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  • Payment: conditions

     
     

    Usually, and advisedly so, the conditions of payment will have been agreed on in advance and will therefore already be known to both parties, especially if the business relationship has existed for some time. But when offering to a new buyer the payment conditions must be specified. (See also Box 6, E-commerce and supply chain management.)

    Letters of Credit

    Uniform Custom and Practice

    In the context of this Guide a letter of credit, basically, is a contract between a bank and a seller whereby the bank undertakes to pay the seller an agreed sum against delivery of an agreed set of shipping documents.  Terms and conditions governing letters of credit are laid down in what is known as the Uniform Custom and Practice for Documentary Credits, issued by the International Chamber of Commerce. The most recent version, the UCP 600, is effective from 1st July 2007. Because of its importance  the UCP is discussed in section 04.06 at the end of this chapter.

    Payment against letter of credit (L/C) requires the buyer to establish an L/C before shipment is effected. A letter of credit is an undertaking from the buyers bank to the exporters bank that payment will be made against certain documents such as the invoice, certificate of origin, weight note, certificate of quality and bill of lading (for sea transport) or waybill (for road or rail transport). The exporter should check that the documents specified in the letter of credit are obtainable. Sometimes buyers require verification of documents by an embassy or consulate not located in the exporters country, or they may include documents the exporter is not contractually required to provide.

    The timing of letters of credit is very important. The L/C must be available for the exporters use from day one of the agreed shipping period, and it must remain valid for negotiation for 21 calendar days after the last date that shipment is permitted to be made. Watch the timing very carefully indeed: once the expiry date has passed, the letter of credit is only as good as the buyer's willingness to extend it.

    If the terms and conditions of an L/C are not met, the exporters bank will not pay the exporter until the buyer has confirmed that all is in order. This may involve sending the documents abroad without payment. If at that stage the buyer refuses to make payment, the exporter may be left with an unpaid shipment in some foreign port. The importance of conforming to all the conditions in a letter of credit cannot be stressed enough. Exporters should always consult their bankers before they assume that a letter of credit is acceptable.

    An ordinary (i.e. revocable) or unconfirmed letter of credit is nothing more than an uncertain promise to pay if certain documentation is submitted. However, the UCP 600 have moved away from revocable credits, i.e. w.e.f. 1st July 2007 all credits are by default irrevocable.

    An irrevocable letter of credit cannot be cancelled once established. The exporter can be certain that funds will be available if valid documents are presented. Even so, the exporters bank may pay the exporter only when it has received the funds from the bank that established the letter of credit.

    This can create problems if for example the buyer argues that the documents are not correct or the buyer's bank is slow in making payment.

    Under a confirmed and irrevocable letter of credit the exporters bank confirms that payment will be effected upon the timely presentation of valid documents without reference to the establishing bank. By adding its confirmation, the exporters bank therefore guarantees payment. If the negotiating bank discovers a minor discrepancy in the documents such as a spelling error, it may still negotiate them providing the exporter signs a guarantee that in case of refusal by the buyer, the exporter will refund the payment received until the matter is settled.

    Whenever exporters feel that letters of credit are required, they should insist that they are confirmed and irrevocable. Even then, extreme care must always be taken to ensure that all details are respected, even to the spelling of words and shipping marks.

    Alternative payment methods

    Payment net cash against documents (NCAD or CAD) on first presentation: the buyer is expected to make payment when the documents are first presented. Exporters will agree to this method of payment if they know their buyers well and have confidence in their financial strength and integrity. An exporter can submit the documents through the intermediary of its own bank, which then asks a correspondent bank abroad to present them to the buyer, collect the payment and remit the funds, less all collection costs, to the instructing bank for the account of the exporter. (This includes the (reasonable) charges raised by the buyer's bank because that bank is now acting on the instructions of the seller's bank and, therefore, the seller. See ECC Article 19(d), E.FCA.CC 18(c) and the relevant section in the GCA contract.) In this way the documents remain within the banking system until payment has been received, thus ensuring that the exporter does not lose control of the goods. If the exporter is in need of prompt payment they can ask their own bank to advance them all or part of the invoice value. This is known as negotiation of documents. The exporter remains responsible for the transaction, of course: if the buyer does not pay, the exporter's bank will demand its money back.

    Documents in trust. Assuming the exporters bank does not object, documents may also be sent direct to the buyer with the request to make payment upon receipt of the documents. This is known as sending documents in trust. As the term implies, the decision to do this depends entirely on the trust the two parties place in each other.

    In payment net cash against documents upon arrival, payment falls due when the goods arrive at the port of destination. When selling on this basis an exporter should always stipulate that payment must be made after expiry of a certain period, whether the goods have arrived or not. Otherwise there will clearly be problems if for some reason the goods arrive six months late or do not arrive at all because the vessel has been lost. Contracts should therefore always stipulate payment net cash against shipping documents upon arrival of the goods at [destination] but not later than 30 [or 60] days after date of bill of lading.

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