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.

West's Encyclopedia of American Law, edition 2. Copyright 2008 The Gale Group, Inc. All rights reserved.

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.

Copyright © 1981-2005 by Gerald N. Hill and Kathleen T. Hill. All Right reserved.

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.

A Law Dictionary, Adapted to the Constitution and Laws of the United States. By John Bouvier. Published 1856.
References in periodicals archive ?
Considering applications of letter of credit, preventing from the assignment of revenues leads to valid and significant benefits for the account party.
Bank of America, acts as the letter of credit bank, the depositary, as well as issuing and paying agent.
Provided the company's bankers are comfortable with the risk of the buyer's bank and the letter of credit wording is in an acceptable form, the instrument may be used to advance funds up to a given percentage of the maximum letter of credit value, say 80 per cent, prior to shipment having taken place.
With a letter of credit, a small business can employ the financial clout of the bank.
In addition to the letter of credit, there are many methods available to pay your foreign source to ship to you in a timely manner, especially if you intend to sell during the traditionally busy holiday season.
A letter of credit, which is issued by banks, guarantees that a buyer's payment to a seller will be received in a timely manner.
* When negotiating treaty and facultative reinsurance terms, get a portion of the ultimate expected reinsurance recoverables covered by a letter of credit. For example, using your loss experience, you can estimate the outstanding reinsurance recoverables at three years out and get collateral for that amount.
A $75,000 letter of credit in favor of the 1R.S issued by a U.S.
In related news, the company announced the refinancing of its revolving credit, term loan and letter of credit facility with CIT Business Credit, a unit of CIT Group Inc.
National courts have required different standards of fraud to justify non-payment, or restraint of payment, under a letter of credit. The United Nations Commission on Trade Law (UNCITRAL) has adopted its own position.
In two recent instances, IRS field offices attempted to treat a note collateralized by a letter of credit as immediate income under the doctrine of constructive receipt, only to be rebuffed by the IRS's national office.
* Standby Letter of Credit in Lieu of Termination Liability Prepayments;