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Week 9: International Payments - Coggle Diagram
Week 9: International Payments
Four modes of payment involving different levels of risk
Pre-payment
Most secure for seller / High for buyer
Payment is before shipment / receipt of goods
eg. (electronic transfer, SWIFT, bank cheque or draft in sellers currency, credit card)
Usually used in situations where the buyer has low levels of negotiating power and the seller has high levels of negotiating power or good reputation
Open Account
Payment is after shipment / receipt of goods
30, 60 or 90 gays after recipt / monthly, bimonthly invoiced
High risk for seller / most secure for buyer
Requires established relationship / high level of trust
Dealings with related companies and within supply chains
Documentary collections using bills of exchange
Can help reduce (but not eliminate) risk of non payment
Can help to reduce (but not eliminate) the impasse when neither seller nor buyer is willing to transfer value first.
Needs to be a relationship of trust between exporter and importer
More risky than a letter of credit- buyer may reject goods / refuse to accept bill of exchange
Even more risky if a seller draws a time or term bill and the documents are released against acceptance of the bill of echange
Must be no doubt as to a buyers willingness to pay. Cannot prevent credit risk
Legal nature of a bill of exchange
It is demand for payment, sent my a seller to a buyer, and routed through the banking system
The bill of exchange (demand for money) initiates the process
Banks facilitate exchange of documents for payment, via a bill of exchange, but the bank does not carry any responsibility beyond due care in handling documents.
Bank only facilitates exchange. It does not check documents guarantee payment. However, parties may incorportate the URC5222 Rules into their arangements
UR5222 are a set of standars t&c clarifying obligations the banks and other actors involved.
Buyer obtains shipping documents against acceptance or payment of the bill of exchange
Drawer = seller. Drawee = buyer
BoE is a negotiable instrument - can be bought, sold and transferred
Types
Slight bills: (documents against payment or D/P): payable on demand upon presentation
Tme Bills: (Documents against acceptance or D/A) a set time for payment, or a fixed and determinable time after occurrance of an event (eg. 60 days after delivery of goods)
Process
Seller delivers goods to carrier, and documents, including bill of enxchange to remitting bank (RB)
RB forwards docs and instructions for collection to collecting bank (CB) in buyers country
CB presents documents and BoE to buyer
Buyer examines documents and pays (CB) money ordered on presentation or by date / event specified in the bill of exchange
CB sunds money to RB
RB makes money available to seller
Documentary collecton
International Chamber of commerce, URC522
Defines the obligations of the parties and the process, where expressly incorporated into the collection agreement (art 1(a))
The parties (art 3)
Principal
Remitting Bank
Collecting Bank
Presenting bank
Drawee
Slight / acceptance (art 6) (payment at sight vs payment at term)
Documents against acceptance vs. documents against payment (art 7)
Rules protect banks and limit banks duties
Banks have no obligations to handle a collection
Banks should act in good faith and take responsible care (art 9)
Banks take no responsibility for the goods (art 10) or the effectiveness of the documents (art 12)
Main obligation on the bank is to check that the form of acceptance of the BoE is correct (i.e, sight, time, etc and that signed to signify acceptance). However, the banks take no responsibility for ensuring the signature is genuine or that the signatory is properly authorised (article 22)
Letters of credit / Documentary letters of credit
A facilitation of payment between two parties by a bank, where a bank provides guarantee of payment
Elements of a letter of credit
An undertaking (promise) to pay by a bank
...given on behlaf of a buyer (applicant)
...to pay a seller (the beneficiary under the l/c)
... a specified sum of money
...if (and only if) the seller presents specified documents which comply with instructions of the L/C
UCP600: Rights and obligations under a letter of credit
ICC Uniform Customs and Practice for Documentary Credits (2007 revision)
Can be incorporated into L/C: Must be expressly stipulated in the terms of L/C to be applicable (art1)
Most standard form applications incorporate the latest UCP
Another initiative of the ICC to harmonise standards and practices in international trade
Process
Buyer applies for letter of credit
Bank will accpept the application. Usually for a fee and therefore becomes the issuing bank (IB)
Provides the promise to pay directly to the beneficiary. Usually through an advising bank in the beneficiary's country. The advising bank will typically do this for a fee
The beneficiary could ask for the confirmation of a third bank or a confirming bank.
Issuing bank must honour a complying presentation
Where documents comply the issuing or confirming bank "must honour" its undertaking to pay the beneficiary (art 15)
The bank will check the sellers documents to ensure the presentation complies with the terms of credit
Check that presentation is made within the time prscriptions in the letter of credit
Default rules in UCP600: Presentation of documents must occur within 21 days of shipment of goods and in any event on or before the expiry date of the L/C (art 14.C) All L/C must have an expiry date (art 6)
Check that the documents required are presented that they comply with the instructions
Complying presentation requires:
Commercial invoice, shipping documents (BOL, air waybill), insurance docs, certificates of origin/quality/inspection, export certificates. (whats required is usually negotiated by buyer and seller)
Bank only has to check for outward compliance (art 14. a). (eg. Only that the docs, on their face, comply with instructions. The bank does not check for genuineness of the docs)
Banks ask:
Have all docs been presented
Have they been presented on time?
Are all particulars (contents) of documents presented correct and consistent?
Some general rules in art 19-30 (see also arts 14(d) and 3)
Shipping docs (arts 19-27) (eg. any Bol must be clean (art 27))
Commercial invoice (art 18 c and 14(e)) (description of goods must correspond with that appearing in the credit
Bank has 5 banking days, following day of presentment, to examine docs (art 14. b)
Strict presentation compliance
A bank exposes self to financial risk if it makes payment on a non complying presentation
Southland rubber v Bank of China (1997)
Instructions required the BoL indicated the name of the carrier and be signed by the carrier
Carrier's name only appeared in on the BoL letterhead, it did not appear in the appropriate space.
BoL needs to be rejected and payment not to be made
The bank can accept minor typos or spelling errors so long as they not affect the nature of the terminology involved
JH Rayner v Hambro's Bank (1943)
Instructions referred to "coromandel ground nuts" BoL said "machine Shelled groundnuts kernals"
Payment not made
The UCP600 is very specific that the invoice must describe the goods in exactly the same terms as the L/C
Managing risks for the seller
About half of all presentations do not comply
The seller avoids making mistakes by...
Checking the terms of credit BEFORE shipment for consistency against the contract of sale (e. incoterm, goods, price, shipping docs. detailed in L/C are consistent with what is going to happen / has been agreed) that seller can present what is requested when the time for presentment arrives.
Terms of credit can easily be corrected prior to the issue of L/C and an ammendment is usually straightforward if the request is made prior to presentation
When presentation is non complying
A bank can refuse to honor credit where the presentation does not comply with the terms of the credit (art 16)
Where a bnk refuses to honour a creedit it must provide notice of refusla to the beneficiary which makes clear that the bank is refusing to honour the credit, the discepancies in the documents on which the refusal is based (details must be provided, and wether the bank is witing on a waiver from the applicant or, what the bank is otherwise doing with the documents
A bank has the discretion to (may) approach the applicant (buyer) for a waiver of the discrepancy
if a discrepancy seems not significant, the applicant can be asked if it will waive the requirement to which the discrepancy relates
Any waiver must be approved of within the 5 day period of examination, which continues to run from date of presentation
A bank cannot refuse to honour credit where...
After the expiry of the 5th day examination period (art 14b)
A bank fails to give proper notice of refusal as required in art 16
A bank should not refuse a complying presentation
Urquhart V lindsay v Eaastern bank (1992)
Buyer under contract of sale (applicant for LC) decided that price of goods ordered should be less than that stated in the credit. Instructed bank to only pay for lesser ammount. Seller (eneficiary) presented complying docs, but bank paid out lesser ammount. Seller sued bank
Risks for Letters of Credit
For the seller
Transfer risk
Political Risk
BAnking system risk
For the buyer
Defective or non conforming goods
Goods under contract of sale may be defective / non conforming, but seller has made a comolying presentation
The L/C contract are not affected by the contract of sale. The contracts are autononous of eachother (art 4). Bank's concern with the docs, not the contract of sale and terms of quality of goods.
Hamzeh Miles v. British Imex Industries (1958)
Contract of sale of goods to be delivered in instalment. Buyer considered first instalment to be defective and sought injunction to prevent payments of L/c. The court refused. the contract of sale and contractual obligations under LC are separate. the LC imposes an absolute obligation on the bank to honour a complying presentation
For the importer
To stop payment in the case of non complyant goods requires an injunction from the courts against issuing bank
Courts are very reluctant to intervene in the contractual obligations under the L/C - they will not on the basis of breach of contract
The contract of sale is independent from the letter of credit
Seller's Fraud
A seller frauduently presents documents for the purposes of drawing on the credit . The seller presents documents that contain, expressly or implied, material representations of facts that are known to the seller to be untrue
Banks are protected in case f seller's fraud under Art 34 (& 14 banks only check documents on their face)
Where there is fraud the bank may decline to honour a comlying presentation. However before declining the fraud must be established to the satisfaction of the bank. The bank must be satisfied that the beneficiary has actual knowledge of the fraud
However, given their protection under art 34, there is little incentive for banks to refuse payment: bank refuses payment in case od presentation on the suspicion of fraud and there is no fraud, bank is exposed to financial liability
The buyer may also be able to obtain a court injunction to prevent payment under a letter of credit
The standard of proof required is very high
Sztejn v Henry Schroder Banking Corp (1941)
Before issuing an injunction to prevent payment, a court must be satisfied
Fraud is noticed in the transaction
The fraid is clearly established
The beneficiary intended to defraud, and or
The beneficiary has knowledge of fraud commited by a third party
The prevention of payment will not harm a third party
Plaintiff contracted to purchase paint brush bristles from a company in india. 50 crates of shipment were filled with worthless cow hair
The court found that fraud was proved, such that the applicant was entitled to an injunction