DOCUMENTARY LETTERS OF CREDIT

Brief description of transaction

Legal base governing relationships between member countries of the letter of credit was represented for the first time in the Uniform Customs and Practice for Documentary Credits (UCP) adopted by Swiss Federal Court in 1952. UCP contains all terms and conditions recognized in international letter of credit transactions, and is considered to be uniform and enforceable. UCP provisions are approved by the International Chamber of Commerce in Paris. At present USP500 in wording of 1993 applies.

Letter of credit is an agreement separated from purchase-sale contract which it may be based on. Banks are by no means obliged to be engaged into such agreements even if letter of credit contains references thereto. As to letter of credit transactions all the parties concerned deal only with documents, and not with goods, services and/or other kinds of obligations which the documents may relate to.

“Documentary letter of credit” and “standby letter of credit” (hereinafter referred to as “letter of credit”) mean any agreement according to which the bank (the issuing bank) acting upon the request and on the ground of instructions given by the customer (applicant for letter of credit) shall:

• make payment to the third party or by its order (to beneficiary), or shall pay or accept bills of exchange drawn by the beneficiary, or
• empower the other bank to make payment or pay, accept or negotiate (buy or discount) bills of exchange against documents provided that all conditions of letter of credit are met.

• Documentary letter of credit is the mean of payment which provides high guarantee of payment to exporter as compared with collection or payment after delivery. However letter of credit has some benefits for importers as well.

• Importer may be given an assistance and recommendations of the issuing bank when determining the set of documents to be delivered under the letter of credit. Exporter will not obtain payment until he delivers documents specified in the letter of credit.
• Importer may be offered a longer credit period in case of letter of credit as compared with direct payment to exporter – less secured way.
• Importer may insist upon goods dispatch within the certain period of time specifying the deadlines in terms and conditions of letter of credit.

• There is a law risk of non-payment, or it does not exist at all provided that exporter meets terms and conditions of letter of credit.
• Letter of credit may be confirmed – so adding guarantee of payment from the other (confirming) bank.

There is a strict set of international rules for documentary letters of credit.

Taking into account the above benefits JSB BROKBUSINESSBANK recommends its customers to give preferences to settlement of account by letter of credit when choosing means of payment.

List of documents required for opening of a letter of credit:

• an application for opening of a letter of credit;
• a foreign trade contract;
• documents provided for in terms and conditions of import letter of credit.

COLLECTION

Brief description of transaction

Collection is a banking settlement transaction according to which the bank by proxy of its customer (exporter) obtains on the ground of settlement documents the funds payable to the customer by the payer (importer).

Standard international rules defining the role and obligations of banks when effecting collection were developed and approved by the International Chamber of Commerce, published as the Uniform Rules for Collection, and took effect in January 1979. According to the above rules, collection means the bank’s order pursuant to instructions and documents obtained (documents mean financial and/or commercial documents):

• obtaining of acceptance and/or payment, if stipulated;
• delivery of commercial documents against acceptance and/or payment, if stipulated;
• delivery of documents pursuant to other conditions.

Collection may be documentary and clean.

Documentary collection is a collection of financial documents accompanied by commercial documents (invoices, shipping and insurance documents), as well as collection of commercial documents only.

Clean collection is a collection of financial documents (bills, cheques and other documents used for receipt of payments) if they are not accompanied by commercial documents.

Benefits for customers

Collection is a mean assisting the exporter in one country in obtaining payment from the debtor in the other country. In case of documentary collection if documents include bill of lading, the exporter may exercise control over goods until the importer either pays for them, or accepts bill of exchange.

List of documents required for collection:

• Collection letter;
• Documents pursuant to collection letter conditions (bill of exchange, cheque, invoices, shipping and insurance documents, etc)

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