Law of International Trade Finance
Credits
|
15
|
Module Convenor
|
Sanem Saidova
|
Term Offered
|
Spring
|
Assessment
|
Examination
|
This module considers the law of certain financial instruments encountered in the field of international trade. These instruments are designed either to serve payment obligations in the underlying transaction or to provide a guarantee to cover breach of the underlying transaction.
The common theme is that they are all concerned with the problem of obtaining money from a party in another jurisdiction and they all involve the introduction of banks as trusted intermediaries between the parties to the underlying commercial transaction. The financial instruments considered are collections, documentary credits (also known as letters of credit) and various types of autonomous bank guarantee.
Consider an international sale of goods. A seller who ships goods overseas without being paid in advance runs a number of financial risks. First, there is the insolvency risk, namely that the buyer will become insolvent before paying for the goods. Secondly, there is the risk of breach of contract, namely that the buyer will refuse without justification to pay for the goods. Thirdly, there is the procedural risk, namely that the buyer will be able justifiably to withhold some or all of the price by reason of non-performance, or at least a genuine allegation of non-performance, by the seller of some of the contractual obligations. Fourthly, there is the political risk that events on the international scene will result in non-payment of the price for political reasons.
A buyer on the other hand who pays in advance runs the risk that the seller may not ship the goods at all, whether because of insolvency, breach or political reasons, or will ship goods that do not conform to the contract in quality and/or quantity. If either party is unwilling to run these risks, the solution is to interpose one or more intermediaries in whom the parties repose confidence. These intermediaries are banks. Under a collection, a bank is asked to assist the seller in obtaining payment from the buyer, usually by transmitting documents from the seller that evidence performance by the seller of the contract of sale. Alternatively, the banks may be asked to undertake a legal responsibility to the seller to pay against production of documents that evidence performance of the sale contract. This payment mechanism is known as a documentary credit.
Similar devices are employed by way of guarantee. Banks may be asked to issue guarantees (also called bonds or standby letters of credit) of various types including the following:
-
an advance payment guarantee secures repayment of monies paid in advance to a seller or contractor;
-
a bid or tender bond acts effectively as a deposit attached to the submission of a tender by a contractor, forfeit should the tender be successful but the contractor back out of the contract;
-
a performance bond acts as security for due performance of the contract and is available to be called upon in the event of breach of the underlying contract.
-
The relevant law is based in large measure on uniform rules promulgated by the International Chamber of Commerce. These rules are of international applicability and, indeed, the Uniform Customs and Practice for Documentary Credits represents the most successful measure of harmonisation of the private law of international trade.