Irrevocable Letter of Credit: All You Need to Know | LegaMart Articles
ILC - Irrevocable Letter of Credit in Commercial and Business Law

Irrevocable Letter of Credit: All You Need to Know

To understand Irrevocable Letter of Credit, Imagin a Jordanian firm (hereinafter buyer) entered into a contract to buy reinforced steel rods from a British firm (hereinafter seller) that were needed to be delivered in two installments, the buyer requested the issuing bank to issue two letters of credit in favor of the seller, out of which one LC was realized as per the delivery of 1st installment.

After which it was discovered that consignment was not as per the contracts and the buyer requested to stop the realization of the 2nd LC where the court held that a confirmed LC constituted a contract between the banker and the vendor, imposing an obligation upon the baker to pay, regardless of a dispute between the parties or whether or not the goods met contract requirements. 

A similar verdict was rendered in another case, where the court stated that courts should not stop banks from honoring LC, as it creates confusion and undermines confidence in the banks. 

From the above two statements, it can be concluded a letter of credit cannot be stopped regardless of any reason and payments are assured to the seller.

To become more familiar with the concept of Letter of Credit, you can read the article below:
Everything You Should Know About Letter of Credit

What is an irrevocable letter of Credit?

It is a primary legal instrument that assures you the payment of the goods or services rendered by the seller as soon as the requirements are met, assuring the buyer of timely delivery of goods and the seller of timely payment. This document can’t be edited, amended, or canceled by the parties involved or by the bank except in the conditions explicitly mentioned in any clause. This LC are generally used in international transactions where buyer and seller are unknown to each other due to distance, varying laws, and no specific communication channels and data. This LC refrains any of the parties to the contract and even the bank to conduct any fraud and securing the transaction. 

There are two kinds of irrevocable letters of credit, one is a confirmed letter of credit in which three parties are involved i.e issuing bank, seller, and confirming bank. With this LC, the issuing bank does not have the authority to amend or edit the LC without the beneficiary’s and confirming bank consent where an unconfirmed letter of credit includes the issuing bank and the seller, in this LC, the issuing cannot edit the LC without the beneficiary’s consent.

Also, read: Top Tips About Revocable Letter of Credit

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What is an irrevocable letter of credit at sight?

Irrevocable LC at sight works as a guarantee of payment to the seller in return for the goods and services rendered by the seller. There’s no major difference in an LC or LC at sight except that the latter is the quickest way to make the payment i.e within 5-10 days of meeting the requirements of the contract. Like an ordinary LC, LC at sight is provided to the issuing bank along with the supporting documents. This process of verifying and submitting the documents is called sighting LC. 

How to get an Irrevocable letter of credit?

Once the parties have entered into a contract, you can request your bank to issue you a letter of credit, after which your creditworthiness will be checked and verified and if it seems promising to the bank, the ILOC is issued and sent to you. Please don’t try to draft the LC by yourself, as this can prove dangerous for your trade and can even result in financial losses, this may seem economical to you but it can be an expensive affair. Since the bank may refuse payment even in major situations where the contractual requirements aren’t met, such as late delivery of goods, and even minor issues such as documentation errors. 

Specifications for irrevocable letters of credit

  • It cannot be changed and amended.
  • These are authenticated and transferred through SWIFT
  • This comes with greater security and quicker payments. 

How does an Irrevocable Letter of Credit Work?

This is a kind of conditional document until and unless the seller completes its obligation to do the work, the buyer is not required to pay for it, but, how does ILOC work in these transactions? Well, the process involves the following steps:

  • The parties enter into a contract, post which the buyer requests the issuing bank to issue an LC which is then issued to the advising bank. The advising bank communicates this to the seller after verifying the details. 
  • The goods are shipped and relevant documents of delivery are sent to the advising bank, and the payment is realized. 

Is irrevocable LC safe?

Yes, irrevocable ILOC is safe from all other forms of LC. The contract cannot be changed or amended by one party without the prior approval of the rest of the parties involved and guarantees payment to the seller once the requirements are met this gives a sense of relief to both the parties the payment and goods will be honored as per the contract encouraging international trade.


Do all Letters of Credit have are irrevocable in nature?

As per the latest version of UCP 600 which is a set of private rules for trade, article 2 of it defines credit that any arrangement, named or described as “irrevocable” article 3 of it talks about the interpretation which states that credit is irrevocable even if there is no indication that it is. Hence, yes! all letter of credit is irrevocable in nature. 

Can an Irrevocable Letter of Credit be revoked or canceled?

Article 10 of the UCP600 rules clearly state that a letter of credit cannot be amended or canceled without the permission of the beneficiary. This ensures that the security related to the money associated with the LC remains intact.

Who can issue an irrevocable letter of credit?

These LCs are issued as a guarantee or written commitment by the commercial bank or federally insured financial institution to make the payments as mentioned in the contract as soon as the requirements of the contract are met. 

What is the difference between an irrevocable letter of credit and a standby letter of credit?

ILOC works as a primary payment method and does not require any specific conditions to be met in order for the contract to be successful, unlike SLBC is a secondary payment method that only becomes active once the buyer fails to make the payments, post which the seller needs to furnish the relevant documents like proof of delivery date and time. ILOC is generally issued as a short-term instrument(up to 90 days) while an SLBC is issued for a long-term(one year or longer). The SLBC’s cost of issuance(ranges from 1%- 10% ) is more than ILCO(ranges from 0.75%-1.50%). 

How to Cancel a Letter of Credit?

In accordance with the letter of credit rules, article 10, a credit cannot be canceled, edited, or edited. However, this statement can be interpreted as “LC cannot be canceled solely by the issuing bank, it can be done if a written declaration is submitted to the issuing bank by the beneficiary(and by the seller depending upon the contract) regarding the cancellation of the LC. 

What is a Clean Irrevocable Letter of Credit?

Clean ILOCs do not have any performance obligations clause, nor do they require specific documentation submitted to the bank or financial institution for payments. For example, in clean ILOC, the seller sends the shipment and gets his payment without showing any financial documents like proof of delivery. A document like this is generally used with established trading partners. One of the key differences between clean ILOCs and commercial LC is that the former one is used as a payment mode while the latter serves as a guarantee of payment.

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