Part 3. Letter of Credit. Main Topics. Definition The Features of L/C The Parties Involved The Chief Contents of L/C The Procedures Involved in the Use of L/C The Varieties of L/C UCP. Definition Of L/C.
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Letter of credit is the chief means which is now most often used in the settlement of payment in international trade.
Aletter of credit, according to the draft of UCP500 (Uniform Customs and Practice for Commercial Documentary Credit), can be simply defined as a document by which a bank, upon the request of an importer, promises to effect the payment of the goods to the exporter.
The Applicant(开证申请人), who is usually the importer who applies to the bank for the letter of credit.
Opening Bank，or Issuing Bank(开证银行), which opens the letter of credit upon the request of the importer. It holds itself responsible for the payment of the goods. It is in the importer’s country.
Advising Bank，or Notifying Bank(通知银行), which is authorized by the issuing bank to transfer the letter of credit to the exporter’s bank. It is in the exporter’s country and usually the correspondent bank of the issuing bank. It is only responsible for the authenticity of the L/C.
Negotiating Bank(议付银行), which is willing to buy on discount the documentary draft drawn by the beneficiary. It can either or not be designated in the letter of credit. In the transfer of the bill of exchange, the negotiating bank can be taken as the bona fide bearer of the bill of exchange. The negotiating bank and the advising bank can be the same bank, as is to be decided by the letter of credit.
Paying Bank，or Drawee Bank(付款银行), which is designated by the letter of credit to pay the draft. In most cases, it is the issuing bank. It might also be some other bank, as when the currency used in the letter of credit is that of a third country, the paying bank can be a bank of that country. Once the paying bank has effected the payment, it can not claim it back by recourse.
Confirming Bank(保兑银行）, which is asked by the opening bank to confirm the L/C. If a bank has confirmed a L/C, it holds itself responsible for the negotiation or payment of the L/C. Mostly, the confirming bank is advising bank, but it can also be some other bank in the country of the exporter.
The chief contents of a L/C can be seen as a combination of the chief contents of a sales contract, the required documents and the bank assurance.
Generally a L/C contains the following provisions:
The parties involved, including the applicant, the issuing bank, negotiating bank, the paying bank, and the like;
Remarks about the L/C: such as the No. of the L/C, its type, the issuing date;
The amount of the L/C;
The clauses of the bill of exchange, such as the amount of the bill, the drawer and drawee, the paying date, etc;
The clauses about the documents, what documents are required, such as the invoice, the bill of lading, the insurance policy, the packing list, the certificate of origin and inspection certificate, etc. Also, the required number of copies of the documents;
Description of the goods or services, including specifications, quantity, packing, unit price, total amount, mode of transport, place of unloading, etc;
Additional conditions, such as the special provisions about the deal in accordance with the particular business or political situations of the importing country;
Guarantee clauses of the opening bank, which testifies that the opening bank will hold itself responsible for the payment to the beneficiary or the holder of the draft.