Closer
look at some key terminology
Many thanks for your overwhelming
response on last week's article - Security in
Letter of Credit (L/c) payment. As many of you
have requested, we take a closer look at some
key terminology and their implication this week:
Irrevocable
Letter of Credit
An irrevocable letter of credit
cannot be amended or cancelled without the consent
of the issuing bank, the confirming bank (if any),
and the beneficiary. The payment is guaranteed
by the bank if the credit terms and conditions
are fully met by the beneficiary. The words "irrevocable
documentary credit" or "irrevocable credit" may
be indicated in the L/c.
Irrevocable
and Without Recourse Letter of Credit
The irrevocable letter of credit
received from an advising bank may be indicated
as "irrevocable and without recourse documentary
credit". The words "without recourse" mean that
the advising bank will not be able to recover
the money paid to the beneficiary in case the
issuing bank does not pay the advising bank.
Revocable
Letter of Credit
A revocable letter of credit can
be amended or cancelled by the issuing bank at
any time without the consent of the beneficiary,
often at the request and on the instructions of
the applicant (buyer). There is no security of
payment in a revocable letter of credit. The words
"this credit is subject to cancellation without
notice", "revocable documentary credit" or "revocable
credit" usually are indicated in the L/c. Obviously,
this type of L/c is highly risky from the beneficiary
point of view.
Confirmed
Irrevocable Letter of Credit
An irrevocable letter of credit
opened by an issuing bank whose authenticity has
been confirmed by an advising bank (usually a
prime world bank) and where the advising bank
has added its confirmation to the credit is known
as confirmed irrevocable letter of credit. The
words "we confirm the credit and hereby undertake
..." or "we add our confirmation to this credit
and hereby undertake ..." normally are included
in the L/c. An exporter whose method of payment
is a confirmed irrevocable L/c is assured of payment
even if the importer or the issuing bank defaults.
The confirmed irrevocable L/c is particularly
important from buyers in a country which is economically
or politically unstable. In a confirmed letter
of credit, the exporter or the importer pays an
extra charge called the confirmation fee, which
may vary from bank to bank within a country. The
fee usually is added to the exporter's account.
The exporter may indicate in the sales contract
that the confirmation fee and other charges outside
the seller's country are on the buyer's account.
Unconfirmed
Irrevocable Letter of Credit
An irrevocable letter of credit
opened by an issuing bank but not confirmed by
an advising bank (usually a prime world bank)
is known as an unconfirmed irrevocable letter
of credit. The promise to pay comes from the issuing
bank only, unlike in a confirmed irrevocable L/c
where both the issuing bank and the advising bank
promise to pay the beneficiary.
Restricted
Negotiable Letter of Credit
In a restricted negotiable letter
of credit, the authorization from the issuing
bank to pay the beneficiary is restricted to a
specific nominated bank.
Freely
Negotiable Letter of Credit
In a freely negotiable letter of
credit, the authorization from the issuing bank
to pay the beneficiary is not restricted to a
specific bank, any bank can be a nominated bank
as long as the bank is willing to pay, to accept
draft(s), to incur a deferred payment undertaking,
or to negotiate the L/c. The words "this credit
is not restricted to any bank for negotiation"
or "this credit may be negotiated at any bank",
or similar words, may be indicated on the L/c.
Revolving
Letter of Credit
When a letter of credit is specifically
designated "revolving letter of credit", the amount
involved when utilized is reinstated or replenished.
In other words, once supply has been made and
beneficiary receives payment for the shipment,
the L/c amount becomes available again without
issuing another L/c and usually under the same
terms and conditions. The revolving L/c is used
for regular shipment of a large quantity over
a period of time (several months).
Latest
Negotiation Date
The latest negotiation date is
the last day of the period of time allowed by
the letter of credit for the presentation of documents
to the bank. The latest negotiation date may not
necessarily be the L/c expiry date. For example,
the latest negotiation date can be July 31, 2001
or 15 days after the date of shipment, whichever
comes first. In case the L/c does not stipulate
the latest negotiation date, it is within 21 days
after the date of issuance of the transport documents,
but on or before the L/c expiry date.
Expiry
Date and Place
The expiry date and place is the
last day of validity of the credit and the place
allowed by the letter of credit for the presentation
of documents for payment, acceptance or negotiation.
In case the validity of an L/c is stated in a
period of time, for example "this credit is valid
for three months" or "this credit is available
for two months" or "this credit is good for one
month", but does not specify the date from which
the time is to run, its validity starts from the
issuance date of L/c by the issuing bank. The
bank normally discourages stating the L/c validity
in a period of time. In case the expiry date and/or
the latest negotiation date falls on a day on
which the bank is closed for reasons not including
the acts of God, strikes, riots, civil commotions,
lockouts, insurrections, wars or any other causes
beyond the bank's control, the expiry date and/or
the latest negotiation date is extended to the
succeeding first day on which the bank is opened.
Such extension, however, does not extend the latest
date of shipment.
Latest
Shipment
The latest shipment---latest date
of shipment or last date for shipment---is the
last day of the period of time allowed by the
letter of credit for shipment, dispatch or taking
in charge.
Transferable
Letters of Credit
A letter of credit can be transferable
or non-transferable. The L/c usually indicates
"transferable" in the case of a transferable credit.
In the absence of such indication, the L/c is
deemed to be non-transferable. In a transferable
letter of credit, the first beneficiary (the exporter)
may request the paying, accepting or negotiating
bank to make the credit available in whole or
in part to one or more second beneficiary or beneficiaries.
The second beneficiary can be another exporter,
trader or manufacturer. The L/c is expressly designated
"transferable" by the issuing bank on instructions
of the applicant. The letter of credit that was
transferred or made available to the second beneficiary
is known as the transferred credit. The bank that
makes the transfer is known as the transferring
bank.
Non-transferable
Letter of Credit
In a non-transferable letter of
credit, the beneficiary cannot transfer the credit
to other beneficiary. The L/c usually indicates
"non-transferable" or "not transferable. " Even
if such indication in not there, the L/c is deemed
to be non-transferable.
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