A documentary credit constitutes a commitment by a bank on behalf of the buyer
(the principal/importer) to pay the seller of goods or services (the
beneficiary/exporter) a specified amount immediately (sight) or at a later date
(forward) subject to the presentation of stipulated documents within a
prescribed period of time. The documentary credit is both a flexible means of
effecting payment and a short-term financing instrument.
Applicant = buyer/importer
Instructs his bank to issue a documentary credit.
Issuing bank = the buyer's bank
The bank instructed to issue a documentary credit and which assumes a payment obligation on the buyer's behalf.
Advising/confirming bank = bank of the beneficiary (seller)
Advises or confirms the documentary credit to the beneficiary on the instructions of the issuing bank.
Beneficiary = seller/exporter
Receives the documentary credit issued in his favour.
These terms all refer to the same product. L/C is the abbreviation for "Letter of Credit" and has become rather obsolete. The customary term nowadays is "D/C" = "Documentary Credit".
No. Documentary credits, by their nature, are separate transactions from the sales or other contracts on which they may be based (UCP Art. 4). Any complaints or disputes therefore have to be settled directly between the buyer and the seller outside the documentary credit. The documentary credit is an instrument designed to reflect the payment and delivery terms specified in the sales contract.
Compared with a delivery on open account or a down payment, it is more time- and cost-intensive. On the other hand, the fact that delivery and payment occur concurrently offers the exporter and the importer maximum security.
The proper handling of documentary credits is time-consuming and labour-intensive for the banks involved. However, these costs have to be seen in relation to the resulting benefits and security.
There are no hard and fast rules. It all depends on a given firm's attitude to risks.
No. In documentary credit operations all parties concerned deal with documents and not with goods, services and/or other performances to which the documents may relate (UCP Art. 5). To ensure goods are of the required quality, arrangements can be made for them to be inspected before despatch by an independent agency. The terms of the documentary credit may stipulate the provision of an inspection certificate.
The terms of payment set out in the underlying contract should provide for the issuance of a confirmed documentary credit. Based on this provision, the applicant (buyer) will request the issuing bank to have the documentary credit confirmed by the exporter's bank (= UBS). For the seller, it is however advisable to enquire from UBS beforehand whether such confirmation is possible (due to the bank and country limits in place) and how much it will cost (confirming commission). This is especially important if the goods are to be exported to one of the emerging markets.
«Proposal for importer's request to issue a confirmed documentary credit»
In the case of a documentary credit confirmed by UBS, which is available by acceptance of a draft drawn on UBS, the exporter can request UBS to discount this draft and thus receives the proceeds of the transaction on sight.
This also applies to documentary credits confirmed by UBS which are available by negotiation and, under certain circumstances, for deferred payment documentary credits confirmed by UBS.
It is important to beware of so-called "soft clauses" or "stop clauses". The exporter has little influence here and no real means of verifying if these terms of the documentary credit have been complied with. There may, for instance, be a provision for the documents to be issued or countersigned by the buyer. Should the buyer choose to delay or even prevent the issuance of the documents, the exporter has no means of verifying correct submission.
The confirmed documentary credit only provides this assurance where all the terms of the credit including specified time periods, conformity of documents etc. have been complied with in full.
No. The banks assume no liability or responsibility for the genuineness, form, sufficiency or legal effect of the documents presented (UCP Art. 34).
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