The Documentary Credit or Letter of Credit is an undertaking issued by a bank for the account of the buyer (the Applicant) to pay the supplier (the Beneficiary) the value of the Draft and/or Documents provided that the terms and conditions of the Documentary Credit are complied with.

contractual arrangements

Under a Documentary Credit operation, there exists a distinct triangular contractual arrangement:

[1] the sale contract between buyer and seller is evidenced by a Pro-Forma Invoice established by the seller.

     Pro forma invoice should feature:

• goods specifications

• currency and amount payable

• payment terms (sight or term)

• shipment / delivery terms (CIF, FOB, etc)

• mode of transport

• latest shipment date

• type of insurance (all risks, etc) (in case goods are insured by the supplier)

• supplier's bank details

• for whose account are overseas bank charges ( buyer or seller)

• whether the documentary credit needs to be confirmed by an overseas bank

[2] the relationship that exists between the applicant and the issuing bank

[3] the relationship that exists between the issuing bank and the negotiating / confirming / reimbursing bank.

Each contract is independent and a beneficiary can in no case avail himself of the contractual relationships existing between the banks or between the applicant and the issuing bank and the undertaking of a bank to pay, accept and pay draft(s) or negotiate and/or to fulfil any other obligation under the letter of credit is not subject to claims or defences by the applicant resulting from his relationships with the issuing bank or the beneficiary.

types of documentary credits

[an irrevocable documentary credit] constitutes a definite undertaking of the Issuing Bank, provided that the required documents as well as the terms and conditions of the documentary credit are compliant.  It cannot be amended, revoked or cancelled without the beneficiary's and/or the negotiating/confirming banks consent.

[an revocable documentary credit] may be amended revoked or cancelling prior to the presentation of the required documents by the beneficiary.

benefits

• facilitates financing

• provides legal protection

• assures expert examination of documents

[a documentary credit]

[a] is a facility provided by banks in international trade transactions.

[b] assures all the contracting parties that the issuing bank of a confirming bank, if any, will honour its obligation provided the terms and conditions of the documentary credit are complied with.

[c] assures payment on the basis of the documents and not based on the goods or services to which it may refer.