Export Documentary Credit
BAF 354: Banking and
Foreign Trade
7th Week
Documentary Part II
Export Documentary Credit
• The advising bank, (i.e. in an unconfirmed L/C context) sends the L/C to
the supplier (as soon as it has ascertained the authenticity of the L/C
received). Even the advising bank is nominated to examine the presentation
of documents (specified in the L/C), there is no commitment from to pay
the supplier in case of a complying presentation. That would be, if
confirmation was added. The advising bank will wait until the funds are
received from the issuing bank to pay the supplier. In other words, in this
scenario, the only commitment the supplier has is the one from the issuing
bank (i.e. a foreign bank, in case of an international deal).
• Advising of a L/C (without adding confirmation to it).
• Whenever a buyer requests the issuance of a L/C (see Import Documentary
Credit section), it is the issuing bank that makes sure that the supplier
(beneficiary) is notified of the details of the L/C. That is done through
another bank, the advising bank, which the issuing bank chooses as advising
and/or nominated bank.
Export Documentary Credit
Upon receipt of the L/C (from the advising bank) the supplier should check amongst
others:
• Do the terms and conditions of the credit match the sales contract?
• Can all the conditions of the L/C be met?
• Are the terms of delivery correct (Incoterms rule)?
• Is the description of the goods correct?
• Are the L/C expiry date, latest shipment date and period for presentation of
documents, as stipulated in the underlying contract/agreement, realistic?
 Export Documentary Credit
Confirmation of a Documentary Credit
• If some items of the L/C are not acceptable, the supplier requests the buyer to instruct the • Reminder: To keep it simple, we are assuming that the advising bank is also
issuing bank to make an amendment. In an irrevocable L/C, an amendment or cancellation
requires the agreement of the buyer, the supplier and the issuing bank (in this scenario of non- the nominated bank and that, in case of confirmation, the
confirmed L/C).
advising/nominated bank is also the confirming bank.
• The supplier ships the goods or provides the services or work and presents, as per the term of
the L/C, the required set of documents to the advising/nominated bank. This bank examines the
presentation and, if compliant to the L/C terms, forwards it to the issuing bank. The issuing
bank will effect payment in the manner stipulated in the L/C regardless of the buyer’s willingness
to pay. Indeed, in a L/C context and as far as the documents are complying, the buyer cannot
withhold payment on any pretext. If the buyer wishes to enforce a notice of defects on the
goods, he must do so outside of the documentary credit (through a legal action for example).
• As such, the supplier is in a stronger position as far as the negotiations are concerned.

Confirmation of a Documentary Credit Confirmation of a Documentary Credit

• In case the advising bank, adds its confirmation to a L/C, the beneficiary of
the L/C (the supplier) does not only have the commitment of the issuing
bank, but also that of confirming bank. Consequently the insolvency of the
buyer, the insolvency risk of the issuing bank, and country risk (including the
political risks) are covered. Moreover, providing a complying presentation,
the supplier receives - without recourse - its payment (at sight or at maturity)
directly from the confirming bank, even if the funds are still expected from
the issuing bank. Having a confirmed L/C allows without recourse financing
possibilities.
• In other words, the confirmation provides additional security to the supplier
against the buyers country and bank risks (issuing bank). By adding its
confirmation, the confirming bank undertakes to honor (or negotiate) the
documentary credit, in the same manner as the issuing bank.
• For example, if the documentary credit is confirmed and the issuing bank
fails to make payment as a result of a natural disaster or a bankruptcy, the
confirming bank, will cover the issuing bank’s default and will pay the
exporter without recourse. The confirming bank will then claim from the
issuing bank reimbursement of the amount paid to the beneficiary.
 Confirmation of a Documentary Credit
It is notable that the confirming bank will always honor/negotiate a complying presentation irrespectively of
whether the issuing bank may honor or not.
The Issuing Bank may instruct, in field 49, that advising bank advises:
• ”With” its confirmation: In this case, the issuing bank explicitly asks for confirmation. On condition that
there are no impediments to do so (e.g. compliance risk, unacceptable country risk or bank risk, etc.),
advising bank adds its confirmation, as instructed by the issuing bank.
• ”May add” its confirmation: the supplier has the possibility to benefit from the confirmation of advising
bank (on condition that there are no impediments to add its confirmation). Before adding its confirmation,
advising bank will ask the supplier whether he requires to do so.
• ”Without” its confirmation: this case, the issuing bank instructs the notifying bank not to add its
confirmation. In case the beneficiary is willing to benefit from advising bank’s confirmation but cannot
manage to have the L/C amended in this way, a silent confirmation may be considered.
Transferable Documentary Credit
• Once a L/C has been transferred, this is known as a Transferred L/C. The
first beneficiary of the transferable L/C is called the principal. The bank that
transfers the L/C is called “the transferring bank” and is usually the
nominated bank. If a documentary credit is transferable, the word
“transferable” appears in field 40A of the documentary credit.
• Article 38 of the Uniform Customs and Practice for Documentary Credits
(UCP 600) is the reference base regarding the transfer of a L/C.
Transferable Documentary Credit
• Under a transferable L/C, a first beneficiary has the right to transfer the L/C
to a second beneficiary. This means that the bank’s commitment contained in
the L/C may be transferred from a first beneficiary to a second beneficiary.
In other words, the transfer of a L/C involves changing the beneficiary of
the bank commitment. No new L/C is issued. In that way it allows the first
beneficiary to transfer the L/C without the need of credit facilities for these
purposes.
Transferable Documentary Credit
Amongst others, the article stipulates that:
• The transferability must be expressly provided by the issuing bank,
• The bank requested to make the transfer must be prepared to do so,
• Transfers to more than one second beneficiary are possible, provided that
the L/C allows for partial drawings or shipments,
• Transferability applies only once (transfer by the second beneficiary to a third
beneficiary is not possible),
 Transferable Documentary Credit Transferable Documentary Credit
• The terms of the transferred L/C must be the same as those of the transferable • Presentation of documents by or on behalf of a second beneficiary must be
L/C, apart from the following changes (which may be made jointly or separately):
made to the transferring bank. Due to the restrictions to make changes, a
o Reduction or curtailment of the amount of the L/C, the unit price, the expiry date, transfer is not always straightforward.
the period for presentation or the latest shipping date (or given period for
shipment),
o Increase of the percentage of the insured cover to provide the amount of cover
stipulated in the credit,
o Replacement of the name of the principal by that of the first beneficiary (unless the
L/C stipulates that the name of the principal must be shown on any document
other than the invoice).

Transferable Documentary Credit Back-to-Back Documentary Credit

A transfer will definitely be ruled out where there is a difference between purchasing and sales
conditions including but not limited to:
• If a documentary credit cannot be transferred (because it is not stipulated as
transferable or because conditions between the purchase agreement and the
• The applicable Incoterms rule,
sales agreement are different), the beneficiary of this doc credit (called
• The currency,
“Master L/C”) will have to request his bank to issue a new documentary
• The documents to be presented,
credit which will cover payment to the supplier.
• The term of payment.
The transferring bank requires that the transferred L/C is available with him and expires at its • This documentary credit issued by the beneficiary’s bank (acting as an
counters in the same way as the transferable L/C. intermediary) is called a “back-to-back” letter of credit and requires the
In no way a bank is obliged to effect the transfer of a L/C! granting of a credit facility.
 Back-to-Back Documentary Credit Back-to-Back Documentary Credit
A back-to-back L/C is used when transfer of a L/C received is not an option, notably • The party requesting the issuance of a back-to-back L/C is the beneficiary
because: of the master L/C. This is often an intermediary or a trader.
• The L/C received is not transferable, • From a commercial point of view, the back-to-back L/C and the master L/C
• The currency is different, are related as they deal with the same goods or services. However, from a
• The payment terms are different, legal point of view, they are totally independent L/Cs.
• The delivery terms are incompatible,
• It is not desirable that the end-buyer should be able to identify the final supplier.

Back-to-Back Documentary Credit Back-to-Back Documentary Credit

• The back-to-back L/C is realized in case of a complying presentation, whether or • In order to allow the issuance of a back-to-back L/C, the bank requires both
not the master L/C is or will be realized. In other words, the smooth processing of the master L/C and the back-to-back L/C to be available with him and to
the back-to-back L/C does not automatically guarantee the smooth processing of
the master L/C. expire at its counters. On top of that, it requires confirmation of the master
L/C (to avoid that the realization of the back-to-back L/C should depend
• The opening of a back-to-back L/C is based on thorough analysis, assessment and
evaluation of the risks involved. For instance, the extent to which the terms and on receipt of the funds under the master L/C).
documents for the master L/C correspond with those of the back-to-back L/C can
be a major factor. The creditworthiness of the applicant of the back-to-back L/C,
his experience and skill in ensuring the success of such a construction are also
crucial.
 Back-to-Back Documentary Credit
• The period of validity of the back-to-back L/C is determined by the period
of validity of the master L/C. This period for the back-to-back L/C must be
shorter to allow for a timely presentation of the documents under the master
L/C.
• The proper handling of a back-to-back L/C is identical to that of a
standard/conventional L/C. The same applies to the master L/C (see
Export Documentary Credit section).

Trade Related Guarantees

• A bank guarantee may be defined as a written undertaking by which a bank, at the request
of its customer (the applicant), irrevocably commits itself to pay a sum of money to a third
party (the beneficiary) upon receipt of a complying demand by the beneficiary informing
the bank that the applicant failed to fulfill his obligations under the underlying commercial
contract.
• As it appears from the definition, the bank does not guarantee the actual fulfillment of the
applicant’s obligation under the contract. It only commits itself to pay, in whole or in part,
the amount stated in the guarantee.
• This means that the bank will not, and is not liable to, deliver the goods or assume any
responsibility for carrying out a project.
• Guarantees are irrevocable, autonomous and independent from the commercial contracts.
 Trade Related Guarantees
In the most common scenario, a guarantee involves the following parties:
• An applicant: the party having an obligation under the underlying
relationship supported by the guarantee.
• A beneficiary: the party in favor of which a guarantee is issued.
• A guarantor: the bank issuing the guarantee and committing itself to pay
upon receipt of a complying demand for payment.
The issuance of a guarantee
There are two ways to issue a guarantee to a beneficiary: Directly and Indirectly.
Directly:
• A direct guarantee is issued by applicant’s bank, directly in favor of the beneficiary.
• Even in case of an advising bank there is only one commitment: from the guarantor to the beneficiary.
Indirectly:
• A guarantee is issued by a bank located in the country of the beneficiary, acting upon the instructions and
under the responsibility of the applicant’s bank. The local bank, upon receiving the counter-guarantee from
the applicant’s bank (called the counter-guarantor), will issue the guarantee in favor of the beneficiary.
• An indirect guarantee clearly involves two commitments that are totally independent from one another.
Trade Related Guarantees
Besides those parties, can also be involved:
• An advising bank: the bank which transmits the guarantee to the beneficiary, without any
other commitment then the authentication of the document.
• A counter-guarantor: the party issuing a counter-guarantee in favor of a guarantor or in
favor of another counter-guarantor.
• An instructing party: the party providing the (counter-) guarantor with instructions to issue a
(counter-) guarantee. The instructing party may be the applicant, or not etc.
Guarantees are usually issued at the request of the sellers (exporters) in favor of the buyers
(importers), except payment guarantees which are issued in favor of the sellers at the request
of the buyers.
Demand Guarantees
• The guarantor commits itself to pay its own debt.
• The beneficiary of the guarantee can claim payment on simple demand, supported
by documents enumerated in the guarantee or not, but without having to prove the
failure of his contractual partner.
• Unless a demand under a guarantee is obviously fraudulent or abusive, the guarantor
is obliged to pay a complying demand, notwithstanding any contestation from the
applicant, with no possibility for the guarantor to invoke exceptions, or defer the
payment for reasons derived from the performance or from the terms of the
contract.
 Demand Guarantees
• Guarantees may be subject to URDG 758, the set of rules for demand guarantees edited by the
International Chamber of Commerce (ICC), applicable since July 1, 2010. The terms of the
guarantee may provide that matters unsettled by the rules will be governed in accordance with the
law of a specific country and that the courts of a specific country (or city) shall have exclusive
jurisdiction in this respect.
• Guarantees may also only be subject to specific laws and courts. If no applicable law is
mentioned it may be understood that the law prevailing in the country of the guarantor prevails;
but it is not always the case. Applicable rules and/or laws should be inserted to avoid ambiguity.
• We must also keep in mind that imperative law always supersedes the rules.
• The guarantee texts a bank may issue can vary depending on the country or applicable laws.
URDG 758 provides a template which can be utilized for every type of guarantees and that I
strongly recommend to use.
Demand Guarantees
• Advance Payment Guarantee/Bond:
The guarantor undertakes to refund to buyer, all or part of any down payments
the latter has paid prior to delivery or prior to performance of the work if the
supplier fails to perform the contract.
The Advance Payment Guarantee usually comes into force on the receipt of
the down payment on the Applicant’s account and is valid until the end of
deliveries/performance of the work.
One guarantee may cover progress payments.
Demand Guarantees
Different types of guarantees can be distinguished:
• Trade Related Guarantees: Guarantees based on trade transactions.
Under a contract, suppliers may be requested to have various guarantees issued in favor of the
buyers:
• Bid Bond (or Tender Bond):
This type of bond is intended to guarantee that the tender submitted by the bidder is serious. The
buyer will be indemnified if the bidder withdraws his tender after the tender closing date, or refuses
to sign the contract if he is the successful bidder, or if, after the successful bidder has signed the
contract, he does not provide the guarantees required by the buyer in the invitation to tender. The
Bid Bond comes into force at the date of the opening of the bids, and is (in general) valid until the
signature of the contract or until the required performance bond is issued.
Demand Guarantees
• Performance Guarantee/Bond:
• The guarantor undertakes to pay to the importer up to a certain sum of
money if the exporter fails to perform, or imperfectly performs, his
obligations arising from the underlying relationship.
• This type of guarantee is aimed to reassure the purchaser about the technical
capacity of the supplier to fulfil his contractual obligations.
• It comes into force as soon as it is issued, and is (in general) valid until the
provisional acceptance of the goods or the works to be performed.
 Demand Guarantees
• Retention Money Guarantee/Bond:
• This guarantee is intended to avoid deduction by the purchaser/importer of
the last term of payment in a contract in case the equipment delivered or
work performed does not conform to the contract specifications. This
guarantee enables the seller/exporter to receive full payment before final
acceptance. The Retention Money guarantee generally covers the period
which runs from provisional acceptance of equipment or work until final
acceptance.
Demand Guarantees
• Payment guarantees:
• At the request of the importer, the guarantor undertakes to pay the supplier
in case of failure by the importer to pay the delivered goods/services on the
contractual payment date. A payment guarantee can cover either the partial
or full amount of a single transaction or business flow.
• Financial Guarantees: Guarantees aimed at covering/ securing credit
facilities granted to our customers (for instance).
Demand Guarantees
• Warranty Bond:
• Covers the seller’s obligations to perform after the expiry of the
performance bond
• (warranty period for a machine for example) generally no term of payment is
involved. It can be called if the seller does not respect his warranty
obligations.
Standby Letters of Credit
• A Standby Letter of Credit (SBLC) can be considered as equivalent to a
demand guarantee from the point of view of its function and aim. It is
payable on first demand against presentation of a declaration from the
beneficiary stating that the applicant is in default of his obligations under the
underlying transaction. The SBLC may provide for the presentation of
additional documents in case of claim.
• An SBLC is an independent undertaking on the part of the bank and is
separate from the underlying transaction or contract.
 Standby Letters of Credit Standby Letters of Credit
Like any other bank guarantee, the Standby Letter of Credit may have multiple A SBLC involves the same parties as a documentary credit: applicant,
purposes:
beneficiary, issuing bank, possibly an advising bank and a confirming bank.
• Tender SBLC
• Advance payment SBLC The applicant will be:
• Performance SBLC • The buyer under a payment SBLC which guarantees the payment of goods
• Retention money SBLC or services.
• Warranty SBLC • The supplier under a trade SBLC which guarantees the due performance of a
• Payment SBLC contract.

Standby Letters of Credit

• A SBLC may be “financial” if the underlying relationship is of financial nature and
“trade related” if the underlying relationship is a a trade transaction.
• SBLCs are issued subject to the Uniform Customs and Practice for Documentary
Credits(UCP600) or subject to the International Standby Practices, ICC Publication
590 (the ISP98). Both sets of rules are international standarts, but the ISP 98 is
devoted entirely to SBLCs. Also, both publications co-exist with each other and
have the advantage of providing a common understanding in the different countries
where Standby Letters of Credit are used.