#10181 - Selecting Incoterms Documentary Credit And Bill Of Exchange - International Commercial Law

When we internationalise our deals we are worried about a number of things

For the Seller:

Delay receiving payment equals a potential cash flow problem

The Seller is risking not getting paid and may also find difficulty enforcing the contract due to expense and distance etc.

For the Buyer

There is an increased risk that the good s are goint to get damaged

The goods will take longer to arrive and the buyer will have to reconsider its business strategy.

Also:

Higher transport costs who pays for what?

Choice of law and Jurisdiction considerations will have to be taken into account.

Consider:

What is the means of transportation?

Is it by sea/air/land?

F & C = the risk passes in the Seller’s country. The difference between F and C is that in the F terms the Buyer will pay for the main carrier and in the C terms the Seller will pay for the main carrier.

1. Who is paying for the main carriage?

Buyer : F Terms

Seller : C Terms

2. What is the method/form of transport?

Shipping:

FAS, FOB

CFR CIF

Any (e.g. air or multi-modal (container)):

FCA

CPT, CIP

4. Select most favorable option for your client using the grid.

DCs + BE & Procedure

Documentary credit:

A guarantee by the Buyer’s bank that payment will be made when certain conditions are met usually provisions of specified docs, such as:

• shipping docs (i.e. receipt from carrier confirming that goods have been received (a bill of Ladding or a Waybill))

• Insurance policy

• Export license (if exporting outside the EU only)

• Invoice

• Certificate of inspection / packaging list (The buyer may want an inspector to go and check that the goods are the ones it is buying)

Advising Bank can act as agent (unconfirmed Documentary Credit (the documentary credit is confirmed by one bank only)) or principal (Confirmed Documentary Credit (the documentary credit is confirmed by both the Seller’s and the Buyer’s banks))

DC’s help Sellers deal with the risk of non-payment

Bill of Exchange :

A bill of Exchange is a document, a piece of paper, telling the bank that it should pay out money to the bearer (e.g. a cheque)

It may be:

• Sight or term (If the buyer wants a credit period then the Bill of Exchange will set a date from which it can be cashed)

• Documentary or Clean (if Doc = all the documents required for payment. If Clean= no requirements)

Bank must “accept” a Bill of Exchange by signing it in order to become liable to pay out on it

• NB once the Bill of Exchange is accepted, the Documentary Credit becomes irrelevant

The Bill of Exchange are transferrable by the holder by endorsing it, thus it can be used as payment or sold on at a discount to help with cash flow.

The Procedure is as follows:

1. Seller and Buyer agree terms

2. Buyer asks its bank in its country to set up a DC

3. The Buyer’s bank notifies the Seller’s bank that the DC has been set up

4. The Seller’s bank tells the Seller that the DC has been Set up

5. The Seller makes, insures, transports and loads the goods,

6. The S hands shipping documents (Commercial Invoice, Bill of Lading and the Insurance policy) to the Seller’s Bank together with the Bill of Exchange (payable to itself)

7. The Seller’s bank checks shipping documents if so, accepts the Bill of Exchange,

8. The Sellers Bank sends “active” bill of exchange to the Seller

9. The sellers bank sends the shipping documents to the Buyer’s bank, which sends them to the Buyer

10. The buyer uses the shipping documents to collect the goods form their closest dock/ship/airport where the goods have arrived.

11. At the end of the credit period, whoever has the Bill of Exchange presents it to the Seller’s bank for payment

12. The seller’s bank pays out on the Bill of Exchange

13. The Seller’s Bank recoups payment form the Buyer’s bank which debits the Buyers account

Task 2

Scenario 1: The goods are damaged on the ship at sea.

2 Issues to look at:

1. Where does the risk Lie?

We are using a CIF where the seller has to insure the goods in the buyer’s name.

The risk under CIF passes to the Buyer on physical delivery on the ship.

2. How will the Seller get Paid?

The seller will get paid by the Bank in accordance with the Bill of Exchange which has been negotiated beforehand.

The buyer, as the accident happened on the ship the risk was with the buyer. The Insurance will pay the Buyer as the risk what with them.

Scenario 2: The goods

2 Issues to look at:

1. Where does the risk Lie?

We are using a CIF where the seller has to insure goods in the buyer’s name.

The risk is with the seller as the goods haven’t been loaded on the ship

2. How will the Seller get Paid?

The seller was not able to...