Legal Issues in Forfaiting Transactions

Forfaiting transactions are financial support programs using a promissory note, bill of exchange, documentary credit, payment guarantee, and trade receivable management to exporters or a bona fide holder under a fixed or fluctuating interest rate without recourse. Many export companies made an attempt to diversify payment settlement options due to the difficulties of collecting proceeds by L/C since 1997 under IMF conditions in Korea. To improve these problems, many export companies tried to establish forfaiting transactions with foreign financial institutions. In 2002, the EXIM bank introduced forfaiting transactions to support export companies who lack a mortgage ability. In payment under reserve, a buyer has right to demand repurchase to the seller when the savings are not cured by the credit support document. Forfaiters may also buy a payment claim from the seller without recourse. In this case, the seller may eliminate credit risk but the buyer shall assume the risk. The parties shall agree on jurisdiction and governing laws to prevent conflicts or disputes. The forfaiting contract may be accepted in a country but may not be accepted in the other country