The letter of credit is the most important and common way of international payment nowadays. It removes the distrust between the seller and the buyer. It ensures the sellers can get the funds if the seller deliveries the correct goods and presents the correct documents stated in the letter of credit. It guarantees that the buyer gets the goods after payment.
As soon as the letter of credit is issued, it becomes the concordant promise between the seller and the buyer. The letter of credit is issued by the issuing bank according to the clauses of the contract. But the banks do not take part in the contract, or perform the responsibility stated in the contract. The business of letter of credit is a kind of dealing of documentaries. The banks just deal with documentaries.
Article 2 in the UCP600 defines that the letter of 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.
The letter of credit is of a kind of bank credit. In some countries or areas trade parties can issue the commercial letter of credit. But the bank letter of credit is more reliable than the commercial letter of credit.
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