CHAPTER 12
Documentary Credits, Part 3 STANDARD CREDITS Revocable vs. Irrevocable Documentary Credits Documentary credits may be issued by the buyer and issuing bank as revocable or irrevocable. (The buyer must indicate either revocable or irrevocable on the application form to the issuing bank.) Each has a distinct advantage for buyers and sellers. REVOCABLE CREDIT
A revocable documentary credit gives the buyer and/or issuing bank the ability to amend or cancel the credit at any time right up to the moment of intended payment without approval by, or notice to, the seller. Revocable credits are, therefore, of great advantage to the buyer. Revocable credits are, conversely, of great disadvantage to the seller as the credit may be canceled at any time, even while the goods are in transit, giving the seller no security whatsoever. Although revocable credits are sometimes used between affiliated firms, sellers are advised never to accept a revocable credit as a payment method. IRREVOCABLE CREDIT
An irrevocable documentary credit constitutes a firm contractual obligation on the part of the issuing bank to honor the terms of payment of the credit as issued. The buyer and issuing bank cannot amend or cancel the credit without the express approval of the seller. Irrevocable credits are of advantage to the seller. As long as the seller complies with the terms of the credit, payment will be made by the issuing bank. Virtually all documentary credits issued today are irrevocable and so state on their face (on the face of the documentary credit itself). Sellers are advised to insist upon an irrevocable credit from the buyer.
Confirmed vs. Unconfirmed Documentary Credits Payment under an irrevocable documentary credit is guaranteed by the issuing bank. However, from the seller’s perspective, this guarantee may have limited value as the issuing bank may be (1) in a foreign country, (2) beholden to the buyer, (3) small and unknown to the seller, or (4) subject to unknown foreign exchange control restrictions. The seller, therefore, might wish that another, more local bank add its guarantee (confirmation) of payment to that of the issuing bank.
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