letter of credit – акредитив
draw a draft – виписувати (виставляти) вексель (тратту)
catalyst – каталізатор
delivery date – термін поставки
caution – застереження, обережність
expiration date – термін придатності
charges – витрати
prepay – передплатити
F.O.B. (f.o.b.) (=free on board) – ФОБ (франко-борт)
C.I.F. (c.i.f.) (=cost, insurance and freight) – СІФ (вартість, страхування, фрахт)
underlying contract – основний контракт
bank application – заява (на отримання акредитиву)
invoice – рахунок-фактура
weight list – вагова відомість
bill of lading – коносамент, вантажна накладна
marine insurance – морська страховка
packing list – упаковчий перелік товарів
inspection certificate – акт (сертифікат) огляду
consular statement – виписка
certificate of origin – свідоцтво (сертифікат) про походження
clearance – дозвіл
damage – пошкодження
ocean bill of lading – коносамент, вантажна накладна на перевезення морським шляхом
fee – збір, внесок
reimburse – відшкодовувати, компенсувати
general average – загальна аварія
jettisoning – викидання за борт вантажу (у випадку загрози аварії)
sue – висувати позов, судитися
transshipment – перевантаження
stale – просрочений, застарілий
mislabele – неправильно маркований
Chamber of Commerce – Торгова Палата
negotiate – вести переговори, обумовлювати, обговорювати, передавати
sight draft – тратта з оплатою по пред’явленні
Letter of Credit (L/C)
The letter of credit is the most widely used instrument of international banking. It has had a long and successful history as a means of facilitating international trade, particularly during times of economic and political uncertainty.
The letter of credit is the bank instrument that assures the person selling merchandise of payment if he makes the agreed-upon shipment. On the other hand, it also assures the buyer that he is not required to pay until the seller ships the goods. It is thus a catalyst that provides the buyer and the seller with mutual protection in dealing with each other.
An international trading transaction begins when a buyer and a seller sign a contract that records all the elements of the transaction: the merchandise, price, delivery date, and method of shipment, as well as specifics of color, size, and so on.
Having worked out an agreement, the buyer and seller must arrange payment. The buyer will want possession before paying and the seller will want payment before making delivery. Since each party often has an incomplete knowledge of the other, there is a certain caution to their dealings.
At this point, the letter of credit can be extremely useful. The buyer requests his bank to issue a letter of credit in favour of the seller. Assuming that the credit risk is acceptable to the bank, it issues its letter of credit. The letter says, in essence, to the seller: “We, the bank, promise that we will pay you when you submit certain documents evidencing that you have made the agreed-upon shipment”. The bank has thus substituted its credit for that of the buyer, which might also be good but probably is not as well as known. The letter of credit also protects the buyer, for he knows that he will not be called upon for payment by his bank until the evidence shows that the shipment has actually been effected.
The letter of credit specifies the documents to be submitted, the shipping requirements, and the expiration date. The seller then assembles the goods, prepares the documents, and makes the shipment. Then the seller draws a draft, as required in the letter of credit, attaches the documents to it, and presents everything to the bank for payment.
The amount of the letter of credit depends on whether the buyer or the seller is paying for the freight and insurance. If the price is quoted F.B.O., then the seller is obliged to pay only the charges (freight and insurance) necessary to put the goods on board the vessel; freight and insurance from then on are to be paid by the buyer. If the price is quoted C.I.F., then the seller must prepay the freight and insurance costs to the delivery port. He of course adjusts his price accordingly in the underlying contract.
The documentary requirements are designated by the buyer in his bank application for the letter of credit. The bank follows these in preparing its letter of credit.
A typical letter of credit may call for the following documents: an invoice, a bill of lading, marine insurance, a packing list, a weight list, an inspection certificate, and a certificate of origin (a consular statement of the country of origin).
Not all of these documents are required in every letter of credit transaction. Sometimes, other documents must be used. For example, food shipments coming into the United States require clearance by the Pure Food and Drug Administration. Multiple copies of each document are required, since the bank retains a set for its own records and the buyer needs copies for his records.
The ocean bill of lading is often considered to be the most important document required by a letter of credit. Uniformity of the law for ocean bills of lading was achieved at an international convention held at The Hague in 1921 and resulted in what are known as “The Hague Rules”.
The letter of credit usually requires evidence that the shipment is insured, either by the buyer or the seller. Marine insurance is a very specialized business. The prime risk, of course, is that the ship may sink and the cargo lost completely. Or pipes may leak, rupture, or sweat and thus damage the cargo. The vessel and cargo may also be damaged at an intermediate port during a strike, riot, or other civil commotion.
There is also the principle of maritime law which states that all of those who put cargo on board a vessel are joined in a common venture. If the vessel encounters a storm at sea and is in danger of sinking, the captain may decide to lighten the vessel by jettisoning cargo. If the vessel then survives and arrives at port, each shipper whose cargo arrives safely is assessed a common fee to reimburse those shippers whose cargo was jettisoned. This procedure is called general average, and it can be insured against.
The letter of credit specifies whether the order is to be shipped as a unit or whether partial shipments are permitted. It likewise indicates whether the goods must go from the exporting port to the importing port on one vessel or whether transshipment at some intermediate port is permitted. The buyer may take a risk by permitting this, since the cargo must await another vessel and serious delays may occur.
The letter of credit specifies the latest date, the expiration date, on which the documents can be presented. The shipment may take place at any time prior to that, but as soon as it does, the shipper must assemble the documents promptly and forward them to the bank. If he delays, the documents can be considered stale, and the bank can refuse to pay him.
Once the seller has made the shipment, he assembles the documents, prepares the draft drawn on the issuing bank, and presents it for payment.
Banks deal only in documents. They have no legal obligation to inspect the actual merchandise. If the buyer discovers that the merchandise has been mislabeled or the cartons are empty, he must sue the seller, not the bank.
The letter of credit negotiator must be extremely careful in his examination of the documents, since the bank pays the seller only when he complies with the terms in the letter of credit.
In order to promote worldwide uniformity of practices and terminology, the major trading countries have agreed on certain definitions and rules for the letters of credit. This is stated on the face of the letter of credit in the sentence, “This credit is subject to the Uniform Customs and Practice for Documentary Credits (1974 revision), International Chamber of Commerce Publication 290”. As a consequence, a bank can easily negotiate a foreign bank’s credits.
Once the documents are verified, the bank pays the sight draft presented by the seller and then notifies its customer, the buyer, that the documents have been successfully negotiated and that he must pay the bank in accordance with his application. After the payment has been completed, the bank releases the documents to the buyer, retaining only such copies as are needed for its files. The buyer now has the bill of lading, which he can present to the shipping company to receive his goods.
Assignments
I. Answer the questions.
1. What is the most widely used instrument of international banking?
2. When does an international trading transaction begin?
3. What does the letter of credit specify?
4. What does the amount of the letter of credit depend on?
5. What do “The Hague Rules” deal with?
6. What evidence does the letter of credit usually require?
7. What is the principal of maritime law?
II. Translate the following sentences into Ukrainian. Put questions to any two of them.
1. The letter of credit has had a long and successful history as a means of facilitating international trade, particularly during times of economic and political uncertainty.
2. The letter of credit protects the buyer, for he knows that he will not be called upon for payment by his bank until the evidence shows that the shipment has actually been effected.
3. The seller then assembles the goods, prepares the documents to be submitted, and makes the shipment.
4. A typical letter of credit may call for the following documents: an invoice, a bill of lading, marine insurance, a packing list, a weight list, an inspection certificate, and a certificate of origin (a consular statement of the country of origin).
5. Banks deal only in documents and have no legal obligation to inspect the actual merchandise.
III. Translate the following sentences into English.
1. Акредитив – це найпоширеніший інструмент міжнародної банківської справи.
2. Якщо ціни котуються ФОБ, покупець повинен оплатити лише витрати (фрахтові та страхові), необхідні для завантаження товарів на борт судна; фрахт та страховка відтоді мають сплачуватися покупцем.
3. Якщо ціни котуються СІФ, покупець повинен передплатити фрахтові та страхові витрати до порту доставки.
4. Вантажна накладна на перевезення морським шляхом часто вважається найважливішим документом, який вимагається за акредитивом.
5. Якщо покупець з’ясовує, що товар неправильно маркований або упаковка є порожньою, він повинен висувати позов продавцю, а не банку.
IV. Name the following definitions.
1. The bank instrument that assures the person selling merchandise of payment if he makes the agreed-upon shipment.
2. If the price is quoted to be this, then the seller is obliged to pay only the charges (freight and insurance) necessary to put the goods on board the vessel; freight and insurance from then on are to be paid by the buyer.
3. If the price is quoted to be this, then the seller must prepay the freight and insurance costs to the delivery port.
V. Find in the text and translate all sentences with Infinitives; define functions of the Infinitives (a subject, attribute, object, adverbial modifier, part of a predicate).
VI. Make sentences with the Complex Subject / Complex Object basing on the text.
VII. Sum up what the text says about the letter of credit.
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