Chapter 6 The use of documents in trade
However, the issuing bank is only required
to make payment if authorised by the
buyer, who may refuse to accept delivery
of the goods, or may seek to reduce the
purchase price in exchange.- Buyer’s bank checks documents and
arranges payment.
If the buyer’s bank is happy there are no
differences between the presented and
required documents, it will arrange for
payment by the buyer in exchange for the
release of the documents. The release of
documents to the buyer allows the buyer
to take ownership of the goods.
In the event of discrepancies, the
buyer’s bank will take instructions from the
buyer, depending on the circumstances. - The buyer’s bank will then pay the
seller’s bank.
If the seller has not already been paid
by its bank, it will receive payment at
this stage as well. This is usually when
‘payment is at the importer’s bank’ (i.e.
when the documents are presented to
the importer’s bank).
Checklist for the letter of credit
The following points should be negotiated
between the parties and then checked by the
seller on receipt of the L/C from its bank:
The details of the parties to the contract –
both should be listed correctly, as
otherwise payment could be withheld.
Face value of credit – both parties need
to agree the value of the L/C to be issued.
This will be the invoice value (less any
negotiated discount) plus any additional
costs (not bank charges). It should be
stated in the currency of the transaction.
Bank charges – only the agreed charges
should be listed on the L/C.
Payment terms – at sight, or after a
specified period; arrangements for
payment (at what point will the buyer’s
bank pay the buyer – when documents are
presented to the exporter’s bank, or to the
importer’s bank?). Shipment terms – again, these need
to match the agreed transportationarrangements, otherwise payment may
be withheld.
Time limit – both parties must agree the
time limit for the operation of the L/C. The
seller must be able to present the all the
required documents by the deadline listed
on the L/C, otherwise payment could
be withheld. This time limit should be
agreed to allow for the compilation of all
the documents as well as the production
and shipping of the consigned goods.
Any export and import processes, such
as getting appropriate licences, should
also be considered before the time limit
is agreed.
Revocability – L/Cs agreed under
UCP 600 rules are irrevocable, unless
otherwise stated.
Confirmation – the seller will also want
to consider whether to ask its bank to
confirm the L/C.What can go wrong
Under the terms of a documentary credit, the
banks are only concerned with the exchange
of documents. Although the buyer’s bank
does offer a guarantee of payment, this is
on receipt of agreed documents, rather than
on receipt of a certain set of goods. The
significant risk to the buyer is therefore that
the received goods are not as expected. The
significant risk to the seller is that it does
not submit the required documents either
accurately or in time, or that the buyer’s
bank does not honour the letter of credit. The
seller can protect itself against dishonour
by the buyer’s bank by asking its bank to
confirm the letter of credit.International standards
Most internationally applied letters of credit
conform to the Uniform Customs and
Practice for Documentary Credits (UCP)
standardised by the International Chamber
of Commerce. The current version of the
standards is the sixth, known as the UCP
600, and was adopted on 1 July 2007.
Alongside these standards there is a set of
standards for banks to follow when assessing
the compliance of documents to UCP 600,
the International Standard Banking Practice