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Arranging Payments for the Price of Goods Bought in an International Sale is by the Use of a Documentary Credit - Essay Example

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“A Popular Method of Arranging Payments for the Price of Goods Bought in an International Sale is by the Use of a Documentary Credit.” I. Introduction The total value of merchandise exported by all countries in 2010 was $ 15.2 Trillion, according to the World Trade Organization Secretariat.24 $ 8.2 Trillion was exported by developed countries…
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Arranging Payments for the Price of Goods Bought in an International Sale is by the Use of a Documentary Credit
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Download file to see previous pages 1.1 Definition and Description of Credit Documents a. Documentary Credits For international transactions, buyers and sellers approach their banks, which will in turn undertake a written agreement for the buyer that promises to pay a certain currency value in favor of the seller on the condition that all the requirements known as terms and conditions are met. Evidence of goods delivered by the seller should be in the form of documents defined in the agreements. The buyer’s bank communicates and deals directly 24 Alejandro Jara and Patrick Low, et. al., World Trade Report 2011. World Trade Organization. p. 24. with the seller’s bank. A credit line is assured by the banks prior to release of goods from the seller. Payments are actually made only after documents are received by the buyer’s bank. Therefore documents such as Letters of Credit are very important for international transactions. Documentary credits may be standard or special depending on what will meet the needs of the transacting parties—buyer, seller, bank of the buyer, and bank of the seller. “Standard documentary credits can be either revocable (may be cancelled by the buyer), or irrevocable…confirmed (a second bank, in addition to the buyer’s bank, guarantees payment) or unconfirmed (payment guaranteed only by the issuing bank).”17 Protection by documentary credits does not include an assurance that the goods are shipped according to understanding. Disagreements can result out of dissatisfaction. Complaints may arise. But the buyer and seller would have to settle the problem on their own. Banks base their decisions on just the documents and the terms and conditions therein. Those documents identify four parties, namely, “applicant, beneficiary, issuing bank, and advising bank” although in the business community, they are known as the “buyer, seller, buyer’s bank and seller’s bank”.18 The International Chamber of Commerce had already prepared the Uniform Customs and 17 Edward G. Hinkelman, A Short Course in International Payments: How to Use Letters of Credit, D/P and D/A, Prepayment, Credit, and Cyber Payments in International Transactions. California, USA, World Trade Press, 2003, p. 50. 18 Hinkelman, A Short Course in International Payments: How to Use Letters of Credit, D/P and D/A, Prepayment, Credit, and Cyber Payments in International Transactions. p. 52. Practice (UCP) for Documentary Credits. The UCP recognizes that there are different types of documentary credits, namely, Standby Credits, Revolving Credits, Transferrable Credits, back-to-back credits, revocable and irrevocable, confirmed and unconfirmed. And the definition of documentary credits according to UCP is any arrangement, however named or described, whereby a bank (the issuing bank) acting at the request and in accordance with the instructions of a customer (the applicant for the credit) (i) is to make payment to or to the order of a third party (the beneficiary) or is to pay or accept or negotiate bills of exchange (drafts) drawn by the beneficiary or (ii) authorises another bank to effect such payment, or to pay, accept or negotiate such bills of exchange against stipulated documents, provided that the terms and conditions of the credit are complied with (Art. 2).4 However, Dr. Zsuzsanna Toth identified documentary credi ...Download file to see next pagesRead More
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