Types of letter of credit | Types of L/C

There are five types of letter of credit. Each has different features and some are more secure than others. The most common types are-

1. Revocable letter of credit.
2. Irrevocable letter of credit
3. Confirmed letter of credit.
4. Transferable letter of credit.

Other types include-

1. Revolving credit.
2. Back-to-Back credit.

Revocable letters of credit.

According to article 8 (a) of the UCP 500 defines a revocable credit.

A revocable letter of credit may be revoked or modified for any reason, at any time by the issuing bank without notification. In practice bank normally inform the beneficiary of the withdrawal of credit. But the bank is not legally obliged to give prior notice to the seller. On presentation of document the bank shall have the right to revoke the credit. But once document are accepted it will not be revoke. The Common law & UCP1994 state that the nature of a documentary credit should be clearly indicated.

Case reference- Cape Asbestos CO Ltd vs Lloyd Bank Ltd.

Lloyds Bank Ltd advised the seller that, they had opened a credit in their favour & expressly mentioned this is merely an advice for the opening credit not a confirmation. The seller initially shipped 17 tons of cargo; the payment for the 17 tons was instructed by the buyer’s bank that the credit was cancelled. Lloyd Bank however fails to inform the beneficiary of the cancellation of credit. On presentation of document the banks refuse to pay. The seller brought an action against the bank & claiming that the bank had a duty to inform the seller of revocation. The court held the bank had no legal duty.

Irrevocable unconfirmed letter of credit.

Article 2 & 7(a) of the UCP defines irrevocable unconfirmed letter of credit.

The irrevocable unconfirmed letter of credit may not be revoked or amended without the agreement of the issuing bank, the confirming bank, and the beneficiary. An irrevocable letter of credit from the issuing bank insures the beneficiary that if the required documents are presented and the terms and conditions are complied with, payment will be made. If a letter of credit is irrevocable it is referenced on its face. The advising bank acts as an agent of issuing bank & does not gives an independent undertakes to pay the seller. The undertakings come from the issuing bank. Irrevocable letters of credit provide more security than revocable ones.The  issuing bank reject the documents of an unconfirmed irrevocable credit and litigation will be take place in a foreign jurisdiction.

Confirmed letters of credit.

A confirmed credit is always irrevocable.Where the letter of credit is confirmed the seller  received an undertaking from the confirming bank ( Situated in his country) that he will be paid as required in the required time on presentation of the documents. The UCP define confirmed credit is irrevocable according to article 2 & 8(a).So a confirmed letter of credit provides more security than an unconfirmed one. By confirming the letter of credit, the advisingbank agrees to guarantee payment even if the issuing bank fails to make it.

Transferable letters of credit.

Article 38(b) of the UCP defines a transferable letter of credit. It is alternative from of  back-to-back credit for a middleman seller in a transferable credit.Under a transferable credit the first benificiary transfer the whole or part of the credit to the second benificiary. A transferable credit arrangement is set up where the parties expressly agreed by the issuing bank.A transferable credit is transfer only once.The second beneficiary can not transfer the credit.

For example- Syan ( First beneficiary) in London sells 1000 lifeboats to buyer (Rose) in Malaysia. Syan is not a manufacture of lifeboats and has to purchase them from the manufacture (Tinto) in Cardiff. In this situation Syan pay Tinto by transferring right and documents as a second beneficiary from the credit set up by Rose.

Revolving letters of credit.

Revolving Credits are used between buyers and sellers who have a long-standing trading relationship and experience in the shipment of the goods. When the transaction conducted on a regular basis between seller and buyer this types of credit are revolves  for an agreed value or time. If the credit revolves with agreed value between the parties & once payment has been made against document the value of the credit will be automatically reinstated.

For example, if the buyer and seller come to an arrangement for monthly shipments over a period of twelve months, a revolving letter of credit with the value of one monthly shipment may be drawn upon twelve times by the seller.

Back-to-back letters of credit.

Back-to-back letters of credit may be used when an intermediary is involved. Upon the intermediary’s request the bank issues a back-to-back credit in favour of the supplier. A back to back letter of credit is a letter of credit which is opened on the basis of an existing non transferable credit. Back to back credits are quite often used to pay the ultimate supplier, such as the sugar mill or the refinery. Once the seller receives a letter of credit from the buyer, the seller opens another letter of credit with the ultimate supplier as the beneficiary, using the buyer’s letter of credit as collateral.

The parties to a Back-to-Back Letter of Credit are:

 

    1.  The buyer and his bank as the issuer of the original L/C.

    2.  The seller/manufacturer and his bank,

    3.  The manufacturer's subcontractor and his bank.

 Types of bill of lading

 Importance of Bill of Lading

 Endorsement of bill of lading

 Types of Bill of Lading

 What is Bill of Lading? | What is B/L?

 Duties of Charterers

 Who are charterers in Shipping

 Types of letter of credit | Types of L/C

 What is L/C?

 Stages in a Letter of Credit Transaction

==============================================================================

This site is mainly dedicated for Students of Law Schools, Law Universities, Students of Higher Education in Law, Admission in Law Schools, Scholars in Law, Students of Bar-at-Law, Law admission information, College of Law, Law Notes, Law Training, Law Tuition,  Law Study Guidelines, Business Law, Students of ACCA, CIMA, CFA,CA,ICWA,CPA, MBA