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10 Currents: Int'l Trade L.J. 37 (2001)
The Application of the Letter of Credit Form of Payment in International Business Transactions

handle is hein.journals/curritlj10 and id is 39 raw text is: D I A K0UDRA CH0V Mi - n - i ie I oi 0| LI. mlI!~U !i l iiu-e~ l[~a 1 I. INTRODUCTION A letter of credit, from a legal perspec- tive, is best defined as a complex of con- tractual obligations. The letter of credit is a form of non-monetary account settlement, that is a conditional obligation of the bank to make a payment to a beneficiary, depending on certain criteria. In order to start a transaction of this manner, the ben- eficiary needs to present the appropriate documents to the bank for issuance. The letter of credit agreement defines the gov- erning conditions and what documents are required for the transaction to take place. These documents normally include the bills of lading and other evidence of compliance by the seller. The letter of credit originated in the Middle Ages. The English name, letter of credit, is a derivative from the French word, accreditif meaning a power to do something, which in turn is a derivative of the Latin word, accreditivus, meaning trust. In the Middle Ages, a letter of cred- it was used as a means of monetary transfer. A traveler, who did not, or could not, take cash money with him on his journeys, would give his money in trust to his banker, and the banker would issue to him a letter of credit. When the traveler reached his des- tination, he could convert the letter of cred- it back into cash by presenting it to the dis- tant bank. In fact, the letter of credit is a derivative of a transferable bill of exchange. Although prevalent in the international sphere, the standard letter of credit is not Dr. Serguei A. Koudriachov received his Ph.D. in Economics from the World Technological University Paris-Moscow in 1999. Dr. Koudriachov also holds a Master of Arts in International Business from Webster University Vienna and a Bachelor of Arts in Management from Webster University Vienna. very common in purely domestic transac- tions as a form of payment. The main rea- son for this is that the sellers security of payment can be guaranteed by government afforded legal protection. Moreover, the rel- ative cost ineffectiveness and the lengthy duration of the document turnover process, makes the letter of credit an unattractive form of payment for domestic transactions. The popularity of the letter of credit, as a tool of international business transac- tions, increased during the middle of the nineteenth century. The need for the inter- national unification of norms and rules for the usage of the letter of credit appeared almost simultaneously.' Additionally, the International Chamber of Commerce (ICC) took an active role in unifying the rules regarding the letter of credit. For example, in 1993, the ICC began publish- ing the Uniform Customs and Practice for Commercial Documentary Credit (UCP), which regulated the transaction procedures involving the use of letters of credit.2 Today, the 6th edition of the 1993 UCP Publication No. 500 (UCP 500) is in operation. II. DIFFERENT TYPES OF LETTERS OF CREDIT When the letter of credit is used as a form of payment, several parties are involved. The applicant is the client who initiates the transaction and, in accordance with her request, goes to the emitting bank to open a letter of credit account. The emit- ting bank is the financial institution who issues the letter of credit, and whose duty it is to make payment. The applicant is also the buyer in the underlying contract. The beneficiary is a person, for whom the letter of credit account is opened, and who is the seller in the underlying contract. The issu- ing bank is the bank authorized by the emitting bank to check the correctness of the documents and monetary transfer. The advising bank is the bank informing the beneficiary about the opening of the letter of credit account. The confirming bank is the bank that shares the responsibility of payment with the issuing bank to the ben- eficiary. The reimbursement bank is the bank which in fact makes the process of monetary transfer on the account of the beneficiary. These are only some of the par- ticipants in the business transaction. Very often, the same bank can act in multiple functions. For example, the advising bank can act as an issuing and confirming bank; the confirming bank usually acts as issuing bank; the emitting bank can act as an appli- cant if a letter of credit account was opened for personal operations under the bank's registered name. There are specific types of letters of cred- =I CURRENTS SUMMER 2001

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