1. The bank opens a letter of credit in accordance with the requirements and instructions of the importer
The bank (issuing bank) opens an irrevocable documentary letter of credit to the designated exporter in accordance with the requirements and instructions of the importer or the applicant or on its own behalf, and promises to guarantee payment under the condition that the documents are consistent. The notifying bank is responsible for verifying the authenticity of the letter of credit and formally notifying the beneficiary in writing.
2. The issuing bank is bound by three documents
(1) Sales contract. It is the basis for the opening of the letter of credit. Generally speaking, the terms and conditions of the letter of credit should be consistent with the sales contract, which is conducive to the smooth assumption and fulfillment of their respective responsibilities and obligations by both parties.
(2) The letter of credit itself. Once the letter of credit is opened, the issuing bank must unconditionally fulfill its guarantee within the validity period of the letter of credit and pay the beneficiary the full amount of the goods under the letter of credit under the condition that the documents are consistent.
(3) Agreement or authorization reached with the notifying bank, negotiating bank, confirming bank or reimbursing bank.
3. The applicant is bound by two documents
(1) Sales contract. The sales contract is the main document that binds the applicant. The applicant must fulfill the obligations of opening a letter of credit, paying for the bill of lading and collecting the goods in accordance with the contract requirements.
(2) Application for letter of credit. The application for letter of credit is a contract between the buyer and the issuing bank, requiring the applicant to fulfill its obligations of paying the deposit for letter of credit, providing collateral or paying for the bill of lading in accordance with the provisions of the application for letter of credit.
4. The beneficiary is bound by two documents
(1) Sales contract. The beneficiary is required to fulfill the obligations of delivering goods in accordance with the quality, quantity and time in accordance with the terms of the contract and to submit all qualified documents required by the contract.
(2) Letter of credit document. The beneficiary is required to strictly abide by the terms of the letter of credit, fulfill the obligation of delivery and provide qualified documents that are consistent with the documents.
In summary, there are different contractual relationships in the letter of credit business: ① There is a trade contract between the applicant (importer) and the beneficiary (exporter), and this trade contract brings about the need for payment credit; ② There is an application for letter of credit between the applicant and the issuing bank, and this application for letter of credit guarantees that the documents received and the funds paid under the letter of credit will be redeemed by the applicant; ③ The issuing bank and the beneficiary are locked by the letter of credit, and the letter of credit guarantees that the documents that meet the requirements submitted by the beneficiary to the bank will be paid.
5. Three payment methods under the letter of credit
(1) The issuing bank promises to pay in the letter of credit and assumes the primary payment obligation.
(2) The issuing bank explicitly authorizes another bank to pay in the letter of credit.
(3) The issuing bank authorizes another bank to negotiate and handle the negotiation or documentary collection of documents under the letter of credit.