FinancingTheFinancingofForeignTrade:Involvestheunderwriting,payingandcollectingofmoneyforthepurchaseofgoodsandservices.TradeDocuments:areusedtofacilitatethefinancingofforeigntrade.BillsofLading:documentsoftitlethatrepresentthegoodsbeingtraded(discussedinLecture10).BillsofExchangeandPromissoryNotes:documentsusedfortransferringmoneyfromthebuyertotheseller.LettersofCredit:documentsusedtoguaranteetheseller'sdeliveryofgoodsandthebuyer'sdeliveryofmoney.A. FINANCINGFOREIGNTRADEB. BILLSOFLADING1. TheEssentialDocumentforallinternationalsalesAdocumentoftitle:Itrepresentsthegoods.Allowsfortransferoftitlewhilegoodsareinthepossessionofacarrierorwarehouseman.

C.BILLSOFEXCHANGE

1.Defined:Abillofexchange(ordraft)is—Awritten,datedandsignedinstrument.Containinganunconditionalorder.Fromdrawer.Directingdrawee.Topayapayee.Adefinitesumofmoney.Withpaymenttobemade.Ondemand,orAtaspecifiedfuturedate.2.BillsofExchangeareNegotiableInstruments“Negotiable〞means:thedrawercannotrefusetopayaproperholderbecause—Theunderlyingcontractwasimproperlyperformed,orTheinstrumentwasimproperlyenteredinto.Importance:Billsofexchangearemorereadilysalableand,therefore,usefulfinancialtools.3.TheLawsGoverningBillsofExchange

a.Anglo-Americanlaws:EnglishBillsofExchangeAct(BEA)of1882.ApplicableinUKandcommonwealthcountries.UnitedStatesUniformCommercialCode(UCC).AdoptedinallUSstatesexceptLouisiana.

b.Modellawsapplicableintherestoftheworld:

UniformLawonBillsofExchangeand

PromissoryNotes(ULB)of1930.

UniformLawforChecks(ULC)adoptedin

1931.4.The“Form〞ofBillsofExchangea.BEAandUCCrequirements:Inwriting.Payableeithertoorderortobearer.b.ULBrequirements:1)Inwriting.2)Payableeithertoorderortobearer.3)Containtheterm"billofexchange"(oranequivalentterm)in—Thebody,andThelanguageofthecheck.4)Statetheplacewherethebillisdrawn.5)Statetheplacewherepaymentistobemade.6)Bedated5.TypesofBillsofExchange

a.Timebill:Draweemustpayatadefinitefuture

time.b.Sight(ordemand)bill:Draweemustpay

eitherwhen—a)Theholderpresentsthebillforpayment,orb)Withinastatedtime-periodafterpresentment.C.Tradeacceptances:

Draweeisonewhobought

goodsfromthedrawerandowesthesaleprice

tothedrawer.a)Draweeisacreditbuyer.b)Drawerisalsothepayee.c)Maybeatimeorsightbill.

d.Checks:Draweeisholdingmoneyonaccount

fordrawer.a)Draweeisabank.b)Checksarealwayspayableondemand.D. PROMISSORYNOTES1.Defined:Apromissorynote(orsimplya“note〞)isAwrittenpromise.Topayadeterminatesumofmoney.Madebetweentwoparties.Maker:Theissuerofapromissorynote.Payee:Thepersontowhomthenoteistobepaid.

2.DifferenceBetweenaPromissoryNoteandaBillofExchange:Themakerofanotepromisestopersonallypaythepayeeratherthanorderingathirdpartytodoso

3.GoverningLaw:SameasthosethatapplytobillsofexchangeE.NEGOTIABILITYOFBILLSANDNOTES

1.RequirementsofNegotiabilitya.Beintheproperform,andb.Containthefollowingpromissoryelements:a)Stateanunconditionalpromiseorordertopay.b)Stateadefinitesumofmoneyoramonetaryunitofaccount.Money:“amediumofexchangeauthorizedoradoptedbyadomesticorforeigngovernmentaspartofitscurrency.〞MonetaryUnitofAccount:“amediumofexchangeestablishedbyanintergovernmentalorganizationorbyanagreementbetweentwoormorenations.〞DefiniteSum:thesumtobepaidmustbeascertainablefromthebillornoteitselfwithoutreferencetoanyoutsidesource.c)Bepayableondemandoratadefinitetime.d)Besignedbythemakerordrawer.Signature:“Anysymbolexecutedoradoptedbyapartywithpresentintentiontoauthenticateawriting.〞F.THENEGOTIATIONANDTRANSFEROFBILLSANDNOTES

1. Assignment:Thetransferofrightsunderacontracta. Theassigneeacquiresonlythoserightsthattheassignorpossessed.b. Anyobjectionstohonoringtheassignedobligationsthatcouldberaisedagainsttheassignorcanberaisedagainsttheassignee.2. Negotiation:Thetransferofabillornoteinsuchawaythattherecipientbecomesaholdera. Negotiatingorderpaper.1) Orderpaper:Abillornotepayabletoanamedpayee.2) Negotiatedbydeliveryandendorsement.b. Negotiatingbearerpaper.1) Bearerpaper:Abillornotepayabletothebearerortocash.2) Negotiatedbydelivery.c. Convertingordertobearerpaperandbearertoorderpaper.1) Ordertobearerpaper:a) Byanendorsementinblank,i.e.,theendorsee’ssignaturealone.b) Byanendorsementtopaytothebearer.2) Bearertoorderpaper:Bytheuseofaspecialendorsement,e.g.“paytoJohnAdams.〞3. ForgedEndorsementsa. Effect.1) ULB:Aforgedendorsementiseffective.a) Boththepersontakingaforgedinstrumentandallsubsequentholdersareentitledtopayment.b) Rationale:Thisruleencouragesthefreetransferandexchangeofbillsandnotes.2) BEAandUCC:Aforgedendorsementisineffective.a) Theendorseetakingfromaforgerisresponsiblefordeterminingthevalidityofanendorsement.1. AlternativestoUsingLettersofCredita.“Cashinadvance〞term:Usedifsellerisunabletodeterminebuyer’screditworthiness.b.“DocumentsAgainstPayment〞term:Usedwhenbuyerwantstoconfirmthatthegoodshavebeenshipped.1)Sellerinstructsabankinthebuyer’scountrytoreleasetitle(e.g.,acarrier’sbilloflading)onlyafterthebuyerdeliverstothebankareceiptfromthesellerindicatingthatthesellerhasreceivedpayment.c.“DocumentsAgainstAcceptance〞term:Buyerinsistsupontakingdeliverybeforemakingpayment.1) Sellerinstructsabankinthebuyer’scountrytoreleasetitleonlyonreceiptofanacknowledgementofdelivery.G. LETTERSOFCREDIT2. TheLetterofCreditTransactiona. Defined:Aninstrument—1) Issuedbyabank,orotherperson,attherequestofacustomer(calledan“accountparty〞).2) Itisaconditionalagreementbetweentheissuerandtheaccountpartythatisintendedtobenefitathirdparty.3) Itobligestheissuer:a) Topayabillofexchangedrawnbytheaccountparty,uptoacertainsumofmoney,b) Withinastatedtimeperiod,andc) Uponpresentationbythebeneficiaryofdocumentsdesignatedbytheaccountparty.b. Function:Tosubstitutethecreditofarecognizedinternationalbankforthatofthebuyer.c. Theparties:1) Thebuyeristheaccountparty.2) Thebuyer’sbankistheissuingbank.3) Theselleristhebeneficiary.

d. TypesofLettersofCredit:1) Irrevocable:Cannotbealteredwithoutthebeneficiary’sexpressconsent.a) Preferredbybeneficiariesbecauseitprovidesthemostsecurity.2) Revocable:Revocablebytheissuingbank.a) Dislikedbybeneficiariesbecauseitprovidestheleastsecurity.3) Confirmed:Asecondbankaddsitsendorsementtothecredit,indicatingthatittoowillmakepaymentagainstthespecifieddocuments.a) Givesthebeneficiaryadditionalassurancethatpaymentwillbemade.3. GoverningLaw:a. InternationalChamberofCommerce’sUniformCustomsandPracticesforDocumentaryCredits(UCP)governsvirtuallyallinternationalletterofcredittransactions.1) MostbanksincorporatetheUCPinthetermsofthecreditstheyissue.4. ApplyingforaLetterofCredita. Applicantmusthaveanexistingrelationshipwithabank.b. Applicantcompletesa“LetterofCreditApplication.〞1) Caveat:Notanapplicationforcredit,butasetofinstructionstellingtheissuingbankwhatneedstobeincludedintheletterofcredit.c. Theconsequencesofnotobtainingaletterofcreditwhenthebuyerhascontractuallyagreedtoobtainone?1) Ifthecreditwasaconditionprecedenttotheformationofthecontract:Therewillbenocontract,andconsequentlynobreach.2) Ifthecreditwasaconditionfortheperformanceofthecontract:Becausethecontractalreadyexists,thefailuretoobtainacreditwillbeabreachthatwillentitletheinjuredpartytosuefordamages.5. DocumentaryFormalitiesa. Noparticularformisrequired.b. Musthavethefollowingformalities:1) Beinwriting.2) Besignedbytheissuer.3) Becompleteandprecise.4) Indicateifitisirrevocable.a) Presumptionthatacreditisrevocable.1] Note:ThelatestversionoftheUCP(UCP600)changesthisrulesothatacreditispresumedtobeirrevocable.5) Indicateclearlywhenandhowcreditsaretobepaid.a) Thismaybeby:1] Sightpayment.2] Deferredpayment.3] Acceptance.4] Negotiation.6) Namethebank(s)whichis/areauthorizedto:a) Paythecredit,b) Acceptbillsofexchangedrawninaccordancewiththeletter,orc) Negotiatethecredit.6. AdvisingandConfirmingLettersofCredita. AdvisingBank:Acorrespondingbankinthebeneficiary’scountywhichdeliversthecredittothebeneficiary.1) Assumesnoliabilityforpayingtheletterofcredit.2) Onlyobligationistotheissuingbank,toinsurethatthebeneficiaryisadvisedandthecreditdelivered,andtotake“reasonablecaretochecktheapparentauthenticityofthecredit.〞a) Itdoesthisbycomparingthesignatureonthecreditwiththeauthorizedsignaturesitmaintainsonfile.b. ConfirmingBank:Abankthatindependentlypromisesthatitwillpay,accept,ornegotiateacredit,asappropriate,whenthedocumentsspecifiedinthecreditarepresentedtoitandtheothertermsandconditionsofthecredithavebeencompliedwith.1) Aconfirmingbankisentitledtoreimbursementfromtheissuingbankifthedocumentsitreceivesareinorder.2) Obligationsofconfirmingbanks:a) Ifthedocumentsarenotinordertheconfirmingbankwillbeleftwithtitletothegoodsinitsownname.b) Iftheissuingbankortheaccountpartyareunabletoreimbursetheconfirmingbank,theconfirmingbankwillbeleftwithtitletothegoodsinitsownname.7. TheObligationsofBanksa. Toexaminedocumentswithreasonablecare.b. Paying,accepting,ornegotiatingbanksmustforwardirregulardocumentstotheissuingbank.c. Tohonororrefusecredits“onthebasisofthedocumentsalone.〞1) Solongasthedocumentsappearregularontheirface,thebankmustpay.a) TheRuleofStrictCompliance:Abankmayrejectdocumentsthatdonotexactlycomplywiththetermsspecifiedintheletterofcredit.2) FraudbytheSeller.a) Ifthesellerdeliveredmislabeledgoodstoacarriertoobtainthedocumentsitneededtocollectagainstaletterofcredit,theissuingbankmayneverthelesspaythesellerevenifitknowsofthis.c) Iftheunderlyingtransactionwasfraudulentandthecreditisrevocable,theissuingbankmayrefusetopaytheseller.d) Iftheunderlyingtransactionwasfraudulentandthecreditisirrevocable,theissuingbankprobablyhastopaytheseller.1] ThereisnofirmruleintheUCP.3) FraudintheCollectionProcess.a) Ifacollectingbank,knowingthataletterofcredithasbeenaltered,attemptstocollectfromtheissuingbank,theissuingbankdoesnothavetopay.8. RightsandResponsibilitiesofBeneficiariesa. Basisofrightsandresponsibilities:Commercialpractice.1) Therearenocontractualrights.b. Prerequisitesforcollectingonaletterofcredit:1) Thebeneficiarymustcomplywiththetermsandconditionsofthecredit.2) Thebeneficiarymustpresenttotheissuer(ortheissuer’sagent)thedocumentsdesignatedinthecredit.a) Commonlytheseinclude?1] Acertificateoforigin:Tocomplywithcust