Chanderprabhu Jain College of Higher Studies School of Law

Chanderprabhu Jain College of Higher Studies
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(Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi& Approved by Bar Council of India)
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Class : BBA LL.B VIII Semester
Paper Code : LLB 410
Subject : International Commercial Law
UNIT-3
International Payments
Introduction:
There are a variety of ways that payments can be made, including a different level risk for
collection. We will try to explain these methods from most secure to least secure for exporters.
Cash-In-Advance
Cash-in-advance payment terms can help an exporter avoid credit risks, because payment is
received up front before the ownership of the goods is transferred. For international sales, wire
transfers and credit cards are the most common used cash-in-advance options available for
importers. This presents the least risk to a seller while having the most risk to the buyer.
However, requiring payment in advance is the least favorite option for the buyer, because it
generates an unfavorable cash flow. Especially when traders do not know each other, buyers are
concerned that the goods may not be sent if payment is made in advance. Also, exporters who
insist on this payment method as their sole manner of doing business may lose to competitors
who offer more attractive payment terms.
Letters Of Credit
A letter of credit, or “credit letter” is one of the most secure payment methods available to
international traders. It is a letter from a bank guaranteeing that a buyer’s payment to a seller will
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be received on time and for the correct amount and it is one of the most secure payment methods
available to international traders. The buyer sets up credit and pays his or her bank for this
service. A Letter of Credit is useful when well-founded credit information about a foreign buyer
does not exist or is difficult to secure, but the exporter is satisfied with the creditworthiness of
the buyer’s foreign bank. A Letter of Credit also protects the buyer as they do not need to make a
payment until the goods have been shipped as promised.
Documentary Collections
In a documentary collection process, the seller instructs their bank to forward documents related
to the export of goods to a buyer’s bank with an instruction to present these documents to the
buyer for payment, pointing when and on what circumstances these documents can be released to
the buyer. Funds are received from the importer and transferred to the exporter through the banks
involved in the collection in exchange for those documents. Documentary Collections involve
using a draft that requires the importer to pay the face amount either at sight (document against
payment) or on a specified date (document against acceptance). The collection letter gives
instructions that specify the documents required for the transfer of title to the goods.
Although banks do act as facilitators for their clients, Documentary Collections offer no
verification process and limited recourse in the event of non-payment. They do not provide the
same level of security as Letters of Credit, but, as a result, the costs are lower. Unlike Letters of
Credit, for a Documentary Collection, the bank acts as a channel for the documents but does not
issue any payment covenants (does not guarantee payment). The bank that has received a
Documentary Collection may debit the buyer’s account and make payment only if authorized by
the buyer.
Open Account
An open account transaction is a sale where the goods are shipped and delivered before payment
is due, which in international sales is typically in 30, 60 or 90 days. Obviously, this method is
based on the trustworthiness between the two parties and this is one of the most advantageous

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options to the importer in terms of cash flow and cost, but is consequently one of the highest risk
options for an exporter.
Because of high competition in export markets, foreign buyers often press exporters for open
account terms since the extension of credit by the seller to the buyer is more common abroad.
Therefore, exporters who are not willing to extend credit may lose a sale to their competitors.
Exporters can offer competitive open account terms while substantially mitigating the risk of
non-payment by using one or more of the appropriate trade finance techniques covered later in
this guide. When exporters offer open account terms, they can also use export credit insurance
for extra protection.
Consignment
Consignment is another method of an open account in which payment is sent to the exporter only
after the goods are sold by the foreign distributor to the end customer. An international
consignment transaction is based on a contractual arrangement in which the foreign distributor
receives, manages, and sells the goods for the exporter who retains title to the goods until they
are sold. Clearly, exporting on consignment contains high risks as the exporter may not receive
any payment and its goods are in a foreign country in the hands of an independent distributor or
agent.
Consignment increases the chances of exporters to become more competitive on the basis of
better availability and faster delivery of goods. Selling on consignment can also help exporters
reduce the direct costs of storing and managing inventory. The key to success in exporting on
consignment is to partner with a reputable and trustworthy foreign distributor or a third-party
logistics provider. Appropriate insurance should be in place to cover consigned goods in transit
or in possession of a foreign distributor as well as to mitigate the risk of non-payment.
Uniform Customs and Practice 600
What is UCP?

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The Uniform Customs and Practice for Documentary Credits (“UCP”) is the rule governing the
Documentary credits. It was established by the international chamber of commerce (ICC) to
mitigate the doubts caused by individual countries promoting their own national rules on
documentary credit practice. The objective, since attained, was to create a set of contractual rules
that would establish uniformity in that practice, obtain global understanding, a common
interpretation and application of documentary credit, so that practitioners would not have to cope
with plenty of conflicting national regulations. UCP is the most successful set of private rules for
trade ever developed.
The main issues that considered in shaping UCP 600
 Addressing developments in banking, transport and insurance industries.

 Easier language and style to remove wordings that could lead to inconsistent application
and interpretation.
 Reviewing ICC Opinions, DOCDEX Decisions.
 Considering the incorporation of or relationship with, ISBP 645, URR 525, ISP 98 and
eUCP.
We all know that in the international trade of goods and services transactions takes place
between the people belonging to different continents, languages, culture, and laws. Since the
language used for communication of terms and conditions of LC may suggest different meaning
in different parts of the world, people across the world realised the need of uniform rules with
standardised words offering the same meaning everywhere for LC transactions. As a result,
international chamber of Commerce (ICC) was created in Paris, France in 1919 and its
International Court of Arbitration was formed in 1923 to deal with the difficulties in international
trade.
Uniform Customs and Practice (UCP) for Documentary Credits is a publication of International
Chamber of Commerce (ICC) which is a voluntary code applied by the banks all over the world.
Though the drawn-up rules of UCP do not have the binding of law, they have gained almost
universal acceptance and are incorporated as a reference in all documentary credits.
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The International Chamber of commerce published the first Uniform Customs and Practice for
Documentary Credits in 1933 and same was periodically revised 1951, 1962, 1974, 1983, 1993
& 2007. The latest UCP revision is done in July 2007 under publication Number UCP 600 of
ICC.
This section considers only the major changes introduced by the Uniform Customs and Practice
for Documentary Credits, 2007 Revision (International Chamber of Commerce 2007a), effective
from 1 July 2007, and commonly referred to as simply the UCP 600, as it is beyond the scope of
this article to examine word-for-word changes from the previous version of the rules: the UCP
500 (International Chamber of Commerce, 1993). As the UCP 600 makes reference to other sets
of rules, these are also commented on, as appropriate, as part of the discussion in this article.
As with any set of rules, the issues surrounding their implementation is the interpretation given
to them and this varies between banks and beneficiaries. Whilst a considerable body of
knowledge has developed over the use of L/C rules, and this has particularly been the case for
the UCP 500, the same cannot be claimed for the current set of rules, UCP 600 as, at the time of
writing this article, these are still in a transition phase and little has been written about them to
date. The UCP 600 has been in force for less than two years since their official application date
of 1 July 2007. As business is conducted on an ongoing basis, and as the UCP 600 does not have
retrospective application, the use of UCP 600, in reality, has been less than a year. This is
evidenced by the fact that a number of L/C would have been issued prior to 1 July 2007 (under
UCP 500), but would have been transacted after 1 July 2007, when the UCP 600 became
effective. No doubt, as in the past, the ICC will continue to play an important steering role in
clarifying the application of these rules in response to queries. In the meantime, an analysis of
the major changes to the UCP 600 should contribute to a greater understanding of their practical
implications. The UCP 500 is comprised of 49 articles, whereas the UCP 600 comprises only 39
articles. The UCP 600 has not just simply removed ten articles; rather it has considerably
rewritten, combined and added some articles, attempting to simplify the overall meaning of the
new rules.

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The UCP 600 applies to L/C transactions in accordance with Article 1 (International Chamber of
Commerce, 2006, p.17) that makes the UCP ‘rules’ for the first time in their life. Whilst this
article states that the rules are ‘binding on all parties’ to the L/C transaction, it also states ‘unless
expressly modified or excluded by the credit’. The general position of the ICC in relation to the
modification of the rules has not changed, as under the UCP 500 this was also possible
(Wickremeratne, 2007), but arguably the UCP 500 text perhaps carried a less explicit message as
their equivalent wording was ‘unless otherwise expressly stipulated in the credit’ (International
Chamber of Commerce, 1993, p.10).
“Even though, in UCP 500, one could always exclude or modify any provision, this had not been
so obvious and openly suggested. Users considered UCP 500 to be tight rules and did not
interfere with them, except in the case of a few and well-understood and necessary modifications
(as was the case with standbys for example). Any exclusion of modification of the UCP 600
must be well thought through. I have even heard of a case where an issuing bank excluded the
whole of article 7!” (Dobas, 2008, p.4).
Article 7 is the UCP 600 article that deals with the issuing bank’s undertaking. Excluding or
attempting to exclude this article would make a mockery of the whole L/C transaction, because
the beneficiary would not therefore be able to rely on the issuing bank to make good the payment
against complying documents. It will be interesting to see whether, in the future, the more
explicit wording of UCP 600 Article 1 will result in an increased propensity to modify or exclude
articles against individual L/C transactions, and if this is the case, then beneficiaries will need to
exercise particular care to ensure that the credit risk protection afforded by the L/C has not been
diluted or lost altogether as a result of these modifications or exclusions. This may necessitate
the beneficiary to acquire a more intimate knowledge of the UCP 600.
New definitions have been inserted via Article 2 of the UCP 600, “which provides the meaning
of the main phrases used throughout the rules” (Wynne, 2007, p.45), such as banking day, credit,
hour and negotiation. Article 2 also provides the meaning of complying presentation, which is
defined as “a presentation that is in accordance with the terms and conditions of the credit, the

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applicable provisions of these rules and international standard banking practice” (International
Chamber of Commerce, 2006, p.17). The reference to international standard banking practice
raises a number of issues. By way of background, the UCP 500 Article 13 also made reference to
international standard banking practices, however, no codified set of practices existed when the
UCP 500 became effective, in 1994. Indeed, the first publication of these practices, referred to as
ISBP by the ICC, did not take place until 2003 (International Chamber of Commerce, 2003).
This meant that for nearly ten years banks were checking documents against a set of practices
that had never been published. To their credit, the ICC did not repeat this mistake with the
release of the UCP 600. The updated – not revised – ISBP were made available in June 2007,
just in time for the UCP 600 effective date of 1 July 2007 (International Chamber of Commerce,
2007b), but as it turns out, only minimal changes were made to the ISBP to bring them in line
with the UCP 600. It is argued here that in relation to the ISBP, there are significant issues of
concern: the lack of authority; and the adoption of the ISBP. The ISBP have not been defined as
rules, but rather as a set of ‘principles’ that explain “how the practices articulated in UCP 600 are
applied by documentary practitioners” (International Chamber of Commerce, 2007b, p.12).
Article 14d of the UCP 600 links the standard for examination of document to international
standard banking practice with the words “data in a document, when read in the context with the
credit, the document itself and international standard banking practice” (International Chamber
of Commerce, 2006, p.27). However, it should be noted that “in this context it does not mean the
ICC publication containing the ISBP” (Andrle, 2007, p.18), as apparently “the practices are
broader than what is stated in this publication” (International Chamber of Commerce, 2007a,
p.16). The concern with this statement is that it would be possible for an alternate set of
international standard banking practices to appear and that may produce unexpected results. The
lack of authority of the ISBP or a similar set of standards, stems from the fact that these are
principles and not rules and in accordance with UCP 600 Article 16cii., the responsibility of a
bank in the face of discrepant documents is to notify the presenter with a single notice that “must
state each discrepancy in respect of which the bank refuses to honour or negotiate” (International
Chamber of Commerce, 2006, p.29). This requirement means that the bank must rely on the UCP
600 alone to advise on the discrepancies, and therefore, the ISBP carries no authority of its own.
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As different practices may exist and different codes may arise, the ICC has not been able to
mandate the adoption of the ISBP. Testament to this is the recognition by the ICC itself that the
ISBP do not cover all international standard banking practices. Although the ICC has attempted
to influence banking procedures by referring to international standard banking practices, the fact
of the matter is that it will be up to banks to voluntarily adopt such practices, and indeed,
voluntarily embrace the ISBP. It is argued here that this situation of uncertainty is not good for
the beneficiary, as the interpretation of the UCP rules, as influenced by banking practices, no
doubt will impact on the acceptance or otherwise of a set of documents and may result in a
differential, rather than standard treatment of documentary acceptance decisions that will vary
from bank to bank and country to country. Hopefully this will not happen, but there is no
evidence that the UCP 600 can prevent this situation from developing.
To the defence of the UCP 600 though, Article 14d does state, in part, that “data in a document
need not be identical to, but must not conflict with, data in that document, any other stipulated
document or the credit” (International Chamber of Commerce, 2006, p.27). This follows the
principles of the doctrine of materiality, supporting the acceptance of documents in light of
minor and inconsequential differences on the documents. The change in the words from the
comparable UCP 500, Article 13 indicates that “a clear attempt has been made to seek to reduce
rejection of documents on presentation on the basis that the documents are inconsistent or in
some way non-compliant” (Wynne, 2007, p.45). Article 14b reduces the time that a bank has to
check the documents for compliance from seven to a maximum of five banking days. This is a
positive step for the beneficiary, in particular when dealing with L/C drawn at sight, as it means
that payment may be forthcoming up to two days earlier than was previously the case.
Under the UCP 500, L/C could either be irrevocable or revocable. A revocable credit is one that,
after it is issued, may be changed without reference to the beneficiary. Under such conditions, it
is not difficult to imagine that the beneficiary has a potentially weakened position in
documentary compliance, because there is no certainty that the original L/C requirements will
remain unchanged until the completion of the transaction. The irrevocable credit, instead, is one
that after having been issued requires the agreement of all parties for changes to take effect. The
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irrevocable L/C, therefore, is preferred by the beneficiary, because there is certainty of

requirement until the end of the transaction, or an amendment has been agreed to. The default
L/C type under the UCP 500 Article 3 was irrevocable, unless the parties expressly indicated the
use of a revocable credit. Revocable credits, not surprisingly, have lost their appeal in modern
day L/C transactions and the UCP 600 reflects this through Article 3 that states in part that “a
credit is irrevocable even if there is no indication to that effect” (International Chamber of
Commerce, 2006, p.19) and “this is a significant change in that the option of revocability ... is
not required” (Wickremeratne, 2007, p.19). This is a positive change for both the seller and the
buyer, as it provides stability in the L/C transaction.
The UCP 600 has not altered the long established ‘principle of independence’, that is, the
separation of the L/C from the underlying contract, insofar as banking operations are concerned,
and this is reflected in Article 4. Article 5 also reinforced that separation by specifying that
“banks deal with document and not with goods, service or performance to which the document
may relate” (International Chamber of Commerce, 2006, p.20).
One area of contention with the UCP 500 was the requirement for data content on commercial
invoices, via Article 37c that stated, in part, “the description of the goods on the commercial
invoice must correspond with the description in the credit” (International Chamber of
Commerce, 1993, p.44). This approach is based on the doctrine of strict compliance that is
unforgiving of inconsequential differences and contributes to, rather than reduces discrepancies.
This requirement fostered a documentary check environment enabling the practice of
‘manufacturing discrepancies’ to be developed. The invention of discrepancies was known to
occur in situations where the issuing bank, having taken considerably less than 100% security
from the L/C applicant, was provided with documents that seemingly complied. Upon enquiry,
the issuing bank would find that the applicant had insufficient funds to cover the L/C payment.
Unwilling to make the payment as due, the issuing bank would suddenly ‘find’ mistakes in the
documents. This practice was simply designed to ‘buy time’ while the banks argued amongst
themselves as to whether these discrepancies were real, or not, in accordance with the UCP 500.
Payment would ultimately ensue, but the beneficiary would incur a time delay with
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consequential cash flow implications and costs. Unfortunately, the now corresponding Article 18
in the UCP 600 has remained substantially unaltered, thus the practice of manufacturing
discrepancies may be allowed to exist in the future.
The responsibility of the advising bank has been clarified by Article 9 of the UCP 600. “By
advising the credit ... the advising bank signifies that it is has satisfied itself as to the apparent
authenticity of the credit ... and that the advice accurately reflects the terms and conditions of the
credit” (International Chamber of Commerce, 2006, p.23). This is an improvement over the
comparable Article 7 of the UCP 500 that merely required the bank to show reasonable care in
checking the apparent authenticity of the credit.
Discrepant documents were discussed above, but in the context of the notice to be given to the
presenter of the documents. However, Article 16 also addresses the process that may be followed
in the presence of discrepant documents and their disposal. Under the UCP 500, in accordance
with Article 14, the issuing bank would seek a written waiver from the applicant before
accepting discrepant documents. Often this process resulted in the buyer seeking to acquire some
gain from the seller, by way of a discount or extended time to pay, in return for accepting the
discrepant documents. Where discrepant documents exist now, an additional option for the
presenter has been introduced by Article 16iii (a). The presenter of the documents may instruct
the issuing
Letters of Credit – Definition, Types & Process
A letter of credit is a document that guarantees the buyer’s payment to the sellers. It is issued by
a bank and ensures the timely and full payment to the seller. If the buyer is unable to make such
a payment, the bank covers the full or the remaining amount on behalf of the buyer. A letter of
credit is issued against a pledge of securities or cash. Banks typically collect a fee, i.e., a
percentage of the size/amount of the letter of credit.‘Letters of Credit’ also known as
‘Documentary Credits’ is the most commonly accepted instrument of settling international trade
payments. A Letter of Credit is an arrangement whereby Bank acting at the request of a customer
(Importer / Buyer), undertakes to pay for the goods / services, to a third party (Exporter /
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Beneficiary) by a given date, on documents being presented in compliance with the conditions
laid down. Bank to hold the documents pending further instructions, and not seek a waiver from
the applicant. This may be a good option in a situation where the price of the goods has
increased, and the seller may be able to gain an additional price for the goods.
Finally, there is another concern that has not yet been resolved. Article 28h refers to ‘all risk’
insurance, but because of differences in liabilities between countries, it is unclear as to what the
article intended. Indeed, the ICC itself is now suggesting that “a documentary credit should not
call for an insurance coverage against ‘all risks’ because there are various types of ‘all risks’
coverage in different markets” (International Chamber of Commerce, 2007, p.133).
The reforms under the UCP 600 rules for L/C transactions have provided a mixed bag of positive
and negative issues. The positive steps taken by the ICC to address some of the problems of the
UCP 500 include:
 A new set of definitions of the most commonly used terms, helping to clarify matters.
 A reduction in the maximum time allowed to a bank for acceptance of the documents to a
maximum of five banking days.
 The abolition of revocable credits from the application of the rules.
 An attempt to reduce discrepancies by not demanding exact data content, following the
principles of the doctrine of materiality – except for the commercial invoices.
 Continuing to uphold the principle of independence.
 Clarifying and strengthening the responsibility of the advising bank in advising the credit to
the beneficiary.
 Allowing the presenter of the documents to instruct the issuing bank to hold the documents
and not seek a waiver from the applicant.
These issues will no doubt assist sellers and buyers to maintain confidence in the L/C as a
method of payment.The negative issues include:

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 Increased prominence on options to exclude articles, and if articles are excluded,

beneficiaries will be concerned about weakening of the credit risk protection offered by the
L/C.
 The confusion over what constitutes international standard banking practices.
 The lack of authority of the ISBP.
 The possibility of different sets of international standard banking practices evolving.
 The lack of clarity over ‘all risks’ insurance.
 The continuing requirement for commercial invoices to show an exact matching description
in accordance with the dogmatic doctrine of strict compliance principles.
The problem for beneficiaries in particular continues to be the challenge of documentary

compliance. It is argued here that it is doubtful that without the removal of the doctrine of strict
compliance, there will be a great reduction in discrepancy rates. Therefore, it is likely that
beneficiaries will continue to run the risk of payment delays and/or defaults. The possible
exclusion of articles and the lack of clarity over what constitutes international standard banking
practice are other issues that cast doubt over the L/C as an acceptable payment mechanism.
As the implementation of the UCP 600 rolls out into the world of commerce, it will be
interesting to discover what will be adopted easily and which of the articles will prove
contentious, and require the intervention of the ICC to clarify the issues concerned. It would be
useful to undertake more in-depth research in the future, once a sufficient period of time has
lapsed and a body of knowledge has developed through the application and use of the UCP 600
to establish, at least, whether the ICC has been successful in reducing documentary discrepancy
rates.
Importance of Letters of Credit
Since the nature of international trade includes factors such as distance, different laws in each
country and the lack of personal contact during international trade, letters of credit make a
reliable payment mechanism. The International Chamber of Commerce Uniform Customs and
Practice for Documentary Credits oversees letters of credit used in international transactions.
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Parties to a Letter of Credit
A letter of credit transaction normally involves the following parties :
i) APPLICANT / OPENER – the buyer of the goods / services (Importer) on whose behalf the
credit is issued
ii) ISSUING BANK - the Bank which issues the credit and undertakes to make the payment on
behalf of the applicant as per terms of the L/C.
iii) BENEFICIARY - the seller of the goods / services (exporter) in whose favour the credit is
issued and who obtains payment on presentation of documents complying with the terms and
conditions of the LC.
iv) ADVISING BANK – Banks which advises the LC, certifying its authenticity to beneficiary
and is generally a bank operating in the country of the beneficiary.
v) CONFIRMING BANK – A bank which adds its guarantee to the LC opened by another
Bank and thereby undertakes responsibility for payment/acceptance/negotiation/incurring
deferred payment under the credit in addition to that of the Issuing Bank. It is normally a bank
operating in the country of the beneficiary and hence it’s guarantee adds to the acceptability of
the LC for the beneficiary. This is being done at the request / authorization of the Issuing Bank.
vi) NOMINATED BANK – A Bank in exporter’s country which is specifically authorized by

the Issuing Bank to receive, negotiate, etc., the documents and pays the amount to the exporter
under the LC.
vii) REIMBURSING BANK – Bank authorised to honour the reimbursement claim made by
the paying, accepting or negotiating bank. It is normally the bank with which Issuing Bank has
Nostro Account from which the payment is made to the nominated bank.
viii) TRANSFERRING BANK – In a transferable LC, the 1st Beneficiary may request the
nominated bank to transfer the LC in favour of one or more second beneficiaries. Such a bank is

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called Transferring Bank. In the case of a freely negotiable credit, the bank specifically
authorised in the LC as a Transferring Bank, can transfer the LC.
Types of letters of credit 20.2.1. Revocable letter of credit
A revocable letter of credit is one which can be cancelled or amended by the issuing bank at any
time and without prior notice to or consent of the beneficiary. From the exporter’s point of view
such LCs are not safe. Besides exporter cannot get such LCs confirmed as no bank will add
confirmation to Revocable LCs. However, if any bank has negotiated bills before receipt of
notice of revocation, opening bank is liable to honour its commitments. The LC should clearly
state that the same is revocable. As per Article-3 of UCP 600, a credit is irrevocable even if there
is no indication to that effect. Further UCP 600 does not provide for revocable LCs and therefore
such credits no longer exist.
Irrevocable Letter Of Credit
An Irrevocable Letter of Credit is one which cannot be cancelled or amended without the consent
of all parties concerned.
Revolving Letter Of Credit
A Revolving Letter of Credit is one where, under terms and conditions thereof, the amount is
renewed or reinstated without specific amendments to the credit being needed. It can revolve in
relation to time and value. This type of credit is generally used in local trade and sometimes for
import also. Such credits are opened for a stated amount and the drawings under the LC are
reinstated as soon as the documents are paid. The LC can be restricted to the individual amount
of drawing at a time as well as aggregate amount of drawings. The Issuing bank has to confirm
to the negotiating bank about the acceptance / payment of the documents for reinstatement of the
amount in the LC. In revolving LC for import, the maximum drawings and the validity would be
to the extent permitted by the import licence, if such imports are backed by Import Licence.
Generally, we do not open Revolving LCs for import. However in exceptional cases such L/C
may be opened with adequate safeguards / conditions subject to strict compliance of Foreign
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Trade Policy and Exchange Control Regulations particularly with reference to aggregate
drawings under such L/C & shipment dates etc.
Transferable Letter Of Credit
A Transferable Credit is one that can be transferred by the original (first) beneficiary to one or
more second beneficiaries. When the sellers of goods are not the actual suppliers or
manufacturers, but are dealers/middlemen, such credits may be opened, giving the sellers the
right to instruct the advising bank to make the credit available in whole or in part to one or more
second beneficiaries. The LC can be transferred to more than one second beneficiary provided
LC permits partial shipment and aggregate value of amounts so transferred does not exceed value
of original LC. The LC can be transferred only once and only on terms stated in the credit, with
the exception of :
- The amount of the Credit,
- Any unit price stated therein,
- The expiry date,
- The latest shipment date or given period for shipment,
- The period for presentation of documents, any or all of which may be reduced or curtailed.
The percentage for which insurance cover must be effected may be increased to provide the
amount of cover stipulated in the credit.
The LC is deemed to be transferable only if it is stated to be ‘Transferable’ in the LC. Second

beneficiary has no right to transfer to third beneficiary. However, he can retransfer to the first
beneficiary. As per our Bank’s policy, Transferable Import LCs is normally not opened.
However, transferable LCs can be opened in exceptional case, by specifying the second
beneficiaries in the LC itself or by amendment, provided.
i) Second beneficiaries should be specific and limited in number,

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ii) Satisfactory credit report on second beneficiary should have been received. Further the second
beneficiary must be a shipper/manufacturer or supplier of goods.
iii) Second beneficiary should normally be residing in the same country. If resident of another
country, method of payment of second beneficiary’s country should conform to Exchange
Control Regulations.
iv) Underlying contract indent/order should provide for such transfers.
Back To Back Letter Of Credit
In case of a transferrable LC, the beneficiary can ask the nominated Bank to transfer the credit in
favour of his suppliers. But, where the credit is not transferrable and in cases where in a middle
man enters into a contract to supply goods to be obtained from other suppliers but is unwilling to
disclose the identity of the buyer and the buyer also is unwilling to open a Transferable Letter of
Credit, such Back to Back credits are opened. Irrevocable letter of credit opened by the buyer, is
used by the beneficiary as security with his bank against which it agrees to open LC in favour of
the actual supplier / manufacturer. The beneficiary of the original L/C will become the applicant
for the second set of L/C (back to back L/C). The terms of back to back L/C will be almost
identical to the L/C received from the buyer except to the extent of amount, unit price and
delivery dates, which will be prior to the expiry of original L/C.
The original credit which is offered as security / backing is called the PRINCIPAL CREDIT or
OVERRIDING CREDIT and the credit opened on its backing is called the BACK TO BACK
credit or countervailing credit.
Red Clause Letter Of Credit
Such letters of credit contain a clause which enables the beneficiary to avail of an advance before
effecting shipment to the extent stated in the LC. The clause used to be printed in red, hence the
LC is called Red Clause LC. The nominated bank provides the pre-shipment credit to the
beneficiary as per the authority given by the issuing Bank. In case the beneficiary fails to export

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the goods or fails to repay the advance the nominated bank gets the amount paid by the issuing
bank.
Green Clause Letter Of Credit
This is an extension of Red Clause Letter of Credit, in that it provides for advance not only for
purchase of raw materials, processing and/or packing but also for warehousing and insurance
charges at the port pending availability of shipping space. Generally advance is granted under
this LC only after goods are put in bonded warehouses etc. up to the period of eventual shipment.
In such cases warehouse receipts are obtained as security / documentary evidence.
Payment Letter Of Credit
Payment credit is a sight credit which is available for payment at sight basis against presentation
of requisite documents to the issuing bank or the nominated bank. In a payment credit,
beneficiary may or may not be called upon to draw a Bill of Exchange. In many countries,
because of stamp duties even on sight bills, drawing Bill of Exchange is dispensed with.
Deferred Payment Letter Of Credit
Deferred Payment Credit is an usance credit where, payment will be made by Issuing bank, on
respective due dates, determined in accordance with the stipulations of the credit, without the
drawing of Bill of Exchange. In a way, it is an extended payment credit. Under deferred payment
credit, no Bill of Exchange will be called upon to be drawn, but it must specify the maturity at
which payment is to be made and how such maturity is to be determined. Deferred payment
arrangements for Imports, providing for payment beyond 6 months from the date of shipment up
to a period of less than three years are treated as Trade Credits for which procedural guidelines
laid down by RBI for External Commercial Borrowing and Trade Credits are required to be
followed.
Acceptance Letter Of Credit

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Acceptance Credit is similar to deferred payment credit except for the fact that in this credit
drawing of a usance Bill of Exchange is a must.
Under this credit, Bill of Exchange must be drawn on the specified bank for specified tenor, and
the designated bank will accept and honour the same, by making payment on the due dates.
Negotiation Letter Of Credit
Negotiation Credit can be a sight credit or a usance credit. A Bill of Exchange is usually drawn
in negotiation credit. The draft can be drawn as per credit terms. In a negotiation credit, the
negotiation can be restricted to a specific bank or it may allow free negotiation, in which case it
is called as ‘Freely Negotiable Credit’ whereby any bank who is willing to negotiate can do so.
Under a negotiation credit, if the bank nominated as a negotiating bank refuses to negotiate, then
the responsibility of issuing bank would be to pay as per terms of that credit. However, if the Bill
of Exchange is drawn at a tenor (on DA basis) the issuing bank can pay less discount. In other
words, in all circumstances under a negotiation credit, responsibility of the issuing bank is to pay
and it cannot say that it is the responsibility of the negotiating bank. A bank which effectively
negotiates draft(s)/document(s) buys them from the beneficiary, thereby becoming a holder in
due course.
Confirmed Letter Of Credit
Confirmed Letter of Credit is a Letter of Credit to which another bank (bank other than the
issuing bank) has added its confirmation. This is to say, in a Confirmed Letter of Credit the
beneficiary will have a firm undertaking of not only the bank issuing the credit, but also of
confirming bank. The bank which adds its confirmation is called a confirming bank and it
becomes a party to the contract of LC. Generally the confirmation to a credit is desired by
beneficiary from a bank known to him, preferably the one located in his country so that his risk
becomes localised and he can deal easily with a local bank rather than deal with a bank abroad
which has issued the credit. But this type of LC is costlier to the parties concerned, since there
would be charges of confirming bank. The LC will be confirmed by another bank with prior

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arrangement, only when it is advised to do so by the opening bank. Confirmation can be added
only to irrevocable credits and not to revocable credits. When a bank acts as an advising bank, it
has the only responsibility to verify the genuineness of the credit. But when it adds its
confirmation, it becomes a prime obligor like the issuing bank and undertakings to pay /
negotiate / accept the documents as per the terms of the credit.
Standby Credit
The standby credit is a documentary credit or similar arrangement however named or described
which represents an obligation to the beneficiary on the part of the issuing bank to make payment
on account of any indebtedness undertaken by the applicant, money borrowed or for any default
by the applicant in the performance of an obligation.
These credits are generally used as a substitute for financial guarantees. In countries like USA,
Japan it is not permissible to issue bank guarantees. Therefore, banks in these countries issue
standby letter of credit in situations where normally a letter of guarantee should have been
issued. The document generally called for under such credits is a simple statement of claim as
certificate of non performance. The standby works as a guarantee in the background of the
underlying transaction and it is expected that it will never be drawn.
This facility may be extended on a selective banks for applicants with good track record. The
nature of transaction is clean and hence is risky.
Import Letters Of Credit: Compliance Of Requirements
An import LC is a commitment by the issuing bank to make payment, for the imports which are
to be taken place on a future date. While opening import LC, the following requirements of
various agencies are to be complied with.
An Import LC is normally opened when
i) A resident in India is importing goods / software / designs and drawings into India

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ii) A resident merchant trader for the purpose of merchanting trade is importing goods from one
country for sale to another country
iii) An Indian exporter executing a contract abroad, imports goods from a third country into the
country where the project is being executed.
Trade Control Requirements
Trade Control lays down the policy and regulations relating to physical movement of goods into
India. Hence bank has to first ensure that goods to be imported can be physically brought to India
under the Foreign Trade Policy. Import shall be free except in cases where they are regulated by
the provisions of the Foreign Trade Policy or any other law in force for the time being. Item wise
import policy shall be as specified in ITC (HS) published and notified by DGFT from time to
time.Hence L/Cs should be opened as per the conditions relating to importability of the
respective item as stated in ITC (HS) Classification. Valid import licence issued by competent
authority should be submitted by the importer, if required under the policy.
Fema Guidelines
Exchange Control Regulations of RBI lay down conditions/procedures of payments to be made

for import of goods into India. Detailed EC Regulations pertaining to Import are furnished in
Chapter 19 of this manual. Payments are to be made in strict conformity with these regulations.
An Import LC should be opened only on behalf of bank’s own customers who are known to be
participating in the trade and for whom valid sanctioned limits for issuance of Import LCs are in
force. "Know Your Customer" (KYC) rules should be observed while handling import
transaction.
Credit Norms
Import letter of credit requirements of a customer are to be assessed like any other normal credit
proposal in view of the fact that :

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i) Though initially a non funded credit facility, it has the potential to turn into a funded facility.
ii) Usance LC on DA basis is a substitution of funded facilities.
If imports are of capital goods, availability of adequate long term funds in the form of Term
Loan/DPG, Surplus Cash flows etc. are to be ensured.
On receipt of the application from its customer, the bank examines the proposal and opens a
letter of credit in favour of the beneficiary with the stipulated terms and conditions. This bank is
known as the opening/issuing bank.
Different types of international payment methods
When it comes to trading of commercial goods, there is always a certain level of risk and trust
involved. Whether you’re a buyer or seller, you are bound to be exposed to some risk when
dealing with international transactions. In large part, the amount of risk involved highly depends
on the method of payment you use.
There are plenty of international paying methods for importers and exporters across the globe.
And as the world continues to globalize, we’re seeing an increase in international payment
modes. But as with Incoterms, the parties lying at the split ends of the spectrum have clashing
agendas and priorities to fulfill and to look out for.
When it comes to cross-border payments, buyers tend to prioritize the cheapest and most
straightforward payment method. In other words, anything that can help reduces cost. Another
priority is ensuring they receive the goods specified.
Calculate Ocean Freight
While buyers prefer paying as late in the transaction process as possible, sellers will want to be
paid in full, as quickly as possible, and via a secure option. Sellers who offer attractive payment
terms and varying methods will have an advantage over those who limit themselves.
The main international payment methods used around the world today include:

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 Cash in Advance
 Letters of Credit
 Documentary Collections
 Open Account
 Consignment
 International payment methods risk levels
In this article, we’ll discuss these commonly used international payment methods between
importer and exporter as well as their pros and cons.
Cash in Advance
Also known as pre-payments, cash in advance is as it sounds. The buyer completes the payment
and pays the seller in full before the merchandise is delivered and shipped off to the buyer.
While there are plenty of cash in advance payment methods available, credit card payment and
wire transfers (electronic payment via banks) are the more commonly used payment modes.
While this is an attractive option for sellers, it’s presents a significantly high risk for buyers as it
produces a disadvantageous cash flow and no definite guarantee of receiving the goods or the
condition in which they arrive.
This is generally a recommended option for sellers who are dealing with new buyers or buyers
with weak credit ratings, and/or for high-valued products.
Letters of Credit
A Letter of Credit is one of the most secure international payment methods for the importer and
exporter as it involves the assistance of established financial institutions such as banks as an
intermediary and a certain level of commitment from both parties.
With a Letter of Credit, payment is made through both the buyer and sellers’ banks. Upon
confirmation of trade terms and conditions, the buyer instructs his bank to pay the agreed-upon

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sum by both parties to the seller’s bank. The buyer’s bank then sends a Letter of Credit as proof
of sufficient and legit funds to the seller’s bank. Payment is only remitted after all stated
conditions are met by both parties and shipment has been shipped.
Letters of Credit are also sometimes known as LC, bankers commercial credit or documentary
credit.
Documentary Collections
Documentary collections is a process in which both the buyer’s and seller’s banks act as
facilitators of the trade.
The seller submits documents needed by the buyer, such as the Bill of Lading, which is
necessary for the transfer of title to the goods, to its bank. The seller’s bank will then send these
documents to the buyer’s bank along with payment instructions. The documents are only
released in exchange for payment, which is remitted immediately or at a specified date in the
future.
With documentary collections, also known as Bills of Exchange, the seller is basically handing
over the responsibility of payment collection to his bank.


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Chanderprabhu Jain College of Higher Studies

Class : BBA LL.B VIII Semester

Paper Code : LLB 410

Subject : International Commercial Law

Campus: Plot No. OCF, Sector A-8, Narela, Delhi-110040

Campus: Plot No. OCF, Sector A-8, Narela, Delhi-110040

Uniform Customs and Practice 600

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The main issues that considered in shaping UCP 600

 Addressing developments in banking, transport and insurance industries.

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Campus: Plot No. OCF, Sector A-8, Narela, Delhi-110040

irrevocable L/C, therefore, is preferred by the beneficiary, because there is certainty of

Letters of Credit – Definition, Types & Process

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 Increased prominence on options to exclude articles, and if articles are excluded,

The problem for beneficiaries in particular continues to be the challenge of documentary

Importance of Letters of Credit

Parties to a Letter of Credit

A letter of credit transaction normally involves the following parties :

vi) NOMINATED BANK – A Bank in exporter’s country which is specifically authorized by

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Types of letters of credit 20.2.1. Revocable letter of credit

Irrevocable Letter Of Credit

Revolving Letter Of Credit

Transferable Letter Of Credit

- The amount of the Credit,

- Any unit price stated therein,

- The expiry date,

- The latest shipment date or given period for shipment,

The LC is deemed to be transferable only if it is stated to be ‘Transferable’ in the LC. Second

i) Second beneficiaries should be specific and limited in number,

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iv) Underlying contract indent/order should provide for such transfers.

Back To Back Letter Of Credit

Red Clause Letter Of Credit

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Green Clause Letter Of Credit

Payment Letter Of Credit

Deferred Payment Letter Of Credit

Acceptance Letter Of Credit

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Negotiation Letter Of Credit

Confirmed Letter Of Credit

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Import Letters Of Credit: Compliance Of Requirements

An Import LC is normally opened when

Campus: Plot No. OCF, Sector A-8, Narela, Delhi-110040

Trade Control Requirements

Exchange Control Regulations of RBI lay down conditions/procedures of payments to be made

Campus: Plot No. OCF, Sector A-8, Narela, Delhi-110040

ii) Usance LC on DA basis is a substitution of funded facilities.

Different types of international payment methods

Calculate Ocean Freight

Campus: Plot No. OCF, Sector A-8, Narela, Delhi-110040

Campus: Plot No. OCF, Sector A-8, Narela, Delhi-110040

Campus: Plot No. OCF, Sector A-8, Narela, Delhi-110040

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