(Tiểu luận FTU) TERMS OF PAYMENT IN THE SALE CONTRACT

I look forward to receiving your comments and suggestions about this payment method So the report has been divided into 4 chapters:  Chapter 1 : Terms of payment  Chapter 2 : Letter of

SCHOOL OF ECONOMICS AND INTERNATIONAL

Ha Noi, September 2019

TABLE OF CONTENTS

INTRODUCTION 1

1.1 Definition of terms of payment 2

1.2 Roles in the sale contract 3

1.3 How can it benefits the players 3

1.3.1 Buyers 3

1.3.2 Sellers 3

1.3.3 Rules of payment in the Commercial Law 2005 4

CHAPTER 1: TERMS OF PAYMENT 5

1.1 Currency 5

1.2 Period 2

1.2.1 Immediate payment 2

1.2.2 Advane payment 3

1.2.3 Deferred payment 3

1.3 Method 4

1.3.1 Collection method 4

1.3.2 Documentary credit method 5

1.3.3 Cash-in-Advance 5

1.3.4 Open Account 5

1.3.5 Consignment 6

1.3.6 Deposits instruments 6

1.3.7 Remittance 7

CHAPTER 2: LETTER OF CREDIT 8

2.1 Definition 8

2.2 Components 8

2.3 Types of L/C 8

2.3.1 Based on the irrevocable features 8

2.3.2 Based on the L/C features 9

2.3.3 Based on payment term of L/C 9

2.4 L/C and International Trade Contract 10

2.5 Customs 10

2.6 Transaction process to open L/C 11

2.7 Capital sources to ensure L / C payment 12

2.8 Request to open L / C 13

2.9 Content of L/C 14

2.10 Checking L/C 14

2.11 Reasons to use L/C 14

2.11.1 Seller’s concern 14

2.11.2 Buyer’s concern 15

CHAPTER 3: HOW TO WRITE PAYMENT TERMS BUSINESS CORRESPONDENCE IN INTERNATIONAL SALE CONTRACT 18

3.1 Period of payment 18

3.2 Method of payment 18

3.3 Credit method 19

3.4 Currency 19

3.5 Shipment method 19

CHAPTER 4: ANALYSIS DISPUTES OF PAYMENT TERMS 20

4.1 Mistakes from exporters 20

4.2 Disputes about terms of payment 23

4.2.1 Case Identification 23

4.2.2 Classification of Issues Present 23

4.2.3 Case Text 24

4.2.4 Summary of ruling 24

4.2.5 Facts and Pleadings 25

4.2.6 TRIBUNAL'S REASONING 25

4.2.7 Absence of the [Seller]'s representatives 27

4.2.8 Applicable law 28

4.2.9 Payment of interest for the use of monetary funds 30

4.2.10 Recovery of the expenses for the payment of the arbitration fee 31

CONCLUSION 32

REFERENCES 33

Currently, there are many different payment methods used between buyers(importers) and sellers (exporters), in which the payment method by letter of credit

is the most popular Specifically, payment by letter of credit (L/C) hascharacteristics that make them the most preferred payment method and the factors

to be aware of, notes when opening L/C

The payment by letter of credit creates many benefits for both parties to thecontract such as time, ease of goods exchange, etc However, there are still manydisputes about payment through this type

So I decided to choose the topic of payment terms and focused on the letter ofcredit payment method for the report

I would like to thank to Mrs Tran Bich when in the last few days you taught,even though you was very busy, but you still enthusiastically guided me so that Icould complete the report and get the bonus points Your devotion makes me evenmore motivated to complete the report in the most completed way I look forward

to receiving your comments and suggestions about this payment method

So the report has been divided into 4 chapters:

 Chapter 1 : Terms of payment

 Chapter 2 : Letter of Credit

 Chapter 3: How to write payment terms business correspondence inInternational Sale Contract

 Chapter 4: Analysing the disputes of terms of payment

1.1 Definition of terms of payment

To understand more about the terms of payment, first we need look up to thedefinition of terms of payment What is terms of payment

According to businessdictionary.com terms of payment can be known as

“Conditions of payment agreed between a buyer and a seller for goods sold orservices rendered”, or in the contract they can be defined as by the functions such as

“The Buyer will pay the purchase price [ specify e.g., on or before (date) or not later than (number) days before the Delivery date” The payment must be made in [currency] by means of [instrument of transfer].

Or maybe you can see the definition in the marketing ways “These are theconditions under which the seller will complete the sale if they are satisfied Theterms include the specific period within which the buyer needs to pay off theamount dues, demands related to cash in advance, cash on delivery, 30 days or moredeferred payment and similar other provisions It is the conditions under which thevendor completes the sale.”

In the international contracts, you should always specify the acceptablecurrency and the instrument of payment The currency selected should be strong andstable to allow some protection agains fluctuating exchange rates, and the means ofpayment should be secure For example may be made by delivery of a documentaryletter of credit or documents against payment, by advance payment in cash or wiretransfer, or by a line of credit of a specified number of days (Karla C Shippey,2003)

In addition to the price, a sales contract should state the time for payment,the method for payment, and any payment schedule agreed upon However, in thefield of international trade, due to cultural differences, financial capacitydistinctions, size and currency of payment, the parties may apply professionalmethod and the support from the third party such as credit institutions or banks

1.2 Roles in the sale contract

Terms of payment is an important part of the international contract because

of specific and detailed provisions on payment term, location, method,consequences

of late payment and sanctions of late payment are very necessary One of the terms that importers and exporters are most interested in because it is closely related to thebenefits of the parties

1.3 How can it benefits the players

As we can see that terms of payment can interest the buyer by showing thedeadline of payment or currency that they should use But this topic is focusing onthe L / C method so let find out what advantages the L / C can bring to the parties

Letters of credit are indispensable for international transactions since they ensurethat payment will be received

1.3.1 Buyers

 The bank will pay the seller for the goods, on condition that the latterpresents to the bank the determined documents in line with the terms of theletter of credit;

 The buyer can control the time period for shipping of the goods;

 By a letter of credit, the buyer demonstrates his solvency;

 In the case of issuing a letter of credit providing for delayed payment, theseller grants a credit to the buyer

 Providing a letter of credit allows the buyer to avoid or reduce pre-payment

1.3.2 Sellers

 The seller has the obligation of buyer's bank's to pay for the shipped goods;

 Reducing the production risk, if the buyer cancels or changes his order

 The opportunity to get financing in the period between the shipment of thegoods and receipt of payment (especially, in case of deferred payment).

 The seller is able to calculate the payment date for the goods

The buyer will not be able to refuse to pay due to a complaint about the goods

1.3.3 Rules of payment in the Commercial Law 2005

Article 51.- Suspension of payment for goods

Unless otherwise agreed, the suspension of payment for goods is providedfor as follows:

1 The purchaser that has proofs of deceit of the seller shall have the right tosuspend the payment

2 The purchaser that has proofs that the goods are subject to a dispute shallhave the right to suspend the payment until the said dispute is settled

3 The purchaser that has proofs that the seller has delivered goods which donot conform with the contract shall have the right to suspend the payment until theseller remedy such inconformity

4 If the proofs produced by the purchaser for the cases of paymentsuspension mentioned in Clauses 2 and 3 of this Article are unfounded, thus causingdamage to the seller, the purchaser must pay compensations for such damage and besubject to other penalties provided for in this Law

CHAPTER 1: TERMS OF PAYMENT

1.1 Currency

In international trade, goods can be paid either in the currency of theexporting country or in the currency of the importing country or in the currency ofthe third country The currency used for payment is called the money of payment

The currency of payment may coincide with the currency of calculation (i.e

the currency denoting the price) and may not coincide When the currency ofpayment and the currency of calculation of prices are two different currencies, onemust determine the exchange rate to convert those two currencies In particular,people choose:

 The exchange rate of the payment instrument (exchange rate of electricitytransfer or by mail)

 The currency of the market rate (in the exporting country, in the importingcountry or in a third country)

 The buying or selling rate

 Trade Agreement rate

For their own benefits, exporters often want to choose the currency ofpayment that is less likely to depreciate, either easily exchanged for other currencies

or easily exchanged for gold And the mindset of importers is the opposite

According to Article 52 of Commercial Law 2005 ( Determination of prices) stating that “ Where there is neither agreement on goods price or on the price-

determining method nor other price indexes, the goods price shall be determined according to the price of such type of goods under similar conditions on mode of goods delivery, time of goods purchase and sale, geographical market, payment

mode and other conditions which affect the prices” so we have another way to

choose the currency

1.2.1 Immediate payment

In international trade, immediate payment in advance is understood as an act

of payment before or during the time when the exporter places the goods documents

or places the goods themselves under the buyer's responsibilty Prompt paymentmay be made by full payment at a time, or by partial payment

The full payment of the goods at once requires the buyer to pay the full value

of the goods in one of the following conditions: upon receipt of the exporter's notice

of readiness to ship the goods; upon receipt of the carrier's notice of completion ofloading at the place of shipment; when all the documents specified in the contractare handed over to the buyer; after a certain number of days or a number offavorable hours since the whole documents are given to the buyer

The partial payment requires the buyer to pay the goods in a number ofinstallments agreed upon in the contract, based on the conditions of delivery or theavailability of the goods

The partial payment based on delivery conditions may be prescribed as

follows: the buyer must pay the seller a substantial part (80 - 95%) of the goods

when the seller has sent the goods or has sent proof from goods, the rest (5 - 20%) will be paid when the buyer has received the goods or when the warranty period ends

Upon partial payment of the availability of the goods, the buyer must pay ininstallments based on the degree of completion of the parts separate of orders or

contracts For example: 10% of the payment upon delivery of the design, 70%

-when the equipment is delivered, 15% upon the acceptance of the project and 5%

upon the expiry of the warranty period.

1.2.2 Advane payment

Advance payment of goods is the delivery of the goods to the seller in whole

or in part before the seller orders the goods at the disposal of the buyer or before theseller fulfills the buyer's order The amount of advance payment is more or lessdependent on the importance of the traded goods, the manufacturing period of thegoods, the relationship between the transactions and the practices formed in therelevant trading industry Today, usually the advance is in the 5 - 10% range of theorder value Advance payment is usually made by deducting money from goods or

by making a definitive calculation at the time of achievement of goods Theadvance is the credit the buyer provides to the seller

1.2.3 Deferred payment

In the paying later, the seller gives the buyer a credit according to theagreement between the two parties This credit is repayable either in cash or inmerchandise In recent years, in the world market for complete equipment, acommon type of contract is product sharing, whereby the importer reimburses thecredit to the exporter by partial delivery (about 20 - 40%) products manufactured bythe introductory equipment

In credit payment (prepaid or postpaid), the parties are usually concernedabout the amount of credit, credit term, credit interest rate and repaymentconditions

1.3 Method

In world market transactions, people use different payment methods to pay forgoods and services But the most popular is the collection method and the creditdocument method Here are some features of these two methods

1.3.1.2 Documentary collection

If the collection slip is included with the shipping document, the method ofpayment is that the bank dominates the set of documents In this case, when thebuyer wants to have the documents to receive the goods, he or she must:

 Pay the money, which called “documents against payment” shortly for D/P

 Accept to pay the money, which called “documents against acceptance”

shortly for D/ACompared with the collection of plain notes, the collection of evidence has beenmore secure for the seller in the issue of money collection (because the Bank on hisbehalf to control the documents) However, the rights of the seller can still bethreatened as the buyer may not want to receive the goods and refuse to receive thedocuments, while the goods have already been sent Because the collection methoddoes not fully protect the rights of the seller, the Ministry of Trade has stipulated(in Circular No 04BNg T / XNK dated January 18, 1986) can only be exportedunder D/A, D/P in the following cases: Export goods which are not of high export

value, contract value of under US $ 10,000 and when processing Export companieshave mastered the solvency of the buyers.

1.3.2 Documentary credit method

Documentary credit method, in a business transaction, is an agreement whereby

a bank at the request of the purchaser will pay the seller or to any person under theseller's order, when the seller presents complete the documents and fulfill therequirements specified in a document called letter of credit, shortly for L/C

In terms of implementation, letters of credit can be at sight or with deferredpayment or transferable to the third person Documentary credit payment methodhas many advantages over mail delivery method

 For the seller, it is guaranteed to earn money

 For buyers, it ensures that payment to the seller is made only once the sellerhas presented a complete set of valid documents and the bank has checkedthe set of documents

1.3.3 Cash-in-Advance

With cash-in-advance payment terms, an exporter can avoid credit risk becausepayment is received before the ownership of the goods is transferred Forinternational sales, wire transfers and credit cards are the most commonly usedcash-in-advance options available to exporters With the advancement of theInternet, escrow services are becoming another cash-in-advance option for smallexport transactions However, requiring payment in advance is the least attractiveoption for the buyer, because it creates unfavorable cash flow Foreign buyers arealso concerned that the goods may not be sent if payment is made in advance Thus,exporters who insist on this payment method as their sole manner of doing businessmay lose to competitors who offer more attractive payment terms

1.3.4 Open Account

An open account transaction is a sale where the goods are shipped and deliveredbefore payment is due, which in international sales is typically in 30, 60 or 90 days

Obviously, this is one of the most advantageous options to the importer in terms ofcash flow and cost, but it is consequently one of the highest risk options for anexporter Because of intense competition in export markets, foreign buyers oftenpress exporters for open account terms since the extension of credit by the seller tothe buyer is more common abroad Therefore, exporters who are reluctant to extendcredit may lose a sale to their competitors Exporters can offer competitive openaccount terms while substantially mitigating the risk of non-payment by using one

or more of the appropriate trade finance techniques covered later in this Guide

When offering open account terms, the exporter can seek extra protection usingexport credit insurance

1.3.5 Consignment

Consignment in international trade is a variation of open account in whichpayment is sent to the exporter only after the goods have been sold by the foreigndistributor to the end customer An international consignment transaction is based

on a contractual arrangement in which the foreign distributor receives, manages,and sells the goods for the exporter who retains title to the goods until they are sold

Clearly, exporting on consignment is very risky as the exporter is not guaranteedany payment and its goods are in a foreign country in the hands of an independentdistributor or agent Consignment helps exporters become more competitive on thebasis of better availability and faster delivery of goods Selling on consignment canalso help exporters reduce the direct costs of storing and managing inventory Thekey to success in exporting on consignment is to partner with a reputable andtrustworthy foreign distributor or a third-party logistics provider Appropriateinsurance should be in place to cover consigned goods in transit or in possession of

a foreign distributor as well as to mitigate the risk of non-payment

1.3.6 Deposits instruments

There are many methods for deposits instruments such as:

 Bill of Exchange (B/E): An unconditional order issued by a person or

business which directs the recipient to pay a fixed sum of money The future

date may be either fixed or negotiable A bill of exchange must be in writingand signed and dated It also called draft

 Check: A note promising to pay money to a named person or entity

 Promissory note: document saying that someone owes a specific amount of

money

1.3.7 Remittance

It is a mode of payment, in which the buyers will ask their bank to transfer thecontract’s value to the sellers’ account at an appointed time There can thosemethods :

 Mail transfer (M/T)

 Telegraphic transfer (T/T, T/Tr)

 Applications

 Low value contract

 High credit with each other

CHAPTER 2: LETTER OF CREDIT2.1 Definition

A letter of credit is a letter from a bank guaranteeing that a buyer's payment to aseller will be received on time and for the correct amount In the event that thebuyer is unable to make a payment on the purchase, the bank will be required tocover the full or remaining amount of the purchase

2.3.1 Based on the irrevocable features

 Irrevocable L/C (Thư tín dụng không thể hủy ngang.): This L/C cannot becancelled or modified without consent of the beneficiary (Seller) This L/Creflects absolute liability of the Bank (issuer) to the other party

 Revocable L/C (Thư tín dụng có thể hủy ngang) This L/C type can becancelled or modified by the Bank (issuer) at the customer's instructionswithout prior agreement of the beneficiary (Seller) The Bank will not haveany liabilities to the beneficiary after revocation of the L/C

2.3.2 Based on the L/C features

 Confirmed L/C (Thư tín dụng xác nhận): In addition to the Bank guarantee

of the LC issuer, this LC type is confirmed by the Seller's bank or any otherbank Irrespective to the payment by the Bank issuing the LC (issuer), theBank confirming the LC is liable for performance of obligations

 Transferable L/C (Thư tín dụng chuyển nhượng): This LC enables the Seller

to assign part of the letter of credit to other party(ies) This LC is especiallybeneficial in those cases when the Seller is not a sole manufacturer of thegoods and purchases some parts from other parties, as it eliminates thenecessity of opening several LC's for other parties

 Revolving L/C (Thư tín dụng tuần hoàn): This kind of letter allows acustomer to make any number of draws within a certain limit during aspecific time period

 Back to Back L/C (Thư tín dụng giáp lưng): This LC type considers issuingthe second LC on the basis of the first letter of credit LC is opened in favor

of intermediary as per the Buyer's instructions and on the basis of this LCand instructions of the intermediary a new LC is opened in favor of Seller ofthe goods

 Stand-by L/C (Thư tín dụng dự phòng): This LC is closer to the bankguarantee and gives more flexible collaboration opportunity to Seller andBuyer The Bank will honour the LC when the Buyer fails to fulfill paymentliabilities to Seller

2.3.3 Based on payment term of L/C

 Sight L/C (Thư tín dụng trả ngay): According to this LC, payment is made tothe seller immediately (maximum within 7 days) after the requireddocuments have been submitted

 Deferred L/C (Thư tín dụng trả chậm): According to this LC the payment tothe seller is not made when the documents are submitted, but instead at alater period defined in the letter of credit In most cases the payment in favor

of Seller under this LC is made upon receipt of goods by the Buyer

 Red clause L/C (Thư tín dụng điều khoản đỏ) : The seller can request anadvance for an agreed amount of the LC before shipment of goods andsubmittal of required documents This red clause is so termed because it isusually printed in red on the document to draw attention to "advancepayment" term of the credit.

2.4 L/C and International Trade Contract

L/C was established on the basis of the International Trade Contract but when

it was released it is completely independent from the foreign trade contract

That is, after the International Trade Contract has been signed, the buyer is onthe basis of the content (terms of the contract) as agreed in the contract to the Bank(importing country) requires this bank to issue a letter of credit to guarantee thepayment to exporters (under instructions and requirements meeting the bank'sconditions of goods given)

After L/C is issued, if the exporter agrees and accepts the contents then theexporter must fulfill its obligations prescribed terms of L/C (not follow the contract

- If there is a difference between L/C and contract)

2.5 Customs

UCP 500/600 – Uniform custom and practise for documentary creditNowadays, mostly using UCP 600 (issued by ICC)

2.6 Transaction process to open L/C

You have to follow similar procedures when opening a letter of creditregardless of the sector you may be located:

 Step 0: The importer and exporter conduct the signing of foreign tradecontracts, which stipulate the payment by documentary credit (LC) method

 Step 1: Based on the signed foreign trade contract, the importer sends anapplication for opening a letter of credit to the issuing bank and makes adeposit (if any) Deposit may be 100% or less than 100% depending on thereputation of the business as assessed by the Bank where LC is opened.

 Step 2: The bank issuing letter of credit considers, if it is reasonable, it willissue a letter of credit (LC) through the Bank notifying the beneficiaryExporter

 Step 3: The correspondent bank will inform the letter of credit and deliverthe original letter of credit to the Beneficiary (Exporter)

 Step 4: The Exporter conducts L / C inspection, if found suitable, thendeliver the goods to the Importer, and if not appropriate, the Importer shouldamend the L / C

 Step 5: The Exporter presents documents to the Bank announcing thecollection

 Step 6: The bank notifies that after checking the documents, the documentsare transferred by the importer so that the bank can open L / C forconsideration and payment

 Step 7: The issuing bank checks and informs the requesting documents of theresult of checking the documents

 Step 8: The requester (The importer) after being notified of the documents ifthe documents differ from each other suggest the amendment or acceptpayment and at the same time receive the set of documents to receive thegoods

 Step 9: The issuing bank requires the Bank to notify payment of money tothe Exporter (Beneficiary)

 Step 10: The issuing bank officially proceeds to credit the beneficiary'saccount

2.7 Capital sources to ensure L / C payment

 When defining the terms of payment by L/C in the contract, customers need

to consider the capital to pay for the L / C that the customers will askVietnam Industrial and Commercial Bank to open:

 L / C issued by own capital, customers must deposit 100%

 L / C is issued by own capital, the client does not deposit 100% and / or hasrequest for exemption or reduction of deposit

 L / C issued by Vietnam Industrial and Commercial Bank’s captial

2.8 Request to open L / C

 Customers fill out the L / C opening request form Because the bank opensL/C according to requirements of the importer, so the customer shouldcarefully review the contract content to guarantee when putting the contractterm in L/C without conflict Documents for opening L/C of customersinclude:

 Application for opening of L/C

 Decision on enterprise establishment (for enterprises having first-timetransactions)

 Business registration (for enterprises having first transaction)

 Registration of import-export code (for enterprises trading for the first time)

 Original international trade contract (in case of contract signing via FAX, theunit must sign and stamp on the copy)

 Authorized import contract (if enterprise has)

 Importing permission of the Ministry of Trade (if the imported goods are onthe list of management regulations in the Prime Minister's Provisions onannual import and export every year from Goverment

 Payment commitment, Credit Contract (in case of loan), Official Letter ofapproval for opening of L/C with deferred payment of Vietnam Industrialand Commercial Bank a.k.a Vietinbank (in case of opening L/C withdeferred payment)