Rates of Exchange

RATES OF EXCHANGE

D Objectives:

After studying this chapter you should understand:

1.1

General concepts

1.2

The foreign exchange market

1.3

Buying and selling foreign currency

1.4

The balance of payments

1.5

The foreign exchange market in Romania

Rates of Exchange

1.1 General concepts

You know that every businessperson involved in the international trade will
have to make or receive payments in foreign currency.
What is an exchange rate?
An exchange rate1 is simply the price of one currency in relation to another
(say Euros per dollar), or it is the price at which one currency can be bought
or sold in exchange for another currency. Other authors define the exchange
rate as the number of units of domestic currency required to purchase 1 unit
of the foreign currency.
E.g. If 1 sterling pound can be exchanged for 4 DM in Munchen, it will cost
you 20 pounds to purchase any article priced at 80 DM.
If the rate moves to 4,25 DM for 1 pound, the article would cost 18,82
pounds (80 DM/4,25 DM = 18,82 pounds).
The exchange rate affects the economy and our daily lives because when the
US dollar becomes less valuable relative to foreign currencies, foreign
goods become more expensive. When the US dollar rises in value, foreign
goods become cheaper.
When a currency increases in value, it experiences appreciation; when it
falls in value and its worth fewer US dollars, it undergoes depreciation.
Exchange rates are important because they affect the relative price of
domestic and foreign goods and services, and the price of financial assets
and liabilities denominated in foreign currencies, and are among the most
important prices within an economy. The dollar price of French goods to an
American is determined by the interaction of two factors: the price of
French goods in francs and the franc/dollar exchange rate.
The conclusion is: When a countrys currency appreciates (rises in value
relative to other currencies), the countrys goods abroad become more
expensive and foreign goods in that country become cheaper (holding
domestic prices constant in two countries). Conversely, when a countrys
currency depreciates, its goods abroad become cheaper and foreign goods
in that country become more expensive.
1

Kiriescu Costin Relaii valutar-financiare internaionale, Ed. tiinific i

Enciclopedic, Bucureti, 1978

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The exchange rate can be classified, as follows:

The nominal exchange rate. It is that rate at which actual transactions
occur.
The nominal effective exchange rate. It is a measure of the value of a
currency against a weighted average of several foreign currencies.
The real exchange rate (or real effective exchange rate) equals a
nominal exchange rate or nominal effective exchange rate index divided
by measures of relative change in general price levels, the prices of
traded products, an index of changes in labour costs, or other measures
of relative competitiveness.
The official exchange rate. It is established by the monetary authority
(the Central Bank, the Treasury) through a foreign exchange law or
regulation;
The market foreign exchange rate. It is freely established in the foreign
exchange market in accordance with the supply and demand of foreign
currency;
The bid exchange rate. It is established in the stock exchange in
accordance with the offer and demand of foreign currency. It is the price
at which a dealer will buy foreign exchange.
The offered rate or asked rate. It is the price at which a dealer will sell
foreign exchange.
The black bid exchange rate. It is established in the black stock
exchange.
The single exchange rate. It is the exchange rate established by the
monetary authority for each currency;
The multiple exchange rates. It is the case when the monetary authority
establishes many exchange rates for the same currency, or
The commercial exchange rate;
The non-commercial exchange rate;
The spot exchange rate. It is the rate of the day, used by banks in
carrying out the spot operations, with the settlement in 48 hours from the
date of the transaction or in two working days;
The forward exchange rate. It is utilized in the forward transactions,
with the settlement over 48 hours (1, 2, 3, 6, 9, 12 months);

Rates of Exchange

The Telegraphic Transfer exchange rate.

The fixed (or pegged) rate. It is set by law or policy to hold a specific
value or is held within a specific range compared to another currency,
basket of currencies, some commodity, or other measures of value.
The floating (or flexible) rate is allowed to vary in value against other
currencies. Many variations exist, depending on national policy; some
rates are allowed to move freely, others are subject to frequent
intervention by authorities to limit the extent or speed of movements,
others fluctuate freely within a band/an interval, others are allowed to
appreciate or depreciate at specific paces dictated by policy, etc.
The foreign currency must be freely convertible, that is, one must be able
to:

Sell it;

Swap it;

Exchange it for another currency.

Exchange rates are quoted in the financial press at middle rates (i.e.: the
difference between the buying rate and selling rate, for acceptable
currencies). Most banks have their own foreign exchange department and
provide daily sheets or screens of up-to-date rates.
1.2 The foreign exchange market
The foreign exchange rate is established in the foreign exchange market,
concentrating the supply and demand of currencies.
The foreign exchange market allows payments to be made across national
boundaries by establishing the prices of national currencies in terms of other
currencies.
The foreign exchange market in one country is a market where foreign
currency is traded in exchange for the home currency or for currencies of
other countries. Although foreign exchange is a means of payment of
another country, this does not mean that the entire stock of that countrys
currency is foreign exchange. Rather it is only part of the money stock,
which becomes foreign exchange when it is traded in exchange for another

Rates of Exchange

currency or when residents of countries other than the country of the

currency hold it.
Like many other markets, however, the foreign exchange market is not free
of government intervention; central banks regularly engage in international
financial transactions called foreign exchange interventions in order to
influence exchange rates. In our current international financial arrangement,
called a managed float regime (or a dirty float), exchange rates fluctuate
from day to day, but central banks attempt to influence their countries
exchange rates by buying and selling currencies. The first step in
understanding how central bank intervention in the foreign exchange market
affects exchange rates is to see the impact on the monetary base from central
bank sale in the foreign exchange market of some of its holdings of assets
denominated in a foreign currency, called international reserves.
A central banks purchase of domestic currency and corresponding sale of
foreign assets in the foreign exchange market leads to an equal decline in
its international reserves and the monetary base.
A central banks sale of domestic currency in order to purchase foreign
assets in the foreign exchange market results in an equal rise in its
international reserves and the monetary base.
The intervention, in which a central bank allows the purchase or sale of
domestic currency to have an effect on the monetary base, is called an
unsterilized foreign exchange intervention2. An unsterilized foreign
exchange intervention in which domestic currency is sold to purchase
foreign assets leads to a gain in international reserves, an increase in
the money supply, and a depreciation of the domestic currency. At the
same time, an unsterilized foreign exchange intervention in which
domestic currency is purchased by selling foreign assets leads to a drop
in international reserves, a decrease in the money supply, and an
appreciation of the domestic currency.
A foreign exchange intervention with an offsetting open market operation
that leaves the monetary base unchanged is called a sterilized foreign
exchange intervention.
2

Mishkin F. The economics of money, banking, and financial markets, sixth edition,
Columbia University, USA, 2001

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The main types of exchange rate regime emphasized by the specialized

literature are:
1. flexible or floating exchange regime;
2. fixed or pegged exchange rates;
3. managed floating, and
4. exchange controls.
There are also a number of mixed or intermediate cases.
The simplest regime is the flexible or floating exchange rate. Under such
a regime, the demand for and supply of each currency in the foreign
exchange market are allowed to determine the exchange rate. The market
for foreign exchange can be treated as competitive, because millions of
individuals and firms participate, foreign exchange is a homogeneous
commodity, information is good, and entry and exit are unrestricted. The
market for foreign exchange under a flexible exchange rate works much like
the market for any other good. In the case of the foreign exchange market,
the good in question is an asset in the form of a bank deposit denominated in
a foreign currency. The exchange rate adjusts until the quantity of foreigncurrency-denominated deposits that individuals wish to hold equals the
quantity available.
Under the fixed or pegged exchange rates, the demand for and supply of
foreign exchange still exist, but they are not allowed to determine the
exchange rate as in a flexible rate system. Central banks (US Federal
Reserve, the Bank of England etc.) must stand ready to absorb any excess
demand for or supply of currency to maintain the pegged rate.
It should be mentioned the types of exchange rate arrangements
according to a classification used at the International Monetary Fund.
In all cases, classifications should be based on the substance of the
arrangement. For example, some countries peg their official rate against a
single currency, but most transactions are at market rates determined at
currency auctions.

Rates of Exchange

Types of exchange rate arrangements3:

Pegged against a single

currency

Pegged against a
currency composite

Against a single currency

Cooperative
arrangements
Adjusted according to
sets of indicators
Other managed floating
Independently floating

Pegged rates
Mostly pegged against the US dollar or
French franc. Also includes several small
countries that peg to the currency of a large
neighbour and several countries in formal
currency unions
Currencies of about 25 countries are pegged
against currency composites. A small number
of other currencies are pegged against
the SDR.
Limited flexibility
An arrangement for several Mid-eastern
countries that formally use a flexible band
around the SDR, but do not always observe
margins in order to maintain a more stable
relationship to the US.
Countries participating in the exchange rate
arrangement of the European Monetary
System.
More flexible
Most use a band around a weighted composite
of the currencies of major trading partners.
Currency may float, but authorities may
intervene or take other policy actions in order
to affect the direction and size of movements
Currencies ale allowed moving freely in
markets.

In Romania, in accordance with the National Bank of Romania Act, the

central bank establishes and pursues enforcement of the foreign exchange
regime on the Romanian territory.
The following ideas are worth mentioning concerning the foreign exchange
regime in Romania:

There is no foreign exchange law, but only an foreign exchange

regulation issued by the National Bank of Romania;
IMF - Money and Financial Statistics Manual, Washington, 1996

Rates of Exchange

On March 25 1998, Romania notified the IMFs Board of its acceptance

of Article VIII obligations, sections 2, 3 and 4 of the IMFs Articles of
Agreement;

The move involves the following:

authorities shall abolish current account restrictions;

no other restrictions shall be introduced;

creation of more favourable conditions for resumption of economic

reform;

foreign exchange policy underwent no significant changes;

The regulation on foreign exchange operations issued by the National

Bank of Romania, establishing current account convertibility, has been
in force since 30 January 1998.

The harmonization of Romanian legislation with the European Union one

involves:

Current account operations are generally performed in line with

provisions under the IMFs Articles of Agreement (Art. XXX);

Capital account operations are performed largely in line with the similar
legislation of European Union and OECD countries;

In July 1999, the National Bank of Romanias Board decided to

liberalize capital inflows the decision is to be fully implemented.

Foreign exchange consists of: paper money, coins, and transaction balances
at banks, all denominated in foreign currency units. In addition, foreign
exchange includes other financial instruments arising from international
transactions and nearing maturity, such as near-maturity foreign drafts or
bankers acceptances, which can readily be converted into foreign means of
payment.
Under the provisions of the National Bank of Romanias Circular No.
26/20014, foreign exchange represents the national currency of another
state, the single currency of a monetary union, as well as the composite
currencies such as: the Special Drawing Rights (SDR).
4

Circular issued in Monitorul Oficial al Romniei, Part I, No. 769/03.12.2001, in order to

amend and complete the Regulation No. 3/1997 concerning the foreign exchange
operations.

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The foreign exchange market basically performs four major functions, such
as:

It converts the purchasing power, which can only be exercised within a

national boundary of a country to that of other countries. Such
conversions often result in transfer of purchasing power from residents
of a country to those of others.

It functions as a clearing house for foreign exchange demanded and

supplied in the course of international transactions by residents of
various countries. Without this, buyers and sellers themselves must find
their prospective counterpart sellers and buyers.

It provides facilities for hedging foreign exchange risks. This function

has become increasingly important since the International Monetary
Fund sponsored international monetary system - abandoned the fixed
exchange rate regime in 1973.

It provides credit for international trade, particularly as it functions as a

secondary market for international trade finance instruments.

Market participants can be split into five groups5:

End users of foreign exchange: firms, individuals and governments who

need currency in order to acquire goods and services from abroad or to
move capital as part of their regular activities;

Market makers: large international banks who hold stocks of currencies

to allow the market to operate continuously and who make their profits
through the spread between buying and selling rates of exchange;

Speculators: banks, firms and individuals who attempt to profit from

outguessing the market;

Arbitrageurs: banks that make profits from buying in one market at the
same time as selling in another, taking advantage of small
inconsistencies which develop between markets;

Central banks who, on behalf of their governments, enter the market to

attempt to influence the international value of their currency.

Howells P.& Bain K. The Economics of Money, Banking and Finance, Pearson
Education Limited, Edinburgh Gate, Harlow Essex CM 20 2JE England.

Rates of Exchange

Other authors6 consider that the participants in the foreign exchange

market are:
central banks;
specialized institutions (commercial banks and other financial
institutions);
large commercial companies and
a few wealthy individuals, as well as
brokers who arrange deals between banks.
The participants represent the total of the banks, companies, institutions,
individuals of a country, who order directly, or by intermediaries, the
purchase or sale of currencies on the account of the specialized institutions.
The establishment of the exchange rate of a currency against another in the
foreign exchange market is called quotation7.
The exchange rate can be expressed against:
A monetary unit, for the US dollar, British pound, etc.
E.g. 1 USD = x FRF
1pound = y FRF.
Hundred monetary units
E.g. 100 DM = x FRF
Thousand monetary units
E.g. 1000 Lit. = x FRF.
Foreign exchange rates are frequently quoted in the following methods:
1. Direct quotation;
2. Indirect quotation.
The direct quotation is the quotation by which the foreign monetary unit is
constant (1, 100, 1000) and the national monetary unit varies.
E.g. 1 USD = x lei
1000 Lit. = z lei.
6

Davies Audrey & Kearns Martin Banking Operations, Pitman Publishing, London 1994,
p.20
7
Negru Mariana Tehnici de calcul valutar-financiar, Editura Militar, Bucureti, 1992,
p. 29

Rates of Exchange

The indirect quotation shows how many foreign monetary units are equal
to one national monetary unit (English, Canadian, etc.)
E.g. 1 pound = x USD
1 pound = y FRF.
The market undertakes trade in two distinct areas:
The wholesale market: mainly for inter-banking trading or very large
commercial companies;
The retail market: for normal trading and commercial customers.
Major currencies traded were: US dollars, German marks, sterling pound,
Japanese yen, and Swiss francs. All quotations are made against the US
dollar, as it is the worlds most available currency.
Each bank or broker must be authorized to deal in foreign exchange and
they are controlled by the Central Bank.
What is the business carried out on the market?
The English literature8 describes three kinds of transactions carried out on
the market:
- Spot transactions;
- Outright transactions;
- Swap transactions.
In the Romanian literature, Costin Kiriescu9 classifies these operations into
the following:
Spot operations are operations with the settlement within two working
days. These businesses are made using the exchange rate of the day,
meaning spot exchange rate. In the world, about 40 per cent of foreign
exchange transactions are spot transactions purchases/sales of foreign
currency for immediate delivery.

Davies Audrey & Kearns Martin Banking Operations, Pitman Publishing, London 1994,
p. 17
9
Kiriescu Costin Relaii valutar-financiare internaionale, Ed. tiinific i Enciclopedic, Bucureti, 1978, p. 230

Rates of Exchange

Forward operations are operations with the settlement at a future time

that is over 48 hours, but less than one year. Each exchange rate is
established in advance in the moment of the negotiation of the deal.
Forward rates of exchange relate to contracts entered into force now for
promised delivery in the future. The most common periods for forward
contracts are one-month and three-months, although longer periods are
possible especially for heavily traded currencies.
The forward operations can be classified into:

simple (outright) it represents a single forward sale/purchase

operation (settlement is at some future date).

complex - swap it represents a purchase/sale of currency in the spot

market, combined with a simultaneous sale/purchase in the forward
market.
As a conclusion, it should be mentioned the following:

Spot operation represents the sale of currency and the purchase of

another at spot exchange rate. So, a spot rate of exchange is a rate of
exchange for a foreign currency transaction, which is to be settled
within two working days of agreeing the rate.

The main factors that can affect the movement of spot rates are:
(a) international interest rate differentials (e.g. If one country raises its
interest rates, this could lead to increased short-term investment in that
country, which will strengthen that countrys home country);
(b) political and economic trends (examples are balance of payments,
money supply figures, government policy changes, and industrial
relations. All these matters influence the opinions of dealers and
traders, and thus affect the supply or demand for a currency.);
(c) central bank actions (central banks may purchase or sell a particular
currency in an attempt to influence its exchange rate);
(d) formal arrangements (the European Monetary System is a prime
example of a formal arrangement. Here governments agreed that their
currencies would not be allowed to fluctuate outside certain defined
parameters.)
-

Forward represents the settlement at a future date. The important thing

is that the price of the foreign exchange is agreed now for future

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delivery. So, a forward rate is a rate of exchange that is fixed now for a
deal that will take place at a fixed date, or between two dates, in the
future.
Forward rate:

Fwd =

d K N z
, where:
360 100

d = the difference of interest rate for both currencies (spread);

K = spot exchange;
Nz = number of days for the calculation period of forward.
In practice, the forward exchange rate is made from the spot exchange rate,
adding or subtracting a difference given by two terms called pips (which
corresponds to the buying or selling exchange rate).
Thus, under direct quotation when the forward exchange rate is greater than
the spot one, the currency has a discount and the differences are added to
the spot exchange rate.
When the forward exchange rate is less than the spot one, the procedure is
reversed and the differences are subtracted from the spot exchange rate.
E.g. we want to establish the forward exchange rate for one month for the
Swiss Frank against the US dollar using the following elements:
spot exchange rate USD/CHF = 1.70;
interest rate for one month for the US dollar = 15%;
interest rate for one month for CHF = 4

11
%;
16

11

1 .70 15 4
16

30 = 1 .70 10 .3125 30 = 0 .0146

P=
360 100
36 ,000

The forward exchange rate will be:

USD 1 = CHF 1.6854 (1.70 0.0146 = 1.6854)
Spot Operations:

Rates of Exchange

E.g. the Romanian Bank X S.A. wants to sell to the Bank of Austria USD
2 million.
Beforehand, the Bank X S.A. asks which is the exchange rate USD/DM in
Austria.
The spot exchange rate is 1.4150 DM/USD.
The deal is concluded.
The Bank X S.A. sells 2 million USD to ING Bank Austria (exchange rate
1.4150 DM/USD) and buys DM, meaning 2,830,000 DM (2 million USD
1.4150).
In two bank-working days, the amounts will be in the accounts of the banks.
The deal:
Deal concluded with:
Sold:
Bought:
Exchange rate:
Value date10:

ING Bank;
USD 2,000,000;
DM 2,830,000;
1.4150 DM/USD;
15th of November 1997.

Forward Operations:

E.g. the Romanian Bank X S.A. concludes a contract with a bank from
Germany on the 15th of December 1997.
It sells USD 1 million and buys DM 1,415,000.
The exchange rate is 1.4150.
The value date is 15th of January 1998.
On the 15th of January 1998, the exchange rate USD/DM could be 1.5200.

10

The date when the discounting of the transaction is made.

Rates of Exchange

So, using a forward operation under a spot exchange rate, the bank can buy
cheaper or more expensive. At the end, the bank will make the following
document:
Deal concluded with Deutsche Bank AG Frankfurt/Main;
Sold: USD
1,000,000;
Bought: DM
1,415,000;
Exchange rate:
1.4150;
Value date:
15th of January 1998.
Swap operations:

The Romanian Bank X S.A. concludes a deal with ING Bank

Vienna, on the 15th of July 1998.
Sold: USD

1,000,000;

Bought: DM

1,415,000;

Exchange rate:

1.4150;

Value date:

15th of July 1998.

At the same time,

it sells: DM 1,410,000;
it buys:USD 1,000,000;
the exchange rate: 1.4100;
the value date: 21st of July 1998.
In two working days (on 17th of July, 1998), the Bank X S.A. will deliver
the US dollars to the Chase Manhattan Bank New York, where the Austrian
Bank has an account opened in US dollars.

At the same date, Bank X S.A. will receive the amount of DM 1,415,000.
On the 21st of July, the Bank X S.A. will send in the United States for
Barclays Bank PLC London the amount of DM 1,410,000, and at the same
date the Bank X S.A. will receive (by order of The English Bank) the
amount of USD 1,000,000.
The profit of the operation is DM 5,000.

Rates of Exchange

In practice, the swap operation is used if the result of the operation is greater
or equal with the difference between the currencies.

Rs =

Fwd 360

, where:
Cs
Nz

Cs

= spot exchange rate;

Nz

= number of days.

It should be mentioned that in the foreign exchange market there is a

foreign exchange risk. A market agent bearing risk is said to have an open
position in the market. There are two types of open position an agent may
go long (take a long position) by having assets in a currency greater than his
liabilities in the same currency. The risk then is that the currency will
weaken, reducing the value of the position. An agent who goes short (takes
a short position) has liabilities in a currency to a greater amount than assets.
The risk is that the currency will strengthen, increasing the debt in that
currency. The act of moving from an open position to a closed position in
the market (that is, covering exchange rate risk) is known as hedging.
Hedging is the way to transfer the foreign exchange risk inherent in all
transactions, such as international trade, that involves two currencies. For
example, suppose you are a US importer who has just purchased 1,000
sterling pounds of goods from a British exporter; payment is due in pounds
in 30 days. You face at least two choices:

you can enter the spot foreign exchange market now, buying a 1,000
pounds deposit at the current spot exchange rate and earning interest on
it until the payment to the exporter is due in 30 days, or

you can hold your dollars in a deposit and earn interest for 30 days until
the payment is due, at which time you enter the spot foreign exchange
market and buy your 1,000 pounds deposit at what is then the current
spot exchange rate.

If you choose the first option, you are hedging. If you wait (take option 2),
the exchange rate might rise during the 30-day period, meaning that you
will have to pay more dollars for each of the 1,000 pounds you must buy.
During the 30-day period under option 2, you are said to be holding a short
position in pounds that is, you are short of pounds that you will need at the

Rates of Exchange

end of the 30 days. Option 1 allows you to avoid this short position and the
associated foreign exchange risk. Once you have purchased the pounds,
changes in the exchange rate no longer affect you. You are then said to be
holding a balanced or closed position in pounds. You own just as many
pounds as you need to cover your upcoming payment due in pounds.
Entering the foreign exchange market to hedge in a way to avoid foreign
exchange risk; it provides a means of insulating wealth from the effects of
changes in the exchange rate.
Speculation is just the opposite of hedging. It means taking a deliberately
risky position by:

purchasing a deposit denominated in foreign currency (taking a long

position) in the hope that the currencys price will rise, allowing you to
sell it later at a profit, or

waiting to purchase a foreign currency deposit that you will need in the
future (taking a short position) in the hope that its price will fall.

In the OECD countries, there are no foreign exchange restrictions and there
is not a foreign exchange control. This means that a person can buy and sell
foreign currency freely and without any restrictions. Some countries
(Romania and the other former communist states) have specific regulations
that allow foreign exchange control measures to be introduced to regulate or
restrict the flow of money, to ensure that the country has sufficient reserves
of foreign currencies to pay its international debt. For example, travellers
may transfer only a certain amount in lei in or out of Romania.
According to the type of underlying transactions, banks offer different rates
of exchange, grouped into two categories:
1.

Commercial rates;

2.

Note rates.

All commercial rates are based on the spot market. By convention, foreign
exchange deals are arranged for settlement in two working days time. The
delay allows instructions to be given and received for the movement of
funds between the correspondent bank accounts. These deals are called
spot transactions.

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The commercial rates vary according to the size of the transactions. Some
rates will incorporate interest costs during the period that the bank is out of
funds (i.e.: for negotiation of currency cheques).
Note rates
The rates of exchange for the purchase and sale of foreign currency notes
and coins are loaded in favour of the banks to take account of the expensive
cost of handling, transportation etc.
1.3 Buying and selling foreign currency

When a bank gives a quotation, it will give two rates:

1.
2.

A selling rate;
A buying rate.

The difference between these rates, called the spread, will be adjusted to
attract or deter business and represents the banks profit. All transactions are
looked at from the banks point of view. A bank sells high and buys low,
which means that it will sell you less currency in exchange for a pound, for
example, but it will expect you to pay more than a pound for that currency.
In order to avoid any possible loss for either of the participants to a foreign
exchange transaction, because of the free pressure of market forces, they
will need to act promptly on a customers instruction, which involve foreign
exchange transactions.
1.4 The balance of payments

Different countries use different currencies; therefore, international

arrangements across borders often involve currency exchanges. Doing
business in an international framework can mean using various currencies
for business transactions. To understand these transactions, it is necessary to
understand the balance of payments system currently used by countries
around the world as well as the international monetary system.
The balance of payments system is used to report monetary transactions
between countries. The international monetary system comprises the
agreements, institutions, laws, and practices governing the movement of
currency from one country to another. The international monetary system
facilitates transactions, and the balance of payments system reports them.

Rates of Exchange

The international monetary system can be seen as providing a financial

context that enables international companies to function across borders.
The balance of payments accounts provide a system for documenting
economic transactions during a given period between the residents of a
country and residents of the rest of the world, in a globally consistent
manner and following generally accepted guidelines. Governments and
international institutions, such as the World Bank publish balance of
payments information.
The balance of payments records all transactions that cross a countrys
borders. The simplest way to think about it is as a record of all payments
going out to foreigners (with the reasons for those payments), and all
payments coming into the country from foreigners (with the reasons for
those payments). A plus sign is given to the payments coming in, and a
minus sign to the payments going out.
A countrys balance of payments statement is like a companys annual cash
flow, or sources and uses of funds statement. A balance of payments
statement provides a record of a how funds were generated from abroad
(inflows from outside the home country) and used in foreign transactions
(outflows to other countries) during a particular year. The balance of
payments statements are compiled on an annual basis, but interim data are
often available on a monthly or quarterly basis.
Because the balance of payments is merely a summary of all the
transactions undertaken by residents of one country with the rest of the
world, it can be divided into sub-accounts that correspond to the various
categories of international transactions in which individuals, firms, and
governments participate.
The balance of payments is a double-entry bookkeeping system. This
means that any international transaction is entered twice, because every
transaction has two sides.
The balance of payments statements are divided into four major sections:
a) the current account, b) the capital account, c) errors and omissions, and
d) the official reserves account.

Rates of Exchange

a) The current account includes imports and exports of goods and

services, interest and dividend payments, and unilateral transfers of money
such as gifts or inheritances.
b) The capital account records investments and loans. Investments in the
home country by foreigners are considered a source of funds, and
investments by locals in foreign countries are a use of funds. Money that is
borrowed from abroad is a source of funds and money that is lent to
foreigners is a use. Interest payments on loans are recorded in the Current
Account.
c) Errors and Omissions

The accounting system is not entirely accurate, and discrepancies can occur
because of errors and omissions. The errors and omissions section
compensates for these discrepancies.
d) The official reserve account
The official reserve account is a compensatory account that changes in
response to surpluses or deficits in the current and capital accounts. A
surplus implies an inflow of funds greater than the outflow and
consequently an increase in reserves. A deficit has the reverse effect and
reduces a countrys reserves.

There are five categories of balances reported in a balance of payments

statement:
1.

The balance of trade reports a countrys exports and imports of goods.

The balance may be positive (a surplus) if exports are greater than
imports (the country is selling more abroad than it is buying) or
negative (a deficit) if exports are less than imports (the country is
buying more abroad than it is selling).

2.

The balance of goods and services reports exports and imports in both
goods and services. This balance can likewise be either a surplus or a
deficit.

3.

The balance of current account reports short-term transfers of capital

in addition to trade in goods and services. This balance can also be
either a surplus or a deficit one.

4.

The balance of capital account reports long-term transfers of capital.

5.

The official settlements balance reports changes in a countrys

reserves needed to balance its surplus or deficit.

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In Romania, the National Bank of Romania in accordance with the

provisions of the Balance of Payments Manual makes out the balance of
payments. The International Monetary Fund in order to issued this be a
guide for member countries, which submit regular balance of payments
reports to this institution.
The Manual provides standards for concepts, definitions, classifications, and
conventions. At the same time, it facilitates the systematic national and
international collection, organization and comparability of balance of
payments and international investment position statistics.
Under the provisions of this Manual, the balance of payments is a statistical
statement that systematically summarizes, for a specific time period, the
economic transactions of an economy with the rest of the world.
Transactions11 (between residents and non-residents) consist of those
involving goods, services, and income, and those involving financial claims
on, and liabilities to, the rest of the world.
The balance of payments of Romania (it can be seen in Annex no.1)
includes the same items as we have just been discussed.
1.5 The foreign exchange market in Romania

Before studying the foreign exchange market in Romania, it is necessarily to

define some terms under the provisions of the Romanian legal framework12,
such as:
Residents are:

Legal persons including the following categories:

Public institutions, autonomous Regies, companies, associations, clubs,

etc. registered or authorized to conduct activities in Romania;
11

12

A transaction itself is defined as an economic flow that reflects the creation,

transformation, exchange, transfer, or extinction of economic value and involves
changes in ownership of goods and financial assets, the provision of services, or the
provision of labor and capital.
National Bank of Romania Regulation no. 3/1997, concerning the performing of the
foreign exchange transactions, issued in Monitorul Oficial al Romniei, Part I,
No. 395/1997, with subsequent amendments

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Individuals and family associations authorized according to the

provisions of the Decree Law no. 54/1990;
Branches, subsidiaries, representations, agencies of foreign companies
registered and authorized to conduct activities in Romania;
Embassies, consulates or other representations of Romania abroad;
Branches, subsidiaries, representations, agencies of Romanian
companies that carry out business abroad, but are not registered abroad
as legal entity.

Individuals including:

Individuals, Romanian citizens, domiciled in Romania, as certified by

an identity card issued by the bodies entitled by law;
Individuals with other citizenship and individuals with no citizenship
domiciled in Romania certified with an identity card issued by the
bodies entitled by law;
Non-residents are:

Legal persons including:

Legal persons with their headquarters abroad and which are not
registered and authorized to conduct activities in Romania;
Embassies, consulates or other representations of other countries in
Romania, as well as the international organizations or the
representations of such organizations functioning in Romania;
Branches, subsidiaries, representations, and agencies of Romanian
companies, which conduct activities and are registered abroad as legal
persons.

Individuals including:

Individuals, foreign citizens, who work within embassies, consulates

and representations of other countries in Romania or within certain
international organizations or their representations which function in
Romania;

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Individual, foreign citizens, as well as individuals with no citizenship

domiciled abroad;
Individuals, Romanian citizens, domiciled.

The foreign exchange transactions represent the proceeds, payments,

compensations, transfers, credits, as well as any other transactions
denominated in foreign currencies and which banking transfer, in cash, with
payment instruments or other means of payment agreed or accepted by the
banks can carry out. In this category are also included the transactions made
in the domestic currency, when performed between residents and nonresidents.
The foreign exchange transactions can be:
Current transactions the transactions performed between residents
and non residents which are not of a capital nature and which derive
from:

international trade transactions with goods and services;

other transactions which are not of a capital nature as they were defined
in the item 1.17.2 of the Regulation No. 3/1997, such as taxes, fees,
commissions, legal charges, fines, technical assistance;

amounts which derive from operational leasing, governmental

expenses, subscriptions to publications, participation fees to
organizations and clubs;

the repatriation of the net income under the form of dividends, interest,
rents, resulting from capital transactions;

remittance of moderate amounts representing current expenses for

supporting the family members;

expenses with are not of a capital nature made by residents abroad for
vocation, sport, business, visits to friends, conferences, health care,
education, religion.

Capital transactions the foreign exchange transactions carried out

between residents and non residents, resulting from:

direct investment (in Romania of non residents; abroad of residents);

real estate investments (in Romania by non residents, abroad by

residents);

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transactions with capital market securities (admission of domestic

securities on the foreign capital market for issuance by placement or
public offer or introduction on a recognised foreign capital market;

transactions in Romania with securities made by non residents;

transactions abroad with securities made by residents);

transactions with money market instruments;

transactions in collective investment securities;

international trade credits (granted by non residents to residents;

granted by residents to non residents);

financial credits and loans;

guarantees (granted by non residents in favour of residents or granted

by residents in favour of non residents);

current account operations (opened by non residents with banks or with

other entities or opened by residents abroad with banks and with other
similar institutions);

deposit account operations (opened by non residents with banks or with

other entities or opened by residents abroad with banks and with other
similar institutions);

life insurance resulting from the life insurance contracts; transfers of the
individuals (presents, donations, inheritances, etc).

Foreign exchange capital account operations of residents and non-residents

are subject to the National Bank of Romania licensing with the exception of:

most capital inflows of non-residents in Romania;

banks:
o money market-specific operations performed abroad;
o foreign exchange current account and deposit operations;
o loans and borrowings with up to 12-month maturity;
o guarantees, endorsements, and other additional financial facilities.

Since January 1st, 2002, the following transactions are not subject to the
National Bank of Romania:

direct investments abroad of the residents;

real estate investments abroad by residents;

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admission of domestic securities and admission of domestic collective

investment securities on foreign financial market;
international trade credits on medium- and long-term granted by
residents to non residents;
guarantees granted by non residents to residents;
transfers related to life insurance;
personal capital transfers meaning short-term credits granted by non
residents to residents;
personal capital transfers such as presents and donations, inheritance,
etc.

Since January 1st, 2003, the following capital transactions shall not be
subject to the National Bank of Romania:
real estate transactions of residents and of foreign collective investment
securities;
financial credits and loans on short-term granted by non residents to
residents;
financial credits and loans and personal loans granted by residents to
non residents;
guarantees granted by residents to non residents.
At the same time, since January 1st, 2004, the following capital transactions
shall not be subject to the National Bank of Romania:

admission of foreign real estate transactions and collective investment

securities on the Romanian capital market;
deposit account operations in leu currency opened by non residents in
Romania
the import or export of financial assets.

The National Bank of Romanias Regulation No.3/1997 stipulates that till

the date when Romania will become member of the European Union, the
following capital operations shall not be subject to the National Bank of
Romania:
transactions with real estate securities or other instruments marketed in
the monetary market;
current account and deposit account operations opened by residents
abroad.

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In Romania, the National Bank of Romania is responsible for the

organization and function of the foreign exchange market.
The legal framework of the foreign exchange market is set by the
Regulation no. 3/1997.
Under the provisions of the Regulation No. 3/1997, the foreign exchange
market is defined as a continuous market, where sales and purchases of
foreign currencies are carried out, for the domestic currency or other foreign
currencies at rates freely determined by intermediaries authorised by the
National Bank of Romania to operate in their own name and account and in
their own name and the account of their clients.
Only authorized intermediaries (credit institutions, exchange offices, and
other non-banking entities authorized by the National Bank of Romania to
operate in the foreign exchange market as brokers or dealers) may perform
transactions in the foreign exchange market.
Under the provisions stipulated in its statute, the National Bank of Romania:

Regulates and supervises the inter-banking foreign exchange market;

Authorizes and supervises the intermediaries of the inter-banking

foreign exchange market;

Participates in the inter-banking foreign exchange market in order to

manage its monetary policy and to protect the national currency;

Publishes a reference exchange rate for the leu currency on a daily

basis.

In order to develop the brokerage activity on the foreign exchange market,

residents legal persons from Romania must obtain the authorization from
the National Bank of Romania.
The minimum conditions, which must be fulfilled for the participation on
the foreign exchange market as an authorized broker, are the following:
a) the existence of an adequate share capital;
b) the existence of an operating authorization; the participation on the
foreign exchange market of brokers, who are undergoing a legal
procedure of reorganization and judicial liquidation may not be
authorized;

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c) the existence of a distinct organization structure and a specific space for

the activity of foreign exchange brokerage;
d) the regularization through own norms regarding:
-

procedures concerning the work with clients;

the relation with other brokers (the communication, confirmation and

settling method of transactions);

competencies and value limits up to which any arbiter may engage

himself, as well as the limits of work with the other authorized brokers;

the due penalties in the relation with the clients, as well as with other
brokers, in case of failure to observe the settling terms of transactions;

the bookkeeping system of foreign exchange operations;

e) the appointing of personnel involved in the activity of foreign exchange

activity, respectively the nominal list of the arbiters, the work
experience, including the experience in the activity of foreign
exchange, as well as the appointment of the chief-arbiter;
f)

the relations of a correspondent established through accounts opened

abroad, for at least 4 currencies: USD, EUR, GBP, CHF;

g) the existence of a specific operating system:

-

specific informational equipment Reuters or Dow Jones;

specific technical equipment for payments and communications

(internal and international telephone lines, a recording system of phone
conversations, telex, SWIFT, fax, etc.)

The inter banking foreign exchange market from Romania operates on every
working day from 9:00 a.m. to 2:00 p.m.
Brokers authorized to participate on the foreign exchange market must post
permanently during the hours when the inter-banking foreign exchange
market operates, both at their counter for the work with clients, and through
spreading systems of information as the Reuters or Dow Jones type, the

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informational exchange rates of the Leu (selling/buying), spot13 and

forward14, for at least the following currencies15:

the American dollar (USD);

the Euro (EUR);

the pound sterling (GBP);

the Swiss franc (CHF);

etc.

Thus, till February 28, 2002, the National Bank of Romania up-dated the
foreign exchange rates list daily published by eliminating the leu quotations
against each IN foreign exchange rates (e.g. the Irish pound IEP February
9th, 2002; the French Franc FRF February 17th, 2002; German Mark
DEM February 28th, 2002).
The quotation shall be direct and it shall be based on the monetary unit of
Romania the Leu (without subdivisions).
The informational forward exchange rate shall be quoted for at least the
following deadlines:

one month (1 M);

three months (3M);

six months (6M);

nine months (9M);

twelve months (12M).

Brokers authorized to participate on the inter-banking foreign exchange

market must quote both for the clients and for the other authorized brokers,
firm or informational exchange rates, on their request.
13

An operation of selling/buying foreign currency with the settlement within two days after
the date of concluding the transaction, at the exchange rate established between the
parties (spot rate).
14
An operation of selling/buying foreign currency with the settlement after more than two
days since the date of concluding the transaction at the exchange rate established
between the parties (forward rate).
15
Since the appearance of Euro, the foreign exchange rates list published by the National
Bank of Romania will include the leu rates against Euro and against IN currencies.

Rates of Exchange

If the firm quotation meaning the amount in foreign currency and the date of
the foreign currency are accepted by the client or the authorized broker, the
transaction is considered concluded and it shall be performed
unconditioned.
The spread between the selling rates and the purchasing ones shall be freely
determined on the inter-banking foreign exchange market.
The selling/buying orders of the clients (residents and non-residents
natural and legal persons), account owners, shall be completed according to
the attached models issued by the National Bank of Romania (forms 1 and
2 see Annex no. 2, and 3). Annexes no. 2.1 and 3.1 reflect a particular
implementation of the above mentioned forms. The spot and forward
purchase orders of the resident and non-resident legal persons shall be
accompanied by the justifying documentation (including the form
DPVE/form CDA).
For capital foreign exchange operations, the documentation related to the
purchase order shall be also completed with the authorization of the
National Bank of Romania, as the case may be.
Residents may participate on the inter-banking foreign exchange market
with purchase order of foreign currency for the reimbursement of credits
and the payment of interest and commissions related to a credit or loan in
foreign currency granted by a resident bank.
The transactions among intermediaries shall be concluded on their own
behalf, by confirmation among dealers (on telephone, telex, Reuters
dealing) and re-confirmations by letters and telex or SWIFT, codified
correspondingly (letter sample of signature, telex telegraphic keys,
SWIFT SWIFT keys). The reconfirmation must include at least the
following elements:
the transaction partner;
the date of concluding the transaction;
the date of the foreign currency;
the transacted foreign currency (currencies);
the transacted amounts;
the type of transaction;
the spot or forward exchange rate;
the correspondents of the parties;

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the method of concluding the transaction (telephone, telex, Reuters

dealing).
As a conclusion, it should be mentioned the following:

Purchases and sales of foreign exchange shall be made only through

intermediaries (dealers) licensed by the National Bank of Romania;

Purchases of foreign exchange by resident legal entities and nonresidents shall be made only against documents;

Purchases of foreign exchange by resident individuals via exchange

bureaus and banks are unlimited.

Progress test

1.

What is an exchange rate?

2.

Explain what is the appreciation and depreciation of a currency.

3.

List at least 8 types of foreign exchange rates and explain them.

4.

Where is the exchange rate established?

5.

Explain the sterilized and unsterilized foreign exchange intervention.

6.

List the main types of foreign exchange rate regime and explain them.

7.

What is the foreign exchange?

8.

What are the major functions of the foreign exchange market?

9.

List the market participants.

10. What represents the difference between a banks buying and selling
rate?
11. When is settlement made for spot deals?
12. When is settlement made for forward deals?
13. What are the swap deals?
14. What is a quotation?
15. How many types of quotations do you know? Give the definitions.
16. Which two categories of rates of exchange do banks offer?

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17. What is the balance of payments of a country?

18. List the four major sections of the balance of payments.
19. Define the residents.
20. Define the non-residents.
21. What are the foreign exchange transactions?
22. List the transactions included in the foreign exchange transactions.
23. Identify the legal framework of the foreign exchange market in
Romania.
24. List the minimal conditions, which must be fulfilled for the
participation on the foreign exchange market as an authorized broker.
25. Describe the inter-banking foreign exchange market in Romania.
26. What is a spot rate?
27. List the main factors that affect the movement of spot rates.
28. What is a forward rate?
29. What are the main exchange rate arrangements?
30. Define a foreign exchange risk.

Rates of Exchange

ANNEX No 1
The Balance of Payments
A. Goods and Services
a. Goods fob (exports/imports)
b. Services
Transportation
Tourism
Other services
B. Income
Compensation of employees
Direct investment income
Portfolio investment income
Other capital investment (interest)
C. Current transfers
Government sector
Other sectors
A. Capital account
a. Capital transfers
Government sector
Other sectors
b. Purchases/Sales of non-produced non-financial assets
B. Financial account
a. Direct investment
Abroad
In Romania
b. Portfolio investment
Assets
Liabilities
c. Other capital investment
Assets
1. Longterm loans and credits
2. Shortterm loans and credits
3. Longterm outstanding exports bills
4. Shortterm outstanding exports bills
5. Currency and cheques

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6. Residents' deposits abroad

7. Other assets
longterm
shortterm
Liabilities
1. Credits and loans from the Fund
2. Longterm loans and credits
3. Shortterm loans and credits
4. Longterm outstanding imports bills
5. Shortterm outstanding imports bills
6. Currency and cheques
7. Nonresidents deposits in Romania
8. Other liabilities
longterm
shortterm
d. In transit accounts
e. Barter and clearing accounts
f. Reserve assets (NBR)
Monetary gold
SDRs
Reserve position with the International Monetary Fund
Foreign exchange
NET ERRORS AND OMISSIONS

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ANNEX No 2

FORM No.1
Denomination/Name of the client
..............................................................
...............................................
Address/Head
office.....................................................
Tel./telex ..........................................
Persons of contact ............................
No.from the Trade Registry .............
Fiscal
code......................................
Non-resident*

ACCEPTED/REJECTED (reason)..
..........................................................
at the FIRM QUOTATION RATE and
accepted by the client of .... Leu/
or at a LIMITED RATE requested by the
client
of..Leu/.
EXECUTED AT THE RATE
ofLeu/.
Authorized clients signature
L.S.
It must be filled in by the broker at his head office in the presence of the client

PURCHASE ORDER OF FOREIGN CURRENCY (SPOT)/ FORWARD

Valid till the date ..................................
To ................................................................................
BUY the amount of .......................... / ..............................with the value date..
(figures)
(letters)
You shall recover the equivalent in Leu currency from our account of availability no.
opened with
The purchased amount in foreign currency shall be paid with the same value date in
our account no. ........................ opened with ............................................
1.

We attach the following documents, which prove the nature of the foreign
currency operation:
..
..
..
..
2.

The purpose of buying currency is:

Current foreign exchange operation;
Capital foreign exchange operation representing:
Direct investment;
Portfolio investment;
Securities investments;
Other capital foreign exchange operations.

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3. Hereby we declare that we agree that the amount in foreign exchange purchased
on basis of the present order and not used within 30 days after the expiration of
the payment term according to the initial destination or for other current foreign
operations, must be purchased through the bank, which executes the present
order.
...........................................
Issuing date
L.S.

........................................
Authorized signature

Notes
1. Tick the fields, if the case.
2. Only residents, legal entities, shall fill in point 2.
3. Points 1si 2 shall not be filled in by residents, natural persons.
4. The provisions of point 3 shall not be applied to residents and non-residents,
natural persons.
*) Non-residents from the foreign exchange point of view, according to point 1,2 of the
regulation

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ANNEX No 2.1

Ctre: THE COMMERCIAL BANK . S.A.

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ANNEX No 3

FORM NO.2
Denomination/Name of the client
.......................................
..................................................
Address/Head
office........................................
Tel./telex ..................................
Persons of contact ....................
No. from the Trade Registry ....
Fiscal code.......................................
Non-resident*

ACCEPTED/REJECTED
(reason)......................
at the FIRM QUOTATION RATE and
accepted by the client of ........ Leu/ .............
or at a LIMITED RATE requested by the
client
ofLeu/.
EXECUTED AT THE RATE
ofLeu/.
Authorized clients signature
L.S.
It must be filled in by the broker at his head office in the presence of the client

SELL ORDER OF FOREIGN CURRENCY (SPOT)/ FORWARD

Valid till the date ..................................
To ................................................................................
SELL the amount of .............. / ...............with the value date
..........
(figures)
(letters)
from
our
foreign
exchange
account
no........opened
with..........................
The equivalent value in Leu currency shall be paid with the same value date in our account no.
..............opened with
1. The purpose of the foreign exchange is:
Current foreign exchange operation;
Capital foreign exchange operation representing:
Direct investment;
Portfolio investment;
Securities investments;
Other capital foreign exchange operations.

..
Issuing date

authorized signature
L.S.

Notes:
1.
Tick the fields, if the case may be.
2.
Only residents, legal entities, shall fill in point 1.
*) Non-residents from the foreign exchange point of view, according to point 1.2 of the
regulation.

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ANNEX No 3.1

Ctre: THE COMMERCIAL BANK . S.A.

Financial Derivatives

FINANCIAL
DERIVATIVES

D Objectives
After studying this chapter you should be able to understand:
2.1 Foreign exchange risk: definition, types, identification
2.2 Financial derivatives
2.2.1 General concepts
2.2.2 Forward exchange contracts
2.2.3 Currency accounts: the Eurocurrency market, loans
2.2.4 Options
2.2.5 Swaps
2.2.6 Financial futures
2.3 Comparing different types of derivatives

Financial Derivatives

2.1 Foreign exchange risk: definition, types, identification

Foreign exchange risk has a variety of forms and can be obvious or obscure.
Foreign exchange risk may exist for a company without the company even
being aware of it. One must be able to identify the existence of foreign
exchange risk and its specific type before it can be effectively managed.
E.g.
1.

2.

3.
4.

An import company Co. from USA is buying Wedgwood china from a

supplier in England and is invoiced in English pounds. Payment is due
on a net 30-day basis. Import Co. USA must buy English pounds
sometime between the date the china is ordered and the payment due
date.
An export Co. from USA is selling its tree trimming equipment to a
company in Thailand. In order to be competitive, it must invoice its
customer in local currency, the Thai baht. Export Co. USA will need to
convert the Thai baht into US dollars upon receipt of the payment, as it
has no accounts payable in Thailand.
New Products Inc. is exporting its products to Nigeria and is billing its
customer in US dollars. Payment is on a net 10-day basis.
Worldwide Corp. has subsidiaries in several different countries around
the world. At each quarter-end, a consolidated balance sheet must be
given to the board of directors. Each subsidiary maintains its own bank
accounts and is responsible for remitting US dollars for dividend
payments.

In each of these situations, the companies involved have foreign exchange

exposure. Each company has a different combination and varying degree of
exposure.
The main foreign exchange exposure can be defined, such as:
1.

Sovereign risk this is another name for political risk. What are the
chances that the government which is in power in the foreign country
will remain intact and will continue to have favourable relations with
the United States, in our case? What happens if the current government
falls and a less-than-friendly governing is installed?

2.

Exchange risk Will the foreign currency be trading freely on the

open market when the time comes to convert into or out of the
currency? Further, are there any restrictions on the availability and

Financial Derivatives

transfer of hard currency out of the foreign country? What happens if

exchange controls are put in place?
3.

Translation risk this is an accounting-based risk. When operating an

overseas operation and a consolidated statement must be filed, changes
may occur in the book value of the overseas operation without any true
changes in its balance sheet. This comes about when different currency
conversion rates are used to value the same set of assets. Since foreign
exchange rates can change in seconds, a quarterly consolidated
statement will show changes in the operations value purely related to
the use of current exchange rates versus those from the previous
quarter.

4.

Transaction risk this is the risk associated with the potential gains
and losses on a given transaction, which is susceptible to foreign
exchange movements. This relates to any transaction resulting in a net
receipt or payment, which must be made in a foreign currency.
Therefore, items such as foreign currency receivables or payables,
repatriation of revenues or dividends, or foreign currency loan
payments or interest income are all subject to transaction risk.

Taking into account the connection between the above four examples of
foreign exchange risk and the main foreign exchange exposures defined, it
should be mentioned the following:
In Example 1, Import Co. USA has transaction risk associated with its
purchase of china from England. The company runs the risk of the English
pound increasing in value (in relation to the US dollar) prior to the company
buying the pounds to cover the invoice. This would result in an increased
cost of the china, which the company may or may not be able to pass on to
its customers.
In Example 2, Export Co. USA has sovereign risk, exchange risk, as well
as transaction risk. Is the government of Thailand stable and free of
sanctions? Is the Thai baht a freely traded currency without conversion
restrictions? Is there a forward market in the baht so Export Co. USA can
sell that baht today for delivery in the future?
In Example 3, New Products Inc. has sovereign risk and exchange risk.
How stable is the Nigerian government? Is it on good terms with the US
government, in our case? Are their any trade sanctions covering the

Financial Derivatives

products being exported? Will the customer be able to purchase US dollars

and, if so, will it be able to transfer them out of the country? How reliable is
the exchange market in Nigeria?
In Example 4, Worldwide Corp. has translation and possibly transaction
risk. The translation risk comes from converting the foreign currency value
of the subsidiary into a US dollar value. With everything else constant, the
exchange rate alone could change the value of the subsidiarys assets
significantly. If the subsidiary has local currency payables and does not
remit profits or dividends to the US parent, no transaction risk exists;
however, if profits or dividends are repatriated, a transaction risk exists and
must be managed effectively in order to protect their value.
In order to identify the foreign exchange risk in a company, a lot of
departments are involved, such as: accounting, sales, legal department, bank
account officer, foreign exchange dealer etc.
The main steps for identifying foreign exchange risk are:
1.

Determine what types of foreign exchange risk exists.

a. Sovereign
b. Exchange
c. Translation
d. Transaction

2.

Determine the extent or degree of the risks identified.

a. Is there an extreme risk of the government failing?
b. Are there exchange controls pending?
c. Is war or sanctions imminent?
d. What are the tax implications of a translation profit or loss?
e. How volatile is the current foreign exchange market for the
currencies involved?

3.

Determine the longevity of the risk.

a. Is this a one-time-only transaction?
b. Will foreign denominated sales or purchases are an on-going part of
your operation?
c. Are you dealing with an overseas subsidiary, which will continue to
generate foreign income and expenses?
d. Are you borrowing or lending a foreign currency? Short term or long
term?

Financial Derivatives

4.

Determine what control procedures are in place or are needed to

monitor the identified risks.
a. Can you adequately forecast when the extent or degree of risk will
increase or change?
b. Who is responsible for monitoring the control process and
developing new controls, as they are needed?
c. How much movements in the foreign exchange rates can be tolerated
without adverse effects on the company?
d. How much exchange risk will be tolerated?

5.

Determine if the operation of the company has naturally offsetting

foreign exchange transactions.
a. Is an overseas subsidiary having both local currency receivables and
payables?
b. Are imports and exports denominated in the same foreign currency?
Are they in similar payment schedules?

As a conclusion, it should be said that whenever someone is involved in a

transaction in a foreign currency other than his or her home currency, an
exchange risk occurs because one currency may move unfavourably against
the other.
In Romania, the National Bank defines and regulates the maximum level of
the adjusted individual currency positions and total currency positions for
banks Romanian legal entities.
Under its provisions1 the National Bank of Romania defined the following
concepts such as:
a) the currency position in a certain foreign exchange represents the net
balance of the patrimony in the respective foreign exchange, being the
expression of the currency risk;
b) on the balance sheet currency position in a certain foreign exchange
represents the amount emphasized in the creditor or debtor balance of
the account 3721 Exchange position, opened on the respective foreign
exchange;
1

The National Bank of Romanias Norm No. 4/2001 concerning the supervision of the
foreign exchange positions, published in Monitorul Oficial al Romniei, Part I,
No. 631/2001

Financial Derivatives

c) off balance sheet currency position in a certain foreign exchange is the

amount emphasized in the creditor or debtor balance of the account 9361
Exchange position, opened on the foreign exchange in cause;
d) individual currency position is the long currency position or the short
currency position on each foreign exchange, in lei equivalent;
e) adjusted individual currency position represents individual currency
position adjusted with the updated equivalent in lei of the share capital
subscribed and paid in foreign exchange and issue premiums paid in
foreign exchange, calculated based on the differences in the exchange
rate related to the availabilities in foreign exchange representing the
contribution to the share capital and the issue premiums paid in foreign
exchange;
f) total currency position is the highest value, in the module, between the
total of the long adjusted, individual currency positions and the total of
the short adjusted individual currency positions.
In Romania, the supervision of the currency risk is accomplished:
g) by banks;
h) by the National Bank of Romania, on the basis of the currency position
indicators reported by banks.
Under the Romanian legal framework, banks are obliged to report to the
National Bank of Romania the level of their currency positions, according to
the form The supervision of the currency positions, provided in the Annex
No. 1.
The reporting form will include data referring to the banks global activity
(the whole of the national territory and all the sub-units from abroad of the
bank).
The currency position in a certain foreign exchange is calculated as an
algebraic sum of the on and off balance sheet currency position.
In order to establish the total currency position, the amounts representing
long adjusted individual currency positions will be considered with the plus
sign (+), and the amounts representing short adjusted individual currency
positions will be considered with the minus sign (-).
The total currency position shall be long when the total of the long adjusted
individual currency positions is longer than the total of the short adjusted

Financial Derivatives

individual currency positions and it shall be short when the total of the short
adjusted individual currency positions is higher than the total of the long
adjusted individual currency positions.
At the end of each working banking day the currency positions of a bank are
submitted to the following limitations:
a) maximum 10% of the banks own funds for each of the adjusted
individual currency positions; and
b) maximum 20% of the banks own funds for the total currency positions.
With a view to limiting the currency risk the banks have the following
obligations:
a) to have a records system which permits permanently both the immediate
registration of the operations in foreign exchange and the calculation of
their results, as well as the determination of the adjusted individual
currency positions and the total currency position;
b) to have a supervision and administration system of the currency risk on
the basis of norms and internal procedures approved of by the banks
board of directors.
2.2 Financial derivatives
2.2.1 General concepts
Exchange risk can be virtually fully removed by financial derivatives.
Rather than buying or selling a currency or a commodity, a firm can now
enter into an agreement to buy or sell the future change in almost any assets
value. These derivatives can remove or reduce some risks but might also
increase others. There are hundreds of different derivatives. Some are very
simple, but others are very complex and risky.
Banks, companies need to know what they are doing and have good controls
in place before entering derivatives markets; otherwise, they risk disasters.
A derivative is a financial instrument based upon the performance of
separately traded commodities or financial instruments. So, financial
derivatives are financial instruments with prices determined by (derived
from) the prices of other financial instruments, commodities, exchange

Financial Derivatives

rates, interest rates, or other prices. Many agricultural and mining products
are traded on commodities markets by firms who are end users of those
products. Equally, bond markets and foreign exchange markets allow end
users to borrow or lend funds or to obtain foreign exchange. It is possible
then to build contracts that promise to deliver those products at some time in
the future or give the right to buy or sell them in the future. These contracts
may then be traded in markets different from the original commodities and
financial markets. Such contracts are known as derivatives. They are linked
to the cash market through the possibility that a delivery of the primary
commodity or instrument might occur. For example, if a trader is to carry
out a promise to deliver an instrument in three months time he will, at some
time during those three months, need to buy the instrument on the cash
market. It follows that the value of a derivative and hence its price varies as
the price in the cash markets fluctuates. In practice, derivatives seldom lead
to the exchange of the underlying instrument. Instead, contracts are closed
out or allowed to lapse before the delivery.
In the International Monetary Funds opinion2, a financial derivatives
contract is a financial instrument that is linked to a specific financial
instrument, indicator or commodity, and through which specific financial
risks can be traded in their own right on financial markets.
Derivatives are used for a variety of purposes, including:

Protecting against market risk of financial losses on commercial

transactions and financial instruments;

Reducing or modifying various financial risks;

Earning income by arbitraging between derivatives and cash markets;

Earning profits through trading in the instruments, and

Speculation, especially in foreign exchange and commodity markets.

Therefore, derivatives, then, are instruments that allow market agents to

gamble on movements in the prices of other instruments without being
required actually to trade in them. Their initial purpose was to allow traders
to hedge risks, which they faced in the cash markets as a part of their normal
business activity by offsetting one type of risk with the opposite risk in a
derivatives market.
2

IMF Manual on monetary and financial statistics, Washington 2000

Financial Derivatives

In the case of financial derivatives, the underlying instrument is financial:

bonds, currencies, or stock exchange indices. The need for financial
derivatives markets was not seen until the early 1970s when the
globalisation of business, which had been proceeding at pace for the
previous 20 years, confronted the increased volatility of foreign exchange
rates and increasing and fluctuating rates of inflation. As companies were
exposed to increasing amounts of risk, risk management became a major
concern of business.
The most obvious form of exchange rate risk relates to current individual
transactions the possibility that apparently profitable activities will turn
into losses because of unfavourable movements in exchange rates. More
generally, the whole future trading performance of a foreign branch or
subsidiary may suffer as a result of exchange rate changes, depending on the
impact they have on factors such as relative inflation rates, government
interest rate and other policies, and a firms profit margins and market share.
To help counter foreign exchange risk, firms developed internal techniques
relating to accounting systems, payment and invoicing procedures.
Governments of developed countries became involved, providing exchange
rate guarantees and other forms of insurance, in effect subsidizing the
foreign activities of their exporting firms.
Developments on international capital markets allowed firms to borrow
more easily in foreign currencies. The growth of Eurocurrency markets
allowed firms to obtain foreign currency overdrafts to offset long positions
in major currencies.
Forward foreign exchange markets developed and banks began to use them
more imaginatively, offering, for example, optional date forward contracts
in which a firm is given an option regarding the maturity date within a
specified period and is charged the premium or discount that applies to the
most costly of the settlement dates within the period.
The great growth in derivatives is indicated by the very rapid increase in the
number of exchanges on which they are traded. The world market is still
dominated by the big Chicago Exchanges which started life as commodities
markets, the Chicago Board of Trade and the Chicago Mercantile Exchange,
but 46 new exchanges opened between 1980 and 1993 and derivatives are
now traded on more than 60 exchanges worldwide, with almost all OECD

Financial Derivatives

countries possessing at least one such exchange. The March Terme

International de France, which only opened in 1986, has become the leader
in the European financial derivatives markets in the world.
The most important financial derivatives that managers of financial
institutions use to reduce risk are: forward contracts, currency accounts,
financial futures, options and swaps.
2.2.2 Forward exchange contracts
Forward contracts are agreements by two parties to engage in a financial
transaction at a future (forward) specified date for a specified price. They
are:

Firm and binding contracts between bank and customer for the

Purchase or sale of a

Specified quantity of a

Stated currency at a

Rate fixed at the time the contract is made for

Performance at a future time

Agreed at the making of the contract.

One of the parties to a forward contract assumes a long position and agrees
to buy the underlying asset on a certain specified future date for a certain
specified price. The other party assumes a short position and agrees to sell
the asset on the same date for the same price. The specified price in a
forward contract will be referred to as the delivery price. A forward contract
is settled at maturity. The holder of the short position delivers the asset to
the holder of the long position in return of a cash amount equal to the
delivery price.
Example: a forward contract in foreign exchange
A unit enters into a forward contract to acquire yen in one month in
exchange for US dollars at the current (spot) price of 95 US cents per 100
yen. The amount to be purchased and the delivery date are negotiated.

Financial Derivatives

On the settlement date, delivery will take place at the forward at the forward
price, or expiration price, of 95 US cents per 100 yen. If the spot price of
yen on the settlement date has increased to 110 US cents per 100 yen, the
purchaser will acquire yen at 15 cents below the market rate.
If, on the other hand, the spot price has fallen to 90 US cents per 100 yen,
the purchaser remains committed to the contract price of 95 Us cents, 5
cents above the market rate.
The calculation of forward rates is based on the difference between the
interest rates in the traders own country and the foreign country. Normally,
rates are quoted for a fixed number of months ahead, e.g. 1, 2, 3, 6 and 12
months. Contracts up to one month are known as short (value dates)
contracts, e.g.:
a) Overnight (O/N);
b)
c)
d)
e)

Tomorrow/next day (T/N);

Spot/next day (S/N);
Spot/week (S/W);
Spot/fortnight (S/F).

Assuming that today is 1 February, overnight would be 2 February,

spot/next day would be 4 February, i.e. 2 working days plus one day;
spot/fortnight would 17 February, i.e. 2 working days plus fourteen days.
Forward rates are issued at premium or discount.
When a currency is quoted at a premium it means that it is more expensive
to buy it in the future rather than now at spot, given the exiting differentials
in interest rates in each country. It is referred to as a strong currency.
A currency quoted at a discount is cheaper to buy in the future as opposed
to the spot rate now, and is known as a weak currency.
In order o calculate the rate applicable for the transaction the bank operates
on the following basis:
(a) Premium: The premium for the currency is deducted from spot to
calculate the applicable rate.

Financial Derivatives

(b) Discount: To discount is added to the spot rate to calculate the rate
applicable.
Example:
The financial press quotes a spread for the day in the US dollar at (buying
selling price):
1,8410
0,0029

1,8430 (spot)
0,0026 (premium)

1,8381

1,8404 - one month forward rates

Thus, if the bank is selling US 10000 at either spot or one month forward it
will cost the customer:
US$ 10000 @ 1,8410 (spot)
US$ 10000 @ 1,8381 (one month forward)
difference

= pounds 5431,83
= pounds 5440,40
= pounds

8,57

I.e. more expensive at one month forward

Types of forward contracts3:
(a)

fixed;

(b)

option;

(c)

close out;

(d)

extension;

(e)

liquidation;

(f)

hedging.

Fixed. It means performance on a specified date.

Option. It means performance between two specified dates and certainly by
the end date. The rate chosen is that most advantageous to the bank.

Davis A & Kearns M Banking operations, The Chartered Institute of Bankers, Pitman,
1992

Financial Derivatives

The rate quoted by the dealer for such a contract will be determined by the
possibility of the customer selling the contract on the least favourable date
from the banks point of view.
Example
US$/ spot rate
1 month margin
3 month margin

= 1,4565 - 1,4575
= 0,0047 - 0,0042
= 0,0079 - 0,0070

The currency is at premium, therefore for a three-month option forward of

US$1m, the best calculation would be:
Bank sells @ 1,4565
Less
0, 0079
1,4486 = 690 322
(if spot or option forward up to 3 months, so the bank would receive more
sterling than if it sold at spot)
or
The bank buys at:
(a)
1,4574 = 686 106
(if spot or option to 3 months, so that the bank would pay less sterling than
if it bought at one or three months forward)
or
(b)
1,4575
Less
0,0042
1,4533 = 688 089
(if option is 1 to 3 months, so that the bank would pay less sterling than if it
bought at three months forward).
To summarize:
Bank
selling
Bank
buying

Premium
Premium charged to last date

If option from spot, no

premium given.
If option between two dates,
premium given to first date.

Discount
If option from spot, no discount
given.
If option between dates, discount
given to first date.
Discount charged to last date.

Financial Derivatives

The shorter the option period, the narrower the difference between the
selling and buying prices.
Close out. When delivery is due but the customers cannot fulfil their part of
the forward contract because, say, the goods or payment have not been
received; the contract must be closed out to avoid breach of contract.
If, for example, an exporter, Happy Boots Limited, has contracted to sell
US$5000 one month forward expecting to receive payment from the US
importer by then, but the importer fails to remit the funds, the exporter will
be forced to buy US$ 5000 at spot in order to fulfil the contract with the
bank.
Extension. From the previous example, on the assumption that funds from
the US importer are merely delayed and are expected within a specified
period, the exporter may decide to extend or roll over the contract, rather
than just closing out; the resulting new forward exchange contract may be
arranged by the bank at a slightly more favourable rate than spot.
Example
Say an original contract was for the bank to buy US$1m at 1,4533, sterling
equivalent 688 089, and the customer needs to extend the forward contract
for 3 months. US$ are at a premium to sterling. Remember that you must
deduct the forward rates.
Todays rates are:
US$/ spot rate
3 month margin

= 1,4390 - 1,4400
= 0,0032 - 0,0028
1,4358 1,4372

(a) The original contract is closed out at spot:

1,4390 = 694 927
(b) The bank buys again US$1m, but sells spot rate:
1,4390
Less

0,0028 (3 months buy margin)

1,4362 = 696 282

Financial Derivatives

The customer has lost the difference between:

The close out price

694 927

The original forward

contract

688 089

6838

Liquidation
A forward contract may have to be liquidated before maturity. It is achieved
by a swap transaction. If the example above was to be liquidated after,
say, 2 months and todays rates are:
US$/ spot rate
1 month margin

= 1,4465 - 1,4475
= 0,0032 - 0,0027

(a) The original contract would be cancelled at the original rate:

1,4533 = 688 089
(b) A replacement forward deal would be struck at the 1 month forward
selling rate:
Less

1,4465
0,0032
1,4433 = $692 857

4768 (cost to customer)

Hedging
Like the Stock Exchange stag an investor may establish a forward
exchange contract to sell in the belief that the currency may devalue in the
meantime. In such event, the currency will be bought at spot for delivery
against the forward contract.
Under the International Monetary Funds statistics4, the most common
forward instruments are:
Forward rate agreements (FRAs) are forwards used mostly in interbank markets to set an interest rate (usually the London Inter-bank
Offered Rate - Libor) at a future date. At settlement, a payment is made
between counter parties equal to the difference between the actual
interest rate and the rate specified in the FRA multiplied by a notional
4

IMF Manual on monetary and financial statistics, Washington 1996

Financial Derivatives

principal (it is a value used for calculation purposes that is not actually
exchanged between counter parties).

Interest-rate swaps are financial instruments in which contraries

exchange streams of payments of interest, usually on a net payment
basis. The floating interest rate leg of an interest-rate swap is a single
contract constructed out of a series of FRAs. Usually, payments on a
swap are calculated based on a notional principal amount specified in
the contract that is not actually exchanged between the counter parties.

Currency swaps are contracts to exchange currencies at a specified

exchange rate, and then re-swap the currencies at a later date (usually at
the original exchange rate). They involve exchange of principal and
interest payments in one currency for principal and interest payments in
another currency.

Currency interest rate swaps or Cross-currency interest rate swaps

are contracts to exchange interest rate streams denominated in different
currencies.

Commodity swaps are contracts that pay the difference between a

fixed reference price for a commodity and an index of the market price
of the commodity.

Other swaps include any swap contracts that are not based on interest
rates or currencies.

2.2.3 Currency accounts: the Eurocurrency market, loans

a) The Eurocurrency market
A Eurocurrency is any currency owned and traded outside its territorial
borders. Such currency accounts are used for a variety of reasons, such as:

To avoid exchange risk for a future transaction;

To collate a number of transactions in the same currency prior to

conversion;

To ease trade transaction;

As a speculative hedge;

To earn interest.

Financial Derivatives

Eurocurrency is so called because Europe was the centre where the trading
of these currencies originated.
Transactions are deposits and loans in currencies other than the domestic
currency of the country where they are held.
Interest rates on Eurocurrencies are normally quoted on a 360-day year
basis. There are exceptions when calculating the benefits and drawbacks to
a customer investing or borrowing on currency accounts.
The correspondent banks may arrange deposits or loans. Sometimes, it may
seem more attractive for a customer to borrow in a low interest rate
currency or, conversely, to invest in a high interest rate currency.
b) Loans
It should be mentioned the situation when banks may be faced with requests
from some customers for loans to be available to them in foreign currency.
For example, a company with expected dollar income in two months time
could borrow today US dollars and convert that to sterling to assist with
working capital. When the dollars are received in two months time, they
are used to repay the dollar borrowing, thus eliminating any exchange risk
during the two months. The cost to the customer is the interest on the US
borrowing, less the cost of interest, which would have been incurred by
borrowing sterling for working capital. A significant reduction in borrowing
costs could be achieved through this means when currency interest rates are
lower than sterling providing there is going to be income in that currency.
2.2.4 Options
Two other instruments whose use has grown rapidly on financial markets in
recent years have been options and swaps. Both instruments help firms
hedge risk.
An option gives the right to buy or sell a given amount of a financial
instrument or commodity at an agreed price (known as the exercise or
strike price) within a specified time, but does not oblige investors to do so.
Options contracts are drawn up between two counter parties, the purchaser
and the writer (seller) of the option, and are registered with and traded
through a futures trading. The seller of the option is obliged to buy or sell
the financial instrument to the purchaser if the owner of the option exercises
the right to sell or buy.

Financial Derivatives

Options contracts are offered both on cash securities (short- and long-term
interest rates, exchange rates, equities of individual companies, and stock
exchange indices) and on futures contracts. For options on cash securities
(premium paid options), the buyer pays the full price or premium of the
option at the time of purchase. For options on futures contracts (premium
margined options), buyers and sellers are margined and marked to market in
the same way as with futures themselves.
Banks may construct non-tradable, custom-made options for their
customers. These are known as over-the-counter (OTC) options and
continue to make up a high proportion of the total value of options sold.
It should be emphasized that an option gives the holder the right to do
something. The holder does not have to exercise this right. This fact
distinguished options from forwards and futures where the holder is obliged
to buy or sell the underlying asset.
Example: exercise of an option
An option to purchase yen grants the purchaser the right to purchase yen at a
price of 95 US cents par 100 yen. The premium is 3 US cents per 100 yen.
On the settlement date, if the spot price of yen is 110 Us cents per 100 yen,
the option is in-the-money and will be exercised. The purchaser will buy
yen for 95 cents from the option seller rather than pay the spot market price
of 110 cents. The option seller, who must supply the yen, on net loses 12
cents per 100 yen on this transaction (the loses 15 cents per 100 yen
supplied, but retains the 3 cents per 100 yen premium).
However, if the spot market price of yen is 90 US cents per 100 yen on the
settlement day, the purchaser will not exercise the option to buy yen at 95
cents, but will purchase yen in the cheaper spot market for 90 cents. In this
case, the option seller pockets the 3 cent premium as his profit.
There are two main types of options5:
a) call option, which gives the customer the right to buy the underlying
currency. For example, an investor who thinks that the DM will rise
against the US dollar could buy a DM/$ option, giving the right to buy
5

Howells P&Bain Keith The economics of money, banking and finance, Pearson
Education Limited, Edinburgh, 1999

Financial Derivatives

DMs at a specified price, say $0,59=DM1. The holder of the option then
has the right to acquire DMs at that price at any time during the life of
the option and is thus in a position to benefit from a rise in the spot price
of the DM. If the spot exchange rate were to rise to $0,65 = 1DM, the
option holder could acquire DMs at $0,59 under the terms of the option
and sell them on the spot market at $0,65. The buyer of a call option
thus assumes a long position in the underlying instrument (in this case
DMs). As the price of the underlying instrument rises, so will the profit,
which can be made from exercising the option. Consequently, the
premium, which must be paid to acquire that option, rises and this
allows the holder of a call option to realize her profit by selling the
option on, rather than by exercising it.
b) put option, which gives the customer the right to sell the underlying
currency, and thus assumes a short position in the specified instrument.
That is, the buyer of a put option stands to gain from a fall in the price of
the underlying currency. Therefore, someone who buys a put option at
$0,59=DM1 will be hoping that the value of the DM will fall below the
level. They will then be able to buy DMs in the spot market at, say,
$0,57=DM1, and then exercise the option in order to sell the DMs at
$0,59 each. In this case, as the DM falls, the profitability of a put option
in DMs will rise and the premium that other investors are prepared to
pay in order to acquire such an option will increase. As above, the
holder of the put option may realize her profit by selling the option on,
rather than exercising it.
There are many variations of the simple call and put options. They are
known as exotic options. We explain some of them:

Barrier options are over-the-counter options designed to meet the

particular needs for customers. They are also known as knock-in or
knockout options which means that they come into being or lapse when
specified prices of the underlying currency are reached.

Look-back options: options that give the right to buy or sell at the
lowest price reached by the underlying currency during the life of the
options;

Asian options: option whose intrinsic value is calculated by comparing

the strike price with the average spot price over the period of the option.

Options an options: an option that gives the right to buy an option etc.

Financial Derivatives

Other types of options6 are:

Exchange-traded options. All options traded on exchanges or
organized markets are financial assets. Exchange-traded options tend to
be limited to instruments for which broad liquid trading can be
established.
Warrants are financial assets. They are negotiable options that trade
like securities that grant the purchaser the contingent right to sell to, or
purchase from, the issuer a debt or equity security. They are often
attached to bond issues, but can be detached and resold on financial
markets.
Conversion options attached to bonds, which permit the holder to
convert the bond into shares.
OTC options. Over-the-counter (OTC) options are derivatives that are
not traded on organized markets, and they include:
- Privately-arranged options, which can cover bank loans, foreign
exchange transactions, and many other financial transactions, and
which can hedge interest rate movements, modify exchange rates
exposures, purchase foreign exchange, exchange financial
instruments, or purchase commodities, etc.
- Call options embedded in securities on long-term liabilities and
securities, which permit the borrower to repay the loan under
specified conditions prior to maturity.
- Swaption, which is an option to enter into a swap.
- Caps A cap places an upper limit on interest rates on a floating rate
loan.
- Floors A floor places a lower limit on interest rates on a floating rate
loan.
- Collars A collar is a combination of a cap and floor that places
upper and lower bounds on the interest rate on a floating rate loan. A
synthetic fixed rate loan is created if the upper and lower bounds are
set equal.
Options are used in the following situations:
When there is exchange or interest rate exposure;
For protecting investments;
6

IMF Manual on monetary and financial statistics, Washington 1996

Financial Derivatives

For flexibility;
Tendering for contract in a foreign currency;
International trading of price-sensitive goods.

The following should use options:

Corporate treasures dealing in multi-currencies;

Banks and financial institutions for trading and hedging;

Any other company which needs to hedge.

It should be mentioned that foreign currency options are particularly

useful during periods of high exchange rates and volatility. In this case,
customers can choose the price, the period and whether to exercise the
option contract, because it gives them flexibility and choice.
2.2.5 Swaps
Swaps7 are financial contracts that obligate one party to exchange (swap) a
set of payments it owns for another set of payments owned by another party.
Swaps are exchanges of cash flows. They are attempts by firms to manage
their asset/liability structure or to reduce their cost of borrowing. Cash flows
generated by many different types of financial instruments may be swapped.
Simple swaps such as interest rate and currency swaps are sometimes
known as plain vanilla swaps. There are many variations of these.
Interest-rate swaps involve the exchange of one set of interest payments for
another set of interest payments, all denominated in the same currency.
An interest rate swap is an exchange of a cash flow representing a fixed rate
of interest on a notional capital sum with that representing a floating rate on
the same sum in the same currency. There is no exchange of the principal
amount. They are potentially useful because the fixed and floating capital
markets are distinct markets and firms wishing to borrow may not have
equal access to both.
7

Howells P&Bain Keith The economics of money, banking and finance, Pearson
Education Limited, Edinburgh, 1999;

Financial Derivatives

Interest-rate swaps are an important tool for managing interest-rate risk, and
they first appeared in the United States in 1982 when there was an increase
in the demand for financial instruments that could be used to reduce
interest-rate risk.
The most common type of interest-rate swap8 specifies:
1. the interest rate on the payments that are being exchanged;
2. the type of interest payments (variable or fixed-rate);
3. the amount of notional principal, which is the amount on which the
interest is being paid;
4. the time period over which the exchanges continue to be made.
Currency swaps involve the exchange of a set of payments in one country
for a set of payments in another currency. These are simply traders
simultaneously buying one currency at spot and selling forward, or selling at
spot and buying forward.
A currency swap has three stages, as follows:
1. an initial exchange of principal: the two counterparts exchange
principal amounts at an agreed exchange rate. This can be a notional
exchange since its purpose is to establish the principal amounts as a
reference point for the calculation of interest payments and the reexchange of the principal amounts;
2.
3.

exchange of interest payments on agreed dates based on outstanding

principal amounts and agreed fixed interest rates;
re-exchange of the principal amounts at a predetermined exchange rate
so the parties end up with their original currencies.

There are many variations on simple currency swaps.

In a cross-currency basis swap two floating-rate cash stream are swapped.
This may be possible because the banks that have made the two loans are
using a different basis rate for the calculation of their floating interest rates.
The most commonly used basis rate on the London market is LIBOR (the
London Inter-Bank Offered Rate). The US$ prime rate is also widely used.

IMF Manual on monetary and financial statistics, Washington 1996

Financial Derivatives

A cross-currency coupon swap is a currency swap involving a fixed interest

stream and a floating interest stream. In other words, it is a combination of
an interest rate swap and a fixed rate currency swap both the interest rate
structure and the currency are exchanged.
Other types of swap include equity swaps, which are agreements to
exchange the rate of return on equity or an equity index for a floating or
fixed rate of interest.
In a commodity swap the counter-parties exchange cash flows, at least one
of which is based on a commodity price or commodity price index.
2.2.6 Financial futures
The first Future Exchange in the world was established in Chicago in 1972
(called the International Monetary Market - IMM), designed to trade
financial futures contracts.
In the early 1980s several other financial centres opened up their own
futures exchanges. The London International Financial Futures Exchange
(LIFFE) started trading in September 1982 and deals in futures contracts in
currencies, interest rates and the value of quoted ordinary shares. Only
members of the Exchange are allowed to conduct trading and before dealing
a prospective buyer or seller must first open an account with a member firm.
The Exchanges Clearing House acts as a guarantor to both parties, taking a
security deposit (margin) from buyer and seller. Settlements are made daily,
when the Clearing House credits members accounts with net gains and
receives immediate payments from members with net losses. So, who are
the participants in this market place?
The participants9 are:
Floor traders/brokers
Every member on the floor is his own auctioneer and receives a small fee
for each transaction achieved. Essentially they are speculators, trading for
themselves.
Futures commission merchants
9

Mishkin F The economics of money, banking and financial markets, sixth edition,
Columbia University, USA 2001.

Financial Derivatives

Intermediaries for the brokers and the customers provide a fast and efficient
communication system, linking the customer quickly with the auctioneering
situation.
Speculators
Their sole motive is profit by dealing with charges in the expected price
levels over time. Normally they do not personally own the commodity in
which they deal. They provide fluidity to the market and by their activities
they help to set the price, allowing hedgers to buy or sell in volume without
difficulty.
Hedgers
They use the Financial Futures Market as an insurance against possible
adverse price movements, thereby reducing their exposure to the risk of
losses. Hedging is of particular benefit to corporate customers, pension
funds, brokers and dealers, banks and other financial institutions. The
service also provides a mean of hedging for those who want to lock-in
current exchange rates on future currency transactions.
How does it work?
A financial futures contract10 is an agreement to exchange (buy or sell) a
standard quantity of a specified currency or financial instrument at a
specified future date at a price agreed between the parties. The instruments
can be anything from three-month time deposits, twenty-year gilt-edged
stock, and foreign currency to a 100-share index.
Thus, a financial futures contract is similar to an interest-rate forward
contract in that it specifies that one party to another must deliver a financial
instrument on a stated future date.
The buyer goes long on the cash market that is he contracts to take delivery
of the underlying currency in the future. The seller goes short, contracting to
deliver the instrument in the future.
Let us look at an example. It is 1 February. A borrower has a 500000
three-month rollover loan from the money market at a rate of 10 %, which is
due to, be rolled over on April 1. The borrower is worried that rates will
10

Hull C.J. Options, futures, and other derivative securities. Second edition, Prentice
Hall, New Jersey, USA 1993.

Financial Derivatives

have risen by then. The borrower decides to use LIFEs Three-Month

Sterling Interest Rate Contract to cover the risk of higher interest rates. This
contract is for a three-month deposit facility of 5000000 commencing in
March or June or September or December. At any time contracts for all
these different months are being dealt in on the Exchange. The borrower
selects the June contract because the March contract will have already
matured before his rollover is due.
The contract is priced by deducting the interest rate to be paid on the deposit
from 100. On February 1 the interest rate is 10,00% and the price of the
contract is accordingly 90.00. The price of the contract changes up or down
in minimum movements of 0,01 known as ticks. The value of each tick is
therefore:
0,01% p.a.
of interest

the face value of the

contract, i.e. 500000

x one quarter
of a year

= 12,50

Being worried that the interest rate will rise and hence that the price of the
contract will fall, the borrower sells one June contract at a price of 90,00.
By 1 April when the borrowing is rolled over the interest has risen to 12%.
The result of the hedge is shown in the table below:
Money market
1 February
He plans to rollover the 500000
three-months borrowing in April.
Current rate on loan is 10%,

Futures market
Sells one futures contract, June
(500000) Three-Month Sterling
Interest Rate at a price of 90.00
(rate = 10%)

1 February
He rolls over the borrowing at the Buys back June futures contract at
the new price of 88,00 (rate =
new rate of 12 %.
12%).
Extra cost: 2% on 500000 for one Gain: 200 ticks at 12,50 = 2500.
quarter = 2500
The hedge worked out perfectly the gain on futures was exactly equal to
the extra interest paid. Thus, the hedger achieved a net borrowing cost of
10% per annum. In practice, such perfect matching will usually not be

Financial Derivatives

achieved. Futures prices may not move exactly in line with money market
rates. If interest rates had fallen the hedgers loss on his futures position
would have been matched by lower interest payments so that his net
borrowing cost would be 10% per annum.
As a conclusion, it should be stipulated that this service provides major
corporate customers with a method of hedging and speculating on
future trends in a variety of exchange and interest rates through the
London International Financial Future Exchange.
2.3 Comparing different types of derivatives
Exchange-traded derivatives have five principal advantages over over-thecounter (OTC) options, as follows:
(1) the existence of the clearing house guarantees all trades and virtually
eliminates the default risk present in OTC trades;
(2) price discovery is easier from exchange-based trading than on OTC
markets because futures and options contracts are reported immediately
and prices are widely distributed;
(3) markets for exchange-based derivatives are more liquid than bilateral
OTC trades since there are many traders in each futures pit;
(4) exchange-based futures and options are highly tradable because they
are standardized whereas OTC options, being non-standard and
redeemable only at the bank where they were bought, have a low resale
value.
(5) Exchange-based derivatives are lower in price than OTC derivatives
since there will almost always be some irreducible residual risk that a
bank is forced to take onto its own book, despite the fact that it will
attempt to minimize its risks by arranging offsetting contracts with
other customers/banks and by taking a position in exchange-traded
options.
There may be too, important cash-flow differences between forward and
futures contract because, whereas net profits on a futures hedge are accrued
on a daily basis, the net profits on a forward hedge are only realized on the
actual date of currency delivery. A different type of problem connected with
the use of futures contracts to hedge an exposed currency position arises in
cases where the lifetime of the futures contract continues beyond the

Financial Derivatives

intended date of currency delivery. This problem stems from the fact that
the difference between the futures and spot rates may not tend uniformly
towards zero as they delivery date for the futures contract approaches,
which is the assumption that underlies calculations of the forward rate.
*
* *
Since the launch of the Euro, there has been intense competition between
LIFE, Eurex, and MATIF/MONEP (now incorporated as part of Paris
Bourse)11. Traders in London are making a significant contribution to
business not only on LIFE but also, remotely from London, on the
continental exchanges.

Short-term interest rate contracts (STIRs) EURIBOR futures contracts

on LIFE are by far the most actively traded short-term Euro interest rate
futures contracts.
Bond futures contracts Eurexs Euro Bund futures contract currently
accounts for 96% of turnover in the major 10-year Euro bond futures
contracts.
Equity index contracts The launch of the Euro has also led to an
expansion in equity index contracts.

Progress test

1. What are the main types of foreign exchange risk?

2. List the main steps for identifying foreign exchange risk.
3. Define the Financial derivatives.
4. What are the most important financial derivatives?
5. What are the Forward exchange contracts?

11

Bank of England Practical issues arising from the Euro, December 1999

Financial Derivatives

6. What is the difference between a long forward position and a short

forward position?
7. How do you explain the expression a currency is quoted at premium?
8. How do you explain the expression a currency is quoted at a discount?
9. List and then define four types of forward contracts.
10. What are the currency accounts?
11. What is an Eurocurrency?
12. List the reasons for what the Eurocurrencies are used.
13. What are options and their main types?
14. Define the OTC options.
15. What is a call option?
16. What is a put option?
17. List a few exotic options.
18. Describe a swap operation.
19. What are currency swaps?
20. What is a financial future contract and how does it work?
21. Compare the different types of derivatives.

Financial Derivatives

ANNEX No 1
BANK...............................................................
Date for which the reporting is made.............
Own funds (thousand lei)..................................

SUPERVISION OF THE CURRENCY POSITIONS

Elements taken into
account
The
OnOffadjustmen
balance
balance
Individual t of the
Long
Short
sheet
sheet Currency
The
currency
share
adjusted adjusted
position
currency currency
weight
Foreign
Exchange position capital and individual individual
position
position -money
beside
issue
currency currency
exchange
rate in lei (thousand
units(balance (balance
the own
lei)
premiums position position
account
account
funds
(thousand
3721)
9361)
lei)
-money
- money
unitsunits(+) (-) (+) (-)
(+/-)
(+/-)
(-)
(+)
(-)
0
1
2 3
4
5
6
7
8
9
10
11

TOTAL

NOTE:
The next columns are calculated thus:
5 =1+2+3+4
7=5*6
9 = 7+8
10 = 7+8
11 = IxI /FP * 100 ( in which x is the highest between 9 and 10)
Elaborated by.................
Name and surname.........
Phone/Extension.............
The banks manager,
.

The manager of the accountingfinancial Department,

(surname, name and signature)

International Trade

INTERNATIONAL
TRADE

Objectives:
After studying this chapter you should be able to understand:
3.1

Introduction in international trade

3.2

Contracts

3.3

Financial documents

3.4

Commercial documents
3.4.1

Internal documents

3.4.2

Shipping documents

3.4.3

Insurance documents

3.4.4

Other commercial documents

International Trade

3.1 Introduction in international trade

We will discuss the most simple methods of payment and we will focus on
the needs of importers and exporters, who are often more complex. Bankers
need to understand the additional risks the international trade involves, how
these risks may be diminished and the procedures for financing and settling
international payments.
First time exporters and importers, in particular, will be looking for advice
and guidance as well as finance and you will have to be prepared to provide
this information or to point them in the right direction. International
businesses will require an effective mean of dealing with the documentation
and settlement, competitive finance, insurance against a variety of risks,
new markets reports and status reports on new customers and suppliers.
The two main problems, except exchange risk, the importer and exporter are
facing are time and distance. Bearing in mind these two major constraints of
time and distance, businesses should consider the potential problems under
four main headings:
a) the market;
b) the buyer or supplier;
c) transportation;
d) payment method.
a) The Market
Exporters need as much information as possible about overseas markets.
They should consider:
language;
local trade standards and technical specifications;
law system;
import duties and restrictions;
local and international competition.
b) The buyer or supplier
The exporter wishes to ascertain whether the buyer is trustworthy and
reliable. If the transaction is based on credit terms, the credit worthiness of
the buyer will have to be assessed. Importers need reassurance as to the
reliability of suppliers and the quality of their goods.

International Trade

c) The transportation
Both the importer and the exporter are concerned not only about the method
of transportation to be used and its cost, but also who is going to pay the bill
and the insurance.
d) The payment
The method of payment will have to be agreed between the buyer and the
seller.
The impact of any exchange control restrictions on the transaction, the
foreign exchange risk must also be taken into account, because they may
delay or prohibit payment.
So, even experienced international companies have a constant need for
information about markets, customers, rules and regulations in foreign
countries. But they will have the advantage of knowing where to seek
information. Many of the larger banks have their own economic information
department, which provides reports on a wide variety of countries and
industries. Banks are also able to obtain status reports on prospective buyers
or suppliers and provide letters of introduction to branches of their own or
their correspondent banks abroad.
3.2 Contracts
A sales contract is an agreement whereby the ownership of property is
transferred from one person to another, for a sum of money, or price. The
sales contract may assume the form of a verbal understanding subsequently
confirmed in writing or not. The contract comes into force only when it
bears the signatures of both parties, the seller and the buyer.
When goods or services are being bought or sold on an international basis,
the transaction is subject to a contractual agreement between the buyer and
the seller. Under the United Nations Convention on the international sales
contract of goods (Vienna 1980), the international character of the contract
is determined by the fact that the contracting parties have the headquarters
in different states.

International Trade

Generally, the international sales contract of goods represents the

agreement between two parties, having the headquarters in different states,
by which one of the parties (the exporter) is obliged to transfer to the other
party (the importer) the ownership of property of a good or service, against
the payment of a price.
Taking into consideration the object of a commercial transaction, contracts
can be: contract for works execution; deposit contract; mandate contract;
transport and international shipping contract; tourism contract etc.
The contract includes a description of the items being bought or sold, the
method of payment agreed upon and where responsibility lies for arranging
transport and insurance.
The contract will also stipulate what documents should be delivered to the
buyer and what these documents should contain.
A contract1 includes the following elements:
title and preamble;
contract clauses (e.g.: parties involved, object, price);
annexes containing judicial, financial and technical details.
The draft of a contract includes (see Annex no. 1 which include different
models of contracts):
1. Contracting parties: the buyer and the seller;
2. Contract object: description, quality, quantity, specifications, origin,
packing;
3. Price: unit price, total price, legal tender/currency of the price;
4. Terms of delivery;
5. Terms of payment: at sight/term/on time. Means of payment: L/C,
collection, bill of exchange etc.;
6. Law: sellers/ buyers or a third party law, the Vienna Convention,
arbitration;
7. Validity;
8. Signatures.

Popa Ioan Tranzacii comerciale internaionale Ed. Economica, Bucureti, 1997, p. 137

International Trade

The object of a contract is the good or service. Negotiating the contract

represents the identification of the goods by determining the quantity,
quality, packaging, mark as well as the duties of the two parties concerning
the goods. In Annex no. 1, you can also notify the difference between a loan
contract and a sales contract. In the first case, the object of the contract is
the loan, money, and in the second the goods or services.
The quantity of the goods is stipulated using the standard units of
measurement. In the contract there is stipulated also the place where the
quantity will be determined as well as the document that indicates the
quantity of goods delivered by the exporter. The commercial practice and
the nature of the goods govern the selection of measuring units. Quantity is
generally expressed in units of measure: long measure, area square measure,
volume, cubic measure, weight, in number of pieces etc.
There are some traditional measures still in wide use. E.g.: cotton is sold by
the bale; timber by the standard or cu.m.; coffee by the bag (of 70 kilos);
crude oil by the barrel; flour by the sack (of 100 kilos); grain by the bushel
or by the ton etc. A tolerance of 3 to 10 per cent more or less is frequently
allowed.
In international commercial use there are several ways of determining the
quality of goods, such as:

By description (raw materials, machinery and installations etc.) meaning

details of the technical features of the goods;

By sample: the seller gives to the buyer a sample. The goods delivered
must be the same like the sample;

By trade mark etc.

The contract stipulates the type of packaging: whether the packaging will
become the property of the buyer or not. Concerning the packaging there are
some clauses: net (free) the cost of packaging is included in the cost of
goods; net plus packaging the seller establishes a separate price for the
packaging.
The price is an important element of the contract. Price is the money
expression of the goods value. It represents the importers obligation of
payment. It can be expressed per unit or as a global amount. Under a
contract of sale, the price may be:

International Trade

1. a specified price set forth in figures and applying to a specified amount

of goods (a unit of weight, long measure square measure etc.);
2. a determinable price, the contract specifying only the elements that
serve to calculate the price, e.g.: the average price the goods have
fetched in a specified market in the last three months.
The contracting parties establish the place and the moment when the goods
together with the risks of delivery should be exchanged and the moment
when payment should be made. The place of delivery is the place where the
property of the goods and the risks are transferred from the seller to the
buyer. The place of delivery is established in the contract. The moment or
the time of delivery is the date when the seller is to deliver the goods and
the buyer is to take delivery of the goods, which are the object of the
commercial transaction. Deliveries may be:
1.

prompt deliveries which require the goods to be delivered

immediately on the conclusion of the contract;

2.

forward (future) deliveries may be:

a) on a stated date (e.g.: on the 15th of March);
b) within a certain time (e.g.: by the end of.);
c) on the occurrence of a certain event (e.g.: within 45 days from the
date of the export license etc.).

The seller may also establish in the contract whether the delivery is partial
or total. Non-observance of the terms of delivery (time or place) ensures
material prejudices called penalties.
Therefore, the delivery clause should be clearly stated in the contract to
avoid misinterpretation or disputes which are likely to arise during the
carrying out of the contract.
The price for the goods paid by the importer will include the cost of
production and an element of profit but it could include other costs as well
(handling, transportation, and insurance).
The sales contract between the exporter and importer should specify what
costs are actually being included in the price quotation and what costs are to
be borne by the importer.

International Trade

The International Chamber of Commerce from Paris published some

international terms in 1936. They were called Incoterms 1936, and they
were reviewed in 1953, 1967, 1976, 1980, 1990 and 2000.
The purpose of Incoterms trade is that different countries have different
interpretations of the same contract wording, and this problem can only be
solved by creating a set of internationally agreed terms.
Incoterms are not incorporated into national or international law, but they
can be made binding on both buyer and seller, provided the sales contract
specifies that a particular Incoterms will apply.
There are 14 different Incoterms2 and each term sets out the obligations of
the seller/exporter, and the responsibilities of the buyer.
Sending goods from one country to another, as part of a commercial
transaction, can be risky for both parties involved. If the goods are lost or
damaged, or in the case of non delivery caused by some other reason, the
trust between the two parties could deteriorate and result in Court action.
When drawing up a contract, if the buyer and the seller specifically include
one of the ICC Incoterms, they make sure that their respective
responsibilities are simply and clearly defined, thereby eliminating any
possibility of misunderstanding and disputes, that can often lead to
expensive and time wasting litigation.
Incoterms 2000 include 4 groups (see the Annex no. 2):
Group E
Exw
Group F
FCA
FAS
FOB
Group C
CFR
CIF
2

Departure
Ex Works (named place)
Main carriage not paid by seller
Free Carrier (named place)
Free Alongside Ship (named port of shipment)
Free on Board (named port of shipment)
Main carriage paid by seller
Cost and Freight
(named port of destination)
Cost, Insurance and Freight (named port of destination)

International Chamber of Commerce ICC publication No. 614, 2000.

International Trade

CPT
CIP

Carriage Paid To
(named place of destination)
Carriage and Insurance Paid To (named place of destination)

Group D
DAF
DES
DEQ
DDU
DDP

Arrival
Delivered at Frontier
Delivered Ex Ship
Delivered Ex Quay
Delivered Duty Unpaid
Delivered Duty Paid

(named place)
(named port of destination)
(named port of destination)
(named place of destination)
(named place of destination)

Group E: - under this term the seller minimises his risk by only making the
goods available at his own premises (works or factory or warehouse).
Group F: - under this term the seller arranges and pays for the pre-carriage
in the country of export.
Group C: - under his term the seller arranges and pays for the main carriage
but without assuming the risk of the main carriage. In the case of CIF and
CIP terms, the seller arranges the insurance of the goods.
Group D: - under this term the sellers cost/risk is maximised because he
must make the goods available upon arrival at the agreed destination.
The documents required for any international transaction will be determined
by the individual needs of the contracting companies concerned,
export/import requirements and other local problems such as Customs and
Exchange Control.
These documents generally fall under the heading Financial or Commercial
and can be used separately or together in support of a trade transaction.
The preparation of trade documents is one of the most common problem
areas for exporters often resulting in non-delivery of goods; delays in
custom clearance; non-payment for goods by buyers and rejection of
documents by banks under letters of credit (L/C).
Bank staff involved in international trade operations has a responsibility to
familiarise themselves with the purpose and characteristics of these
documents in order to protect the interests of the bank and its customers.

International Trade

Financial documents mean Bills of Exchange; Promissory Notes; Payment

Receipts; Cheques or other similar instruments used for obtaining the
payment of money.
Commercial documents mean: invoices, shipping documents, documents of
title, insurance documents or any other documents whatsoever, not being
financial documents.
3.3 Financial documents
The Bill of Exchange and the promissory note are negotiable instruments,
the cheque is an instrument of payment.
Parties to the transaction:
There are three parties involved: the drawer, the drawee and the payee/
beneficiary.
The bill of exchange is made out by the drawer (creditor), who gives an
order to his debtor called the drawee, to pay a certain amount of money, at a
determinable future time either to a payee or to the order of this payee.
In Romania, the Bill of Exchange is regulated by the provisions of the Law
no 58/1934 concerning the Bill of Exchange and the Promissory Note.
Under this law, there are some mandatory items of the Bill of Exchange (see
Annex No.3):
the denomination bill of exchange in the title of the text;
an unconditional order to pay a certain amount of money;
the drawee;
the maturity date;
the place where the payment will be made;
the drawer;
the date and place where the bill was issued;
the signature of the drawer;

International Trade

Under the British law3 the Bill of Exchange (see different types of the Bill of
Exchange in the Annex No. 4), or the Draft (the two words are
synonymous) is:

an unconditional order in writing;

addressed by one person (the drawer);

to another (the drawee);

signed by the person giving it, meaning the drawer;

requiring the person to whom it is addressed (the drawer);

to pay;

on demand or at a fixed or determinable future date;

a certain sum of money;

to, or to the order of, a specified person (the payee), or to Bearer.

The words on demand mean at sight, requiring the drawee to honour the
bill when it falls due.
The bill could be payable on a fixed future date or a determinable future
date.
For instance, a bill payable at 90 days sight means that it is payable 90
days after presentation.
-

The drawee accepts the bill by signing on its face, thus agreeing to
pay at that future time.

The bills can be transferred by endorsement. Endorsement is the

signature of the person who transfers the bill. (It is written on the back
of the bill).

The Bill of Exchange drawn on the advising bank can be discounted.

The bank (exporter) can purchase the bill at less than its face value, giving
the proceeds to the exporter. The bank can hold the bill until maturity, or
rediscount it.

Bills of Exchange Act 1882

International Trade

The Bill of Exchange is an instrument of credit and an instrument of

payment; it is used under a L/C or bill of collection.
The Promissory Note
There are two parties involved: the issuer and the beneficiary/payee. The
Promissory Note is created by the issuer as a debtor who is obliged to pay a
certain amount in money at a certain time or at the presentation of the payee
called creditor.
Under the provisions of the Law no 58/1934, the Promissory Note includes
the following elements:

The denomination promissory note in the title of the text;

The unconditional promise to pay a fixed amount of money;

The maturity;

The place where the payment will be made;

The name of the person who gives the order to pay;

The date and place of the issuing of the Promissory Note;

The issuers signature.

3.4 Commercial documents

The main commercial documents4 are:
Internal:

The invoice;

The packing list.

(these documents are issued by the exporter)
Shipping documents:

Documents of title: bills of lading ;

Airway bill/air consignment note;

Rail consignment note/ railway bill;

Lorry-way bill.
4

Popa Ioan Tranzacii comerciale internaionale Ed. Economica, Bucureti, 1997, p. 147

International Trade

Insurance documents:

Insurance policy;

Certificate of insurance.

Other commercial documents:

EUR 1 (movement certificate);

Certificate of origin;

Certificate of age;

SAD (Single Administrative Documents).

3.4.1 Internal documents

The main internal documents utilized in the international trade are:
Commercial invoice it is usually produced on the exporters headed
paper, and gives details of the goods, details of the payment, and delivery
terms, together with the details of freight, measurements etc., as required.
The export invoice is a document issued by the exporter (in the Annex No. 5
you can see the model of a British invoice).
The main details which appear on invoices are:

Name and address of the exporter;

Name and address of the importer;

Reference number, place and date of issue;

Terms of delivery (Incoterms);

Shipping marks;

Description of goods;

Breakdown of the cost of freight and insurance;

Quantity of goods;

Total amount payable by the importer;

Signature of the exporter.

International Trade

The functions of the invoice:

it shows that the goods were sold;

it shows the transfer of property from the seller to the buyer;

it is used to collect the money for the goods sold;

it is used for custom duties.

There are different types of invoices such as:

1. Pro Forma invoice its issued before concluding the contract; it is a
document required for the importer in order to obtain some previous
formalities (e.g. import license). A pro forma invoice is very similar to a
commercial invoice, except that it will not include any shipping marks,
and it will be clearly stamped pro forma.
2. Consular invoice the invoice is on the form required by the country
concerned, rather than suppliers invoices. It is a document required by
the Custom of some importing countries in order to establish the custom
duties. The forms can be obtained from the embassy or the consulate of
the importers country. The exporter completes the details on the form
and the document is then authenticated by the consulate of the importer.
This consulate will be located in the exporters country.
The main purpose of consular invoices is to certify that the exporter is
not dumping goods at artificially low prices.
3. Legalised/visaed invoices In this case, the exporter presents his
invoices together with the evidence of shipment to the embassy of the
importing country. They will check for example that the goods can be
imported and that they represent a fair market price and will stamp the
invoices to this effect.
4. Customs invoice It is a special invoice required by customs in various
countries (Commonwealth) for import purposes. (To establish the price
structure on the market of the country of origin). The format varies from
country to country.
Packing list It is an internal document of the companies, it gives details of
the packed goods and contains the marks, invoice numbers as well as the
weight of goods.

International Trade

3.4.2 Shipping documents

The main shipping documents5 utilised in the international trade are:
Bill of Lading It is issued when goods are transported by sea. Usually two
or three originals are issued and signed on behalf of the shipping company
or its agents. A Bill of Lading has four major functions, such as:
1.

A bill of lading acts as a receipt of the goods from the shipping

company to the exporter;

2.

The bill of lading is an evidence of a contract of carriage between the

exporter and the carrier;

3.

A bill of lading is a quasi negotiable document. Any transferee for

value who takes possession of an endorsed bill of lading obtains a good
title to it, provided the transferor had a good title in the first place.

4.

A bill of lading acts as a document of title for goods being shipped

overseas it allows to the final beneficiary of the goods to take the
goods at destination only against production of one of the original bills
of lading.

Copies (unsigned) Bills of Lading do not represent a title to the goods.

A bill of lading normally embodies the following details (see the Annex
No. 6):

The name of the shipping company, sometimes known as the carrier;

The name of the shipper, who is usually the exporter, or the exporters
agent;

The name of the consignee. If the word order appears here, then the
shipper/exporter must endorse the bill of lading. When the bill of lading
has been endorsed in this way, then it is transferable by delivery. Once
the goods arrive at their destination, they will be released to the bearer
of one original bill of lading. Normally bill of lading are made out to
order and endorsed by the exporter.

The notify party is the person whom the shipping company will notify
on arrival of the goods;

The name of the carrying vessel;

Twells Harry Exporters checklist, a step-by-step guide to succesful exporting, National

Westminster Bank, Lloyds of London Press Ltd, 1992, p. 154

International Trade

The port;

The marks and numbers which appear on the cases in which the goods
are contained;

A brief description of the goods;

The number of cases;

It is stipulated whether the freight costs have already been paid, or

whether payment of freight is due on arrival at the destination;

It is stipulated if the bill of lading represents an original;

Etc.

A Bill of Lading can be of two basic types:

Received for shipment or shipped on Board. This can be normally

seen from the small print at the bottom of the face of B/L although this
can vary between shipping companies.

A dirty B/L, or claused B/L is one that has a clause relating to the
condition of the goods, e.g. 3 cartons damaged.

The parties to a B/L:

1. Shipper the party (i.e. exporter) with whom the contract of carriage
has been concluded by the carrier. It may show the actual Shipper or the
Shippers forwarding agent.
2. Consignee completed either with the name of the consignee or the
words: to order which means that the goods are to the order of the
shipper and delivery will be made in accordance with his instructions.
These instructions are given by the Shippers endorsement on the B/L,
either:

specific: e.g. Delivery to ABC LTD. The carrier would only release
goods to ABC limited against the surrender by them of an original B/L.

blank: this would make the B/L a bearer document and the carrier
would release the goods to the holder of the bill.

3. Notifying party the party to be notified on arrival of the goods (when

B/L consigned to order).

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Other types of Bills of Lading:

Short form B/L operates like an ordinary (Long form) B/L except that the
terms and conditions of the contract are not printed on the reverse side of
the form. The terms and conditions (normally identical to those on a long
form B/L) under which the goods are being shipped are, instead, available
for inspection at the Shipping Companys office and reference to this is
made on the reverse side of the B/L.
Common short form B/L the main difference between this and the ordinary
short form B/L is that the shipping companys name is not pre-printed on
the top right-hand corner. The shipper would insert this before the bills
were presented for signing. The prime purpose of this document is to avoid
the need for shippers to keep suppliers of B/L for each carrier they use.
Through B/L - B/L which covers the shipment of goods on two separate
vessels, i.e. where no direct service is available and the goods have to be
transhipped during the voyage from one vessel to another.
LASH (Lighter Aboard Ship) B/L issued when goods are loaded on a
lighter that sails to a specially designed carrying vessel where the lighter is
loaded on board. At the destination, the lighter is unloaded and sails to the
dock area where the goods are unloaded.
Liner B/L - issued when goods are being carried on a vessel sailing a regular
trade defined route, having reserved berths at scheduled ports of call.
Combined transport B/L covers transports of goods on two or more
different modes of transport, e.g. Road-Sea-Road.
Fiata combined transport B/L - operates like the standard combined
transport B/L, except that it is issued by a forwarding agent acting as a
carrier, and it is a document of title of the goods. FIATA = The International
Associations of Freight Forwarders.
Transhipment B/L - These are used when the goods have to be transferred
from one ship to another at a named transhipment port.
Charter Party B/L - This bill of lading is issued by the hirer of a ship to the
exporter. The terms of the bill of lading are subject to the contract of hire
between the ships owner and the hirer. Such bills are usually marked
subject to charter party.

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Other shipping documents

Air waybill (air consignment note) completed and signed by the
shipper, or its agents. When the goods are delivered to the airline, the
bill is signed as a receipt for the goods. It may further indicate the
dispatch of the goods with the addition, by the airline of a flight stamp
indicating the date, time and number of the flight. It is not a document of
title.
Rail consignment note (Rail waybill) issued by the railway
authorities covering the transport of goods by rail. It is not a document
of title.
Lorryway bill (consignment note) issued by a road haulier. CMR =
Convention de Merchandise par Route. A set of rules agreed at an
international convention covering international road haulage. It only
covers goods, which travel by road between countries. The goods must
remain on the lorry all the time, i.e. not offloaded onto another means of
transport and back in to a truck again.
Parcel Post Receipt a receipt issued by the post office. It usually
bears a date stamp including the branch name of the post office.
3.4.3 Insurance documents
Every consignment runs the danger of loss or damage from a variety of
risks: fire, theft, explosions, leakage, spoilage, etc.
Therefore it is normal for either the buyer or the seller (depending on the
terms of the contract) to take out insurance cover against any risks that are
likely to be encountered. Written evidence of insurance is provided in two
main forms:
Insurance Policy it is the main legal document, issued only by an
insurer and it must be signed by or on behalf of the insurer. It must show
the name of the assured and endorsed by him so that the right to claims
can be transferred to another party. It contains: the goods insured, the
insured value (110% of the goods value), covered risks etc.
Insurance Certificate (see the Annex No. 7) - a single Insurance Policy
is taken out by the Assured to cover all his export-import shipments. It is
made out in 3 copies: one travels with the goods, one remains with the
insurance company and one goes to the importer/exporter.

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Insurance documents usually show the following details:

The name and signature of the insurer;

The name of the exporter;

The risks covered;

The sum insured is, normally, expressed in the same currency as that of
the invoice, and is normally for the invoice value plus 10%.

The description of the goods;

The place where the claims are payable together with the details of the
agent to whom claims are to be directed.

The signature of the exporter which is required to validate the

certificate.

The date of issue.

As goods are shipped, the assured (exporter/importer) issues certificates in

accordance with the main policy.
Certificates are more common than policies but do not give full detail of
terms and conditions. They can be assigned by endorsement. It contains:
name and signature of the insurer, covered risks, the value insured (in the
same currency as of the invoice), goods description, date of issue.
There are three basic levels of cover that can be obtained to cover
Marine/Air/Parcel Post risks as applicable. In descending order of the extent
of cover provided, there are:
-

Institute Cargo Clauses (A);

Institute Cargo Clauses (B);

Institute Cargo Clauses (C).

Two specific types of cover are also available:

a.
b.

Institute War Clauses;

Institute Strike Clauses.

All of these clauses can be tailored by the insurance company to individual

customers needs. However, the important point to bear in mind is that there
is no type of insurance available which covers all risks likely to be
encountered on the voyage.

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3.4.4 Other commercial documents

Other commercial documents utilised in the international trade are:
Movement certificate EUR 1 an EU document signed and filled in by
the exporter and counter-signed by the Customs of the exporting EU
country. Export is made to a country with which EU has a preferential
trade agreement. This would allow the importer to pay a preferential rate
of import duty.
Single administrative document (SAD) replaces about 100 Customs
export, import and transit forms used in the EU. This document shows
that the goods are moving between member states without the need to
pay duties.
Certificate of origin (see the Annex No. 8) is signed by a Chamber
of Commerce certifying the origin of the goods. It is required by the
Custom Authority of the importing country.
TIR book it goes with the goods during the transport. It is used for the
non-EU countries. It certifies the seal of the lorry by the Customs of the
exporting country and assures the non-payment of other custom duties in
other countries of transit.

Progress Test

1. What information can a bank provide to a prospective exporter?

2. What is it a sale contract? But, what is it an international sales contract?
3. What are the elements included in a draft of a contract?
4. What are the main methods used in order to determine the quality of
goods?
5. Enumerate the four groups of Incoterms 2000.

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6. Where goods are FOB, who pays the freight?

7. List the financial documents.
8. What are the parties involved in the bill of exchange?
9. What is a promissory note?
10. List the main elements of the promissory note, under the Law
no. 58/1934.
11. What is a commercial invoice?
12. What are the functions of the invoice?
13. List and define different types of invoices.
14. What is a bill of lading?
15. Enumerate the parties to a bill of lading.
16. List types of bills of lading.
17. Describe an airway bill.
18. What is an insurance policy?
19. What is an insurance certificate?
20. What other commercial documents do you know?
21. Describe a movement certificate EUR 1.
22. What is a TIR book?

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ANNEX No 1
DATED ______199__
Draft
LUBRICANT SALES AGREEMENT
BETWEEN TEXACO LIMITED
AND

THIS LUBRICANT SALES AGREEMENT is made the__day of ___ 2002,

BETWEEN:
(1) TEXACO LIMITED, an English company with its registered office at 1
Westferry Circus, Canary Wharf, London E14 4HA, (Texaco); and
(2)

company with its principal place of business at __

(Buyer)

Texaco and Buyer are sometimes referred to herein individually as Party and
collectively as Parties.
RECITALS
(A) Texaco is engaged in the world-wide distribution and marketing of Texacobranded petroleum and petroleum by-products including automobile lubricants,
including, but not limited to, those listed on Schedule 1 (the Products).
(B) Buyer desires to purchase Products for distribution to its customers in Ukraine
(the Territory).
NOW THEREFORE, Texaco agrees to sell Products to Buyer on the following
terms and conditions:
ARTICLE 1 - SCOPE OF AGREEMENT
1.2. The terms and conditions set forth in this Agreement shall govern and apply to
all sales of Products By Texaco to Buyer and no other terms and conditions or any
amendments hereto shall apply to such sales unless agreed to in writing by Texaco.
1.3. Texaco may, in its sole discretion, elect not to sell Products to Buyer and
nothing herein shall be construed at any time to obligate Texaco to sell Products to
Buyer. No offer By Buyer to purchase Products from Texaco under the terms of

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this Agreement shall be binding up Texaco, unless and until said offer is accepted
by Texaco in Writing.
1.4. Texaco expressly reserves the right to sell Products to any other person or
entity for use or distribution in the Territory and Buyer is not and shall not hold
itself out to be Texaco s exclusive distributor of Products in the Territory.
1.5. Buyer shall not sell Products outside the Territory without the prior written
consent of Texaco, not transport, sell or trade Products in contravention to any
United States, Ukrainian or European Union law or regulation.
1.6. Texaco reserves the right to amend the listing of available Products in
Schedule 1, by adding or deleting a Product or Products from the list.
ARTICLE 2 - TERM
2.1. This Agreement shall commence as of the date first set forth above and shall
terminate upon the earliest to occur of the following:
2.1.1. six (6) months from the date first set forth above;
2.1.2. on the date specified in a notice of termination in writing given by one Party
or the other; or
2.1.3. a Party ceases or threatens to cease to carry on business.
ARTICLE 3 - PRICES
3.1. The prices for Product to be sold to Buyer by Texaco under this Agreement
shall be as set forth in Schedule 1.
3.2.Product prices shall be in U.S. Dollars.
3.3. Unless otherwise agreed, the prices are exclusive of VAT and other
governmental taxes and possible costs of insurance, transport and packing.
Texaco has the right upon thirty (30) days prior written notice to Buyer to change
the price of the Products.
ARTICLE 4 - DELIVERY AND STORAGE
4.1. The delivery conditions, time of delivery, and ordering procedures for deferent
classes of Products are as set forth in Schedule 2 attached hereto and made a part
hereof, which Schedule 2 shall be subject to amendment by Texaco from time to
time upon ten (10) days written notice to Buyer.

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4.2. All Products delivered to Buyer must be resold in the original packages in
which received by Buyer; refilling and replacing of Texaco products is explicitly
forbidden.
4.3. Risk of damage to and loss of Products shall pass to Buyer at the moment that
the Products are made available to Buyer at the delivery location. Upon delivery,
Buyer shall discharge the Products immediately and Buyer shall compensate
Texaco all costs and damages suffered by Texaco as a consequence of any delayed
discharge.
4.4. Buyer shall be obliged to take delivery of the Products. If the Buyer does not
take delivery of the Products when made available by Texaco, costs incurred by
Texaco including all further costs of transport, keeping and storage shall be for
account of Buyer.
4.5. The Products shall be stored in compliance with recommendations contained
in applicable Product information provided to Buyer by Texaco, or otherwise in
such a manners will ensure no deterioration in the packing of the Products.
4.6. Buyer shall not mix any Products with products of any type and shall not store,
transport, pump, or otherwise handle any Products supplied by Texaco in facilities
which do not comply with all applicable government or regulatory requirements.
Buyer agrees to indemnify Texaco in respect of any failure by Buyer to adhere to
the provisions of this Article 4.
4.7. Buyer shall permit Texaco or Texacos appointed representative to enter
Buyers place of business at any time to obtain samples of Products stored or
conduct such tests or inspections as may in Texacos judgement be reasonably
required to determine that Buyer is complying with the obligations contained in
this Agreement.
ARTICLE 5 - PAYMENT
5.1. Payment for all Products purchased by Buyer hereunder shall be made in
advance by wire transfer in immediately available funds to a bank account to be
designated in writing by Texaco.
5.2. Payment for all Products shall be in U.S. Dollars.
5.3.All expenses and commissions of Texacos bank in connection with the
performance of this Agreement shall be at Texacos expenses and commissions at
Buyers bank shall be at Buyers expense.

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ARTICLE 6 - TRADEMARKS AND ADVERTISING

6.1. This Agreement does not grant any rights to use of the Texaco name or
trademarks on products, in advertising or otherwise. Such rights can be granted
only by means of a separate trademark license agreement.
ARTICLE 7 - FORCE MAJEURE
7.1. Texaco shall not be liable for failure to perform in whole or in part any of its
obligations under this Agreement to the extent that such performance is prevented
or impeded by reason of events of Force Major.
7.2. For the purpose of this Agreement, the term Force Major means any event or
circumstance that could not reasonably have been prevented (without limitation)
Act of God, official strike or other official industrial action, war declared or
undeclared, threat of war, terrorist act, blockade, revolution, riot or other civil
disturbance, flood, fire, enactment of any legislation or regulation the effect of
which is to prevent the carrying out of either in whole or in part of the obligations
of one or both of the parties to this Agreement.
ARTICLE 8 - CONSEQUENCES OF TERMINATION
8.1. Upon termination of this Agreement for any reason:
8.1.1. Buyer shall cease to promote, market, advertise, or sell Products; and
8.1.2. Buyer shall make no claim against Texaco for compensation for loss of
agency rights, loss of good will, or any other loss whatsoever, and shall
indemnify Texaco against similar claims made by any third parties.
ARTICLE 9 - FOREIGN CORRUPT PRACTICES ACT
9.1. In carrying out its responsibilities under this Agreement, Buyer shall not pay
or agree to pay, directly or indirectly, any funds or anything of value to any public
official in the Territory influencing such officials acts or decisions.
9.2. Buyer represents and warrants that no owner, partner, officer, director, or
employee of Buyer or an owner, partner, officer, director or employee of Buyer
becomes an official of any foreign government during the term of this Agreement,
Buyer shall immediately so notify Texaco.
9.3. If Buyer directly or indirectly offers, pays, promises, gives or authorises
payment of any money or anything of value to any government or public official
for the purpose of influencing any official act of such official in the course of

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carrying out this Agreement, then Texaco shall have the right to terminate this
Agreement forthwith, and Buyer shall then forfeit any claim for payment under this
Agreement, and shall refund any payments received under this Agreement.
9.4. Buyer shall, if so requested by Texaco, cooperage with Texaco in obtaining an
opinion of local counsel in the Territory prior to performing any services to the
effect that the entering into and performance of this Agreement is permitted under
the law of the Territory. Payments to officials of the Territory are prohibited by
law.
ARTICLE 10 - DEFECTS AND LIABILITY
10.1.If Buyer feels that the Products delivered by Texaco do not meet the agreed
quality, the Buyer shall give Texaco notice thereof within twenty-four (24) hours
after having established the alleged defect and give Texaco the opportunity to
investigate any alleged deficiency by making a sample of the product available to
Texacos representative. In no case shall Texaco be liable for any defects in
Products which are mixed with other products or which are improperly stored in
contravention of Article 3.
10.2. If Buyer feels that the Products delivered do not meet the agreed quality,
Buyer shall give notice thereof to Texaco within forty-eight (48) hours after having
established the alleged deficiency.
10.3. Buyer warrants that it will only supply Product for the purposes
recommended by Texaco and will indemnify Texaco for any liability or costs
arising whereby Buyer, its agents, servants or employees have supplied Product for
other usage.
10.4. Notwithstanding any other provisions in this agreement, neither party shall
have any liability to the other in respect of consequential or indirect damages
howsoever caused and irrespective of negligence.
ARTICLE 11 - MISCELLANEOUS PROVISIONS
11.1. Governing Law and Language. This Agreement shall be governed and
construed in accordance with the laws of England and the English Courts shall
have exclusive jurisdiction over any disputes relating to or arising out of this
Agreement and each of the Parties hereby submits to the jurisdiction of the English
Courts. This Agreement has been negotiated and executed in English and if
translated into any other language the English version shall prevail in the case of
any conflict between the English version and any other version.
11.2. Assignment. Buyer shall not assign all or any part of this Agreement without
the prior written consent of Texaco in its sole discretion.

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11.3. No agency. Buyer shall purchase from Texaco and shall resell to its
customers in its own name and for its own account, and shall not represent itself as
an employee or agent of Texaco and shall have no authorisation, express or
implied, to undertake any commitments on behalf of Texaco, nor to bind Texaco in
any manner whatsoever unless otherwise expressly agreed in writing.
11.4. Notices. Any notices required to be given by either Party shall be given in
writing and delivered by messenger, by mail, by telex, or by facsimile with mail
confirmation at the addresses set out in this Agreement (or such other address as
shall have been notified to the other Party in writing), as follows:
To Texaco:

Texaco Limited
1 Westferry Circus
Canary Wharf
London E14 4HA
Attention: Manager - Lubricant Sales
To Buyer:
If sent by messenger, notices are deemed served upon receipt. If sent by first class
mail, notices are deemed derived on the fifth day after posting. If sent by telex,
notices are deemed served upon receipt of senders answer back. If sent by
facsimile, notices are deemed served upon receipt of the senders confirmation,
provided that such facsimile notice is followed by confirmation by first class mail.
11.5. Entire Agreement. This Agreement represents the entire agreement between
the Parties with respect to the subject matter hereof and expressly supersedes any
previous agreement or understanding relating thereto.
11.6. Severability. In the event that any one or more of the provisions contained in
this Agreement shall for any reason be held to be unenforceable, illegal, or
otherwise invalid in any respect, such unenforceability, illegality, or invalidity shall
not affect any other provisions of this Agreement and this Agreement shall then be
construed as if such unenforceable, illegal, or invalid provisions had never been
contained herein.
11.7. Authorisation. Buyer warrants that the person representing Buyer for
purposes of this Agreement is authorised for representation in foreign trade
operations.
IN WITNESS WHEREOF, the Parties have executed this Agreement effective on
the date first herein above written.

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TEXACO LIMITED
By:________________
Name:______________
Title:_______________
BUYER
By:________________
Name:______________
Title:_______________
SCHEDULE 2
1. Products will be ordered by Buyer from Texaco by fax using number .
Telephone orders must be confirmed by Buyer by facsimile. Each order should
contain following information:
Number of packages of product required by package type;
Quantity of cartons/drums;
Total litters/kilos required;
Delivery date requested;
Any special requirements.
2. Product will be made available to Buyer ex-works at Texaco Lube plant at
Ghent, Belgium.
3. Lifting of the Products at, and transportation thereof from, the delivery points
stated in 2 above, shall be responsibility of and arranged and paid for by Buyer.
4. Product cartons to be labeled as follows:
-

Package size;

Product code;

Product name;

- Batch number;
5. Address of consignee:
6. Pro-forma invoice accompanying the carrier will carry the following
information:

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Quantity of shipped carton boxes;

Net and gross weight;
Day of shipment;
All details pertaining the order.
7. Deliveries will include the following documents:

Certificate of quality;

Packing lists (special instruction);

Certificate of origin;

Bills of goods;

Customs documents;

Pro-forma invoice (copy will be faxed to Buyer Ltd).

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SALES CONTRACT No ....../200_

MASSEY FERGUSON S.A.
60026 BEAUVAIS CEDEX
FRANCE
(hereinafter referred to as the Seller)
and
SOCIETATEA AGRICOLA AGROTEL
Jud. Teleorman
Romania
(hereinafter referred to as the Buyer)
Whereas the Buyer wishes to purchase goods as defined hereunder and has
accepted the Seller's offer, a copy of which is attached and forms part of this
Contract, for the sale of such goods, now this agreement witnesses that:
Subject of Contract
The Seller agrees to sell and the Buyer agrees to purchase agricultural machinery
to specifications described in Appendices I and II (Proforma Invoices MF-ROM
351/96 and Standard Specifications).
Delivery Terms
The contractual point of delivery is CIP Alexandria, Romania
CIP Prices
The Seller agrees to sell and the Buyer agrees to purchase goods described in
Appendices I and II at the following prices CIP Alexandria, Romania:
* Deutschemarks DEM 55 250 (DEM fifty five thousand two hundred and
fifty);
*French Francs FF 457 034 (FF four hundred and fifty seven thousand and
thirty four).
Total Contract Value
The total Contract value of the above items delivered CIP Alexandria, Romania is
Deutschemarks DEM 55 250 (DEM fifty five thousand two hundred and fifty) and

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French Francs FF 457 034 (FF four hundred and fifty seven thousand and thirty
four).
Time of Delivery
Delivery CIP Alexandria, Romania will be effected in accordance with the
Schedule of Availability attached (Appendix III).
Terms of Payment
In consideration of goods supplied, the Buyer agrees to pay the Seller by means of
an irrevocable letter of credit or wire transfer, payable at sight at the counters of
and confirmed by a first class international bank, which must:
1) Be in favor of beneficiary:
MASSEY FERGUSON S.A.
60026 BEAUVAIS CEDEX
FRANCE
Seller's Bank:
MASSEY FERGUSON S.A.
Account No....
SOCIETE GENERALE
Beauvais - France
2) Be opened under the uniform customs and practice for documentary credits
(ICC-UCD 500, effective January 01,1994).
3) Be confirmed by a prime international bank with all charges for the account of
the opener.
4) Stipulate an expiry date no earlier than three months from date of opening.
5) Permit partial shipments, and trans-shipment.
6) Permit presentation of documents within 21 days after the date of issue of the
bill of lading.
Warranty
All goods will be subject to Massey Ferguson Standard Warranty Terms (Appendix
IV).

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General Terms of Business

This Agreement is made subject to the General Terms of Business for Massey
Ferguson Direct Sale of Farm Machinery. (Appendix V).
Effective Date
The agreement becomes effective upon the date of signature by both parties.
Arbitration
All disputes and differences which may arise out of the present contract or in
connection with the same are to be settled under French law in the French Courts.
Appendices
The following appendices form an integral part of this agreement:
I) Performa Invoice Ref: MF-ROM 351/96
II) Bulletins confirming the Romanian Standard Specifications of the goods.
Ill) Schedule of Availability.
IV) Standard Warranty Schedule.
V) Massey Ferguson General Terms of Business for Direct Sale of Farm
Machinery.
.
Signed on behalf of the
Seller
.
Signed of behalf of the
Buyer

Date

Date
.

APPENDIX III - SCHEDULE OF AVAILABILITY

The goods subject of the present Contract are available for shipment ex-factory,
according to the following time periods commencing from the date of receipt by
MASSEY FERGUSON S.A. of the corresponding Letter of Credit or wire transfer,
as follows:
*MF 8160 4WD Cab Tractor: ex-factory Beauvais, France, 10-12 weeks
* MF 725 7-F Reversible Plough: ex-factory Sweden. 10-12 weeks

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Sales Contract
No. 1234/2002
Made this 4 day of January 2002 between the undersigned:
-

GENERALEX1M SRL, residing at Blvd...., Bucharest, sect.l, Romania,

(registered in the Trade Register under no. A/1200/1992 " J29/1300/I995),
represented by Mr...., hereinafter referred to as the "Seller of the one hand, and

THE UNIVERSAL TRADE INC., residing at 15 Ave, 100 Suite Bayside

New York 11100 USA (registered in the Trade Register under no. 5000/1980),
represented by Mr..., hereinafter referred to as the 'Buyer' of the other hand,
whereby it is agreed as follows:

Subject to the terms and conditions specified herein, the Seller has sold and agrees
to deliver to the Buyer, and the Buyer has purchased and agrees to accept the
following items:
Art.1. Object
Aluminium- 99.5%Al.- lingots in size of 400*100*100mm and 500*100*100mm.
Art.2. Quantity
1000 tons oflingots- total quantity, say 500 tons of 400*100*100mm, hereinafter
referred to as the "goods'.
2.a. The seller is to deliver the goods at no more than a 5% allowance of each
size.
2.b. Partial deliveries not allowed.
Art. 3. Quality
Aluminum A5 - according to DIN (Germany). The quality is supported by a
Certificate of Quality annexed, issued by SLATINA SA, (the Producer that
accompanies the goods to destination.
The quality certificate shall be issued in triplicate as follows:
- one copy will be enclosed with the payment documents;
- one copy will be enclosed with the documents accompanying the transport;
- one copy will be sent to the Buyer by airmail registered, the moment the goods
are dispatched or handed over to the transport agent.

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Upon Buyer' s request, the control of goods can be made by the Buyer or his
representative in the factory of the Producer, according to the main manufacturing
phases of the respective goods. This control does not affect in any way the Seller' s
responsibility concerning non corresponding quality of the delivered goods.
Art. 4. Price
The price is to be understood US$1000/ to (for each size) says a total value of US$
1imiliion FOB Constanza, packing included.
Art. 5. Packing
The Seller is to take every precaution to have the goods properly packed. The
packing consists of RC wooden pallets and must ensure the goods integrity and
protection all throughout transportation to the end user.
Art. 6. Delivery
Delivery terms are to be FOB Constanza/ Romania, according to INCOTERMS
1990, The Seller undertakes to deliver the goods in the quantity and quality as
stipulated herein in the Contract with the properties of the sample which was
submitted to the Buyer.
The time of delivery is deemed to be 15 April, 2001, the date of the B/L.
The Seller shall notify the Buyer by fax or telex until 15 March 2001, at the latest,
that the goods are ready for loading.
The Seller shall notify the Buyer by fax or telex within 48h. from the time of
delivery the following shipping details: Contract no., destination, the ship' s name,
delivery/ loading date, goods description, number of packages for each size and
quality, gross/net weight, the goods value and the number of injunctions from
Navlomar (the forwarding agent of the Seller).
The delivery of the goods is considered to be effected in accordance with the
instructions of Navlomar -Forwarding Co.-Bucharest, received from their
correspondent at the port of unloading. Should the Seller fail to deliver the goods
on board of the vessel on the advised position all expenses resulted from the
(demurrage, ship' s detention, dead freight, warehousing,
additional handling etc.) shall be on the Seller' s account.
The Buyer shall notify by fax or telex 7 days before the vessel' s arrival and the
final notification shall be 24 hours before the vessel's arrival.
In the event of failure to notify or of a delay in the vessel' s arrival as against the
notified time, the Seller is entitled to extend the time of delivery thereon and the
Buyer must bear all the supplementary costs and the vessel shall operate without
demurrage to be considered.

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Art. 7. Payment terms

Payment is to be made by an irrevocable documentary (DL/C) opened 15 days
from the date of the Seller' s notification by telex or fax that the goods are ready for
shipment.
The DL/C shall be valid 30 days from the day of its opening for the delivery and 45
days for the presentation of the documents.
The same time shall be applied to any amendments to the DL/C or to any increase
in its value.
The documentary L/C shall be paid at sight against the presentation of, the
following documents:
A) Commercial Invoice in duplicate in favor of UNIVERSSAL TRADE INC.,
New York;
B) The Specification of the goods delivered;
C) Packing List in duplicate;
D) B/L in 3/3 full set original, 'clean on board', 'under deck' issued to the order of...
and endorsed to the order of the Romanian Foreign Trade Bank Bucharest,
loaded in Constanza Port, freight prepaid (B/L and C/P allowed; transhipments
allowed; partial deliveries not allowed);
E) Certificate of Quality in copy issued by the Producer.
F) Export License in photocopy or in duplicate/ the Seller' s Statement in the
Commercial Invoice that no Export License is needed;
G) The Seller' s confirmation certifying that at the date of loading a duplicate of the
Invoice and of the Certificate of Quality were airmailed to the Buyer;
H) Fax or telex notification in copy within 48 hours from the date of shipment,
according to art.6 above mentioned.
The bank charges for opening and utilizing the Dl/C shall be on the Buyer' s
account.
The Buyer shall bear the costs incurred in amending the DL/C only if the delay has
been caused by an erroneous opening or because of an increase in the DL/C value.
All other terms shall be as to ICC Brochure 500/1993, cone. DL/C.

International Trade

Art. 8. Reception
The Quantitative and Qualitative reception of the goods is to be made in maximum
5 days as from the date of the goods arrival at the Buyer, according to the Contract:
a) Reception as to quantity shall be made by weighing and stated in a Statement of
Delivery/ Reception; all findings certificates of weighing or shortages shall be
ascertained by the Buyer' s and Seller representatives;
b) Reception as to quality shall be made by a Control Certificate issued by a neutral
organization.
The Quality check is to be made according to the quality clause stipulated in the
Contract.
The goods or that part of goods found as unsuitable delivery on qualitative
reception shall be at the Seller' s disposal in maximum seven days as from the date
of Reception at the latter' s expense, or those goods can be made use of but only
with the Seller' s consent.
The a/m delay can be extended by the agreement of both sides.
Art. 9. Claims
The Claims can be filed by the Buyer against the Seller as follows:
a) Quantitative claims- within 15 days as from the date the goods will have been
received at final destination under the statement stipulated in the Art.6.a.
b) Qualitative claims- within 30 days as from the date of the goods arrival at the
final destination under the control certificate issued by a neutral organization,
according to Art.6.a.
c) In the event of quality deficiencies caused by hidden vices during the normal
period of utilization, the claims are to be filed within 15 days from their appearance
and shall be supported by one of the following documents issued by an authorized
organization;
Inspection Certificate, Control Certificate or Analysis Bulletin, photos, and
samples as required. Within 15 days from the date the claim has been received, the
Seller has the obligation to notify his point of view, his opinion against the claim
filed by the Buyer.
Within the same period, the Seller will choose to inform if he wants to see the
goods claimed, and in this case, the inspection shall be made within the reasonable
period the goods are kept at his disposal.
The time allowed for the settlement of claims is 30 days from the date they have
been filed, and will consist either in guaranteeing a discount in the value of the
goods claimed, in replacing the defective goods or in reimbursing the counter value
of the short shipment. Or in other manner, if agreed upon.

International Trade

If the Buyer fails to notify the Seller of the selected claim within a period under the
Contract, shall be entitled to claim as in the case of a non-fundamental breach of
the Contract.
In addition to the settlement of the claims already stipulated, the Buyer shall be
entitled to compensation for damage and to penalties.
Art. 10. Penalties
The parties have agreed upon the following penalties to be applied in the event of
failure in observing the obligations set forth hereinafter.
- In the event of considerable quantitative/ qualitative claims, in addition to
discount or replacement of the goods claimed, the Seller undertakes to pay
penalties for non-delivery in due course of time in the percentage agreed under
the Contract for any delays in delivery.
The penalties shall be calculated from the date of delivery according to the
Contract until the discount has been granted or the goods have been replaced.
- For delays in delivery the following penalties are calculated and written of the
amounts which were to be paid to the Seller:
- For the first 15 days 0.05% per day,
- For the following 15 days 0.08% per day;
- For delays over 30 days 0.12% per day.
The- penalties are calculated on the value of the late shipments and are irreducible.
For delays over 30 days the Buyer is entitled to call off the non-delivered goods
and ask for damages from the Seller.
- For failure to deliver the Quality Certificates according to the Contract
provisions/the seller shall pay the same penalties required for late deliveries.
At the Buyer' s first request such penalties shall be paid by the Seller or they are to
be written off any amounts owed by the Buyer to the Seller. However this clause
does not rule out total coverage of the damage occurred to the Buyer.
Art. 11. Force Majeure
a)

Force Majeure represents all facts and/ or circumstances beyond the control of
that side who invokes Force Majeure, and they are un for thought, un
removable and they arise after the Contract has been concluded; thus
preventing or delaying totally or partially the fulfillment of the obligations
deriving from this Contract (casualties, energy penury, fire, floods, civil
commotion, governmental acts, natural phenomena, wars, revolutions, delays
in transportation etc.).

International Trade

b) Should any circumstances arise which could be considered as Force Majeure

and which prevent or delay entirely or partially the fulfillment of the Contract
provisions, the side affected shall be released from any liability of the period
such circumstances last.
c)

Either party shall make every effort to cut as much as possible the delays
caused by Force Majeure.

d) The party for whom it became impossible to meet his obligation under this
Contract, shall immediately advise the other party thereof by telex or fax,
following which, within 5 days he is to notify the other party by a registered
letter about the
e)

Circumstances qualified as Force Majeure, at the same time, sending out a

Certificate issued by the Chamber of Commerce or by any other competent
authority which shall be sufficient proof of such circumstances and their
duration.

f)

The same procedure and manner of notification is also applied for the
termination of such circumstances as Force Majeure within the stated period, is
held liable for the prejudices caused to the other party.

g) When receiving the a/m notification and confirmation, the two parties are to
consult each other and agree within 15 days, upon the actions and
arrangements to be made in the interests of both parties, in order to prevent the
effects of such circumstance considered as Force Majeure.
h) In the event that Force Majeure was rightly notified and well grounded to the
other party, the rights and obligations of both parties would be extended for a
period equal to that during which such circumstances lasted.
i)

Should the parties fail to come to an agreement within 30 days from the
notification of the Force Majeure the advised party is entitled to call off the
Contract by registered letter, no formality whatsoever, is considered.

j)

The parties will establish the consequences of the Contract's cancellation as to

their will and/ or the legal provisions that govern the Contract.

k) For any delay and/ or non fulfillment of the obligations by either party to The
Contract as an aftermath of the Force Majeure notified and Justified
accordingly, neither of the parties has the right to make a demand upon the
other party for penalties, interests and compensation of any possible damages.
l)

Force Majeure circumstances shall not release either party from its liability to
make payments for the goods supplied and services rendered by such time of
Force Majeure occurrence.

International Trade

Art. 13. Other Terms

a)

The Seller must provide at his own expense the Export License (if needed) to
allow him to fulfill on time and in good order and condition, his contractual
obligations to avoid the payment of any damage.

b) The Contract can be amended in writing before or during its carrying on with
the agreement of both parties;
c)

The Buyer has the right to reexport the goods that are the object of the present
Contract.

d) This Contract takes effect and is enforceable only upon its confirmation by the
Buyer within 15days from the date of its signature.
e)

The negotiations and correspondence prior of the date of signing this Contract,
and contrary to its provisions are null and void,

f)

The correspondence between the parties to this Contract, following its

conclusion will be uncharged in the language used in the Contract or, in
special cases, in a language widely used in the international trade.

g) The present Contract has been concluded in three copies equally valid in
Bucharest, Romania.
Seller

Buyer

International Trade

LOAN AGREEMENT
(Agreement No..)
This loan agreement is made on the 19th of December, 200_ between TOMEN
CORPORATION, a company duly organised and existing under the laws of Japan
having its principal office at 14-27, Alaska 2-chome, Minato-ku, Tokyo 107 Japan
(hereinafter referred to as Lender) and TOMEN TELECOM PROJECT
(ROMANIA) CO., SRL., a company duly organised and existing under the laws of
Romania having its principal office at Diplomat Hotel Apt. 401, St Sevastopol
14-17, Sector 1, Bucharest, Romania (hereinafter referred to as Borrower).
Wherwas, the Lender has agreed to make available to the Borrower loans up to a
maximum amount of equivalent amount in Japanese Yen to US Dollars 7,530,000upon the terms and conditions of this Agreement.
Now it is hereby agreed as follows:
Section 1. Definitions:
For the purpose of this Agreement, the following expressions have the meanings
set forth below:
(a) Commitment: the obligation of the Lender to make loans fixed in Japanese
Yen to the Borrower pursuant to Section 2 hereof and the amount of the
Commitments shall mean aggregate amount which the Lender is obliged to
advance hereunder;
(b)Effective Date: the date of this Agreement;
(c) Rate of Exchange: Applicable rate of exchange shall be determined by the
Lender at the ;
Section 2. The Loans:
2.1. Subject to the terms and conditions of this Agreement, the Lender agrees from
and after the Effective Date down to and including December 5, 2006 to make
advance in US Dollars or in any other agreed currency to the Borrower by the
way of loan up to but not exceeding the amount of Commitments.
2.2. The Borrower may draw any portion of the amount of the Commitments at any
time, provided that in the event that the Borrower has not borrowed hereunder
the whole amount of Commitments on or before December 5, 2006, any
unused portion of the Commitments shall forthwith terminate.

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2.3. The Borrower shall give at least ten business days prior authenticated telex
notice of each Borrowing Date (each of which shall be Working Date) and
confirmation of the amount in Japanese Yen advanced by the Lender shall be
determined by the Lender within ten days after Borrowing Date.
2.4. The Borrower shall reply each Loan in Japanese Yen not later than June 5,
2007 at latest. The Borrower shall be entitled to prepay the whole of any Loan
at any time subject to availability of cash at the Borrower and prior mutual
agreement.
2.5. Interest and Commitment fee shall not be applicable.
Section 3. Interest:
3.1. The Interest rate shall be the rate of zero percent.
Section 4. Convenience:
4.1. The Borrower convenience and agrees that from and after the Effective Date
and so long as any amount payable or repayable hereunder remains
outstanding.
(a) The purpose of Loan is to invest the borrowed amount to MobilROM S.A., to
pay corresponding expenses related to the investment or any other purpose
separately agreed between the parties.
Section 5. Miscellaneous
5.1. The Borrower agrees to indemnify and hold harmless the Lender from any
present or future claim or liability for any stamp or any other similar taxes
(including without limitation, any interest equalisation tax) and any penalties
or interest.
5.2. This Agreement shall be deemed to be a contract under, and this Agreement
and the rights of the parties hereunder shall be governed by, and construed and
interpreted in accordance with the laws of Japan.
5.3. The Borrower hereby submits to the non-exclusive jurisdiction of the
In witness, the parties hereto have executed this Agreement in two originals for
each party on the date first above written.
TOMEN CORPORATION
General Manager
Communications&Projects
TOMEN TELECOM PROJECT
(ROMANIA) CO., SRL.

International Trade

ANNEX No 2
INCOTERMS6 Transport obligations, costs and risks
TERMS
EXW
Ex Works
(named place)

TRANSPORT

COST TRANSFER

RISK TRANSFER

ANY

Cost transfer from the

seller to the buyer when
the goods are at the
disposal of the buyer

Risk transfer from the

seller to the buyer when
the goods are at the
disposal of the buyer

ANY

Cost transfer from the

seller to the buyer when
the goods have been
delivered to the carrier
of the named place

Risk transfer from the

seller to the buyer when
the goods have been
delivered to the carrier at
the named place.

Sea or Inland
Waterway

Cost transfer from the

seller to the buyer when
the goods have been
placed alongside the
ship.

Risk transfer from the

seller to the buyer when
the goods have been
placed alongside the
ship

Sea or Inland
Waterway

Cost transfer from the

seller to the buyer when
the goods pass the ships
rail

Risk transfer from the

seller to the buyer when
the goods pass the ships
rail.

Note: Carriage to
be arranged by
the buyer
FCA
Free Carrier
(named place)
Note: Carriage to
be arranged by
the buyer or by
the seller on the
buyers behalf.
FAS
Free Alongside
Ship (named port
of shipment)
Note: Carriage. to
be arranged by
the buyer
FOB
Free on Board
(named port of
shipment)
Note: Carriage. to
be arranged by
the buyer

ICC Publication No. 614/2000

International Trade
Sea or Inland
Waterway

Cost transfer at port of

destination, buyer
paying such costs as are
not for the sellers
account under the
contract of carriage.

Risk transfer from the

seller to the buyer when
the goods pass the ships
rail.

Sea or Inland
Waterway

Cost transfer at port of

destination, buyer
paying such costs as are
not for the sellers
account under the
contract of carriage

Risk transfer from the

seller to the buyer when
the goods pass the ships
rail.

ANY

Cost transfer at place of

destination, buyer
paying such costs as are
not for the sellers
account under the
contract of carriage

Risk transfer from the

seller to the buyer when
the goods have been
delivered to the carrier

CIP
Carriage and
Insurance Paid
to (named place
of destination)
Note: Carriage
and insurance to
be arranged by
the seller

ANY

Cost transfer at place of

destination, the buyer
paying such costs as are
not for the sellers
account under the
contract of carriage

Risk transfer from the

seller to the buyer when
the goods have been
delivered to the carrier.

DAF
Delivered at
Frontier (named
place)
Note: Carriage. to
be arranged by
the seller

ANY

Cost transfer from the

seller to the buyer when
the goods have been
delivered at the frontier

Risk transfer from the

seller to the buyer when
the goods have been
delivered at the frontier.

CFR
Cost and Freight
(named port of
destination)
Note: Carriage. to
be arranged by
the seller
CIF
Cost Insurance
and Freight
(named port of
destination)
Note: Carriage.
and insurance to
be arranged by
the seller
CPT
Carriage Paid To
(named place of
destination)
Note: Carriage. to
be arranged by
the seller

International Trade
DES
Delivered Ex
Ship (..named
port of
destination)
Note: Carriage. to
be arranged by
the seller

Sea or Inland
Waterway

Cost transfer from the

seller to the buyer when
the goods are placed at
the disposal of the buyer
on board the ship.

Risk transfer from the

seller to the buyer when
the goods are placed at
the disposal of the buyer
on board the ship.

DEQ
Delivered Ex
Quay (named
port of
destination)
Note: Carriage to
be arranged by
the seller

Sea or Inland
Waterway

Cost transfer from the

seller to the buyer when
the goods are placed at
the disposal of the buyer
on the quay

Risk transfer from the

seller to the buyer when
the goods are placed at
the disposal of the buyer
on the quay.

DDU
Delivered Duty
Unpaid
(named place of
destination)
Note: Carriage to
be arranged by
the seller

ANY

Cost transfer from the

seller to the buyer when
the goods are placed at
the disposal of the
buyer.

Risk transfer from the

seller to the buyer when
the goods are placed at
the disposal of the
buyer.

DDP
Delivered Duty
Paid (named
place of
destination)
Note: Carriage to
be arranged by
the seller

ANY

Cost transfer from the

seller to the buyer when
the goods are placed at
the disposal of the buyer

Risk transfer from the

seller to the buyer when
the goods are placed at
the disposal of the
buyer.

International Trade

ANNEX No 3

trase in

Cod fiscal

exemplare

stipulata

Adresa

Adresa
Cod fiscal

Semnatura tragatorului

Cont nr.
Deschis la

ANNEX No 4

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ANNEX No 5

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ANNEX No 6

International Trade
ANNEX No 7

International Trade

ANNEX No 8

Methods of Payment or Settlement

METHODS
OF PAYMENT
OR SETTLEMENT

Objectives:
After studying this chapter you should be able to understand:
4.1

Advance payment

4.2

Open account

4.3

Documentary collections

Methods of Payment or Settlement

Some of the inherent risks involved in the settlement process can be reduced
or eliminated depending upon the method of payment selected. Therefore it
is necessary for the exporter and importer to agree upon the methods of
payment and incorporate the details in the contract of sale.
There are four main Terms of Settlement in the international trade1:
1. Advance payment;
2. Open account;
3. Bill of collection/ Documentary collections;
4. Letter of credit.
4.1 Advance payment
Under this term of settlement the importer will pay to the exporter the goods
before the exporter delivers them.
Although full payment in advance is obviously most desirable for the
exporter, he will only be able to obtain such terms when there is a sellers
market, or occasionally when such terms are customary in that particular
trade.
In fact, this is a credit granted by the importer to the exporter. Being a
credit, the importer can ask the exporter the payment of an interest. This
term is very useful for the exporter.
It is quite common for a sale contract to require partial payments in
advance; for example the contract could stipulate, say, 20% payable on the
signing of the contract with the remaining 80% payable after dispatch of the
goods under one of the other means of payment.
The risks of the exporter: the goods received can be specialized goods and if
the importer cancels the order before the payment is made, the exporter
cannot sell these goods easily.

Davies Audrey & Kearns Martin Banking Operations, Pitman Publishing, London
1992, p.20

Methods of Payment or Settlement

The risks of the importer:

sometimes the exporter does not send the goods;

the documents can be wrong;

the goods are sent with a delay or to a wrong destination.

This method of settlement is used between old partners with a long business
relationship. Another method of advance payment can be the following:
30% of the value in advance and 70% of the value will be paid upon
delivery.
Advantages to the importer:
few arrangements have to be made other than ensuring that funds are
available to meet payments when they are due;
the importer has the control over the timing of settlement and the
method by which funds are remitted;
inspection of the goods is usually possible before payment is made.
4.2 Open account
When a buyer and a seller agree to deal an open account term, it means that
the seller will dispatch his goods to the buyer and will also send an invoice
requesting payment. The seller loses control of the goods as soon as he
dispatches them. He trusts that the buyer will pay in accordance with the
invoice.

1) contract
Exporter
Importer
2) goods shipped and documents sent direct
3) payment at agreed future date, via banking system

Methods of Payment or Settlement

Open account is the simplest method of settlement. However, because the

exporter is delivering the goods without payment or some other absolute
means of insuring that payment is received, this method presents the
greatest risk.
Despite all of this, the majority of international trade transactions continue
to be settled this way. Open account settlements have some advantages that
make them attractive, for both the exporter and the importer, but there are
disadvantages also.
The list of advantages and disadvantages that follows, for open account or
other means of settlement, is not by any means exhaustive, but should be
seen in the context of the needs of the two parties involved: importer and
exporter.
The exporter requires payment, protection of the goods until they are paid
and perhaps, financial assistance in the intervening period. The importer
wants the goods to be delivered on time at the right place and of the correct
quality and perhaps, with a period of credit.
Advantages to the exporter:
1. because this method of settlement tends to be used when there is a long
standing relationship between the seller and the buyer, the open account
balance is settled on a monthly or quarterly basis and transactions can be
dealt within very much the same way as the domestic trade;
2. subject to any contract with the buyer, there are less constraints on
documentation, timing of shipments and places of dispatch that make
this method more feasible;
3. as only the settlement payments pass through the banking system, the
exporter incurs no charges.
Disadvantages to the exporter:
1. there is no guarantee of payment and control if the goods are lost;
2. the exporter is exposed to political, economic and country risks unless
other steps are taken to cover these risks;

Methods of Payment or Settlement

3. because, often there is no specific constraint on the timing of the

payments, it is very difficult to control the cash flow;
4. there is a possibility that delays in the banking system will delay the
transfer of funds;
5. when received, payment can be in the form of a foreign cheque that will
have to be negotiated or collected, causing further delay;
6. greater debtor control may be required in the form of the maintenance
of a sealed ledger and sending out statements and reminders of payment
due.
One method by which the exporter can reduce the risk of non-payment is
relevant here and that is the use of advance payments, which involve the
buyer being persuaded to provide part or the entire payment before
receiving the goods.
Advantages to the importer:
1. the importer retains control over the timing of settlement and the method
by which funds are remitted;
2. inspection of the goods is usually possible before payment is made.
Disadvantages to the importer:
1. the importer has little control over shipment details and the timing of the
receipt of the goods;
2. there is no control over the quality of the goods. If special documents
(certificates of origin) are required, there is no guarantee that these will
be received.

Methods of Payment or Settlement

4.3 Documentary collections

Parties to a documentary collection are:

-

the principal (exporter). This is the customer who entrusts the

operation of collection to his bank;

the remitting bank, or the exporters bank. This is the bank to which
the principal entrusts the operation of collection;

the collecting bank, or the importers bank. This is the bank involved in
processing the collection order;

the presenting bank is the collecting bank which makes presentation to

the drawee;

the drawer (importer). This is the one to whom presentation the

payment is to be made according to the collection order.

Under the provisions of the Uniform Rules for Collection, the handling of
documents by banks or instructions received in order to:
-

obtain acceptance and/or, as the case maybe, payment, or

Methods of Payment or Settlement

deliver commercial documents against acceptance and/or, as the case

maybe, against payment, or

deliver documents on the other terms and conditions.

This method of settlement2 provides some comfort to the exporter, who will
ship the goods and then arrange for the documents of title and collection
instructions to be sent by the exporters own bank (remitting bank) to a
correspondent bank (the collecting bank) in the importers country. The
documents may include a bill of exchange drawn by the exporter on the
importer for the amount of the invoice and payable at sight or at a fixed or
future determinable time (under British law).
The documents of title are usually sent via the following route:
(a) The exporter ships the goods and obtains documents of title;
(b) The exporter sends documents of title to his bank with appropriate
instructions;
(c) The exporters bank sends documents of title to the importers bank with
the instruction that the documents can only be released:
(i) on payment; or
(ii) on acceptance of the bill of exchange.
(d) On payment or acceptance of the bill of exchange, the importers bank
releases the documents of title so that the importer can obtain the goods
on their arrival in his country.
It can be seen that the exporter retains control over the goods under this
method until either payment is made, or a legally binding undertaking to
pay is given.
Where the Bill of Exchange is not accompanied by documents, these having
been sent to the importer, the transaction is known as a clean collection. The
collecting bank will be instructed to release the documents and, therefore,
title to the goods, to the importer against payment (D/P) or acceptance
(D/A) of the bill of exchange. Payment or the accepted Bill of Exchange

Negru Mariana Mijloace i modaliti de plat internaionale, Editura Academiei,

Bucureti, 1986, p. 45

Methods of Payment or Settlement

will be sent to the remitting bank that will, in the latter case, present it for
payment on the maturity date.
As a conclusion, it should be mentioned that the documentary collection is a
form of making payment and ensuring payment through banks, and the
documents involved in the carrying out the transactions will be delivered on
certain terms and conditions.
As you have already seen, the documentary collection transactions are
handled on the basis of the following documents:
- Documents against Payment (D/P). The exporter takes the goods for
shipment and the collecting bank may only deliver the documents to the
importer in exchange of his immediate payment (at sight). Or
-

Documents against Acceptance (D/A). The exporter takes the goods for
shipment and the collecting bank may only deliver the documents
against acceptance of a draft issued by the drawee (importer).

There is a code of practices and procedures governing the terms used and
the procedures to be followed by all parties involved in documentary
collections. It was drawn up by the International Chamber of Commerce and
is known as Uniform Rules for Collections No. 522. The rules cover the
liabilities and responsibilities of the parties, and such things as presentation,
payment, acceptance, promissory note, receipts and other instruments,
protest, case of need and protection of goods, advice of fate, interest charges
and expenses. The Uniform Rules for Collections (URC see Annex No.1)
form an internationally accepted code of practice covering documentary
collections. The Rules are not incorporated in national or international law,
but become binding on all parties because all bank authorities will state that
the collection is subject to the Uniform Rules for Collections.
Summary of the provisions of the Uniform Rules for Collections:
(a) The four main parties to a documentary collection are:
(i)

the principal, i.e. the exporter;

(ii)

the remitting bank. This is the bank to which the principal

entrusts the collection order. This is normally the exporters own
bank.

(iii)

the collecting bank. This is any bank other than the remitting
bank which is involved with the collection. Normally this will be
a bank in the importers country.

Methods of Payment or Settlement

(iv)

the presenting bank. This is the bank which notifies the drawee
of the arrival of the collection and which requests payment or
acceptance from him or her. The collecting and presenting bank
will normally be the same bank, but they could be different
banks.

(b) Documents are of two types:

(i)

financial documents the instruments used for the purpose of

obtaining money (e.g. bills of exchange).

(ii)

commercial documents the documents relating to goods for

which the financial documents are to secure payment (e.g.: bill
of lading, insurance document).

Clean collections represent financial documents which are not accompanied

by commercial documents.
Documentary collections represent commercial documents which may or
may not be accompanied by financial documents.
(c) Articles 1 and 2 state that banks will act in good faith and exercise
reasonable care. Banks must verify that they appear to have received the
documents which are specified in the collection order.
(d) Banks have no liability for any delay or loss caused by postal or
telex failure.
(e) Duties of the remitting bank:
-

to check the principals collection instructions;

to check that the presented documents are complete;

to pass on the principals instructions to the collecting bank/presenting

bank;

to monitor the operation collection.

(f) Duties of the presenting bank:

-

to confirm receipt of the documents;

to present the documents to the drawer in strict compliance with the

collection instructions (D/P or D/A);

Methods of Payment or Settlement

in the case of D/P, to effect payment to the remitting bank in accordance

with the latters instructions;

to notify the remitting bank that the draft has been accepted at its
maturity date, or, if requested, to return the bill to the remitting bank,

(g) etc.
Advantages to the exporter3:
1. the exporter has some measure of control over the documents and goods
unless there is no document of title and/or the goods consigned direct to
the importer or the importers agent;
2. if the exporter has to pay charges for the collection, allowance for these,
including interest, can be computed when the invoice price is calculated;
3. this method is less expensive than a documentary credit.
Disadvantages to the exporter:
1. if control is not retained through the documents of title, the exporter
relies entirely on the ability and willingness of the importer to pay;
2. if documents against acceptance (D/A) terms are granted to the importer,
control of goods is lost once the bill of exchange has been accepted.
Advantages to the importer4:
1. a period of credit can be obtained through the use of a term bill or
promissory note;
2. the exporter will normally be responsible for the charges;
3. finance can be raised using the goods as security;
4. it is more convenient and less expensive than a documentary credit.

Twells Harry Exporters checklist, a step-by-step guide to successful exporting,

National Westminster Bank, Lloyds of London Press LTD, 1992, p. 160
4
Idem

Methods of Payment or Settlement

Disadvantages to the importer:

1. payment or acceptance is required on presentation when the commercial
documents have arrived at the collecting bank and before the arrival of
the goods;
2. if the bill is accepted the importer is legally liable despite, for example,
any clauses in the contract relating to defective goods;
3. there is no guarantee that the goods will be received as ordered or on
time.

Progress Test
1. What are the main terms of settlement used in the international trade?
2. Describe the advance payment.
3. What are the risks to the exporter or importer under this term of
settlement?
4. List the advantages to the importer under advance payment term.
5. Define the open account method of settlement.
6. List the advantages and disadvantages to the exporter.
7. List the advantages and disadvantages to the importer.
8. Define and explain the documentary collection.
9. Enumerate the advantages and disadvantages to the exporter.
10. List the advantages and disadvantages to the importer.
11. An exporter and importer agree to deal on documentary collection terms.
Whose name would you expect to appear as the drawer of the draft and
whose name would you expect as drawee?
12. What are the Uniform Rules for Collections?
13. Give one example of a financial document, and two examples of
commercial documents as defined in URC.
14. Which is the most secure from an exporters point of view, D/P or D/A?

Methods of Payment or Settlement

ANNEX No 1
ICC UNIFORM RULES FOR COLLECTIONS5
A. General Provisions and Definitions
Article 1
Application of URC 522
a) The Uniform Rules for Collections, 1995 Revision, ICC Publication no.
522, shall apply to all collections as defined in Article 2 where such
rules are incorporated into the text of the collection instruction
referred to in Article 4 and are binding on all parties thereto unless
otherwise expressly agreed or contrary to the provisions of a national,
state or local law and/or regulation which cannot be departed from.
b) Banks shall have no obligation to handle either a collection or any
collection instruction or subsequent related instructions.
c) If a bank elects, for any reason, not to handle a collection or any related
instructions received by it, it must advise the party from whom it
received the collection or the instructions by telecommunication, or if
that is not possible, by other expeditious means, without delay.
Article 2
Definition of Collection
For the purpose of these Articles:
a) Collection means the handling by banks of documents as defined in
sub-Article 2(b), in accordance with instructions received, in order to:
i. obtain payment and/or acceptance, or
ii. deliver documents against payment and/or against acceptance, or
iii. deliver documents on other terms and conditions.
b) Documents means financial documents and/or commercial
documents:
i. Financial documents means bills of exchange, promissory notes,
cheques, or other similar instruments used for obtaining the payment
of money;
5

URC No. 522 published by the International Chamber of Commerce from Paris

Methods of Payment or Settlement

ii. Commercial documents means invoices, transport documents,

documents of title or other similar documents, or any other
documents whatsoever, not being financial documents.
c)

Clean collection means collection of financial documents not

accompanied by commercial documents.

d) Documentary collection means collection of:

i. Financial documents accompanied by commercial documents;
ii. Commercial documents not accompanied by financial documents;
Article 3
Parties to a Collection
a)

For the purposes of these Articles the parties thereto are:

i. the principal who is the party entrusting the handling of a
collection to a bank;
ii. the remitting bank which is the bank to which the principal has
entrusted the handling of a collection;
iii. the collecting bank which is any bank, other than the remitting
bank, involved in processing the collection;
iv. the presenting bank which is the collecting bank making
presentation to the drawee.

b) The drawee is the one to whom presentation is to be made in

accordance with the collection instruction.
B. Form and Structure of Collections
Article 4
Collection Instruction
a) i. All documents sent for collection must be accompanied by a
collection instruction indicating that the collection is subject to URC
522 and giving complete and precise instructions. Banks are only
permitted to act upon the instructions given in such collection
instruction, and in accordance with these Rules.
ii. Banks will not examine documents in order to obtain instructions.

Methods of Payment or Settlement

iii. Unless otherwise authorized in the collection instruction, banks will

disregard any instructions from any party/bank other than the
party/bank from whom they received the collection.
b) A collection instruction should contain the following items of
information as appropriate:
i. Details of the bank from which the collection was received including
full name, postal and SWIFT addresses, telex, telephone, facsimile
numbers and reference.
ii. Details of the principal including full name, postal address, and if
applicable telex, telephone and facsimile numbers.
iii. Details of the drawee including full name, postal address, or the
domicile at which presentation is to be made and if applicable telex,
telephone and facsimile numbers.
iv. Details of the presenting bank, if any, including full name, postal
address, and if applicable telex, telephone and facsimile numbers.
v. Amount(s) and currency(ies) to be collected.
vi. List of documents enclosed and the numerical count of each
document.
vii.

a. Terms and conditions

acceptance is to be obtained.

upon

which

payment

and/or

b. Terms of delivery of documents against:

1) Payment and/or acceptance
2) Other terms and conditions
It is the responsibility of the party preparing the collection
instruction to ensure that the terms for the delivery of documents
are clearly and unambiguously stated; otherwise banks will not be
responsible for any consequences arising there from.
viii. Charges to be collected, indicating whether they may be waived or
not.
ix.

Interest to be collected, if applicable, indicating whether it may be

waived or not, including:
a. rate of interest

Methods of Payment or Settlement

b. interest period
c. basis of calculation (for example 360 or 365 days in a year)
as applicable.

c)

x.

Method of payment and form of payment advice.

xi.

Instructions in case of non-payment, non-acceptance and/or noncompliance with other instructions.

i. Collection instructions should bear the complete address of the

drawee or of the domicile at which the presentation is to be made. If the
address is incomplete or incorrect, the collecting bank may, without any
liability or responsibility on its part, endeavor to ascertain the proper
address.
ii. The collecting bank will not be liable or responsible for any ensuing
delay as a result of an incomplete/incorrect address being provided.

C. Form of Presentation
Article 5
Presentation
a) For the purposes of these Articles, presentation is the procedure
whereby the presenting bank makes the documents available to the
drawee as instructed.
b) The collection instruction should state the exact period of time within
which any action is to be taken by the drawee.
Expressions such as first, prompt, immediate, and the like should
not be used in connection with presentation or with reference to any
period of time within which documents have to be taken up or for any
other action that is to be taken by the drawee. If such terms are used,
banks will disregard them.
c) Documents are to be presented to the drawee in the form in which they
are received, except that banks are authorized to affix any necessary
stamps, at the expense of the party from whom they received the
collection unless otherwise instructed, and to make any necessary
endorsements or place any rubber stamps or other identifying marks or
symbols customary to or required for the collection operation.

Methods of Payment or Settlement

d) For the purpose of giving effect to the instructions of the principal, the
remitting bank will utilize the bank nominated by the principal as the
collecting bank. In the absence of such nomination, the remitting bank
will utilize any bank of its own, or another banks choice in the country
of payment or acceptance or in the country where other terms and
conditions have to be compiled with.
e) The documents and collection instruction may be sent directly by the
remitting bank to the collecting bank or through another bank as
intermediary.
f) If the remitting bank does not nominate a specific presenting bank, the
collecting bank may utilize a presenting bank of its choice.
Article 6
Sight/Acceptance
In the case of documents payable at sight, the presenting bank must make
presentation for payment without delay.
In the case of documents payable at a tenor other than sight, the presenting
bank must, where acceptance is called for, make presentation for acceptance
without delay, and where payment is called for, make presentation for
payment not later than the appropriate maturity date.
Article 7
Release of Commercial Documents
Documents Against Acceptance (D/A) vs. Documents Against Payment
(D/P)
a)

Collections should not contain bills of exchange payable at a future date

with instructions that commercial documents are to be delivered against
payment.

b) If a collection contains a bill of exchange payable at a future date, the

collection instruction should state whether the commercial documents
are to be released to the drawee against acceptance (D/A) or against
payment (D/P).

Methods of Payment or Settlement

In the absence of such statement, commercial documents will be

released only against payment and the collecting bank will not be
responsible for any consequences arising out of any delay in the
delivery of documents.
c)

If a collection contains a bill of exchange payable at a future date and

the collection instruction indicates that commercial documents are to be
released against payment, documents will be released only against such
payment and the collecting bank will not be responsible for any
consequences arising out of any delay in the delivery of documents.

Article 8
Creation of Documents
Where the remitting bank instructs that either the collecting bank or the
drawee is to create documents (bills of exchange, promissory notes, trust
receipts, letters of undertaking or other documents) that where not included
in the collection, the form and wording of such documents shall be provided
by the remitting bank, otherwise the collecting bank shall not be liable or
responsible for the form and wording of any such document provided by the
collecting bank and/or the drawee.
D. Liabilities and Responsibilities
Article 9
Good Faith and Reasonable Care
Banks will act in good faith and exercise reasonable care.
Article 10
Documents vs. Goods/Services/Performances
a)

Goods should not be dispatched directly to the address of a bank or

consigned to or to the order of a bank without prior agreement on the
part of that bank.
Nevertheless, in the event that goods are dispatched directly to the
address of a bank or consigned to or to the order of a bank for release to
a drawee against payment or acceptance or upon other terms and

Methods of Payment or Settlement

conditions without prior agreement on the part of that bank, such bank
shall have no obligation to take delivery of the goods, which remain at
the risk and responsibility of the party dispatching the goods.
b) Banks have no obligation to take any action in respect of the goods to
which a documentary collection relates, including storage and insurance
of the goods even when specific instructions are given to do so. Banks
will only take such action if, when, and to the extent that they agree to
do so in each case. Notwithstanding the provisions of sub-Article 1(c),
this rule applies even in the absence of any specific advice to this effect
by the collecting bank.
c)

Nevertheless, in the case that banks take action for the protection of the
goods, whether instructed or not, they assume no liability or
responsibility with regard to the fate and/or condition of the goods
and/or for any acts and/or omissions on the part of any third parties
entrusted with the custody and/or protection of the goods. However, the
collecting bank must advise without delay the bank from which the
collection instruction was received of any such action taken.

d) Any charges and/or expenses incurred by banks in connection with any

action taken to protect the goods will be for the account of the party
from whom they received the collection.
e)

i. Notwithstanding the provisions of sub-Article 10(a), where the

goods are consigned to or to the order of the collecting bank and the
drawee has honored the collection by payment, acceptance or other
terms and conditions, and the collecting bank arranges for the release of
the goods, the remitting bank shall be deemed to have authorized the
collecting bank to do so.
ii. Where a collecting bank on the instructions of the remitting bank or
in terms of sub-Article 10(e) i, arranges for the release of the goods, the
remitting bank shall indemnify such collecting bank for all damages and
expenses incurred.

Methods of Payment or Settlement

Article 11
Disclaimer for Acts of an Instructed Party
a)

Banks utilizing the services of another bank or other banks for the
purpose of giving effect to the instructions of the principal do so for the
account and at the risk of such principal.

b) Banks assume no liability or responsibility should the instructions they

transmit not be carried out, even if they have themselves taken the
initiative in the choice of such other bank(s).
c)

A party instructing another party to perform services shall be bound by

and liable to indemnify the instructed party against all obligations and
responsibilities imposed by foreign laws and usage.

Article 12
Disclaimer on Documents Received
a) Banks must determine that the documents received appear to be as
listed in the collection instruction and must advise by
telecommunication or, if that is not possible, by other expeditious
means, without delay, the party from whom the collection instruction
was received of any documents missing, or found to be other than
listed.
Banks have no further obligation in this respect.
b) If the documents do not appear to be listed, the remitting bank shall be
precluded from disputing the type and number of documents received
by the collecting bank.
c)

Subject to sub-Article 5(c) and sub-Articles 12(a) and 12(b) above,

banks will present documents as received without further examination.

Article 13
Disclaimer on Effectiveness of Documents
Banks assume no liability or responsibility for the form, sufficiency,
accuracy, genuineness, falsification or legal effect of any document(s), or
for the general and/or particular conditions stipulated in the document(s) or
superimposed thereon; nor do they assume any liability r responsibility for

Methods of Payment or Settlement

the description, quantity, weight, quality, condition, packing, delivery, value

or existence of the goods represented by any document(s), or for the good
faith or acts and/or omissions, solvency, performance or standing of the
consignors, the carriers, the forwarders, the consignees or the insurers of the
goods, or any other person whomsoever.
Article 14
Disclaimer on Delays, Loss in Transit and Translation
a)

Banks assume no liability or responsibility for the consequences arising

out of delay and/or loss in transit of any message(s), letter(s) or
document(s), or for delay, mutilation or other error(s) arising in
transmission of any telecommunication or for error(s) in translation
and/or interpretation of technical terms.

b) Banks will not be liable or responsible for any delays resulting from the
need to obtain clarification of any instructions received.
Article 15
Force Majeure
Banks assume no liability or responsibility for consequences arising out of
the interruption of their business by Acts of God, riots, civil commotions,
insurrections, wars, or any other causes beyond their control or by strikes or
lockouts.
E. Payment
Article 16
Payment without Delay
a) Amounts collected (less charges and/or disbursements and/or expenses
where applicable) must be made available without delay to the party
from whom the collection instruction was received in accordance with
the terms and conditions of the collection instruction.
b) Notwithstanding the provisions of sub-Article 1(c) and unless otherwise
agreed, the collecting bank will affect payment of the amount collected
in favor of the remitting bank only.

Methods of Payment or Settlement

Article 17
Payment in Local Currency
In the case of documents payable in the currency of the country of payment
(local currency), the presenting bank must, unless otherwise instructed in
the collection instruction, release the documents to the drawee against
payment in local currency only if such currency is immediately available for
disposal in the manner specified in the collection instruction.
Article 18
Payment in Foreign Currency
In the case of documents payable in a currency other than that of the country
of payment (foreign currency), the presenting bank must, unless otherwise
instructed in the collection instruction, release the documents to the drawee
against payment in the designated foreign currency only if such foreign
currency can immediately be remitted in accordance with the instructions
given in the collection instruction.
Article 19
Partial Payments
a)

In respect of clean collections, partial payments may be accepted if and

to the extent to which and on the conditions on which partial payments
are authorized by the law in force in the place of payment. The financial
document(s) will be released to the drawee only when full payment
thereof has been received.

b) In respect of documentary collections, partial payments will only be

accepted if specifically authorized in the collection instruction.
However, unless otherwise instructed, the presenting bank will release
the documents to the drawee only after full payment has been received,
and the presenting bank will bot be responsible for any consequences
arising out of any delay in the delivery of documents.
c)

In all cases partial payments will be accepted only subject to

compliance with the provisions of either Article 17 or Article 18 as
appropriate.
Partial payment, if accepted, will be dealt with in accordance with the
provisions of Article 16.

Methods of Payment or Settlement

F. Interest, Charges and Expenses

Article 20
Interest
a) If the collection instruction specifies that interest is to be collected and
the drawee refuses to pay such interest, the presenting bank may deliver
the document(s) against payment or acceptance or on other terms and
conditions as the case may be, without collecting such interest, unless
sub-Article 20(c) applies.
b) Where such interest is to be collected, the collection instruction must
specify the rate of interest, interest period and basis of calculation.
c)

Where the collection instruction expressly states that interest may not
be waived and the drawee refuses to pay such interest the presenting
bank will not deliver documents and will not be responsible for any
consequences arising out of any delay in the delivery of document(s).
When payment of interest has been refused, the presenting bank must
inform by telecommunication or, if that is not possible, by other
expeditious means without delay the bank from which the collection
instruction was received.

Article 21
Charges and Expenses
a)

If the collection instruction specifies that collection charges and/or

expenses are to be for account of the drawee and the drawee refuses to
pay them, the presenting bank may deliver the document(s) against
payment or acceptance or on other terms and conditions as the case may
be, without collecting charges and/or expenses, unless sub-Article 21(b)
applies.
Whenever collection charges and/or expenses are so waived they will
be for the account of the party from whom the collection was received
and may be deducted from the proceeds.

b) Where the collection instruction expressly states that charges and/or

expenses may not be waived and the drawee refuses to pay such
charges and/or expenses, the presenting bank will not deliver
documents and will not be responsible for any consequences arising out

Methods of Payment or Settlement

of any delay in the delivery of document(s). When payment of

collection charges and/or expenses has been refused, the presenting
bank must inform by telecommunication or, if that is not possible, by
other expeditious means without delay the bank from which the
collection instruction was received.
c)

In all cases where in the express terms of a collection instruction or

under these Rules, disbursements and/or expenses and/or collection
charges are to be borne by the principal, the collecting bank(s) shall be
entitled to recover promptly outlays in respect of disbursements,
expenses and charges from the bank from which the collection
instruction was received, and the remitting bank shall be entitled to
recover promptly from the principal any amount so paid out by it,
together with its own disbursements, expenses and charges, regardless
of the fate of the collection.

d) Banks reserve the right to demand payment of charges and/or expenses

in advance from the party from whom the collection instruction was
received, to cover costs in attempting to carry out any instructions, and
pending receipt, of such payment also reserve the right not to carry out
such instructions.
G. Other Provisions
Article 22
Acceptance
The presenting bank is responsible for seeing that the form of the
acceptance of a bill of exchange appears to be complete and correct, but is
not responsible for the genuineness of any signature or for the authority of
any signatory to sign the acceptance.
Article 23
Promissory Notes and Other Instruments
The presenting bank is not responsible for the genuineness of any signature
or for the authority of any signatory to sign a promissory note, receipt, or
other instruments.

Methods of Payment or Settlement

Article 24
Protest
The collecting instruction should give specific instructions regarding protest
(or other legal process in lieu thereof), in the event of non-payment or nonacceptance.
In the absence of such specific instructions, the banks concerned with the
collection have no obligation to have the document(s) protested (or
subjected to other legal process in lieu thereof) for non-payment or nonacceptance.
Any charges and/or expenses incurred by banks in connection with such
protest, or other legal process, will be for the account of the party from
whom the collection instruction was received.
Article 25
Case-of-Need
If the principal nominates a representative to act as case-of-need in the event
of non-payment and/or non-acceptance the collection instruction should
clearly and fully indicate the powers of such case-of-need. In the absence of
such indication banks will not accept any instructions from the case-ofneed.
Article 26
Advices
Collecting banks are to advise fate in accordance with the following rules:
a) Form of Advice
All advices or information from the collecting bank to the bank, from
which the collection instruction was received, must bear appropriate
details including, in all cases, the latter banks reference as stated in the
collection instruction.
b) Method of Advice
It shall be the responsibility of the remitting bank to instruct the
collecting bank regarding the method by which the advices detailed in
(c)i, (c)ii and (c)iii are to be given. In the absence of such instructions,

Methods of Payment or Settlement

the collecting bank will send the relative advices by the method of its
choice at the expense of the bank from which the collection instruction
was received.
c) i. ADVICE OF PAYMENT
The collecting bank must send without delay advice of payment to
the bank from which the collection instruction was received,
detailing the amount or amounts collected, charges and/or
disbursements and/or expenses deducted, where appropriate, and
method of disposal of the funds.
ii. ADVICE OF ACCEPTANCE
The collecting bank must send without delay advice of acceptance to
the bank from which the collection instruction was received.
iii. ADVICE OF NON-PAYMENT AND/OR NON- ACCEPTANCE
The presenting bank should endeavor to ascertain the reasons for
non-payment and/or non-acceptance and advise accordingly, without
delay, the bank from which it received the collection instruction.
The presenting bank must send without delay advice of non-payment
and/or advice of non-acceptance to the bank from which it received
the collection instruction.
On receipt of such advice, the remitting bank must give appropriate
instructions as to the further handling of the documents. If such
instructions are not received by the presenting bank within 60 days
after its advice of non-payment and/or non-acceptance, the
documents may be returned to the bank from which the collection
instruction was received without any further responsibility on the
part of the presenting bank.

Documentary Credit/Letter of Credit

DOCUMENTARY
CREDIT/LETTER
OF CREDIT

D Objectives
After studying this chapter you should be able to understand:
5.1

Definition, parties to the documentary credit, and the basic steps

of making a payment by documentary credit

5.2

Types of credits

5.3

General practice points on documentary credits

5.4

General rules

5.5

Conclusions

Documentary Credit/Letter of Credit

5.1 Definition, parties to the documentary credit, and the basic steps of
making a payment by documentary credit
The requirement for the letter of credit will be included in the contract
between the exporter and the importer, and when the letter of credit is issued
it should describe the documentary requirements demanded from the
exporter.
Bankers documentary letters of credit provide a means by which an
exporter can get his money safely before the goods are received by the
importer. For the exporter this is, in fact, a guarantee of payment that is
nearly as good as getting paid in advance.
For the importer it is better than paying in advance because by specifying
the documents that the exporter must produce, the importer retains some
control over the goods. For example, inspection certificates can be requested
to try to make sure the quality of the goods is acceptable.
What is a letter of credit?
A documentary credit1 can be simply defined as a conditional guarantee of
payment made by a bank to a named beneficiary, guaranteeing that payment
will be made, provided that the terms of the credit are met. These terms will
state that the beneficiary must submit specified documents, usually to a
stated bank and by a certain date.
The letter of credit2 is a letter or other authenticated communication
addressed by one bank (at the request of its customer) to another bank
requesting the bank to whom it is addressed to make payments to (or
advance payment to) or accept or negotiate bills of exchange (drafts) to or to
the order of a third person (known as the beneficiary) either against
stipulated documents or upon condition that all the other terms and
conditions of the credit are complied with or upon the performance (or nonperformance in the case of stand-by credits) of any other act by the said
beneficiary.
1

Watson Alasdair Finance of international trade, 4th edition, The Chartered Institute of
Bankers, London, 1990
2
Aurey Davies & Martin Kearns Banking operations, Pitman Publishing, London, 1992,
p. 55.

Documentary Credit/Letter of Credit

In most banks throughout the world, documentary credits are governed by a

code of practice drawn up by the International Chamber of Commerce
Commission on Banking Techniques and Practice. The code is called The
Uniform Customs and Practice for Documentary Credits or UCP for
short. It was last revised in 1993 ICC Publication No. 500 (see Annex No.
1). Under the provisions of the "UPC, a documentary credit is defined as:
An arrangement between a customer and a bank to make payment to, or to
the order of the beneficiary,
-

or to pay or accept Bills of exchange drawn by the beneficiary,

or to authorise another bank to effect such payment, or to pay, accept,

or

negotiate such bills of exchange,

against stipulated documents, provided that the terms and conditions are
complied with3.

The general procedure is that the importers bank (issuing bank) issues at
the request of the importer (applicant) a credit in favour of the exporter
(beneficiary). The exporter may be advised directly but normally will be
advised of the credit through a bank (advising bank) in his own country.

Article 2 of UPC.

Documentary Credit/Letter of Credit

The basic steps of making a payment by documentary credit are as follows:

A contract is made between an importer in one country and an exporter
in another in which it is agreed that payment will be made by
documentary credit.
The exporter prepares the goods for export.
The importer arranges the documentary credit by applying to his bank
for a letter of credit to be issued.
The importers bank (issuing bank) draws up the letter of credit (if it
considers the importer is creditworthy) including in it the details of the
documents that the exporter will have to provide. The letter is sent to the
exporters bank.
The exporters bank (the advising bank) advises the exporter that the
letter has been received and the exporter than provides the documents to
show that the goods have been sent. By providing documents that
comply exactly with the terms of the letter of credit the exporter can be
sure of payment, guaranteed by the bank that has issued the letter of
credit. In some cases the contract between exporter and importer will
arrange for a bank in the exporters country to add its guarantee or
confirmation that payment will be made; such a bank is known as a
confirming bank.
The exporter sends the goods to the importer.
The exporter presents the documents showing that the goods have been
sent to his bank.
The exporters bank checks the documents and if they are:
A)

completely correct - payment is made to the exporter and the

documents are sent to the importers bank which will then pay back
the exporters bank;

B)

almost correct - payment can be made to the exporter after taking

an indemnity from him by which he promises to repay if the
documents are refused;

C)

incorrect - the exporter will have to get new documents or send

the wrong documents for collection, which will mean a delay in
getting paid.

Documentary Credit/Letter of Credit

If the documents are correct the importers bank will pay the exporters
bank as agreed in the letter of credit by one of the three basic methods of
payment: draft, mail transfer or urgent transfer.
The importer will receive the documents and collect the goods.
The kind of documents used in a documentary credit are generally the same
kind of documents used for collections (insurance documents, invoices and
transport documents) but a variety of other documents may also be
requested.
As you have already seen, the parties involved in the documentary credit
are:
1. The applicant. The importer or applicant is responsible for the setting
up of the credit. He will complete a bank application form (see Annex
No. 2, for Romanian specimen, or Annex No. 3 for British one) detailing
the terms and conditions the beneficiary will have to meet to obtain
payment. The terms and conditions will generally consists of:

how much is to be paid and when

a description of the goods

a list of shipping documents to be presented by the beneficiary

dates within which goods must be shipped and documents presented.

The application is the request by the applicant for the issuing bank to
undertake to pay the beneficiary on his behalf.
2. The issuing bank. This will normally be the applicants own bank.
Initially they must decide if they are prepared to issue an undertaking on
behalf of their customer. Once the credit has been issued they will have
to pay even if the applicant can not. The issuing bank will also verify the
application to make sure:
a) the terms and conditions are clear and concise;
b) that its own rules, and any exchange control rules have been
satisfied.
3. The advising bank. This is the bank, which receives details of the credit
from the issuing bank. The advising bank will check the credit for:
a) authenticity;
b) feasibility;
c) exchange control regulations.

Documentary Credit/Letter of Credit

Before passing on the beneficiary.

4. The beneficiary. This is the exporter (or seller of the goods) who
probably insisted on a credit in the first place. On receipt of the credit he
should verify that it agrees with the contract, and that he can comply
with the conditions. The beneficiary should have in his hands an
undertaking by a bank that payment will be made.
5.2 Types of credits
All types of credits should be issued as a subject matter of the Uniform
Custom Regulations of the International Chamber of Commerce.
A documentary credit: It involves payment or acceptance or negotiation
against stipulated documents, provided that the terms and conditions of the
credit are complied with.
Since over 99% of all credits handled at branch level are documentary
credits we shall talk more about these ones.
Credits are classified as either irrevocable or revocable.
A revocable credit may be cancelled or amended at any time without prior
notice being given to the beneficiary. This type of credit is rare.
Some characteristics of revocable credits:
a) A revocable credit cannot be confirmed.
b) The advising bank should advise such revocable credits to the
beneficiary with the following phrase added: Without engagement on
the part of the advising bank.
c) The issuing bank can cancel such a credit provided that, prior to receipt
of advice of amendment or cancellation of the said credit, the
beneficiary had not submitted the stipulated documents under the
credit for payment, acceptance or negotiation.
An irrevocable credit constitutes a definite undertaking by the issuing bank
to make payment without recourse. Irrevocable credits can only be amended
or cancelled with the agreement of all parties. Irrevocable credits can be
either confirmed or unconfirmed by the advising bank.

Documentary Credit/Letter of Credit

This is the most common form of letter of credit used in international

transactions, and it is defined, as constituting in Uniform Custom: a
definite undertaking of the issuing bank provided that the stipulated
documents are presented and that the terms and conditions of the credit are
complied with:
A if the credit provides for sight payment to pay;
B if the credit provides for deferred payment to pay or to provide that
the payment will be made on the date(s) determinable in accordance with
the stipulations of the credit;
C if the credit provides for acceptance to accept drafts drawn by the
beneficiary if the credit stipulates that they are to be drawn on the issuing
bank;
D if the credit provides for negotiation to pay without resource the
drawer and/or bona fide holders, drafts drawn by the beneficiary at sight or
at a tenor, on the application for the credit or on any other drawee stipulated
in the credit other than the issuing bank itself.
Characteristics of irrevocable credit:
an irrevocable credit can only be amended or cancelled with the consent
of all the parties to the credit;
once the exporter has complied with the terms and conditions of the
irrevocable credit and has submitted the stipulated documents, he will
receive payment (or acceptance) from the issuing bank;
where an irrevocable credit is routed through another bank located in the
country of the beneficiary (exporter/seller), the bank that notifies the
terms and conditions of the credit to the beneficiary is known as the
advising bank;
where an advising bank either declines confirmation or is not asked to
confirm an irrevocable credit, its role is confined to that of agent of the
Issuing Bank. Its mandate is to follow the instructions given by the
issuing bank.
Irrevocable confirmed credits
It is, as the title implies, a type of credit carrying the definite undertaking
of two banks: the definite undertaking of the opening bank and the
confirmation of the opening banks commitment by another bank known as
the confirming bank.

Documentary Credit/Letter of Credit

Therefore when an issuing bank authorises or requests another bank to

confirm its irrevocable credit and the latter does so, such confirmation
constitutes a definite undertaking of such a bank (the confirming bank) in
addition to that of the issuing bank, provided that the stipulated documents
are presented and that the terms and conditions are complied with:
A if the credit provides for sight payment to pay;
B if the credit provides for deferred payment to pay or to provide that
payment will be made on the date(s) determinable in accordance with
the stipulations of the credit;
C if the credit provides for acceptance to accept drafts drawn by the
beneficiary if the credit stipulates that they are to be drawn on the
confirming bank, or to be responsible for their acceptance and payment
at maturity if the credit stipulates that they are to be drawn on the
applicant for the credit or any other drawee stipulated in the credit;
D if the credit provides for negotiation to negotiate without recourse to
drawers and/or bona fide holders, draft(s) drawn by the beneficiary at
sight or at a tenor, on the issuing bank or on the applicant for the credit
or on any other drawee stipulated in the credit other than the confirming
bank itself.
Characteristics of irrevocable confirmed credits:
a) when an advising bank agrees to add its confirmation to an irrevocable
credit, it adds the following clause to the credit: This credit bears our
confirmation and we shall accordingly honour your drafts on us on due
presentation if accompanied by documents as stipulated by and in
compliance with the credit terms and conditions.
b) with such a confirmation, the beneficiary of the irrevocable confirmed
credit has the engagement of the banking institutions in the two
countries;
c) this type of credit is most favourable to the exporter as he is assured of
payment or eventual settlement in his own country provided that he
submits the stipulated documents and complies with all the other terms
and conditions of the credit.
d) where an advising bank, upon being asked to add its confirmation, is
unable to do so, it must so inform the issuing bank without delay.

Documentary Credit/Letter of Credit

e) amendments or cancellations of any of the terms and conditions

embodied in the irrevocable confirmed credit cannot be made without
the agreement of the issuing bank, the confirming bank and the
beneficiary.
f) partial acceptance of amendments contained in one and the same advice
of amendment is not effective without the agreement of all the above
mentioned parties.
Sight credits. These allow for payment to be made as soon as documents are
presented.
Deferred Payment Credit. This type of credit is becoming increasingly
popular. It allows for payment at a future date without calling for a Bill of
Exchange. The terms of such credit would state for instance: available
against presentation of the following documents.but payable only..days
after date of invoice. Bill of lading. Presentation date, etc4
The provisions of UCP mention some specialised credits, such as:
Transferable credit. It is one that can be transferred by the original
beneficiary to one or more second beneficiaries. It is normally used when
the first beneficiary does not supply or manufacture the goods himself, but
is a middleman and thus wishes to transfer part, or all of his rights to the
actual supplier or manufacturer. This type enables the middleman to give
the supplier an undertaking from a bank to pay, against which they would
probably be prepared to supply the goods. Without a transferable credit, a
middleman of little financial standing, would probably not be able to get a
bank to issue such an undertaking, and so the deal would probably fall
through.
This type of credit can only be transferable once, i.e. the second beneficiary
does not have the right to transfer the credit to anyone else.

Back to back credits. Under the Back to back concept, the beneficiary of
the first credit offers it as security to the advising bank for issuance of the
second credit.
4

See UCP

Documentary Credit/Letter of Credit

Red clause credits. The so-called Red clause credit incorporates a special
concession to the beneficiary allowing the advising bank to advance a
percentage of the total credit amount before presentation of shipping
documents. The clause was originally written in red ink to draw attention to
this special condition.
Revolving credit. It is one where the amount can be renewed or reinstated
without specific amendments to the credit being needed. The purpose of a
revolving credit is to replace a series of credits to the same beneficiary, and
be able to control the size of shipments at any one time.
Standby credits. This type of credit (is referred to in Articles 1 and 2 of
UCP) can be issued by a bank on behalf of a customer and in favour of an
overseas party in the same manner as an ordinary credit except that it will
not call for payment, acceptance or negotiation by it or an overseas
advising/confirming bank; instead it is payable against a simple document
(e.g. confirmation of shipment, simple receipt, etc.) and is irrevocable. This
type of credit serves to act as a guarantee by the issuing bank to the overseas
beneficiary against defaults by its applicant customer.
As you can see, the basic forms of documentary differ in respect of the
degree of security they provide for the beneficiary. Credits are further
classified into various types according to the method of settlement
employed. There are also special arrangements involving combinations of
separate credits or the assignment of credit proceeds.

Types of credit5, classified by the Credit Suisse:

5

Documentary credits-Documentary collections-Bank guarantee a guide to safer

international trade, issued by Credit Suisse Special Publications, Vol. 77

Documentary Credit/Letter of Credit

Type of credit

Method of settlement

Sight credit

Immediate payment on presentation of the

documents. The contract specifies payment in
cash.

Deferred payment credit Payment at maturity. The contract specifies

payment at a future date (without a bill of
exchange). After presentation of the
documents, the amount due under the credit
may be obtained in the form of an advance.
Acceptance credit

Payment at maturity. The contract specifies

payment at a future date (with a bill of
exchange). After presentation of the
documents, the bill can be discounted in order
to obtain the amount of the credit immediately.

Negotiation credit

The beneficiary can obtain the value of the

documents from the bank nominated as having
authority to negotiate. In a freely negotiable
credit, any bank is regarded as a nominated
bank.

Red clause credit

An advance
beneficiary.

Revolving credit

The beneficiary receives payment in fixed

instalments for goods dispatched in partshipments.

Standby credit

The credit functions as a guarantee.

Transferable credit

The credit is used to pay the beneficiarys

suppliers.

is

made

available

to

the

Special arrangements6:

Documentary credits-Documentary collections-Bank guarantee a guide to safer

international trade, issued by Credit Suisse Special Publications, Vol. 77.

Documentary Credit/Letter of Credit

Arrangement

Method of settlement

Back-to-back credit

A trader arranges for his supplier to be

paid by means of a credit issued by the
traders bank. This credit is secured by
a non-transferable credit issued in the
traders favour. The possibilities have
to be ascertained in each case.

Assignment of the proceeds of The beneficiary assigns all or part of

a credit
the proceeds of the credit to a supplier.

5.3 General practice points on documentary credits

The International Chamber of Commerce, in its last issue, has warned
customers to refrain from any of the following acts:

calling for documents which the beneficiary cannot obtain;

requiring inclusion, in a stipulated document, of particulars that are not

within the issuers knowledge;

stipulating conditions whose observance cannot be ascertained from the

face of the documents.

The following particulars must be adequately provided in the application

form7 (see Annex No. 2):

Applicants name, full postal address (including postal code, where this
available);

Date on which credit application form is filled in and submitted should

be inserted;

Date and place of expiry of the credit should be clearly inserted:

Date: all credits must stipulate an expiry date. However if the

expiry date falls on a day on which the bank to which presentation

Norms concerning the circulation of the Order of external foreign currency payment
(DPVE) and L/C Opening request (CDA) forms NRV 8, annex to the Regulation
no. 3/1997.

Documentary Credit/Letter of Credit

has to be made is closed for reasons (), the expiry date will be
extended to the first following business day on which the said bank
is open.

Place: this is interpreted to mean the city or country where the credit
is to be available.
Beneficiary: this is often, but not always, the seller of the goods. The
applicant to the credit should provide his name and full postal address
(together with postal code). Where the credit is to be teletransmitted; his
telex number, fax number or other similar details must be indicated on
the application form.
The name of the beneficiary must be spelled accurately; his address
must also be correct. (Incorrect or suspicious addresses can be a warning
signal).
Finally, the applicant would have satisfied himself as to the reliability,
standing, trustworthiness, performance ability and record of the
beneficiary to be although this is not of direct concern to the issuing
bank.
Methods of transmitting the credits:
Is the credit to be transmitted by AIR MAIL preceded by a brief
teletransmission advice?
Is the credit going to be teletransmitted by: cable, telegram, telex,
facsimile, data communication network (such as SWIFT)?
Where the teletransmission is the operative credit instrument, the
beneficiary can draw drafts and present documents under the credit and
the nominated bank can pay or accept or negotiate drafts against the
stipulated documents.

Confirmation
The parties to the sales contract must have agreed, in advance, whether
the credit is to be irrevocable or revocable and whether the irrevocable
credit should be confirmed by another bank.
Transferable:
In order to be transferable, a credit must have been expressly designated
transferable by the issuing bank.
Amount of the credit:
Like cheques, the amount of the credit must be expressed in both words
and figures.

Documentary Credit/Letter of Credit

Bank at which the credit is to be available:

A bank should always be nominated in every letter of credit, with
authority to:
pay (paying bank);
accept drafts drawn on it (accepting bank);
negotiate (negotiating bank), unless the credit allows negotiation by
any bank.

Method of payment under the credit:

A credit is to indicate clearly the way of payment. The credit applicant
should therefore indicate, on the application form, whether the credit is
to be available by sight payment, deferred payment, and acceptance or
by negotiation.
Are partial shipments to be allowed?
Partial shipments are allowed unless the credit clearly indicates
otherwise. In order to avoid any doubt, the credit applicant should write
either partial shipments allowed or partial shipments not allowed.
Are trans-shipments allowed?
The applicants attention should be drawn to the question of transshipment.
Documents required to be submitted under the credit.
The credit applicant should specify the types of documents, which must
be submitted by the beneficiary to the paying/accepting/or-negotiating
bank. The following types of documents are presented to banks in credit
operations:

A. Drafts-i.e. Bills of Exchange drawn by the beneficiary at sight or at a

tenor ( 30,60,90 or 180 days after sight);
B. Commercial invoice
Unless otherwise stipulated in the credit, Commercial invoices must be
made out in the name of applicant for the credit; furthermore, the
description of the goods in the commercial invoice must correspond
with the description of the credit.
C. Transport documents required
These will depend on the mode of transportation to be used:
By Air ( Air Consignment note or Air Waybill );

Documentary Credit/Letter of Credit

By Post (Air or Surface Mail);

By Rail(Rail waybill or Rail Consignment Note);
By Road;
By inland waterway;
By sea (marine bill of lading);
By combined transport (by both rail and sea). A combined transport
document should be called for.
A. Insurance documents to be submitted under the credit.
Insurance documents must be as stipulated in the credit and must be
issued and/or signed by insurance companies or underwriters or their
agents.
Cover notes issued by agents will not be accepted, unless specifically
authorised by the credit.
B. Other documents to be submitted under the credit:

certificate of origin;

certificate of analysis;

packing list;

weight list, etc.

Presentation period:
The credit applicants attention should be drawn to the provisions of
Uniform Custom regulations that state that every credit which calls for a
transport document should also stipulate a specified period of time after
the date of issuance of the transport document within which the
documents must be presented for payment, acceptance or negotiation.
In all cases, the documents must be presented no later than the expiry
date of the credit, even if the documents presentation period has not
expired.

Mode of settlement of indebtedness under the credit.

The credit applicant should indicate how payments, acceptances and
negotiations under the credit are to be settled. Usually, the applicant
authorizes the issuing bank to debit my/our account no. or, where

Documentary Credit/Letter of Credit

forward exchange contracts has been concluded debit my/our account

no. utilizing forward contract no. .

Signature of the credit application form.

Each credit application form should be duly signed and dated by the
applicant or his accredited officer. The reverse side of the form may
also require signing as an acknowledgement of the Conditions under
which the bank will grant the credit.

5.4 General rules

In credit operations all parties concerned deal in documents and not in
goods, services and/or other performances to which the documents may
relate.
Therefore, indeed the examination of stipulated documents is the most
important function of the branch staff of a bank charged with the task of
handling documentary credits.
Failure to keep in view the terms and conditions of the letter of credit can
result in the following discrepancies that cause unnecessary delays in
making payments under credits:
late presentation of documents, the letter of credit having expired;
late presentation of documents within the time scale laid down in the
credit even though the credit itself may not have expired;
late shipment;
the description of the goods on the invoices is not the same as that one
stated in the letter of credit.
Presentation of documents
Customers should always ensure that the credit documents are presented to
the branch office or specified department of the bank that originally advised
the credit.
Delivery of the credit documents to the wrong branch or section of the bank
could result in delays in making payments.
The presenter of the credit documents must give precise instructions
regarding the way of payment (by cheque, or Banks draft, by crediting an

Documentary Credit/Letter of Credit

account the number of the account and the branch and bank should be
provided).
Other problems that may arise in the presentation of documents are:
-

The bills of exchange (or draft) are incorrectly drawn or not endorsed.

The documents presented do not bear any relationship one to the other
and can be said to be inconsistent with one another.

When bills of lading are presented and the shipped on board notation
is not signed or even dated by an authorized official.

When airway bills (Air Consignment Note) are to be presented under

the credit, but they are not signed as agent for the carrier.

When some documents called for under the credit are missing.

When the insurance documents show an incorrect insurance value or

the risks to be insured under the credit are not covered.

Settlement procedures
Once the branch has adequately completed the examination of the stipulated
documents, the settlement may be by means of: payment, acceptance or
negotiation.
5.5 Conclusions
The two fundamental principles of documentary credit practice are:
- the independence of the credit from the underlying contract and,
-

the requirement that documents strictly comply with the terms of the
credit.

A. Independence of the documentary credit from the underlying contract.

The documentary credit is completely independent of the underlying
contract. If the exporter fulfils the documentary obligations, payment
must be effected according to the terms of the credit, regardless of
disputes connected to the underlying contract.
It is essential that all parties remain confident that issuing or confirming
banks will respect their payment commitments.
B. Strict compliance. The terms of the documentary credit must be strictly
adhered to as the doctrine of strict compliance. This means that

Documentary Credit/Letter of Credit

documents presented under the credit must conform very precisely to

the terms of the credit.
Advantages and disadvantages to the exporter and importer involved in L/C
The main advantages to the exporter are8:
dependence on the credit worthiness of an importer is replaced by
dependence on a bank.
if the credit is confirmed by a bank in the exporters country, the
exporter is no longer subject to country risk.
if the credit is an irrevocable form it cannot be cancelled without the
exporters express agreement, but notice of revocation can be rejected if
received after shipment.
the documents and therefore the goods will not be released until
payment or a commitment to payment is made.
when credit has been allowed, the Bill of Exchange will have been
accepted by a bank and can, therefore, be used to obtain finance by
discounting.
The main disadvantages to the exporter are:
the exporter has to produce the correct document, accurate in every
detail. Even small discrepancies can cause delay.
if in revocable form the credit could be cancelled between shipment and
payment.
where the advising bank does not have immediate access to
reimbursement by the issuing bank, payment may delay.
The main advantages to the importer are:
the importer can provide for stringent documentary requirements.
because the exporter is more reassured of receiving payment, the
importer may be able to negotiate better terms on the purchase of the
goods.
the importer can control the timing of the shipment and the destination.
there is reassurance that no funds will be paid unless documents of title
are received and are correct.

Aurey Davies & Martin Kearns Banking operations, Pitman Publishing, London, 1992,
p.60

Documentary Credit/Letter of Credit

protection is provided by the Uniform Customs Practice for

Documentary Credits.
The main disadvantages to the importer are:
because the banks only deal with in the documents and not the goods,
the provide no protection against poor quality, or defective or incorrect
goods.
if the credit is irrevocable, it cannot be cancelled without the consent of
the exporter.
the importer takes on the liability of the credit and remains liable
regardless of any changes in circumstances.
documentary credits can be expensive, although the importer can
attempt to pass the charges on through increased prices.
Documentary collections and documentary credits
Although there are certain similarities between documentary collections and
documentary credits there are also important differences. These are
summarized in the following table:
Collections
1. The exporter (principal) requests
the bank to handle the collection.
2. The exporter controls what banks
can do by what is included in the
collection order.
3. For the exporter, obtaining
payment depends on the importers
ability to pay.

Credits
1. The importer (applicant) requests
the bank to issue a letter of credit.
2. The importer controls what
banks can do by specifying
documents required
3. For the exporter, obtaining
payment depends on producing the
correct documents and on the credit
worthiness of the bank which has
agreed to pay.
4. For the importer, getting the 4.
For
the
importer,
the
documents usually depends on commitment to pay arises when an
paying or accepting a bill of application is made. Obtaining the
exchange.
documents requires no further
formalities.
The range of methods of settlement

You need to pay special attention to collections and documentary credits

because they are complicated, but they are only two of the possible choices

Documentary Credit/Letter of Credit

which importers and exporters can make about the payment terms for
settling a debt.
The following list shows the options, which are available. From the
exporters point of view these are shown in order of decreasing risk, the
most dangerous, first. The risk increases from an importers point of view.
1.

Consignment of goods (which means sending them abroad without

having a definite sale arranged and waiting for payments as goods are
sold).

2.

Open account trade (which means goods are sent and payment is made
at intervals).

3.

Documents sent direct to the importer with payment to be made when

they are received (which gives the exporter no control).

4.

Collections.

5.

Documentary credits.

6.

Payment in advance (which means the exporter gets his money before
sending goods, and may have a period of credit during which the
money can be used to make or purchase the goods to be exported).

Progress Test

1.

What is a letter of credit?

2.

Define a documentary credit.

3.

Give the correct names for the following parties to a documentary

credit:

a)

Importer;

b)

Importers bank;

c)

Exporters bank;

Documentary Credit/Letter of Credit

d)

Exporter.

4.

List the parties involved in the letter of credit.

5.

List and describe the basic steps in making a payment by documentary

credit.

6.

What must an exporter do to obtain payment under a documentary

credit?

7.

List the main types of credit.

8.

What is a revocable credit?

9.

What is an irrevocable credit?

10.

List the characteristics of the irrevocable credits.

11.

What is an irrevocable confirmed credit?

12.

List the characteristics of the irrevocable conformed credits.

13.

List the main particulars provided in the application form.

14.

List the documents required to be submitted under the letter of credit.

15.

List some advantages to the exporter of a documentary credit.

16.

List some advantages to the importer of a documentary credit.

17.

List some disadvantages to the exporter of a documentary credit.

18.

List some disadvantages to the importer of a documentary credit.

19.

Introduce the main differences between collections and credits.

Documentary Credit/Letter of Credit

ANNEX No 1

PUBLICATION No. 5009

A. General Provisions and Definitions
Article 1
_____________________________________________________________
________________________________________________
Application of UCP
The Uniform Customs and Practice for Documentary Credits, 1993 revision,
ICC Publication N500, shall apply to all Documentary Credits (including to
the extent to which they may be applicable, standby Letter(s) of Credit)
where they are incorporated into the text of the Credit. They are binding on
all parties thereto, unless otherwise expressly stipulated in the Credit.
Article 2
_____________________________________________________________
________________________________________________
Meaning of Credit
For the purposes of these Articles, the expressions "Documentary Credit(s)"
and "Standby Letter(s) of Credit" (hereinafter referred to as "Credit(s)"),
mean any arrangement, however named or described, whereby a bank (the
"Issuing Bank") acting at the request and on the instructions of a customer
(the "Applicant") or on its own behalf,
i. is to make a payment to or to the order of a third party (the
"Beneficiary"), or is to accept and pay bills of exchange (Draft(s))
drawn by the Beneficiary,
or
ii. authorises another bank to effect such payment, or to accept and pay
such bills of exchange (Draft(S)),
or
iii. authorises another bank to negotiate,
9

issued by the International Chamber of Commerce from Paris

Documentary Credit/Letter of Credit

against stipulated document(s), provided that the terms and conditions of the
Credit are complied with.
For the purposes of these Articles, branches of a bank in different countries
are considered another bank.
Article 3
_____________________________________________________________
_______________________________________________
Credit v. Contracts
a

Credits, by their nature, are separate transactions from the sales or

other contract(s) 0n which they may be based and banks are in no way
concerned with or bound by such contract(s), even if any reference
whatsoever to such contract(s) is included in the Credit. Consequently,
the undertaking of a bank to pay, accept and pay Draft(s) or negotiated
and/or to fulfill any other obligation under the Credit, is not subject to
claims or defenses by the Applicant resulting from his relationship
with the issuing bank or the Beneficiary.
_____________________________________________________________
________________________________________________
b

A Beneficiary can in no case avail himself of the contractual

relationship existing between the banks or between the Applicant and
the Issuing Bank.

Article 4
_____________________________________________________________
_________________________________________________
Documents v. Goods/Services/Performances
In Credit operations all parties concerned deal with documents, and not with
good, services and/or other performances to which the documents may
relate.

Documentary Credit/Letter of Credit

Article 5
_____________________________________________________________
_______________________________________________
Instructions to Issue/Amend Credits
a

Instructions for the issuance of Credit, the Credit itself, instructions for
an amendment thereto, and the amendment itself, must be complete
and precise.
In order to guard against confusion and misunderstanding, banks
should discourage any attempt:
i. to include excessive detail in the Credit or in any amendment
thereto;

ii. to give instructions to issue, advise or confirm a Credit by reference

to a Credit previously issued (similar Credit) where such previous
credit has been subject to accepted amendment(s), and/or
unaccepted amendment(s).
_____________________________________________________________
_______________________________________________
b All instructions for the issuance of a Credit and the Credit itself and,
where applicable, all instructions for an amendment thereto and the
amendment itself, must state precisely the document(s) against which
payment, acceptance or negotiation is to be made.
B.

Form
and
Notification
Credits_______________________________

of

Article 6
_____________________________________________________________
_______________________________________________
Revocable v. Irrevocable Credits
a

A Credit may be either

i.

revocable, or

ii. irrevocable
_____________________________________________________________

Documentary Credit/Letter of Credit

b The Credit, therefore, should clearly indicate whether it is revocable

or irrevocable.
_____________________________________________________________
________________________________________________
c In the absence of such indication the Credit shall be deemed to be
irrevocable.
Article 7
_____________________________________________________________
________________________________________________
Advising Bank's Liability
a A Credit may be advised to a beneficiary through another bank (the
"Advising Bank") without engagement on the part of the Advising
Bank, but that bank, if it elects to advise the Credit, shall take
reasonable care to check the apparent authenticity of the Credit which
it advises. If the bank elects not to advise the Credit, it must so inform
the Issuing bank without delay.
_____________________________________________________________
_________________________________________________
b If the Advising Bank cannot establish such apparent authenticity it
must inform, without delay, the bank from which the instructions
appear to have been received that it has been unable to establish the
authenticity of the Credit and if it elects nonetheless to advise the
credit it must inform the beneficiary that it has not been able to
establish the authenticity of the credit.
Article 8
_____________________________________________________________
__________________________________________________
Revocation of a Credit
a A revocable Credit may be amended or cancelled by the Issuing Bank
at any moment and without prior notice to the beneficiary.
_____________________________________________________________

Documentary Credit/Letter of Credit

b However, the Issuing Bank must:

i. reimburse another bank with which a revocable Credit has been
made available for sight payment, acceptance or negotiation - for
any payment, acceptance or negotiation made by such bank - prior
to receipt by it of notice of amendment or cancellation, against
documents which appear on their face to be in compliance with the
terms and conditions of the Credit;
ii. reimburse another bank with which a revocable Credit has been
made available for deferred payment, if such a bank has, prior to
receipt by it of notice of amendment or cancellation, taken up
documents which appear on their face to be in compliance with the
terms and conditions of the Credit.
Article 9
_________________________________________________________________________
__________________________________________________________

Liability of Issuing and Confirming Banks

a An irrevocable Credit constitutes a definite undertaking of the Issuing
Bank, provided that the stipulate documents are presented to the
Nominated Bank or to the Issuing bank and that the terms and
conditions of the Credit are complied with:
i.

if the Credit provides for sight payment - to pay at sight;

ii. if the Credit provides for deferred payment - to pay on the

maturity date(s) determinable in accordance with the stipulations
of the credit;
iii. if the Credit provides for acceptance:
(a) by the Issuing Bank - to accept Draft(s) drawn by the
Beneficiary on the Issuing bank and pay them at maturity,
or
(b) by another drawee bank - to accept and pay at maturity Draft(s)
drawn by the beneficiary on the Issuing Bank in the event the
drawee bank stipulated in the Credit does not accept Draft(s)
drawn on it, or to pay Draft(s) accepted but not paid by such
drawee bank at maturity;

Documentary Credit/Letter of Credit

iv. if the Credit provides for negotiation - to pay without recourse to

drawers and/or bona fide holders, Draft(s) drawn by the
beneficiary and/or document(s) presented under the credit.
Draft(s) on the Applicant should not issue a Credit available. If
the Credit nevertheless calls for Draft(s) on the Applicant, banks
will consider such Draft(s) as an additional document(s).
_____________________________________________________________
_______________________________________________
b

A confirmation of an irrevocable Credit by another bank (the

"Confirming Bank") upon the authorization or request of the Issuing
Bank, constitutes a definite undertaking of the Confirming Bank, in
addition to that of the Issuing Bank, provided that the stipulated
documents are presented to the Confirming Bank or to any other
Nominated Bank and that the terms and conditions of the Credit are
complied with:
i. if the Credit provides for sight payment - to pay at sight;
ii. if the Credit provides for deferred payment - to pay on the maturity
date(s) determinable in accordance with the stipulation of the
credit;
iii. if the Credit provides for acceptance:
a.

by the Confirming Bank - to accept Draft(s) drawn by the

Beneficiary on the Confirming Bank and pay them at maturity;

or
a. by another drawee bank - to accept and pay at maturity
Draft(s) drawn by the Beneficiary on the Confirming Bank, in
the event the drawee bank stipulated in the Credit does not
accept Draft(s) drawn on it, or to pay Draft(s) accepted but not
paid by such drawee bank at maturity;
iv. if the Credit provides for negotiation - to negotiate without
recourse to drawer and/or bona fide holders, Draft(s) drawn by
the beneficiary and/or document(s) presented under the Credit.
Draft(s) on the Applicant should not issue a Credit available. If
the Credit nevertheless calls for Draft(s) on the Applicant, banks
will consider such Draft(s) as an additional document(s).
_____________________________________________________________
c

Documentary Credit/Letter of Credit

i.

If another bank is authorized or requested by the issuing bank to

add its confirmation to a Credit but is not prepared to do so, it
must so inform the Issuing Bank without delay.

ii.

Unless the Issuing Bank specifies otherwise in its authorization or

request to add confirmation, the Advising Bank may advise the
Credit to the Beneficiary without adding its confirmation.

__________________________________________________________________
____________________________________________

i.

Except as otherwise provided by Article 48, an irrevocable Credit

can neither be amended nor cancelled without the agreement of
the Issuing Bank, the Confirming Bank, if any, and the
beneficiary;

ii.

The Issuing Bank shall be irrevocably bound by an amendment(s)

issued by it from the time of the issuance of such amendment(s).
A Confirming Bank may extend its confirmation to an
amendment and shall be irrevocable bound as of the time of its
advice of the amendment. A Confirming Bank may, however,
choose to advise an amendment to the Beneficiary without
extending its confirmation and if so, must inform the Issuing
Bank and the beneficiary without delay.

iii. The terms of the original Credit(s) or a Credit incorporating

previously accepted amendment(s)) will remain in force for the
beneficiary until the beneficiary communicates his acceptance of
the amendment to the bank that advised such amendment. The
Beneficiary should give notification of acceptance or rejection of
amendment(s). If the beneficiary fails to give such notification,
the tender of documents to the Nominated bank or Issuing Bank,
that conform to the Credit and to not yet accepted amendment(s),
will be deemed to be notification of acceptance by the Beneficiary
of such amendment(s) and as of that moment the Credit will be
amended.
iv.

Partial acceptance of amendments contained in one and the

same advice of amendment is not allowed and consequently will
not be given any effect.
_____________________________________________________________

Documentary Credit/Letter of Credit

Article 10
_________________________________________________________________________
________________________________________________________

Types of Credit
a All Credits must clearly indicate whether they are available by sight
payment, by deferred payment, by acceptance or by negotiation.
_________________________________________________________________________
__________________________________

b i.

Unless the Credit stipulates that it is available only with the

Issuing Bank, all Credits must nominate the bank (the
"Nominated Bank") which is authorized to pay, to incur a
deferred payment undertaking, to accept Draft(s) or to negotiate.
In a freely negotiable Credit, any bank is a Nominated Bank.
Presentation of documents must be made to the Issuing Bank or
the Confirming Bank, if any or any other Nominated Bank.
ii. Negotiation means the giving of value for draft(s) and/or
documents(s) by the bank authorized to negotiate. Mere
examination of the documents without giving of value does not
constitute a negotiation.

_________________________________________________________________________
___________________________________

Unless the Nominated Bank is the Confirming Bank, nomination by

the Issuing Bank does not constitute any undertaking by the
Nominated Bank to pay, to incur a deferred payment undertaking, to
accept Draft(s), or to negotiate. Except where expressly agreed to by
the Nominated Bank and so communicated to the Beneficiary, the
Nominated Bank's receipt of and/or examination and/or forwarding of
the documents does not make that bank liable to pay, to incur a
deferred payment undertaking, to accept Draft(s), or to negotiate.

_________________________________________________________________________
____________________________________

By nominating another bank, or by allowing for negotiation by any

bank, or by authorizing or requesting another bank to add its
confirmation, the Issuing Bank authorizes such bank to pay, accept
Draft(s) or negotiated as the case may be, against documents which
appear on their face to be in compliance with the terms and conditions
of the Credit and undertakes to reimburse such bank in accordance
with the provisions of these Articles.

Documentary Credit/Letter of Credit

Article 11
_____________________________________________________________
_______________________________________________
Teletransmitted and Pre-Advised Credits
a

i. When an Issuing Bank instructs an Advising Bank by an

authenticated teletransmission to advice a Credit or an amendment
to a Credit, the teletransmission will be deemed to be the operative
Credit instrument or the operative amendment, and no mail
confirmation should be sent. Should a mail confirmation
nevertheless be sent, it will have no effect and the Advising Bank
will have no obligation to check such mail confirmation against the
operative Credit instrument or the operative amendment received by
teletransmission.

ii. If the teletransmission states "full details to follow" (or words of

similar effect) or states that the mail confirmation is to be the
operative Credit instrument or the operative amendment, then the
teletransmission will not be deemed to be the operative Credit
instrument or the operative amendment. The Issuing Bank must
forward the operative Credit instrument or the operative amendment
to such Advising Bank without delay.
_____________________________________________________________
_______________________________
b If a bank uses the services of an Advising Bank to have the Credit
advised to the Beneficiary, it must also use the services of the same
bank for advising an amendment(s).
_____________________________________________________________
_______________________________
c A preliminary advice of the issuance or amendment of an irrevocable
Credit (pre-advice), shall only be given by an Issuing Bank if such
bank is prepared to issue the operative Credit instrument or the
operative amendment thereto. Unless otherwise stated in such
preliminary advice by the Issuing Bank, an Issuing Bank having given
such pre-advice shall be irrevocable committed to issue or amend the
Credit, in terms not inconsistent with the pre-advice, without delay.

Documentary Credit/Letter of Credit

Article 12
_________________________________________________________________________
___________________________________

Incomplete or Unclear Instructions

If incomplete or unclear instructions are received to advise, confirm or
amend a Credit, the bank requested to act on such instructions may give
preliminary notification to the Beneficiary for information only and without
responsibility. This preliminary notification should state clearly that the
notification is provided for information only and without the responsibility
of the Advising Bank. In any event, the Advising Bank must inform the
Issuing Bank of the action taken and request it to provide the necessary
information.
The Issuing Bank must provide the necessary information without delay.
The Credit will be advised, confirmed or amended, only when complete and
clear instructions have been received and if the Advising Bank is then
prepared to act on the instructions.
C. Liabilities and Responsibilities________________________________
Article 13
_________________________________________________________________________
__________________________________

Standard for Examination of Documents

a Banks must examine all documents stipulated in the Credit wits
reasonable care, to ascertain whether or not they appear, on their face,
to be in compliance with the terms and conditions of the Credit.
Compliance of the stipulated documents on their face with the terms
and conditions of the Credit shall be determined by international
standard banking practice as reflected in these Articles. Documents,
which appear on their face to be inconsistent with one another, will be
considered as not appearing on their face to be in compliance with the
terms and conditions of the Credit.
Banks will not examine documents not stipulated in the Credit. If they
receive such documents, they shall return them to the presenter or pass
them on without responsibility.
_____________________________________________________________
b

Documentary Credit/Letter of Credit

The Issuing Bank, the Confirming Bank, if any, or a Nominated bank

acting on there behalf, shall each have a responsible time, not to
exceed seven banking days following the day of receipt of the
documents, to examine the documents and determine whether to take
up or refuse the documents and to inform the party from which it
received the documents accordingly.
_____________________________________________________________
_______________________________
c

If a Credit contains conditions without stating the document(s) to be

presented in compliance therewith, banks will deem such conditions
as not stated and will disregard them.

Article 14
__________________________________________________________________
___________________________________________

Discrepant Documents and Notice

a

When the Issuing Bank authorizes another bank to pay, incur a

deferent payment undertaking, accept Draft(s), or negotiate against
documents which appear on their face to be in compliance with the
terms and conditions of the credit, the Issuing Bank and the
Confirming Bank, if any, are bound:
i.
to reimburse the nominated bank which has paid, incurred a
deferred payment undertaking, accepted draft(s), or negotiated,
ii.
to take up the documents.

__________________________________________________________________
________________________________

Upon receipt of the documents the issuing bank and/or Confirming

Bank, if any, or a Nominated Bank acting on their behalf, must
determine on the basis of the documents alone whether or not they
appear on their face to be in compliance with the terms and conditions
of the Credit. If the documents appear on their face not to be in
compliance with the terms and conditions of the credit, such banks
may refuse to take up the documents.
________________________________

Documentary Credit/Letter of Credit

If the Issuing bank determines that the documents appear on their face
not to be in compliance with the terms and conditions of the Credit, it
may in its sole judgment approach the Applicant for a waiver of the
discrepancy(ies). This does not, however, extend the period mentioned
in sub-Article 13 (b).

__________________________________________________________________
________________________________

d i. If the Issuing Bank and/or Confirming Bank, if any, or a

Nominated Bank acting on their behalf, decides to refuse the
documents, it must give notice to that effect by telecommunication
or, if that is not possible, by other expeditious means, without
delay but no later than the close of the seventh banking day
following the day of receipt of the documents. Such notice shall be
given to the bank from which it received the documents, or to the
beneficiary, if it received the documents directly from him.
ii. Such notice must state all discrepancies in respect of which the
bank refuses the documents and must also state whether it is
holding the documents at the disposal of, or is returning them to,
the presenter.
iii. The Issuing Bank and/or Confirming Bank, if any, shall then be
entitled to claim from the remitting bank refund, with interest, of
any reimbursement which has been made to that bank
__________________________________________________________________
__________________________________

e If the Issuing Bank and/or Confirming Bank, if any, fails to act in

accordance with the provisions of this Article and/or fails to hold the
documents at the disposal of, or return them to the presenter, the
Issuing Bank and/or Confirming Bank, if any, shall be precluded from
claiming that the documents are not in compliance with the terms and
conditions of the Credit.
__________________________________________________________________
__________________________________

If the remitting bank draws the attention of the Issuing Bank and/or
Confirming Bank, if any, to any discrepancy(ies) in the document(s)
or advises such banks that it has paid, incurred a deferred payment
undertaken, accepted Draft(s) or negotiated under reserve or against
an indemnity in respect of such discrepancy(ies), the Issuing Bank

Documentary Credit/Letter of Credit

and/or Confirming Bank, if any, shall not be thereby relieved from

any of their obligations under any provision of this Article. Such
reserve or indemnity concerns only the relations between the remitting
bank and the party towards whom the reserve was made, or from
whom, or on whose behalf, the indemnity was obtained.
Article 15
_____________________________________________________________
_______________________________________________
Disclaimer on Effectiveness of Documents
Banks assume no liability or responsibility for the form, sufficiency,
accuracy, genuineness, falsification or legal effect of any document(s), or
for the general and/or particular conditions stipulated in the document(s) or
superimposed thereon; nor do they assume any liability or responsibility for
the description, quantity, weight, quality, condition, packing, delivery, value
or existence of the goods represented by any document(s), or for the good
faith or acts and/or omission, solvency, performance or standing of the
consignors, the carriers, the forwarders, the consignees or the insurers of the
goods, or any other person whomsoever.
Article 16
_____________________________________________________________
________________________________________________
Disclaimer on the Transmission of Message
Banks assume no liability or responsibility for the consequences arising out
of delay and/or loss in transit of any message(s), letter(s) or document(s), or
for delay, mutilation or other error(s) arising in the transmission of any
telecommunication. Banks assume no liability or responsibility for errors in
translation and/or interpretation of technical terms, and reserve the right to
transmit Credit terms without translating them.

Article 17

Documentary Credit/Letter of Credit

_____________________________________________________________
_________________________________________________
Force Majeure
Banks assume no liability or responsibility for the consequences arising out
of the interruption of their business by Acts of God, riots, civil commotion,
insurrection, wars or any other causes beyond their control, or by any strikes
or lockouts. Unless specifically authorized, banks will not, upon resumption
of their business, pay, incur a deferred payment undertaking, accept Draft(s)
or negotiate under Credit, which expired during such interruption of their
business.
Article 18
_____________________________________________________________
_________________________________________________
Disclaimer for Acts of an Instructed Party
a

Banks utilizing the services of another bank or other banks for the
purpose of giving effect to the instructions of the Applicant do so for
the account and at the risk of such Applicant.
_____________________________________________________________
______________________________
b

Banks assume no liability or responsibility should the instructions

they transmit not be carried out, even if they have themselves taken
the initiative in the choice of such other bank(s).
_____________________________________________________________
______________________________
A party instructing another party to perform services is liable for
any charges, including commissions, fees, costs or expenses
incurred by the instructed party in connection with its
instructions.
ii. Where a Credit stipulates that such charges are for the account of
a party other than the instructing party, and charges cannot be
collected, the instructing party remains ultimately liable for the
payment thereof.
_____________________________________________________________
_______________________________
c

i.

Documentary Credit/Letter of Credit

Then Applicant shall be bound by and liable to indemnity the banks

against all obligations and responsibilities imposed by foreign laws
and usage.

Article 19
_____________________________________________________________
_______________________________________________
Bank-to-Bank Reimbursement Arrangements
a

If an Issuing Bank intends that the reimbursement to which a paying,

accepting or negotiating bank is entitled, shall be obtained by such
bank (the "Claiming Bank"), claiming on another party (the
"Reimbursing Bank"), it shall provide such Reimbursing Bank in good
time with the proper instructions or authorization to honor such
reimbursement claims.
_____________________________________________________________
_____________________________
b

Issuing Bank shall not require a Claiming Bank to supply a certificate

of compliance with the terms and conditions of the Credit to the
Reimbursing Bank.
_____________________________________________________________
_____________________________
An Issuing Bank shall not be relieved from any of its obligations to
provide reimbursement if and when reimbursement is not received by
the Claiming Bank from the Reimbursing Bank.
_____________________________________________________________
_____________________________
c

The Issuing Bank shall be responsible to the Claiming Bank for any
loss of interest if reimbursement is not provided by the Reimbursing
Bank on first demand, or as otherwise specified in the Credit, or
mutually agreed, as the case may be.
_____________________________________________________________
______________________________
e

Documentary Credit/Letter of Credit

The Reimbursing Bank's charges should be for the account of the

Issuing Bank. However, in cases where the charges are for the account
of another party, it is the responsibility of the Issuing Bank to so
indicate in the original Credit and in the reimbursement authorization.
In cases where the
Reimbursing Banks charges are for the account of another party they shall
be collected from the Claiming Bank when the Credit is drawn under. In
cases where the Credit is not drawn under, the Reimbursing Banks charges
remain the obligation of the Issuing Bank.
D. Documents
Article 20
_____________________________________________________________
______________________________________________
Ambiguity as to the Issuers of Documents
Terms such as first class, well known, qualified, independent,
official, competent, local and the like, shall not be used to
describe the issuers of any document(s) to be presented under a Credit.
If such terms are incorporated in the Credit, banks will accept the
relative document(s) as presented, provided that it appears on its face
to be in compliance with the other terms and conditions of the Credit
and not to have been issued by the Beneficiary.
_____________________________________________________________
________________________________________________
b Unless otherwise stipulated in the Credit, banks will also accept as an
original document(s), a document(s) produced or appearing to have
been produced:
i. by reprographic, automated or computerized systems;
ii. as carbon copies;
provided that it is marked as original and, where necessary, appears to be
signed.
a

A document may be signed by handwriting, by facsimile signature, by

perforated signature, by stamp, by symbol, or by any other mechanical or
electronic method of authentication.
_____________________________________________________________

Documentary Credit/Letter of Credit

c i. Unless otherwise stipulated in the Credit, banks will accept as a

copy(ies), a document($) either labeled copy or not marked as an
original a copy(ies) need not be signed.
ii. Credits that require multiple document(s) such as duplicate, two
fold, two copies and the like, will be satisfied by the
presentation of one original and the remaining number in copies
except where the document itself indicates otherwise.
d Unless otherwise stipulated in the Credit, a condition under a Credit
calling for a document to be authenticated, validated, legalized, visaed,
certified or indicating a similar requirement, will be satisfied by any
signature, mark, stamp or label on such document that on its face
appears to satisfy the above condition.
Article 21
_____________________________________________________________
_______________________________________________
Unspecified Issuers or Contents of Documents
When documents other than transport documents, insurance documents and
commercial invoices are called for, the Credit should stipulate by whom
such documents are to be issued and their wording or data content. If the
Credit does not so stipulate, banks will accept such documents as presented,
provided that their data content is not inconsistent with any other stipulated
document presented.
Article 22
_____________________________________________________________
________________________________________________
Issuance Date of Documents v. Credit Date
Unless otherwise stipulated in the Credit, banks will accept a document
bearing a date of issuance prior to that of the Credit, subject to such
document being presented within the time limits set out in the Credit and in
these Articles.

Documentary Credit/Letter of Credit

Article 23
_____________________________________________________________
________________________________________________
Marine/Ocean Bill of Lading
a If a Credit calls for a bill of lading covering a port-to-port shipment,
banks will, unless otherwise stipulated in the Credit, accept a
document, however named, which:
i. appears on its face to indicate the name of the carrier and to have
been signed or otherwise authenticated by:
- the carrier or a named agent for or on behalf of the carrier, or
- the master or a named agent for or on behalf of the master.
Any signature or authentication of the carrier or master must be identified as
carrier or master, as the case may be. An agent signing or authenticating for
the carrier or master must also indicate the name and the capacity of the
party, i.e. carrier or master, on whose behalf that agent is acting,
and
ii. indicates that the goods have been loaded on board, or shipped on a
named vessel.
Loading on board or shipment on a named vessel may be indicated by preprinted wording on the bill of lading that the goods have been loaded on
board a named vessel or shipped on a named vessel, in which case the date
of issuance of the bill of lading will be deemed to be the date of loading on
board and the date of shipment.
In all other cases loading on board a named vessel must be evidenced by a
notation on the bill of lading which gives the date on which the goods have
been loaded on board, in which case the date of the on board notation will
be deemed to be the date of shipment. If the bill of lading contains the
indication intended vessel, or similar qualification in relation to the
vessel, loading on board a named vessel must be evidenced by an on board
notation on the bill of lading which, in addition to the date on which the
goods have been loaded on board, also includes the name of the vessel on
which the goods have been loaded, even if they have been loaded on the
vessel named as the intended vessel.

Documentary Credit/Letter of Credit

If the bill of lading indicates a place of receipt or taking in charge different

from the port of loading, the on board notation must also include the port of
loading stipulated in the Credit and the name of the vessel on which the
goods have been loaded, even if they have been loaded on the vessel named
in the bill of lading. This provision also applies whenever loading on board
the vessel is indicated by pre-printed wording on the bill of lading,
and
iii. indicates the port of loading and the port of discharge stipulated in the
Credit, notwithstanding that it:
a

indicates a place of taking in charge different from the port of

loading, and/or a place of final destination different from the port
of discharge,

and/or
b

contains the indication intended or similar qualification in

relation to the port of loading and/or port of discharge, as long as
the document also states the ports of loading and/or discharge
stipulated in the Credit,

and
iv. consists of a sole original bill of lading or, it issued in more than one
original, the full set as so issued,
and
iv. appears to contain all of the terms and conditions of carriage, or some
of such terms and conditions by reference to a source or document
other than the bill of lading (short form/blank back bill of lading);
banks will not examine the contents of such terms and conditions,
and
vi. contains no indication that it is subject to a charter party and/or no
indication that the carrying vessel is propelled by sail only,
and
vii. in all other respects meets the stipulations of the Credit.

Documentary Credit/Letter of Credit

For the purpose of this Article, transhipment means unloading and

reloading from one vessel to another vessel during the course of ocean
carriage from the port of loading to the port of discharge stipulated in
the Credit.

Unless transhipment is prohibited by the terms of the Credit, banks

will accept a bill of lading, which indicates that the goods will be
transhipped, provided that the entire ocean carriage is covered by one
and the same bill of lading.

Even if the Credit prohibits transhipment, banks will accept a bill of

lading which:

i. indicates that transhipment will take place as long as the relevant

cargo is shipped in Container(s), Trailer(s) and/or LASH~ barge(s) as
evidenced by the bill of lading, provided that the entire ocean carriage
is covered by one and the same bill of lading,
and/or
incorporates clauses stating that the carrier reserves the right to tranship.
Non-Negotiable Sea Waybill
If a Credit calls for a non-negotiable sea waybill covering a port-to-port
shipment, banks will, unless otherwise stipulated in the Credit, accept a
document, however named, which:
i. appears on its face to indicate the name of the carrier and to have been
signed or otherwise authenticated by:
-

the carrier or a named agent for or on behalf of the carrier, or

the master or a named agent for or on behalf of the master,

Any signature or authentication of the carrier or master must be identified as

carrier or master, as the case may be. An agent signing or authenticating for
the carrier or master must also indicate the name and the capacity of the
party, i.e. carrier or master, on whose behalf that agent is acting,
and
indicates that the goods have been loaded on board, or shipped on a named
vessel.

Documentary Credit/Letter of Credit

Loading on board or shipment on a named vessel may be indicated by preprinted wording on the non-negotiable sea waybill that the goods have been
loaded on board a named vessel or shipped on a named vessel, in which case
the date of issuance of the non-negotiable sea waybill will be deemed to be
the date of loading on board and the date of shipment.
In all other cases loading on board a named vessel must be evidenced by a
notation on the non-negotiable sea waybill which gives the date on which
the goods have been loaded on board, in which case the date of the on board
notation will be deemed to be the date of shipment.
If the non-negotiable sea waybill contains the indication intended vessel,
or similar qualification in relation to the vessel, loading on board a named
vessel must be evidenced by an on board notation on the non-negotiable sea
waybill which, in addition to the date on which the goods have been loaded
on board, includes the name of the vessel on which the goods have been
loaded, even if they have been loaded on the vessel named as the intended
vessel.
If the non-negotiable sea waybill indicates a place of receipt or taking in
charge different from the port of loading, the on board notation must also
include the port of loading stipulated in the Credit and the name of the
vessel on which the goods have been loaded, even if they have been loaded
on a vessel named in the non-negotiable sea waybill. This provision also
applies whenever loading on board the vessel is indicated by pre-printed
wording on the non-negotiable sea waybill,
and
iii. indicates the port of loading and the port of discharge stipulated in
the Credit, notwithstanding that it:
a

indicates a place of taking in charge different from the port of loading,

and/or a place of final destination different from the port of discharge,

and/or
b contains the indication intended or similar qualification in relation
to the port of loading and/or port of discharge, as long as the
document also states the ports of loading and/or discharge stipulated
in the Credit,

Documentary Credit/Letter of Credit

and
iv consists of a sole original non-negotiable sea waybill, or if issued in
more than one original, the full set as so issued,
and
v.

appears to contain all of the terms and conditions of carriage, or

some of such terms and conditions by reference to a source or
document other than the non-negotiable sea waybill (short
form/blank back non-negotiable sea waybill); banks will not
examine the contents of such terms and conditions,

and
vi. contains no indication that it is subject to a charter party and/or no
indication that the carrying vessel is propelled by sail only,
and
vii. in all other respects meets the stipulations of the Credit.
c

For the purpose of this Article, transhipment means unloading and

reloading from one vessel to another vessel during the course of ocean
carriage from the port of loading to the port of discharge stipulated in
the Credit.

Unless transhipment is prohibited by the terms of the Credit, banks will

accept a non-negotiable seaway bill, which indicates that the goods will be
transhipped, provided that the entire ocean carriage is covered by one and
the same non-negotiable sea waybill.
Even if the Credit prohibits transhipment, banks will accept a nonnegotiable sea waybill which:
indicates that transhipment will take place as long as the relevant cargo is
shipped in Container(s), Trailer(s) and/or LASH barge(s) as evidenced by
the non-negotiable sea waybill, provided that the entire ocean carriage is
covered by one and the same non-negotiable sea waybill,
and/or
incorporates clauses stating that the carrier reserves the right to tranship.

Documentary Credit/Letter of Credit

Article 25
_____________________________________________________________
_________________________________________________
Charter Party Bill of Lading
a

If a Credit calls for or permits a charter party bill of lading, banks will,
unless otherwise stipulated in the Credit, accept a document, however
named, which:
i. contains any indication that it is subject to a charter party,

and
ii. appears on its face to have been signed or otherwise authenticated
by:
- the master or a named agent for or on behalf of the master, or
- the owner or a named agent for or on behalf of the owner.
Any signature or authentication of the master or owner must be identified as
master or owner as the case may be. An agent signing or authenticating for
the master or owner must also indicate the name and the capacity of the
party, i.e. master or owner, on whose behalf that agent is acting,
and
iii. does or does not indicate the name of the carrier,
and
iv indicates that the goods have been loaded on board or shipped on a
named vessel.
Loading on board or shipment on a named vessel may be indicated by pieprinted wording on the bill of lading that the goods have been loaded on
board a named vessel or shipped on a named vessel, in which case the date
of issuance of the bill of lading will be deemed to be the date of loading on
board and the date of shipment.
In all other cases loading on board a named vessel must be evidenced by a
notation on the bill of lading which gives the date on which the goods have
been loaded on board, in which case the date of the on board notation will
be deemed to be the date of shipment,

Documentary Credit/Letter of Credit

and
indicates the port of loading and the port of discharge stipulated in the
Credit,
and
vi. consists of a sole original bill of lading or, if issued in more than
one original, the full set as so issued,
and
vii. contains no indication that the carrying vessel is propelled by sail
only,
and
viii. in all other respects meets the stipulations of the Credit.
b Even if the Credit requires the presentation of a charter party contract
in connection with a charter party bill of lading, banks will not
examine such charter party contract, but will pass it on without
responsibility on their part.
Article 26
_____________________________________________________________
________________________________________________
a

If a Credit calls for a transport document covering at least two

different modes of transport (multi modal transport), banks wilt,
unless otherwise stipulated in the Credit, accept a document, however
named, which:
i. appears on its face to indicate the name of the carrier or multimodal
transport operator arid to have been signed or otherwise
authenticated by:
-

the carrier or multimodal transport operator or a named agent for or

on behalf of the carrier or multimodal transport operator, or

the master or a named agent for or on behalf of the master.

Any signature or authentication of the carrier, multimodal transport operator

or master must be identified as carrier, multimodal transport operator or
master, as the case may be. An agent signing or authenticating for the

Documentary Credit/Letter of Credit

carrier, multimodal transport operator or master must also indicate the name
and the capacity of the party, i.e. carrier, multimodal transport operator or
master, on whose behalf that agent is acting,
and
ii. indicates that the goods have been dispatched, taken in charge or
loaded on board.
Dispatch, taking in charge or loading on board may be indicated by wording
to that effect on the multimodal transport document and the date of issuance
will be deemed to be the date of dispatch, taking in charge or loading on
board and the date of shipment. However, if the document indicates, by
stamp or otherwise, a date of dispatch, taking in charge or loading on board,
such date will be deemed to be the date of shipment,
and
iii.

indicates the place of taking in charge stipulated in the

Credit which may be different from the port, airport or place
of loading, and the place of final destination stipulated in
the Credit which may be different from the port, airport or
place of discharge,

and/or
contains the indication intended or similar qualification in relation to the
vessel and/or port of loading and/or port of discharge,
and
iv. consists of a sole original multimodal transport document or, if
issued in more than one original, the full set as so issued,
and
v.

appears to contain all of the terms and conditions of carriage, or

some of such terms and conditions by reference to a source or
document other than the multimodal transport document (short
form/blank back multimodal transport document); banks will not
examine the contents of such terms and conditions,

and
vi. contains no indication that it is subject to a charter party and/or no
indication that the carrying vessel is propelled by sail only,

Documentary Credit/Letter of Credit

and
vii. in all other respects meets the stipulations of the Credit.
b

Even if the Credit prohibits transhipment, banks will accept a

multimodal transport document which indicates that transhipment will
or may take place, provided that the entire carriage is covered by one
and the same multimodal transport document.

Article 27
_____________________________________________________________
________________________________________________
Air Transport Document
If a Credit calls for an air transport document, banks will, unless otherwise
stipulated in the Credit, accept a document, however named, which:
appears on its face to indicate the name of the carrier and to have been
signed otherwise authenticated by:
the carrier, or
a named agent for or on behalf of the carrier.
a

Any signature or authentication of the carrier must be identified as

carrier.
i. An agent signing or authenticating for the carrier must also indicate
the name and capacity of the party, i.e. carrier, on whose behalf that
agent is acting,

and
ii. indicates that the goods have been accepted for carriage,
and
iii. where the Credit calls for an actual date of dispatch, indicates a
specific notation of such date, the date of dispatch so indicated on
the air transport document will be deemed to be the date of
shipment.
For the purpose of this Article, the information appearing in the box on the
air transport document (marked For Carrier Use Only or similar
expression) relative to the flight number and date will not be considered as a
specific notation of such date of dispatch.

Documentary Credit/Letter of Credit

In all other cases, the date of issuance of the air transport document will be
deemed to be the date of shipment,
and
iv. indicates the airport of departure and the airport of destination
stipulated in the Credit,
and
v.

appears to be the original for consignor/shipper even if the Credit

stipulates a full set of originals, or similar expressions,

and
vi. appears to contain all of the terms and conditions of carriage, or
some of such terms and conditions, by reference to a source or
document other than the air transport document; banks will not
examine the contents of such terms and conditions,
and
vii. in all other respects meets the stipulations of the Credit.
b For the purpose of this Article, transhipment means unloading and
reloading from one aircraft to another aircraft during the course of
carriage from the airport of departure to the airport of destination
stipulated in the Credit.
c Even if the Credit prohibits transhipment, banks will accept an air
transport document which indicates that transhipment will or may take
place, provided that the entire carriage is covered by one and the same
air transport document.
Article 28
_____________________________________________________________
__________________________________________________
Road, Rail or Inland Waterway Transport
Documents
a

If a Credit calls for a road, rail, or inland waterway transport

document, banks will, unless otherwise stipulated in the Credit, accept
a document of the type called for, however named, which:
i.

appears on its face to indicate the name of the carrier and to

have been signed or otherwise authenticated by the carrier or a
named agent for or on behalf of the carrier and/or to bear a

Documentary Credit/Letter of Credit

reception stamp or other indication of receipt by the carrier or

a named agent for or on behalf of the carrier.
Any signature, authentication, reception stamp or other indication of receipt
of the carrier, must be identified on its face as that of the carrier. An agent
signing or authenticating for the carrier, must also indicate the name and the
capacity of the party, i.e. carrier, on whose behalf that agent is acting,
and
ii. indicates that the goods have been received for shipment, dispatch
or carriage or wording to this effect. The date of issuance will be
deemed to be the date of shipment unless the transport document
contains a reception stamp, in which case the date of the reception
stamp will be deemed to be the date of shipment,
and
iii. indicates the place of shipment and the place of destination
stipulated in the Credit,
and
iv. in all other respects- meets the stipulations of the Credit.
b

In the absence of any indication on the transport document as to the

numbers issued, banks will accept the transport document(s) presented
as constituting a full set. Banks will accept as original(s) the transport
document(s) whether marked as original(s) or not.

For the purpose of this Article, transhipment means unloading and

reloading from one means of conveyance to another means of
conveyance, in different modes of transport, during the course of
carriage from the place of shipment to the place of destination
stipulated in the Credit.

d Even if the Credit prohibits transhipment, banks will accept a road,

rail, or inland waterway transport document which indicates that
transhipment will or may take place, provided that the entire carriage
is covered by one and the same transport document and within the
same mode of transport.

Documentary Credit/Letter of Credit

Article 29
_____________________________________________________________
______________________________________________
Courier and Post Receipts
a If a Credit calls for a post receipt or certificate of posting, banks will,
unless otherwise stipulated in the Credit, accept a post receipt or
certificate of posting which:
i. appears on its face to have been stamped or otherwise authenticated
and dated in the place from which the Credit stipulates the goods are
to be shipped or dispatched and such date will be deemed to be the
date of shipment or dispatch,
and
ii. in all other respects meets the stipulations of the Credit.
b If a Credit calls for a document issued by a courier or expedited
delivery service evidencing receipt of the goods for delivery, banks
will, unless otherwise stipulated in the Credit, accept a document,
however named, which:
i. appears on its face to indicate the name of the courier/service, and
to have been stamped, signed or otherwise authenticated by such
named courier/service (unless the Credit specifically calls for a
document issued by a named Courier/Service, banks will accept a
document issued by any Courier/Service),
and
ii. indicates a date of pick-up or of receipt or wording to this effect,
such date being deemed to be the date of shipment or dispatch,
and
iii. in all other respects meets the stipulations of the Credit,

Documentary Credit/Letter of Credit

Article 30
_____________________________________________________________
_________________________________________________
Transport Documents issued by Freight Forwarders
Unless otherwise authorised in the Credit, banks will only accept a transport
document issued by freight forwarder if it appears on its face to indicate:
i. the name of the freight forwarder as a carrier or multimodal transport
operator and to have been signed or otherwise authenticated by the
freight forwarder as carrier or multimodal transport operator,
or
ii. the name of the carrier or multimodal transport operator and to have
signed or otherwise authenticated by the freight forwarder as a
named agent for or on behalf of the carrier or multinatimodal
transport operator.
Article 31
_____________________________________________________________
_________________________________________________
On Deck, Shippers Load and Count, Name of Consignor
Unless otherwise stipulated in the Credit, banks will accept a transport
document which:
i

does not indicate, in the case of carriage by sea or by more than one
means of conveyance including carriage by sea, that the goods are or
will be loaded on deck. Nevertheless, banks will accept a transport
document which contains a provision that the goods may be carried
on deck, provided that it does not specially state that they are or will
be loaded on deck,
and/or

ii

bears a clause on the face thereof such as shippers load and count
or said by shipper to contain or words of similar effect,
and/or

iii indicates as the consignor of the goods a party other than the
Beneficiary of the Credit.

Documentary Credit/Letter of Credit

Article 32
_____________________________________________________________
________________________________________________
Clean Transport Documents
a

A clean transport document is one which bears no clause or notation

which expressly declares a defective condition of the goods and/or the
packaging.

Banks will not accept transport documents bearing such clauses or

notations unless the Credit expressly stipulates the clauses or
notations which may be accepted.

Banks will regard a requirement in a Credit for a transport document

to bear the clause clean on board as complied with if such transport
document meets the requirements of this Article and of Articles 23,
24, 25, 26, 27, 28, or 30.

Article 33
_____________________________________________________________
_______________________________________________
Freight Payable/Prepaid Transport Documents
a

Unless otherwise stipulated in the Credit, or inconsistent with any of

the documents presented under the Credit, banks will accept transport
documents stating that freight or transportation charges (hereafter
referred to as freight) have still to be paid.
If a Credit stipulates that the transport document has to indicate that
freight has been paid or prepaid, banks which will accept a transport
document on which words clearly indicating payment or prepayment
of freight appear by stamp or otherwise, or on which payment of
freight is indicated by other means. If the Credit requires courier
charges to be paid or prepaid banks will also accept a transport
document issued by courier or expedited delivery service evidencing
that courier charges are for the account of a party other than the
consignee.

c The words freight prepay able of freight to be prepaid or words of

similar effect, if appearing on transport document, will not be
accepted as constituting evidence of the payment of freight.

Documentary Credit/Letter of Credit

Banks will accept transport documents bearing reference by stamps or

otherwise to costs additional to the freight, such as costs of, or
disbursements incurred in connection with, loading, unloading or
similar operations, unless the conditions of the Credit specifically
prohibit such reference.

Article 34
_____________________________________________________________
________________________________________________
Insurance Documents
a Insurance documents must appear on their face to be issued and
signed by insurance companies or underwriters or their agents.
b If the insurance document indicates that it has been issued in more
than one original, all the originals must be presented unless otherwise
authorized in the Credit.
c Cover notes issued by brokers will not be accepted, unless specifically
authorized in the Credit.
d Unless otherwise stipulated in the Credit, banks will accept an
insurance certificate or a declaration under an open cover pre-signed
by insurance companies or underwriters of their agents. Is a Credit
specifically calls for an insurance certificate or a declaration under an
open cover, banks will accept, in lieu thereof, an insurance policy.
e Unless otherwise stipulated in the Credit, or unless it appears from the
insurance document that the cover is effective at the latest from the
date of loading on board or dispatch or taking in charge of the goods,
banks will not accept an insurance document which bears date of
insurance later than the date of loading on board or dispatch or taking
in charge as indicated in such transport document.
f

i.

Unless otherwise stipulated in the Credit, the insurance document

must be expressed in the same currency as the Credit.

iii. Unless otherwise stipulated in the Credit, the minimum amount

for which the insurance document must indicate the insurance
cover to have been effected is the CIF (cost, insurance and freight
(named port of destination)) or CIP (carriage and insurance
paid to (named place of destination)) value of goods, as the

Documentary Credit/Letter of Credit

case may be, plus 10%, but only when the CIF or CIP value can
be determined from the documents on their face. Otherwise, banks
will accept as such minimum amount 110% of the amount for
which payment, acceptance or negotiation is requested under the
Credit, or 110% of the gross amounts of the invoice, whichever is
the greater.
Article 35
_____________________________________________________________
________________________________________________
Type of Insurance cover
a

Credits should stipulate the type of insurance required and, if any, the
additional risks which are to be covered. Imprecise terms such as
usual risks or customary risks shall not be used; if they are used,
banks will accept insurance documents as presented, without
responsibility for any risks not being covered.

Failing specific stipulations in the Credit, banks will accept insurance

documents as presented, without responsibility for any risks not being
covered.

Unless otherwise stipulated in the Credit, banks will accept an

insurance document which indicates that the cover is subject to a
franchise or on excess (deductible).

Article 36
_____________________________________________________________
_______________________________________________
All Risks Insurance Cover
Where a Credit stipulates insurance against all risks, banks will accept an
insurance document which contains any all risks notation or clause,
whether or not bearing the heading all risks, even if the insurance
document indicates that certain risks are excluded, without responsibility for
any risk(s) not being covered.

Documentary Credit/Letter of Credit

Article 37
_____________________________________________________________
_______________________________________________
Commercial Invoices
a

Unless otherwise stipulated in the Credit, commercial invoices:

i. must appear on their face to be issued by the Beneficiary named in
the Credit (except as provided in Article 48),

and
ii. must be made out in the name of the Applicant (except as provided
in sub-Article 48(h)),
and
iii. need not to be signed.
b

Unless otherwise stipulated in the Credit, banks may refuse

commercial invoices issued for amounts in excess of the amount
permitted by the Credit. Nevertheless, if a bank authorized to pay,
incur a deferred payment undertaking, accept Draft(s), or negotiate
under a Credit accepts such invoices, its decision will be binding upon
all parties, provided that such bank has not paid, incurred a deferred
payment undertaking, accepted Draft(s) or negotiated for an amount in
excess of that permitted by the Credit.

The description of the goods in the commercial invoice must

correspond with the description in the Credit. In all other documents,
the goods may be described in general terms not inconsistent with the
description of the goods in the Credit.

Article 38
_____________________________________________________________
________________________________________________
Other Documents
If a Credit calls for an attestation or certification of weight in the case of
transport other than by sea, banks will accept a weight stamp or declaration
of weight which appears to have been superimposed on the transport
document by the carrier or his agent unless the Credit specifically stipulates
that the attestation or certification of weight must be by means of a separate
document.

Documentary Credit/Letter of Credit

E. Miscellaneous Provisions
Article 39
_____________________________________________________________
_______________________________________________
Allowances in Credit Amount, Quantity and Unit Price
a The words about, approximately, circa or similar expressions
used in connection with the amount of the Credit or the quantity or the
unit price stated in the Credit are to be constructed as allowing a
difference not to exceed 10% more or 10% less than the amount or the
quantity or the unit price to which they refer.
b Unless a credit stipulates that the quantity of the goods specified must
not be exceeded or reduced, a tolerance of 5% more or 5% less will be
permissible, always provided that the amount of the drawings does not
exceed the amount of the Credit. This tolerance does not apply when
the Credit stipulates the quantity in terms of a stated number of
packing units or individual items.
c Unless a Credit which prohibits partial shipments stipulates otherwise,
or unless sub-Article (b) above is applicable, a tolerance of 5% less in
the amount of the drawing will be permissible, provided that if the
Credit stipulates he quantity of the goods, such quantity of goods is
shipped in full, and if the Credit stipulates a unit price, such price is
not reduced. This provision does not apply when expressions referred
to in sub-Article (a) above are used in the Credit.
Article 40
_____________________________________________________________
________________________________________________
Partial Shipments/Drawings
a
b

Partial drawings and/or shipments are allowed, unless the Credit

stipulates otherwise.
Transport documents which appear on their face to indicate that
shipment has been made on the same means of conveyance and for the
same journey, provided they indicate the same destination, will not be
regarded as covering partial shipments, even if the transport
documents indicate different dates of shipment and/or different ports
of loading, places of taking in charge, or dispatch.

Documentary Credit/Letter of Credit

Shipments made by post or by courier will not be regarded as partial

shipments if the post receipts or certificates of posting or couriers
receipts or dispatch notes appear to have been stamped, signed or
otherwise authenticated in the place from which the Credit stipulates
the goods are to be dispatched, and on the same date.

Article 41
_____________________________________________________________
________________________________________________
Installments Shipments/Drawings
If drawings and/or shipments by installments within given periods are
stipulated in the Credit and any installment is not drawn and/or shipped
within the period allowed for that installment, the Credit ceases to be
available for that and any subsequent installment, unless otherwise
stipulated in the Credit.
Article 42
_____________________________________________________________
________________________________________________
Expiry Date and Place for Presentation of Documents
a All Credits must stipulate an expiry date and a place for presentation
of documents for payment, acceptance, or with the exception freely
negotiable Credits, a place for presentation of documents for
negotiation. An expiry date stipulated for payment, acceptance or
negotiation will be construed to express an expiry date for
presentation of documents.
b

Except as provided in sub-Article 44(a), documents must be presented

on or before such expiry date.

If an Issuing Bank states that the Credit is to be available for one

month, for six months, or the like, but does not specify the date
from which the time is to run, the date of issuance of the Credit by the
Issuing Bank will be deemed to be the first day from which such time
is to run. Banks should discourage indication of the expiry date of the
Credit in this manner.

Documentary Credit/Letter of Credit

Article 43
_____________________________________________________________
_________________________________________________
Limitation on the Expiry Date
a

In addition to stipulating an expiry date for presentation of documents,

every Credit which alls for a transport document(s) should also
stipulate a specified period of time after the date of shipment during
which presentation must be made in compliance with the terms and
conditions of the Credit. If no such period of time is stipulated, banks
will not accept documents presented to them later than 21 days after
the date of shipment. In any event, documents must be presented not
later than the expiry date of the Credit.

In cases in which sub-Article 40(b) applies, the date of shipment will

be considered to be the latest shipment date on any of the transport
documents presented.

Article 44
_____________________________________________________________
_______________________________________________
Extension of Expiry Date
a

If the expiry date of the Credit and/or the last day of the period of time
for presentation of documents stipulated by the Credit or applicable by
virtue of Article 43 falls on a day on which the bank to which
presentation has to be made is closed for reasons other than those
referred to in Article 17, the stipulated expiry date and/ or the last day
of the period of time after the date of shipment for presentation of
documents, as the case may be, shall be extended to the first following
day on which such bank is open.

b The latest date for shipment shall not be extended by reason of the
extension of the expiry date and/or the periods of time after the date of
shipment for presentation of documents in accordance with subArticle (a) above. If no such latest date for shipment is stipulated in
the Credit or amendments thereto, banks will not accept transport
documents indicating a date of shipment later than the expiry date
stipulated in the Credit or amendments thereto.

Documentary Credit/Letter of Credit

The bank to which presentation is made on such first following

business day must provide a statement that the documents were
presented within the time limits extended in accordance with subArticle 44 (a) of the Uniform Customs and Practice for Documentary
Credits, 1993 Revision, ICC Publication No. 500.

Article 45
_____________________________________________________________
________________________________________________
Hours of Presentation
Banks are under no obligation to accept presentation of documents outside
their banking hours.
Article 46
_____________________________________________________________
________________________________________________
General Expressions as to Dates for Shipment
a Unless otherwise stipulated in the Credit, the expression shipment
used in stipulating an earliest and/or latest date for shipment will be
understood to include expressions such as, loading on board,
dispatch, accepted for carriage, date of post receipt, date of
pick-up and the like, and in the case of a Credit calling for a
multimodal transport document the expression taking in charge.
b

Expressions such as prompt, immediately, as soon as possible.

And the like should not be used. If they are used banks will disregard
them.

If the expression on or about or similar expressions are used, banks

will interpret them as a stipulation that shipment is to be made during
the period from five days before to five days after the specified date,
both end days included.

Documentary Credit/Letter of Credit

Article 47
_____________________________________________________________
_______________________________________________
Date Terminology for Periods of Shipment
a

The words to, until, till, from and words of similar import
applying to any date or period in the Credit referring to shipment will
be understood to include the date mentioned.

The word after will be understood to exclude the date mentioned.

The terms first half, second half of a month shall be constructed

respectively as the 1st to the 15th, and the 16th to the last day of such
month, all dates inclusive.

The terms beginning, middle, or end of a month shall be

constructed respectively as the 1st to the 10th, the 11th to the 20th, and
the 21st to the last day of such month, all dates inclusive.

F. Transferable Credit
Article 48
_____________________________________________________________
________________________________________________
Transferable Credit
a

A transferable Credit is a Credit under which the Beneficiary (Firs

Beneficiary) may request the bank authorized to pay, incur a deferred
payment undertaking, accept or negotiate (the transferring Bank), or
in the case of a freely negotiable Credit, the bank specifically
authorized in the Credit as a Transferring Bank, to make the Credit
available in whole or in part to one or more other Beneficiary(ies)
(Second Beneficiary(ies)).

b A Credit can be transferred only if it is expressly designated as

transferable by the Issuing Bank. Terms such as divisible,
fractionable, assignable and transmissible do not render the
Credit transferable. If such terms are used they shall be disregarded.

Documentary Credit/Letter of Credit

The Transferring Bank shall be under no obligation to effect such

transfer except to the extend and in the manner expressly consented to
by such bank.

At the time of making a request for transfer and prior to transfer of the
Credit, the first Beneficiary must irrevocably instruct the Transferring
Bank whether or not he retains the right to refuse to allow the
Transferring Bank to advise amendments to the Second
Beneficiary(ies). If the Transferring Bank consents to the transfer
under these conditions, it must, at the time of transfer, advise the
Second Beneficiary(ies) of the First Beneficiarys instructions
regarding amendments.

If a Credit is transferred to more than one Second Beneficiary(ies),

refusal of an amendment by one or more Second Beneficiary(ies) does
not invalidate the acceptance(s) by the other Second Beneficiary(ies)
with respect to whom the Credit will be amended accordingly. With
respect to the Second Beneficiary(ies) who rejected the amendment,
the Credit will remain unlamented.

Transferring Bank charges in respect of transfers including

commissions, fees, costs or expenses are payable by the First
Beneficiary, unless otherwise agreed. If the Transferring Bank agrees
to transfer the Credit it shall be under no obligation to effect the
transfer until such charges are paid.

Unless otherwise stated in the Credit, a transferable Credit can be

transferred once only. Consequently, the Credit cannot be transferred
at the request of the Second Beneficiary to any subsequent Third
Beneficiary. For the purpose of this Article, a transfer to the First
Beneficiary does not constitute a prohibited transfer.
Fractions of a transferable Credit (not exceeding in the aggregate the
amount of the Credit) can be transferred separately, provided partial
shipments/ drawings are not prohibited, and the aggregate of such
transfers will be considered as constituting only one transfer of the
Credit.

The credit can be transferred only on the terms and conditions

specified in the original Credit, with the exception of:
- the amount of the Credit,
- any unit price stated therein,

Documentary Credit/Letter of Credit

- the expiry date,

- the last date for presentation of documents in accordance with
article 43,
- the period of shipment,
any or all of which may be reduced or curtailed.
The percentage for which insurance cover must be effected may be
increased in such a way as to provide the amount of cover stipulated
in the original Credit, or these Articles.
In addition, the name of the First Beneficiary can be substituted for
that of the Applicant, but if the name of the applicant is specifically
required by the original Credit to appear in any document(s) other
than the invoice, such requirements must be fulfilled.
i

The first Beneficiary has the right to substitute his own invoice(s) and
(Draft(s) for those of the second Beneficiary(ies), for amounts not in
excess of the original amount stipulated in the Credit and for the
original unit prices if stipulated in the Credit, and upon such
substitution of invoice(s) (and Draft(s)) the First Beneficiary can draw
under the Credit for the difference, if any, between his invoice(s) and
the Second Beneficiarys(ies) invoice(s).
When a Credit has been transferred and the first Beneficiary is to
supply his own invoice(s) (and Draft(s)) in exchange for the Second
Beneficiarys(ies) invoices (and Draft(s)) but fails to do so on first
demand, the Transferring Bank has the right to deliver to the Issuing
Bank the documents received under the transferred Credit including
the second Beneficiarys(ies) invoice(s) (and Draft(s)) without further
responsibility to the First Beneficiary.

The first Beneficiary may request that payment or negotiation be

effected to the Second Beneficiary(ies) at the place to which the
Credit has been transferred up to and including the expiry date of the
Credit, unless the original Credit expressly states that it may not be
made available for payment or negotiation at a place other than that
stipulated in the Credit. This is without prejudice to the first
Beneficiarys right to substitute subsequently his own invoice(s) (and

Documentary Credit/Letter of Credit

Draft(s)) for those of the second Beneficiary(ies) and to claim any

difference due to him.
G. Assignment of Proceeds
Article 49
_____________________________________________________________
_______________________________________________
Assignment of Proceeds
The fact that a Credit is not stated to be transferable shall not affect the
beneficiarys right to assign any proceeds to which he may be, or may
become, entitled under such Credit, in accordance with the provisions of the
applicable law. This article relates only to the assignment of proceeds and
not to the assignment of the right to perform under the Credit itself.

Documentary Credit/Letter of Credit

Annex No 2

Documentary Credit/Letter of Credit

Documentary Credit/Letter of Credit

Annex No 3

Short-term Finance Exports

SHORT-TERM
FINANCE EXPORTS

D Objectives
After studying this chapter you should be able to understand:
6.1

Short-term finance: definition, difference between post-shipment

and pre-shipment, with recourse and without recourse finance

6.2

Definitions of factoring; types, organization of factoring, and

relationships between partners in a factoring operation

6.3

The legal framework of factoring

6.4

Advantages and disadvantages of factoring

6.5

The factoring services in Romania

Short-term Finance Exports

6.1 Short-term finance: definition, difference between post-shipment

and pre-shipment, with recourse and without recourse finance
No legal definition of short-term finance exists, but the British specialized
literature will consider any facility, which would normally be repaid within
two years to be of a short-term nature.
Facilities, which cover a two to five year period, are usually classed as
medium-term facilities and any period in excess of five years is normally
classed as long-term.
Usually, exporters of consumer goods require short-term finance because
importers do not expect long periods of credit. Exports of capital goods are
often sold on medium- or long-term credit.
Post-shipment finance is money required to finance the exporter between
dispatch of goods and receipt of payment. Usually, this period is longer for
exporters than for businesses, which sell purely in the domestic market.
Pre-shipment finance is the money required to finance the business between
the commencement of the manufacturing process and the dispatch of goods.
This period will be identical for the exporter and the non-exporter.
If finance is provided with recourse then the exporter is legally responsible
for payment of that money. Hire, purchase, leasing, forfeiting and export
house type facilities may be for both short- and medium-term credit periods.
If finance is provided without recourse, it means that the lender has agreed
to look to someone other than the exporter for repayment.
6.2 Definitions of factoring; types, organization of factoring,
and relationships between partners in a factoring operation
The beginnings of factoring
The first market for factoring was in the United States of America where
from the early 1890s factors started to offer their services to clients
active in textile and clothing sector. Until the 1960s American companies
were primarily family owned. But when banks were given the
authorization to engage in factoring, a string of acquisition took place.

Short-term Finance Exports

Today, nearly all of the major American factors are bank owned, and
factoring has become more accepted and respected as an integral part of
the financial sector.
As ownership of the American factors passed to the banks, factoring
began to go overseas. American know-how was first introduced to the
United Kingdom in the 1960s, and similar initiatives followed later in
other Western European countries. Some companies were joint ventures
with large American factors, while others were independent initiatives
taken by local commercial banks with a keen eye for the attractiveness of
receivables financing on a factoring basis.
Today, more than 300 factoring companies can be found in all European
countries including the newly emerging markets in Central and Eastern
Europe.
At a diplomatic conference in Ottawa in May 1988 the International
Institute for the Unification of Private Law in Rome (commonly known as
UNIDROIT) presented uniform rules to provide a legal framework that
will facilitate international factoring. The full text of their definition
contained in Article 1.2 and 1.3 is as follows:
2.

For the purposes of this Convention, factoring contract means a

contract concluded between one party (the supplier) and another party
(the factor) pursuant to which:
(a) The supplier may or will assign to the factor receivables arising
from contracts of sale of goods made between the supplier and its
customers (debtors) other than for the sale of goods bought for
their personal, family or household use;
(b) The factor is to perform at least two of the following functions:

Finance for the seller, including loans and advance payments;

Maintenance of accounts (ledger keeping) relating to the A/R;
Collection of receivables;
Protection against default in payment by the buyers;
(c) Notice of the assignment of the receivables is to be given in writing
to the debtors.
3. In this Convention references to goods and sale of goods shall
include services and the supply of services.

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This is the official definition of factoring, internationally accepted. The

definition presented by the Bank of France is based on the juridical
dimension:
A factoring operation consists in the transfer of commercial receivables
from their owner to a factor, which assumes the obligation to cash them in,
even in the case of a temporary or permanent incapacity of the debtor. The
factor can pay in advance all, or only a part of, the total amount of the
transferred receivables.
The most used definition is the British one, due to its simplicity and
concision: the operation through which a company sells its Clients
accounts to a factor. This description of factoring can be translated into
legal terms as the technique allowing a seller of goods or services to transfer
his receivables towards a specialized institution, which becomes their
owner.
A factor purchases book debt of a client company, usually buying that
payable within a maximum period of 180 days. Up to 80 % of the invoice
value is paid to the Client Company immediately, the remainder, net of fees
and expenses, is paid after the debts have been cleared.
The implementation of factors (credit institutions) was determined by the
suppliers need to cash in the amounts from his debtors as soon as possible
and to be exempted from keeping track of the debtors, or from pursuing
them in case of non-payment. The factor will take on him the duty of
cashing in the clients receivables, becoming their beneficiary. At the same
time, he assumes the whole risk of non-payment by the debtors1.
The main types of factoring are:
1) The full service
Factoring in its full form, or old line (i.e. traditional) factoring, is a
continuing relationship between a factor and a supplier (the client) of goods
and services to trade customers in which the factor purchases substantially
all the trade debts of his client arising from such sales of goods or the
provision of such services as they arise in the normal course of business.
1

Basno,C., Dardac,N., Floricel,C., Moned, credit, bnci, Ed. Didactic i pedagogic,

Bucuresti, 1994

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The client in return for agreed fees and finance charges is thereby relieved:
-

From the need to administer and control a sales ledger and collect
amounts payable from the debtors;

From losses arising from the inability of a debtor to pay;

From the provision of trade credit to the debtors, to a substantial degree.

The transfer of ownership of the debts is normally accompanied by the

submission to the factor of the copies of invoices that represent the debts
sold. In some cases, the factor may require the submission of originals to
him for onward transmission to the debtors, accompanied by copies for
retention by the factor. Many factors now arrange for their larger clients to
notify debts to them by electronic means and some do not even insist on the
input to be supported by hard copies of invoices or credit notes.
The factor, in turn, is responsible to the client for the purchase price of the
debts assigned. The purchase price is normally the amount of any discount
or other allowance allowed to the debtor and, in some cases, after the
deduction of the factors charges. The factor will credit the account of the
client in his records with such purchase price of debts sold and as a
corollary the client may charge all his sales to one account that of the
factor. The client will now look to the factor alone to collect the proceeds of
his sales.
The final date for payment of the purchase price will be either a fixed
number of days after invoice date (often referred to as the maturity date) or
when collection has been effected from the debtor.
To the extent that the factor has given approval of the debts, he purchases
the debts without recourse to the client as regards the debtors failure to pay
owing to insolvency. The client thus receives full protection against bad
debts provided that he does not sell to any debtor not approved by the factor
or to an extent greater than the approval given.
By making an early payment (sometimes referred to as prepayment or an
initial payment) on account of a substantial part of the purchase price of
each debt as soon as it is created and purchased, the factor provides the
finance to meet the trade credit requirements of the clients debtors. Some
factors make such prepayment by way of an advance secured by their right
to set it off against the full purchase price when due, whereas others provide
for prepayments by part payments of the purchase pieces.

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The factor will make a retention of part of the purchase price of each debt so
that in aggregate he will hold a sufficient balance to provide for any debt to
be charged back to the client by way of recourse for the non-payment of an
unapproved or disputed debt. However, the balance credited for the
purchase price of debts purchased less the retention may normally be drawn
by the client by way of prepayment at short notice.
2) Recourse factoring
Although most forms of factoring other than the full service are provided
with full recourse to the client in respect of the failure of the debtor to pay
for any reason, recourse factoring normally describes the service by which
the factor provides finance for the client and carries out the functions of
sales ledger administration and collections, but does not protect the client
against bad debts. The factor has full recourse(the right to have payment
guaranteed or the debt repurchased by the client) for debts unpaid for any
reason, including insolvency of the debtor.
Thus, the variation is effected by the simple expedient of providing that in
respect of every debt purchased by the factor he will have the right to sell it
(or part of it) back to the client for the amount for which he credited the
purchase price originally in addition to his charges (or be guaranteed
payment in full by the client) to the extent that the debtor shall not have
settled it by an agreed period after invoice date.
The period often agreed is three months or 90 days from the end of the
month in which the invoice is dated. Such a period postulates that in many
trades and industries, in which the normal usage is for payment to be due at
the end of the month following that of the invoice, the factor must collect
payment within two months of the due date or the recourse may come into
effect.
It is usual to provide that the factor will refrain from exercising his right of
recourse for a specified further period in payment of an additional charge by
the client. In such case, however, the factor may require that an additional
retention be maintained against the purchase price of further debts
purchased so that in effect the client will have repaid the amount paid by the
factor against, or on account of, the purchase price of the unpaid debts.

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In this way, in respect of debts that are seriously overdue, the client will
remain relieved from the collection function but the finance for such debts
may be withdrawn. If it becomes irrecoverable, the recourse is then finally
exercised. It is apparent that the factor, in such a case, does not have the
ultimate responsibility for collection. Approvals of credit are given by the
factor on debtor accounts for the purpose of specifying the amount of
finance available against them or as an advisory service to the client, or for
both reasons.
3) Agency factoring
This variant of the service is sometimes referred to as bulk factoring but as
virtually all factoring relates to the whole of a clients sales with the
submission to the factor of batches or schedules of debts in bulk, the term
bulk could be applied to all forms.
The term agency is now usually used to denote the form for which the
Germans use the more descriptive term Eigen Service Factoring (OwnService Factoring). This form of factoring is further removed from the full
service in that the factor, although requiring disclosure to the debtors, takes
no responsibility for the administration or collection of the debts and the
factoring is fully on a recourse basis.
In some cases directions are given to the debtor to pay direct to the factor; in
others, although notice of the assignment is given to debtors, they are
instructed to pay to the client as the factors agent. In the latter cases the
client is obliged to hold the money recovered in trust for the factor and to
pay it into a bank account of the factor.
In all cases the client administers the sales ledger and enforces payment
from debtors as agent for the factor; thus, this form of factoring is usually
referred to as agency factoring or agency discounting. The purpose of the
arrangement is purely for financing the trade credit requirements of the
clients debtors and the notice to them to pay the factor is to improve the
factors security. The service provided is, therefore, no more than that
obtained by means of invoice discounting, and it is sometimes referred as
disclosed invoice discounting.
This system is used where the clients pattern of trade consists of a large
number of small debtor accounts but where he does not meet the standards

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of financial standing or administration required for consideration of an

invoice discounting arrangement. However, although the foregoing is the
usual nature of agency factoring, at least one leading factoring company
provides this service on a non-recourse basis, subject to approval of debtor
accounts. Another recently developed variant has been described as a
halfway house between recourse and agency factoring. Under that
arrangement the factor retains responsibility for the administration of the
sales ledger but allows the client to carry out collection procedures2.
4) Invoice discounting or confidential factoring
For the clients who need finance for the trade credit requirements of their
debtors but no administrative service or protection, another service is
provided extensively by factors.
By the sample expedient of releasing the client from the need to notify the
debtors to pay direct to the factor and by providing that all debts sold to the
factor should be subject to full recourse, factoring is changed to a purely
financial service sometimes referred to as confidential factoring or, more
commonly, invoice discounting.
In the early days of invoice discounting, debts represented by individual
invoices were sold to factors. This system gave rise to some difficulties: it
was not always possible for the client to pass on to the factor the payment
for the invoice in its original form as the payment might be made after
deductions for cross-claims or combined with payment of other invoices.
In recent years, the service of invoice discounting has more usually been
provided on a whole turnover basis by including all the clients sales or all
his sales to particular customers. The client maintains the sales ledger and
collects from the debtors on behalf of the factor to whom the ownership of
the debts has been transferred, and arrangements are made for the proceeds
of collections to be paid by the client direct to the factors bank account.

It is referred to as CHOC (Client Handles Own Collections), for a purist a misnomer: the
collections are the factors and not the clients because the debts belong to the factor!

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5) Undisclosed factoring
The term undisclosed factoring is sometimes applied to an invoice
discounting as described above; but it is usually taken to denote an
arrangement for invoice discounting whereby the factor will provide
protection against bad debts to a limited extent by specifying that an agreed
percentage (normally 80%) of any approved indebtedness shall be without
recourse as regards credit risks.
The arrangement limits the protection to such a percentage so that the client,
who maintains the ledger and collects from debtors, has some incentive to
carry out the duties with efficiency. In some cases however factors have
been known to accept the full amounts of approved debts should be without
recourse and thus to provide the same protection against bad debts as in the
full service.
6) Maturity factoring
The above are the principal forms of factoring in which the factor provides
finance by making prepayments of part of the purchase price of the debts
purchased by him.
Where finance is not required, an arrangement, used increasingly by small
businesses as an alternative to credit insurance, comprises full
administration of the sales ledger, collection from debtors and protection
against bad debts. This service, often called maturity factoring, can be
defined as a full service factoring without the financing element.
Because of the lack of financing, the guarantees are different. The risk
consists only in debtors risk; there is no sellers risk. For the same reason,
there are no financing commissions, the factor being remunerated through
commission taxes.
- The factor pays his clients receivables in one of the following ways:
After a certain period from the date of invoicing (the maturity period); the
client knows when he receives the money, so he can his cash flow
accordingly, or
- Cashing in the receivables from the debtor, or

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- In the case of the debtors insolvency, after cashing the insurance policy,
if the non-payment risk is insured.
- To apply for this service, the client is supposed to have enough finance
sources; he demands the factor to improve the weak administration of his
organisation, to diminish the indirect costs and to ensure security.
Basically, a factoring operation involves three participants: the factor,
usually a banking institution buying the receivables which a business, called
the client, has over another business, called the debtor. The factor
represents the link between the client and the buyer, to whom it renders
several services.
The mechanism

Supplier
(Client)

Factor

Beneficiary
(Debtor)

The system
of
correspondent banks

Source: Cirstea, A., Consortiile bancare si factoringul

certitudini ale cooperarii financiar-bancare internationale,
Bucuresti, 1999
1.

The supplier (client) delivers the merchandises to his domestic or

foreign client (debtor), according to the commercial contract
concluded between them.

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2.

On the basis of the factoring contract, the client presents to the

factoring company a register consisting of :
the ceded receivables, together with their rights and accessories;
a declaration of transferring his receivables to the factor;
a payment request for the issued invoices.

3.

After analyzing the invoices received from the client, the factoring
company lets him know about the accepted invoices (taking into
consideration the guarantees each of them provides).

4.

The client sends to the factor the originals of the accepted invoices.
From this moment on, it is the factor that will cash them in, and will
take the potential financial risks that could appear. In his position as
owner of the receivables, the factor has no right to turn against his
client.

5.

The client announces to his debtor the ownership transfer of his

receivables to the factoring company.

6.

The factoring company pays a first share of the accepted invoices'

amount, usually 80 - 85% of their total value, after deducing the agio
(the factoring companys commission).
The agio differs from one country to another and from one period to
another, according to the economic situation and to the relationship
between demand and supply.
For its general services rendered to the client, the factoring company
receives a commission, whereas for the prepayment of the invoices
(before cashing them in from the buyer), it receives an interest,
calculated as pro rata temporis.

7.

The client learns from his bank (through a statement of account) about
crediting his account by the corresponding amount.

8.

Upon the received notification, the debtor will pay to the factoring
company the entire value of the invoices on the maturity date stated in
the economic contract.

9.

The factor learns from his bank (through a statement account) about
crediting his account by the total value of the accepted invoices.

10.

Within 2-3 working days since it has cashed in the money from the
debtor, the factor shall pay to the client the rest of 15-20%.

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11.

The client learns from his bank (through a statement account) about
crediting his account by the value of the second share of the invoice
value.
In a more detailed scheme, in the case of international contracts, besides
the initial factor there is a second factor (resident in a foreign country),
who will be an import-factor, if he takes the risks of collecting the
receivables in his country, or an export-factor, if after buying the
receivables of a domestic client, he will send them to be collected by a
factor in the country of the debtor, thus exporting the risk.
The operational scheme3 for this case looks like the following:

EXPORTER

Exportfactor
B

Export-factor
A
5

Export-factor
C

Import-factor

Import-factor

IMPORTER

Import-factor
C

Source: Cirstea, A., Consoriile bancare i factoringul certitudini ale cooperrii

financiar-bancare internaionale, Bucureti, 1999

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So, at international level, there are new participants coming up:

The import-factor: a factor operating in the importing country, who

takes the obligation, together with the debtor, of repaying the
merchandises;

The export-factor: a factor operating in the exporting country, who

has information upon exporters, for which he takes the responsibility
of collecting receivables from their debtors;

The factoring chain: the international network of factoring

companies and their relational system (there are three big international
factoring chains: International Factors, W.B. Heller, Factors Chain
International, but every international banking group has created its
own factoring department).

The inter-relations created among all these participants in a complex

factoring operation (at international level) function as follows:
1.

The exporter delivers the goods or renders the services.

2.

As a result of the export operation, payables are issued upon the

importer and receivables are to be collected by the exporter.

3.

The exporter cedes the rights (receivables) he has over the importer to
a factoring company.

4.

The export-factor pays on instant 85% of the invoice value to the

exporter (called also seller or client).

5.

Before making the payment, the export-factor keeps the interest

(which it charges for prepayment) and then it cedes the paid
receivables, together with an agreed share of interest to the importfactor.

6.

The import-factor cashes in the invoice value from the importer. At

this moment, the difference of 15% and the commissions between the
import-factor, the export-factor and the client are also paid. The risk
of insolvency is thus transferred from the client towards the exportfactor, and from the export-factor towards the import-factor.

This technique provides the client with money available before the maturity
of credits granted to importers.
If the factor lent his liquidities by a common credit contract, he would gain
only the interest; moreover, he would have only the quality of a simple
creditor in case the debtor goes bankrupt. Through factoring, instead, he

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may charge an interest by 1.5-3% higher, included in the commission (for

all the services offered). At the same time, by assuming the clients position
towards the ceded debtors, the factor will benefit of all the guarantees the
client used to have4.
Companies ask for factoring in order to benefit from various advantages,
such as:

The factor takes the risk of non-payment by the external debtors and
makes the payment of the receivables before their maturity, turning a
period-payment into a current-payment;

The period for obtaining liquidities is much shorter than in the case of
a credit; the client will improve his cash-flow, the money being used
according to his immediate needs and not for specific destination, as
in the case of a credit.

The documents needed for obtaining financing through factoring are not as
many as when applying for a credit. The acceptance of receivables by the
bank is irrevocable, but it implies a proper execution of the commercial
contract by the client.
The import-factor can check each of the buyers from various countries
where the seller exports.
The debtor (importer) pays the value of the receivables in his country,
avoiding a currency exchange; at the same time, he has the opportunity of
corresponding with the import-factor in his own language and of solving
potential litigations within the legal framework and the jurisdictional
competence which are familiar to him.
The factoring operations represents an advantageous means of financing for
exporters, providing liquidities necessary to develop their business,
protection against the risk of non-payment by their debtors, administration
and collection of invoices, in the conditions of attractive costs.
Taking into consideration that not all activities can be performed by
factoring, the clients selection supposes an analysis of the business, a deep
understanding of all the aspects involved in it, in order to make the decision
whether factoring is appropriate or not.
4

Popa I. (coord.), Tranzacii comerciale internaionale, Ed. Economic, Bucureti, 1997

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Besides his obligation of cashing in receivables, the factor (both export and
import) can offer his client two supplementary services:

1. guarantee for a proper execution of the contract;

2. financing, by making available the whole sum or a part of it,
representing the invoice value, before the buyers payment.
The relationship between the client and the factor, including all the three
services provided (administration, guarantee and financing of receivables)
can be summarized by the following scheme:
Co-operation

Export - factor
Transfer
of
Receivables

Import - factor

Financing

Regulations

Guarantee

The seller
(Client)

Selling
Invoicing

Administration
of
receivables

The buyer
(Debtor)

Source: Cirstea, A., Consortiile bancare si factoringul certitudini ale

cooperarii financiar-bancare internationale, Bucuresti, 1999
The relationships between partners give rise to certain bilateral obligations:
seller buyer, export-factor client, import-factor debtor, export-factor
import-factor.
a)

The relationship seller buyer

The seller has to deliver the goods. The order from the buyer (previously
accepted by the seller) creates a certain and due receivable over the buyer.
On the other hand, the buyer becomes a debtor who is obliged to pay the
amount stipulated by the contract for the goods delivered by the seller.

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b)

The relationship export-factor client

The client agrees with the factoring contract proposed by the factor. This
contract defines the rights and duties of each party.
The client has the obligation to transfer the receivables. In return, he may
benefit from the three basic services: administration, guarantee and
financing of his receivables.
As for the factor, he takes over the receivables presented by the client, but
receives remuneration for the services he renders.
c)

The relationship import-factor debtor

The buyer is the debtor, and he will be notified about his obligation to pay
the value of the goods he bought directly to the factor.
d)

The relationship import-factor export-factor

The co-operation relationship between the financial institutions which

intermediate such an operation (this mechanism could not be possible
without them) is achieved on contractual basis, being strictly regulated.
6.3 The legal framework of factoring
A factoring contract is the contract by which a person (the client) cedes his
receivables to a third party (the factor), who assumes the responsibility of
taking over the receivables in exchange for a tax (the agio).
The direct transfer of invoices (no other formality needed) does ceding the
receivables, the factor becoming their owner.
The contract clearly and completely stipulates the rights and duties of each
party.
The nature of the contract
The factoring contract has to comply with the common law regulations and
it has an intuit personae character. This dimension is permanently present
due to its commercial operationally. Thus, the factor may cancel the
contract if significant changes in the financial or juridical structure of the
client occur.
The contract stipulates mutual rights duties with onerous title (as their
meaning is the payment for the services rendered by the factor to his client),
whose execution is consequent, according to the time distribution of the
operations phases.

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The structure of the contract

The structure of the contract (see the Annex No. 1) comprises two aspects:

general conditions (regulating the general framework of the relationship

between the factor and the client);

Particular conditions (specific provisions agreed by the parties).

The general conditions refer to:
1. the factors duties;
2. the clients duties;
3. the conditions of the guarantee provided to the client:
previous agreement regarding the list of debtors and the amount of
their payables;

at any moment, the factor may modify the guarantees (only

applicable to future operations);

the factor becomes the owner of the ceded receivables;

the receivables are not contested by the debtor;
the guarantee does not apply over receivables not cashed in either
because of fortuitous causes (war, calamities), or as an effect of
financial regulations regarding the currency transfer;
4. the average period of the credit (generally, it is periodically revised);
5. the payment of the accepted receivables;
6. the subrogation (setting the conditions to achieve it);
7. the cashing in of receivables (the client shall mention on his invoices
that the payment is directed towards the factor);
8. the supervision of receivables:

the clients obligation to pass to the factor all the receivables

regarding the agreed debtors;

the factors right to agree or to reject the renewals or the

arrangements requested by the debtors;

the expenses related to the cash in operations are made by the factor
(for all the accepted receivables);

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9. the remuneration of the factor:

the factoring general commission, calculated on the total value of

the invoice;

the interest (a special commission) charged for crediting the client;

the clients obligation to pay all the fiscal charges related to the
execution of the contract;
10. the indivisibility of invoices and compensations;
11. the right of control for the factoring company (or a third party appointed
by it) over the documents regarding the contractual operations, as well
as the obligation of the client to facilitate to the factor the exercise of
this right;
12. The way of solving the contests, by stating the competent body.
The particular conditions include all the specific dispositions or derogations
agreed by the parties, such as:
1.

the operations for which the contract is applicable;

2.

the good being the object of the contract;

3.

the countries to which the contract refers;

4.

the maximum amount guaranteed by the factor for each debtor;

5.

the average period of the credits and the revision period;

6.

the maximum period for each credit;

7.

the maximum payment the factor agrees to make for crediting the
client;

8.

guarantees and other accessories;

9.

the specific conditions for the factors remuneration;

10. the duration of the contract, which is usually undetermined, and

can be cancelled by either of the parties (a notice must be made
three months before);
11. the authorized risks.

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A factoring contract represents:

A current account convention intended to record all the
financial glows linked with the contractual operations.
A payment effect determined by the transfer of the ownership
right.
In case of non-payment at maturity, the factor may choose one of the
following options:
a) to cancel the crediting operation of the particular account and to
debit the same account by the corresponding amount, or

b)

To cancel the crediting of the account and to sue the debtors, in order
to get his money back.
-

A guarantee effect, because the receivables guarantee the debts of

every party.

An innovating effect, because the original receivable turns into an

item of the new account, and from this moment on, all its specific
actions, exceptions and guarantees end. By the effect of current
account contract, the buyer does not pay the price, but places it in
the credit part of the current account. Since the moment the
receivable is included in this account, the seller cannot reject the
sale-purchase contract anymore, because the receivable still exists
only as an item of the account. Though, in case of nullity or
partial cancellation of the receivable, this will affect also the
recordings of the item in the account.

An indivisibility effect (compensation effect), meaning that since

theyre entering in the account, the receivables depersonalizes.
This effect occurs only for one current account, not for two or
more accounts, even if opened between the same parties (unless
the explicit merger of the accounts).

A convention of exclusivity, according to which the client commits

himself to deliver to only one factor the totality of the receivables he
has upon all the debtors included into the contract.

The factors attributions

According to contractual provisions, and due to the fact that he substitutes
the supplier, the factor commits himself to the followings (concerning the
particular field of his clients activity):
1.
the duty to cash in the receivables;

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2.
3.

the financial risks derived from the commercial relationships between

the client and the debtor;
updated information collection regarding the financial status of the
debtor;

4.

determination of the credit limit for each debtor (the client is notified
about it);

5.

guarantee of the receivables (together with the client) up to the

established limits;

6.

acceptance of the receivables for the goods included into the contract;

7.

taking the position of beneficiary of the receivables;

8.

performance of several operations (on the basis of the documentation),

among which:
checking the primary financial statements;
accepting the documents related to the merchandises included into
the contract;
debiting the clients account on the receivables maturity date;

9.

payment of the receivables value (immediately after receiving the

invoices and the docket), thus becoming the clients creditor;

10.

calculation of the factoring commission and interest, deducing these

amounts from the total value of receivables;

11.

cashing in the invoices, keeping the necessary evidences of the

debtors;

12.

sending to the client periodic accounting evaluations of the debtors;

13.

Starting a lawsuit against bad debtors (in case of non-payment of an

invoice).

The clients attributions

Mainly, the responsibilities of the client in a factoring operation (within his
relationship with the factor or the debtor) are the following:
1.

Guarantee of the receivables (together with the factor), up to the limits

communicated by the factor and accepted by both parties;

2.

Accepting responsibility in cases of technical or commercial contest

forwarded by a debtor and admitted as valid;

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3.

Release from the concerns related to the debtors, all their financial
operations being taken over by the factor;

4.

duty to send to the factoring company at the dates agreed in the

contract:

the invoices issued for his debtors in that particular period;

any other financial documents created in regard to the debtors;

5.

maintenance of responsibilities for operations beyond the guarantee

(going over the limits agreed with the factor), or for debtors not
comprised within the factoring contract;

6.

cashing in the value of the receivables ceded to the factor (since the
moment the invoices and the docket are sent), less the factors
commission and the interest for the sum credited by the factor;

7.

periodic reports regarding the situation of his debtors, sent by the

factor;

8.

notification from the factor about the commercial causes determining

the non-payment of an invoice.

Criteria for choosing factoring

The classic criteria for choosing a factoring operation are the following two:
1.

The turnover is sufficiently high, or else the factoring company would

not have a yield high enough to cover the amortization of logistics and
the risk division.

The average invoice value is high enough, because the unit cost of
factoring services is usually higher than the established figures.

The other eligibility conditions are more or less negotiable and particular to
each factor.
Company needs
The company applying for factoring has to determine its needs not only
according to its present situation, but also according to its expected future

Short-term Finance Exports

evolution: the turnover increase produces structural consequences at various

levels.
6.4 Advantages and disadvantages of factoring
The main advantages provided through factoring are:
The greatest advantage of international factoring consists in the exporters
contact with only the factor resident in his country; thus, the exporter has an
easy and effective way of tracking, recording and cashing his receivables
from debtors in different countries. The export-factor is in charge with the
international operations, the client having just a domestic and easy-toconduct transaction to conclude.
At first, factoring has been a technique preferred by small and medium size
companies, but larger companies discovered, at their turn, the flexibility of
receivables financing. The main benefits for the users of factoring services
are: a consistent cash flow, lower administrative costs, reduced credit risks,
more time for core activities.
Factoring also provides complementary advantages for the clients, such as:
1.

no administrative operations of tracking and cashing in the invoices

and other receivables from the debtors;

2.

a more efficient use of the financial resources, being able to make use
of the funds received from the factor on account of the ceded invoices;

3.

reducing the funds for the current activities;

4.

the opportunity to start business relations with a larger number of

clients (debtors);

5.

improved security, by better knowing the debtors standing;

6.

the enlargement of the market, by establishing relations with worthy

partners;

7.

no preliminary operations and expenses before concluding

international commercial contracts, in order to find out the financial
status of the partners, this being the factors duty;

8.

exemption from legal actions in the case of debtors non-compliance

with the contract terms;

Short-term Finance Exports

9.

all the accounts concerning the relations with debtors are replaced by
only one account in order to record the operations done by the factor.

For the factor, the advantages can be summarized by the following:

1.

He knows all the details about the clients debtors, so he does not start
business with partners having low credit worthiness;

2.

He can find new clients with a high standing within the international
factoring network.

The main difficulties and limitations in factoring are:

The use of a factor improves the cash flow and helps avoid over-trading, as
well as reducing overheads by allowing someone else to take responsibility
for debt collection.
However, many firms are resistant to factoring, because it is often argued
that recourse to a factor is a sign that the firm is experiencing trading
problems. If this were the case, then that firms suppliers might loose their
own trade credit arrangements and be required to pay invoices in advance of
receipt of the goods an services involved.
Furthermore, where firms experience delays in payments of more than a
specified number of days, the factor will reclaim the funding already issued.
Finally, firms may find that, once they rely upon the services of a factor,
they may be locked in to the relationship even when conditions improve,
because of the cash flow implications of any arrangements5.
The auxiliary downsides refer to:
1.

The relatively high costs (the interest and the commission);

2.

The difficulties raised by the termination of factoring relations:

for the client, because he has no experience in book-keeping for

debtors who have been used to work with the factor;

for the factor, because he looses a client, diminishing his profits;

Burns, P., Dewhust, J., Small Business and Enterpreneurship (2nd edition), Macmillan
Business, Hampshire, 1996

Short-term Finance Exports

3.

The low autonomy of the client, because the factor knows in detail all
his administration and his relations with debtors.

6.5 The factoring services in Romania

The development of factoring practices in Romania is not such a common
technique. This can be explained by the lack of specialized institutions of
this kind. At the same time, the banking institutions which are allowed by
law to perform such activities, have not yet developed an efficient and
comprehensive cooperation system with factors in other countries (either
specialized institutions, commercial banks or their specialized departments),
in order to be able to check the creditworthiness of various foreign debtors,
and also to cash in directly their receivables.
The first steps
The factoring system entered Romania in 1994, when the Romanian Bank
for Development joined the Factors Chain International. It was the first
Romanian banking institution starting offering this kind of services on the
Romanian market. The offer of the Romanian Bank for Development at the
time was addressed exclusively to Romanian exporters, and the bank has
been providing only export-factoring services so far.
In October 1999, the Romanian Commercial Bank and the Demirbank
joined the Factors Chain International at the same time. In the beginning,
the Romanian Commercial Banks offer was directed only to exporters
through export-factoring services. After one year, though, the bank started
performing factoring operations also for domestic customers (in ROL).
The customers of factoring have diversified and increased significantly
every year. The total value of such operations in the last year was USD 11
mill., the Romanian Commercial Bank earning USD 300,000 out of this
amount.
There are a big number of medium and small size companies from the
textile and furniture industry, which have required and used factoring
services. Well-known companies in chemical and petrochemical industry
have also asked for these services, giving up other kinds of financing for
factoring.

Short-term Finance Exports

In the present state of the national economy, the factoring represents a

viable solution for Romanian exporters. It will promote and encourage
exports from Romania, by providing:
- Resources to cover the immediate liquidity needs,
- Guarantee (by the factor) for cashing in all the receivables, and
- Risk taking in case of non-payment of foreign debtors.
The legal provisions
In legal terms, the factoring services for Romania were regulated through
the Emergency Government Ordinance no.10/1997 (issued on April 19,
1997, in order to stop the financial blockage and the loss in the economy).
According to this law, factoring is seen as one of the financial instruments
allowed for payment between commercial companies or between these
companies and autonomous Regies. The authorized legislative body defined
it as a contract concluded between the client, who sells goods or renders
services, on one side, and the factor, which is a bank or a specialized
financial institution, on the other side. Through this contract, the factor
provides financing, receivables tracking and credits risk protection, whereas
the client cedes (by sale or subrogation) his receivables arisen from goods
sold or services rendered to third parties.
On September 2, 1997, the government issued methodological norms for the
implementation of the provisions of the ordinance. Within these norms, it is
stipulated for factoring that the value of receivables ceded by the client
through the contract will be negotiated by the parties and it needs the
approval of the clients Board of Directors or manager, as it is the case.

Progress test

1.

Define short-term finance.

2.

Show the difference between post-shipment and pre-shipment finance.

3.

Define the factoring.

Short-term Finance Exports

4.

List and define the main types of the factoring.

5.

What is the recourse factoring?

6.

What are the parties involved in the mechanism of the factoring?

7.

Describe the mechanism of the factoring.

8.

What are the participants of the factoring at international level?

Describe the mechanism.

9.

What are the main elements of a factoring contract?

10.

List the factors attributions under the contractual provisions.

11.

List the clients attributions under the contractual provisions.

12.

List the advantages provided through the factoring, as well as the

difficulties and limitations in factoring.

13.

Describe the factoring in Romania.

Short-term Finance Exports

ANNEX No 1
FACTORING AGREEMENT
The Romanian Commercial Bank registered in the Register of Trade
under the no. J/12/./1990, located in Bucharest, 110 Bd. Ferdinand,
hereby called the Factor, represented by Mr..., as general manager,
And
S.C. X SRL, phone/fax , having its headquarters in Bucharest,
22 Negura Street, registered in the Register of Trade under the no.
J38/../1991, hereby called the Client, represented by Mr..., general
administrator,
Have agreed upon the following:
1.

The Client cedes, in favor of the Factor, its receivables emerging from
the contract no. 05/2001, concluded on March 19, 2001, with S.C. Y
S.A (see the Annex No. 2).

2.

The Factor accepts the ceded receivables from its Client, amounted to
EUR 22,500. Since this moment on, the Factor becomes the new
owner of the receivables, so it will cash them in from the debtor.
If within 30 days from the moment the Factor is informed about the
debtors inability to pay the due amounts of principal and interest, the
debtor is still not able to pay these amounts plus penalties, the Factor
is allowed to claim to the Client to make the payment.

3.

This agreement is concluded for a period of 2 months, with an interest

rate of 17% charged by the Factor on the day of the agreement.

4.

The Client is allowed to receive immediately from the Factor the

amount of EUR 18,000, representing 80% of the total value of ceded
receivables, under the following conditions:

A)

The sum has a compulsory destination: it shall be used only for

matters linked with the performance of the mentioned contract.

Short-term Finance Exports

B)

The Client accepts to pay monthly the principal and the interest, as
charged by the Factor, for the advance payment received. The
schedule of repayment is presented in the table below:
DATE

PRINCIPAL INTEREST TOTAL AMOUNT

23-Apr-01

9,000

3,060

12,060

23-May-01

9,000

1,530

10,530

TOTAL

18,000

4,590

22,590

The repayment is allowed to be pre-paid, partially or entirely. If the client

pays the whole amount before the due date, the provisions of the present
factoring agreement become void and after this moment both parties will be
exonerated from subsequent obligations regarding these provisions.
Any infringement of the payment terms entitles the Factor to cancel the
payments to the Client, unconditionally, and to claim potential damages.
The payment will be made in the Clients account, no. 4391.1-1 and will
be available starting March 23, 2001.
During the period of the agreement, the Factor is allowed to adjust the
interest rate in accordance with the evolution of inflation and cost of
financial resources. The new interest rate will be applied to the outstanding
principal on the day the change has occurred and the Client will be informed
within 5 days, with no other specifications. In the case the Client does not
pay the rest of the principal and interest within 10 days after notification, the
new interest level is considered as accepted by the Factor.
The interest and bank commissions are computed and paid monthly, starting
one month after the factoring agreement enters into force. Interest
computation period is since the 23rd of the previous month till the 22nd of the
current month.
The Client is obliged to:
A)

Employ the money only to the specified destination;

B)

Pay the principal, interest and commissions on their maturity, as

agreed;

C)

Submit any document requested by the Factor, issued from its

relationship with the debtor.

Short-term Finance Exports

The Factor is entitled to cancel the present agreement if the Client submits
any false information.
The Factors obligations are:
A)

Payment of the accepted receivables value immediately after

submission of invoices by the Client;

B)

Calculation of factoring commission and interest;

Providing periodic evaluations to the Client on the receivables cashing in

situation.
The present factoring agreement has been concluded today, March 22, 2001,
in 4 copies.

FACTOR:
Romanian Commercial Bank

CLIENT:
S.C. X SRL

Short-term Finance Exports

ANNEX No 2
CONTRACT NO. 05/2001
Concluded on March 19, 2001
Art.1 Contracting parties
S.C. X SRL, phone/fax .., having its headquarters in City.., 22
Negura Street, sector 2, fiscal code R .., account no. 4391.1...1/ROL, opened with the Romanian Commercial Bank Bucharest ,
represented by Mr. .. and Mr. ... administrators, as the Performer,
And
S.C. Y S.A., phone , having its headquarters in Town, 17 Avram
Iancu Street, fiscal code R ., account no. 5221100000.., opened with
the Transilvania Bank Branch, represented by Mr. .. - manager and Mr. ..
administrator, as the Beneficiary.
Art. 2 Object of the contract
Automation equipment for the production line of concrete-based mortars.
Art. 3 Phases and execution deadlines
The phases and execution deadlines according to the annex 1.
Art. 4 Values and terms of the contract
The value of the contract, according to the annex 1, is EUR 20,000 (VAT
not included) and refers to the phases specified in the annex 1. The value
and completion deadline for each phase has been specified in the annex 1.
The payment shall be made in ROL, for the exchange rate ROL/EUR
calculated by the National Bank of Romania on the day of the payment.
The projection phases (the execution project and the information program
for the programmable equipment and for the operation station) will be paid
after the presentation of the minutes.
Art. 5 Payment terms
5.1 The payment for the activities performed by the Performer shall be
made by the transfer of agreed amounts through the parties banks,
according to the commercial invoices.

Short-term Finance Exports

5.2 The payment of the invoices issued by the Performer shall be made
according to the documents certifying the completion of the works
performed by them, which have been accepted by the Beneficiary.
5.3 The checking of the works by the Beneficiary should be made within 5
days after their reception and the payment of the invoices, within 15
days from their acceptance.
5.4 If a work is not has not been checked by the Beneficiary within the 5
days, it is considered accepted, so the corresponding invoice will
become payable.
Art.6 Obligations of the parties
6.1. The obligations of the Performer:

to perform the works included in the contract, according to the technical

specifications;

to perform quality works, on the deadlines stipulated in the contract;

to operate the necessary modifications in the case the initial technical

documentation has been changed, and at the same time, to renegotiate
the terms and values;

to remake, out of its own resources, the poor quality works due to its
fault, found during the execution and /or while the checking.

6.2 The obligations of the Beneficiary:

to provide a clean working place as the works advance;

To perform its own works, according to the technical specifications.

Art.7 Projection deadline

The Performer commits itself to finishing the projection phase until April
23, 2001, under the condition of being provided the projection theme by the
Beneficiary until March 20, 2001.
Art.8 Guarantees
The performed works are guaranteed 12 months after reception, but no more
than 18 months after delivery.

Short-term Finance Exports

Art.9 Contractual clauses

9.1 The Beneficiary may cancel the contract if:

the Performer goes bankrupt, declares bankruptcy or starts liquidation;

the Performer has abandoned the contract.

In the case of termination of the contract because of the Performer, the

parties will assess the stage of the works already performed, the inventory
of the auxiliary equipment and tools, and will establish the amounts to be
paid according to the contract.
9.2 The Performer may cancel the contract if:

the Beneficiary neglects its obligations, making the Performer unable to

perform its activity;

the Beneficiary has not made a payment fallen due, according to the
terms of the contract;

the Beneficiary goes bankrupt, declares bankruptcy or starts liquidation.

Art.10 Penalties
10.1 The non-payment of an invoice within 20 days after their issuance
makes the Beneficiary liable for a penalty of 0.15%/day, but less than 5% of
the invoice value, and leads to the postponement of the next payments with
the number of days of this payment delay.
10.2 The delay in completion of works by the Performer will be charged
with a penalty of 0.15% on the value of the phase, but less than 5% of the
phase value. As a guarantee for the proper completion, the Beneficiary
retains 5% of the value of works until the reception of the last phase.
Art.11 Final dispositions
Any modification or addition to this contract is possible only through
additional acts signed by both parties.
Before canceling the contract, the parties will try to reconcile, and the
results of this action will be recorded in a minute.
For the unsolved litigation, the parties may address to the Court, in the
conditions of the Romanian laws, in order to materialize the requested
claims.

Short-term Finance Exports

None of the parties will be held responsible in the case of force majeure,
according to the Romanian law.
A protocol containing the work safety rules will be concluded and annexed
to this contract.
This contract enters into force in the moment of its conclusion by the parties
and after the Beneficiary has paid an advance of 35% of the total value of
the contract.
This contract has been concluded in 2 copies, one for each party.

Date: March 19, 2001

BENEFICIARY:
Administrator,

PERFORMER:

Manager,

Administrators,

ANNEX 1
To the Contract no. 05/2001

No.

Name

Phase

Execution project, information

program for the programmable
Art.2
equipment and for the operation
station

Programmable equipment and

Art.2 PC with microprocessor INTEL
and display 19"

Art.2 Command board

TOTAL

Value
(EUR)

Deadline

7000

5 weeks from
conclusion and
advance payment

5 weeks from
conclusion
13000
and advance
payment
5 weeks from
conclusion and
advance payment
20000

Medium- and Long-term Finance for Exports

MEDIUM- AND
LONG-TERM FINANCE
FOR EXPORTS

D Objectives
After studying this chapter you should be able to understand:
7.1

Supplier credit and buyer credit

7.2

ECGD medium-term supplier credit guarantee

7.3

Forfeiting

7.4

Leasing
7.4.1

History of leasing

7.4.2

Leasing: definitions, types

7.4.3

Leasing in Romania: the legal framework

7.4.4

The importance of leasing

Medium- and Long-term Finance for Exports

7.1 Supplier credit and buyer credit

Supplier credit involves the exporters bank in the lending of money to the
exporter, to provide post-shipment finance. The onus is on the exporter to
repay the bank, and so supplier credit is usually provided with recourse to
the exporter.
Buyer credit facilities involve a loan from a bank to enable the buyer to pay
the full cash price of the export on shipment. The loan can be made directly
to the overseas buyer, or via an intermediary organization in the importers
country. There is no recourse to the exporter if the buyer defaults, since it is
the buyer who has borrowed the money, not the exporter. Buyer credit
facilities turn the export sale into cash on shipment sale from the exporters
point of view.
7.2 ECGD medium-term supplier credit guarantee
Being able to export its goods and services successfully is vital to any
countrys economic health but in most overseas markets there is intense
competition either from the domestic producers or other exporters. To
remain competitive UK exporters have to be prepared to offer credit to
prospective importers and, this involves taking a risk because the exporter is
releasing the goods before being paid. The longer the period of credit the
greater the chance of something going wrong and the normal way against
the risk of loss or damage to the goods in transit and can also take some
precautions, such as a letter of credit, to try to ensure that the importer pays.
The exporter also faces a variety of political and country risks, such as a
change of government in the importers country followed by a suspension of
settlements of overseas debt which prevent the exporter being paid.
To persuade exporters to grant periods of credit and to take on these
additional risks which can not be covered by normal commercial insurance
policies, the government set up in the United Kingdom a credit insurance
scheme under the auspices of ECGD in 1919. In addition, to providing
insurance cover, ECGD also provides a range of guarantees to banks and
other financial institutions to encourage them to provide finance to support
exports. These guarantees extend to overseas buyers who are looking for
credit to purchase UK exports.

Medium- and Long-term Finance for Exports

A. ECGD medium-term supplier credit guarantee

The main steps of the facility operation are1:
a) Arrangement made prior to shipment:
- the exporter must have basic ECGD insurance of the overseas debt;
- the exporter applies via his bank for an ECGD medium-term supplier
credit guarantee;
- if the ECGD are satisfied with the transaction, they issue a guarantee in
favour of the exporters bank covering the full amount of the money the
bank is authorized to lend under the scheme, plus interest;
- the exporter must sign a recourse agreement with the ECGD and must
pay a premium for both the guarantee and for the ECGD insurance;
- the amount which the bank can lend and be covered by the ECGD
guarantee will normally be between 80% and 85% of the contract price
and the credit period will be between two and five years. The importer
will normally pay the balance of the contract price from his own
resources at the outset.
b) Procedure on shipment:
- The exporter will ship his goods and submit a series of bills of exchange
covering repayment of the money owing in the agreed installments;
- The bank in effect negotiates these documents. Thus the exporter
receives the full face value, and will pay interest between the date of the
advance and the date of the repayment. The bank presents the bills of
exchange or promissory notes, for payment in the same way as it would
an ordinary collection.
- The rate of interest is subsidised by the ECGD and the rate, known as
the consensus rate, remains uncharged throughout the period of the loan.
c) Position if the bills of exchange/promissory notes are dishonoured:
- The ECGD guarantee covers the full amount, plus interest, of any bill of
exchange/promissory note for which payment has not been received
three months after the due date of payment. If the Bill of Exchange has
not been accepted, the bank must claim from the exporter. However, the
ECGD guarantee still protects the bank if the exporter can not repay. If
the Bill of Exchange has been accepted, the bank claims directly from
the ECGD.
1

Watson A Finance of international trade, 4th edition, The Chartered Institute of Bankers,
London 1992

Medium- and Long-term Finance for Exports

The bank can, therefore, claim from the ECGD under the terms of the
guarantee, and will be paid in full whatever the reason for the nonpayment.
The ECGD will claim from the exporter the amount paid to the bank
under its guarantee.
The exporter will be able to offset the amount to which he is entitled
under his ECGD insurance policy. Hence, if the buyer causes defaults
insolvency, and if the exporter has fulfilled the terms of his ECGD
insurance, then 90 % of the amount will be claimable and can be offset.
In this situation, the exporter will pay only the net 10% to ECGD.
However, if the exporter has no claim under his insurance policy, then
he could end up having to reimburse the ECGD with the full amount,
which it has paid out to the bank under the guarantee.
The exporter has to show a contingent liability in his balance sheet
because there is potential recourse against him by the ECGD.

B. ECGD single contract buyer credit guarantee

The main steps of the operation of the facility are2:
a) Operation and availability
ECGD single contract buyer credit guarantees are available where the
contract value is for 1 million or more. The exporter and his bank should
contact the ECGD before commercial negotiations begin, to see if the
facility will be available. The exporter should be aware of the ECGDs
attitude and likely conditions before he submits any tender or quotation to
the overseas buyer.
b) Position if the buyer defaults
The loan from the UK bank to the buyer is guaranteed in full by the ECGD.
There is no right of recourse by the ECGD if the buyer defaults on the loan,
unless the exporter defaults on the commercial contract. Hence, two
particular advantages of buyer credit facilities for the exporter is:
- No contingent liabilities need to appear in his balance sheet because
there is no right of recourse.
- There is no need to take out any form of ECGD insurance as, from the
exporters point of view, the sale is on cash terms.
c) Other advantages to the exporter from buyer credit guarantee:
2

Watson A Finance of international trade, 4th edition, The Chartered Institute of Bankers,
London 1992

Medium- and Long-term Finance for Exports

The exporter does not have to pay interest on the loan, since the loan is
made to the buyer.

The interest rate, payable by the buyer, is fixed and is subsidised.

d) The disadvantages of buyer credit guarantees:

-

There is a minimum contract value of 1 million.

Complex documentation, which takes a long time to finalise.

The buyer may object to having a loan from an UK bank and paying
interest and charges to an UK bank.

e) Procedure
-

The exporter, importer, UK bank and ECGD agree in principle that

buyer credit guarantees are suitable.

Four agreements are made simultaneously:

(i)

Supply contract the commercial contract of sale.

(ii)

Loan agreement UK bank to overseas buyer.

(iii)

Guarantee ECGD the UK bank.

(iv)

Premium agreement exporter-ECGD.

The money covered by the ECGD single contract buyer credit guarantee,
is paid directly to the exporter by the lending bank, against presentation
of documents specified in the loan agreement and in the supply contract.
Legally, this transaction amounts to a transfer of loaned funds on the
buyers instructions, and the buyer becomes liable to repay.

C. ECGD lines of credit

The main steps of the operation of the facility are:
a) Common principles which apply to all types of lines of credit.
From the UK exporters point of view, lines of credit operate in a similar
way to the single contract buyer credit guarantee. The lines of credit cover
loans to buyers to enable them to pay on cash terms for UK exports of
capital, semi-capital goods and associated services.

Medium- and Long-term Finance for Exports

Common factors which apply to both single contract buyer credits and to
lines of credit are:
-

Consensus rates of interest apply in exactly the same way as for the
other two facilities.

The buyer must pay a percentage of the contract value from his own
resources.

Being a buyer credit facility, there are no contingent liability problems.

As there is no recourse to the exporter, he does not require any ECGD

insurance of the debt, but must contribute towards the overall cost of the
ECGD cover given to the lending bank.

Details of all lines of credit are available from the specialist export
finance department of the banks, or from the ECGD.

b) Project lines of credit.

This facility is useful for major projects where a number of UK suppliers are
nominated by the overseas buyer to provide goods and services in
connection with a single project.
The ECGD will guarantee a loan from the UK bank to the overseas buyer or
procurement agent. The buyer can split up the loan using it to pay various
UK suppliers on individual contracts, which may be as low as 25,000
each. The total amount lent to the overseas buyer will normally exceed 3
million, but, this sum can be divided to cover individual contracts of
25,000 minimum, with credits periods of two to five years.
Principal risks for which ECGD will provide cover:
1. Insolvency of the buyer;
2. Buyers failure to pay within six months of due date for goods which
have been accepted;
3. Buyers failure to take up goods dispatched;
4. Moratorium on external debt, i.e. Government restrictions on settlement
of overseas debt;
5. Government action preventing performance of contract in whole or in
part;

Medium- and Long-term Finance for Exports

6. Political events, economic difficulties, legislation or administrative

measures outside UK preventing payment.
7. Legal discharge of a debt in a foreign currency resulting in a shortfall at
date of transfer;
8. War and certain other events outside cover of commercial insurance;
9. Cancellation or non-renewal of exports license.
7.3 Forfeiting
The forfeiting service was born in Europe to provide supplier and buyer
credit facilities for the continental banks customers who did not have the
benefit of the ECGD service.
As an alternative to ECGD cover for exporters in the United Kingdom,
forfeiting is primarily a method of providing fixed rate finance in support of
the sale of capital and semi-capital goods over credit periods of between 90
days and seven years. Repayment is made in installments.
The service is based on first-class commitments only, which means that the
drawee must be of undoubted standing, and a bank guarantee is required.
The forfeiter purchases trade receivables, i.e. invoices, bills of exchange,
promissory notes, at a discount and without recourse to the exporter. Thus,
the forfeiting represents the discounting of the trade receivables without
recourse to the exporter3.
The forfeiter bears all political and currency risks. Thus, the exporter will
not need to enter into forward foreign exchange contracts, nor will they
need to worry about the problems of bookkeeping and debt collection.
On the other hand, apart from the relatively high cost, the exporter may
receive only 80-90 % of the value of the debt. The forfeiter may require the
difference to be paid immediately in cash.

Watson A Finance of international trade, 4th edition, The Chartered Institute of Bankers,
London 1992.

Medium- and Long-term Finance for Exports

A. How forfeiting operates4:

1. The importer finds a bank or other first class institution, which is willing
to guarantee his liabilities. The institution is not resident in the
exporters country. However when the buyer is resident in a third world
country, the guarantor institution may well be a European bank.
2. The method of guarantee can take the following forms:
3. The form of the guarantee is unimportant, provided the guarantee is
legally binding. What matters is the status of the guarantor institution.
4. Provided the guarantor is undoubted, the exporters bank, known as the
forfeitist, will discount the bills or promissory notes, i.e. will pay the
exporter the face value less the discount charge. If the importer is
undoubted, then the forfeit facility could be provided without the need
of a guarantee from another institution.
B. Benefits of forfeiting to the exporter are:
1. The facility is flexible. The documentation can be set up in a matter of
hours, whereas ECGD buyer credit guarantee can take up to three
months to arrange.
2. The rate of discount applied by the forfeitist is fixed, and subsequent
changes in the general level of interest rates do not affect the discount.
3. The finance is without recourse, so there is no need for any contingent
liability on the exporters balance sheet. Forfeiting does not affect any
other facilities, e.g. overdrafts.
4. All exchange risks, buyer risks, and country risks are removed.
5. The exporter receives cash in full at the outset.
6. Cash flow is improved.
7. The finance costs can be passed on to the buyer if the exporter is in a
strong bargaining position.
8. Administration and collection problems are eliminated.
4

Davies A & Kearns M Banking operations UK lending and international business,

Pitman, London 1992.

Medium- and Long-term Finance for Exports

C. Benefits of forfeiting to the importer are:

1. The importers can match repayments to projected revenues, allowing for
grace periods.
2. The importer can obtain 100% financing and avoid paying out cash in
advance.
3. The importer can pay interest on a fixed rate basis for the 4th life of the
credit that will make budgeting simpler and safer.
4. The importer can access medium to long term financing that may be
prohibitively expensive or completely unavailable locally.
5. The importer may be able to take advantage of export subsidies schemes
that are often available from the exporters government.
D. Disadvantages of forfeiting are:
a) Costs can be high, and there is no interest rate subsidy such as the
consensus rates.
b) It may be difficult to find an institution, which will be prepared to
guarantee the importers liabilities. Sometimes the guarantor institution
may change a high commitment fee if the buyer is not considered
undoubted.
Forfeiting offers exporters flexibility within a simple structure and increases
their ability to win business in competitive international markets.
Forfeiting can be applied as a stand-alone finance package or it can be used
in conjunction with officially supported credits backed by Export Credit
Agencies (ECAs) such as ECGS in the United Kingdom, Hermes in
Germany, SACE in Italy. COFACE in France, and Ex-Im Bank in the
United States of America.
7.4 Leasing
7.4.1 History of leasing
Leasing as a modern financial technique appeared in the United States of
America after the 1929 crash in order to overcome the financial difficulties.
First leasing company was established in 1952 in the same country. During
the 60's leasing also started to be applied in Europe and Japan.

Medium- and Long-term Finance for Exports

In modern days, the leasing phenomenon in Europe appeared first in the

United Kingdom in the 19th century (contract signed by the British railway
Wagons)5 and developed in the present form over the last 30 years.
7.4.2 Leasing: definitions, types
If, for some reason, a person does not wish to purchase an asset by means of
instalment credit, that person can decide to lease the asset instead. By
paying a rental charge over an agreed period of time a person can have the
exclusive use of, say, a car as a lessee but the car belongs always to the
lessor, the leasing company. Even though the vehicle is of a persons own
choice, that person has no option to purchase under a financial lease
arrangement. At the end of the initial leasing period a person may have the
option to renew at a much-reduced nominal rent. There is a second type of
lease arrangement, called an operating lease. In this latter case, the lease is
granted for an agreed term and, on expiry, the car is sold in the second
hand market to a third party. Part of the sale proceeds will be returned to
you as a refund of rentals. This type of lease can be terminated voluntarily
at any time if you pay agreed termination rentals.
This type of facility can improve your cash flow. Rental payments are tax
deductible if you are using the car for business purposes. The lessor is
responsible for maintenance of the asset, but the lessee must ensure against
fire, theft and other normal business risks.
Basically, leasing is defined as an agreement whereby the lessor conveys to
the lessee, in return for a payment or series of payments, the right to use an
asset for an agreed period of time.
Leasing is a financial technique that enables the utilisation of a given fixed
asset without possessing its ownership.
Major parties and some brief definitions in leasing are as follows:
Lessee: The party that purchases the usage rights of the equipment in
leasing transactions against the rentals determined in advance by the
contract.

British Leasing Company

Medium- and Long-term Finance for Exports

Lessor: The party that possesses the legal ownership of the equipment
subject to leasing and that transfers the usage rights of the equipment to the
Lessee against the rentals determined in advance by the contract.
Contract (see the Annex No.1 - A rental agreement and the Annex No. 2
A lease agreement): The written agreement between the Lessor and the
Lessee, covering all the terms and conditions in relation to the transfer of
usage of the leased equipment and repayment of lease rentals to the Lessor.
Supplier: Manufacturer or marketing company providing the equipment
subject to the leasing contract.
Rental: Periodical payments, effected by the Lessor to the Lessee for the
utilisation of the equipment and which are determined in advance with the
contract.
Leasing of goods, which are exported, operates in much the same way as the
leasing of goods traded within the domestic market. The leasing company
(the lessor) buys the goods outright from the supplier and then leases them
to the ultimate buyer, who has the use of the goods for an agreed period,
subject to payment of the agreed rent to the lessor.
The system can work in one of two ways:
-

By arranging for a lessor in the exporters country to buy the goods and
to lease them to the overseas buyer. This is known as cross border
leasing; or
By arranging for a lessor in the buyers country to act.

In order to summarise, it should be mentioned the two types of lease:

a) Operating lease the lease term covers only part of the estimated life of
the asset, which is then sold and the proceeds split.
b) Financial lease covers the capital cost of the asset plus the cost of
financing the lease over an agreed term. The period of rental depends on
the estimated life of the asset.
Lease finance provides a significant source of funds for companies to
acquire or use assets. It was estimated that leasing represented about oneeighth of the worlds annual equipment financing requirement.

Medium- and Long-term Finance for Exports

The purpose of the lessee could be to purchase the capital good or to solely,
utilise it, for a certain period. Besides the value of the equipment, leasing
provides finance for other initial costs such as: bank transfers, custom
clearance, delivery, etc. incurred before the receipt of the equipment by the
Lessee.
What kind of commodities can be leased?
All kinds of movable and immovable commodities and equipment can be
leased. Intellectual property rights such as patent rights cannot be included
in lease. The following are some examples of major equipment that can be
hired through lease:

Road vehicles;

Construction machinery, cranes and working machines;

Printing presses;

Computers and high-capacity data processing units;

Medical equipment;

Telephone exchanges and communication equipment;

All kinds of work benches and production machinery;

Looms;

Complete factories;

Complete hospital, hotel and office equipment;

Air-transport vehicles;

Dry-cargo vessels, tankers and other marine vessels;

Energy facilities, etc.

7.4.3 Leasing in Romania: the legal framework

In the Romanian legislation6, the leasing operations are defined as being
those operations through which one party, called the lessor, is committed,
due to the order of another party, called the lessee, to buy or take from a
6

The Government Ordinance No. 51/1997, amended by the Law No.90/1998, and
republished in 1999.

Medium- and Long-term Finance for Exports

third party called the supplier a real estate or equipment and to transmit to
the lessee the ownership or use of this good for a certain amount called
payment due.
The legal framework for leasing in Romania is consisting of the provisions
of the Government Ordinance No. 51/19977 regarding leasing operations
and leasing companies.
Leasing is quite new in Romania but the leasing Romanian market has
developed rapidly in the last period. The number of leasing companies
increased in the period 1994-2000 from 2 to more than 25.
At present, being in line with the development models on the international
markets, the Romanian leasing market is structured as follows:
A. Bank affiliated leasing companies;
B. Producers or suppliers affiliated leasing companies;
C. Independent leasing companies;
The Ministry of Finance closely controls the Romanian leasing and financial
leasing and cross-border transactions are submitted to a special department
from the National Bank of Romania.
In Romania, all kinds of movable and immovable goods can be leased with
the exception of intangible rights as copy rights and patents with maturity
over one year. The law requires that the goods to be leased must be sold to
the lessee and then acquired by the lessor. During the life of the lease, the
lessor keeps the ownership of the leased assets, thus enjoying all the
benefits associated with ownership while the lessee has the right to use the
assets without the interference from the lessor and the third parties.
Under the Romanian legislation, operating lease is the operation settled in
the leasing contract between the lessee and the lessor which stipulates that
the payment of installments for the right to use the goods for a determined
period of time must cover minimum 40% from the normal life period of the
goods according to the depreciation law, but not more than 80%.
7

Republished in Monitorul Oficial al Romniei, Part I, No. 236/ May, 1999.

Medium- and Long-term Finance for Exports

The financial leasing represents the leasing operation stipulated in the

contract between the financing company or leasing financing company and
the user which settles the right to own the goods by the user negotiated
starting with the beginning of the contract, and the total amount of the
installments paid.
The leasing operations may have as object the following: the use of the
industrial equipment, the use of real estate assets with commercial or
industrial destination, acquired or built by a leasing company, called real
estate company for commerce and industry SICOMI; the use of the trade
fund or of one of its immaterial elements, the use of long term utilization
goods of the real estate meant for dwelling, for physical persons, with the
observance of the legal stipulations regarding the protection of the client.
Under the provisions of the Romanian Ordinance, the parties to a lease
operation have some duties, such as:
The lessor/financier binds himself to:
a) observe the users right to choose the supplier according to his need;
b) conclude a sale-purchase contract with the supplier appointed by the
user under the conditions and terms expressly provided by him.
c) conclude the leasing contract with the user and, based on it, to transfer
all the rights resulting from the sale-purchase contract, except the
disposal right, to the user;
d) obey the users optional rights consisting of the possibility to choose the
extention of the contract or to acquire or deliver back the good;
e) guarantee to the user the use of the good provided that the user has
complied with all the contractual clauses;
f) Insure the goods offered for leasing through an insurance company.
The lessee/user binds himself to:
a) receive the good at the term stipulated in the leasing contract;
b) use the good in accordance with to contracts provisions, receive the
instructions given by the supplier and provide for the training of the
personnel appointed to use it;

Medium- and Long-term Finance for Exports

c) not to pledge any charges on the good which is the object of the leasing,
contract without having the financiers previous approvals;
d) make the payments under the title of leasing rates in the agreed upon
value amount at the terms provided in the leasing contract;
e) incur the maintenance expenses and some further costs resulting from
the leasing contract;
f) assume himself for the whole period of the contract, should there be no
contrary stipulation, all the responsibilities resulting from the direct use
of the good or from the use thereof by his officials in charge, the risk of
losing, damaging or destroying the used good due accidental cases
included, and to undertake to go on with the payments under the title of
leasing rates till the total payment value of the leasing contract;
g) allow the financier to periodically examine the operational state and
manner of the good which is the object of the leasing contract;
h) inform the financier, in due time, about any disturbance of the property
right raised by any third party;
i) not to make any changes to the good without having got the financiers
previous prevent;
j) deliver back the good in accordance with the previous stipulations of the
leasing contract at the end of the leasing period.
In the case when the user does not fulfil his duty to pay the leasing rate for
consecutive months, the financier shall have the right to cancel the leasing
contract and in such case the user is obliged to deliver back the good, to pay
the outstanding rates with the pertaining interest damages, the contract
should not provide otherwise.
If the financier does not observe the users option right, then the former
shall pay interest damages in an amount equal to the residual value of the
thereof calculated on the expiry date of the leasing contract.
If during the leasing contract development the financier sells the good
which is the object of the contract to another financier, the new financier is
held liable for the same contractual responsibilities as those of the sellers
and the seller remains as responsible for the fulfilment of his duties against
the user.

Medium- and Long-term Finance for Exports

Beginning with the conclusion date of the leasing contract and till the expiry
date thereof as well as till the moment the good comes back into the
financiers possession, the financier shall be exempt from any liability
against the third parties for the damages caused by the users use.
The leasing companies, being Romanian legal entities, are set up and
operate in accordance with the provision of the Act No. 31/1990 on the
business as it has been re-issued8.
The leasing companies are business companies having as their activity
object the carrying on of the leasing operations and having a minimum
authorised capital of ROL 500 million, totally underwritten and paid on the
setting up date.

For the financial leasing, leasing rate shall be calculated taking into
account the entry value and pertaining leasing interest spread out
during the period of the contract development; the purchases of the fixed
assets are dealt with as investments and they are subject to amortisation
in accordance with the standard regulations in force;

For the operating leasing, the leasing rate shall be calculated taking into
account the entry value of the good, the benefit agreed upon between the
parties and the amortisation of a share from the entry value thereof; the
amortisation conditions will be mutually agreed upon by the parties in
accordance with the provisions of the Act No. 15/1994 on the
amortisation of the locked9 up capital in corporeal assets, as
subsequently amended.

The main types of goods leased in Romania are: vehicles and trucks - from
50% to 85%, industrial, medical and office equipment from 10% to 20%,
agriculture equipment. The duration of the contract is from 10 to 60 months,
financial and operational leasing.
Even if inthe developed countries almost 30% of the investments are
realized through leasing, in Romania this figure is not significant because
the legal frame work came to regulate the operations with the last provisions
in 1999. Leasing offers longer-term financial opportunities while
eliminating loan problems. All the advantages make leasing a financial tool,
which shall be preferred in time.
8
9

Republished in Monitorul Oficial al Romniei, Part I, No. 33/1998.

Published in Monitorul Oficial al Romniei , Part I, No. 80/1994.

Medium- and Long-term Finance for Exports

7.4.4 The importance of leasing

The leasing proved to be the most efficient way of financing the production
investments, offering a bigger safety to the owner of the capital. All the
states encouraged the financing through leasing of several investments of a
general interest.
Using leasing means the appearance of advantages and disadvantages to the
lessor, as well as to the lessee.
Leasing regarded from the lessors point of view
The main advantages to the lessor are:
1. The financing of all the expenses determined by the acquisition of the
equipment leased is borne by the lessee. This fact determines a low
initial expense for acquiring new modern equipment.
2. The leasing is a perfect alternative for the acquisition of high quality
equipment considering the fact that its technological development is
extremely fast.
3. The leasing process approval is relatively short and the policy of the
leasing companies concerning the guarantees is very flexible.
4. The equipment rented or the liabilities resulted from the payment of the
lease fee do not change the balance sheet of the company; the fee is
considered an expense and, not an investment.
5. The fixed fee facilitates a stricter expense schedule.
6. Important savings are realized in a short period.
7. The lessor allows the use of the equipment for larger fees after the
contractual period expires.
The main disadvantages to the lessor are:
1. It is efficient only if the equipment is used during the entire period of the
lease.
2. In the case when the lessee can attain profitable preferential credit,
leasing may be more expensive. Therefore the option in favor of leasing
can only be justified if the available amounts are used for more
profitable investments.

Medium- and Long-term Finance for Exports

3. The lessee has only the rights of use during the leasing contract period;
as a result he can not alienate or sell the equipment.
Leasing regarded from the lessees point of view
The main advantages to the lessee are:
1. It promotes the development of exports; the supplier has the possibility
to realize besides the normal export, the leasing one. The leasing export
contributes to the development of the demand for high-valued goods.
2. New beneficiaries are attracted to invest. In addition, leasing has a
promotional effect in the case when the equipment is rented first, the
beneficiary is convinced of its yield and in the case of positive result he
will acquire it.
The main disadvantages to the lessee are:
1. It transfers only the use of the equipment, not the property. Thus, as a
result, the beneficiary may deteriorate the equipment and the lessor is
not able to put the penalties into operation even they are foreseen by the
contract.
2. After the first lease period, the lessor may not find other lessee.

Progress test

1.

Which ECGD facility provides with recourse finance to exporters for

credit periods in excess of two years?

2.

Which ECGD facilities provide without recourse finance to exporters?

3.

An exporter already holds ECGD insurance in connection with a

particular transaction. He wishes to make use of that insurance policy to
help raise finance. Which of the ECGD financial guarantees would
make use of the exporters insurance?

Medium- and Long-term Finance for Exports

4.

List the advantages of forfeiting for exporters.

5.

How forfeiting does operate?

6.

An exporter requires a source of without recourse finance, which can be

arranged very quickly. Which facility would you suggest?
a) ECGD buyer credit guarantee;
b) Forfeiting.

7.

From the exporters point of view, what is the main difference between
an ECGD line of credit and an ECGD buyer credit guarantee?

8.

An operating lease means that the asset will be:

a) Chosen by the lessor;
b) Written-off during the agreed term;
c) Sold part-way through its estimated life;
d) Re-leased at a nominal rent.

9. Define the leasing under the Romanian legislation.

10. List the two types of leasing and define them.
11. List four obligations for the lessor as a party to the leasing operation.
12. List four obligations for the lessee as a party to the leasing operation.
13. List the main advantages and disadvantages of leasing from the lessors
point of view.
14. List the main advantages and disadvantages of leasing from the lessees
point of view.

Medium- and Long-term Finance for Exports

ANNEX No 1

RENTAL AGREEMENT

Concluded between TAI CHONG LTD., lodged In 8"' Poor, Princes'

Building, Hong Kong, Phone 2522-6022, Fax 2845-2588, GPO BOX 50,
represented by Mrs. ...., as General Manager, (hereafter called the
"LOCATOR' and/or the "Initial LOCATOR") and EUROCONF
INDUSTRIAL s.a., Str.... 51, Romania (hereafter called "the RENTER")
represented by Mr. .. as General Manager, Collectively regarded as the
'Parties",
PREMISES
An offer has been set up which allows the RENTER to get right to use
Equipment for a given period in consideration of the payment of rentals. As
a consequence, the Parties have executed that present RENTAL Agreement
whereby it is agreed that the LOCATOR win let and the RENTER will rent the
Equipment as mentioned in Annex A.
Article 1 Definitions
RENTAL: means period during which the LOCATOR rents the Equipment
to the RENTER for its own needs. PRODUCER: means manufacturer,
producer or reseller who has provided the Equipment as required by the
RENTER. Equipment: means systems or subsystems as described in the
PRODUCER'S documentation, and listed in Annex A.
Article 2 Contractual Documents
The present RENTAL Agreement, including Annex A, contains alt the
rights and obligations of the Parties.
Article 3 Subject of the RENTAL Agreement
Under the conditions of this RENTAL Agreement the LOCATOR rents to
the RENTER the Equipment, as described in Annex A.
Article 4 Custom procedures and rendance of the equipment
Being the present Rental Agreement valid for a 24-month period, the
RENTER must import all the equipment is mentioned in the Annex A

Medium- and Long-term Finance for Exports

within temporary importation custom procedures. The equipment should be

rented to the LOCATOR within the validity period of the Agreement.
Article 5 Choice of the Equipment, Delivery, Installation.
The RENTER has chosen and defined under its responsibility the relevant
Equipment. The RENTER and the PRODUCER have defined together the
conditions, the lead-time and the place of delivery of the Equipment. Before
delivery the RENTER, at his own expenses, shall prepare and provide all
proper accommodation and facilities (including proper environmental
condition) for the Equipment and its maintenance according to the
PRODUCER'S specifications. After delivery, the RENTER or the PRODUCER
will install either the Equipment. For Equipment already on site, the
RENTER hereby warrants that the installation of the Equipment has been
achieved. The transport, installation and operationalization of the
Equipment at the address stated in Annex A shall be initiated by and on the
costs thereof shall be paid by the RENTER if the cost price of the said
transport, installation and operationalization are not the PRODUCER'S
expenses.
Article 6 Warranty
The LOCATOR is no way liable for the quality of the description of the
Equipment or for the suitability of the Equipment for the purpose for which
the RENTER intends to use it. After giving the Equipment in use, the
LOCATOR has no obligations towards the RENTER in the reference to the
quality, according to the producers warranty obligations.
All the warranty obligations, expressed or implied, legal or contractual,
shall remain on the responsibility of the PRODUCER in relation to the
Equipment chosen by the RENTER. The LOCATOR commits to extend to
the RENTER for the duration of the RENTAL Agreement the benefit of any
warranty which may have been given by the PRODUCER or which is
implied by law, in relation to the Equipment.
Prior to the making of any claim under the warranty, the RENTER shall
inform LOCATOR of its intention to make the claim.
Should the LOCATOR receive a payment surplus by the PRODUCER, it
shall retrace it to the RENTER.
Article 7 Use, Maintenance and Care of the Equipment
The RENTER shall faithfully comply with all instruction given by the
PRODUCER with respect to the use of the Equipment and ensure that all

Medium- and Long-term Finance for Exports

reasonable care is taken to maintain the Equipment in good working

condition. Only replacement parts supplied by the manufacturer may be
used for any necessary replacement and repairs. Solely the RENTER shall if
no restriction, pay for maintenance and repairs. The RENTER shall have all
necessary replacements and repairs carried out immediately. If the RENTER
fails to initiate immediate replacement or repair, the LOCATOR shall be
entitled to initiate such and to take responsibility for the Equipment if
necessary, such at the expense of the RENTER and irrespective of any of
the RENTERS other obligations based on the RENTAL Agreement or the
law.
Under no circumstances may any alterations or additions to the Equipment
reduce the value of the Equipment and/or obstruct or hinder the intended use
of the Equipment. The LOCATOR shall irrevocably own anything and
everything mounted on or in the Equipment by or on behalf of the
RENTER.
The RENTER shall further permit to the LOCATOR, if requested, access to
the site during the normal working hours in order that the LOCATOR can
verify the Equipment is present arid under which conditions it is used.
Article 8 Value of the Agreement and Rentals
8.1 The total value of the present Rental Agreement is Lit 890.640.000. The
RENTER in 24 monthly rentals will pay this value. The value of any rental
will be of Lit. 37.110.000
8.2 Amount of rentals
The RENTER will pay the LOCATOR the rentals in full, together with any
all taxes included. Rentals are firm and not subject to revisions during the
execution of the RENTAL Agreement.
8.3 Revisions of the rentals prior to the commencement of the RENTAL
The rentals are subject to revision without notice. In the event that between
the date of commencement of the RENTAL and the date of the signature of
the RENTAL. agreement, the PRODUCER'S purchase price has changed,
the new rental prices shall be adjusted proportionally to the change of the
purchase price.

Medium- and Long-term Finance for Exports

8.4 Commencement of the RENTAL

The first RENTAL commences 30 days after the trucks will be unloaded at
the address of the RENTER in Focsani Romania. At the same day of any of
the next 23 successively month.
In the event that the installation is delayed due to the fault of the RENTER,
the RENTER shall pay the equivalent of the rental fee for the period of the
delay.
8.5 Rental payment
The payment will be made by banking transfer order against presentation of
regular commercial invoices issued by the LOCATOR.
The rental will be due, in any circumstances, even in the case of Equipment
deficiencies. If the Equipment subject to the RENTAL Agreement do not
give satisfaction for any reason, the RENTER will send a claim to the
PRODUCER. The RENTER commits to pay all charges thereunder
specified, including but not limited to the rentals, which are absolute and
unconditional. RENTERS obligations shall not be subject to any abatement,
reduction or whatsoever. It is the expressed intention of the LOCATOR and
the RENTER that all rentals payable by the RENTER in all events (even
when the Equipment ceases to run for whatever the reason) throughout the
term and any extensions thereof of the present RENTAL Agreement. In the
event the RENTER shall fail to pay without justification at the contractual
date and non-payment continues for twenty successive days, the LOCATOR
shall invite the RENTER by registered mail to make payment within the
successive thirty days. Should the RENTER fail to pay, the LOCATOR
shall be entitled to declare that all the rentals which have not matured as yet
for payment become immediately due and payable. The preceding provision
shall apply in the event that the unpaid rentals do exceed the number of
four.
Article 9 Taxes
In addition to the rentals, the RENTER shall pay any taxes, registration fees
and any other fees and obligations charged by the Authorities in reference to
the RENTAL, possession and/or use of the Equipment.
Article 10 Equipment Property
The Equipment subject to the RENTAL remains the exclusive property of
the LOCATOR.

Medium- and Long-term Finance for Exports

In case of seizure, requisition or theft, the RENTER will have to inform the
LOCATOR immediately, lodging any complaint and to take any necessary
safety measure.
In case of violation by the RENTER of the provisions of this Agreement,
the LOCATOR shall be entitled to damages under the law in addition to the
other remedies contemplated by this Agreement, unless this contract
specifically contemplates no such cumulating of remedies.
Article 11 Insurance-Responsibility
11.1 Risks
The RENTER shall carry any risk or loss or damage to the Equipment, and
any loss or damage of the Equipment shall in no way influence RENTERS
obligations under the RENTAL nor its duration, specifically but not
exclusively with regard to its obligation to pay the rentals.
In the event a third party or an unlawful act of third party thereof damages
the Equipment or any part, the RENTER will immediately notify the
LOCATOR of such event.
The RENTER shall not accept any settlement for damages caused by a third
party, unless authorised in writing by the LOCATOR. The LOCATOR shall
be held, if the LOCATOR so requests, to institute in its own name legal
actions against third parties, which may be reasonably justified under the
circumstances.
11.2 Civil Liability
Unless caused by the LOCATOR, the LOCATOR will not be responsible
for any damages whatsoever the RENTER might suffer because of use of
the Equipment. The RENTER agrees to hold LOCATOR' S harmless, during
the full term of the RENTAL, for any and all claims demands and liabilities,
of any third party arising from the use of the Equipment or any damages
caused by its use.
11.3 Insurance
The RENTER undertakes to insure the Equipment against loss or damage
with a primary Insurance company acceptable to the LOCATOR for entire
duration of the contract. Said insurance policy shall indicate the LOCATOR

Medium- and Long-term Finance for Exports

as the beneficiary to the extent of the financial exposure of the LOCATOR

in connection with the Equipment in question.
11.4 Responsibility
The LOCATOR is not liable for any indirect, special or consequential
damages of lost profits to anyone arising out of the RENTAL Agreement or
the use of the Equipment. It is also not liable for damages due to the nonfulfilment of the RENTER'S obligations not for indirect damages and
financial or commercial damages.
The LOCATOR is not liable for any failure or delay in performance due to
any cause beyond its control and has no obligation arising out of the
abnormal use of the item, site conditions not conforming to the
PRODUCER' S specifications, or any causes external, enforceable and
irresistible, including but not limited to accident, acts of God, fire or water
damages, criminal conduct, neglect, acts or war, riots, strikes, lightning,
electrical disturbances or other similar causes.
Article 12. Addition or exchange of Equipment
Should the RENTER at any time add any Equipment to those describes in
Annex A, this Annex A shall be amended In order to include the financial
conditions and the duration of the RENTAL related to this new equipment.
Article 13. Termination of the RENTAL Agreement
13.1 Termination of the commencement of the RENTAL
a) In case of failure by the Renter to pay one or more rental instalments or to
comply with the obligations contemplated in this Agreement, the
LOCATOR shall notify the RENTER by registered mail of the breach and
Invite the RENTER to take remedial action within the successive thirty
day. Should the RENTER fail to do so, the LOCATOR shall be entitled
either to enforce the Agreement through Judicial action or to terminate it
by written notice of termination to the RENTER.
b) The LOCATOR shall be entitled to terminate the RENTAL in the event
of Bankruptcy of the RENTER or of entire stoppage of activities by the
RENTER or in the. event that the financial situation of the RENTER has
objectively deteriorated to a degree that the credit of the LOCATOR is
materially at risk. In the event of termination, the LOCATOR shall be
entitled to the payment of all rentals due plus an indemnity equal to the

Medium- and Long-term Finance for Exports

lesser value of the Equipment at the time of termination, except for the
normal wear and tear.
13.2 Financial and commercial information.
The performance of the LOCATOR'S obligations under the present RENTAL
Agreement are subject to the true and real, financial and commercial
situation of the RENTER which are regarded by the LOCATOR as
fundamental issue. Consequently if the RENTER'S legal, financial and
commercial situation should materially deteriorate between the date of the
signature of the RENTAL Agreement and the commencement of the RENTAL
or during the performance of the RENTAL Agreement, the LOCATOR
Agreement, the LOCATOR shall terminate the RENTAL Agreement.
The RENTER shall submit to the LOCATOR each year a copy of its annual
report (balance sheet, statement of profit and loss, cash How and relevant
explanations) as soon as these documents have been compiled. If the
RENTER has intermediate balance sheet or statement of profit and loss
complied, the RENTER shall also immediately submit to the LOCATOR a
copy of these documents. Moreover, the RENTER shall submit without
delay all information concerning its financial and commercial stale deemed
necessary by the LOCATOR.
Article 14 Duration
The RENTAL covered by this RENTAL Agreement shall remain in effect
45 days from the date of expiration of the RENTAL.
Article 15 Surrender of the Equipment
As contemplated in this RENTAL Agreement, the RENTER shall be held to
deliver the Equipment, at "its costs, to the location designated by the
LOCATOR within twenty days from the date of expiration of the RENTAL.
Should the RENTER fail to do so, or should the Equipment be defective or
damaged, except for ordinary wear and tear, the LOCATOR shall be
entitled, at its choice, to demand:
a) the payment of an amount equal to the market value of the Equipment not
returned at the net of the ordinary wear and tear;
b) or the replacement of the Equipment with equivalent equipment in good
working conditions, save for wear and tear, provided that the

Medium- and Long-term Finance for Exports

corresponding equipment may be reasonably found in the market and

may be purchased at reasonable conditions;
c) or, if the Equipment is damaged or defective, the reimbursement of
reasonable damages hereof.
Article 16 Notices
Any demand, notice or other communication required or permitted to be
given under this RENTAL Agreement shall be in writing and sent by first
class prepaid letter post or deliverer by hand to the addressee at it address
set forth above or to such other address as that party notify to the other for
the purposes of this clause.
Article 17 Applicable Law and Authorised Court
The RENTAL Agreement is subject to Romanian law. All conflicts or
claims resulting from or pertaining to this RENTAL Agreement shall be
submitted to the authorised court in Romania Ito the exclusion of all other
legal institutions.
This document is issued in two (2) original copies.
Place and date of the RENTAL Agreement = Focani- Romnia

Medium- and Long-term Finance for Exports

ANNEX No 2
LEASE AGREEMENT
Lease contract No. 100926 / 01850 - 01850
between LESSOR
X BANK AG
Austria
on one hand
and
LESSEE
ANYEL PRODIMPEX SRL
on the other hand
LEASED OBJECT(S):
Units / Vehicle brand
DEALER
LEASED OBJECT
PORSCHE ROMANIA SRL 1 unit(s)
VWPASSAT1.9
The leased objects are specified in the attached list No 1 and constituted an
inseparable part of this lease agreement. The enclosed leasing instalments
are based on the offer of Lessor dated 10.02.00 to the following general
business terms.
THE BANK
GENERAL BUSINESS TERMS
1. Proprietary rights
X Bank AG is the owner of the leased object; in the event of direct
delivery to the customer, the acquisition of title shall be in favour of the
XBank AG by means of customer's taking possession on behalf of the
Bank AG.
1.2
Unless otherwise agreed, the X Bank AG shall permit the customer to
register the vehicle in his name and for his own account, except the two
parties agreed on a deviated solution. In any case the customer shall bear the
risk as the registered user of the motor vehicle. He shall indemnify and hold
the X Bank AG harmless against any disadvantages for which he is

Medium- and Long-term Finance for Exports

responsible, particularly as the user. The customer shall renew the

registration on the dates prescribed by law.
1.3
The X Bank AG shall solely be entitled to assert any claims particularly
recovery or indemnification claims that arise from its title to the leased
object. Lessee shall not be entitled to pledge, sell or otherwise encumber the
vehicle with any third party rights whatsoever.
Availability and delivery
2.1
The leased object shall be made available and delivered by Dealer. All
relevant items of the purchase agreement shall be agreed with Dealer. The
X Bank AG shall not assume any liability whatsoever for performance of
any obligations by Dealer arising under the contract of sale.
2.2
Dealer shall deliver the leased object to Lessee on the date agreed in the
sales contract for the new car. Dealer shall notify Lessee to take possession
of the vehicle (i.e. notification of availability). Lessee shall take possession
of the car within a period of one week after being notified of its availability
by Dealer. Dealer shall prepare a,,take over protocol" at the time of taking
possession which shall be signed by Lessee (i.e. taking possession). If there
is a delay in Lessee's taking possession of the vehicle, the date of taking
possession shall be deemed the last day of the deadline on which Lessee
was obligated to take possession of the vehicle. The deadline shall begin on
the date of mailing the respective notification. Lessee shall provide proof of
having paid the first leasing instalment upon taking possession of the
vehicle.
3. Terms of payment
3.1
The parties agree that all payments to be made under this Agreement shall
be made in DEM or, upon compulsory introduction of the EURO, in the
equivalent converted amount. Leasing instalments shall be calculated either
for full months or on a quarterly basis. If a vehicle is delivered during the
month, the instalment shall become due for the full month in which the
vehicle was delivered; the same shall apply if the vehicle is delivered during
a calendar quarter. The first leasing instalment shall become due for the

Medium- and Long-term Finance for Exports

month or quarter in which the vehicle was delivered. The total number of
leasing instalments shall be regulated by the term of the Agreement.
3.2
If the price of the vehicles is changed between signing the lease contract and
take-over of the cars, the computation of the lease instalments shall be
adjusted accordingly to the actual prices.
3.3
The leasing instalments shall be due and payable on the first of each
calendar month or on the first day of the first month of the calendar quarter
for quarterly payments, granting five days of grace; leasing instalments must
be on the account specified by the X Bank AG and at its disposal on such
date.
3.4
Any first payment agreed between the parties shall be paid directly into an
account of the X Bank AG. Such first payment shall reduce the leasing
instalments to the amount specified in the Agreement. Lessee understands
and agrees that the cars will be ordered only after the first payment has been
received in the specified account.
3.5
Lessee shall pay any costs for registration in Romania or costs to maintain
the vehicle such as insurance, taxes, etc. as well as any costs, custom duties,
taxes and other duties associated with its import such as the statutory
withholding and value-added tax directly to the respective authority, unless
already included in the leasing instalment. Lessee shall be obligated to pay
any amounts requested by the Romanian authorities exceeding or not
included in the amount contained in the leasing instalment. Lessee shall bear
the risk of any amendment of the law with respect to the expenses specified
in this article. Lessee shall indemnify and hold the X Bank AG harmless
against payment of all amounts to be directly remitted by Lessee. Expenses
not included in the leasing payment:
Customs duties and customs commissions
Value-added tax
Road and transport tax
Luxury tax

Medium- and Long-term Finance for Exports

Withholding tax
Vehicle registration
Liability insurance
Expenses, fees and other duties
3.6
The lessee shall pay to the X Bank AG the premiums from Generala
Asigurari S.A. passed on by the X Bank AG, plus expenses and any
commission fees for the comprehensive insurance and insurance for
irretrievable credits (i.e. the insurance package s. item 6.2) on the first day
of each calendar month, granting 5 days of grace.
3.7
In the case of default in payment. Lessee shall pay default interest in the
amount of 3 % over the interest rate charged by the X Bank AG; Lessee
shall also compensate the X Bank AG for any dunning and collection
fees, particularly attorney's fees, in the prescribed amount.
4. Term and termination of lease
4.1
Upon becoming legally effective (see Article 11) this Lease Agreement
shall commence on the date of delivery, in the event of delayed delivery on
the date the X Bank AG and/or the delivering dealer make the vehicle
available to the customer.
4.2
Premature termination of the Agreement shall be subject to the consent of
both parties; such termination shall only be possible if Lessee purchases the
vehicle from the X Bank AG and all accounts under the Lease Agreement
are settled.
4.3
The X Bank AG is entitled to terminate this Lease Agreement without
notice regardless of the agreed term of the agreement in the event that:
4.3.1 bankruptcy or composition proceedings are instituted over Lessee's
assets or if such proceedings are not instituted due to the lack of assets;

Medium- and Long-term Finance for Exports

4.3.2 Lessee is in default of part or all of the leasing payment for two weeks;
the Lessee is overdue in payment of the insurance premium for the
insurance package taken out (item 7.2) in whole or in part for a period of 2
weeks;
4.3.3 Lessee uses the leased object in a considerably detrimental manner or
jeopardises the X Banks proprietary rights;
4.3.4 the leased object becomes a total technical or economic loss; to be
deemed a total economic loss, the residual value of the leased object plus
the necessary repair costs must be higher than the cost of replacing the
leased object;
4.3.5 the leased object is destroyed or otherwise lost (theft, etc.).
Lessee shall immediately notify the X Bank AG of the destruction or loss
of the leased object and shall forward a copy of the report of loss or theft (to
be filed immediately at any police department).
4.4
In the event of premature termination of the Agreement, Lessee shall
immediately return the vehicle to the X Bank AG and compensate the
X Bank AG for any disadvantages arising from the premature termination.
In the event of premature termination, the X Bank AG shall be entitled to
a settlement equivalent to the outstanding leasing payments calculated,
discounted at FIBOR or EURJBOR interest, and the discounted stipulated
residual value. It shall expressly reserve the right to claim any additional
damage, particularly incidental expenses such as sales expenses, default
interest, collection fees or any duties accruing. In this case the lease
agreement represents executor title.
5. Conclusion of contract
5.1
Lessee shall return the leased object in a faultless, running and roadworthy
condition, otherwise he shall be liable to pay for the estimated damage. The
parties hereto shall authorise the authorised Dealer (to be named by the X
Bank) taking back the vehicle to prepare a test report, establishing any
defects and estimating the cost to remedy such defects. The test report shall
be the basis for remarking the leased object. Both parties shall be entitled to
raise objections within 7 days after receiving the test report, otherwise the
results of the test report shall be considered accepted; Lessee shall pay for

Medium- and Long-term Finance for Exports

any kilometres exceeding the agreed kilometre at a rate of DEM 0.50 per
kilometre.
5.2
After conclusion of Contract the actual market value shall be established by
soliciting a specific purchase offer from an authorised dealer. Lessee shall
undertake to pay any difference between the market value and the stipulated
residual value within a period of 14 days.
5.3
Lessee shall remove his accessories and belongings from the leased object
upon returning the vehicle, otherwise the title to such objects shall pass to
the X Bank AG without compensation. In such case the X Bank AG
shall be entitled to have accessories removed or to restore the vehicle to its
original state if this is expedient to remarking the leased object.
6. Insurance and bearing the risk
6.1
The lessee shall take out vehicle liability insurance for the leased object to
cover the accident risk during the term of the Lease Agreement. The vehicle
liability insurance shall be registered in favour of the X Bank AG; the
lessee agrees that any compensation paid by the insurance company shall by
paid out to the X Bank AG.
6.2
Furthermore, the lessee shall expressly agree to have the X Bank AG take
out comprehensive insurance including insurance for irretrievable credits
("the insurance package") with Generala Asigurari S.A. The insurance
package shall cover the comprehensive insurance risks such as damage
through accident, theft, etc. according to the standard terms and conditions
as well as the risk of partial or total non-payment of the leasing payments.
The X Bank AG shall be entitled to pass on and invoice the leasing
payment together with the insurance premium (see item 3.6.)
6.3
Lessee shall immediately notify the X Bank AG in writing of any
accident. All repairs, regardless of the type or purpose, must be carried out
by an authorised workshop. Lessee shall not have the right to take care of
repairs himself or to make any statements concerning settlement for damage

Medium- and Long-term Finance for Exports

to the leased object; the right to make such statements shall be reserved to
the X Bank AG alone. As the vehicle owner, the X Bank AG shall
order repairs to be carried out; Lessee shall indemnify the X Bank for all
disadvantages incurred from such damage; this shall also apply to any
depreciation or customs tax accruing. From the workshop invoice value
lessee shall cover 10% deductible, but not less then 1,5% from the C1P
price of the leased object.
6.4
In case of theft or total damage the lessee is entitled to receive a
compensation as follows: During the first year of contract the compensation
equals the purchase price minus 10% deductible.
After the first year the compensation equals the current value of motorcars
according to Schwacke (international recognised catalogue for used cars
market prices) minus 10% deductible.
The compensation will be used to settle the contract in accordance to pt. 4.4.
Should the compensation exceed the settlement costs (4.4) the difference
amount will be paid to the lessee.
6.5
Downtime during repairs or for other reasons shall not constitute a
restriction of possible use and shall not entitle Lessee to reduced payments.
6.6
For travelling abroad with the leased object lessee needs the approval from
the lessor, as well as an extra insurance.
7. Warranty
Lessee shall waive his right to assert warranty claims against the X Bank
AG; as a countennove, the X Bank AG shall assign the warranty and/or
guarantee claims against the delivering Dealer to which it is entitled as the
owner to Lessee, who accepts such assignment.
8. Arbitration clause
Any disputes arising out of this Agreement or in connection with its
infringement, termination or nullity shall be settled by one or more
arbitrators pursuant to the Rules of Arbitration and Conciliation of the
International Court of Arbitration of the Vienna Chamber of Commerce

Medium- and Long-term Finance for Exports

(Vienna rules). The court shall be composed of three arbitrators and shall be
governed by Austrian law. Salzburg shall have jurisdiction.
9. Severability
If any provision of this Agreement is or becomes invalid or unenforceable
for legal or factual reasons, it shall not affect the other provisions of the
Agreement. If individual provisions should be or become invalid or
unenforceable under the law of a part of the contract territory, it shall not
affect the validity of the contract provisions in the remaining part of the
contract territory. If a provision is found to be invalid or unenforceable, the
parties shall substitute an alternative arrangement, which achieves the
economic, legal and commercial objectives to the greatest extent possible.
The same shall apply if the entire Agreement is or becomes invalid or
unenforceable.
10. Data processing
Lessee shall give his express consent to permit Lessor to process any data
acquired through conclusion of this Agreement, particularly Lessee's
personal data, and to transmit such data to third parties such as the general
importer or affiliated companies. Such data shall not be made available to
list brokers and/or direct advertising companies. Lessor is registered in the
Data Processing Register. Lessee shall be entitled to revoke his consent to
the transmission of data at any time, such revocation shall not, however,
affect the principal transaction.
11. Condition precedent
This Agreement shall be subject to a condition precedent, i.e. subject to
Lessee's submission of the following documents:
11.1
Confirmation of the legally effective establishment of the company, if
Lessee is a legal entity (e.g. extract from the Commercial Register, bylaws);
11.2
Confirmation of the signatory's power to represent; if Lessee is a legal
entity, such confirmation shall be provided by submitting an extract from
the Commercial Register. Private persons shall submit a written power of
attorney.

Medium- and Long-term Finance for Exports

12. Vehicle identity card (VIC)

Within 30 days after take over of the leased object(s) lessee has to forward
the vehicle identity card to dealer.
Lessee shall arrange the registration of the X Bank as owner of the leased
vehicle(s) on page 4, Remarks.
13. Written form
Any modifications or supplements to this Agreement shall be made in
writing to be legally effective; any waiver of this written requirement must
also be made in writing.
Freilassing .2000
On behalf of ...........,...................._......,
Name of the undersigned.................................

Guarantees or Bonds

GUARANTEES
OR BONDS

D Objectives
After studying this chapter you should be able to understand:
8.1

The role of guarantees and bonds in international trade

8.2

Bonds: definition, parties involved, elements, and types

8.3

On demand bonds
8.3.1

An overview of the Uniform Rules for Demand Guarantees

Guarantees or Bonds

8.1 The role of guarantees and bonds in international trade

A guarantor issues a guarantee or bond, usually a bank or an insurance
company, on behalf of an exporter. It is a guarantee to the buyer that the
exporter will fulfil his contractual obligations. If these obligations are not
fulfilled, the guarantor undertakes to pay a sum of money to the buyer in
compensation. This sum of money can be anything from 1% to 100% of the
contract value.
If a bank issues the bond, then the exporter is asked to sign a counter
indemnity, which authorises the bank to debit his account with any money,
paid out under the bond.
Bonds are usually required in connection with overseas contracts, or with
the supply of capital goods and services.
Middle Eastern countries commonly require bonds, but nowadays, many
other countries also require them. Most international aid agencies, such as
the World Bank or the European Development Fund, and most government
purchasing organisations in the developing world, plus major purchasers of
goods and services in the North Sea Oil sector now require bonds from
sellers.
In the international trade, it is usually difficult for the buyer of goods and
services to estimate the professional and financial abilities of the supplier.
So, the buyer is interested to request a guarantee, which proves that the
seller is able to follow his commitments.
On the other hand, the bank guarantee is mainly limited to covering the right
of unpayment, provided that the payment system based on invoices is used.
8.2 Bonds: definition, parties involved, elements, and types
The bank guarantee represents an irrevocable engagement assumed by a
bank to pay a cash amount in the case that a third party does not respect his
duties to deliver certain goods, perform certain services or follow payment.
The guarantee represents itself an engagement, independent of the contract
signed between the creditor and the debtor.

Guarantees or Bonds

From the moment when the bank guarantee is issued, the bank is responsible
to pay at first request to the beneficiary of the bank guarantee, if the
conditions stipulated if the guarantee is correct.
Usually, the guarantees are subject to the national law of the issuing bank.
There are two methods to issue a bank guarantee, as follows:
-

direct, by using the bank from the sellers country to issue the guarantee
in favour of the foreign buyer;

indirect, the bank from the sellers country empowers a foreign bank to
issue a guarantee in favour of the buyer.

The wording of a guarantee is very important. It needs to be clear, precise,

and simple. Accordingly, all guarantees should include the following
parties involved:
a) the Principal who is requiring the issue of the guarantee, bond.
b) the Beneficiary is the person in the favour of whom the payment shall be
made.
c) the Guarantor is a bank. It issues the guarantee, bond.
Important inclusions as far as the UK bank is concerned are:
a) name and address of beneficiary;
b) clear and unambiguous wording;
c) definite expiry date;
d) maximum bank liability stated;
e) guarantee for monetary payment only, i.e. no goods involved;
f) time period for submission of claims under guarantee;
g) procedure for claims;
h) drawn subject to English law, where possible.
In Romania the guarantee or bond is called a letter of guarantee. Taking into
consideration the important role of the bonds in the international trade, the
International Chamber of Commerce from Paris and other international
bodies wanted to standardise the practices in the bond field.

Guarantees or Bonds

Thus, in 1978, the International Chamber of Commerce from Paris

elaborated the Uniform Rules for Contract Guarantees, called the
Publication No. 325 (see Annex No. 1), with the view to securing a
uniformity of practice based upon an equitable balance between the parties
concerned.
In 1992, the International Chamber of Commerce from Paris issued a new
set of rules called the Uniform Rules for Demand Guarantee or the
Publication No. 458 (see Annex No. 2).
It should be mentioned that nowadays both the Publication No. 325, and the
Publication No. 458 is into force.
In Romania, banks apply these two sets of rules in the guarantee field.
The main elements of a guarantee are (see Annex No. 3):
a) the parties involved (the beneficiary, the principal);
b) the guarantee purpose/object (e.g. Under this contract the buyer is to
pay them sum ofas an advance payment being % of the contract
value in favour of the seller);
c) the guarantee value (e.g. In consideration of the above conditions, we
Bank hereby give you our guarantee and undertake to pay irrevocably
the amount of. );
d) the assignment formulation of the bank (e.g. The Bank.undertake
to pay the amount.on receipt of your first demand in writing);
e) the terms of payment;
f) the guarantee validity (e.g. This guarantee is valid for written..on or
before after which date our liability..will cease);
g) the legislation clause (e.g. This guarantee shall be governed by English
law).
There are several types of guarantees, which the seller may be called upon
to provide in favour of the buyer. The most common types of guarantee are:
a) Tender or bid bonds
This type of guarantee is necessary in the case of public offer requests. The
purpose of a tender bond is to indicate to the buyer that the tender is a
serious offer and the party submitting it will sign the contract if the tender is
accepted. The buyer will be confident in the knowledge that the seller is

Guarantees or Bonds

financially able to enter into such an undertaking. The validity term is until
the signing of the contract or the delivery of a performance bond (usually
from three to six months). Finally, it is an assurance to the buyer that on
award of the contract subsequent guarantee requirements to secure
performance and/or advance payments will be forthcoming.
A tender or bid bond is usually for between 2% and 5% of the contract
value, and will guarantee that the exporter will take up the contract if it is
awarded. Failure to take up the contract results in a penalty for the amount
of the bond. In addition, the tender bond usually commits the exporter and
his bank to joining in a performance bond if the contract is awarded. Tender
bonds serve to prevent the submission of frivolous tenders.
b) Performance bonds
These are the most commonly used types of guarantee. The purpose of a
performance guarantee is exactly what it states to ensure performance by
the seller in accordance with their contractual obligations. Thus, the
performance bond is given at the sellers request by the bank, which
commits itself to pay to the beneficiary the guaranteed sum, in the case that
the supplier does not fulfil his contractual obligations.
Performance bonds guarantee that the goods or services will be of the
required standard and a stated penalty is payable if they are not. The amount
payable will be a stated percentage of the contract price: often 10% but
sometimes more.
The validity term is for the entire amount until the complete execution of the
contract.
c) Advance payment bonds
Advance payment bonds undertake to refund any advance payments if the
goods or services are unsatisfactory. The validity term is until the end of the
complete delivery of the object of the contract.
d) Warranty or maintenance bonds
Warranty or maintenance bonds undertake that the exporter will maintain
the equipment for a period of time. Maintenance guarantees are normally
requested in connection with construction contracts. The purpose is to
ensure that once construction has been completed the obligation of the
contractor will be fulfilled during the maintenance period.

Guarantees or Bonds

e) Retention bonds
Retention bonds enable retention money, which would otherwise be held by
the buyer beyond the completion of the contract, to be released early. These
bonds guarantee the returns to the buyer of the retention money in the event
of non-performance of post-completion obligations by the exporter. A
retention money guarantee enables the seller to receive the total amount of
each payment while assuring the buyer that these funds will be payable in
the event of a failure of performance.
f) Recourse bonds
Recourse bonds are sometimes demanded by the ECGD to cover the
potential recourse by the ECGD under buyer credit.
g) Stand-by letter of credit
This type of credit, which has the characteristics of a guarantee, is especially
used in the United States of America, where the law does not entitle the
banks to issue guarantee, in the European meaning of the word.
An alternative to the bond is a stand-by letter of credit issued by the UK
bank in favour of the importer, promising to pay a given amount against
specified documents, usually a formal default claim. From the UK banks
point of view, a stand-by letter of credit is better than a bond because it will
be subject to UCP for documentary credits instead of being subject to
complex legalities. In addition, a stand-by letter of credit will always have a
definite expiry date.
All these types of guarantees may take the form either of bank demand
guarantee or of surety default bonds.
a) Demand guarantee/bond or Bank first demand guarantee where the
bank undertakes to pay away funds on claim.
b) Surety bonds where the surety is bound to make good any defaults of
the constructor, e.g. remedial work. Insurance companies, not banks,
normally issue these bonds.
Since a bank will not wish to have primary responsibility for the fulfilment
of a customers contractual obligations, the bank will issue only demand
guarantees.

Guarantees or Bonds

Demand guarantee can be:

Simple when the beneficiary claims, bank pays, i.e. no conditions, or

Conditional where the beneficiary must support the claim with

specific documentation. Conditional bonds can be divided into two
types:
Conditional bonds requiring documentary evidence; they give maximum
protection to the exporter, and

Conditional bonds which do not require documentary evidence.

Any claim received where the guarantee is payable on simple demand must
be honoured, whether or not the seller claims that they are not in default.
8.3 On demand bonds
These bonds, sometimes known as unconditional bonds, can be called at the
sole discretion of the buyer. The bank must pay if called upon to do so, even
in circumstances where it may be clear to the exporter that the claim is
wholly unjustified. UK courts have often ruled that the bank must honour
claims under demand bonds.
If the bank has to pay under the bond, it will debit the customers account
under the authority of the counter indemnity. The exporter will then be left
with the unenviable task of claiming reimbursement in the courts of the
buyers country.
It should be mentioned that banks never become involved in contractual
disputes. If payment is called for which conforms to the terms of the bond,
the bank must pay.
Under the provisions of the Uniform Rules concerning the bank demand
guarantee, any demand bond, guarantee or other instrument in writing
issued or executed by the Guarantor in favour of the Beneficiary pursuant to
which the Guarantor undertakes on Default1, either:

Articles 2 from ICC Uniform Rules for Contract Bonds Any breach, default or failure
to perform any contractual obligation which shall give rise to a claim for performance,
damages, by the Beneficiary.

Guarantees or Bonds

i.
ii.

to pay or satisfy any claim or entitlement to payment of damages,

compensation or other financial relief up to the Bond Amount2; or
to pay or satisfy such claim or entitlement up to the Bond Amount or
at the Guarantor3s option to perform or execute the Contract4 or any
Contractual Obligation5.

Bank demand guarantee imposes legally binding obligations on a bank. It

may provide for payment to the buyer either on first or simple demand, or
on first or simple demand supported by a document or documents referred to
in the guarantee. That means that if a Bank receives a demand, which on its
face complies with the terms of the guarantee, the Bank is obliged to pay
without any reference to the seller.
Accordingly the Uniforms Rules on demand bonds, all guarantees should
stipulate:
a) the Principal;
b)
c)
d)
e)

the Beneficiary;
the Guarantor;
the underlying transaction requiring the issue of the guarantee;
the maximum amount payable and the currency in which it is payable;

f) the Expiry Date and/or Expiry Event of the guarantee;

g) the terms for demanding payment;
h) any provision for reduction of the guarantee amount.
A guarantee enters into effect as from the date of its issue unless its terms
expressly provide that such entry into effect is to be at a later date or is to be
subject to conditions specified in the guarantee and determinable by the
guarantor on the basis of any documents.
The UK banks basic requirements are that any guarantee, which it is asked;
to issue should comply with the following criteria:

Idem - The sum inserted in the bond as the maximum aggregate liability of the
Guarantor
3
Idem Any Person who shall issue or execute a Bond on behalf of a Principal.
4
Idem Any written agreement between the Principal and the Beneficiary for the carrying
out of works, the performance of services
5
Idem Any duty, obligation or requirement imposed by a clause, paragraph, term,
conditionof the Contract.

Guarantees or Bonds

1. The guarantee must be for a defined sum of money either in

sterling/Euro or in a specified foreign currency. The guarantee must not
place upon the UK bank any obligation other than payment of a defined
sum of money.
2. The wording of the guarantee must be clear and unambiguous. In
particular, the circumstances in which the UK bank is to pay a claim
must be clear, e.g. simple demand or a demand supported by signed
statements and/or specified documents. The UK bank will not enter into
a commitment, which involves acting as an arbitrator between its
customer and the buyer.
3. The guarantee must provide for termination on a specified date or on an
indisputable event, e.g. the issue and production to the UK bank of a
specified architect or engineers certificate.
4. The guarantee must be non-assignable by the beneficiary.
8.3.1 An overview of the Uniform Rules for Demand Guarantees
The first function of the Uniform Rules for Demand Guarantees (see Annex
No.2) is to codify rules of good practice to which parties subscribe by
incorporating the rules in their contracts. Thus, the Rules provide a
contractual framework for the relationships between the guarantor and the
beneficiary, between the Instructing party and the guarantor, and between
the principal and the guarantor or the instructing parties.
The text of the Rules is prefaced by an Introduction, which describes the
purpose and scope of them, the legitimate expectations of the various parties
and the concern of the International Chamber of Commerce to encourage
good demand guarantee practice. The text itself consists of 28 article
divided into six sections, as follows:
A. Scope and Application of the Rules
B. Definitions and General Provisions
C. Liabilities and Responsibilities
D. Demands
E. Expiry Provisions
F. Governing Law and Jurisdiction

Guarantees or Bonds

It should be mentioned the three fundamental principles of demand

guarantee law, as follows:
-

the independence of the guarantee from the underlying transaction;

the documentary character of the guarantee;

the guarantor is concerned only with whether demands and other
documents appear on their face to conform to the guarantee.

One of the main important parts of the Rules is the Section C that is devoted
to the liabilities and responsibilities of the parties. These are broadly of
three kinds: to examine, to inform and to transmit.
Section D of the Rules is devoted to the important subject of demand and
contains a rule designed to provide some safeguard against unfair calling
whilst preserving the documentary character and speed of implementation of
demand guarantees.
A demand guarantee must be made on or before the expiry date of the
guarantee and before any expiry event. It must comply with the express
terms of the guarantee and to independent documentary requirements.
The main problems which bonds cause for exporters are:
a) The effect of bonds on the credit rating of the exporter.
Banks treat the issue of bonds in exactly the same way as they would treat
any lending facility. If payment is called for within the terms of the bond,
the bank must pay, irrespective of whether its customer has funds to honour
the counter indemnity. Hence banks would normally wish to reduce a
customers maximum borrowing facilities pound for pound by the same
amount as the bond.
Tender bonds involve the worst problems. The average success rate is often
said to be one in eight for tenders, so the average contractor may at any one
time have eight tenders outstanding. If each of these tenders involves a
tender bond, say 2%, and then the exporters total potential borrowing
facilities are reduced by 16% of his overall tender volume.

Guarantees or Bonds

b) Unauthorised extension of bonds.

Some countries, such as Syria, have laws, which prevent the local bank from
cancelling the bond without the importers specific authority. This
prohibition applies even if the bond contains an expiry date.
Sometimes the local bank will threaten to call for payment unless the bond
is formally extended. The usual result is that the local bank is able to
persuade the UK bank to extend the bond, and that the annual bank charges
continue to be levied by both banks.
Sometimes tender bonds are not cancelled, even when the contract has been
awarded and a performance bond has been issued.
c) Unfair calling of bonds.
The buyer may call for payment, even when such a call is unjustified. If the
call conforms to the terms of the bond, the bank must pay and will debit the
exporters account under the terms of its counter indemnity. The exporter
can be left with the task of claiming reimbursement from the buyer via the
overseas courts.

Progress test

1.

What is a bank guarantee?

2.

List the parties involved in a guarantee.

3.

Enumerate the main elements of a guarantee.

4.

Define the tender or bid bond.

5.

Define the performance bond.

6.

What is a demand guarantee?

Guarantees or Bonds

7.

What are the main provisions stipulated in the Uniform Rules on

contract bonds?

8.

What are the main provisions stipulated in the Uniform Rules on

demand bonds?

9.

What are the main problems that bonds cause for exporters?

Guarantees or Bonds

ANNEX No 1

UNIFORM RULES FOR CONTRACT GUARANTEES6

Article 1. Scope
1. These Rules apply to any guarantee, bond, indemnity, surety or similar
undertaking, however named or described (guarantee), which states
that it is subject to the Uniform Rules for Tender, Performance and
Repayment, Guarantees (Contract Guarantees) of the International
Chamber of Commerce (Publication No. 325) and are binding upon all
parties thereto unless otherwise expressly stated in the guarantee or any
amendment thereto.
2. Where any of these Rules is contrary to a provision of the law applicable
to the guarantee from which the parties cannot derogate, that provision
prevails.
Article 2. Definition
For the purposes of these Rules:
a. tender guarantee means an undertaking given by a bank, insurance
company or other party (the guarantor) at the request of a tendered (
the principle) or given on the instructions of a bank, insurance
company, or other party so requested by the principle ( the instructing
party) to a party inviting tenders (the beneficiary) whereby the
guarantor undertakes - in the event of default by the principle in the
obligations resulting from the submission of the tender to make
payment to the beneficiary within the limits of a stated sum of money;
b. performance guarantee means an undertaking given by a bank,
insurance company or other party (the guarantor) at the request of a
supplier of goods or services or other contractor ( the principal) or
given on the instructions of a bank, insurance company, or other party
so requested by the principle ( the instructing party) to a buyer or to
an employer ( the beneficiary) whereby the guarantor undertakes in
the event of default by the principal in due performance of the terms of
6

Publication No 325 issued by the International Chamber of Commerce from Paris

Guarantees or Bonds

a contract between the principal and the beneficiary ( the contract)

to make payment to the beneficiary within the limits of a stated sum of
money or, if the guarantee so provides, at the guarantors option, to
arrange for performance of the contract;
c.

repayment guarantee means an undertaking given by a bank,

insurance company or other party (the guarantor) at the request of a
supplier of goods or services or other contractor ( the principal) or
given on the instructions of a bank, insurance company, or other party
so requested by the principle ( the instructing party) to a buyer or to
an employer ( the beneficiary) whereby the guarantor undertakes in
the event of default by the principal to repay in accordance with the
terms and conditions of a contract between the principal and the
beneficiary ( the contract) any sum or sums advanced or paid by the
beneficiary to the principal and not otherwise repaid to make payment
to the beneficiary within the limits of a stated sum of money.

Article 3 Liability of the guarantor to the beneficiary

1.

The guarantor is liable to the beneficiary only in accordance with the

terms and conditions specified in the guarantee and these Rules and up
to an amount not exceeding that stated in the guarantee.

2.

The amount of liability stated in the guaranty shall not be reduced by

reason of any partial performance of the contract, unless so specified in
the guarantee.

3.

The guarantor may rely only on those defenses, which are based on the
terms, and conditions specified in the guarantee or are allowed under
these Rules.

Article 4 Last date for claim

If a guarantee does not specify a last date by which a claim must have been
received by the guarantor, such last date (expiry date) is deemed to be:
a.

In the case of a tender guarantee, six months from the date of the
guarantee;

b.

In the case of a performance guarantee, six months from the date

specified in the contract for delivery or completion or any extension
thereof, or one month after the expiry of any maintenance period
(guarantee period) provided for in the contract if such maintenance
period is expressly covered by the performance guarantee;

Guarantees or Bonds

c.

In the case of a repayment guarantee, six months from the date

specified in the contract for delivery or completion or any extension
thereof.

If the expiry date falls on a non-business day, the expiry date is extended
until the first following business day.
Article 5 Expiry of guarantee
1.

If the guarantor on or before the expiry date has received no claim or if

any claim arising under the guarantee has been settled in full
satisfaction of all the rights of the beneficiary thereunder, the guarantee
ceases to be valid.

2.

notwithstanding the provisions of Article 4, in the case of tender

guarantees: a) upon acceptance by the beneficiary of the tender by the
award of the contract to the principal and, if so provided for in the
written contract, or, if no contract has been signed and it is so provided
for in the tender, the production by the principal of a performance
guarantee or, if no such guarantee is required, the signature by the
principal of the contract, the tender guarantee issued on his behalf
ceases to be valid;

a) a tender guarantee also ceases to be valid if and when the contract to

which it relates is awarded to another tenderer, whether or not that
tenderer meats the requirements referred to in para.2a of this Article;
b) a tender guarantee also ceases to be valid in the event of the beneficiary
expressly declaring that he does not intend to place a contract.
Article 6 Return of guarantee
When a guarantee has ceased to be valid in accordance with its own terms
and conditions of these Rules, retention of the document embodying the
guarantee does not in itself confer any rights upon the beneficiary, and the
document should be returned to the guarantor without delay.
Article 7 Amendments to contracts and guarantees
1.

A tender guarantee is valid only in respect of the original tender

submitted by the principal and does not apply in the case of any
amendment thereto, nor is valid beyond the expiry date specified in the
guarantee or provided for by these Rules, unless the guarantor has given

Guarantees or Bonds

2.

3.

notice in writing or by cable or telegram or telex to the beneficiary that

the guarantee so applies or that the expiry date has been extended.
A performance guarantee or a repayment guarantee may stipulate that it
shall not be valid in respect of any amendment to the contract or that
the guarantor be notified of any such amendment for his approval.
Failing such a stipulation, the guarantee is valid in respect of the
obligations of the principal as expressed in the contract and any
amendment thereto. However, the guarantee shall not be valid in excess
of the amount or beyond the expiry date specified in the guarantee or
provided for by these Rules, unless the guarantor has given notice in
writing or by cable or telegram or telex to the beneficiary that the
amount has been increased to a stated figure or that the expiry date has
been extended.
Any amendment made by the guarantor in the terms and conditions of
the guarantee shall be effective in respect of the beneficiary only if
agreed to by the beneficiary and in respect of the principal or the
instructing party, as the case may be, only if agreed to by the principal
or the instructing party, as the case may be.

Article 8 Submission of claim

1.

A claim under a guarantee shall be made in writing or by cable or

telegram or telex to be received by the guarantor not later than the
expiry date specified in the guarantee or provided for by these Rules.

2.

On receipt of a claim the guarantor shall notify the principal or the

instructing party, as the case may be, without delay, of such claim and
of any documentation received.
A claim shall not be honored unless:

3.

a.
b.
c.

It has been made and received as required by para.1 of this Article;

and
It is supported by such documentation as is specified in the
guarantee or in these Rules; and
Such documentation is presented within the period of time after the
receipt of a claim specified in the guarantee, or, failing such
specification, as soon as practicable, or, in the case of
documentation of the beneficiary himself, at the latest within six
months from the receipt of a claim. In any event a claim shall not
be honoured if the guarantee has ceased to be valid in accordance
with its own terms or with these Rules.

Guarantees or Bonds

Article 9 Documentation to support claim

If a guarantee does not specified the documentation to be produced in
support of a claim or merely specifies only a statement of claim by the
beneficiary, the beneficiary submit:
a.

In the case of a tender guarantee, his declaration that the principals

tender has been accepted and that the principal has then either failed to
sign the contract or has failed to submit a performance guarantee as
provided for in the tender, and his declaration for agreement, addressed
to the principal, to have any dispute on any claim by the principal for
payment to him by the beneficiary of all or part of the amount paid
under the guarantee settled by judicial or arbitrate tribunal as specified
in the tender documents or, if not so specified or otherwise agreed
upon, by arbitration in accordance with the Rules of the ICC Court of
Arbitration or with the UNCITRAL Arbitration Rules, at the option of
the principal;

b.

In the case of a performance guarantee or of repayment guarantee,

either a court decision or an arbitrage award justifying the claim, or the
approval of the principal in writing to the claim and the amounts to be
paid.

Article 10 Applicable law

If a guarantee does not indicate the law by which it is to be governed the
applicable law is that of the guarantor place of business. If the guarantor has
more than one place of business, the applicable law is that of the branch
which issued the guarantee.

Article 11 Settlements of disputes

1.

Any disputes arising in connection with the guarantee may be referred

to arbitration by agreement between the guarantor and the beneficiary,
either in accordance with the Rules of ICC Court of Arbitration, the
UNCITRAL Arbitration Rules or such other rules of arbitration as may
be agreed between the guarantor and the beneficiary.

Guarantees or Bonds

2.

If a dispute between the guarantor and the beneficiary which touches

upon the rights and obligations of the principal or the instructing party
is referred to arbitration, the principal of the instructing party shall have
the right to intervene in such arbitrage proceedings.

3.

If the guarantor and the beneficiary have not agreed to arbitration or to

the jurisdiction of any specific court, any dispute between them relating
to the guarantee shall be settled exclusively by the competent court of
the country of the guarantors place of business or, if the guarantor has
more than one place of business, by the competent court of the country
of his main place of business or, at the option of the beneficiary by the
competent court of the country of the branch which issued the
guarantee.

Guarantees or Bonds

ANNEX No 2
ICC UNIFORM RULES FOR DEMAND GUARANTEES7
A. Scope and Application of the Rules.
Article 1
These Rules apply to any demand guarantee and amendment thereto which a
Guarantor (as hereinafter described) has been instructed to issue which
states that it is subject to the Uniform Rules for Demand Guarantees of the
International Chamber of Commerce (Publication No.458) and are binding
on all parties thereto except as otherwise expressly stated in the Guarantee
or any amendment thereto.
B. Definitions and General Provisions
Article 2
a.

b.

For the purpose of these Rules, a demand guarantee (hereinafter

referred to as Guarantee ) means any guarantee, bond on other
payment undertaking, however named or described, by a bank,
insurance company or other body or person ( hereinafter called the
Guarantor ) given in writing for the payment of money on presentation
in conformity with the terms of the undertaking of a written demand for
payment and such other document(s) ( for example a certificate by an
architect or engineer, a judgment or an arbitrage award ) as may be
specified in the Guarantee, such undertaking being given:
- at the request or on the instructions and under the liability of a party
(hereinafter called the Principal ); or
- at the request or on the instructions and under the liability of a bank,
insurance company or any other body or person (hereinafter the
Instructing Party) and acting on the instructions of a Principal to
another party (hereinafter the Beneficiary).
Guarantees by their nature are separate transactions from the contract(s)
or tender conditions on which they be based, and Guarantors are in no
way concerned with or bound by such contract(s), or tender conditions

Publication No. 458 issued by The International Chamber of Commerce from Paris

Guarantees or Bonds

despite the inclusion of a reference to them in the Guarantee. The duty

of a Guarantor under a Guarantee is to pay the sum or sums therein
stated on the presentation of a written demand for payment and other
documents specified in the Guarantee which appear on their face to be
in accordance with the terms of the Guarantee.
c.

d.

For the purpose of these Rules Counter-Guarantee means any

guarantee, bond or other payment undertaking of the Instructing Party,
however named or described, given in writing for the payment of
money to the Guarantor on presentation in conformity with the terms of
the undertaking of a written demand for payment and other documents
specified in the Counter-Guarantee which appear on their face to be in
accordance with the terms of the counter-guarantee. Counter
Guarantees are by their nature separate transactions from the
Guarantees to which they relate and from any other underlying
contract(s) or tender conditions, and Instructing Parties are in no way
concerned with or bound by such Guarantees, contract(s) or tender
conditions despite the inclusion of a reference to them in the CounterGuarantee.
The expressions writing and written shall include an authenticated
tele-transmission or tested electronic data interchanged (EDI)
message equivalent thereto.

Article 3
All instructions for the issues of Guarantees and amendments thereto and
Guarantees and amendments themselves should be clear and precise and
should avoid excessive detail. Accordingly, all Guarantees should stipulate:
a.

The Principal;

b.

The Beneficiary;

c.

The Guarantor;

d.

The underlying transaction requiring the issue of the Guarantee;

e.

The maximum amount payable and the currency in which it is payable;

f.

The Expiry Date and /or Expiry Event of the Guarantee;

g.

The terms for demanding payment;

h.

Any provision for reduction of the Guarantee amount.

Guarantees or Bonds

Article 4
The Beneficiarys right to make a demand under a Guarantee is not
assignable unless expressly stated in the Guarantee or in an amendment
thereto.
This article shall not, however, affect the Beneficiarys right to assign any
proceeds to which he may be, or may become, entitled under the Guarantee.
Article 5
All Guarantees and Counter-Guarantees are irrevocable unless otherwise
indicated.
Article 6
A Guarantee enters into effect as from the date of its issue unless its terms
expressly provide that such entry into effect is to be at a later date or is to be
subject to conditions specified in the Guarantee and determinable by the
Guarantor on the bases of any documents therein specified.
Article 7
a. where a Guarantor has been given instructions for the issue of a
Guarantee but the instructions are such that, if they were to be carried
out, the Guarantor would by reason of law or regulation in the country
of issue be unable to fulfill the terms of the Guarantee, the instructions
shall not be executed and a Guarantor shall immediately inform the
party who gave the Guarantor his instructions by telecommunication,
or, if that is not possible , by other expeditious means, of the reasons for
such inability and request appropriate instructions from that party.
b. Nothing in this Article shall oblige the Guarantor to issue a Guarantee
where the Guarantor has not agreed to do so.
Article 8
A Guarantee may contain express provision for reduction by a specified or
determinable amount or amounts on a specified date or dates or upon
presentation of the Guarantor of the document(s) specified for this purpose
in the Guarantee.

Guarantees or Bonds

C. LIABILITIES AND RESPONSABILITIES

Article 9
All documents specified and presented under a Guarantee, including the
demand shall be examined by the Guarantor with reasonable care to
ascertain whether or not they appear on their face to conform to the terms of
the Guarantee. Where such documents do not appear so to conform or
appear on their face to be inconsistent with one another they shall be
refused.
Article 10
a. A Guarantor shall have a reasonable time within which to examine a
demand under a Guarantee and to decide whether to pay or to refuse the
demand.
b. If the Guarantor decides to refuse a demand, he shall immediately give
notice thereof to the Beneficiary by tele-transmission, or, if that is not
possible, by other expeditious means. Any documents presented under
the Guarantee shall be held at the disposal of the Beneficiary.
Article 11
Guarantors and Instructing Parties assume no liability or responsibility for
the form, sufficiency, accuracy, genuineness, falsification, or legal effect of
any document presented to them or for the general and/or particular
statements made therein, nor for the good faith or acts or omissions of any
person whomsoever.
Article 12
Guarantors and Instructing Parties assume no liability or responsibility for
the consequences arising out of delay and/or loss in transit of any messages,
letters, demands or documents, or for delay, or other errors arising in the
transmission of any telecommunication. Guarantors and Instructing Parties
assume no liability for errors in translation or interpretation of technical
terms and reserve the right to transmit Guarantee texts or any parts thereof
without translating them.

Guarantees or Bonds

Article 13
Guarantors and Instructing Parties assume no liability or responsibility for
the consequences arising out of the interruption of their business by acts of
God, riots, civil commotion, insurrections, wars or any other causes beyond
their control or by strikes, lock-outs or industrial actions of whatever nature.
Article 14
a.

Guarantors and Instructing Parties utilising the services of another party

for the purpose of giving effect to the instructions of a Principal do so
for the account and at the risk of that Principal.

b. Guarantors and Instructing Parties assume no liability or responsibility

should the instructions they transmit not be carried out even if they have
themselves taken the initiative in the choice of such other party.
c.

The Principal shall be liable to indemnify the Guarantor and the

Instructing Party, as the case may be, against all obligations and
responsibilities imposed by foreign loss and usage.

Article 15
Guarantors and Instructing Parties shall not be excluded from liability or
responsibility under the terms of Articles 11, 12 and 14 above for their
failure to act in good faith and with reasonable care.
Article 16
A Guarantor is liable to the Beneficiary only in accordance with the terms
specified in the Guarantee and any amendment(s) thereto and in these Rules,
and up to an amount not exceeding that stated in the Guarantee and any
amendment(s) thereto.
D. DEMANDS
Article 17
Without prejudice to the terms of Article 10. in the event of a demand the
Guarantor shall without delay so inform the Principal or, where applicable,
his Instructing Party, and in that case the Instructing Party shall so inform.

Guarantees or Bonds

Article 18
The amount payable under a Guarantee shall be reduced by the amount of
any payment made by the Guarantor in satisfaction of a demand in respect
thereof and, where the maximum amount payable under a Guarantee has
been satisfied by payment and/or reduction, the Guarantee shall thereupon
terminate whether or not the Guarantee and any amendment(s) thereto are
returned.
Article 19
A demand shall be made in accordance with the terms of a Guarantee before
its expiry, that is, on or before its Expiry Date and before any Expiry Event
as defined in Artcle22. in particular, all documents specified in the
Guarantee for the purpose of demand, and any statement required by Article
20, shall be presented to the Guarantor before its expiry at its place of issue;
otherwise the Guarantor shall refuse the demand.
Article 20
a.

Any demand for payment under the Guarantee shall be in writing and
shall (in addition to such other documents as may be specified in the
Guarantee) be supported by a written statement (whether in the demand
itself or in a separate document or documents accompanying the
demand and referred to in it) stating:
-

that the principal is in breach of his obligation(s) under the

underlying contract(s) or, in the case of a tender guarantee, the
tender conditions; and

the respect in which the Principal is in breach;

b.

Any demand under the Counter-Guarantee shall be supported by a

written statement that the Guarantor has received a demand for payment
under the Guarantee in accordance with its terms and with this Article.

c.

Paragraph a of this Article applies except to the extend that it is

expressly excluded by the terms of the Guarantee. Paragraph b of this
Article applies except to the extend that it is expressly excluded by the
terms of the Counter-Guarantee.

Guarantees or Bonds

d.

Nothing in this Article affects the application of Articles 2 (b) and 2 (c),
9 and 11.

E.EXPIRY PROVISIONS
Article 22
Expiry of the time specified in a Guarantee for the presentation of demands
shall be upon a specified calendar date ( Expiry Date) or upon
presentation to the Guarantor of the document(s) specified for the purpose
of expiry ( Expiry Event). If both an Expiry Date and an Expiry Event are
specified in Guarantee, the Guarantee shall expire on whichever of the
Expiry Date or Expiry Event occurs first, whether or not the Guarantee and
any amendment(s) thereto are returned.
Article 23
Irrespective of any expiry provision contain therein a Guarantee shall be
cancelled on presentation to the Guarantor of the Guarantee itself or the
Beneficiarys written statement of release from liability under the
Guarantee, whether or not, in the latter case, the Guarantee or any
amendment(s) thereto are returned.
Article 24
Where a Guarantee has terminated by payment, expiry, and cancellation or
otherwise, retention of the Guarantee or of any amendment(s) thereto shall
not preserve any rights of the Beneficiary under the Guarantee.
Article 25
Where to the knowledge of the Guarantor the Guarantee has terminated by
payment, expiry, cancellation or otherwise, or there has been a reduction of
the total amount payable there under, the Guarantor shall without delay so
notify the Principal or where applicable, the Instructing Party shall so notify
the Principal.

Guarantees or Bonds

Article 26
If the Beneficiary requests an extension of the validity of the Guarantee as
an alternative to a demand for payment submitted in accordance with the
terms and conditions of the Guarantee and these Rules, the Guarantor shall
without delay so inform the party who gave the Guarantor his instructions.
The Guarantor shall then suspend payment of the demand for such time as is
reasonable to permit the Principal and the Beneficiary to reach agreement
on the granting of such extension and for the Principal to arrange for such
extension to be issued.
Unless an extension is granted within the time provided by the preceding
paragraph, the Guarantor is obliged to pay the Beneficiarys conforming
demand without requiring any further action on the Beneficiarys part. The
Guarantor shall incur no liability (for interest or otherwise) should any
payment to the beneficiary be delayed as a result of the above- mentioned
procedure.
Even if the Principal agrees to or requests such extension, it shall not be
granted unless the Guarantor and the Instructing Party or Parties also agree
thereto.
F. GOVERNING LAW AND JURISDICTION
Article 27
Unless otherwise provided in the Guarantee or Counter-Guarantee, its
governing law shall be that of the place of business of the Governor or
Instructing party (as the case may be) or, if the Guarantor or Instructing
Party has more than one place of business, that of the branch that issued the
Guarantee or Counter-Guarantee.
Article 28
Unless otherwise provided in the Guarantee or Counter-Guarantee, any
dispute between the Guarantor and the Beneficiary relating to the Guarantee
or between the Instructing Party and the Guarantor relating to the CounterGuarantee shall be settled exclusively by the competent court of the country
of the place of business of the Guarantor or Instructing Party (as the case
may be), or, if the Guarantor or Instructing Party has more than one place of
business, by the competent court of the country of the branch which issued
the Guarantee or the Counter-Guarantee.

Guarantees or Bonds

ANNEX No 3
Simple Demand Tender Guarantee
Our
number___________________________________________

guarantee

_____________________________________________________________
We are informed that____________________________________________
_____________________________________________________________
(hereinafter called the Seller) are tendering for a contract with you for the
supply of______________________________________________________
_____________________________________________________________
and that a tender guarantee is required in the sum of___________________
_____________________________________________________________
On behalf of the Seller we Barclays Bank PLC [branch] hereby give you
our guarantee and undertake to pay you any amount or amounts not
exceeding in total a maximum of [amount] on receipt of your first demand
in writing. Any claims must bear the confirmation of your bankers that the
signatures thereon are authentic.
This guarantee is valid for written demands received by us on or before
[date] after which date our liability to you under this guarantee will cease
and this guarantee will be of no further effect.
This guarantee is personal to you and is not assignable.
This guarantee shall be governed by English law.

Glossary

RATES OF EXCHAGE
accepted = acceptat;
appreciation = apreciere;
balance of payments = balan de pli;
branch = sucursal;
capital account = cont de capital;
capital foreign exchange operations = operaiuni valutare de cont de
capital;
capital transactions = tranzacii de capital;
commodity exchange = burs de marfuri;
covering exchange rate = acoperirea cursului de schimb valutar;
current account = cont curent;
current foreign currency operations = operaiuni valutare curente sau
operaiuni valutare de cont
curent;
current transactions = tranzacii curente;

Glossary

deals = tranzacii;
delay = ntrziere;
delivery = livrare, distribuire;
demand = cerere;
depreciation = depreciere;
devaluation = devalorizare;
direct quatation = cotaie direct;
direct investment = investiie direct;
due penalties = penaliti scadente;
exchange control = foreign exchange control = control valutar;
exchange office = exchange bureau = cas de schimb valutar;
exchange rate = curs de schimb valutar;
failure = euare; eec;
firm quotation = cotaie ferm;
fixed exchange rate regime = regimul valutar cu un curs de schimb fix;
foreign currency = foreign exchange = valut;
foreign exchange market = pia valutar;
foreign exchange intervention = intervenie valutar;
foreign exchange restrictions = restricii valutare;
foreign exchange risk = risc valutar;

Glossary

foreign exchange transactions = tranzacii valutare;

forward exchange rate = curs de schimb valutar la termen;
forward operations = forward transactions = operaiuni la termen;
headge = acoperire;
hedging = tehnic de acoperire a riscului valutar;
indirect quatation = cotaie indirect;
individuals = persoane fizice; indivizi;
international debt = datorie extern;
international reserves = rezerve internaionale;
international trade = comer internaional;
legal framework = cadru legal;
legal persons = persoane juridice;
loss = pierdere;
managed float regime (dirty float) = regim valutar controlat;
moderate amounts = sume moderate, (aici) sume aferente cheltuielilor
curente de ntreinere a membrilor familiei, care pot
fi justificate ulterior cu documente.
monetary unit = unitate monetar;
non-residents = nerezideni;
offer = ofert;
outright transactions = tranzacii complexe de vnzare-cumprare de
valute;

Glossary

own norms = norme proprii;

purchase order = ordin de cumprare;
quotation = cotaie;
reimbursement = rambursare;
rejected = respins;
residents = rezideni;
retail market = pia en-detail; pia cu amnuntul;
revaluation = revaluare;
settlement = (aici) decontare;
share capital = capital social;
spot exchange rate = curs de schimb valutar la vedere;
spot operations = spot transactions = operaiuni la vedere;
spread = marj; diferena dintre cursul de schimb de vnzare i cumprare,
sau dintre dobnda activ i pasiv a unei bnci;
sterilized foreign exchange intervention = intervenie valutar sterilizat;
stock exchange = burs de valori;
subsidiary = filial;
swap operations = ncheierea concomitent, pe piaa valutar, a dou
operaiuni legate ntre ele, bazate pe aceeai sum de
bani: cumprare curent i vnzare la termen, vnzare
curent i cumprare la termen sau vnzare i
cumprare la termene diferite.
traded = comercializat, tranzacionat;
trade balance = balan comercial;

Glossary

unsterilized foreign exchange intervention = intervenie valutar

nesterilizat;
up-to-date rate = rat actualizat;
wholesale market = pia en-gros;
working day = zi lucrtoare;
World Bank = Banca Mondial;
International Bank for Reconstruction and Development (IBRD) =
Banca Internaional pentru Reconstrucie i Dezvoltare
(BIRD).

FINANCIAL DERIVATIVES
options = opiunea reprezint contractul care acord beneficiarului dreptul
de a cumpra sau a vinde un instrument financiar sau o marf la
un pre specificat ntr-o perioad determinat;
option premium = prim pentru o opiune;
call option = opiunea call este opiunea de cumprare;
put option = opiunea put este opiunea de vnzare;
European option = opiune european;
American option = opiune american;
exotic options = opiuni exotice;
interest rate swaps = swap pe rata dobnzii;
currency swaps = swap valutar

Glossary

currency account = un cont bancar exprimat n orice valut, alta dect

moneda naional;
Eurocurrency = un depozit exprimat n orice valut deinut n afara rii
emitente;
Forward contract = contract la termen;
Hedging = asigurarea riscului valutar;
foreign exchange risk = risc valutar;
foreign exchange exposure = expunere valutar;
sovereign risk = risc de suveranitate;
hard currency = valut forte;
strong currency = valut forte (puternic);
weak currency = valut slab;
foreign exchange control = control valutar;
translation risk = risc de transformare;
transaction risk = riscul operaiunii;
overseas = abroad = n strintate;
derivatives = derivate; acestea sunt instrumente financiare care sunt n
esena un produs secundar al aciunilor, obligaiunilor etc.
bond markets = pieele obligaiunilor;
borrow (to) = a mprumuta;
lend (to) = a da cu imprumut;
lapse (to) = a decdea; a se scurge;

Glossary

gamble (to) = a risca; a pierde;

exchange rate arbitrage = arbitraj de curs de schimb;
invoice (to) = a factura
consolidated balance sheet = bilan contabil consolidat;
open outcry = strigare liber;
initial margin = marj iniial;
financial futures = operaiuni financiare la termen;
clearing house = cas de compensare;
settlement price = preul de decontare;

INTERNATIONAL TRADE
abroad = n strintate;
advertising = reclam publicitar;
advising bank = banc avizatoare;
airway bill / air consignment bill = scrisoare de transport aerian;
arrival = sosire;
at sight = la vedere;
batch = grup, lot (de mrfuri);
bear all risks = suport toate riscurile;
berth = dan, chei;

Glossary

bill of collection = incasso documentar;

bill of exchange = cambie;
bill of lading = conosament;
borrower = mprumutat/debitor;
buyer = cumprtor;
by-products = produse derivate;
Carriage Paid to = CPT = transport pltit pn la...;
Carriage = transport;
carrier = cru;
certificat of origin = certificat de origine;
Cost, Insurance and Freight = CIF = cost, asigurare i navlu;
Carriage and Insurance Paid to = CIP = cost i asigurare pltite pn la...
clearance = achitare;
collection = incasso;
commercial documents = documente comerciale;
commitment = angajament;
consignee = destinatar;
consular invoice = factur consular;
Cost and Freight.= CFR = cost i navlu;
contracting parties = pri contractante;
damaged = avariat;

Glossary

deferred = amnat;
Delivered at Frontier = DAF = franco frontier;
Delivered Duty Paid= DDP = franco destinaia vmuit;
Delivered Duty Unpaid= DDU = franco destinaie nevmuit;
Delivered Ex Quay= DEQ = franco chei;
Delivered ex Ship = DES = franco nava nedescrcat;
departure = plecare;
documents of title = documente de titlu;
draft = proiect;
ex works = franco fabric;
fee = tax;
financial documents = documente financiare;
flight stamp = timbru par avion;
flood = inundaie;
foreign exchange risk = risc valutar;
Free Alongside Ship = FAS = franco de-a lungul vasului;
free carrier = FCA = franco transportator;
Free on Board = FOB = franco la bord;
freight = navlu;
global amount = sum global;

Glossary

handling = manipulare;
harmless = fr pagube;
haulage = transport prin cruie; tax de transport;
issuer = emitent;
insurance certificate = certificat de asigurare;
insurance documents = documente de asigurare;
insurance policy = polia de asigurare;
international sales contract = contract internaional de vnzare;
invoice = factur;
L/C = letter of credit = scrisoare de credit;
documentery letter of credit = acreditiv documentar;
leakage = pierdere/scurgere de cantitate;
legalised/visaed invoice = factur legalizat;
lender = mprumuttor/creditor;
letter of introduction = scrisoare de prezentare;
lifting = ridicare;
lighter = lep;
loan contract = contract de mprumut;
lorry-way bill = scrisoare de trsur pentru transportul rutier;
main carriage unpaid = transportul principal nepltit;

Glossary

mark = marcare;
movement certificate EUR-1 = certificat de micare EUR-1;
non delivery = nelivrare;
notifying party = partea notificatoare;
offloaded = n afara ncrcturii;
on behalf of somebody = n numele cuiva;
outstanding = nepltit, restant, important;
packaging = ambalare;
packing list = list de ambalaj;
Parcel Post Receipt = recipis de coletrie;
port of call = port de escal;
preamble = preambul;
pro forma invoice = factur proform;
Promissory Note = bilet la ordin;
pursuant = conform;
railway bill = rail consignment note = scrisoare de trsur pentru
transportul feroviar;
raw materials = materii prime;
rediscount = rescontare;
rejection = respingere;
right - hand corner = colul din dreapta;

Glossary

riot = revolt;
SAD = Single Administrative Document = document administrativ unic;
sales contract = contract de vnzare;
sample = mostr;
ship = vas, nav;
shipping documents = documente de transport;
spoilage = alterare;
strike = grev;
supersede (to) = a nlocui;
supplier = furnizor;
term of delivery = termen de livrare;
term of payment = termen de plat;
TIR book = carnet TIR;
be assessed (to) = a fi evaluat;
be discounted (to) = a fi scontat;
be encountered (to) = a fi lovit / ciocnit;
be impended (to) = a fi iminent;
be labelled (to) = a fi etichetat;
be posted (to) = a afia, a lipi;
be tailored (to) = a fi confecionat / ajustat;
bind-up (to) = a lega;

Glossary

check (to) = a verifica;

fall due (to) = a fi scadent;
fall under somebody heading (to) = a cdea sub jurisdicia cuiva;
fill in (to) = a completa;
forfeit (to) = a pierde prin confiscare; a pierde un drept;
mix (to) = a amesteca;
pump (to) = a pompa;
rediscount (to) = a fi rescontat;
stamp (to) = a timbra, a tampila;
wire (to) = a telegrafia;
trade mark = marca fabricii / marc de comer;
truck = camion;
trustworthy = demn de ncredere;
type of packaging = mod de ambalare;
validity = valabilitate;
VAT = tax on added value = TVA (tax pe valoarea adugat);
wasting litigation = aciune n justiie n cazul unei pierderi;
worthiness = credibil;
written evidence = document scris;

Glossary

METHODS OF PAYMENT OR SETTLEMENT

ability = capacitate; abilitate
advance payment = plat n avans;
cash flow = flux monetar;
clean collection = incasso curat;
D/A (acceptance of documents) = acceptarea documentelor;
D/P (against payment) = documente contra plat;
dispatch = expediere;
documentary collection/ bill of collection = incasso documentar;
domestic trade = comer interior;
drawee = tras;
foreign trade = comer exterior;
guarantee of payment = garanie de plat;
liabilities = pasive, obligaii;
open account = cont deschis;
responsibilities = responsabiliti;
security = (aici) garanie;
statement of account = extras de cont;
cancel the order (to) = a anula un ordin;
grant a credit (to) = a acorda un credit;

Glossary

DOCUMENTARY CREDIT/ LETTER OF CREDIT

accepting bank = banc acceptatoare;
advising bank = banc avizatoare;
applicant = (aici) ordonator;
at sight = la vedere;
certificate of analysis = certificat de analiz;
confirming bank = banca confirmatoare;
consignment = transport de marf;
country risk = risc de ar;
deferred payment = plat amnat;
documentary credit/ letter of credit = acreditiv documentar;
expiry date = data de expirare;
forward contract = contract la termen;
indebtedness = stare de ndatorare;
inspection certificate = certificat de inspecie;
International Chamber of Commerce = Camera Internaional de Comer;
irrevocable credit = acreditiv irevocabil;
issuing bank = banc emitent;
payment in advance = plat n avans;
revocable credit = acreditiv revocabil;
shipment = ncrctur;

Glossary

tenor = maturity = scaden;

trustworthiness = credibilitate;
worthiness = credibilitate;
assignment of the proceeds of a credit = cesiunea acreditivului

SHORT-TERM FINANCE EXPORTS

short-term finance = finanare pe termen scurt;
factoring = invoice discounting = colectarea datoriilor este o finanare pe
termen scurt utilizat n comerul internaional i are la baz un
contract ncheiat ntre o parte numit furnizor i o alta numit
factor;
factoring chain = lanul de factoring este o reea internaional a tuturor
companiilor de factoring;
principal = rata de capital;
schedule of the repayment = scandenarea plii ratelor de capital i
dobnd;
minute = proces verbal;

MEDIUM- AND LONG-TERM FINANCE FOR EXPORT

supplier credit = credit furnizor;
buyer credit = credit cumprtor;
ECGD = Export Credits Guarantee Department = Departamentul de
Garantare a Creditelor de Export a fost nfiinat n anul 1991
pentru a-i asigura pe exportatorii britanici contra unor riscuri care
apar n comerul exterior.
onus = rspundere, obligaie;
overseas debt = datorie extern;

Glossary

default (to) = a nu-i ndeplini obligaiile;

lines of credit = linii de credit;
insolvency = incapacitate de plat;
instalments = plat in rate;
lease (to) = a nchiria;
financial lease = leasing financiar;
lessee = persoan care nchiriaz; persoan care pltete o sum de bani
pentru proprietatea nchiriat;
lessor = persoan care acord o nchiriere; persoan care ofer spre
nchiriere;
rental contract = contract de nchiriere;
loom = rzboi de esut; gherghef;
rent = chirie.

GUARANTEES OR BONDS
guarantee = bond = garanie;
bank guarantee = garanie bancar;
guarantor = garant;
tender = bid bond = garanie pentru licitaie;
performance bond = garanie de aducere la ndeplinire;
retention bond = garanie de reinere;
demand guarantee = garanie la cerere;
principal = ordonator;

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