Assignment of International Trade Law

8/11/2019 Assignment of International Trade Law

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ASSINGNMENT OF INTERNATIONAL TRADE LAW

ON

PAYMENT OF INTERNATIONAL SALES

SUBMITTED BY-

ANKITA SINGH

ENROLLMENT NO.

A8111110058

BATCH 2010-2015

YEAR OF STUDY 4TH

YEAR (8TH

SEMESTER)

AMITY LAW SCHOOL

LUCKNOW CAMPUS (U.P.)


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Index

Acknowledgement

Introduction

Letters Of Credit

Definition

Availability of Letter of Credit

Parties in Letter Of Credit transaction

The flow of Letter Of Credit

Need for checklists and flowcharts

Role of Bank

Bills Of Exchange

Nature of Bills Of Exchange

How Bills Of Exchange are used

Definition

Essentials of a Bill Of Exchange

The parties to a Bill Of Exchange

Bibliography


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Acknowledgement

It is great privilege to express deep gratitude to my learned and

esteemed International Trade Law teacher, Mr. Mohammad Atif

Khan, for his wise and accurate suggestions, careful and reasoned

criticism and keen interest.

I would also thank my institution and faculty members without

whom this project would have been a distant reality. I also extend

my heartfelt thanks to my family and friends.

Ankita Singh

B.A., LL.B.(Hons.)

8thSemester

Enroll. No.-A8111110058


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Introduction

To succeed in todays global marketplace, exporters must offer their customers attractive

sales terms supported by the appropriate payment method to win sales against foreign

competitors. As getting paid in full and on time is the primary goal for each export sale, an

appropriate payment method must be chosen carefully to minimize the payment risk while

also accommodating the needs of the buyer.

Key Points:

International trade presents a spectrum of risk, causing uncertainty over the

timing of payments between the exporter (seller) and importer (foreign buyer). To exporters, any sale is a gift until payment is received.

Therefore, the exporter wants payment as soon as possible, preferably as soon as

an order is placed or before the goods are sent to the importer.

To importers, any payment is a donation until the goods are received.

Therefore, the importer wants to receive the goods as soon as possible, but to

delay payment as long as possible, preferably until after the goods are resold to

generate enough income to make payment to the exporter.

Cash-in-Advance

With this payment method, the exporter can avoid credit risk, since payment is received

prior to the transfer of ownership of the goods. Wire transfers and credit cards are the

most commonly used cash-in-advance options available to exporters. However, requiring

payment in advance is the least attractive option for the buyer, as this method creates

cash flow problems. Foreign buyers are also concerned that the goods may not be sent if

payment is made in advance. Thus, exporters that insist on this method of payment as

their sole method of doing business may find themselves losing out to competitors who

may be willing to offer more attractive payment terms.


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Letters of Credit

Letters of credit (LCs) are among the most secure instruments available to international

traders. An LC is a commitment by a bank on behalf of the buyer that payment will be made

to the exporter provided that the terms and conditions have been met, as verified through

the presentation of all required documents. The buyer pays its bank to render this service.An LC is useful when reliable credit information about a foreign buyer is difficult to obtain,

but you are satisfied with the creditworthiness of your buyers foreign bank. An LC also

protects the buyer since no payment obligation arises until the goods have been shipped or

delivered as promised.

Documentary Collections

A documentary collection is a transaction whereby the exporter entrusts the collection of a

payment to the remitting bank (exporters bank), which sends documents to a collecting

bank (importers bank), along with instructions for payment. Funds are received from theimporter and remitted to the exporter through the banks involved in the collection in

exchange for those documents. Documentary collections involve the use of a draft that

requires the importer to pay the face amount either on sight (document against payment

D/P) or on a specified date in the future (document against acceptanceD/A). The draft lists

instructions that specify the documents required for the transfer of title to the goods.

Although banks do act as facilitators for their clients under collections, documentary

collections offer no verification process and limited recourse in the event of nonpayment.

Drafts are generally less expensive than letters of credit.

Open Account

An open account transaction means that the goods are shipped and delivered before pay-

ment is due, usually in 30 to 90 days. Obviously, this is the most advantageous option to

the importer in cash flow and cost terms, but it is consequently the highest risk option for

an exporter. Due to the intense competition for export markets, foreign buyers often

press exporters for open account terms since the extension of credit by the seller to the

buyer is more common abroad. Therefore, exporters who are reluctant to extend credit

may face the possibility of the loss of the sale to their competitors. However, with the use

of one or more of the appropriate trade finance techniques, such as export credit

insurance, the exporter can offer open competitive account terms in the global market

while substantially mitigating the risk of non payment by the foreign buyer.


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Letters of credit

In any business transaction there are risks. When trading internationally, these risks

increase considerably as in addition to customer risks, exporters may also be exposed to

country and foreign exchange risks.

Frequently in international trade activities, buyers and sellers find themselves at opposite

ends of the spectrum, where the buyer may not wish or may not be permitted to remit

payment in advance for goods, and the seller may be reluctant to ship goods without any

guarantee of payment.

To overcome this impasse, parties may agree that a Documentary Letter of Credit is the

most appropriate method of payment, as this provides security for both parties to the

transaction.

Definition:

A writtencommitment to pay, by abuyer's orimporter'sbank (called theissuing bank) to

theseller's orexporter's bank (called theaccepting bank,negotiating bank,orpaying bank).

A letter ofcreditguaranteespayment of a specifiedsum in a specifiedcurrency, provided

the seller meets precisely-definedconditions andsubmits the prescribeddocuments within

a fixed timeframe. These documents almost always include aclean bill of lading orair

waybill,commercial invoice,andcertificate of origin.Toestablish a letter of credit in favourof the seller or exporter (called thebeneficiary) the buyer (called theapplicant oraccount

party) eitherpays the specified sum (plusservice charges) upfront to the issuing bank,

ornegotiates credit.Letters of credit areformaltradeinstruments and are used usually

where the seller is unwilling to extend credit to the buyer. In effect, a letter of

creditsubstitutes the creditworthiness of a bank for the creditworthiness of the buyer.

Thus, the internationalbanking systemacts as anintermediary between far flung exporters

and importers. However, the banking system does not take on anyresponsibility for

thequality ofgoods, genuineness of documents, or any otherprovision in thecontract ofsale. Since the unambiguity of the terminology used inwriting a letter of credit is of vital

importance, theInternational Chamber Of Commerce (ICC) has suggested

specificterms (calledIncoterms)that are now almost universally accepted and used. Unlike

abill of exchange,a letter of credit is a nonnegotiable instrument but may be transferable

with theconsent of the applicant.
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Issuing BankAn Issuing Bank (or LC opening bank) is the bank that issues the LC in favour of a

seller at the request of the LC applicant. The Issuing Bank is normally located in the

applicants country with established banking relationship with the applicant. By

issuing an LC, the Issuing Bank undertakes to pay the beneficiary the value of the

draft and/or other documents if all the terms and conditions of the LC are complied

with.

Advising BankAn Advising Bank (or sometimes known as notifying bank) is the bank that advises the

LC beneficiary that there is an LC issued in his favour. Advising Bank is normally

located in the sellers country and is either appointed by the Issuing Bank or LC

applicant. Its primary responsibility is to authenticate the LC to ensure that the LC

comes from genuine source.Confirming Bank.A Confirming Bank (normally also the

Advising Bank) is the bank that adds its own undertaking to pay the LC beneficiary if

all terms and conditions of the credit are complied with. Such undertaking is in

addition to that given by the Issuing Bank at the request of the Issuing Bank. The

Confirming Bank will only confirm an LC upon satisfactory evaluation on the

conditions of the Issuing Bank and its domicile country.

Nominated BankA Nominated Bank is a bank authorised by the Issuing bank in the credit to pay,

negotiate, issue a deferred payment undertaking or accept drafts under the LC. If the

LC does not specify a Nominated Bank, the LC is deemed as freely negotiable and any

banks that receive documents from the LC beneficiary are qualified to be a Nominated

Bank.A Nominated Bank is not responsible to pay under the credit unless it has added

its confirmation to the credit. In such a case, it will become a Confirming Bank.

Negotiating BankA Negotiating Bank is the bank that examines the drafts and/or documents presented

by the LC beneficiary and gives values to such drafts and/or documents. Negotiation

could be in the form of purchasing or agreeing to purchase the drafts and/or

documents presented.

Reimbursing BankA Reimbursing Bank is the paying agent appointed by the Issuing Bank to honour claims

submitted by the nominated or negotiating bank.


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The Flow of Letter of Credit

Stage 1: Letter of Credit Issuance and Advising/Confirmation

Step 1:Buyer and seller conclude the sales contract and agreed to use an LC as the method

of payment.

Step 2:Buyer approaches the Issuing Bank to issue an LC on his behalf in favour of the seller

with all the terms and conditions specified.

Step 3:Issuing Bank issues the LC and requests the advising bank to advise or confirm the

credit to the LC beneficiary (seller).

Step 4: Advising/confirming bank authenticates the LC and sends the LC to the LC

beneficiary.


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Stage 2: Presentation of Documents and Settlement (Sight LC with Reimbursing

Bank)

Step 5:Seller prepares and despatches the goods to the buyers country.

Step 6:Seller presents the drafts and/or documents to the nominated bank.

Step 7:Nominated (nominated as the negotiating bank) Bank checks documents presented

against the LC terms and conditions and seeks instructions from seller on documentary

discrepancies.

Step 8a:Nominated Bank forwards the drafts and/or documents to the Issuing Bank.

Step 8b:If documents are free from discrepancies or discrepancies are supported by sellers

indemnity, nominated bank claims reimbursement from the appointed reimbursing bank.

Step 8c: Reimbursing Bank pays the nominated bank against a valid reimbursement

authority received from the Issuing Bank and statement from negotiating bank that the

documents complied with LC terms.

Step 9:Nominated Bank credits the net proceeds into the sellers account.

Step 10:Issuing Bank checks documents presented against the LC terms and conditions. If

documents are free from discrepancies, Issuing Bank reimburses the reimbursing bank.


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Step 11:Issuing Bank presents documents to the buyer for payment.

Step 12:Once payment is received from the buyer, Issuing Bank releases documents to the

buyer for the latter to collect his goods.

Need for checklists and flowcharts

Letters of Credit detail dates by which certain activities must take place, e.g. ship by dates,

presentation of documents date, Letter of Credit expiry date, etc. The seller must be fully

aware of the need to ensure full compliance with these dates. Any failure in adherence will

affect release of payment to him.

The use of a checklist to aid the examination process of a Letter of Credit, and further

supported by a documentation and activity flow chart can be of great benefit in ensuring

that shipment and all other aspects of the Credit conditions are adhered to in a structured

manner.

Role of Banks

Banks play a pivotal role in Letters of Credit transactions, as it is the issuing bank which

makes the commitment to pay, albeit that payment may be channelled through a

nominated United Kingdom bank. This release of funds by the issuing bank is entirely

dependent on the seller providing documentary evidence that he has complied fully with

conditions detailed in the credit.

As compliance with the terms is of paramount importance, sellers who are to be paid by

means of a Letter of Credit, should examine in detail the Letter of Credit on initial receipt

and highlight any discrepancies or issues to the buyer, which may be of concern to him and

affect his ability to fulfill the conditions contained in the credit.

The seller may request that the buyer arranges for amendments to the Letter of Credit

terms. If agreeable, the buyer should request amendments be made by the issuing bank and

notification of amendments by that bank to any other bank involved in the handling of the

Letter of Credit.


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Bills of exchange

Nature of bills of exchange:

When goods are supplied to someone on credit ,or services performed for him, then that

person becomes a debtor. The creditor firm would normally wait for payment by the debtor.

Until payment is amde the money owing is of no use to the creditor firm as it is not being

used in any way. The can be remedied by factoring the debtors, which involves padding the

debts over to a finance firm. They will pay an agreed amount for the legal rights to the

debts.

Another possibility is that of obtaining a bank overdraft, with the debtors accepted as part

of the security on which the overdraft has been granted.

Yet another way that can give the creditor affective use the money owing to him is for him

to draw a bill of exchange on the debtor. This means that the document is drawn up

requiring the debtor to pay the amount owing to the creditor, or to anyone nominated by

him at any time, on or by a particular date. He sends this document to the debtor who, if he

agrees to it, is said to accept it by writing on the document that he will comply with it and

appends his signature. The debtor then returns the bill of exchange to the creditor. This

document is then legal proof of the debt. The debtor is not then able to contest the validity

of the debt except for any irregularity in the bill of exchange itself.

How bills of exchange are used:

The creditor can now act in one of three ways:

1. He can negotiate the bill to another person in payment of debt. That person may

also negotiate to someone else. The person who possesses the bill at maturity, i.e.

the date for payment of the bill, will present it to the debtor for payment.

2. He may discount it with a bank. Discount here means that the bank will take the

bill of exchange and treat it in the same manner as money deposited in the bank

account. The bank will then hold the bill until maturity when it will present it to the

debtor for payment. The bank will make a charge to the creditor for this service,

known as a discounting charge.

3. The third way open to the creditor is for him to hold the bill until maturity when he

will present it to the debtor for payment. In this case, apart from having a document

which is a legal proof of the debt and could therefore save legal costs if a dispute

arose, no benefit has been gained from having a bill of exchange. However, action 1

or 2could have been taken if the need has arisen.


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Definition:

A written, unconditionalorder by oneparty (the drawer) to another (thedrawee) topay a

certainsum, either immediately (asight bill) or on a fixed date (aterm bill),

forpayment ofgoods and/orservices received. The drawee accepts the bill by signing it,thusconverting it into a post-dated check and abinding contract.

A bill ofexchange is alsocalled a draft but, while alldrafts arenegotiable instruments,only

"to order" bills of exchange can be negotiated. According to the

1930ConventionProviding AUniformLaw For Bills of Exchange andPromissory

Notesheld in Geneva (also called Geneva Convention) a bill of exchange contains: (1)The

term bill of exchange inserted in the body of theinstrument and expressed in the

languageemployed indrawing up the instrument. (2) An unconditional order to pay

adeterminate sum ofmoney. (3) The name of theperson who is to pay (drawee). (4)Astatement of the time of payment. (5)A statement of the place where payment is to be

made. (6) The name of the person to whom or to whose order payment is to be made. (7)A

statement of the date and of the place where the bill is issued. (8) Thesignature of the

person whoissues the bill (drawer). A bill of exchange is the most often usedform of

payment in local andinternational trade,and has along history- as long as that ofwriting.

Essentials of a bill of exchange:

In order that an instrument may be called a bill of exchange it should satisfy the followingconditions:

1. It must be in writing.

2. It must contain an unconditional order to pay.

3. It must be signed by the drawer.

4. There must be three parties to the instrument and the parties must be certain.

5. The order must be to pay a certain sum of money.

6. The instrument must contain an order to pay money and money only.

7. It must comply with the formalities as regards date, consideration, stamp etc.

A bill of exchange like a promissory note may be written in any language. It may be written

in any form of words provided the requirements of the section are complied with.
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The Parties to a Bill of Exchange:

: The Drawer -Is the party that issues a Bill of Exchange in an international tradetransaction; usually the seller.

The Drawee -Is the recipient of the Bill of Exchange for payment or acceptance in an

international trade transaction; usually the buyer.

The Payee -Is the party to whom the Bill is payable; usually the seller or their bankers.


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Bibliography

Google.com

PDF: Mechanism of Letter of Credit- UOB

PDF: Documentary Letter of Credit

PDF: Bills of Exchange

Assignment of International Trade Law

Documents

Transcript of Assignment of International Trade Law