Law Commons^™

The Role Of Letters Of Credit In Payment Transactions, Ronald J. Mann

Faculty Scholarship

Common justifications for the use of the letter of credit fail to explain its widespread use. The classic explanation claims that the letter of credit provides an effective assurance of payment from a financially responsible third party. In that story, the seller – a Taiwanese clothing manufacturer, for example – fears that the overseas buyer – Wal-Mart – will refuse to pay once the goods have been shipped. Cross-border transactions magnify the concern, because the difficulties of litigating in a distant forum will hinder the manufacturer's efforts to force the distant buyer to pay. The manufacturer-seller solves that problem by …