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Letter of credit
From Wikipedia, the free encyclopedia
A letter of credit is a document that a financial institution or similar party issues to a seller of goods or services which provides that the issuer will pay the seller for goods or services the seller delivers to a third-party buyer.[1] The seller then seeks reimbursement from the buyer or from the buyer's bank. The document serves essentially as a guarantee to the seller that it will be paid by the issuer of the letter of credit regardless of whether the buyer ultimately fails to pay. In this way, the risk that the buyer will fail to pay is transferred from the seller to the letter of credit's issuer. Letters of credit are used primarily in international trade for large transactions between a supplier in one country and a customer in another. In such cases, the International Chamber of Commerce Uniform Customs and Practice for Documentary Credits applies (UCP 600 being the latest version).[2] They are also used in the land development process to ensure that approved public facilities (streets, sidewalks, storm water ponds, etc.) will be built. The parties to a letter of credit are the supplier, usually called the beneficiary, the issuing bank, of whom the buyer is a client, and sometimes an advising bank, of whom the beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot be amended or canceled without the consent of the beneficiary, issuing bank, and confirming bank, if any. In executing a transaction, letters of credit incorporate functions common to giros and traveler's cheques.
After a contract is concluded between buyer and seller, buyer's bank supplies a letter of credit to seller
Contents
1 Terminology 1.1 Origin of the term 1.2 Types and related terms 2 Documents that can be presented for payment 3 Legal principles governing documentary credits 4 Definitions of Related Terms: 5 Different Types of Letter of Credit 6 The price of letters of credit 7 Legal basis 8 International Trade Payment methods 9 Risk situations in letter-of-credit transactions 10 See also 11 References 12 External links
http://en.wikipedia.org/wiki/Letter_of_credit
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Terminology
Origin of the term
The English name letter of credit (http://www.quantitysurveying-practices.com/2011/06/letter-of-credit-letter-ofcredit.html) derives from the French word accrditation, a power to do something, which in turn derives from the Latin accreditivus, meaning trust. This applies to any defense relating to the underlying contract of sale. This is as long as the seller performs their duties to an extent that meets the requirements contained in the letter of credit.[citation needed]
Seller provides bill of lading to bank in exchange for payment. Seller's bank exchanges bill of lading for payment from buyer's bank. Buyer's bank exchanges bill of lading for payment from the buyer.
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Shipping Documents Transport Document, Insurance Certificate, Commercial, Official or Legal Documents Official Documents License, Embassy legalization, Origin Certificate, Inspection Certificate, Phytosanitary certificate Transport Documents Bill of lading (ocean or multi-modal or Charter party), Airway bill, Lorry/truck receipt, railway receipt, CMC Other than Mate Receipt, Forwarder Cargo Receipt, Deliver Challan...etc Insurance documents Insurance policy, or Certificate but not a cover note.
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Letter of credit also refers to FIATA documents. More strictly, in practice freight forwarders usual present FIATA documents and the question is does FIATA documents can use like a document for activating letter of credit. In theory, the question is not very clear, because of the weakness in UCP 600.
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In this type of credit buyer and the bank which has established the LC, are able to manipulate the letter of credits or make any kinds of corrections without informing the seller and getting permissions from him. According to UCP 600, all LCs are Irrevocable, hence this type of LC used no more. Irrevocable LC In this type of LC, Any change (amendment) or cancellation of the LC (except it is expired) done by the Applicant through the issuing Bank must be authenticated by the Beneficiary of the LC. Whether to accept or reject the changes depends on the beneficiary. confirmed LC An LC is said to be confirmed when another bank adds its additional confirmation (or guarantee) to honor a complying presentation at the request or authorization of the issuing bank. Unconfirmed LC This type of letter of credit, does not acquire the other bank's confirmation. Transferrable LC A Transferable Credit is one under which the exporter has the right to make the credit available to one or more subsequent beneficiaries. Credits are made transferable when the original beneficiary is a middleman and does not supply the merchandise himself but but procures goods from the suppliers and arrange them to be sent to the buyer and does not want the buyer and supplier know each other. The middleman is entitled to substitute its own invoice for the one of the supplier and acquire the difference as his profit in transferable letter of credit mechanism. Important Points of Consideration: A letter of credit can be transferred to the second beneficiary at the request of the first beneficiary only if it expressly states that the letter of credit is "transferable". A bank is not obligated to transfer a credit. A transferable letter of credit can be transferred to more than one second beneficiary as long as credit allows partial shipments. The terms and conditions of the original credit must be indicated exactly in the transferred credit. However, in order to keep the workability of the transferable letter of credit below figures can be reduced or curtailed. Letter of credit amount any unit price of the merchandise (if stated) the expiry date the presentation period or the latest shipment date or given period for shipment. The first beneficiary may demand from the transferring bank to substitute his name for that of the applicant. However, if a document other than invoice required in the transferable credit must be issued in a way to show the applicant's name, in such a case that requirement must be indicated in the transferred credit. Transferred credit cannot be transferred once again to any third beneficiary according to the request of the second beneficiary. Untransferable LC
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It is said to the credit that seller cannot give a part or completely right of assigned credit to somebody or to the persons he wants. In international commerce, it is required that the credit will be untransferable. Usance LC It is kind of credit that won't be paid and assigned immediately after checking the valid documents but paying and assigning it requires an indicated duration which is accepted by both of the buyer and seller. In reality, buyer will give an opportunity to the seller to pay the required money after taking the related goods and selling them. At Sight LC It is a kind of credit that the announcer bank after observing the carriage documents from the seller and checking all the documents immediately pays the required money. Red Clause LC In this kind of credit assignment seller before sending the products can take the pre-paid and parts of the money from the bank. The first part of the credit is to attract the attention acceptor bank. The reason why it named so, is that the first time this credit is established by the assigner bank, to take the attention of the offered bank, the terms and conditions were written by red ink, from that time it became famous with that name. Back to Back LC In this type of LC consisted of two separated and different types of LC. First one is established in the benefit of the seller that is not able to provide the corresponding goods for any reasons. Because of that reason according to the credit which is opened for him, neither credit will be opened for another seller to provide the desired goods and sends it. Back-to-back L/C is a type of L/C issued in case of intermediary trade. Intermediate companies such as trading houses are sometimes required to open L/Cs by supplier and receive Export L/Cs from buyer. SMBC will issue a L/C for the intermediary company which is secured by the Export L/C (Master L/C). This L/C is called "Back-to-back L/C".
Legal basis
Legal writers have failed to satisfactorily reconcile the banks undertaking with any contractual analysis. The theories include: the implied promise, assignment theory, the novation theory, reliance theory, agency theories, estoppels and trust theories, anticipatory theory, and the guarantee theory.[6] Davis, Treitel, Goode, Finkelstein and Ellinger have all accepted the view that documentary credits should be analyzed outside the legal framework of contractual principles, which require the presence of consideration. Accordingly, whether the documentary credit is referred to as a promise, an
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undertaking, a chose in action, an engagement or a contract, it is acceptable in English jurisprudence to treat it as contractual in nature, despite the fact that it possesses distinctive features, which make it sui generis. Although documentary credits are enforceable once communicated to the beneficiary, it is difficult to show any consideration given by the beneficiary to the banker prior to the tender of documents. In such transactions the undertaking by the beneficiary to deliver the goods to the applicant is not sufficient consideration for the banks promise because the contract of sale is made before the issuance of the credit, thus consideration in these circumstances is past. In addition, the performance of an existing duty under a contract cannot be a valid consideration for a new promise made by the bank: the delivery of the goods is consideration for enforcing the underlying contract of sale and cannot be used, as it were, a second time to establish the enforceability of the bank-beneficiary relation.[citation needed] Andrs Menndez in his paper Letter of Credit, its Relation with stipulation for the benefit of a third party (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2019474) sustains that is feasible to typify letter of credit as contracts for a third-party beneficiary because there are in fact three different entities participating in the letter of credit transaction the seller, the buyer, and the banker. Because letters of credit are prompted by the buyers necessity and in application of the theory of Jean Domat the cause of a Letter of Credit is to release the buyer of his obligation to pay directly to the seller with legal tender. Therefore, Letter of Credit theoretically fits as a collateral contract accepted by conduct or in other words, an Implied-in-fact contract under the framework for third party beneficiary where the buyer participate as the third party beneficiary with the bank acting as the stipulator and the seller as the promisor. For him the term "beneficiary" is not used properly in the scheme of a letter of credit because a beneficiary (also, in trust law, cestui que use) in the broadest sense is a natural person or other legal entity who receives money or other benefits from a benefactor. Note that under the scheme of letters of credit, banks are neither benefactors of sellers nor benefactors of the buyers, and the seller doesnt receive money in gratuity mode. Thus is possible that letter of credit was one of those contracts that needed to be masked to disguise the consideration or Privity requrement, as a result this kind of arrangement, would make letter of credit to be enforceable under the action assumpsit because of its promissory connotation. A few countries including the United States (see Article 5 of the Uniform Commercial Code) have created statutes in relation to the operation of letters of credit. These statutes are designed to work with the rules of practice including the UCP and the ISP98. These rules of practice are incorporated into the transaction by agreement of the parties. The latest version of the UCP is the UCP600 effective July 1, 2007.[7] The previous revision was the UCP500 and became effective on 1 January 1994. Since the UCP are not laws, parties have to include them into their arrangements as normal contractual provisions. For more information on legal issues surrounding letters of credit, the Journal of International Commercial Law (http://www.law.gmu.edu/org/jicl/) at George Mason University's School of Law (http://www.law.gmu.edu/) published Volume 1, Issue 1 (http://www.law.gmu.edu/org/jicl/past) exclusively on the topic. .
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Subject to ICC's UCP 600, where the bank gives an undertaking (on behalf of buyer and at the request of applicant) to pay the shipper (beneficiary) the value of the goods shipped if certain documents are submitted and if the stipulated terms and conditions are strictly complied with. Here the buyer can be confident that the goods he is expecting only will be received since it will be evidenced in the form of certain documents called for meeting the specified terms and conditions while the supplier can be confident that if he meets the stipulations his payment for the shipment is guaranteed by bank, who is independent of the parties to the contract. Documentary collection (more secure for buyer and to a certain extent to seller) Also called "Cash Against Documents". Subject to ICC's URC 525, sight and usance, for delivery of shipping documents against payment or acceptances of draft, where shipment happens first, then the title documents are sent to the [collecting bank] buyer's bank by seller's bank [remitting bank], for delivering documents against collection of payment/acceptance Direct payment (most secure for buyer) Where the supplier ships the goods and waits for the buyer to remit the bill proceeds, on open account terms.
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Risks to the Issuing Bank Insolvency of the Applicant Fraud Risk, Sovereign and Regulatory Risk and Legal Risks Risks to the Reimbursing Bank no obligation to reimburse the Claiming Bank unless it has issued a reimbursement undertaking. Risks to the Beneficiary Failure to Comply with Credit Conditions Failure of, or Delays in Payment from, the Issuing Bank
See also
Uniform Customs and Practice for Documentary Credits Buyer's Credit Documentary collection
References
1. ^ Letter of Credit explained What is a letter of credit? (http://www.loanuniverse.com/letters.html) . LoanUniverse.com. 2. ^ Understanding and Using Letters of Credit, Part I (http://www.crfonline.org/orc/cro/cro-9-1.html) . Credit Research Foundation. 3. ^ See Ficom S.A. v. Socialized Cadex [1980] 2 Lloyds Rep. 118. 4. ^ United City Merchants (Investments) Ltd v Royal Bank of Canada (The American Accord) [1983] 1.A.C.168 at 183 5. ^ J. H. Rayner & Co., Ltd., and the Oilseeds Trading Company, Ltd. v.Ham bros Bank Limited [1942] 73 Ll. L. Rep. 32 6. ^ For extensive analysis See Finkelstein, H. Legal Aspects of Commercial Letters of Credit, pp. 275-295 7. ^ Dominique Doise,The 2007 Revision of the Uniform Customs and Practice for Documentary Credits (UCP 600)[1] (http://www.alerionavocats.com/fr/expertise/publications/la-revision-2007-des-regles-etusances-uniformes-relatives-aux-credits-documentaires-ruu-600/)
External links
Anatomy of a Letter of Credit, showing an actual negotiated letter of credit (http://www.vulcanhammer.info/china/letter-of-credit.php) Letters of Credit and How They Work (http://www.lancasterpollard.com/news/letters-ofcredit) Credit Research Foundation - Understanding & Using Letters of Credit - Part 1 (http://www.crfonline.org/orc/cro/cro-9-1.html) Credit Research Foundation - Understanding & Using Letters of Credit - Part 2 (http://www.crfonline.org/orc/cro/cro-9-2.html) (in Persian) (http://banki.ir/danestaniha/214-general/2468-lc) Letter of Credit, its Relation with Stipulation for the Benefit of a Third Party (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2019474) Retrieved from "http://en.wikipedia.org/w/index.php?title=Letter_of_credit&oldid=519703482"
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Categories: Contract law Basic financial concepts Legal documents Letters (message) International trade This page was last modified on 25 October 2012 at 05:12. Text is available under the Creative Commons Attribution-ShareAlike License; additional terms may apply. See Terms of Use for details. Wikipedia is a registered trademark of the Wikimedia Foundation, Inc., a non-profit organization.
http://en.wikipedia.org/wiki/Letter_of_credit
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