A letter of credit is a document issued mostly by a financial institution which provides generally an irrevocable commitment of payment (it may also be revoked, confirmed, no, transfer or other, such as back to back: renewable but it is more commonly irrevocable / confirmed) to a beneficiary against compliance with the documents as indicated in the letter of credit. Letter of Credit is the symbol is an LC or L / C, and is often regarded as a documentary credit, abbreviated DC or D / C, documentary letter of credit, or simply credit (as in the UCP 500 and UCP 600 ). Once the beneficiary or a banker acting on his behalf, made a presentation to the issuing bank or confirming bank, if any, within the expiration date of the Labour Code, including documents that conform to the terms and conditions of the Code Labour, UCP and international standard banking practice, the issuing bank or confirming bank, if any, is required to comply regardless of all the instructions of the applicant. In other words, the obligation to honour (usually payment) rose from the applicant to the issuing bank or confirming bank, if any. Non-banks can also issue letters of credit, but the parties must find a balance between the potential risks.
The labour code can also be the source of payment for a transaction, which means that the exporter will be paid on the redemption letter of credit. Letters of credit are mainly used nowadays in international business transactions of great value, for deals between a supplier in one country and a major customer in another. They are also used in the process of land development to ensure that public facilities approved (streets, sidewalks, stormwater basins, etc.) will be built. The parties to a letter of credit are usually a beneficiary who is to receive money, the issuing bank which the applicant is a client and the bank whose beneficiary is a client. Almost all letters of credit are irrevocable, ie, can not be amended or cancelled without prior consent of the beneficiary, the issuing bank and the confirming bank, if any. In the execution of a transaction, letters of credit integrate functions common to giros and traveller’s cheques. As a general rule, documents a beneficiary must submit to rely on the credit are the commercial invoice, bill of lading, insurance documents. However, the list and form of documents is open to imagination and negotiation and could contain requirements to submit documents issued by a neutral third party attesting to the quality of the goods shipped.
Terminology
The English name “letter of credit comes from the french word” accreditif “, a power to do something, which in turn is derived from the latin word” accreditivus “, which means trust.This indeed reflects the modern understanding the instrument. When a seller agrees to be paid through a letter of credit, he is looking for a reliable bank which has an obligation to pay the amount stipulated in the credit agreement, notwithstanding any defence relating to sub contract of sale. That is as long as the seller performs its functions in a manner that satisfies the conditions of credit.
Details of work
Imagine that a company called WAPRO occasionally imports steel from a company called MIL, that banks with the Bank Business India. WAPRO holds an account at the Community Financial. WAPRO wants to buy a value of $ 500000 Merchandise MIL, who agrees to sell goods and WAPRO given 60 days to pay for them, provided that they are provided with a 90-day LC for the full amount. The steps to obtain the letter of credit would be as follows:
* WAPRO goes in the Commonwealth of financial claims and a $ 500000 letter of credit with MIL as
the beneficiary.
* The Commonwealth Financial may issue an LC or on the approval of a standard loan underwriting or
WAPRO funding directly with a deposit of $ 500000 plus taxes between 1% and 8%.
* The Commonwealth financial sends a copy of the LC Bank Business India, which notifies the MIL
that payment is ready and can ship goods WAPRO ordered with the full assurance of payment.
* Upon presentation of the documents specified in the letter of credit and compliance with the terms
and conditions of the letter of credit, the Commonwealth of $ 500000 financial transfers to the Bank
Business India, which credits the account of the MIL this amount .
* It is noteworthy that banks deal only with documents under the letter of credit and not the
underlying transaction.
* Many exporters have misunderstood that payment is guaranteed after receipt of the LC. The
issuing bank is obliged to pay under the letter of credit that when documents are presented and the
terms and conditions of the letter of credit were met accordingly.
Legal principles governing documentary credits
One of the main peculiarities of documentary credit is that the payment obligation is abstract and independent sub-contract of sale or any other contract in the transaction. Thus, the bank of the obligation is defined by the terms of credit alone, and the contract of sale is irrelevant. The defenses of the purchaser under the contract of sale does not affect the bank and in no way affect its liability.Article 3 (a) UCP States this principle clear. Article 4 of UCP further states that banks deal with documents only, they are not concerned products (facts). Accordingly, if the documents presented by the beneficiary or his representative, seem to be in order, then in general the bank is both the right and obligation to pay without further qualifications.
The policies behind the adoption of the principle are purely commercial capture and reflect some of the expectations: firstly, if the responsibility for the validity of documents was launched on the banks, they would be burdened to investigate the facts each transaction and is therefore less likely to issue documentary credits that the operation would lead to a high risk and disadvantages. Secondly, the documents required under the credit could, under certain circumstances, be different from those required under the sales transaction; banks would then be placed in a dilemma in deciding the terms to follow if necessary to look beyond credit. Thirdly, the fact that the basic function of credit is to provide the seller with the certainty of receiving payment, as long as he performs his duties documentary, suggests that banks must honour their obligation despite the allegations of wrongdoing by the buyer. Finally, courts have emphasized that buyers have always appealed for action on the contract of sale, and that it would be a disaster for the business if, for any violation of the contract between the seller and the buyer, a bank has been tasked to investigate said violation.
The “principle of strict compliance” would also improve the bank’s duty to make payment against documents easy, efficient and fast. Hence, if the documents submitted under this credit depart from the language of Credit Bank is empowered to suspend the payment, even if the difference is purely semantics. [4] The general legal maxim de minimis non CURAT lex has no place in the field of documentary credits. In this phenomenon, it is not possible for the invester to make sure the bank to get money from the bank.
Legal Basis for letters of credit
Although the documentary credits are enforceable once communicated to the beneficiary, it is difficult to show any consideration by the beneficiary banker before the bid documents. In such transactions of the company by the beneficiary to deliver goods to the applicant has not sufficiently taken into account in the bank’s promise because the contract of sale is made before the issuance of credit, what counts in these circumstances is past. In addition, the performance of an obligation under a contract can not be a valid consideration for another promise made by the bank: the delivery of goods is reviewing the implementation of the sub-contract of sale and can not be used, as was the case a second time to establish the enforceability of the receiving bank-report.
Authors have analysed all possible theory of every legal and did not satisfactorily reconcile the bank with a commitment of any contractual analysis. Theories include: the implicit promise, the assignment theory, the theory of innovation, the dependency theory, theories agency, estoppel and trust theories, the theory of anticipation, the security and theory. [5] Davis, Treitel, Goode, Finkelstein and ELLINGER have all accepted the idea that documentary credits should be analysed outside the legal framework for contractual principles, which require the presence of the exam. Accordingly, if the credit is regarded as a promise, enterprise, chose in action, a commitment or a contract, it is acceptable in English jurisprudence of the deal as a contract, despite the fact that he has distinctive traits, which makes it sui generis.
Even if a couple of countries and U.S. states (see, for example, Article 5 of the Uniform Commercial Code) have tried to create laws to establish the rights of parties involved in the letter of credit, most parties to submit the Uniform Customs and Practices (UCP), issued by the International Chamber of Commerce (ICC) in Paris. The ICC has no legislative power, rather, industry representatives and various trade groups from different countries gather to discuss how to revise the UCP and adapt to new technologies. The UCP are rated according to the publication number, the ICC gives them. The UCP 600 are ICC Publication No. 600 effective July 1, 2007. The previous revision was called UCP 500 and entered into force 1993. Since the UCP are not laws, parties must include in their diet than normal contractual arrangements. It is interesting to see that in the field of international trade that the parties do not rely on governmental regulations, but rather prefer the speed and ease of self-regulation
from: Wikipedia
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