letters of credit - dinsmore.com · we will be covering •wh t l tt f dit?what are letters of...
TRANSCRIPT
Presenter
J b A M iJacob A. ManningOffice ^ [email protected]
© 2011 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com
We will be covering
Wh t l tt f dit?•What are letters of credit?
•Benefits of use in international trade
•Tips for Getting Paid
•Bank Payment ObligationsBank Payment Obligations
© 2011 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com
TermsTerms
Letter of CreditLetter of CreditBank undertakes to pay a named beneficiary upon
the timely presentation of complying documentsCommercial Letter of CreditBank undertakes to pay to Seller the purchase price
f th d i t f S ll ’ i i thof the goods upon receipt of Seller’s invoice or other documents evidencing Seller’s right to payment of the purchase pricep pOther documents may be transport, insurance,
customs, inspection, etc.
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Commercial Letter of CreditCommercial Letter of Credit
Buyer Bank1. Applies for LC
Buyer Bank6. Reimbursement
Seller
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Terms (cont.)Terms (cont.)
“Applicant” applies to “Issuer”, which issues the Applicant applies to Issuer , which issues the letter of credit to “Beneficiary”Beneficiary “presents” complying documents to y p p y g
Issuer (or Confirmer, or Nominated Bank)Issuer must “honor” a complying presentation p y g p
and pay Beneficiary or “dishonor” a non-complying presentation
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Commercial Letter of CreditCommercial Letter of Credit
Three independent obligations:Three independent obligations:
Buyer-Applicant
Seller-Beneficiary
Purchase Price Obligation
Applicant Beneficiary
Reimbursement Obligation
Bank-
g
Issuer
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ConfirmationConfirmation
If Seller is unfamiliar with Buyer’s Bank orIf Seller is unfamiliar with Buyer s Bank or cannot trust the letter of credit practice or law in the country where Buyer’s Bank is located, the Buyer’s Bank may authorize a local bank to confirm the letter of creditConfirming Bank in effect issues a parallel letter
of credit to Beneficiary and seeks reimbursement from Buyer’s Bankreimbursement from Buyer s Bank
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ConfirmationConfirmation
Two additional obligations:Two additional obligations:
Buyer-Applicant
Seller-Beneficiary
Purchase Price Obligation
Applicant Beneficiary
Reimbursement Obligation LC Confirmation
Bank-
Obligation
Bank-Issuer Confirmer
Reimbursement Obligation
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Terms (cont.)Terms (cont.)
Nominated BankNominated BankIssuing Bank may authorize another bank to receive
documents and pay BeneficiaryNominated Bank is not authorized to confirm the letter
of credit and may not pay until it examines documents and obtains recourse against the Beneficiaryand obtains recourse against the BeneficiaryNominated Bank obtains reimbursement from Issuing
Bank
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Terms (cont.)Terms (cont.)
Advising BankAdvising BankIssuing bank may authorize another bank to notify the
Beneficiary that the letter of credit has been issued, confirmed, or amendedNo authorization to pay Beneficiary or seek
reimbursementreimbursementNegotiating BankIssuing bank may authorize another bank to purchaseIssuing bank may authorize another bank to purchase
documents from the Beneficiary (usually at a discount)
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Terms (cont.)Terms (cont.)
Standby Letter of CreditStandby Letter of CreditObligations are the same: Bank undertakes to pay
upon the timely presentation of complying documentsOften used in transactions other than the sale of
goodsBeneficiary typically presents a demand with aBeneficiary typically presents a demand with a
statement that Applicant is obligated to pay Beneficiary the stated amount
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Benefits to SellerBenefits to Seller
Assurance of timely paymentAssurance of timely paymentPossibly even before goods manufactured
Bank takes risk of insolvency or refusal to payBank takes risk of insolvency or refusal to payPayment upon presentation of documentsIn the event of dispute Seller is already paidIn the event of dispute, Seller is already paidAlmost cash advance
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Benefits to BuyerBenefits to Buyer
Not a cash advanceNot a cash advanceBuyer’s bank assesses creditworthinessCan bargain for assurances of qualityCan bargain for assurances of quality
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Tips for Getting PaidTips for Getting Paid
Anticipate issues in the contractAnticipate issues in the contract Many problems avoided at this stageMore than just ‘letter of credit’jTerms can addressIssuersC fi tiConfirmationRulesIrrevocableTermsExpirationLaw and Forum
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Law and Forum
Tips for Getting PaidTips for Getting Paid
IssuerIssuerGood international reputationSolvencyyLC expertise“Satisfactory”
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Tips for Getting PaidTips for Getting Paid
ConfirmationConfirmationClose to homeAdditional undertakinggAdded cost
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Tips for Getting PaidTips for Getting Paid
RulesRulesCommercial—UCP600Standby—ISP98y
IrrevocableAssumed/Default RuleRevocable only if stated
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Tips for Getting PaidTips for Getting Paid
TermsTermsDocumentsTiminggLast day for shipment or presentation
ExpirationMeaningExtensionF M jForce Majeure
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Tips for Getting PaidTips for Getting Paid
Law and ForumLaw and ForumSignificance OptionspLocal USUN Convention on Independent Guarantees and StandbyUN Convention on Independent Guarantees and Standby
Letters of Credit
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Tips for Getting PaidTips for Getting Paid
Consider LC as an exhibitConsider LC as an exhibitNegotiate in advance
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Tips for Getting PaidTips for Getting Paid
Advising BankAdvising BankAuthenticate termsAccuracy of documentsy
Negotiating BankNo undertaking to actBuy documentsSilent confirmation
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Tips for Getting PaidTips for Getting Paid
Commercial versus StandbyCommercial versus Standby StandbyCan be used in ongoing tradePay in case of defaultCan save on fees (issuance, amendment, discrepancies)Higher cost than single commercial LCg e cost t a s g e co e c a C
CommercialSingle transactionSales price to be paid by bankLower cost on single LC
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Tips for Getting PaidTips for Getting Paid
Applicant-Controlled ConditionsApplicant Controlled ConditionsVeto power LC banks will enforce
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Tips for Getting PaidTips for Getting Paid
Discrepancies and WaiversDiscrepancies and Waivers60-80% of new presentations are discrepantCan cure but before expiration?pVerify on all documents:Descriptions of goodsN d dd f tiNames and addresses of partiesAny quoted language
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Tips for Getting PaidTips for Getting Paid
Difficult countriesDifficult countriesExamples (not exhaustive): China, Korea, India,
Taiwan, PakistanDeal with major offices of the banks—not ruralScrutinize documentsIf d t i E li h ti t i l E li h i tiIf documents in English, notice typical English variations
Maintain control over goodsUse nominated US bank if possibleUse nominated US bank if possible
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Tips for Getting PaidTips for Getting Paid
If no paymentIf no paymentCan protest, sueJurisdiction may be provided fory pArbitration Can recover costs under US law
InjunctionsExcessively used in some countriesReserved for LC fraud
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Bank Payment ObligationsBank Payment Obligations
Product of SWIFT (Society for WorldwideProduct of SWIFT (Society for Worldwide Interbank Financial Telecommunication) and ICC To be used in and support open account tradepp pElectronic issuance and presentationQuestionsQuestionsIs it a letter of credit?Rules/Law?
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Questions?
J b A M iJacob A. ManningOffice ^ [email protected]
© 2011 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com