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Letter of Credit

bill, banker, person and draw

LETTER OF CREDIT. A letter of credit is a document issued by a banker authorising the banker to whom it is addressed to honour the cheques of the person named to the ex tent of a certain amount and to charge the sums to the account of the grantor ; or it may be worded so as to authorise the person to whom it is addressed to draw on demand, or at a currency, upon the banker issuing the letter, and the grantor undertakes, in the letter, to honour all drafts drawn in accord ance with the terms of the credit. The letter states the period for which the credit is to remain in force, and it should be in dorsed with particulars of all drafts drawn under the credit. When a letter of credit is issued, the amount is debited to the cus tomer's account and credited to a " Letters of Credit " account.

In addition to an " open " or " clean " letter of credit (as above) there is a docu mentary letter of credit which authorises the drawing of bills upon the grantor and undertakes to honour them provided that the documents of title to the goods named (bills of lading with insurance policies and in voices) are sent to the grantor.

When the authority to draw a bill is printed upon the margin of the form which is to be used for drawing the bill, the docu ment is called a marginal letter of credit. The authority portion of the document refers to the bill portion in such words as " 1 authorise you to draw the annexed bill." The two parts of the instrument must not be separated.

Where a banker is authorised to pay cheques under a letter of credit, he must see that the signature of the drawer is correct and that the terms of the letter are strictly observed. He should be furnished with a specimen of the signature of the person who is entitled to draw the money.

Where a letter of credit is shown to a merchant abroad who is selling goods to the holder of the letter, it has the effect of satisfy ing the merchant that the bill will be duly accepted by the banker issuing the letter. The essence of a letter of credit is, as Lord Justice Cairns said (in In re Agra fr Master man's Bank, 1867, 2 Ch. 391), " that the person taking bills on the faith of it is to have the absolute benefit of the under taking in the letter, and to have it in order to obtain the acceptance of the bills which are negotiable instruments payable accord ing to their tenor, and without reference to any collateral or cross claims." A letter of credit is not a negotiable instrument.

For the purpose of stamp duty a letter of credit is treated as a bill of exchange (see Section 32, Stamp Act, 1891, under heading BILL OF EXCHANGE), but a letter of credit granted in the United Kingdom, authorising to be drawn out of the United King dom payable in the United Kingdom is exempt from duty (see Exemption 4, under