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Certified Documentary Credit Specialist 2010

Incoterms Supplement
This supplement incorporates the recent changes made to Incoterms. Please replace
Chapter 2 with the following.

Two

The Sales Agreement

Chapter outline
2.1 Introduction and learning objectives
2.1.1 Introduction
2.1.2 Learning objectives
2.2 Contract of sale
2.2.1 Conclusion of the export contract
2.2.2 Form of the export contract
2.2.3 Agreements
2.2.4 Law and disputes
2.2.5 International sales law
2.2.6 Effective sales agreements
2.3 Trade terms in foreign trade Incoterms and documentary credits
2.3.1 Introduction
2.3.2 The 11 Incoterms
2.3.3 An Incoterms case study
2.3.4 Implications of Incoterms 2010 for documentary credits
2.3.5 Electronic developments
2.4 Methods of payment
2.4.1 Methods of payment
2.4.2 Bills of exchange/promissory notes as instruments of negotiation and as
instruments for avalisation or forfaiting in collections and documentary credits
2.4.3 The documentary credit as a method of payment and the autonomy of
documentary credits (the independence principle)

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2.1 Introduction and learning objectives


2.1.1 Introduction
The most basic agreement in international trade is the sales agreement between the seller
and the buyer (this is often referred to as an export contract or a foreign sales agreement).
All other agreements and procedures commonly used in international trade result from the
performance of this contract or agreement. For example, the two most essential terms of the
sales agreement are the sellers undertaking to provide the goods to the buyer and the
buyers undertaking to pay the price in return. In the context of an export sale, the first of
these usually involves the conclusion of a contract with a carrier to transport the goods from
the country of the seller to that of the buyer. The second undertaking makes it necessary for
the buyer to arrange payment through the banking system. Note that payment mechanisms
commonly employed on import/export transactions, including documentary credits, are
briefly examined and compared later in this chapter. Other procedures related to the export
sale and the payment operation sometimes include government requirements, such as
customs procedures and exchange control regulations.
A documentary credit is an undertaking separate from the export agreement or other
commercial transaction on which it may be based. This essential characteristic and its
consequences will be covered in further detail in subsequent chapters, but in commercial
rather than legal terms, documentary credits are issued to facilitate performance of the
buyers payment obligation to the seller. The need for a documentary credit in an
import/export transaction arises from the creation and completion of an export agreement
and/or other commercial transactions.
Against this background, this chapter summarises some of the main features of export
contracts and a number of the most frequently used ways in which payment may be effected
under an export contract. The purpose is to give the documentary credit specialist a general
understanding of the major principles applicable to export contracts and of the different ways
in which the buyers obligation to effect payment may be met.

2.1.2 Learning objectives


The learning objectives for the documentary credit specialist are:

to understand who is involved in the sales agreement and to appreciate that the
agreement supersedes the payment obligation;
to understand why the sales agreement is important in order that the exchange of goods
for money can be effected smoothly;
to obtain a clear understanding of Incoterms, as applicable to an international trade
transaction;
to be able to compare the basic methods of payment; and
to understand when the documentary credit is a preferred method of payment and to
understand the principle of the autonomy of a documentary credit.

2.2 Contract of sale


2.2.1 Conclusion of the export contract
Although trade is continuing to become more international in nature, there is still no general
system of international commercial law applicable to export transactions. This means that
the detailed provisions governing the conclusion, performance and enforcement of export

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contracts still differ from one country to another, in accordance with the different laws of
each country.
In general terms, the buyer and seller conclude a legally enforceable export contract by
agreeing on the goods to be sold and the price to be paid for them. Usually, their agreement
will, in addition, cover related items such as the time period for delivery, the method of
payment and how the goods are to be delivered (the trade terms). It may also specify what
law is applicable to the contract and which court or arbitration system has jurisdiction to hear
any claims in the event of a dispute.

2.2.2 Form of the export contract


Precise requirements for export contracts vary from one country to another, but, as a general
principle, the determining factor is the agreement of the seller and buyer to sell and to buy.
Accordingly, the import/export contract does not have to be a lengthy formal document in
order to be legally enforceable. Characteristically, contracts of this type are concluded on the
basis of an informal exchange of messages, including telephone conversations, faxes and
emails. Often, the seller sends the buyer a pro forma invoice, indicating details of the goods
and their unit prices, before the conclusion of the transaction.

2.2.3 Agreements
Export sales are usually concluded between professional buyers and sellers acting in the
course of their business rather than between private individuals. In this situation, buyers and
sellers frequently maintain their own set of standard conditions of sale and purchase, setting
out the terms on which they normally conduct business. Typically, these are included by
reference in the contracts.
Problems sometimes arise when the buyer and seller send their standard conditions to each
other during the pre-contract negotiations. It is then frequently unclear which set of
conditions (if either) applies to the transaction and whether the parties have effectively come
to an agreement at all. In extreme cases, the uncertainty created by this practice leads to a
dispute that ends in court. In this event, the judge or arbitrator may decide that no contract
was ever concluded because the buyer and seller failed to agree on the conditions
applicable. More often, the judge or arbitrator will try to save the contract by determining, for
example, that one or the other set of conditions applies or that both sets of conditions apply,
to the extent that they do not conflict.

2.2.4 Law and disputes


As mentioned above, there is still no supranational commercial legislation to cover all
aspects of export contracts. As a result, in most cases, export contracts are governed at
least in part by the laws of the country of one of the parties involved. The buyer and seller
may themselves agree which law is to apply by including a specific provision in the sales
contract. Otherwise, if a dispute occurs, the judge or arbitrator hearing the matter may have
to decide this issue first, in order to determine what rules of law apply to the case.
In this situation, judges and arbitrators characteristically resolve the issue by applying the
law of the country that is most closely connected with the contract for example, the country
to which the goods are to be delivered. In many instances, a trade term applicable to the
contract indicates the point at which delivery is to be made for legal purposes. For example,
under CIF (cost, insurance and freight) or FOB (free on board) terms, the seller fulfils the
delivery obligation when the goods are loaded on board a ship in the sellers country.
Because the sales agreement is signed only by the seller and the buyer, banks are not
involved in the sales agreement.

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2.2.5 International sales law


A number of attempts have been made to overcome the difficulties that exist with sales
contracts by establishing international law for export sales. The latest of these is the 1980
UN Convention on Contracts for the International Sale of Goods (CISG). It provides a
standardised set of legal rules for import/export transactions but, although it has now been
adopted by a number of major trading countries, it has yet to gain global ratification and
application.

2.2.6 Effective sales agreement


It must be stressed that, in order for there to be a smooth exchange of goods for payment
with minimum dispute between seller and buyer, the seller and buyer must resolve the
following issues (in addition to goods and unit price):

the terms of delivery of the goods;


the point at which the risk in respect of goods passes from seller to buyer;
who should clear goods through customs and up to what point;
who arranges for insurance for the carriage of goods and up to what point;
what precise risks to goods need to be covered and specifically shown as covered on
the insurance document;
what commercial documents are needed and what should be shown on them; and
whether any other documents (such as inspection certificates) are needed and who is to
issue such documents.

The most common method of minimising the risk of dispute arising in the sales contract is to
incorporate Incoterms (see below). But it is not only important for the seller and the buyer to
agree to trade terminology as covered by Incoterms: it is even more important for there to be
a clear understanding on their application. It is only when these objectives have been
achieved that an effective sales agreement is created.

2.3 Trade terms in domestic and foreign trade Incoterms


and documentary credits
2.3.1 Introduction
In order for trade to prosper, buyers and sellers must be clear as to where their
responsibilities under commercial contracts begin and end. Consequently, in respect of the
transport of goods sold/purchased under these contracts, buyers and sellers will need to
know who is responsible for the payment of carriage, insurance, loading/unloading costs,
import/export taxes and other related disbursements. They will also need to have a clear
indication of the point at which such responsibilities end. Failure to establish transparently
the parameters of these responsibilities within the commercial contracts would make it
difficult for sellers to price their goods accurately and for buyers to calculate the full purchase
costs. It would also increase the number of contractual disputes between buyers and sellers,
which would have to be resolved by arbitration or through the courts, with all the cost
implications of such actions.
When looking at trade across national borders, you have the added problem that different
countries have a variety of interpretations of the same contract wording under their own
laws. Thus, in order for international trade to develop, it was necessary for a set of trade
terms to be agreed and internationally accepted. As a result, the International Chamber of
Commerce (ICC) designed International Commercial Terms, or Incoterms, which were first
published in 1936. There were, at that time, alternative trade terms that were used by some

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countries, but Incoterms are now the accepted international standard for trade terms referred
to in commercial contracts.
The latest version of Incoterms came into effect on 1 January 2011 and is titled Incoterms
2010. Full details can be found in ICC Publication No. 715E. It is worth mentioning here that
Incoterms are confined to the rights and responsibilities of parties relating to delivery of
goods sold under the contract of sale. They do not extend to other contracts, such as
insurance, carriage and payment, although the implications of the particular Incoterms used
may have links to such contracts. An example of this would be if the Incoterm CFR (cost
and freight) were to be incorporated in a contract this would imply that carriage would be
by sea and therefore that either bills of lading or sea waybill documentation would be
needed. Taking this example a stage further, if payment were to be made under a
documentary credit, the type of transport document called for by such a credit would have to
comply with the Incoterm stated otherwise, at the very least, advising of the credit or
payment thereunder may be delayed.

2.3.2 The 11 Incoterms


The new Incoterms are for use in domestic and international trade transactions. There are
11 Incoterms and each sets out the obligations of the buyer and the seller in respect of that
particular Incoterm. Any obligation that does not appear in a particular Incoterm must be the
responsibility of the buyer unless the commercial contract states otherwise.
Incoterms 2010 have been designed to mirror changes in commercial practices that have
occurred since the last revision in 2000. These included reference to electronic alternatives
to paper documentation, Cargo Insurance Clauses and also the major changes in
responsibilities of parties dealing on DAT and DAP terms basis.
For ease of understanding and structure, the 11 Incoterms are split into two groups, as
follows.

Group 1: Rules for any mode or modes of transport


These terms include:
EXW Ex Works
FCA Free Carrier
CPT Carriage Paid To
CIP Carriage and Insurance Paid
DAT Delivered At Terminal
DAP Delivered At Place
DDP Delivered Duty Paid

Group 2: Rules for sea and inland waterway transport only


These terms include:
FAS Free Alongside Ship
FOB Free On Board
CFR Cost and Freight
CIF Cost, Insurance and Freight

It can be readily seen from the above Incoterm groupings that the obligations of the seller
with regard to costs and delivery risks escalate from the minimum EXW to the maximum
DDP.
When incorporating an Incoterm into the sales contract, the parties should take care to
ensure that the term selected is appropriate to the agreed point of delivery and the mode of
transportation to be used. For example, CFR, CIF, FAS and FOB apply only if a ship is used
for delivery, ie for transportation by sea or inland waterway. All of the other terms may be
used as applicable for any mode of transportation.

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2.3.3 An Incoterms case study


Perhaps the best way of understanding the implications of Incoterms 2010 is by considering
a case study.
Let us presume that Excro Ltd of Tettun Road, Denby, UK, is exporting/selling goods to
Imcro Inc of Iowa Road, Miami, Florida, USA.
Tables 2.1 and 2.2 explain the implications for both parties, where appropriate, of the
different Incoterms that might be applied to such a transaction. The various Incoterms are
set out in a logical order, starting with that which imposes the least obligation on Excro Ltd
and ending with that which imposes the most obligations upon Excro.

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Table 2.1 Incoterms 2010 case study: Group 1 Rules for any mode or modes of transport of goods
Incoterm

Ex works
[named place,
eg Tettun
Road factory,
Denby]

Standard
ICC
Abbreviation
EXW

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Obligation of Excro Ltd (seller)

Responsibilities of Imcro Inc (buyer)

This term may be used irrespective of mode of transport selected and may
be used where more than one mode of transport used.
The seller makes the goods available for collection from Tettun Road,
Denby, by Imcro Inc. Once Imcro Inc has collected the goods, Excro Ltds
responsibility is at an end. A commercial invoice, or equivalent electronic
record or procedure (if this is customary or has been agreed between the
parties) will be provided for Imcro Inc. Goods should be suitably packed for
transportation, unless it is the norm for the goods involved to be delivered
unpacked.
The seller must at its own expense provide other documents, eg quality and
quantity certificates, which are necessary for the delivery of the goods.
The seller must provide other documents, eg quality and quantity certificates,
if required by the buyer at additional cost to the buyer.
The seller must deliver the goods on the agreed date or within the agreed
period.
The seller must give notice of the availability of the goods to the buyer to
enable the buyer to take delivery of the goods.

The buyer, Imcro Inc, pays for the goods as


required in the sale contract.
The buyer takes delivery from Tettun Road.
It makes all arrangements at its own cost to
take goods to its own premises.
It is in Imcro Incs interests to arrange
appropriate insurance to cover this journey.
Imcro Inc is responsible for obtaining
relevant export and import licences, and
completion
of
customs
formalities,
payments for the export and import duties
and taxes on the goods.
Imcro Inc is advised not to use EXW if it
cannot directly or indirectly obtain an export
licence and clearance of the goods for
export.

Incoterm

Standard
ICC
Abbreviation

Obligation of Excro Ltd (seller)

Responsibilities of Imcro Inc (buyer)

Free carrier
[named place,
eg Denby
inland
container
depot]

FCA

This term may be used irrespective of mode of transport selected and may
be used where more than one mode of transport is used.
Goods must be suitably packaged for transportation unless it is the norm for
the goods involved to be delivered unpacked or the buyer has notified the
seller of specific packaging requirements before the contract of sale is
concluded.
The seller, Excro Ltd, makes the goods available to Denby Containers at the
inland container depot or at the buyers named place of delivery. The delivery
would be incomplete until the goods had been loaded onto the carriers own
transport.
Excro Ltd must advise delivery of the goods at Denby Containers to Imcro
Inc.
Excro Ltd clears the goods for export, where applicable; it completes export
and customs requirements, including obtaining an export licence and paying
any costs, duties and taxes in respect of export.
The seller bears all risks of loss or damage to the goods until they have been
delivered to the carrier or another person nominated by the buyer.
The seller supplies the buyer with a commercial invoice or equivalent
electronic record or procedure (if this is customary or has been agreed
between the parties), and a transport document (delivery note) with proof of
delivery to Denby Containers, ie a document in accordance with the terms of
sale contract.
The seller has no obligation to buy insurance to cover loss or damage to
goods.
However, the seller must (at the buyers expense) provide the buyer, if
requested, with information that the buyer needs in order to obtain insurance
cover.
The seller must deliver the goods to the carrier or another person nominated
by the buyer at the agreed point or named place on the agreed date or within
the agreed period.
The seller must notify the buyer that the goods have been delivered to the
carrier named by the buyer to enable the buyer to take delivery of the goods.

Imcro Inc must pay for the goods as


required in the sale contract.
It must take delivery of the goods when they
have been delivered at a named point or at
the named place of delivery (ie before they
have been loaded onto any collecting
vehicle).
At its own risk and expense, Imcro Inc
makes all the arrangements for insurance
cover and for transportation of the goods to
its own premises from Denby Containers
inland container depot.
Imcro Inc should obtain any import licence
and perform any customs requirements
necessary for the import of the goods,
including paying all costs, import duties and
taxes, etc, at the place of destination.
The buyer bears all risks of loss or damage
to the goods from the time they have been
delivered, as agreed between the parties.

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Incoterm

Standard
ICC
Abbreviation

Obligation of Excro Ltd (seller)

Responsibilities of Imcro Inc (buyer)

Carriage Paid
To...[named
place of
destination]

CPT

This term may be used irrespective of mode or modes of transport selected


by the buyer.
Goods must be suitably packaged for transportation, at the sellers expense,
unless it is the norm for the goods involved to be delivered unpacked.
In this case the seller delivers the goods to the carrier named by the buyer at
the named place according to the sale contract on the agreed date or within
the agreed period.
The seller pays for the carriage of the goods to the named place for the
delivery of the goods.
The CPT term requires the seller to clear the goods for export. The seller
obtains an export licence at its own cost and pays export duties and taxes,
etc.
The risk of loss or damage to the goods, as well as any additional costs due
to events occurring after the goods have been delivered to the carrier, is
transferred from the seller to the buyer when the goods have been delivered
into the custody of the carrier.
Carrier means any person who, in a contract of carriage, undertakes to
perform or to procure the performance of carriage by rail, road, sea, inland
waterway or by a combination of such modes.
If subsequent carriers are used for the carriage to the agreed destination, the
risk passes from the seller to the buyer when the goods have been delivered
to the first carrier.
The seller provides a commercial invoice, or equivalent electronic record or
procedure (if this is customary or has been agreed between the parties),
transport document freight paid, and quality and quantity documents if
required in the sale contract.
The seller must notify the buyer that the goods have been delivered to the
carrier in accordance with the sale contract to enable the buyer to take
delivery of the goods.
The seller must deliver the goods to the carrier or another person nominated
by the buyer at the agreed point or place on the date or within the agreed
period.

The buyer pays for the goods as required in


the sale contract.
The buyers responsibilities are to:

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take delivery of goods when delivered at


the named place of destination;
arrange an import licence, pay custom
duties, taxes;
arrange and pay for cargo insurance
from the point when the goods are
delivered into the custody of the first
carrier.
The buyer is also responsible for the cost of
transportation of the goods from the named
place of destination to the buyers
warehouse.
The buyer bears all risks of loss or damage
to the goods from the time they have been
delivered at the named place.

Incoterm

Standard
ICC
Abbreviation

Obligation of Excro Ltd (seller)

Responsibilities of Imcro Inc (buyer)

Carriage and
Insurance
Paid To...
[named place
of destination]

CIP

This term may be used irrespective of mode or modes of transport selected


by the buyer.
The seller has the same obligation as under CPT but with the addition that it
has to arrange and pay for insurance of the goods against the risk of loss or
damage to the goods during the carriage, complying at least with minimum
cover as provided by Clause (C) of the Institute of Cargo Clauses or any
similar clauses.
The insurance must cover the invoice value plus 10%, in the currency of the
contract.
It is the sellers obligation to clear the goods for export.
The seller must obtain an export licence and other necessary documents for
export of the goods, if required, pay custom duties and taxes.
The seller provides a commercial invoice, or equivalent electronic record or
procedure (if this is customary or has been agreed between the parties), an
appropriate transport document (clean bill of lading) freight paid, and cargo
insurance policy.
The goods must be packed appropriately for the export purpose.
The seller must deliver the goods to the carrier or another person nominated
by the buyer at the agreed point or named place on the agreed date or within
the agreed period.
The seller must notify the buyer that the goods have been delivered to the
carrier named by the buyer to enable the buyer to take delivery of the goods.

The buyer pays for the goods as agreed in


sale contract.
The buyer must take delivery of transport
and other documents as agreed in the sale
agreement.
The buyer must take delivery of the goods
at the named place of destination.
The buyer is responsible for paying for the
import licence, import duties and taxes. It
must clear the goods for import and pay the
cost of transportation from the port of
destination to its (importers) premises.

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Incoterm

Delivered At
Terminal...
[named
terminal at
port or place
of destination]

Standard
ICC
Abbreviation
DAT

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Obligation of Excro Ltd (seller)

Responsibilities of Imcro Inc (buyer)

This term may be used irrespective of mode or modes of transport selected


by the buyer.
The seller fulfils its obligation to deliver when the goods are unloaded and
placed at the disposal of the buyer at the named terminal at the named port
or place of destination.
The terminal includes any place, whether covered or not, such as a quay,
warehouse, container yard or road, rail or air cargo terminal.
The seller bears all risks of loss or damage to the goods involved in bringing
the goods to the terminal at the named port or place of destination, and the
costs of unloading.
The sellers obligations are to obtain an export licence and other necessary
official documents required for export purposes.
The seller has to bear all risks and costs including duties, taxes and other
charges for export.
The seller provides a commercial invoice, or equivalent electronic record or
procedure (if this is customary or has been agreed between the parties),
appropriate transport document freight paid, insurance policy or other
documents, as agreed in the sale contract.
The seller will provide at its own risk and expense additional quality and
quantity certificates, if required under the sale contract.
Goods will be suitably packaged for transportation at the sellers expense,
unless it is the norm for the goods involved to be delivered unpacked.

The buyer pays for the goods as required in


the sale contract.
The buyer is responsible for taking delivery
of the goods from the named terminal.
The buyer must obtain an import licence at
its own risk and expense, pay customs
duties and taxes and bear the cost of
loading
at
the
named
terminal,
transportation to and unloading at the place
of destination.

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Incoterm

Delivered At
Place [named
place of
destination]

Standard
ICC
abbreviation
DAP

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Obligation of Excro Ltd (seller)

Responsibilities of Imcro Inc (buyer)

This term may be used irrespective of mode or modes of transport selected


by the buyer.
Under this term the seller fulfils its obligations to deliver when the goods have
been delivered at the named place and the goods put at the disposal of the
buyer on the vehicle/container ready for unloading.
DAP requires the seller to clear the goods for export and obtain an export
licence at its own risk and expense; it also requires the seller to pay export
duties and taxes, etc.
The seller procures a contract for the carriage of the goods, including
loading and unloading at the place of destination.
The term DAP may be used for any place named by the buyer, including
that of the country of the exporter.
Therefore, it is of vital importance that the place in question must be clearly
defined by naming the place and the Incoterm in the sale contract.
Goods will be suitably packaged for transportation unless it is the norm for
the goods involved to be delivered unpacked.
The seller provides the quality and quantity certificates at its own risk and
expense, if required in the sale contract.
The seller bears all the risks of loss or damage to the goods until they have
been delivered to the carrier named in the sale contract.
The seller must notify the buyer that the goods have been delivered to the
carrier named by the buyer.
The seller provides a commercial invoice, or equivalent electronic record or
procedure (if this is customary or it has been agreed between the parties), an
appropriate transport document, insurance policy and quality and quantity
certificates, as agreed in the sale contract.

The buyer pays for the goods as required in


the sale contract.
The buyer must take delivery of the transport
document.
The buyer is required to obtain delivery of the
goods at the place of destination, as agreed
in the sale contract, to bear the cost of
unloading, and to pay customs duties, import
licence fees, import duties and taxes, etc.
The buyer must pay all costs relating to the
goods from the time they are delivered at the
named place of destination to their arrival at
the buyers warehouse.
The changes to Incoterms should make this
term more useful for container traffic, where
goods are sold on a delivered basis.

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Incoterm
Delivered
Duty Paid
[named place
of destination]

Standard ICC
abbreviation
DDP

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Obligation of Excro Ltd (seller)

Responsibilities of Imcro Inc (buyer)

This term may be used irrespective of mode or modes of transport selected


by the buyer.
The seller fulfils its obligation to deliver when the goods have been made
available at the named place of destination in the country of importation.
The seller has to bear the risks and all costs in respect of clearing the
goods for export, including the export licence, export duties and taxes.
The seller is also obliged to pay import duties, taxes and other charges
incurred in delivering the goods cleared for importation to the named place
of destination.
The EXW term represents the minimum obligation upon the seller. DDP
represents the maximum obligation upon the seller and the minimum
obligations of the buyer.
This term should not be used if the seller is unable directly or indirectly to
obtain the import licence.
If the parties wish to exclude from the sellers obligation some of the costs
payable upon importation of the goods (such as value added tax (VAT)),
this should be made clear by adding words to this effect: Delivered duty
paid, VAT unpaid (. . . named place of destination).
Goods will be suitably packaged for transportation unless it is the norm for
the goods involved to be delivered unpacked.
The seller bears all the risks of loss or damage to the goods until they have
been delivered to the carrier named in the sale contract.
The seller must notify the buyer that the goods have been delivered to the
carrier named by buyer.
The seller provides a commercial invoice, or equivalent electronic record or
procedure (if this is customary or has been agreed between the parties), as
well as appropriate transport document, insurance policy, and quality and
quantity certificates, as agreed in the sale contract.
The seller must give notice to the buyer that the goods have been delivered
to the carrier to enable the buyer to take delivery of the goods.
The seller must deliver the goods by placing them at the disposal of the
buyer on arrival, ready to be unloaded at the agreed point or the named
place of destination on the agreed date or within the agreed period.

The buyer pays for the goods as required in


the sale contract.
The buyer must take delivery of the goods
when they have been delivered at the
named place of destination.
The EXW term represents the maximum
obligation upon the buyer. DDP represents
the maximum obligation upon the seller and
the minimum obligation upon the buyer.

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Table 2.2 Incoterms 2010 case study: Group 2 Rules for transport of goods by sea and inland waterway
Incoterm
Free
Alongside
Ship (named
port of
shipment)

Standard ICC
abbreviation
FAS

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Obligation of Excro Ltd (seller)

Responsibilities of Imcro Inc (buyer)

This term is to be used only for sea or inland waterway transport of goods.
Free Alongside Ship means the seller places or delivers the goods
alongside the vessel, eg on the quay or on a barge nominated by the buyer
at the named port of shipment.
The seller fulfils its obligation to deliver when the goods have been placed
alongside the vessel on the quay or in lighters at the named port of
shipment.
The seller provides export-quality packing of goods and bears the cost of
transport of goods from its warehouse or factory to the port of shipment for
loading on the ship.
If the goods are in containers the seller will provide the goods to the carrier
at a terminal and not alongside the vessel. In such cases the term FCA
would be more appropriate.
The sellers obligations are to:

The buyer pays for the goods as required in


the sale contract.
The buyer must accept the proof of delivery
or transport document as agreed in the sale
contract.
The buyers obligations are to:

clear the goods for export, if required;

obtain at its own risk and expense an export licence and other legal
documents required for export of the goods;

pay export customs duties and taxes;

provide a commercial invoice or electronic record or procedure (if this


is customary or has been agreed between the parties), and a clean bill
of lading received for shipment;

give notice to the buyer that the goods have been delivered or placed
alongside the vessel at the named port of shipment;

deliver the goods on the agreed date or within the agreed period.

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give sufficient notice of the vessel


name, loading point and delivery time
within the agreed period;

take delivery of the goods when


delivered at the port of destination;

obtain an import licence, at own risk


and expense;

bear all the freight charges, unloading


costs, import duties and taxes, if
applicable, and arrange for clearance
of goods from the port of destination;

bear the risks of loss or damage to the


goods from the moment the goods are
placed on the quay alongside the
vessel.

Incoterm
Free On
Board
[named port of
shipment]

Standard ICC
abbreviation
FOB

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Obligation of Excro Ltd (seller)

Responsibilities of Imcro Inc (buyer)

This term is to be used only for transport of goods by sea or inland


waterway.
The FOB term requires the seller to clear the goods for export, and to pay
export duties and taxes, and loading charges.
The sellers obligations are to:

The buyer pays for the goods as required in


the sale contract.
The buyer must take delivery of the
transport document.
The buyer has to obtain at its own risk and
expense an insurance policy to cover the
risks of loss or damage to the goods from
the point when the goods have been
delivered on board the named ship at the
port of shipment.
The buyer has to arrange for payment of
freight for the cargo, unloading costs and
other import customs duties and taxes, etc,
at the port of destination.
The buyer is responsible for the clearance
of the goods from the port of destination.

deliver the goods on board the ship (this requirement is fulfilled when
the goods have passed over the ships rail at the named port of
shipment);

obtain an export licence, if required;

obtain, at its own risk and expense, quality and quantity certificates, if
required in the sale contract;

provide the buyer with a commercial invoice, or an electronic record or


procedure (if this is customary or had been agreed between the
parties), and a clean on board bill of lading freight to pay;

give notice to the buyer that the goods have been delivered on board
the named ship at the port of shipment.

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Incoterm
Cost and
Freight
[named port of
destination]

Standard ICC
abbreviation
CFR

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Obligation of Excro Ltd (seller)

Responsibilities of Imcro Inc (buyer)

This term is to be used only for transport of goods by sea or inland


waterway.
The seller fulfils its obligation when the seller has delivered the goods on
board the vessel.
CFR requires the seller to clear the goods for export, obtain an export
licence, pay export duties and taxes, and bear the risk of loss or damage to
goods until the goods have been delivered on board the vessel.
The seller must pay the costs and freight necessary to take the goods to the
named port of destination.
The risk of loss or damage to the goods, as well as any additional costs due
to events occurring after the time the goods have passed the ships rail and
have been delivered on board the vessel, is transferred from the seller to
the buyer.
The seller provides a commercial invoice, or an electronic record or
procedure (if this is customary or has been agreed between the parties), a
clean on board bill of lading freight paid, and quality and quantity
certificates if required in the sale contract.
The seller must also give notice to the buyer that the goods have been
shipped on board the ship at the port of shipment.

The buyer pays for the goods as required in


the sale contract.
The buyer takes delivery of the goods when
they arrive at the port of destination.
The buyer is responsible for:

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obtaining an import licence

arranging and paying for the insurance


of the goods;

paying import duties and taxes;

arranging clearance of goods;

paying transportation costs from the


port of destination to the buyers
premises, including unloading costs.

Incoterm
Cost,
Insurance and
Freight
[named port of
destination]

Standard ICC
abbreviation
CIF

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Obligation of Excro Ltd (seller)

Responsibilities of Imcro Inc (buyer)

This term is to be used only for sea or inland waterway transport of goods.
The seller has the same obligation as under CFR but with the addition that it
has to procure marine insurance against the buyers risk of loss or damage
to the goods during carriage.
The seller contracts for insurance and pays the insurance premium. CIF
requires the seller to clear the goods for export and pay duties and taxes.
Cover should comply with the minimum provision of Clause (C) of Institute
of Cargo Clauses (LMA/IUA). It should cover 110% of the contract value in
the currency of the contract.
The seller provides a commercial invoice, or an electronic record or
procedure if this has been agreed between the parties, quality and quantity
certificates if required in the sale contract, a marine insurance policy, a
clean on board bill of lading freight paid or prepaid.
The seller must deliver the goods to the ship nominated by the buyer at the
port of shipment on the date or within the period agreed in the sale contract.
The seller must give notice to enable the buyer to arrange to take delivery
of the goods when they arrive at the port of destination.

The buyer pays for the goods as required in


the sale contract.
The buyer must take delivery of the
transport document(s).
The buyer must take delivery of the goods
when they arrive at the port of destination.
The buyer is responsible for acquiring an
import licence, paying import duties and
taxes, clearance of goods from the port of
destination, and transportation of goods
from the port of destination to the buyers
premises.

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2.3.4 Implications of Incoterms 2010 for documentary credits


The case study encapsulates how responsibilities, and therefore costs, are transferred from
the buyer to the seller and vice versa, depending upon the Incoterm used.
When buyers agree commercial contracts with sellers, with payment due under a
documentary credit, the parties must take into account the Incoterm being used. There is
obviously no point in requesting an air waybill as one of the documents to be presented by a
beneficiary under a documentary credit if the Incoterm clearly identifies that the mode of
transport is by sea. Similarly, a buyer should not request an insurance document from the
seller if it is not the sellers responsibility to insure the goods under the CFR Incoterm, for
example. Such errors can only delay the issuance, advising or payment under a
documentary credit and can also have a financial cost, in the form of additional bank
charges, and possible impact on cash flow. They may also affect the viability of any future
trading relationship between the seller and buyer.
Sellers agree to payment under documentary credits because of the assurance from a bank
that payment will be made, provided that the documentation presented conforms with the
requirements of the relevant documentary credit, irrespective of whether the buyer can afford
to pay at that time. A seller should therefore, at the outset, carefully scrutinise the terms of a
documentary credit, ensuring that it conforms with the Incoterm quoted in the commercial
documentation and can therefore be met.
Failure to do so, as mentioned above, can have damaging consequences.

2.3.5 Electronic developments


Incoterms 2010 covers the use of modern technology in using electronic equivalents of
documents, in addition to the more traditional paper-based forms.

2.4 Methods of payment


By agreeing to buy goods from the seller, the buyer undertakes to pay for them on delivery
or as otherwise agreed in the sales contract. This payment obligation forms part of the sales
contract itself. In order to perform its payment obligation towards the seller, the buyer
concludes legally separate agreements with its bank, and this section provides an overview
of the main methods of payment used for export sales.

2.4.1 Methods of payment


2.4.1.1 Payment in advance
A buyer may make payment to a seller in advance, before the goods are shipped. The
reasons for adopting this method may be summarised as follows:

The seller may be unwilling to ship goods to the country of the buyer for reasons of
country risk.
The buyer may wish to encourage the seller into a long-term trade relationship.
The seller may not have finance with which to buy or prepare the goods for shipment.
The buyer feels comfortable with its relationship with the seller and with both credit and
country risk.

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2.4.1.2 Open account trading


When business is conducted on open account terms, the seller dispatches goods to the
buyer and, at the same time, sends the buyer an invoice (together with other appropriate
documents) for payment on an agreed date or at the end of an agreed period. A typical
example of an agreed period is for payment to be made at the end of the month following the
month of shipment. The buyer makes arrangements to pay on the relevant date according to
the terms of the agreement and, for this purpose, may use any appropriate payment method,
such as an international bank transfer or cheque.
Open account trading is most commonly used in situations in which the two companies
concerned have a long-established trading relationship. For example, transactions between
sellers and buyers in countries in Western Europe and the USA are often conducted on this
basis. In some cases, sellers also use the procedure as a way to secure contracts with
parties in a number of developing countries in which documentary credit terms have applied
in the past.
Open account trading offers several advantages: in particular, it is simple to administer and
involves minimal banking fees or other costs. The system is particularly attractive to buyers
because it affords them the opportunity of examining the goods before they have to make
payment. Sellers using open account methods obtain no security for payment and have to
rely entirely on the creditworthiness and good faith of the buyer. This may be contrasted with
the situation under documentary credits and documentary collections, in which the seller
obtains the security of a bank undertaking or a bank retaining control of the documents
relating to the merchandise. The only involvement by banks in open account trading is in the
transfer of funds from buyer to seller.

2.4.1.3 Documentary collection


Under a documentary collection, the seller ships the goods to the buyer in the importing
country. At the same time, it hands over to its own bank documents relating to the goods and
their shipment. Examples of common documents are bills of lading, commercial invoices,
cargo insurance documents and certificates of origin. The bank forwards these to a
correspondent bank in the buyers country, which may be the bankers of the buyer, to handle
the documents in accordance with the instructions of the seller, as instructed by the sellers
bank in its collection instruction.
Under this procedure, the banks channel the documents, but they do not themselves give
any payment undertaking. This solution offers less security than a documentary credit, but,
in return, the costs are lower. The solution nonetheless gives the seller a measure of
security for payment. The sellers interest is best served where the buyer is not able to
obtain possession of the goods without the presentation of shipping documents that are sent
through the banking system by the seller. The full security of a documentary collection
applies only if the transport document is a negotiable bill of lading and/or if the goods are
consigned to the bank in the importing country, with the consent of that bank.
If the seller has agreed to supply the goods on short-term credit, it can stipulate that the
documents be handed over against the buyers acceptance of a bill of exchange or signature
on a promissory note. The seller may be able to discount the bill or note in return for an
immediate payment. The international rules governing collections are the ICC Uniform Rules
for Collections, Publication No 522.

2.4.1.4 Documentary credits


Documentary credits constitute the main subject matter of this book and their features and
operation are accordingly described in detail in other chapters. The documentary credit
structure provides the seller with an independent bank undertaking of payment. The buyer,
on the other hand, knows that payment will not be made unless the seller presents

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documentary evidence covering the goods and their shipment. The role of a documentary
credit as a method of payment is discussed in Section 2.4.3 of this chapter.

2.4.2 Bills of exchange/promissory notes as instruments of negotiation


and as instruments for avalisation or forfaiting in collections and
documentary credits
Negotiable instruments, such as bills of exchange (also known as drafts) and promissory
notes, are a frequent feature of export sales throughout the world. They are employed both
as a means of extending credit to the buyer usually on a short-term basis and as a
device to provide the seller with a negotiable security for payment.
For example, a seller in one country may contract to ship machine parts to a buyer in
another country. Payment is to take place 60 days from the date of shipment. The seller
dispatches the goods and sends the buyer the shipping documents, which may include a bill
of exchange drawn on the buyer payable to the seller at the end of the 60-day period and
signed by the seller as drawer.
The bill of exchange orders the drawee (the buyer) to pay the agreed sum on the stipulated
date. The buyer evidences acceptance of the order to pay by endorsing it and returning it to
the seller (the specific method of acceptance, ie signature on the front or back, the use of
acceptance stamps and other information contained on the draft will be determined by local
law or bank regulation). The buyers acceptance constitutes an unconditional payment
undertaking by the acceptor (the buyer) who is thereby obligated to pay the instrument at
maturity independently of its obligations under the underlying sales agreement. The rights of
the payee are fully negotiable and can be transferred to another person by endorsing and
handing over the instrument. This means that the seller may be able to obtain an immediate
payment before the maturity date by discounting the instrument with a bank or other
institution that is willing to do so.
The above practice is commonly employed in foreign trade and is frequently used for sales
between countries in Asia. The discounting of bills is an important activity for many banks in
that region, which offer trade-financing services. The banking facility offered may be referred
to as a trade bills or acceptance bills service, or some similar term. Although bills of
exchange are the type of negotiable instrument most frequently encountered in international
trade, promissory notes may also be used. These have a similar effect, but they are drawn
up and signed directly by the person undertaking provide a means whereby a payment
undertaking can be detached from any underlying commercial or financial contract and
issued in the form of an independent document that can be transferred from one person to
another.
Cheques, bills of exchange and promissory notes provide the main examples of negotiable
instruments. The payment undertaking contained in these documents can also be
guaranteed by a third party, such as a bank. Negotiable instruments drafts in particular
play a key role in the payment mechanism under many documentary credits. This is
because, in some cases, the credit is made available by acceptance or negotiation of a draft.

2.4.2.1 Legal requirements governing negotiable instruments


Negotiable instruments and the rights of parties to them are governed in most countries by
detailed legislation. This varies from one country to another, although a set of international
conventions drawn up in Geneva in the 1930s provide a common form for a large number of
European systems. Britain applies its own legislative rules, which have influenced other
countries, the systems of which are based on English legal principles. In the USA, the
Uniform Commercial Code provides detailed law on negotiable instruments. These sources
provide the main sets of rules on negotiable instruments. In addition, the UN Commission on

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International Trade Law (UNCITRAL) has developed a model law for international negotiable
instruments.
Negotiable instruments have special legal effects that concern the rights and obligations of
third parties, as well as the parties who originally created the instrument. For this reason,
documents have to conform to strict formal requirements in order to be legally accepted as
negotiable instruments. These requirements are established in national legislation and in the
applicable international conventions. Typically, the requirements include written form,
signature and the need for the payment undertaking or order to be expressed in
unconditional terms.
Under a bill of exchange, the drawer writes and signs the bill instructing the drawee a bank,
in the case of bills under documentary credits to pay a specified sum of money either to a
third party or to the drawer (the payee). The bill may either call for payment on presentation
(a sight draft) or on a specified future date or a determinable event (a tenor or usance
draft).
The payment order must be unconditional. A tenor draft may be presented to the drawee for
acceptance. The drawee accepts the draft by signing either on the back or front, according
to local custom and law. Acceptance constitutes an unconditional undertaking to pay the
draft at maturity. The payee and subsequent holders can negotiate (discount) the bill. This
means that they can sell their rights in the bill to a third party, who then becomes the holder.
In return for making immediate cash payment, the party buying the bill often pays a
discounted amount, which is less than the face value of the bill. This difference between the
amount paid and the full amount payable on the bill at a later date represents the buyers
interest charge, opportunity costs and assumption of risk.
Drafts are normally made payable to a particular party and, if so, are transferred by
endorsement and delivery. (The latter is the legal term for the physical handing over of the
document.) But they can also be made payable to bearer that is, the person duly holding
the bill at any particular time. In this event, they do not name the bearer and they are
transferred by delivery alone.
The legal structure of a cheque is similar to that of a bill of exchange. Unlike a bill of
exchange, however, a cheque must be drawn on a bank and it is payable upon presentation
to that bank.
A promissory note also has most of the same features as a bill of exchange. The essential
difference is that it is not an order to another party to pay, but a direct promise of payment by
the party who signs the note (the maker). In the same way as the bill of exchange, it must
be drawn up in unconditional terms.

2.4.2.2 Avalisation
In some countries, a bank or other party can guarantee payment of a draft or promissory
note by giving its aval. By signing the note in this way on the back, the bank or other
organisation commits itself unconditionally to pay should the maker or drawee default. The
practice is well established by legislation in most European countries in particular, those
that have adopted the Geneva Convention but there is no precise equivalent in legal
systems based on English law.
The benefit of an aval is transferred automatically when the note is negotiated. Accordingly,
the use of an aval is a particularly convenient way of dealing with commercial paper
underwritten by banks in the secondary markets. Each person in the chain can claim against
previous holders and the drawer, if the draft is not honoured, whether or not it has been
accepted. A party negotiating a draft thus acquires a right of recourse, in case of dishonour,
against the party endorsing the draft and to previous endorsers. The mere drawing up of a
bill of exchange does not oblige the drawee to pay. The drawee is bound by the bill only
upon acceptance.

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2.4.2.3 Holder in due course


A vital concept in enforcing payment under negotiable instruments is that of the holder in due
course. As mentioned above, such instruments are legally separate from any underlying
transaction. Holders acquire their right to claim payment from endorsement and delivery of
the instrument. Their rights are not generally affected by disputes on the rights and wrongs
of any commercial contract that led to the instrument being granted.
To benefit fully from the protection, the holder must be a holder in due course. This means
that the holder must have taken the instrument in good faith without notice of any defect in
its title. Under English law, for instance, the holder is fully protected only if, in addition, they
gave valuable consideration normally money payment for the instrument. Suppose a thief
steals a bill of exchange and forges an endorsement on it: under English law, the drawer and
endorsers prior to the forged endorsement are no longer liable to subsequent holders. Later
endorsers may still be liable to subsequent holders. Many other legal systems, including
those covered by the Geneva Convention, consider that the chain of title is not broken by the
forgery provided that the subsequent holder takes possession without notice of the theft.

2.4.2.4 Dishonour
All legal systems establish precise formalities to be observed in case of dishonour (ie nonpayment). English law provides for notice to be given to all parties affected. Many other
countries provide a procedure called protest. Where this applies, the act of non-payment
has to be officially established and stamped on the instrument by a public notary.

2.4.2.5 Forfaiting
The term forfaiting describes the formal arrangement or agreement between a seller and a
lender by means of which the seller is to receive payment for export receivables from the
lender, without recourse on the seller against the security of bills of exchange avalised
(guaranteed by a bank) acceptable to the lender. This device also sometimes referred to
as a forfait financing has a number of applications. Its single greatest use is for the
medium-term financing of exports of capital goods and equipment in cases in which official
export credit support is not available. It provides a flexible means whereby a bank or other
institution in the sellers country can extend credit to the buyer, backed by the guarantee of a
bank in the importing country.
Essentially, forfaiting works as follows.
The seller and buyer agree the terms of sale, including the granting of medium-term credit to
the buyer for example, over a period of five years with quarterly repayments. At the same
time, the seller checks with the forfaiter a bank or specialist institution in its own country
that finance will be available for the transaction. The buyer accepts a series of drafts or signs
a set of promissory notes corresponding to the instalment dates for repayment of the agreed
credit. These bills or notes are guaranteed by the buyers bank. This takes the form either
ofa separate guarantee or of a special endorsement on the bill or note, known as an aval.
(Rights to payment under documentary credits are also sometimes accepted as security in
forfaiting deals.)
The seller presents these bills or notes to the forfaiter. The latter buys them from the seller
for an immediate discounted cash payment. The discounted sum received by the seller
corresponds to the sale price agreed with the buyer. The difference between that amount
and the total for which the bills or notes have been drawn up corresponds to the interest
payment to be made by the buyer in return for being granted credit terms. The forfaiter
makes its profit on the transaction out of the difference between the discounted price paid
and the total sum payable to the forfaiter under the bills or notes. The forfaiter can either
hold onto the bills or notes and present them for payment on the maturity dates, or sell them
in the secondary markets that exist for trading in such instruments.

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An essential element of forfaiting is that the forfaiter buys the bills or notes from the seller
without recourse to the seller. This means that the forfaiter and not the seller bears the loss if
the buyer and the guaranteeing bank default or if, for any reason, funds cannot be
transferred out of the buyers or guaranteeing banks country. Moreover, the seller will have
obtained a commitment from a forfaiter before concluding its deal with the buyer.
Accordingly, the seller obtains a similar type of bank undertaking to that obtainable under a
confirmed irrevocable documentary credit, but in a situation in which longer-term credit is
being granted to the buyer.

2.4.3
The documentary credit as a method of payment, and the
autonomy of documentary credits (the independence principle)
The principal four methods of payment outlined in Section 2.4.1 above may be summarised
briefly as follows.

Advance payment

Open account

The seller does not dispatch goods before receiving payment.


The buyer sends payment before goods are dispatched.
The seller dispatches goods before receiving payment.
The buyer pays after dispatch of goods and often after receipt of payment on the
sale of goods.

Documentary collection

The seller dispatches goods before receiving payment.


The buyer pays upon receipt of shipping documents covering the goods, or on other
terms stipulated in the collection instruction.

In all of the above cases, either the buyer or the seller has to depend upon the good faith
and performance of the other for the smooth exchange of goods for payment. In contrast, the
documentary credit provides the buyer and seller with independent assurance in the
exchange of goods for payment. The seller has the irrevocable undertaking of the issuing
bank (and the separate irrevocable undertaking of the confirming bank, in the case of a
confirmed documentary credit) that it will receive payment, provided the following conditions
are satisfied:

The seller presents the documents as stipulated in the documentary credit.


The terms and conditions of the documentary credit are complied with.

The issuing bank or confirming bank undertaking is addressed directly to the seller
(beneficiary) and is a legally binding undertaking. The issuing bank or confirming bank
effects payment without recourse to the seller (beneficiary), which means that the payment is
final and there can be no claim upon the seller (beneficiary) for refund or repayment. The
buyer, as applicant of the documentary credit, has the undertaking of the issuing bank that
no payment will be made under the documentary credit unless the beneficiary has:

presented the documents as stipulated in the documentary credit; and


complied with the terms and conditions of the documentary credit in the presentation of
documents.

The applicants mandate to the issuing bank is on the above basis. In view of the comfort
provided to both the beneficiary and the applicant by the independent undertaking of a bank,
documentary credits are often a preferred method of payment in international trade.

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The autonomy of the documentary credit has been upheld in the courts of many countries.
As a general rule, courts in most countries are reluctant to interfere with the concept of the
autonomy of documentary credits and any party seeking to obtain an injunction preventing a
bank from honouring its obligations under a documentary credit would have an onerous task
in convincing the court of many matters even including that there has been fraud and that
the granting of an injunction is the correct course to follow in the circumstances. It will be
seen that the autonomous nature of documentary credits is:

articulated in UCP 600;


made clear in the wording of the undertaking given by banks to a beneficiary in the
documentary credit itself; and
repeatedly upheld in courts.

The autonomy of documentary credits is evidenced in the following articles of UCP 600, the
extracts and texts of which are shown below.

2.4.3.1 Article 2 definitions


Credit means any arrangement, however named or described, that is irrevocable and
thereby constitutes a definite undertaking of the issuing bank to honour a complying
presentation.
Complying presentation means a presentation that is in accordance with the terms and
conditions of the credit, the applicable provisions of these rules and international standard
banking practice. Attention is drawn to the definition of complying presentation and the fact
that honour (ie to pay at sight, to incur a deferred payment undertaking and pay at maturity
or to accept a draft drawn by the beneficiary and pay at maturity) or negotiation is made
against a presentation that is in accordance with the terms and conditions of the
documentary credit, the applicable provisions of UCP 600 and international standard
banking practice. It should be emphasised that this is the basic condition of all documentary
credits and there are no other conditions.

2.4.3.2 Article 4 credits v contracts


a.

A credit by its nature is a separate transaction from the sale or other contract on which it
may be based. Banks are in no way concerned with or bound by such contract, even if
any reference whatsoever to it is included in the credit. Consequently, the undertaking of
a bank to honour, to negotiate or to fulfil any other obligation under the credit is not
subject to claims or defences by the applicant resulting from its relationships with the
issuing bank or the beneficiary. A beneficiary can in no case avail itself of the
contractual relationships existing between banks or between the applicant and the
issuing bank.

An issuing bank should discourage any attempt by the applicant to include, as an integral
part of the credit, copies of the underlying contract, proforma invoice and the like. Attention is
drawn to sub-article 4(a) above, which provides indisputable evidence that sales and other
contracts have nothing to do with the credit transaction, which is separate. Sub-article 4(a)
also protects the independence of the issuing banks undertaking further by indicating that
such undertaking is not, in any way, affected by the applicants relationship with either the
issuing bank or the beneficiary. Sub-article 4(b) enforces the position that it should be the
contents of the documentary credit to which the beneficiary is required to adhere and that
any conditions in the sales or other contract that are pertinent to the actions of the
beneficiary must be incorporated into the documentary credit and must not form part of any
integral attachment.

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2.4.3.3 Article 5 Documents v goods, services or performance


Banks deal with documents and not with goods, services or performance to which the
documents may relate. Article 5 states, in simple and clear language, that banks deal with
documents and are not concerned with goods, services or performance to which the
documents may relate.

2.4.3.4 Article 7 Issuing bank undertaking


a.

Provided that the stipulated documents are presented to the nominated bank or to the
issuing bank and that they constitute a complying presentation, the issuing bank must
honour if the credit is available by:
i. sight payment, deferred payment or acceptance with the issuing bank;
ii. sight payment with a nominated bank and that nominated bank does not pay;
iii. deferred payment with a nominated bank and that nominated bank does not incur
its deferred payment undertaking or, having incurred its deferred payment
undertaking, does not pay at maturity;
iv. acceptance with a nominated bank and that nominated bank does not accept a draft
drawn on it or, having accepted a draft drawn on it, does not pay at maturity;
v. negotiation with a nominated bank and that nominated bank does not negotiate.

b.

An issuing bank is irrevocably bound to honour as of the time it issues the credit.

c.

An issuing bank undertakes to reimburse a nominated bank that has honoured or


negotiated a complying presentation and forwarded the documents to the issuing bank.
Reimbursement for the amount of a complying presentation under a credit available by
acceptance or deferred payment is due at maturity, whether or not the nominated bank
prepaid or purchased before maturity. An issuing banks undertaking to reimburse a
nominated bank is independent of the issuing banks undertaking to the beneficiary.

2.4.3.5 Article 8 Confirming bank undertaking


a. Provided that the stipulated documents are presented to the confirming bank or to any
other nominated bank and that they constitute a complying presentation, the confirming
bank must:
i.
ii.
iii.
iv.

honour, if the credit is available by


sight payment, deferred payment or acceptance with the confirming bank;
sight payment with another nominated bank and that nominated bank does not pay;
deferred payment with another nominated bank and that nominated bank does not
incur its deferred payment undertaking or, having incurred its deferred payment
undertaking, does not pay at maturity;
v. acceptance with another nominated bank and that nominated bank does not accept
a draft drawn on it or, having accepted a draft drawn on it, does not pay at maturity;
vi. negotiation with another nominated bank and that nominated bank does not
negotiate.
vii. negotiate, without recourse, if the credit is available by negotiation with the
confirming bank.
b.

A confirming bank is irrevocably bound to honour or negotiate as of the time it adds its
confirmation to the credit.

c.

A confirming bank undertakes to reimburse another nominated bank that has honoured
or negotiated a complying presentation and forwarded the documents to the confirming
bank. Reimbursement for the amount of a complying presentation under a credit
available by acceptance or deferred payment is due at maturity, whether or not another
nominated bank prepaid or purchased before maturity. A confirming banks undertaking

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to reimburse another nominated bank is independent of the confirming banks


undertaking to the beneficiary.
d.

If a bank is authorised or requested by the issuing bank to confirm a credit but is not
prepared to do so, it must inform the issuing bank without delay and may advise the
credit without confirmation.

Note especially the reiteration of the liabilities of the issuing bank and the confirming bank:

to honour, provided that the stipulated documents are presented and that the terms and
conditions of the documentary credit have been complied with (sub-articles 7(a)(iv),
8(a)(i)(ae); and for a confirming bank, to negotiate without recourse (sub-article
8(a)(ii)).

2.5 Questions
1. What are the essential issues upon which the buyer and seller should agree in a sales
agreement?
2. Why is it important that both buyers and sellers understand the three-letter Incoterm
abbreviations used in their sale agreement?
3. If they do not understand them, where and how would you direct them to find out their
meaning?
4. Are there any Incoterms that you do not fully understand?
5. Who is not involved in a sales agreement?
6. Can you recall the four methods of payment? Can you recall the basic features of each
method?
7. Can you recall the parties to a bill of exchange?
8. What is an aval?
9. What is forfaiting?
10. Can you recall why documentary credits are a preferred method of payment in
comparison with advance payment, open account or documentary collection?
11. Can you quote the relevant UCP articles to beneficiaries and applicants that will show
that you, as a documentary credit specialist, are not concerned with the sales
contract/goods/services or performance?
12. What are possibly the only grounds upon which courts should uphold an application for
an injunction?

ifs School of Finance 2010

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