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Terms, international payment methods

In the international goods purchase and sale activities, the payment is the right and obligation of both parties buying (import) and selling (export). Therefore, when negotiating the payment method, the parties desire to choose the best payment method for them.

Ha Do Law Firm with a team of Lawyers and High Commissioner in the field of international trade, often perform business, have a lot of experience in consulting clients to select the most suitable payment method and control risks in international payments.

We would like to share information about the major payment methods that are frequently used for the Customers to refer.

1. Remittance

In international transaction, according to this method, importers require their banks to transfer a certain amount of money to the exporter (the beneficiary) in a given place by means of money transfer stipulated by importers.

In fact, many cases, importers will not transfer money to exporters until they fully receive goods. This is an advantage for the importer but risk for the exporter when goods have been delivered but money has not been paid, delayed or insufficiently paid. However, the importer may also take risks, especially in the case of transferring money before delivering goods such as: getting all the money before delivering, deposit, advance…In this case, the importer may bear the risk if the money is transferred, but goods are not delivered on time and on quality or quantity…

To prevent risks, the parties should:

  • Establish clear money transferring roadmap: For example: How many % up-front? When? When the rest are paid?
  • Agree that time transfer coincides with the time of delivery.
  • Specify clearly the transfer means, who will bear the costs of transferring money?

2. Letter of Credit - L / C

According to this method, a bank (Originating Bank), as requirement of the client (the person request to open letters of credit) will pay a certain amount to another person (the beneficiary of letter of credit) or accept bills of exchange drawn by this person within that amount when that person presents to the Bank reasonable payment vouchers in accordance with the provisions of the letter of credit.

2.1.            The legal nature of the letter of credit (L / C)

In essence, in goods purchase and sale activities, L/C payment method transfers payment responsibility of importers to the Bank ensuring that the exporter delivers goods and receives money safely and quickly, the importer receives shipment invoice punctually. Therefore, this method is commonly used in the sale and purchase of goods internationally.

This is a reasonably safe payment method; however, in the process of applying, the Parties need to note the following legal characteristics of letters of credit to avoid misapplication and damages:

  • L / C is an independent contract with international sales and purchase Agreement (basic agreement).

L / C is formed on the basis of basis Agreement (Sales and Purchase Agreement, Service Agreement,), but when it is issued, it is completely independent of basic agreement. Originating Bank and other banks involved in letter of credit transactions only comply with stipulation of letters of credit.

  • Letter of credit is a "type of sale purchase of vouchers”

According to Article 5 of UPC600: “the Bank conducts transactions on the basis of the vouchers, not with goods, services or performance related to above vouchers"

Thus, the Bank is obliged to pay the exporter when they present vouchers in accordance with the terms and conditions stipulated in the L / C. Banks are not allowed to use the excuse that the buyers have not received goods to refuse payment if the vouchers presented by the seller are in accordance with the terms and conditions stipulated in the L / C.

2.2.            Notes when using L/C

Payment by L / C is a relatively safe method for both importers and exporters. However, in order to use L / C effectively, simultaneously to ensure their benefits when using the L / C as a method of payment, the parties should keep in mind a number of issues raised following.

For importers, they must prepare the procedures and submit applications for L/C issuance. Actually, because applications for L/C insurance are under the international standard format (Standafo, Standaci), importers should only need to fill necessary information in gaps and delete unnecessary information. To ensure the accuracy of the application, later is letter of credit, the importer must be based on the contents of international sales and purchase Agreement to establish application and avoid any differences.

Specially, for exporters (the beneficiary of the L / C), they need to thoroughly check the letter of credit. Because if there is a mismatch between the L / C and international sales and purchase Agreement that the exporters cannot detect but continue to deliver goods, the exporters will have difficulty in getting money or vice versa if delivery is refused the exporters will breach of Agreement.

Basis to check the L / C is international sales and purchase Agreement (basic Agreement). L / C must be consistent with basic Agreement and not be contrary to the contents of the basic Agreement. For Agreement having amendments, or supplements, be careful to check the contents of the original Agreement and Agreement with amendments and supplements. In addition, the legal basis adjusting L/C normal are UCP 600, ISBP 681, eUCP 1.1 and URR 525 1995.  Therefore, need to assess form and contents of L/C on the basic of applicable Law.

In terms of the contents of the L / C, needs to thoroughly check the following: the amount of L / C; effectiveness expiration date of L/C; effectiveness expiration place of L/C; type of L/C (normally letter of irrevocable credit (exporters should choose irrevocable L / C without recourse conditions; it’s better if confirmed)); delivery deadlines; manner of delivery; way of transport; commercial documents; invoices; bills of lading; insurance.

When detecting that the contents of the L / C are not consistent with basic Agreement or contrary to applicable law or inability to perform, the exporters must require the importers to make L / C amendment and supplement procedures. In case of errors in the L / C is not too serious, the exporters and banks can coordinate to come up with the resolution such as: the exporters compose letter of ensuring responsibilities about payment vouchers and send to Bank issuing L/C, or through a representative of the importer applying payment acceptance and send to Bank issuing L/C... or switch to other payment methods, such as collection method, or recourse method and restitution…

In short, L / C with contents are in accordance with basis Agreement and not contrary to the applicable law will protect the interests of both importers and exporters.

Ha Do Law Company wishes to become a trusted and regular partner of valued Customers.

For advice and cooperation, please contact us.


About Me: Lê Minh Tuấn

Luật sư, Giám đốc / Lawyer, Director

Tư vấn thương mại quốc tế / International Trade Consultant

Điện thoại: (024) 730 86 999 / Mobi: 090 45 45 299

Email: infor@hado-law.com / Email: infor.ssv@gmail.com