1. Drafts and Title Documents
    This chapter describes the documentary draft transaction step by step. This transaction finds application in much of international trade. Its chief features are the draft or bill of exchange, the order to pay that we first discussed in chapter III, section 4, and the multimodal transport document, the document of title we first discussed in chapter II. These two documents provide considerable protection for the seller, on the one hand, and the buyer, on the other. The transaction is one step away from the standard documentary credit transaction. As this chapter explains, the documentary draft transaction’s chief weakness is its failure to protect the seller from the buyer’s default. The letter of credit transaction guards against this weakness.

  1. Step One: Drafting the Sales Contract
    The first step in the documentary draft transaction is drafting the international sales contract in a way that allows the parties to use the banking system to achieve certain advantages. As chapter I explains, the contract should specify payment arrangements and credit terms. For a documentary draft payment arrangement, the sales contract should indicate that payment terms are “documents against payment” or “cash against documents”, sometimes abbreviated, respectively, as D/P and CAD. For a documentary draft credit arrangement, the sales contract should indicate that terms are “documents against acceptance” (D/A) or similar language indicating that the buyer will receive the goods on credit but only after agreeing to make the payment when it is due under the draft. These terms and the form of the draft are explained below.

  1. Step Two: Obtaining the Document of Title
    The second step is to obtain the “documents”. Control over the goods can be maintained by the seller if one of these documents is a document of title, like a negotiable multimodal transport document, a negotiable port-to-port (ocean) bill of lading or a negotiable warehouse receipt. Such a document will state that the goods it covers will be delivered by the issuer “to the order of ” the seller or simply “to order” and thereby allow transfer of title by endorsement and delivery of the document or by delivery alone. Note that title documents are not available when carriage is by air and that they are usually not available when carriage is solely by truck or rail. Under the laws of most trading nations, the negotiable combined transport document (the most common document in these transactions), the negotiable bill of lading and the negotiable receipt stand for the goods. In other words, both the law and commercial parties treat the documents as if they were the goods. We can treat the documents as if they were the goods because the carrier that issues the negotiable transport document and the warehouse that issues the negotiable receipt will not deliver the goods without surrender of the document. The person that who holds a document that has been properly endorsed to that person will control the goods, and all parties (exporters, importers, banks, and sub-buyers) can treat the document as if it were 10 000 barrels of Saudi crude oil or 100 000 bushels of #1 corn.
    If the goods are to be shipped, as they most often will in an international sale, the seller obtains the document by delivering the goods to the carrier that issues the document. If the goods are shipped to and/or stored in a warehouse and the buyer is to take delivery of them from the warehouse, the seller will normally obtain the warehouse receipt from the warehouse that issues the document to the seller when the seller stores the goods.
    If shipment is by air or solely by truck or rail, the carrier will almost never issue a negotiable transport document. Rather, the shipper must provide the carrier with a place to deliver the goods and a named consignee. Delivery will not depend on surrender of any documents but merely someone signing for the goods on behalf of the consignee. This is not to say that documentary draft collections cannot be used when shipment is by air, truck or rail—indeed a large portion of documentary draft collections involve such shipments—but the protection that is provided to the seller when title is controlled by the documents is not available for such shipments. The buyer will receive the goods and the bank will merely attempt to collect the draft, which usually involves “protesting” or making a public report of the buyer’s refusal to honour the draft.

  1. Step Three: Drawing the Draft
    The third step is the drawing of the draft.
  • As chapter III, section 4 explains, the draft is an order that is usually negotiable in form. Banks with international departments often have web sites that the seller can use to create and print drafts.
  • The draft will show the seller as the drawer, i.e. the party that signs the draft on the signature line.
  • The draft will also designate a drawee, the buyer, whose name and address usually appear at the bottom of the draft and a little to the left.
  • The seller must date the draft and indicate the payee. The seller is often the payee. In that case, the draft orders the drawee, the buyer, to pay the seller. The seller’s bank will ask the seller either to endorse the draft to the seller’s bank or to make the seller’s bank the payee. In that case, the draft orders the buyer to pay the seller’s bank, which is serving as the remitting bank. Because it knows it will be in the chain of payment, the seller’s bank may agree to advance funds to the seller before the buyer pays. Bankers call this “discounting” the draft, and it is an attractive feature of the documentary sale since the seller receives payment early, which is always a welcome event.
  • Finally, the seller must indicate the amount to be paid and whether it is payable “at sight” or “at usance” (i.e. at a designated time, thereby giving the buyer credit terms). Section 6 below explains the difference between “sight” drafts and “usance” or “time” drafts.


  1. Step Four: Collecting
    The fourth step is to initiate collection of the documentary draft. Thanks to the role that remitting banks play in the documentary draft transaction, this can be a very simple procedure for the seller. All the seller has to do is to take the draft and the documents to its bank and ask the bank to collect them. The draft will be payable to order of the bank, and the title document, if one is being used, must also be endorsed either to the bank or in blank. At this point, a further and critically important event will occur. The bank will decide whether or not to credit the seller’s account immediately or under reserve. If the seller’s credit standing is strong or if the value of the goods controlled by the documents is sufficient, the bank may be willing to advance funds against the documentary draft, so that the seller, who may be depositing many documentary drafts that day or week, will have the use of working capital to pay its suppliers and prepare future orders. The bank will, of course, charge the seller for collecting the draft as well as for any advance, and in all probability the bank will take the draft “with recourse”. This means the seller must refund any advance if the buyer dishonours the draft, i.e. if the buyer does not pay it. Payment without recourse is a form of forfaiting, as discussed in chapter V, and may take place after the draft has been accepted by the buyer, as described in the next section. The various charges and the “with recourse” or “without recourse” features of the transaction are matters that the seller and the bank must negotiate between themselves.
  2. Step Five: Presentment
    The fifth step occurs at the buyer’s place of business. When the documentary draft arrives at the remitting bank’s correspondent in the buyer’s city, the correspondent notifies the buyer that the draft and the documents have arrived and asks the buyer to honour the draft. This act of the correspondent is known as “presentment”, and the buyer must act promptly to honour or dishonour the draft. If the buyer dishonours, the presenting bank will notify the remitting bank and send the documents back or may assist in making arrangements to sell the goods, usually at a distressed price. “Honour” consists of either payment of the sight draft or acceptance of the usance (time) draft, followed by payment of that draft when it comes due.
  • Honouring the sight draft
    The seller uses a sight draft when the sales contract calls for delivery of documents against payment (D/P or CAD). The buyer honours the sight draft by paying it when the presenting bank presents it. Often, the presenting bank is chosen based on the fact that it holds a deposit account in the buyer’s name. If the buyer elects to honour the sight draft, the presenting bank will debit the buyer’s account and remit the funds to the collecting bank. If the buyer does not maintain an account with the presenting bank, the seller will honour the draft by putting the buyer’s designated bank in funds.


  • Honouring the usance draft
    The seller draws a usance or time draft under a sales contract that calls for credit terms and, usually, provides that delivery of documents will be against “acceptance” (D/A). The usance draft is payable not “at sight” but a number of days after sight (30 or 60 days after sight) or a number of days after some other discernable date (e.g. “30 days after bill of lading date” or “on June 1, 2008”). The number of days is agreed upon in the underlying sales contract, and this number reflects the credit terms of the contract.
    The buyer honours the usance draft first by accepting it and later by paying it. “Acceptance” is the act of signing the draft, usually in a vertical plane on its face. The buyer thus takes the draft, rotates it by 90 degrees, signs it and dates it. The buyer has now created a trade acceptance, an obligation to pay the acceptance when it matures (say, 30 or 60 days later). The value of a trade acceptance depends on the creditworthiness of the buyer. Because the trade acceptance is normally payable to the order of the seller or the seller’s bank, it is a negotiable instrument and passes from hand to hand (usually from bank to bank) free of any equities in the underlying contract—a legal consequence that can have significant value for the holder of the acceptance. Once the buyer accepts the usance draft, the buyer returns the valuable trade acceptance to the presenting bank, which holds it for the seller or the seller’s bank or may offer to purchase it from the seller or the seller’s bank per the remitting bank’s instructions
    The buyer must pay the usance draft at the maturity date (say, 30 or 60 days after acceptance). On that date, the buyer completes its honour of the acceptance by paying it and completing the payment feature of the underlying sales contract.
  1. Step Six: Surrendering the Title Documents
    When the buyer returns the trade acceptance to the presenting bank, the presenting bank simultaneously delivers the documents to the buyer. If the documents include a title document, the buyer then controls the goods and will be able to obtain them from the warehouse or from the carrier when the goods arrive in the buyer’s city.

  1. Step Seven: Delivery to Buyer
    By surrendering the title document to the carrier or warehouse, the buyer will take delivery of the goods and complete the delivery phase of the underlying sales contract.

  1. Summary
    Note that, when used with a document of title, the documentary draft transaction has four essential features that the commercial parties can use to their advantage.
  • First, by retaining the document of title through its bank agents, the seller controls the goods until the buyer honours the draft by paying the sight draft or accepting the usance draft.
  • Second, the transaction protects the buyer, who is not obligated to pay or accept until it obtains the document of title that gives it control of the goods.
  • Third, by accompanying the draft with the document of title, the seller gives the collecting bank and any third party that purchases the draft control of the goods until the buyer honours the sight draft or accepts the usance draft. That control is a security interest, and it permits the banks to finance the transaction while the goods are en route to the buyer.
  • Fourth, because the usance draft is usually negotiable, the holder of the draft (the seller, the seller’s bank or some third party) can enforce it against the buyer even if the buyer is dissatisfied with the goods.

Note also that there are some disadvantages to the documentary draft transaction.

  • Because the documents leave the seller’s city and the goods are en route, the seller faces the risk of buyer dishonour. In the case of dishonour, the seller will have a claim against a distant party and the goods will be en route or in a distant port—not a good situation for the seller. If no document of title was used, as in air, truck and rail shipments, the buyer will have physical possession of the goods. In effect, the seller is usually undertaking the risk of buyer insolvency or buyer irresponsibility. As we see in chapter XII, the commercial letter of credit transaction largely avoids this risk.
  • When a title document is used, the buyer must pay the demand draft or accept the usance draft prior to delivery of the goods. Although he may examine the collection documents prior to payment, the buyer bears the risk that the goods may be damaged, defective, short or otherwise non-conforming. The buyer may wish to instruct the seller to include inspection and insurance certificates that he can examine prior to payment in order to limit these risks. Commercial letters of credit usually require such additional documentation and provide for examination of the documents (by the issuing bank) for the same purpose (see chapter VII, section 8).
  • Finally, by using the documentary draft transaction, the seller and the buyer incur bank charges. They must therefore decide whether the benefits of using the documentary draft outweigh the costs of assuming the risks that the documentary draft avoids.