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.
Banking and Finance Law Firm in Vietnam
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 whether 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 in financial 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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