Documentary Credits

XIII. As we have already seen, a bill of exchange might not be honoured, or the order might be cancelled. So, a letter of credit is a more binding method of payment.

A bill of exchange might not be honoured, as we saw at 9.6.6, or the order might be cancelled. But a letter of credit is a more binding method of payment.

Letters of credit (L/C) have been used for centuries in one form or another to enable travellers to obtain money from overseas banks. The process begins with the traveller asking his bank to open a letter of credit in his favour, i.e. for him, for a specific amount which is debited to his account. The bank then drafts a letter which will allow him to draw money on overseas banks with whom the home bank has an agreement. The foreign banks will then draw on the home bank to recover their payments.

This method of obtaining money has now generally been replaced by Euro cheques, traveller's cheques, and credit cards. But documentary credits - letters of credit accompanied by documents -are widely used in the import/export trade.

There are two types of documentary credit: revocable, i.e. those that can be cancelled, and irrevocable, i.e. those that cannot be cancelled. The second type is more common in overseas business transactions.

The stages in an irrevocable documentary credit transactionare as follows:

1. The importer agrees to pay by documentary credit, and tells his bank that he will do so by completing an application form (see 9.8.2) which names the exporter and states: the amount to be paid; the documents concerned; what the consignment consists of; whether the shipment is c.i.f., f.o.b., etc.; details of dispatch and any other documents involved, e.g. certificate of origin, consular invoice, certificate of quality; and the length of time the credit will be available. The availability of the credit should take account of how much time it will take to prepare and ship the goods.

2. The importer's bank will then select a bank in the exporter's country to act as its agent, and will notify them that the credit has been opened.

3. The agent bank will notify the exporter that a credit has been opened, and they may add their own confirmation, i.e. they will promise to see that the conditions of payment against the documents will be fulfilled. If they confirm the letter, the L/C is known as a confirmed credit and the agent bank as the confirming bank.

4. The exporter ships the goods before the credit expires and sends the shipping documents (bill of lading, insurance certificate, invoice, etc.) to the agent bank who check the documents against the conditions and pay him; or they may have asked him to draw a bill of exchange on them, and will discount the bill for him so that he can get his money immediately.

5. The agent bank will then send the documents and debit the importer's bank with the cost and charges, which are calculated as a percentage of the total amount of the invoice, plus an extra charge if the letter is confirmed.

6. The importer's bank then checks the documents, pays the agent bank, and sends the documents to the importer so that he can claim the goods.

N. Z. Business Machines Pty.   100, South Street, Wellington Directors: C.M. Perimann, L.F. Drozin   Telephone: [phone] Telex: 60184 BUSMAC Fax: [phone]   The Manager Date: 3 May 20— New Zealand Bank Takapuna House Takapuna Street Wellington 8   Dear Sir,   Please open an irrevocable documentary credit for £22,000 in favour of Delta Computers Ltd., England. I have enclosed your application form with all the relevant details completed. Please inform me when you have made arrangements with your agents in London. Yours faithfully,     M. Tanner N.Z. Business Machines Pty.   Encl. Application for documentary credit

The importer writes to his bank opening the credit. The bank sends him the form, which should be filled in. Study the form, take into account all minute details of it.

N. Z. Business Machines Pty. 100, South Street, Wellington Directors: C.M, Perimann, L.F. Drozin   Telephone: [phone] Telex; 60184 BUSMAC Fax: [phone]   Mr G.James Delta Computers Ltd. Bradfield Estate Date 5 May 20— Bradfield Road Wellingborough Northamptonshire NN8 4HB UNITED KINGDOM   Dear Mr James,   Thank you for replying to our enquiry of 19 April and letting us know that the C2000 computers, Cat. No. D16 are available. The terms you quoted are quite satisfactory, and you will find our order, 8815, enclosed. We have instructed our bank, New Zealand Bank, Takapuna Street, Wellington, to open an irrevocable letter of credit for £22,000 in your favour. This should cover c.i.f. shipment and bank charges, and the credit is valid until 10 June 20—. You will receive confirmation from our bank's agents Eastland Bank Ltd., 401, Aldgate, London EC 1, and you may draw on them at 60 days for the amount of the invoice. When submitting your draft, would you please enclose the following documents? Bill of lading (6 copies) Invoice c.i.f. Wellington (4 copies) A.R. Insurance Policy for £24,200 Please fax or telex us as soon as you have arranged shipment. Yours sincerely,   M. Tanner N.Z. Business Machines Pty.   Encl. Order 8815

Eastland Bank

401 Aldgate, London EC1 Telephone: [phone] (10 lines) Fax: [phone]

Chairman: Lord Seaforth Managing Director: I.P. Raimer Directors: R. Lichen M.Sc., B.A. S.D. Harrisman O.B.E., P.R.AkermannB.Sc., N.L.Renut   Delta Computers Ltd. 15 May 20— Bradfield Estate Bradfield Road Wellingborough Northamptonshire NN8 4HB   Dear Sir,   Please find enclosed a copy of the notification we received yesterday from the New Zealand Bank, Wellington, to open an irrevocable letter of credit in your favour for £22,000 which will be available until 10 June 20—. You may draw on us at 60 days against the credit as soon as you provide evidence of shipment. Would you include with the draft the following documents? Bill of lading (six copies) Commercial invoice c.i.f. Wellington (four copies) A.R. Insurance certificate for £24,200. Your draft should include our discount commission which is fivepercent, and our charges listed on the attached sheet. Yours faithfully,     P. Medway Documentary Credits Department   Enc. Irrevocable Credit No. 2/345/16

Barclays Bank International Limited 168 Fenchurch Street, London, EC3P 3HP Date 20^th July 200_ Documentary Credits Department Specimen Irrevocable credit No: FDC/2/6789 To be quoted on all drafts and correspondence
Beneficiary (ies) Speirs ans Wadley Limited, Adderley Road, Hackney, London, E.8.		Advised through
Accreditor Woldal Incorporated, PO Box 667, Broadway Hong Kong		To be completed only if applicable Our cable of Advised through Refers
Dear Sir(s) In accordance with the instructions received from The Downtown Bank & Trust Co. we hereby issue in your favour a Documentary credit for £4108 available by your drafts (say) Four thousand, one hundred and eight pounds sterling drawn on us   at sight for the 100% c.i.f. invoice value, accompained by the following documents:   1. Signed Invoice in triplicate. 2. Full set of clean on board Shipping Company’s Bill of Lading made out to order and blank endorsed, marked “Freight Pay” and “Notify Woldal Inc., PO Box 667, Broadway, Hong Kong”. 3. Insurance Policy or Certificate in duplicate, covering Marine and War Risks up to buyer’s warehouse, for invoice value of the goods plus 10%.
Subject to Uniform Customs and Practice for Documentary Credits (1974 Revision) I.C.C. Publication No. 290	Covering the following goods: 400 Electric Power Drills To be shipped from London toHong Kong not later than 10^th August 200__ Partshipment not permitted Transhipment not permitted The credit is available for presentation to us Until 31^st August 200__ Documents to be presented within 21 days of shipment but within credit validity. Drafts drawn here must be marked “Drawn under Barklays Bank International Limited 168 Fenchurch Street London branch, Credit number FDC/2/6789 We undertake that drafts and documents drawn under and in strict conformity with the terms of this credit will be honoured upon presentation. Yours faithfully, Co-signed (Signature No. 9847) Signed (Signature No. 1027) CRE 202 (replacing CRE 83.606 series) Please See Reverse

Compare two methods of payment by a bill of exchange and by a documentary credit.

1. Which one is the safest?

2. Which one is more time-consuming?

3. Which one could be chosen by you and explain why?

UNIT III

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