Legal Nature Of The Documentary Letters Of Credit

Documentary letter of credit is universally applied in modern international trade. It is called the 'life blood of international commerce'. In cases that the credit is involved, courts of different countries recognized it as enforceable.Documentary letter of credit has always been an payment arrangement ever since its origin. The function of bankers' assurance and emergence of documentary transaction led to the appearance of modern letters of credit. This article deals with bankers' documentary credits, not including standby letters of credit. A principle in legal rules of documentary credits is that commercial customs must be respected. In a narrow sense the parties of a credit only consist of the issuing bank and the beneficiary; their relations define the legal nature of documentary credits. The independence principle of documentary credits is the basis of this mechanism. Documentary credit is independent of the underlying sale and also the application for issuing credit.Legal nature of documentary credit is disputable in practice and theories. Many theories are put forward by scholars, such as contract theory, guarantee theory and agency theory, among which contract theory is dominant. This article introduces some contract theories of the Anglo-American legal system and the Continental legal system, and discusses letters of credit in the Chinese contract law. It is proved that letter of credit constitutes a special contract. Then the author compares letter of credit to guarantee, agency, brokage and trust.Generally speaking the parties of a letter of credit also include intermediary banks, their relations with the issuing bank and beneficiary are different between each other.