INTRODUCTION
The rapid integration of Vietnam with international organizations in the region
makes import-export become one of the important elements of the economic sector.
Since then there have been many trades between Vietnam and countries around the
world, the number of contracts through international exchange also increased. And
one of the issues that I feel is the best and most noticeable is the terms of payment.
Currently, there are many different payment methods used between buyers
(importers) and sellers (exporters), in which the payment method by letter of credit
is the most popular. Specifically, payment by letter of credit (L/C) has
characteristics that make them the most preferred payment method and the factors
to be aware of, notes when opening L/C.
The payment by letter of credit creates many benefits for both parties to the
contract such as time, ease of goods exchange, etc. However, there are still many
disputes about payment through this type.
So I decided to choose the topic of payment terms and focused on the letter of
credit payment method for the report.
I would like to thank to Mrs. Tran Bich when in the last few days you taught,
even though you was very busy, but you still enthusiastically guided me so that I
could complete the report and get the bonus points. Your devotion makes me even
more motivated to complete the report in the most completed way. I look forward
to receiving your comments and suggestions about this payment method
So the report has been divided into 4 chapters:

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Chapter 1 : Terms of payment
Chapter 2 : Letter of Credit
Chapter 3: How to write payment terms business correspondence in

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trade, due to cultural differences, financial capacity distinctions, size and currency of
payment, the parties may apply professional method and the support from the third party
such as credit institutions or banks.

1.2. Roles in the sale contract


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Terms of payment is an important part of the international contract because of
specific and detailed provisions on payment term, location, method,consequences of late
payment and sanctions of late payment are very necessary. One of the terms that importers
and exporters are most interested in because it is closely related to the benefits of the parties
1.3. How can it benefits the players
As we can see that terms of payment can interest the buyer by showing the deadline
of payment or currency that they should use. But this topic is focusing on the L / C method
so let find out what advantages the L / C can bring to the parties. Letters of credit are
indispensable for international transactions since they ensure that payment will be received.
1.3.1. Buyers
• The bank will pay the seller for the goods, on condition that the latter presents to the
bank the determined documents in line with the terms of the letter of credit;
• The buyer can control the time period for shipping of the goods;
• By a letter of credit, the buyer demonstrates his solvency;
• In the case of issuing a letter of credit providing for delayed payment, the seller
grants a credit to the buyer.
• Providing a letter of credit allows the buyer to avoid or reduce pre-payment

1.3.2. Sellers
• The seller has the obligation of buyer's bank's to pay for the shipped goods;
• Reducing the production risk, if the buyer cancels or changes his order
• The opportunity to get financing in the period between the shipment of the goods and

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1 TERMS OF PAYMENT

1.4. Currency
In international trade, goods can be paid either in the currency of the exporting
country or in the currency of the importing country or in the currency of the third country.
The currency used for payment is called the money of payment.
The currency of payment may coincide with the currency of calculation (i.e. the
currency denoting the price) and may not coincide. When the currency of payment and the
currency of calculation of prices are two different currencies, one must determine the
exchange rate to convert those two currencies. In particular, people choose:
• The exchange rate of the payment instrument (exchange rate of electricity transfer or
by mail).
• The currency of the market rate (in the exporting country, in the importing country or
in a third country).
• The buying or selling rate.
• Trade Agreement rate.
For their own benefits, exporters often want to choose the currency of payment that is
less likely to depreciate, either easily exchanged for other currencies or easily exchanged for
gold. And the mindset of importers is the opposite.
According to Article 52 of Commercial Law 2005 ( Determination of prices) stating
that “ Where there is neither agreement on goods price or on the price-determining method
nor other price indexes, the goods price shall be determined according to the price of such
type of goods under similar conditions on mode of goods delivery, time of goods purchase
and sale, geographical market, payment mode and other conditions which affect the prices”
so we have another way to choose the currency.


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delivered, 15% upon the acceptance of the project and 5% upon the expiry of the warranty
period.
1.5.2. Advane payment
Advance payment of goods is the delivery of the goods to the seller in whole or in part
before the seller orders the goods at the disposal of the buyer or before the seller fulfills the
buyer's order. The amount of advance payment is more or less dependent on the importance
of the traded goods, the manufacturing period of the goods, the relationship between the
transactions and the practices formed in the relevant trading industry. Today, usually the
advance is in the 5 - 10% range of the order value. Advance payment is usually made by
deducting money from goods or by making a definitive calculation at the time of
achievement of goods. The advance is the credit the buyer provides to the seller.
1.5.3. Deferred payment
In the paying later, the seller gives the buyer a credit according to the agreement
between the two parties. This credit is repayable either in cash or in merchandise. In recent
years, in the world market for complete equipment, a common type of contract is product
sharing, whereby the importer reimburses the credit to the exporter by partial delivery
(about 20 - 40%) products manufactured by the introductory equipment.
In credit payment (prepaid or postpaid), the parties are usually concerned about the
amount of credit, credit term, credit interest rate and repayment conditions.

1.6. Method
In world market transactions, people use different payment methods to pay for goods
and services. But the most popular is the collection method and the credit document method.
Here are some features of these two methods.


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1.6.1. Collection method
Collection method is a payment method in which the seller, after delivering goods or

transferable to the third person. Documentary credit payment method has many advantages
over mail delivery method.
• For the seller, it is guaranteed to earn money.
• For buyers, it ensures that payment to the seller is made only once the seller has
presented a complete set of valid documents and the bank has checked the set of
documents.
1.6.3. Cash-in-Advance
With cash-in-advance payment terms, an exporter can avoid credit risk because payment
is received before the ownership of the goods is transferred. For international sales, wire
transfers and credit cards are the most commonly used cash-in-advance options available to
exporters. With the advancement of the Internet, escrow services are becoming another
cash-in-advance option for small export transactions. However, requiring payment in
advance is the least attractive option for the buyer, because it creates unfavorable cash flow.
Foreign buyers are also concerned that the goods may not be sent if payment is made in
advance. Thus, exporters who insist on this payment method as their sole manner of doing
business may lose to competitors who offer more attractive payment terms.
1.6.4. Open Account
An open account transaction is a sale where the goods are shipped and delivered before
payment is due, which in international sales is typically in 30, 60 or 90 days. Obviously, this
is one of the most advantageous options to the importer in terms of cash flow and cost, but it
is consequently one of the highest risk options for an exporter. Because of intense
competition in export markets, foreign buyers often press exporters for open account terms
since the extension of credit by the seller to the buyer is more common abroad. Therefore,
exporters who are reluctant to extend credit may lose a sale to their competitors. Exporters
can offer competitive open account terms while substantially mitigating the risk of nonpayment by using one or more of the appropriate trade finance techniques covered later in
this Guide. When offering open account terms, the exporter can seek extra protection using
export credit insurance.


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Mail transfer (M/T)
Telegraphic transfer (T/T, T/Tr).
Applications
Low value contract
High credit with each other


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CHAPTER 2: LETTER OF CREDIT
2.1. Definition
A letter of credit is a letter from a bank guaranteeing that a buyer's payment to a seller
will be received on time and for the correct amount. In the event that the buyer is unable to
make a payment on the purchase, the bank will be required to cover the full or remaining
amount of the purchase.
2.2. Components
• Applicant: The party applying for the letter of credit, usually the importer in a grain
transaction.
• The Issuing Bank: The bank that issues the letter of credit and assumes the obligation
to make payment to the beneficiary, usually the exporter.
• Beneficiary: The party in whose favor the letter of credit is issued, usually the
exporter in a grain transaction.
• Amount: The sum of money, usually expressed as a maximum amount, of the credit
defined in a specific currency.
• Terms: The requirements, including documents, that must be met for the collection of
the credit.
• Expiry: The final date for the beneficiary to present against the credit.
2.3. Types of L/C
2.3.1. Based on the irrevocable features

• Sight L/C (Thư tín dụng trả ngay): According to this LC, payment is made to the
seller immediately (maximum within 7 days) after the required documents have been
submitted.
• Deferred L/C (Thư tín dụng trả chậm): According to this LC the payment to the seller
is not made when the documents are submitted, but instead at a later period defined
in the letter of credit. In most cases the payment in favor of Seller under this LC is
made upon receipt of goods by the Buyer.
• Red clause L/C (Thư tín dụng điều khoản đỏ) : The seller can request an advance for
an agreed amount of the LC before shipment of goods and submittal of required
documents. This red clause is so termed because it is usually printed in red on the
document to draw attention to "advance payment" term of the credit.


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2.4. L/C and International Trade Contract
L/C was established on the basis of the International Trade Contract but when it was
released it is completely independent from the foreign trade contract.
That is, after the International Trade Contract has been signed, the buyer is on the basis
of the content (terms of the contract) as agreed in the contract to the Bank (importing
country) requires this bank to issue a letter of credit to guarantee the payment to exporters
(under instructions and requirements meeting the bank's conditions of goods given).
After L/C is issued, if the exporter agrees and accepts the contents then the exporter
must fulfill its obligations prescribed terms of L/C (not follow the contract - If there is a
difference between L/C and contract).

2.5. Customs
UCP 500/600 – Uniform custom and practise for documentary credit
Nowadays, mostly using UCP 600 (issued by ICC)


2.7. Capital sources to ensure L / C payment
• When defining the terms of payment by L/C in the contract, customers need to
consider the capital to pay for the L / C that the customers will ask Vietnam Industrial
and Commercial Bank to open:
• L / C issued by own capital, customers must deposit 100%
• L / C is issued by own capital, the client does not deposit 100% and / or has request
for exemption or reduction of deposit.
• L / C issued by Vietnam Industrial and Commercial Bank’s captial
2.8. Request to open L / C
• Customers fill out the L / C opening request form. Because the bank opens L/C
according to requirements of the importer, so the customer should carefully review
the contract content to guarantee when putting the contract term in L/C without
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conflict. Documents for opening L/C of customers include:
Application for opening of L/C
Decision on enterprise establishment (for enterprises having first-time transactions)
Business registration (for enterprises having first transaction)
Registration of import-export code (for enterprises trading for the first time)


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• Original international trade contract (in case of contract signing via FAX, the unit
must sign and stamp on the copy)
• Authorized import contract (if enterprise has)
• Importing permission of the Ministry of Trade (if the imported goods are on the list
of management regulations in the Prime Minister's Provisions on annual import and

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Number, location, date of opening L / C
L / C type
Name and address of parties: L/C applicant, beneficiary, banks ...
Amount, currency of money
Validity period, payment term, and delivery term
Terms of delivery: conditions of delivery, place of delivery, etc
Content of goods: name, quantity, weight, packaging ...
Documents of The beneficiary must be presented: bill of exchange, commercial

invoice, bill of lading, insurance documents, certificate of origin
• Commitment of the bank to open letter of credit
• Others content.


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2.10. Checking L/C
When we receive the letter of credit, we must carefully examine the contents of the
terms of L/C; even words, spelling errors, numbers, dates, ... Because later on when
shipping and making documents about the goods to ask customers to pay, they must follow
the L/C, not follow the contract also.
2.11. Reasons to use L/C
2.11.1. Seller’s concern
The following are some key concerns of a Seller regarding selling goods to a Buyer in a
foreign country:
• Contract risk: Having a well-crafted sales agreement with proper terms of sale and
payment.
• Production risk: What if the buyer cancels the order?

• Legal risk: Knowing the local laws and jurisdiction in case of disputes and/or
defaults.
• Risk of misunderstanding: Using terms of sale and payment terms that has common
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interpretation in the buyer’s and seller’s countries.
Control on the timing for shipment of goods.
Control on logistics of shipping the goods.
Control on transfer of risk from buyer to seller during transit of goods.
Negotiating credit terms from the seller for payment: Net 30, Net 60 etc.

A Letter of credit (LC, LoC, L/C) makes it possible to do business globally since it
largely meets the aspirations and the above-listed concerns of buyers and sellers that engage
in cross-border trade.
Upon the instructions of a buyer, a bank issues a letters of credit in a way to ensure a
seller that payment will be made as long as the seller complies with conditions agreed upon,
solely by submitting the required documents within a strict time frame stated in the LC. The
Buyer is the Applicant or the Account Party of the Letter of Credit and the Seller is the
Beneficiary or the recipient of funds. In between the Applicant and the Beneficiary stands
the Bank that replaces the risk of the buyer who in turn undertakes to pay the beneficiary
(seller) when conditions stipulated in its issued letter of credit are met by the seller. Once
issued, this undertaking is binding even if the buyer goes bankrupt.
At the very outset it should be noted that LCs deal in documents. In order to make
payment, the bank that issues the letter of credit scrutinizes the 'documents', that are
submitted by the beneficiary (the seller), for compliance and not the physical 'goods' that the



Time for payment .................. days from date of invoice
Open account backed by demand guarantee or standby letter of credit
Account ......................... Holder .......................... Bank ..............................................
Documentary collection
D/P documents against payment

D/A documents against acceptance

Details ....................................................................................................................
..............................

Irrevocable documentary credit

confirmed

unconfirmed

Bank & Place of issue
..........................................................................................................

Bank & Place of confirmation (if applicable) ..............................................................


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3.3. Credit method
After has choosen the method of payment, you have to choose what credit do you want
to make business with your seller or buyer. Then you write down in the contract
Credit available
by payment at sight
by deferred payment, .............. days


CHAPTER 4: ANALYSIS DISPUTES OF PAYMENT TERMS
Once you’ve established that a letter of credit is the best form of payment for shipping
your goods internationally, you must pay special attention to make sure you’re correctly
completing not only the letter of credit, but the entire process. Sometimes, there are ome of
the common mistakes exporters make when completing letters of credit.
4.1. Mistakes from exporters
Not understanding the real purpose of a letter of credit.
This is the starting point for avoiding any errors on the document. If you don’t
understand the real purpose of a letter of credit, you probably won’t understand how or if
you’re meeting its requirements. You may accidentally complicate (or simplify) details.
Solution: Take time to really understand what a letter of credit is, how it works, and what it
does. We also have more than 70 articles on the International Trade Blog that address letters
of credit issues.
Choosing a letter of credit when another method of payment is preferable.
At the beginning of this article, we posited that you have already determined that the
letter of credit is the best form of payment for your export. However, according to Novak,
it’s crucial to make sure you take the time to actually consider this step. If you’re blindly
choosing a letter of credit as your method of payment, you could be making an expensive
mistake.
Solution: Make sure you’ve researched all of the options before you settle on complex
letters of credit, because there may be a different option that is better suited to your needs
Failing to negotiate the terms of a letter of creditduring the negotiation of the contract
If you don’t negotiate all the terms upfront, you’re exposing yourself to potential issues
that you may be legally bound to, even if they aren’t in your best interest. This is especially
important if you’re working with a sales team who just wants to sell and may not be
particularly interested in the details of how they are going to get paid.


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Also, remember that the checklists your bank provides are only guides, and that due to
the individual nature of every transaction, it’s likely your specific letter of credit will be
different than anyone else’s letter of credit (or a template). It is your responsibility as the
seller to make sure you’re seeking help if and when you have questions about reviewing a
letter of credit.
Letting someone who is inexperienced prepare the documents under the letter of
credit.
You wouldn’t trust just anyone to handle your finances, settle your legal disputes, or
take care of your family. So why would you hand off the responsibility of your letter of
credit to just anyone? You shouldn’t!
Solution: Make sure the person who is preparing the documents under the letter of
credit (even if that person is you) has all of the background information and resources
available to do this correctly. Here are some things you should consider about who prepares
your letter of credit:
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Are they experienced with letters of credit and exporting in general?
Do you have a plan in place for how these people (or this person) will be trained?
What standard will they use to prepare documents?
Are the documents doubled checked for accuracy after completion?

Every company is different. While multinationals might have a department of
experienced people to help generate the documents regarding overseas shipment, small and
mid-size businesses might not have resources allocated for these employees. If you do it
yourself or even hire a third party for assistance, you must make sure you’re asking
questions that can help you guarantee they will do it the right way. (You should also be
asking what happens if something goes wrong).

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Gap-filling by convention
Interest
Restitution of benefits received

Key provisions of CISG mentioned:
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Article
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4.2.3. Case Text
Queen Mary Case Translation Programme

Russian Federation arbitration proceeding 132/2004 of 27 October 2005

4.2.4. Summary of ruling