Letter of credit, Shipping bill and Bill of Lading

Letter of credit: Letter of credit, popularly known as L/C, is by far the most important single document in International trade. It forms the basis of a very large volume of world trade. Through the instrument of letter of credit, the promise to pay usually made by the overseas importer is substituted by the promise to pay by his bank. It is this characteristic of the letter of credit which gives the exporter great security. The exporter should carefully examine the terms and conditions of the L/C to ensure (i) that he can meet them, and (ii) that they conform to the basic contract he has entered into with the importer. If there are any differences, he should get in touch with the bank and the importer to arrange for an amendment.

Bill of Exchange: When a draft is drawn on a foreign bank, it is known as a foreign draft or bill of exchange. A bill of exchange is, thus, a means of collecting payment from the foreign buyer through the banking channel. It is also a method of extending credit. It has two main functions. If the bill of exchange is payable at sight, it becomes a demand for payment and a receipt for payment made. If the bill of exchange is payable at some future date after sight, it is a demand for payment by the exporter, a promise of payment by the importer, and a receipt for payment after such payment has been made.

The bill of exchange under a documentary credit must be drawn strictly in accordance with the terms of the credit. The bill will be drawn on the bank through which the credit is opened, advised or confirmed.

Shipping Bill: This is a customs document. There are three types of forms of shipping bills, namely: (1) Shipping Bill for Free Goods, (2) Dutiable Shipping Bill, and (3) Duty Drawback Shipping Bill. The Shipping Bill must be prepared according to the category of the export goods.

Marine Insurance Policy: It is the basic instrument in marine insurance. A policy is a contract and a legal document. Its principle function is to serve as evidence of the agreement between the insurer and the assured. The policy must be produced to press a claim in a court of law. An exporter must also put up the marine insurance policy as a collateral security when he gets an advance against his bank credit.

The exporter should ensure that (i) the currency and the total value of the policy are as per the terms of the L/C, (ii) details of the transport documents are specified therein, and (iii) risks of transshipment or deck shipment are covered. He should also ensure that (i) the policy is in the name of the beneficiary and is duly endorsed in blank, (ii) the policy does not contain any adverse clauses, and (iii) policy is duly stamped.

Bill of Lading: Bill of Lading (B/L) is a document which is issued by the shipping company acknowledging that the goods mentioned there in have been placed on board the ship and an undertaking that the goods in like order and condition as received will be delivered to the consignee, provided that the freight specified therein has been duly paid. The Bill of Lading has the following main functions: (1) It is a document of title to the goods shipped; (2) it is a receipt for goods; and (3) it is an evidence of the contract of affreightment. When the export contract is c.i.f., the exporter makes payment of the freight and gets ‘freight paid’ bill of lading. On the other hand, if the contract is f.o.b., the freight has to be paid by the importer. In that case the shipping company will issue a ‘freight collect’ bill of lading. The bill of lading should give the details about the exporter, carrying vessel, goods shipped, port of shipment, destination, consignee and the party to be notified on arrival of the goods at destination. B/Ls are made in sets, usually of two or three originals, any one of which gives title to the goods.

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