Week 7 Flashcards
(23 cards)
The Parties
Issuer Account party Beneficiary Advising bank Confirming bank
Issuer
a bank or other party who issues a letter of credit.
Account party
the person who requests a bank or some other person to issue a letter of credit
Beneficiary
a person who is not a party to a contract but who is designated by a party to receive benefits of a contract.
Advising bank
a bank engaged by the issuer of a letter of credit to advise the beneficiary that it has a credit for delivery and to deliver the credit upon verification of the beneficiary’s signature.
Confirming bank
a bank that makes an independent promise to pay, accept or negotiate a letter of credit issued by another bank when the documents named in the credit are delivered to it.
Letter of Credit
An instrument issued by the bank or another person at the request of an account party that obliges the issuer to pay to a beneficiary a sum of money within a certain period of time.
The International Chamber of Commerce
Uniform Customs and Practices for Documentary Credits (UCP).
The UCP:
Not a treaty
Not a legislative rule (enactment)
The International Chamber of Commerce
Uniform Customs and Practices for Documentary Credits (UCP).
In Practice:
almost all letters of credit are governed by the UCP
The reasons for issuance of LC
The seller:
Wishes to be assured in advance that:
- the buyer is in earnest (serious about the sale contract),
- seller will get paid (when the goods were delivered).
has expenses to pay in relation to goods
🢥 To pay goods with L\C (i.e. B\E)
Types of Letters of Credits:
Irrevocable Revocable Transferrable Applying for a Letter of Credit The issuing bank may refuse to issue a Letter of Credit
Irrevocable
(unchangeable)
It cannot be altered without the beneficiary’s express consent.
- Preferred by beneficiaries because it provides the most security.
Revocable
(changeable, reversible)
Revocable by the issuing bank.
- Disliked by beneficiaries because it provides the least security.
Transferrable
Permits a seller to transfer the credit to another seller (you can trade it).
Applying for a Letter of Credit
The amount of credit
Whether the credit is revocable/irrevocable
Whether the credit is transferrable
Whether the credit is to be made available by payment, deferred payment, acceptance or negotiation.
How the credit is to be advised
If there are bills of exchange involved, the party on whom they are drawn
Details of the documents required as a prerequisite to making payment
When the documents need to be delivered
Whether partial shipments are prohibited
Whether transhipments are prohibited
The data and place at which the credit will expire
The issuing bank may refuse to issue a Letter of Credit if:
The applicant does not have sufficient funds on deposit
The bank has not already extended a line of credit to the applicant.
Cross Border Payment Banks
ISSUING BANK:
Issues the LC
Delivers the LC to a correspondent bank (advising bank) located in the beneficiary’s country.
ADVISING BANK:
Delivers the LC to the beneficiary
Ensures that the beneficiary is advised, and the credit delivered.
Assumes no liability for paying the letter of credit.
CONFIRMING BANK:
Confirms the LC
A confirmation
an independent promise (obligation) to pay, accept or negotiate a credit
the documents specified in the credit are presented
other terms and conditions of the credit have been complied with.
Account party (e.g. A buyer) Rights and obligations:
based on contracts with:
the beneficiary (e.g. a sales contract with the seller).
the issuing bank relating to the letter of credit.
Beneficiary (e.g. A seller)
Rights:
based on commercial practices (not law).
To collect on letters of credit
no [contractual] rights with respect to the letter of the credit transaction (UCP, Article 6).
Beneficiary (e.g. A seller)
Duties
comply with the terms and conditions of the LC
present to the issuer (or the issuer’s agent) the documents designated in the credit (e.g. Bill of Lading).
Countertrade
Trade transaction which linking exports and imports of goods and services in addition to, or in place of, a financial settlement.
(NOT FOR a monetary price).
Countertrade
Reasons
the buyer lacks commercial credit or a convertible currency;
the buyer wants to exploit a favourable market position to obtain better terms;
a government purchaser seeks to protect or stimulate the output of domestic industries or maintain the balance of its overseas trade.
