Documents found in international trade

• bank transfer / credit transfer – the originator instructs a bank to pay the beneficiary; it is simple but may give the seller less payment security

• UNCITRAL Model Law on International Credit Transfers – where enacted, it allocates responsibilities of originator, intermediary and beneficiary banks and the consequences of delay or error

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1 International Bills of exchange

• a bill of exchange is

  • an unconditional order

  • in writing

  • addressed by one person (drawer) to another (drawee)

  • signed by the person giving it

  • requiring the person to whom it is addressed

  • to pay

  • on demand, or of a fixed or determinable future time

  • a sum certain in money

  • to, or to the order of

  • a specified person (payee)

  • or to bearer

• for a bill of exchange to be classed as “an international bill of exchange”, it must identify at least two of the following five places of which at least two are in different states

  • the place where the bill is drawn

  • the place where the drawer signed

  • the place next to the drawee’s name

  • the place next to the payee’s name

  • the place where it is to be paid

• in addition, the words “International Bill of Exchange” must be shown (Uncitral Convention)

• the bill will be sent by the drawer to the drawee (typically the drawer’s bank)

• the drawee will sign it and thus accept liability

• by that signature, the drawee becomes the acceptor

• the accepted bill will then be delivered to the payee (the drawer’s creditor)

• in turn the payee, if they want the money now instead of at “some fixed or determinable future time”, can sign the bill and thus becomes the indorser

• the indorsement may be in favour of a specified person (the indorsee) or may be signed in blank

• an indorsee of an indorsed bill can themselves indorse it in favour of another ....

• and that “other” can indorse it in favour of another who can, in turn, indorse it in favour of .......

• if signed in blank, the bill becomes a bearer bill and the person who has possession of that bearer bill is the person entitled to claim the money represented by the bill

• the bearer of a bearer bill can settle a debt merely by passing the bill to their creditor who, in turn, becomes the bearer

• liability? If, on final presentation to the acceptor (originally called the drawee) the acceptor refuses to pay, the bill is classed as dishonoured

• in this situation, all prior parties who have signed the bill before it came into the hands of the holder (as well as the person who passed a bearer bill to the holder) will be liable

• it is possible to have yet another party to a bill – a guarantor in case of need

• such a person who guarantees a bill is presumed to be guaranteeing that the drawee will pay the bill on final presentation.

• promissory note – an unconditional written promise by its maker to pay a specified sum, on demand or at a future time, to a named person or bearer

2 Parties

• drawer owes money to the payee

• drawee typically, the drawer’s bank

• payee the creditor of the drawer

• acceptor the drawee who signs as “accepted”

• indorser the payee who signs the bill on to the payee’s own creditor

• indorsee the creditor of the indorser

• guarantor a person who guarantees that the bill will be honoured

• holder a person who has taken the bill through the process of negotiation / indorsement, or the bearer of a bearer bill

3 Bills of lading

• bill of lading – the carrier’s receipt, evidence of the contract of carriage and, if negotiable, a document of title

• bill of lading may be:

  • negotiable or non-negotiable

  • inland, ocean or through

• negotiable

  • the person who owns the bill of lading also, therefore, owns the goods

  • the bill is made out in favour of the seller

  • the carrier therefore holds the goods on behalf of the seller

  • the seller will present the bill to a bank to obtain payment …

  • ... and then indorse the bill by signing it (negotiate it), thereby transferring title to the goods

• non-negotiable

  • the bill is made out in favour of the buyer to whom the carrier must deliver the goods

• inland bill

  • relates to a contract for carriage overland to the international departure point

  • for example, from point of manufacture to the shipping port

• ocean bill

  • relates to a contract for carriage from a port in the seller’s state to a specified port in another state

• through bill

  • relates to a contract for carriage which effectively combines “inland” with “ocean”

  • so a contract to transport goods from point of manufacture to specified port in buyer’s state

• air waybill – a non-negotiable receipt and evidence of carriage, not a document of title

  • relates to a contract for carriage of goods by air

  • applies both to domestic flights as well as international flights

4 Letters of credit

• are a means whereby a seller can get immediate payment for goods sold ....

• ... but the buyer still enjoys a period of credit before payment is made

• letters of credit should be arranged before the contract is entered into

• mechanism (B is buyer, BB is buyer’s bank or the issuing bank, S is seller, SB is seller’s bank or the advising bank)

1 B asks BB to issue a letter of credit in favour of S

2 by the issue, BB is guaranteeing that S will be paid

3 BB asks SB to advise S that a letter of credit has been issued

4 SB agrees to handle their end of the process

5 S produces to SB proof of delivery / transfer of the goods

6 SB pays S, and forwards the documents to BB

7 BB checks the documents, and pays SB

8 BB debits B’s account, and hands the documents over to B

• a letter of credit may be confirmed or unconfirmed

  • confirmed is where, at step 4 above, SB adds its own guarantee

  • unconfirmed – SB does not add its own confirmation / guarantee that S will be paid

• under UCP 600 a documentary credit is irrevocable; banks deal with conforming documents, not the goods, and strict compliance is required

5 Letters of comfort

• apply to situations involving a group of companies

• typically, a letter of comfort will be written by a parent / holding company indicating its intention to continue to support its subsidiary

• most commonly applicable where the subsidiary is insolvent or is trying to raise finance

• but (normally) it is just a comfort

• rarely does such a letter bind the parent so, if the subsidiary in fact does become insolvent, there is no liability for the parent to settle the subsidiary’s obligations