In the case of documentary letters of credit, the bank enters into a payment obligation to pay the beneficiary of a letter of credit a certain amount within a fixed period of time against presentation of certain prescribed documents. The payment obligation consists of an abstract and conditional undertaking to perform an act. The letter of credit constitutes an independent legal association that is detached from the underlying legal transaction and which only gives rise to an obligation to pay on fulfillment of the prescribed conditions.

There are many different types of letters of credit. Most are combinations of types of letter of credit that are conditional on the agreements made in the contract of sale. Today, most letters of credit issued are irrevocable unconfirmed and payable at sight. If confirmation is intended in the letter of credit or the exporter (the beneficiary of the letter of the credit) demands the addition of the confirmation through its principal bank, it will then receive a further agreement to pay from a second bank.

Confirmation will primarily be of interest in cases where the creditworthiness of the issuing bank is not known by the exporter or the country risk being too high. Confirmation of the letter of credit by the second bank represents the granting of a credit facility to the issuing bank and requires the existence of a credit line between the participating banks.

The main advantages of a documentary letter of credit are:

• An independent legal relationship
• In the abstract and by clause detached from original business transaction
• Obligations derive exclusively from the documents
• Obligations cannot be amended or cancelled by reference to the underlying commercial contract
• Conformity between the documents and goods is not examined
• Examination is limited solely to the terms of the letter of credit, and
  payment is effected only against fulfillment of the terms prescribed in the letter of credit

What are the benefits for you as an exporter or importer?

Exporter

• Undertaking to pay from a bank
• Confirmation of the status and creditworthiness of the business partner and
• access to export subsidizations

Importer

• Credit capacity can also be used on foreign markets
• Granting of deferral of payment facilitated by the export
• Payment solely against documents
• Fulfillment of the contract attested by the exporter