Letter of Credit

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Related to letters of credit: Standby Letters of Credit

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 ?
He noted that the seminar aimed to offer valuable insights, practical tips and case studies to enhance their awareness of key processes related to managing letters of credit, adding that participants were also informed about key challenges and methods that can be used to manage and minimise associated risks.
Absence of documents: Documents required by the letters of credit are missing.
Severn said it determined that a reserve against certain standby letters of credit was prudent due to insufficient collateral supporting these letters of credit as of June 30, 2014.
Our customers in Asia have requested us to facilitate the financing of their crude oil deliveries and we have responded with this initiative to facilitate Letters of Credit directly from banks based in Singapore.
Section 5-116 of the Codex and Article 46 of the Uniform Regulation of letters of credit has restricted the transferring the right of letter of credit setting.
So the Group pulled out from the agreement and submitted the letters of credit to the bank to have them liquidated.
Businesses in Europe tend to use letters of credit, but the financial crisis may make these instruments more difficult to obtain at a reasonable cost.
The rejection of Greek letters of credit may demonstrate a complete lack of faith in the ability of Greek banks to back the credit of Greek businesses like Manesiotis'.
The company has no borrowings or letters of credit outstanding under the Bank of America facility.
By KARACHI, April 06, 2010 (Frontier Star): The State Bank of Pakistan has decided that letters of credit (LCs) for import of second-hand machinery established up to June 30, 2010 will be also be eligible for refinancing under the Long Term Financing Facility (LTFF) Scheme, according to SMEFD circular letter No.3 issued here on Tuesday.
In recent years, with the world becoming a smaller place, the use of traditional 'vanilla' trade banking products such as letters of credit have been on a slow decline, or have at best levelled off, whilst international trade continued to increase year on year.
New letters of credit opened by commercial banks for private firms' imports stood at 61.19 billion Saudi riyals in the six months to June 30,down from 93.68 billion riyals a year earlier,according to central bank data published this week.