GLOSSARY LETTERS OF CREDIT TERMS
by Richard Macias and Jane Fennelly

Every credit professional is familiar generally with letters of credit as a written agreement from a bank to pay specified invoices upon presentation of certain supporting documentation, but what do all of those letter of credit terms mean? Here is a glossary of basic terms.

Account Party/Applicant: Party requesting that bank issue letter of credit to be payable to a specific beneficiary.

Advising Bank: Notifies beneficiary of the letter of credit; accepts letter of credit documents and sends to issuing or confirming institution for payment.

Beneficiary: Party entitled to draw or demand payment based on terms of letter of credit.

Commercial Letter of Credit: A letter of credit issued for a transaction involving payment for the purchase of goods. Sometimes referred to as a “Straight Letter of Credit.”

Confirming Bank: Agrees to honor letter of credit issued by another institution and receives reimbursement from that institution.

Draw: Presentation of original letter of credit and other required documents in accord within letter of credit terms

Draw Terms: The letter of credit conditions which must be met to ensure payment, Usually presentation of documents and/or some type of statement about the underlying obligation.

Draft: Instrument similar to check presented with original letter of credit for amount of draw.

Discrepancies: Differences between the draw terms and the actual draw submitted for payment which prevent payment until discrepancies are cured.

Dishonor: Issuing, Advising or Confirming bank’s refusal to pay usually based on discrepancies in the draw.

Expiration: Stated date the letter of credit expires, often noted on the letter of credit as the “expiry date”. Draws submitted after this date will not be honored.

Governing Law for Letters of Credit:

UCP: Uniform Customs and Practice for Documentary Credits (UCP) or

ISP: International Standby Practices issued by International Chamber of Commerce or

Article 5: of Uniform Commercial Code

Honor: Payment under letter of credit to beneficiary.

“Independence Principle”: Bank must pay if documentation required under the terms of the LC is presented. Bank cannot look for extrinsic facts, (alleged breach of contract, for example) to find justification to dishonor draw.

Irrevocable Letter of Credit: Letter of credit that can not be amended or cancelled without the agreement of all parties, especially the beneficiary.

Issuer/ Issuing Institution: Institution which issues letter of credit.

Partial Draws Permitted: Beneficiary can make more than one draw, but total amount of draws cannot exceed amount of letter of credit.

Presentation: Delivery of original letter of credit and all required documents by beneficiary for payment /honor.

Revocable Letter of Credit: Letter of credit that can be amended or cancelled by the issuer at any time.

Standby Letter of Credit: Agreement to pay under certain conditions, for example, invoices not timely paid or other default in payment.

Strict compliance: Draw must mirror terms of letter of credit and comply with requirements for time, place and mode of presentation or issuer is not required to honor.

Richard Macias and Jane Fennelly are with the Los Angeles creditors' rights law firm of Creim Macias Koenig & Frey LLP. They may be reached by telephone at 213-614-1944 and by email at rmacias@cmkllp.com or jfennelly@cmkllp.com.