sionals advising exporters should have a good nderstanding of the UCP 500. The rules in the UCP 500 are drafted by and for the banking community. One of the major purposes is to protect the banks from liability in L/c transactions. The banks are providing a service - the financing of the transaction - and they expect to be protected from getting involved in disputes between the parties as to the terms of the contract of sale. For this reason "the independence principle" is a very important concept in LC transactions. This means that the LC, and the documents required under the LC for payment, are completely independent from the underlying transaction between buyer and selLetter of credit (L/c) is a widely accepted and commonly used payment method in international trade. They are usually issued by larger banks and contain a promise to pay a seller beneficiary) upon receipt of goods by a buyer if certain conditions outlined in the letter have been met.

There are three general principles governing the use of letters of credit:

1. The banks' responsibility to deal in documents only;
2. The rule of strict construction, which dictates that the terms and conditions of the letter of credit are to strictly adhered to; and
3. The rule of independence, which mandates that the letter of credit is to be considered independent from the sales contract or any other agreement between the parties.

Put simply, the Issuing bank has two main roles:

• To give a binding undertaking to the seller that if compliant documents are presented, the bank will pay the seller the amount due. This offers security to the seller
• To examine the documents, and only pay if these comply with the terms and conditions set out in the letter of credit. This protects the buyer's interests

Note that the letter of credit refers to documents representing the goods - not the goods themselves! Banks are not in the business of examining goods on behalf of their customers. Typically the documents requested will include a commercial invoice, a transport document such as a bill of lading or airway bill, an insurance document; but there are many others.

How secure is the L/c payment method ? Although an L/c is considered one of the most secure means of payment, exporters should understand that they can never totally control the payment process. Documents which are required to be presented under an L/c are frequently prepared by other people, and may not meet the strict compliance standards required by the banking community for payment. Sometimes banks which have not properly ensured their own reimbursement by customer (the buyer), apply very narrowly L/c principles to deny payment. Such denials have regularly been upheld by courts on grounds that the seller has not strictly complied with the terms of the L/c.

How to Secure your Payment ? Like most other things in life -prudence, knowledge and certain precautions can greatly reduce your risk. Following are certain steps that an exporter can take to maximize his control of the L/c process

Knowledge is Power The rules governing L/c are codified in a publication sponsored by the International Chamber of Commerce ("ICC"), known as the Uniform Customs and Practice for Documentary Credits. Professionals advising exporters should have a good nderstanding of the UCP 500. The rules in the UCP 500 are drafted by and for the banking community. One of the major purposes is to protect the banks from liability in L/c transactions. The banks are providing a service - the financing of the transaction - and they expect to be protected from getting involved in disputes between the parties as to the terms of the contract of sale. For this reason "the independence principle" is a very important concept in LC transactions. This means that the LC, and the documents required under the LC for payment, are completely independent from the underlying transaction between buyer and sel

ent from the sales contract or any other agreement between the parties.

Put simply, the Issuing bank has two main roles:

• To give a binding undertaking to the seller that if compliant documents are presented, the bank will pay the seller the amount due. This offers security to the seller
• To examine the documents, and only pay if these comply with the terms and conditions set out in the letter of credit. This protects the buyer's interests

Note that the letter of credit refers to documents representing the goods - not the goods themselves! Banks are not in the business of examining goods on behalf of their customers. Typically the documents requested will include a commercial invoice, a transport document such as a bill of lading or airway bill, an insurance document; but there are many others.

How secure is the L/c payment method ? Although an L/c is considered one of the most secure means of payment, exporters should understand that they can never totally control the payment process. Documents which are required to be presented under an L/c are frequently prepared by other people, and may not meet the strict compliance standards required by the banking community for payment. Sometimes banks which have not properly ensured their own reimbursement by customer (the buyer), apply very narrowly L/c principles to deny payment. Such denials have regularly been upheld by courts on grounds that the seller has not strictly complied with the terms of the L/c.

How to Secure your Payment ? Like most other things in life -prudence, knowledge and certain precautions can greatly reduce your risk. Following are certain steps that an exporter can take to maximize his control of the L/c process

Knowledge is Power The rules governing L/c are codified in a publication sponsored by the International Chamber of Commerce ("ICC"), known as the Uniform Customs and Practice for Documentary Credits. Professionals advising exporters should have a good nderstanding of the UCP 500. The rules in the UCP 500 are drafted by and for the banking community. One of the major purposes is to protect the banks from liability in L/c transactions. The banks are providing a service - the financing of the transaction - and they expect to be protected from getting involved in disputes between the parties as to the terms of the contract of sale. For this reason "the independence principle" is a very important concept in LC transactions. This means that the LC, and the documents required under the LC for payment, are completely independent from the underlying transaction between buyer and sel

. Typically the documents requested will include a commercial invoice, a transport document such as a bill of lading or airway bill, an insurance document; but there are many others.

How secure is the L/c payment method ? Although an L/c is considered one of the most secure means of payment, exporters should understand that they can never totally control the payment process. Documents which are required to be presented under an L/c are frequently prepared by other people, and may not meet the strict compliance standards required by the banking community for payment. Sometimes banks which have not properly ensured their own reimbursement by customer (the buyer), apply very narrowly L/c principles to deny payment. Such denials have regularly been upheld by courts on grounds that the seller has not strictly complied with the terms of the L/c.

How to Secure your Payment ? Like most other things in life -prudence, knowledge and certain precautions can greatly reduce your risk. Following are certain steps that an exporter can take to maximize his control of the L/c process

Knowledge is Power The rules governing L/c are codified in a publication sponsored by the International Chamber of Commerce ("ICC"), known as the Uniform Customs and Practice for Documentary Credits. Professionals advising exporters should have a good nderstanding of the UCP 500. The rules in the UCP 500 are drafted by and for the banking community. One of the major purposes is to protect the banks from liability in L/c transactions. The banks are providing a service - the financing of the transaction - and they expect to be protected from getting involved in disputes between the parties as to the terms of the contract of sale. For this reason "the independence principle" is a very important concept in LC transactions. This means that the LC, and the documents required under the LC for payment, are completely independent from the underlying transaction between buyer and sel

er), apply very narrowly L/c principles to deny payment. Such denials have regularly been upheld by courts on grounds that the seller has not strictly complied with the terms of the L/c.

How to Secure your Payment ? Like most other things in life -prudence, knowledge and certain precautions can greatly reduce your risk. Following are certain steps that an exporter can take to maximize his control of the L/c process

Knowledge is Power The rules governing L/c are codified in a publication sponsored by the International Chamber of Commerce ("ICC"), known as the Uniform Customs and Practice for Documentary Credits. Professionals advising exporters should have a good nderstanding of the UCP 500. The rules in the UCP 500 are drafted by and for the banking community. One of the major purposes is to protect the banks from liability in L/c transactions. The banks are providing a service - the financing of the transaction - and they expect to be protected from getting involved in disputes between the parties as to the terms of the contract of sale. For this reason "the independence principle" is a very important concept in LC transactions. This means that the LC, and the documents required under the LC for payment, are completely independent from the underlying transaction between buyer and sel

sionals advising exporters should have a good nderstanding of the UCP 500. The rules in the UCP 500 are drafted by and for the banking community. One of the major purposes is to protect the banks from liability in L/c transactions. The banks are providing a service - the financing of the transaction - and they expect to be protected from getting involved in disputes between the parties as to the terms of the contract of sale. For this reason "the independence principle" is a very important concept in LC transactions. This means that the LC, and the documents required under the LC for payment, are completely independent from the underlying transaction between buyer and seller.

The bank is not concerned if the contract between buyer and seller is being performed according to its terms. The bank's only concern is whether the documents presented by the seller conform to the documents required under the LC, and whether the documents are presented within the required time periods. The bank employees who examine documents presented under the L/c are essentially clerks. Their job is not to make judgment calls, but simply to see if the documents presented by the seller/ beneficiary comply strictly with the documents required by the LC. It is therefore very important to understand the rules as a lack of knowledge may invite disaster.

Your choice of Issuing Bank One way of securing some control on payment process is to choose a bank you know or familiar with. This implies that during negotiating seller should try to get the buyer to use a bank of the seller's choice to issue the L/c. The seller should find out from his/her own bank, preferably a bank with a substantial international presence, what corresponding bank it uses in the country of the buyer. If the buyer can have the L/c issued by that correspondent bank, the process can proceed more expeditiously. At the very least, the seller should insist that the buyer use a bank that is well-known and highly regarded by the banking community. The seller's own bank can provide information on the financial status and reputation of the foreign bank. Since a major purpose served by an L/c is that the issuing bank assumes the risk of the buyer's insolvency, if the bank itself is financially weak, the L/c may not serve its purpose.

When in doubt - Get Confirmation If the seller is not comfortable with the bank of the buyer's choice, the L/c should be confirmed by a prime world bank. When a prime bank confirms an L/c issued by a foreign bank, it takes upon itself the payment obligation. There is a charge for confirmation, which varies directly on perceived risk the prime bank believes it is taking in confirming the L/c. The question of who pays the prime bank's confirmation charges is negotiable, but if not negotiated in advance the bank may charge the beneficiary.

Simple Documentation The seller should ensure during negotiation that as few ocuments as possible are submitted to bank, that documents should have simple description and all documents called for by the L/c can in fact be produced. Seller should avoid dependence on unknown or unreliable parties (e. g. if bank documents include a certificate from the government of buyer's country or a signature from someone under buyer's control - complications may arise).