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LAW 724 (53)
Lecture

Chapter 8 Ancillary Contracts for the International Transaction.docx

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Department
Law and Business
Course
LAW 724
Professor
Alyssa Brierley
Semester
Fall

Description
Chapter 8 Ancillary Contracts for the International Transaction: Financing, Transportation, and Insurance - Additional or supporting contracts that are essential to commercial transactions - Keeping in mind the rule of privity of contract, it is important to incorporate the obligation of the parties to conclude these separate contracts with third parties into the primary contract as a condition, so if a party fails to make these separate contracts as promised, the innocent party is relieved of its obligation to perform under the primary contract, and the failure is actionable as a breach of the contract between the two principal parties Financing International • for Canada, payment arrangement most often agreed upon Transactions by Canadian parties doing business in countries other than 1. Understanding US is the letter of credit L/C the letter of • exporting firms will want to secure payments while importers credit will want to postpone payments as long as possible to assure arrangements that goods are shipped on time and obligations are met fully • international banks play major role in transactions as the issuing bank issues letter of credit (written undertaking by bank given to exporter in accordance with the importer) • stipulated documents include; commercial invoice, certificate of origin, insurance policy and transport document - Banking parties Confirming bank-> undertakes a direct obligation to the exporter to involved and pay on the proper presentation of documents under L/C, and is then rules entitled to reimbursement from the issuing bank, provided it has paid on a proper presentation of documents under L/C Advising bank-> undertakes only to examine and forward the documents to the issuing bank; it is not obligated or authorized to negotiate a draft or pay the seller. -> if an advising bank refuses to pay on the tender of the documents, the exporter may be compelled to institute legal proceedings abroad, a situation that is avoided if the nominated is a confirming bank -for this reason, and exporter will prefer an L/C in which there is a confirming bank, although this will increase the cost of the L/C to the importer • Once the importer receives the documents, it can then transfer title in the goods to a third party, eve in advance of receiving the goods • If the documents presented by the exporter do not comply with the documents described in the letter of credit, there are a number of possibilities o Documents may be corrected if the exporter/seller or shipping company is able to remedy the deficiency within the period of time for presentation documents  If this cannot be done, the exporter/seller, may request authority from the issuing bank to negotiate the draft despite the discrepancy • Issuing bank may have to wait on the importers decision depending on the seriousness of the situation o Sometimes an exporter who requires prompt payment will have no alternative but to provide the paying bank with an indemnity by which the exporter undertakes to repay the bank if the L/C is not honored by the importer • If the L/C is an irrevocable L/C, the commitment of the issuing bank is a binding one and, provided that the correct documents are tendered before the expiry of the L/C, the bank must pay the amount agreed on o Bank cannot accept a revocation of the L/C even if the importer/purchaser gives subsequent instructions to the bank not to pay Confirming bank-> undertakes a direct obligation to the exporter to pay on the proper presentation of documents under L/C, and is then entitled to reimbursement from the issuing bank, provided it has paid on a proper presentation of documents under L/C Advising bank-> undertakes only to examine and forward the documents to the issuing bank; it is not obligated or authorized to negotiate a draft or pay the seller. -> if an advisisng bank refuses to pay on the tender of the documents, the exporter may be compelled to institute legal proceedings abroad, a situation that is avoided if the nominated is a confirming bank -for this reason, and exporter will prefer an L/C in which there is a confirming bank, although this will increase the cost of the L/C to the importer • Once the importer receives the documents, it can then transfer title in the goods to a third party, eve in advance of receiving the goods • If the documents presented by the exporter do not comply with the documents described in the letter of credit, there are a number of possibilities o Documents may be corrected if the exporter/seller or shipping company is able to remedy the deficiency within the period of time for presentation documents  If this cannot be done, the exporter/seller, may request authority from the issuing bank to negotiate the draft despite the discrepancy • Issuing bank may have to wait on the importers decision depending on the seriousness of the situation o Sometimes an exporter who requires prompt payment will have no alternative but to provide the paying bank with an indemnity by which the exporter undertakes to repay the bank if the L/C is not honored by the importer • If the L/C is an irrevocable L/C, the commitment of the issuing bank is a binding one and, provided that the correct documents are tendered before the expiry of the L/C, the bank must pay the amount agreed on o Bank cannot accept a revocation of the L/C even if the importer/purchaser gives subsequent instructions to the bank not to pay • A revocable L/C can be withdrawn at any time and is thus a very insecure method of payment o It is advantageous only in that it is cheaper - Process 1. Contract between the importer/purchaser and the exporter/seller whereby the importer agrees to obtain the L/C fot the benefit of the exporter 2. Contract between the importer and its bank whereby the bank agrees to provide the :/C on the importers behalf 3. The undertaking by the importers bank, the issuing bank, to pay a specified sum when the specific documents are presented to the importers bank or its agent, usually the nominated bank - The undertaking of the issuing bank in the letter of credit is primary and must be honored without any claim, setoff, or defence that the issuing bank or the importer/purchaser may have against the seller. Negotiating of the letter - Making the terms of the credit financing a condition in the of credit arrangements sales contract means that if any of the provisions of the credit financing are not met, the exporter is not required to proceed with the contract. Import provisions Pg240 txt list on things to consider when negotiating letter of that must be credit anticipated and agreed on by the - once parties have agreed on these matters, they are in a parties position to include terms in the sales agreement providing for the requisite L/C - importer will them arrange with its bank to issue a L/C confirming agreement International rules for - Uniform customs & Practice for Documentary credits-> set of L/C internationally agreed rules that govern credit transactions - Advantage; provides security for those involved - Payment based on document itself and not the merchandise or services Documentary credit and ->standby letter of credit; anticipates the possibility that something standby letters of credit: will go wrong such as the failure of the applicant to perform some important differences contractual obligation - Standby letter of credit is payable ONLY if things go wrong in the underlying transaction ->documentary credit: method of payment that anticipates a positive credit. - Means of implementing the performance of the buyer and seller o Requires presentation of documents as a condition of payment Three major sets of rules governing credit transactions (adopted by ICC) pg 242 - Uniform customs and practice for UPC primarily drafted to deal with documentary credits used in the documentary sale of goods context credits - Specifically includes standby letters of credit within its scope - Uniform rules for demand guaranteed Intended to apply to independent guarantees, but standby letters of credit are also included in its scope - International standby practices Addresses international standby letters of credit. - Intended to bridge gap when the UCP has not been fully suitable for standby letters of credit - United nations commission on international trade law Convention on independent guarantees and standby letters of credit (UNCITRAL) - Not hey had the necessary number of ratifications to be widely relied on Importance of standby Risks assessments and insurance must be considered due to risks credit in global in; environment of - Physical risk expanding trade in services - Labour risk - Human risk - Design risk - Site risk - Logistical difficulties - Regulatory risks - Financial risk - Political risk Differences between ->performance bond: requires contractor provide bond (issued by a standby letters of credit surety company) and performance bonds 243 • In event of contractor default, surety company stands behind performance of contractor and acts as guarantor of the project owner for full performance of the underlying contract • Surety may be required to;  Finance contractor and keep insolvent contractor afloat so that project may be completed  Engage another contractor to finish project  Allow owner to finish project by paying the owner the amount of liability assumed by the surety ->slight draft: draft that is payable on demand Principles of L/C Characteristics; transactions - Autonomy of the credit - Doctrine of strict compliance Autonomy for L/C 244 - Provides that the credit is separate from and independent of the underlying contract of sale or other transaction o Based on satisfactory document presentation and not on basis of delivery of goods and services that conform to contract o Rules of UCP have been confirmed by judicial decision in both common, and civil law jurisdictions Credits, by their nature are separate transaction from the sales or other contract(s) on which they may be based and banks are in no way connected with or bound by such contract(s) even If any - Article 3 reference whatsoever to such contract(s) is included in the credit In credit operations all parties concerned deal with documents and not goods, services and/or other performances to which the documents may relate - A
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