nal transactions, there are often two banks involved. The buyer applies to open a letter of credit in favor of the seller in another country. The bank in the buyer's country then notifies a bank in the seller's location to advise the seller that of the credit. After the seller ships the goods, he will present the required documents to his local bank; this bank will either pay the seller (if authorized to do so) or will transfer the documents to the buyer's local bank, which will wire the funds to the seller's local bank.
Two sources of law apply to the use of letters of credit. The first is the Uniform Commercial Code (UCC) and the second is the Uniform Customs and Practice for Documentary Credit (UCP), which was first published by the International Chamber of Commerce (ICC) in 1933. The UCC applies in most cases where general state law is used in the United States. New York and a few other states have given parties the option of being governed by the UCP if they so state in the letter of credit itself. In other states, the UCP would likely be accepted in cases where the parties desired and where the UCC provisions allow the parties to define their own responsibilities.
There are two main issues which concern commercial letters of credit: compliance with the credit provisions and fraud. The first issue deals with how strictly the parties must comply with the requirements stated in the letter of credit in order for the issuing bank to pay the agreed to amount. The second issue deals with cases of fraud, where one party does not adhere to the underlying contract, although ostensibly complies with the letter of credit terms.
Most often, the terms of the credit require that the buyer present documents to the issuing bank which conform to the instructions set forth in the letter. These terms are agreed upon by the parties before the letter is issued and are furnished to the issuing bank by the account party (buyer). ...