Professional Documents
Culture Documents
Hansa A4 Dokmaksed Eng UUS
Hansa A4 Dokmaksed Eng UUS
Methods of payment
In trade transactions goods move from the seller to the buyer, while money
moves from the buyer to the seller. At the time of entering into the contract
of sales it is decided how the settlements must be arranged between the
buyer and the seller. Each method of payment has its advantages and
disadvantages, depending on which party you are, the buyer or the seller.
The most common methods of payment are:
Advance payment
The goods are first paid for; thereafter, the goods are shipped
The buyer has to take into account the possibility that
the seller does not ship (the right kind of) goods
the seller fails to meet the agreed deadlines
the seller goes bankrupt
Open account
The goods are first shipped; thereafter, the goods are paid for
The seller has to take into account the possibility that
the buyer does not pay
the buyer fails to pay as agreed
Regardless of which of the aforementioned payment methods is used, one of the business partners
is inevitably the weaker side i.e. exposed to certain risks. If the described risks are acceptable for
the parties, everything is fine. If not, a bank as a neutral intermediary can step in with the following
methods of payment which can help better balance the risks between the parties.
Collection
The goods are first shipped; thereafter, a collection order along with the
documents is submitted to the buyers bank
the buyer decides whether it wants the goods and is willing to pay for them,
but
the buyer will not receive the documents giving evidence of shipment of goods
before the buyer has agreed to pay for the goods
Documentary credit
Regardless of which method of payment to use there is always the risk that cannot be hedged entirely
for instance, the risk of not receiving money upon settlements with an open account, the risk of the
goods not being shipped in the case of using documentary credit, etc. With a bank guarantee the bank
covers urgently and following a simple procedure expenses arising from non-performance with breach
of contracts.
Guarantee
The bank will be called upon only if the parties run into problems in the course of
performance of the contract and the party receiving the guarantee wants
financial compensation.
Collections
Description of collection
In a collection transaction the buyers bank delivers the documents
evidencing the shipment of goods (commercial documents) to the buyer
in accordance with the collection instructions either against payment or
against acceptance. The terms and conditions of collection are established
by the seller and reflected in the collection instructions.
The role of the bank as a neutral intermediary is to introduce the terms and conditions of release of
commercial documents and payment of money. Since the buyer needs the commercial documents in
order to receive and use the goods and the seller does not want to hand them over to the buyer before
the buyer has agreed to pay, the bank as an intermediary assumes the obligation to strictly follow the
sellers instructions regarding how and when to release the documents to the buyer.
The banks obligations upon handling collection are confined to following the terms and conditions of
collection, intermediation of collection to the buyer and secure holding of commercial documents. The
bank does not assume any payment obligation the buyer must pay for the goods. If the buyer refuses
to pay because of lack of funds, or if he does not consent to collection, the seller will not be paid under
the collection process.
For the purpose of regulation and harmonisation of handling collections the International Chamber of
Commerce (ICC) has issued Publication No. 522, ICC Uniform Rules for Collections (URC 522).
Collection process
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If the goods are shipped by train, airplane, truck or post the goods will usually be delivered to the
buyer without the need to present the transport document (provided the goods are consigned to the
buyer). In such cases the buyer therefore does not need the document sent for collection. Only where
the goods are shipped using marine transport and the originals of the negotiable bill of lading are sent
for collection, the buyer will not get the goods right away but will need to present the original bill of
lading.
If the buyer refuses collection, the seller may face a situation where
the goods have to be stored at the destination for a long time;
the seller has to start looking for a new buyer for the goods;
the goods have to be sold at an auction;
the goods have to be returned to the place of departure;
the goods have to be destroyed (e.g. highly perishable goods).
Some of the risks listed can be prevented by using documentary credit instead of collection.
If the buyer sends collection documents for payment, the banks retain control over the documents until
the buyer has paid the collection amount. If the documents are sent for acceptance, the buyers bank
releases them to the buyer against an undertaking to pay at maturity or acceptance of a bill of exchange
and the actual payment on the required due date depends solely on the buyers solvency.
To exert pressure on the buyer the seller may demand that the collecting bank protest the refusal to pay
or accept, which is the prerequisite for claiming payment of the money in a court in most countries and
which results in the disclosure of the party who refused to pay or accept. A protest can be filed if a bill
of exchange has been submitted to the buyer along with the collection documents (see the chapter
titled Bill of Exchange). In Estonia the procedure for protesting bills of exchange is regulated by the
Law of Obligations Act.
If the sums are big and the seller does not completely trust the buyer, the seller may prefer to use
documentary credit.
The submitted bill of exchange can be accepted, i.e. signed in the presence of a bank employee only by a
person authorised by the buyer. Authorised persons can be people who have been specified as members
of the management board of the company in part B of the commercial register.
The seller of the goods may demand that the buyers bank provide an aval for the bill of exchange to
guarantee the payment on due date. If the buyers bank does not agree to provide an aval for the bill of
exchange, the buyer will not have the right to receive the collection documents. For further information
on provision of bill of exchange an aval see the Classification of guarantees by purpose section in the
chapter titled Bank guarantees.
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Documentary credits
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LC is a precisely regulated and harmonised banking service used throughout the world most of the
banks understand the obligations, examination of documents and other principles of LCs in the same
way. Such commercial LCs, which are not handled in accordance with the UCP rules are extremely rare
in practice.
LC process
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10
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3
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LC payment methods
LC must specify how it is available: by sight payment, deferred payment,
acceptance or negotiation.
In the LC the issuing bank may authorise another bank (= the nominated bank) to act under the LC, e.g.
to evaluate compliance of the documents submitted by the beneficiary with the terms and conditions
of the LC and to pay the amount of the LC to the beneficiary. This bank may be the advising bank and, in
the case of freely negotiable LCs, a bank chosen by the beneficiary.
The issuing bank may choose not to give such a nomination to other banks.
Payment at sight
The value of the documents is paid to the beneficiary immediately after the documents have been
submitted to the nominated bank and the nominated bank has determined that the documents comply
with the terms and conditions of the LC.
Example: The nominated bank receives the documents Monday, May 2.
On May 5 the bank decides, after examining the documents, that they
comply with the terms and conditions of the LC and makes the payment
value date Monday, May 9.
Usually, the issuing bank pays the nominated bank before having the possibility to examine documents
compliance with the terms and conditions of the LC. Therefore the issuing bank must trust the
nominated bank and its ability to evaluate the compliance of the documents with the terms and
conditions of the LC as well as its ability to return the funds should the documents be refused due to
valid discrepancies.
Deferred payment
The value of the documents is not paid to the beneficiary immediately after presentation of the
documents, but on the date calculated pursuant to the formula specified in the LC.
One of the most common methods of calculation of the due date is the one whereby the agreed period
in days is added to the date of shipment of the goods or to the date of presentation of the documents to
the bank. This way the applicant can defer payment for the goods purchased by the LC until the money
from the resale of the goods is received.
Example: The LC is payable 60 days after loading the goods on board the ship.
The nominated bank receives the documents on May 2. On May 5 the bank
decides, after examining the documents, that they comply with the terms and
conditions of the LC. According to the bill of lading the goods were loaded on
board April 12. The bank is obligated to pay the beneficiary on June 11.
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Negotiation
In the case of negotiation the nominated bank pays (or promises to pay) the beneficiary the value of the
documents (or the bill of exchange) before it receives money from the issuing bank.
Example: The LC is payable by negotiation at sight in the sellers bank. The
sellers bank receives the documents on May 2. On May 5 the bank decides, after
examining the documents, that they comply with the terms and conditions of
the LC. The bank agrees to negotiate and pays the money to the beneficiary on
the same date. By mutual agreement the negotiating bank pays the beneficiary
the document amount less interest charged for two weeks. The money accrues
from the issuing bank to the negotiating bank on May 16.
The nominated bank is not obligated to negotiate. Its activities depend on how certain it is in the issuing
bank and the beneficiary. If the nominated bank negotiates the documents, it does so with the right to
claim the money back (right of recourse), i.e. the bank which negotiated the documents can reclaim
the paid sums from the beneficiary if the issuing bank does not pay for some reason. The issuing or
confirming bank does not have the right of recourse (see the chapter titled Confirmed LCs).
Unlike other methods of payment, in case of freely negotiable LCs any bank may be chosen by the
beneficiary (except the issuing bank) as a nominated bank to negotiate. Obviously, the circle of banks
nominated to negotiate can be limited in the terms and conditions of the LC, e.g. to the banks of the
country of location of the beneficiary or a specific bank.
In the case of negotiation the banks usually charge interest on the period that remains between
negotiation and the receipt of money from the issuing bank.
Acceptance
It is a traditional form of deferred payment LCs whereby the beneficiary must, along with other
documents specified in the LC, submit a bill of exchange whose due date is calculated pursuant to the
terms and conditions of the LC.
If the documents presented by the beneficiary are in compliance with the terms and conditions of the
LC, the issuing bank or the nominated bank accepts the bill of exchange, thus undertaking to pay the
amount of the bill of exchange on the due date. If the beneficiary wants to receive money right away, it
can sell the bill of exchange with a discount.
a)
b)
c)
d)
e)
.
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Types of LC
Confirmed LC
If the LC has been confirmed, the confirming bank undertakes, in addition to
the issuing bank, to pay for the complying documents.
Sellers who want to avoid the possible political or other risks of the issuing bank or its country of
location should always ask for the confirmation of the LC. Confirmation of the LC also helps to obtain
settlements faster and more conveniently after receiving the payment from the confirming bank the
transaction is over for the seller. Possible disputes between the issuing and confirming bank are no
longer its concern.
NB! The bank is not obligated to confirm the LC. Before asking the buyer
for a confirmed LC the seller should always ask the bank about the possibility
of confirmation.
Transferable LC
A transferable LC gives the intermediary the opportunity to apply to the nominated bank for the
transfer of the LC for the benefit of its supplier. Thus, the intermediary buys the goods using the same
LC that it resells to the buyer.
NB! The seller of the goods (supplier) knows that it deals with an intermediary!
The transferable LC allows for intermediating major goods transactions without making any
investments. The supplier (= the second beneficiary) has to fulfil the terms and conditions of the LC and
submit the documents. The intermediary (= the first beneficiary) replaces only the invoice and bill of
exchange of the second beneficiary (higher by its commission/profit) upon the arrival of the documents
at the transferring bank.
If the terms and conditions of the LC allow for partial consignments, the LC can be transferred to several
second beneficiaries (to the extent of the initial amount or quantity of goods).
If the intermediary would like to build up a transaction using a transferable LC, it must keep in mind that
upon transfer of the LC the terms and conditions of the LC must not be changed, except the
latest shipment date, the validity and the period for presentation of documents (all may be
curtailed) and the amount and the unit price (both may be reduced);
all the documents listed in the letter of credit (incl. transport documents) must be submitted
by the second beneficiary (the first beneficiary may only substitute its own invoice and bill of
exchange for those of the second beneficiary). Therefore, the terms and conditions of the LC
must specify the shipment of the goods directly from the supplier to the buyer.
NB! The LC may be transferred only if it specifically states to be transferable.
This will normally be based on an indication to this effect in the LC application
issued by the buyer.
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In the transfer application the intermediary should shorten the period of submission of the documents
and the validity of the LC in such a manner that upon arrival of the documents to the transferring bank
the intermediary would be able to replace the invoice and the bill of exchange submitted by the supplier.
The use of transferable LCs is regulated by an article 38 in the UCP 600.
Back-to-back LC
The bank opens a back-to-back LC at the request of the intermediary in favour of the supplier. This form
of LC is based on and secured by another LC (= the master credit) opened by the buyer in favour of the
intermediary. Unlike the transferable LC, the master credit and the back-to-back LC are two legally
independent LCs, although both are meant for the same transaction.
To reduce the risks banks usually demand that the intermediary provide additional collateral for issuing
such LC.
Since the back-to-back LC formally are two legally independent LCs the back-to-back LC is not
mentioned in the UCP 600.
Revolving LC
In the case of a revolving LC the conditions of the LC are renewed periodically or after a certain event
and the seller of goods can ship another consignment in the amount and on the terms and conditions of
the LC. Since the terms and conditions of the LC are exactly the same in the case of each consignment,
the revolving LC is suitable only in the case of regular consignments which have exactly the same terms.
Red clause LC
LCs of this type allow the seller to receive advance payment before fulfilment of all the terms and
conditions (for acquisition or production of goods, coverage of transportation expenses, etc.). Usually,
to receive such an advance payment some document, for instance, a certificate stating that the goods
complying with the terms and conditions of the LC are in the port or at the storage site (if the advance
payment is necessary for financing transportation) must be submitted. In such an event the seller
receives the remaining amount after shipping the goods to the buyer and submitting all the documents
listed in the LC, including the transport document.
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quantity of the goods either exact (e.g. 1,250) or more vague (e.g. 1,000 kg +/5%);
price of the goods;
other essential parameters of the goods, which have to be specified in the LC (e.g. highly
perishable goods must be transported in a refrigerated container);
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The usage of LC may give the buyer the opportunity to negotiate a lower price, because the closure of
the transaction and receipt of the money are guaranteed to the seller by the issuing bank. LC also allows
the buyer to manage cash flow more flexibly, because upon agreement with the bank the buyer can
postpone its obligation to pay the amount of the LC to the bank to a time that is more suitable for the
buyer.
However, the buyer must take into account that
the banks approval of LC application takes time and requires collateral
the buyer cannot unilaterally cancel the LC or amend the terms and conditions thereof
the LC service is expensive and in any event the buyer is (ultimately) responsible for payment of
all service fees
If the banks involved in the LC settlements do not receive their service fees from the seller for some
reasons regardless of the fact that the terms and conditions of the LC so demand, the issuing bank (and
thereby the buyer) will be liable for payment of all the respective service fees (Article 37(c)).
the payment is made on the basis of the right documents, not the goods
It is important to remember that if the seller submits the documents complying with the terms and
conditions of the LC, the issuing bank will be obligated to pay the amount of the LC to the seller. Thus,
the buyer is obligated to compensate the issuing bank for such payment regardless of whether the
goods shipped or the service provided by the seller complies with the agreement or the expectations of
the applicant or whether the goods have been shipped in compliance with the submitted documents.
upon making the payment decision, the bank will not take into account the terms and conditions
which have not been stipulated in the LC
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The bank verifies the fulfilment of only those terms and conditions which have been stipulated in the LC
and the fulfilment of which has been certified by the required documents. The bank does not take into
account the fulfilment or non-fulfilment of other terms and conditions (e.g. the terms and conditions of
the trade agreement) and/or other documents.
shipped goods may not comply with the documents submitted
NB! Bank employees cannot be experts in a single chapter of goods or branch
of industry, but are merely LC specialists.
Banks verify the compliance of the documents based on the terms and conditions of the LC, not
the compliance of the goods against the agreement, the standards of the industry, etc. It is the
issuers of the documents (not the banks) that are liable for the correctness of the data contained in the
documents.
If the goods do not meet the expectations, they are not shipped or they are shipped later or otherwise
in conflict with the transport documents, complaints should not be addressed to the bank but the seller
and/or the carrier who has issued the documents.
fraud cannot be precluded entirely
The banks are not liable if the documents which seem to comply with the terms and conditions of the LC
prove to be forged later on. The buyer of the goods itself has to learn to know the other party to the
agreement before it trusts the party!
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The banks payment obligation can be made even more certain through confirmation. If the seller
cannot evaluate the issuing bank located in another country the seller may demand that the
LC be confirmed by a bank that the seller is more familiar with. In the case of confirmed LC the
confirming bank, in addition to the issuing bank, assumes the irrevocable obligation to pay the
value of the documents complying with the terms and conditions of the LC to the beneficiary. The
seller can consider the transaction completed right after the submission of the documents to the
confirming bank and receipt of the payment or the promise of payment from the bank. Possible
later disputes between the confirming and issuing bank are none of the sellers concern.
The seller can plan the time of accrual of the money exactly. In the UCP and/or international
banking practice there are time standards for examination of documents and making payments,
which banks must follow.
LC allows for better management of cash flow by discounting deferred payments the sellers
bank, using the good name and reputation of the issuing bank as the collateral, pays the seller the
value of the documents along with reasonable interest before the due date of the LC. The seller
should check already before issuing the LC whether its bank agrees to take the risk of the issuing
bank, i.e. to discount the accrual of the LC.
In countries where the government strictly controls import LC is often the only way of getting the
business deal through.
NB! The mere fact that a bank has decided to issue an LC can be considered an
indirect confirmation of the buyers trustworthiness. Banks do not issue LCs
for clients who are not trusted or whose solvency is in doubt.
In addition to many good qualities the seller has to take into account that
the LC service may be considered expensive (at least when compared to other payment
instruments like collections), because the compilation of each LC, considering the terms and
conditions, clarity and unambiguity of the transaction and the international practice, calls
for manual work by specialists such as later handling of documents and verification of their
compliance with the terms and conditions of the LC and the requirements of UCP 600;
The time limits of the LC must be adhered to (e.g. time limits for shipping goods, presentation
of documents, etc.). If the seller exceeds the limits even by one day, the seller loses the right to
receive money from the bank;
formalisation of sales documents is a daily and routine activity for companies, which usually
does not take much time, but formalisation of the documents of LC may well be much more
labour-intense;
the buyer is the one on whose instructions LC is opened. The seller cannot make any amendments
to the LC but refuse the LC and/or negotiate with the buyer;
banks go bankrupt as well (when replacing the buyers payment risk with the payment obligation
of a bank the beneficiary must of course carefully consider that risk as well).
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Are the remaining terms and conditions of the LC understandable and can they be fulfilled?
Is the LC issued subject to the rules of UCP 600?
If the LC does not meet the sellers expectation or some condition cannot be fulfilled, the buyer must be
contacted and asked for amendments.
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The data in a document need not be identical to, but must not conflict with the data given in other
documents or the terms and conditions of the LC.
Example: The weight of the goods can be shown as 910 kg or 0.91 tons. If in one
place the weight is 910 kg and in another it is 0.9 tons, it is considered to be in
conflict.
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Before submitting the documents to the nominated bank you should make certain that
the LC has not expired and that the presentation made is within the given deadline (the default
rule is that presentation must be made no later than 21 calendar days after the date of shipment);
the goods have been dispatched within the term permitted in the LC;
the presentation contains the required number of originals and copies of the documents.
NB! At least one original of each required document must be presented.
If the LC in describing how many copies of each document are required, uses
expressions like folds, duplicates, triplicates, then at least one of those copies
must be original, and the remaining may be copies.
Bill of exchange
A bill of exchange is a document whose issuer (drawer ) claims the amount of the bill of exchange from
the payer of the bill of exchange, (drawee ). A bill of exchange (unlike other documents required in LCs) is
a financial document. you cannot find any connection with the trade or the reason for payment on a bill
of exchange.
A bill of exchange must be presented if LC is payable by negotiation or acceptance. In that case the
LC specifies the requirement of submission of a bill of exchange (field 42C in SWIFT message MT700
of issuing LCs, hereinafter MT700/42C) and the bank that is the drawee (MT700/42A) usually the
issuing or confirming bank.
Often the issuing bank (especially if it is a British bank or former British colony bank) demands a
bill of exchange also in the case of sight payment and although the bill of exchange does not have
any practical meaning in such an event, its submission is necessary for fulfilment of the terms and
conditions of the LC.
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A bill of exchange must be signed by the issuer and contain the following data:
it must mention that it is a bill of exchange in the language in which the bill of exchange is issued,
usually draft or bill of exchange;
traditional wording pay the order of ... [name of the beneficiary].
It is necessary that the person indicated as the drawer has assigned the payment to the
intermediary on the reverse side of the bill of exchange, confirming it with their signature,
i.e. specifically to ones own bank (e.g. pay Swedbank) or without specifying the bank (e.g.
pay the submitter of the bill of exchange);
the payer, i.e. the drawee the bank required in the LC;
the issuer of the bill of exchange, i.e. the name and address of the beneficiary exactly in the same
format as in the LC;
the due date in accordance with the terms and conditions of the LC:
BILL OF EXCHANGE
Place/date of issue:
At
sight
GBP 49.701,50
British Pounds Forty Nine Thousand Seven Hundred One and 50/100
Drawee:
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Drawer:
O Tipp-Topp
Paikuse Rural Municipality
Estonia
A bill of exchange must be signed by the issuer and contain the following data:
it must mention that it is a bill of exchange in the language in which the bill of exchange is issued,
usually draft or bill of exchange;
traditional wording pay the order of ... [name of the beneficiary].
It is necessary that the person indicated as the drawer has assigned the payment to the
intermediary on the reverse side of the bill of exchange, confirming it with their signature,
i.e. specifically to ones own bank (e.g. pay Swedbank) or without specifying the bank (e.g.
pay the submitter of the bill of exchange);
the payer, i.e. the drawee the bank required in the LC;
the issuer of the bill of exchange, i.e. the name and address of the beneficiary exactly in the same
format as in the LC;
the due date in accordance with the terms and conditions of the LC:
BILL OF EXCHANGE
Place/date of issue:
At
sight
GBP 49.701,50
British Pounds Forty Nine Thousand Seven Hundred One and 50/100
Drawee:
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Drawer:
O Tipp-Topp
Paikuse Rural Municipality
Estonia
A bill of exchange must be signed by the issuer and contain the following data:
it must mention that it is a bill of exchange in the language in which the bill of exchange is issued,
usually draft or bill of exchange;
traditional wording pay the order of ... [name of the beneficiary].
It is necessary that the person indicated as the drawer has assigned the payment to the
intermediary on the reverse side of the bill of exchange, confirming it with their signature,
i.e. specifically to ones own bank (e.g. pay Swedbank) or without specifying the bank (e.g.
pay the submitter of the bill of exchange);
the payer, i.e. the drawee the bank required in the LC;
the issuer of the bill of exchange, i.e. the name and address of the beneficiary exactly in the same
format as in the LC;
the due date in accordance with the terms and conditions of the LC:
BILL OF EXCHANGE
Place/date of issue:
At
sight
GBP 49.701,50
British Pounds Forty Nine Thousand Seven Hundred One and 50/100
Drawee:
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Drawer:
O Tipp-Topp
Paikuse Rural Municipality
Estonia
A bill of exchange must be signed by the issuer and contain the following data:
it must mention that it is a bill of exchange in the language in which the bill of exchange is issued,
usually draft or bill of exchange;
traditional wording pay the order of ... [name of the beneficiary].
It is necessary that the person indicated as the drawer has assigned the payment to the
intermediary on the reverse side of the bill of exchange, confirming it with their signature,
i.e. specifically to ones own bank (e.g. pay Swedbank) or without specifying the bank (e.g.
pay the submitter of the bill of exchange);
the payer, i.e. the drawee the bank required in the LC;
the issuer of the bill of exchange, i.e. the name and address of the beneficiary exactly in the same
format as in the LC;
the due date in accordance with the terms and conditions of the LC:
BILL OF EXCHANGE
Place/date of issue:
At
sight
GBP 49.701,50
British Pounds Forty Nine Thousand Seven Hundred One and 50/100
Drawee:
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Drawer:
O Tipp-Topp
Paikuse Rural Municipality
Estonia
Invoice
For the invoice it is important that
it has been issued by the seller (the beneficiary). The sellers name must be exactly in the same
form as specified in the LC (MT700/59); the sellers location (address) must be in the country
specified in the LC;
it contains the signature of the seller if a signed invoice has been required in the LC;
it has been issued to the buyer (the applicant), whereby the buyers name must be in the form
specified in the LC (MT700/50), the buyers location must be in the country specified in the LC;
the description of the goods (MT700/45A) must comply with the LC exactly, whereby the invoice
must reflect the goods actually sent, the actual quantity and the actual price.
Additions are permitted if they are not in conflict with the terms and conditions of the LC.
Example: Goods can be sent in batches and the description of goods in the LC is
as follows: 5555 pairs of blue mens socks and 6666 pairs of red womens
socks. In the first batch only goods of the first variety are sent and their
quantity is smaller than the total quantity specified in the order. A sufficient
description on the invoice is: 4444 pairs of blue mens socks.
the delivery terms are in accordance with the terms and conditions of the LC, whereby the total
amount of the invoice must contain transport and insurance fees (if any) in accordance with the
delivery terms;
the total amount and the unit price of the goods are in accordance with the terms and conditions
of the LC and the goods actually sent;
all other data (numbers, weight, notations, etc.) are in accordance with (and not in conflict with)
the terms and conditions of the LC and the documents required in the LC;
the permitted quantity of the goods has not been exceeded and other goods which have not been
listed in the LC have not been sent.
Example: Free samples or advertising materials added to the goods free of
charge must not appear from the invoice (unless called for by the LC).
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the name and signature of the issuer of the document, whereby the issuer must identify himself
or herself next to the signature as:
the carrier of the goods or
the captain of the vessel (master) or
o the agent of the carrier or master (e.g. XYZ Ltd. as agents for the carrier ABC Shipping
Inc.);
NB! If the masters signature is identified as master (captain) or if the
agent is signing on behalf of the master, then the name of the master
need not be stated.
the place of loading and unloading in full conformity with the terms and conditions of the LC;
the consignee in full conformity with the LC; depending on the terms and conditions of the LC,
the following must be specified in the document with regard to the consignee:
name, or
to order of [name] if the given consignee must have the opportunity to assign the title to
the goods, or
to order (without name) if the shipper assigns the title to the goods to the person
submitting the document confirming the title to the goods on the reverse of the bill of
lading (endorsement);
the carriers notation regarding acceptance of the goods for carriage or notation on
board and the date of acceptance for carriage or loading on board (the notation regarding
acceptance for carriage or loading on board may be pre-printed on the document form in that
case the date of issue of the document is enough);
the date of issue of the document;
a notation about payment of the carriage charges in accordance with the delivery terms
specified in the LC: freight prepaid, if the seller pays the carriage charges (CIF, CFR, etc.), freight
collect, if the buyer has to pay the carriage charges (FAS, FOB, FCA, etc.);
the terms and conditions of the carriage contract or a reference to their existence in other
sources (banks examine the existence of the terms and conditions of the carriage contract, not
their content).
The following must not appear from the document:
The goods have been sent using only one type of transport;
the goods have been loaded on the deck of the vessel;
the goods have been or the packaging has been damaged (i.e. the bill of lading contains respective
notations);
that the document has been issued subject to a charter party.
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the port of loading and unloading in full conformity with the terms and conditions of the LC;
the consignee in full conformity with the LC; depending on the terms and conditions of the LC,
the following must be specified in the bill of lading with regard to the consignee:
name, or
to order of [name] if the given consignee must have the opportunity to assign the title to
the goods, or
to order (without name) if the shipper assigns the title to the goods to the person
submitting the document confirming the title to the goods on the reverse of the bill of
lading (endorsement);
the assignment of the title to the goods (endorsement), if required in the LC; the endorsement
may be:
to the named party (endorsed to [name]), or
blank endorsed;
the name of the vessel;
notation on board and the date of loading the goods on board (the notation regarding loading
on board may be pre-printed on the form of the bill of lading in that case the date of issue of the
bill of lading is enough);
The notation on board must clearly show that the goods have been loaded to the vessel in the
port of loading specified in the LC.
a notation about payment of the carriage charges in accordance with the delivery terms
specified in the LC: freight prepaid, if the seller pays the carriage charges (CIF, CFR, etc.), freight
collect, if the buyer has to pay the carriage charges (FAS, FOB, FCA, etc.);
in the case of container transport the number(s) of the container(s);
the terms and conditions of the carriage contract or a reference to their existence in other
sources (banks examine the existence of the terms and conditions of the carriage contract, not
their content).
The following must not appear from the bill of lading:
that the goods have been loaded on the deck of the vessel;
that the goods have been or the packaging has been damaged (i.e. the bill of lading contains
respective notations);
that the bill of lading is issued subject to a charter party.
NB! If the parties want to use a charter party, it must be
specified in the LC!
30
the place of loading and unloading in full conformity with the terms and conditions of the LC;
the consignees name in full conformity with the LC;
the carriers notation regarding acceptance of the goods for carriage;
the date of issue of the consignment note or the date of acceptance of the goods for carriage;
a notation about payment of the carriage charges in accordance with the delivery terms
specified in the LC: freight prepaid, if the seller pays the carriage charges (CIP, CFR, etc.), freight
collect, if the buyer has to pay the carriage charges (FAS, FCA, etc.).
The consignment note must not contain any notations regarding the defective condition of the goods
or packaging.
31
Air waybill
An air waybill is a document covering the carriage of goods by plane from one airport to another. The
original for shipper, usually original No. 3 of the air waybill remains with the seller for submission to
the bank.
The following must be specified in the waybill:
the shippers name (the shipper does not have to be the beneficiary of the LC);
the carriers name and identification that it is the carrier of the goods (e.g. carrier: ABC Shipping
Inc.);
the name and signature of the issuer of the waybill, whereby the issuer must identify himself or
herself next to the signature as:
the carrier of the goods or
the agent of the carrier (e.g. XYZ Ltd. as agents for the carrier ABC Inc.);
the airport of loading and unloading in full conformity with the terms and conditions of the LC;
the consignees name in full conformity with the LC;
the carriers notation regarding acceptance of the goods for carriage;
the date of issue of the waybill or the date of acceptance of the goods for carriage;
a notation about payment of the carriage charges in accordance with the delivery terms
specified in the LC: freight prepaid, if the seller pays the carriage charges (CIP, CFR, etc.), freight
collect, if the buyer has to pay the carriage charges (FAS, FCA, etc.);
the terms and conditions of the carriage contract or a reference to their existence in other
sources (banks verify the existence of the terms and conditions of the carriage contract, not their
content).
The waybill must not contain any notations regarding the defective condition of the goods
or packaging.
32
Insurance document
All originals of the insurance document (insurance policy or certificate) must be submitted to the bank.
The insurance document must:
be issued and signed by the insurance company, the underwriter or their agents and/or their
proxies, whereby the issuer must be identified next to the signature as:
the insurer (insurance company or underwriter), or
the agent of the insurer (e.g. ZYX Ltd. as agents for the insurance company/underwriter
CBA Inc.);
the authorised representative of the insurer (e.g. Mr. Smith as proxy for the insurance
company/underwriter CBA Inc.);
indicate the sum insured;
be in the same currency as the LC;
have entered into force not later than on the date when the goods were loaded, accepted for
carriage or shipped according to the transport document. The issue date of the document must
not be later than the date of shipment (unless it appears from the document that the insurance
cover is effective from a date not later than the date of shipment);
cover at least 110% of the CIF or CIP value of the insured goods (unless another sum insured
has been specified in the LC);
cover all the risks specified in the LC;
describe the shipment of the goods (place of departure and destination, description of the goods,
type of transport, in the case of marine/ocean transport the name of the vessel) in full conformity
with the terms and conditions of the LC and other documents;
specify that the insurance cover is valid at least starting from the place of loading the goods up to
the place of unloading the goods as specified in the LC;
show as the assured or insured (unless otherwise required in the LC):
the applicant of the LC (buyer),
the holder of the insurance document (the holder of this policy), or
someone else, if the person has assigned the LC to the applicant or the holder of the
insurance document by his or her endorsement on the reverse of the insurance document.
33
Other documents
If the LC requires other documents such as the certificate of origin, quality certificate, packing list,
weight certificate, etc., besides the transport and insurance documents and the invoice, it must be kept
in mind in preparation of these documents that
the content of the document must comply with the requirements of the LC; if the content or
wording of the document has not been determined in the LC, it may be formulated in any manner,
provided that it is not in conflict with other required documents and seems to fulfil the function of
the document (e.g. the certificate of origin shows the country of origin of the goods, etc.);
the document must have been issued by the institution or agency specified in the LC;
if the issuer of the document has been specified vaguely in the LC (e.g. official, local, competent,
independent or other similar person or agency), the document may be issued by anyone except
the beneficiary (seller) itself;
if the LC does not specify the issuer of the document at all, the document may be issued by
anyone, including the beneficiary itself.
In the case of some documents there are restrictions with regards to the issuer or contents
of the document already in the name of the document (GSP certificate of origin, EUR 1
certificate, export licence, etc.);
the document may be issued before the date of issuing the LC, but not later than on the date
of presentation of the documents.
34
The buyer of the goods and the issuing bank make a decision about acceptance of the
discrepant presentation of documents, whereby the issuing bank has the right to refuse
payment in the case of the buyers consent. In the worst case the documents are refused
by the issuing bank and returned to the presenter without payment which effectively
means a refusal of the goods.
Bank guarantees
36
37
38
Payment guarantee
For sellers, it is essential to reduce the payment risk of the buyer(s). For that purpose, a payment
guarantee that guarantees the seller payment for goods if the buyer has not fulfilled its payment
obligations by the due date is used. The amount of a payment guarantee is usually the value of the
goods and the due date to which a certain number of days for making a demand have been added
is the term of validity.
39
Performance guarantee
The aim of a performance guarantee is to guarantee compensation for a party to the agreement if the
counterparty does not perform its contractual obligations (for example, delivery of goods, performance
of work, provision of services, etc.). The amount of a performance guarantee is agreed between the
parties. Usually, a performance guarantee is 5-20% of the contract value. The date of expiry of the
guarantee is the due date of performance of the obligation specified in the contract to which a certain
number of days has been added for submission of the demand.
Aval
A bill of exchange or draft guarantees the recipient of a payment under the bill of exchange, i.e. the
drawer compensation if the payer of the bill of exchange or draft, i.e. the drawee, does not redeem the
bill of exchange or draft on the due date, i.e. does not make the payment. Both the acceptance of the
drawee and the banks aval is noted on the bill of exchange with a relevant note and signatures.
Operations of the bill of exchange are regulated by the laws of different countries. In Estonia bills of
exchange/drafts are regulated by the Law of Obligations Act.
Other guarantees
The guarantees described so far help to hedge the most common risks, but there are many other
different risks, for instance, the incorrect loan repayment risk, risk of late payment of rent, the risk of
non-payment of customs duties risk, etc., for covering of which banks issue corresponding guarantees.
40
41
42
In the case of the third type of payment mechanism along with the
presentation of a written demand the beneficiary must submit a court
judgment or arbitration award to the guarantor by which the principal has
been found guilty of a breach of the contract against the beneficiary.
Since the bank is not involved in the court dispute and the banks payment mechanism is triggered by
the submission of a claim complying with the terms and conditions of the guarantee (a court judgment
or arbitration award along with a written demand), it is nevertheless an independent guarantee. Such
guarantees may be issued pursuant to the requirements of URDG 458 or ISP98 as well.
Guarantees of the third type are used rarely.
44
Submission of demands
If the beneficiary submits a payment demand it means that the beneficiary
exercises its right under the guarantee to receive the indemnity.
Before submission of the demand the beneficiary must be convinced that
the guarantee is still valid and the beneficiary is able to send the demand documents to the
address specified in the guarantee by the right time (i.e. on or before the date of expiry);
the amount of the demand does not exceed the guarantee amountt;
the demand has been made in writing (phone call, e-mail or fax are unacceptable);
the demand refers to the guarantee number and underlying document of the transaction
(contract, order, etc.);
the demand has been signed by the authorised representative of the company;
all other documents and confirmations required in the guarantee (e.g. confirmation of the breach
of the terms and conditions of the contract) are available;
all other terms and conditions of the guarantee have been or can be fulfilled.
After receipt of the demand, the obligations of the bank that issued the guarantee are as follows:
to make certain that the demand was filed by the beneficiary. For instance, in the case of
international guarantees it is common that the guarantee contains the requirement to submit
the demand through the local bank who, in turn, has to notify the guarantor that the payment
demand was signed by the authorised representative of the beneficiary;
to verify the compliance of the payment demand with the terms and conditions of the
guarantee;
to verify the existence of other documents required in the guarantee and their compliance
with the terms and conditions of the guarantee;
to verify whether the payment demand has been submitted in a timely manner.
After the aforementioned examination and a positive result (i.e. all terms and conditions of the
guarantee have been fulfilled) the bank must pay the sum of the demand to the beneficiary.
NB! The pay or extend clause
If the beneficiary would like to extend the validity of the guarantee, it may
submit to the bank the pay or extend demand. The purpose of submitting
such a demand is not to receive indemnity for the breach of the contract, but
the desire to achieve amendment of the date of expiry of the guarantee. Only
if the guarantee is not extended, the guarantor has to pay the sum of the
demand. It is a prerequisite that that pay or extend demand comply with
the terms and conditions of the guarantee, otherwise the guarantor may
refuse to both extent and pay.
45
Expiry of guarantees
A guarantee expires in the following events:
the date of expiry;
upon full payment of the sum of the guarantee;
upon cancellation of the guarantee.
Counter-guarantees expire upon full payment of the sum of the guarantee or cancellation of the
guarantee, but there are two dates of expiry in the case of counter-guarantees: the date of expiry of the
direct guarantee and the date of expiry of the counter-guarantee, which is usually longer than the date
of expiry of the direct guarantee (usually by 14 calendar days). Thus, the obligation of the bank which
issued the counter-guarantee and that of the principal does not expire before the date of the counter
guarantee is over and no demands were submitted during that time.
The laws of some countries do not allow for acceptance of direct and counter-guarantees with a fixed
date of expiry as a result of which the validity of such guarantees does not expire before the beneficiary
of the direct or counter-guarantee has official confirmed the cancellation or expiry of the guarantee.
46
A bill of exchange must be signed by the issuer and contain the following data:
it must mention that it is a bill of exchange in the language in which the bill of exchange is issued,
usually draft or bill of exchange;
traditional wording pay the order of ... [name of the beneficiary].
It is necessary that the person indicated as the drawer has assigned the payment to the
intermediary on the reverse side of the bill of exchange, confirming it with their signature,
i.e. specifically to ones own bank (e.g. pay Swedbank) or without specifying the bank (e.g.
pay the submitter of the bill of exchange);
the payer, i.e. the drawee the bank required in the LC;
the issuer of the bill of exchange, i.e. the name and address of the beneficiary exactly in the same
format as in the LC;
the due date in accordance with the terms and conditions of the LC:
BILL OF EXCHANGE
Place/date of issue:
At
sight
GBP 49.701,50
British Pounds Forty Nine Thousand Seven Hundred One and 50/100
Drawee:
26
Drawer:
O Tipp-Topp
Paikuse Rural Municipality
Estonia
A bill of exchange must be signed by the issuer and contain the following data:
it must mention that it is a bill of exchange in the language in which the bill of exchange is issued,
usually draft or bill of exchange;
traditional wording pay the order of ... [name of the beneficiary].
It is necessary that the person indicated as the drawer has assigned the payment to the
intermediary on the reverse side of the bill of exchange, confirming it with their signature,
i.e. specifically to ones own bank (e.g. pay Swedbank) or without specifying the bank (e.g.
pay the submitter of the bill of exchange);
the payer, i.e. the drawee the bank required in the LC;
the issuer of the bill of exchange, i.e. the name and address of the beneficiary exactly in the same
format as in the LC;
the due date in accordance with the terms and conditions of the LC:
BILL OF EXCHANGE
Place/date of issue:
At
sight
GBP 49.701,50
British Pounds Forty Nine Thousand Seven Hundred One and 50/100
Drawee:
26
Drawer:
O Tipp-Topp
Paikuse Rural Municipality
Estonia
A bill of exchange must be signed by the issuer and contain the following data:
it must mention that it is a bill of exchange in the language in which the bill of exchange is issued,
usually draft or bill of exchange;
traditional wording pay the order of ... [name of the beneficiary].
It is necessary that the person indicated as the drawer has assigned the payment to the
intermediary on the reverse side of the bill of exchange, confirming it with their signature,
i.e. specifically to ones own bank (e.g. pay Swedbank) or without specifying the bank (e.g.
pay the submitter of the bill of exchange);
the payer, i.e. the drawee the bank required in the LC;
the issuer of the bill of exchange, i.e. the name and address of the beneficiary exactly in the same
format as in the LC;
the due date in accordance with the terms and conditions of the LC:
BILL OF EXCHANGE
Place/date of issue:
At
sight
GBP 49.701,50
British Pounds Forty Nine Thousand Seven Hundred One and 50/100
Drawee:
26
Drawer:
O Tipp-Topp
Paikuse Rural Municipality
Estonia
A bill of exchange must be signed by the issuer and contain the following data:
it must mention that it is a bill of exchange in the language in which the bill of exchange is issued,
usually draft or bill of exchange;
traditional wording pay the order of ... [name of the beneficiary].
It is necessary that the person indicated as the drawer has assigned the payment to the
intermediary on the reverse side of the bill of exchange, confirming it with their signature,
i.e. specifically to ones own bank (e.g. pay Swedbank) or without specifying the bank (e.g.
pay the submitter of the bill of exchange);
the payer, i.e. the drawee the bank required in the LC;
the issuer of the bill of exchange, i.e. the name and address of the beneficiary exactly in the same
format as in the LC;
the due date in accordance with the terms and conditions of the LC:
BILL OF EXCHANGE
Place/date of issue:
At
sight
GBP 49.701,50
British Pounds Forty Nine Thousand Seven Hundred One and 50/100
Drawee:
26
Drawer:
O Tipp-Topp
Paikuse Rural Municipality
Estonia