Banking / Finance Law
Letter of Credit
A financial instrument issued by a bank guaranteeing payment to a seller on behalf of a buyer, provided specified conditions and documents are met.
Letters of credit are widely used in international and large domestic trade to reduce payment risk — the seller gets assurance of payment from a reputable bank, rather than relying solely on the buyer's promise to pay.
Disputes can arise over whether the documents presented strictly comply with the letter of credit's conditions, since banks are generally required to honour payment based on document compliance rather than the underlying commercial dispute.
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