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CHAPTER 15 INTERNATIONAL PAYMENT
Instruments of International Payment
Remittance and Collection
Letter of Credit
Banker’s Letter of Guarantee
§1 Instruments of International Payment
Bills of exchange (draft)?
Definition of bill of exchange
A bill of exchange is a written, dated and signed instrument that contains an unconditional order from the drawer (出票人) that directs the drawee (受票人) to pay a definite sum of money to a payee (收款人) on demand (立即) or at a specified future date.
Simply put, a bill of exchange is a written order by the drawer to the drawee to pay money to the payee.?
?
The order is valid only if the drawee has an underlying obligation to pay money to the drawer.
Drawer
Depositor
Lender
Seller
Drawee (Payer)
Bank who holds money
on account of the drawer；
Borrower
Buyer who owes the sales
price to the drawer
Payee
(2) Contents of bills of exchange
A bill of exchange must fulfil the following requirements:?
Indicating the word “draft” or “exchange”;
An unconditioned order in writing;?
Certain amount;?
Payer's (drawee's) name, usually the buyer or its nominated bank;?
Payee's name, usually the seller or its nominated bank;?
Date and place of issue;?
Signature of the drawer, usually the seller.
SPECIMEN A
￡160,000 London
11th August 2004
AT SIGHT OF THIS SOLE EXCHANGE PAY TO OUR ORDER
THE SUM OF STERLING POUNDS ONE HUNDRED AND SIXTY
THOUSAND ONLY FOR VALUE RECEIVED
Drawn under irrevocable letter of credit of Barclays Bank of
Canada Toronto, Number TODC603921 dated 30 June 2004.
To: Barclays Bank PLC For and on behalf of
Manchaster ISB NATHAN & COLES LTD
51 Mosley Street ____________________
Manchester Director
SPECIMEN B
￡160,000 London
11th August 2004
AT 90 DAYS AFTER DATE OF THIS FIRST EXCHANGE (SECOND OF
THE SAME TENOR AND DATE BEING UNPAID) PAY TO OUR ORDER
THE SUM OF STERLING POUNDS ONE HUNDRED AND SIXTY
THOUSAND ONLY FOR VALUE RECEIVED
Drawn under irrevocable letter of credit of Barclays Bank of
Canada Toronto, Number TODC603921 dated 30 June 2004.
To: Barclays Bank PLC For and on behalf of
Manchaster ISB NATHAN & COLES LTD
51 Mosley Street ____________________
Manchester Director
(3) Usage of bills of exchange
Present for acceptance
Draw
(Issue)
Present for payment
Accept
dishonor
Pay
① Issuance
The drawer’s action of drawing and giving out of a draft.
Upon issuance, the drawer has a contingent liability (或有负债) on the bill until it matures as, in the event of default by the acceptor, the drawer is obliged to pay out the face value of the bill on its due date to the holder.
② Presentment: a demand to pay or accept the draft made to the drawee.
③ Acceptance
An agreement generally on the part of the drawee to pay the bill.
Simply writing down the word “accepted”, marking the date and signing its name across the face of the bill.
Upon acceptance the drawer, now the acceptor, becomes the principal debtor and the party primarily liable for the payment of the bill.
The drawee is under no legal obligation to accept the bill, even if he is indebted to the drawer to the amount of the bill, or has funds of the drawer in its possession to that amount, unless he has agreed to accept it.
④ Payment: On the expiry date of draft, the payer makes sufficient payment to the legal bearer, the latter then writes off the draft and return it to the payer as a receipt. ?
⑤ Endorsement: The act of a payee, drawee, or holder of a draft in signing the back of the draft to transfer rights in the draft to another.
In financial market, the typical endorsement is discount (贴现) of draft, i.e., the bearer transfers a time and accepted draft to a bank or a discounting company, who, as transferee, will deduct the interest as per discount rate and pay the remaining sum to the bearer.
The payee appears as the first endorser on the reverse of the bill and this endorsement starts the chain of ownership of the bill.
⑥ Dishonor and recourse
Dishonor: the payer refuses or fails to pay or accept the bill when the holder makes presentment to him.
When dishonored, the holder shall pursue the right of recourse by giving notice of dishonour to the drawer and each endorser.?
⑦ Protest
An official certificate evidencing the act of dishonour and stating the reason for the protest, demands made on the drawee (or the acceptor) and the response received.?
(4) Types of draft
Drawer
Time of
payment
Sight draft (demand draft): payable on
presentation to the drawee.
Time draft (usance draft): allows a delay in
payment.
Acceptor
Shipping
documents
attached？
Trade acceptance draft: drawn on a firm
Banker’s acceptance draft: drawn on a bank
Trade draft : drawn by a trader.
Banker’s draft: drawn by a bank.
Clean draft : not attached
Documentary draft: attached.
2. Promissory note
A written promise to pay a determinate sum of money.
Differences between a bill of exchange and a promissory note
Bill of Exchange Promissory Note
Nature An order to pay A promise to pay
Parties two three
Primary liability Sight draft: the drawer
Time draft: acceptor The drawer
Copies A sole or a set An original note
3. Cheque?
A bill of exchange drawn on a bank payable on demand.
If the drawer has not enough deposit in the bank for the cheque amount, the cheque will be dishonoured, and this kind of cheque is called “bounced cheque” (空头支票), which is not allowed.??
§2 Remittance and Collection
1. Remittance
Here means the transfer of funds from one party to another among
different countries.
Parties related to a remittance?
Remitter: requests its bank to remit, usually the buyer.
Payee or beneficiary: the addressee of the remittance, usually
the seller.
Remitting bank: the bank transferring the funds at the request
of the remitter.
Paying bank: the bank entrusted by the remitting bank to make
payment to the beneficiary.
(2) Ways of remittance
① Remittance by airmail (M/T): To transfer funds by means of a payment order, a mail advice or a debit order.
② Remittance by cable/telex/SWIFT (T/T): Instructions from the remitting bank to the paying bank are transmitted by wire or through the SWIFT system.
③ Remittance by banker's demand draft (D/D): A banker's draft drawn by a bank on its overseas bank is used as an instrument for effecting transfer of money.
The draft must be physically transferred to the payee, and the payee must then present the draft for payment.
SWIFT: the Society for Worldwide Interbank
Financial Telecommunication
A bank group established in Brussels in May 1973 and has
set-up global standards for sending and receiving
authenticated instructions for wire transfers and letters of
credit.
SWIFT also means a highly sophisticated message switching or communication system.
The SWIFT system operates 24 hours per day, seven days a week, delivering a very high level of online performance to its members.
payment
② debit advice
Remitter
Beneficiary
Remitting Bank
Paying Bank
① application
③ payment order/ mail advice/ debit advice
(by mail or telegraphically)
⑤ reimbursement claim
④ payment
Figure 15-1 M/T or T/T flow diagram
② banker’s D/D
Remitter
Beneficiary
Remitting Bank
Paying Bank
④ banker’s D/D
① application
③ D/D advice
⑦ debit advice
⑤ banker’s D/D
Figure 15-2 D/D flow diagram
⑥ payment
(3) Application of remittance
① Open account sales
The buyer is trusted to pay the seller after receipt of goods.
The seller and the buyer are related entities or where there is a history of transactions between the parties.
② Payment in advance sales
The seller will not ship the goods until the buyer has remitted payment to him.
All shipping documents, including title documents are handled directly between the trading partners.
The role of banks is to effect a clean payment to the seller as required.
2. Collection
A payment arrangement whereby a bank acts on behalf of
a seller for collecting and remitting payment for a shipment.
The seller presents the shipping and collection documents to his bank (in his own country) which sends them to its correspondent bank in the buyer's country. The foreign bank hands over shipping documents to the buyer in exchange for payment or a firm commitment to pay on a fixed date.
(2) Parties to a collection
① Drawer or principal: The party who entrusts the collection items to his bank. usually the seller.
② Drawee: The party to whom the collection items are to be presented for acceptance or payment. usually the buyer.
③ Remitting bank: The bank to which the drawer entrusts the collection items.
④ Collecting bank: The bank entrusted by the remitting bank to present the collection items to the drawee.
⑤ Case of need: A representative appointed by the principal as case of need in the event of non-acceptance and/or non-payment.
(4) Types of collection
Clean collection
Documentary
collection
Documents against payment (D/P):
Documents are released to the buyer
when payment has been made.
D/P at sight: demand draft
D/P after sight: time draft
Collection on financial instruments,
No commercial documents.
Goods shipped on consignment.
Purely financial transaction.
Documents against acceptance (D/A):
Documents are released to the buyer
when acceptance has been made.
Consignment
A sale arrangement whereby the exporter (consignor) delivers the merchandise to an agent (consignee) under an agreement that the agent will sell it for the account of the exporter. Under this kind of arrangement, the consignor/exporter retains title to the goods until they are sold, while the consignee/agent sells the goods in exchange for a commission and remits the net proceeds to the consignor.
(4) Procedure for payment by D/P at sight
④ payment
Drawee (Buyer)
Principal (Seller/Drawer)
Collecting Bank
Remitting Bank
① goods
⑤ documents
③ documents/drafts/collection order
⑥ payment
⑦ payment
② documents/drafts
/collection order
(5) Risk management under payment by collection (for the seller)?
① Non-acceptance risk.
The buyer may base the refusal on some small, inadvertent (非故意的) infraction (违约) of the sales contract. The real reason: a significant drop in the market price.
The seller is stuck with goods in a foreign port, probably incurring a heavy storage charge and a market at a greatly reduced price.
② Non-payment of trade acceptance draft risk. The seller is dependent upon the buyer’s integrity to pay the draft at maturity. D/A is more risky than D/P after sight.
Measures to manage the risks involved:
Make sure that the buyer is of good credit and financial standing. Buyers who have unsatisfactory creditworthiness may reject the goods on some pretext (借口) after its arrival, in the hope of driving the seller into a price reduction.
Take into account the economic and political conditions in the importing country. For instance, if the market price of the imported goods falls, the buyer may also find a pretext to refuse to make payment. ?
The amount of transaction should be moderate.
(6) Financing under documentary collection
To the seller: The bank may purchase the documentary bill if
the export goods enjoy great popularity in the market abroad
and both the seller and the buyer are thought reliable.
The net amount = face value - bank fees - interest incurred.
To the buyer: Under D/P after sight, if the collecting bank has
a great degree of trust in the buyer, the bank may be willing to
release the negotiable bill of lading to the buyer against a
trust receipt.
A trust receipt:
A written declaration by the buyer to the collecting bank that ownership in goods released by the bank is retained by the bank, and that the buyer has received the goods in trust (被托管) only and will act as the trustee of the bank to arrange the discharge, customs clearance, transportation and insurance of the goods.
§3 Letter of Credit
Definition of letter of credit
UCP 600: A letter of credit is “a definite undertaking (保证) of the issuing bank to honour (承付) a complying presentation (相符交单).”
In simple terms, a letter of credit is a conditional undertaking of payments by a bank.
2. Parties to a letter of credit
?
Applicant or opener
The party who fills out and signs an application form, requesting the bank to issue a letter of credit in favor of a seller abroad.
Ensure that the credit is issued in compliance with the terms and conditions laid down in the sales contract within a proper or reasonable time.
After the payment is effected by the issuing bank, the opener must pay the bank against correct shipping documents or refuse to pay if the documents are not in order.?
(2) Beneficiary
The party in whose favor the credit is issued.
If there is a discrepancy between the credit and the sales contract, he may accept it or ask the opener to have it amended.
Once the beneficiary accepts the credit, he must deliver the goods in compliance with the contract.
Then he tenders to his bank or any other bank all the relevant documents as stipulated in the credit.
If the issuing bank does not pay, he can claim from the opener for the payment.?
(3) Issuing bank or opening bank
The bank which issues a letter of credit at the request of an applicant.
It is irrevocably bound to honour as of the time it issues the credit.
If the applicant fails to pay after the issuing bank makes payment, the latter has the right to sell the goods and claim from the applicant if the proceeds are not sufficient.
It is primarily liable to the beneficiary, no matter whether the applicant is in default or not.?
(4) Advising bank
The bank which advises the credit to the beneficiary in accordance with stipulations on the credit.
It is located in the place of the beneficiary and is usually the issuing bank's branch or correspondent acting as an agent of the opening bank in accordance with the instructions given.?
(5) Negotiating bank
The nominated bank who purchases drafts (drawn on a bank other than the nominated) and/or documents by advancing or agreeing to advance funds to the beneficiary.
It becomes the holder in due course of the draft after its negotiation and has a right of recourse against the drawer (beneficiary) in the event of dishonour by the issuing bank.
(6) Paying bank
A bank nominated by the issuing bank to make payment under the credit.
Always the drawee of a draft stipulated in the credit.
It may be the issuing bank itself.?
(7) Reimbursing bank
The agent of the issuing bank.
It honours the reimbursement claims of a paying bank or
an accepting bank or a negotiating bank in accordance with
the instructions or authorization given by the issuing bank.?
3. Procedure for letter of credit operations?
(Issuance —Amendment—Utilization)
BUYER
(Applicant/Buyer)
ISSUING BANK
(Buyer’s Bank)
ADVISING BANK
(Seller’s Bank)
SELLER
(Beneficiary/Seller)
ISSUANCE
② Apply for Credit
② Open Credit
③ Credit Advice
① Contract
3. Procedure for letter of credit operations?
(Issuance —Amendment—Utilization)
BUYER
(Applicant/Buyer)
ISSUING BANK
(Buyer’s Bank)
ADVISING BANK
(Seller’s Bank)
SELLER
(Beneficiary/Seller)
AMENDMENT
② Request amendment
③ Amendment Advice
④ Amendment Advice
① Request amendment
3. Procedure for letter of credit operations?
(Issuance —Amendment—Utilization)
BUYER
(Applicant/Buyer)
ISSUING BANK
(Buyer’s Bank)
ADVISING BANK
(Seller’s Bank)
SELLER
(Beneficiary/Seller)
Utilization
⑥ Payment
⑤ Payment
③ Credit Advice
① Goods
② Documents
④ Documents
⑦ Documents
4. Contents of a letter of credit
Name and address of the issuing bank;
Type of the credit.
Name and address of the beneficiary;
Amount of the credit and its currency;?
Expiry date of the credit and its place to be expired;
Name and address of the applicant;
L/C number and date of issue;
Drawer and drawee as well as tenor of the draft.
Full details of the goods;
(10) Full details of the documents to be presented;
(11) Partial shipment permitted/not permitted;
(12) Transshipment allowed/not allowed;
(13) Port of shipment and port of discharge;
(14) Latest date for shipment, and the latest date for presentation
of documents;
(15) Instructions to the advising bank, negotiating bank or paying
bank;
(16) Other special terms and conditions;?
(17) The undertaking clause of the issuing bank;
(18) The indication “This credit is subject to the Uniform Customs
and Practice for Documentary Credit (2007 revision),
International Chamber of Commerce Publication No.600.” ?
5. Features of letter of credit business
Banker’s credit
Banks are in no way concerned with
or bound by sales contract.
The issuing bank follows an application
handed in by the buyer.
Self-sufficient
document
Banks deal
with documents
The issuing bank undertakes to effect
payment and assumes a primary liability.
Not with goods, services and/or other
performances to which the documents
may relate.
6. The UCP600
The Uniform Customs and Practice for Documentary Credits, ICC publication No. 600. It came into force on July 1, 2007. 39 articles.
First published in 1933, and revised by the ICC in 1951, 1962, 1974, 1983 and 1993.
Most letters of credit in international transactions are subject to the UCP. But the UCP does not automatically apply to a credit. Most parties choose to use the UCP. Exception to the rules can be made by express modification or exclusion.
7. Classification of credits
(1) According to the attaching of documents?
Clean credit
Documentary
credit
Payment will be effected only against
a draft without any shipping documents
attached or sometimes, against a draft
with an invoice alone attached thereto.?
Payment will be made against
documents representing title to the
goods. ?
Universally used in international trade.
(2) According to the nature of the credit
Revocable credit
Irrevocable credit
Can be amended or cancelled by
the issuing bank at any moment
and without notification. ?
Little security for the seller.
Can be amended or cancelled by
the issuing bank at any moment
and without notification.
Greater assurance of payment.
“A credit is irrevocable even if there is no indication to that effect” (UCP600 Art.3)
(3) According to the adding of confirmation
Confirmed
credit
Unconfirmed
credit
A credit which is advised to the
beneficiary with another bank's
confirmation added thereto.
A definite undertaking of the
confirming bank, in addition to
that of the issuing bank, to honour
or negotiate a complying
presentation.
“This credit is confirmed by us.” ?
(4) According to the time of payment?
Sight credit
Time credit
(Usuance credit)
Calling for the presentation of sight
drafts.
T/T reimbursement clause: After
verifying the documents, the negotiating
bank will notify the opening bank of its
confirmation of receipt of compliant
documents and claim reimbursement.
Specifying that drafts are to be
drawn at any length of time.
May require no drafts at all.
(5) According to the ways of availability
Sight
payment credit
Deferred
payment credit
“Available with XX bank by payment at sight”
The bank is authorized to pay at sight
upon receiving a complying presentation.
Draft is optional.
“Available with XX bank by deferred payment.
The bank is authorized to incur a
deferred undertaking and pay at maturity
upon receiving a complying presentation.
No draft is required.
(5) According to the ways of availability?
Acceptance
credit
Negotiation
credit
“Available by acceptance of draft drawn
on XX bank.”
The beneficiary may discount the
accepted draft to get paid immediately.
Buyer’s usuance credit*
(fake usuance credit)
Negotiable by a nominated bank or
freely negotiable by any bank.
May be sight credit or time credit.
Negotiating bank will be duly
honoured by the opening bank.
Buyer’s usance credit
The credit states “The usance draft is payable on a sight basis, discount charges and acceptance commission are for buyer’s account.”
Purpose of this credit:
Facilitating financing, or taking advantage of
the banker’s accepted draft to obtain
financing at a favorable discount rate which
is normally lower than the commercial credit.
(6) Other credits ① Revolving credit
Revolving
credit
Renews itself after its amount is drawn.
To facilitate continuous repeated purchases
from the same supplier.
When the drawing is made by the beneficiary,
the original credit amount becomes again
available for the next period.
Automatic revolving
Semi-automatic revolving: renew if the
negotiating bank is not advised of stopping
renewal
Non-automatic revolving: only upon receipt of
issuing bank’s notice of renewal.
(6) Other credits ② Transferable credit
Transferable
credit
Specifically states it is “transferable”.
The 1st beneficiary can transfer all or part of
the proceeds of the credit to a 2nd beneficiary.
The 2nd beneficiary cannot transfer the L/C to
any subsequent third beneficiary other than
the 1st beneficiary.
L/C amount, unit price may be reduced
Expiry date, period for presentation and
shipping date may be curtailed.
Applicant
(Buyer)
Opening Bank
Advising Bank
Second Beneficiary
(Actual Supplier)
① Apply for
Transferable L/C
②Open transferable L/C
③ Advise transferable L/C
First Beneficiary
(Seller/Middleman)
④ Request transferring L/C
Transferring Bank
⑤ Transferred L/C
⑦ Documents
⑧Documents
Contract
Figure 15-5 Transferable L/C flow diagram
⑨ Documents
⑥ Ship goods
(6) Other credits ③ Back-to-back credit
Back-to-back
credit
Opened on the basis of an already
existing, nontransferable credit.
The first credit is used as collateral
(附属担保品) for the second credit.
Permission of the ultimate buyer or that
of the issuing bank is not required.
To hide the identity of the actual supplier.
The middleman is responsible for paying
the second L/C
Applicant
(Buyer)
Opening Bank
Advising Bank
Beneficiary
(Actual Supplier)
① Apply for L/C
② Open L/C
③ Advise L/C
Beneficiary-Applicant
(Seller/Middleman)
④ Apply for Back-to back L/C
Opening Bank
⑤ Back-to-backL/C
⑦ Documents
⑧ Documents
Contract
Figure 15-5 Back-to-Back L/C flow diagram
⑨ Documents
⑥ Ship goods
(6) Other credits ④ Red clause credit
Red clause
credit
Allows the beneficiary to draw the advance
funds from the credit to produce goods.
Once the goods are delivered the seller may
then submit the proper documents to obtain
the balance of the letter of credit.
The buyer and seller have close working
relationship.
The buyer is extending an unsecured loan
to the seller.
(6) Other credits ⑤ Standby credit
Standby
credit
This credit is primarily a substitute for a
performance bond or payment guarantee.
It is used primarily in the United States.
It is often called non-performing letters of
credit because they only used as a backup
payment method if the collection on a primary
payment method is past due.
It can be used to guarantee repayment of
loans, fulfillment by subcontractor, securing
the payment for goods delivered by third parties.
(6) Other credits ⑥ SWIFT credit
SWIFT credit
The credit sent in SWIFT form.
SWIFT is increasingly replace other forms of
transmission.
Indicates the issuing bank at the top
and has tags at the left for specific information
such as:
40 A: Form of Documentary Credit
20: Documentary Credit Number
31C: Date of Issue
31D: Date and Place of Expiry
51a: Applicant Bank
§4 Banker's Letter of Guarantee
Banker’s letter of guarantee (L/G):
A contract by which a bank (the guarantor) agrees to pay another's debt or to perform another's obligation only if that other individual or legal entity fails to pay or perform.
Parties to a banker’s letter of guarantee
(1) Principal: The person who applies for the issuance of L/G.
For instance, in loan guarantee, the principal is
the borrower.
(2) Guarantor: The bank or a financial institution which issues
a L/G undertaking to make payments to the
beneficiary in the event of non-performance of
a contract by the principal.?
(3) Beneficiary: The person in whose favour the guarantee is
issued. For example, in import guarantee, the
beneficiary is the seller.
2. Types of the letter of banker’s guarantee?
Tender guarantee (tender bond or bid bond)
A guarantee issued by a bank or a financial institution (the guarantor) at the request of a tenderer (the principal) in favor of a party inviting tenders abroad (the beneficiary), whereby the guarantor undertakes, in the event of default by the principal in the obligations resulting from the submission of tender, to make payment to the beneficiary within the limits of a stated sum of money.
(2) Performance guarantee
Issued by a bank or a financial institution (the guarantor) at the request of one party of a contract (the principal) to another party of a contract (the beneficiary), whereby the guarantor guarantees, in the event of the principal's failure to perform the contract in compliance with its terms, to make payment to the beneficiary within the limits of a stated sum of money.
4. Differences between letter of guarantee and letter of credit
L/C L/G
Issuing bank’s liability Primary Depends on the terms
Application S/C smoothly performed Non-performance
Relevance with the sales contract No relevance with S/C The guarantor is usually involved in the disputes of S/C.
§5 Terms of Payment in the Contract
1. Payment by remittance?
(1) “The Buyer shall pay the total value to the
Seller in advance by T/T (M/T or D/D) not later
than June 30, 2008.”?
(2) “Payment by T/T: Payment to be effected by
the Buyer shall not be later than 30 days after
receipt of the documents listed in the contract.”?
2. Payment by collection
?
(1) “Upon first presentation the Buyer shall pay against documentary draft drawn by the Seller at sight. The shipping documents are to be delivered against payment only”. (Payment by D/P at sight)
(2) “The Buyer shall duly accept the documentary draft drawn by the Seller at 60 days sight upon first presentation and make payment on its maturity. The shipping documents are to be delivered against payment only”. (Payment by D/P after sight)
(3) “The Buyer shall duly accept the documentary draft drawn by the Seller at 90 days sight upon first presentation and make payment on its maturity. The shipping documents are to be delivered against acceptance”. (Payment by D/A)
3. Payment by letter of credit
?
“The Buyers shall open through a bank acceptable to the Sellers an Irrevocable Letter of Credit at 30 days’ sight to reach the Sellers XX days before the month of shipment, valid for negotiation in Shanghai until the 15th day after the month of shipment.”
Simplified terms: “Payment by Irrevocable Sight Credit”, “By Irrevocable Credit at 30 days’ sight.”

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