Introduction
The traditional documentary letter of credit has had huge success in facilitating inter- 14.01
national sale and supply transactions.
There are a number of reasons behind this success: the development by an international body of a uniform set of contractual default principles (in the form of the UCP 600) reflecting and harmonising market practice; the adoption of fundamental principles (namely strict compliance and autonomy) that limit the defences to payment under the letter of credit, thereby inspiring parties' confidence in the unimpeachability of banks' payment obligations; and the utilisation of a network of banks to ensure that a beneficiary's entitlements are governed as far as possible by its own domestic legal principles. That said, the iron grip that the letter of credit has had over trade finance is arguably loosening, in just the same way as the bill of exchange became less popular in a previous era. Indeed, it is the letter of credit's demise that has created the space for alternative trade-finance mechanisms. Accordingly, section II will examine the reasons that lie behind this shift away from bank-dependent documentary finance. The consequence, however, is that trade parties have turned to simpler, quicker, and cheaper solutions to finance their sale transactions. Most significant has been the meteoric rise of the simplest possible payment terms, namely that the sale be on ‘open account' terms (when shipment occurs before payment) or on ‘prepayment' or ‘cash-in-advance' terms (in the converse situation). Such payment terms alone are relatively high-risk, however, since they require parties to trust one another and can leave a party with real cash-flow difficulties if its counterparty's performance is not immediately due. To this end, banks and other finance-providers have attempted to provide liquidity through various forms of Supply Chain Finance (‘SCF') to address those trust and liquidity issues. Whilst there have always existed finance techniques designed to address these concerns, their increasing popularity and use has brought them out of the shadows and placed them firmly centre-stage. Accordingly, section III will examine traditional techniques designed to provide liquidity to trade parties within the context of documentary letters of credit, before considering the more modern SCF techniques associated with open-account and pre-payment trade terms. Section IV concludes.II.
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