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Note: Terms followed by an asterisk (*) are "Incoterms". These terms are defined by the "International Rules for the Interpretation of Trade Terms", Publication Number 560, 2000 Edition, of the International Chamber of Commerce ("ICC"). They are used to describe the respective responsibilities of both trading parties to avoid misunderstanding. This latest edition supersedes Incoterms 1990 Edition and takes into account the increased use of multimodal transport.
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Advance Payment Guarantee
Buyers will sometimes make an advance payment to the seller or contractor to enable them to begin acquisition or production of goods. An Advance Payment Guarantee will undertake to refund all or part of this advance payment upon the buyer certifying that the seller did not produce or deliver the goods or services.
Advising Bank
(Correspondent of the Issuing Bank)
The bank designated by the buyer or the issuing bank to authenticate and forward the Documentary Letter of Credit to the beneficiary.
Applicant
(Buyer or Importer)
The party applying to the Issuing Bank
for the Documentary Letter of Credit.
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Back-to-Back Letter of Credit
In situations where a Transferable Credit is not available or not acceptable, it may sometimes be possible to arrange a Back-to-Back Letter of Credit. A Back-to-Back Letter of Credit is an ancillary credit that arises when the beneficiary uses an irrevocable credit given by the issuing bank to support another credit opened by the advising bank or the beneficiary’s own bankers. As applicant for the second credit, the beneficiary of the first credit is responsible for reimbursing the bank that opens the second credit regardless of whether or not payment is made under the first credit.
Beneficiary
(Seller, Exporter or Shipper)
The party in whose favour the Documentary Letter of Credit is issued.
Bid Bond
A company or
an individual bidding on a contract will sometimes be required to post a
Bid Bond or Tender Bond. In such cases, the company requesting bids will
be protected if the company selected is not able or willing to enter into
a contract.
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CFR*
(Cost & Freight)
The amount includes the cost of goods and all transportation charges to the named point of destination. Risks of loss or damage are assumed by the buyer when goods cross the ship’s rail in the port of shipment.
CIF*
(Cost, Insurance & Freight)
The amount includes the cost of goods, insurance and all transportation charges to the named port of destination. An insurance policy or certificate will accompany the other documents.
Confirming Bank
If specified in the Documentary Letter of Credit, another bank – usually the advising bank – may add its commitment to that of the issuing bank to pay the beneficiary if the documentation is in order. The confirming bank then assumes the risk of the issuing bank, including the political, social and economic risk associated with the country of the issuing bank.
A confirmed Documentary Letter of Credit is often required by sellers who do not wish to rely solely on a foreign bank and who feel more comfortable knowing their "home" bank has added its commitment to that of the issuing bank.
Confirmed Irrevocable Documentary Letter of Credit
This Credit provides the beneficiary
with added assurance of payment, since a bank other than the issuing bank
has added its undertaking to that of the issuing bank. In the case of an
unconfirmed Documentary Letter of Credit, the seller relies entirely on
the solvency of the issuing bank.
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EXW*
(Ex Works)
The amount includes only the cost of goods. Expenses
such as inland transportation, loading and insurance will be for the
account of the buyer. The full cost and risk involved in bringing the
goods from the seller’s warehouse to the desired destination is also for
the account of the buyer.
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FAS*
(Free Alongside Ship)
The amount includes the cost of goods and all expenses relating to the delivery of goods along-side the ship on the quay or in lighters, but does not include the cost of loading on board. The buyer bears all cost and risk of loss or damage from the moment of delivery at point of loading.
FOB*
(Free on Board)
The amount includes the cost of goods and all expenses
up to and including delivery of the goods on board a named vessel at the
named port of shipment. The buyer’s risk and costs commence when the goods
cross the ship’s rail.
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Irrevocable Documentary Letter of Credit
These Credits, once established, cannot be amended or cancelled without the consent of all parties to the Credit: the applicant, issuing bank, beneficiary, and confirming bank, if any. Under U.C.P. 500 (1993 revision), all credits are irrevocable unless otherwise stated.
Issuing Bank
(Opening Bank)
The bank issuing the Documentary Letter of
Credit substitutes its credit standing for that of the buyer for payments
to be made under the terms of the Documentary Letter of Credit.
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Large-Value Confirmations
Exports of capital goods, other manufactured goods and
agricultural products or large-scale construction projects may be of
substantial financial value. High-value Documentary Letters of Credit
often need confirmation by one or more banks because factors such as
country exposure limits may not permit an individual bank to assume total
liability for the Credit. In these cases it may be necessary to syndicate
the confirmation among a number of banks. BMO Nesbitt Burns and Harris
Bank each have extensive experience in syndicating Documentary Letter of
Credit confirmations throughout North America and over 100 countries
around the world.
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Performance Bond
As the
name suggests, this type of Special Credit will undertake payment in the
event of the buyer certifying that the seller failed to perform in
accordance with the terms of a commercial contract or failed to perform to
the satisfaction of the buyer. Payment is usually made against a
certificate from the buyer stating that the seller has failed to
perform.
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Red Clause Credits
This type of Documentary Letter of Credit is now rarely used. It incorporates a special clause that authorizes the advising or confirming bank to provide the seller with funds prior to shipment of goods and/or presentation of documents.
Revocable Documentary Letter of Credit
This type of Credit may be amended or cancelled by the issuing bank – without prior notice to the beneficiary – up to the moment of payment to the beneficiary. Due to the limited protection afforded to exporters by revocable credits, they are rarely used.
Revolving Credit
Provided the Credit issued is irrevocable, it may be
issued in revolving form. That is, a sum up to a stated amount will be
available against special documents during a given period of time, e.g.,
per month. The amount available periodically may be cumulative or
non-cumulative, and may depend on the customer’s credit availability.
Revolving credits are frequently used by large-volume purchasers buying
overseas through local agents or trading companies, which in turn source
goods from a variety of suppliers.
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Standby Letter of Credit used as Security for a Loan or Operating Facility
In the same way that a
Documentary Letter of Credit adds the credit of a financial institution to
that of a buyer, a Special Credit will achieve the same effect for a
borrower, possibly in another country or another part of the same country.
For example, large corporations doing business in another country, but
with no corporate entity and assets in that country, will use a special
Documentary Letter of Credit issued by their bank to secure an operating
line in that other country.
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Transferable Irrevocable Documentary Letter of Credit
A Documentary Letter of Credit
designated by the opening bank as transferable, which may be transferred
by the first beneficiary to one or more second beneficiaries. A
Transferable Documentary Letter of Credit is normally used when the first
beneficiary does not actually supply the merchandise but is an agent or a
broker who wishes to transfer part or all rights and obligations to the
true supplier(s) as second beneficiary(ies).
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Warranty Bonds
These are
similar to Performance Bonds but usually cover a warranty period after
completion of the contract.
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