La lettre de change (document en anglais)

ANGLAIS PTC CM 09/10

When the seller attaches the bill of exchange to the …, the bill of exchange is called a documentary bill of exchange. By doing this, the seller ensures that the buyer doesn’t obtain any rights to the goods via the transport document, before having accepted/ having paid the bill of exchange. Since they are negotiable, draughts may be transferred by endorsement to a third party who then becomes the holder in due course.

The limits of the DBE (documentary bill of exchange)

This system against documents provides some security for the seller through his ultimate control of the document that gives title to property in the goods. However, the buyer’s ability or willingness to pay may change from the time the goods are shipped until the time the draft is presented. There is, in fact, no legal binding (bank promise) to pay that underpins the buyer’s obligation meaning that the seller is not fully protected. They can’t really rely on any bank to cover the buyer’s failure to pay, there’s no guarantee behind it. The seller who has incurred the expense of the manufacturing the goods and shipping them all the way to the buyer’s country runs the risk, however he still runs the risk of seeing his draft dishonored by the buyer and, in this instance, he is left with the goods on his hands and he will then have the trouble and expense of exposing/selling them elsewhere.

Section 2: The documentary credit

This is the most secure method of payment that involves the letter of credit. The documentary credit is a method of payment used when the seller needs a firm assurance before he arranges for the physical shipment of the goods that he would be paid after shipment. As we’ve seen, there are other less secure methods of payment and the use of documentary credit may be pinned on a number of factors. Obviously, the security aspect, the degree of confidence felt by the seller in the credit worthiness of the buyer, but also the use of the documentary credit may depend on the type of the market. If it’s a seller’s market, he can impose documentary credit.

The basic mechanism of the documentary credit

It’s a complicated mechanism, it involves all main parties: the buyer and his bank (known as the issuing bank) and the seller and the bank situated in the seller’s country (known as the advising bank). There is a general duty to comply to the original contract of sale between the buyer and the seller, which is the basic root contract from which all the other agreements stem. The seller’s right to demand a documentary credit and the exact nature of the credit to which he is entitled depend on the terms of the contract of sale. The buyer must ensure that the letter of credit (L/C or LC) issued to the seller is that described or stipulated in the contract. Fulfillment of this obligation is a condition precedent to the seller’s duty to perform his delivery obligations.

Condition precedent = something must happen before we can actually enter into contractual situation.

If the contract provides for a conform credit, the seller is entitled to reject an unconfirmed credit and if the L/C stipulates that a bill of lading whereas the contract of sale permits the seller to tender (propose, present) a delivery order, the L/C will likewise be defected and can be rejected by the seller.

Steps

The first major step is taken by the buyer who must apply to his bank (issuing bank, in the buyer’s country) to open a credit in favor of the seller, meaning that the seller will be eventually be paid. This means that the issuing bank is undertaking to pay him a sum equal to the contract price of payment. Payment to the seller is actually made later. The buyer will be required to fill in/out the bank’s standard form of application to open the credit giving full details of his requirements.

The credit to be issued by the issuing bank may be either revocable or irrevocable. The revocable can be withdrawn by the issuing bank without notice, thus giving the seller little security. Irrevocable credit however constitutes a binding undertaking which the issuing bank is not entitled to cancel whether with/without notice.

The issuing bank may issue the L/C directly to the seller, but almost invariably it will arrange a notification by another bank, known as the advising bank, which is situated in the seller’s country.

The advising bank informs the seller of the opening of a credit in his favor and the issuing bank becomes immediately bound (on presentation of the required documents) vis-à-vis the seller when the latter receives the L/C.

If, as is often the case, the contract of sale stipulates confirmed credit, the issuing bank will ask the advising bank to add its own undertaking to honor the credit on due presentation of the documents. This undertaking is known as confirmation and the credit is a confirmed credit. This means that it’s a credit under which the issuing bank undertaking is reinforced by a separate payment undertaking.

The advantages for the seller are obvious: instead of having to rely exclusively on a foreign bank (the issuing bank), whose standing (financial situation) is unknown to him and which would have to be sued in a foreign country, he has the benefit of a separate commitment by a bank in his own country, which can be relied on to pay or to procure payment and is subject to (to tax) legal action in his own country, at home. When the advising bank does not add the separate confirmation, the credit is called an unconfirmed credit.

Now that the seller has got the L/C, he carefully reviews the conditions set in the L/C. He may well contact his freight-forwarder to make sure that the shipping day will be respected, since goods must be shipped … . The seller will also check to see that the L/C’s terms correspond to the terms of his Performa invoice (quotation). If the seller cannot comply with/meet any of the conditions, or if any info is incorrect or misspelled, the buyer is immediately alerted.

The seller may want the L/C to specify that partial shipments or transshipment (the cargo changes vessel during the journey) to be permitted, he must then check, at this stage, that these have been foreseen in the LC. Before, as well, the seller can then proceed to fulfill the order and ship the goods. Early in this process, the freight-forwarder completes the necessary documentation when the goods are loaded. Once all the documents relating to the shipment and export transaction as a whole, they are handed over to the advising bank by the seller or by his

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