Letters of Credit: credit autonomy and strict performance

Letters of Credit: credit autonomy and strict performance

Letters of Credit: credit autonomy and strict performance

Letters of Credit: credit autonomy and strict performance

 

In international payments through Letters of Credit there are two fundamental principles guiding these operations:

(a) THE PRINCIPLE OF “CREDIT AUTONOMY”, and

(b) THE PRINCIPLE OF THE DOCTRINE OF “STRICT PERFORMANCE”.

 

In accordance with the “Credit Autonomy” principle, documentary credit is a separate operation and independent from the sales contract that gives rise to it. The financial transaction is independent of the commercial operation.

The “Strict Performance” doctrine is the legal principle that authorizes the bank to reject documents that are not in strict compliance with the terms of the documentary credit.

Documentary credits are, by nature, separate transactions from the transactions or other contracts on which they are based, and banks will in no way be bound by such instruments, even if any reference to them is included in the credit. Therefore, documentary credits will deal with documents and not with the goods or services or even the performance that the documents require.

The guarantees given by the importer to the bank may be promissory notes signed by the importer covering the total value of the transaction, a commercial pledge of 100% of the principal amount of the credit (assets under guarantee), with a depository receiving, on behalf of the bank, deposit of amounts in guarantee with the bank (the percentage of the amount deposited in relation to the credit will depend on the degree of relationship between the issuing bank and the buyer/applicant), insurance of the assets seized with the bank appearing as beneficiary of the policies, exchange for payment of the promissory note, guarantee of duplicates, etc.

It is important to remember that this type of payment is applicable to practically every type of commercial operation, transferable, renewable, revolving, revocable Letters of Credit that allow installments (partial shipments), red clause discounts, and that in the case of bank loans/guarantees, they are often used to leverage international financing, both by exporters and by importers.

 

Letters of Credit: credit autonomy and strict performance

You can learn more about Letters of Credit in the IntradeBlog: https://blog.intradebook.com/en/letters-of-credit-international-payments/

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