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Irrevocability of the Letter of Credit

It is often mentioned that a letter of credit (LC) should be irrevocable and that the seller should not accept a revocable LC. Nowadays, almost all LCs used in international trade are irrevocable and revocable LCs are unusual.

What is the difference between irrevocable and revocable LCs?

When an issuing bank issues an irrevocable LC, it means the bank is not allowed to revoke (withdraw, cancel) the LC or change its terms without the consent of the beneficiary under the LC. On the contrary, when issuing a revocable LC, the issuing bank has the right to revoke or change the terms of the LC without the beneficiary’s consent.

It is obvious that a revocable LC is an uncertain and risky method of payment for sellers dealing internationally, which is why they are unwilling to accept such an LC when negotiating transactions with foreign buyers.

How will the beneficiary know whether an LC is irrevocable?

Almost all LCs used in international trade are governed by the Uniform Customs and Practice for Documentary Credits (UCP 600) issued by the International Chamber of Commerce (ICC). This is expressly stated in the terms of each LC. The UCP 600 states in Art.2, in the definition of ‘Credit’, that the LC is ‘irrevocable’, and in Art.3, it states that a credit is irrevocable even if there is no indication to that effect. Finally, Art.10 makes it clear that a credit cannot be cancelled without the agreement of the beneficiary.

Consequently, when an LC is governed by the UCP 600, it is an irrevocable LC. Irrevocability of the LC is the minimum requirement small- and medium-sized sellers should have when negotiating the terms of LCs, since it is globally accepted in practice.

Can the issuing bank issue a revocable LC by amending the terms of UCP 600?

It would be unusual but possible to amend the terms of the UCP 600 in such a way. Therefore, the seller should read all the terms included in an LC when being advised that the foreign buyer’s bank has issued the LC. It would be good for the commercial contract agreed between the seller and the foreign buyer to include that the foreign buyer will instruct its bank to issue an irrevocable LC. Even when such a term is included in the commercial contract, the seller should check whether any amendments of the UCP 600 have been included in the terms of the LC by the issuing bank.

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