CHAPTER 2

NEGOTIATING PRICE AND

PAYMENT
Lecturer: Phan Kim Thoa
Foreign Trade University

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OBJECTIVES
• Understand what are the factors make the price in an export contract
increased or decreased.
• The payment term should specify: modes of payment, date of
payment, place of payment, excusable delay in payment, results of
non-excusable delay in payment.
• Third party security for payment: Guarantor, Insurance company.
• Payment by open account, letter of credit.

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OVERVIEW

2.1 Warming up
2.5 Letter of credit

2.2 Negotiating price

2.6 Key words and phrases

2.3 Five steps in negotiating payment

2.7 Practice and homework

2.4 Third party security for payment

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2.1. WARMING UP
1. What are the risks for exporter in payment?
2. What should the exporter do to reduce the risks of payment?

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2.1. WARMING UP (cont.)
Suggested answer
1. The risks in payment are non-payment, late payment.
2. The exporter should choose the method of payment that makes late
payment impossible.

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2.2. NEGOTIATING PRICE
Factors influence on price in export contract
1. Specifications
2. Order size
3. Packaging
4. Incoterm
5. Terms of payment
6. Date of delivery
7. Warranty period

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2.2. NEGOTIATING PRICE (cont.)
• In negotiating price and payment, exporters should quote a price that
relates to the complete set of contract terms: Specifications, Order
size, Packaging, Incoterm, Terms of payment, Date of delivery,
Warranty period. The exporter should guarantee that the contract
price reflects any change in a set of assumptions of the above
mentioned terms.
• As item in the contract are negotiated, the exporter should assess the
influence of each factor on price, and adjust the price accordingly.
• Sometimes the exporter improves his terms without adjusting the
price, but only in order to create goodwill for future deals, to ensure
that the exporter gets the order, or for some other business reason.

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 2.3. FIVE STEPS IN NEGOTIATING PAYMENT

STEP 1 STEP 2 STEP 3 STEP 4 STEP 5

• Mode of • Timing • Place of • Delay - What • Results of
Payment payment delay in delay
payment is
excusable?

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2.3. FIVE STEPS IN NEGOTIATING PAYMENT
(cont.)
2.3.1 Mode of payment

2.3.2 Timing

2.3.3 Place of payment

2.3.4 Delay - what delay in payment is excusable?

2.3.5 Results of delay

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2.3.1. MODE OF PAYMENT
There are four common modes of payment:
1. Payment on open account with no security: this type is seriously risky to
the exporter.
2. Payment on open account secured by export credit insurance: the
exporter pays money to an insurance company to buy an export credit
insurance.
3. Payment on open account secured by a payment guarantee: the buyer
pays money to a bank to receive a bank guarantee.
4. Payment by letter of credit: this approach is to position the money with a
bank in the country of the exporter and to allow the exporter to collect
that money when the goods are delivered.

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2.3.1. MODE OF PAYMENT (cont.)

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• Payment on delivery: This choice of payment allows buyer to make
payment for a good at the time of delivery.

• Payment against invoice: When buyer purchase the good, he or she

will receive the invoice with a certain amount of time to pay it. Cash
against invoice is the typical open account transaction. In a case of
distrust between buyer and seller, the seller could require the buyer
to make 100% payment for the good in advance, which is known as
cash with order.

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2.3.2. TIMING
This step determines the date of payment.
• The importer often wants to delay the time of payment but the
exporter suffers from delay because late payment is subject to
payment of interest so most sellers offer discount for early payment.
This helps the buyer save on the invoice price and the seller quickly
collects his money.
• The date of payment may be regulated date or a chain of dates.
• It is also calendar dates or interval times.

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2.3.3. PLACE OF PAYMENT
• This step determines where the money must be before payment is to
be completed.
• The exporters prefers the place of payment to be his own bank
account.
• Under the Vienna Sales Convention, payment is normally deemed to
be made only when the cash is available at “ the seller’s place of
business”.

• A specimen clause:
Payment shall be deemed to have been made only when the contract sum is paid into
the Seller’s bank account and is at the Seller’s full disposal.
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2.3.4. DELAY - WHAT DELAY IN PAYMENT IS
EXCUSABLE?
Delay in payment may be excused during a grace period (not common)
or a force majeure event (more common). But most exporters do not
want to excuse these delays and any payment made after the agreed
date of payment is in delay.
• In most contracts nothing, not even force majeure, excuses late
payment.
• Late payment causes harm to the exporter – the bank interest he
must pay while waiting for his money. This interest should be
compensated to him by the buyer under the terms of the contract.

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2.3.5. RESULTS OF DELAY
• When delay in payment happens the exporter is usually
compensated for losses due to late payment.
• The exporter may ask for a payment guarantee which makes sure
payment is made on time.
• The best solution to get rid of delay is to create a payment article in
the sale contract which makes late payment is impossible.
• A specimen clause:
If payment of any sum payable is delayed, the Buyer shall be entitled to receive
interest on the amount unpaid during the period delay. The interest shall be at
an annual rate three percentage points above the discount rate of the central
Bank in the Seller’s country.

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2.4. THIRD PARTY SECURITY FOR PAYMENT
In the international trade, the exporter may face a lot of risks and one
of the significant ones is non-payment. There are two main ways that
the exporter can use to reduce this risk. One is export credit insurance
and the other is bank guarantee.

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2.4. THIRD PARTY SECURITY FOR PAYMENT
(cont.)
2.4.1 Export credit insurance

2.4.2 Payment guarantee/Bank guarantee

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2.4.1. EXPORT CREDIT INSURANCE
• Export credit insurance allows exporter to recover the major part of the
contract price if the buyer fails to pay after six months. To buy such
insurance, the exporter must explain the detail of the business to an
insurance company and receive a quotation.
• If the insurer refuses to pay, it may mean that there are some problems in
the exporter or importer. The exporter has to pay an export insurance
premium which depends on many factors, such as:
• The type of goods exported;
• The creditworthiness of the buyer;
• The political stability of the importer country.
• Although this way is attractive, it has some limitations:
• The exporter has to wait for a long time to be compensated.
• The compensation is unlikely to cover 100% of the invoice price.

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 2.4.2. PAYMENT GUARANTEE
• In this method, the buyer may ask for a bank guarantee which means that
the bank will pay the contract price if the buyer fails to do so. The buyer
pays the fee for the bank to be a guarantor.
• Guarantees are commonly used in four business situations, as the following:
• Risk 1: Non-payment => Payment guarantee
• A payment guarantee makes sure that the exporter will receive payment. It commits the bank to pay
if the buyer defaults.
• The payment guarantee is usually for 100% of the contract price.
• Risk 2: Revocation => Tender guarantee
• This type of guarantee is used in case that the exporter who bids on a contract to supply goods or
materials to a government department or agency is withdrawn.
• A normal figure for tender guarantee is usually from 1.5% to 5% of the contract price.

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 Bid or performance bond

• A financial guarantee, given by a contracting company, which

states that it has the capability to start and satisfactorily complete
the project
2.4.2. PAYMENT GUARANTEE (cont.)
• Risk 3: Non-performance => Performance guarantee
• Performance guarantee makes sure that if the exporter works badly or not at
all, the guarantor will pay, within stated limits, the costs of the exporter’s
failure to perform.
• A figure for performance guarantee is from 5% to 10% of contract price.
• Risk 4: Losing Prepayment => Prepayment guarantee
• This guarantee promises the buyer that the bank will return advance payments
if the exporter fails to deliver.
• The guarantee is often for 100% of the prepayment.

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2.4. THIRD PARTY SECURITY FOR PAYMENT
(cont.)
• Export credit insurance covers the risk of non-payment.
• Guarantees are designed to reduce contractual risks.
• The payment guarantee reduces the risk of non-payment.
• The tender guarantee reduces the risk of the revocation of an offer.
• The performance guarantee reduces the risk of non-performance or
inadequate performance by the exporter.
• The advance payment guarantee reduces the risk of losing prepayments.
• If a bank issue a “demand guarantee”, it must pay the guarantee sum
on first demand without question. Since most payment guarantees
are of this type, they are dangerous for the principal (the buyer) and
are seldom used; the letter of credit is far more common.

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 2.5. LETTER OF CREDIT
• Letter of credit: A document issued by a bank, whereby the bank replaces
the buyer as the paying party. The exporter is basing his risk of getting paid
on the bank rather than on the importer. The bank will have to be
reimbursed by the importer.
• In letter of credit situation documents are exchanged for money.
• Letters of credit are issued in many forms for many purposes. Some letters
of credit offer first class security for the exporters, some are little better
than a personal check.

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 2.5. LETTER OF CREDIT (cont.)
• Parties in the letter of credit:
• Applicant: the buyer – open the letter of credit;
• Beneficiary: the seller – present documents and receive payment;
• Issuing/opening bank: The bank that the buyer asks to open a letter of credit
(open/issue LC as the buyer’s request);
• Advising bank: The bank notifying the exporter that the letter of credit has been
opened (advice LC to the beneficiary);
• Confirming bank: commit to pay beneficiary and bear the risk of issuing bank;
• Paying bank;
• Accepting bank;
• Negotiating bank.

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2.5. LETTER OF CREDIT (cont.)
• The most ideal type of letter of credit from the exporter’s point of
view is an irrevocable, confirmed, at sight letter of credit.
• The Uniform Customs and Practice for Documentary Credits (UCP) by
the International Chamber of Commerce is the most universal set of
practices ruling over payment by letter of credit.
• The principles of letter of credit: Autonomy and Strict Compliance.
• Autonomy: means that the L/C is a contract in its own right, entirely separate
from the contract for the sale of goods. This means the bank is obliged to pay
– whatever the dispute between the Buyer and the Exporter.
• Strict Compliance: means that the exporter must present to the bank shipping
documents that comply in all respects with the terms of the credit. Small
deviations will result in refusal by the bank to pay.
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2.5. LETTER OF CREDIT (cont.)
Documents required under typical letter of credit:
• Commercial Invoice: must be made out to the applicant for the letter of credit.
The amount shown on the invoice should not be more than the amount
permitted by the letter of credit; if it is, the bank may refuse to accept the invoice.
• Transport documents:
• Sea transport – full set marine bill of lading;
• Air transport – air waybill;
• Rail transport – railway consignment note;
• Road transport – road consignment note;
• Combined transport – combined transport bill of lading.
• Insurance document: If shipment is made on CIF or CIP terms, the LC will call for
an insurance Policy/ certificate.
• Other documents: Certificate of origin, Certificate of Inspection, Packing list,
Weight list.

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2.5. LETTER OF CREDIT (cont.)

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2.5. LETTER OF CREDIT (cont.)
Issuing a letter of credit
1. The applicant (the buyer) completes a contract with the seller.
2. The buyer fills in a letter of credit application form and sends it to his or
her bank for approval.
3. The issuing bank (the buyer’s bank) approves the application and sends
the letter of credit details to the seller’s bank (the advising bank).
4. The advising bank authenticates the letter of credit and sends the
beneficiary (the seller) the details. The seller examines the details of the
letter of credit to make sure that he or she can meet all the conditions. If
necessary, he or she contacts the buyer and asks for amendments to be
made.

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2.5. LETTER OF CREDIT (cont.)

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2.5. LETTER OF CREDIT (cont.)
5. When the seller (beneficiary) is satisfied with the conditions of the letter of credit, he or she ships
the goods.
6. The seller presents the documents to his or her bankers (the advising bank). The advising bank
examines these documents against the details of the letter of credit and the International Chamber
of Commerce rules.
7. If the documents are in order, the advising bank sends them to the issuing bank for payment or
acceptance. If the details are not correct, the advising bank tells the seller and waits for corrected
documents or further instructions.
8. The issuing bank (the buyer’s bank) examines the documents from the advising bank. If they are
in order, the bank releases the documents to the buyer, pays the money promised or agrees to pay
it in the future, and advises the buyer about the payment. (If the details are not correct, the issuing
bank contacts the buyer for authorization to pay or accept the documents.) The buyer collects the
goods.
9. The issuing bank advises the advising (or confirming) bank that the payment has been made.
10. The advising/confirming bank pays the seller and notifies him or her that the payment has been
made.

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2.5. LETTER OF CREDIT (cont.)
A specimen clause:
The Buyer, on receipt of the Confirmation of Order from the Seller, shall at
least 20 days prior to the date of delivery open a confirmed, irrevocable
letter of credit. This credit shall be subject to Uniform Customs and Practice
for Documentary Credits, 1993 Revision, ICC publication No.500. 20% of the
credit shall be available against the Seller’s draft accompanied by invoice,
the remaining 80% shall be available against the Seller’ draft accompanied
by the shipping documents.

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2.5. LETTER OF CREDIT (cont.)
• The principles of letter of credit: Autonomy and Strict Compliance.
• Autonomy: means that the L/C is a contract in its own right, entirely separate
from the contract for the sale of goods. This means the bank is obliged to pay
– whatever the dispute between the Buyer and the Exporter.
• Strict Compliance: means that the exporter must present to the bank shipping
documents that comply in all respects with the terms of the credit. Small
deviations will result in refusal by the bank to pay.
• If the credit requires documents that the exporter cannot furnish or if
compliance is impossible for some other reason, then the letter of
credit must be amended – a process that requires the cooperation of
the buyer.
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2.5. LETTER OF CREDIT (cont.)
Common discrepancies reported by banks
• Discrepancy occurs when documents presented under an L/C do not
conform with L/C requirements OR do not conform with one another
(need both conditions).
• Outcomes:
• Issuing bank refuses to pay.
• Beneficiary to contact applicant to amend L/C.
• Beneficiary to alter documents to comply with L/C requirement.

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2.5. LETTER OF CREDIT (cont.)
Common discrepancies reported by banks
a. Problems with the Letter of credit
• Documents required by the credit are missing.
• Documents required to be signed are not signed.
• The credit amount is exceeded.
• The credit has expired.
• Documents are not presented within the required time.
• Shipment was short.
• Shipment was late.

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 2.5. LETTER OF CREDIT (cont.)
Common discrepancies reported by banks
b. Problems with the Bill of lading
• The bill of lading is “unclean” – it has comments on it relating to damage to or
other deficiencies in the goods.
• A marine bill of lading is required, but the bill does not state that the goods were
“shipped on board” a named vessel.
• The bill of lading shows shipment between ports other than those specified in the
credit.
• The bill of lading shows that the goods were shipped on deck. This is normally
forbidden unless the credit expressly allows it.
• The bill of lading offers no evidence that freight was paid by the exporter (if this
was required).
• There is no endorsement (if endorsement is necessary).
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 2.5. LETTER OF CREDIT (cont.)
Common discrepancies reported by banks
c. Problems with Insurance
• The insurance document is not of the type specified in the credit.
• The insurance risks are not those specified in the credit.
• Insurance cover is expressed in a currency other than that of the credit. This is
forbidden unless the credit expressly allows it.
• The sum insured is below the figure required.
• Insurance cover does not begin on or before the date of the transport document.
d. Inconsistencies among the documents
• Description of the goods on the invoice and in the credit are different.
• Weights differ between two documents.
• Marks and numbers differ between two documents.
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2.5. LETTER OF CREDIT (cont.)
Types of Letter of credit
• Revocable letter of credit: A letter of credit that may be canceled at any moment without prior notice to the beneficiary.
• Irrevocable letter of credit: A letter of credit that cannot be canceled nor amended without agreement of all parties.
• Sight letter of credit: Payment is to be made at the time of presenting the document then it is referred as the Sight Letter of
Credit. In this case banks are allowed to take the necessary time required to check the documents.
• Deferred payment letter of credit: A letter of credit under which the documents are forwarded to the importer’s bank, while
sight draft is presented at a latter future date.
• Transferable letter of credit: A letter of credit that can be utilized by someone designated by the original beneficiary.
• Advised letter of credit: A letter of credit issued by a bank and forwarded to the beneficiary by a second bank (advising bank)
in his area. The second bank validates the signatures and attests to the legitimacy of the first bank.
• Confirmed letter of credit: A letter of credit issued by one bank to which a second bank (confirming bank) adds its
commitment to pay.

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2.5. LETTER OF CREDIT (cont.)
Methods of settlement
a. Settlement by Sight payment
In settlement by sight payment, the exporter presents the necessary documents to the
paying bank (normally a confirming bank), the bank checks the documents. If they are in
order, the bank pays the full face value of the letter of credit. This is usually what the
exporter wants.
b. Settlement by Deferred payment
In settlement by deferred payment, the letter of credit is not payable until a number of
days (180 days perhaps) after delivery. Payment is safe but it is in delayed. The letter of
credit cannot be paid, but it has an obvious value – probably most of it. The exact figure
he can discuss with any bank. On the face of it, this arrangement is less advantageous for
the exporter than settlement by payment, but circumstances may make such a deal
necessary.

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2.5. LETTER OF CREDIT (cont.)
Methods of settlement
c. Settlement by Acceptance
• So far the bank has paid cash to the exporter against the documents.
• Another approach, in settlement by acceptance, is to use a bill of exchange.
• A bill of exchange is like a cheque; it allow the beneficiary (the exporter) to make a
draft for a given sum of money on the buyer.
• In international trade, this bill of exchange is usually a time draft – it can be collected
only after a certain date. That is obviously a danger for the exporter. Accordingly the
accepting bank will accept the bill of exchange and agree to pay at full face value
when it falls due. A bill of exchange that is accepted can be “negotiate”, i.e. sold at a
discount to any bank if the exporter needs money.

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2.5. LETTER OF CREDIT (cont.)
Methods of settlement
d. Settlement by Negotiation
• Negotiation – the selling of a financial instrument to a bank for less
than its face value.
• In this final method of settlement, the bank with whom the exporter
deals is called the negotiating bank. In settlement by negotiation, a
bill of exchange again allows the exporter to make a draft on the
buyer, but this bill must be negotiated – the advising bank has no
authority to pay it at its full face value.
• This kind of settlement is the least satisfactory for the exporter.

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 2.5. LETTER OF CREDIT (cont.)
Steps in negotiating a letter of credit

Agreement Incorporation Specification Verification Compliance

The exporter and The list is The buyer applies The exporter The exporter
the buyer discuss incorporated into for letter of credit checks the credit rigorously checks
and list all the contract. specifying the to see that documentation
required agreed required and submit it to
documentation. documentation. documentation is the bank.
as agreed.

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50
2.5. LETTER OF CREDIT (cont.)

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TELEX
• LST WK
• ARV/ARVL
• INFO
•N
• CU
Documentary Credit Application
In practice, most banks have a form of their own, but it may differ widely from the ICC
standard.
• Segment 1: Applicant
The full name and address of the applicant (buyer), including normally the buyer's account
number with the issuing bank
• Segment 2: Issuing Bank
The name of the issuing bank. This can be left blank. If you obtain an application form from
a bank, the name is often preprinted.
• Segment 3: Application Date
The date on which the application form is submitted to the bank. In negotiating your
contract, you can leave this blank.

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• Segment 4: Date and Place of Expiry
The last date for presentation of documents to the bank. This timing decision
should obviously be coordinated with the other timing decisions of the credit.
• Segment 5: Beneficiary
The full name and address of the exporter in most cases.
• Segment 6: Method of Issue
There are choices of issuing the letter of credit. The choice depends on the time
available to the parties.
• Segment 7: Transfer of Credit
It allows the first beneficiary to request the confirming bank to pay a third party.
• Segment 8: Confirmation
This is a crucial issue for exporter.
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• Segment 9: Amount
The amount of the credit should be expressed both in figures and in words. The currency of the credit should be stated using the ISO
currency code. In some cases, the application should state what percentage of the invoice price is covered by the credit.
• Segment 10: Partial Shipment
It is an incomplete shipment with some part of the goods follow later.
• Segment 11: Transshipment
Transshipment means moving the goods from one conveyance to another. Container transport obviously presumes transshipment.
• Segment 12: Availability
This is sometimes followed by the name of the advising bank chosen by the exporter. It is left blank more often.
• Segment 13: Insurance Covered by the Buyer
It clarifies that insurance is taken care of by the buyer.
• Segment 14: Transport Information
In stating where goods will travel from and where they will travel to, the parties should agree

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• Segment 15: Goods
A brief description of the goods will be written on this segment.
• Segment 16: Incoterm
If there is another incoterm other than FOB, CFR, CIF, it also should be listed.
• Segment 17: Additional instruction
All the documents should be listed in a requested order.
• Segment 18: Time for Presentation of Documents
After transport documents have been signed, exporters need time to collect the required
documents, prepare them and present to the bank.
• Segment 19: Additional Instructions
It clarifies the percentage of the invoice in the letter of credit if it is lower than 100% or the
delivery schedule if delivery is made in multiple shipments. Normally in this category, the
applicant will specify the documents required.

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Partial shipment vs shipment in installment
• Option 1: lot 1: 500 pairs; lot 2: 500 pairs

• Option 2: lot 1: 1000 lefts; lot 2: 1000 rights

• Segment 20: Debit Authorization
It is the responsibility of the buyer only.
• Segment 21: Signature

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