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Letters of credit are legally-binding financial instruments that are issued by banks or specialist trade finance institutions to ensure that payment is made for goods received.¹⁾

Documentary credits are payment instruments that constitute a definite undertaking of the issuer (“the issuing bank”) on the instruction of the buyer (“applicant”) to pay a certain specified amount to a seller (“the beneficiary”) at sight or on a future determinable date (“the maturity date”) provided that documents stipulated in the documentary credit are presented in compliance with the stated terms and conditions.¹⁾

The irrevocable nature of letters of credit means there are only exceptional circumstances in which banks do not have to make payment after supporting documentation has been accepted. The main exception is in cases of fraud.²⁾

For the seller in an international transaction (i.e., the beneficiary), the primary benefits of a documentary credit are that:²⁾

The risk of payment under the sales contract shifts from the buyer to the issuing bank (which may have a credit rating which exceeds the applicant’s).³⁾

In the event they do not pay, for whatever reason, the seller can still rely on the sales contract from its buyer.⁴⁾

The exporter always has the option of not availing himself of the credit and letting it expire; he is under no obligation to inform the importer or the banks of his decision.⁵⁾

There is the possibility of further recourse to a confirming bank. (This is useful if the seller has concerns regarding the political, or legal landscape for the buyer’s country or the credit rating of the issuing bank).⁶⁾

Even though the applicant initiates the request, it is not a party to the documentary credit since a credit is a bank undertaking.⁷⁾

The beneficiary is the party in whose favour the documentary credit is issued. It is generally the seller in an international trade transaction.⁸⁾

The issuing bank issues the documentary credit as per the applicant’s request. The issuing bank irrevocably undertakes to pay the beneficiary upon receipt of the necessary documents as determined by the terms and conditions of the documentary credit.⁹⁾

so called because this is the bank that will issue the letter of credit³⁾

• a.k.a. confirming bank

Unless the advising bank has confirmed the documentary credit, it assumes no further liability or responsibility.¹⁰⁾

The issuing bank can authorise another bank, called the nominated bank, to pay a presenter at sight, to accept a bill of exchange, or to incur a deferred payment undertaking to pay at maturity.¹¹⁾

The reimbursing bank is another party - usually the issuing bank’s correspondent bank, with which the issuing bank maintains an account in the currency of the documentary credit.¹²⁾

The documentary credit will stipulate the name of the reimbursing bank on which the nominated bank or the confirming bank (then known as “claiming bank”) should make a reimbursement claim.¹³⁾

The issuing bank authorises the reimbursing bank to honour a reimbursement claim from the claiming bank.¹⁴⁾

The reimbursement authorisation is often subject to the ICC Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits (URR 725). If not so indicated in the credit, reimbursement is subject to UCP 600 article 13 (Bank-to-Bank Reimbursement Arrangements).¹⁵⁾

In some cases, the beneficiary is an intermediary trader that sources the goods from another supplier and may request its buyer to arrange a transferable documentary credit.¹⁶⁾

A doc­u­men­tary let­ter of cred­it is a writ­ten oblig­a­tion from a bank to pay to the sell­er (ben­e­fi­cia­ry) on be­half of the buy­er (cus­tomer) a cer­tain amount in a des­ig­nat­ed cur­ren­cy with­in a pre­de­ter­mined pe­ri­od in ex­change for a set of pre­scribed doc­u­ments ver­i­fy­ing the de­liv­ery of spe­cif­ic goods.

I believe the most correct and precise definition of a letter of credit can be found in article 2 of the UCP 600 ICC.

This article reads as follows: “Credit means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation”

Letter of credit also arises irrevocable from the entry into force of the UCP 600 ICC. A credit cannot, therefore, be revoked without the consent of the beneficiary.

The “applicant” is defined as “the party on whose request the credit is issued”. In this regard, it should be noted that a letter of credit can be issued by entities other than a bank, bearing in mind that such rules, being privatised, are derogatory.

Indeed, according to some operators, in the near future, the share of letters of credit issued by non-bank entities (financial institutions, insurance companies, forfaiters, corporates, etc.) will increase considerably.

With a “negotiation”, a nominated bank – other than the issuing bank – “buys” the drafts and/or documents in a complying presentation, preparing (or being available to do so) the beneficiary at a time earlier than the day that bank should be reimbursed.

Therefore, an issuing bank can only “honour” and cannot make a “negotiation”. Obviously, an issuing bank may “negotiate” under a separate agreement with the beneficiary, as this transaction is not governed by the UCP 600 ICC.

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