Main outline
Financing of International Trade •  Overview to financing of international trade
Lecture 1 Bills of exchange and Collections
Yanan Zhang,
Yanan.zhang@uef.fi,
Department of Law,
University of Eastern Finland
Introduction
1.  Risks in international trade
2.  Center risks – Seller: risk of non-payment;
Buyer: goods not conform to contract
3.  Bank/ banks: reconcile conflicting interests
4.  Payment arrangements: Open accounts; Bills
of exchange; collection, letter of credit
5.  Guarantee arrangements; Other financing
methods: Factoring, Forfeiting, financial
leasing
Open account
•  Seller delivers goods, then at a future time,
sends invoice + other shipping documents for
payment; Seller extends a fixed period (30, 60,
90 days) of credit to buyer; sales “on credit”
•  Risk least for buyer; greatest for seller;
Confidence in integrity and solvency of buyer,
stability of buyer’s country + import regulations
•  Less common, cheap; nowadays, increased.
•  Methods to manage Risk: buyer insurance,
logistics company, political risk insurance,
factoring, etc.
•  Open accounts
•  Bill of exchange/documentary bill
•  Collections
Overview of payment, finance and
security for international transactions
•  Payment means: to effect payment; further
protection by requiring attachment of additional
documents, processed through banks
•  Security mechanism: bank; removes danger of
buyer/seller; each has different risk-reduction
and documentary characteristics; reduce risk, at
cost of greater documentary complexity and
higher banks fees/service costs
•  Finance devices: need to grant credit to traders
Draft/Bill of Exchange (B/E)
1.  A negotiable instrument, unconditional
demand for payment; Not necessarily
involve a bank; used where buyer makes
a direct payment to seller; very frequently
used in collection and LC
2.  Advantages to both parties – seller can
turn into cash by negotiation; buyer is
allowed a period of credit for settlement
unless the bill is payable at sight
3.  Law governing bills of exchange in UK is
codified in the Bills of Exchange Act
1882 (hereinafter the Act)
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 Definition of Bill of Exchange Graphic form of bill of exchange

•  1882 Act, Section 3 defines it as Joensuu, January 10, 2012

“…an unconditional order in writing, $ 10,000
addressed by one person to another, signed
On demand/On April 10, 2012 pay B Exports Limited or order of B
by the person giving it, requiring the person Exports limited the sum of ten thousand dollars.
to whom it addressed to pay on demand or
for and on behalf of A Imports Inc,
at a fixed or determinable future time a sum To C Bank
certain in money to or to the order of a Lansikatu 20 signature Director
specified person or to bearer” Joensuu

Understanding the definition Understanding B/E

1.  The person who writes out the order to pay is called the
drawer.
2.  The person upon whom the bill of exchange is drawn
(who is ordered to pay) is called the drawee.
3.  The drawee may "accept" the bill. This is a special use
of the word accept because it means that he accepts to
pay the amount payable expressed in the bill, i.e. if he
accepts the obligation to pay he writes "accepted"
across the face of the bill and signs it. From that time on
he is know as the "acceptor" of the bill and has absolute
liability to honor the bill on the due date.
4.  The amount of money must be mentioned clearly. For
example, I cannot make out a bill requiring someone to
pay the value of my car or house. That is an uncertain
sum. It must say a certain amount.
5.  5. The time must be fixed or at least be determinable.
For example, "sixty days after date" is quite easily
determinable.

Understanding B/E Explanation of graphic form

6. The person who is entitled to receive the money
2.present
from the acceptor is called the "payee". If the drawer
The drawer 1. issue The payee
decides, the bill can be made payable to someone else by (B Exported The drawee
(A Imports Inc) (C Bank )
endorsing it. That is why the definition says, to pay..... to, or Limited)

the the order of, a specified person. 3. accept, pay

7. A bill can be made payable to a bearer, but it is
risky, since any finder of the bill or any thief, can claim the
money from the acceptor.
1.  Issue: Drawer (such as buyer) draws and signs and delivers
it to the payee (such as seller)
2.  Present: to a party liable to pay on it
3.  Accept or pay: drawee writes down the word “accepted”,
marks the date and signs his name across the face of the bill,
which means the drawee promise to pay at the date of
payment; or pay

2
Characteristics of a bill of exchange
1.  Every obligation arising under the bill must be
expressed in writing on the bill and signed by the party
liable (s.23, the Act 1882)
2.  Obligations can be transferred easily by “negotiation”
3.  Performance of obligations can only be claimed by a
person holding the document (the holder of the bill and
defined as payee/endorsee/bearer of the bill)
4.  The person to whom a bill is negotiated may acquire a
better right under it than his predecessors possess (to
facilitate the negotiation of bills) (s.38 (2), the Act
1882)
UN Convention on International Bills of Exchange
and International Promissory Notes (1988)
1.  Law of BE is divided into two families:
(a) Geneva system, founded on Geneva
Conventions (adopted in civil law jurisdictions);
(b) Anglo-American system, (applies in UK,
US, other common law jurisdictions)
2. To reconcile two systems, UNCITRAL
prepared the Convention (adopted by the General
Assembly of the UN on Dec. 9, 1988), text can be
found at http://www.uncitral.org
3. Provisions will apply only if the instrument is
designated “International Bill of Exchange” or
“International Promissory Note) and this
designation must appear in the heading and the
text of the instrument
Documents in collection
1. Documents usually include
•  bill of lading/other transport document,
•  cargo insurance policies,
•  inspection certificates and certificates of
origin;
2. Function: buyer needs such documents
to obtain possession of goods and clear
them through customs
Documentary Bill/draft
1.  According to whether the shipping documents
are attached or not: (a) clean bill (b)
documentary bill (very often)
2.  Purpose: to ensure buyer not take up bill of
lading (right of disposal of the goods), unless
he has first accepted or paid the attached B/E
3.  If buyer fails to honor B/E, he has to return the
bill of lading, and if he wrongfully retains it, the
law presumes that the property in the goods
sold has not passed to him
Collections: Introduction
1.  A method of effecting payment; a bank in buyer’s
country acts on behalf of seller for collecting and
remitting payment for a shipment
2.  Seller asks bank to collect the sum from buyer in
exchange for the transfer of title, shipping, and other
documents enabling buyer to take possession of goods
3.  Bank, can be its own branch office abroad or a
correspondent bank in the buyer’s country
4.  Bank’s essential role: forward the documents and
ensure that these are not released to buyer unless
acceptance or payment is made
Collections: uses
1.  Used in deals by parties in industrialized
countries to companies in developing countries
2.  Seller - Disadvantages: not payment security;
Advantages: retains control of goods until
payment/acceptance; cheaper and more
flexible; relieves part of administrative work
connected with collection of documents; major
banks, worldwide networks of contacts
3.  Buyer – Disadvantages: lack of finance to take
up collections before selling;
Advantages: not have to pay/accept until
goods arrive; cheaper; no liability until collection
arrives
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 Types of collections
1.  Clean collections: not involve goods but consist of
financial documentation only
2.  Documentary collections: entail use of commercial
documentation; Two main categories–
(a) documents against payment (D/P) (presenting bank is
authorized to release documents to the importer only
against immediate cash payment)
(b) documents against acceptance (D/A) (time draft is
used; seller instructs bank to deliver documents
provided that buyer has accepted the draft; buyer shall
make payment on expiry date)
Parties to documentary collections
1.  The exporter (Seller): the principal, the party
on whose behalf banks carry out collection
2.  The remitting bank: instructed by exporter that
sends documents for collection to a bank in
importer’s country
3.  The presenting bank: in importer’s country,
which presents documents to importer;
sometimes a further intermediary bank is
involved in processing the collection (refers to
collecting bank in URC)
4.  The importer: the buyer

Collection – parties and procedure Six stages

1.  Agree documentary collection terms; what documents
Documents +
are to be presented
collection order 2.  Seller prepares all documents and sends them to
remitting bank together with collection order;
Remitting bank Presenting (Collecting)
bank 3.  Remitting bank then sends documents together with
necessary instructions to presenting bank
Payment
Documents + Acceptance Presentation 4.  Presenting bank reviews documents; informs buyer
collection Payment arrival and notifies him of terms of release of these
payment documents documents;
order
goods 5.  Buyer makes payment or signs an acceptance in
Principal Drawee exchanges for documents;
Seller/Exporter Buyer/Importer 6.  Presenting bank then transfers collected amount to
remitting bank which credits it to seller’s account
Commercial contracts

Role of International Chamber of

Collection order and Dishonor
1.  Collection order is the key document prepared
by seller specifying terms and conditions of
documentary collections; “complete and
precise”, as banks are only permitted to act
upon instructions given in order and not on
instructions from past transactions or verbal
understandings
2.  Specific directions as to steps to be taken by
collecting bank in case of dishonor should be
included in collection order
Commerce (ICC)
•  ICC, in Paris, worthy-sounding institution, created by
business people in 1919, is owned and controlled by its
members; most work is carried out by plenary
commission and smaller working parties;
•  Example: Commission on International Banking
Technique and Practice (ICC banking commission)
www.iccwbo.org
•  Activities: drafting, obtaining business agreement to
codes of practice and procedure for international
operations; lobbying; offers rules, guides relevant to
international trade payments and project financing;
business services to corporate sector

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 Uniform Rules for Collections
Summary
(URC)
1.  URC is internationally recognised codification •  A general overall picture of payment and
of rules unifying banking practice regarding financing of international trade
collection operations
•  Open account
2.  Developed by ICC; revised and updated (1st
edition in 1956, with revisions in 1967 and •  Bill of exchange, and documentary bill
1978); current 1995 Revision, July1995, took •  Collections – types, parties, procedure.
effect as from Jan. 1, 1996 (ICC No. 522)
•  Next section – documentary credits
3.  URC apply only if incorporated by the parties
to their contract (Art. 1(a))

Outline

Financing of International Trade •  Background and definition

Lecture 2 Documentary credit I •  Function of documentary credits
•  Procedure and stages
•  Two fundamental principles – principle of
Yanan Zhang, autonomy; principle of strict compliance
Department of Law,
University of Eastern Finland •  UCP 600, several articles

Definition and
Historical background Sale and L/C
•  Documentary credits, also letters of credit (L/C) or
banker’s commercial credits; written promise of a bank, Graphic form
on behalf of a buyer, to pay a seller amount provided
seller complies with terms and conditions.
Right to Payment
•  Created in 18th century; the most common method; “the
life blood of international commerce”.
•  Why L/C? – high level of protection and security to both;
seller: paid by a bank independent of buyer as long as
terms and conditions of the credit are met; buyer:
payment to seller only after bank has received title Documentary credit
documents. Sale Contract

•  Limitations: not ensure goods shipped as ordered nor When seller delivers When beneficiary Presents
protect parties from other disagreements or complaints. Confirming goods Conforming Documents

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 Types of credits
•  Various types of L/C; each type contains a
variety of features designed to meet the different
needs of buyers, sellers, or the banks.
•  The most important types are: revocable (may
be cancelled by buyer) v. irrevocable credits;
confirmed (a second bank, in addition to buyer’s
bank, guarantees payment) v. unconfirmed (only
by issuing banks) credits; documentary v.
standby
•  Common feature: payment to be made by a
bank on presentation of specified documents by
seller
Function of L/C
•  Essence of L/C transaction? - lies in its documentary
character (e.g. goods are represented by bill of lading).
•  “The general course of international commerce involves
the practice of raising money on the documents so as to
bridge the period between the shipment and the time of
obtaining payment against documents” (Lord Wright, in
T.D. Bailey, Son & Co v. Ross T. Smyth & Co Ltd (1940)
56 T.L.R.825 at 828 )
•  Why paying bank is to pay? - it holds documents as
collateral security and, if necessary, can have recourse
to issuing bank, which can have recourse to buyer.

Uniform Customs and Practice for

Documentary Credits (UCP)
•  In use for a long time; how to effect transactions in a
practical, fair, and uniform manner
•  Banking practice regarding L/C is unified by the UCP
600 (2007 Revision, which are a set of rules issued by
ICC; now have almost universal effect); supplement to
UCP600 for Electronic Presentation, 12 articles
•  Application: in principle, apply to any L/C “when the text of the
credit expressly indicates that it is subject to these rules. They are binding
on all parties on all parties thereto unless expressly modified or excluded by
the credit” (Art.1).
•  In English law, no force of law; normally used by British
banks; thus English courts familiar with UCP and have
frequently interpreted them
Parties and relationships
•  Four main parties to a basic L/C transaction;
each party has multiple names (UCP 600, art.2
definitions).
1.  The buyer (Applicant/Importer) – “the party on
whose request the credit is issued” The issuing
(buyer’s) Bank
2.  The Issuing bank
3.  The advising (seller’s) Bank – “advises the
credit at the request of the issuing bank”
4.  The seller (Beneficiary/Exporter) – “the party in
whose favor a credit is issued”

Issuance Procedure Diagram The stages of a L/C transaction

Issuance
•  All stages in a L/C operation form part of a single
transaction; legally it breaks down into several
separate contracts; four stages:
Buyer (1) Sales contract
Seller 1.  S and B agree in sale contract that payment be made
(Applicant/Importer) (Beneficiary/Exporter) under L/C
2.  B (applicant for the credit) instructs a bank (Issuing) to
(2) (4) open a L/C for S (Beneficiary) on terms specified by B
Apply to Credit advice/ in his instructions to IB
open credit Notification 3.  IB arranges with bank at locality of S (advising bank) to
(3) Documentary credit
negotiate, accept, or pay S’s draft upon delivery of
Issuing Bank Advising Bank documents by B
(in Buyer’s country) (in Seller’s country) 4.  Advising bank informs S that it will negotiate, accept or
pay his draft upon delivery of documents; may do so
either without its own engagement or may confirm it

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 Utilization Diagram Two fundamental principles
1.  Autonomy (independence): separate from and
Utilization independent of underlying sale contract or other
transaction; bank concerns only with whether
Buyer
1. Goods
Seller documents correspond to those specified in
(Applicant/importer) (Beneficiary/Exporter) instructions (paper transaction; underlying - irrelevant);
(art. 4 Credits v. Contracts and art. 5 Documents v.
2
Goods, Services or Performance)
6 7 3
Documents
2.  Doctrine of strict compliance: if documents are not
Payment
Payment Documents exactly compliant with credit conditions, S not entitled
4 Documents to payment
Advising Bank (1) Reason: advising bank is special agent of IB, and
Issuing Bank IB is special agent of B
(Buyer’s Bank) (Seller’s Bank)
(2) If agent acts outside authority, agent cannot
5 Payment
recover from principal and has to bear commercial risk
of transaction; bank deals with finance, not goods, and
it normally not expert in trade

The documents tendered to bank The documents tendered to bank

•  Commercial invoice: key accounting document
describing commercial transaction (UCP, art.18);
identification and addresses of S and B, listing
and description of goods, invoice No., shipping
details, etc.
•  Packing (supplementary to Invoice): describing
packing conditions of goods; including packing
(packing slip), weight, measure list, weight
memo, etc.
•  Transport (art.19-27): Marine/Ocean/Port-to-Port
Bill of lading (stands for goods; evidences of
carriage; a receipt); Charter party BL; multimodal
(combined) Transport; Air transport; Road, rail,
or Inland waterway
•  Insurance document (or Certificate): indicates
type and amount of insurance coverage in force
on a particular shipment (art.28)
•  Certificate of origin: issued by an authority,
stating the country of origin of goods.
•  Inspection certificate: usually issued by an
authority, indicating goods have inspected
before shipment and inspection results; obtained
from neutral testing organizations (such as a
government entity or independent service Co.).

Complying with the L/C Principle of strict compliance: Standard

•  After receiving L/C, S should immediately and carefully for examination of documents
examine if it conforms with original sales contract and all
conditions can be met
•  UK has adopted a strict approach: “…there is no
1. Merchandise description v. sales contract
2. L/C’s payment availability v. contract conditions
room for documents which are almost the same,
3. Shipping, expiration, and presentation dates allow or which will do just as well, as those
sufficient time for processing the order, shipping goods, specified” (Sir John Donaldson M.R.)
and preparing documents •  Applies to all contracts arising out of a L/C
4. No unacceptable conditions transaction: underlying; applicant and issuing;
5. Can Specified documents be obtained in the form
required? issuing/confirming and beneficiary; issuing and
6. The IB or Confirming bank is known to S correspondent bank
7. Partial or transshipments are specified correctly •  Degree of strictness varies according to different
8. Insurance coverage and party to pay charges are as contracts in some jurisdictions
agreed
9. Instructions on whom drafts are to be drawn, and
maturity dates

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 Standard for examination of documents in
UCP – functional standard of verification
approach
•  UCP, art. 14 Standard for examination of
documents:
•  a. “ must examine a presentation to determine,
on the basis of the documents alone, whether or
not the documents appear on their face to
constitute a complying presentation”
•  d. “data in a document, when read in context
with the credit, the document itself and
international standard banking practice, need not
be identical to, but must not conflict with, data in
that document, any other stipulated document or
the credit”
Discrepancy of the Documents
•  Two situations: (1)ambiguity in the credit
instructions; (2) ambiguity regarding
tendered documents
•  If (1): best way for bank is to ask for
clarification; if not possible, is protected if it
has acted reasonably
•  If (2) : tender is a bad tender, but bank
should not insist on rigid fulfillment of
precise wording in all cases
•  But, room allowing bank in interpreting
documents is very narrow, and bank will
be at risk if not insist on strict compliance.
What is An Original Document?
•  In international trade practice, this had
caused a big problem
•  UCP, art. 17 Original Documents and
Copies:
a. at least one original of each document
stipulated in the credit must be present
b. any document bearing an apparently
original signature, mark, stamp, or label of
the issuer of the documents, unless the
document itself indicated that it is not an
original
Functional standard of Verification Approach
e. “In documents other than the commercial
invoice, the description of the goods, services or
performance, if stated, may be in general terms
not conflicting with their description in the credit”
f. if a credit requires a document, without
stipulating by whom is to be issued or its data
content, banks will accept the document if its
content appears to fulfill the function of the
required document
h. “if a credit contains a condition without
stipulating the document to indicate compliance
with the condition, banks will deem such
condition as not stated and will disregard it”
UCP, art. 16 Discrepant Documents,
Waiver and Notice
•  a. may refuse to honor or negotiate
•  b. may in its sole judgment approach
applicant for a waiver of the
discrepancies
•  c. if decided to refuse, it must give a
single notice to that effect to the
presenter
UCP, article 17
c. appears to be written, typed, perforated or
stamped by the document issuer’s hand or;
appears to be on document issuer’s original
stationery or; states that it is original, unless the
statement appears not to apply to the document
presented
d. if requiring presentation of copies of
documents, presentation of either originals or
copies is permitted.
e. if requiring presentation of multiple documents
by using terms such as “in duplicate”, “in tow
fold” or “in two copies’, will be satisfied by
presentation of at least one original and
remaining number in copies
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 Summary
•  What is a documentary letter of credit? Financing of International Trade
•  The main parties and procedure of a Lecture 3 Documentary credit II
documentary credit
•  Two fundamental principles
Ya Nan Zhang
•  Standards of examining documents Department of Law,
•  Relevant rules in UCP 600 University of Eastern Finland

•  Next section – fraud exception rules in

documentary credit transactions

The Fraud Exception

to Payment
•  L/C system works well if B and S honest; but
offers little protection against fraud
•  Reason: autonomy principle – bank pay against
conforming documents, not involved in any
dispute between parties to underlying contract
•  However, in cases where fraud is committed,
would be unreasonable to stick to this principle;
developed in judicial practice; one exception,
permitting a court to consider cases of fraud
other than actual terms and conditions of L/C
Outline
•  First, examine briefly to what extent and in
what circumstances a beneficiary's right to
payment may be defeated by allegations
of fraud or similar misconducts (examples)
in English law
•  Secondly, look at procedural issues –
Injunctions
•  Finally, consider how to fight against fraud
in international L/C transactions

One L/C fraud case : Where is the Sugar? Analysis of L/C fraud in general
1.  1974 east Africa ,no local sugar crop, Somalian National Agency of
Commerce ordered 10,000 tons from Eastern Development
Corporation of Bangkok, $5.9 M.; L/C was made in favor of a •  Where documents are discrepant, defects
Singapore company, available in that country at the counters of
Moscow Narodny Bank are apparent on their face, and bank is
2.  S shipped 6,874 bags on a chartered vessel Lord Byron, then drew
up false B/L, invoices and other documents to make it look as if the
entitled to dishonor
rest had been dispatched on another ship
3.  Documents presented to Mosccow appeared to comply with credit
•  Where documents appear to be in order
terms; bank paid $5.9 M; finally, Somalian government found out; on their face, but they or their tender are
Singapore co. registered shortly before with a share capital of $2.
4.  Somali authorities seized the Lord Byron and imprisoned captain, tainted by fraud; usually relate to
an innocent victim of an international fraud documents themselves; may be forged or
untrue in relation to goods, however on
•  No one knows how many cases go unreported their face, correct and good tender
because parties prefer to swallow a loss

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Analysis of types of disputes relating to
fraud in documentary credits
•  Impact of fraud in L/C is seen in one specific
context: dispute concerning whether bank is
obliged to pay in circumstances where fraud is
alleged; such disputes come before courts,
likely in 3 situations
1.  Where applicant wishes to stop the paying bank
making payment on the grounds that beneficiary has
been guilty of fraud
2.  Where beneficiary is suing bank on the basis that bank
has refused to make payment on the grounds of fraud
3.  Where paying bank has already made payment and
recovery is sought on the ground of fraud in relation to
documentation presented in support of payment
English law on fraud exception
•  Foundational case: an American Case
– Sztejn v. J Henry Schroder Banking Corpn
(applicant alleged that what had been shipped was rubbish
rather than any good contracted for; bank dismissed claim
because of no cause of action; applicant applied to court an
injunction against IB to stop payment; court may interfere to
prevent payment)
•  Fraud exception as established in English law: An
exception to the principle of autonomy; as a part of the
common law (court cases);
•  Payment can be refused: Where there is clear evidence
of fraud; the bank has clear notice of this evidence of
fraud; bank’s awareness of fraud was “timely”
English law on fraud exception
•  Presentation must be untrue to knowledge of
presenter of documents; knowledge? – state of
mind primarily to be considered, also something
else; proof very difficult; bank no duty to
investigate any allegation;
•  Whose fraud? - Seller
•  Fraud exception will operate only in ‘exceptional
circumstances’ – position summarized in
judgment of Harbottle [1978] case; Courts will
not allow their process to be used by a dishonest
person to carry out a fraud
Approach of the UCP to fraud
•  Do not deal with fraud issue, and leave it to national laws
•  Bank’s Duty: to “examine a presentation to determine, on
the basis of the documents alone, whether or not the
documents appear on their face to constitute a
complying presentation” (art. 14, a)
•  Art. 34 states that “ a bank assumes no liability or
responsibility for the form, sufficiency, accuracy,
genuineness, falsification or legal effect of any document
or superimposed thereon” and other various matters that
bank holds no responsibility for.
•  Emphasize autonomy of L/C; banks are
concerned with documents alone; Intention: to
leave fraud Qs to national law, but not deny
existence of a fraud exception
English Law on Fraud Exception
•  Effect: enables bank to consider
something external to documents;
•  Bank has to decide on documents and
facts which it knows or suspects;
•  If refuse, have to establish fraud at trial if it
is sued;
•  Civil burden of proof is generally proof on
the balance of probabilities, but the degree
depends on the subject matter.
Procedural mechanism -Injunctions
•  Where applicant considers beneficiary is going to make
or has made a presentation which he should not make,
he may seek to prevent presentation or payment or both
by applying for injunctions against relevant parties
(useful type: interlocutory injunctions)
•  A number of difficulties (two in particular):
1.must show a good arguable claim against
party – establishing a case of fraud to
knowledge of party and a duty owed to him by
that party, either in contract or in tort
2. balance of convenience - grant is the correct
exercise of court’s discretion.
10

Injunctions
•  Basic rule: court will not interfere
on the ground of matters coming
from outside of L/C itself)
•  High difficulties; doubt: useful?
•  Future development: way
forward?; great care needed
Fighting against fraud
•  Frauds in L/C operations are just one of
the many banking sector frauds in
international trade and other cross-border
business transactions.
•  Introduce some organizations concerning
with maritime and other types of fraud
•  Look at some of measures parties can
take to reduce their risks and how to react
when suspicious circumstances arise.
International organizations
•  The United Nations Conference on Trade and
Development (UNCTAD): takes a detailed interest in all
aspects of maritime fraud and tries to encourage better
dissemination of information and cooperation between
governments (e.g. produced a report – “A primer on new
techniques used by the sophisticated financial fraudster”
on 3 March 2003)
•  Lloyd’s Shipping Information Services: offer a ship
classification and registration service covering some
70,000 merchant vessels
•  Other bodies, such as the International Criminal Police
organization (Interpol)
When fraud exception Applies
1.  Where only buyer make allegation to bank, that
fraud has occurred; may be founded on a
(grave) suspicion; or bank itself may have such
suspicion: No
2.  Where clearly established to the satisfaction of
bank that a fraud has occurred; unambiguous
evidence;
But: no evidence show beneficiary knew of
fraud; possibility that fraud was committed by a
third party: No
3. Where bank has positive proof that a fraud
committed and that beneficiary know of this fraud;
if both facts are clearly established to the
satisfaction of the bank: Yes
International organizations
•  International Maritime Organization (IMO), http://www.imo.org/
•  ICC: since early 1980s , has build up its services to business in
combating commercial crime
1. ICC, a pamphlet -- Guide to the prevention of maritime fraud (ICC
Publication 370, 1980)
2. Three ICC units are involved, under the overall control of ICC
Commercial Crime Services (CCS) (was set up as an umbrella
organization in 1994) http://www.icc-ccs.org.uk
(a) International Maritime Bureau (IMB) (established in 1981;non-
governmental non-profit-making; for information concerning maritime
fraud activates)
(b) Commercial Crime Bureau (c) Counterfeiting Intelligence Bureau
3. Task of the three: to provide business with knowledge to introduce
precautionary procedures; offer effective protection; CCS can
provides access to professional advice.
Preventive measures
•  Usually victim is B; sometimes Bank (B and S conspire);
less often S
•  Mostly, banks cannot refuse to pay if documents look
right, and courts issue injunction order only in
exceptional cases; buyer has to reimburse bank and try
to get money back from fraudulent S; most fraud losses
not covered by cargo insurance.
•  “Various anti-fraud measures can be taken, but the two
most important points are basic ones; these are to know
the party you are dealing with and to understand the
business in which you are operating” (Captain P.
Mukundan at the IMB in UK)
•  Suggestion: banks should take more responsibility for
deals they finance; make discreet enquires when
something looks not quite right
•  An astute checker may develop a sense which sounds
alarm bells when fraudulent pieces of paper presented.
11
 Continuous efforts required
•  Despite repeated warnings from financial institutions and
specialist bodies, such L/C fraud flourish strongly in
today’s global markets, particularly in developing
countries
•  “Apart from the huge losses inflicted on innocent
individuals and companies, business is vitally concerned
in the fight against fraud because trust in the at the heart
of all business relationships. Its erosion through the
spread of fraud must be resisted by the entire business
community” (Eric Ellen, Executive Director of ICC CCS in
the UK)
•  “A more coherent business effort is needed to meet the
challenge of commercial crime. Reaction to specific
incidents and measures confined to a limited area or
industrial sector are not enough. What is need is
probably organized, coordinated and concerted effort
from all parties, working together, sharing information
and using all resources at their disposal” (Eric Ellen)
Financing of International Trade
Lecture 4 Standby L/C, Performance Bonds and
Demand Guarantees
Yanan Zhang,
Department of Law,
University of Eastern Finland
Standby L/C: Historical background
•  Are most used in the US, but their use is
also spreading to other countries
•  In US commonly employed to replace
bank guarantees payable on demand;
banks in US have limited powers to issue
guarantees; can issue L/C and deal
negotiable instruments; thus developed it
•  Adopt the legal form of a normal L/C
Summary
•  Approach of UCP to L/C fraud exception
•  Essential points concerning fraud
exception rules in L/C in English case law
•  Preventive measures against fraud
•  Next section – standby L/C, performance
bonds and guarantees
Overview
•  Different function; L/C: to provide payment against
documents; But these: provide security against default in
performance of underlying contract.
•  B need assurance too to secure performance of S; more
often in international construction contracts where
overseas employer requires financial security from a
reputable third party (usually a bank) against contractor
defaulting in performance
•  Purpose: to add an incentive to performance and to give
B immediate financial recourse in the event of default
•  Must be capable of being called quickly by B/beneficiary;
cause abuse since bank dealing with no documents, has
nothing to verify; sometimes, beneficiary required to
furnish a written statement affirming default by S;
sometimes a simple demand will suffice
Standby L/C : definition
•  Is an obligation on the part of an IB to pay a
beneficiary when nonperformance of the
applicant
•  Similar to an ordinary L/C: Issued by bank and
embodies a promise to make payment to a third
party (beneficiary) or to accept bills of exchange
drawn by him
•  Security, can be drawn if party defaults in
performance of contractual obligations to
beneficiary (such as, work, providing goods/
service)
12
 Uses and Features Operation of standby L/C
1.  A party to a deal who has to provide the other party
with security for performance, asks its bank to issue a
•  Can be used to guarantee the following types of standby L/C
payments and performance: 2.  The banks issues it in favor of the other party
(1) Repayment of loans (2) Fulfillment by (beneficiary)
3.  Contains an irrevocable obligation by IB to pay the
contractors and subcontractors (3) Securing credit sum on beneficiary’s demand (typically, call for
payment for goods/services delivered by third to accompany its demand with a sight draft/BE drawn
parties on IB)
4.  IB takes a counter-indemnity from its customer (called
•  Default instrument rather than payment the account party or credit applicant); this secures its
instruments; are called in the event of failure to right to immediate reimbursement if the standby L/C is
perform and not in normal operation of the deal; called and paid
thus, liability of a bank is intended to be 5.  Are payable at counters of IB; may be notified through
another bank; often a foreign beneficiary requires a
secondary to that of the principal guarantee from a bank in its own country; the US bank
then issues its standby L/C in favor of local guarantor
by counter-guarantee

Parties and procedure Uniform Rules

•  Standby L/C, covered by UCP (subject to its
Diagram incorporation by the parties), and principles of
autonomy of the credit and strict compliance
Corresponding bank
(3) Counter-guarantee apply in general
Issuing bank
(Instructing party) Guarantor •  However, UCP, ill-suited to security nature; ICC
Banking Commission, in collaboration with the
(4) Counter – Give a written (2) Demand
Indemnity
A written demand +
guarantee
Institute of International Banking Law and
statement
(Reimbursement)
some
documents Practice, has endorsed and approved separate
Rules on International Standby Practices
Seller/Exporter Buyer/Importer
Beneficiary
(ISP98)(ICC Publication No 590) in April 1998,
Principal
(effective on 1 Jan. 1999) – can be issued
(1) Underlying contracts subject to both, depending on parties’ will

Major Rules of ISP 98 Major Rules of ISP98

•  Criticized as detailed and legalistic; involve a wider
legal and commercial community
•  Divided into 10 Rules, outline of some major
provisions:
1.  Rule 1 General provisions: Scope, application,
definitions and interpretations
2.  Rule 2 Obligations: Obligation of different branches,
agencies, other offices; conditions to issuance;
nominations; etc.)
3.  Rule 3 Presentation: what constitutes a presentation;
when timely presentation is made; partial drawing and
multiple presentations; extend or pay; etc.
•  Rules 4 Examination: Examination for compliance;
required signature on a document; identical wording;
non-documentary terms and conditions; standard
document types; etc.
•  Rules 5 Notice, Preclusion. And Disposition of
documents: Timely notice of dishonour; notice of expiry;
issuer request for applicant waiver with and without a
request by the presenter; disposition of documents, etc.
•  Rule 6 Transfer, Assignment and Transfer by Operation
of Law: Transfer of drawing rights and conditions thereto;
acknowledgement of assignment of proceeds and
conditions thereto; rights and obligations of a successor
in the event of a transfer by operation of law; etc.)

13
 Major Rules of ISP98
•  Rule 7 Cancellation: Consent of beneficiary
required to cancel to his rights; issuer’s
discretion regarding a decision to cancel; etc.
•  Rule 8 Reimbursement Obligations: right to
reimbursement; refund of reimbursement; bank-
to-bank reimbursement; etc.
•  Rule 9 Timing: Duration of standby; calculation
of time; time and day of expiration; etc.
•  Rule 10 Syndication/Participation
Guarantees: Uses
•  The majority connecting with transnational projects and
trade are issued by banks, in form of irrevocable
undertakings payable on demand of beneficiary;
•  Supplier’s bank is required to issue a guarantee/bond,
underwriting suppliers’ performance obligations
•  Sometimes also may be provided to seller to underpin
buyer’s obligation to pay
•  Together with bonds issued by insurance/specialized
surety companies can frequently be found as additional
security element in more complex trade and project
financing structures
Types of Guarantees
•  3 types frequently; developed largely since 1960s and much
influenced by growing of major infrastructure works and
construction projects in developing world
1.  A Tender/Bid bond: acts as a deposit attached to
submission of a tender;security if a successful tender
failing to perform contractual obligations
2.  A Performance bond: security for due performance of
contract and available to be called upon in case of
breach of underlying contract; now more often refer to
instruments similar in form and function to standby L/C
(sometimes called ‘on demand’ performance bonds or
‘demand guarantees’) (our focus)
3.  An advance payment guarantee: a party makes it to
another party and obtains a guarantee as security
against that payment ; the advanced sum will be
returned if agreement under which the advance was
made cannot be fulfilled.
Guarantees in general
•  Is a promise by a third party to carry out
obligations owed by A to B in the event of
default.
•  Concept forms basis of obligations given by
banks, insurance companies and other
institutions that facilitate performance of
international business deals.
•  Not provide a complete procedure for effecting
payment or granting credit; by providing third
party security against default, enable business
people to conclude deals and grant or benefit
from credit on more advantageous terms or in
risky circumstances
Guarantees: advantages
•  Can provide comfort to guarantee beneficiary in
several different ways
1.  Most importantly, assures that compensation will be
available in the case of default by the other party
2.  In form of irrevocable bank obligation payable on
demand, bank is unlikely to issue it unless it is
confident of its customer's financial status; indirectly
provides beneficiary with a degree of assurance of
solidity of the party
3.  The instructing party (principal) stands to lose the
guarantee amount if failing to fulfill contract terms;
gives a strong incentive to complete contract
Independent character of
demand guarantee
•  Generally “autonomous” i.e. independent of:
1.  Underlying contract between, e.g. S and B;
2.  Contract between client (debtor) and IB
•  Guarantor is bound to honor; cannot raise
defences that stem from underlying contract;
nor can refuse because contract with his client
is null and void or client has insufficient credit;
terms and conditions of the undertakings of
guarantor are exclusively determined by the
guarantee content
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 Calling on demand guarantee
•  IB agrees to make payment, when beneficiary
gives a written demand or his written declaration
that the principal has defaulted
•  Beneficiary need only demand or ask payment;
not have to prove that principal has defaulted in
performance of underlying contract (sometimes
a certificate from an independent third party
indicating principal has defaulted)
Unfair calls and
stop-payment orders
•  When confronted with an unfair call, principal debtor may
apply an injunction to block payment by the bank
•  Assessment by court on such application is delicate:
principal has a legitimate interest that no payment is
made; independent and unconditional nature should not
be denied
•  Courts generally very reluctant to interfere with the
independent nature and forbid payment only in
exceptional cases (e.g. English courts)
•  Banks must ascertain unfairness independently and on
basis of objective facts
UN Convention on Independent Guarantees
and Standby Letters of Credit 1995:
•  29 articles;
•  results from a project of the United Nations Commission
on International Trade Law (UNCITRAL) to harmonize
law governing cross-border;
•  designed to facilitate its use;
•  solidifies recognition of common basic principles and
characteristics;
•  also apply to L/C;
•  contains rules governing exceptions to payment
obligation and ordering of provisional measures (Article
19 and 20)
Rights and duties of parties
•  Underlying Contract: principal debtor and beneficiary (IB,
not a party, cannot refuse payment relying on it, even
when principal not defaulted; principal recover amount
from beneficiary in legal action)
•  Bank and principal debtor: IB has a mandate from
principal; when pays, does so in its own name but on
behalf of principal; basis -duty of reimbursement by
principal; special duty of care - explaining risk when
issuing and duty of care when called – reasonable care,
adhere strictly to terms and notify principal when called
•  First (instructing) and second (correspondent) bank:
beneficiary often not satisfied with a guarantee issued by
a foreign bank (first) and demand one in its own country
(second); unless stipulated, the second has only an
obligation regarding beneficiary and will only accept to
pay if it can obtain reimbursement from the first bank
(becomes ‘counter-guarantor’)
Uniform rules and Convention
•  The ICC Uniform Rules for Demand Guarantees
(URDG):
•  ICC publication no. 758, valid as from 1 July 2010; 35
articles
•  Try to provide a solution for a fair balance of parties’
interests; help to avoid hesitation, misunderstanding and
confusion
•  Art. 2: Various definitions, amongest others
•  Art. 7: Non-documentary conditions
•  Art. 14: Presentation
•  Art. 15: Requirements for a demand
•  Art. 19: Examination of a presentation
Similarities of Standby LC and
Demand Guarantee
•  Parties concerned: Applicant, beneficiary,
Guarantor, Counter-guarantor
•  Purpose or function (to act as security)
•  Features: (1) payment obligation; (2)
independent; (3) Documentary transaction
15
 Differences
•  Categories:
(1) Guarantees: accessory vs. demand
(2)  Standby LC
•  Applicable and international rules are
different
Summary: Security instruments
•  Standby L/C
•  Performance bonds and demand
guarantees
•  Export credit insurance
•  Next section – Factoring, forfaiting, leasing
Introduction
•  Short-term trade financing, where finance
is made available by banks or finance
houses, used in modern export trade
•  covers 3 financing methods
•  International factoring and international
financing leasing form the subject matter
of international conventions
Export credit guarantees/insurance
•  Basic and vital role; support essential to both supplier
and buyer;
•  various institutions insure import, export and foreign
investment risks (government & private agencies) (e.g.
UK, Export Credits Guarantee Department)
•  Usually cover the following risks:
1.  Commercial/business risk: buyer's insolvency, refuse
to pay; fails to adequately perform contract;
performance blocked by a “force majeure” event
2.  Political and related risks
3.  Financial/currency risks
Financing of International Trade
Lecture 5 Factoring, Forfaiting, and International
Financial Leasing
Yanan Zhang,
Department of law,
University of Eastern Finland
Purpose of factoring
•  Essence of exporting factoring: a finance house (factor),
agrees to relieve exporter of financial burden of export
transaction, in particular collection of price due from
overseas buyers
•  Purpose: delegate all or part of administrative work on
clients account, seller – concentrate on his real business,
selling and marketing of his products, dispatch of goods,
documentation; factor: credit management
•  obtain a protection against the risk of non-payment
•  obtain, if needed, an advance payment of its debts
(helps to ease cash flow of exporter’s business); if no-
recourse, affords protection against bad debts
16
 Types of factoring Direct factoring
•  Direct and indirect /one factor and two
factor
•  Whatever type, factoring contract, Exporter factor (3) contract
separate from sales contract; governing (2) Factoring
(bank or company)

law normally the place where factor carries contract, sells

on business accounts receivable
Immediate
or invoices at a Pay to
•  Direct: only one factor, export factor, discount
money factor
conclude factoring agreement with
exporter; upon assignment of claim for Buyer/Importer
price, export factor enters into direct Seller/Exporter
(client) (debtor)
contractual relations with overseas buyer
(1) Commercial contracts

Indirect factoring Indirect factoring

•  Indirect: two factors;
•  Oversea buyer, to whom arrangement is (3) Contract
disclosed, makes payment to import factor Export factor Import factor

– will pay export factor– exporter;

•  No contractual relationship between (2) Factoring Pay to import (4) contract
exporter and import factor; contract Immediate
money
factor

•  Advantage: each finance house deals with

a local customer;
Seller/Exporter Buyer/Importer

(1) commercial contracts

Operation of Indirect Factoring Questions

•  A common practice of a “two factor system”:
1.  Seller is to enter into agreement with a factor in his
own country ( “exporter factor”)
2.  Exporter factor enters into agreement with
correspondent factors ( “import factors”) in countries of
buyer; import factors accept credit risk of debtors
situated in their own country and are responsible for
collection
3.  Export factor sub-assigns purchased debt to the import
factors
4.  Relationship chain: import factor is responsible to
export factor; exporter factor to seller; rights of
recourse may be exercised
•  When entering into agreement, two legal
points are important to consider for
exporter:
1. what is the legal form of arrangement ?
Or is it disclosed or undisclosed?
2. in disclosed factoring, does the factor
have a claim of recourse if overseas buyer
fails to pay or it is on a non-recourse
basis?

17
 Legal forms of factoring
•  Legal structure of disclosed and undisclosed, different
•  Disclosed: founded on a legal assignment of exporter’s
claim for payment to factor as assignee ( has to comply
with requirements of section 136 of the Law and
Property Act 1925,which regulates assignment of debts;
in writing, singed by assignee, absolute and express
notice in writing to debtor- buyer)
•  Undisclosed: most common form, equitable assignment
of seller’s claim to finance house; don’t satisfy
requirements of a legal assignment, as no notice is given
to buyer; arrangement is confidential between exporter
and finance house
Disclosed factoring
•  Functions of “exporter’s credit
management”: set out in agreement,
several options available, such as
handling of internal credit control by factor
and sales accounting of the exporter
•  If exporter wants factor to finance
transaction, and services: immediate
payment to exporter, usually up to 80
percent of book value of approved
invoices; factor will carefully select
exporters as clients
Undisclosed factoring
•  In form of an equitable assignment of purchase
price by exporter to factor; such arrangement not
disclosed to buyer; buyer pays purchase price to
seller
•  Factoring contract: seller receives price as a
trustee of factor and has to place it into a
separate account nominated by the latter;
usually on a recourse basis
•  Worldwide chains of correspondent factors
established, have produced common rules for
regulation of factoring transactions
Disclosed factoring
•  Operation of “price collection service”:
•  (1) factor and exporter, contract, purchase
approved short-term debts (“approved
receivables”) owed by overseas buyers.
•  (2) exporter sells goods abroad, claim for
price is assigned to factor and buyer is
asked to pay to him; buyer is notified of
the fact the price shall not be paid to
exporter
•  (3) assignments of approved receivables
may and often do form non-recourse
finance; unapproved receivables, on a
recourse basis
With recourse/non-recourse
factoring
•  With or without recourse to seller, agreement
between parties:
1, Non-recourse: factor, bears credit risk and is
not entitled to reimbursement if buyer defaults
2. With recourse: e.g. for unapproved
receivables assigned to the factor ( has a claim
for indemnification)
•  However, if to the knowledge of S, non-
conforming goods are supplied or another
condition of sales contract is breached by S and
B rightly refuses to pay under sales contract,
factor is normally entitled to recourse, even if
contract provides for non-recourse finance
The UNIDROIT Convention on
International Factoring
•  Prepared by UNIDROIT (the International Institute for the
Unification of Private law in Rome) and adopted on 28
May 1988; aim: to “facilitate..,while maintaining a fair
balance of interests between different parties”
•  Applies whenever receivables assigned pursuant to a
factoring contract arise from a sale contract in different
states; applies to undisclosed and disclosed factoring
•  A difficult issue: whether a prohibition of assignment of
the claim for the price prevents seller from assigning
claim to the factor; solution: effective, but a Contracting
state may contract out of this provision art. 6(1), (2) and
18); not affect any obligation of good faith owed by seller
(art. 6(3))
18
 International Factoring
UNIDROIT Convention
•  Where debtor has made payment to factor,
Association (IFA)
never receives goods or non-conforming goods, •  Aims to assist factoring community by
in principle, no right to recover, but has a claim
against seller(art.10(1)); 2 exceptional cases: (1) providing info, training, purchasing power
factor has not paid seller (2)factor paid seller and a resource for factoring community
with knowledge that seller had defaulted on his
obligations to the debtor (art. 10(2)) •  Founded in 1999, a platform to work
•  Also regulates indirect factoring (art.11) together, have a single voice in market
•  But not cover domestic factoring nor deal with •  www.factoring.org
relationship between factor and supplier (by
domestic law); fails to address questions of
priority of competing claims to receivables and
ignores difficult Qs of conflict of laws”

Forfaiting
•  A form of international supply chain financing,
involves discount of future payment obligations
on a without recourse basis (a purchase of a
debt from creditor on a non-recourse basis)
•  Can be applied to wide range of trade related
and purely financial receivables
•  Discounted receivables typically have matureis
over 3-5 years, also can be short as 6 months,
or as long as 10 years
•  A flexible discounting technique, can be tailored
to different need of parties and domestic, or
international transactions
Key characteristics
•  100% financing without recourse to the seller of the debt
•  The payment obligation is often but not always
supported by a bank guarantee
•  The debt is usually evidenced a legally enforceable and
transferable payment obligation such as a bill of
exchange, promissory note, letter of credit or note
purchase agreement.
•  Transaction values can range from US$100,000 to US
$200 million
•  Debt instruments are typically denominated in one of the
world’s major currencies, with Euro and US Dollars being
most common.
•  Finance can be arranged on a fixed or floating interest
rate basis.

Essence of forfaiting Procedure of a typical

forfaiting transaction
•  Creditor can turn Debtor’s obligation (due at
(2) Commercial contract
some future date), at once into ready cash, by
selling that obligation to forfeiter (non-recourse
basis + only if it is secured by a third party) Exporter (3) Delivery of goods Importer
•  Used in 2 types of transactions: (5) Hands over documents

•  (1) a financial transaction, to make a long-term (1) (7) (6)Delivers (4) Gives (4) Repays
Commitment Pays at maturity
financial facility liquid; to purchase cash
documents guarantee
deal
•  (2) in an export transaction, to help cash flow of
exporter who has allowed overseas buyer credit Forfaiter Bank
(our concern) (8) Presents documents
for payment

19
 A Typical forfaiting transaction
Step 1
1.  During the course of negotiations
between an exporter and an importer for
the supply of goods, the importer asks for
credit terms.
Step 3,4,5
3. The forfaiter provides the exporter with an indication of
the costs involved. At this stage neither party is committed
in any way.
4.  When the details of the commercial contract have been
agreed, but usually before it has been signed, the
exporter asks the forfaiter for a commitment to purchase
the debt obligations (bills of exchange, promissory notes
etc) created under the export transaction.
5.  The information required for this is the same as for an
indication.
Step 7, 8
7. The exporter signs the commercial contract
with the importer and delivers the goods (2+3).
8. In return, if required, the importer obtains a
guarantee from his bank (4) provides the
documents that the exporter requires in order to
complete the forfaiting (5). This exchange of
documents is usually handled by a bank, often
using a Letter of Credit, in order to minimise the
risk to the exporter.
Step 2
2.  The exporter approaches a forfaiter and asks for an
indication of whether the forfaiter is willing to provide
this credit and how much it is likely to cost. At this stage
the forfaiter will need to know:
•  The country of the importer
•  The importer’s name
•  The type of goods
•  The value of the goods
•  The expected shipment date
•  The repayment terms sought by the importer
•  Whether the importer’s obligations will be guaranteed by
a bank, and if so, who?
Step 6
6. The forfaiter issues a commitment which is accepted by
the exporter and which is binding on both parties (1). This
commitment will contain the following points:
•  The details of the underlying commercial transaction.
•  The nature of the debt instruments to be purchased by
the forfaiter.
•  The discount (interest) rate to be applied, together with
any other charges
•  The documents that the forfaiter will require in order to
be satisfied that the debt being purchased is valid and
enforceable
•  The latest date that the exporter can deliver these
documents to the forfaiter
Step 9, 10
9. The exporter delivers the documents to
the forfaiter who checks them and pays for
them as agreed in the commitment (6+7).
10. Since this payment is without recourse,
the exporter has no further interest in the
transaction. It is the forfaiter who collects the
future payments due from the importer (8)
and it is the forfaiter who runs all the risks of
non-payment.
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 Benefits of Forfaiting
1.  Eliminates Risk
•  Removes political, transfer and
commercial risk
•  Provides financing for 100% of contract
value
•  Protects against risks of interest rate
increase and exchange rate fluctuation
Benefits of Forfaiting
3. Improves Cash Flow
•  Forfaiting enables sellers to receive cash
payment while offering credit terms to their
customers
•  Removes accounts receivable, bank loans
or contingent liabilities from the balance
sheet
International Forfaiting
Association (IFA)
•  Worldwide trade association for
commercial parties, financial institutions
and intermediaries engaged in forfaiting
•  Aims to foster business relationships and
develop best practice, transact forfaiting
business profitably and safely
•  Founded in Aug. 1999, over 140 members
•  http://www.forfaiters.org/
Benefits of Forfaiting
2. Enhances competitive Advantage
•  Enables sellers of goods to offer credit to
their customers, making their products
more attractive
•  Helps sellers to do business in countries
where the risk of non-payment would
otherwise be too high
4. Increases Speed and Simplicity of
Transactions
•  Fast, tailor-made financing solutions
•  Financing commitments can be issued
quickly
•  Documentation is typically concise and
straightforward
•  No restrictions on origin of export
•  Relieves seller of administration and
collection burden
ICC Uniform Rules for Forfaiting (URF)
•  Effective since 1 Jan. 2013
•  Complement to other Uniform rules
•  Provide contractual framework to
transform other trade finance instruments
into viable banking investments; e.g. LC
are largely forfeited, especially in China
•  Developed in cooperation with IFA,
complement other ICC uniform rules.
21
 ICC URF
•  Are designed for use in both primary and
secondary markets
•  For ease of use, also are accompanied by
model form agreements for both parties;
•  Certain safeguards: e.g. a provision
specifying all parties in both primary and
secondary markets are liable if certain
basic breaches occur.
Types of financing leasing agreement
1.  Pure leasing transaction: possession
reverts to the lessor when the lease is
terminated
2.  in others: lesee has option of acquiring
property in the leased goods; a deferred
price component is included in rental
UNIDROIT Convention
•  Art. 1 specifies the characteristics of the
transactions that the Convention governs
•  Most important feature: shifts responsibility
for non-delivery, late delivery or delivery of
non-conforming equipment from the lessor
to the supplier (see art. 8 10 and 12(5))
•  Two further provisions: in case of lessee’s
default, lessor may recover accrued
unpaid rentals, together with interest and
damages (art. 13(1)); lessor’s rights in
equipment are protected in the event of
the insolvency of lessee (art. 7)
International financial leasing
•  Banks and finance houses;
•  Normally concern capital goods, such as leasing of
ships/aircraft, containers, or heavy equipment for
exploration of oil/mineral resources
•  Ordinary lease a two-party agreement between lessor
and lesee; lesee (use equipment, pays lessor a rental);
as period of lease may be lengthy, lessor incurs a
considerable financial risk; If owner of equipment
accepts risk, he will himself act as lessor
•  A three-party transaction: where lessor not want to
accept risk, a financing leasing transaction is entered
into; owner (supplier) sells goods to finance house
(creditor), possibly on cash basis, acts as lessor, the
user (lessee/debtor)
The UNIDROIT Convention on
International financial leasing
•  1988
•  Main objective is to remove, regarding
equipment, liability form the lessor to the
supplier, as the lessor has only a financial
interest in transaction; except as agreed,
lessor does not incur liability to lesee
concerning equipment and to third parties
for death, personal injury or damage to
property caused by equipment though may
be liable as the owner (art. 8 (1)(2)(3))
Summary
•  International Factoring, and the UNIDROIT
Convention on International Factoring
•  Forfaiting
•  International leasing, and the UNIDROIT
Convention on International financial
leasing
22
•  Thank you! Questions?
•  Comments welcome!
•  Best wishes for your future!

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