Letter of credit (L/C) can be defined as an “undertaking” whereby the buyer’s bank is committed (on behalf of the buyer) to place an agreed amount of money at the seller’s disposal under some agreed conditions. Since the agreed conditions include, amongst other things, the presentation of some specified documents, the letter of credit is called Documentary Letter of Credit or, in short, Documentary Credit. The Uniform Customs & Practice for Documentary Credit (UCPDC) published by International Chamber of Commerce (2007) Revision; Publication No. 600 defines Documentary Credit:
“Credit means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honor a complying presentation.”
Complying presentation means a presentation that is in accordance with the terms and conditions of the credit, the applicable provisions of these rules and international standard banking practice. According to the definition of “Credit”, when an issuing bank determines that a presentation (of documents) is complying, it must honor.
a) to pay at sight, if the credit is available by sight payment, b) to incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment, c) to accept a bill of exchange (draft) drawn by the beneficiary and pay at maturity if the credit is available by acceptance.
Article 15b of UCP-600 says that when a confirming bank determines that a presentation is complying, it must honor or negotiate. In case of complying presentation, a nominated bank may also honor or negotiate (article 15c). It thus appears that credit is not only available at issuing bank, it (credit) can also be made available at confirming bank or nominated bank (appointed by issuing bank). Moreover, any bank can be a nominated bank in case of a credit available with any bank. (Article 2 and 6a of UPC-600) At this point, it is also imperative to define “Negotiation”. According to article 2 (UCP- 600)
Negotiation means the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank.
The above terms such as sight payment, deferred payment, acceptance and negotiation, are infact, reflecting terms of payment of credit. Terms of payment or maturity date of payment (when issuing bank or confirming bank or nominated bank is going to make payment) is therefore, an essential characteristic of a credit.
Article 6b of UCP-600 states, a credit must state whether it is available by sight payment, deferred payment, acceptance or negotiation.
It thus follows from the above discussion that a credit:
i) is an irrevocable/definite undertaking of an issuing bank to honor a complying presentation ii) must indicate with which it is available; and
iii) must indicate the terms of payment
1.1 Parties to a Letter of Credit
The parties are:
• The Issuing Bank
• The Confirming Bank, if any, and
• The Beneficiary
Other parties which facilitate the Documentary Credit are:
• The Applicant
• The Advising Bank
• The Nominated Bank
• The Reimbursing Bank
• The Claiming Bank
• The Presenter
• The Transferring Bank, if any
Issuing Bank means the bank that issues a credit at the request of an applicant or on its own behalf.
Confirming Bank means the bank that adds its confirmation to a credit upon the issuing bank’s authorization or request. Confirmation means a definite undertaking of the confirming bank, in addition to that of the issuing bank, to honor or negotiate a complying presentation.
Beneficiary means the party in whose...
Please join StudyMode to read the full document