Authority To Purchase

Authority To Purchase

Summary of Authority To Purchase

An instrument used primarily by Far Eastern banks to finance import purchases. The authority-to-purchase instrument resembles, and is often confused with, a letter of credit, although it lacks some of the features of a letter of credit. The authority instrument directs the negotiating (i.e., advising) bank to purchase the beneficiary’s drafts upon the performance of prescribed actions, usually the shipment of merchandise, as evidenced by the submission of shipping documents. An authority to purchase calls for drafts to be drawn upon the purchaser of the merchandise, rather than upon the opening or advising bank. In the event that the authority instrument does not clearly state that the bank is to purchase the drafts at face value, it is likely that the bank will regard any draft as a collection item. In addition, the instrument may provide for drafts to be drawn “with recourse”; under such circumstances, should the buyer repudiate the draft, the bank will look to the drawer for refund of the sums paid. In the event that the authority instrument provides for drafts to be purchased at face value and without recourse, and if the instrument is confirmed by the negotiating bank, the authority provides the seller with essentially the same protection as a letter of credit.

Authority-to-purchase instruments have been largely supplanted by letters of credit.

See Letter of Credit.

(Main Author: William J. Miller)


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