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KembaraXtra – Legal Terms – Letter of Credit
A letter of credit is a financial instrument issued by a bank guaranteeing payment to a seller, provided that specified documents are presented. It is widely used in international trade to reduce the risks associated with transactions between parties in different countries.
The key feature of a letter of credit is its independence from the underlying contract of sale. This means that the bank’s obligation to pay depends only on whether the required documents are submitted correctly, not on whether the goods themselves are satisfactory. This protects sellers from non-payment due to disputes over performance.
There are different forms, including irrevocable and confirmed letters of credit. An irrevocable letter cannot be cancelled without consent, while a confirmed letter involves an additional bank guaranteeing payment. These variations enhance security and trust in global commercial transactions.
A letter of credit is a financial instrument issued by a bank guaranteeing payment to a seller, provided that specified documents are presented. It is widely used in international trade to reduce the risks associated with transactions between parties in different countries.
The key feature of a letter of credit is its independence from the underlying contract of sale. This means that the bank’s obligation to pay depends only on whether the required documents are submitted correctly, not on whether the goods themselves are satisfactory. This protects sellers from non-payment due to disputes over performance.
There are different forms, including irrevocable and confirmed letters of credit. An irrevocable letter cannot be cancelled without consent, while a confirmed letter involves an additional bank guaranteeing payment. These variations enhance security and trust in global commercial transactions.
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