In the practice of import and export trade, letters of credit have the following characteristics.
1) Letter of credit is an independent document
Although the opening of a letter of credit is based on a trade contract, once it is opened, it becomes another contract independent of the trade contract. A trade contract is a contract signed between a buyer and a seller, and is only binding on the buyer and the seller. A letter of credit is a contract between the issuing bank and the beneficiary. The issuing bank, the beneficiary and other banks involved in the letter of credit business should be bound by the letter of credit, but these bank parties have nothing to do with the trade contract and are therefore not bound by the contract. In this regard, Article 4 of “UCP600” (International Chamber of Commerce Publication No. 600 of “Uniform Customs and Practice for Documentary Credits”) clearly stipulates that a letter of credit is a business of a different nature from the sales contract or other contract on which it may be based. Even if the letter of credit contains any reference to the contract, the bank has nothing to do with the contract and is not bound by it.
2) The issuing bank is the primary payee
The letter of credit payment method is a bank credit, in which the issuing bank guarantees payment with its credit. The issuing bank provides credit rather than funds. Its characteristic is that under the conditions stipulated in the letter of credit, the issuing bank bears the responsibility of payment first. Article 2 of “UCP600” clearly stipulates: A letter of credit is an agreement, according to which the issuing bank, in accordance with the requirements and instructions of the applicant, pays the beneficiary or his designated person, or pays or accepts the bill of exchange issued by the beneficiary, if the specified documents meet the terms of the letter of credit; it may also authorize another bank to make the payment, or pay, accept, and negotiate the bill of exchange. Obviously, the latter situation cannot change the responsibility of the issuing bank as the primary payee.
3) The letter of credit business deals with documents
Article 5 of “UCP600” clearly stipulates: In the letter of credit business, the relevant parties deal with documents, not goods, services or other behaviors related to the documents. It can be seen that the letter of credit business is a pure document business for payment based on documents. Articles 15, 16 and 17 of UCP600 further explain this provision, that is, as long as the documents are consistent with each other, the documents are consistent with the letter of credit, and as long as it can be determined that the documents are in line with the terms of the letter of credit on the surface, the bank must pay based on the documents. The documents become the only basis for the bank to pay, that is, the bank only recognizes whether the documents are consistent with the letter of credit, and is not responsible for the form, completeness, accuracy, authenticity or legal effect of any document, the general and/or special conditions stipulated or attached on the document; it is not responsible for whether the quality of the goods is good, whether the packaging is intact, whether the quantity (weight) is correct, etc. Therefore, under the condition of using a letter of credit for payment, if the beneficiary wants to receive the payment safely and promptly, the documents must be consistent.