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 going 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 Lading 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...