International Trade Finance - International Trade Finance...

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U N I V E R S I T Y O F A L B E R T A A L B E R T A International Trade Finance BLAw 444
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U N I V E R S I T Y O F A L B E R T A Topics § Letter of Credit § Drafts § ICC and UPC § Standby Letters of Credit § Alternative Methods of Guaranteeing Performance § Sources of Trade Finance
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U N I V E R S I T Y O F A L B E R T A Letter of Credit (LOC) § A commercial bank guarantee that: Guarantees payment by the buyer Guarantees performance by one of the parties Allows the seller to finance the production and export of the goods § Payment is based on documents, not on the terms of sale or condition of goods sold § The bank responsible for payment must verify that all documents are exactly as required by the letter of credit
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U N I V E R S I T Y O F A L B E R T A Letter of Credit (LOC) Documentary collection transactions: § Protect sellers because they do not give up control of the goods until the buyer purchases the documents § Protect buyers because they gain legal control over the goods in transit upon purchasing the documents, reducing the risk of non delivery by the seller Irrevocable Letter of Credit – most commonly used in export transactions Revocable Letter of Credit – provides the seller with little security, as the bank can revoke it an any time
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U N I V E R S I T Y O F A L B E R T A Contracts Created by the Letter of credit 1) Purchasers applies to its bank for a letter of credit. If accepted, bank issues letter of credit; the initial application forms a contract between the account party (buyer) and the issuing bank. 2) The bank, upon issuing the letter of credit, forms a contract with the beneficiary party (seller) to pay the contract price for the presentation of required documents **Note: These are 2 separate contracts**
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U N I V E R S I T Y O F A L B E R T A Key Terms § Advising bank – if the intermediary bank refuses to confirm or guarantee the LOC, it is referred to as an advising bank. It would have no legal obligation to the beneficiary party (in case of dishonoring by the issuing bank), and would merely act as a conduit for transmitting documents and payment. ** Advising bank must be aware that the transaction would be governed by laws of the country with most significant relationship (likely the issuing bank)** § Confirming bank – most often an intermediary bank located near the seller of the port of shipment. If bank confirms the LOC it would become independently liable for its payment, and form two new contracts: 1) Between the confirming bank and the beneficiary 2) Between the confirming bank and the issuing bank
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U N I V E R S I T Y O F A L B E R T A Letter of Credit (LOC) in action (a u.s. example) 1) After US exporter (seller) and buyer agree on terms of sale, the buyer arranges for its bank to open a LOC 2) The buyer’s bank prepares an irrevocable LOC, including all instructions to the seller concerning the shipment 3) The buyer’s bank sends the irrevocable LOC to a US bank, requesting confirmation 4)
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