CHAPTER 12 FINANCING 12-1

Topics for this chapter: CHAPTER 12 FINANCING Topics for this chapter: Financing Foreign Trade Bills of Lading Bills of Exchange Promissory Notes Negotiability of Bills and Notes Negotiation and Transfer of Bills and Notes Letters of Credit Financing Foreign Operations Countertrade 12-2

Financing Foreign Trade Foreign traders use formal documents that assure the parties that their sales contract will go forward as agreed. The three most important documents used are: Bill of lading (Ch 11)(提单） Bills of exchange（汇票） and promissory notes（本票） Letter of credit（信用证） Domestic carrier near Plymouth, UK. Formal documents may be used for domestic sales, but most domestic sales are financed through open-account credit arrangements. Photo: Lic Public domain 12-3

Bills of Lading The bill of lading is an essential document for all international sales. Because it is a document of title, it allows the seller and buyer to exchange control over the goods while the goods are in the actual possession of the warehouseman or carrier. 12-4

Bills of Exchange A bill of exchange （汇票）is a written, dated, and signed three-party instrument containing an unconditional order by a drawer that directs a drawee（付款人） to pay a definite sum of money to a payee（收款人） on demand or at a specified future date. Where the drawee is a bank, the bill is known as a check（支票）. Where the drawee is a buyer, the bill is a trade acceptance.（商业承兑汇票） 12-5

The Law Governing Bills of Exchange Bills of Exchange Act of 1882 enacted in England and still in force in the UK and former British colonies. Uniform Commercial Code (UCC) enacted in the US in 49 states. Geneva Conventions on the Unification of the Laws Relating to Bills of Exchange (ULB) and two additional conventions signed by most continental European countries. The widely followed set of international rules governing the collection are the International Chamber of Commerce (ICC) Uniform Rules for Collections. 12-6

Types of Bills of Exchange The form that a bill of exchange must take depends upon the governing law: 12-7

Time and Sight Bills A time bill(远期票据） is payable at a definite future time. A sight bill（即期票据） is payable at the time it is presented or at a stated time after presentment. 12-8

Trade Acceptances A trade acceptance（商业承兑汇票） is the bill of exchange most commonly used in the sale of goods. The seller of the goods is both the drawer and payee. 12-9

Checks A check is a bill of exchange on which the drawee is a bank. Checks are always payable on demand. 12-10

Promissory Notes A promissory note（本票） is a written, dated, and signed two-party instrument containing an unconditional promise by a maker to pay a definite sum of money to a payee on demand or at a specified future date. The only difference between a promissory note and a bill of exchange is that the maker of a note promises to personally pay the payee rather than ordering a third party to pay the payee. 12-11

Ex 12-6 American/French Promissory Notes 12-12

A collateral note is secured by personal property. Promissory Notes A collateral note is secured by personal property. A mortgage note is secured by real property. An installment note is payable in installments. When the bank is the maker promising to repay money plus interest, the promissory note is called a certificate of deposit (CD). 12-13

Negotiability of Bills and Notes To be negotiable, a bill must: be in the proper form, and contain a promise by the maker or drawer to make payment. To meet the promissory requirements, a bill or note must: State an unconditional promise or order to pay State a definite sum of money Be payable on demand or at a definite time Be signed by the maker or drawer 12-14

Unconditional Promise or Order to Pay A bill or note must contain a promise or an order to pay that is unconditional. The promise must be expressed in the bill or note and may not be implied. The promise or order cannot be conditioned upon the performance of some other obligation, such as delivery of goods in the future. Mere reference to some other agreement, such as the underlying contract for the sale of goods that caused the bill or note to be issued, does not make the bill or note nonnegotiable. (in Common Law Countries, not Civil Law) 12-15

Definite Sum of Money or Monetary Unit of Account A bill or note must be payable in money, which must be for a definite sum. The sum paid must be money. The sum paid must be certain or determinate. The amount to be paid must be ascertainable from the bill or note itself without reference to an outside source. Payments can be made in installments, but the interest must be fixed, not variable. 12-16

Payable on Demand Signed by the Maker or Drawer The time when the bill or note is payable has to be ascertainable from its face. The time requirement establishes when the obligation is due, establishes when the statute of limitations runs, and defines the period for calculating interest. The bills or notes must be signed by the drawer or maker. A signature can be any symbol executed or adopted by a party with present intention to authenticate a writing. 12-17

Case 12-1 Constantaras v. Anagnostopoulos Defendant signed several checks as a surety or coprincipal. The checks were drawn by a third party who never signed them. Issues: Was defendant who signed the check as a surety liable when the bank refused to pay? Secondly, was the check a nullity prior to the drawer’s signature or was it a legal bill of exchange? Held: It was a bill when properly prepared and when delivered, the defendant became bound as a surety on the instrument. 12-18

The Negotiation and Transfer of Bills and Notes To satisfy commercial needs, bills and notes have to be freely transferable. The transfer of rights under a contract is called an assignment (转让）. The assignee acquires only those rights that the assignor possessed. Defenses that can be raised against the assignor may be raised against the assignee. Aware of problems in taking instruments by assignment, bankers and merchants prefer to be paid in cash or by negotiable instrument. 12-19

Negotiation Negotiation （议付）is the transfer of a bill or note in such a way, usually by endorsement(背书） or delivery（交付）, that the recipient becomes a holder. 12-20

Negotiating Order Paper Order paper (指示票据）is a bill or note that either: Contains the name of a payee capable of endorsing it (e.g., “pay to the order of Keith Jones), or Contains as its last endorsement a special endorsement （具名背书）(e.g., “pay to Ned Vork”). Order paper is negotiated by delivery and endorsement. 12-20

Negotiating Bearer Paper Bearer paper is an instrument that either: contains on its face an order to pay bearer or to pay in cash, or contains as its last endorsement a blank endorsement. This is the signature of the payee or the last endorsee named in a special endorsement. 12-21

Case 12-2 Miller v. Race Finney owed 21 pounds and 10 shillings to Odenharty. Finney purchased a note in that amount and mailed it. It was stolen. Miller, an innkeeper, came into possession in the normal course of business. Miller presented the note to Race, the bank clerk, who refused to pay the note. 12-22

Case 12-2 Miller v. Race Issue: Whether Miller had a sufficient property in this bank note to entitle him to recover its stated value. Held: The innkeeper took the note, bona fide, in his business from a person who did not arouse suspicion. A bank note is universally treated as money. “…No dispute ought to be made with the bearer of a cash note—in regard to commerce, and for the sake of credit.” Judgment for the plaintiff. Query: Would the result have been the same if the innkeeper had conspired to steal the mail with others? 12-23

Converting Order to Bearer Paper and Bearer to Order Paper Check drawn by President Benjamin Harrison in 1880. While it appears to be order paper, it is bearer paper. Order paper can be converted to bearer paper by an endorsement in blank or by an endorsement to pay to the bearer. Bearer paper can be converted to order paper through the use of a special endorsement. 12-24

Endorsements Special endorsements (具名背书） Blank endorsements （空白背书） An endorsement is the act of payee, drawee, accommodation party, or holder of a negotiable instrument in signing the back of the instrument, with or without qualifying words, to transfer rights in the instrument to another. There are four basic kinds of endorsements: Special endorsements (具名背书） Blank endorsements （空白背书） Qualified endorsements（无追索背书） Restrictive endorsements（限制性背书） 我国法绿关于空白背书的规定： 《票据法》 第二十九条　【背书的记载事项】 背书由背书人签章并记载背书日期。 背书未记载日期的，视为在汇票到期日前背书。 第三十条 【记名背书】 汇票以背书转让或者以背书将一定的汇票权利授予他人行使时，必须记载被背书人名称。 《关于审理票据纠纷案件若干问题的规定》 第四十九条　依照票据法第二十七条和第三十条的规定，背书人未记载被背书人名称即将票据交付他人的，持票人在票据被背书人栏内记载自己的名称与背书人记载具有同等法律效力。 12-25

Qualified Endorsement A qualified endorsement is an endorsement in which 　　　　　　　　　　　the endorser does not 　　　 guarantee that the instrument will be accepted and paid by the drawer or maker. This is commonly done by adding the words without recourse. This type of endorsement is often used by persons acting in a representative capacity, such as an attorney who has received funds that are to be passed on to a client. 12-26

Restrictive Endorsements A restrictive endorsement restricts the rights of subsequent holders. These include: Conditional endorsement – an endorsement that conditions payment on the occurrence of some event. Endorsement for collection – an endorsement that makes the endorsee a collection agent for the endorser. Endorsement prohibiting further endorsements – an endorsement that states that the instrument may only be paid to a particular person. Agency endorsement – requires the endorsee to pay the proceeds from the negotiation of the instrument to the endorser or a designated third party. 我国法： 一、《票据法》 　　第三十三条　【附条件背书、部分背书、分别背书的效力】背书不得附有条件。背书时附有条件的，所附条件不具有汇票上的效力。 　　将汇票金额的一部分转让的背书或者将汇票金额分别转让给二人以上的背书无效。 　　第三十四条　【背书人的禁止背书及其效力】背书人在汇票上记载“不得转让”字样，其后手再背书转让的，原背书人对后手的被背书人不承担保证责任。 　　第三十五条　【委托收款背书和质押背书及其效力】背书记载“委托收款”字样的，被背书人有权代背书人行使被委托的汇票权利。但是，被背书人不得再以背书转让汇票权利。 　　汇票可以设定质押；质押时应当以背书记载“质押”字样。被背书人依法实现其质权时，可以行使汇票权利。 　　第三十六条　【不得背书转让的情形】汇票被拒绝承兑、被拒绝付款或者超过付款提示期限的，不得背书转让；背书转让的，背书人应当承担汇票责任。 二、《关于审理票据纠纷案件若干问题的规定》 第四十八条　依照票据法第二十七条的规定，票据的出票人在票据上记载“不得转让”字样，票据持有人背书转让的，背书行为无效。背书转让后的受让人不得享有票据权利，票据的出票人、承兑人对受让人不承担票据责任。 （相关资料: 裁判文书3篇 实务指南） 　　第四十九条　依照票据法第二十七条和第三十条的规定，背书人未记载被背书人名称即将票据交付他人的，持票人在票据被背书人栏内记载自己的名称与背书人记载具有同等法律效力。 （相关资料: 裁判文书18篇 相关论文4篇 实务指南） 　　第五十条　依照票据法第三十一条的规定，连续背书的第一背书人应当是在票据上记载的收款人，最后的票据持有人应当是最后一次背书的被背书人。 （相关资料: 裁判文书5篇 相关论文2篇 实务指南） 　　第五十一条　依照票据法第三十四条和第三十五条的规定，背书人在票据上记载“不得转让”、“委托收款”、“质押”字样，其后手再背书转让、委托收款或者质押的，原背书人对后手的被背书人不承担票据责任，但不影响出票人、承兑人以及原背书人之前手的票据责任。 （相关资料: 相关论文3篇 实务指南） 　　第五十二条　依照票据法第五十七条第二款的规定，贷款人恶意或者有重大过失从事票据质押贷款的，人民法院应当认定质押行为无效。 　　第五十三条　依照票据法第二十七条的规定，出票人在票据上记载“不得转让”字样，其后手以此票据进行贴现、质押的，通过贴现、质押取得票据的持票人主张票据权利的，人民法院不予支持。 （相关资料: 裁判文书1篇） 　　第五十四条　依照票据法第三十四条和第三十五条的规定，背书人在票据上记载“不得转让”字样，其后手以此票据进行贴现、质押的，原背书人对后手的被背书人不承担票据责任。 12-27

Effect of Different Endorsements 12-28

Forged Endorsements A forgery is the false making or altering of a writing with the intent to defraud. Under the ULB, the drawer or maker is the party who must sue the forger of assume the loss. The ULB makes a forged endorsement fully effective. The common law makes a forged endorsement ineffective, placing the burden on determining the validity of an endorsement on the endorsee. Two exceptions to the common law rule are the imposter rule and the fictitious payee rule. 我国《票据法》 第十四条　【票据的伪造和变造】票据上的记载事项应当真实，不得伪造、变造。伪造、变造票据上的签章和其他记载事项的，应当承担法律责任。 　　票据上有伪造、变造的签章的，不影响票据上其他真实签章的效力。 　　票据上其他记载事项被变造的，在变造之前签章的人，对原记载事项负责；在变造之后签章的人，对变造之后的记载事项负责；不能辨别是在票据被变造之前或者之后签章的，视同在变造之前签章。 12-29

Case 12-3: Mair v. Bank of Nova Scotia The appellant issued a check to “Barbara Hill” for architectural work. The check was altered to add “Associates” to the payee name. The check was honored by the Bank of Nova Scotia. When the cancelled check was forwarded to the appellant, he brought the alteration to the attention of the bank and demanded reimbursement. The bank refused. 12-30

Case 12-3: Mair v. Bank of Nova Scotia Any material alteration of a bill or note invalidates it. The court found that there was a material alteration. Because the check was irregular on its face, the bank was a holder but not a holder in due course. Since Mair could not show any actual damages, he was awarded $5 nominal damages. 12-31

Limitations on the Excuses that Drawers and Makers Can Use to Avoid Paying Off a Bill or Note Anyone who acquires a bill or note by negotiation is a holder who is entitled to payment from the maker or drawer. Under ULB, there are only three excuses for not having to pay off the instrument that are available to these parties. 12-32

Limitations on the Excuses that Drawers and Makers Can Use to Avoid Paying Off a Bill or Note Common law holder – A person who acquires an instrument by negotiation. Common law holder in due course – A holder who acquires a negotiable instrument for value, in good faith, and without notice that it is overdue, that it has been dishonored, or that persons required to pay on it have a valid excuse for not doing so. 12-33

Limitations on the Excuses that Drawers and Makers Can Use to Avoid Paying Off a Bill or Note 12-34

Liabilities of Makers, Drawers, Drawees, Endorsers, and Accommodation Parties For makers, drawees, and accommodation（保证） parties, they must make payment on presentment of the instrument. It must be presented on the day it is due (other than demand instrument) or within a reasonable time (demand instrument). 12-35

Liabilities of Makers, Drawers, Drawees, Endorsers, and Accommodation Parties Liability on the instrument for drawers, endorsers, and accommodation endorsers is secondary. They have to pay only if the maker, drawee, or accommodation maker fails to do so. Three steps holder or transferee must take before he or she can seek recourse from parties with secondary liability: Instrument has to be properly presented. If bill of exchange, must be protested, certificate of dishonor must be made and presented. Give notice to parties with secondary liability. 12-36

Case 12-4: Far East Realty Invest. v. Court of Appeals et al. In September 1960, Dy Hian Tat, Siy Chee, and Gaw Suy An obtained a loan for P4,500 from Far East. Dy An drew a check on his account for P4,500 and the other two men signed as accommodation parties. Loan was not repaid. Four years later, Far East presented the check and the bank refused to pay. The account was closed. Notice of dishonor was not given to the parties for an additional four years, until April 1968. Issue: Whether or not presentment for payment and notice of dishonor of the questioned check were made within a reasonable time. 12-37

Case 12-4: Far East Realty Invest. v. Court of Appeals et al. “Reasonable time” defined as so much time as is necessary under the circumstances for a reasonable, prudent, and diligent man to do, conveniently, what the contract or duty requires should be done. Held: The payee’s delay of four years in presenting the check was not within a reasonable time. The bank did not have to honor the check. 12-38

Warranty Liability Transferor has good title Large difference in warranty liability between Europe and the US. In Europe, a party must sign the instrument to be liable on it, meaning, in Europe there is no warranty liability. In US, any person who transfers an instrument in exchange for consideration, which even includes bearer paper, makes five warranties: Transferor has good title All signatures are genuine or authorized Instrument has not been materially altered No defense good against the transferor Transferor has no knowledge of insolvency 12-39

Case 12-5: Charles R. Allen, Inc. v. Island Cooperative Services Assoc. Island Coop was paid for purchase of potatoes by Vegetable Mart by way of bank draft. Island Coop sold this draft to Bank of Nova Scotia. Bank of Nova Scotia forwarded the draft to South Carolina bank for collection. When Vegetable Mart deposited funds to cover the draft, the funds were attached by Allen to try and collect judgment against Island Coop. Issue: Whether the Bank of Nova Scotia was the absolute owner of the proceeds of the draft at the time of attachment of the funds by Allen. 12-40

Case 12-5: Charles R. Allen, Inc. v. Island Cooperative Services Assoc. Held: The title to the draft in question passed to the Bank of Nova Scotia when it purchased it for a discount and gave the proceeds to Island Coop unconditionally. Since there was nothing to qualify the effect of such act, the bank acquired title of the draft and was owner. 12-41

Letters of Credit （信用证） A letter of credit is an instrument issued by a bank or another person at the request of an account party that obliges the issuer to pay to a beneficiary （受益人）a sum of money within a certain period of time upon the beneficiary’s presentation of documents specified by the account party. The function of the letter of credit is to substitute the credit of a recognized international bank for that of the buyer. Buyer=account party（开证申请人） Seller=beneficiary 12-41

Letter of Credit Transaction 12-43

Governing Law Virtually all letters of credit are governed by the ICC’s Uniform Customs and Practices for Documentary Credits (UCP). These are model rules that are usually incorporated by banks into credit terms. A few countries have legislation governing letters of credit, such as Article 5 of the UCC in the US. The UCP is revised once every 10 years. UCP 600 went into effect in 2007. 12-44

Applying for Letters of Credit In all cases, a Letter of Credit Application must be completed. It is a set of instructions telling the bank what needs to be included in the letter of credit. These instructions include: The amount of the credit Whether credit is revocable（撤销） or irrevocable（不可撤销） Whether the credit is transferable Whether the credit is to be made available by payment, deferred payment, acceptance（承兑, or negotiation（议付行） 12-45

Applying for Letters of Credit: Contents of Application (cont’d) How the credit is to be advised If there are bills of exchange involved, the party on whom they are drawn Details of the documents required as a prerequisite for making payment When the documents are to be delivered Whether partial shipments are prohibited Whether transshipment is prohibited The date and place at which the credit will expire 12-46

Case 12-6: Trans Trust Sprl v. Danubian Trading Co. Ltd. The parties had a contract for the sale of goods, which included a promise by the buyer to furnish a letter of credit forthwith. Buyer never arranged letter of credit and goods were not delivered. Seller sued for lost profits. Some letter of credit are part of the contract while others were precedent to the making of the contract. 12-47

Case 12-6: Trans Trust Sprl v. Danubian Trading Co. Ltd. Held: The seller was depending on the letter of credit as an essential part of the agreed-upon contract, and thus the breach of obligation required payment of damages by the buyer. 12-48

Advising and Confirming Letters of Credit Advising bank（通知行） – A bank engaged by the issuer of a letter of credit to advise the beneficiary that it has a credit for delivery and to deliver the credit upon verification of the beneficiary’s signature. Confirming bank （保兑行）– A bank that makes an independent promise to pay, accept, or negotiate a letter of credit issued by another bank when the documents named in the credit are delivered to it. 12-49

Amendments and Waiver If there is only a minor discrepancy in the documents, banks will commonly obtain a written waiver from the account party. If there is a major discrepancy（重大不符点）, the letter of credit can be amended. Amendments require the approval of the issuing bank, the confirming bank, and the beneficiary. If the issuing bank is notified of a discrepancy, it has a reasonable time to examine the documents and determine whether to accept or refuse the documents. If bank does not act in timely fashion, it will be deemed to have given an implied waiver. 12-51

Fraud Fraud is a knowing misrepresentation（虚假陈述）made with intent of causing another to rely upon it to the latter’s detriment. Banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification, or legal effect of any documents. Bank may pay seller even if it knows the seller is perpetrating a fraud. It is questionable whether the bank can refuse to pay on a revocable letter of credit when the underlying transaction is fraudulent. 12-52

Case 12-7: Sztejn v. J. Henry Schroeder Banking Corp. Transea Traders contracted to sell hog bristles to Sztejn. Transea filled 50 cases with cow hair and rubbish, perpetrating a deliberate fraud. Sztejn sued to enjoin Schroeder from paying on the letter of credit. The security afforded by the merchandise is taken into account. Bank is interested in assuring itself that there are some goods represented by the documents. 12-53

Rights and Responsibilities of the Account Party Account party’s rights and obligations are based upon two contracts: The underlying contract with the beneficiary The contract with the issuing bank relating to the letter of credit Because the account party is in privity（合同相对性） only with the issuing bank, it can only look to the issuing bank for performance. It has no right to bring an action against the advising or confirming banks. 12-54

Rights and Responsibilities of Beneficiaries A beneficiary cannot avail himself of the contractual relationships existing between the banks or applicant and issuing bank. Before a beneficiary can collect on a letter of credit, he must comply with the terms and conditions of the credit and present to the issuer the documents designated in the credit. These documents include: export license and/or health inspection certificate（卫生检验证书） certificate of origin（原产地证书） certificate of inspection（检验证书） commercial invoice（商业发票） bill of lading（提单） marine insurance policy（海运保单） 12-56

Standby Letters of Credit To ensure that a seller will perform, a buyer can insist that the seller obtain a standby letter of credit. If the goods delivered do not perform as promised, the buyer is put in the position of having to either absorb the loss or suing the seller. This situation is avoided by insisting that the seller arrange an irrevocable credit that will reimburse the buyer in the event that the goods do not perform. 12-57

Financing Foreign Operations Private sources of capital Equity funding Debt funding Governmental sources of capital Host country development banks Home country import/export financing agencies Examples in the US include: U.S Agency for International Development (AID) U.S. Overseas Private Investment Corp (OPIC) the U.S. Export-Import Bank U.S. Small Business Administration Regional and international development agencies 12-57

Countertrade Not all international trade involves the sale of goods or services for money. Countertrade is any transaction linking exports and imports of goods or services in addition to, or in place of, financial settlement. Examples of countertrade include: Barter（易货） Buyback（回买）（设备换产品） Counter purchase（互购)（种子换小麦） Offset (抵消） Swap （债权互换） Tolling （来料加工） 12-58

Chapter 12 The End of Financing in International Business Law