Supplying Computer Software under Documentary Credits

Using a Letter of Credit/Documentary Credit to pay for computer software, could be problematic today, due to technological changes which were designed to make purchasing software easier.

A Documentary Credit is a financial instrument where payment is guaranteed by the buyer as long as the seller ships the goods and this is verified by a third party (usually a shipping company) through the issuance of a transport document of some sort.

What happens, however, if the goods being shipped are not physically present to be shipped?

The growing paradox of supplying computer software
Computer software packages are a classic case in point.  In the past it was possible (and with some types of software it still is) to physically ship the software in the form of CD discs.  But this meant that the software could be easily stolen and used by other parties and a faulty CD could lead to a very frustrating situation for the buyer.  In addition, the transmission of software data through a CD left a lot of software companies exposed to licensing fraud, even when customers signed licensing agreements, and recent developments in communications infrastructures globally has meant that software companies can control all purchases, local and international, through the concept of an electronic key.

In most cases this is a very fast and secure method of purchasing the software and has benefits, not only for the software companies, but for their customers as well.

However, what happens if the software is being purchased on behalf of an end user by an agent based in a different country, and is being paid for under a Documentary Credit?  With the concept of an electronic key, where the goods are shipped direct from the software company to the end user electronically using e-mail addresses, how does the Seller prove shipment that will satisfy conditions on the Documentary Credit?  Also, due to licensing agreements imposed by the software companies, can the Seller in one country even legally purchase the software on behalf of a Buyer in a different country?  Sometimes not.  Such questions need to be asked at the time of enquiry and double checked with the software company concerned.  But even if it is legally possible, how can the Seller provide the right documents that would be both valid and acceptable to all parties concerned in the Documentary Credit supply chain?

The answer is that there are difficulties.  The wording on the Documentary Credit would need to be such that somehow proof that a licence has been issued is clearly identifiable by the banks concerned and that the payment will be forthcoming even in the absence of a shipping document.

Alternatives to Documentary Credits
There are alternatives.  The Applicant can issue a Standby Letter of Credit and if they don’t pay in the time periods concerned, then the Seller has a guaranteed form of payment that can be called upon, but again the wording of the Standby and the documentation to be submitted as proof of a breach of contract, would need to clearly indicate that the goods were shipped as agreed.  Or, in this case, transmitted as agreed.  The question remains however, how does the Seller provide proof of transmission (issued by a third party) that will satisfy the bank and be easily identifiable as the real thing?

In my experience these are not easy questions to answer and although I would hesitate to state categorically that it is not possible to supply certain types of software under a Documentary Credit payment, I would have to say that it is complicated.  That more often than not, the end result is an inability to supply the software, which can cause contractual problems and accusations of non-compliance with contractual terms.

Summary
The supply of computer software as part of an international transaction by a third party is becoming problematic, and due to the growing use of electronic keys as the preferred method of supply, sometimes virtually impossible to supply under Documentary Credit terms.  I strongly advise that questions, such as those posed above, are asked prior to any contracts being signed, and, if the answers indicate that software can be supplied legally and without any confusion, that nevertheless constant checks are made during the lifetime of the contract that nothing has changed in the meantime.

Maria Narancic from Point to Point Export Services is an independent international trade adviser who assists organisations world wide with their international trade projects, documentation, Documentary Credits and import/export training.  She is based in the United Kingdom.  If you require any further assistance with the matters mentioned above, please do contact us by e-mail on info@point-point.com or to access other articles on International Trade matters please do check out our website at www.point-point.com

 

Leave a Reply

Protected by WP Anti Spam