Payment for paperless trade: Are the viable alternatives to the documentary credit?

Law and Policy in International Business, Fall 2001 by Laryea, Emmanuel T

For its part, the importer can reimburse the issuing bank and obtain the documents to take delivery of the goods, knowing that the specified goods have been shipped.66 The credit thus shields the importer from the risk of paying an exporter that has not fulfilled its obligations under the underlying contract. Banks in the payment chain, which usually pay or incur deferred payment obligations before they are reimbursed, obtain security over the shipping documents.67 The issuing bank usually obtains security over the documents, the goods represented by those documents, and the importer's general assets.68 The correspondent bank, either advising or confirming, usually relies on the undertaking of the issuing bank or occasionally the shipping documents.

2. Liquidity In addition to affording security to the parties, the documentary credit mechanism provides liquidity for both the importer and the exporter, mainly for the period of shipment.69 Except in a few cases in which importers pay the issuing bank in advance of shipment, the importer does not pay until the goods arrive and it needs the shipping documents.70 The exporter, on the other hand, often presents the

documents shortly after shipment and receives payment or acceptance of drafts, which it can negotiate or discount for cash.

3. Proximity for Claims

Parties involved in documentary credit transactions often deal with counterparties located in their jurisdiction. The importer deals with the issuing bank, the exporter deals with the confirming bank,71 and the banks deal with the importer or the exporter. This gives each party an entity proximate to it for suit if something goes wrong, and protects the parties from costly litigation abroad.

F. Disadvantages of Documentary Credits

Although documentary credits have served international commerce well, they are not without problems.72 Among the main operative problems of documentary credits are delay, cost, and fraud-the documentary procedure takes too long, it is more expensive than any other instrument of international settlement, and it is open to fraud.73

1. Delay

Delays occur with documentary credits for two reasons, the first being that the documentary credit mechanism involves the movement of paper documents, which is often slow.74 It takes time to issue and transmit paper documents.75 By the time the exporter gathers and presents the stipulated documents for payment, considerable time may have elapsed. The second cause of delay is that documents tendered are often discrepant with credit terms.76 Discrepancy in tendered documents causes delays because of the fundamental principle of documentary credit law that documents must strictly comply77 with the terms of the credit.78 One-half to two-thirds of documents tendered are discrepant with the terms of the credit and rejected when first presented.79 Where the discrepancies are minor, banks often inquire from their customers whether they wish to waive their right to reject the discrepant documents. The process of consultation with customers on discrepant documents causes further delays. Although the Uniform Customs and Practice (UCP), the legal regime that regulates documentary credits,88 provides for a reasonable period within which banks ought to review documents and communicate their acceptance or rejection, the period may be extensive.81 The issuing and confirming banks, and any other bank that may be involved in the transaction, have a reasonable time, not exceeding seven banking days from the day of receipt of documents, to examine and determine whether to accept or refuse the documents and to inform the party presenting the documents.82 The time allowable under the UCP is in addition to the transit time of the documents moving from one party to another; thus, the process may take weeks."s