Commercial Letter of Credit Law and Legal Definition

A commercial letter of credit is a contractual agreement between the issuing banks, on behalf of one of its customers, authorizing another bank known as the advising or confirming bank, to make payment to the beneficiary. The issuing bank makes a commitment to honor drawings made under the credit. Normally, the beneficiary is the provider of goods and/or services. The issuing bank replaces the bank’s customer as the payee.

Commercial letters of credit are used primarily to facilitate foreign trade. It has been used for centuries to facilitate payment in international trade. Letters of credit used in international transactions are governed by the International Chamber of Commerce Uniform Customs and Practice for Documentary Credits. The general provisions and definitions of the International Chamber of Commerce are binding on all parties. Domestic collections in the U.S. are governed by the Uniform Commercial Code.