In international commercial transactions there are four ways of securing payment:
1. OPEN ACCOUNT(O/A)-Most risky
2. LETTERS OF CREDIT(L/C)-Least risky.
3. DOCUMENTS AGAINST PAYMENT(D/P)
4. DOCUMENTS AGAINST ACCEPTANCE(D/A)
In cases of 3 and 4 the risk is lower than O/A and greater than L/C.
D/P and D/A are depending on Bills of Exchange or Draft( BE/Draft) in international commercial parlance.
- A negotiable instrument
- Drawn by the exporter/seller
- Made payable to the exporter/seller
BE has three parties to it: Drawer(exporter/seller), Drawee(Buyer) and Payee(Seller’s bank)
BEs are payable
1. At Sight known as ‘Sight Drafts’
2. At future date known as ‘Time or future Drafts’
D/P DOCUMENTS AGAINST PAYMENT:
(A) In this type the exporter,
a. ships the goods
b. sends sight draft to the clearing bank
c. shipping documents accompany b above
(B) The importer ,
a. settles the payment with the bank to get the documents released
b. takes delivery of the goods
This is known as ‘D/P transaction by SIGHT DRAFT’: Payment is on demand
NOTE: If the importer does not settle payment, the exporter has to recover the goods and resell them
The following risks are involved in this type of transaction:
i. On different grounds the buyer can refuse to honour payment
ii. If it is a long distance shipment it is nearly impractical to get back the goods to its country of origin. The exporter will end up in heavy discount sale.
iii., If the export is by air, the buyer may first receive goods before making payment.
D/A DOCUMENTS AGAINST ACCEPTANCE:
This is nothing but a credit arrangement: terms are like ‘60 days from date of bill of lading’ or ‘60 days sight’.
The buyer has to accept a time draft drawn upon him. Then, the clearing bank releases the documents to the buyer to take possession of goods.
In this type of transaction following are the risks involved:
- The importer can refuse to accept the goods
- The importer can refuse to make payment. Then, the exporter has to recourse to law or collect import back the goods.
ADVANTAGES OF D/P D/A TRANSACTIONS:
- Using BE, importer can go for trade credit
- Seller can have access to bank finance
- BE acts as a documentary evidence in courts of countries.
LEGAL COURSE FOR EXPORTER:
The exporter can sue the importer for payment through NOTING and PROTESTING. These are to be done by the NOTARY PUBLIC.
Almost all courts in the globe accept the PROTEST as evidence that the Bill of Exchange is dishonoured.
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