Understanding the Revocable Letter of Credit: A Legal Overview

Q: What happens if a third party has already drawn on the credit?

The letter cannot be revoked once payment has been made to the third party.

Q: Are revocable letters of credit common?

Most letters of credit are irrevocable, making revocable ones less common.

Definition & Meaning

A revocable letter of credit is a financial document issued by a bank that allows the issuing bank to cancel or modify the letter with appropriate notice to all parties involved. This type of credit can be revoked before it is paid out, but once a third party has drawn on the credit, it cannot be canceled. While revocable letters exist, most letters of credit are irrevocable, meaning they cannot be changed or canceled without the consent of all parties involved.

Table of content

Legal Use & context

Revocable letters of credit are primarily used in commercial transactions to facilitate payments between buyers and sellers. They are common in international trade, where they provide security for both parties. In legal practice, these letters may be referenced in contracts and agreements, especially in the fields of commercial law and finance. Users can manage related forms and documents through platforms like US Legal Forms, which provide templates drafted by qualified attorneys.

Key legal elements

Real-world examples

Here are a couple of examples of abatement:

(Hypothetical example) A company in the United States wants to purchase goods from a supplier in another country. The buyer requests a revocable letter of credit from their bank. If the buyer decides to cancel the letter before the supplier has drawn on it, they can do so by notifying the bank and the supplier. However, if the supplier has already received payment, the letter cannot be revoked.

Comparison with related terms

Term	Description	Key Difference
Irrevocable Letter of Credit	A letter of credit that cannot be canceled or modified without agreement from all parties.	Cannot be revoked once issued.
Standby Letter of Credit	A guarantee from a bank that payment will be made if the buyer fails to fulfill their obligations.	Used as a backup rather than a primary payment method.

Common misunderstandings

What to do if this term applies to you

If you are involved in a transaction that requires a revocable letter of credit, ensure you understand the terms and conditions. It may be beneficial to consult with a legal professional to navigate the complexities. Additionally, you can explore US Legal Forms for templates that can help you manage the necessary documentation effectively.

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Quick facts

Typical use: Commercial transactions and international trade.
Notice required: Yes, before cancellation.
Common misconception: All letters of credit are revocable.

Key takeaways

Frequently asked questions

Can a revocable letter of credit be canceled at any time?

No, it can only be canceled with appropriate notice before any payment is made.