A documentary credit facilitates international trade by enabling individuals from different countries to purchase and sell goods. Essentially, it is a commitment from a bank to compensate the seller if the buyer fulfils their obligations. This system ensures that all parties receive what they anticipated and simplifies cross-border commerce.
A documentary credit is a financing arrangement that facilitates international transactions by authorizing a financial institution to make a payment to a third party at the request of a customer. This allows the importer to obtain credit and the exporter to receive expedited cash payment. For example, if a company in the United States wants to purchase goods from a supplier in China, the supplier may require upfront payment before shipping the goods. To mitigate the risk, the U.S. company can use a documentary credit. Their bank will issue a letter of credit to the Chinese supplier’s bank, guaranteeing payment upon receipt of the required shipping documents. Once the goods are shipped and the necessary documents are provided, the payment will be released to the Chinese supplier. Similarly, if an exporter in Germany wants to sell goods to a customer in Brazil who lacks the necessary funds upfront, the German exporter can request a documentary credit from the Brazilian customer’s bank. The Brazilian bank will issue a letter of credit to the German exporter’s bank, guaranteeing payment upon receipt of the required shipping documents. Once the goods are shipped and the necessary documents are provided, the payment will be released to the German exporter. These examples demonstrate how a documentary credit can mitigate risks in international transactions, providing peace of mind to both the importer and exporter that payment will be made upon document verification.
A documentary credit, also known as a letter of credit, is a financial instrument issued by a bank on behalf of a buyer to guarantee payment to a seller upon the fulfillment of certain conditions specified in the credit.
When a seller and buyer agree to use a documentary credit, the buyer’s bank issues the credit to the seller’s bank. The seller then ships the goods and presents the required documents to their bank, who verifies the compliance with the credit terms. If all conditions are met, the seller’s bank pays the seller and forwards the documents to the buyer’s bank for reimbursement.
Using a documentary credit provides security for both the buyer and seller. The buyer is assured that payment will only be made if the seller fulfills the agreed-upon conditions, while the seller is guaranteed payment upon meeting those conditions.
The specific documents required may vary depending on the terms of the credit, but common documents include commercial invoices, bills of lading, packing lists, insurance certificates, and certificates of origin.
Yes, a documentary credit can be amended if both the buyer and seller agree to the changes. Any amendments should be communicated through the banks involved in the transaction.
If the documents presented by the seller do not comply with the credit terms, the buyer’s bank may refuse to make payment. The seller will then have the opportunity to rectify the discrepancies or negotiate with the buyer for acceptance of the non-compliant documents.
A documentary credit can be canceled by the buyer if the goods have not yet been shipped or if both parties agree to cancel the credit. However, canceling a credit without the consent of the seller may result in legal consequences.
If the buyer fails to make payment under a documentary credit, the seller can approach their bank for assistance. The bank may take legal action against the buyer or utilize other means to recover the payment owed.
Yes, documentary credits are governed by international laws and regulations, primarily the Uniform Customs and Practice for Documentary Credits (UCP 600) published by the International Chamber of Commerce (ICC).
Yes, a documentary credit can be transferred to a third party if the credit allows for such transfer. The transfer is typically done through an assignment or negotiation process, involving the banks and the consent of all parties involved.
This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.
This glossary post was last updated: 17th April 2024.
To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.
- Page URL:https://dlssolicitors.com/define/documentary-credit/
- Modern Language Association (MLA):Documentary Credit. dlssolicitors.com. DLS Solicitors. May 09 2024 https://dlssolicitors.com/define/documentary-credit/.
- Chicago Manual of Style (CMS):Documentary Credit. dlssolicitors.com. DLS Solicitors. https://dlssolicitors.com/define/documentary-credit/ (accessed: May 09 2024).
- American Psychological Association (APA):Documentary Credit. dlssolicitors.com. Retrieved May 09 2024, from dlssolicitors.com website: https://dlssolicitors.com/define/documentary-credit/
Our team of professionals are based in Alderley Edge, Cheshire. We offer clear, specialist legal advice in all matters relating to Family Law, Wills, Trusts, Probate, Lasting Power of Attorney and Court of Protection.
All author posts