letter of credit

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Letter of Credit

A written instrument from a bank or merchant in one location that requests that anyone or a specifically named party advance money or items on credit to the party holding or named in the document.

When a letter of credit is used, repayment of the debt is guaranteed by the bank or merchant issuing it. For example, if a bank is aware that a prominent citizen is trustworthy and can safely be relied upon to settle the debts which he or she incurs, then a letter of credit will be offered to that person on the basis of his or her good reputation so the person can travel without carrying large sums of money.

Letters of credit were used frequently before credit cards and travelers' checks were in common usage.

letter of credit

n. a document issued by a bank guaranteeing to provide a customer a line of credit (automatic loan up to a certain amount) for money or security for a loan. Such a letter is used primarily to facilitate long-distance business transactions.

letter of credit

noun credit account, credit note, guaranty, negotiable instrument, paper credit, security
Associated concepts: financial guarantee, letter of delegaaion, letter of exchange, letter of introduction, letter of liiense, letters testamentary
See also: draft

LETTER OF CREDIT, contracts. An open or sealed letter, from a merchant in one place, directed to another, in another place or country, requiring him that if a person therein named, or the bearer of the letter, shall have occasion to buy commodities, or to want money to any particular or unlimited amount, either to procure the same, or to pass his promise, bill, or other engagement for it, the writer of the letter undertaking to provide him the money for the goods, or to repay him by exchange, or to give him such satisfaction as he shall require, either for himself or the bearer of the letter. 3 Chit Com. Law, 336; and see 4 Chit. Com. Law, 259, for a form of such letter.
     2. These letters are either general or special; the former is directed to the writer's friends or correspondents generally, where the bearer of the letter may happen to go; the latter is directed to some particular person. When the letter is presented to the person to whom it is addressed, he either agrees to comply with the request, in which case he immediately becomes bound to fulfill all the engagements therein mentioned; or he refuses in which case the bearer should return it to the giver without any other proceeding, unless, indeed, the merchant to whom the letter is directed is a debtor of the merchant who gave the letter, in which case he should procure the letter to be protested. 3 Chit. Com. Law, 337; Mal., 76; 1 Beawes. 607; Hall's Adm. Pr. 14; 4 Ohio R. 197; 1 Wilc. R. 510.
     3. The debt which arises on such letter, in its simplest form, when complied with, is between the mandator and the mandant; though it may be so conceived as to raise a debt also against the person who is supplied by the mandatory. 1. When the letter is purchased with money by the person wishing for the foreign credit; or, is granted in consequence of a check on his cash account, or procured on the credit of securities lodged with the person who granted it; or in payment of money due by him to the payee; the letter is, in its effects, similar to a bill of exchange drawn on the foreign merchant. The payment of the money by the person on whom the letter is granted raises a debt, or goes into account between him and the writer of the letter; but raises no debt to the person who pays on the letter, against him to whom the money is paid. 2. When not so purchased, but truly an accommodation, and meant to raise a debt on the person accommodated, the engagement, generally is, to see paid any advances made to him, or to guaranty any draft accepted or bill discounted and the compliance with the mandate, in such case, raises a debt, both against the writer of the letter, and against the person accredited. 1 Bell's Com. 371, 6th ed. The bearer of the letter of credit is not considered bound to receive the money; he may use the letter as he pleases, and he contracts an obligation only by receiving the money. Poth. Contr. de Change, 237.

References in periodicals archive ?
Speakers at the seminar included: Vincent O'Brien, a member of the ICC Banking Commission and ICC and Chair of the ICC Market Intelligence Group; and Khalil Matar a Certified Documentary Credit Specialist, a certified internal auditor.
[23.] Kashani Zadeh, Hoda, comparative study of obligations of beneficiary and issuer of documentary credit against each other in The Uniform Customs and Practice for Documentary Credits (UCP600) and Article 5 of the Uniform Commercial Code of the United States of America (UCC), Journal of International Law, the Journal of the affairs Centre of International Law, Legal Assistance of presidential parliamentary affairs 26th year, 40: 314-344.
Global Banking News-September 28, 2012--Pharma company issues first RMB documentary credit in India(C)2012 ENPublishing - http://www.enpublishing.co.uk
As such, an L/C will remain an off-balance sheet exposure until the documents are presented and honoured by the bank, usually in accordance with the provisions of a standardised code of practice, the ICC Uniform Customs and Practice for Documentary Credits (UCP 600).
The offer also includes direct payment capability; full trade related services, eg documentary credits and collections; and foreign exchange transacting and hedging delivered via the bank's own internet banking platform.
With a series of sessions planned over the next couple of months to cover a host of topics in the field including international trade, the first workshop centred on one of the most successful set of private rules for trade ever developed, the Uniform Customs and Practice for Documentary Credits (UCP 600).
She specialises in complex commercial claims and cross-jurisdictional litigation, particularly relating to banking, financial services, documentary credits and international trade law.
Algiers, 26 August: The External Bank of Algeria (BEA) proposes to raw materials importers, deferred-payment documentary credits and interim credits, under the complementary finance act 2009, the bank CEO Mohamed Loukal told APS on Wednesday.
It produces universally accepted rules and guidelines for documentary credits, documentary collections, bank-to-bank reimbursement and bank guarantees.
To learn more about international business, global traders should become familiar with the United Nations Convention on Contracts for the International Sale of Goods (UNCISG) and the International Chamber of Commerce's Uniform Customs and Practices for Documentary Credits. The book Law of Letters of Credit, by John F Dolan, also is an internationally recognized authority on laws covering international payments under letters of credit.
The project will provide a facility to guarantee documentary credits originated by selected commercial banks in Pakistan.