Definition of Payment Service by Letter of Credit

- Place of opening L/C . This is where the bank opening L/C makes a commitment to pay money to the exporter. This place is important in the matter of choosing the applicable law, whenever a dispute arises between the parties related to the letter of credit. Normally, if the letter of credit does not clearly specify the place of opening the letter of credit, according to transaction practice, the place of opening the letter of credit is determined to be the address where the issuing bank has its head office, or branch office (if the letter of credit is opened at a specific branch of the bank).

- L/C opening date. This is the date on which the legal representative of the issuing bank signs the letter of credit document to create a letter of credit in accordance with the rules of documentary credit, based on compliance with the Rules and Practice for Documentary Credits (UCP500, UCP600). In practice, in most cases, the letter of credit opening date is the date on which the bank's payment commitment to the exporter becomes effective, and is also the effective date of the contract between the issuing bank and the importer. However, in theory, it is also possible that the letter of credit opening date does not coincide with the effective date of the letter of credit, if the letter of credit contains a note from the issuing bank regarding the extension of the letter of credit's validity to a certain date after the letter of credit opening date. Sometimes, the date of opening the letter of credit is also considered as the basis for the exporter to check whether the importer opened the L/C correctly as stipulated in the sales contract or not.

- Name and address of the parties involved in the L/C . These parties include: the applicant for the L/C; the beneficiary of the L/C; the issuing bank of the L/C; the advising bank of the L/C and sometimes the confirming bank of the L/C. These parties must have their identities, addresses and account numbers (if any) clearly identified to prevent and limit disputes that may arise during the implementation of the letter of credit.

- Value of L/C. It is the amount written in words and numbers, expressed

The value of the issuing bank's asset obligation to the beneficiary must be consistent with the value in words and the value in numbers in the L/C. In case of disagreement, the amount in words can be considered valid. In addition, the name of the currency must be clearly, completely and accurately stated in accordance with the generally accepted regulations in international payment transactions and avoid misunderstandings or interpretations that are not beneficial to the parties.

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- L/C validity period . This is the period in which the issuing bank commits to pay the exporter if the exporter presents the payment documents within that period and in accordance with the provisions of the L/C. The term of the L/C is calculated from the date of opening the L/C to the date of expiry of the L/C. The validity period of the L/C must be a reasonable period of time to facilitate the contract implementation process as well as not cause difficulties in presenting the payment documents from the exporter/beneficiary.

- Payment term of L/C . This term is related to immediate payment or deferred payment. This term depends entirely on the provisions of the foreign trade contract, in which the buyer and seller can clearly determine whether payment is by sight letter of credit or deferred payment letter of credit.

- Delivery period . This period will be stipulated in the sales contract and must be recorded in the L/C as a payment condition for the beneficiary. In case the parties to the sales contract agree to extend the delivery period without mentioning the extension of the validity period of the letter of credit, it is automatically considered that the letter of credit is also extended by a corresponding period. Conversely, if the parties agree to extend the validity period of the letter of credit but do not agree to extend the

The delivery deadline should not be understood as a corresponding extension of the delivery time.

- Terms and conditions related to goods such as name of goods, quantity, weight, price, specifications, quality, packaging, and markings are fully recorded in the L/C.

- Terms and conditions related to transportation and delivery of goods such as delivery terms (FOB, CIF, CFR...), loading and unloading place, place of shipment, place of delivery, form of transportation... are also recorded in the L/C.

- The clause defines the set of documents that the exporter must present to request payment. This is a very important content of the L/C, because the set of documents is evidence proving that the exporter has fulfilled the obligation to deliver the goods as stipulated in the L/C. If the set of documents is in accordance with the L/C, the issuing bank will pay for the goods to the exporter and vice versa, the issuing bank of the L/C can refuse to pay. The set of documents stipulated by the L/C is more or less, depending on the nature of the goods and the agreement between the buyer and seller. In international payments, the bank makes payment based on the documents, not on the goods. Normally, the bank that opens the L/C requires the exporter to satisfy the following characteristics when presenting the set of documents:

+ Types of documents agreed upon in the sales contract between the exporter and the importer.

+ Quantity of each type of document.

+ Signing procedures for each type of document.

- The commitment to pay of the L/C opening bank . This is one of the most important contents of the L/C. This clause binds the responsibility of the L/C opening bank to pay the exporter if the exporter presents a set of documents in accordance with the provisions of the L/C. Practice shows that

It is seen that if this provision is not clearly defined, it is likely to lead to disputes between the parties and cause difficulties for the Court or Arbitration in the process of dispute resolution.

- The terms record the rights and obligations of the parties involved . In reality, different types of L/C have different characteristics and contents. Therefore, the provisions on the rights and obligations of the parties involved in a letter of credit may also be different.

- Other special terms.

In addition to the above contents, the L/C opening bank and the importer can agree to add some other contents to the letter of credit such as being able to refund by telegraphic transfer or email...

- Signature of the L/C issuing bank. Since the letter of credit is essentially a civil contract or agreement, the person signing the letter of credit must also have full legal capacity and capacity to act according to the provisions of civil law. Normally, the person signing the letter of credit is the legal representative of the issuing bank, including the legal representative or the authorized representative.

1.1.1.5. Classification of Letters of Credit

And depending on the function, L/C is divided into many different forms. However, there are 5 main types of L/C that are most commonly used at Agribank:

- Irrevocable letter of credit: This is a type of L/C that, once opened by the bank, cannot be modified, supplemented or canceled within its validity period without the agreement of the participating parties. This type of L/C has the advantage of ensuring the rights of the participating parties.

- Confirmed L/C: Is an irrevocable letter of credit, confirmed by another bank, which means that in addition to the commitment

Payment by the issuing bank of an L/C also includes a payment commitment from the confirming bank.

- Deferred payment L/C (L/C available by deferred payment): Is a type of L/C in which the issuing bank commits to pay the beneficiary the amount of the letter of credit, a number of days after the perfect set of documents is presented or after the delivery date.

- Transferable L/C: Is an L/C in which the first beneficiary can request the serving bank to transfer all or part of the original L/C value to one or more second beneficiaries. The purpose of this type of L/C is to help the importer carry out export services without needing its own capital.

- L/C payable by draft at sight: This is an irrevocable L/C and must be paid immediately upon presentation of the draft. The risk in this type of letter of credit is that payment is often required before receiving the goods, because the draft and documents often arrive before the goods arrive at the port.

- Standby Letter of Credit: Standby L/C is a type of L/C opened at the request of the exporter, which stipulates the obligation of the L/C opening bank to commit to paying the importer the amount of deposit, advance payment... in case the exporter fails to fulfill the delivery obligation as stipulated in the L/C, as well as the L/C opening bank will compensate for the damage caused by itself to the importer. This type of credit is quite commonly applied in some countries such as the US, Japan... to ensure the rights of the buyer against the risk of the seller's breach of contract.

- Red Clause Letter Of Credit.

This is a type of L/C in which the issuing bank allows the bank to notify the beneficiary in advance to purchase goods and raw materials for production.

The advance payment is taken from the account of the applicant, that is, the commercial credit, not the credit of the advising bank to the issuing bank. The advising bank only carries out the procedures according to the terms of the L/C without committing or being responsible for that amount. The advance payment is authorized by the issuing bank to the advising bank. The issuing bank will then deduct the applicant's account and transfer it to the advising bank. The name of the L/C comes from the fact that it was previously printed in red ink to increase attention.

With the red clause, the issuing bank commits to advance a certain amount of the L/C upon receipt of the following documents, usually:

+ Draft of advance payment.

+ Invoice.

+ IOU or delivery commitment.

* Based on the time of payment, letters of credit can be divided into the following two types:

- Letter of credit at sight.

This is an irrevocable L/C in which the issuing bank commits to pay the exporter for the goods immediately upon receipt of a set of documents in accordance with the L/C within the validity period of the letter of credit.

- Usance L/C.

This is an irrevocable L/C in which the issuing bank commits to pay the exporter for the goods after a certain period of time specified in the L/C, if the exporter presents a complete set of valid documents according to the L/C's regulations and within the validity period of the L/C.

1.1.2. Payment service by letter of credit (L/C)

1.1.2.1. Definition of payment service by letter of credit

Payment by L/C is a form of payment through a bank, according to which

Payment is made from an amount of money deposited in advance by the buyer at his/her bank to pay the seller according to the documents presented by the seller on the quantity of goods delivered and services provided according to the terms of use of L/C.

For payment by letter of credit, opening a letter of credit is a mandatory condition to apply this form of payment. In domestic and international trade transactions, payment by L/C is often applied when the seller does not trust the buyer's ability to repay the debt, so they require the buyer to have a payment guarantee by opening a letter of credit at the bank to prepare to pay them, after delivering the goods according to the signed contract. Because payment by letter of credit is always associated with a payment commitment of a bank (called the L/C issuing bank), this form is very safe for the seller as the beneficiary.

1.1.2.2. Characteristics of payment services by letter of credit

In theory, payment by L/C has the following basic characteristics:

Firstly, the L/C issuing bank makes payment to the beneficiary (seller) from an amount of money that has been deposited or escrowed by the buyer in advance at the bank. This allows to minimize the risks that may occur to the bank. In this case, even if there are unexpected risks to the buyer or seller, the bank does not have to share the same disadvantages with them. However, the amount of escrowed depends on the agreement between the parties as well as the level of friendliness of the relationship between the bank and the customer - the person requesting the opening of the letter of credit.

Second, in payment by letter of credit, although the obligation to pay the seller is inherently the obligation of the buyer, arising from the sales contract, the bank that issued the letter of credit commits to performing the obligation itself.

That is at the request of the buyer, so in principle, the bank will be the one to directly pay the seller, then request a refund from the buyer based on the buyer's deposit when opening the letter of credit. This obligation of the L/C issuing bank, although arising on the basis of the buyer's obligation to the seller in the sales contract, but then, this obligation of the bank is independent of the buyer's obligation in the sales contract, accordingly, the L/C issuing bank must pay the beneficiary - the seller when they present all valid documents, regardless of the legal relationship between the buyer and the seller.

Thus, it can be seen that in payment by letter of credit, after the bank has accepted to open an L/C, the buyer almost does not have to pay the debt to the seller himself but completely authorizes the bank to perform this obligation, on the basis of deposit procedures and paying fees to the bank. When the seller has presented a complete set of appropriate documents, the bank will make payment to the seller in accordance with the provisions of the L/C. At the same time, the bank proactively requests the seller to deliver the goods to the buyer because only after delivery will the seller have enough documents to request the bank to pay according to the opened L/C.

Third, payment by L/C always reflects the service relationship between the buyer's bank and the buyer. This is one of many service activities provided by the bank and the bank is charged for this service.

In addition, payment by L/C can also reflect the credit relationship between the L/C issuing bank and the buyer, when the buyer's deposit account does not have enough money to pay the seller. This difference is agreed upon by the parties when negotiating the deposit amount at the bank to open the L/C and it is considered a loan of the customer opening the L/C at the issuing bank. This loan can be secured in any form depending on the agreement between the parties when conducting the transaction to open the letter of credit.

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