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Payment Terms Generally Adopted in Foreign Trade
As “delivery” is the essence of the contract for the importer (overseas buyer), timely and sure receipt of payment is the matter that is of prime interest to the exporter. In a contract for export of goods, it is natural that there are a number of clauses defining in exact terms how the payment is to be made to the exporter. There are different modes of making payment to the exporter. Some of the payment terms generally adapted in foreign trade are:
Clean payments:
This is the direct form of settlement between the Exporter and Overseas buyer, without the intermediation of a Commercial Bank. The merchandise is shipped by the exporter and the shipping documents and invoice are directly forwarded to the overseas buyer. The buyer then remits the payment. This mode of transacting carries an element of risk for the exporter, if the foreign buyer defaults to make payment. If the payment is remitted in advance, there is An element of risk for the buyer. Hence this form of settlement can be resorted to only in exceptional cases, where the transaction is for a small value, or that the exporter and overseas buyer belong to a same group of concerns. Or the two parties have long-standing satisfactory dealings. Documentary Bills on D/A terms:
Under this system, the goods are consigned by ship, the shipping documents and commercial invoice are attached to a Demand Draft and send to the overseas banker of the Buyer for collection. The documents are delivered to the buyer against payment at the overseas centre. These are called D/P Bills. When a L/C cannot be established this is the ideal mode of payment. The exporter can also attach the after sight bill for a specified No. of days and advise the Banker to deliver the Bill of Loading and other documents against acceptance of the after sight draft. The banker will deliver the documents and on the due date of the Draft he will collect the amount and remit to the exporter. This is called D.A. Bill. The exporter’s bank may also purchase both DP or DA export bills and make the funds available to the exporter immediately less their discount and charges and reimburse itself eventually when the bills are paid by the overseas buyer. Normally Indian Banks allow packing credit facilities to the exporters to procure and export the goods. The packing credit advance is adjusted by purchasing the export bills. It cannot be adjusted by any other mode. This is called a FOBP (Foreign outward bills Purchased) facility. When the Bills are not purchased, the Banker renders a collection service, when presents the bill to the overseas buyer, collects the amount and places to the credit the exporter’s account after collection. Bankers’ Documentary Letter of credit:
A Letter of credit is established by the Banker of the Overseas buyer, in favour of Exporter. The Letter of credit is advised and generally confirmed by a local Bank in the country of the exporter. This enables the exporter to deal with the advising Bank in his country for all purposes. In terms of the Letter of Credit, the Bank establishing the L/C irrevocably undertakers to negotiate bills tendered by the exporter confirming to the terms of the L/C upto a specified amount and within a period. Normally the Letter of credit is made available by the overseas buyer, while sending is order initially or within a short time thereafter, and based on the Letter of credit, the Exporter’s Bank may allow packing credit to the Exporter to procure and export the goods. The Letter of credit safeguards the interests of both the exporter and the overseas buyer and offers the best mode of transacting for both. Normally the exporter should insist on a confirmed irrevocable credit. The terms of an irrevocable credit cannot be modified by the issuing bank without the consent of the beneficiary i.e. the exporter. When the domestic Bank representing the foreign Bank opening the L/C adds its own conformation to the credit, it is called confirmed credit. Consignment terms:
Under consignment terms the goods are not sold to the buyer, but sent to the agent of the exporter in the foreign country. The exporter continues to own the goods even if the agent in the overseas country remits an advance payment. The consignment agent arranges to sell the goods at the foreign country on behalf of the exporter and remit the amount of sales from time with an account current. He is paid only commission on the sales for his margin. The exporter’s bank can only allow packing credit against the stocks remaining at the overseas centre on consignment basis and no bill can be purchased.
Distinction between “L.C” and “Guarantee”
A letter of credit is a written undertaking issued by buyer’s bank to pay a certain sum of money within a stipulated period against a specified set of documents. It is a conditional undertaking. It undertakes to pay a certain amount of money on presentation of stipulated documents and the fulfillment by the exporter of all the terms and conditions incorporated in the L/C. The Letter of credit is a separate and distinct contract from the underlying sale contract, and the bank is not responsible for the fulfillment of the terms of the sale contract. The essential and basic provisions of the sale contract must be incorporated in the letter of credit. In addition, the amount of credit, its expiry date, the tenor of the draft to be drawn, party on whom the draft is to be drawn, the documents to be presented, brief description of the goods, must be precisely stated in the letter of credit.
A guarantee is understood as a supplementary contract. A (designated as ‘debtor’) and B (designated as ‘creditor’) enter into a main contract in terms of which A promises to do something to B. Now B wants safeguards in case A fails to perform what he has promised and demands from A to provide him a guarantor. In this contract C at the request of A comes forward and enters into a Contract of Guarantee with B. This is thus a supplementary contract entered by C with B. In terms of this contract of guarantee C promises to B that in case A fails to perform his obligations under the main contract to B, C will perform the same or compensate the loss of B, as may be provided in the contract of Guarantee. A contract of guarantee is called a contingent guarantee.
The differences between the two i.e. L/C and guarantee are given below.
In a letter of credit there are only two contracting parties, i.e. the Banker and the beneficiary. The Banker opens the L/C on behalf of the buyer, but the buyer is not a contracting party, AS THE Letter of credit is a distinct and independent contract. In a Guarantee there are always three parties, 1. The Debtor 2. The Creditor (beneficiary of the guarantee) and 3.the Guarantor. The guarantee is a supplementary contract based on an already existing original contract between the Debtor and Creditor (beneficiary of the guarantee. The Letter of credit however is a distinct contract (original contract) and it is not in any way linked with any supply contract excising between the seller (beneficiary of the guarantee) and the buyer (on whose behalf the Bank issues the Guarantee to the beneficiary In a letter of credit the Banker accepts accept certain obligations distinctly and directly, upon the beneficiary fulfilling the terms and conditions of the L/C. In a guarantee however, the agreement is between the Debtor and the beneficiary (i.e. seller and buyer). In a guarantor however the rights of the beneficiary on the guarantor is of a contingency right. The beneficiary can have recourse to the guarantor, only in case of failure of the principal debtor to perform the contact. Cancellation of the original sale/purchase agreement between the seller and buyer will not automatically affect the Letter of credit, since it is an independent contract. However cancellation of the original contract between the Debtor and the beneficiary will have the effect to nullify the guarantee and the beneficiary will not be Able to claim the benefits of the guarantee, when he has no valid claim on the debtor. L/C creates two way obligations. The beneficiary of the L/C can claim payment for his bills only after consigning the goods and presenting the documents drawn strictly in terms of the L/C to the Banker. This sort of enforcement of dual discipline is not possible, in case of a Guarantee. In a guarantee only one Branch of the Bank will be normally be involved with the beneficiary. But in a L/C the L/C is established by the overseas Bank and it is advised by a local correspondent normally, who adds his confirmation. This is the established convention and sellers will only accept such an L/C A documentary L/C covering merchandise provides a ready security (or collateral) to the Banker, as the Banker gets a general lien on the goods covered by the consignment. No such security accrues to the Bank in a guarantee transaction in the normal course, and hence the Banker will seek in addition to Margin deposit, mortgage of immovable properties as collateral security. In view of this a L/C is deemed a self-liquidating credit, while a Guarantee is deemed as an unsecured commitment. Letter of credit can be negotiated in parts stretched over a period. A guarantee cannot be invoked more than once.
In view of several limitations of Guarantee it is not normally availed of a facility in export or Inland Trade. Letters of credit either Foreign or Inland is considered as the convenient tool. It is possible to issue a single revolving Letter of credit and cover all sales/purchases done periodically during a course of a year. Such flexibility and ease are not available under a guarantee. However a Guarantee from a Bank is considered appropriate in case deferred payment sale of equipment. The seller supplies (sells) a costly equipment on deferred payment (quarterly/half year or annual payments) over 3 to 5 years. As the seller has no security in case of default by the buyer, he insists of a Bank guarantee. Such a guarantee called Deferred Payment Guarantee is normally issued by the Bank. . A Letter of credit initiates a new line of operations and serves as an integral part thereto. On the other hand a Guarantee being a provision for a specific contingency comes into focus only when there is a break in the regular transactions and an exception development (i.e. default by the guarantee giver) takes place. If there is no such default by the guarantee giver, the guarantee never comes into focus and gets automatically discharged on the completion of the transaction. Based on this criterion we may say that the L/C is a driving force, while the guarantee is an exception handler.
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