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

The problems of delay, costs and fraud notwithstanding, documentary credits continue to be relevant to international trade,s as they balance the competing interests of all parties to the transaction, and afford an ironclad assurance of payment.94

111. RELEVANCY OF DOCUMENTARY CREDITS IN PAPERLESS TRADE

As discussed above, the documentary credit is preferred because of the needs it serves and the interests it satisfies. In only three situations will the credit become irrelevant or redundant: (1) where the needs served by credits are no longer present; (2) where there is an alternative way for meeting those needs (e.g., by another payment method); and (3) where credits are electronically inoperable.

The security, liquidity, and proximity needs of international business

parties are as present today as ever, but the nature of paperless documentation may change the scope of these needs. It is therefore important to evaluate the various needs in paperless trade.

A. Security for Payment and Paperless Documentation

It is worth reiterating that the security offered by credits includes an assurance of payment to the seller, a reasonable assurance of receipt of the right goods by the importer, and an assurance of reimbursement to the issuing, confirming, and negotiating banks. One of the reasons credit security is important is that paper documents take a long time to issue and transport.95 The paper system is so slow that by the time the documents reach the importer, the goods will be nearing their destination, if not already there.96 Huge losses and grave inconveniences may result if the importer defaults when the goods are already in her country. For instance, the exporter would incur further costs to transport the goods back or re-route them to another location.97

The problems an exporter may face are compounded by the legal nature of the bill of lading. The holder of the bill of lading has constructive possession of the goods and the right to control the goods.98 The right to control the goods is the authority to give instructions to the carrier as to the fulfillment of the contract of carriage, including instructions to stop the goods in transit, unload the goods to a warehouse, re-route the goods, or deliver the goods to some person other than the named consignee.99

The exporter loses its right to control the goods as soon as it sends the bill of lading to the importer or other persons. This means the exporter is generally unable to stop the goods in transit when it learns of the importer's default but no longer has possession of the documents.loo Considering that it may take some time for the exporter to repossess the documents even if the importer promptly dispatches them, severe losses may result. The goods may have to be stored in a warehouse awaiting return transportation or, if the goods are perishable, their quality may deteriorate.

Documentary credits minimize these problems. With trade credits, the exporter obtains payment assurance from a local bank before it ships the goods. In the words of Lord Diplock, "[t] he whole commercial purpose for which the system of confirmed irrevocable documentary credits has been developed in international trade is to give the seller an assured right to be paid before he parts with control of the goods. . . ."101 Furthermore, the exporter is able to present the documents quickly and demand payment because presentation of documents is to a local bank.12 If the bank refuses to pay or accept the exporter's draft, the exporter may be able to repossess the documents quickly and stop the goods in transit. If the exporter thinks he has fulfilled the terms of the credit, he may proceed against the bank instead.