Understanding the Letter of Credit

Written by Michelle L. DelMar, Esq. | Jan 19, 2016 6:28:00 PM

One of the biggest risks in using a Letter of Credit, is not fully understanding the terms. Clarification can be obtained easily, with proper counsel.

A Letter of Credit is a Contract, however, the typical contract rules do not apply in every case. There are rigorous formalities and requirements. Banks, institutions and larger companies often have staff that are well trained and work exclusively in this area, however, businesses are at a higher risk of incurring significant transactional penalties resulting from misunderstanding of the terms.

It is critical that businesses on both sides of the transaction, fully understand the terms of the Letter of Credit before agreeing to them.

Beneficiaries of the Letter of Credit, should beware that Letter of Credit applicants have had increased success in preventing payment in the United States by obtaining court orders (injunctions) to stop their bank from paying demands on letters of credit by claiming, amoungst other things, that fraud was involved. For example, Courts have issued temporary or preliminary injunctions even when the beneficiary is not present at the hearing. Only thereafter does the beneficiary receive a notice from the issuing bank of dishonor and refusal to pay based upon the court order.

I can provide you with a cost effective, comprehensive legal analysis of the terms of your Letter of Credit, in terms that you can understand. In addition, I can recommend changes to the terms so that the letter of credit protects your interests and addresses your concerns.

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