Letter of Credit Learning objectives

Letter of Credit

• Learning objectives:

• The students are required to

• 1. understand the definition and features of L/C;

• 2. master the contents and the types of L/C;

• 3. know the procedures of payment by L/C;

• 4. can read, check and amend L/C.

• 5. master the useful words and sentences

Ability objectives:

• Ability objectives:

• Understand L/C.

• Master the skills of checking and amending L/C.

• Job projects:

• Check and amend L/C.

Warm-up activities (1-1)

• Revision:

• What kinds of Contract do we often have?

• There are two kinds:

• 1) Sales Contract/Purchase Contract

• 2) Sales Confirmation and Purchase Confirmation

• What are the contents of contract?

• Contract usually includes three parts:

Warm-up activities (1-2)

• (1) head of the contract

• (2) body of the contract

• (3) signature

• What is letter of Credit?

• It’s a kind of written document issued by a bank on application of the importer in which the bank promises to pay on certain conditions.

Warm-up activities (1-3)

• What is the relationship between L/C and the Contract?

• L/C is opened against a contract. Upon it is accepted, it becomes an independent document and will not be subject to the contract any more.

Letter of Credit (1-1)

• How many kinds of L/C are they? And what are they?

• There are 12 kinds of letters of credit mentioned here.

• 1. Revocable L/C/irrevocable L/C

• 2. Confirmed L/C/unconfirmed L/C

• 3. Sight L/C/usance L/C

• 4. Banker’s acceptance credit

Letter of Credit (1-2)

• 5.transferable L/C (or) assignable L/C (or) transmissible L/C /non-transferable L/C

• 6.Divisible L/C/indivisible L/C

• 7. Revolving L/C

• 8.L/C with T/T reimbursement clause

• 9. L/C without recourse / L/C with recourse

Letter of Credit (1-3)

• 10. Documentary L/C/clean L/C

• 11. Deferred payment L/C/anticipatory L/C

• 12. Back to back L/Reciprocal L/C

• 13. Usance L/C payable at sight or Buyer’s usance L/C

Letter of Credit (1-4) The Procedures of payment by L/C

• How many parties involved in the operation of L/C? (Six)

• Buyer/applicant contract Seller/beneficiary

• inform apply to … check/amend

• to buy for opening … inform effect shipment

• make out

• Issuing Bank issue … and send Advising Bank

• check … against present … for

• reimburse

• Paying Bank send… for … Negotiating Bank

• check … against

• (Reimbursing Bank) comply with

Letter of Credit (1-5)

• 1. Both the seller and the buyer sign the contract and agree to pay by L/C.

• 2. The buyer, the applicant, applies to a bank in his place to establish an L/C in accordance with the contract. The bank is called the issuing bank or the opening bank.

• The opening bank opens an L/C and sends it to a bank in the seller’s place. This bank is called the advising bank. The advising bank notifies the seller, the beneficiary, of the arrival of the L/C.

Letter of Credit (1-6)

• The seller checks the L/C against the contract and amends the L/C if necessary. If the L/C is found in accordance with/comply with the contract/in good order, the seller will effect shipment and get all the shipping documents ready/make out all the shipping documents and presents them to a bank for negotiation. This bank is called the negotiating bank.

Letter of Credit (1-7)

• The negotiating bank checks the documents against the L/C. If all the documents are in compliance with the terms of the L/C, the bank negotiates the beneficiary.

• After negotiation, the negotiating bank sends the documents to the issuing bank or a bank appointed by the issuing bank for reimbursement. This bank is called the

Letter of Credit (1-8)

• paying bank or reimbursing bank. The paying bank checks the documents against the L/C and reimburse the negotiating bank.

• 6. Finally, the issuing bank asks the buyer, or the applicant to buy the shipping documents.

Letter of Credit (1-9)

• What is the basic content of an L/C?

• Basic content of an L/C:

• 1. Parties concerned in an L/C

• 1) applicant / for account of / accountee or derer / opener/in the name of/at request of/you are authorized to draw on 2) issuing/establishing/opening bank

• advising bank

• notifying bank

Letter of Credit (1-10)

• 2. advised through…bank advised by airmail / cable through…bank / be advised through / transmitted through

• 3. negotiating bank / available with

• (Usually it’s the correspondent bank of issuing bank)

• 3) beneficiary/in favor of / in one’s favor /favoring

• 4) reimbursement bank / reimbursing bank

• 5) paying bank / accepting bank

Letter of Credit (1-11)

• 4. L/C Clause：

• 1) Drawn Clause

• 2) Shipping Documents Clause

• 3) Shipment / shipment Clause

• 4) Goods Description

• 5) Instruction to Negotiating Bank

• 6) Banking Charges

Letter of Credit (1-12)

• 7) Discrepancy Clause

• 8) Undertaking Clauses

• 5. Details of the L/C itself

• 1) Categories / form / kinds of the L/C: irrevocable /documentary/sight L/C

• L/C No. / Our Ref. No

Letter of Credit (1-13)

• 3) Amount of the L/C

• L/C amount / credit amount/amounting to / for amount of / for a sum of / for amount RMB￥… amount not exceeding / up to an amount of / to the extent of / maximum amount

• /up to an aggregate amount of / for amount about …/USD5000+ 5%（more or less 5%，plus or minus 5%）

Ability Training Task (1-1)

• 1. Translate the following into English:

• 1) 金额为…

• 2) 累计金额最高为港币……

• 3) 总金额不得超过5英镑……

• 4) 金额为36500港币

• 5) 金额为10万美元……

• 6) 金额的总数不得超过85000日元

Ability Training Task (1-2)

• Suggested answer:

• 1) amount RMB￥…

• 2) up to an aggregate amount of Hongkong Dollars…

• 3) for a sum (sums) not exceeding a total of GBP50,000

• 4) to the extent of HKD36,500

• 5) for the amount of USD100,000

Ability Training Task (1-3)

• 6) for an amount not exceeding total of JPY85000

• Try to tell if the following expiry place is in our favor or not.

• a) Drafts drawn under this credit must be presented for negotiation in China before 5th May, 2006.

Ability Training Task (1-4)

• b) This credit remains valid until May 5, 2006 for negotiation in London.

• c) Draft(s) accompanied by the documents specified herein must be presented to the drawee bank not later than May 5, 2006.

• d) Documents must be presented to us within 15 days after date of B/L date.

Letter of Credit (2-1)

• 3. Drawn clause

• The drawn clauses stipulate what kind of draft is required.

• 1) The credit is available with any bank by negotiation, against presentation of beneficiary’s draft(s) at sight, drawn on us in duplicate and accompanied by the following shipping documents:

Letter of Credit (2-2)

• 2) This credit is available by beneficiary’s draft(s), drawn on issuing bank, in duplicate, without recourse, at sight, for 100% of the invoice value. Draft must indicate the number and date of this credit

• 4. About Shipping Documents

• Have a clear idea about the required title of the documents including the copies and the requirements for making.

Letter of Credit (2-3)

• 3) We hereby establish our irrevocable L/C in your favor up to an aggregate amount of 35,900.00 (in words) available by your draft drawn at sight on us for 100% invoice value.

• 5. About Shipping Documents

• Have a clear idea about the required title of the documents including the copies and the requirements for making.

Letter of Credit (2-4)

• Clean On Board Bill of Lading, Signed Commercial Invoice, Packing List, Insurance Policy, Certificate of Origin, Certificate of Inspection etc. (See the examples on P16-17)

• The documents should give clear indication of the title of the documents and copies, such as：

• in duplicate/in two copies

• in triplicate/in three copies

Letter of Credit (2-5)

• in quadruplicate / in four copies

• in quintuplicate

• in sextuplicate

• Signed commercial invoice in duplicate

• Full set of (two originals and one copy)

• Clean on board ocean B/L (“clean” means no remarks on the B/L)

• 3/3 or 2/3 B/L

Letter of Credit (2-6)

• Made out to order To order of the shipper / xxx Bank

• To bearer

• Delivery / Consigned to … only blank endorsed / endorsed in blank / blank endorsement marked “Freight Prepaid / paid / collect / to collect / to be collected”

• (according to the price terms: CIF “Freight Prepaid or Paid”)

Letter of Credit (2-7)

• To bearer

• Delivery / Consigned to … only blank endorsed / endorsed in blank / blank endorsement marked “Freight Prepaid / paid / collect / to collect / to be collected”

• (according to the price terms: CIF “Freight Prepaid or Paid”)

• notify applicant / opener /… Corp.

Letter of Credit (2-8)

• 6. Insurance Policy / certificate

• 7. Certificate of Chinese origin / GSP Form A Certificate of Origin

• 8. About description of goods：

• DESCRIPTION OF GOODS; SHIPMENT OF GOODS;COVERING THE FOLLOWING

• GOODS; EVIDENCING SHIPMENT OF;SHIPMENT OF;COVERING THE FOLLOWING GOODS

Letter of Credit (2-9)

• BY(STEAMER);CONSIGNMENT;COVERING SHIPMENT;

• MERCHANDISE etc.

• 9. About shipment/shipment clause

• Terms of shipment often includes the port of loading and port of destination, and partial shipment and transshipment allowed or not.

Letter of Credit (2-10)

• Examples:

• SHIPEMNT FROM …TO …

• SHIPMENT FROM … TO … W/T/VIA HONGKONG

• TRANSHIPMENT ALLOWED OLY IN HONGKONG

• TANSHIPMENT IS ALLOWED ONLY GOODS IN CONTAINER

• LATEST SHIPMENT DATE; LATEST DATE OF SHIPMENT; SHIPMENT LATEST; SHIPMENT NOT LATER THAN

Letter of Credit (2-11)

• 10. About banking charges

• Banking charges usually refers to the charges of negotiation , notifying , amendment and postage：

• a) All your banking charges are for beneficiary’s account.（unacceptable）

• All banking charges outside issuing bank’s country are for account of beneficiary.（acceptable）

Letter of Credit (2-12)

• 11. Discrepancy clause

• a) AN ADDITIOANL CHARGE OF USD15.00 FOR US DOLLARS L/C, CAD20.00 FOR CANADIAN DOLLARS L/C OR EQUIVALENT OF CAD 20.00 FOR L/CS IN OTHER CURRENCEIES IS PAYABLE BY THE BENEFICIARY FOR EACH PRESENTING DOCUMENTS WHICH DOES NOT STRICTLY COMPLY WITH THE TERMS OF THIS L/C. AND RELATIVE AMOUNT WILL BE DEDUCTED FROM PROCEEDS AT TIME OF REIMBUSEMENT.

Letter of Credit (2-13)

• b) IF DOCUMENTS CONTAIN DISCREPANCIES, A SPECIAL DISCREPANCY HANDLING FEEOF HKD200.00 WILL BE CHARGED.

• c) A USD30.00 (OR EQUIVALENT) FEE SHOULD BE DEDUCTED FROM THE REIMBURSEMENT CLAIM FOR EACH PRESENTATION OF DISCREPANT DOCUMENTS UNDER THIS DOCUMENTARY CREDIT. THIS CHARGE SHOULD FOR THE ACCOUNT OF BENEFICIARY.

Letter of Credit (2-14)

• What is the reimbursement clause?

• Reimbursement clause

• a) We shall reimburse the negotiating bank as per their instructions upon our receipt of documents in strict compliance with the credit terms.

• b) We hereby engage with the drawers, endorsers and bona-fide holders of draft(s) drawn under and in compliance with the terms of the credit that the same shall be duly. The amount of each draft must be

Letter of Credit (2-15)

• endorsed on the reversed of this credit by negotiation bank.

• What are the ways to pay if the issuing bank has the correspondent account with the negotiating bank?

• 1） Authorize to debit the account of issuing bank

• In reimbursement, we hereby authorize you to debit our account with your bank (your head office Beijing) upon negotiation under your

Letter of Credit (2-16)

• advice to us.

• 2) Authorize to credit the account of issuing bank.

• In reimbursement of your payment made under the L/C, we shall credit your account with us under your telex advice to us.

• 12.Soft conditions

• 1、 This credit is not operative only after having obtained the

Letter of Credit (2-17)

• import license and in any case only after our telex advice to you.

• 2、 The merchandise is subject to a subsequent inspection in Panama. If the specification of merchandise is not in conform with our standard, payment should be refused.

Ability Training Task (2-1)

• Go over the L/C on P20 and find out the needed information.

• 1.What is the issuing bank?

• 2.What kind of L/C is it?

• 3.Who is the beneficiary?

• 4.Who is the applicant?

• 5.When is the L/C opened?

Ability Training Task (2-2)

• 6. What is the L/C No.?

• 7. What about the date and place of expiry of the L/C?

• 8. What is the amount of the L/C?

• 9. When is the latest date of shipment?

• 10. How many original B/L are required?

Letter of Credit (3-1)

• What are the ways to issuing an L/C?

• There are two ways of issuing way:

• 1. L/C is issuing by letters and sent by ordinary mail, air mail or express

• 2. L/C is issuing by cable.

• 1）Brief cable advice: preliminary advice

• The beneficiary should not ship the goods with

Letter of Credit (3-2)

• the brief cable advice, because banks will not accept it and negotiate with it. Usually the cable states clearly with Full details to follow or Operative instrument mailing or Mail confirmation to follow. Brief cable advice is just for the beneficiary to get the goods ready.

• 2）by full cable/telex

• It’s a legal L/C with all necessary details.

• 3）Swift

Letter of Credit (3-3)

• 3）Swift

• Explanation

• Sample of an L/C by telex.

• The credit is available with any bank by negotiation.

• The credit is available with freely negotiable by any bank.

• By negotiation/acceptance/payment.

Letter of Credit (3-4)

• Sample of an L/C by SWIFT

• Basic header

• Applicant header

• User header:

• (additional reading material)

• M/O M=mandatory O= optional

• How to get to know whether the L/C is operative instrument or not?

Letter of Credit (3-5)

• 1) Seek whether there is any “primary key or test key” in the L/C.

• 2) Seek whether there are any sentences like as “No confirmation instrument to follow” “No mail confirmation to follow” etc.

• Code Currency and amount.

Letter of Credit (3-6)

• Questions for discussion:

• Is it the maximum amount of the L/C?

• How do we do when we make out the invoice?

• The amount of the invoice should not be more than that of the L/C

• What is the date of expiry and what is the latest shipment?

• When should we present documents for negotiation?

Ability Training Task 3

• Read and understand the L/C on P113. Try to answer the following questions:

• What kind of L/C is it?

• Which bank is the opening bank?

• Is it a sight L/C or a time L/C? Why?

• What is the advising bank?

• Who is the drawee?

Letter of Credit (4-1)

• Supplementary Material:

• Swift L/C

• Example

• BASIC HEADER

• APPL. HEADER

• USER HEADER

• MT: 700 ISSUE OF A DOCUMENTARY CREDIT

• SEQUENCE OF TOTAL

• FORM OF DOCUMENTARY CREDIT

• DOCUMENTARY CREDIT NUMBER

Letter of Credit (4-2)

• DATE OF ISSUE

• DATE AND PLACE OF EXPIRY

• CURRENCY CODE, AMOUNT

• AVAILABLE WITH …BY…

• G.S.P CERTIFICATE OF ORGIN FORM A IN 3 COPIES

• INSURANCE POLICY OR CERTIFICATE IN DUPLICATE

• ENDOSED IN BLANK WITH CLAIM PAYABLE IN JAPAN IN THE CURRENCY

• OF THE DRAFT COVERING 110 PERCENT OF INVOICE VALUE INCLUDING

• INSTITUTE WAR CLAUSES INSTITUTE CARGO CLAUSES(ALL RISKS)

Letter of Credit (4-3)

• INSTITUTE S.R.C.C. CLAUSES

• BENEFICIARY‘S CERTIFICATE STATING THAT ONE SET OF ORIGINAL

• SHIPPING DOCUMENTS INCLUDING CERTIFICATE OF ORGIN FORM A HAS

• BEEN SENT DIRECTLY TO THE APPLICANT （ATTN. OSALM SECTION）

• WITHIN TWO DAYS AFTER SHIPMENT BY AIR COURIER.

Letter of Credit (4-4)

• ADDITIONAL CONDITIONS

• THIS CREDIT IS SUBJECT TO UNIFORM CUSTOMS AND PRACTICE OF

• DOCUMENTARY CREDITS （1993 REVIDION）I.C.C. PUBLICATION NO 500.

• T.T. REIMBURSEMENT：

• UNACCEPTABLE

• THE GOODS MUST BE CONTAINERIZED

• A COPY OF CABLE ADVISING SHIPPING DETAILS FAX TO THE ACCOUNTEE

• WITHIN 2 DAYS AFTER SHIPMENT.

Letter of Credit (4-5)

• CLEAN ON BOARD COMBINED TRANSPORT B/L OF ITOCHU EXPRESS CO.，LTD IS ACCEPTABLE.

• ALL BANKING CHARGES AND COMMISSIONS INCLUDING REIMBURSEMENT

• COMM. OUTSIDE JAPAN ARE FOR A/C OF BENEFICIARY.

• PERIOD FOR

• PRESENTATIONS：

• DOCUMENTS TO BE PRESENTED WITHIN 10 DAYS AFTER THE DATE OF

• SHIPMENT BUT WITHIN THE VALIDITY OF THE CREDIT

Letter of Credit (4-6)

• CONFIRMATION INSTRUCTION：WITHOUTINSTRUCTION TO BANK

• ALL SHIPPING DOCUMENTS TO BE SENT DIRECT TO THE OPENING

• OFFICE BY REGISTERED AIRMAIL IN ONE LOT

• UPON RECEIPT OF THE DRAFTS AND DOCUMENT IN ORDER， WE WILL

• REMIT THE PROCEEDS TO YOUR ACCOUT WITH THE BANK DESINATED

• BY YOU.

• TRAILER

Letter of Credit (4-7)

• Homework

• Review what have learnt today.

• Read L/Cs on page 110 ,116. Try to understand all the terms and conditions in the L/C.