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 LETTER OF CREDIT
LC is a bank service ensuring payment of the amount indicated in the letter of
credit to the Seller as per the Buyer's instructions against the shipment of
goods, performance of other conditions stipulated in the letter of credit and
submittal of relevant documents.

Thus, upon transfer of ownership over the goods sent by the Seller to the
Buyer and submittal of the document confirming the fulfillment of other
conditions of the LC, the Bank (issuer) will ensure the transfer of payment to
the Seller's account.

Performance of LC
1. Buyer and Seller address the Bank for LC issue;
2. A special account is opened with the Bank for payments;
3. Buyer transfers the amount indicated in the contract to this account in the Bank;
4. Buyer submits a document confirming the transfer of ownership over delivered goods and
then the Bank transfers the funds from the special account to the Seller's account;
5. If the required documents are not submitted within the time period indicated in the
contract, the Bank returns the funds from the special account to the Buyer's account.

After a contract is concluded between a buyer and a seller, the buyer's bank supplies a letter
of credit to the seller.
Seller consign the goods to a carrier in exchange for a bill of lading.

Seller provides the bill of lading to bank in exchange for payment. Seller's bank then
provides the bill to buyer's bank, who provides the bill to buyer.

Buyer provides the bill of lading to carrier and takes delivery of the goods.

A letter of credit (LC), also known as a documentary credit, is a written commitment by

a bank on behalf of a buyer that payment be made to a seller provided that the terms and
conditions stated therein have been met.

A letter of credit is an important payment method in international trade. It is particularly

useful where the buyer and seller may not know each other personally and are separated by
distance, differing laws in each country and different trading customs. A letter of credit is
generally regarded to provide a good balance of security between the buyer and the seller,
because both rely upon the security of banks and the banking system to ensure that
payment is received and goods are provided. In a letter of credit transaction the goods are
consigned to the order of the issuing bank, meaning that the bank will not release control
until the buyer has either paid or undertaken to pay the bank for their guarantee.

In the event that the buyer is unable to make payment on the purchase, the seller may
make a demand for payment on the bank. The bank will examine the beneficiary's demand
and if it complies with the terms of the letter of credit, will honor the demand. Most letters
of credit are governed by rules promulgated by the International Chamber of
Commerce known as Uniform Customs and Practice for Documentary Credits. The current
version, UCP 600, became effective July 1, 2007. Banks will typically require collateral from
the purchaser for issuing a letter of credit and will charge a fee which is often a percentage
of the amount covered by the letter of credit.

Advantages of LC for the Buyer:

- Elimination of risk of losing money for the Buyer
- Payments are made after fulfilment of the Seller's contractual obligations
- Transfer of ownership over shipped goods to the Buyer within the period indicated in the
LC and according to other terms.

Advantages of LC for the Seller:

- Guarantee of payment independent of the Buyer (subject to the fulfilment of contractual
obligations)
- Possibility of payment before handing the goods over to the Buyer
- Possibility of execution of complex commercial contracts

TYPES OF LETTERS OF CREDIT

1. Irrevocable LC. This LC cannot be cancelled or modified without consent of the

beneficiary (Seller). This LC reflects absolute liability of the Bank to the other party.

2. Revocable LC. This LC type can be cancelled or modified by the Bank (issuer) at the
customer's instructions without prior agreement of the beneficiary (Seller). The Bank will
not have any liabilities to the beneficiary after revocation of the LC.
3. Stand-by LC. This LC is closer to the bank guarantee and gives more flexible
collaboration opportunity to Seller and Buyer. The Bank will honour the LC when the Buyer
fails to fulfill payment liabilities to Seller.

4. Confirmed LC. In addition to the Bank guarantee of the LC issuer, this LC type is
confirmed by the Seller's bank or any other bank. Irrespective to the payment by the Bank
issuing the LC (issuer), the Bank confirming the LC is liable for performance of obligations.

5. Unconfirmed LC. Only the Bank issuing the LC will be liable for payment of this
LC.

6. Transferable LC. This LC enables the Seller to assign part of the letter of credit to
other party(ies). This LC is especially beneficial in those cases when the Seller is not a sole
manufacturer of the goods and purchases some parts from other parties, as it eliminates the
necessity of opening several LC's for other parties.

7. Back-to-Back LC. This LC type considers issuing the second LC on the basis of the
first letter of credit. LC is opened in favor of intermediary as per the Buyer's instructions and
on the basis of this LC and instructions of the intermediary a new LC is opened in favor of
Seller of the goods.

8. Payment at Sight LC. According to this LC, payment is made to the seller

immediately (maximum within 7 days) after the required documents have been submitted.

9. Deferred Payment LC. According to this LC the payment to the seller is not

made when the documents are submitted, but instead at a later period defined in the letter
of credit. In most cases the payment in favor of Seller under this LC is made upon receipt of
goods by the Buyer.

10. Red Clause LC. The seller can request an advance for an agreed amount of the
LC before shipment of goods and submittal of required documents. This red clause is so
termed because it is usually printed in red on the document to draw attention to "advance
payment" term of the credit.
 CONCLUSION

Originally UCP has been drafted by the Banking Commission of the ICC, which
was comprised of the representatives of the banking community, which shows
the dominance of the banks and banking experts. Their dominance in UCP
drafting hints that in drafting UCP. ICC was acting as a private legislature. It
looks that the rules contain in the UCP are much beneficial for the banks than
any other party, and giving a limited chance to the judiciaries to interfere to
protect customers from any careless behaviour of the banks.

The authority to interpret the UCP rests in the ICC's Commission on Banking
Technique and Practice, which can apply these interpretations to solve the
problems arising in any case. Because of wide publicity and distribution of
commission's answers, their interpretation can be considered as an official
interpretation of the UCP. Commission can enhance, interpreting, and
sometimes amend the provisions of the UCP. The banks which deal with the
letters of credit, act upon these interpretations and any amendments. As in
theory, commission is only answerable to ICC members, therefore the chances
of any challenge to such interpretation is very low.

Role of courts in a letter of credit transaction

In Discount Records Ltd. v. Barclay Bank Ltd., the judge was reluctant to
“interfere with bankers' irrevocable credit and not least in the sphere of
international banking”. The position is same in many other cases. The apparent
reason for the reluctance of the judges to interfere looks that they are afraid
from the threats of the banking experts that their decisions would have an
unfavourable affect on international trade. The difficulties of the courts to
balance the rights and duties of all parties to a letter of credit transaction have
increased.

In Mannesman Handel AG v. Kaunlaran Shipping Corporation, the Swiss

bank argued that the bank was in rejecting the documents by the German
company relying on the independence principle and the discrepancies appeared
on the documents. The court was asked not to apply the good faith principle
otherwise the court “would be calculated to undermine if not destroy the
doctrine of strict compliance and to blur if not extinguish the distinction
between transactions concerning goods and transactions concerning
documents.” Normally the judicial decisions relating to the legal aspects of
documentary credits base on either the express intentions of the parties or
established business practice at the time, the parties entered in a contractual
relationship. In cases where the UCP provisions are different from business
practice, a court will apply the UCP if the UCP is incorporated in the contract of
the parties. It shows that courts have assented to the entire documentary credit
system being run by the banking industry and eventually abstaining the courts to
intervene to balance the legal rights and duties amongst all the parties.