Letter of Credit: A Legal Perspective

The purpose of documentary credit is to provide a mechanism to facilitate the settlement of an international or domestic trade transaction by using a bank’s undertaking. Letters of Credit (LoC) have been in prevalence since the twelfth century as a financial instrument used to promise payment against the delivery of goods. Letters of credit expedite mercantile transactions by providing an independent assurance of payment to parties and therefore are equipped with the feature of reliability and certainty of payment. There exist several types of letters of credit with their differential features, regulating legal framework, use, and obligations of parties involved therein. The UCP 600 regulates international Letter of Credit transactions and controls rights and obligations of parties subject to well established Principle of Autonomy and Doctrine of Strict Compliance. Simultaneously, the Fraud exception also restricts dishonest beneficiaries from obtaining payment without actually performing their duties towards the issuing bank and buyer (applicant). This research paper examines in detail the concept of letter of credit and its regulatory mechanism in relation to mercantile transactions from a global perspective. The author has also endeavoured to explore legal intricacies involved in such transactions while tracing the judicial approach as to how the Courts have applied the existing legal regulations and interpreted the relevant principles while striking a balance between smooth trade activities and the interest of relevant parties.