The Payment Options and Risks Involved between Company A and Company V - Coursework Example

A critical reflective essay on the payment options and risks involved between company A and company V (Author’s name) (Institutional Affiliation) Abstract. The United Nations Convention of 1980 on Contracts for the International Sale of Goods or the CISG is a unifying law for transactions of an international character. This convention is will be highlighted as a possible governing law to the agreement between company A and V. The various payment methods that concern transactions of an international character include payment systems such as the Letter of credit, Open Account, cash in Advance, Buyer’s credit, Advance payment and Bills for Collection. The various systems of payment have pros and cons towards either the exporter of the importer in this case either company A or V. Introduction. The two companies A, and V, intend to enter into a long term agreement. The two have never traded before. There are various aspects that are involved in this situation. There is a legal perspective as well as a business perspective. The legal perspective will tries to identify the suitable law for such transaction involving an international character. The business perspective will look into the available payment options and the risks that are involved. This paper will thus look into the legal aspect and the business aspect that surrounds the agreement that will be entered into by the two companies. A critical reflective essay on the payment options and risks involved between company A and company V. The legal aspect. The bilateral relationship between Australia and Vietnam is regarded as economically, politically and strategically significant. Since the establishment, of diplomatic relations in the month of February in 1973 between the two countries the relations have been steadily growing and strengthening.1 The traditional commercial practices of yester years involved a simple agreement between a buyer and a seller. Presently, trades are a bit complex because they have crossed boundaries such as economic societies such as planned or capitalist, ideological and legal. Trade also takes place between countries that are developed and those that are less developed as well civil and common law jurisdictions.2. The above complexities among others and the increase in international agreements and commerce has facilitated and precipitated the formation of a law that is uniform such as the United Nations Convention of 1980 on Contracts for the International Sale of Goods commonly abbreviated as the CISG.3 This convention caters for the modern as well as the evolving trade of goods. The purpose of the CISG is thus, to provide contemporary, fair and uniform system or regime for contracts for sale of goods of an international character. The convention significantly contributes to the introduction of certainty in agreements, commercial relations and exchanges as well as decreasing the costs of transactions. A contract of sale is said to be the backbone of international agreements or international trade in countries. This is so irrespective of their level of economic development, legal system or ideologies. Many scholars and economic analysts and experts advocate for its universal application and adoption as it is among the core convention on international agreements or trades.4 The CISG rules contracts for the international sale of goods between businesses that are privately owned. Its application is excluded in sales to consumers and the sale of services. It is also excluded in certain specified commodities. It particularly applies to contracts involving the sale of goods between companies and other parties whose place of trade or business are in different countries who are signatory to the convention. It also applies when the rules and regulations of private international law also known as the conflict of laws leads to the application of the law of a country that is contracting. The contracting parties may also elect the application of CISG.5 Australia is a contracting state to the CISG while Vietnam is not in such a case the CISG might still apply. Article 1 sub-article 1(b) of the CISG provides that even when one or both companies or parties do not have their business place in a state that contracts to the CISG it might still be applicable. This is when the rules and provisions of private international law provide guidance towards the submission to the law of a contracting country.6 In this case, if Australia and Vietnam companies choose Australian law as the law of the agreement, the CISG would thus apply because Australia is a contracting country notwithstanding the fact that Vietnam is not a contracting country. The application of the CISG to the agreement between A and V will harmonize the terms and bring uniformity to the long term contract or agreement involving the two companies. It is also possible that A and V might choose to be governed by either Vietnamese law or Australian law thereby disregarding the CISG. The CISG is an important unifying law that should apply to the obligations of the two companies. Under this governing convention, the parties set out the price and mode of payment. The price or mode of payment might also be fixed in a manner that is in agreement with the contract. It is worth to borrow from the English Sale of Goods law that governs contracts of sales. For instance, it is established under the English Law that when parties have on the face of it shown an intention to bind themselves particularly in a long term agreement, the courts should not be too quick to abort that very intention on the grounds that there is some shortfall or inadequacy on a particular part or aspect of the contract. The English law does take the same approach as the CISG. In support of the position adopted by the English Courts are the cases of Hillas and Company Ltd v Arcos Ltd,7 and the case of Pagnan SpA v Feed Products.8 The principle from two English cases can be adapted to the situation because the Vietnamese and Australian companies have intentions to enter into a long term agreement. The courts or the preferred method of dispute resolution will not be too quick to abort contractual obligations between the two companies. The various payment options available and risks involved from a business perspective. Open Account An open account is a settlement option that is available under the foreign trade. In an open account transaction, the importer and the exporter enter into an agreement. In this agreement, the exporter sells the goods to the importer on credit with a view of future business relationship or simply because of the exporter’s need to attract customers. The exporter then ships and delivers the goods or consignment before payment is received. This takes place 30 to 90 days after shipment of the goods. The open account structured is favored in continuous trade relationships. The situation concerning company A in Australia is that, the trade agreement to purchase goods is going to be the first trade relationships with the Vietnamese company V. The necessary documentation for the transaction is shipped to the importer together with an invoice that stipulates the payment date for the consignment. Over the years, exporters have increasing been forced to use the open account system due to increased competition from other exporters. Importers generally seek suppliers who offer credit in order to reduce their investment in working capital. Consequently the risk faced by the exporter is high while the importer faces no risk since the goods are delivered before payment. The various risks likely to be faced by the exporter include failure by the importer to fulfill the financial obligation that arises. Other risks are the fact that the importer’s country might be politically and economically sound. There is also the risk that the legal system in the importer’s country might make it effortless and effective in cost for the exporter to seek recourse in case of default by the importer. The legal climate of the importers country must also be compared to the local system of the exporter and any existing bilateral relationship between the importer’s and exporter’s country may provide some soft landing during legal resource on default by the importer. Unfortunately, such relationships do not always exit between countries. In an open account transaction, the support and financing options available to the exporter play a big role in how far the exporter may participate in the open account. For instance, the exporter might have access to cheap financing of working capital, Guarantee from Government on funds invested in financing exports, availability of export factoring or favorable terms in their trade insurance. With regard to the Australian and Vietnamese case, the open account would favor the Australian company and, as such, the Australian company would prefer this method of payment. Though one must bear in mind that the Vietnamese company is from a developing country and, as such, the costs of finance and the working capital will be high and, consequently the Vietnamese company may not favor this mode of payment. This mode of payment does not bridge the divide between the exporter and importer. The open account constitutes a form of trade credit. Most credit payment options are not favorable to developing countries due to a lack of access to credit referencing. The Australian company comes from a developed country where credit referencing is available but, the Vietnamese company may not have access to such information. Letter of credit or LC. The Letters of credit9 hereinafter the LC system deals in documents, not goods. The focus in letters of credit is the financial transaction and not the actual exchange of goods. A Letter of Credit can be irreversible and irrevocable or reversible and revocable. A LC that is irreversible or irrevocable cannot be changed unless both the purchaser and seller consent. With a LC that is revocable, changes can be made without the approval of the receiver or beneficiary. A letter of credit constitutes a bank to bank commitment to settle a financial obligation in favor of the exporter. It is on the basis of documents set out as conditions concerning the transaction between the exporter and importer. The importer’s bank will transfer funds to the exporter’s bank if the exporter provides certain documents as laid down in terms of the LC.10 The documents are set out in the LC to ensure the exporter fulfills their duties and the goods safely and delivered to the importer: The documents are: Bill of Exchange that seeks to set the value to transaction Invoice or Packing list which confirm that the commodities have being packaged and prepared appropriately for shipping. Documents for Shipping. Documents for Transport, Certificate of Insurance, a document for official Commercial, or Legal purpose. Official Documents such as an Embassy official legalization, a License, a certificate that of Origin, a Certificate of Inspection. Transport Documents that verify landing of goods into the importers country such as a Bill of Lading, Deliver Challan, or an Airway bill. Insurance documents such as an Insurance policy, or Certificate that secures the safe delivery of the goods to the importer. According to SITPRO International Trade Guides over 90% of the world's banks adhere to LC as such this mode is convenient to both parties. Trade risk is greatly reduced to both parties due the mediation of professional bodies i.e. the receiving and the issuing banks. This is the most preferred mode of payment that the Australian company can use in its transaction. This mode is efficient and the risks involved are greatly reduced.11 Cash-in-Advance. With the cash-in-advance as a payment method, the exporter can avoid credit risks. This is because the payment is conveyed prior to the transfer of possession of goods. There are three types of cash- in advance- payment methods. They include the wire transfer, credit card, and payment by check. The most commonly used cash in advance options that are available to exporters are credit cards and Wire transfers. This method that requires payment in advance is not an option that attracts the buyer because it creates problems of cash flow. Foreign purchasers are also alarmed that the commodities may not be delivered when payment is made in advance. Thus, exporters who insist or maintain on this means of imbursement as their only scheme of carrying out transactions are likely to lose out to opponents or competitors who willing offer payments terms that are attractive and favorable. Buyer's credit is the credit availed by an importer or a buyer from lenders who are overseas such as financial houses or institutions and Banks for imbursement of his or her imports on the due date. The overseas Banks usually lends the importer or buyer based on the Letter of comfort. A Letter of Comfort is a Bank Guarantee which is issued by the importers or the buyer's Bank. The importers Bank or the Buyers Credit Consultant or even the importer make arrangements for the buyer’s credit from international branches of the Bank for the Vietnam company V or other international banks. For these services, the bank of the importer or the credit consultant for the buyer charges a fee which is referred to as an arrangement fee. This mode of payment might be preferred by the Australian company A as the buyers as it is risky to them. This method however, would be preferable to the Vietnamese company V as the sellers who will receive cash in advance before they deliver the goods. Buyer’s credit. The buyer’s credit as a mode of payment increases the importers access to cheap foreign funds close to The London Interbank Offered Rate or the LIBOR rates as against domestic sources of funding which are higher than the LIBOR rates. LIBOR is an everyday reference rate that is based on charges of interest at which a bank borrows or seeks finances or funds that are unsecured from other banks in the wholesale money market of London or the lending market for banks. Buyers’ credit varies from one year with the import of goods that are consumable and for about three years if the import involves Capital Goods. The interest on Buyer’s credit may get reset after a period of six months. Benefits of Buyer's Credit to an importer. The exporter is able to get paid on the due date whereas; the importer gets a date that is extended when an import payment is made in accordance with the cash flows. The importer is able to contract or transact with the exporter on a sight basis and can thus negotiate a favorable discount as well as avail funding using the buyer’s credit means or route. Depending on the choice of the customer, the funding currency can be in any FCY such as the Great Britain Pound, the United States Dollar, the Euro and the Japanese Yen among others. In this case either the Australian Dollar of the Vietnamese currency. It is possible to have different currencies under this method. For instance the currency used for imports may vary from the legal tender of the currency that is funding. This enables the purchasers to use a currency that is favorable. Advance Payment Advanced payment is deemed as the most secure mode of settlements for exporters and, consequently the least attractive for importers. The importer transfers payments to the exporter in full, prior to goods being shipped. Advanced payment is a system of payment whereby payment is made prior to its normal schedule. For instance, the goods are paid for before one actually receives the commodities. The vendors at times prefer Advance payments as security against failure of payment. This is the scenario in the case of utilities and rent. Bills for Collection A bill for collection is a more secure means of payment for an exporter than the Open Account trading mode because the exporter's documentation is sent from V’s bank to the purchaser’s bank. This regularly takes place after delivery and contains instructions that are specific or the considerations that ought to be obeyed. The seller or the exporter in certain circumstances retains the title to goods when the purchaser fails to comply. The title may however, be recoverable. The bank of the buyer will act on the directives or specifications that the purchaser or the exporter provides. The directives are via their own bank. This channel often provides a valuable communication route through which disputes are resolved. Conclusion. As discussed earlier, the modes of payment are varied and the various risks involved greatly depend on the mode of payment that is preferred by the parties involved. The Letter of Credit or the LC has been identified as the most preferred mode of payment that the parties should use. The risks involved are greatly reduced. From the earlier discussion it was stated that the LC involves documents and not the actual goods. The banks of company V and company A will handle the financial obligations agreements. The document sets out the conditions that will concern the transaction between the two companies. In case of disputes between the two, the LC can prove the rights and obligations that were involved. References. Books. Huber, P. and Mullis, A. (2007). The CISG: A new textbook students and practitioners. Sellier: European Law Publishers. Honnold, J. (1999). Uniform law for international sales under the 1980 United Nations Convention. (3rd Ed.). Cambridge, MA: Kluwer Law International. Articles. Note, (1984). ‘Unification and Certainty: The United Nations Convention on Contracts for the International Sale of Goods’, Harvard Law Review, 97, 1984-2000. Cases. Hillas and Company Ltd v Arcos Ltd (1932) All ER Rep 494. Pagnan SpA v Feed Products (1987) 2 Lloyd’s Rep 619 Electronic sources. Vietnamese Embassy Australia. (2011) accessed on 22 October 2011 from, http://www.vietnamembassy.org.au/Relations.htm The United Nations Convention on Contracts for the International Sale of Goods of 1980 or the CISG available from http://www.cisg.law.pace.edu/cisg/text/treaty.html Read More