Letters of Credit This paper will discuss letter

A commercial letter of credit is a legal undertaking by a bank or other lender to pay a certain designated "beneficiary" if terms and conditions prescribed in the letter are satisfied and certain stipulated documents are tendered. The beneficiary is usually the seller of the goods in the transaction; the buyer in the transaction is referred to as the "account party." The letter of credit represents an obligation by the issuing bank to pay the designated beneficiary; underlying this obligation is a transaction between the buyer and the seller. The letter assures the seller, before he parts with his goods, that he will be paid by a bank rather than by the less creditworthy buyer. The buyer is then obligated to pay the bank. Consequently, the letter of credit is completely independent of the underlying transaction, in that compliance by either party with the terms of the transaction is not necessary for the issuing bank to be obligated to pay the seller. The bank's obligation is dependent solely upon compliance with the conditions and terms of credit; often, in the case of a documentary letter of credit

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g transaction. Even though a beneficiary may meet his obligations under the sales contract with the buyer, he cannot expect the issuer to honor the credit if he presents documents which do not conform to the terms of the credit. It is not the responsibility of the issuer to judge whether the terms of the underlying contract have been met. In one case, the terms of the credit required that a certificate be presented which stated that the freight charges had been "prepaid." The certificate which was actually presented had no such statement but did have a box at the top marked "cash" which was crossed out. The beneficiary presented evidence of a trade custom which interpreted the crossed out box as indicating that the freight charges had been prepaid; in fact, the beneficiary had prepaid the charges, complying with the underlying contract. The beneficiary thus said that since this was a trade custom, banks should be obligated to adhere to it. the court, however, held that banks were not bound to follow customs in other trades. The problem of completely separating the letter of credit from the underlying transaction is that the issuer may be obligated to pay the beneficiary event though the beneficiary has perpetrated a frau
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Approximate Word count = 4953
Approximate Pages = 20 (250 words per page)

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