Financing Under ITL

Question 1

Letter of Credit - Documentary Credits

Answer 1

A Letter of Credit (LC) is a financial instrument issued by a bank guaranteeing that a seller will receive payment in full as long as certain delivery conditions have been met

Question 2

What is UCP 600?

Answer 2

UCP 600 is the Uniform Customs and Practice for Documentary Credits, published by the International Chamber of Commerce (ICC), which provides standardized rules for LCs used globally.

Question 3

Who are the parties to a Letter of Credit?

Answer 3

1. Applicant – The buyer/importer.
   
   2. Issuing Bank – The buyer’s bank.
   3. Beneficiary – The seller/exporter.
   4. Advising Bank – Usually in seller’s country; authenticates LC.
   5. Confirming Bank (optional) – Guarantees payment in addition to the issuing bank.
   6. Negotiating Bank – Examines documents and pays if terms are met.

Question 4

What are the types of Letters of Credit?

Answer 4

• Revocable LC – Can be amended/cancelled without beneficiary’s consent.
• Irrevocable LC – Cannot be changed without all parties agreeing.
• Confirmed LC – Guaranteed by a second bank (the confirming bank).
• Revolving LC – Replenished automatically over time.
• Transferable LC – Can be passed to a third party.
• Standby LC – Acts like a guarantee in case of default.

Question 5

What is the Autonomy Principle?

Answer 5

The LC is independent from the underlying contract of sale. The bank deals only with documents, not goods or performance.

Question 6

What is the Principle of Strict Compliance?

Answer 6

Documents presented under the LC must strictly match the terms and conditions of the credit.

Question 7

What is the Fraud Exception?

Answer 7

The autonomy principle may be overridden in cases of clear fraud, especially where the seller has no right to be paid.