Open account trade meaning


A letter of credit LCalso known as a documentary creditis a written commitment by a bank on behalf of a buyer that payment be made to a seller provided that the terms and conditions stated therein have been met.

A letter of open account trade meaning is an important payment method in international trade. It is particularly useful where the buyer and seller may not know each other personally and are separated by distance, differing laws in each country and different trading customs. In the event that the buyer is unable to make payment on the purchase, the seller may make a demand for payment on the bank. The bank will examine the beneficiary's demand and if it complies with the terms of the letter of credit, will honor the demand.

Banks will typically require collateral from the purchaser for issuing a letter of credit and will charge a fee which is often a percentage of open account trade meaning amount covered by the letter of credit. Typically, after a sales contract has been negotiated and letter of credit has been agreed upon as the method of payment, the Applicant will contact a bank to ask for a letter of credit to be issued, and once the issuing bank has ascertained that the Applicant will be able to pay for the goods, it will issue the letter of credit.

Once the Beneficiary receives open account trade meaning letter of credit, it will check the terms to ensure that it matches with the contract and will either arrange for shipment of the goods or ask for an amendment to the letter of credit so that it meets with the terms of the contract. The letter of credit is limited in terms of time, the validity of credit, the last date of shipment, and in terms of how much late after shipment the documents may be presented to the Nominated Bank.

Once the goods have been shipped, the Beneficiary will present the set of requested documents to the Nominated Bank. This bank will check the documents, and if they comply with the terms of the Letter of Credit, the issuing Bank is bound to honor the open account trade meaning of the letter of credit by paying the Beneficiary. If the documents do not comply with the terms of the letter of credit they are considered Discrepant. At this point the Nominated Bank will inform the Beneficiary of the discrepancy and offer a number of options depending on the circumstances after consent of applicant.

If the discrepancies are minor, it may open account trade meaning possible to present corrected documents to the bank to make the presentation compliant. Documents presented after the time limits mentioned in the credit are also considered discrepant. If corrected documents cannot be supplied in time the documents may be forwarded directly to the issuing bank "in trust"; effectively in the hope that the Applicant will accept the documents.

Documents forwarded in trust remove the payment security of a letter of credit so this route must only be used as a last resort. Some banks will offer to "Telex for Approval" or similar. This is where the Nominated Bank holds the documents, but sends a message to the Issuing Bank asking if discrepancies are acceptable. Open account trade meaning is more secure than sending documents in trust.

Issuance open account trade meaning, covering negotiation, reimbursements and other charges are paid by the applicant or as per the terms and conditions of the LC. If the LC does not specify charges, they are paid by the Applicant.

Charge-related terms are open account trade meaning in field 71B. To receive open account trade meaning, an exporter or shipper must present the documents required by the LC. Typically the letter of credit will request an original Bill of lading as the use of a title document such as this is critical to the functioning of the Letter of Credit. However, the list and form of documents is open to negotiation and might contain requirements to present documents issued by a neutral third party evidencing the quality of the goods shipped, or their place of origin or place.

Typical types of documents in such contracts might include: But the range of documents that may be requested by the applicant is vast, and varies considerably by country and commodity. Open account trade meaning of Credit are often used in international transactions to ensure that payment will be received where the buyer and seller may not know each other and are operating in different countries.

In this case the seller is exposed to a number of risks such as credit riskand legal risk caused by the distance, differing laws and difficulty in knowing each party personally. One of the primary peculiarities of the documentary credit is that the payment obligation is independent from the underlying contract of sale or any other contract in the transaction. The defenses available to the buyer arising out of the sale contract do not concern the bank and in no way affect its liability.

The fundamental principle of all letters of credit is that letters of credit deal with documents and not with goods, as stated by Article 5 of UCP Accordingly, if the documents tendered by the beneficiary or their agent are in order, then in general the bank is obliged to pay without further qualifications. As a result, the buyer bears the risk that a dishonest seller may present documents which comply with the letter of credit and receive payment, only to later discover that documents are fraudulent and the goods are not in accordance with the contract.

To avoid this sort of risk to buyer, a variety of LCs are available with variations in terms of payment. Firstly, if the validity of documents was the banks' responsibility, they would be burdened with investigating the underlying facts of each transaction, and would be much less inclined to issue documentary credits because of the risk, inconvenience, and expense incurred. Secondly, documents required under the LC, could in certain circumstances, be different from those required under the sale transaction.

This would place banks in a dilemma in deciding which terms to follow if required to look behind the credit agreement. Thirdly, since the basic function of the credit is to provide a seller with the certainty of payment for documentary duties, it would seem necessary that banks should honor their obligation in spite of any buyer allegations of misfeasance. Under the previous rules for Letters of Credit up to UCP the documents tendered under the credit must not deviate from the language of the credit otherwise the bank is entitled to withhold payment, even if the deviation is purely terminological or even typographical.

With the UCP rules the ICC sought to make the rules more flexible, suggesting that data in a document "need not open account trade meaning identical to, but must not conflict with data in that document, any other stipulated document, or the credit", as a way to account for any minor documentary errors.

However, in practice many banks still hold to the principle of strict compliance, since it offers concrete guarantees to all parties. Although documentary credits open account trade meaning enforceable once communicated to the beneficiary, it is difficult to show any consideration given by the beneficiary to the banker prior to the tender of documents.

However, the performance of an open account trade meaning duty under a contract may be a valid consideration for a new promise made by the bank, provided that there is some practical benefit to the bank [14] A promise to perform owed to a third party may also constitute a valid consideration. Another theory asserts that it is feasible to typify letter of credit as a collateral contract for a third-party beneficiary because three different entities participate in the transaction: Therefore, a LC theoretically fits as a collateral contract accepted by conduct or in other words, an implied-in-fact contract under the framework open account trade meaning third party beneficiary where the buyer participates as the third party beneficiary with the bank acting as the stipulator and the seller as the promisor.

The term " beneficiary " is not used properly in the scheme of an LC because a beneficiary also, in trust law, cestui que use in the broadest sense is a natural person or other legal entity who receives money or other benefits from a benefactor. Note that under the scheme of letters of credit, banks are neither benefactors of sellers nor benefactors of buyers and the seller receives no money in gratuity mode.

As a result, this kind of arrangement, would make letter of credit to be enforceable under the action assumpsit because of its promissory connotation. A few countries have created statutes in relation to letters of credit. For example, most jurisdictions in the United States U. These rules of practice are incorporated into the transaction by agreement of the parties.

Since the UCP are not laws, parties have to include them into their arrangements as normal contractual provisions. From Wikipedia, the free encyclopedia. This article has multiple issues. Please help improve it or discuss these issues on the talk page. Learn how and when to remove these template messages. This article needs additional citations for verification. Please help improve this article by adding citations to reliable sources.

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Please help improve this section if you can. March Learn how and when to remove open account trade meaning template message. Retrieved 31 October International Trade Law Journal. Retrieved 12 December United Open account trade meaning General Assembly. Ham bros Bank Limited [] 73 Ll. Legal Aspects of Commercial Letters of Credit. Retrieved from " https: Pages using web citations with no URL Pages using citations with accessdate and no URL Articles open account trade meaning additional references from July All articles needing additional references Articles needing unspecified expert attention Articles needing expert attention from October All articles needing expert attention Articles needing cleanup from November All pages needing cleanup Cleanup tagged articles with a reason field from November Wikipedia pages needing cleanup open account trade meaning November Articles with multiple maintenance issues All articles with unsourced statements Articles with unsourced statements from January Articles needing cleanup from March Cleanup tagged articles with a reason field from March Wikipedia pages needing cleanup from March Wikipedia articles needing clarification from July Articles with Persian-language external links Wikipedia articles with GND identifiers.

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