Before we start, here’s a big disclaimer. Many of the decisions that are made in business are the outcome of often lengthy internal discussions. Many bold decisions are based on scanty information while others are based on the outcome of discussions with advisors, be they financial or legal.

We’re going to paint a picture using the Incoterms® rules, the UCP 600, and the “ICC Guide to the Uniform Rules for Bank Payment Obligations” as the palette. That picture may resonate with what you are already doing, or it may raise some red flags that prompt further investigation. Bidvest International Logistics is in no position to give legal or financial advice and nothing written here is therefore intended as legal or financial advice; if that’s what you need, seek the appropriate professional counsel.

The preceding three blog posts looked at the first two elements of the international contract:

• identifying the offer, and
• the acceptance of the offer.

We also explored the mitigation of risk that exists in a badly drafted (or not documented) sale contract. We will now spend time exploring the third element of the international sale contract, payment mechanisms.

Paying for goods

The Seller has earned the right to be paid when it has delivered as envisaged in A2 of the Incoterms® rules. What then is the trigger for payment i.e. what event or document tells the buyer that the seller has delivered? Note that earning the right to be paid is not the same as what is stipulated in the contractual agreement with regards to when payment will be made. There may be credit (or other contractual) terms that define the effective payment date.

Incoterms® 2020 tell us that the following constitutes proof that the seller has delivered as envisaged in A2, risk has transferred to the buyer, and the seller has earned the right to be paid.

• EXW     There is no requirement for proof of delivery
• FCA      The ‘usual’ proof of delivery which MAY be Transport Document
• FOB      The ‘usual’ proof of delivery which MAY be Transport Document
• CIF       Negotiable B/L
• CIP       The usual transport document or Negotiable B/L
• CFR      The usual Transport Document or Negotiable B/L
• CPT      The usual Transport Document or Negotiable B/L
• DAP      Any document enabling the Buyer to take delivery

Several small, medium and large buyers (importers) either choose or agree with the seller, to arrange payment for the goods through the mechanism of a Documentary Credit (Credit) sometimes referred to as a Letter of Credit (L/C). The Credit is a conditional guarantee of payment by the issuing bank to the beneficiary but, “is the Credit the most appropriate mechanism for your business?”

The reasons for the choice of credit vary:

• tradition (that is what we have always done);
• the seller’s insistence as it seeks in some way to mitigate the risk of non-payment;
• in the case of a bank-financed purchase, the applicant bank insisting on the Credit;
• those buyers who mistakenly believe that the Credit will in some way, protect their interests.

What the UCP 600 says about credits

From Article 1, Application of UCP, ICC Publication 600E:“The Uniform Customs and Practice for Documentary Credits 2007 Revision, ICC Publication No.600 (“UCP”) are rules that apply to any documentary credit (“credit”) (including, to the extent to which they may be applicable, any standby letter of credit) when the text of the credit expressly indicates that it is subject to these rules. They are binding on all parties thereto unless expressly modified or excluded by the credit.” In other words, the definitions and interpretation of the credit are laid down for the banks in the UCP 600.

From Article 2, Definitions: “Credit means any arrangement, however named, or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation…”

From Article 4, Credits v. Contracts: “A credit by its nature is a separate contract from the sale or other contracts on which it may be based. Banks are in no way concerned with or bound by such contract, even if any reference whatsoever to it is included in the credit. Consequently, the undertaking of a bank to honour, to negotiate or to fulfil any other obligation under the credit is not subject to claims or defences by the applicant resulting from its relationship with the issuing bank or the beneficiary.

A beneficiary can in no case avail itself of the contractual relationships existing between banks or between applicant and the issuing bank.”

From Article 5, Documents v. Goods, Services or Performance: “Banks deal with documents and not with goods, services or performance to which the documents may relate.”

• Article 16 describes how the banks will deal with discrepant documents
• Article 17 states that at least one of each document making up a complying presentation must be original
• Article 18 deals with the Commercial Invoice
  • It must be issued by the beneficiary
  • It must be made out in the name of the applicant (Usually the Buyer)
  • Must be made out in the same currency as the credit
• Articles 19, 20, 21, 22 and 23 deal with Transport Documents for ocean and Air Shipments
  • Article 19 covers multi-modal transport documents (no specification that it must be ‘negotiable’)
  • Article 20 covers the Bill of Lading (no specification that it must be ‘negotiable’)
  • Article 21 covers the Non-negotiable Sea Waybill
  • Article 22 covers the Charter Party Bill of Lading
  • Article 23 covers the Air Transport Document

In summary

• The credit is a contract between the issuing bank and the beneficiary,
• UCP 600 does not specify what documents make up a compliant presentation, only the standard that must be met by the documents presented, and the interpretation of those documents,
• The credit is separate from other contracts. Banks are not concerned with the other contracts upon which the credit may be based.

Other payment options

Open account: The Buyer and Seller reach agreement, (hopefully) reduced to writing in the sales contract to the effect that payment is affected by the Buyer to the Seller so many days after proof of delivery. That proof of delivery to take the form of, for example the Seller’s Proof of Delivery, a Forwarders Cargo (Certificate of) Receipt, the usual transport document, or a Sea Waybill. The Buyer concludes payment against the POD by the agreed means.

Bank Payment Obligation (BPO); Taken from Chapter 1 of ICC Publication:751E: “It is Important to note from the outset that, unlike a letter of credit, the BPO represents an undertaking given by a bank (known as the Obligor Bank) acting on behalf of the Buyer to another bank (known as the Recipient Bank) acting on behalf of the Seller.”

“Within the Uniform Rules for Bank Payment Obligations (URBPO) a BPO is defined as follows:

“‘Bank Payment Obligation’ or ‘BPO’ means an irrevocable and independent undertaking of an Obligor Bank to pay or incur a deferred payment obligation and pay at maturity a specified amount to a Recipient Bank following submission of all Data Sets required by an Established Baseline resulting in a data Match or an acceptance of a Data Match.””

The below illustration provided by SWIFT compares the mechanics of the three payment options discussed. The BPO has been in existence since around 2013 but has not gained traction, at least in South Africa. Amongst its many virtues, the BPO eliminates the need for an exchange of original documents, specifically the Transport Document.