According to the Uniform Customs and Practice for Documentary Credits (ICC Publication No. 500, referred to as “UCP500”), the letter of credit payment method has the following three characteristics:
(1) Letter of credit is a bank credit.
The letter of credit payment method is a bank credit, in which the issuing bank guarantees payment with its own credit. Under the terms of letter of credit payment, the bank is in the position of the first payee. “UCP500” stipulates that a letter of credit is an agreement, according to which the issuing bank pays, accepts or negotiates to the beneficiary or its designated person based on the specified documents and in the event that the terms of the letter of credit are met. Once the letter of credit is issued, it constitutes a definite commitment of the issuing bank. It can be seen that after the letter of credit is issued, the issuing bank is the first payee. In the letter of credit business, the liability of the issuing bank to the beneficiary is an independent liability.
(2) The letter of credit is a self-sufficient document.
The issuance of a letter of credit is based on a sales contract, but once a letter of credit is issued, it becomes another contract independent of the sales contract and is not subject to the sales contract. UCP500 stipulates that a letter of credit and the sales contract or other contract on which it may be based are independent transactions. Even if the contract is mentioned in the letter of credit, the bank has nothing to do with it and is not bound by it. Therefore, a letter of credit is a contract independent of the relevant contract and is a self-sufficient document. The bank’s commitment to pay, accept and pay bills of exchange and/or perform other obligations under the letter of credit is not subject to claims or defenses arising from the existing relationship between the applicant and the issuing bank or between the applicant and the beneficiary. The issuing bank and other banks involved in the letter of credit business only handle letter of credit business in accordance with the provisions of the letter of credit.
(3) A letter of credit is a sale of documents.
Under the letter of credit method, the principle of payment against documents is implemented. UCP500 stipulates: In the letter of credit business, the relevant parties deal with documents, not the goods, services and/or other actions related to the documents. Therefore, the letter of credit business is a pure document business. In the letter of credit business, as long as the documents submitted by the beneficiary or its designated person comply with the provisions of the letter of credit, the issuing bank shall bear the responsibility of payment or acceptance and payment. On the contrary, if the documents do not comply with the provisions of the letter of credit, the bank has the right to refuse payment. However, it should be pointed out that according to the provisions of “UCP500”, although the bank has the obligation to “reasonably and carefully review all documents”, this review is only used to determine whether the documents comply with the terms of the letter of credit on the surface, and the issuing bank will only pay based on documents that comply with the terms of the letter of credit on the surface. Therefore, “the bank is not responsible for the form, completeness, accuracy, authenticity, forgery or legal effect of any document, or the general and/or special conditions stipulated or attached on the document.” Therefore, under the terms of the letter of credit, the so-called “strict compliance principle” is implemented. The “strict compliance principle” requires not only “document consistency”, that is, the documents submitted by the beneficiary are apparently consistent with the terms of the letter of credit, but also “document consistency”, that is, the various documents submitted by the beneficiary should be consistent on the surface.