Title

V.2.5 - Payment of contract price through letter of credit

Content

No. V.2.5 - Payment of contract price through letter of credit

An agreement by the parties to effect payment through a letter of credit (documentary credit, L/C) means any arrangement, however named or described, whereby a bank (the "issuing bank") acting at the request and on the instructions of a customer (the "applicant") or on its own behalf,

i)

is to make a payment to or to the order of a third party (the "beneficiary"), or is to accept and pay bills of exchange (draft(s)) drawn by the beneficiary, or

ii)

authorizes another bank to effect such payment, or to accept and pay such bills of exchange (draft(s)), or

iii)

authorizes another bank to negotiate,

against stipulated document(s), provided they appear, on their face, to be in compliance with the terms and condition of the credit, to be determined according to international standard banking practices as reflected in the Uniform Customs and Practices for Documentary Credits (UCP) issued by the International Chamber of Commerce. 

Commentary

1 Opening a letter of credit (documentary credit, L/C) has become a standard way of payment by buyers/importers in international trade. The abstract and binding undertaking of the issuing bank, often confirmed by a bank in the country of the seller/exporter, to pay the contract price if the documents provided for in the L/C agreement between the parties are presented to the bank by the seller/exporter and are considered to be "clean on their face", is almost as good as a cash payment by the buyer and provides security for the seller/exporter who can be sure to receive his money while the goods are still in transit to the buyer/importer.

2 Almost all documentary credit transactions are governed today by the Uniform Customs and Practices for Documentary Credits (UCP) which are formulated and published exclusively by the International Chamber of Commerce (ICC) in Paris, France. Because of their global and longstanding use and recognition, the UCP must be considered as part of transnational law.

References

Doctrine

Fouchard, Philippe, L'Arbitrage Commercial International, Paris 1965

Goldman, Berthold, Frontières du Droit et Lex Mercatoria, 9 Archives de Philosophie du Droit 1964, at 177 et seq.Schmitthoff, Clive, International Trade Usages, Institute of International Business Law And Practice Newsletter, Special Issue, ICC Publ.440,4, Paris 1987Stoufflet, Jean, L'oeuvre normative de la Chambre de commerce internationale dans le domaine bancaire, in: Etudes offertes à Berthold Goldmann, Paris 1982, at 361 et seq.

National Legislation

Czechoslovak International Trade CodeGIW GDR

Arbitral Awards

ICC Award No. 143, World Trade, November 1932, at 11 et seq.ICC Award No. 3820, YCA 1982, at 134 et seq.

Model Terms

ICC Uniform Customs and Practice for Documentary Credits

Model Laws

Uniform Commercial Code (USA)

Contract Clauses

1. Contractual Clause Providing for Use of a Letter of CreditSales & Purchase Contract