Giving Credit Where Credit is Due: Letters of Credit and the Coronavirus

March 2020

By: Michael Evan Avidon and Rachel S. Kwon

Documentary Credit World

Letters of credit (“LCs”) are irrevocable, independent and documentary payment mechanisms by which an issuing bank in effect substitutes its credit for that of an applicant. LCs play a key role in facilitating trade transactions and financial transactions by allowing parties to manage risk and alleviate uncertainty with respect to payment obligations. From an LC that is arranged by a Japanese cloth manufacturer in favor of a New York cloth seller, to an LC that is arranged by a Benin company in favor of a Costa Rican company for the shipment of fish from Argentina to Benin, LCs have resiliently demonstrated relevance to trade and financial transactions. In the rapidly changing economic and political environment we are facing due to the COVID-19 pandemic, parties to LCs are questioning how LCs and related documents (such as reimbursement agreements and sales agreements) allocate risks posed by the virus, and deciding how best to proceed moving forward.

 

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