Prof - Dr.Bernd Müller

Prof. Dr.
Bernhard Müller
International Trade and Finance
VI. Standard Documentary

Letters of Credit (L/C)
1. Introduction
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© Prof. Dr. Bernhard Müller, 2016 all rights reserved
1. Introduction
a) According to the ICC Uniform Customs and Practice for

DocumentaryCredits (UCP 2007 revision of UCP 600) a
documentary letter of creditmeans any arrangement,
however named or described, as irrevocablethereby
constitutes a definite undertaking by the issuing bank to
honoura complying presentation of documents.
b) The terms and conditions of a documentary credit

revolve around two issues: The presentation of
documents which evidence title to goods shipped by the
seller and payment to the seller as beneficiary of the
credit.
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1. Introduction
c) L/Cs provide a high protection level to exporters and

importers engaged in international trade.
d) The exporter is assured that he will get the outstanding

amount independent form the importer as long as the
terms and conditions of the credit are met.
e) The buyer is assured that payment will be released to

the seller only after the L/C issuing bank has received
the title documents called for in the credit.
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2. Types of Standard L/Cs and the
parties involved
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2.1. Revocable / Irrevocable credits
a) The revocable L/C can be cancelled or its terms and

conditions can be changed by the buyer without the
beneficiary’s approval.
b) The irrevocable L/C is non cancellable by the buyer.
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2.2. Advised / Confirmed L/C
a) An advised L /C means a guaranteed payment to the

beneficiary by the issuing bank only. The advising bank
in the country of the exporter has no obligation to pay
the exporter immediately after having received the
documentation.
b) The confirmed L /C is characterized by a second

commitment to pay in addition to the original payment
undertaking by the issuing bank. This construction
means improved security for the beneficiary since the
confirmation allows him to change a foreign bank
address risk into a domestic one.
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2.3. Parties involved
a) The applicant (importer): Initiates the documentary

credit process by applying to his bank to open a
documentary credit naming the seller as beneficiary.
b) The issuing (buyer’s) bank: Upon instruction from the

applicant, the issuing bank establishes the payment
commitment and creates the L / C text which is sent (for
instance via SWIFT) to the advising (or confirming) bank
abroad.
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2.3. Parties involved
c) The advising (or confirming) bank: According to the

instructions given by the issuing bank the bank advises
the seller of the credit.
d) The beneficiary (exporter): The exporter receives

notification of the credit from the advising bank,
complies with the terms and conditions of the L/C and
gets paid.
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3. Credit application process
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The importer has to contact a bank in his country and to apply

for a special credit line which is used for the opening of
documentary letters of credit by the bank on behalf of the
importer.
The issuing bank has to proof the creditworthiness of the
importer since the bank has to pay the exporter (written
commitment) even when the importer
has gone bankrupt during the lifetime of the L /C.
In case the opening bank and the buyer (importer) agreed upon
the issue of a
L /C the following points should be mentioned in the L / C text.
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- Name and address of the beneficiary

- Irrevocable / revocable credit
- The actual amount of the credit
- Transportation form
- The period for presentation of the documents
- L / C expiry date
- The beneficiary’s bank
- The type of payment availability
- Detailed merchandise description
- Confirmation order
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STATE OF UTAH FORM 4C
DEPARTMENT OF NATURAL RESOURCES
Letter of Credit No. _____________DIVISION OF OIL, GAS AND MINING
IRREVOCABLE DOCUMENTARY LETTER OF CREDIT
TO: STATE OF UTAH

DEPARTMENT OF NATURAL RESOURCES
DIVISION OF OIL, GAS AND MINING
GENTLEMEN:
We hereby establish our Irrevocable Documentary Letter of Credit in favor of the Director of the Division of Oil, Gas and Mining
of the State of Utah for the account of (operator name)
for the aggregate amount of:
dollars ($ )
available by your drafts at sight on the bank when drawn in accordance with the terms ans accompanied by
the documents listed under Part C below:
A. This letter of Credit iss issued because the operator is or will be engaged in the drilling, redrilling, deepen-
ding, reparing, operating and plugging and abandonment of a well or wells and restoring the well site
or sites in the State of Utah for the purpose of oil or gas production and/or the injection and disposal of
fluids in connection therewith for the following describedland or weit:
Blanket Bond: To cover all wells drilled in the State of Utah
Inividual Bond: Well No.:
Section: Township: Rang:

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Country: , Utah
B. This Letter of Credit is specially issued at the request of the operator as guaranty that this fund will be
available during the time that the wells referenced above are active. We are not a party to, nor bound by,
the terms of any agreement between you and the operator out of which this Letter of Credit may arise.
C. Drafts drawn under this Letter of Credit must be accompanied by an affidavit from the Direcotr of Oil,
Gas and Mining stating that:
1. Any well subject to this Letter of Credit is deemed necessary for plugging and abandonment and the
operator has not fulfilled such obligation under the Oil and Gas Conservation General
Rules of the State of Utah.
2. The draft is the estimated cost of plugging each well subject to the Letter of Credti up to the aggregate
amount of the Letter of Credit.
We will be entiled to rely upon the statements contained in the affidavit and will have no obligation
to independenty verify any statements contained therein.
Each draft hereunde must be insted and endorsed on the reverse side of this Letter of Credit and this Letter of
Credit must be attached to the last draft when the credit has exhaused. Draffts may be presented at the office of
this bank no later than 2:00 p.m. (local time) on (date)
, 20 . and bear the clause Drawn under the (bank name) .

Bank Letter of Credit No. , dated , 20 .
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THIS LETTER OF CREDIT SHALL BE DEMMED AUTOMATICALLY EXTENDED FOR A PERIOD OF ONE YEAR FROM
THE CURRENT OR ANY FUTURE EXPRIATION DATE HEREOF, UNLESS AT LEAST 90 (NINETY) DAYS PRIOR TO
SUCH EXPIRATION DATE, WE NOTIFY YOU THAT WE HAVE ELECTED THIS LETTER OF CREDIT FOR SUCH ADDITIONAL
PERIOD.
We hereby engage with the bona fide holders of this draft and/or documents presented under and in complace
with the terms of this Letter of Credit that such draft and/ or documents will be duly honored upon presentation
to us. Our obligations hereunder shall not be subject to any claim or defense by reason of the invalitidy, illegality,
or unenforceability of any of the agreements upon which this Letter of Credit is based.
(Corporate or Notary Seal here) Bank Name:

By (print name):
Title:
Signature:
Telephoe No:
Attestee:_______________ Date: __________ Bank Address:
city state zip
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4. Utilization of the credit
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a) The beneficiary ships the goods to the buyer and obtains a

negotiable transport document.
b) The beneficiary prepares and presents a document package

to the advising (confirming) bank as required by the
applicant in the documentary credit.
c) The advising bank reviews the document package making

certain the documents are in conformity with the terms of
the credit, (often) pays the beneficiary and forwards the
documents to the issuing bank
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d) The issuing bank reviews the document package making

certain the documents are in conformity with the terms of
the credit, pays the advising bank and advises the buyer
that the documents have arrived.
e) The applicant makes cash payment (or signs an

acceptance), receives the documents for customs reasons.
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1. Sign the Contract
Exporter Importer
5. Ship the Goods
4. Advise 10. Make

L/C Payment
6. Submit
Docs 11. Relase
Docs
9. Make 2. Apply
Pavement L/C
Exporter‘s 3. Issue L/C

Bank (Advising Bank of China
Bank/Negotiating 7. Send to Docs. (Issuing Bank)
Bank)
8. Payment/Acceptance 23
5. Availability of the credit
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5.1. The sight credit (settlement by payment)
a) In a sight credit the value of the credit is available to the

beneficiary as soon as the terms and conditions of the
credit have been met.
b) The value of the credit is made available to the beneficiary

once the advising bank has received the funds from the
issuing bank.
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5.2. The usance credit (settlement by acceptance)
a) In a usance credit the beneficiary presents the required
documents to the bank along with a time draft drawn either
on one of the banks involved or on the applicant.
b) Once the documents have made their way to the buyer and
found to be in order, the draft is accepted by the drawee
and is returned to the beneficiary who can hold it until
maturity.
c) The beneficiary has the option of selling the acceptance to
his bank by discounting its value . The discount charged by
the financing bank will reflect the time to maturity of the
draft and the perceived risk associated with its collection.
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5.3. The deferred payment credit
(settlement by negotiation)
a) In a deferred payment credit the buyer accepts the
documents and agrees to pay the bank after a certain
period of time (grace period).
b) Essentially, this gives the buyer time between delivery of
the goods and payment.
c) The issuing bank makes payment at the specified time
provided the documents presented by the beneficiary are
in conformity with the L/C text.
d) The beneficiary may try to sell the deferred payment L/C on
“a forfait basis” to his bank in order to get the outstanding
amount less forfaiting expenses immediately.
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6. Common problems with
documentary credits
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6. Common problems with documentary credits
a) Shipment schedule stipulated in the credit cannot be met.
b) Stipulations concerning freight costs are deemed

unacceptable.
c) Price is insufficient due to changes in exchange rates.
d) Quantity of product ordered is not the expected amount.
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6. Common problems with documentary credits
e) The product description is either insufficient or too

detailed.
f) The required documents are difficult or impossible to

obtain.
g) Discrepancies with documents.
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Case study
A German company is for many years in a close business

relationship with a Canadian importer.
Until now both partners agreed upon an advised documentary

letter of credit as term of payment. Since the financial
management of the German exporter is wondering if the term
of payment should be changed for a documentary collection
you are asked as financial advisor of the exporter to distinguish
the documentary collection from the advised documentary
letter of credit from the exporter´s point of view.
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Prof. Dr.

International Trade and Finance

VI. Standard Documentary

a) According to the ICC Uniform Customs and Practice for

b) The terms and conditions of a documentary credit

c) L/Cs provide a high protection level to exporters and

d) The exporter is assured that he will get the outstanding

e) The buyer is assured that payment will be released to

a) The revocable L/C can be cancelled or its terms and

b) The irrevocable L/C is non cancellable by the buyer.

a) An advised L /C means a guaranteed payment to the

b) The confirmed L /C is characterized by a second

a) The applicant (importer): Initiates the documentary

b) The issuing (buyer’s) bank: Upon instruction from the

c) The advising (or confirming) bank: According to the

d) The beneficiary (exporter): The exporter receives

The importer has to contact a bank in his country and to apply

- Name and address of the beneficiary

IRREVOCABLE DOCUMENTARY LETTER OF CREDIT

TO: STATE OF UTAH

Blanket Bond: To cover all wells drilled in the State of Utah

Inividual Bond: Well No.:

Section: Township: Rang:

, 20 . and bear the clause Drawn under the (bank name) .

(Corporate or Notary Seal here) Bank Name:

city state zip

a) The beneficiary ships the goods to the buyer and obtains a

b) The beneficiary prepares and presents a document package

c) The advising bank reviews the document package making

d) The issuing bank reviews the document package making

e) The applicant makes cash payment (or signs an

4. Advise 10. Make

Exporter‘s 3. Issue L/C

a) In a sight credit the value of the credit is available to the

b) The value of the credit is made available to the beneficiary

a) Shipment schedule stipulated in the credit cannot be met.

b) Stipulations concerning freight costs are deemed

c) Price is insufficient due to changes in exchange rates.

d) Quantity of product ordered is not the expected amount.

e) The product description is either insufficient or too

f) The required documents are difficult or impossible to

g) Discrepancies with documents.

A German company is for many years in a close business

Until now both partners agreed upon an advised documentary

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