Lesson 54: Letters of Credit in International Trade

Letters of Credit (LC) play a crucial role in international trade by providing a secure method of payment, ensuring that both the seller and the buyer meet their contractual obligations. This article will delve into the key aspects of Letters of Credit, their types, and how they function within the framework of the Uniform Commercial Code (UCC).

What is a Letter of Credit?

A Letter of Credit is a financial document issued by a bank on behalf of a buyer, guaranteeing payment to the seller upon presentation of specified documents that prove the goods have been shipped or services have been provided.

Types of Letters of Credit

  • Commercial Letter of Credit: Used in trade transactions to ensure payment for goods or services. Learn more.
  • Standby Letter of Credit: Acts as a backup payment method if the buyer defaults. Discover this book.
  • Revocable and Irrevocable Letters of Credit: A revocable LC can be altered or canceled by the issuing bank, while an irrevocable LC cannot be changed without the agreement of all parties. Find out more.

Process Flow of a Letter of Credit

graph TD; A["Buyer (Applicant)"] -->|Requests LC| B["Issuing Bank"]; B -->|Issues LC| C["Advising Bank"]; C -->|Notifies LC| D["Seller (Beneficiary)"]; D -->|Ships Goods| E["Carrier"]; E -->|Provides Documents| D; D -->|Submits Documents| C; C -->|Sends Documents| B; B -->|Releases Payment| D;

Roles and Responsibilities

Understanding the roles and responsibilities of various parties involved in a Letter of Credit transaction is crucial.

  • Applicant: The buyer who applies for the LC.
  • Issuing Bank: The bank that issues the LC on behalf of the buyer.
  • Beneficiary: The seller who receives the LC and is guaranteed payment.
  • Advising Bank: The bank that notifies the seller of the LC and may authenticate it.

Compliance with UCC Article 5

Article 5 of the UCC governs Letters of Credit in the United States. It provides the legal framework for the issuance, amendment, and enforcement of LCs. To learn more about the scope and application of the UCC in international transactions, refer to Lesson 52.

Advantages of Using Letters of Credit

  • Provides security to both buyers and sellers.
  • Reduces the risk of non-payment.
  • Facilitates international trade by providing a trusted payment method.

Key Provisions and Legal Considerations

When dealing with Letters of Credit, it is essential to understand the key provisions and legal considerations under the UCC:

  • Strict Compliance: Documents presented must exactly match the terms of the LC.
  • Independence Principle: The LC is independent of the underlying contract between the buyer and seller.
  • Fraud and Dishonor: The issuing bank may refuse payment if it suspects fraud.

Example of a Letter of Credit



  Bank ABC
  Buyer XYZ
  Seller 123
  $100,000
  2023-12-31
  
    Goods must be shipped by 2023-11-30
    Bill of Lading must be presented

Conclusion

Letters of Credit are vital in facilitating secure and reliable international trade transactions. By understanding their types, roles, and legal considerations, law students and practitioners can better navigate the complexities of international trade under the UCC framework. For more insights into the basics of Letters of Credit, refer to Lesson 27.

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