Unit 20 MODES OF INTERNATIONAL PAYMENT

05 steps in negotiating payment

1. Modes of payment (How will payment be made?)
2. Timing (What is the date of payment?)
3. Place of payment (Where must the money be before payment is considered complete?)
4. Delay (What delay in payment is excusable?)
5. Result of delay (What are the results of non-excusable delay in payment?)

MODES OF INTERNATIONAL PAYMENT

1. Bill of Exchange (draft)
- Bill of exchange is an ______________ ______________for payment drawn on a drawee by a drawer
requesting the drawee to pay ______________ or ______________ a certain amount to a beneficiary.
Parties in B/E:
- Drawer: is the party who signs the B/E, requesting the payment.
- Drawee: is the party on whom the B/E is drawn.
- Bearer: is the last beneficiary who presents the B/E for getting payment.
Types of B/E
- Sight drafts: are payable on demand when__________________________________________.
- Time drafts: (also called usance drafts) are payable at a ______________ (specific) date or ______________
(e.g., 30,60,90 days) date.

(1) Sample of Bill of Exchange used in payment by collection:

(2) Sample of Bill of Exchange used in payment by documentary credit:

Features
• A bill of exchange must be ______________and must be ______________.
• It must contain an order to pay a certain sum of money. The order must be ______________.
• The money must be payable to a ____________________________or to ______________or to the bearer.
• It must be for a specified ______________and specified ______________.
• The bill must be accepted by the party on whom the order is made.
• The language: ______________is used.
Notes:
- B/E is often issued in ______________to avoid loss of B/E in sending. If the earlier has been paid, the later
shall become____________________________.
- First copy: “Second of the same tenor and date being unpaid”
- Second copy “First of the same tenor and date being unpaid”.
• Corrections are ____________________________in B/E.
B/E contents

(1) B/E title:

(2) B/E number:
(3) B/E amount:
(4) Place of drawing B/E:
(5) B/E date:
(6) Time of payment
- Sight B/E: “at....sight” or “at...\...sight”
- Time B/E: “at xxx days after sight” with xxx: a number, for example: 30, 60, 90...
(7) Beneficiary
- Order B/E: “pay to the order of…’
- Nominated B/E: “pay to”
(8) B/E amount
- This item is presented by “the sum of...”.
- In case an L/C is relevant, B/E usually includes “L/C charges and amount shall be to the account of....(the
importer)” with information about the L/C (date, number, issuing bank)
(9) Name, address of the drawee.
(10) Name, address of the drawer and signature of the legal representative of the drawer.

2. Open Account
- Seller offers ______________ to buyer.
- Payment is made ______________ delivery.
- Procedures:
(1) Seller delivers the goods to buyer
(2) Seller sends debit card to buyer
(3) Buyer sends funds to seller on maturity
Usage:
- When there is a ____________________________between two parties.
- Used between ____________________________.
- For payment of a ______________.

3. Remittance
- A buyer asks his bank to send certain amount of money to a ______________at a named place at a definite
time.
- Funds are transferred ____________________________delivery as agreed by parties.
Forms of remittance:
- MT: Mail transfer
-TT: Telegraphic transfer
Procedures
- Step 1: The beneficiary (usually the exporter) delivers the goods and sends the
____________________________ to the remitter (the importer).
- Step 2: After checking the goods and/or the set of shipping documents, if the importer finds everything is as
agreed, he shall prepare a ______________order to the remitting bank.
- Step 3: The remitting bank sends the ______________to the paying bank to effect the payment.
- Step 4: The paying bank pays to the ______________as instructed.
Usage:
- When there is there is a ____________________________between parties.
- For payment of____________________________. (advanced payment, down- payment, deposit, payment of
fees or services, commission, payment of balanced amounts...).

4. Collection
- Seller asks a bank in buyer’s country to collect money for him.
Types of collection:
- Clean collection
- Documentary collection
4.1. Clean Collection
- Payment without documents
Procedures to conduct clean collection
- Step 1: Exporter sends ____________________________to Importer.
- Step 2: Exporter ____________________________to ask Remitting bank to help collect the money.
- Step 3: Remitting bank sends ______________ to Collecting bank
- Step 4: Collecting bank asks Importer for ______________.
- Step 5: Importer makes payment for ______________.
- Step 6: Send the ______________or a ______________ to the exporter.
- Step 7: The bank shall send the ____________________________to the exporter. It may be a signed B/E or
a refusal.
Usage:
- When there is a high ____________________________between parties.
- Payment for a service.

4.2. Documentary Collection

- Payment accompanied by documents.
Procedures
- Step 1: Exporter sends the ______________ to a ______________.
- Step 2: Exporter draws B/E, a collection instruction and a set of ____________________________to ask the
collecting bank to collect the money.
- Step 3: Remitting bank sends the B/E, ____________________________, the set of commercial documents
to Collecting bank to ask to collect the money from the Importer.
- Step 4: The Collecting bank ______________ the B/E, collection instruction to the Importer to ask for
payment.
- Step 5: Importer ____________________________against B/E to get ______________.
(1) DP: Importer signs B/E, makes ____________________________against sight B/E
(2) DA: Importer signs B/E, makes ____________________________against after sight B/E
- Step 6: Collecting Bank sends the signed B/E and ______________ to Remitting Bank
- Step 7: Remitting bank notifies Exporter the ______________of funds in his account.
Note:
- In case an importer disagrees to make payment, he shall send a refusal letter to the Collecting Bank, which
will be sent to Exporter.
Usage:
- There is a certain degree of trust between parties.

Practice 1. Read the Bill of Exchange below and answer the questions.

Questions:
- The value of the draft is: __________________________________________
- The drawee of the draft is: __________________________________________
- The payee of the draft is: __________________________________________
- The drawer of the draft is: __________________________________________
- This draft was drawn under a letter of credit issued by: __________________________________________
- The beneficiary of this letter of credit is: __________________________________________

Practice 2. Issue a Bill of Exchange on the basis of the following data:

- Exporter: MD Co., Ltd,
- Importer: T. H Trading Co LTD., Pusan, Korea.
- Advising bank: Bank for Foreign Trade of Vietnam HCM City Branch.
- Issuing bank: Sinhan Bank Seoul, Korea.
- Confirming bank: Tokyo bank, Japan.
- Means of payment: L/C A/S.
- Amount of payment: USD 48,000.00.
- Shipment date: 25/9/2017.
- Irrevocable Confirmed L/C No: M426300/NS02617, dated 01 August, 2017.
- Invoice No: 18/ M.M /2005 dated: 27/09/2017.
- Beneficiary: ABC Co.Ltd

Unit 21 DOCUMENTARY CREDIT

1 Payment by Documentary credit
1.1 Documentary Credit
- It is a method of payment made through banks ___________ _____________.
- It is used to guarantee:
+ seller’s right of getting payment _____________ _____________
+ buyer’s right of getting the goods in accordance with_____________.
- Legal sources: UCP 600-ICC, ISBP
1.2. Participating parties
- Applicant: a person/company (Importer) who requests or instructs a bank to issue a letter of credit.
- Issuing/Opening bank: a bank which issues a letter of credit upon the request of the applicant.
- Beneficiary: a person/company (usually Exporter) in whose favour a letter of credit is issued.
- Advising bank: a bank which advises or is authorized to advise a beneficiary of the availability of a credit
and its terms.
-Confirming bank: a bank which guarantees/ confirms the payment of a credit issued by opening bank.
1.3. Procedures of payment by L/C
Relationship among parties
- Between Seller and Buyer: __________________________
- Between Buyer and Bank: _____________
- Between Seller and Bank: __________________________
Procedures of L/C application:
- Step 1: Sales contract signed with payment by______________________.
- Step 2: Basing on the signed contract, Importer applies to open an L/C at__________________________.
- Step 3: Issuing bank opens an L/C and sends _____________ to Advising bank
- Step 4: Advising bank sends the L/C to the _____________.
Payment against documents
1) Exporter delivers the _____________to the carrier
2) Exporter gets transport documents from Carrier and prepares other required _____________
_____________
3) Exporter presents _____________ _____________to Advising bank
4) Advising bank sends shipping documents to __________________________
5) Issuing bank checks shipping documents and if______________, sends _____________to Advising bank.
6) Advising bank notifies Exporter the __________________________in Exporter’s account.
7) Issuing bank releases shipping documents to _____________
8) Importer presents _____________ _____________to Carrier and takes delivery of goods.

2. Negotiating the terms of a Letter of Credit

2.1 Steps in negotiating the terms of an L/C
Step 1 Agreement
- Seller and Buyer discuss and list all_____________ _____________.
Step 2. Incorporation
- Seller and Buyer _____________the list of documents into their contract
Step 3. Specification
- Buyer applies for an L/C, specifying all __________________________
- The bank issues _____________and sends it to the Seller
Step 4. Verification
- Seller checks the L/C to see if the _____________are as agreed.
- In case of any _____________in the documents, seller should negotiate with the Buyer and the Bank to
_____________ _____________the documents.
Step 5. Compliance
- Seller _____________ _____________ the documents and submits them to the bank for payment

2.2. Segments in a Letter of Credit

Segment 1: Applicant
- The full name and address of the applicant (buyer), including normally the buyer's account number with the
issuing bank.
Segment 2: Issuing Bank
- The name of the issuing bank. This can be left blank in case of application form of an issuing bank.
Segment 3: Application Date
- The date on which the application form is submitted to the bank. (this should be left open to the issuing
bank)
Segment 4: Date and Place of Expiry
- It is the __________________________of documents to the bank.
- This should be carefully negotiated. (The buyer shall want an ______________________to save bank
charges; the exporter shall want _____________ _____________after delivery to present the documents and
to __________________________that might be discovered by the bank.)
- A _____________ (expired) letter of credit shall not be paid without an amendment.
- The place of expiry is often "At the _____________of the confirming bank."
Segment 5: Beneficiary
- The full name and address of the beneficiary (usually the_____________ in most cases)
- In case of issuing by Teletranmission, the telephone, telex and fax numbers should be included.
Segment 6: Method of Issue

- Usually issued by Telex, SWIFT

Segment 7: Transfer of the Credit

Transferable credit

- This segment is used in case the Seller wants to transfer the amount to a _____________ _____________.
Segment 8: Confirmation

Confirmation of credit to the beneficiary

Not requested Requested

- This is the choice of the Seller: If he wants to get payment right after_____________ _____________, this
will be used.
Segment 9: Amount

Amount:

- This should be expressed both in figures and in words.

- The currency code of ISO is used: USD, VND, GBP…
Note:
(1) If payment is made entirely by L/C, ____________ ____________in the contract is used
(2) If part of payment is made by L/C, write ________________________paid by L/C.
(3) If _____________is used, the exact rate of tolerance must be used (10% more or less).
(4) In case of partial shipment, phrases “_________________________________..” should be used.
- Avoid the use of ________________________

Segment 10: Partial Shipment

 Partial shipments

allowed not allowed

- Difference between partial shipments and shipment installments.

+ Shipment in installments: an agreed schedule has been set up (e.g., three ________________________in
March, August and October 20--.)
+ This schedule should be noted in "Additional Instructions" (Segment 19).
+ Partial shipment is an ________________________with some part of the goods to follow later. Unless the
buyer has some clear reason for wishing all the goods to arrive together, partial shipment should be
_____________
Segment 11: Transshipment

Transshipment
allowed not allowed

- Transshipment means moving the goods from one _________________to another.

- It is often allowed for container transport, “________________________”. (Combined B/L is used)
- In case of ________________________of the goods, transshipment is not allowed (Direct B/L is used)
Segment 12: Availability

Credit available with..."

- It is often left open for the issuing bank to decide.
- If it is chosen by the seller, this is the name of the ______________________.
By sight payment: ________________________
By acceptance: ________________________
By deferred payment: ________________________
By negotiation: ________________________
Segment 13: Insurance Covered by the Buyer

Insurance shall be covered by us

- For information only, to indicate that the Seller is __________________to present an insurance document.
- It is used only when Incoterm rules (other than ________________) are used
Segment 14: Transport Information
Loading on board/dispatch/taking in charge at/from:
not later than …….. for transportation to:…….

- Loading/ discharge place should be clearly specified.

- “not later than”: indicates a________________________.
- Other stipulations: “during May 20--” or “not before 20th May 20-- and not after 28th June 20--.”
Segment 15: Description of the Goods

Goods (brief description without excessive detail)

- It should be kept____________________________________. The complicated the description may lead to a

chance of a ____________with some other documents
- Quantities:
+ If ____________is used, it must be clearly stated. For example: “100MT, 10% more or less”
+ The words "about", "approximately", "circa" or similar expressions allow a _______________________
(UCP 600, Article 30)
Segment 16: Incoterms

- A term of delivery is used

Segment 17: Documents
Parties should clearly specify:
- Name of documents (________________________)
- Number of ____________
- ________________________issues such documents
Segment 18: Presentation Period

- Most buyers fix a ________________________between shipment and presentation.

- If this box is left empty, the UCP (Article 43) automatically allows ________________________.
Segment 19: Additional Instructions

Additional instructions

- In case of a ________________________of invoice value is used, and delivery in____________.

Segment 20: Authorization to Debit

We authorize you to debit our account

This segment is the buyer’s responsibility alone.

Segment 21: Signature

Name, stamp and authorized signature(s) of the applicant

- It is the buyer signs and stamps the form.

2.3. Common Discrepancies in documents

(1) Problems with the letter of credit
- Documents required by the credit are missing. - Documents are not presented within the required
- Documents required to be signed are not signed. time.
- The credit amount is exceeded. - Shipment was short.
- The credit has expired. - Shipment was late.
(2) Problems with the bill of lading
- The bill of lading is "unclean" it has comments on it relating to damage to or other deficiencies in the goods.
- A marine bill of lading is required, but the bill does not state that the goods were "shipped on board" a
named vessel.
- The bill of lading shows shipment between ports other than those specified in the credit.
- The bill of lading shows that the goods were shipped on deck. This is normally forbidden unless the credit
expressly allows it.
- The bill of lading offers no evidence that freight was paid by the exporter (of this was required).
- There is no endorsement (if endorsement is necessary).
(3) Problems with insurance
- The insurance document is not of the type specified in the credit (e.g., a certificate of insurance is produced
while the credit calls for a policy).
- The insurance risks are not those specified in the credit.
- Insurance cover is expressed in a currency other than that of the credit. This is forbidden unless the credit
expressly allows it.
- The sum insured is below the figure required.
- Insurance cover does not begin on or before the date of the transport document.
(4) Inconsistencies among the Documents
- Descriptions of the goods on the invoice and in the credit are different.
- Weights differ between two documents.
- Marks and numbers differ between two documents.

3. Stipulations of payment clause in a contract

(1)Type of L/C (6) The beneficiary
(2) Name of issuing bank. (7) The validity of L/C
(3) Name of advising bank (8) Date and Place of expiry
(4) The currency of L/C (9) Documents required
(5) The value of L/C

Typical Clause of payment by L/C:

“ Payment shall be made by confirmed irrevocable Letter of Credit, in United States Dollars,
- Time of opening: 15 days prior to the agreed delivery date
- Validity of Credit: 45 days, expires in Vietnam,
- Value: 100% of Contract value.
- Issuing bank: Tokyo Commercial Bank, Japan
- Advising bank and confirming bank: Vietcombank, Vietnam.
Documents required on presentation in triplicate unless otherwise stated:
(1) Commercial Invoice
(2) Packing List issued by the Manufacturer
(3) Certificate of quality and quantity issued by the Manufacturer
(4) Insurance Policy for 110% of Contract's value covering "All risks".
(5) Certificate of Origin issued by the Chamber of Commerce of Italy .”
(6) 3/3 set of origin clean "shipped on board" Bill of Lading, marked "Freight prepaid", made out to order of
Seller and Notify Buyer No. 287 PXL Street, Hochiminh city ‑ Vietnam.
(7) Vinacontrol Certificate for goods at the site.
( 8) Receipt of DHL showing that : 1/3 original B/L, triplicate copy of Commercial Invoice of Packing list of
Certificate of origin and set of non ‑negotiable documents have been sent to Buyer ‑ No 287 PXL Street,
Hochiminh city ‑ Vietnam.
(9). Test certificate issued by the manufacturer.
“…All expenses and charges relating to the L/C establishment inside Vietnam shall be borne by the Buyer. All
banking charges outside Vietnam shall be borne by the Seller. Charges for amendment or extension of L/C
shall be borne by the party who requires”

4. Letter of Credit and Its Associated Documentation

Common shipping documents:
- Commercial invoice;
- Transport documents;
- Insurance documents;
- Other documents such as certificate of origin, certificate of analysis, packing list, weight list, phyto-sanitary
certificate, etc.
4.1. Invoices
(1) Proforma Invoice
Usage
- Not for getting payment.
- In domestic trade, it is used by a seller for quoting his/her sale terms.
- In foreign trade:
+ it is used by an exporter or importer for customs clearance for non-commercial goods.
+ It helps an importer to obtain an import licence and foreign exchange for completion of the contract.
(2) Commercial Invoice
- It is made out by the seller that gives details and value of the goods to be supplied.
- The purpose is to get payment from the buyer
Main particulars:
- Giving details of the seller, the buyer, invoice No., date of the invoice, descriptions of the goods, marking,
unit price, terms of delivery and payment and signature.
Notes:
In accordance with UCP 600, a commercial invoice:
+ Must appear to have been issued by the beneficiary
+ Must be made out in the name of the applicant for the UC
+ Must be made out in the same currency as the L/C.
+ Needn’t be signed
+ The descriptions of the goods must be in correspondence with those in the letter of credit.
Usage:
+ To ask for payment of the goods
+ To make customs declaration, to take delivery of the goods and to make claims for compensation.
+ To supply details of the goods that serves as a benchmark on checking the goods.
+ Details in a commercial invoice must be in line with requirements in the contract and the letter of credit.
Significance of Commercial Invoice
- It is an evidence of the contract of sale and purchase of goods.
- It constitutes the main document for various export formalities such as preshipment inspection, quality,
excise and customs procedures.
- It is useful for accounting purposes, both by the exporter and importer.
- It is required in collection/negotiation of documents through the bank.
- For claiming for compensation, this document is essential.
Common mistakes when issuing a commercial invoice, which results in non-customs clearance:
- Missing delivery term (E.g. FOB + port of shipment or CIF + port of discharge).
- Price calculated at CIF, but stipulated at FOB price.
- Goods are sold at discounts while discount amount is not invoiced.
- Unclear description of goods.
(3) Consular Invoice
- It is issued by an importer’s consulate located in the exporter’s country.
Usage
+ for securing authentication of information contained in the invoice.
+ for assessing import duties and statistical purposes.
+ can be used to replace Certificate of Origin
- Commercial Invoice is often prepared in three copies.
+ One copy is retained by the consulate office.
+ One copy is sent to the customs of the importing country.
+ One copy is given to the exporter to forward with other documents to the bank for collection/negotiation.
Significance of Consular Invoice:
(1) to the Exporter
- Exporter is assured of no import restrictions in the importer’s country
- No problem in realization of export proceeds or foreign exchange.
- Prompt clearance from the customs of exporter’s country for shipping the goods.
(2) to the Importer
- In the importer’s country, the customs do not normally open the packages, the importer can get speedy
delivery of goods.
(3) to the Customs
- The customs of the exporting country can easily clear the goods.
- The customs of the importing country need not open the packages for checking and can easily calculate the
import duties.

4.2. Packing List

- It is often issued by a manufacturer.
- It is a list of all the items in a package.
- It gives specific descriptions on the packing of the goods (quantity of bags, packing materials, weight,
measurements and marks)
- Packing List is often required to be made in 3 copies.
+ One copy is put inside a package for a consignee to check.
+ One copy sent to a consignee in separate cover.
+ One copy is enclosed with other documents to be submitted to the bank for payment.

4.3 Certificate of Origin (C/O)

- It is issued by an authorized governmental agencies in the exporter’s country as an evidence of origin of the
country’s manufacture.
- Its contents must conform to the terms of the contract and letter of credit.
(1) Significance of Certificate of Origin
- It is used to get preferential tariff for importers.
- It facilitates the importer to adhere to the rules and regulations of his country.
- When goods from some countries are banned, importing country requires this certificate to ensure that goods
from banned countries are not entering into the country.
- It is required by exporting country to ensure that the goods imported are not reshipped again.
- For a customs agency to apply taxes imposed on the goods subject to Government policies and track on the
use of quotas.
- It can tell about the quality of the goods as the product quality is the locality and production conditions.
(2) The forms of C/O:
Form A: used to confirm origin of the goods from developing to developed countries to enjoy preferential
taxes under General System of Preference (GSP)
Form B: used for all the goods exported to foreign countries, not for tax preference.
Form O: used for coffee products exported from ICA (ICA: International Coffee Association)
Form X: used for coffee products exported from non-ICA
Form T: used for textiles and garments exported European Union (EU)
Form D: used for the goods traded in intra - ASEAN
Form AK: used for the goods traded between ASE/ South Korea, issued by the Ministry of Industry and Trade
Form S: used for the goods traded between Vietnam and Laos.
Form E: used for the goods traded between Vietnam and China.

4.4. Certificates of Inspection

- It is a certificate issued by an Inspection Agency to certify the quality and quantity of goods exported.

(1) Certificate of quality

- Subject to the agreement of the parties to the contract, it is issued by the manufacturer or by a third party.
- The purpose is to confirm that the quality of the goods delivered is in conformity with the contract.
- The contents:
+ Information on the consignment concerned, including names of the shipper and consignee, commodity,
contract No., marking, quantity and weight, means of transportation, port of loading, port of discharge and
date of loading.
+ Inspection results, which can be noted under quality criteria or can be noted generally “the goods are in
conformity with Contract No... dated...”
(2) Certificate of quantity/ weight: It is issued by an export or a third party to guarantee the quantity or weight.
(3) Sanitary Certificate: It is issued by an authorized governmental inspection agency to confirm the facility
and/or cargo which has been inspected and meets the minimum sanitary requirements.
(4) Veterinary Inspection Certificate
- As a confirmation on the product quality and an evidence that the goods (animal meat) meet the
requirements of the contract.
- To carry out customs formalities for the export.
- To fulfill a set of documents to get payment.
(5) Phyto-sanitary Certificate
- It has the same functions as Veterinary Inspection Certificate.
- It is used for goods plants
(6) Fumigation certificate
- This certificate shows that the goods have been fumigated.

5. Types of letter of credit

(1) According to the nature of the L/C:
- Revocable LC: a credit which can be revoked or withdrawn anytime before it has been performed, for
example, it has been negotiated or the compliant documents have been accepted by an authorized bank.
- Irrevocable LC: a credit under which the issuing bank undertakes not to revoke the credit before a specific
time or event, provided that the beneficiary complies with its terms.
- Confirmed Irrevocable LC:
+ an L/C to which a confirming bank has added its confirmation that it shall undertake the responsibility of
payment in case of non-payment by the issuing bank.
+ It is used when the seller wants to get money from the confirming bank.
(2)According to recourse
- LC with recourse: Under 'With Recourse" letter of credit, the negotiating bank can make the exporter liable,
in case of default in payment by the opening bank or importer. For this, negotiating bank has to obtain suitable
undertaking from the exporter for refund of amount paid, in the event of not getting reimbursement from the
issuing bank. In other word, negotiating/nominating bank shall take back money in case of with recourse.
- LC without recourse: Under "Without Recourse" letter of credit, the negotiating bank has no recourse to the
exporter. But, if the confirming bank happens to be the negotiating bank, it cannot have recourse to the
exporter. In other word, negotiating/nominating/confirming bank will not take back money once paid.
(3) According to the time of payment
- Sight Payment LC:
+ an L/C in which if beneficiary presents a perfect set of documents, he shall get immediate payment.
+ It is used with sight draft
- Deferred Payment LC:
+ an L/C in which if beneficiary presents a perfect set of documents, he shall get a confirmation to get
payment at a definite time in the future.
+ It is used with time draft
(4) Other types of L/C
- Transferable LC: A credit which can be transferred by the beneficiary pursuant to the terms of the credit. +
A transferable documentary credit is one where the beneficiary may request that part of the proceeds
(payment) of the credit be transferred to one or more other parties who become second beneficiaries. It is used
in case of business transaction made through an intermediary
- Standby credits: Are often called nonperforming letters of credit because they are only used if the collection
on a primary payment method is past due. It can be used to guarantee repayment of loans, fulfillment by
subcontractors, and securing the payment for goods delivered by third parties.
- Revolving LC: A revolving documentary credit is an obligation on the part of an issuing bank to restore a
credit to the original amount after it has been utilized, without the need for amendment.
- Back to back LC: This is a new credit opened on the basis of an already existing, nontransferable credit. It
is used by traders to make payment to the ultimate supplier. A trader receives a documentary credit from the
buyer and then opens another documentary credit in favor of the ultimate supplier. The first documentary
credit is used as collateral for the second credit. The second credit makes price adjustments from which comes
the trader's profit. It is used in case of business transaction made through an Intermediary
- Red clause LC: A red clause documentary credit is an obligation on the part of an issuing bank to guarantee
advance payments made by a confirming (or any other nominated bank) to the beneficiary prior to
presentation of documents.

6. Letter of Credit Checklist

6.1. Seller’s consideration on receipt L/C from an advising bank
- Are L/C amount and currency (and if applicable the tolerance) in conformity with the contract?
- Are expiry place and payment regulations as per contract and if agreed, does the L/C contain the order to add
the confirmation (if required)?
- Are date of shipment, date of expiry and period for presentation of documents calculated sufficiently?
- Do goods description and terms of delivery conform to the contract?
- Are you able to fulfill L/C conditions concerning transport route, partial shipments and transshipments?
- Are you able to present the required documents with all clauses/confirmations/legalizations in time?
- In case of CIF or CIP delivery - are you able to get the necessary cover of insurance?
- Are the conditions concerning who is going to pay the bank commissions and charges as per contract?
- In case the ship-owner allows transportation of certain goods only ,on deck' - do L/C conditions permit
shipment ,on deck?
- Does the L/C contain the remark „transferable" if required?
- Is the L/C operative or will the L/C be set operative subject to fulfillment of a condition which cannot be
influenced by yourselves?
6.2. Seller’s consideration before presenting documents to a bank
- Is the L/C still valid?
- Is the documents presentation period not yet expired?
- Are goods shipped within latest shipment date or according to shipment schedule?
- Do the documents refer to the same delivery and to the same L/C?
- Are required documents issued in the stipulated number of copies?
- Are all documents named as per L/C terms?
- Do all documents correspond to each other concerning measurement, weight, number and kind of packing as
well as marks?
- Are all documents, if necessary, certified and/or legalized by the correct authority?
- Do documents show corrections? - If yes - are they properly approved by the issuer?
- Have additional conditions (if any) been fulfilled?
- Are goods description and prices exactly as per L/C terms?
- Are there any calculation errors in the invoice?
- Does the remark concerning freight in the transport document correspond to the terms of delivery?
- Is the consignee of the goods stated in the transport document L/C-conform?
- Do you have the full set of original Bills of Lading, are they signed properly and endorsed correctly if
necessary?
- Is the transport document "clean" i.e. does not bear any clause or notation expressly declaring a defective
condition of the goods or their packaging?
- Do the L/C conditions allow the presentation of a "Charter Party" Bill of Lading"?
- Is the "notify-party" shown in the Bill of Lading L/C-conform?
- Has the shipment advice been sent correctly and in time?
- Does the insurance document cover the risks asked for in the L/C?
- Is the insurance amount correct?
- Do you have the full set of original insurance documents and are they endorsed properly?
- Are the measurement, weight and packing units stated correctly in the packing list/weight list/ specification
and do they correspond to the other documents?
- Are all documents which are named as "certificate" signed by the issuer?
- If the L/C requires the presentation of drafts - are they duly signed?
7. Comparison of international methods of payment
Method Time of payment Goods available to Risk to Seller Risk to Buyer
Buyer
CASH IN ___________ ___________ ___________ ___________
ADVANCE
OPEN ___________ ___________ ___________ None
ACCOUNT
REMITTANCE ___________ Before or after Full risks if payment Full risks if
(Telegraphic payment ___________ payment
transfer) ___________ shipment ___________
shipment
CLEAN ___________ ___________ Seller ___________ ___________
COLLECTIONS on buyer to pay the
account as agreed.
COLLECTIONS Usually soon ___________ Buyer may Relatively
1. Sight Draft after the local ___________ draft. ___________
DP bank notifies the
buyer of
___________
2. Time Draft Expected on the Before Reliance on the Relatively
DA ___________of payment, but after buyer to pay the draft ___________.
the draft. buyer ___________ ___________
LETTER OF Upon ___________ ___________ ___________
CREDIT ___________ of Subject to the terms Subject to the
1. Sight Draft conforming of L/C terms of L/C
documents to the
negotiating bank.
LETTER OF After Usually after the ___________ ___________
CREDIT presentation of bank's promise to
2. Time Draft ___________ pay is
 , and bank's established, but
acceptance of ___________.
draft due on
specified date.

Practice 1 Multiple choice – International payment

Choose the correct answer (A, B, C, D or E) in the following cases:
1. In a documentary collection, the banks________________
A. Evaluate the quality of the goods before shipment
B. Act as intermediaries in the collection process C. Finance the buyer and the seller
D. Dictate the terms E. Only check the drafts
2. An exporter receives a P/O (purchase order) and payment for 100 kg of knitting yarn. This is an example of
which type of payment option?
A. Cash in advance B. On consignment C. Open account D. Letter of credit
E. Documentary collection
3. If the bank holds shipping documents in custody and delivers them to the buyer upon receipt of payment,
what type of payment term is this?
A. Letter of credit B. Cash in advance C. Cash against goods
D. Documents against collection E. Open account
4. An exporter receives a P/O (purchase order) for 1000 pullovers and ships the goods and the documents
directly to the buyer before receiving payment for the goods. Which payment option is this?
A. Cash against documents B. On consignment C. Time draft
D. Cash in advance E. Open account
5. An “open account” transaction gives all of the advantages to the_________
A. Consignee B. Seller C. Bank D. Forwarder E. Buyer
6. Identify the payment option(s) which place(s) the seller in the risky position of nonpayment by the
buyer (select all that apply)?
I. Cash in advance III. Irrevocable letter of credit at sight
II. Open account IV. On consignment
A. I and II B. Only II C. II and IV
D. Only I E. Only III
7. What kind of payment option(s) should the seller consider when his/her products are in low demand (select
all that apply)?
I. Cash in advance III. Open account
II. Letter of credit IV. Documents against payment
A. Only II B. II and III C. Only III D. III and IV E. Only IV
8. Identify the risk(s) faced by the seller when collecting payment from an overseas buyer (select all that
apply).
I. Country III. Industrial
II. Political IV. Foreign exchange
A. Only I B. Only III C. II and III D. III and IV E. I, II, III, IV
9. What payment option(s) should the seller consider when he/she is willing to extend credit to the buyer?
A. Cash in advance B. Letter of credit at sight
C. Draft or documentary collection D. Documents against payment
E. Documents against acceptance
10. In clean collection, which document below must be presented to a collecting bank by an exporter?
A. Bill of Lading B. Bill of Exchange C. Invoice D. C/O
11. In order to minimize risks in payment by collection, an exporter should choose “payment by clean
collection”
A. True B. False
12. In clean or documentary collections, the responsibility of collecting bank is to________
A. release shipping documents to an importer
B. control shipping documents until payment is made by an importer
C. control shipping documents until payment is accepted by an importer
D. All are wrong
13. In payment by L/C, the remitting bank, who remits the shipping documents presented by an exporter to the
issuing bank, is responsible for checking the documents.
A. True B. False
14. The risk to an exporter in payment by collection and documentary credit is the same.
A. True B. False
15. All amendments or modifications to an L/C can be made by a(n)______________
A. advising bank B. issuing bank C. remitting bank D. confirming bank
16. The party who decides that the shipping documents presented by an exporter are in conformity with the
terms and conditions in the L/C is the ___________
A. Issuing bank B. Applicant C. Negotiating bank D. Advising bank
17. A full set of clean perfect documents is a basis for the fact that___________
A. an exporter asks the issuing bank for payment
B. an importer reimburses the issuing bank
C. an issuing bank confirms its payment to the exporter
D. all are correct
18. In an L/C, the commodity consists of 30 trucks and 15 tractors. This L/C allows partial shipments: first
shipment: 30 trucks; second shipment: 15 tractors. After the first shipment, the exporter presents the
documents for payment, the issuing bank refuses to make payment. Is the issuing bank right or wrong?
A. right B. wrong
19. On 10 October, 2017, an Issuing Bank received a Bill of Exchange issued on 1 October, 2015. This Bill of
exchange stipulated: “30 days after sight”. This issuing bank must make payment__________
A. 30 days from 1 October, 2017 B. 30 days from 10 October, 2017
20. Which L/C below is considered as a sponsorship for an exporter?
A. Irrevocable credit B. Red clause credit
C. Revolving credit D. Irrevocable transferable credit

Practice 2. Read the extract of a contract below and complete the L/C application form.
Contract for sale and purchase of fertilizer
No: 01-93/ XYZ- ABC
Between GALLUCK LIMITED
Flat A. 3/F , Causeway Tower, 16 – 22 Causeway Road, Causeway Bay, HONGKONG
Tel : 8153084 ,8955992 Fax : 5764980 Telex : 61355 WSGTC HK
(hereinafter called the Seller)
And SAIGON FOOD EXPORT IMPORT Co., Ltd.
40 Hai Ba Trung Street, District 1, Hochiminh City, VIETNAM
Tel : 256771, Telex : 411526 – VNFVT
 (hereinafter called the Buyer)
It has been mutually agreed to the sale and purchase of rice under the terms and conditions as follows:

ARTICLE 1: COMMODITY & SPECIFICATION

1.1 Commodity: UREA FERTILIZER
1.2 Origin: INDONESIA
1.3 Specification:
- Nitrogen: 46% min.
- Moisture: 0.5% max.
- Biuret: 1.0% max.
- Color: White
- Free flowing: treated with Anti- Caking.
1.4 Packing: - 50 kg net in Polypropylen Woven bag with polythylene inner liner - 2% of total bags as empty
spare bags to be supplied free of charge.

ARTICLE 2: UNIT PRICE - QUANTITY & TOTAL AMOUNT

2.1 Unit price: USD 178/ MT CFR Hochiminh City Port, Vietnam
2.2 Quantity: 1000 MT (plus or minus 10% at seller's option)
2.3 Total amount: USD 178,000.00 (+/- 10% at seller's option)
Say: US Dollars one million seven hundred eighty thousand.
ARTICLE 3: SHIPMENT - DELIVERY
3.1 Time of shipment: not later than September 20--
3.2 Port of loading: Indonesia main ports
3.3 Destination port: Hochiminh City Port
3.4 Partial shipment and transshipment: prohibited
3.5 Notice of shipment:
Within 2 days after the sailing date of carrying vessel to S.R Vietnam, the Seller shall notify by cable to the
Buyer the following information:
+ L/C number + Port of loading
+ Amount + Date of shipment
+ Name and nationality of the vessel + Expected date of arrival at discharging port
+ Bill of Lading number/ date

3.5 Shipping mark:

UREA 50 KGS NET
46% NITROGEN MINIMUM USE NO HOOKS
1% BIURET MAXIMUM MADE IN INDONESIA
0.5% MOISTURE MAXIMUM One side printed in green color

ARTICLE 4: PAYMENT
4.1 By irrevocable Letter of Credit at sight from B/L date for the full amount of the Contract value, available
for the Seller’s draft, drawn on the Issuing bank.
4.2 L/C Beneficiary: KOLON INTERNATIONAL CORP. 45 Mugyo- Dong, Chung Gu, Seoul - Korea
4.3 L/C advising Bank: KOREA FIRST BANK, Seoul – Korea
4.4 Bank of Issuing L/C: AGRIBANK, Hochiminh City, Vietnam
4.5 Time of opening L/C: within Sep. 15, 20—valid for 30 days from the date of opening.
4.6 Shipping documents:
Payment shall be made upon receipt of the following documents:
- 3/3 of clean on board Bill of Lading marked FREIGHT PREPAID
- Signed Commercial Invoice in triplicate
- Packing list in triplicate
- Certificate of origin issued by Indonesian Chamber of Commerce
- SUCOFINDO's Certificate on quality/ weight in duplicate

Application for Irrevocable Documentary Credit

To: Agribank
With all our obligations we hereby request you to issue your irrevocable L/C for our account in accordance
with the instructions below (mark X where appropriate)

Form of credit
Irrevocable Transferable Confirmed Revolving
Applicant (full name and address)
______________________________________________________________________________________
______________________________________________________________________________________
Beneficiary (full name and address)
GALLUCK LIMITED
Flat A. 3/F , Causeway Tower, 16 – 22 Causeway Road, Causeway Bay, HONGKONG
Advising bank :________________________________________________; Swift code :
Date and place of expiry (Where documents must be presented) :
______________________________________________________________________________________Cu
rrency, amount on figure and words:
______________________________________________________________________________________Av
ailable with:
Issuing Bank Any Bank Nominated Bank
By Sight payment Negotiation
Acceptance Deferred payment
Percentage credit amount tolerance (If any): __________________________
Drafts not required Drafts required
At sight
At days after date of ( B/L ) Other …………………….
For _______________ invoice value)
Trade term as per INCOTERMS 2020
FOB CFR CIF DAF other: __________
Place of taking in charge/dispatch from/Place of receipt:
______________________________________________________________________________________
Place of final destination/For transportation to/Place of Delivery:
______________________________________________________________________________________
Latest shipment date:
______________________________________________________________________________________
Partial shipment: Allowed Not allowed
Transshipment: Allowed Not allowed
Description of goods and/or services:
________________________________________________________________________________________
________________________________________________________________________________________
__________________________________________________________________________________Docum
ents required:
Available by beneficiary’s draft(s) drawn on ____________________________________
at ________________________ sight for 100 % invoice value.
Signed commercial invoice in _______3__________ original(s).
Detailed packing list in ______3_______ original(s).
Full (3 /3) set of clean ‘shipped on board’ ocean Bill of Lading made out to order of the Seller, blank
endorsed marked ‘_____________________’ and notify the applicant.
Certificate of origin issued by ____________________________ in ______ original(s).
Certificate of weight issued by _____________________ in _________ original(s).
Certificate of quality issued by _____________________ in __________ original(s).

Special conditions:
Period for presentation: Documents to be presented within ______________ days after the date of issuance the
transport documents but within the validity of the credit. (21 days unless otherwise stated)

Practice 3 Read the following letter of credit and answer the questions
Letter of Credit
Name of Issuing Bank:
American Bank, New York, USA
Place and Date of Issue:
New York, September 1, 2013
Applicant:
American Trading Company
200 Main Street
New York, USA
Advising Bank:
Japan Bank Ltd., Tokyo, Japan
Partial Shipments __ allowed X not allowed
Transshipment __ allowed X not allowed
__ Insurance covered by buyers
Shipment as defined in UCP 600 Article 46
From: Tokyo, Japan
For transportation to: New York, USA
Not later than: September 15, 2014
Irrevocable Documentary Credit
Number: AB1001
Expiry Date and Place for Presentation of Documents
Expiry Date: September 30, 2013
Place for Presentation of Documents: Tokyo, Japan
Beneficiary:
Japan Trading Company
200 Palace Street
Tokyo, Japan
Amount:
US$ 100,000
Credit available with Nominated Bank:
Japan Bank Ltd., Tokyo, Japan
X by payment at sight
__ by deferred payment at:
__ by acceptance of drafts at:
__ by negotiation
Against the documents detailed herein:
- X and Beneficiary’s draft(s)) drawn on:
Japan Bank Ltd., Tokyo, Japan
- X Commercial Invoice in triplicate
- X Bill of Lading in triplicate
- X : Certificate of Origin in triplicate
Documents to be presented within 10 days after date of shipment but within the validity of the Credit.
We hereby issue the Irrevocable Documentary Credit in your favor. It is subject to the Uniform Customs
and Practice Documentary Credits
•1993 Revision, International Chamber of Commerce, Paris, France, Publication No. 500) and engages us
in accordance therewith. The number and date of the Credit and the name of our bank must be quoted on
all drafts required available by negotiation, each presentation must be noted on the reverse side of this
advice by the bank where the credit is available.

This document consists of 01 signed page(s)). John Doe_____

American Bank

Answer the questions- Identify the following:

1. Applicant: __________________________________________________________________
2. Beneficiary:__________________________________________________________________
3. Issuing Bank:_________________________________________________________________
4. Advising Bank:________________________________________________________________
5. Nominated Bank:______________________________________________________________
6. Drawee:_____________________________________________________________________
7. Drawer:_____________________________________________________________________
8. Documents required to be presented by the Beneficiary:
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________
Practice 4 Case studies -Letters of credit
Case 1
Read the information below and determine if the bank will pay the seller.
- A seller presents documents to a bank under a letter of credit. The documents comply with the terms of the
letter of credit. However, the buyer claims that the goods sent by the seller are of inferior quality.
Question: Will the bank pay the seller? Why or why not?
______________________________________________________________________________________
Case 2
Review the information below and determine if the beneficiary will be paid.
- A bank receives documents from a beneficiary of a revocable letter of credit. While the bank is examining
the documents, a notice that the letter of credit has been canceled is received from the issuing bank.
Question: Will the beneficiary be paid? Why or why not?
________________________________________________________________________________________
Case 3
A seller presents documents to a bank under a letter of credit. The documents comply with the terms of the
letter of credit. However, the buyer has gone bankrupt and, therefore, will not be able to reimburse the issuing
bank.
Question: Does the issuing bank still have to make payment under the letter of credit? Why or why not?
________________________________________________________________________________________
Case 4
A seller presents documents to a bank under a letter of credit. The documents comply with the terms of the
letter of credit. However, the buyer claims that the seller has violated the terms of the sales contract and the
buyer instructs the issuing bank not to make payment under the letter of credit.
Question: Does the issuing bank still have to pay the seller? Why or why not?
______________________________________________________________________________________
Case 5 An L/C stipulates as follows:
- Commodity: Coffee bean, crop 2016-2017, Vietnam origin
- Quantity: 100MT
- Shipment: from a Vietnamese port, to Pusan port, Korea
- Partial shipment: prohibited
A Vietnamese exporter presents 03 Bills of Lading with following stipulations:
(1) Bill of Lading 1:
- Dated: 7 February, 2017
- Quantity: 30MT
- Port of discharge: Pusan port.
- Vessel: MS Shangmaru
(2) Bill of Lading 2:
- Dated: 15 February, 2017
- Quantity: 35MT
- Port of loading: Saigon port, HCM city, port of discharge: Pusan port.
- Vessel: MS Shangmaru
(3) Bill of Lading 3:
- Dated: 20 February, 2017
- Quantity: 35MT
- Port of loading: Vung Tau port, Vung Tau, Vietnam; port of discharge: Pusan port.
- Vessel: MS Shangmaru
Questions:
1. Which is the date of delivery? Why?
________________________________________________________________________________________
________________________________________________________________________________________
__________________________________________________________________________________
2. Does the exporter violate the clause “Partial shipment: prohibited”? Why or why not?
______________________________________________________________________________________
______________________________________________________________________________________
3. Can the exporter get money from the bank?
______________________________________________________________________________________
Unit 22 Timing, Location and Delay of payment
1. Timing
The Principle: Time of payment is in close link with the return of turnover, proceeds, or the ability to avoid
the fluctuation of currencies used for payment. Therefore, it often gives rise to disputes between the parties in
negotiating a contract.

1.1 Advance payment

- Payment is made after the _____________ of a contract or after the exporter accepts the buyer’s order, but it
is made ______________.
- During such time, the buyer makes payment ____________________________of the entire value of the
contract.
E.g.: “Payment is made 15 days from the date of coming into force of the contract/from the date of signatures
of the contract”
Usage:
- A buyer offers a ____________________________to his supplier.
- The down payment is considered as a ____________________________

1.2. Immediate payment

1.2.1 Cash on Delivery (COD)
- Payment is made after the seller has fulfilled his _________________________ under Incoterms 2020.
- Payment is made to the seller after the seller has fulfilled his delivery obligation at a
______________________of delivery, agreed in the contract.
E.g.:
- For EXW: Payment is made after the seller has delivered the goods at his premises, such as warehouse,
factory…
- For FCA: payment is made when the seller has delivered the goods to a carrier at a named placed of
delivery
=> After the seller has fulfilled his delivery obligation, he sends an advice (by Telex, Fax, Telephone, Mail)
to the buyer. The buyer then shall make payment to the seller.

1.2.2 Payment is made to the seller after the goods have been loaded onto the vehicle at a named place of
delivery
- E.g.: FOB: “Payment is made when the seller has delivered the goods onto the vessel at the port of
shipment”
=> Upon receipt of the_____________, the seller sends an advice to the Buyer for payment
1.2.3 Payment is made after a full set of shipping documents is made out and sent to the buyer.
- The buyer shall make payment for such documents
1.2.4. Cash on Receipt (C.O.R)
- Payment is made to the seller after the buyer has taken delivery at an agreed place (can be at seller’s country)
or port of destination (can be at buyer’s country)

1.3. Deferred payment

- After X days from the date of the Buyer’s receipt of seller’s advice that delivery has been made to the carrier
at an agreed place of delivery.
- After X days from the date of the Buyer’s receipt of the shipping documents (D/A)
- After X days from the date of taking delivery of the goods by the buyer.
E.g.:

- 3% of the total contract value shall be made to the Seller within 30 days from
the date of signing the contract by the parties
- 7% of the total contract value shall be made to the Seller 30 days before the
first shipment is delivered”
- 5% of the total contract value shall be made to the Seller after the last shipment
is delivered.
- 5% of the total contract value shall be made to the Seller after the completion of
installation of the machine, but not later than 12 months from the date of
completion of the last shipment”
-The balance of 80% shall be made by five (05) installments in five (05) years”

2. Place of payment
Point at which money is deemed to be paid:
WHEN WHEN MONEY WHEN WHEN
BUYER IS PAID INTO PAYING FUNDS
INSTRUCTS HIS BANK BY BANK ARRIVE IN
BANK BUYER FOR MAKES SELLER’S
TO PAY TRANSFER TRANSFER BANK’S
TO SELLER OF FUND ACCOUNT

Buyer prefers Seller prefers

The principle
Negotiators must work this out carefully: the conflicts of interest are clear.
=> the point of payment must be expressly defined.
- To avoid the dangers of late payment, sellers try to protect themselves with a clause like this:
- “Payment shall be deemed to have been made only when the contract sum is paid into the Seller’s bank
account at Vietcombank and is at the Seller’s full disposal”
Or:
- “Payment shall be made in the UK or elsewhere as the Seller may determine from time to time.”
If the parties agree to incorporate The Vienna Sales Convention into their contract, the place of payment will
be stipulated as follows:
Article 57 [Place for payment]
(1) If the buyer is not bound to pay the price at any other particular place, he must pay it to the seller:
(a) at the seller's place of business ; or
(b) if the payment is to be made against the handling over of the goods or of documents, at the place where the
handing over takes place.
(2) The seller must bear any increase in the expenses incidental to payment which is caused by a change in his
place of business subsequent to the conclusion of the contract.

Notes:
- Payment can be made at buyer’s country, buyer’s country or at a _____________________country
- In international business practices, the use of the ____________ of one country shall determine the place of
payment in that country.

3. Delay and results of delay

3.1 What delay is excusable?
- Grace Period
- Force Majeure
“Payment shall be made by 30-day sight draft on demand, documents against acceptance”
=> grace period: _________________
Notes:
- In business practices, Force Majeure excuse for delay seldom ____________________in the context of
payment; most sellers try to resist it.
- ICC, in Force Majeure clause (Chapter 1, Section 2,) states that payment of interest on overdue sums payable
to the Seller is __________________by Force Majeure.

3.2 Results of delay

- In case of late payment, the buyer shall pay interest on the _________________________.
- Seller is entitled to compensation for losses due to late payment, rate of interest is ____________ to interest
rates in the seller country.
Typical clause:
“If payment of any sum payable is delayed, the Seller shall be entitled to receive interest on the amount
unpaid during the period of delay. Unless otherwise stated in Part II, the interest shall be at an annual rate
three percentage points above the discount rate of the central bank in the Seller’s countries. The Contractor
shall be entitled to such payment without formal notice and without prejudice to any other right or remedy.”

Practice 1 Use one most suitable word to fill each gap of the following clauses of payment
1. The Buyer, on _____________ from the Seller's shipping advice, shall open an irrevocable Letter of Credit
with the Commercial Bank of Sydney, in _____________ of the Seller for the total value of shipment, 25-30
days _____________to the date of delivery. The L/C shall be _____________against the Seller's draft at
_____________ on the issuing bank for 100% invoice value _____________by the shipping documents
specified in payment clause mentioned in sales Contract. Payment shall be _____________by the issuing bank
by T/T against _____________of the aforesaid draft and documents. The L/C shall be _____________until
the 20th day after the shipment is effected.
2. The Buyer shall open a 100% confirmed, irrevocable, _____________and negotiable letter of credit in
favor of the Seller within 5 _____________days from date of the agreement through the _____________
bank. The letter of credit shall be drawn against _____________at sight upon presentation of the following
documents:
- Full set of the Seller's ______________ invoice.
- Full set of clean, blank, ______________bill of lading.
-______________ certificate of quality and quantity.
3. Payment is made by ______________60 days sight. The Buyer shall ______________accept the
documentary ______________drawn by the Seller at 60 days sight upon first ______________and make
payment on its______________. The shipping documents are to be delivered ______________payment only.
4. The Buyer shall open an irrevocable sight L/C through a bank ______________to the Seller. The L/C must
reach the ______________45 days before the date of delivery, ______________for negotiation in Vietnam
until the 15th day after the ______________shipment date.
5. The Supplier shall send the ______________ a weekly invoice that includes ______________details of the
Service Fees for Services provided to the Purchaser for the week and any other ______________owing
hereunder. For Packaging Services, the Supplier shall ______________Purchaser daily invoices of Packaging
Services completed. ______________of invoices shall be made by wire transfer of immediately
______________United States funds to one or more accounts specified in writing by the Supplier. Payment
shall be made ______________30 days after the date of Purchaser’s receipt of the
Supplier’s______________.
Unit 23 QUALITY, QUANTITY INSPECTION AND DEFECT LIABILITY
Questions for discussion:
1. In international trade, when are the goods inspected?
2. How many steps are there in negotiating the defect liability period?
3. What should an exporter be aware of when negotiating inspection before and after delivery?
4. What counts as defect?
5. When can the buyer be entitled to reject the goods?

The five steps in negotiating Defects Liability

(1) Inspection
(2) Terms (terminology)
(3) Definition
(4) Timing
(5) Corrective action

1. Inspection
- What counts as defect?
- Types of warranty
- Time and place of inspection

The principle:
- In some legal systems, the buyer has the right or the duty to inspect delivered goods.
- If the quality or quantity of the goods do not conform with the contract, the buyer is entitled to terminate or
cancel the contract (provided the seller fails to take any corrective action required by the buyer)
- The seller is liable for both patent and latent defects.
Vienna sale convention:
Conformity of the goods and third party claims (Article 35)
(1) The seller must deliver goods which are of the quantity, quality and ……………… required by the contract
and which are contained or ………………….. in the manner required by the contract.
(2) Except where the parties have agreed …………………., the goods do not conform with the contract
…………………they:
(a) are ……………. for the purposes for which goods of the same description would …………………. be used;
(b) are fit for any …………………. purpose expressly or …………………. made known to the seller at the time
of the …………………… of the contract, except where the ………………….. show that the buyer did not rely, or
that it was unreasonable for him to rely, on the seller's ……………and judgment;
(c) possess the ………………of goods which the seller has held out to the buyer as a ………………. or model;
(d) are contained or packaged in the manner ……………….. for such goods or, where there is no such
manner, in a …………….. adequate to preserve and protect the goods.
(3) The seller is not liable under subparagraphs (a) to (d) of the preceding paragraph for any ………….. of
conformity of the goods if at the time of the conclusion of the contract the buyer knew or could not have been
……………….. of such lack of conformity.
1.1. What counts as defects?
- Discrepancy in quantity
- Defective workmanship
- Defective materials
- Defective design
What does not count as defects?
- Fair wear and tear: is the result of normal use
- Misuse, improper operation
- Improper storage, careless maintenance

1.2 Types of warranty

- Express warranties: is the express promises (stated in a contract) by the seller to cure any defects arising.
- Implied warranties: is a warranty in accordance with the law.
(1) Implied warranty of conformity with contract: The quality and quantity must be in strict conformity
with the specifications defined by the seller.
Vienna sale convention:
The buyer may declare the contract avoided:
(a) if the failure by the seller to perform any of his obligations under the contract or this Convention amounts
to a fundamental breach of contract…

(2) Implied warranty of Merchantable Quality: “Merchantable”: requires the goods supplied by the seller
can be resold or resalable.
(3) Implied warranty of Fitness for Intended purpose
- It is required the seller to supply the goods which must be fit for the intended purpose stipulated by the
contract.
Vienna sale convention:
“The goods do not conform with the contract unless they: (b) are fit for any particular purpose expressly or
impliedly made known to the seller at the time of the conclusion of the contract, except where the
circumstances show that the buyer did not rely, or that it was unreasonable for him to rely, on the seller's skill
and judgment”

1.3. Time and place of inspection

- Inspection by buyer during manufacture at Seller’s premises
- Inspection by buyer or buyer’s agent before delivery
- Inspection by inspection service
- Inspection by carrier on dispatch
- Open package inspection on arrival at destination
(1) Inspection by buyer during manufacture at Seller’s premises
- For specific goods (not for mass produced goods)
Typical clause:
“The Employer is authorized to inspect during the progress of the Work the factories and other stores of the
Contractor where the Work is performed and to follow the progress of the Work at any time, either directly or
through his appointed representative.”

(2) Inspection by buyer or buyer’s agent before delivery (pre-shipment Inspection)

- Purpose: to eliminate a situation where a dishonest seller ships defective goods.
- Disadvantage: delay in delivery may arise
Typical clause:
 “The Buyer may, at the Buyer’s option, inspect the Goods prior to shipment. At least 15 Days before the
actual Delivery Date, the Seller shall give notice to the Buyer, or to any agent nominated by the Buyer, that
the Goods are available for inspection. The Seller shall permit access to the goods for the purposes of
inspection at a reasonable time agreed by the parties. An authorized representative from the Buyer shall come
to inspect the goods during production and before shipment”

(3) Inspection by inspection service

- The outcomes will be more objective and this can save time and cost for the buyer
Typical clause:
“SGS shall be solely responsible to and shall act on behalf of the Buyer in the protection of the Buyer’s
interest in respect of quality and quantity. Should the Seller have appointed a supervisor at the port of
destination, the Buyer shall always appoint such supervisors' representatives, if any, at the interior
destination”

(4) Inspection by carrier on dispatch

- It is used when the carrier is fully trusted by the buyer and the carrier is expertise in inspection business.
Typical Clause
“The carrier shall act on behalf of the Buyer and is fully entitled to inspect the Goods at the port of shipment
and the Seller shall be liable for making the Goods available and accessible to the carrier’

(5) Open package inspection on arrival at destination

Typical clause
“The Goods shall be inspected at the Buyer's expense as quickly as possible but not later than 15 calendar
days from the final date of discharge at the port of destination in conformity with local custom.”

1.4. When can the buyer reject the goods

(CLAIMS, EVIDENCE OF INSPECTION, ACCEPTANCE AND REJECTION)

(1) Rejection or acceptance

Buyer’s right:
- To reject the goods in whole (if the whole consignment is NOT in conformity with the contract)
- To accept the goods in whole (if the whole consignment is in conformity with the contract)
- To accept the goods in part and reject the rest (if part of the goods delivered is not suitable)

The seller’s right to cure:

- Duties of the seller for warranty are disposive : seller can exclude all warranties
- Seller may, even after the date for delivery, remedy at his own expense any failure to perform his
obligations.

(2) Claims, evidence of inspection

The principle:
- All claims are required to be made in writing
- Evidence or proof of loss, damage… must be fully given
Typical clause
“Should any shortages, defect, or damage be found in the delivered Goods during the open package
inspection, a detailed record shall be made and signed by the two parties’ representatives. Such record shall
be taken as an effective evidence for the Buyer to claim replacement, repair or supplement from the Seller.
The actual shipped weight/quantity shall be stated in the bill of lading.”

(3) Costs and Expenses

- Seller’s responsibility
Typical clause
“Where the Goods are sold “landed weight”, the cost of weighing shall be borne by the Seller who shall
furnish the Buyer with evidence of weight made out in conformity with the custom of the port of shipment. The
Seller shall provide, free of charge, SGS’s inspectors with necessary working facility during the inspections,
such as technical documentation, drawings, testing tools and apparatus.”

- Buyer’s responsibility
Typical clause
The Buyer may, at his option, require the Goods to be inspected by a recognized body but the inspection
charge shall be for the Seller’s account.

2. Defects Liability
2.1 The Principle and Terminology
Warranty:

- The Seller warrants the buyer =>The Seller promises to make good defects to the Buyer
Guarantee:

(1) Principal makes promise

(2) Principal asks Guarantor to issue a guarantee
(3) Guarantor promises to pay money if Principal breaks his promise

=> To avoid confusion: Term used: “DEFFECT LIABILITY”

Typical clause of WARRANTY
“The Supplier warrants that each Item supplied under this contract (and each part thereof) shall at the date of
its acceptance:
- be free from defects in material
- be free from defects in workmanship including but not limited to all manufacturing processes.
- be free from defects inherent in design including but not limited to selection of materials, and be fit for the
purpose for which the Item is normally used.
2.2 Corrective action
The seller’s favored clause: “at his discretion”
“If, during the defects liability period, any defect comes to light in any item of supply, the Seller shall, at his
discretion, repair or replace the item.”
Buyer’s favored clause:
“When a latent defect or other warranty claim in the Supplies occurs to the same item of supply more than
once, the Supplier shall, at its own expense, correct or replace all like items already delivered or to be
delivered.
Rule: The tougher the warranty, the higher the contract price.

2.3 Timing of defect liability

- How long is the defects liability period?
- When does this begin? what about the other things?
• The length of the defects liability period
• The time allowed to the buyer to notify the seller of a defect
• The time the seller has to correct the defect
• The period during which the buyer can raise a legal action
(1) TIME FRAME 1: THE DEFECT LIABILITY PEIOD

Seller prefers Buyer prefers

Typical clause
“The Defects Liability Period shall be extended by a period ……………. to the period during which the Goods
are unable to be used by reason of the aforementioned defect, but not so as to ……………. the Defects Liability
Period for more than twenty – four months from the date of first …………….. of the repaired or replaced
Goods.”
Buyer’s favored clause: “eternal warranty”
“Any Supplies corrected or furnished by way of replacement under ……………….. shall be subject to the
provisions of this Clause to the same ……………. as Supplies initially accepted by the Contractor for a full
………………… period of warranty.”
Seller’s favored clause:
“Any parts replaced under this warranty shall be subject to the provisions of this clause for a full further
period of………………. ; however, the total warranty period shall in no case …………… three years.”

(2) TIMEFRAME 2: THE NOTIFICATION PERIOD

- In practice, many contracts do not put a precise time limit on the Notification Period.
E.g.:
“The Buyer shall notify the Seller of defects without undue delay.”
OR
“Notice of Defects
If any such defect appears or damage occurs, the Buyer shall forthwith notify the Seller thereof.”

(3) TIMEFRAME 3: THE RECTIFICATION PERIOD

- Rectification is similar to notification: the making good of defects “without undue delay” or “within a
reasonable time” is a fair and normal contract requirement.
Specimen clause
“The Seller shall make good the defect or damage as soon as practicable and at his own cost.”

(4) TIMEFRAME 4: THE LEGAL ACTION PERIOD

- Common Continental Law: the legal action period begins when the buyer notifies the seller of the defect.
The legal action period is the same length as the defects liability period.
- Anglo-American Law: legal action period: 04 years. The parties may shorten this period, but no lengthen it.
Under normal circumstances, the four-year period starts with delivery. Contracts rarely regulate the legal
action period, leaving the matter to the applicable law.

“Defects liability period

The Defects Liability Period shall be a period of twelve months …………………. from the date of delivery of
the Goods.
If any defect occurs during the Defects Liability Period, the Buyer shall …………….. notify the Seller stating
in writing of the nature of the defect.
The Seller shall be liable for making good with all ……………. speed any defect so notified which …………
from defective materials, workmanship or design (other …………… a design furnished or specified by the
Buyer)…
The provisions of this clause shall apply to any Goods repaired, replaced or ……………made good by the
Seller, but not so as to extend the Defects Liability Period for more than twenty four months from the date of
first delivery of the ……………. or replaced Goods.
The Defects Liability Period shall be …………… by a period equal to the period during which the Goods
cannot be used by reason of the aforementioned defect, but not so ……… to extend the Defects Liability
Period for more than twenty four months from the date of ………… delivery of the repaired or replaced
Goods.”

3. Who pays for claims under warranty?

THE PRINCIPLE
- No standard defects liability provisions, every provision of warranty must be carefully negotiated
- The stronger the buyer, the heavier the seller’s liability.
- Risk for the seller: facing consequential or indirect loss
- To limit responsibility to direct loss only, seller includes the following clause:
“The Seller shall not be liable to the Buyer by way of compensation for any loss of use of the Works (whether
…………………. or partial) or for any loss of any profit or for any indirect or ……………………….. damage
that may be suffered by the Buyer.”

Strong Buyer to weak Seller:

“The Seller shall indemnify and hold harmless the Buyer against any loss or damage whether direct or
indirect ……………. by the Buyer as the result of defective or faulty goods delivered by the Seller.”
3.1. Corrective actions: 05 options
(1) Repair:
- For seller, it is costly and time-consuming. It is advisable that seller must take such costs into account when
setting his export price.
(2) Allow the Buyer to repair at Seller’s cost
Disadvantages for seller:
- it will be an expensive repair bill.
- Repair may not be properly carried out
- Repair by buyer may result in new problem
=> Note: seller should avoid the provision of “repair by buyer”
(3) Replace (part or whole Item)
- Advantage for seller: keep goodwill of the buyer
- Disadvantage for seller: much more expensive than repair
(4) Reduce the price:
- If payment is by L/C, a price reduction must take the form of direct payment.
- If payment is by open account, and the invoice has not been settled, payment due is reduced
(5) Return the goods and Refund the price
- For Seller: it is least desirable as such a deal means a total loss for the seller

3.2. Defects Liability and Maintenance

Purpose of maintenance: To keep equipment, machinery running despite fair wear and tear, misuse, accidents,
and even force Majeure events => keep them working in good order.
The principle: A well drafted contract does not confuse making good defects and keeping equipment in
running order

Practice Read the case below and answer the questions

Case 1. Weight Loss
ABC Co. delivers 200 sets of electronic scales for weighing chemicals. For each problem below, decide what
kind of defect is involved.(defect in material, workmanship, design or no defect)
1. The scales are delivered with pans that hold only 1 kilo of most chemicals though the scales weigh up to 8
kilos
2. Two scales have no rubber feet.
3. One scale cannot be set to zero.
4. Five scales are badly painted.
5. Twenty scales arrive late.
6. The scales are designed to be accurate within .001 grams; tests give figures closer to 0.02 grams.
Case 2. All in Favor
Compare the two extracts below, and then answer the questions
Warranty
The Supplier warrants that the Goods supplied under this contract are free of defects of any kind. The
Supplier will repair or replace any Goods of his supply that are found to be defective during the warranty
period.
Defects Liability Period
The Supplier warrants that the Goods supplied under this contract are, on the date of delivery, free from any
defect of workmanship, materials or design. If the Purchaser notifies the Supplier during the defects liability
period that any of the said Goods were provably defective on the date of delivery, then the Supplier shall, at
his discretion, repair or replace the Goods.
Assume that the quantity is unknown, with which of these statements do you agree?
AGREE DISAGREE
1.   Provision 2 is not a warranty because it is headed “Defects Liability Period”
2.   Provision 2 makes the supplier’s rights clearer because it specifies a date when the
products were free of defects: the date of delivery.
3.   Provision 2 makes the supplier’s rights clearer because it limits the defects to three
types: workmanship, materials, and design. This excludes defects cause by bad
shipping, theft, misuse by the purchaser, etc.
4.   Provision 2 makes the supplier’s rights clearer because it forces the purchaser to
prove the defect was present in the goods on the date of delivery.
5.   Provision 2 makes the supplier’s rights clearer because it allows him to choose
whether to repair or replace the goods.
Case 3. Designer Defects
These provisions are taken from a contract to provide a key electrical component for a rapid transit system(
subway) in a country in the Far East. The seller was unhappy about both provisions. Can you see why?

If, in the opinion of the Project manager, it becomes necessary within the Defects Liability Period to correct a
defect in respect of Train design, design of software or component parts of the Train, or in respect of the
interaction of the various elements of the Train, including the updating of all the associated Documentation,
the Project Manager may instruct the Contractor within a time specified to correct such satisfaction of the
Project Manager.

In the event that the Employer procures spare parts from sources other than the Contractor, provided such
spare parts are fully compatible with the Train and Works supplied by the Contractor, then the use of such
spare parts shall not invalidate the Defects Liability provisions of this Agreement.

Your answer:
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