In an L/C transaction, there are 4 parties involved:
When an international sale is agreed upon to be paid by way of an L/C, the buyer will take steps to establish through the buyer’s bank (usually at the buyer’s place of residence) a letter of credit in favour of the seller. In other words, the buyer opens a letter of credit for the overseas seller on terms agreed upon in the contract of sale.
By issuing the L/C, the buyer’s bank agrees to pay the seller a specified sum of money on presentation of such documents as are required by the terms of the letter of credit. An L/C thus evidences a contract between an issuing bank and a seller. It is distinct and independent from the contract of sale although both the L/C and the contract of sale relate to the same transaction.
Prudence dictates that the buyer takes the necessary steps to open an L/C giving the buyer enough time to comply with the import licensing or monetary control regulations of the importing country. The best protection which might thus be afforded to a seller is to request the immediate establishment of an irrevocable Letter of Credit in the port of shipment, current for the duration of the agreed shipping delay. An irrevocable L/C, once established by the issuing bank, is a commercial credit from which neither the issuing bank nor the buyer can withdraw.
The seller and buyer should confirm that:
There are however potential pitfalls that parties to a Letter of Credit should be aware of:
Comasters is able to advise a Buyer on the pertinent steps in arranging a Letter of Credit and can put the Buyer in touch with the appropriate financial institution. We are also able to advise a Seller who is intending to receive an international payment by way of an L/C.
© Comasters 2001. Revised Nov 2003.
Important: This is not advice. Clients should not act solely on the basis of the material contained in this paper. Our formal advice should be sought before acting on any aspect of the above information.