Documentary Sales and Letters of Credit Flashcards
What is the benefit of documentary sales and letters of credit?
Gives Buyer and Seller substantially less risk in the transaction (Seller wants to get paid, Buyer wants goods that conform to the contract).
• Buyer wants to inspect and accept the goods before paying. Seller wants to get paid before sending the goods.
Who are the additional parties in a documentary transaction and what do they do?
- Freight forwarder - a company that serves as an agent for the exporter in moving cargo to an overseas destination.
- Carrier - the company that owns (or leases) ocean-going vessels that will carry the goods.
- Issuing Bank - financial institution that the buyer approaches to issue, on the buyer’s behalf and for the benefit of the seller, a letter of credit that will specify the terms of this documentary sale. Usually the Buyer’s bank.
- Confirming Bank - generally in the Seller’s country and confirms the letter of credit. Typically selected by the Issuing Bank.
- Insurance Company - provides insurance during the shipping process.
What does an advising bank do?
advises that the Issuing Bank has issued a letter of credit, but has not confirmed, and has no obligation to buy the documents (but they may).
• The Issuing Bank is not obligated to buy the documents from the Advising Bank because it has not been “Nominated”.
What are the steps in a documentary sale?
- Formation of the Sales Contract
- Arrangement of Financing
- Shipping of the Goods (and handling of the documents)
- Payment for the Goods (and release to Buyer)
What is a pro forma invoice?
a preliminary bill of sale that is designed to show what the actual invoice would look like.
What is given by the issuing bank that requires payment against documents?
Irrevocable letter of credit
What is “clean on board”?
Goods are in good condition and loaded on board the vessel.
What is the purpose of a letter of credit?
Preclude the risk of nonpayment in cases where credit was extended to strangers in distant places.
What three relationships are in play for a letter of credit?
- Contract between buyer and seller,
- Agreement between the bank and its customer (the Buyer) in which the Bank issues a letter of credit, and
- Bank’s resulting engagement to pay the beneficiary (Seller), provided that certain documents presented to the bank conform with the terms and conditions of the credit issued on its customer’s behalf (the proper documents).
What is the independence principle?
The bank’s payment obligation to the beneficiary is primary, direct, and completely independant of any claims which may arise in the underlying sale of goods transaction
What is the UCP and what does it say in regards to the revocability of letters of credit?
Uniform Customs and Practice for Documentary Credits) - incorporated by reference in the overwhelming majority of letters of credit.
• Letters of credit are irrevocable unless specified otherwise.
What is a complying presentation?
a presentation that is in accordance with the terms and conditions of the credit, the applicable provisions of [the UCP] and international standard banking practice. (conforming documents)
