Documentary Credit (also known as
letter of credit or bankers commercial credit, or letter of undertaking) is one
of the payment instruments that institutions providing non-cash payment
services (banks, foreign bank branches, etc.) deal with to make a valid payment
transaction at the request of the account holder. Documentary credit is the
most commonly used for payment of international sales of goods.
The supply of international payment
services by institutions providing non-cash payment services shall be conducted
in accordance with regulations of the law on foreign exchange management,
treaties to which Vietnam is a member and commercial practices (including
international commercial practices provided by the International Chamber of
Commerce; and other commercial practices which are not contrary to the
Vietnamese laws) which agreed upon by the parties.
According to UCP 600, credit means
any arrangement, however named or described, that is irrevocable and thereby
constitutes a definite undertaking of the issuing bank to honour a complying
presentation. Documentary credit is an independent and separate
transaction from the sales and other contracts on which it may be based. The
Issuing Banks and Advising Banks are in no way concerned with or bound by
contract between the Applicant (purchaser) and the Beneficiary (seller), even
if any reference whatsoever to it is included in the credit. Banks deal with
documents only. Goods, services or performance to which the documents may
relate are not under scope of handling of the Banks. When the issuing bank
determines that a presentation of documents is complying, payment shall be
made.
The independence between the
documentary credit and the sales contract ensures that the seller definitely
receives payment if complying presentation, however, does not protect the
interests of the purchaser when there is any dispute about the quality of the delivered
goods or any other dispute after delivery. When the seller presents complying
documents, the issuing bank is obliged to make payment without any doubt
whetherf the goods have actually been delivered according to the specifications
as specified in the contract. At the same time, the cancellation or termination
of contract does not affect the effectiveness of documentary credit, payment
still is made if presentation is complying.
International payment instruments
play an important role in commercial transactions between parties residing in
different countries. Each payment method reflects the way of receiving and
paying for goods amount between the buyer and the seller. The parties
participating in international commerce transaction need to understand the
characteristics of each payment instrument to protect their rights and
obligations, and avoid disputes in international sales of goods, or disputes infinancial service using
letter of credit or other forms, disputes in performance of contract and should
involve lawyers in early stage if possible to avoid mishap.
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