Talking about letters of credit

When an exporter and importer have done business for several years and there is a high degree of trust (1) … between them security of payment is not an important issue. With a new client, however, both the importer and exporter use the bank as an intermediary. In order to minimize (2) … the risk of non-payment, the exporter, wants to have assurance (3) … that he will receive the full amount within the agreed time limit (4) … . The importer, on the other hand, does not want to pay (5) … until he is certain that the seller has fulfilled (6) … all his obligations (7) … and the goods have been transported (8) … .

The documentary credit offers a unique (9) … and universally (10) … used method of arranging payment against documents. These documents represent the goods and facilitate (11) … the transfer of rights to those goods. In this process the bank plays a supervisory (12) … role and payment is not made unless the documents are complete (13) … . The most commonly used and secure type of letter of credit is an irrevocable letter of credit as this cannot be changed (14) … without the agreement (15) … of all parties involved.

Exercise 106. Look at the flow diagram below, which shows the stages in the process of issuing a documentary credit. Then number the stages according to the diagram.

1. CONTRACT

5. GOODS SHIPPED

6. DOCUMENTS 9. DOCUMENTS

7. PAYMENT PRESENTED . L/C ADVICE 2. APPLICATION FORWARDED MADE IF FORWARDED TO ESTABLISH AND DOCUMENTS L/C APPLICANT’S

IN ORDER ACCOUNT

3. L/C ISSUED DEBITED

8. DOCUMENTS CHECKED

AND REIMBURSEMENT

CLAIMED

Importer

(APPLICANT)

BUYER

EXPORTER

(BENEFICIARY)

SELLER

Importer’s bank

(ISSUING BANK)

EXPORTER’S BANK

(ADVISING BANK)

… The Advising Bank checks the documents against the credit. If the documents are in order, the bank will pay, accept or negotiate, according to the terms of the credit.

… The Issuing Bank then checks the documents and arranges reimbursement.

… The Issuing Bank asks another bank, usually in the country of the Seller, to advise or confirm the credit and issues the credit.

… The Seller then sends the documents evidencing the shipment to the bank where the credit is available (the nominated bank).

… The Buyer and the Seller conclude a Sales Contract providing for payment by documentary credit.

… As soon as the Seller receives the credit and is satisfied that he can meet its terms and conditions, he can load the goods and despatch them.

… The Buyer instructs his bank (the Issuing Bank) to issue a credit in favour of the Seller (Beneficiary).

… The Advising or Confirming Bank sends the documents to the Issuing Bank and debits the applicant’s account

… The Advising or Confirming Bank informs the Seller that the credit has been issued.

Exercise 107. Answer the following questions about the letter of credit (fig.5).

1. Which company is the exporter?

2. Which company is the importer?

3. Which bank has issued the credit?

4. What is the total value of the credit?

5. Who will arrange insurance and freight?

6. What four documents must be sent before payment is made?

7. What goods have been bought?

8. Which port will they be shipped to?

9. Can the credit be used for more than one shipment?

10. What is the latest date for the presentation of the document?

Exercise 108. Match the items in italic in the letter of credit (Fig. 5) with these descriptions.

1. Three copies of a document.

2. The building where goods are stored before delivery.

3. Written orders to pay sums of money.

4. The date the document becomes invalid.

5. Following a set standard.

6. Two identical copies of a document.

7. The right to compel payment.

8. Responsibility for payment.

9. Loading and unloading goods from one kind of transport to another.

10. The agreed conditions.

11. The clients on whose behalf the bank is acting.

12. Sending goods by sea.

Exercise 109. Look through the letter of credit (fig. 5) and find English equivalents of the following:

Открытый коносамент; оплачен по предъявлению; подтверждать; частичная поставка; "Подпись удостоверяю..."; "Фрахт оплачен"; в пределах условий действия кредита; в двух экземплярах; на случай бедствия в море или военного конфликта; бенефициар; указывать в траттах и корреспонденции; в трех экземплярах; транзитная поставка; подлежащий погашению Вашими траттами на наше имя; пла­тельщик; "Для ...."; с получением авизо через; подписанный и по­меченный; Свидетельство о происхождении груза; на предъявителя; коносаменты, подтверждающие, что груз в полной сохранности был отгружен на торговое судно; настоящим...

Exercise 110. The Binny Company arrange for an irrevocable credit (HMDM/8726) to be opened in favour of John Watson Ltd through the International Bank of Bombay. The credit is for $17,223 to pay for 1200 stainless steel traps. The order should be sent CIF Bombay and be shipped from London by 15 December. The advising (and paying bank) is Barclays International. The documents required are:

1. Invoice in triplicate, signed and marked Licence No. MD/I6I2.

2. Certificate of Origin issued by a Chamber of Commerce.

3. Full set of clean on board Shipping Company’s Bills of Lading made out to order and blank endorsed, marked ‘Freight Paid’ and ‘Notify The Binny Company, 16 South Road, Bombay’.

4. Insurance Policy or Certificate in triplicate; covering Marine and War Risks up to buyer’s warehouse for the invoice value of the goods plus 10%.

The credit is for The credit must be presented within 21 days of shipment but within the credit validity (by 31 December). Neither partshipment nor transhipment is allowed.

Complete the Letter of Credit below using both the information above and that in Practice Letter 1.

168 Fenchurch Street, London, EC3P 3HP

date (1) ……

DOCUMENTARY CREDITS DEPARTMENT

SPECIMEN IRREVOCABLE CREDIT No:- (2) ……

To be quoted on all drafts and correspondence