Chapter 4 Letters of Credit

Chapter4Letterofcredit（L/C）LearningGuide4.1Introduction4.2ContentsandProcedureofLetterofCredit4.3TypesofLetterofCredit4.4ApplicationofLetterofCredit4.1Introduction--definitionAwrittenundertakingissuedbyabankgiventothesellerattherequestandinaccordancewiththeinstructionsofthebuyertoeffectpaymentatsightoratadeterminablefuturetimeuptoastatedsumofmoneyandagainststipulateddocumentswhicharecompliedwiththetermsandconditionsofthecredit.Aconditionalundertakingofpaymentbyabank—insimpleterms4.1Introduction--issuanceLetterofcreditcanbeissuedbyairmailorbycable/telex/SWIFT.Ifitisissuedbyanairmail,itoughttobeauthenticatedbysignatures,andbytestkeyifitisissuedbycable/telex/SWIFT.4.1Introduction--ContractualarrangementsunderL/CContractualarrangementsthesalescontractbetweenbuyerandsellertheapplicationandsecurityagreementbetweenthebuyer(applicant)andtheissuingbankThedocumentarycreditbetweentheissuingbankandthebeneficiary4.1Introduction--partiestoaletterofcreditApplicant(importer):applyfortheissuanceofaletterofcreditIssuingbank:issuetheL/CBeneficiary(exporter):receivepaymentprovidedthetermsoftheL/CaremetAdvisingbank:advisetheexporteroftheestablishmentofaletterofcreditinitsname(iftheaddresseeofthecreditisthebank)Transmittingbank:playthesameroleasthatoftheadvisingbank,transmittheoriginalL/Ctothebeneficiary(iftheaddresseeofthecreditisthebeneficiary.)4.1Introduction--partiestoaletterofcreditConfirmingbank:thebankwhoaddsitsownpromisetopaytothepromiseoftheissuingbank(usuallytheadvisingbankorthetransmittingbank)Negotiatingbank:thebanknegotiatesthedraftand/ordocumentspresentedbytheexporter…inthecasewhenacreditisavailablebynegotiation.Payingbank:nominatedbytheissuingbank,thedraweebankofthedraftandmusteffectpaymenttotheexporterwithoutrecourseprovided…incaseofacreditavailablebypayment4.1Introduction--partiestoaletterofcreditAcceptingbank:nominatedbytheissuingbank,thedraweebankofthetimedraftwhichacceptsthetimedraft,musteffectpaymenttotheexporterwithoutrecourseprovided…incaseofacreditavailablebyacceptanceReimbursingbank:nominatedbytheissuingbanktohonortheclaimfromthenegotiatingbank,thepayingbankortheacceptingbankonbehalfoftheissuingbank4.1Introduction--CharacteristicsofthecreditTheL/Cprovesarelationship(acontract)betweenexporterandbank.AL/Cplacesabank’screditinsteadofacommercialcredit.Theissuingbanktakesprimaryliabilitiesforpayment,providedthedocumentspresentedareincompliancewiththetermsandconditionsofthecredit.L/Cservesasself-sufficientinstrument.AcreditbyitsnatureisaseparatetransactionfromthesalescontractorothercontractsL/Cfollowspuredocumentsprinciple.Banksdealwithdocumentsratherthanphysicalgoods,servicesorotherperformancestowhichthedocumentsmayrelate.Evendealingwithdocuments,bankswillenjoythefollowingescapingclauses:Banksassumenoliabilityorresponsibilityfortheform,sufficiency,accuracy,genuineness,falsificationorlegaleffectofanydocumentspresented.Banksassumenoresponsibilityfortheactsofathirdpartyortheircorrespondentbanks.Banksarenotresponsiblefordelaysinthetransmissionofinformationoverwhichtheyhavenocontrol.L/Cmayminimizetherisksofdefaultsinforeigntrade,providemoresecurityforbothparties.Thedocumentarycreditachievesacommerciallyacceptablecompromisebetweentheconflictinginterestsofbuyerandsellerbymatchingtimeofpaymentforthegoodswiththetimeoftheirdelivery.L/Cmayprovidefinancingfacilitiesforbothpartiesinforeigntrade.4.1Introduction--FunctionsofL/C4.1Introduction--UCP600TheUniformCustomsandPracticesforDocumentaryCredit,ICCpublicationNo.600Thegoverningrulesconcerningdocumentarycredit4.2ContentsandProcedureofLetterofCredit--contents(p96)ItemsonthecredititselfformoftheCreditCreditNumberDateofIssueDateandPlaceofExpiryNameandAddressoftheApplicantNameandAddressoftheBeneficiaryIssuingbankAdvisingbankAmountandCurrencyoftheCredit4.2ContentsandProcedureofLetterofCredit--contentsNominatedBankandCreditAvailability—indicatehowtoeffectpaymentandwhichbankistoeffectpaymentexpressionwouldreadas:“creditavailablewithbankby”4.2ContentsandProcedureofLetterofCredit--contentsThefirstblankindicateswhetherthepaymentiseffectedbytheissuingbank,byanominatedbankorbyathirdbank.CreditavailablewiththeissuingbankTheissuingbankwilleffectpaymentuponreceiptofdocumentstogetherwithadraftdrawnonit.Thecreditwillbeexpiredattheplaceoftheissuingbankandthedocumentsshouldbepresentedtotheissuingbankwithinthevalidityofthecredit.CreditavailablewiththenominatedbankThenominatedbank(thepayingbank,theacceptingbankorthenegotiatingbank)willeffectpayment.CreditavailablewithathirdbankAclearingbankinamajorcurrencyclearingcenterintheworld.4.2ContentsandProcedureofLetterofCredit--contentsThesecondblankindicateswhetherthepaymentiseffectedbypaymentatsight,bydeferredpayment,byacceptanceorbynegotiation.CreditavailablebysightpaymentCreditavailablebydeferredpaymentCreditavailablebyacceptanceCreditavailablebynegotiation4.2ContentsandProcedureofLetterofCredit--contentsItemsongoods,shippingdocumentsandtransportPartialshipmentTransshipmentInsurancecovere