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Simple English definitions for legal terms
circular letter of credit
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A quick definition of circular letter of credit:
A circular letter of credit is a document issued by a bank that promises to pay a third party (the beneficiary) if they meet certain conditions. This is often used in international trade to ensure that the seller gets paid even if the buyer doesn't fulfill their obligations. There are different types of letters of credit, including ones that require specific documents to be presented and ones that can be paid without any additional paperwork. It's important to understand the terms of a letter of credit before using it in a transaction.A more thorough explanation:
A circular letter of credit is a type of letter of credit that is issued by a bank at the request of a customer. It guarantees payment to a third party, known as the beneficiary, as long as certain conditions are met. This payment is made regardless of whether the underlying agreement between the customer and the beneficiary is fulfilled.
For example, if a company in the United States wants to buy goods from a company in China, they may use a circular letter of credit. The US company would ask their bank to issue the letter of credit, which would guarantee payment to the Chinese company once they provide the required documents and meet the specified conditions.
Circular letters of credit are governed by Article 5 of the Uniform Commercial Code (UCC). There are different types of letters of credit, including:
- Commercial letter of credit: used in the sale of goods, especially in international transactions
- Standby letter of credit: used to guarantee a monetary or non-monetary obligation
- Irrevocable letter of credit: cannot be modified or revoked without the consent of all parties
- Revocable letter of credit: can be canceled by the issuing bank
Overall, circular letters of credit are a useful tool for businesses engaging in international trade, as they provide a level of security and assurance for both the buyer and seller.