This document provides notes on methods of payment in international trade, including payment on open account, payment by bills of exchange, collection arrangements, documentary credits, and bank guarantees. It discusses key concepts like the autonomy principle, where the credit is independent from the underlying sales contract, and the strict compliance doctrine, where banks must strictly adhere to credit terms. Documentary credits are described as the most secure payment method, offering protection to buyers and sellers through the bank system. The types of credits - revocable/irrevocable and confirmed/unconfirmed - are also outlined.

1. ILYANA ISKANDAR – INTERNATIONAL LAW NOTES AS AT 2016
PAYMENT IN INTERNATIONAL TRADE
1) INTRODUCTION
a. Methods of payment try to reconcile the conflicting interests involved in export
and import transactions.
b. The seller’s interest: to obtain the purchase price as soon as possible.
c. However, the seller will not wish to part with documents (esp. BL) before having
received payment.
d. The buyer: will wish to postpone payment of the price until the documents
(esp. BL) are no longer in the disposition of the seller.
e. A reconciliation of these conflict of interests: the interposition of a bank is
necessary.
f. Payment with interposition of banks
i. Collection arrangements
ii. Payment under a ‘documentary credit’.
g. Payment without the interposition of banks
i. Payment on ‘open account’ or ‘direct payment’;
ii. Payment by ‘bill of exchange’.
2) PAYMENT ON OPEN ACOUNT (DIRECT PAYMENT)
a. Usual between parties who have been trading with each other for a long time
[trustworthiness].
b. A cheaper form of payment with bank involvement kept to a minimum and
bank charges considerably reduced.
c. The seller will deliver the goods to the buyer directly and send him an invoice
calling for payment of the purchase price.
d. The buyer then deposit the payment into seller’s account.
3) PAYMENT BY BILLS OF EXCHANGE
a. Normally, the buyer does not transfer the purchase price on open account, but
allows the seller to draw a bill of exchange on him.
b. This arrangement offers some advantages to both parties.
c. The seller: obtains a negotiable instrument which he can turn into cash by
negotiation at once.
d. The buyer: is allowed a definite period of credit for settlement unless the bill is
payable at sight.
e. nature of the bill of exchange
i. The bill of exchange (sometimes referred to as a ‘draft’) is a very old
established method of transferring money.
1. Section 1 of the Bills of Exchange Act 1882 - “An unconditional
order in writing, addressed by one person to another, signed by the

2. ILYANA ISKANDAR – INTERNATIONAL LAW NOTES AS AT 2016
person giving it, requiring the person to whom it is addressed to
pay on demand or at a fixed or determinable future time a sum
certain in money to or to the order of a specified person or to
bearer”.
4) COLLECTION ARRANGEMENTS (SELLER’S INITIATION)
a. Normally, the seller asks his bank to arrange for the collection of the price.
b. The seller’s bank (known as the remitting bank) will carry out this task through a
correspondent bank in the buyer’s country.
c. The bill of exchange, accompanied by the documents relating to the goods, will
be sent to the correspondent bank, through the remitting bank.
d. The correspondent bank will hand the documents to the buyer when he accepts
the bill of exchange or pays on it.
5) DIFFERENCE BETWEEN A COLLECTION ARRANGEMENT AND A
DOCUMENTARY CREDIT
a. In a collection arrangement, the bank receives its instructions from the seller.
b. The exchange of the documents of title representing the goods and the payment
of the price is normally effected at the buyer’s place of business.
c. Conversely, in the case of a letter of credit, the instructions to the bank usually
emanate from the buyer.
d. The exchange of the documents and the price is normally effected at the
seller’s place of business.
6) DOCUMENTARY CREDITS
a. Documentary credits, also called bankers’ commercial credits or letters of
credit, represent the most secure method by which a seller may obtain and the
most common method of payment for goods in export trade.
i. The Bhoja Trader, Donaldson L. J: They have been described by courts
as “the life blood of international commerce”.
b. Documentary credits are generally governed by the Uniform Customs and
Practice for Documentary Credits (2007 Revision, ICC Publication No 600)
[known as UCP 600].
c. The UCP applies to all Documentary Credits where they are incorporated into
the text of the Credit.
d. They are binding on all parties thereto. (Art. 1 of the UCP).
e. ROLE OF DOCUMENTARY CREDIT SYSTEM“SECURITY TO ALL
PARTIES”
i. The value of this system lies in the security that it affords to all the
parties concerned.

3. ILYANA ISKANDAR – INTERNATIONAL LAW NOTES AS AT 2016
ii. The seller has the payment of his price assured, provided he tenders the
correct document, by a reputable bank, usually one in his own country.
iii. The Advising Bank (AB: Bank in seller’s country) will receive the
documents, before it allows the seller to draw for the price, and will thus
be able to hold them as security pending payment by the issuing bank.
iv. The Issuing Bank (IB: Bank in buyer’s country), in turn, will have the
documents as security for payment by its own customer, the buyer.
f. mechanism of a documentary credit transaction [there are basically four
stages]
i. The seller and the overseas buyer agree in the contract of sale that
payment shall be made under a DC.
ii. The overseas buyer (‘Applicant’ for the Credit) instructs a bank at his
place of business (Issuing Bank- IB) to open a DC for the seller (the
“Beneficiary’).
iii. The IB arranges with a bank at the seller’s place of business (Advising
Bank- AB), to negotiate, accept or pay the seller’s Draft upon delivery of
the transport documents by the seller.
iv. The AB informs the seller that it will accept or pay his Draft upon
delivery of the transport documents.
1. The AB may do so either without its own undertaking or it may
confirm the Credit opened by the IB (In which case the AB will
become the ‘Confirming Bank’ – CB).
2. Provided the correct documents are tendered and this is done
before the expiry of the Credit, there is a binding undertaking of
the IB, if the Credit is irrevocable, and also of the CB, if it is
confirmed, to the Beneficiary (seller) to pay the purchase price.
7) TIME OF OPENING OF CREDIT
a. It is important not only that a credit of the right type is opened but that it is
opened in good time.
b. If the contract stipulates a time for the opening of the credit the buyer must
comply with this stipulation.
c. It is more common, however, to stipulate that a credit is to be opened
‘immediately’.
i. Garcia v Page & Co Ltd - “[I]n such time as is needed by a person of
reasonable diligence to get that credit established”.
ii. Lindsay & Co Ltd v Cook - [A] credit was to be opened ‘immediately’.
The date for shipment of the goods was to be 28 September but the seller
was not advised of the opening of the credit until 6 October. It was

4. ILYANA ISKANDAR – INTERNATIONAL LAW NOTES AS AT 2016
held that the opening of the credit on time was a condition precedent to
the seller’s duty to ship the goods.
8) THE MANDATE
a. The instructions which are given by the buyer (applicant of the credit) to his
bank comprise the buyer’s mandate.
b. These instructions must be complete and precise stating those documents against
which the bank is to make payment and those documents which, if tendered by
the seller will be unacceptable. [Art. 5(b), UCP]
c. A bank that has paid out contrary to given instructions has no recourse against the
buyer.
d.
9) THE TWO FUNDAMENTAL PRINCIPLES
a. The law relating to the documentary credit is founded on two principles:
i. The autonomy of the credit
1. According to this principle, the documentary credit is separate
from and independent of the underlying contract of sale or other
transaction.
2. Art. 3, UCP explains the principle in this way: “(a) Credits, by
their nature, are separate transactions from the sales or other
contract(s) on which they may be based and banks are in no way
concerned with or bound by such contract(s)…”.
3. A bank which operates a credit is concerned only with whether
the documents tendered by the seller correspond to those
specified in the instructions.
4. Power Curber International Ltd v National Bank of Kuwait -
Lord Denning: “It is vital that every bank which issues a letter of
credit should honour its obligations. [The bank is in no way
concerned with any dispute that the buyer may have with the
seller.] The buyer may say that the goods are not up to the contract.
Nevertheless the bank must honour its obligations. A letter of
credit is like a bill of exchange given for the price of the goods. It
ranks as cash and must be honoured.”
5. THE FRAUD RULE
a. The only case in which – exceptionally – the bank should
refuse to pay under the documentary credit occurs if it is
proved to its satisfaction:
i. that the documents are fraudulent; and
ii. that the seller was involved in the fraud.
b. This is usually referred to as the “fraud exception”.
c. United City Merchants v Royal Bank of Canada

5. ILYANA ISKANDAR – INTERNATIONAL LAW NOTES AS AT 2016
i. In this case, payment for the sale of goods was by
confirmed irrevocable documentary credit.
ii. The carrier’s agent fraudulently issued a bill of
lading showing shipment to be within shipment
period.
iii. That bill of lading was incorrect and false.
iv. This was not known to the sellers.
v. The confirming bank refused to pay on the basis
that it had information suggesting that shipment
had not taken place as indicated in the bill of
lading.
vi. The HL, however, held that the instant case did not
fall within the fraud exception.
vii. The sellers were unaware of the inaccuracy of the
statement in the bill of lading.
viii. They had in fact believed it to be true.
ix. They were therefore not a party to the fraud.
ii. The doctrine of strict compliance.
1. The buyer will send to the Issuing Bank instructions (known as
‘mandate’) as to the documents which the seller is to present to
the bank (or the correspondent bank) in order to be allowed to
draw on the credit.
2. It is a term of the contract between the buyer and his bank that the
bank will allow the seller to draw only if the documents are in
strict compliance with theses instructions.
3. A bank which pays on documents which do not comply will be
liable to the buyer.
4. Moralice (London) Ltd v E D & F Man
a. The contract was for the sale of 5,000 bags but the bill of
lading tendered to the bank indicated that there were three
bags short. The bank was held to be entitled to reject the
documents. Mc Nair J stated: “When a CIF contract
provides that payment shall be by means of presentation of
documents against an irrevocable credit, the documents
must be such as will strictly comply with the terms of the
letter of credit.”
5. Equitable Trust Co of New York v Dawson Partners Ltd
a. Lord Sumner expressed the doctrine of strict compliance in
the following classic passage: “If the bank does as it is told,

6. ILYANA ISKANDAR – INTERNATIONAL LAW NOTES AS AT 2016
it is safe; if it departs from the conditions laid down, it acts
at its own risk”.
6. The second reason for the rule of strict compliance lies in the
bank’s position in relation to the sale contract.
7. The bank is not a dealer in goods; it cannot be expected to know
trade terms and practices or to know why the buyer has
stipulated for a particular item and what importance he might
attach to that item.
a. H Rayner & Co Ltd v Hambro’s Bank Ltd
i. The letter of credit described the goods as
“Coromandel groundnuts”.
ii. The sellers had tendered a bill of lading referring to
the goods as “machine-shelled groundnut
kernels” and an invoice for “Coromandel
groundnuts”.
iii. Held: although it was well known in the trade that
the two terms are one and the same, the bank was
entitled to reject the documents and refuse payment.
iv. It was quite impossible to suggest that a banker has
to have knowledge of the customary terms of
every one of the thousands of trades for whose
dealings he may issue a letter of credit.
10) SHORT-CIRCUITING
a. When contract of sale has established a documentary credit as the mode of
payment, the seller has duty to present the documents to the bank and is not
entitled to short-circuit the documentary credit procedure by presenting the
documents directly to the buyer and demanding payment from him.
b. Soproma SPA v Marine and Admiral By-Products Corpn - The documents
tendered by the seller to the bank were in many ways unsatisfactory. The BLs
were Marked “freight collect” instead of “freight paid” as required.
c. A certificate of analysis which should have indicated ‘minimum 70% protein’ in
fact stated ’67 % protein’ and thus documents were rejected by the bank.
d. The sellers then obtained documents which did conform to the requirements
of the credit but by the time they had done so the term of the credit had
expired.
e. They therefore tendered the documents directly to the buyers and demanded
payment.
f. Held: they were not entitled to do so as the sellers having made an invalid tender
had failed to comply with the terms of the credit.

7. ILYANA ISKANDAR – INTERNATIONAL LAW NOTES AS AT 2016
g. The direct presentation to the buyer was irrelevant and ineffective.
11) TYPES OF DOCUMENTARY CREDITS
a. Documentary credits are of various types.
b. The particular type to be employed in a transaction will be usually laid down in
the contract of sale under which the credit is arranged.
i. Revocable and irrevocable credits
1. The quality of the credit as “revocable” or “irrevocable” refers to
the obligation of the Issuing Bank to the beneficiary (the seller).
ii. Confirmed and unconfirmed credits
1. The quality of the credit as “confirmed” or “unconfirmed” refers to
the obligation of the Advising Bank to the beneficiary.
2. Art. 6, UCP, states that a credit may either be revocable or
irrevocable.
a. REVOCABLE AND UNCONFIRMED CREDITS
i. Under Art. 8 (a), UCP, a revocable credit may be
amended or cancelled by the issuing bank at any
moment and without prior notice to the beneficiary.
ii. This type of credit clearly does not give the security
that a seller normally looks for.
iii. In practice, therefore, revocable credits are not
widely used.
iv. Irrevocable credits, which may be confirmed or
unconfirmed, are the norm.
b. IRREVOCABLE AND UNCONFIRMED CREDITS
i. Where this type of credit is used, the issuing bank
cannot revoke its undertaking to the beneficiary, but
the advising bank does not enter into its own
obligation to make payment under the credit.
ii. If the advising bank refused to pay on tender of the
documents, the beneficiary might be compelled to
institute proceedings overseas – a situation which
largely defeats the main purpose of the commercial
credit.
c. IRREVOCABLE AND CONFIRMED CREDITS
i. This is the type of documentary credit most
favourable to the exporter (seller) because the
advising bank undertakes that it will honour the
seller’s drafts provided they are drawn and
presented in conformity with the terms of the credit.

8. ILYANA ISKANDAR – INTERNATIONAL LAW NOTES AS AT 2016
ii. Hamzeh Malas & Sons v British Imex Industries
Ltd -
1. A Jordanian firm contracted to buy from a
British firm, a quantity of steel rods, to be
delivered in two instalments.
2. Payments were to be made under two
confirmed credits, one for each instalment,
to be opened with the Midland Bank,
London.
3. Both credits were duly opened and
confirmed by the bank to the sellers.
4. The first instalment was duly paid for but
the buyers argued that the goods were
defective.
5. That being the case, they applied for an
injunction to stop the bank from paying
under the second letter of credit. [Injunction
was denied.]
6. Held: “The opening of a confirmed letter of
credit constitutes a bargain between the
banker and the seller of the goods, which
imposes upon the banker an absolute
obligation to pay, irrespective of any dispute
there may be between the parties as to
whether the goods are up to the contract or
not. A seller of goods selling against a
confirmed letter of credit is selling under the
assurance that nothing will prevent him from
receiving the price”.
12) BANK GUARANTEES
a. A bank guarantee/other contract guarantee describes a primary and independent
undertaking by the guarantor to pay if the conditions of the guarantee are
satisfied.
b. According to Somervell, J., the word guarantee is often, other than its legal sense,
simply means “undertaking”.
c. performance guarantees
i. Bank guarantees may be procured by the buyer or seller.
ii. If they are procured by the buyer, their aim is to secure the payment of the
price to the seller by substituting a reliable paymaster for the buyer.

9. ILYANA ISKANDAR – INTERNATIONAL LAW NOTES AS AT 2016
iii. If they are procured by the seller their purpose is to secure the buyer if he
has a claim for damages against the seller for non-delivery of the goods,
for defective delivery or other cases of non-performance.
iv. Such guarantees are known as performance guarantees.
d. bank guarantee: contract of indemnity
i. The contract of indemnity is a two-party arrangement under which the
indemnor undertakes to hold the other harmless if the latter suffers loss in
his dealings with another.
ii. For example:
1. Issuance of a letter of indemnity for a clean bill of lading.
2. Issuance of a letter of indemnity for the delivery of the goods.