•
LAW OF FINANCIAL INSTITUTIONS AND SECURITIES
BLO3405
• DOCUMENTARY CREDITS
• If an Australian exporter sells goods to an overseas buyer, the following problems may arise:
• The seller wishes to be paid early, the buyer wants to pay as late as possible
• The seller and the buyer will be concerned of the other’s solvency
• The buyer will be concerned the goods meet contract specifications
• DOCUMENTARY CREDITS
• The ‘documentary transaction’ can solve many of these problems
• Basically, the buyer agrees to purchase documents that represent the goods
• The CIF (cost, insurance, freight) contract is the legal embodiment of this notion
• Documents that constititute the CIF contract include:
• A document of title to the goods
• A commercial invoice that describes the goods in detail
• A transferable policy of marine insurance
• DOCUMENTARY CREDITS
• Goods may be lawfully bought and sold by person in possession of these three documents
• The seller must deliver the documents to the buyer, usually this will be through the agency
of both the seller and the buyer’s banks
• DOCUMENTARY CREDITS
• A documentary letter of credit (DLC) is an enforceable undertaking by the issuing bank to
pay the seller in an international trade transaction, provided that the required documents
are tendered and found to be in order
• DOCUMENTARY CREDITS
• The essential features of a DLC are as follows:
• The DLC is a unilateral promise by the bank to the seller
• The promise is enforceable against the bank
• The promise is irrevocble
• The obligation is to pay against the presentation of specified documents
• The promise is independent of the sale contract
• DOCUMENTARY CREDITS
• Related instruments
, • Similar instruments to the DLC are used to make payment on default or non performance
• A demand guarantee is a promise that the bank pay the seller on demand
• These serve as a risk management strategy where there is default on the contract
obligations
• DOCUMENTARY CREDITS
• For example, in a construction project, the builder may be contractually bound to provide a
demand guarantee providing for payment if the project fails to meet construction deadlines
• The guarantee will be payable pending the outcome of any dispute between the parties
• DOCUMENTARY CREDITS
• The DLC means that the credit of the bank is substituted for the credit of the buyer so that:
• The buyer is assured of delivery, since the bank will not approve payment unless the
documents are in order
• The seller is assured of payment, since the buyer’s bank is required to pay if the documents
are in order
• Neither party has control of the goods (represented by the documents) and the money at
the same time
• DOCUMENTARY CREDITS
• ICC Standard Terms
• The law of documentary credits was standardised by the International Chamber of
Commerce when it published the Uniform Customs and Practices of Documentary Credits
(UCP)
• The UCP is a set of contractual terms incorporated by reference into a DLC
• DOCUMENTARY CREDITS
• The UCP rules apply to a DLC if the credit expressly states that it is subject to the rules
• Where there is no conflict, the incorporated terms of the UCP rank equally with the other
terms in the DLC
• Many of the legal problems that arise wrt to DLC are due to the various (multilateral)
contractual relationships that arise
• Future Developments
In the Financial sector
• The future of banking
• We will look at technological driven change in the banking sector
• Blockchain
• Other future developments
LAW OF FINANCIAL INSTITUTIONS AND SECURITIES
BLO3405
• DOCUMENTARY CREDITS
• If an Australian exporter sells goods to an overseas buyer, the following problems may arise:
• The seller wishes to be paid early, the buyer wants to pay as late as possible
• The seller and the buyer will be concerned of the other’s solvency
• The buyer will be concerned the goods meet contract specifications
• DOCUMENTARY CREDITS
• The ‘documentary transaction’ can solve many of these problems
• Basically, the buyer agrees to purchase documents that represent the goods
• The CIF (cost, insurance, freight) contract is the legal embodiment of this notion
• Documents that constititute the CIF contract include:
• A document of title to the goods
• A commercial invoice that describes the goods in detail
• A transferable policy of marine insurance
• DOCUMENTARY CREDITS
• Goods may be lawfully bought and sold by person in possession of these three documents
• The seller must deliver the documents to the buyer, usually this will be through the agency
of both the seller and the buyer’s banks
• DOCUMENTARY CREDITS
• A documentary letter of credit (DLC) is an enforceable undertaking by the issuing bank to
pay the seller in an international trade transaction, provided that the required documents
are tendered and found to be in order
• DOCUMENTARY CREDITS
• The essential features of a DLC are as follows:
• The DLC is a unilateral promise by the bank to the seller
• The promise is enforceable against the bank
• The promise is irrevocble
• The obligation is to pay against the presentation of specified documents
• The promise is independent of the sale contract
• DOCUMENTARY CREDITS
• Related instruments
, • Similar instruments to the DLC are used to make payment on default or non performance
• A demand guarantee is a promise that the bank pay the seller on demand
• These serve as a risk management strategy where there is default on the contract
obligations
• DOCUMENTARY CREDITS
• For example, in a construction project, the builder may be contractually bound to provide a
demand guarantee providing for payment if the project fails to meet construction deadlines
• The guarantee will be payable pending the outcome of any dispute between the parties
• DOCUMENTARY CREDITS
• The DLC means that the credit of the bank is substituted for the credit of the buyer so that:
• The buyer is assured of delivery, since the bank will not approve payment unless the
documents are in order
• The seller is assured of payment, since the buyer’s bank is required to pay if the documents
are in order
• Neither party has control of the goods (represented by the documents) and the money at
the same time
• DOCUMENTARY CREDITS
• ICC Standard Terms
• The law of documentary credits was standardised by the International Chamber of
Commerce when it published the Uniform Customs and Practices of Documentary Credits
(UCP)
• The UCP is a set of contractual terms incorporated by reference into a DLC
• DOCUMENTARY CREDITS
• The UCP rules apply to a DLC if the credit expressly states that it is subject to the rules
• Where there is no conflict, the incorporated terms of the UCP rank equally with the other
terms in the DLC
• Many of the legal problems that arise wrt to DLC are due to the various (multilateral)
contractual relationships that arise
• Future Developments
In the Financial sector
• The future of banking
• We will look at technological driven change in the banking sector
• Blockchain
• Other future developments
