Publication date: January 05, 2026

A documentary letter of credit (L/C) is a form of non-cash monetary settlement made through a bank. It serves to protect the interests of the parties in commercial transactions, particularly in sales contracts. Its essence is the bank’s commitment to pay an appropriate amount of money upon receipt of specific documents, which are assumed to constitute confirmation of the obligation’s fulfillment. The use of letters of credit is now standard in international trade.

General information

From a legal perspective, a documentary letter of credit is a legal relationship between the parties (in the example of a sales contract) the importer (buyer), the exporter (seller), and the bank issuing the letter of credit (buyer’s bank). In some cases, the exporter may wish to utilize the services of its own bank, which can collect the letter of credit documents from the exporter or confirm the letter of credit (intermediary bank). In the sales contract (underlying agreement), the buyer and seller specify that payment for the goods will be made via letter of credit and specify which documents the seller will need to submit to the bank to receive the funds. The agreement commits one party (usually the buyer) to conclude a letter of credit agreement with a specific bank under specific terms. After issuing the letter of credit, the buyer deposits funds. After the seller obtains the documents specified in the sales contract, they submit them to the bank (directly or through an intermediary bank). After the bank examines the documents, the importer receives the funds immediately or after a period specified in the letter of credit agreement. The bank’s obligation to pay the funds is abstract in nature, which means that their payment is not dependent in any way on the underlying agreement, but only on the presentation of the relevant documents.

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KG Legal prepared presentation about letter of credit as a form of security for payments in international transactions. The presentation includes risk in international trade, limiting of payment risk, incoterms 2000, payment settlement scheme etc.

If you are interested you can READ it or you can WATCH it.

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Bearing in mind the universality of international transactions and the risks that entrepreneurs face, the letter should pay attention to risk-reducing methods offered by banks. Paweł Dyrduł, associate lawyer from the law firm KG Legal Kiełtyka Gładkowski Professional Partnership based in Krakow, discusses the instrument of the letter of credit as a form of payment as well as the form of limiting the risk involved with transactions.

The essence of international trade

Progressive globalization has imposed on domestic companies – even on local ones – relationships with other international companies. Examples of such a connection, which may be either direct or indirect, include: competition with foreign entities, adaptation of manufactured products to international standards, the use of developed and implemented technological and management solutions.

An international commercial transaction is a transaction involving a cross-border element, so it comes down to transactions between entities based in different countries. Foreign trade can be considered in two perspectives: narrow and broad. In the narrow sense, the subject of foreign trade is material goods. Broad sense includes, for example, current and assets and credit turnovers, purchase of goods and intangible services.

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