CHAPTER 4: RULES GOVERNING IMPORTS AND EXPORTS OF GOODS

Domestic scale- it is the exchange of goods within a country.

International scale- it is the exchange of goods among different countries through the import and export
transactions.
International sales of goods- are performed in the forms of export; import; temporary import for re-
export; temporary export for re-import; and international sales of goods without import-export procedures
at border-gates.
10 Key Clauses of an International Sales Contract

1. Description of goods 6. Documents

2. Contract price 7. Inspection of goods by the buyer
3. Delivery terms 8. Retention of title
4. Time of delivery 9. Force majeure
5. Payment conditions 10. Resolution of disputes

4.1 Regulations on International Sales of Goods

Different sources of law that govern the international sales of goods

 Domestic law,
 International treaties, and
 International mercantile customs and usages.

A. Domestic Law
-a sales contract may be governed simultaneously by the laws of many countries.

CONFLICT OF LAWS ON CONTACTS

 Conflict of laws on contract forms: It is the case where the laws of different countries comprise
different rules on the form of the sales contracts.
 Conflict of laws on the content of contracts: It is the case where the laws of different countries
comprise different rules on the various and complex issues, such as the rights and obligations of
parties, principal contract terms, or the application of remedies in the case of breach of contract.
Rules of conflict do not directly define the rights and obligations of parties involved in a transaction,
but 'refer' to an applicable law which is most directly are applied, the applicable law may be 'lex fori',
or the law of another country.
B. International Treaties
Conflicts of laws may cause disputes in international sales of goods. To prevent these, countries often
negotiate the adoption of related international treaties in order to unify certain rules aiming at
governing these transactions.
Two types of International treaties
1. Treaties to Unify the Substantive Rules
The unification of the substantive rules occurs when countries agree to create the substantive rules, in
order to govern international sales of goods transactions. Since 1920s, many international commercial
treaties containing substantive rules were adopted and performed, showing an indispensable trend in the
economic development of the world.
The Vienna Convention 1980
- The United Nations Convention on Contracts for International Sales of Goods (hereinafter the 'CISG').
- CISG was adopted in Vienna on 11 April 1980 and officially came into effect on 1 January 1988.
- Drafted by the United Nations Commission on International Trade Law (UNCITRAL) in an effort to
create a uniform legal document for substantive rules on the international sales contracts.
- As of 1 August 2011, UNCITRAL reported that 77 states have adopted the CISG is estimated.
- The CISG contains specific provisions on the rights and obligations of the seller and buyer, the
responsibilities of each party in cases of breach of contract or others.
2. Treaties to Unify the Rules of Conflict
For certain transactions, the national rules of conflict may differ among countries. If there exist different
national rules of conflict to resolve the same issue, there might occur 'the conflict of rules of conflict.
Applying rules of conflict therefore causes considerable difficulties and risks in resolving the conflicts of
laws.
Conflict Rules Unification
Universal International Treaties
Disadvantages:

 Narrow scope of application

 Relatively small number of treaties
 Relatively small number of contracting parties
Reaction of the EU
First: treaties with a special regime (closed)
Then: EU legislation (secondary law)
The Hague Convention 1955 on the Law Applicable to International Sales of Goods
According to this Convention, a sales contract must be in compliance with the law chosen by the involved
parties. If there is no agreement on the applicable law, the law of the country where the seller has his/her
office upon received orders shall apply, with the following exceptions: (i) if an order is assigned to be
performed by a branch of the seller, the law where the branch locates shall apply; (ii) if an order is
received by the seller or his/her agent in the buyer's country, the law of the country where the buyer has
his/her permanent residence shall apply (Article 3). The Hague Convention took effect in 1964 and
currently has eight member countries (such as Denmark, Finland, France, Italy, Norway, Sweden,
Switzerland and Niger)

STATUTORY CHOICE OF LAW

TRADE IN MOVABLES TRADE IN MOVABLES OTHER CONTRACTS
The Hague International Sales The United Nations Convention The Rome Convention on the
Convention on Contracts for the law applicable to contractual
International Sale of Goods obligations
CISG
1995 1980
1980

C. International Mercantile Customs and Usages

International mercantile customs and usages are an important source of law governing sales contracts.
They have been recognized and widely applied to business global scale. Some international mercantile
customs and usages applied to the international sales of goods include International Commercial activities
on a regional or a Terms (hereinafter the 'INCOTERMS') codified and issued by the Chamber of
Commerce (hereinafter the 'ICC') in 1936 (and amended in 1953, 1968. 1976, 1980, 1990, 2000 and
2010; and Uniform Custom and Practice for Documentary Credits (hereinafter the 'UCP'). The
international mercantile customs and usages usually govern specific issues, such as the transfer of risk
from the seller to the buyer, the obligations of each party related to the transport and insurance of goods,
etc.
D. Other Legal Sources
The 'Model Contracts' and 'General Principles of Contract Law' are other sources of law, which are also
becoming increasingly important in governing international commercial contracts in general and sales
contracts in particular, having a legal effect similar to international mercantile customs and usages.
Model Contracts -It is necessary to distinguish a model contract drafted by a professional association,
from one provided to the parties by an independent organization.
- Professional associations of many sectors have developed Model Contracts, such as the Model Contract
on the sale of grains (GAFTA contracts), the sale of oil (FOSFA contracts), and the sale of coffee, cocoa
or cotton.
General principles of contract law- they have been usually principles extracted from international
business practices recognized and applied by traders in their international contracts transactions, and have
considered popular. They have included the principles of free contract, cooperation, good faith and
precaution. Most of these principles have been also inserted uniformly into national laws.
International Commercial Terms (INCOTERMS)
Are the most widely used commercial terms applied throughout the world published by the ICC.
First published in 1936, and its current version is INCOTERMS 2010.
The 2000 revision makes few changes from the previous revision, INCOTERMS 1990. The main
reasons for the revision was:

 The desire to adapt terms to the increasing use of Electronic Data Interchange, including
negotiable bills of lading, as long as their contract specifically allows them to do so.
 It stemmed ‘from transportation techniques, particularly the utilization of cargo in containers,
multimodal transport, and roll-on-rol-off traffic with road vehicles and railway wagons in “short
sea” maritime transport.’

Older terms that applied to peculiar modes of land and air transport, such as Free on Rail (FOR), Free
on Truck (FOT), and FOB Airport, were eliminated and the Free Carrier term was expanded.
INCOTERMS 2010 eliminated four terms such as DAF, DES, DEQ and DDU) and added two (DAP
– Delivered at Place and DAT – Delivered at Terminal), reducing the total number of terms to eleven.
INCOTERMS 2010 officially admits the use of the terms in domestic and international trade.

INCOTERMS 2010
Classified into Four (4) Groups: ‘E’ group, ‘F’ group, ‘C’ group, and ‘D’ group
‘E’ group – requires the buyer to take delivery of the goods at the buyer’s premises.
Term Included: Ex Works (EXW)
‘F’ group – requires the seller to deliver goods to a carrier.
Terms Included: Free Carrier (FCA), Free Alongside Ship (FAS), and Free on Board (FOB)
‘C’ group – requires the seller to arrange and pay for carriage, but seller does not assume the risk for loss
or damage once the goods are delivered to the carrier.
Terms Included: Cost and Freight (CFR), Cost, Insurance and Freight (CIF), Carriage Paid to
(CPT), and Carriage and Insurance Paid to (CIP)
‘D’ group – requires the seller to bear all costs and risks of bringing the goods to the buyer’s country.
Terms Included: Delivered at Terminal (DAT), Delivered at Place (DEP), and Delivered Duty Paid
(DDP)

INCOTERMS apply to particular Forms of Transport:

1. Apply ONLY to Sea and Inland Waterway Transport:

 FAS  FOB
  CFR  CIF
2.) Apply to ANY Form of Transport:

 EXW  DAT
 FCA  DAP
 CPT  DDP
 CIP

United Nations Convention on Contracts for the International Sale of Goods (CISG)
The CISG was drafted by the United Nations Commission on International Trade Law (hereinafter the
‘UNCITRAL’) and adopted in Vienna in 1980.
It was based on two (2) previous attempts to achieve a uniform law on international sales, such as
the Conventions relating respectively to the:

 Uniform Law on the Formation of Contracts for the International Sales (‘ULF’)
 Uniform Law on the International Sales of Goods (‘ULIS’)

Both were adopted in The Hague in 1964. However, did not gain widespread success.
The CISG has now gained worldwide acceptance and is considered to be the most successful
convention promoting International Commerce. UNCITRAL reported that 77 states have adopted the
CISG.

The CISG includes 101 Articles and is divided into Four (4) Parts:
1. PART I (from Article 1 to 13): Lays down Rules on it Application and General Provisions
2. PART II (from Article 14 to 24): Governs the Formation of the Contract
3. PART III (from Article 25 to 88): Contains Substantive Rules for the Sales Contract (i.e., the
Obligations and Rights, in particular the Remedies, of the parties)
4. PART IV (from Article 89 to 101): Contains Rules on Ratification and Entry into Force, including the
Reservations

Check the Reservations to determine whether a State has Ratified the CISG. There are options that
may be taken by Ratifying the States. They fall into Three (3) Main Categories.
1. The Reservations which may prohibit the application of the CISG
2. The Reservations that may limit the application of the CISG
3. The Reservations that alter the content of the CISG
The Main Contents of the CISG:
(a) the Criterion for Identifying an International Sales Contract according to the CISG
(b) Scope of the CISG’s Application
(c) Formation of International Sales Contract
(d) the Buyer’s and Seller’s Obligations
(e) Remedies for Breach of International Sales Contract

A. The Criterion for Identifying an International Sales Contract according to the CISG
Article 1 of the CISG laid down ‘place of business of parties to contract’ as an only criterion for
identifying an international sales contract.
A contract is considered as an International Sales Contract if the parties to the contract have their
respective place of business in different countries which are contracting states.

B. Scope of the CISG’s Application

Two (2) Cases of Application
1. The case where there is a choice of law referring to apply the CISG.
2. The case where parties to the contract do not expressly or impliedly identify the applicable law as the
CISG in the contract.
Under Article 1(1)(a), if no private international law rules apply, the CISG would be the governing
law.
Under Article 1(1)(b), where private international law rules refer to the law of a contracting state, the
applicable law would be the CISG.

Three (3) Cases of Non-Application

1. Non-Application of the CISG to certain types of transaction (e.g., Consumer Sales, Auctions or
Executions or Other Sales by Authority of Law, Sales of Securities)
2. Non-Application of the CISG to certain specific goods (e.g., Ships, Aircraft, Electricity, Property)
3. Non-Application of the CISG to some subject matter (e.g., Validity of the Contract, the Effect which
the contract may have on the property in the goods sold, the Liability of the Seller for the Injuries caused
by the Goods to any person)

Forum Applicable Legal System CISG Applicable?

In Reservation Contracting State Law of Reservation Contracting NO
State
In Reservation Contracting State
Law of Non-Reservation YES
Contracting State
In Non-Reservation Contracting Law of Reservation Contracting YES – forum state has
State State international law obligation to
apply the CISG.
OR
NO – applying the CISG does
not constitute correct application
of the lex causae.
In Non-Contracting State Law of Reservation Contracting NO
State

C. Formation of International Sales Contract

1. Offer
An offer is a definite expression of the offeror’s will (intention to be bound), addressed to one or more
specific persons. A proposal that is not addressed to one or more identified persons would be considered
as an offer only if this is clearly indicated by the person making the offer.
Under Article 15(2) of the CISG:

 The offeror may still withdraw his offer if the withdrawal reaches the offered BEFORE or at the
SAME TIME as the offer, even the offer is irrevocable.
 Also, the offeror may still revoke his offer after the offer has reached the offeree, but BEFORE
THE ACCEPTANCE has been dispatched.

2. Acceptance
 By accepting, the offeree indicates his assent to the offer. As soon as an indication of assent
reaches the offeror, the acceptance becomes effective and a contract is formed.
 Actions of the acceptor, such as the dispatch of goods or payment of the price, may indicate an
implied acceptance. Silence or Inactivity on the other hand, does not amount to acceptance.
 If an acceptance is late, the offeror may accept it, but must notify the offeree as soon as possible.
Conversely, if an acceptance is late, but would have been timely under normal circumstances, the
offeror must immediately inform the offerre, is s/he does not accept the acceptance as timely.

D. The Buyer’s and Seller’s Obligation

As stated in Article 9, the parties are bound by any usages to which they have agreed and by any practices
which they have established between themselves.
According to the CISG, the buyer and the seller are under the following main obligations:
1. Obligations of the Seller
a. The seller must deliver goods that conform and are free of third party rights.
b. The seller must hand over any documents relating to the delivered goods.
2. Obligations of the Buyer
a. The buyer must take delivery of the goods.
b. The buyer must pay for the goods

The Obligation to Pay covers Four (4) Elements, such as:

1. Determination of the Price
2. Place of Payment
3. The Moment of Payment
4. The Method of Payment

E. Remedies for Breach of International Sales Contract

According to the Article 79(1) of CISG, breach of contract includes all forms of defective performance, as
well as a complete failure to perform. It also includes both excusable and inexcusable non-performance

Fundamental Breach of Contract has Two (2) Elements:

(a) There has to be a substantial detriment which deprived the aggrieved party of what s/he is entitled to
expect under the contract
(b) The result of the breach must be foreseeable.

1. Remedies of the Buyer

a. Specific Performance
b. Additional Period for Performance

2. Remedies of the Seller

a. Specific Performance
b. Additional Period for Performance

EXEMPTION: Buyer or Seller is not liable for failure to perform, if this is due to an an impediment
beyond his control, rendering the performance impossible.

UNIDROIT Principles of International Commercial Contracts 2010 – PICC

Part A: Desciption of PICC and the Growing Impact they have on the International Contracts
Part B: Their Possible Application to International Sales Contracts
A. PICC – Overview
UNIDROIT is an intergovernmenal institution located in Rome (Italy), active, as its name indicates, at
the harmonization of laws.
In more recent times, the PICC are one of the most outstanding accomplishments of UNIDROIT. The
project originated in 1971. The first texts were elaborated by a prestigious triumvirate of comparative
lawyers such as Professors R. David (Civil Law), C. Schmithoff (Common Law), and T. Popescu
(Socialist Law).
In 1980, a Working Group took over, chaired by Professor J. Bonell of Italy.
PICC
 It consist of a codification of the general law of contracts, where the provisions themselves (the
so-called “black letter rules’) are followed by comments and illustrations
 They have been conceived as a ‘soft law’ instrument, with no own normative value.
 They are simply published as a book, and their contents are at the disposal of anyone interested in
using them.
 The nature and possible uses of the PICC are stated in their Preamble:

These Principles set forth general rules for international commercial contracts, are as listed
below:

 They shall be applied when the parties have agreed that their contract be governed by them.
 They may be applied when the parties have agreed that their contract be governed by general
principles of law, the lex mercatoria or the like.
 They may be applied when the parties have not chosen any law to govern their contract.
 They may be used to interpret or supplement international uniform law instruments.
 They may be used to interpret or supplement domestic law.
 They may serve as a model for national and international legislators.

The FIRST EDITION of the PICC came out in 1994.

The SECOND EDITION, published in 2004, added new chapters on:

 Authority of Agents
 Third Party Rights
 Set-Off
 Assignment of Rights
 Transfer of Obligations
 Assignment of Contracts and Limitation Period

The THIRD EDITION, issued in 2010, brought innovations mainly on the subjects of:

 Validity
 Restitutions
 Conditions and Plurality of Obligors and of Obligees
 PICC 2010 now consist in 211 articles (only 120 in 1994 edition and 185 in 2004 edition) After the
already mentioned Preamble, eleven chapters successively deal with:
(i) General Provisions
(ii) Formation and Authority of Agents
(iii) Validity
(iv) Interpretation
(v) Content, third party rights and conditions
(vi) Performance
(vii) Non-Performance
(viii) Set-off
(ix) Assignment of Rights, Transfer of Obligations, Assignment of Contracts
(x) Limitation Periods
(xi) Plurality of Obligors and Obligees

B. The PICC and International Sales Contracts

PICC are rules applicable to commercial contracts in general; they have been devised to govern any type
of contract. They state common rules concerning, mainly: the Formation, Performance and Non-
Performance of Contracts in general.

Principles of European Contract Law (PECL)

Are the product of work carried out by the Commission on European Contract Law, a body of
lawyers drawn from all the member states of the European Communinty, under the chairmanship of
Professor Ole Lando.
They are a response to a need for a Community-Wide Infrastructure of Contract Law to consolidate
the rapidly expanding volume of Community law regulating specific types of contract.

(a) Application of the PECL

The PECL may be applied only to international sales contracts that are connected to Europe.
As stated in Article 1:101 of the PECL, the PECL will apply to the following situations:
1. The parties have agreed to incorporate them into their contract or that their contract is to be governed
by them:
2. The parties have agreed that their contract is to be governed by ‘general principles of law’, the lex
mercatoria or the like; and
3. The parties have not chosen any system or rules of law to govern their contract.
(b) Freedom of Contract
 Direct Application of Freedom of Contract is laid down in Article 1:102 of the PECL. The parties
are free to enter into a contract and to determine its contents, subject to the requirements of good
faith and fair dealing, and the mandatory rules established by the PECL.
 Article 1:103 of the PECL details the Limiting of Freedom of Contract by mandatory rules. This
provision allows parties, when applicable law determined by the choice of law rules of the forum
before which dispute is brought.
 The freedom of parties to submit their contract to the PECL can thus allow them to elude the
application of certain national mandatory rules, which the commentary has christened ‘ordinary’
mandatory laws in contrast to the so-called ‘directly applicable laws’ which are applicable
irrespective of which law governs the contract.

(c) Formation of the Contract

 Under PECL, a contract is concluded on the basis of the agreement of the parties, the formation
of contract is constituted mainly through exchange of Offer and Acceptance.
 The Acceptance that does not conform to the offer is deemed to be a ‘counter-offer’, unless the
modifications were not material. Negotiations have to be entered into and continued in good faith.

(d) Remedies for Non-Performance

The PECL contain a series of remedies for Breach of Contract, such as:

 Specific Performance
 Reduction of the Price
 Termination of Contract
 Reimbursement of Damages

EXCEPTION: In respect of excuse due to an impediment beyond the control of the non-performing
party, the remedies of reimbursement of damages and of specific performance are not admitted
METHODS OF FINANCING OF INTERNATIONAL SALES OF GOODS
Article 1 of the CISG, an international sales as contracts must be signed by parties whose places of
business are in different states. The seller ships the goods obtains the shipping documents and wishes to
receive payment immediately; the buyer, who has not yet received the goods, does not yet wish to pay for
them.
This Section will deal with Two Types (2) of Financing Arrangements under International Trade:
1. It mentions Documentary Bills and Documentary Credits, which have the key functions of providing
payment security for goods and services against specified documents tendered.
2. Standby credits, Performance Bonds and Guarantees with the key function of providing security
against default in performance of the principal in the underlying contract.

Documentary Bills

 In international Sales of Goods, the term ‘documentary bills’ denotes a bill of exchange
accompanied by shipping documents and is intended to be accepted or paid in exchange for those
documents.
 United Nations Convention on International Bills of Exchange and International Promissory
Notes was adopted in 1988 with the intention, as of any international convention, of harmonizing
the law relating to bills of exchange.
 Under English law, Section 3(1) of the Bills of Exchange Act 1882 defines a bill of exchange as
‘An unconditional order in writing, addressed by one person to another, signed by the person
giving it, requiring the person whom it addressed to pay on demand or at a fixed or determinable
future time a sum certain in money to or to the order of a specified person, or bearer.’
 A bill of exchange (also known as a ‘draft), along with others belongs to the class of document
known as ‘negotiable instruments’.
 Where the bill of exchange is negotiated With Recourse, the endorser may be liable to the
subsequent holder if the bill is dishonored by the drawee, upon notice of such failure to honor it by
the subsequent holder.
 Where the bill of exchange is negotiated Without Recourse, the endorser negates this liability
and therefore, the subsequent holder bears the loss.
 Bill of exchange may be a Sight Bill or Time Bill. A Sight Bill must be paid on presentation. A
Time Bill must be paid upon presentment for acceptance, when the bill matures a fixed time after
sight.

Parties in Documentary Collections

When payment is to be made by documentary collection, the parties to the operation are:
 The principal (usually the drawer) - the seller who prepares the collection documents and delivers
them to his/her bank with collection instructions.
The remitting bank - normally the seller's bank which forwards the documents together with the
seller's instructions to the collecting bank.
The collecting bank - is any bank (other than the remitting bank) involved in the processing of the
collection and would normally be the remitting bank's correspondent in the buyer's country.
The presenting bank-normally the buyer's bank, which presents the collection to the drawee (buyer)
and collects the payment, or obtains the acceptance. from the drawee. The collecting and presenting banks
are often one and the same bank
The drawee - the buyer to whom the documents are presented for payment or acceptance.

Documentary Credits

 Also known as Commercial Credits or Letters of Credits.

 These are preferred alternatives to a documentary bill.
 Their popularity in international commerce has led judges to describe them as ‘the life blood of
international commerce’.
 An eminent academic on commercial law in the UK, Professor R.M. Goode, described it as the
‘most successful harmonizing measure in the history of international commerce’. The unfication
is, as Professor E.P. Ellinger, a leading expert of credit, observes, a consequence of necessity and
use of banks as agents in international trade.
 It is a banker’s assurance of payment against presentment of specified documents.
 It may also be describe as an advice issued by a bank authorizing the payment of money to a
named party, the beneficiary, against the delivery by the beneficiary of specified documents
evidencing the shipment of described goods.
Under the UCP, its Article 2 read: ‘Credit means any arrangement, however named or described, that
is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honor a complying
presentation

Uniform Customs and Practice (UCP)

It is seen as a Code to Standardize:
(i) Conditions under which bankers are prepared to Issue Documentary Credits at the request of the trader
willing to arrange the payement for their traded goods via the means of documentary credits
(ii) the Interpretation of Documentary Credits
It was first published by the ICC in 1933 and has been revised 6 times since then. The latest version
is UCP 600 (took effect on July 1, 2007) which replaces the 1993 version (UCP 500)

Application of the UCP Article 1 of the UCP provides:

The Uniform Customs and Practice for Documentary Credits, 2007 Revision, ICC Publication No. 600
(UCP) are rules that apply to any documentary credit when the text of the credit expressly indicates that
it is subject to these rules.
Three (3) Legal Matters should be taken into consideration:
1. UCP Rules Apply to Documentary Credit
2. Applied in the Case where the Text of the Credit Expressly Indicates that It Is the Subject to These
Rules
3. The UCP is Binding on All Parties thereto unless Expressly Modified or Excluded by the Credit
In order to ascertain the definition of a documentary credit under Article 2 above, relevant terms in this
Article as defined in the UCP should be taken into consideration, as follows:

 'Issuing bank' means the bank that issues a credit at the request of an applicant or on its own
behalf;

 'Honour' means:
To pay at sight if the credit is available by sight payment;
To incur a deferred payment undertaking and pay at maturity if the credit is available
by deferred payment;
To accept a bill of exchange ('draft') drawn by the beneficiary and pay at maturity if the
credit is available by acceptance.
'Complying presentation' means a presentation that is in accordance with the terms and conditions of
the credit, the applicable provisions of these rules and international standard banking practice.

TYPE OF DOCUMENTARIES

1. Irrevocable and Revocable Credits

• Irrevocable Credit
- Article 3 of the UCP provides that a credit is irrevocable even if there’s no indication to that
effect. An irrevocable credit constitutes a definite undertaking by the issuing bank that it ill honor the
credit, provided that there is a complying presentation of the documents specified in the credit. •
Revocable Credit
- A credit that may be cancelled or the terms altered at anytime without the consent of the
beneficiary.

2. Unconfirmed and Confirmed Credits

- Confirmation a definite undertaking of the confirming bank, in addition to that of that of the
issuing bank, to honor or negotiate a complying presentation, the beneficiary has assurance that
she will have one more definite undertaking to pay in addition to that of issuing bank.
- Unconfirmed credit only issuing bank provides an undertaking to pay the beneficiary and the
advising bank has no undertaking to pay.
 a. Confirmed plus Irrevocable Credits
- It constitutes an undertaking of payment by to banks. Ideal for seller which almost serves to
provide the assurance that s/he will be paid.
b. When a Credit should be Confirmed?
- When the issuing bank is a well-known and located in a country with a stable political and
economic climate, confirmation has a little practical value and otherwise.
c. Operation of a Credit Confirmed
- The instruction to an advising bank to confirm a credit must be given by the issuing bank, which
is responsible for the confirmation fee unless it instructs that the fee is to be charged to
beneficiary.
- d. Silent Confirmation
- Undertaking given by a bank at the request of the beneficiary without the request or authorization
of the issuing bank.

3. Sight Payment, Acceptance, and Deferred Payment Credits

- Payment at sight the bank undertakes to pay the seller (the beneficiary) upon the presentation of
sight bill of exchange and with specified documents.
- Deferred Payment where a future payment by the bank is to be made other than against an
accepted bill of exchange (acceptance credit)
- Acceptance Credit the bank undertakes to accept bills of exchange drawn on it by the seller. The
bill ill usually be a time bill payable at a future date.

4. Straight or (Special Advised) Credits and Negotiation credits

- straight credit the issuing banks payment undertaking is directed towards to the seller. Negotiation
credits, the issuing bank payment undertaking is not confined to the seller, it extends to the
nominated bank authorized to negotiate to purchase the bill of exchange drawn by the seller.

5. Red clause and Green clause credits

- Red clause credits are those allowing the seller to draw on the documentary credit in advance of
shipment.
- Green clause credits, the goods are stored in the name of the bank .

6. Revolving credits
- A credit that revolves around time. It enables the beneficiary to present the documents as often as
s/he wishes during the credit period so long as the overall limit specified in the credit is not
exceeded.
 7. Transferable and Non-transferable Credit
- Transferable credit are allows the seller (beneficiary) to transfer the rights embodied in the credit
to a third party. Transferable doesn’t mean negotiable, a documentary credit is not a negotiable
instrument that maybe transferred from one person to another through endorsement and delivery.

8. Demand Guarantees and standby Credits

- These types of credit are within the UCP, these are different from the ordinary documentary
credits.

OPERATION OF DOCUMENTARY CREDITS

• The seller and the buyer agree in the sales contract the payment shall be made under a
documentary credit
• The buyer (acting as the applicant for the credit) requests a bank to his/her on country to open a
documentary credit in favor of the seller on the terms specified by the buyer in his/her instruction.
• The issuing bank opens an irrevocable credit that undertakes I. to pay the contract price
II. to incur a deferred payment undertaking and pay at maturity
III. to accept a bill of exchange drawn by the beneficiary and pay at maturity.
• The issuing bank may open the credit by sending it directly to the seller.
• The issuing bank may also ask the advising bank to add its confirmation to the credit. If so, the
advising bank gives the seller a separate payment and benefits from having the payment
obligation localized in his/her on country.
• The seller ships the goods and tenders the required documents to the advising bank. If the
documents conform to the terms of the credit, the advising bank ill:
I. Pay the contract price
II. Incur a deferred payment undertaking and pay it at maturity
III. Accept a bill of exchange and pay it at maturity
IV. Negotiate a bill of exchange drawn for a price and seek reimbursement from the issuing
bank.

THE CONTRACT ARIING OUT OF A DOCUMENTARY CREDIT TRANACTION

Contractual Relationship in a documentary credit transaction.

I. There is the underlying sales contract sales contract between the seller and the buyer
II. when the issuing bank agrees to act upon the instruction of the buyer, a contract comes into
existent between them.
III. when the correspondent bank agrees to act upon the instructions of the issuing bank and advises
or confirms the credit , there is a contractual relationship between the issuing bank and the
correspondent bank.
IV. The payment undertakings given to the seller by the issuing and confirming banks in a
documentary credit transaction are contractual in nature.
UNDERTAKINGS BY THE ISSUING BANK AND CONFIRMING BANK
when a credit is confirmed, the beneficiary will be paid by the confirming bank. If the credit is
unconfirmed, the beneficiary will be paid by the issuing bank.

with respect to the undertakings of the issuing bank, ARTICLE 7 UCP provides as follows:

a. Provided that the stipulated documents are presented to the nominated bank or to the issuing
bank and that they constitute a complying presentation, the issuing bank must honour if the credit
is available by : I. sight payment, deferred payment or acceptance with the issuing bank
II. sight payment with a nominated bank and that nominated bank does not pay;
III. Deferred payment with a nominated bank and that nominated bank does not incur its deferred
payment undertaking or having incurred its deferred payment undertaking , does not pay at
maturity.
IV. Acceptance with a nominated bank and that nominated bank does not accept a draft drawn on it
or having accepted a draft drawn on it, does not pay at maturity
V. Negotiation with a nominated and that nominated bank does not negotiate.

b. An issuing bank is irrevocably bound to honor as of the time it issues the credit.
c. An issuing bank undertakes to reimburse a nominated bank that has honored or
negotiated a complying presentation and forwarded the documents to the issuing bank.

with respect to the undertakings of the issuing bank, ARTICLE 8 UCP provides as follows:

a. Provided that stipulated documents are presented to the confirming bank, the
confirming bank must:
I. Honor if the credit is available by:
• sight payment, deferred payment or acceptance with the bank
• sight payment with a nominated bank and that nominated bank does not pay;
• Deferred payment with a nominated bank and that nominated bank does not incur its deferred
payment undertaking or having incurred its deferred payment undertaking , does not pay at
maturity.
• Acceptance with another nominated bank and that nominated bank does not accept a draft
drawn on it or having accepted a draft drawn on it, does not pay at maturity
• Negotiation with a nominated and that nominated bank does not negotiate.

II. Negotiate without recourse, if the credit is available by the negotiation with the confirming bank.
b. A confirming bank is irrevocably bound to honour or negotiate as of the time it adds its
confirmation to the credit.
c. A confirming bank undertakes to reimburse another nominated bank that has honoured or
negotiated a complying presentation and forwarded the documents to the confirming bank.
d. If the bank is authorized or requested by the issuing bank to confirm a credit but is not prepared to
do so, it must inform the issuing bank without delay and may advise the credit without
confirmation.
FUNDAMENTAL ASPECTS
I. Principle of Autonomy of the Credit
- Article 4 of UCP
a. A credit by its nature is a separate transaction from the sale or other contract on which it may be
based.
b. An issuing bank should discharge any attempt by the applicant to include as an integral part of the
credit.

II. Standard for examination of documents

- Article 14 UCP
a. A nominated bank acting on its nomination and the issuing bank must examine a presentation to
determine on the basis of documents alone, whether or not the documents appear on their face to
constitute a complying presentation.
b. A nominated bank acting on its nomination and the issuing bank shall each have a maximum of
five banking days following the day of presentation to determine if a presentation is complying.

Article 5 UCP

- Banks deal with documents and not with goods, services or performance to which the documents
may relate.

THE GOVERNING LAW OF DOCUMENTARY CREDITS

Relationship under a Documentary credit arrangement

I. The buyer and the issuing bank

II. The issuing and confirming bank
III. The confirming bank and the seller IV. The issuing bank and the seller

Article 4 of Rome Convention most useful provision in identifying the governing law of documentary
credits, which are:

a. To the extent that the la applicable to the contract has not been chosen, the contract shall be
governed by the law of the country which it is most related to.
b. It shall be presumed that the contract is most closely connected with the country where the party
who is to affect the performance which is characteristic of the contract has.

Standby credits, Performance Bonds and Guarantees

- standby credits, Performance Bonds and Guarantees are instruments that provides security against
default in the performance of the underlying contract, whereas the function of a documentary
credits is to provide payment of goods and services against documents.
a. Standby Credit
- It is issued by a bank and embodies an undertaking to make payment to a third party or to accept
bills of exchange drawn on his/her. It is given by way of security with the intention that it should
only be drawn on if the party by whom the work should be done defaults in the performance of
his/her contractual obligation to the beneficiary.

b. Performance bonds and Guarantees

- sometimes called on demand guarantee, the bank issuing a demand guarantee agrees to make
payment on production of a written demand by the beneficiary or his/her declaration that the
principal has defaulted. The beneficiary needs only a demand payment, s/he does not need to
prove that the principal has defaulted in performance of the underlying contract.
- The recent major development was the worldwide adaption at a large voting majority of the
Uniform Rules for Demand Guarantees , brochure No. 758 at the ICC Commission on Banking
Technique and Practice meeting on 24 November 2009, this set of rules (35 articles) will in most
cases bring a reply and a solution for a fair balance of parties’ interests.