Guide2lc

AGuideto
LettersofCredit

Import
Export

TableofContents

Introduction

2

PartiesInvolvedinaLetterofCredit

3

WhatisaLetterofCredit?

4

AdvantagesandDisadvantagesofUsingaLetterofCredit

8

LettersofCredit–Importer’sPerspective

10

InstructionsforanImportertoCompleteaLetterofCreditApplication
AmendmentstoaLetterofCredit
QuestionsCommonlyAskedbyImporters
LettersofCredit–Exporter’sPerspective

23

Step-by-StepProcessfortheExporter
Unconfirmedvs.Confirmed LetterofCredit
HowtoConfirmaLetterofCredit
CopyofanExportLetterofCreditinSWIFTFormat
WhatanExporterShouldLookforWhenReviewingaLetterofCredit
HowtoConveyLetterofCreditRequirementstotheImporter
DocumentPreparation Checklist
Draft
CommercialInvoice
TransportDocument
InsuranceCertificate
CertificatesofOriginandInspection
PackingandWeight
ListsDealingwith Discrepancies
Acceptances
Discounting Acceptances
AssignmentofProceeds
QuestionsCommonlyAskedbyExporters
StandbyLettersofCredit

39

OtherTypesofLettersofCredit

42

Back-to-BackLetterofCredit
TransferableLetterofCredit
TD’sNorthAmericanGlobalTradeFinanceOffices–Seebackcover

AGuideto Lettersof Credit

LettersofCredithavebeenacornerstoneof
internationaltradedatingbacktotheearly
1900s.Theycontinuetoplayacriticalrolein
worldtradetoday.Foranycompanyentering
theinternationalmarket,LettersofCredit
areanimportant paymentmechanismwhich
helpeliminatecertainrisks.

Ourpurposeinpublishingthisguideisto
provideabasicunderstandingofLettersof
CreditfromboththeImporter’sandExporter’s
pointsofview.Inaddition,we hopethatitwill
serveasahandyreferencetoolasyouuse
LettersofCreditinyourinternationaltrade
transactions.

2

Parties Involved
inaLetterofCredit
AGuideto DocumentaryLettersof Credit

ThefollowingdefinitionswillassistinunderstandingaLetterofCredit
(L/C)transaction.

AcceptingBank

The banknamedinaterm(usance)LetterofCreditonwhichdraftsare
drawnthathasagreedtoacceptthedraft.Byacceptingthedraft,theDrawee
Banksignifiesitscommitmenttopaythefaceamountatmaturitytoanyone
whopresentsitatmaturity.Afteracceptingthedraft,theDraweeBank
becomestheAcceptingBank.
AdvisingBank

The banktowhichtheIssuingBankforwardstheLetterofCreditwith
instructionstonotifytheExporter(Beneficiary).
“availablewith”Bank

The bankauthorizedintheLetterofCredittoeffectpaymentunder,acceptor
negotiatetheLetterofCredit.
ConfirmingBank

The bankwhich,attherequestoftheIssuingBank,addsitsconfirmationto
theLetterofCredit.Indoingso,theConfirmingBankundertakestomake
paymenttotheExporteruponpresentationofdocumentsundertheLetterof Credit.
DraweeBank

The banknamedintheLetterofCreditonwhichthedraftsaretobedrawn.
Exporter/Beneficiary/Seller

The partythathascontractedtosellgoods.
Importer/Applicant/Buyer

The partythathascontractedtobuygoods.
IssuingBank

The bankissuingtheLetterofCreditonbehalfoftheImporter(Buyer).
ReimbursingBank

The bankdesignatedintheLetterofCredittoreimbursethe“availablewith”
BankwhichsubmitspaymentclaimsundertheLetterofCredit.
TransferringBank

The bankauthorizedby theIssuingBanktotransferallorpartoftheLetter
ofCredittoanotherpartyattheBeneficiary’srequest.

1
3

What isaLetterofCredit?

ALetterofCredit,simplydefined,isawritteninstrument issuedby abank
attherequestofitscustomer,theImporter(Buyer),wherebythebank
promisestopaytheExporter(Beneficiary)forgoodsorservices,provided
thattheExporterpresentsalldocumentscalledfor,exactlyasstipulatedin
theLetterofCredit,andmeetallothertermsandconditionssetoutinthe
LetterofCredit.ALetterofCreditisalsocommonlyreferredtoasa
DocumentaryCredit.
TherearetwotypesofLettersofCredit:revocableandirrevocable.A
revocableLetterofCreditcanberevokedwithouttheconsentofthe
Exporter,meaningthatitmaybecancelledorchangeduptothetimethe
documentsarepresented.ArevocableLetterofCreditaffordstheExporter
littleprotection;therefore,itisrarelyused.Anirrevocable LetterofCredit
cannotbecancelledorchangedwithouttheconsentofallparties,including
theExporter.Unlessotherwisestipulated,allLettersofCreditareirrevocable.
AfurtherdifferentiationismadebetweenLettersofCredit,dependingonthe
paymentterms.Ifpaymentistobemadeatthetimedocumentsare
presented,thisisreferredtoasasightLetterofCredit.Alternatively, if
paymentistobemadeatafuturefixedtimefrompresentationofdocuments
(e.g.60daysaftersight),thisisreferredtoasaterm,usanceordeferred
paymentLetterofCredit.
The InternationalChamberofCommerce(ICC)publishesinternationally agreeduponrules,definitionsandpracticesgoverningLettersofCredit,called
“UniformCustomsandPracticeforDocumentaryCredits”(UCP).The UCP
facilitatesstandardizationofLettersofCreditamongallbanksintheworld
thatsubscribetoit.Theserulesareupdatedfromtimetotime;thelast
revisionbecameeffectiveJanuary1,1994,andisreferredtoasUCP500.
CopiesoftheUCP500areavailablefromyourTDbranchorGlobalTrade
Financeoffice.Pleaserefertothebackcover ofthisguideforalisting
oftheseoffices.

4


Thefollowingisastep-by-stepdescriptionofatypicalLetterof
Credittransaction:

1.

AnImporter(Buyer)andExporter(Seller)agreeonapurchaseandsale
ofgoodswherepaymentismadeby LetterofCredit.

2.

The Importercompletesanapplicationrequestingitsbank(Issuing
Bank)toissueaLetterofCreditinfavouroftheExporter.Notethatthe
ImportermusthavealineofcreditwiththeIssuingBankinorderto
requestthataLetterofCreditbeissued.

3.

The IssuingBankissuestheLetterofCreditandsendsittotheAdvising Bankby
telecommunicationorregisteredmailinaccordancewiththe
Importer’sinstructions.ArequestmaybeincludedfortheAdvising
Banktoadditsconfirmation(Seepage24formoreinformationon
LetterofCreditconfirmation).TheAdvisingBankistypicallylocatedin
thecountrywheretheExportercarriesonbusinessandmaybethe
Exporter’sbankbutitdoesnothavebe.

4.

TheAdvisingBankwillverifytheLetterofCreditforauthenticityand
sendacopytotheExporter.

IssuanceofaLetterofCredit
Buyer/Importer

1

Beneficiary/Exporter

Purchase&Sales
Agreement
2
4

Requestfora
LetterofCredit
RequesttoAdvise
andpossiblyconfirm
theLetterofCredit
IssuingBank

3

AdviceofLetter
ofCredit

Advising/Confirming
Bank

5


5.

The ExporterexaminestheLetterofCredittoensure:
a)itcorrespondstothetermsandconditionsinthepurchaseand
saleagreement;
b)documentsstipulatedintheLetterofCreditcanbeproduced;and
c)thetermsandconditionsoftheLetterofCreditmaybefulfilled.

6.

7.

Whenallpartiesagreetotheamendments,theyareincorporatedinto
thetermsoftheLetterofCreditandadvisedtotheExporterthrough
theAdvisingBank.ItisrecommendedthattheExporterdoesnotmake
anyshipmentsagainsttheLetterofCredituntiltherequired
amendmentshavebeenreceived.

8.

The Exporterarrangesforshipmentofthegoods,preparesand/or
obtainsthedocumentsspecifiedintheLetterofCreditandmakes
demandundertheLetterofCreditby presentingthedocumentswithin
thestatedperiodandbeforetheexpirydatetothe“availablewith”Bank.
ThismaybetheAdvising/ConfirmingBank.Thatbankchecksthe
documentsagainsttheLetterofCreditandforwardsthemtotheIssuing
Bank.The drawingisnegotiated,paidoracceptedasthecasemaybe.

9.

6

IftheExporterisunabletocomplywithanytermorconditionofthe
LetterofCreditoriftheLetterofCreditdiffersfromthepurchaseand
saleagreement,theExportershouldimmediatelynotifytheImporter
andrequestanamendment totheLetterofCredit.

The IssuingBankexaminesthedocumentstoensuretheycomplywith
theLetterofCredittermsandconditions.The IssuingBankobtains
paymentfromtheImporterforpaymentalreadymadetothe“available
with”ortheConfirmingBank.


10.DocumentsaredeliveredtotheImportertoallowthemtotake
possessionofthegoodsfromthetransportcompany.The tradecycle
iscompleteastheImporterhasreceiveditsgoodsandtheExporter
hasobtainedpayment.
Note:Inthediagram below,theAdvisingBankisalsoactingasthe
Confirming Bank.

PaymentUnderaLetterofCredit

Applicant/Importer

1


ShipmentofGoods

2

3

2

Documents Payment

3

Documents Payment
Payment

IssuingBank

3
2

Advising/Confirming
Bank

Documents

Akeyprinciple underlyingLettersofCreditisthat banks dealonlyin
documentsandnotingoods.Thedecisiontopayunder aLetterof
Creditisentirely onwhether thedocumentspresentedtothebank appear
ontheirfacetobeinaccordance withthetermsand
conditions oftheLetterofCredit.Itwouldbeprohibitiveforthe banks
tophysicallycheckallmerchandiseshipped under Lettersof
Credittoensure merchandisehasbeenshipped exactlyaspereach
LetterofCredit.Accordingly,theintegrityofboththeExporter and
Importer areveryimportantinaLetterofCredittransaction.The
appropriateduediligenceshouldbeexercisedbybothparties.

7

Advantages andDisadvantages
ofUsingaLetterofCredit

AdvantagestotheImporter

• ImporterisassuredthattheExporterwillbepaidonlyifalltermsand
conditionsoftheLetterofCredithavebeenmet.
• ImporterisabletonegotiatemorefavourabletradetermswiththeExporter
whenpaymentby LetterofCreditisoffered.
DisadvantagestotheImporter

• ALetterofCreditdoesnotofferprotectiontotheImporteragainstthe
Exportershippinginferiorqualitygoodsand/oralesserquantityofgoods.
Consequently,itisimportant thattheImporterperformstheappropriate
duediligencetoassessthereputationoftheExporter.IftheExporteracts
fraudulently,theonlyrecourseavailabletotheImporteristhroughlegal
proceedings.
Note:

Addedprotection totheImportermaybeprovided
byrequestingadditionaldocumentationintheLetterofCredit,
e.g.aCertificateofInspection.RefertoDocuments
Section(page18).

• ItisnecessaryfortheImportertohavealineofcreditwithabankbefore
thebankisabletoissueaLetterofCredit.The amountoutstandingunder
eachLetterofCreditissuedisappliedagainstthislineofcreditfromthe
dateofissuanceuntilfinalpayment.

8


AdvantagestotheExporter

• Theriskofpaymentreliesuponthecreditworthiness oftheIssuingBank
andthepoliticalriskoftheIssuingBank’sdomicile,andnotthe creditworthiness
oftheImporter.
• Exporteragreesinadvancetoallrequirementsforpaymentunderthe
LetterofCredit.IftheLetterofCreditisnotissuedasagreed, theExporter
isnotobligatedtoshipagainstit.
• Exportercanfurtherreduceforeignpoliticalandbankcreditriskby
requestingconfirmationoftheLetterofCreditby aCanadianbank.

DisadvantagestotheExporter

• Documentsmustbepreparedandpresentedinstrictcompliancewiththe
requirementsstipulatedintheLetterofCredit.
• SomeImportersmaynotbeabletoopenLettersofCreditduetothelackof
creditfacilitieswiththeirbankwhichconsequentlyinhibitsexportgrowth.

9

LettersofCredit–
Importer’s Perspective

InstructionsforCompletinganImportLetterofCreditApplicationForm

TDBankclientswithanactivelineofcredithavetheoptionofforwardingdulycompletedLettersofCreditapplicationstotherespective
GlobalTradeFinanceofficeeitherdirectly,electronicallyormanually
throughtheirbranch.DealingdirectlywiththeGlobalTradeFinance
officeelectronicallyviaTD’sInternet-based system,tdfacilitrade,is
fast,efficient,andcosteffective.
Onpage12isacopyofTD’sLetterofCreditapplicationform.Detailed
instructions follow forthecompletionoftheform.Instructions
forusingTD’selectronicsystem,tdfacilitrade,canbeobtainedfromthe
tdfacilitradehelpdesk.Please contacttheGlobalTradeFinanceoffice
nearestyouformoredetails.

ABranch.Completeaddressofbranchofaccountforyourlineofcredit.
BApplicationDate.Enterdateoftheapplication.
CExpiryDate.EntertheexpirydateoftheLetterofCredit(L/C).
Note:

Example:

10

IndeterminingtheexpirydateofanL/C,youmustallow
enoughtimefortheExporter(Beneficiary)toeffectthe
shipmentandpresent thedocumentsrequired intheL/C.The
generalruleistotaketheLatestShippingDate(K)andaddthe
numberofdaystheExporterisallowedtopresent thedocuments(Q).
IftheLatestShippingDateisNovember1and10daysare
allowedtopresent
documents,thentheExpiryDateofthe
L/CwouldbeNovember11.


DApplicant.Enteryourcompanynameandaddressexactlyasitappears
onyourlineofcredit.

EBeneficiary.The nameandaddressoftheExporter.
F IssueBy.Thisisthemethodby whichwe willsendtheLetterofCredit
totheAdvisingBank.Itmaybesentatyouroptionby mailor
teletransmissiondependingontheurgencyofthesituation.Forasmall
cost,teletransmissionenablesyourLetterofCredittobereceivedfaster
bytheBeneficiary.Thisisthemethodmostcommonlyused.

GCurrencyandAmount.Enterthecurrencyandmaximumamountthat
canbedrawnundertheLetterofCredit.
Note:

Writing thewords“about”,“approximately”or“circa”before
theamount indicatesthattheamount mayvaryupto+/-10%.
Varianceisnotrestrictedonlytothepercentagesindicated
above;youmaychooseanyothervariances,e.g.+/-15%.
Furtherinformationregardingvariances isdetailedunder
Goods(M).

HPartialShipments.Checktheappropriateboxtoindicateifyouwillallow
partialshipmentstotakeplaceundertheLetterofCredit.
Transhipment.Indicatewhetherornottranshipmentisallowed.Your choice

dependsonthemethodofshipment/transportdocumentused.
Generally,transhipmentmeansthat,duringthecourseofvoyage,
merchandiseisunloadedandreloadedfromonevessel toanothervessel
orfromonemodeoftransportationtoanother.Transhipmentmustbe
allowedformultimodalandairtransportdocuments.

11


A

TheToronto-DominionBank

C

B

D

E
G

F
H

J

I
K

L

N

M

O

P
Q
R

S

12

T


ExamplesofTranshipment:
1.AshipmentisdestinedforthePhilippinesbutthereisno carrieravailableto
godirectlytothePhilippines.It mustfirststopinJapanandbetransferredto
anothercarrierdestinedforthePhilippines.
2.AshipmentisdestinedtoCalgary,AlbertafromtheportofHongKong.
FirstittravelsbyoceancarrierfromHongKongtoVancouver,BCandthen
mustbetransferredontoatruckorraildestinedfor Calgary.

I TransferableCredit.IndicateiftheLetterofCreditmaybetransferredto
anotherparty.ForinformationregardingTransferableLettersofCredit,please
refertoOtherTypes ofLettersofCredit(page43).

J AvailableAgainstDocumentsDetailedHerein.
ABeneficiary’sDraft.The documentthatrepresentsthedemandfor
paymentthattheExporter(Beneficiary)makesonthebank.Generally,a
Beneficiary’sdraftisrequiredasevidencethatadrawinghasbeenmadeby
theBeneficiaryontheLetterofCredit.
Theuseofdraftsisnotcommoninallcountries;sometimes adraftis
avoidedinviewoftheexcisestampdutythatitattracts.Whilethisdoes
notchangeanythinginthecaseofsightpaymentsunderLettersof
Credit,thesituationisslightlydifferentwhenatermpaymentisused.
Inthiscase,settlementisdefinedasa“DeferredPayment”.
AtSight.Paymentismadeuponpresentationofstipulateddocuments.
Thispaymenttermiscommonlyused.
DaysAfterSightorDaysafterDateof:The Exportermayagreeto
provideextendedpaymenttermssuchas“payable60daysaftersight”or“30
daysafterDateofBillofLading”.Thisisreferredtoasatermpayment.Inthis
case,paymentwillbemadeonthematuritydateoftheaccepteddraft.

KShipmentFrom.Nameoftheplace/portfromwhichthegoodswillbeshipped.
ForTransportationTo.Nameoftheplace/porttowhichthegoodswill
beshipped.

13


NotEarlierThan.Ifspecified,goodscannotbeshippedearlierthanthisdate.
NotLaterThan.The latestmutuallyacceptabledatefortheshipmentto
bemade.Commonlyknownasthe“LatestShippingDate”.

L Insurance.Indicatewhetheryou,theApplicant,ortheShipper(Exporter)
isresponsibleforinsuringthegoods.Keepinmindthatthismust
coincidewiththeTradeTerm(N).

MGoods.Enterabriefdescriptionofthemerchandise.Thecommonpractice
istouseaPurchaseOrderorPerformaInvoicenumber.Example: Men’s
shoesasperPurchaseOrder#23456.Includingexcessivedetaildoesnot
giveyoumoreprotectionagainstinferiorordefectivegoodsshippedsince,
asmentionedearlier,banksdealindocumentsandnotingoods.
Variances.Avarianceof5%moreor5%lesswillbeallowedaslongas:

a)themerchandisedescriptionisnotstatedinnumberofpackingunitsor
individualitems;
b)theamountoftheLetterofCreditisnotexceeded;and
c)theLetterofCreditdoesnotstipulatethatthequantityofgoods
specifiedmustnotbeexceededorreduced.
Varianceis notrestrictedto5%;youmayspecify anothervariance, e.g.+/15%.

Note:Whenyouallowavariance,remembertoclearlyadvise whetherthat
varianceappliestoboththeValue ($)andtheQuantityortotheValue ($)only.

14

MostCommonTradeTerms

ReverseofApplicationForm
AW ORDOFADVICEAND CAUTION
Pleaseconsiderthefollowingpointsandobservationsbeforecompletingandsigningtheformon
thereverse:
- Thereputationandcreditstandingofthebeneficiary(seller)
- Anorder shouldhavebeenplacedwiththeselleroracontractsignedpriortotheopening oftheCredit
- Tradetermsmusthavebeenagreed uponwiththeseller
MOSTCOMMONTRADETERMS:
EXWORKS:
Exworks(..namedplace)
Sellermakesthegoodsavailableathispremises(i.eworks, factory,warehouse,etc.)
tothebuyer
FCA:
FreeCarrier (…namedplace)
Sellerhandsoverthegoods, clearedfor export,intothecharge ofthecarrier named
bythebuyer atthenamed placeorpoint
FAS:
FreeAlongsideShip(…namedportofshipment)
Sellerdelivers thegoodsalongsidethevesselonthequayorinlighters atthe named
portofshipment.
FOB:
FreeOnBoard(…port ofshipment)
Sellerdelivers thegoodsonboard thevesselorattheairportatthenamed
port/airportofshipment.
CFR:
CostandFreight(…namedportofdestination)
Sellerpayscostsandfreightandtodeliverthegoodstothenamed portof destination.
Thisterm canonly beusedfor seaandinlandwaterway transport.
CIF:
Cost,Insurance,andFreight(…namedportofdestination)
Sellerpayscosts,insurance andfreighttodeliverthegoodstothenamed port
ofdestination.
CPT:
Carriage Paidto(…namedplaceofdestination)
Sellerpaysfreightandinsurance forcarriage ofthegoodstothenamed
destination.
CIP:
Carriage andInsurancePaidto(…namedplaceofdestination)
Sellerpaysfreightandinsurance forthecarriage ofthegoodstothenamed destination.
DAF:

DeliveredatFrontier(…namedplace)
Sellerdelivers thegoodsatthenamed pointandplaceatthefrontier.

DES:

DeliveredExShip(…namedportofdestination)
Sellermakesthegoodsavailabletothebuyer onboard theshipunclearedfor
importatthenamed portofdestination.

DEQ:

DeliveredExQuay-Duty Paid(…namedportofdestination)
Sellermakesthegoodsavailabletothebuyer onthequay(wharf) atthe named
portofdestination, cleared for importation.

DDU:

DeliveredDuty Unpaid(…namedplaceofdestination)
Sellermakesthegoodsavailabletothebuyer atthenamed placeinthe country
ofimportation.

DDP:

DeliveredDuty Paid(…named placeofdestination)
Sellermakesthegoodsavailabletothebuyer atthenamed placeinthe country
ofimportation.Thesellerbearstherisksandcosts,includingduties,
taxesandotherchargesofdelivering thegoods.

15


NTradeTerms.ThesearecommonlyreferredtoasINCOterms.They
determinetheobligationsoftheExporterandImporterwithrespectto
freightcosts,insurance,taxes,duties,etc.Thesetermsareissuedby the
InternationalChamberofCommerce.Alistofthemorecommonlyused
INCOtermscanbefoundonthereverseoftheapplicationform
illustratedonpage15.YoumaywishtorefertotheInternational
ChamberofCommerce’s publication“GuidetoINCOterms”formore
information.
Example: IfthetradetermisF.O.B.(FreeonBoard)Kaoshiung,Taiwan,
itwillbemarked“FreightCollect”onthetransportdocument,
sincetheImporter(Applicant)isresponsibleforpayingall
freightchargesandinsurancefromKaoshiung,Taiwanto
thepointofdestination.

ODocumentsRequired.The followingisalistofdocumentscommonly
requestedinaLetterofCredit.The documentsyouchoosewillbe
determinedinthecontractbetweenyouandtheExporter.
CommercialInvoice.The commercialinvoiceisnormallyrequired.

Indicatewhetheryourequireoriginalsignedcopiesoftheinvoiceor
simplycopiesoftheoriginal.Youmustalsostipulatethenumberof
copiesthatarerequired.
TransportDocuments.The followingaresimpleguidelinestoassistyou

inmakingyourselection.ItisadvisablethatyourefertotheUCP500, Articles2333formoredetailedinformation.
Ingeneral,atransportdocumentprovidesevidencethecarrierhas
receivedthegoodsitisresponsibletoship.Sometransportdocuments,
suchasaMarine/OceanBillofLading,alsocarrytitletothegoods.A
transportdocumentisnegotiableifittransferstitletothegoods.

16


FullSetOf:Afull setreferstothenumberoforiginaldocumentsbeing
issued.GenerallyBillsofLadingareissuedinthreeoriginals.Ifthe
methodoftransportationincludesanoceanvessel,indicatewhichofthe
followingtwodocumentsarerequired:
1.MultimodalTransportDocument.Forshipmentsusingmorethan

onemodeoftransportation,e.g.oceanvessel andtruck.
2.OnBoardMarine/OceanBillofLading.Usedforoceanshipments

fromoneoceanporttoanother.Foracitytobeconsideredaport,
itmustbeaccessibleby oceanvesselyearround.
Issuedby:Youmayspecifywhoistoissuethetransportdocuments.
MarkedFreightPrepaid orCollect.Checktheappropriateboxasto
whetherthefreightchargeswillbeprepaidby theExporteroriftheyare
theresponsibilityoftheImporterandarethereforecollect.Thisshouldbe
consistentwiththetradetermusedinSectionN.
Notify:Namethepartytobenotifiedoncethegoodsarriveatthe
destinationpoint.
AirTransportDocument.Transportdocumentusedwhentheshipment isby
air.Thisisanon-negotiabledocument;therefore,itdoesnotcarry
titletothegoods.Youmustindicatetowhomthegoodsarebeing
consigned,e.g.yourself(Applicant)orTD.
Trucking/RailBillofLading.Transportdocumentforshipmentby truck
orrail.Thesebillsofladingarenotnegotiableandareusuallyconsigned
toyou,theApplicant,butmaybeconsignedtoanothernamedparty.

17


InsuranceDocuments

Policy/Certificate.ThisdocumentmustberequestediftheExporteris
responsibleforarranginginsuranceontheshipment.Itisrecommended
thattheminimumamountofinsurancebe110%oftheinvoicevalue.
Youmustalsostatewhatriskstheinsurancepolicyiscovering.A
standardinsurancepolicywillcover allrisks. The term“allrisks”,
however,doesnotmeanthatallrisksarecovered.Certainriskssuchas war,
strikesandriotsarenotincludedandmustbespecificallyrequested.
Itisimportant tounderstandthatthereisadifferencebetweenan
insurancepolicyandacertificateofissuance.RefertotheUCP500, Articles3436fordetailedinformationregardinginsurance.Itisalso
recommendedthatyouseekprofessionaladvicefromyourinsurance
brokeroragent.

OtherDocuments

Youmayrequestdocumentsotherthanthoselistedabove.Forall
documentsinthiscategory,youmuststipulatewhichpartywillissuethe
documentaswellasthewordingofthedocument,otherwiseitwillbe
acceptedaspresented.The followingisalistofcommonlyused
documentsthatfallintothiscategory.
GeneralizedSystemofPreference CertificateofOriginForm“A”.This
documentcertifiesthecountryoforiginofthegoodsbeingshippedand
mayprovidetheImporterwithapreferentialdutyrate.Indicatehow
manycopiesarerequired.YoushouldcontactCanadaCustomsor
yourcustomsbrokerforinformationregardingwhetherthisdocument
isrequired.
PackingList.Alistofthepackingofgoodsbeingsent,whichcanassist
youintheinventoryanddistributionofthemerchandise.
CanadaCustomsInvoice.ImportsintoCanadarequirethataCanada
Customsinvoicebepresented.Thisinvoicecanbepreparedby you;
however,itmaybecalledforintheLetterofCredit.Ifthisdocumentis
beingrequested,youmustindicatehowmanycopiesyourequire.
InspectionCertificate.AnInspectionCertificatemayberequestedfroma
thirdpartyoranagentoftheImporterlocatedinthecountryofdispatch,
toensureacertainqualityofgoods.Inthiscase,youmuststipulatethe

18


issuerofsuchaCertificateand,ifnecessary,thecontentorwordingofthe
Certificate,otherwisebankswillacceptsuchadocumentaspresented.It
isrecommendedthatanInspectionCertificateberequestedwherever possible.
WeightList.Adocumentstatingtheweightofthegoods.

P SpecialConditions
TransportDocuments issuedbyFreightForwardersAcceptable.
Exportersoftenusetheservicesofafreightforwardertotransportgoods
andpreparedocumentsrelatingtotheshipment.Indicateherewhether
documentspreparedby afreightforwarderareacceptabletoyou.
PleaseAdviceBeneficiarybyPhoneorFax.Ifitisurgentthatthe
BeneficiarybenotifiedimmediatelyoftheLetterofCredit,pleaseinclude
instructionsastowhotheAdvisingBankmustcallorfaxuponits
receipt.

QDocumentstobePresentedWithin.Referstothenumberofdaysafter
shipmentinwhichtheExporterisallowedtopresentdocumentstothe
“availablewith”Bank.The shortestpossiblepresentationtimeis
recommendedtoensurethattheimporterreceivesdocumentspriorto
thearrivalofgoodsatdestination.

R

BankingCharges.IndicatewhowillpaytheExporter’sbankingcharges

alongwiththechargesofanyotherbankoutsideofCanadathatis
involvedinthetransaction,suchastheReimbursingBank.Itisnot
uncommonforallbankingchargesoutsideCanadatobeforthe
Beneficiary’saccount.NotethattheIssuingBankchargesarealwaysthe
responsibilityofyou,theApplicant.

S

Date.YourbranchmustinsertthedatethatyousignedtheContinuing

DocumentaryCredit Agreement.Twoauthorizedbankofficersmustsign
andindicatetheirsignaturenumbers.

19


TYourcompanynamemustbetyped/printed infull andtheappropriate
company-signingofficersmustsigntheform.
Oncethebranchhasreceivedtheapplicationformanduponapproval,it
willbeforwardedtoTD’snearestGlobalTradeFinanceoffice.Pleasenote
thatLetterofCreditapplicationscanalsobehandledelectronically
throughtheInternetusingtdfacilitrade.Youcanfeelsecureknowingthat
thesubmittedapplicationformwillbecloselyreviewedandany
clarificationswillbediscussedwithyou.

AmendmentstoaLetterofCredit

AfterissuanceofaLetterofCredit,changescanbedonethrough
amendmentssubjecttoacceptanceby theExporter.Amendmentstothe
LetterofCreditwillberequiredwheneithertheImporterortheExporter
isunabletocomplywiththetermsofthesaleagreementorthe
agreementhasbeenchanged.Forexample,anExporterwillaskforan
amendment toextendtheexpirydateandthelatestshippingdateifthey
areunabletomanufacturethemerchandiseaccordingtotheagreedupon
time.AnImportermayrequestanamendment toincreasethevalueof
theLetterofCreditiftheysubsequentlydecidetopurchaseahigher
quantityofmerchandise.
The Importermustcompleteanamendment applicationlistingall
requiredchangesandforwardtherequesttotherespectiveGlobalTrade
Financeofficeviathesameroutetheoriginalapplicationwassent.TD
clientswithaccesstotdfacilitradecanforwardamendmentsviathe
Internet.Amendmentrequestswillbeprocessedsubjecttocreditapproval
bytheIssuingBankwherenecessary.
AnyamendmentstotheLetterofCreditmustbeacceptedby theExporter
andwheremorethanonechangeisincludedinanamendment,they
mustbeacceptedasawholeasopposedtoacceptingorrejecting
individualitemswithintheamendment.

20

Questions CommonlyAsked
byImporters

Q WhentheLetterofCreditexpirydateisset,shouldenoughtimebe
allowedforthegoodstoreachmeorforpaymenttobemadewhen extended
paymenttermshavebeennegotiated(e.g.60daysafter sight)?

A No.The expirydateshouldsimplyallowtheExportersufficienttime,
afterthelatestshippingdate,topresentdocumentstothe“availablewith”
Bank.InaLetterofCredit,theImporterisnotallowedtheopportunity
toinspectthegoodspriortopayingforthem.Keepinmindthatbanksdeal
onlyindocumentsandnotingoods.

QIsthereanywaythatIcanprotectmyselfbyusingaLetterofCreditto
ensureIdonotgetinferior qualitygoods?

A Yes.Thiscanbedoneby requestingappropriatethirdpartydocumentsto
besubmittedundertheLetterofCreditthatwouldevidenceshipmentof
thepropergoods,e.g.InspectionCertificate,HealthCertificate,Agent’s
Certificate,etc.

QHowquicklywilltheExporter receivemyLetterofCredit?
A OncetheLetterofCreditapplicationformisreceivedbyTD’sGlobal
TradeFinanceoffice,theLetterofCreditwillbeissuedwithin24hours.If
itissentby teletransmission/SWIFT,theAdvisingBankwillreceivethe
advicethesamebusinessdayorthenextbusinessdaythelatest.Youmay
includeinstructionsintheapplicationformfortheAdvisingBankto
notifytheBeneficiaryby phoneorfaxandthatyoualsoincludethe
relevantnumberstobeused,enablingtheExportertoreceiveacopyof
theLetterofCreditwithoutdelay.

QWhatisthecosttoissueaLetterofCredit?
A ThefeesvarybasedonthedollaramountofyourLetterofCredit
andthelengthoftimeitisoutstanding.YoushouldcontactyourTD
branchforaFeeSchedule.

21


QUnderaLetterofCredit,whatrecourseisavailabletomeifthe
quantityorqualityofgoodsisdifferentfromwhatwasagreedupon?

A Sincebanksdealonlyindocumentsandnotingoods,alldisputes
ofwhatevernaturemayeitherbereferredtoInternationalChamberof
CommerceArbitrationorhandledthroughcourtsoflaw.

QWhathappensifmyoceanshipmentarrivesbeforemytransport
documents?

A Youhavetwooptions.Oneis towaitfortheshippingdocumentstoarrive
whichmayresultinpaymentof demurragecharges.Theotheroption often
usedbyimportersis toobtainashippingguarantee.Ashipping
guaranteeisabondof indemnityyourbankwillissuetotheshippingline
allowingyoutoobtaintheimportedgoods withoutproducingtheoriginal
transportdocuments.Obviouslythebankwillnotetheliabilityofthe
shippingguaranteeagainstyourlineofcredit.
Whenoriginaltransportdocumentsdoarriveyoumusthandthemover to
theshippingcompanywhowillreturnthebondof indemnitytoyou
whichyoumustdeliverbacktothebanktofreeyourlineofcredit.

22

LettersofCredit–
Exporter’sPerspective

Step-by-StepProcessfortheExporter

Thefollowingisadetailedexplanationoftheprocessyou,asanExporter
followwhennamedasaBeneficiaryunderaLetterofCredit.Inthis
explanation,TDisactingastheAdvisingBankandConfirmingBank.
1.Thereareseveraldifferentways tonotifyyouthataLetterofCredithas
beenissuedinyourfavour.TD’sExportLetterofCreditDepartmentwill
callyoudirectlyandobtaininstructionsastohowyouwouldliketo
receivetheLetterofCredit.The choicesinclude:
• FaxingacopyoftheLetterofCredit.
• SendingtheoriginalLetterofCreditby courierormail.
• ElectronicallydownloadingthecontentoftheLetterofCreditvia
tdfacilitrade,allowingyoutoprintyourowncopyoftheLetterofCredit.
tdfacilitradeevenallowsyoutoelectronicallyforwardthecontentsof
theLetterofCredittoyourFreightForwarder.Formoreinformation,
pleasecontacttheGlobalTradeFinanceofficenearestyou.
PleasenotethatanExporter doesnothavetobea TDcustomertobe
advisedofaLetterofCreditthroughTD.
2.UponreceiptoftheLetterofCredit,youshouldreaditcarefullypaying
closeattentiontoalltermsandconditionstoensuretheycanbemet.
AccompanyingtheLetterofCreditisacoveringletterwhichincludesthe
addressofTD’sGlobalTradeFinanceofficeandtheappropriatephone
numberstocallwithanyquestionsregardingtheLetterofCredit.See
page26foranillustrationofaLetterofCreditinSWIFTformat.
3.IfanyofthetermsandconditionsintheLetterofCreditdifferfromthe
salescontractbetweenyouandtheImporter,youshouldrequestan amendment
totheLetterofCredit.Itisrecommendedthatshipmentsnot
bemadeagainsttheLetterofCredituntilallamendmentshavebeen
received.Pleaserefertopage20forfurtherinformationregarding amendments.
4.OnceyouaresatisfiedwiththetermsandconditionsoftheLetterof
Creditandtheshipmentismade,alldocumentsrequestedintheLetterof
Creditmustbepreparedorobtained.Youwouldthenforwardthese
documents,alongwiththedraft(ifrequired)andacopyoftheoriginal
LetterofCredit,toTD’sGlobalTradeFinanceofficelistedinthecovering letter.

23

5.TDchecks thesedocumentstoensurecompliancewiththetermsand
conditionsoutlinedintheLetterofCredit.Ifthedocumentscontain
discrepancies,TDwilldiscusshowtheymaybecorrectedaswellaswhat
otheroptionsareavailable.Discrepanciesarediscussedonpage34.
6.Whenthedocumentsareinorder,paymentundertheLetterofCredit
ismadetotheExporteror,inthecaseofatermLetterofCredit,payment
willbemadeonthematuritydateoftheaccepteddraft.

Unconfirmedvs.ConfirmedLetterofCredit

FortheExporter,theissueofwhetherornotaLetterofCreditis confirmed
isanextremely importantone.
WhenaLetterofCreditisissued,theriskofpaymentrestswiththebank
thathasissuedtheLetterofCredit.ThisisanUnconfirmedLetterofCredit.
However,itmaybethattheIssuingBankisnotconsideredanacceptable
riskand/orthecountrywhereitislocatedhashighpoliticaloreconomic
uncertainty.Inthissituation,theExportershouldconsiderrequestinga
ConfirmedLetterofCredit.WithaConfirmedLetterofCredit,another
bank,the“ConfirmingBank”,usuallylocatedinthesamecountrythatthe
Exporterislocated,willaddits“confirmation”totheLetterofCredit.By
addingitsconfirmation,theConfirmingBankundertakestohonourthe
Exporter’sclaimundertheLetterofCredit,providedalltermsand
conditionsoftheLetterofCreditaremet.The riskofpaymentisnow assumedby
theConfirmingBank,aswellastheIssuingBank,thereby
providingmoreprotectionfortheExporter.

24


HowtoConfirmaLetterofCredit

AnExporterwhodecidestohaveaLetterofCreditconfirmedshould
informtheImportertoinstructtheIssuingBanktoissuea“Confirmed
IrrevocableLetterofCredit”.The IssuingBankmustrequestathirdbank,
generallytheAdvisingBank,toadvisetheLetterofCredittotheExporter
addingtheirconfirmation.The ConfirmingBankwillchargeafeefor
undertakingsuchrisk.The questionofwhichpartybearsthecostofthe
confirmationissubjecttonegotiationbetweentheExporterandImporter.
PriortotheissuanceofaLetterofCredititisrecommendedthatthe
Exportercheck withitsownbankastowhetherthebankispreparedto
additsconfirmation,shoulditberequestedtodoso.Tomakethis
decision,thebankwillneedpreliminaryinformationabouttheLetterof
CreditsuchasthenameoftheIssuingBank,countryofissuance,expiry
dateandamount.
IftheAdvisingBankhasagreedtoconfirmaLetterofCredit,italso
becomestheConfirmingBank.InthecaseofaConfirmedLetterof
Credit,thecoveringletterattachedtotheLetterofCreditwillincludea
clausesimilartothefollowing:
“ThisCreditcarriesourconfirmationandwe herebyengage,withthe
drawers,endorsesandholdersinduecourseofdraftsdrawnunderthis
Credit,thatsuchdraftswillbedulyhonouredonpresentationatourcounter,
providedthatalltermsandconditionsoftheCredithavebeencomplied with.”

25


CopyofanExportLetterofCreditinSWIFTFormat

RECEIVEDFROM:

BTTT76XXXUNIVERSALBANK,TAIWAN

TO:

TDOMCATTTORTORONTODOMINIONBANK,TORONTO,CANADA

ISSUEOFADOCUMENTARYCREDIT
40A:FORMOFDOCUMENTARYCREDIT
20A:DOCUMENTARYCREDITNUMBER
31C:DATEOFISSUE
31D:DATEANDPLACEOFEXPIRY

:IRREVOCABLE
:001/5845
:97/01/15
:97/02/20

50: APPLICANT

CANADA
:A-TO-Z-IMPORTLIMITED

59: BENEFICIARY

77,EWE
STREETTAIPEI,TA
IWAN
:EXPORTTRADINGINC

32B:CURRENCYCODE,AMOUNT

21MAINST
TORONTO,CANADA
:USD50000.00

41D:AVAILABLEWITH…BY…
42C:DRAFTSAT…
42D:DRAWEE
43P:PARTIALSHIPMENTS
43T:TRANSHIPMENT
44A:LOADINGONBOARD/DISPATCH…
44B:FORTRANSPORTATION TO…
44C:LATESTDATEOFSHIPMENT

:YOURSELVES
PAYMENT
:SIGHT
:YOURSELVES
:NOTALLOWED
:NOTALLOWED
:VANCOUVER,CANADA
:TAIPEI,TAIWAN
:97/02/10

45A:DESCRIPTIONOFGOODSAND/ORSERVICES

:2MOLDINGMACHINESASPERP.O
NUMBER26578CIFTAIWAN

46A:DOCUMENTSREQUIRED
1/FULL SETOFCLEANONBOARDMARINEBILLSOFLADINGMADEOUTTOTHE
ORDEROFUNIVERSALBANK,TAIWANMARKEDFREIGHTPREPAIANDNOTIFY
APPLICANT
2/COMMERCIALINVOICE INORIGINALANDTWOCOPIES
3/INSURANCE CERTIFICATEINDUPLICATEFOR110%OFINVOICEVALUECOVERING
ALLRISKS
4PACKAGINGLIST
71B:CHARGES

:BANKINGCHARGES OUTSIDEOF
TAIWANAREFORBENEFICIARY’S
ACCOUNT

48: PERIODFORPRESENTATION

:DOCUMENTSMUSTBEPRESENTED
NOLATERTHAN10DAYSAFTER
DATEOFSHIPPINGDOCUMENTS
FORNEGOTIATION BUTWITHIN
THECREDITVALIDITY
:WITH
:TDOMCATTTOR

49: CONFIRMATIONINSTRUCTIONS
53A:REIMBURSEMENTBANK
72: SENDERTORECEIVERINFORMATION

1

:THISIS THEOPERATIVE INSTRUMENT
*ENDOFMESSAGE*

SWIFT(SocietyforWorldwideInterbank FinancialTelecommunications):
aninternational electronicinterbank messagesystem

26


WhatanExporterShouldLookforWhenReviewingaLetterofCredit
(RefertothesampleofanExportLetterofCreditonopposite page)

1. WhichbankissuedtheLetterofCredit(L/C)?(L/Cheaderunder
“ReceivedFrom:”)Isthisbankareputableonethatcanbereliedonfor
payment?(ContactTD’slocalGlobalTradeFinanceofficeifunsure.)If
not,doestheLetterofCreditallowforconfirmationby anotherbank? (field49)
2. IstheLetterofCreditirrevocable?(Field40A)Ifitisnotstated,theL/Cis
irrevocable.
3. AretheImporter’s(Applicant’s)nameandaddressspelledcorrectly?
(Field50)
4. Areyournameandaddressspelledcorrectly?(Field59)
5. ArethedollaramountandcurrencyoftheLetterofCreditcorrect?
(Field32B)
6. Doesthepaymenttermagreewiththesalescontract?(Field42C)
7. Ifnecessary,arepartialshipmentsallowed?(Field43P)
8. Arethepointsofshipment(Field44A)anddestination(Field44B)
asagreed?
9. Isitpossibleforyoutomeetthelatestshippingdate?(Field44C)Are
enoughdaysallowedtopresentdocuments?(Field48)Youmayneedto check
withthefreightforwarderhandlingtheshipmentandpreparing
documentsforyou.

27


10.Isthemerchandisedescriptioncorrectand,ifneeded,doesitincludeunit
price,weightandquantities?(Field45A)Ifnecessary,doestheLetterof
Creditallowforanyvarianceonthequantityand/ordollaramount?
11.Arethetermsofthesaleregardinginsuranceandfreightchargesas
agreed?(Field45A)
12.CanalldocumentslistedintheLetterofCreditbeobtained?(Field46A)
13.Whichpartyisresponsibleforbankingcharges?(Field71b)
14.WhereistheLetterofCreditpayable?(Field41D)Note:thiswillaffectthe
lengthoftimerequiredtoreceiveyourfunds.
AfterreviewingtheLetterofCredit,ifyoufindanytermsand conditions
unsatisfactory,youmustasktheImporter(Applicant)to instruct
theIssuingBanktomakethenecessaryamendmentstothe
LetterofCredit.Itisrecommendedthatyounotproceedwith
shipmentuntilsuchamendmentsarereceived.

28


HowtoConveyLetterofCreditRequirementstotheImporter

AsanExporter,youcanbeproactiveandtellyourcustomer(theImporter)
exactlywhattermsandconditionsyouareagreeable toinaLetterofCredit.
WhilethiswillnotguaranteetheLetterofCreditwillarriveexactlyasyou
specified,itcanhelpavoidmisunderstandingsbetweenyouandthe
Importer.AsampleofaLetterofCreditrequisitionformisillustratedon page
29.Toobtainacopy,pleasecontactthelocalGlobalTradeFinance office.
YoumayalsorequestthattheLetterofCreditbeadvisedthroughtheTD
BankregardlessofwhetherornotTDisyourbanker.Simplyprovidethe
ImporterwiththeaddressandSWIFTcodeofTD’snearestGlobalTrade
Financeoffice.Pleaseseebackcoverofthisguidefor alistingofthese offices.

DocumentPreparationChecklist

ThefollowingchecklistisintendedtoprovidetheExporterwithsimple
guidelinesfor documentpreparation.Notethatinadditiontocheckingthe
documentsfor inconsistencieswiththeLetterofCredit,the “availablewith”
Bankchecksfor inconsistenciesamongdocuments.
ItisrecommendedthatExportersunfamiliarwithLettersofCredituseor
consultwithareputablefreightforwarder.SincepaymenttotheExporter
dependsonthedocumentsbeinginfullcompliancewiththeLetterof
Credit,thepreparationofthesedocumentsisanextremelyimportantpart
oftheLetterofCreditprocess.

Draft

ADraft,alsoknownasaBillofExchange,isalegallyenforceableinstrument,whichis
regardedasformalevidence ofdebtunderaLetterof
Credit.Itisdefinedasanunconditionalorderinwritingaddressedbyonepersontoa
nother,signedbythepersongivingit,andrequiringtheaddresseetopayatafixedord
eterminabletimeacertainsumofmoneytoortotheorderofaspecifiedparty.Adraft
mustbepresentedwithallotherdocumentsrequestedintheLetterofCredit,unlesssti
pulatedotherwise.DraftsmaybeobtainedfromanyofTD’sGlobalTradeFinanceoffic
es.

30


ExampleofaDraft
DUE
2 Atsight
___

1
___

AFTERDATEFORVALUERECEIVED 3February192002
__

PAYTOTHEORDEROF

Sam p
le

4 US
THESUMOF ____ DFifty-Thousand

$_5 USD50,000
___

DRAWNAGAINST LETTEROFCREDITNO.6 001/5945DATED7Jan.152097
__
___

UniversalBank,Taipei,Taiwan
TOToronto-DominionBank
9 GlobalTradeFinance
100WellingtonSt.West
10
_____
Toronto,Ontario
EXPORTTRADINGINC.
ISSUEDBY_ 8
___

HowtoCompleteaDraft
(RefertotheLetterofCreditinSWIFTformatpage26)

1.IfaspecificdateofpaymentisintheLetterofCredit,itmustbeentered here.
2.Paymentterm,e.g.“atsight”,“30daysaftersight”,“60daysafterBillof
LadingDate”.(Field42C)
3.Date youpresentdocumentstothe“availablewith”Bank.
4.DollaramountoftheDraftinwordsalongwiththecurrency.
5.DollaramountoftheDraftinfiguresalongwiththecurrency.
6.Letterofcreditnumberassignedby theIssuingBank.(Field20)
7.DatetheLetterofCreditwasissued.(Field31C)
8.NameandaddressoftheIssuingBank.(ListedintheHeaderunder
“ReceivedFrom”)
9.NameandaddressofthebankonwhichtheDrafts aretobedrawn.
(Field42D)Ifitstates“yourselves”,itisdrawnonwhicheverTDGlobal
TradeFinanceofficeassumingtheLetter ofCredit was advisedbyTD.
10.SignatureofanauthorizedsigningofficeroftheCompany.The
Beneficiary’snamemustbespelledoutbelowtheline.

31


CommercialInvoice

1.Doesthemerchandisedescription-includingweight,quantityandpriceconformexactlywiththeLetterofCreditandotherdocuments?
2.ArethenameandaddressoftheImporterandExporterexactlyasshown
intheLetterofCredit?
3.Havethecorrectnumberoforiginalsandcopiesbeenpresentedandsigned
ifrequired?
4.IsitmadeoutinthesamecurrencyastheLetterofCredit?
5.IsthetradetermlistedpertheLetterofCredit,e.g.C.I.F.?(Seepage15fora
listingofcommonlyusedtradeterms)

TransportDocument
(commonlyreferredtoasa“BillofLading”)

1.Hasitbeensubmittedwithalltherequiredoriginals?
2.IsthemerchandisedescriptionconsistentwiththeLetterofCredit?
3.ArethepointsofloadinganddischargeconsistentwiththeLetterofCredit?
4.IstheBillofLadingconsignedtotheorderofthepartyspecifiedinthe
LetterofCredit?
5.IsitdatedonorbeforethelatestshipmentdatestipulatedintheLetterof
Credit?
6.IstheBillofLadingendorsedcorrectly?
7.IftheLetterofCreditstatesfreightistobeprepaid,isthisclearlyindicated
ontheBillofLading?

32


InsuranceDocument

1.Doestheinsurancedocumentcover allrisksspecifiedintheLetterof
Credit?
2.Doestheinsuredamountmeetthepercentagerequirement oftheLetter
ofCreditandisitinthecurrencyoftheLetterofCredit?
3.Istheissuedateoftheinsurancedocumentpriortotheshipmentdateof thegoods?
4.Istheinsurancedocumentsignedby orendorsedinblankby theinsured
orendorsedtotheorderofthepartydesignatedincredit?
5.Istheinsurancedocumentsignedby theinsurancecompany,underwriter
oragent?
6.IsthemerchandisedescribedaspertheLetterofCredit?

CertificatesofOriginandInspection

1.EnsurethedocumentsaredatedasoforbeforetheBillofLadingdate.
2.EnsurethecontentsmeettherequirementsoftheLetterofCredit.

PackingandWeightLists

1.Doesthequantityofunits/weightmatchthatwhichisindicatedinthe
CommercialInvoice?
2.Isthebreakdownofmerchandise/weight percartonshownifrequestedin
theLetterofCredit?

33


DealingwithDiscrepancies

Anyinconsistencyfoundindocumentspresentedorfailuretocomply
withthetermsandconditionsoftheLetterofCreditisdeemeda
“discrepancy.”
Certaindiscrepanciesmaybecorrectedby theExportereitherby
amendingtheoriginaldocumentsorby replacingthemwithnewones.
IfdiscrepanciesarenotedintheBillofLading,insurancedocumentor
consularizedinvoice,thedocument(s)mustbereturnedtotheissuing
partyforcorrection,ifdesiredby theExporter.

OptionsAvailabletotheExporterWhenDocumentsareDiscrepant

Ifcertainnoncorrectablediscrepanciesarenoted,suchaslateshipmentorpresentationofdocument
spasttheexpirydate,TDwillcontacttheExportertorequesthandlinginstructions.Th
eExporterhasthreeoptions,asfollows:
1.Forward DocumentonApproval.TDsendsthedocumentsatthe
Exporter’srisktotheIssuingBank,notingtherelevantdiscrepancies.In
thisscenario,theExporterbelievesthattheImporterwillapprovethe
discrepancies.Italsomaybethattheshipmenthasalreadyarrivedoris
abouttoarriveandtheExporterdoesnotwanttheshipmenttoincura
demurragecharge.
Whenthedocumentsarereceivedby theIssuingBank,theywillbe
checkedandthediscrepanciesreferredtotheImporterforacceptance.
Meanwhile, thedocumentswillnotbereleasedtotheImporteruntilthe
IssuingBankreceivestheImporter’sapprovalofthediscrepancies.Upon
receiptoftheImporter’sapproval,paymentwillbemadeundertheLetter ofCredit.

Note:

34

ItisadvantageousfortheExportertoadvisetheImporter
directlyofthediscrepanciestoensureaquickresponsewhen
theImporteriscontactedbytheIssuingBank.


2.CableforApproval.AttherequestoftheExporter,TDsendsaSWIFT
messagetotheIssuingBankrequestingauthoritytonegotiatethe
documentsandnotingthediscrepanciesfound.The IssuingBank,inturn,
willnotifytheImporterofthesediscrepancies.The Importerwillthen
indicatetotheIssuingBankwhetherthedocumentsareacceptablewith
thediscrepanciesnoted.Ifauthorization towaive thediscrepanciesis
received(byTDfromtheIssuingBank),TDwillsendthedocumentsto
theIssuingBankandpaymentwillbemadeaccordingtotheLetterof
Creditterms.
3.Indemnity.The ExportermayprovideTDwithanacceptableIndemnity
Agreementforthediscrepancies.SuchindemnityenablesTDtoeffect
paymentimmediately,eventhoughtherearediscrepanciesinthe
documents.Ifdocumentsarenotacceptedby theImporter,TDhasthe
righttoclaimthefundsbackfromtheExporterundertheIndemnity Agreement.

Acceptances

ALetterofCreditissaidtobea“TermLetterofCredit”or“UsanceLetter
ofCredit”whenextendedpaymenttermsareagreedto,suchas60days
aftersightor60daysafterBillofLadingdate.Oncedocumentsanda
usancedraftarepresentedundera“TermLetterofCredit”andarefound
tobeingoodorder,insteadofpayingtheExporterrightaway,theDrawee
Bank“accepts”thedraft,whichisessentiallyapromisetopaytheExporter
onthematuritydatestatedinthedraft.TheAcceptingBankholdsthe
accepteddraftuntilmaturityorthedraftcanbereturnedtothe
Beneficiary,dependingontheBeneficiary’spreference.
Onceadrafthasbeenaccepted,itbecomesanegotiableinstrument
calledaBanker’sAcceptanceorsimplyreferredtoasanAcceptance.
Acceptancesmaybediscountedasdiscussedonthenextpage.

35


DiscountingAcceptances

InsteadofholdinganAcceptanceuntilthematuritydate,theExporter
mayhavetheaccepteddraft“discounted”atprevailingdiscountrates.This
allowstheExportertoreceivepayment,netofdiscountcharges,assoonas
thedrafthasbeenaccepted,insteadofwaitinguntilthematuritydate.In
additiontotheExporterreceivingfundspriortothematuritydate,
anotheradvantagetodiscountingisthatthediscountrateisbasedonthe
riskoftheAcceptingBankandthereforeisusuallylowerthanthe
Exporter’sborrowingrate.ContactoneofTD’sGlobalTradeFinance
officesforfurtherinformation.


The BeneficiarymayassignpartoralloftheproceedsoftheLetterof
Credittoathirdparty(assignee)suchasasupplier.Akeypointforthe
assigneetokeepinmindisthatpaymentisforthcomingonlyifthe
ExporterreceivespaymentundertheLetterofCredit,overwhichthe
assigneehasnocontrol.Anassignmentofproceedsisirrevocableand
thereforeallpartiesmustconsenttoanychanges.
Assigningproceedsmaybeanacceptablealternativetoasupplierwho
otherwisemightrequestaLetterofCreditordemandfundsinadvanceof
shipment.

36


ProceduretoAssignProceeds

1.AnAssignmentofProceedsformmustbecompletedby theExporteronce
theLetterofCreditisreceived.Thisformcanbeobtaineddirectlyfrom
oneofTD’sGlobalTradeFinanceoffices.
2.Oncetheformhasbeencompleted,itissentbacktotheGlobalTrade
Financeofficeforacknowledgment.
3.Anadviceoftheassignmentissenttothedesignatedassignee.

Applicant/Importer

1


Purchase&SaleA
greement
2

4

Requestfora
LetterofCredit

Adviceof
Letterof
Credit
RequesttoAdvise
LetterofCredit

IssuingBank

3

5

Requestto
Advise
Assignment
ofProceeds

AdvisingBankand
“Available with”Bank

Supplier
6

Adviceof
Assignment
ofProceeds

QuestionsCommonlyAskedbyExporters

QIhavereceivedaLetterofCredit,butitdoesnotmeetthesaleterms
agreedupon.WhatshouldIdo?

A IftheLetterofCreditisnotacceptabletoyou,youshouldrequestan amendment
totheLetterofCreditfromtheImporter.Refertopage20
fordetailsonamendments. IftheImporterdoesnotagreetotherequest
foramendment,youmayrefusetoshipagainsttheLetterofCreditand
simplyletitexpireunused.

37


QWhatisthefeeforhavingaLetterofCreditconfirmed?
A The confirmationfeeiscalculatedasapercentageofthefacevalueofthe
LetterofCreditandisbasedonboththerisksoftheIssuingBankand
thecountryinwhichitisdomiciled.The feeisusuallyquotedonaper90-dayperiodandcurrentlyrangesupwardsfromapproximately0.10%. The
rateissubjecttochangeatanytimebasedonprevailingmarket conditions.

QIjustreceivedapaymentadviceunderaLetterofCreditdetailing alist
ofcharges.Whatare“ReimbursingBank”charges?

A AReimbursingBankisoneauthorizedby theIssuingBanktofacilitate
thetransferoffundsbetweenTDandtheIssuingBank.Itmaybe
necessarytohaveaReimbursingBankinvolvedbecausereimbursement
isinaforeigncurrencyorbecausetheIssuingBankandTDdonotshare
settlementaccounts.The ReimbursingBankwillchargeafeetofacilitate
thepayment.ThisfeeistheresponsibilityoftheExporteriftheLetterof
Creditstatesthatall chargesoutsideoftheImporter’scountrywillbe
paidby theExporter.

QIreceivedaLetterofCreditadvisedbyaCanadian

bankotherthanTD.

CanIstillnegotiate mydocumentswithTD?

A

IftheLetterofCreditstatesthatitis“negotiablewithanybank”,thenyou
maynegotiateyourdocumentswithTD.
Thisinformationisfoundinthe
LetterofCreditSWIFTformatinfield41D“Availablewith...“.

QHowdoIgetacopyoftheUniformCustomsandPracticefor
DocumentaryCredits(UCP)500,(1993revision)?

A YoucanobtainacopyfromyourlocalTDbranchorfromoneof
TD’sGlobalTradeFinanceofficeslistedonthebackcover
ofthisguide.

38

Standby LettersofCredit

The basisofaStandbyLetterofCreditisthatitmaybedrawnonby the
BeneficiarywhentheApplicant(Buyer)hasfailedtoperformin
accordancewiththeunderlyingcontractbetweentheApplicantand
Beneficiary.
Insimpleterms,aStandbyLetterofCreditis“standingby”toprotectthe
BeneficiaryincasetheApplicantdefaultsonanagreed-uponcontract.
StandbyLettersofCreditareeithergovernedby theUniformsCustoms
andPracticeforDocumentaryCredit(UCP)ortheInternationalStandby
Practice(ISP)rules.
UnlikeaDocumentaryLetterofCredit,theusualdocumentscalledfor
underaStandbyLetterofCreditarenomorethanawrittendemand(or
sightdraft)fromtheBeneficiary,accompaniedby itsstatementthatthe
Applicanthasdefaultedinperformanceoftheagreed-uponcontract.
Becausethedocumentsaremuchlessstringent,theriskofaStandby
LetterofCreditrestsmoreheavilyontheApplicantthantheBeneficiary.
AStandbyLetterofCredit,therefore,shouldbeissuedonlywhenthe
Applicanthasnodoubtastothetrustworthinessandintegrityofthe Beneficiary.
StandbyLettersofCreditsareusedinavarietyofforms.Mostcommonly
theyareusedforBidBonds,PerformanceBonds,AdvancePayment Guarantees,
WarrantyBonds,andtosecurefinancialobligationsof
obligors.OftensuppliersasktheirbuyerstoprovideStandbyLettersof
Creditsassecurityforgoodssoldonopenaccount.ALessormayrequesta
StandbyLetterofCreditfromaLesseetocover leaseobligations.These
aresomeofexamplesofStandbyLetterofCreditsand,intheeventofa
default,thebeneficiarycoulddemandpaymentfromtheissuingbankof
theStandbyLetterofCredit.
Itisalsoimportant torecognizethedistinctionbetweenGuaranteesand
StandbyLettersofCredits. BothStandbyLetterofCreditsandGuarantees
obligatetheIssuingBanktomakepaymenttoabeneficiaryintheeventof
adefault.However,thedistinctionisattributabletotherulesandlaws
underwhicheachinstrument isissued.TypicallyGuaranteesareissued
subjecttolocallawswhileStandbyLettersofCreditsareissuedsubjectto
UniformCustomsandPracticeRulesorInternationalStandbyPractice Rules.

39


ThefollowingexampleillustratestheuseofaStandbyLetterofCredit.
Example

ACanadianshoeimporter,BestShoesImporterInc.,hassignedaone-year
contractwithasupplierinBrazil,BrazilianShoesSupplierInc.,agreeing
topurchaseonopenaccountleathershoesvaluedatCAD$30,000/month.
Undertheopenaccountarrangement,paymentmustbemade30days
aftertheinvoicedate.Toguaranteepaymentby BestShoesImporterInc.,
BrazilianShoesSupplierInc. requiresthatanIrrevocableStandbyLetter
ofCreditwithanexpirydateofoneyearfromthedateofissuebeissued
initsfavourforCAD$30,000.

40


TO:

(…ADVISINGBANK…)

FROM:

THE TORONTODOMINIONBANK

ATTHEREQUESTOFOURCUSTOMER,
WETHE TORONTODOMINIONBANK,GLOBALTRADEFINANCE,
500ST.JACQUES STREET,10THFLOOR,MONTREAL,
QUEBEC,CANADAH2Y1S1
HEREBYISSUEINYOURFAVOUROURIRREVOCABLESTANDBY LETTEROF
CREDITINTHETOTALAMOUNTOF
WEAUTHORIZEYOUTODRAWONTHIS BRANCHUNDERTHISSTANDBY
LETTEROFCREDITINTHEFORMOFADEMANDFORPAYMENTWHICH
DEMANDWESHALLHONOURWITHOUTENQUIRINGWHETHERYOUHAVEA
RIGHTASBETWEENYOUANDTHECUSTOMERTOMAKESUCHDEMANDAND
WITHOUTACKNOWLEDGINGANYCLAIMOFTHECUSTOMER.
PROVIDED,HOWEVER,THATYOUARETODELIVERTOUSATTHEABOVE
ADDRESS,THEFOLLOWING DOCUMENTATION:
• YOURSIGHTDRAFTDRAWNONUS
• THEORIGINALOFTHISSTANDBY LETTEROFCREDITANDANY
AMENDMENTSIFANY
• COPYOFUNPAIDINVOICES
• ACERTIFICATE PURPORTEDLYSIGNEDBYANAUTHORIZEDOFFICEROF
YOURCOMPANYSTATING THAT
ISINDEFAULTAND
THATTHEMONIESDRAWNBYYOUAREDUEANDPAYABLETOYOUBY
BENEFICIARY
PARTIALDRAWINGSAREPERMITTED
ITISEXPRESSLYUNDERSTOODTHATNEITHERTHISSTANDBY LETTEROFCREDIT
NORITSPROCEEDSARETRANSFERABLEORASSIGNABLETOANYTHIRDPARTY
THISSTANDBY LETTEROFCREDITISISSUEDSUBJECTTOUNIFORMCUSTOMS
ANDPRACTICEFORDOCUMENTARYCREDIT,1993REVISIONICCPUBLICATION
NO.500.
THEABOVEDOCUMENTATION
MUSTBEPRESENTEDATTHIS
BEFORE3:00P.M.OURTIMEON
,ATWHICHTIMETHIS
LETTEROFCREDITSHALLEXPIRE.

BRANCHONOR
STANDBY

41

OtherTypesofLettersofCredit

Back-to-BackLetterofCredit

WhenoneLetterofCreditisusedtosecuretheissuanceofanotherLetter
ofCredit,thepartiesaresaidtobedealingwitha“Back-to-Back”Letterof
Credittransaction.Suchatransactionisoftenrequestedby an
intermediaryparty,suchasabroker,toprovidesettlementtoasupplier
fromwhichthegoodsarepurchased.
InaBack-to-BackLetterofCreditscenario,theintermediarypartywould
receiveandbetheBeneficiaryofaLetterofCreditfromitscustomerthat
hasagreedtopurchasegoods.ThisLetterofCreditisreferredtoasthe Primary
Credit.Subsequently,theintermediarypartymustissueaLetter
ofCredit,referredtoastheSecondaryCredit,toitssupplier,foralesser
amountthantheonereceived.Atthispoint,theintermediarypartywould
approachabank,offeringthePrimaryCreditascollateralforissuanceof
theSecondaryCredit.
The acceptanceofthePrimaryCreditassecurityfortheSecondaryCredit
isextremelyriskytotheintermediaryparty’sbank.Circumstancesmay
arisethatpreventtheintermediarypartyfrommeetingthetermsand
conditionsinthePrimaryCredite.g.insolvency.Therefore,the
intermediaryparty’sbankwouldbeunabletodrawunderthePrimary
Creditithastakenascollateral.The supplierthatreceivedtheSecondary
Credit,however,wouldnotbeprecludedfromdrawingunderitsLetterof
Creditand,theintermediaryparty’sbankisobligatedtohonourthe
drawingeventhoughitcouldnotcollectfundsunderthePrimaryCredit.
DuetotheinherentriskinessofaBack-to-BackLetterofCredittransaction,
bankswilllikelynotparticipateinsuchatransaction.Asanalternative,
theintermediaryparty’sbankmayrecommendusingaTransferable
LetterofCredit(describedonnextpage).

42



A TransferableLetterofCreditisusedincaseswheretherearethree
partiestoatransactionasdescribedintheBack-to-BackLetterofCredit
transaction;anImporter(Buyer),Exporter(Seller),andanintermediary
party,suchasabroker,whoisresponsibleforarrangingthesale.
Insuchatransaction,theintermediarypartyrequestsaLetterofCredit
fromtheImporterasprotectionagainstnon-payment.The Exporter,in
turn,wantsassurancefromtheintermediarypartythatpaymentwillbe
made,andwillalsorequestaLetterofCredit.Itmaybethecase,however,
thattheintermediarypartyhaslittleworkingcapitalordoesnothave
accesstoalineofcreditwithitsbanktoissueaseparateLetterofCredit
totheExporter.Asanalternative,theintermediarypartymayprovide
suchassurancetotheExporterby transferring overaportionoftheLetter
ofCredititreceivedfromtheImporter.ThisistermedaTransferable
LetterofCredit.
TotransferaLetterofCredit,theintermediarypartymustrequesta
TransferableLetterofCreditfromtheImporter.
IftheLetterofCreditisnotdesignatedtobetransferable,itcannotbe
transferred.The LetterofCreditcan,however,beamendedtoallowitto
betransferable.InadditiontheLetterofCreditmustnominateabank,
generallytheAdvisingBank,whoisauthorizedtoeffectatransfer.
The intermediarypartywouldbetheBeneficiaryoftheLetterofCredit
and,inaTransferableLetterofCredittransaction,isreferredtoasthe
FirstBeneficiary.The FirstBeneficiarywouldthenasktheTransferring
Banktotransfer,inpartorinfull,itsrightsundertheLetterofCreditto
themanufacturer ofthegoods,whichisreferredtoastheSecond Beneficiary.
ATransferableLetterofCreditmaybetransferredonlyonce;therefore,a
SecondBeneficiaryisunabletotransferaportionofaTransferableLetter
ofCredittoathirdbeneficiary.Itmay,however,betransferredtomore
thanoneSecondBeneficiary.

43


Example

Thefollowingisasimplifiedexampleofa Transferable Letterof
Credittransaction:
Importer:

ABCBuyer

IntermediaryParty:

CanadianMapleTradingCompany

Manufacturer:

XYZSupplierCanada

IssuingBank:

WorldWideBank

TransferringBank:

TDBank

AsperABCBuyer’sinstructions,WorldWideBankissueda
TransferableLetterofCreditinfavourofCanadianMapleTrading
Company,whichisactingastheintermediarypartyinthetrade
transaction.ThisTransferableLetterofCreditisintheamountof
USD$100,000andTDBankisauthorizedandwillingtodothe transfer.The
descriptionofgoodsis5,000pairsofmoccasinsatUSD
$20perpair.OnceCanadianMapleTradingCompanyastheFirst
BeneficiaryreceivestheLetterofCredit,itrequestsTDBankto
transferUSD$75,000toXYZSupplierCanada,statingthesame
quantityofgoods,5,000pairsofmoccasins,butatUSD$15perpair.
TDBankadvisesthetransferhasbeenmadetoXYZSupplier
Canada,whichnowbecomestheSecondaryBeneficiaryoftheLetter
ofCredit.
OnceXYZSupplierCanadahasshippedthegoods,itpresents
documentsinaccordancewiththeTransferableLetterofCredit,
alongwithitsdraftforUSD$75,000,toTDBank.TDBankthen
notifiesCanadianMapleTradingCompanyofthepresentation.
CanadianMaplewillpresentitsowninvoiceanddraftshowinga
valueofUSD$100,000.TDBankthensubstitutesthesedocuments
withthedraftandinvoicepresentedby XYZSupplierCanadaand
forwardsthedocumentstoWorldWideBank.TDBankreceivesUSD
$100,000andpaysUSD$75,000toXYZSupplierCanadaandUSD
$25,000toCanadianMapleTradingCompany.

44


Note:Transferable LettersofCreditarerarelyassimpleastheyseem
andmanydifficultiesmayarise.Theyshouldbeundertakenonlyby
experienced traders.


Applicant/Importer
(ABCBuyer)

1

IntermediateParty(CanadianM
apleTradingCo.)“FirstBeneficia
ry”

SalesContract
(USD$100,000)
2

4

Application for
Letterof Credit
(USD$100,000)

5

Manufacturer

(XYZSupplierCanada)
Adviceof Requestto
“SecondBeneficiary”
Letterof
Transfer
Credit (USD$75,000)
6

IssuingBank
(WorldWideBank)

LetterofCredit
3

TransferringBank
(TDBank)

Transferof
LetterofCredit
(USD$75,000)

45

AGuideto DocumentaryLettersof Credit

TDBankFinancialGroupisprovidingthisguideasageneraldiscussionof
LettersofCredit.Althougheveryefforthasbeenmadetoensurethe
informationpresentediscorrect,we donotguaranteeitsaccuracy.
Furthermore,theinformationinthisguideshouldnotbeintendedasnor
relieduponaslegal,financialorinvestmentadvice.
WehopethisguidegivesyouageneralunderstandingofLettersofCredit
asitwasintended.

46

Guide2lc

Recommandé

Recommandé

Contenu connexe

Similaire à Guide2lc

Similaire à Guide2lc (20)

Dernier

Dernier (20)

Guide2lc