Client guide: Letters of Credit, the UCP600 and documentary requirements
Letters of credit (LCs) are one of the most common methods of payment for goods in international trade.
An LC is a contract by which a bank agrees to pay the beneficiary upon the happening of a specific event or, in connection with the export of specific goods, against the presentation of specified documents. The use of LCs to effect payment is widespread in international trade. This is because they offer security of payment for and receipt of goods to contractual counterparties who may be in different jurisdictions to each other – and who may be contracting to buy and sell goods which are located in a third jurisdiction, or which are in transit.
LCs are standalone contracts, separate from the sale contract, and banks are concerned only with the LC contract, not the sale contract. (Article 4 UCP 600). A feature common to all types of LCs is that money is raised on the documents, not on delivery of the goods (Article 5 UCP 600).
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