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 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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