Trading Terms

1. Letter of Credit or L/C: A written commitment to pay, by a buyer's or importer's bank (called the issuing bank) to the seller's or exporter's bank (called the accepting bank, negotiating bank, or paying bank). A letter of credit guarantees payment of a specified sum in a specified currency, provided the seller meets precisely-defined conditions and submits the prescribed documents within a fixed timeframe. These documents almost always include a clean bill of lading or air waybill, commercial invoice, and certificate of origin. To establish a letter of credit in favor of the seller or exporter (called the beneficiary) the buyer (called the applicant or account party) either pays the specified sum (plus service charges) up front to the issuing bank, or negotiates credit. Letters of credit are formal trade instruments and are used usually where the seller is unwilling to extend credit to the buyer. In effect, a letter of credit substitutes the creditworthiness of a bank for the creditworthiness of the buyer. Thus, the international banking system acts as an intermediary between far flung exporters and importers. However, the banking system does not take on any responsibility for the quality of goods, genuineness of documents, or any other provision in the contract of sale. Since the unambiguity of the terminology used in writing a letter of credit is of vital importance, the International Chamber Of Commerce (ICC) has suggested specific terms (called Incoterms) that are now almost universally accepted and used. Unlike a bill of exchange, a letter of credit is a nonnegotiable instrument but may be transferable with the consent of the applicant. Although letters of credit come in numerous types, the two most basic ones are (1) Revocable-credit letter of credit and (2) Irrevocable-credit letter of credit, which comes in two versions (a) Confirmed irrevocable letter of credit and (b) Not-confirmed irrevocable letter of credit. 2. Accepting bank: Bank which accepts a bill of exchange by countersigning (endorsing) it, and thus incurs the legal obligation of paying the bill's amount on its maturity date. See also advising bank. 3. Negotiating bank: In documentary credit, usually the beneficiary's bank which agrees to pay the beneficiary by purchasing a negotiable instrument (importer's or buyer's draft). Also called accrediting party. 4. Paying bank: Bank on which a check or draft is drawn; the bank which cashes it. Also called accepting bank, drawee bank, or payer bank. 5. Issuing bank: Buyer's or importer's bank which establishes (opens) a letter of credit (L/C) in favor of a beneficiary (seller or exporter), forwards it to an advising bank for delivery to the beneficiary, and commits itself to honor demand drafts drawn by the beneficiary against the amount specified in the L/C. Also called opening bank. 6. Advising bank: Correspondent bank (usually in the exporter's country) of an issuing bank (usually in the importer's country) that receives a letter of credit (L/C) from the issuing bank for authenticating it and informing ('advising') the exporter (the L/C's beneficiary) that a L/C has been opened by the importer in the exporter's favor. The advising bank usually also takes on other roles in the transaction, such as (1) confirming the letter of credit (playing the role of the 'confirming bank'), (2) accepting a bill of exchange by endorsing it (becoming the 'accepting bank') and/or, (3) paying the exporter on presentation of documents (becoming the 'paying bank' or 'negotiating bank'). Also called adviser bank or nominated bank. 7. Some Very Important Documents: Collective term for air waybills, bills of lading, certificates of origin, commercial invoices, drafts, packing lists, and other such records required under documentary credit or collection.

a. Bill of lading (B/L): A document issued by a carrier, or its agent, to the shipper as a contract of carriage of goods. It is also a receipt for cargo accepted for transportation, and must be presented for taking delivery at the destination. Among other items of information, a bill of lading contains (1) consignor's and consignee's name, (2) names of the ports of departure and destination, (3) name of the vessel, (4) dates of departure and arrival, (5) itemized list of goods being transported with number of packages and kind of packaging, (6) marks and numbers on the packages, (7) weight and/or volume of the cargo, (8) freight rate and amount. It serves as a proof of ownership (title) of the cargo, and may be issued either in a negotiable or non-negotiable form. In negotiable form, it is commonly used in letter of credit transactions, and may be bought, sold, or traded; or used as security for borrowing money. A bill of lading is required in all claims for compensation for any damage, delay, or loss; and for the resolution of disputes regarding ownership of the cargo. The rights, responsibilities, and liabilities of the carrier and the shipper under a bill of lading (often printed on its back) are governed generally either by the older Hague rules, or by the more recent Hague-Visby rules. See also lading. b. Clean bill of lading (B/L): B/L that is free from any adverse remarks or notations (called 'clauses'), made by the shipping company about the condition, packaging, or quantity of the goods being shipped. Importers and their banks usually insist on a clean B/L for payment under a letter of credit. See also foul bill of lading. c. Foul bill of lading (B/L): B/L with adverse remarks or notations (called 'clauses') by the carrier that the goods received for shipping (or their packaging) look wet, damaged, or otherwise in doubtful condition, or not of correct quantity. Importers and their banks normally do not accept foul B/L for payment under a letter of credit. Also called claused bill of lading, dirty bill of lading, or unclean bill of lading. d. Air waybill (AWB): Type of bill of lading that serves as a (1) receipt of goods by an airline (carrier) and (2) as a contract of carriage between the shipper and the carrier. It includes (a) conditions of carriage that define (among other terms and conditions) the carrier's limits of liability and claims procedures, (b) a description of the goods, and (c) applicable charges. The airline industry has adopted a standard format for AWB which is used throughout the world for both domestic and international traffic. Unlike a bill of lading, an AWB is a non-negotiable instrument, does not specify on which flight the shipment will be sent, or when it will reach its destination. See also forwarder's air waybill. Also called airbill or air consignment note. e. Contract of carriage: Binding agreement (evidenced usually by an air waybill, bill of lading, or passenger ticket) which contains conditions of carriage that spell out the obligations and rights of a carrier and a shipper/passenger. The carrier undertakes to deliver goods/passengers from a named place of departure to a named destination, in consideration for freight/fare. This contract addresses issues associated specifically with what is being carried, and how the liability and compensation for damage or injury to (or loss of) the goods/passengers is assessed, apportioned, and paid. In airline, cruise ship, and other passenger-transport industries, it contains also the carrier's policy regarding baggage, bumping, cancellation and delays, claims, reservations, ticket validity, etc. See also contract of affreightment. f. Commercial invoice: Document required by customs to determine true value of the imported goods, for assessment of duties and taxes. A commercial invoice (in addition to other information), must identify the buyer and seller, and clearly indicate the (1) date and

terms of sale, (2) quantity, weight and/or volume of the shipment, (3) type of packaging, (4) complete description of goods, (5) unit value and total value, and (6) insurance, shipping and other charges (as applicable). g. Certificate of origin: Document that certifies a shipment's country of origin. It is used between members of a trading block or where special privileges are granted to goods produced in certain countries. Certificate of origin is commonly issued by a trade promotion office, or a chamber of commerce in the exporting country. Also called declaration of origin. 8. Irrevocable letter of credit (L/C): Firm commitment by an issuing bank to pay an accepting bank a specified sum in a specified currency, provided the conditions included in the L/C document are met within a specified timeframe. This L/C cannot be canceled (or its terms amended) without the seller's (beneficiary's) prior written approval, and comes usually as a confirmed irrevocable letter of credit. Also called irrevocable credit. 9. Back to back letter of credit (L/C): Arrangement in which one irrevocable letter of credit serves as the collateral for another; the advising bank of the first letter of credit becomes the issuing bank of the second letter of credit. In contrast to a transferable letter of credit, permission of the ultimate buyer (the applicant or account party of the first letter of credit) or that of the issuing bank, is not required in a back-to-back letter of credit. It is used mainly by intermediaries to hide the identity of the actual supplier or manufacturer. Also called counter credit or reciprocal letter of credit.