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GLOSSARY

Documentary letter of credit definition

Published by a LexisNexis Commercial expert

What does Documentary letter of credit mean?

A documentary letter of credit is where the buyer under an international sales contract procures his bank to issue an irrevocable credit in favour of the seller to pay an agreed sum of money against tender by the seller of the shipping documents.

In an international sales contract transaction, the buyer usually has the duty to procure his bank, known as the issuing or originating bank, to issue an irrevocable credit in favour of the seller by which the bank undertakes to the seller, either directly or through another bank in the seller's country known as the correspondent or negotiating bank, to pay an agreed sum of money against tender by the seller of the shipping documents. The type of documentary letter of credit dealt which is issued by a bank at the buyer's request in favour of the seller must be distinguished from another form of 'letter of credit' issued by a bank in favour of its own customer and given to him for the purpose of being shown to third persons.

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Characteristics of commercial letters of credit

Commercial letters of credit (also known as traditional letters of credit or L/Cs) are used in relation to the movement of goods in the context of international or domestic trade. They are often used as a method of payment under contracts of sale because they are a useful tool where a seller has concerns over the creditworthiness of its buyer or the jurisdiction in which its buyer is located.They are sometimes referred to as documentary letters of credit or documentary credits.By contrast, standby letters of credit are a different type of letter of credit. They serve a different purpose. They are used in similar circumstances to on demand guarantees or performance bonds to provide a means for securing payment or other obligations. They are a form of quasi-security. For information on standby letters of credit, see Practice Note: Characteristics of standby letters of credit and Q&A: What is the difference between a standby letter of credit and a letter of credit?.Purpose and uses of commercial letters of creditA commercial letter...

ICC standard rules and practices for commercial letters of credit—UCP and ISBP

The International Chamber of Commerce (ICC) has developed standard rules and guidance to govern letters of credit. The key publications for commercial letters of credit are:•the Uniform Customs and Practice (UCP) for Documentary Credits which incorporates the Supplement to UCP for Electronic Presentation (known as the eUCP), and•the International Standard Banking Practice for the Examination of Documents under Documentary CreditsFor more information on commercial letters of credit in general, see Practice Notes:•Characteristics of commercial letters of credit•Types of commercial letters of credit, and•Commercial letters of credit—structure and partiesThe nature of the Uniform Customs and Practice for Documentary CreditsThe UCP is a set of standard terms and conditions which can be incorporated into a letter of credit if the parties concerned wish to use them. The UCP does not have the force of law but it is internationally recognised.Incorporating the UCP into a letter of creditThe provisions of the UCP are not automatically incorporated into a letter of credit. They must be expressly incorporated otherwise they will not apply.The vast majority...

Discover our 6 Practice Notes on Documentary letter of credit