Introduction to Maritime International Trade, Letter of Credit and Bill of Lading
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What is a Letter of Credit and its function?
A letter of credit is a form of a documentary credit used in international trade. A letter of Credit comes into the picture when the buyer instructs its bank to issue a letter of credit to the seller whereby the bank undertakes to make payment to the seller to pay upon the presentation of the relevant trade documents. It is a contract between the buyer’s bank and the seller to bind the bank and not the seller. This is an independent contract of the sale and purchase contract between the buyer and the seller.
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What are the different types of Letters of Credit available to the buyer to issue through its bank?
There are many types of letters of credit. The common one used by the buyer is the irrevocable letter of credit. This type cannot be amended or cancelled. An Irrevocable letter of credit can be a confirmed or unconfirmed letter of credit whereby there will be another financial institution to confirm if the funds are within the buyers account in the buyer’s bank. Next comes the revolving letter of credit which is usually used by parties who have a long standing business relationship with one another and the funds are used for a series of payment. A transferable letter of credit is one that allows the first beneficiary to transfer some or all of the credit to another party, which creates a secondary beneficiary. The negotiable letter of credit are ones is a deferred payment letter of credit that states that it is “available by negotiation” or includes language indicating that it is negotiable. This language in a deferred payment letter of credit constitutes an unconditional promise by the issuing bank to pay not only the beneficiary, but also bona fide holders and endorsers. The straight letter of credit will differ from the negotiable letter of credit whereby the issuing bank will make the payment to the beneficiary only. These are the common types of letters of credit used in international trade. There are many more that may be used based on the parties preference and availability with the issuing bank.
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What are the common terms in a letter of credit?
The common terms usually contained in a letter of credit will involve release of payment at the presentation of the documents required by the issuing bank and incompliance with any other terms of compliance like time limit of presentation of the same. The usual documents required will be a clean and shipped bill of lading; invoice and packing list; certificate of quality and / or quantity; and in a cif contract, the insurance policy.
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What are fallout involved for an issuing bank from a letter of credit?
Usually the bank must accept or reject the documents within 5 banking days of presentation. In the event of no rejection within the 5 banking days, then the documents are deemed as accepted and the payment must be honoured by the issuing bank. The issuing bank will usually be at risk of breaching the letter of credit when they pay on non-compliant documents, except in some instances, or fail to pay on compliant documents.
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What is the role of bills of lading in international trade?
The bill of lading is issued by the shipowner to the consignor (seller) once the goods are loaded in the ship. The consignor then tenders this bill of lading to the bank issuing the letter of credit for payment. Once this bill is received the bank will make the payment to the consignor. Next, the bank will pass on the bill of lading to the consignee (buyer) and the consignee will in turn take the bill of lading and present it to the shipowner at the destination port and collects the goods. The bill of lading is usually issued in a set of three originals. Only one of these originals need to be presented to the shipowner or carrier for release of the goods.
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What other shipping documents can be utilised in international trade?
The other documents that can be used in international trade are the sea waybill and a ship delivery order. In the case of a sea way bill, the consignor can transfer the goods to another party but for the ship’s delivery order, it is not transferable and can only be collected by the named consignee.
This article is written by our Principal Associate, Chakaravarthi
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