UNIT -3 INTERNATIONAL PAYMENTS

A. Methods of international payments in international

commercial contracts
In international commercial contracts, various methods of payment are utilized to facilitate

transactions between parties across different countries. Here are some common methods:

1. Letter of Credit (LC):

This is a widely used method where a bank, at the request of the buyer (importer), guarantees
payment to the seller (exporter) upon presentation of documents confirming the shipment of
goods as per the terms of the contract. LCs provide security to both parties as payment is
assured once the required documents are submitted.

LETTER OF CREDIT- A letter of credit is a letter issued by the banker of the foreign buyer,
at the latter’s request, in favour of the exporter informing him that the issuing banker
undertakes to accept the bills drawn in respect of, exporters made to the foreign buyer
specified therein. In other words, a letter of credit may be described as a written intimation
from the overseas buyer’s bank that they have been instructed to open a credit for a certain
amount of goods to be exported under certain terms and conditions.

DEFINITION- Article 2 of the Uniform Customs and Practice for Documentary Credit, 500

defines a letter of credit as under-

“expression ‘Documentary Credits’ and ‘standby letters of credit’ means any arrangement,
however named or described, whereby a bank acting at the request and on the instructions of
a customer or on its own behalf,

i. is to make a payment to or to the order of a third party (the ‘beneficiary’) or is to

accept and pay bills of exchange drawn by the beneficiary, or

ii. authorized another bank to effect such payment, or to accept and pay such bills of

exchange, or
iii. authorizes another bank to negotiate,

against stipulated documents, provided under the terms and conditions of the credit are

complied with.”

2. Documentary Collection:

In this method, also known as a bill of exchange or draft, the seller's bank collects payment
from the buyer's bank upon presenting shipping documents. It's less secure than an LC
because payment depends on the buyer's acceptance of documents and willingness to pay.

3. Advance Payment:

The buyer pays the seller upfront before the goods or services are provided. This method
carries risks for the buyer as they might not receive the goods/services as expected, so it's
often used when there's a high level of trust between the parties.

4. Open Account:

This is where the seller ships goods and invoices the buyer with payment due at an agreed-
upon future date. It's convenient but carries risks for the seller, such as delayed or non-
payment.

5. Cash in Advance:

Similar to advance payment, but with immediate transfer of funds before the goods are
shipped.

6. Consignment:
 The seller ships goods to the buyer, who agrees to pay for them after they are sold. This
method is more common in certain industries like art or fashion.

7. Bank Guarantees:

A bank guarantee assures the seller that the bank will pay a specified amount if the buyer
fails to fulfill their obligations under the contract.

8. Escrow Services:

A neutral third party holds funds until both parties fulfill their contractual obligations. Once
the conditions are met, the funds are released accordingly.

B. Uniform customs and practice 600

The Uniform Customs and Practice for Documentary Credits (UCP) is a set of standardized

rules for international trade transactions, specifically for documentary credits, commonly

known as letters of credit (LCs). UCP 600 is the latest version, published by the International

Chamber of Commerce (ICC), which came into effect on July 1, 2007. It replaced the

previous version, the UCP 500.

Here's an overview of UCP 600:

1. Standardization:

UCP 600 provides a set of internationally recognized rules and guidelines for banks,
importers, and exporters to follow when using documentary credits in trade transactions.

2. Interpretation and Application:

It establishes uniformity in the interpretation and application of LC terms and conditions,
reducing discrepancies and misunderstandings between parties involved in international
trade.

3. Roles and Responsibilities:

UCP 600 outlines the roles and responsibilities of various parties in a letter of credit
transaction, including the issuing bank, confirming bank (if any), beneficiary
(seller/exporter), and applicant (buyer/importer).

4. Document Requirements:

It specifies the documents that must be presented by the beneficiary to the issuing bank in
order to receive payment under the LC. These documents typically include commercial
invoices, bills of lading, certificates of origin, inspection certificates, and other relevant
documents as per the terms of the LC.

5. Examination and Discrepancies:

UCP 600 sets out the procedures for banks to examine the documents presented under the LC
and handle any discrepancies that may arise. It provides guidelines for determining when
documents are compliant with the LC terms and when discrepancies can be waived or
corrected.

6. Electronic Communication:

UCP 600 recognizes the increasing use of electronic communication in trade finance and
allows for the electronic presentation of documents and communication between parties,
provided that all parties agree to such methods.
 7. Uniformity and Certainty:

By promoting uniformity and clarity in LC transactions, UCP 600 helps reduce risks and
uncertainties associated with international trade, fostering confidence and trust among
trading partners.

Overall, UCP 600 plays a crucial role in facilitating smooth and efficient international trade by
providing a common set of rules and standards that govern the use of documentary credits
worldwide.

C. TYPES OF LETTER OF CREDIT

There are several types of letters of credit (LCs), each tailored to meet the specific needs and
requirements of different trade transactions. Here are some common types:

1. Irrevocable Letter of Credit:

This is the most common type of LC and cannot be modified or canceled without the consent
of all parties involved. It provides a higher level of security for the beneficiary
(seller/exporter) as it assures payment as long as the terms and conditions of the LC are met.

2. Revocable Letter of Credit:

Unlike an irrevocable LC, a revocable LC can be modified or canceled by the issuing bank
without prior notice to the beneficiary. However, revocable LCs are rarely used in
international trade due to their lack of security for the beneficiary.

3. Confirmed Letter of Credit:

In a confirmed LC, a second bank (confirming bank) adds its guarantee to the LC, in addition
to the issuing bank's guarantee. This provides an extra layer of assurance to the beneficiary,
especially when dealing with unfamiliar or risky markets.

4. Unconfirmed Letter of Credit:

 An unconfirmed LC is only guaranteed by the issuing bank and does not involve a
confirming bank. While it is still a valid form of payment, the beneficiary may face higher
risks, particularly if the issuing bank's creditworthiness is in question.

5. Transferable Letter of Credit:

This type of LC allows the beneficiary (first beneficiary) to transfer all or part of the credit to
one or more secondary beneficiaries. It is commonly used when the first beneficiary is a
middleman or intermediary in the transaction and needs to involve other suppliers or
subcontractors.

6. Standby Letter of Credit (SBLC):

Unlike commercial LCs used for payment in trade transactions, SBLCs serve as a form of
financial guarantee. They are often used as backup payment mechanisms to ensure the
fulfillment of contractual obligations, particularly in cases of default or non-performance by
the applicant.

7. Revolving Letter of Credit:

A revolving LC allows for multiple drawings within a specified period, up to a pre-

determined credit limit. This is useful for ongoing or repetitive transactions where the
beneficiary may need to make multiple shipments or drawdowns over time.

8. Red Clause Letter of Credit:

This type of LC includes a clause (usually printed in red) that allows the beneficiary to
receive an advance payment before shipping the goods. It provides financial assistance to the
beneficiary for pre-shipment expenses, such as raw materials or production costs.

D. PARTIES TO LETTER OF CREDIT

In a letter of credit (LC) transaction, several parties are involved, each with specific roles and
responsibilities. The main parties to a letter of credit are:

1. Applicant:
Also known as the buyer or importer, the applicant is the party who initiates the issuance of the
letter of credit. The applicant requests its bank (the issuing bank) to issue an LC in favor of the
beneficiary (seller/exporter).

2. Beneficiary:

Also known as the seller or exporter, the beneficiary is the party who will receive payment under
the letter of credit. The beneficiary must fulfill the terms and conditions specified in the LC,
including presenting the required documents, to receive payment.

3. Issuing Bank:

The issuing bank is the bank that issues the letter of credit on behalf of the applicant. It is
obligated to honor the LC and make payment to the beneficiary upon presentation of compliant
documents, as long as the terms and conditions of the LC are met.

4. Advising Bank:

The advising bank, also known as the notifying bank, is the bank located in the beneficiary's
country that receives the LC from the issuing bank and forwards it to the beneficiary. The
advising bank does not necessarily provide any payment obligation but may offer additional
services such as authentication of the LC and advising the beneficiary.

5. Confirming Bank (if applicable):

In cases where a confirmed LC is required, a confirming bank adds its confirmation to the LC,
thereby providing an additional guarantee of payment to the beneficiary. The confirming bank
assumes the credit risk of the issuing bank and ensures payment to the beneficiary even if the
issuing bank defaults.

6. Nominated Bank (if applicable):

In certain LCs, the issuing bank may nominate a specific bank in the beneficiary's country to
handle the negotiation or payment under the LC. This bank is referred to as the nominated bank
and acts on behalf of the issuing bank in dealing with the beneficiary.

7. Paying Bank:
The paying bank is the bank that makes payment to the beneficiary upon presentation of
compliant documents. In some cases, the paying bank may be the same as the issuing bank,
especially in confirmed LCs. Otherwise, it may be a correspondent bank designated by the
issuing bank. These parties work together to facilitate the smooth execution of international trade
transactions by ensuring that the terms and conditions of the letter of credit are fulfilled, and
payment is made securely and efficiently.

E. LANDMARK CASES

1. Banco Santander SA v. Bayfern Ltd (2000):

This case involved the interpretation of a standby letter of credit (SBLC) and the obligation of
banks to honor such instruments. The House of Lords ruled that the issuing bank's obligation to
honor an SBLC is separate from the underlying contract between the parties, emphasizing the
independence principle of letters of credit.

2. United City Merchants (Investments) Ltd v. Royal Bank of Canada (1983):

In this case, the House of Lords clarified the fraud exception under letters of credit. The court
held that banks are not obligated to honor fraudulent demands under an LC, even if the
documents are facially compliant with the LC's terms. This case established the principle that
banks can refuse payment if they have knowledge of fraud.

3. Sztejn v. J. Henry Schroder Banking Corp. (1941):

This landmark case in the United States involved the examination of documents under a letter of
credit transaction. The court held that banks have a duty to only pay against documents that
appear on their face to comply with the terms of the LC. This case highlighted the principle of
strict compliance in letters of credit transactions.

4. ICC Uniform Customs and Practice for Documentary Credits (UCP) cases:
While not specific legal cases, various decisions and interpretations by arbitration panels under
the ICC's UCP have significantly influenced the understanding and application of LC provisions
in international trade. These decisions often provide guidance on issues such as document
discrepancies, fraud, and the roles and responsibilities of the parties involved.

5. Texaco Overseas Petroleum Co. v. Libya (1979):

This case involved the application of LC provisions in the context of international investment
disputes. The arbitration tribunal's decision clarified the obligations of banks to honor LCs
despite political or economic changes in the issuing country, reinforcing the principle of the
independence of LCs from the underlying contract.