Title: At least three ways to pay
1(At least) three ways to pay
- Cash with order/cash in advance
- Buyer/importer takes commercial risk
- Open account or monthly/quarterly payment
- Seller/exporter takes commercial risk by
extending credit, so... - usually requires collateral security
- Cash against documents
2Bill of lading one way, money the other
Carrier
Shipper/ Exporter
Indorsee/importer
Bank in exporters country
Issuing bank
3Documentary collection
- Exporter requires bank in its country to send
documents to importers bank - Importers bank holds documents until
- money received from importer(or undertaking to
pay made) - Importers bank releases documents to importer,
forwards money to exporters bank
4Documentary collection (contd)
- Banks are merely collection instruments
- Importers bank collects documents
- Exporters bank collects money
- Depends on integrity of the banks (especially
importers bank) - Bank-to-bank practice codified by ICC in URC 522
5Letters of credit
- Major drawback of documentary collection is that
there is no guarantee of payment once goods
shipped to foreign destination - Exporter wants guarantee of payment once goods
put on ship - That is what letters of credit provide
6Letters of credit (contd)
- Importer asks its bank to issue a credit in
favour of exporter - Importers bank is known as issuing bank
- Issuing bank sends letter of credit to exporter
(and/or its bank) stating what documents must be
presented for payment
7Letters of credit (contd)
- Issuing bank pays on presentation of documents,
whether or not it has been put in funds by
importer - Holds bill of lading as security
- Documents usually presented via bank in
exporters country - Often exporters own bank, but can be one
selected by issuing bank - Known as corresponding bank or advising bank
8Letters of credit (contd)
- Bank in exporters country may also guarantee
payment - Then it is known as confirming bank - confirms
the credit - It too holds bill of lading as security
- Again, whole mechanism depends on banks trusting
one another - Bank-to-bank practice codified by ICC in UCP 500
9A cute animation
- http//www.westpac.com.au/business/intl/letterofc_
import_demo.html
10Strict compliance required
- Art 13(a) UCP 500 international standard banking
practice - Glencore International AG v Bank of China
- Art 20(b) what constitutes an original
- Robalen Inc v Generale de Banque SA
- Art 23(a)(ii) on board stamp and date
- On board notation without date no good
11Payment mechanism vs payment
- Banks refusal to pay under LC does not excuse
buyer from its obligation to pay for the goods - Saffron v Société Minière Cafrika
- (Unless sale contract makes it clear that
provision of an LC is sufficient to discharge
buyers obligation.) - LC is payment mechanism agreed between buyer and
seller
12The autonomy principle
- Art 4 UCP500
- In credit operations all parties concerned deal
with documents and not with goods, services
and/or other performances to which the documents
may relate. - Art 3(a) UCP500
- Credits, by their nature, are separate
transactions from the sales or other contract(s)
on which they may be based and banks are in no
way concerned with or bound by such
contracts(s) - Pure unthinking machinery (supposedly)
13The fraud exception
- Inflatable Toy Co Pty Ltd v Bank of New South
Wales (1994) 34 NSWLR 243 - Issuing bank may refuse to pay (or be enjoined
from paying) if there is compelling evidence of
fraud on the documents
14Further erosion of the autonomy principle
- Trade Practices Act 1974 (Cth), s 51AA
- prohibition against acting unconscionably
- Olex Focas Pty Ltd v Skodaexport Co Ltd 1998 3
VR 380 at 404, per Young J - The effect of the statute, applying as it does
to international trade and commerce, is to work a
substantial inroad into the well-established
common law autonomy of letters of credit and
performance bonds and other bank guarantees.
15Deferred payment
- Bills of exchange (usually with collections)
- Independent promise to pay holder on maturity
(30, 60 or 90 days hence) - Deferred payment letter of credit
- Promise by (issuing) bank to pay on maturity (30,
60 or 90 days hence) - Either promise can be sold to a forfaiter
immediately at a discount
16The fraud exception and deferred payment
- Banco Santander SA v Bayfern Ltd (2000) UK CA