Letter of credit (L/C) can be defined as an “undertaking” whereby the buyer’s bank is committed (on behalf of the buyer) to place an agreed amount of money at the seller’s disposal under some agreed conditions. Since the agreed conditions include, amongst other things, the presentation of some specified documents, the letter of credit is called Documentary Letter of Credit or, in short, Documentary Credit. The Uniform Customs & Practice for Documentary Credit (UCPDC) published by International Chamber of Commerce (2007) Revision; Publication No. 600 defines Documentary Credit:
“Credit means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honor a complying presentation.”
Complying presentation means a presentation that is in accordance with the terms and conditions of the credit, the applicable provisions of these rules and international standard banking practice. According to the definition of “Credit”, when an issuing bank determines that a presentation (of documents) is complying, it must honor.
Honor means,
a) to pay at sight, if the credit is available by sight payment, b) to incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment, c) to accept a bill of exchange (draft) drawn by the beneficiary and pay at maturity if the credit is available by acceptance.
Article 15b of UCP-600 says that when a confirming bank determines that a presentation is complying, it must honor or negotiate. In case of complying presentation, a nominated bank may also honor or negotiate (article 15c). It thus appears that credit is not only available at issuing bank, it (credit) can also be made available at confirming bank or nominated bank (appointed by issuing bank). Moreover, any bank can be a nominated bank in case of a credit available with any bank. (Article 2 and 6a of UPC-600) At this point,