Characteristics of commercial letters of credit
Characteristics of commercial letters of credit

The following Banking & Finance practice note provides comprehensive and up to date legal information covering:

  • Characteristics of commercial letters of credit
  • Purpose and uses of commercial letters of credit
  • An independent obligation (the autonomy principle)
  • Autonomy from the underlying transaction
  • Exceptions to the autonomy principle
  • The fraud exception
  • Injunctions against the beneficiary
  • Dealing in documents only
  • Documents to be presented under a commercial letter of credit
  • Doctrine of strict compliance
  • More...

Commercial letters of credit (also known as traditional letters of credit or L/Cs) are used in relation to the movement of goods in the context of international or domestic trade. They are often used as a method of payment under contracts of sale because they are a useful tool where a seller has concerns over the creditworthiness of its buyer or the jurisdiction in which its buyer is located.

They are sometimes referred to as documentary letters of credit or documentary credits.

By contrast, standby letters of credit are a different type of letter of credit. They serve a different purpose. They are used in similar circumstances to on demand guarantees or performance bonds to provide a means for securing payment or other obligations. They are a form of quasi-security. For information on standby letters of credit, see Practice Note: Characteristics of standby letters of credit and the Q&A What is the difference between a standby letter of credit and a letter of credit?.

Purpose and uses of commercial letters of credit

A commercial letter of credit is essentially an undertaking by a bank to pay the beneficiary of the letter of credit a specific sum within a specified time limit against the presentation of specific documents in accordance with the terms of the letter of credit.

Commercial letters of credit are most commonly used in international trading arrangements

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