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transnational law transnational law (lex mercatoria or international business law) and "Payment of contract price through documentary credit" 2016-03-01 13:58:16 https://www.trans-lex.org/img/logo_ball.png
Principle

No. V.2.5 - Payment of contract price through documentary credit

An agreement by the parties to payment through Documentary Credit (Letter of Credit, L/C) means any arrangement, however named or described, whereby a bank (the "Issuing Bank") acting at the request and on the instructions of a customer (the "Applicant") or on its own behalf,

i)

is to make a payment to or to the order of a third party (the "Beneficiary"), or is to accept and pay bills of exchange (Draft(s)) drawn by the Beneficiary, or

ii)

authorizes another Bank to effect such payment, or to accept and pay such bills of exchange (Draft(s)), or

iii)

authorizes another Bank to negotiate,

against stipulated document(s), provided they appear, on their face, to be in compliance with the terms and condition of the credit, to be determined according to international standard banking practices as reflected in the UCP issued by the International Chamber of Commerce. 

Commentary
1 Opening a documentary credit (letter of credit, L/C) has become a usual way of payment by buyers/importers in international trade. The abstract and binding undertaking of the issuing bank, often confirmed by a bank in the country of the seller/exporter, to pay the contract price if the documents provided for in the L/C agreement between the parties are presented to the bank by the seller/exporter and are considered to be "clean on their face", is almost as good as a cash payment by the buyer and provides security for the seller/exporter who can be sure to receive his money while the goods are still in transit to the buyer/importer.

2 Almost all documentary credit transactions are governed today by the Uniform Customs and Practices for Documentary Credits (UCP) which are formulated and published exclusively by the International Chamber of Commerce (ICC) in Paris, France. Because of their global and longstanding use and recognition, the UCP must be considered as part of transnational law.

Please cite as: "Commentary to Trans-Lex Principle , "
References
Arbitral Awards
Doctrine
Model Laws
Model Terms
National Legislation
Contract Clauses
1. Contractual Clause Providing for Use of a Letter of Credit
Sales & Purchase Contract
Payment
(...) Buyer shall establish in favor of Seller an irrevocable letter of credit negotiable on sight draft through a first class international bank satisfactory to Seller, which shall be received by Seller immediately after conclusion of the contract. The letter of credit shall be valid and effective for at least {X} days after the final date of the term of shipment for negotiation of the relative draft. The substance and forms of the letter of credit shall be acceptable to Seller in writing (...)
Payment Term
(...) Within {X} days of Contract Execution, the Buyer shall establish an irrevocable documentary letter in favor of the Seller in amount of {X} for payments specified in the Payment Schedule paragraphs. The letter of credit shall be substantially in the format set forth in Annex {X} hereto (the Letter of Credit). The Letter of Credit shall be issued by a bank acceptable to the Seller and confirmed by a United States branch of a bank acceptable to the Seller. The Letter of Credit shall be freely negotiable and payable in the United States (...) - International Contracting: Law and Practice - Larry A. DiMatteo - §2.05 A - S. 23.
Letter of Credit
The Letter of Credit is to be drawn in irrevocable form and be subject to the Uniform Customs and Practices for Documentary Credits as published and updated from time to time by the International Chamber of Commerce. The Letter of Credit must be advised through and confirmed by a bank located at the port of shipment acceptable to the seller. It must be payable at the counters of the confirming bank – (International Contracting: Law and Practice – Larry A. DiMatteo – §4.07 – S. 122)
Securing Payment
Buyer shall pay for the goods ordered by mean of a documentary collection whereby Seller shall draw a time draft, which shall be accepted by buyer against buyer's receipt of documents {specify documents} not less than {X} days after shipment, and payable {X} days after such acceptance. Payment of the draft shall be made by buyer's bank and acceptable to Seller – (International Contracting: Law and Practice – Larry A. DiMatteo – §3.25 – S. 103)
Loan Contract
Letters of Credit
(...) upon Borrower's request, Bank may, in its good faith business discretion, issue or have issued Letters of Credit denominated in Dollars or a Foreign Currency for Borrower's account (...) If, on the Maturity Date (...) there are any outstanding Letters of Credit, then on such date Borrower shall provide to Bank cash collateral in an amount equal to (i) with respect to Letters of Credit denominated in Dollars, one hundred and five percent (105.0%), and (ii) with respect to Letters of Credit denominated in a currency other than Dollars, one hundred ten percent (110.0%), of the Dollar Equivalent amount of all such Letters of Credit plus all interest, fees, and costs due or to become due in connection therewith (as estimated by Bank in its good faith business judgment), to secure all of the Obligations relating to such Letters of Credit.
2011
Letters of Credit Sublimit
As part of the Revolving Line, Bank shall issue or have issued Letters of Credit denominated in Dollars or a Foreign Currency for Borrower's account. The aggregate Dollar Equivalent amount utilized for the issuance of Letters of Credit shall at all times reduce the amount otherwise available for Advances under the Revolving Line. The aggregate Dollar Equivalent amount available to be used for the issuance of Letters of Credit may not exceed (i) the lesser of (A) the Revolving Line or (B) the Borrowing Base, minus (ii) the sum of all outstanding principal amounts of any Advances (including any amounts used for Cash Management Services and the Dollar Equivalent of the face amount of any outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit and any Letter of Credit Reserve).
2011
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