Intricacies Involved in an International Transaction by ‘Letter of Credit’

Abstract

In this paper, an endeavor has been made to address the intricacies involved in an international transaction by a Letter of Credit, the different types of Letters of Credit, and the differing obligations of the buyer and seller attached to each of the transactions. In the course of my discussions I will also be analyzing as to how, the Letter of Credit has gained prominence in the international trade and the discrepancies, which flow along with it.Documentary letters of credit or documentary drafts are often used to protect the interests of both buyer and seller. These two methods require that payment be made based on the presentation of documents conveying the title and that specific steps have been taken. Letters of credit and drafts can be paid immediately or at a later date. Drafts that are paid upon presentation are called sight drafts. Drafts that are to be paid at a later date, often after the buyer receives the goods, are called time drafts or date drafts. Letters of credit: ‘A letter of credit adds a bank's promise to pay the exporter to that of the foreign buyer provided that the exporter has complied with all the terms and conditions of the letter of credit. The foreign buyer applies for issuance of a letter of credit from the buyer's bank to the exporter's bank and therefore is called the applicant; the exporter is called the beneficiary’.‘A letter of credit is a written commitment by a bank to make payment at sight of a defined amount of money to a beneficiary (exporter) according to the terms and conditions specified by the importer (applicant). The letter of credit should set a time limit for completion and specify which documents are needed to confirm the transaction's fulfillment.’