6.3 Letter of Credit

6.3.1 Basic FeaturesThe documentary credit: the issuing bank undertakes to the beneficiary (seller) to pay against presentation of documents conforming to the credit's terms. The chain: buyer (applicant) → issuing bank → advising bank → beneficiary; documents travel the reverse way; goods never need inspection by the banks — documents, not goods, are the currency of an LC.6.3.2 Fundamental Principle and the Rule of Uniform Commercial Practice (UCP)The autonomy (independence) principle: the credit is separate from the sale contract; banks deal in documents only. The Uniform Customs and Practice for Documentary Credits (UCP600, ICC) — the international rule set banks incorporate by wording the credit — governs examination standards: documents must comply on their face; discrepant documents may be refused within the UCP's time limits. The narrow fraud exception allows refusal of documents tainted by established fraud — the credit's autonomy yields only to demonstrated fraud.6.3.3 Trust ReceiptsUnder a trust receipt, the buyer takes delivery of documents/goods from the bank while acknowledging the bank's ownership; the buyer holds the goods and proceeds in trust until payment. Misapplication of the goods or proceeds is the classic trust-receipt default.