Documentary Letters of Credit

A documentary letter of credit is an obligation of the bank that opens the letter of credit (the issuing bank), to pay the agreed amount to the seller on behalf of the buyer, upon receipt of the documents specified in the letter of credit. The letter of credit is opened by the bank on the basis of the importer’s instructions, which are compiled in accordance with the terms of the contract.

The letter of credit as a form of payment minimizes risks connected with the international trade transaction. Having received a documentary letter of credit, the seller can be sure that as soon as he delivers his goods and presents the necessary documents to the bank, the other party (the issuing bank), independently of the buyer, will make payment. In his turn, the buyer can be sure that the payment will be made only when the seller presents the documents confirming delivery of goods to the address of the buyer and if the documents fully correspond to the requirements of the letter of credit.

Both the importer and exporter should take into account that the letters of credit constitute a transaction separate from the purchasing-selling agreement or other agreements on which they are based. The bank’s obligations on carrying out the letters of credit are limited by the terms of the letter of credit only, and the bank deals exclusively with documents, not with goods or services.

Issuing and servicing of letters of credit is regulated by the Uniform Customs and Practice for Documentary Credits, 2007 revision, ICC publication # 600, or by the Uniform Customs and Practice for Documentary Credits, 1993 revision, ICC publication # 500.