Banking & Documentary credits

Our experienced team of International Trade Lawyers are experts in all areas of Banking and Documentary Credits.

Documentary Credits (also known as Letters of Credit (LCs)) are one of the most secure instruments available to international traders, as protects buyers (ensuring shipment) and sellers (securing the payment).

We have advised companies on Letters of Credit in all their forms for many years, guaranteeing that import / export transactions are secure.

This involves prior advice on the operation (i.e. sales of goods contract), drawing up a co-accepted draft of the LC matching our clients’ needs, negotiation of fees with the banks involved, an exhaustive review of the conditions of the LC, including shipping and customs regulatory requirements, all commercial aspects, and required official and non-official documents.

We negotiate with companies, banks and all parties involved, if you wish, on your behalf, to ensure that the operation is safe.

We understand that companies operate in a global market. In this context, international legal advice and a solid legal base for business operations become essential to govern the relationships between the different agents (exporters, importers, manufacturers or suppliers), while minimize risks.

LC is an effective payment instrument, but it is key to know how the letter operates internally to prevent the lack or error in a document or date, or regulatory requirements that prevent it from being paid.The existence of such discrepancies can make the transaction unsuccessful, and CPM LAWYERS can help you avoid them.


What Is a Letter of Credit?

A letter of credit (LC), also known as a documentary credit is a payment mechanism used in international trade to provide an economic guarantee from a creditworthy bank to an exporter of goods.

An LC is a commitment by a bank on behalf of the buyer that payment will be made to the exporter, provided that the terms and conditions stated in the LC have been met, as verified through the presentation of all required documents.

Most letters of credit are governed by rules promulgated by the International Chamber of Commerce (ICC) known as Uniform Customs and Practice for Documentary Credits, UCP 600.

Due to the nature of international dealings, including factors such as distance, differing laws in each country, different time zones, and different languages, the use of letters of credit has become a very important aspect of international trade.A letter of credit spells out the details so that everybody is on the same page, which provides certainty to the transactions.


How a Letter of Credit Works

  • Typically, after a sales contract has been negotiated, and it is agreed that a LC will be used as the method of payment, the Applicant will contact a bank to ask for a letter of credit to be issued.
  • The issuing bank will issue the letter of credit, meaning that it will provide a promise to pay the seller upon presentation of certain documents.
  • Once the Beneficiary (the seller) receives the LC, it will check the terms to ensure that it matches with the contract and will either arrange for shipment of the goods or ask for an amendment to the LC so that it meets with the terms of the contract.
  • The LC is limited in terms of time, the validity of credit, the last date of shipment, and in terms of how much late after shipment the documents may be presented to the Nominated Bank.
  • Once the goods have been shipped, the Beneficiary will present the requested documents to the Nominated Bank. This bank will check the documents, and if they comply with the terms of the LC the issuing Bank is bound to honour the terms of the letter of credit by paying the Beneficiary.


What Can Go Wrong?

Letters of credit make it possible to reduce risk while continuing to do business. They are important and helpful tools, but they only work when you get all the details right. A minor mistake or delay can wipe out all the benefits of a letter of credit.

If you rely on a letter of credit to receive payment, make sure you:

  • Review all requirements for the letter of credit before agreeing to any deal.
  • Understand all the documents required
  • Will be able to obtain all the necessary documents for the letter of credit.
  • Understand the time limits associated with the letter of credit, and whether they are reasonable.
  • Know how quickly your service providers (shippers, etc.) will produce documents for you.
  • Can get the documents to the bank on time.
  • Verify all documents required by the letter of credit and match them to the letter of credit application exactly. Even typographical errors or common substitutions will be considered as “discrepancies”.
  • If the documents do not comply with the terms of the Letter of Credit, they are considered  At this point, the Nominated Bank will inform the Beneficiary of the discrepancy and offer a number of options depending on the circumstances after consent of applicant.

CPM LAWYERS have encountered cases of having to bring the bank to court to resolve the interpretation of discrepancies to ensure payment of the LC to the client.


When Does Payment Happen?

A beneficiary only gets paid after performing specific actions and meeting the requirements spelled out in a letter of credit.

LC is a conditional undertaking to pay a certain amount of money, given by the issuing bank, at the request of the applicant to a beneficiary, upon presentation of specified documents. So, the presentation of documents specified is the essential condition for triggering the payment obligation.

A complying presentation means a presentation that is in accordance with the terms and conditions of the LC, the applicable provisions of UCP 600 and international banking practice. The banks are bound to honour a complying presentation. That is the essence of the irrevocable undertaking under an LC. Honour means to pay at sight if the LC is available by sight payment or to incur a deferred payment undertaking and pay at maturity.


Letter of Credit: Terms

UCP 600 regulates common market practice within the letter of credit market. It defines a number of terms related to LCs which are crucial to understand the role financial institutions play within. These include:

  • The Applicant is the party who requests the LC to be issued; this will normally be the buyer.
  • The Beneficiary is the party who receives payment; this will normally be the seller (UCP600 Art.2 defines the beneficiary as «the party in whose favour a credit is issued»).
  • The Issuing Bank is the bank that issues the credit, usually following a request from an Applicant.
  • The Nominated Bankis a bank mentioned within the LC at which the credit is available.
  • The Advising Bankis the bank that receives the LC from the issuing bank and notifies the beneficiary that the letter is available, send the original credit to the Beneficiary or their Nominated Bank, and provide the Beneficiary or their Nominated Bank with any amendments to the letter of credit.
  • Confirmationis an undertaking from a bank other than the issuing bank to pay the Beneficiary for a Complying Presentation, allowing the Beneficiary to further reduce payment risk, although Confirmation is usually at an extra cost.
  • Confirming Bank is a bank that “guarantees” payment to the beneficiary if the requirements in the LC are satisfied. The issuing bank already guarantees payment, but the beneficiary may prefer a guarantee from a bank in her home country. This adds its confirmation to credit upon the issuing bank’s authorization or request thus providing more security to beneficiary.
  • Complying Presentationis a set of documents that meet with the requirements of the LC and all the rules relating to letters of credit.
  • Freight forwarder is a company that assists with international shipping. Freight forwarders often provide the documents exporters need to provide in order to get paid.
  • Shipper is the company that transports goods from place to place.
  • Legal counsel is a firm that advises applicants and beneficiaries on how to use letters of credit. It’s essential to get help from an expert who is familiar with these transactions.


Documents That May Be Requested for Presentation

Typically, the LC will request an original Bill of Lading as the use of a title document such as this is critical to the functioning of the Letter of Credit.However, the list and form ofdocuments is open to negotiation and might contain requirements to present documents issued by a neutral third-party evidencing the quality of the goods shipped, or their place of origin or place. Types of documents in such contracts might include:

  • Financial documents Bill of exchange, co-accepted draft
  • Commercial documents — Invoice, packing list
  • Shipping documents — Bill of Lading (ocean or multi-modal or charter party), airway bill, lorry/truck receipt, railway receipt, CMC other than mate receipt, forwarder cargo receipt
  • Official documents — license, legalization, origin certificate, inspection certificate, phytosanitary certificate
  • Insurance documents — insurance policy or certificate.



Several categories of LC’s exist which seek to operate in different markets and solve different issues. An example of these include:

  • Import/export
  • Revocable/ Irrevocable
  • Confirmed/Unconfirmed
  • Restricted/ Unrestricted
  • Deferred / Usance
  • At Sight
  • Red Clause
  • Back to Back
  • Standby Letter of Credit
  • Transferable


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