Course
: Law in International Business
Lecturer
: Dr. Shidarta, S.H., M.Hum.
Date : 9 April 2013 (Session 6)
Topic
: Letter of Credit
Method : GSLC
Export:
A function of international trade whereby goods produced in one country are
shipped to another country for future sale or trade after meeting the
applicable provisions.
Exporters:
The person who sends goods or commodities to a foreign country, in the way of
commerce. They must have business license to be able to export.
Import:
A good or service brought into one country from another after meeting the
applicable provisions.
Importers:
Entrepreneurs who can perform trading activities by entering the goods from
abroad into the customs territory of Indonesia according to applicable
regulations.
International
Trade Payment System
Export><Import->Cross-country
Background:
·
Currency
differences
·
The
different parties regions
·
Difficulty
of procedure
·
Different
locations
The
international commerce contracts also included how the payment system or clause
works.
Letter
of Credit is a letter issued by a bank (foreign bank) at the request of the
importer (customer/bank subscription) addressed to the exporter in a foreign
relations of the importer, which entitles the exporter to draw drafts-notes the
importers concerned to the amount of money mentioned in the letter.
An order
made by the buyer or importer addressed to the bank to open an L / C in order
to pay a sum of money to the seller or exporter.
Advantages
of L/C:
·
Exporters
feel safe as payment for goods delivered to the importer is no certainty
·
The
seller will carry out delivery of goods if he has obtained the information from
the bank about the opening credits that were ordered for him.
·
Importer
feel secure because the new bank realizes the payment of the purchase if the
seller has handed over documents in question according to the agreement.
Legal
Basis of L/C
PP
1/1982 & Uniform Custom Practice for Documentary Credits (UCP 500)
Ways of
implementing domestic payment: cash, marketable securities: checks, bills of
exchange, promissory notes / promissory note, demand deposit, commercial paper
/ commercial paper, and L / C in abroad (SKBDN).
Opening
of L/C
Importer
asks the bank to open an L/C for & on behalf of the exporter.
Opening
of L/C is done through correspondent banks abroad.
Advising
bank inform exporters about the opening of L/C.
1.
Buyer
took the initiative to order the goods or services.
2.
Seller
asks the buyer to open an L/C by telling, “terms & conditions” that could
be accepted & the name of the designated advising bank.
3.
Buyer
requested bank where the account is located (Issuing Bank) to open an L/C to
notify “terms & conditions” is acceptable as well as the name of advising
bank designated by the seller.
4.
Issuing
Bank to open an L/C and send it to the Advising Bank. (As well as sending a
copy to the buyer, the buyer sends the copy to the seller as a confirmation
that the L/C has been opened).
5.
Advising
Bank submits L/C to the beneficiary (seller).
6.
Once
the goods / services ordered are ready to be delivered, beneficiary (seller) to
prepare the required documents within the L/C (export documents).
7.
Advising
Bank will study the contents of the document; if it has been qualified (in accordance
with the conditions of L/C) then the document will be sent to the Issuing Bank
to demand payment.
8.
Once
the documents are received, the Issuing Bank will check the completeness and
appropriateness of the documents received by the terms and conditions in the L/C.
Terms of
opening an L/C
1.
L/C
should be a commercial documentary L/C so that the importer can specify the
requirements listed in the L/C tailored to the needs, requirements for security
administration and issuance of import licenses.
2.
Completeness
of the document as follows:
·
Draft/Bill
of Exchange/Receipt
·
Shipping
documents:
·
Full
set of Bill of Lading
·
Commercial
invoice
·
Packing
List
·
Wight
Note
·
Measurement
List
·
Insurance
Certificate
·
Inspection
Certificate
·
Certificate
of Origin
·
Manufacturer’s
Certificate
·
Chemical
Analysis
·
Assembling
Guide Book
·
Layout
Scheme
·
Instruction
Manual
·
Consular
Invoice
·
Brochure/Leaflet
3.
Description
of goods in short but clear words.
4.
Delivery
requirements such as: loading port & destination or discharging port.
5.
Requirements
that are required by the competent authority, for example: import license
number, order number, contract number and the sales of the trademark goods.
6.
Clause
about whether or not the right recipient L/C to pass down L/C to another party
or another supplier, stating assignable L/C or transferable L/C.
7.
The
validity of the L/C should be longer than the last shipment time, at least be
equal to the last shipping date.
L/C by
nature
·
Revocable:
L/C that at times may be withdrawn/canceled by the opener or opening a bank
without the consent of the beneficiary.
·
Irrevocable:
L/C that cannot be canceled during the period of validity specified in the L/C
opening bank & still guaranteed.
·
Irrevocable
& Confirmed: Payments are fully guaranteed by the opening bank &
advising bank if all requirements are met. It is also not easy to be canceled
because it is irrevocable & it is also considered the safest & perfect
L/C.
Applicant
– The buyer in a transaction
Beneficiary
– The seller or ultimate recipient of funds
Issuing
bank – The bank that promises to pay
Advising
bank – Helps the beneficiary use the letter of credit
The bank
will only issue a letter of credit if they know the buyer will pay. Some buyers
deposit enough money to cover the letter of credit & some customers use a
line of credit with the bank. Sellers must trust that the bank issuing the letter
of credit is legitimate.
To pay
on a letter of credit, banks simply review documents proving that a seller
performed his required actions. They do not worry about the quality of goods or
other items that may be important to the buyer & seller.
Advantages
for sellers: By asking for an appropriate letter of credit a seller is
reassured that they will receive their money in full & on time. A letter of
credit is one of the most secure methods of payment for exporters as long as
they meet all the terms & conditions. The risk of non-payment is
transferred from the seller to the bank.
Advantages
for buyers: When a buyer uses a letter of credit they get a guarantee that the
seller will honor their side of the deal
& provide documentary proof of this.
References:
Conclusion
An L/C
is a binding document that a buyer can request from his bank in order to
guarantee that the payment for goods will be transferred to the seller.
Basically, a letter of credit gives the seller reassurance that he will receive
the payment for the goods.
Credits
are highly sophisticated tools in commerce. If structured correctly, they can
substantially reduce some of the risks associated with international
transactions. If structured incorrectly, they can lead to unfortunate results
that differ significantly from one or more of the parties’ expectations. It is
better to seek advice of competent legal counsel before engaging in any
transaction involving credits.
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