Payment for paperless trade: Are the viable alternatives to the documentary credit?

upon acceptance of the draft by the importer. The accepted draft is returned to the exporter, which will usually discount the draft-that is, agree to receive a slightly lesser amount in return for immediate access to the funds-and receive the proceeds.29 At maturity, the bill is returned to the bank abroad for presentation to the importer for payment, and the money is remitted to the exporter or, if the exporter had discounted the bill, the discounting institution.30

There are two types of documents usually involved in documentary collection, namely, commercial documents and financial documents.31 Commercial documents include bills of lading, insurance policies or certificates, invoices, inspection certificates, certificates of origin, export and import licences, health certificates, and any other nonfinancial documents.32 Financial documents include drafts, bills of exchange, and orders.33 Similar to the documents used in document collection, documentary credits also involve the use of financial and commercial documents. Documentary collection also offers two advantages to the exporter. First, the exporter retains the security of the goods until the importer pays or accepts the bill. Second, the exporter can liquidate the goods even after he extends credit to the importer, as he can discount the draft.34

Documentary collection provides reciprocal advantages to the importer. Most importantly, the importer is allowed to inspect the documents of title before the bill is paid or accepted. If the documents are satisfactory, the importer's objectives of assuring both quality and quantity are prima facie satisfied.35 In this way, documentary collection serves to provide the trading parties with a compromise between payment on account terms and prepayment.36

However, documentary collection has its disadvantages. From the exporter's point of view, the importer may dishonor his draft, by refusing to pay or accept it, at a time when the goods are on the high seas or already in the importer's country. An importer's default at that point means that the exporter would have to find another buyer to purchase the goods overseas where there may not be any ready buyers. Without a market to liquidate its goods, the exporter may have to transport the goods back to his country, incurring further costs. To make the situation worse, the goods may be perishable and lose value over the period, or the goods may not be sellable in the exporter's country.

The exporter's main remedy for the importer's default will be damages for breach of contract.37 If the damages have to be sought in the importer's country, the exporter will encounter many problems and costs associated with international litigation.

In addition to the possibility of actual default on the part of the importer, the exporter is further exposed to the importer's insolvency risks.38 If the importer becomes insolvent at a time when the goods have been shipped and are either on the high seas or in the importer's country, the exporter will be in a position similar to when the importer refuses to pay. Here, the exporter is forced to either find another buyer or re-route the goods. Moreover, if the importer obtains the shipping documents, takes delivery of the goods and then becomes insolvent before she pays the exporter, the exporter will be in a worse position. In such a case, the exporter will have to litigate a claim as one of many unsecured creditors, unless it is in the unlikely situation where it holds security over the importer's assets or has retained title to the goods at the time of insolvency.39