Letter of Credit

Topics: International trade, Trade finance, Letter of credit Pages: 14 (3773 words) Published: March 8, 2012
4.1Introduction – What is Letter of Credit4
4.2Parties to Letter of Credit5
4.3Should Letter of Credit be chosen as the Payment Method?6 4.4Types of Letter of Credit6
4.4.4Standby Letter of Credit7
4.4.5Revolving Letter of Credit8
4.4.6Transferable Letter of Credit9
4.4.7Back to Back Letter of Credit9
4.5Documents Required By Letter of Credit9
4.6Governing Rules under Letter of Credit10
4.6.1Uniform Commercial Code (UCC)10
4.6.2Uniform Custom and Practice for Documentary Credits (UCP)10 and the UCP11 can become a member of ICC?12
4.7Autonomy of Letter of Credit12
4.8Doctrine of Strict Compliance13
4.8.1Definition - Doctrine of Strict Compliance14
5.0Case Study17


Letter of credit is a commercial device involving three parties: the issuer (usually a bank), the customer and the beneficiary. The customer, in essence, buys the letter of credit from the issuer. That is, the customer pays a fee for the issuance of the letter of credit and agrees to be responsible to the issuer for reimbursement of any funds which the issuer pays to the beneficiary. The issuer is then bound to honor the demand of the beneficiary for payment of the letter of credit, as long as the demand is in compliance with the conditions of the letter of credit, including presentation of appropriate documents. (D. Brinkman., 1997)

Letters of credit have increasingly become the first and last resort for many credit executives attempting to eliminate transaction risks, and they are essential to both domestic and international trade. Letters of credit are particularly important to international commerce. A letter of credit is a commercial device involving 3 parties: 1. the issuer, 2. the customer, and 3. the beneficiary. The strict compliance doctrine requires the seller/beneficiary to present documents that conform to a strict reading of the letter of credit. Letters of credit are always conditioned upon the submission of documents, not extrinsic facts. An issuer may dishonor a letter of credit if the documents are fraudulent or if there is fraud in the transaction. (D. Brinkman., 1997)


The methodology for this paper is from reading and Internet research. The scope for this project centers on Letter of Credit and the cases involves with Letter of Credit.

Materials from research from the internet as well as online Journals, articles through the internet were also conducted.


Based on www.wikipedia.org, Letter of Credit derives from the French word ‘accreditif’, a power to do something which in turn is derivative of the LatinWord ‘accreditivus’, meaning trust.

But the simple definition of Letter of Credit is an undertaking by a bank to make payment to a named beneficiary within a specified time against the presentation of documents which comply strictly with the terms of the letter of credit. (SITPRO International Guide)

In the www.investorwords.com, Letter of Credit is a binding document that a buyer can request from his bank in order to guarantee that the payment for goods will be transferred to the seller. Basically, a letter of credit gives the seller reassurance that he will receive the payment for the goods. In order for the payment to occur, the seller has to present the bank with the necessary shipping documents confirming the delivery of goods within a given time frame. It is often used in international trade to eliminate risks such as unfamiliarity with the foreign country, customs or political instability.

Introduction – What is Letter of Credit

Letters of Credit are commonly used in international trade. They are issued by larger banks and contain a promise to pay a seller upon...
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