Bill of Exchange

How to Determine Maturity Date if Letter of Credit States That Tenor of the L/C is 60 Days After Bill of Lading Issue Date?

Ozgur Eker (CDCS) Bill of Exchange, Bill of Lading, How to Work With a Letter of Credit, Letter of Credit Basics, Letter of Credit Documents 29 November 20186 April 2019Bill of Exchange, Bill of Lading, Date of Shipment, Maturity Date

Maturity date is a term related to a time draft.

A time draft is a form of payment that is guaranteed by an issuing bank, but is not payable in full until a specified amount of time after it is received and accepted. (1)

The maturity date is a date on which a bill of exchange or deferred payment undertaking under a documentary credit is to be paid by the party assuming the undertaking. (2)

Determining the maturity date is an important concept especially when the letter of credit is available with a time draft.

Example: A letter of credit has been issued by an international bank’s branch in France states that the documentary credit is available by drafts payable at 60 days after bill of lading issue date.

The beneficiary has presented the bill of lading showing:

date of issue : 04.August.2014 and
shipped on board date : 01.August.2014.

How to determine the maturity date of the draft based on above information?

First of all we need to understand that whether there are any differences exist between the “bill of lading date” and the “bill of lading issue date”.

When we look at the ISBP 745 we understand that ICC Banking commission used these terms with the same meaning. As a result both “bill of lading date” and “bill of lading issue date” have the same meaning in terms of letter of credit rules.

Secondly we need to answer which date we should be using when determining the maturity date of the draft.

Should we use bill of lading issuance date or shipped on board date?

Once again we need to look at the ISBP 745 for the correct answer. ISBP 745 states that shipped on board date is deemed to be bill of lading date or bill of lading issue date with the following statement:

“When the tenor refers to, for example, 60 days after the bill of lading date, the on board date is deemed to be the bill of lading date even when the on board date is prior to or later than the date of issuance of the bill of lading.”

As a result we need to use shipped on board date when determining the maturity date of the draft even if the letter of credit states that tenor of the L/C is 60 days after bill of lading issue date.

On the above example shipped on board date is 01.August.2014 and tenor is 60 days after bill of lading issuance date.

We should accept shipped on board date as bill of lading issue date and should use it on calculation of the maturity date.

The maturity date is 30.September.2014.

Important Note: You should add 60 days to 01.August.2014. Remember you should exclude 01.August.2014 when counting 60 days.

Sources:

https://www.investopedia.com/terms/t/time-draft.asp
Documentary credits in practice, Reinhard Längerich, Second edition – 2009, Page: 304, Published by: Nordea

How Does a Bill of Exchange Work?

Ozgur Eker (CDCS) Bill of Exchange, How to Work With a Letter of Credit, Letter of Credit Basics, Letter of Credit Documents 3 July 20187 April 2019Bill of Exchange, Draft, Letter of Credit Documents

Bill of exchange, which is also known as draft, is a financial document commonly used in international trade transactions.

According to UK’s Bill of Exchange Act (1882), the bill of exchange defined as an “unconditional order in writing, addressed by one person to another, signed by the person giving it (drawer), requiring the person to whom it is addressed (drawee) 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 (payee), or to bearer”.

Parties to a Bill of Exchange:

Drawer of a Bill of Exchange / Draft: Is the party that issues a Bill of Exchange in an international trade transaction; usually the seller or exporter.
Drawee of a Bill of Exchange / Draft: Is the recipient of the Bill of Exchange for payment or acceptance in an international trade transaction; usually the importer or importer’s bank.
Payee of a Bill of Exchange / Draft: Is the party to whom the Bill is payable; usually the seller or his bank.

How Does a Bill of Exchange Work in the Documentary Collections?

Documentary Collection (D/C) is a payment method in international trade. Documentary collection is also known as Cash Against Documents (CAD).

There are two payment options available in the documentary collections: Documents Against Payment (D/P) and Documents Against Acceptance (D/A).

Under the documents against payment option, it is not advisable to use a bill of exchange. The importer should make the payment at sight against the documents.

Under the documents against acceptance (D/A) payment option, it is advisable to use a bill of exchange payable at a future date (time draft).

Bill of Exchange Workflow in the Documentary Collections:

The bill of exchange workflow under documents against acceptance (D/A) payment option is as follows:

The exporter issues a bill of exchange payable at a future date (time draft) along with other shipping documents and sends it to the importer via his bank on collection basis.

The importer applies to his bank, accepts the bill of exchange, receives the documents, clears the goods from the customs and makes the payment at the maturity date of the bill of exchange.

How Does a Bill of Exchange Work in the Letters of Credit?

There are four payment options available in the letters of credit: Sight payment, acceptance, deferred payment and negotiation.

It is not possible to use a bill of exchange in the letters of credit, which are available by deferred payment.

On the other hand, every letter of credit that is issued available by acceptance must demand presentation of a bill of exchange along with other shipping documents.

Under sight payments and negotiation, the bill of exchange may or may not be used.

Bill of Exchange Workflow in the Letters of Credit:

The bill of exchange workflow in the letters of credit available by sight payment, acceptance or negotiation is as follows:

Sight Payment:

After making the shipment, the exporter collects all the shipping documents and issues an at sight bill of exchange to make the presentation to the issuing bank or confirming bank or nominated bank, as applicable.

If the bank determines that the presentation is complying, then pays the credit amount to the beneficiary.

Acceptance:

After making the shipment, the exporter collects all the shipping documents and issues a time draft (bill of exchange payable at a future date) to make the presentation to the issuing bank or confirming bank or nominated bank, as applicable.

If the bank determines that the presentation is complying, then accepts the time draft and pays the credit amount to the beneficiary at maturity.

Negotiation:

The letters of credit available by negotiation can be payable at sight or usance.

If the letter of credit requires an at sight bill of exchange, the process will be the same as the sight payment.

If the letter of credit requires presentation of a time draft, the process will be the same as the acceptance.

Conclusion:

Bill of exchange plays an important role in commercial and financial cycles not only as a method of payment or a way of providing credit, but also as security for payments. (1)
Bill of exchange mainly used in documentary collections and letters of credit.
Under the documentary collections, the bill of exchange can be used only when Documents Against Acceptance (D/A) payment option is chosen.
Under the documentary collections, the bill of exchange payable at a future date (time draft) drawn on the importer. The importer accepts the bill of exchange, receives the documents, clears the goods from the customs and makes the payment at the maturity date of the bill of exchange.
If the importer does not pay the bill of exchange amount at maturity, the exporter tries to use his legal rights that is stem from the bill of exchange.
Under the documentary collections, the importer’s banks has no payment obligation unless the bill of exchange has been avalized by the importer’s bank.
Under the letters of credit, the bill of exchange can be used with at sight, acceptance and negotiation payment options.
Under the letters of credit, the bill of exchange can be issued at sight or payable at a future date (time draft).
Under the letters of credit, the bill of exchange must be drawn on a bank that is specified in the credit.
Under the letters of credit, the bill of exchange does not give additional payment guarantee to the beneficiary, whereas the situation will be different for the banks. Bill of exchange may change the payment obligation between the nominated bank and the issuing bank; the confirming bank and the issuing bank etc.

References:

Bills of Exchange, A Guide to Legislation in European Countries, Dr. jur. Uwe Jahn, ICC Publication No 531 (E), 1996, P:3

Sample Bill of Exchange

Ozgur Eker (CDCS) Bill of Exchange, Letter of Credit Documents 28 April 20187 April 2019Bill of Exchange, Draft, Letter of Credit Documents

On this page, you can find a sample “Bill of Exchange”, which is drawn under a typical letter of credit transaction.

Bill of exchange can be defined as an unconditional order in writing, addressed by one person to another, signed by the 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.

If you need further information regarding the bill of exchange, please read my previous post from this link: “Bill of Exchange“.

Please keep in mind that some banks mention “Bill of Exchange” as “Draft” in letters of credit.

So bill of exchange and draft have the same meaning.

Letter of Credit Details:

An unconfirmed letter of credit has been issued by Commerzbank AG, requires an at sight draft drawn on the issuing bank.

Issuing Bank:
Commerzbank AG D-60261 Frankfurt am Main GERMANY
Documentary Credit Number:
LC304/3610/12IC
Applicant:
Import Hause Herrengraben 54 20459 Hamburg GERMANY
Beneficiary:
Export Handel Po Box 123 Amsterdam Holland
Currency Code/Amount:
EUR100000
Available With … By …:
ABNANL2A (ABN Amro Bank NV, AMSTERDAM BRANCH)…BY PAYMENT
Drafts at …:
Sight
Drawee:
COBADEFF (Commerzbank AG, Frankfurt am Main BRANCH)

Sample Bill of Exchange / Draft

The exporter drawn the draft on the issuing bank. The bill of exchange is payable at sight.

Remaining details of the bill of exchange are:

drawer is the beneficiary, who is also the exporter: Export Handel Po Box 123 Amsterdam Holland
drawee is the issuing bank, who is also the importer’s bank that opened the letter of credit: Commerzbank AG D-60261 Frankfurt am Main GERMANY
payee is also the beneficiary.

Ozgur Eker (CDCS) Bill of Exchange, Letter of Credit Documents 27 April 201821 April 2024Bill of Exchange, Draft, Letter of Credit Documents

On this page, I will try to explain “Bill of Exchange” and its applications in letters of credit.

Banks mention “Bill of Exchange” as “Draft” in some occasions.

Bill of exchange can be used as a supporting financial document in cash against documents and letters of credit payments.

Bill of exchange is one of the most hard-to-understand concepts in trade finance terms.

May be it is why some professionals find it unnecessary and demand its removal from the letters of credit, altogether.

https://www.youtube.com/watch?v=Q6NnhQg3ZnU

Definition: According to UK’s Bill of Exchange Act (1882), the bill of exchange defined as an unconditional order in writing, addressed by one person to another, signed by the person giving it (drawer), requiring the person to whom it is addressed (drawee) 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 (payee).

Parties to Bill of Exchange:

There are 3 parties involved in a typical bill of exchange transaction.

Drawer of a Bill of Exchange: Is the party that issues a Bill of Exchange in an international trade transaction; usually the seller or exporter.
Drawee of a Bill of Exchange: Is the recipient of the Bill of Exchange for payment or acceptance in an international trade transaction; usually the importer, the issuing bank or the confirming bank.
Payee of a Bill of Exchange: Is the party to whom the Bill is payable; usually the seller or his bank such as the advising bank. (Source: aib trade finance)

Basic Bill of Exchange Transaction:

Bill of exchange transaction process may vary along with the selected payment method.

Below image illustrates a very basic bill of exchange process under an unconfirmed letter of credit transaction.

Step 1 : The exporter (drawer) draws the bill of exchange on the issuing bank (drawee) and send it to the issuing bank for acceptance through the advising bank.
Step 2 : The issuing bank (drawee) accepts the bill of exchange and makes the payment to the advising bank (payee) at maturity.
Step 3 : The advising bank transmits the payment to the exporter (drawer).

Important Note: The drawee and payee may change from one letter of credit to another. Especially, under confirmed letters of credit the drawee is the confirming bank instead of the issuing bank.

Legal Coverage:

Two major legal traditions, common law and civil law, govern the bill of exchange slightly different as a financial instrument in international trade transactions.

Bills of Exchange Act (1882): Bills of Exchange Act (1882) is valid for United Kingdom, Ireland, commonwealth nations such as Australia, India, New Zealand etc..
Geneva Conventions (1930): Geneva Conventions (1930) is valid for Germany, France, Austria, Belgium, Saudi Arabia, Denmark, Finland, South Korea, Greece, Taiwan, Thailand, Oman, Syria, Iceland, Poland, Italy, Czech Republic, Liechtenstein, Slovakia, Luxembourg, Hungary, Malta, Albania, Netherlands, Bulgaria, Norway, Romania, Portugal, Croatia, Spain, Bosnia-Herzegovina, Sweden, Macedonia, Switzerland, Slovenia, Turkey, Serbia, Indonesia, Lebanon, Japan, Jordan etc…

How to Use Bill of Exchange in Letters of Credit Transactions:

UCP 600 – Article 6 states that “A credit must not be issued available by a draft drawn on the applicant.”
Drafts, transport documents and insurance documents must be dated even if a credit does not expressly so require.
Shipping documents have the following meaning under international standard banking practice; “shipping documents” – all documents (not only transport documents), except drafts, required by the credit.
Even if not stated in the credit, drafts, certificates and declarations by their nature require a signature.
The draft must be endorsed, if necessary.
The draft must be drawn on the party stated in the credit.
The draft must be drawn by the beneficiary.
A credit may be issued requiring a draft drawn on the applicant as one of the required documents, but must not be issued available by drafts drawn on the applicant.

Letter of Credit Documents

Ozgur Eker (CDCS) Air Waybill, Bill of Exchange, Bill of Lading, Certificate of Origin, Charter Party Bill of Lading, Commercial Invoice, Featured, Inspection Certificate, Insurance Policy, Letter of Credit Documents, Packing List, Road Transport Document, Sea Waybill 12 March 20187 April 2019Bill of Lading, Certificate of Origin, Commercial Invoice, Inspection Certificate, Insurance Policy, Letter of Credit Documents, Packing List

After reading this post, you should understand why documentation is very important under letters of credit.

Additionally, most frequently used document links have been supplied on later parts of this article.

There are many important points in a typical letter of credit transaction that need to be taken care of professionally.

However, documentation is much more important than any other aspects of the letters of credit transactions, because the documentation forms the backbone of the letters of credit structure.

In order to understand the importance of the documentation, please assume that you are an exporter, whom has just shipped an order.

How can you prove to the issuing bank that you have make the shipment according to the letter of credit terms?

Which means that;

you have shipped the goods on time, not late
you have shipped the right goods, not wrong ones
you have shipped the goods in good condition, no apparent defect on the packing
you have delivered the goods to the carrier for transportation from port of loading to the port of discharge indicated in the credit etc.

In order to prove above points to the issuing bank, you have to supply a relevant transport document.

Furthermore, let us also consider that the delivery term was CIF Incoterms 2010, which obligates the exporter, which is you, to arrange and pay the insurance for the shipment.

Once again, you have to supply an insurance policy to fulfill your insurance responsibility.

The examples can be extended, but perhaps the main idea is very clear. Letters of credit transactions are related to the documents only, not actions.

The importance of the documentation is stated in UCP 600 article 5 as follows:

Banks deal with documents and not with goods, services or performance to which the documents may relate.

In addition, every condition stated in the letter of credit must be connected to a document. This point is also clearly indicated in UCP 600 article 14 as below.

If a credit contains a condition without stipulating the document to indicate compliance with the condition, banks will deem such condition as not stated and will disregard it.

Documents Most Frequently Used Under Letters of Credit Transactions:

Transport Documents:

Insurance Documents:

Financial Documents:

Bill of exchange (Draft) (Sample)

Commercial Documents:

Official Documents: