An irrevocable letter of credit is a bank undertaking that cannot be cancelled or amended without the agreement required by its terms and applicable rules. Payment depends on a complying presentation of documents, not on the bank inspecting the goods.
Who participates?
- Applicant, usually the buyer
- Issuing bank
- Beneficiary, usually the seller
- Advising bank
- Confirming or nominated bank where applicable
How does it work?
- The buyer applies for the credit using agreed trade terms.
- The issuing bank transmits the irrevocable undertaking.
- The seller reviews the terms before shipment.
- The seller presents the specified documents.
- Banks examine the presentation for compliance.
- A complying presentation is honored as stated.
Irrevocable vs. revocable credit
Modern documentary credits subject to commonly used rules are generally treated as irrevocable. A revocable arrangement could be changed without equivalent consent and offers different protection. The instrument should state the governing rules clearly.
What does irrevocable not mean?
It does not guarantee that every presentation will be paid. Documents can be discrepant, the credit can expire, and country or bank risk may remain unless addressed through confirmation or another arrangement.
What should the parties review?
Check amount, currency, expiry, shipment dates, presentation period, required documents, tolerances, bank charges and amendment process. Avoid conditions that depend on evidence the beneficiary cannot control.
