may suffer cash flow disruption, bear storage or return costs, and lose out on resale opportunities if the buyer refuses to accept the goods. (35.25)
126
What is the buyer’s position when a bank pays under a non-compliant presentation?
The buyer may be liable to reimburse the bank unless the non-compliance was significant or involved fraud. Buyers must act promptly to dispute improper payment. (35.26)
127
Can the buyer stop payment if goods are defective but documents comply?
No. The credit is independent. The buyer’s recourse is to sue the seller for breach of contract but cannot block the bank’s payment obligation. (35.27)
128
What is the 'fraud exception' in letters of credit?
Banks may refuse payment if there is clear evidence of fraud by the seller, such as falsified documents. However, the standard of proof is high. (35.28)
129
How is the fraud exception applied in practice?
Courts require strong evidence — mere suspicion or buyer’s claims are insufficient. Banks must be sure the documents are fraudulent before refusing payment. (35.29)
130
What happens if the bank pays out despite a fraud and the buyer sues?
The buyer may sue the bank for breach of mandate, but only if it can prove the bank knew or ought to have known of the fraud at the time of payment. (35.30)
131
What is the standard of proof required to invoke the fraud exception in credit transactions?
A: There must be clear evidence of fraud. The fraud must be established on incontrovertible grounds, not merely alleged or suspected. (35.31)
132
Can banks rely on an injunction to stop payment under a credit where fraud is alleged?
Yes, but courts will only grant such injunctions if there is strong, clear evidence of fraud and the case meets a high evidential threshold. (35.32)
133
What is the 'nullity exception'?
It applies where a document is a nullity (e.g., a forged bill of lading). In such cases, the bank may refuse payment even if no fraud is proven against the seller. (35.33)
134
How does the nullity exception differ from the fraud exception?
A: The nullity exception does not require fraudulent intent by the seller; it is sufficient that the document is worthless or fake in form or substance. (35.34)
135
What is the issuing bank's primary responsibility under a letter of credit?
To honour payment upon presentation of conforming documents, regardless of disputes between buyer and seller. (35.35)
136
Can a confirming bank be liable if it wrongly rejects conforming documents?
Yes. If the confirming bank wrongly refuses to pay, it may be sued by the seller for breach of the confirmation undertaking. (35.36)
137
How does the seller benefit from a confirmed credit?
The seller has an additional, independent assurance of payment from the confirming bank, typically located in the seller’s country, thus reducing cross-border enforcement risks. (35.37
138
What happens when an advising bank fails to confirm a credit when requested?
A: The seller may reject the unconfirmed credit if confirmation was contractually required, or seek damages against the buyer for breach. (35.38)
139
What is the effect of a defective credit on the seller’s delivery obligations?
If the credit is non-compliant with the sale contract, the seller may suspend performance and require rectification before shipping the goods. (35.39)
140
Can a seller reject a late or non-conforming credit?
Yes. The seller can treat this as a breach of contract and is not obliged to perform until a conforming credit is issued. (35.40)
141
How are time limits managed under UCP 600?
Credits must state an expiry date. Banks will not accept documents after expiry, and presentation must occur within the period stated in the credit or as prescribed under UCP rules. (35.41)
142
Can the buyer rely on the seller’s acceptance of documents to support the seller's claim of conformity of goods?
No. A seller's acceptance of documents does not waive the buyer’s rights to reject the goods if they are non-conforming upon arrival. (35.42)
143
Does payment under a credit mean acceptance of the goods?
Not necessarily. Banks deal only with documents, not goods. The buyer may still reject the goods if they fail to meet contractual specifications. (35.43)
144
What is the effect of partial shipment terms in a letter of credit?
If partial shipments are prohibited, any shipment made in parts may result in refusal of payment; the credit must align with the seller’s logistics. (35.132)
145
Can banks vary terms of the credit unilaterally?
No. Once a credit is issued, its terms cannot be altered without the agreement of all parties, particularly the seller (beneficiary). (35.58)
146
What documents are typically required under a letter of credit?
Common documents include the commercial invoice, transport document (e.g., bill of lading), insurance policy, and certificates of origin or inspection. The exact documents depend on credit terms.
147
Why must documentary requirements be carefully specified in a credit?
Ambiguities can cause presentation discrepancies, leading to rejection by the bank. Precise drafting ensures smoother payment processing.
148
What is the consequence of document misdescription?
Misdescribed goods or incorrect document details may lead to rejection of the documents, even if the goods themselves are in conformity with the sale contract.
149
What is the ‘mirror principle’ in letters of credit?
It means the documents presented must exactly match the terms of the credit — there must be no deviations.
150
How can a seller ensure conformity of presentation?
By closely aligning shipping practices and document preparation with the credit terms, and possibly engaging professionals or banks familiar with UCP 600 and ISBP.
151
What role does the ISBP play in presentation compliance?
The ISBP offers interpretive guidance on document examination and helps reduce rejection due to technical inconsistencies.
152
What is the effect of discrepancies not raised by the bank within the time limit?
The bank may be precluded from later relying on those discrepancies to justify non-payment.
153
153
Why do banks prefer standardised document formats?
Uniformity reduces error rates, speeds up examination, and limits the risk of unjustified refusal of payment.
154
What is the impact of local customs or trade usage on document interpretation?
Unless incorporated by reference, local customs do not override the strict terms of the credit or UCP rules.
155
How are electronic records treated under eUCP?
Electronic documents are treated as equivalent to paper, provided the credit allows for electronic presentation and the format complies with eUCP rules.
156
What risks do sellers face with electronic presentation?
Technical failure, formatting errors, or lack of system compatibility may result in rejection, especially where banks are unfamiliar with e-documents.
157
How does the eUCP assist with automation?
The eUCP facilitates automated document checks, reducing manual intervention and error, thereby accelerating payment processes.
158
What are the advantages of using electronic rather than paper documents?
Faster transmission, lower costs, less risk of loss or delay, and better integration with logistics and customs systems.
159
What challenges remain with full adoption of electronic trade documents?
Legal recognition varies between jurisdictions, and not all banks or trading partners are equipped to handle electronic records.
160
Why is training in UCP and ISBP important for parties using credits?
Understanding these rules helps parties avoid costly mistakes in document preparation and ensures compliance with international standards.
161
What is the difference between a 'negotiable credit' and a 'straight credit'?
A negotiable credit allows any nominated bank to purchase drafts or documents, while a straight credit restricts payment to a specified bank only.
162
How does a seller use a negotiable credit to raise finance?
The seller may present complying documents to a nominated bank, which may then discount or negotiate the credit and provide immediate funds.
163
What is the effect of the issuing bank’s reimbursement obligation?
It assures nominated or confirming banks that they will be repaid for payments made under a conforming presentation, facilitating negotiation or discounting.
164
How does the issuing bank’s failure to reimburse a nominating bank affect the seller?
If the issuing bank refuses to reimburse the negotiating bank, the seller may face recovery action from the nominating bank, unless the nominating confirmed the credit.
165
What are deferred payment credits?
These credits require the bank to pay at a future date after presentation of complying documents — often used to allow buyer credit while giving seller financing options.
166
Can a seller raise finance on a deferred payment credit?
Yes. The seller can ask the nominated or confirming bank to discount the deferred obligation and provide funds in advance.
167
What is the impact of a confirming bank’s commitment in deferred credits?
The confirming bank becomes directly obligated to pay at maturity, which enhances the seller’s ability to raise finance.
168
What is pre-shipment finance in the context of credits?
It is funding advanced to the seller before shipment, based on the assurance of future payment under the letter of credit.
169
What risks do banks face when providing pre-shipment finance?
Risks include non-compliance with credit terms, buyer cancellation, or fraud, which might prevent the bank from recovering its advance.
170
171
What is the purpose of the International Standard Banking Practice (ISBP)?
ISBP provides detailed guidance on document checking, helping banks reduce discrepancies and increase consistency in document examination.
172
How do tolerances in credits support smoother trade?
Tolerances (e.g., ±5%) in quantity or value reduce the risk of rejection for minor variances, facilitating more flexible trade execution.
173
Under what conditions can a bank refuse payment for fraud?
A bank may refuse to honour the credit if it has clear evidence of fraud in the documents or underlying transaction — though proving fraud is challenging.
174
What contractual relationships exist in a confirmed credit?
There are five key relationships: seller-buyer, buyer-issuing bank, issuing-advising bank, advising-confirming bank, and confirming bank-seller.
175
Can the seller reject a credit that does not conform to contract terms?
Yes. The seller may reject a defective or late credit and hold the buyer in breach unless an appropriate credit is issued within the stipulated time.
176
When does the seller’s obligation to deliver resume if a defective credit is corrected?
Once a conforming credit is issued within the contractually allowed time, the seller must proceed with performance under the contract.
177
What if the credit remains defective and shipment occurs?
If the seller ships under a non-conforming credit, it may lose the right to complain and be taken to have waived the defect.
178
Can the seller claim damages if a defective credit is not remedied?
Yes. If the buyer fails to issue a conforming credit in time, the seller may treat it as a breach and claim damages for non-performance.
179
How are damages for failure to provide a proper credit assessed?
Damages are typically based on lost profits or losses arising from an inability to ship or resell the goods as planned.
180
What are the rules on expiry dates in letters of credit?
Credits must specify an expiry date, and banks will not accept documents presented after this date unless expressly allowed.
181
Does acceptance of documents waive rights regarding the goods?
No. Even if a bank accepts conforming documents, the buyer retains the right to reject the goods if they are defective or non-conforming.
182
What governs the relationship between buyer and issuing bank?
The relationship is usually governed by the bank’s standard credit application terms and the UCP, forming a unilateral contractual obligation from the buyer, i.e. the buyer makes an offer by completing and submitting the form, which the bank accepts by issuing the credit.
183
Can the buyer sue the issuing bank for wrongful payment?
Yes. If the issuing bank pays against non-conforming documents or in breach of its mandate, the buyer may have a claim for breach.
184
What is Article 37 of UCP 600, and why is it controversial?
Article 37 limits the issuing bank’s liability for actions of other banks (e.g., advising or confirming), which may be inconsistent with English law’s view of agency responsibility.
185
How might Article 37 UCP 600 conflict with English legal principles?
English law may hold the issuing bank responsible for the acts of its agents (e.g., the advising bank), contradicting Article 37’s broad disclaimer of liability.
186
What are the legal risks of relying on Article 37?
If the advising or confirming bank acts negligently or fraudulently, and the issuing bank disclaims responsibility under Article 37, the buyer may be left without recourse unless the clause is struck down under domestic law (e.g., UCTA).
187
How might English law treat an Article 37 exclusion clause?
Such an exclusion may be invalid under the Unfair Contract Terms Act 1977 if it is deemed unreasonable in a consumer or business context.
188
What governs the relationship between issuing and advising banks?
This relationship is typically governed by the UCP and the agreement between them — the advising bank acts as agent but is not liable unless it confirms the credit.
189
When does the issuing bank’s promise become binding on the seller?
The bank’s promise becomes binding once the credit is issued, even before the seller sees it. This autonomy deviates from classical offer-and-acceptance principles.
190
What is the legal basis for the confirming bank’s obligation?
The confirming bank’s liability arises upon confirmation and release of the credit. No further acceptance by the seller is needed.
191
Why are letters of credit treated as sui generis rather than traditional contracts?
Because there is no consideration or offer/acceptance in the normal sense, courts treat bank undertakings as unique, enforceable commitments arising upon issuance for commercial certainty.
192
How have English courts addressed the doctrinal gap in consideration with credits?
Courts stretch contract doctrine to enforce bank promises despite the lack of classical consideration, prioritizing commercial utility over doctrinal purity.
193
Does a bank's obligation to pay under a credit depend on the performance of the sale contract?
No. The bank’s duty is documentary and independent — it must pay against conforming documents regardless of any dispute over the sale contract.
194
Can the buyer prevent the bank from paying if the goods are defective?
No. Due to the autonomy principle, the bank must pay if documents comply, regardless of the buyer’s complaints about the goods.
195
When does the fraud exception apply to letters of credit?
If the documents presented are fraudulent and the bank is aware or ought to be aware, it may refuse payment despite the autonomy principle.
196
Besides fraud, what other exceptions may prevent payment under a credit?
Illegality, misrepresentation, or mistake may also allow a bank to resist payment, although such grounds are narrowly construed and fact-sensitive.
197
What protection exists for a holder in due course of a draft accepted under a credit?
A bona fide holder in due course is entitled to enforce the draft, even if fraud exists in the underlying transaction — enhancing negotiability.
198
What remedy does the seller have if the bank refuses to pay on a conforming presentation?
The seller can sue for damages for wrongful dishonour of the credit, as the bank is in breach of its autonomous undertaking.
199
Is the seller entitled to specific performance if the bank dishonours a complying presentation?
No. Courts generally award damages rather than order the bank to pay, even though the seller expected payment.
200
How are damages measured for wrongful dishonour of a credit?
Damages aim to put the seller in the position they would have been in if the credit had been honoured — usually the amount due under the credit.
201
Does the seller have to prove consequential loss to recover?
No. Recovery of the credit amount is generally sufficient; proof of additional loss is not typically required.
202
Must the seller mitigate losses in wrongful dishonour cases?
Yes. As with other contractual claims, mitigation and foreseeability principles apply to the calculation of damages.
203
Can the seller recover legal costs if the bank’s refusal was wrongful?
Yes, especially where the bank acted in bad faith or without justification; courts may award costs on an indemnity basis
204
What if the seller committed fraud in procuring the credit?
The seller loses the right to enforce the credit. Fraud vitiates the obligation, even if documents appear compliant.
205
What are standby credits and demand guarantees?
These are alternative instruments to traditional credits, designed to provide assurance of payment upon demand or upon a specified default — widely used in infrastructure and international projects.
206
Why were ISP98 and URDG 758 developed?
To resolve confusion caused by applying UCP rules to standby credits and demand guarantees. These new regimes provide more appropriate rules tailored to those instruments.
207
Do standby credits and demand guarantees follow the autonomy principle?
Yes. Like documentary credits, these instruments are autonomous, and payment is based on the demand and documentation, not the underlying transaction.
208
What is a common abuse associated with demand guarantees?
Beneficiaries may make unjustified demands to pressure the applicant. Courts are cautious but may intervene where the demand is clearly abusive or fraudulent.
209
Is the autonomy principle equally applicable to standby credits?
Yes. The issuer’s obligation remains independent from the underlying contract, and payment depends only on documentary compliance.
210
What is required for a valid demand under a standby credit?
Strict compliance with the terms of the credit, including precise wording and documentation required to trigger payment.
211
Does the fraud exception apply to standby credits?
Yes. Banks may refuse payment if there is clear evidence of fraud in the demand or supporting documents, though proof must be strong.
212
Who is immune from the effects of the beneficiary’s fraud?
The fraud exception is not available against a bank which, in conformity with an authorization from the issuing bank, has confirmed or negotiated the credit prior to becoming aware of the fraud or against a bona fide transferee of a transferable credit or a holder in due course of a draft. The position is otherwise as regards a party who acts without authorization, as where a bank takes an assignment of a credit (as opposed to the proceeds of a credit) which is not transferable.
213
Under an FOB contract, where is the delivery point?
On board the nominated ship.
214
Under a CIF contract, where is the delivery point?
On board the nominated ship.
215
Under an FOB contract, when does risk pass to the buyer?
When, on loading, goods pass over the ship's rail.
216
Under an CIF contract, when does risk pass to the buyer?
On shipment
217
Under an FOB contract, when does property pass to the buyer ?
Where the Law of England and Wales is applicable prima facie risk and property pass at the same time (SGA 1979, s.20). However, this is subject to SGA 1979, section 17 and also to contrary intention. Contrary intention may be subject to s.28 payment and delivery are concurrent obligations.
218
Under an CIF contract, when does property pass to the buyer?
Property normally passes when the documents are transferred to the buyer and the price is paid (see Cheetham & Co Ltd v. Thornham Spinning Co Ltd [1964] 2 Lloyd’s Rep 17). Where the Law of England and Wales applies, the position will be otherwise where SGA 1979,
section 19 is not satisfied.
219
What is "party autonomy" in a conflict of laws situation.
In conflict of laws (also called private international law), party autonomy refers to the principle that the parties to a contract or other private legal relationship have the freedom to choose which jurisdiction’s law will govern their agreement or relationship.
220
What are INCOTERMS?
INCOTERMS — short for International Commercial Terms — are a set of standardized trade terms published by the International Chamber of Commerce (ICC). They define the responsibilities of the buyer and seller regarding:
Delivery of goods (who arranges transport and to where)
Transfer of risk (who bears the risk of loss or damage at each stage)
Costs (who pays for transport, insurance, duties, etc.)
Key points about INCOTERMS:
They do not cover ownership transfer or payment obligations (those are handled separately in the contract of sale).
Each term specifies very precisely when risk passes from seller to buyer, who organizes insurance, who arranges customs clearance, and who pays which costs.
221
In ex-works and ex-store contracts when does property pass?
In ex-works and ex-store contracts, property presumptively passes when the buyer collects the goods at the seller’s place of work or store.
