Negotiable instruments – Bill of Exchange
A seller will require payment and security of payment for goods being shipped to a foreign country. A negotiable instrument such as a bill of exchange provides such security.
A bill of exchange has 3 parties, the drawer (who writes the bill), the drawee (the Bank, who pays out the money) and the payee (the person paid by presenting the cheque).
It is similar to a personal cheque except for the drawee only becomes liable to pay the bill after signing it. The obligation of payment by the drawee can be transferred usually for a lesser price and only the person holding the bill can demand payment.
A bill can be a term bill or a sight bill. A term bill allows the seller to offer credit to the buyer and is payable on a certain date after initial presentation to drawee (usually 90 or 180 days from initial date of presentation). So they must be presented twice to the bank. The bill can be sold for less than its 100% value for early payment, often to the bank.
A sight bill is paid on sight and does not facilitate any credit for the buyer.
In an international sale the seller will draw up the bill of exchange and present it to his own bank for acceptance. This is to prevent him having to travel to the buyer’s bank to present the bill. If it is agreed that the buyer’s bank will reimburse the sellers bank for the documents required to execute the contract for sale the sellers bank will agree to accept the bill.
If a contract for the sale of goods is breached the bill of exchange remains as good as cash and remains unaffected. The buyer will pay any bank charges unless it is stipulated otherwise in the bill.
Negotiable instruments – Documentary Credits (Letters of Credit)
Documentary credits are used to prevent non payment by an insolvent buyer or fraud etc, and are a means of ensuring and guaranteeing the performance of the buyer. Here a buyer will arrange and pay for an issuing bank to enter into an agreement where it provides written assurance (the documentary credit) that where the seller performs their side of the contract they will be paid. Here the bank acts not as a guarantor, but a as a principle and it is the bank the seller will enforce their rights against.
Advantages to using documentary credits are added security, insolvency is less of a risk, the bank holding the shipping documents can secure its own position, the seller can bank in their own country.
Documentary credits are expressed to be drawn up under the Uniforms Customs and Practice for Documentary Credits which is published by the ICC (UPC500).
Two fundamental principles of documentary credits are their autonomy (which makes it independent of any other contractual arrangement) and the doctrine of strict compliance where the banks are only concerned whether the documents provided by the seller are in accordance with the instructions, they do not look to any other underlying contracts.
With this form of payment, where there is no fraud, the bank cannot refuse payment and the buyer cannot stop payment to the seller.
The CE marking is a mandatory conformity mark on products placed on the market in the European Economic Area (EEA) and certifies that a product has met EU consumer safety, health or environmental requirements.
Manufacturers of a product will affix the CE marking to the product, but they have to take certain obligatory steps before their product can bear CE marking such as a conformity assessment, setting up a technical file and sign an EC declaration of conformity.
Importers of products must confirm that a manufacturer outside the EU has undertaken the necessary steps and that the documentation is available upon request.
Distributors should be able to show the national authorities that they have acted with due care and should have affirmation from the manufacturer or importer that the necessary measures have been taken.
Products which do not fall within the scope of at least one of the CE Marking of which there are 20, are not required to be CE marked. More than one directive can apply.
The CE Marking process is a self-declaration process however there are various ‘attestation routes’ to conformity depending on the Directive and classification of the product. Some products may, to some extent, have a mandatory requirement for some involvement of an authorised third party.