NOTES IN DOCUMENTARY CREDITS. Prepared by Nguyen Minh Duc 2009 1 LETTER OF CREDIT l Any arrangement, however, named or described, whereby a bank (issuing bank) acting at the request and on the instructions of a customer (the applicant) or on its own behalf: l makes a payment to a third party (beneficiary) or, l authorizes another bank to effect such payment or l authorizes another bank to negotiate Prepared by Nguyen Minh Duc 2009 2 ADVANTAGES OF USING THE DOCUMENTARY CREDITS l facilitate the obtainment of a financial transaction, give to a concrete transaction an independent credit support and a payment agreement well defined. l satisfy the financial needs of the seller and the purchaser providing both the solvency of a bank. l reduce the commercial credit risk, since the payment is guaranteed by the issuing bank, the seller is no longer worried by the payment capacity of the purchaser. l reduce some political risks but does not eliminate the same. Prepared by Nguyen Minh Duc 2009 3 1
ADVANTAGES OF USING THE DOCUMENTARY CREDITS l open the business universe for sellers and buyers since the lack of trust between them could be minimized using the documentary credits, l both parts has the security to receive the payment/goods if they ship the goods & comply with the terms of the credit. l guarantee that documents will be examined by experts Prepared by Nguyen Minh Duc 2009 4 CREDIT VS. CONTRACTS l D/C are separate transactions from the sales or other contracts on which they may be based. l banks are not concerned with such contracts. l the undertaking of a bank to fulfill its obligations is not subject to claims or defenses by the applicant resulting from his relationship with the issuing bank or the beneficiary. l beneficiary can not avail himself of the contractual relationships existing between banks or between applicants and the isuing bank. Prepared by Nguyen Minh Duc 2009 5 CREDITS VS. GOODS/SERVICES/PERFORMANCES l in credit operations all parties concerned deal with documents, and not with goods, services and/or other performances to which the documents may relate Prepared by Nguyen Minh Duc 2009 6 2
INSTRUCTIONS TO ISSUE/AMEND CREDITS. l CHARACTERISTICS: l shall be complete and precise l not including excessive detail in the credit or any amendment l not referenced to any other credit issued or amended in the past. l issuance/amendments must state precisely the documents against which payment, acceptance or negotiation is to be made. Prepared by Nguyen Minh Duc 2009 7 FORM AND NOTIFICATION OF CREDITS l Kind of credits: l revocable l irrevocable l in case of no indication the credit shall be deemed to be irrevocable Prepared by Nguyen Minh Duc 2009 8 ADVISING BANK LIABILITY l advising bank shall take reasonable care to check the apparent authenticity of the credit which advises l any problem establishing the authenticity of the credit must be informed to issuing bank and beneficiary. Prepared by Nguyen Minh Duc 2009 9 3
REVOCABLE CREDITS l may be amended or cancelled at any moment and without prior notice to the beneficiary. l CONSIDERATIONS l issuing bank shall reimburse to a third bank that has paid, negotiate documents prior to the receipt of the amendment or cancellation only if documents appear to be according terms and conditions of the credit. Prepared by Nguyen Minh Duc 2009 10 LIABILITY OF ISSUING BANK l IRREVOCABLE: a definite undertaking to. l pay at sight l pay at maturity l an irrevocable letter of credit can be closed only if all the parts involved agreed to do so. l issuing bank is bound by any amendment issued by it from the time of the issuance. l only if documents are apparently according with the terms and conditions of the credit Prepared by Nguyen Minh Duc 2009 11 LIABILITY OF THE CONFIRMING BANK l CONSIDERATIONS l confirmation means that confirming bank assume the risk to pay the credit for account of the issuer bank l confirming banks are, in most cases, correspondents of the issuing bank. l confirming bank should pay the credit to beneficiary with no delay l confirms another bank and acts under instructions of the issuing bank (there could be a third bank acting as confirming). l constitutes a definite undertaking in addition to that of the issuing bank. Prepared by Nguyen Minh Duc 2009 12 4
LIABILITY OF THE CONFIRMING BANK CONT. l The confirming bank must: l pay at sight. l pay at maturity of deferrement. l accept drafts drawn by beneficiary and pay them at maturity. l negotiate without recourse to drawers, drafts drawn by the beneficiary and/or documents presented under the credit. Prepared by Nguyen Minh Duc 2009 13 AMENDMENTS TO A DOCUMENTARY CREDIT l confirming bank shall communicate without delay to issuing bank about his decision. l partial acceptance of amendments could be confirmed are not allowed l amendments could be rejected by beneficiary, however, any presentation of documents to the nominated bank or confirming bank should be taken as those amendments were accepted. Prepared by Nguyen Minh Duc 2009 14 TERMS l AT SIGHT: payment immediately against documents acording terms and conditions of the credit. l DEFERRED PAYMENT: payment on a due date calculated usually from a shipment date l ACCEPTANCE: idem as the previous with the inclusion of a draft issued by beneficiary and accepted by confirming bank. l NEGOTIATION: the process of deliver the amount of the documents to another party. l MIXED PAYMENT: a mixture of sight with deferred payment. l documents must be presented to issuing bank or confirmation bank or any other nominated bank. Prepared by Nguyen Minh Duc 2009 5
LIABILITIES AND RESPONSIBILITITES l banks must examine all documents with reasonable care to ascertain that are consistence between each other and according to D/C terms. l documents not stipulated in the credit will not be examined by banks. l all banks involved shall have each a reasonable time, not exceeding seven banking days to examine the documents and determine whether to take up or refuse the same. l if there are conditions not related to any document to be presented, banks will deem such conditions as not stated and will disregard them. Prepared by Nguyen Minh Duc 2009 16 DISCREPANCIES IN DOCUMENTS AND NOTICE l Issuing bank and Confirming bank are bound to: l reimburse the nominated bank which has paid, incurred a deferred payment, accepted or negotiated drafts l take up documents l only if documents appear to be according to D/C terms. l banks involved must determine on the basis of the documents received if the terms and conditions has been complied. l any refusal of documents must state the discrepancies of refusal. l any bank involved shall be entitled to claim from the remitting bank refund, with interests of any reimbursement which has been unduely made (seven day term) Prepared by Nguyen Minh Duc 2009 17 DISCLAIMER ON EFFECTIVENESS OF DOCUMENTS BANKS ASSUME NO LIABILITY OR RESPONSIBILITY FOR: l the form l suffiency l accuracy l genuineness l falsification l legal effect l general and particular conditions stipulated in the documents nor: l the description l quantity l weight l quality l condition l packing l delivery l value l existence of goods l good faith l omissions l solvency l performance Prepared by Nguyen Minh Duc 2009 18 6
OTHER DISCLAIMERS (BANKS) l for consequences arising delay or loss of any message, documents, letters or any mutilation in the transmission, errors in translation. l no liability for the interruption of their business activity by Acts of God, riots, civil conmotions, wars, insurrections or any other causes beyond their control. l no liability for the utilization of other banks for the purpose to given effect to the instructions of the applicant. l charges are for account of the party who instruct to perform any services/instructions. l if there is an instruction to collect charges from any different party and if charges cannot be collected the instructing party remains liable for the payment thereof. l the applicant shall be bound by and liable to indemnify the banks against obligations and responsibilities imposed by foreign laws and usages. Prepared by Nguyen Minh Duc 2009 19 BANK-TO-BANK REIMBURSEMENT ARRANGEMENTS l reimbursement bank could be another than issuing bank (mostly). l reimbursing bank shall pay to claiming bank. l reimbursement instructions must be issued at the issuance of the credit. l issuing bank shall be responsible for any charge if reimbursing bank does not honor the reimbersement on first demand. l reimbursing bank charges should be for account of issuing bank, however issuing bank must indicate at the issuance of the credit whom is the part who will pay those charges Prepared by Nguyen Minh Duc 2009 20 DOCUMENTS l issuer of documents-ambiguous terms shall not be used (first class, well known, qualified, independent, official, competent, local). l to be valid as originals, documents shall be marked as well and appears to be signed (handwriting, facsimile, perforation, stamp, symbol or any mechanical or electronic method) l documents should be considered as copies if are not marked as original. l if multiple documents are required: duplicate, two fold, two copies the presentation of one original and the remaining copies will satisfy this requirement. l any authentication, validation, legalisation, etc shall be satisfied by any signature, stamp or label that of its face appears to satisfy this condition. l any other document different than the usual (transport documents, invoices, insurance documents) are required, the credit should stipulate by whom such documents are to be issued and the data content, otherwise banks will accept any document that appears to be those required. Prepared by Nguyen Minh Duc 2009 21 7
BILL OF LADING l Port to port shipment - banks shall accept a b/l if: l indicates: l the name of the carrier and is signed or otherwise authenticated l that the goods have been loaded on board or shipped on a named vessel (pre printed wording). l the port of loading and the port of discharge stipulated in the credit. l consists of a sole original bill of lading or the full set issued. l appears to contain all the terms and conditions of carriage. l contains no indication that is subject to a charter party and/or no indication that the carrying vesse is propelled by sail only. l in all other respects meets the stipulations of the credit. Prepared by Nguyen Minh Duc 2009 22 BILL OF LADING-CONT. l transhipment: means unloading and reloading from one vessel to another vessel during the course of ocean carriage. l unless is prohibited by the terms of the credit, banks will accept a B/L which indicates that the goods will be transhipped, provided that the entire ocean carriage is covered by one and the same B/L. l if transhipments are prohibits, banks will accept a B/l which indicates that transhipment will take place as long as the relevant cargo is shipped in containers, trailers and or lash barges as evidenced by the B/L provided that the entire ocean carriage is covered by one and the same B/L or incorporates clauses stating that the carrier reserves the right to tranship. Prepared by Nguyen Minh Duc 2009 23 NON NEGOTIABLE SEA WAYBILL l Banks will accept: a document which indicates l the name of the carrier or have been signed or authenticated l that the goods have been loaded on board, or shipped on a named vessel l the port of loading and the port of discharge stipulated in the credit. l even if the place of taking in charge different from the port of loading and final destination different from the port of discharge. l consists of a sole original bill of lading or the full set issued. l appears to contain all the terms and conditions of carriage. l contains no indication that is subject to a charter party and/or no indication that the carrying vesse is propelled by sail only. l in all other respects meets the stipulations of the credit. Prepared by Nguyen Minh Duc 2009 24 8
MULTIMODAL TRANSPORT DOCUMENT l A multimodal transport document shall cover at least two different modes of transport, banks will accept a document which indicates: l the name of the carrier or have been signed or authenticated l that the goods have been dispathced, taken in charge or loaded on board l the place of taking in charge and place of final destination stipulated in the credit, which may be different from the place of loading and the place of final destination. l consists of a sole original bill of lading or the full set issued. l appears to contain all the terms and conditions of carriage. l contains no indication that is subject to a charter party and/or no indication that the carrying vesse is propelled by sail only. l in all other respects meets the stipulations of the credit. Prepared by Nguyen Minh Duc 2009 25 AIR TRANSPORT DOCUMENT l Banks will accept any document which indicates: l the name of the carrier or have been signed or authenticated l that the goods have been accepted for carriage. l where the credit calls for an actual date of dispatch, indicates a specific notation of such date, the date of dispatch so indicated on the air transport document will be deemed to be the date of shipment. l indicates the airport of departure and the airport of destination stipulated in the credit. l appears to be the original for consignor/shipper even if the credit stipulates a full set of originals or similar expresions. l appears to contain all the terms and conditions of carriage. l in all other respects meets the stipulations of the credit. l even if the credit prohibits transhipment, banks will accept an air transport document which indicates that trnashipment will or may take place, provided that the entire carriage is covered by one and the same transport document. Prepared by Nguyen Minh Duc 2009 26 ROAD, RAIL OR INLAND WATERWAY TRANSPORT DOCUMENTS l WHEN THE CREDIT NEED TO BE PRESENTED ANY ROAD, RAIL, INLAND WATERWAY TRANSPORT DOCUMENT, IF ITS NOT OTHERWISE STIPULATED IN THE CREDIT ACCEPT ANY DOCUMENT WHICH: l APPEARS TO INDICATE THE NAME OF THE CARRIER AND HAVE BEEN SIGNED OR AUTHENTICATED. l INDICATES THAT THE GOODS HAVE BEEN RECEIVED FOR SHIPMENT, DISPATCH OR CARRIAGE OR WORDING TO THIS EFFECT l INDICATES THE PLACE OF SHIPMENT AND THE PLACE OF DESTINATION STIPULATED IN THE CREDIT l IN OTHER RESPECTS MEETS THE STIPULATIONS OF THE CREDIT. l IF TRANSHIPMENTS ARE NOT ALLOWED IN THE CREDIT, THE BANKS WILL ACCEPT A DOCUMENT WHICH INDICATES THAT TRANSHIPMENT MAY TAKE PLACE ONLY IF THE ENTIRE CARRIAGE IS COVERED BY ONE AND THE SAME TRANSPORT DOCUMENT AND WITHIN THE SAME MODE OF TRANSPORT. Prepared by Nguyen Minh Duc 2009 27 9
COURIER AND POSTAL RECEIPTS l BANKS WILL ACCEPT ANY DOCUMENT WHICH l APPEARS TO HAVE BEEN STAMPED OR OTHERWISE AUTHENTICATED AND DATED IN THE PLACE FROM WHICH IS STIPULATED THE GOODS ARE TO BE SHIPPED. l IN ALL OTHER RESPECTS MEETS THE STIPULATIONS OF THE CREDIT. l IF A COURIER DELIVERY PROOF IS NEEDED, BANKS WILL ACCEPT A DOCUMENT THAT APPEARS TO INDICATE THE NAME OF THE COURIER SERVICE AND APPEARS TO HAVE BEEN STAMPED, SIGNED OR OTHERWISE AUTHENTICATED BY SUCH NAMED COURIER. l INDICATES THE DATE OF PICK-UP OR OF RECEIPT OR WORDING. l IN ALL OTHER RESPECTS MEETS THE STIPULATIONS OF THE CREDIT Prepared by Nguyen Minh Duc 2009 28 TRANSPORT DOCUMENTS ISSUED BY FREIGHT FORWARDERS l Banks will accept any document which: l indicates the name of the freight forwarder as carrier or multimodal transport operator l signed or otherwise authenticated by the freight forwarder Prepared by Nguyen Minh Duc 2009 29 CLEAN TRANSPORT DOCUMENTS l the clean transport documents are those who does not have any notation which declares any defective condition on the goods and or the packaging. l banks will reject any transport document if such clauses appears in the document unless the credit allowed specific clauses that must be stated at the issuance of the credit. Prepared by Nguyen Minh Duc 2009 30 10
FREIGHT PAYABLE / PREPAID TRANSPORT l banks will accept documents where the freight have still to be paid, unless other instruction in the text of the credit. l if the credit states that the freight should be prepaid, banks will accept any document that is clearly marked as prepaid or this payment is marked in any way, or when its mentioned than the payment of freight is for any other party different than the consignee. l freight prepayable or freight to be prepaid does not means that the freight has been prepaid. l banks will accept transport documents bearing reference by stamp or otherwise to costs additional to the freight unless otherwise stated in the credit Prepared by Nguyen Minh Duc 2009 31 INSURANCE DOCUMENTS l Insurance documents must: l Appear to be issued and signed by insurance companies or underwriters or their agents. l all the originals must be presented unless otherwise authorised in the credit. l a insurance policy could be accepted instead of a declaration under an open cover pre-signed by insurance companies or their agents. l not be issued after the shipment date, unless a notation when the cover date is effective at the latest from the date of loading on board or dispatch or taking in charge of the goods. l be issued in the same currency as the credit. l cover the 110 % of the cif / cip value, if its not possible to determine such value in documents the insured amount shall be the 1 of the invoice value or the amount negotiated under the credit or whichever is the greater. l cover notes issued by brokers will not be accepted, unless authorised in the credit. Prepared by Nguyen Minh Duc 2009 32 TYPE OF INSURANCE COVER l should be stipulated in the text of the credit (precisely), usual risks or customary risks shall not be issued, l banks will accept insurance documents as presented without responsibility for any risks not being covered. l missing instructions regarding the insurance will allow banks to accept documents as presented. l indications in insurance documents related that the cover is subject to a franchise or a deductible should be accepted by banks l all risks insurance cover l if its stipulated insurance against all risks the notation of any all risks clause shall be comply with this requirement. Prepared by Nguyen Minh Duc 2009 33 11
COMMERCIAL INVOICES l This document must: l appear to be issued by the beneficiary named in the credit, except if the credit is transferable. l be made out in the name of the applicant, except if the credit is transferable in which case the first beneficiary can subtitute the name of the applicant. l have the identical description of the goods as stated in the credit. l need not to be signed l banks may refuse invoices issued for amounts in excess of the permitted in the credit, the payment could be done up to the amount permitted by the credit. Prepared by Nguyen Minh Duc 2009 34 NOTES REGARDING EXPIRATION DATES AND PLACES FOR PRESENTATION OF DOCUMENTS l all credits must stipulate the expiration date and place where the documents must be presented. l documents shall be presented on or before of the expiration date stated in the credit. Prepared by Nguyen Minh Duc 2009 35 LIMITATION OF THE EXPIRATION DATE l if a transport documents is required, an expiration date for presentation of documents must be stated, l banks will not accept documents presented to them later than 21 days after the shipment date, however, documents must be presented not after the expiration date of the credit. Prepared by Nguyen Minh Duc 2009 36 12
EXTENSION OF EXPIRATION DATE l if the expiration date or expiration date for presentation is in a day that the negotiating banks has to be closed, the first following day when the bank is open should be taken as the final date for negotiation or presentation of documents, bank must provide a statement that the documents were presented within the time limits extended Prepared by Nguyen Minh Duc 2009 37 GENERAL EXPRESSIONS AS TO DATES FOR SHIPMENT l the expression shipment should also been understood as: l loading on board l dispatch l accepted for carriage l date of post receipt l date of pick up l in multimodal transport: taking in charge l expressions such as prompt, immediately, asap should not be used Prepared by Nguyen Minh Duc 2009 38 DATE TERMINOLOGY FOR PERIODS OF SHIPMENT l words to, until, till, from and similar refered to shipments will be understood to include the date mentioned. l the word after exclude the date mentioned. l the term first half, second half of a month shall be taken as the 1st. to the th and the 16th to the last day of such month. l the terms beginning, middle or end of a month should be taken as the 1st. to the 10th, the 11th to the 20th and the 21st to the last day of such month. Prepared by Nguyen Minh Duc 2009 39 13
TRANSFERABLE CREDITS l a credit in which the original beneficiary can transfer totally or partially the credit to a second beneficiary (ies). l only can be transferred a credit designated as transferable. l refusal of amendments from any second beneficiary does not invalidate the acceptance of the same by any other second beneficiary. l first beneficiary should be responsible for any charge regarding the transfer to any second beneficiary. l only one transfer to a second beneficiary is allowed. Prepared by Nguyen Minh Duc 2009 40 TRANSFERABLE CREDITS CONT. l A transfer of a credit is made only in the terms and conditions stated, with the exception of: l the amount of the credit l any unit price stated l the expiration date l the last day of presentation of documents l the period for shipment l any of the above may be reduced or curtailed. l the name of the first beneficiary can be substituted for that of the applicant. l the first beneficiary has the right to substitute his own invoices and draft for those of the second beneficiaries. Prepared by Nguyen Minh Duc 2009 41 SUMARY THE DOCUMENTARY CREDIT l is a payment instrument issued by banks with the object to contribute for a better performance of the international commercial transactions. l bring the safety to both contracting parties that both banks (issuer and confirming) will honor their obligations only if the terms and conditions of the credit has been complied. l ensure the payment if the terms and conditions of the credit has been complied. l ensure the payment based only in documents and not based in the goods or services contained in the same Prepared by Nguyen Minh Duc 2009 42 14
OPERATIVE ADVICES REGARDING THE DOCUMENTARY CREDITS. l costs could be reduced if issuing bank is a first class bank and no confirmation will be needed l only the existence of proper human resources could ensure the success of this operation. l check with your bank for the conditions under the confirmation is made, each bank opperates in different ways. l check if your bank is able to check and negotiate documents in the same place that are going to be presented. l always put the payment terms in your invoice (according the contract). l be sure that all the terms of the D/C are according the intl. sales contract signed with your customer. Prepared by Nguyen Minh Duc 2009 43 FINANCIAL COST FOR CONFIRMATION FOR CONFIRMED D/C S FOR NON CONFIRMED D/C. AMOUNT CONFIRM. FEE VALIDITY D/C- DAYS CONFIRM. COMM. TERM OF PAYMENT - DAYS RATE FINANCIAL COST DIFERENCE 20,000.00 1.00% 200.00 83.33-116.67 30,000.00 1.00% 300.00 125.00-175.00 50,000.00 1.00% 500.00 208.33-291.67 75,000.00 0.75% 562.50 312.50-250.00 100,000.00 0.75% 750.00 416.67-333.33 0,000.00 0.75% 1,125.00 625.00-500.00 200,000.00 0.75% 1,500.00 833.33-666.67 250,000.00 0.50% 1,250.00 1,041.67-208.33 300,000.00 0.50% 1,500.00 1,250.00-250.00 350,000.00 0.50% 1,750.00 1,458.33-291.67 400,000.00 0.50% 2,000.00 1,666.67-333.33 450,000.00 0.50% 2,250.00 1,875.00-375.00 Prepared by Nguyen Minh Duc 2009 44 OPERATIVE ADVICES REGARDING THE DOCUMENTARY CREDITS CONT. l if you find errors in the text of the d/c. put in contact asap with your customer and ask for the proper amendments. l be aware about the expiration dates, shipment and presentation dates in the D/C. l be aware about the kind of documents you can obtain in your country, each continent has different usages and ways to operate. Prepared by Nguyen Minh Duc 2009 45
COSTS REGARFING THE USE OF D/C. l quarterly banks commisions, every 90 days l commissions: l notification l confirmation (if its confirmed) 1/4 l negotiation per utilization l deferrement - % per year l other charges (courier, messages, etc.) Prepared by Nguyen Minh Duc 2009 46 FINANCIAL IMPACT WHEN DISCREPANCIES ARE PRESENT. l most of the companies use banks as providers of funds to back up their activities. l the delay in the presentation will affect the payment of a D/C, and increases the financial costs of a company. Prepared by Nguyen Minh Duc 2009 47 FINANCIAL IMPACT FOR DELAYS (PRESENTATION / PAYMENT) AMOUNT DELAY ON PRESENTATION DELAY ON PAYMENT RATE FINANCIAL COST 50,000.00 100,000.00 0,000.00 200,000.00 5 5 5 5 277.78 555.56 833.33 1,111.11 AMOUNT DELAY ON PRESENTATION DELAY ON PAYMENT RATE FINANCIAL COST 50,000.00 100,000.00 0,000.00 200,000.00 10 10 10 10 20 20 20 20 416.67 833.33 1,250.00 1,666.67 Prepared by Nguyen Minh Duc 2009 48 16