Financing the International Sale

Chapter 8

Negotiable Instrument
A written promise to pay, the ownership of which may be transferred by endorsement and delivery. Endorsement – signing the instrument/document Delivery is the act of handing over the document Examples are checks, bills of exchange, drafts, letters of credit, promissory notes

Bill of Exchange
Unconditional order in writing , requiring the person to whom it is addressed, to pay on demand or at a fixed or determinable time, a sum certain in money to, or to the order of a specified person or bearer. (Canadian definition per Nicholson) Underlined items are required elements to qualify the instrument as a bill of exchange

Another name for bills of exchange more common in US.

Legal Environment for Bills of Exchange
- two basic legal systems for B/E: 1/ Canada, UK: Bills of Exchange Acts U.S. - very similar, under UCC 2/ Europe, Japan: B/E laws comply with Geneva Convention on Bills of Exchange and Promissory Notes - UNCITRAL - Convention on International Bills of Exchange and Promissory Notes, 1988 - attempt to unify two systems, compliance uncertain

Cash is good, but not mobile, sometimes not liquid

Wire Transfers
Problems Sometimes money disappears into black hole (the banking system) for a few days. Requires trust between buyer and sellerWhat happens first – get paid or get goods?

Letters of Credit
Payment is made (usually by a bank in exporters country) upon presentation by exporter of particular documents, specified in the L/C, representing the goods

In L/C Transactions
1. There is a contractual arrangement between the exporter (seller) and the importer (buyer). 2. There is another contractual relationship between importer (buyer) and buyer’s bank where buyer’s bank promises to pay the beneficiary (seller, exporter) or its bank upon presentation of certain specified documents 3. These transactions are legally completely separate

The L/C is the written undertaking by the issuing bank at the request of and in accordance with the instructions of the buyer (importer) to effect payment up to a specified amount, against stipulated documents within a certain time limit

Stipulated Documents
Can Include • Commercial invoice – required for import duties assessment • Certificate of Origin - required for import duties assessment • Insurance policy or certificate – demonstrate that the product is covered by insurance during shipping • Transport document – to show how and where it is being shipped • Bill of exchange To ensure that the product, now paid for, will find its way to the buyer with certainty

International Laws for L/Cs
Uniform Customs and Practices for Documentary Credits, 1993 (UCP 500) - provides rules to ensure goods shipped by agreed date, & exporter paid if L/C terms met - note - payment based on documents only ( if documents correct - L/C must be paid) - L/Cs are irrevocable by default unless specified revocable

Corresponding Bank
- advising - passes info/documents to issuing bank only - has no independent financial obligations - confirming - direct obligation to pay exporter on presentation of B/E (with correct documentation, within specified time)

Put Credit Details In Sales Contract
- credit irrevocable ( UCP 500) - credit terms - immediate, future date - specify drawee - importer or issuing bank - goods specified, terms for commercial invoice - freight costs - who pays - all documents required - confirmed (want a bank in your jurisdiction) - embarkation and destination points for goods & alternatives - transhipment permitted -yes/no - last permissible date for shipment of goods - partial shipments - yes/no - time period for presentation of documents - credit transferable - yes/no - date, place, expiry date of credit - method credit advised (communicated)

If Documents Do Not Comply?
- can be corrected by exporter/shipper if within specified time for documents presentation - exporter can request issuing bank to negotiate B/E despite discrepancy ( with importers approval) - exporter can guarantee to pay back to paying bank if L/C not honoured by importer

Commitment of Issuing Bank
- irrevocable L/C - binding commitment if correct documents provided in specified time - revocable L/C - not binding (avoid)

Principles of L/C Transactions
- autonomy of the credit - doctrine of strict compliance

Autonomy of the Credit
- credit independent of contract of sale - payment made on basis of satisfactory document presentation not on basis of delivery of goods - buyer needs protection under contract of sale e.g. pre-inspection, warranties

Doctrine of Strict Compliance
documents must strictly conform with terms of L/C or bank will not accept even if goods conform to contract requirements

Common Discrepancies
- unclean bill of lading - different ports than named - incorrect insurance documents - underinsurance - inconsistent documents - different amounts on invoice and B/E - absence of required documents - absence of required signatures - credit expired

Summary of Principles
- banks accept no responsibility for contractual compliance of sales agreement - any serious discrepancy in documentation requires waiver by buyer if L/C to be honoured - if strict documentary compliance but buyer has conclusive evidence of fraud by seller, bank does not have to pay L/C

Negotiating Bills of Exchange
Liability on a Bill: - 3 original parties on B/E – drawer (exporter), drawee (importer), payee (usually exporter) are normally obligated to honour B/E - for example – 1/ if drawee/importer accepts bill, must pay 2/ if drawer and payee are different, drawer must honour B/E if not paid by drawee 3/ if payee/exporter endorses and transfers (negotiates) it to a creditor (to pay off a debt) and B/E is not paid by drawee, payee is liable for full payment of B/E - drawer or payee can avoid liability by adding “without recourse” to their signature (but reduces value of B/E)

Negotiation of a B/E
• delivery is transfer of B/E to payee • negotiation is subsequent endorsement and delivery by payee to new holder (transferee) and subsequent holders • be aware if you are a drawee/importer, holders of negotiated B/E’s may have more legal ability to collect if contract dispute than original drawee/exporter (ask for non-transferable B/E)

Dishonour of a Bill
• failure or refusal of drawee (buyer, importer) to accept or, after acceptance, to pay B/E

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