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, 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.