Documentary Credits system

The financial arrangements most commonly used between an exporter and his
overseas importer is the Documentary Credit System.

At the request of the exporter, the importer applies to his banker to open a
documentary credit, in favour of the exporter, for an amount equal to the value of the
export goods.

The importer’s bank (the Issuing Bank) will contact an associated bank in the country
of the exporter, which is known as the Correspondent Bank, to make credit available
by bills of exchange at sight or at a fixed number of days after sight.

The bank issues a letter of credit, revocable or irrevocable (preferably the latter),
authorizing the exporter to draw on the correspondent Bank, for the account of the
importer, a bill or bills of exchange to the amount stated in the letter of credit.

The letter of credit will also indicate the period during which credit will be available
(usually a maximum of six months) and what other documents are to be presented
with the B/L. These documents may include:-

Invoices; specifying quality, quantity and price of the goods; the description must
Correspond to that in the letter of credit; the required number of copies
Must be submitted.

Marine Insurance Policy or Certificate.

Bills of Lading. A full set of clean shipped bills to the port of destination.

Consular Invoices. An invoice on an official form used in the export trade;

required at port of entry in connection with import dues.
Exporter signs a declaration with respect to invoice(s)
issued. The document is certified by the consul.

Certificate of Quality.

Certificate of Origin.

These documents must be strictly correct.

The exporter, assured of his clients ability to pay, can now load the goods, obtaining
the shipped bills of lading to show he has fulfilled his obligations under the contract.

HSNA. LUCKNOW
The B/L is deposited with the Correspondent Bank for examination, together with the
required documents. If the documents are in order, a banker’s draught will be issued
to him for the amount of the B/L. All the documents are then forwarded to the Issuing
Bank.

When the documents arrive in the country of destination, the Issuing Bank will release them to the
importer on the latter’s payment to the bank of the price of the goods. The importer then uses the
documents to obtain a delivery order from the ship owner’s agents, which enables him to take delivery
of the goods from the ship or warehouse.

Where the importer’s credit is known to be good, the Issuing Bank may give credit to the importer on
the basis of “documents against acceptance” meaning that once the importer has accepted the B/E, by
signing his name on the face of the bill, the documents can be released to him.

Alternatively a bill may be drawn on the importer himself, in which case the exporter sends the
documents through his bank to be delivered to the importer against the importer’s payment of the bill.
Meanwhile, the goods will not be released by the ship owner or warehouse man until a bank release,
in proper form has been lodged.

BILLS OF LADING AND OTHER

DOCUMENTS

MERCHANT MERCHANT
BANK BANK
X Y
AR ARRANGE DOCUMENTARY
CREDIT

RETURNS SIGNED BILL OF EXCHANGE

IMPORTER EXPORTER
“BUYER” “SELLER”

Documents
REQUEST BUYER TO OPEN B/Lading
DOCUMENTARY CREDIT Documents
Invoices
Insurance cert.
Consular cert.
Quality cert.
Origin cert.

HSNA. LUCKNOW
 BILL OF EXCHANGE
Merchant Bank (If future date e.g. 20 July, Bank will claim interest)

Writes Accepted 5 July

Seller 8 July
12 Bales B/L sent to Buyer Buyer
of Silk
e.g. 1 July 4 July

Alternatively

Merchant Bank Merchant Bank

Pays B/L to Bank

Buyer
Seller
e.g. 12
Bales of
Silk

HSNA. LUCKNOW
 INTERNATIONAL USE OF BILL OF EXCHANGE/DOCUMENTARY CREDIT

COUNTRY ‘X’ COUNTRY ‘Y’

BUYER SELLER
Send Bills of Lading
And other Documents (8)
Merchant Mercha
E
bank X nt Bank
(4) Arranges Documentary
Y
(7)
Credit Issues
(5) Bankers Draft
Informs Bank to Open Letter of
Doc/Credit in Branch Credit Issued
Or correspondent bank of exporter

(2) Signs Bills of exchange

(3)

Importer Exporter
“Buyer” “Seller”

(9)
(1)Sends B/Exchange and
(10) ask buyer to open (6)
documentary credit at Deposits
Pays Merchant Merchant Bank B/Lading
Bank and in exchange after invoices
Receives bill of issue of Insurance Cert
Lading and other Doc/credit Consular “
documents Quality “
Origin “
Importer Export Licence
Presents Documents
to Ship owners
Agents and
Receives Delivery
Order for Goods

Follow the numbered sequence

HSNA. LUCKNOW
 The legal definition of a bill of exchange is:

1. An unconditional order in writing.

2. Addressed by one person (the Drawer)
3. To another (the Drawee)
4. Signed by the person given it (the Drawer)
5. Requiring the person to who it is addressed (the Drawer)
6. To Pay
7. On demand or at a Fixed or Determinable future time
8. A certain sum in money
9. To, or to the order of a specified person or to Bearer (the Payee)

Explain the major differences between a Charter Party by way of Demise and not by way of
Demise?
Demise (Bareboat) Not Demise (Voyage or Time)
Lease of the ship Hire of the ship (time) Freight (voyage)
Charterer takes over management and Owner still has right to manage own ship.
control of ship Charterer has commercial control (time)
Charterer provides crew Owner provides crew
Possession of the ship with Charterer Owner never loses possession. Depending on
contract, charterer is carrier (time)
Charterer is carrier, owner never liable to Owner is carrier (voyage)
shippers
Master signs B/L for Charterer Depends on Charter wording. Normally
voyage-master, time-agent.
Charterer responsible for statutory duties Owner responsible
Charterer liable for collision damage Owner liable for collision damage.
Hull insurance provided by charterer Owner normally responsible
Charterer can cover damages in tort (i.e. Time charterer not in possession of ship, thus
in civil action) cannot claim damages due to negligence.

HSNA. LUCKNOW
 Relationship between Carrier,
Charterer and third party

Ship owner ------------------------------C/Party-------------------------------Charterer

(Carrier) (Shipper)

Bill of Lading Bill of Sale

Third Party (Endorsee or Consignee)

Conditions contained in the contract will determine the rights and obligations between the
parties.

HSNA. LUCKNOW