Payment for Paperless Trade: Are There Viable Alternatives to the Documentary Credit? (2001)

I. INTRODUCTION The ever-increasing move to paperless trade calls for an evaluation of various aspects of international trade, of which payment is particularly important. (1) There are four traditional methods of payment in international sales: (1) cash in advance or prepayment; (2) payment on account or open account; (3) documentary collection; and (4) documentary credits. (2) Trade parties adopt most suitable method for their purpose, but documentary credit is, (3) for reasons to be outlined later, most frequently used method. (4) Thus, documentary credit has been described as the life blood of international commerce. (5) Although documentary credit is sometimes used in domestic trade, (6) its qualities come into sharp focus in international transactions. Consequently, discussions in this article focus on its use in international transactions. While international factoring is becoming an increasingly important method of payment, (7) and new electronic forms of payment are emerging, (8) traditional methods of payment, and documentary credit in particular, continue to dominate. In its over one-hundred fifty years of use, (9) documentary credit mechanism has required presentation of paper documents to complete transaction. (10) As a result, digitization of trade documentation raises questions as to best mode of payment. These questions need serious consideration. This article assesses whether there are viable alternatives to documentary credit for paperless trade or whether documentary credit can be effectively dematerialized to adapt to paperless trade. Such an assessment entails addressing four main issues: (1) reason documentary credits are preferred method of payment; (2) relevance of documentary credit in paperless trade; (3) viable alternatives to documentary credit; and (4) operability of electronic documentary credits. Part II discusses reasons for popularity of documentary credits, highlighting that credits satisfy three crucial interests of trade parties that other methods of payment do not--security, liquidity, and proximity. This section reviews all four major methods of payment because popularity of documentary credit is best understood when compared with these other methods of payment. Part III discusses continuing relevance of documentary credit in paperless trade. It assesses whether needs served by credits continue to be relevant to paperless trade. This part concludes that, although electronic documentation may change nature of needs, they remain relevant. Part IV explores possibility of satisfying traders' interests by alternative payment methods and concludes that there are currently no alternative methods that meet needs of traders as well as or better than documentary credit. Part V discusses adaptation of documentary credit to paperless trade, and Part VI concludes article. II. REASONS FOR THE DOCUMENTARY CREDIT'S POPULARITY The documentary credit is most popular payment method because it secures interests of all parties involved in transaction, provides liquidity to importers and exporters, and affords parties a local entity to sue in event of a dispute. With respect to these qualities, credits are unparalleled by other methods of payment. To explain preference for documentary credits in international sales, this section briefly reviews four traditional methods of payment and highlights major disadvantages of three non-documentary credit payment methods. A. Cash in Advance or Prepayment Cash in advance, or prepayment, simply refers to arrangement where a buyer, pursuant to a contract of sale, transfers funds into an account accessible to seller in advance of manufacture, procurement or shipment of goods that are subject matter of contract. …