The terms of paymentThe terms of payment

DOCUMENTARY CREDITDOCUMENTARY CREDIT

Dr. Katalin CsekőDr. Katalin Csekő

Classification of methods of paymentClassification of methods of payment

independent independent dependent dependent ↓ ↓ ↓ ↓advantageous to the SELLER advantageous to the SELLER advantageous to the advantageous to the

BUYERBUYERrisky for the buyerrisky for the buyer risky for the sellerrisky for the seller

↓ ↓ ↓↓

payment in payment in open account open accountadvance advance

documentary creditdocumentary credit documentary collectiondocumentary collection

The seller does not want to suffer double default: The seller does not want to suffer double default: To be out of the possession of the goods;To be out of the possession of the goods; Not to receive the value of the goods;Not to receive the value of the goods;The buyer wants to have a control on the goods before paying the price of The buyer wants to have a control on the goods before paying the price of

them;them;

Documentary Credit 1.Documentary Credit 1.

Usage set up by the International Chamber of Commerce; Usage set up by the International Chamber of Commerce; The latest version: UCP 600;The latest version: UCP 600; The predecessor is the Commercial letter of credit (CL/C);The predecessor is the Commercial letter of credit (CL/C); The electronic form has already been introduced;The electronic form has already been introduced; Term: An irrevocable promise of payment undertaken by a Term: An irrevocable promise of payment undertaken by a

bank on the behalf of its own as to the terms of its own to a bank on the behalf of its own as to the terms of its own to a named beneficiary; named beneficiary;

Payment will be effected by the bank, provided:Payment will be effected by the bank, provided: the stipulated documents are submitted without any the stipulated documents are submitted without any

discrepancy: full compliance with each other and with discrepancy: full compliance with each other and with terms of documentary credit itself;terms of documentary credit itself;

within the expiry date, at the nominated or issuing bank;within the expiry date, at the nominated or issuing bank;

Documentary Credit 2. The principlesDocumentary Credit 2. The principles

1. 1. Principle of independence = the payment under the Principle of independence = the payment under the documentary credit is completely separated from the documentary credit is completely separated from the underlying transactions;underlying transactions;

The involved banks deal onlyThe involved banks deal only with documents and never with documents and never with the good itself;with the good itself;

2. Principle of strict 2. Principle of strict compliancecompliance= the issuing and confirming = the issuing and confirming bank is obliged to pay if there is no discrepancy in the bank is obliged to pay if there is no discrepancy in the documents=when they are letter by letter of the same and documents=when they are letter by letter of the same and identical with the terms & conditions of the doc.credit;identical with the terms & conditions of the doc.credit;

3. Principle of fraud exemption=the issuing and the confirming 3. Principle of fraud exemption=the issuing and the confirming bank can reject the payment only in case of fraud, bank can reject the payment only in case of fraud, fraudulency in the transaction, or of forged documents, BUT fraudulency in the transaction, or of forged documents, BUT in the possession of a valid decision of a court in in the possession of a valid decision of a court in competencecompetence; ;

Documentary Credit 3. The issuanceDocumentary Credit 3. The issuance1. 1. The Buyer= The applicant gives order toThe Buyer= The applicant gives order to

his bank= issuing bank to issue a documentary his bank= issuing bank to issue a documentary credit= to undertake an irrevocable promise to pay credit= to undertake an irrevocable promise to pay to the seller=beneficiary;to the seller=beneficiary;

2. The buyer concludes a contract of reimbursement and 2. The buyer concludes a contract of reimbursement and lays a coverage for the value of the goods + banking lays a coverage for the value of the goods + banking charges;charges;

3. The Buyer’s bank= issuer issues the doc. credit, which 3. The Buyer’s bank= issuer issues the doc. credit, which is a contract including the promise of payment and is a contract including the promise of payment and send it as a SWIFT message to the seller’s bank send it as a SWIFT message to the seller’s bank =advising bank;=advising bank;

4. Advising bank= a bank which has been nominated by 4. Advising bank= a bank which has been nominated by the issuer to give a notice upon the issuance towards the issuer to give a notice upon the issuance towards the seller;the seller;

5. Involved banks can be nominated to other functions 5. Involved banks can be nominated to other functions such as: confirmation, negotiation, paying; such as: confirmation, negotiation, paying;

Documentary Credit 3.Documentary Credit 3.Details of the order to issueDetails of the order to issue

Type of Credit: irrevocable ( or revocable; confirmed; Type of Credit: irrevocable ( or revocable; confirmed; freely negotiable);freely negotiable);

Name, and address of the beneficiary;Name, and address of the beneficiary; Name and address of the applicant, buyer;Name and address of the applicant, buyer; The total amount of the documentary credit;The total amount of the documentary credit; Unit price;Unit price; The quantity of goods;The quantity of goods; Delivery term as to Incoterms 2000/2010;Delivery term as to Incoterms 2000/2010; Delivery time;Delivery time; Expiry date and place; Expiry date and place; The (brief) description of the goods;The (brief) description of the goods; The specific type and the required copies of The specific type and the required copies of

documentsdocuments;; Transhipment; Partial shipment;Transhipment; Partial shipment;

Documentary Credit Documentary Credit 4.4. The Honor The Honor1. 1. Seller = the beneficiary performs = delivers the Seller = the beneficiary performs = delivers the

goods, and acquires all documents of the performance goods, and acquires all documents of the performance such as commercial invoice, weight list, ocean bill of such as commercial invoice, weight list, ocean bill of lading, certificate of origin;lading, certificate of origin;

2. Seller forwards the documents stipulated by the doc. 2. Seller forwards the documents stipulated by the doc. credit to the advising bank in order to present them to credit to the advising bank in order to present them to the issuing bank for payment;the issuing bank for payment;

3. The issuing bank receives the documents check them 3. The issuing bank receives the documents check them word by word (or letter by letter) in 5 banking working word by word (or letter by letter) in 5 banking working days and declares whether or notdays and declares whether or not they are in the best they are in the best order order

If the presentation is in full compliance with the terms If the presentation is in full compliance with the terms and condition of the doc. credit and within the expiry and condition of the doc. credit and within the expiry and honors:and honors:

Pay at sight;Pay at sight; Pays at deferred time e.gPays at deferred time e.g. . at 60 days on board; at 60 days on board; Accepts a bill of exchange drawn upon the issuer; Accepts a bill of exchange drawn upon the issuer;

Documentary Credit Documentary Credit 55. Functions of . Functions of banksbanks

Advising bank: has a „postman” function, but has Advising bank: has a „postman” function, but has to check the authenticity of the doc. Credit;to check the authenticity of the doc. Credit;

Confirming bank: adds the confirmation of its own Confirming bank: adds the confirmation of its own to a credit, on issuing bank’s request=undertakes to a credit, on issuing bank’s request=undertakes to pay in its own name;to pay in its own name;

Negotiating bank: „purchases” as nominated Negotiating bank: „purchases” as nominated bank drafts, (drawn on a bank other than the bank drafts, (drawn on a bank other than the nominated bank, commonly on the issuer and the nominated bank, commonly on the issuer and the confirmer) and gives money in advance for confirmer) and gives money in advance for complying documents, discounting interests + complying documents, discounting interests + banking charges due from the date of payment banking charges due from the date of payment until the negotiating bank receives until the negotiating bank receives reimbursement from the issuing bank;reimbursement from the issuing bank;

Paying bank: nominated bank for payment, a Paying bank: nominated bank for payment, a bank with which the credit is available;bank with which the credit is available;

Documentary credit Documentary credit 6.6. Types of the Types of the creditcredit

Irrevocable (revocable)= can not be unilaterally Irrevocable (revocable)= can not be unilaterally modified or cancelled,modified or cancelled,

Confirmed; Confirmed; At sight= after checking it the bank pays;At sight= after checking it the bank pays; Deferred=after checking it the bank pays…..days after Deferred=after checking it the bank pays…..days after

(commonly) from on board time;(commonly) from on board time; Acceptance=after checking the issuer or confirmer Acceptance=after checking the issuer or confirmer

accepts a bill of exchange drawn upon the bank and accepts a bill of exchange drawn upon the bank and pays on the due date of the B/E; it is a specific form of pays on the due date of the B/E; it is a specific form of the deferred type;the deferred type;

Back to back;Back to back; Transferable;Transferable; Red clause;Red clause; Revolving;Revolving;