International Trade Services

Carl J E T Abruquah
FINANCIAL LITERACY PROGRAM
ORGANIZED BY CHARTERED INSTITUTE
OF BANKERS GHANA
Agenda
• Introduction/Objectives
• The Master Agreement
• Incoterms
• Documents
• International Payment Methods
• International settlement Methods
• Demand Guarantees
• Discussion
• Conclusion
Introduction
• Banks provide international trade finance services for their clients
• Significant risks are encountered in international trade finance
and banks must ensure they obey the international rules and
regulations relating to trade finance.
• A key source of rules and regulations has been the International
Chamber of Commerce.
The International Sales Agreement
• Governed by the principle of “freedom of contract”
• Parties fix the terms and conditions such as price, handling of
payment, the burden of cost of delivery and who will support
which risks
• These terms are subject to the general principles of law and rules
of law governing unfair contract terms
• It is the master contract as all ancillary contractual arrangement
such as transport, insurance and payment should be in
accordance with its provisions.
The Sales Contract
• Should be carefully drafted and should refer to trade terms such
as current incoterms when indicating the point of delivery and the
allocation of rights and responsibilities between the buyer and the
seller.
• If payment is to be by letter of credit, the requirements under the
credit should be clearly specified.
Characteristics of International Sale of Goods
• Involve long distances during which period the goods are in the
custody of the carrier
• Transit risks are very significant and it is difficult to reverse the
transaction as returning the goods would be impracticable
• Due to its international nature, the transaction may be subject to a
number of different jurisdictions with diverse legal systems.
• Much effort has been made to standardize international trade
rules to cater for the needs of international commerce
• Standard contracts have also been developed in a number of areas
such as the sale of manufactured goods intended for resale
Objective of seminar
• To familiarize participants with some of the most important tools
used in international commerce to
▫ Allocate the rights and responsibilities of exporters and importers in
the area of arrangement and payment for the delivery of goods
▫ Secure payment by the buyer of the goods contracted
▫ To protect the buyer against non-performance of contractual
obligations by the seller
Incoterms
• Standardization of trade terms goes a long way to accurately calculate
the costs and risks associated with the delivery of goods and to reduce
disputes inherent in international business transactions
• The objective of trade terms is to define the method of delivery of the
goods sold and to delimit the rights and duties of the buyer and seller
regarding:
▫ The party who would arrange and pay for the carriage of the goods from
one point to the other
▫ The party who will bear the risks if these operations cannot be carried out
▫ The party who will bear the risk of loss of or damage to the goods in transit
Incoterms
• The most important and universally recognized trade terms are the
Incoterms developed by the International Chamber of Commerce (ICC)
• Incoterms do not cover all legal and transportation issues that arise
from an international sale but are a contractual shorthand that allows
that parties to easily specify their undertaking as to
▫ The transport costs that the seller would bear
▫ The point at which risk of loss would transfer from the seller to the buyer
▫ Who must handle customs formalities and pay the duties
▫ Insurance coverage if any
Brief History of ICC Incoterms
• ICC initiated a detailed research in the 1920s when it noticed that
interpretation of trade terms in use was widely disparate
• The research showed that notwithstanding the different
interpretations there were many areas of agreement
• Based on the findings of the studies, the first version of the
Incoterms® rules was published. The terms included FAS, FOB,
C&F, CIF, Ex Ship and Ex Quay.
• They published standardized trade terms in 1936 and
subsequently reviewed them in 1953, 1967, 1976, 1980, 1990 and
2010
1953: Rise of transportation by rail

• Due to World War II, supplementary revisions of the Incoterms

rules were suspended and did not resume again until the 1950’s.
• The first revision of the Incoterms rules was then issued in 1953.
It debuted three new trade terms for non-maritime transport.
• The new rules comprised DCP (Delivered Costs Paid), FOR (Free
on Rail) and FOT (Free on Truck).
1967: Misinterpretations corrected

• ICC launched the third revision of the Incoterms rules, which

dealt with misinterpretations of the previous version.
• Two trade terms were added to address delivery at frontier (DAF)
and delivery at destination (DDP).
1974: Advances in air travel

• The increased use of air transportation gave cause for another

version of the popular trade terms.
• This edition included the new term FOB Airport (Free on Board
Airport).
• This rule aimed to allay confusion around the term FOB (Free on
Board) by signifying the exact “vessel” used.
1980: Proliferation of container traffic

• With the expansion of carriage of goods in containers and new

documentation processes, came the need for another revision.
• This edition introduced the trade term FRC (Free Carrier…Named
at Point), which provided for goods not actually received by the
ship’s side but at a reception point on shore, such as a container
yard.
1990: A complete revision

• The fifth revision simplified the Free Carrier term by deleting

rules for specific modes of transport (i.e., FOR; Free on Rail, FOT;
Free on Truck, and FOB Airport; Free on Board Airport).
• It was considered sufficient to use the general term FCA (Free
Carrier…at Named Point) instead.
• Other provisions accounted for increased use of electronic
messages.
2010: Reflections on the contemporary trade
landscape
• Incoterms® 2010 is the most current edition of the rules to date.
• This version consolidated the D-family of rules, removing DAF
(Delivered at Frontier), DES (Delivered Ex Ship), DEQ (Delivered
Ex Quay) and DDU (Delivered Duty Unpaid) and adding DAT
(Delivered at Terminal) and DAP (Delivered at Place).
• Other modifications included an increased obligation for buyer
and seller to cooperate on information sharing and changes to
accommodate “string sales.”
Categorization of Trade Terms
• Incoterms may be categorized using the first letter as an indication of
the category it belongs to.
• The first category is tagged as E and comprises only one incoterm, Ex
Works.
• The second category termed F terms comprises three, namely Free
Carrier (FCA), Free Alongside Ship (FAS), and Free on Board (FOB).
• The third category are the C Terms which include Cost Paid To (CPT),
Carriage and Insurance Paid (CIP), Cost Freight (CFR) and Cost
Insurance Freight (CIF).
• The fourth category are the D terms which comprise Delivered at
Terminal (DAT), Delivered at Place (DAP) and Delivered Duty Paid
(DDP).
Categorization in Terms of Mode of Transport
• A different classification may be made in terms of the mode of
transportation.
• Group 1 terms are those that may be used for any mode or modes
of transportation.
• These include one F term (FCA) two C terms (CPT and CIP) and
three D terms (DAT, DAP and DDP).
• Group 2 covers terms for maritime transportation including sea
and inland waterway transportation. These comprise two F terms
(FAS and FOB) and two C terms (CFR and CIF).
Group 1 Incoterms – Any Mode of Transportation
• Free Carrier (FCA)
• Carriage Paid to (CPT)
• Carriage and Insurance Paid to (CIP)
• Delivered at Terminal (DAT)
• Delivered at Place (DAP)
• Delivered Duty Paid (DDP)
EX WORKS EXW

• Ex works means the seller is to deliver the goods to the buyer at

the seller’s premises and any other named place e.g. works,
warehouse or factory.
• The seller has no duty to load the goods on any vehicle or to clear
the goods for export if the sale is an international sale.
• Ex Works can also be used for domestic sale.
FREE CARRIER (FCA)

• FCA is a stipulation that the seller delivers the goods to a specified

carrier or another person nominated by the buyer at the seller’s
premises or another named place.
• The parties are well advised to specify as clearly as possible the
point within the named place of delivery, as the risk passes to the
buyer at that point.
CARRIAGE PAID TO (CPT)

• CPT means the seller delivers the goods to the carrier or another
person nominated by the seller at an agreed place (given that such
has been agreed between the parties.
• The seller must also undertake to arrange and pay the costs of
carriage necessary to deliver the goods to the named place or
destination
CARRIAGE AND INSURANCE PAID TO (CIP)

• CIP implies a stipulation that the seller must deliver the goods to the
carrier or another person nominated by the seller at an agreed place
(given that such a place is been agreed between the parties).
• The seller must also contract for and pay for the cost of carriage needed
to bring the goods to the place of destination.
• In addition, the seller undertakes insurance cover of the buyer's risk of
loss or damage to the goods during carriage.
• The buyer should note that under CIP the seller is required to obtain
insurance only on minimum cover.
• Should the buyer wish to have more insurance protection, it will need
either to agree as much expressly with the seller or to make its own
extra insurance arrangements
DELIVERED AT TERMINAL (DAT)

• DAT denotes that the seller will deliver when the goods, once
unloaded from the arriving means of transport are placed at the
disposal of the buyer at a named terminal at the named port or
place of destination
• “Terminal” includes a place, whether covered or not, such as a
quay, warehouse, container yard or road, rail or air cargo
terminal.
• The seller bears all risks involved in bringing the goods to and
unloading them at the terminal at the named port or place of
destination.
Delivered at Place
• DAP means the seller delivers when the goods are placed at the
disposal of the buyer on the arriving means of transport, ready for
unloading at the named place or destination.
• The seller bears all risks involved in bringing the goods to the
named place.
DELIVERED DUTY PAID (DDP)

• DDP signifies that the seller delivers the goods when the goods are
placed at the disposal of the buyer, cleared for import at the
arriving means of transportation for unloading at the named place
or destination.
• The seller bears all of the costs and risks up to destination and
also has the duty to clear the goods for exports as well as imports,
to pay duties and to deal with all customs formalities.
Group II Terms – Sea and Inland Water Way
• Free Alongside Ship (FAS)
• Free on Board (FOB)
• Cost and Freight (CFR)
• Cost Insurance Freight (CIF)
FREE ALONGSIDE SHIP

• FAS is an indication that the seller delivers when the goods are
placed alongside the vessel on e.g. a quay or barge nominated by
the buyer at the named port of shipment.
• Risk of loss or damage passes at this point and the buyer bears all
costs from this point.
FREE ON BOARD (FOB)

• Under FOB, the seller delivers the goods on board the vessel
nominated by the buyer at the named port of shipment, or
purchases the goods already so delivered.
• The latter caters for multiple sales during a chain commerce
especially in the case of commodity trade.
• The risk of loss of or damage to the goods passes when the goods
are on board the vessel, and the buyer bears all costs from that
moment onwards.
CFR Cost and Freight

• “Cost and Freight” means that the seller delivers the goods on
board the vessel or procures the goods already so delivered.
• The risk of loss of or damage to the goods passes when the goods
are on board the vessel.
• The seller must contract for and pay the costs and freight
necessary to bring the goods to the named port of destination.
COST INSURANCE FREIGHT (CIF)

• Under CIF, the seller delivers the goods on board a vessel or procures goods
so delivered.
• In addition, the seller contracts and pays cost of freight necessary to bring the
goods to the named port of destination.
• The seller also contracts for insurance cover against the buyer's risk of loss or
damage to the goods during carriage.
• The risk of loss of or damage to the goods passes when the goods are on
board the vessel.
• The buyer should note that under CIF the seller is required to obtain
insurance only on minimum cover.
• Should the buyer wish to have more insurance protection, it will need either
to agree as much expressly with the seller or to make its own extra insurance
arrangements
B. METHODS OF PAYMENT
• The method of payment relates to the timing and manner of
payment that is agreed between the buyer and the seller.
• Methods of payment are the terms agreed between the respective
parties on the terms in which payment will be made.
• The four main methods of payment in order of security for the
exporter
▫ Payment in Advance
▫ Letters or credit (documentary credits)
▫ Documentary collections - bills for collection
▫ Open Account
Payment in Advance
• From the point of view of the exporter, payment in advance as a method of
payment does not give rise to any funding requirements.
• The counterparty abroad pay before the exporter arranges for shipment of
goods.
• This is therefore the best method of payment from the point of view of the
exporter
• On the other hand, payment in advance is the worst method of payment
when looked at from the importer’s view point.
• Here the importer pays in advance before its counterparty supplies the goods.
• Further time would be spent disposing off the goods before the importer gets
its cash back.
• This therefore calls for funding for the importer before the goods are sold and
the proceeds used to pay back the advance.
Documentary Credits

• A documentary credit may be described as an advice issued by a bank

authorizing the payment of money to a named party, the beneficiary, against
delivery by the beneficiary of specified documents (usually accompanied by a
bill of exchange for the amount to be paid) evidencing the shipment of
described goods.
• The advice sets out the strict terms and conditions that must be fulfilled.
• Such conditions include submission by the exporter of certain documents
relating to the transaction to a bank for checking after shipping of the goods
and shipping the goods within a certain time frame.
• The documentary credit may be routed through the exporter’s bank (advising
bank). The advising Bank may add its confirmation to the letter of credit
Methods of Settlement in LCs
• A letter of credit will normally stipulate the method of settlement
e.g.:
▫ Sight bill for immediate payment
▫ Deferred payment
▫ Acceptance of bill
▫ Negotiation of bill
• Where the L/C calls for acceptance, the beneficiary can arrange
for it to be discounted.
• The cost of the L/C is borne by the buyer.
Documentary Collections

• Documentary collections involve the exporter requesting his Bank to assist with the
arrangements for payment from the exporter’s customer by handling shipping
documents and payment instruments like bills of exchange and cheques.
• Documents against payment - Also termed as cash against documents this is
used where payment is expected from the buyer immediately i.e. at sight. The
buyer’s Bank is instructed to release the exporter’s goods only when payment is
made.
• Documents against acceptance - This is used where there is a credit period
30/60/90 day’s sight of document or from date of shipment has been agreed
between the exporter and buyer. The buyer is able to collect the document against
their undertaking to pay on an agreed date in the future.
• When the buyer agrees to pay on a certain date, they sign denoting acceptance of the
draft. It is against this acceptance that the documents are released to the buyer.
Open Account Trading

• Open account trading involves payment after the good has been
received by the importer.
• From the point of view of the exporter, it is the worst mode of
payment.
• This is because he receives his money only after the goods have
reached his counterparty abroad.
• There is also the risk that the counterparty will not pay for the
goods due to one reason or the other such as the goods not
meeting specifications.
The Process
• The buyer and seller conclude a sales contract providing for payment
by documentary credit - the method of payment
• The importer applies for a Letter of Credit in favour of the seller from
its bankers, which becomes the issuing bank
• The issuing bank asks an intermediary bank – usually in the country of
the seller to advise and/or confirm the credit
• The advising/confirming bank informs the seller of the issuing of the
documentary credit
• As soon as the seller is satisfied that he can meet the terms and
conditions of the letter of credit he can dispatch the goods to the buyer
• The seller presents documents evidencing the shipment to the bank
where the credit is available
The Process 2
• The bank checks the documents against the credit; if the documents
meet the requirement of the credit, the bank will pay, accept and or
negotiate according to the terms of the credit.
• The advising/confirming bank sends the documents to the issuing bank
• The issuing bank pays/reimburses his correspondent bank
(advising/confirming bank)
• The documents are released to the buyer upon payment of the amount
due
• The buyer sends the transport document to the carrier who will then
proceed to deliver the goods(if the document is a document of title)
Definitions
• Applicant – the party on whose request the credit is issued
• Beneficiary
• Complying presentation
• Confirmation
• Honour
• Negotiation
• Presentation
• Presenter
Nature of Documentary Credits
• Article 2 of UCP 600 Uniform Practices for documentary credits
defines a documentary credit as
“any arrangement, however named or described, that is irrevocable
and thereby constitutes a definite undertaking of the issuing bank to
honour a complying presentation”
• An LC is a transaction in documents and not in goods and services or
other performances to which the documents may relate
• All parties are therefore concerned with documents
• They may be issued as revocable or irrevocable.
• In the absence of any indication, a credit will be considered as
irrevocable.
Revocable Credits
• Such credit may be amended or cancelled by the issuing bank at
any time without prior notice to the beneficiary.
• However if any bank has incurred any commitment against
documents that appear on the face of it to be in compliance with
the terms of the credit, on the credit prior to receipt of such
notice, the issuing bank would have to reimburse such a bank
Definitions
• Applicant means the party on whose request the credit is issued
• Banking day is a day on which aa bank is regularly open at the
place at which an act subject to the UCP 600 rules is to be
performed
• Beneficiary means the party in whose favour a credit is issued
• A complying presentation is a presentation that is in accordance
with the terms and conditions of the credit the applicable
provisions of these rules and international standard banking
practice.
Definitions 2
• Confirmation means a definite undertaking of the confirming
bank in addition to that of the issuing bank to honour or negotiate
a complying presentation
• Honour means:
▫ To pay at sight if the credit is available by sight payment
▫ To issue a deferred payment undertaking and pay at maturity if the
credit is available by deferred payment
▫ To accept a bill of exchange (draft) drawn by the beneficiary and pay
at maturity if the credit is available be acceptance
Definition
• Negotiation means the purchase by the nominated bank of drafts
(drawn on a bank other than the nominated bank and/or documents
under a complying presentation, by advancing or agreeing to advance
funds to the beneficiary on or before the banking day on which
reimbursement is due to the nominated bank
• Presentation means either the delivery of documents under a credit to
the issuing bank or nominated bank or the documents so delivered
• Presenter means a beneficiary, bank or other party that makes a
presentation
Parties to a Documentary Credit
• The buyer
• The seller
• The issuing Bank
• The advising bank
• The confirming bank
• The nominated bank
• The paying bank
• The reimbursing bank
The Seller
• The seller is the manufacturer or wholesaler of the goods who is
exporting the goods to another country
• The seller’s objective is to receive the price of the goods sold
• In a credit, the seller does not immediately obtain cash for the goods
• He therefore seeks assurance that the cash would be paid by an entity
whose solvency and integrity is not in doubt.
• The paying entity would then recoup what it has paid from the buyer
• The credit from the reputable institution provides this assurance the
seller is seeking
The buyer
• The buyer is the recipient of the goods and services supplied by
the seller.
• The buyer’s legal objective is to obtain ownership of the goods.
• His concern is therefore to receive some assurance that the seller
has performed his side of the bargain by transporting the good or
service.
• It is the buyer who applies to his bankers for a credit
The Issuing Bank
• The issuing bank means the bank that issues a credit at the
request of an applicant or on its own behalf
• This is the bank that gives a definite undertaking to “reimburse a
nominated bank that has honoured or negotiated a complying
presentation and forwarded the documents to the issuing bank”
UCP Article 7 c
• This undertaking to reimburse the nominated bank is
independent of the issuing bank’ undertaking to the beneficiary
• Reimbursement is due at maturity of the credit irrespective of the
time the nominated bank paid.
The Advising Bank
• The advising bank means the bank that advises the credit at the
request of the issuing bank
• An advising bank advises without any engagement on its part
• However once it undertakes to advise it must take reasonable care
to check the authenticity of the credit which it advises.
• If it elects not to advise, it must inform the issuing bank without
delay
The Confirming bank
• The confirming bank is the bank that adds its confirmation to the credit
upon the issuing bank’s authorization or request
• It assumes like obligations t o the beeficiary as those of the issuing
bank.
• Confirmation will only be added to irrevocable credits, usually available
with the advising bank.
• Where confirmation is required, the applicant must state this expressly
in his application
• The confirming bank assumes the credit risk of the issuing bank as well
as the political and transfer risks of the purchaser’s country
The Nominated Bank
• The nominated bank means the bank with which the credit is available
or any bank in case the credit is available with any bank
• The nominated bank is authorised by the issuing bank to pay, to incur a
deferred payment undertaking, to accept drafts or to negotiate.
• A confirming bank is a nominated bank
• Under Article 12 (a) of UCP 600, unless the nominated bank is the
confirming bank, an authorization to honour or negotiate does not
impose any obligation on that nominated bank to honour r negotiate,
except when expressly agreed to by that nominated bank and so
communicated to the beneficiary.
The Negotiating Bank
• The negotiating bank is that bank that is nominated by the issuing bank
to negotiate a credit.
• In negotiating a credit, the bank will examine the draft and documents
presented under the credit and will advance the amount subject to
recourse
• Recourse means the negotiating bank can debit the beneficiary if the
issuing bank refuses to pay because of issues with the presentation of
documents.
• The bank will then seek reimbursement from the issuing bank
• When the negotiating bank has been asked to add its confirmation,
then repayment to the beneficiary is without recourse
The Paying Bank
• The paying bank is the bank that pays the negotiating bank on
receipt of the specified documents and on fulfillment of all the
terms of the credit.
• Sometimes the issuing bank nominates a paying or reimbursing
bank or would normally perform the role itself
• The issuing bank will only make payment on receipt of the correct
documents at their counters abroad.
The Reimbursing Bank
• The reimbursing bank is the bank from which the advising bank
request cover on payment during negotiation.
• The reimbursing bank will only have commitment to pay if it has
confirmed the reimbursement instructions.
• If cover for the reimbursing bank should not arrive on time, the
issuing bank is obliged to pay including accrued interest on
arrears.
Types of Credits
• Confirmed Credits
• Back-to back credit
• Revolving credits
• Standby letters of credit
Confirmed Credits
• Most often there is a stipulation that an irrevocable credit should
be confirmed by a bank in the seller’s country of business
• The confirming bank agrees to reimburse another bank that has
honoured or negotiated a complying presentation and forwarded
the documents to the confirming bank.
• This undertaking is without recourse to the seller and for that
matter if the issuing bank does not reimburse the confirming
bank, the latter cannot sue the seller.
Back to back credits
• This a credit raised by the seller’s bank on the back of the original
credit, for a smaller value.
• They are in identical terms apart from the value.
Revolving Credit
• A revolving credit is one which after utilization is automatically
reinstated for further drawing.
• This enables the bank to limit its liability to a stated maximum
amount whilst providing a credit to cover a series of regular
shipment over a period
Standby Credit
• These are essentially a form of bank guarantee
• The difference between standby credits and ordinary credits is
that it is undertaking conditional on the applicant defaulting
• Furthermore it does not require trading documents such as bill of
lading required under ordinary credits.
Contractual Relationships between the Parties
• Five autonomous contract arise between
▫ Buyer and seller
▫ Applicant and issuing bank
▫ Issuing bank and confirming bank
▫ Confirming bank and seller
▫ Issuing bank/confirming bank and beneficiary
Essential Principles
• Compliance with documentary requirements – article 14, 15 and
16
▫ Bank’s duty to raise all discrepancies
▫ Time period for examination of documents – 5 days – Article 14 b
▫ Waiver of discrepancies – Article 16
• The principle of independence of the credit and the underlying
contract – Article 4
• Compliance with time limits for presentation
• The exception of fraud
Documents Required – Articles 17 -24
• Bill of Lading
• Commercial Invoice
• Insurance cover
• Additional documents
▫ Certificate of origin
▫ Certificate of quality
▫ Certificate of inspection
▫ Movement certificate
▫ Phytosanitary certificate
▫ Packing list
▫ Freight certificate
▫ Bank of Ghana import declaration form
Guarantees
• The purpose of guarantees is to protect the buyer against non-
performance of the contract by the seller
• There are two basic kinds of guarantees/bonds in international
trade
▫ Suretyship guarantees, which establish an accessory or conditional
obligatgion towards the creditor, subject to the existence of the
principal debtor’s obligation
▫ Demand guarantees which represent instant cash for the beneficiary,
who only has to make a demand
Demand Guarantees
• Under this type of guarantee, the guarantor must pay on first demand
as long as the claims submitted meet the formal conitions laid down in
the guarantee.
• The guarantor does not examine the material justification of the claim
but will make payment merely against presentation of proper
documents.
• Once again. The principle of autonomy plays an important role a in the
case of documentary credits.
• The beneficiary is relieved not only of the risk of the principal
becoming insolvent but also of the risk of having to obtain a judgment
or award before the guarantee is executed.
• The rule is pay first, sue later.
Demand Guarantees 2
• Demand guarantees are subject to the ICC Uniform Rules for Demand
Guarantees ICC Publication No. 458
• Article 20 of the rules sets forth the formal requirement for payment
under this type of guarantee. It requires that the demand for payment
shall be I writing and be supported by a written statement stating:
▫ That the principal is in breach of his obligations under the underlying
contract
▫ The respect in which the principal is in breach.
• Due to the fact that the liability is of a primary nature, demand
guarantees are normally given for a small percentage of the total
contract value.
Suretyship Guarantees.
• Also termed as conditional guarantees, since the liability of the
guarantor is secondary to that of the principal.
• Under this guarantee, the beneficiary must prove a breach of
contract and establish that it has suffered damages before it is
entitled to payment.
• Since these guarantees provide a greater measure of protection
for the principal than demand guarantees, it is not unusual for the
amounts guaranteed to be higher with this type of guarantee
• It is regulated by the ICC Uniform Rules for Contract Bonds, ICC
Publication No. 524
Guarantees Encountered in International Trade
• Tender guarantees
• Performance guarantees
• Advance payment guarantees
• Retention guarantees
• Payment guarantee in case of non-payment
• Maintenance guarantees
Tender Guarantees

• A tender guarantee is provided by a banker on behalf of a

customer tendering for a contract, when the prospective client
wants to be sure that the tenderor is genuinely committed to
entering into the contract.
• The bank undertakes to pay a certain percentage of the contract
value to the buyer (5% in this example) if the exporter fails to take
up the tender once it is accepted.
• The idea of such a guarantee is to compensate the buyer for
having to draw up a new tender.
Performance Bond

• A performance bond is provided by a banker on behalf of a

customer who has been awarded a contract (following a successful
tender) and guarantees to the buyer that the supplying customer
will fulfil the contract, is bona fide and can deliver the goods or
services which the contract specifies.
• If the contract is not ‘performed’ correctly then the buyer can
request on demand for example 20% of the total contract value.
• The terms of the bond are usually onerous, allowing the bank’s
customer little say in whether performance has been satisfactory.
Advance Payment Guarantee

• Many organizations that are successful in obtaining contracts do

not have the cash flow to start or service the contract.
• Thus it is reasonable for the supplier to ask the buyer to provide
‘up front’ funds e.g.25% of contract value in order to buy materials
to commence the contract.
• This type of guarantee will therefore provide cover for the buyer
(one who awarded the contract) in that he will be reimbursed by
the supplier’s (exporter’s) bank on demand if default occurs, and
it also benefits the supplier himself because it is cheaper than
borrowing money to finance the contract.
Retention Guarantees

• This is a type of bond that protects the customer until a job or project has
been completed.
• It guarantees that the contractor will carry out all necessary work to correct
structural and/or other defects discovered immediately after completion of
the contract, even if full payment (less the retention) has been made to the
contractor.
▫ The Bank will normally make the following checks:
▫ Whether the contractor has adequate capital base to undertake the contract of the
size and duration proposed
▫ Will the contact be profitable?
▫ Duration of the bond, the longer the riskier
▫ Will sub-contracts be involved?
▫ What security can customer offer?
▫ What are the other liabilities of customer?
Payment Guarantees in Case of Non-payment
• This type of guarantee is mainly used in the securing of payments
made on an open account basis, but may also be used for several
purposes including as security for the full payment of the delivery
of goods or services.
• The payment of a claim under a payment guarantee is usually
made against the beneficiary’s written declaration that he has
delivered the goods but has not received payment at maturity
Maintenance Guarantees
• These are used to secure the warranty obligations of equipment
suppliers throughout the period of the supplier’s liability for
defects
Discussion
• International Trade finance Issues that have come before you for
adjudication
THE END

THANK YOU