Letter of Credit (LC) is a conditional undertaking given by an LC issuing bank, at the request of an applicant to a beneficiary to pay a certain amount of money subject to presentation of specified documents. This undertaking is irrevocable i.e. the issuing bank cannot go back on its commitment to pay without the consent of the beneficiary. So, it is known as irrevocable LC. Since presentation of documents is an essential condition for payment, it is also known as irrevocable documentary credit.
A situation where the issuing bank can go back on its commitments without the consent of the beneficiary is so rare that UCP 600 does not deal with it. However, the earlier version UCP 500 had a reference to revocable LC.
If a correspondent of an issuing bank, at the request of the issuing bank, adds its confirmation, the LC is referred to as a confirmed LC. Under a confirmed LC, the beneficiary gets the irrevocable commitment of the confirming bank, in addition to that of the issuing bank, that payment will be made upon presentation of documents specified in the LC. Essentially, it is still an irrevocable LC.
Sometimes, a sale contract envisages repeated shipment of certain goods of certain quantity at a certain price. Instead of opening an LC for each shipment, an arrangement may be made whereby every time the issuing bank makes payment to the beneficiary or any intermediary, the LC amount gets reinstated and the beneficiary can present the documents again under the LC and claim payment. In such cases, the terms and conditions of the LC remain unchanged. Only the face value of LC gets reinstated. Such an LC is known as a revolving LC and it is an irrevocable LC. Since it is only a convenient arrangement, UCP 600 makes no special mention about revolving LC.
A transferable LC is one where a bank designated by the issuing bank as the transferring bank can, at the request of the first beneficiary, transfer the LC to a second beneficiary, who gets the right to present the documents to the transferring bank and claim payment under the LC. The Article 38 of UCP 600 deals with transferable LCs.
A standby LC is one where shipping documents or documents evidencing some performance by the beneficiary are not called for. Instead, the LC calls for presentation of a statement or declaration from the beneficiary of non-performance by the applicant or a specified third party. As the name states, it is a standby where the main arrangement as per underlying contract fails due to default by one of the parties. Usually, it is issued in lieu of a guarantee. UCP 600 applies to standby LCs.
Where LC restricts presentation of documents to a nominated bank, it is called a restricted LC. Where an LC issuing bank allows presentation of documents to any bank and undertakes to reimburse the bank that negotiates the documents i.e. gives value for the documents, it is called a freely negotiable LC. An LC where the payment will be made immediately upon presentation of documents is called a sight LC. Where the undertaking of the issuing bank is to make payment after lapse of a certain number of days, it is called a deferred payment LC. UCP 600 makes no mention about such LCs separately.
Red clause and green clause LCs refer respectively to credits where certain amount is advanced to the beneficiary, as unsecured credit or against presentation of warehouse receipts. UCP 600 makes no reference to such credits, as these are merely trade practices.