Letter of Credit in Lithuania

Letter of Credit – a secure form of international settlements

A letter of credit (also referred to as a documentary letter of credit) is a form of ensuring the fulfillment of obligations used in international trade settlements, including in the Republic of Lithuania. It is a commitment undertaken by a bank, at the request of the buyer (the applicant of the letter of credit), to pay the seller (the beneficiary of the letter of credit) the amount specified in the letter of credit upon presentation of documents that comply with the terms and conditions of the letter of credit. The use of a letter of credit is recommended when the parties are unfamiliar with each other, when there are concerns about the buyer’s solvency, when contracts are concluded with politically unstable or economically weak countries, or when it is required by the laws of a country, for example, in Lithuania.

When settling through a letter of credit, the bank that has opened the letter of credit and acts on behalf of the payer or in its own name (the issuing bank) undertakes to pay the funds to the beneficiary or to accept and honor a draft issued by the beneficiary. The bank may also authorize another bank (the advising or paying bank) to pay the funds to the beneficiary, to accept and pay the draft upon its maturity, or to purchase the documents (negotiate) if the documents presented comply with the conditions of the letter of credit. By appointing another bank as the executing bank, the issuing bank may authorize it to debit the full amount specified in the letter of credit documents from the account held by the issuing bank in the executing bank, or commit to transferring the funds to the account indicated by the executing bank upon request, or authorize the executing bank to approach another designated bank for payment.

Execution and Control of the Letter of Credit

To execute a letter of credit, the beneficiary submits to the issuing bank, the confirming bank (if applicable), or the executing bank the documents confirming that all conditions of the letter of credit have been met. If even one of these conditions is violated, the letter of credit is not executed. If the executing bank has made a payment or performed another operation in accordance with the terms of the letter of credit, the issuing bank or the confirming bank (if applicable) must reimburse the expenses incurred. All expenses related to the execution of the letter of credit are borne by the payer, including in the Republic of Lithuania.

If the issuing bank or the confirming bank (if applicable), or the executing bank acting on their behalf, refuses to accept documents that do not comply with the terms of the letter of credit, it must immediately notify the bank from which the documents were received, or the beneficiary if the documents were submitted directly by them, specifying the reasons for the refusal. If the issuing bank or the confirming bank (if applicable) determines that the documents do not meet the terms of the letter of credit, it has the right to refuse to accept them and demand from the executing bank the return of the amount paid to the beneficiary in violation of the letter of credit conditions, together with interest, or to refuse reimbursement of the amounts paid.

For any breach of the letter of credit conditions towards the payer, the issuing bank is liable, while towards the issuing bank, the confirming bank (if applicable) and/or the executing bank are liable, except in cases provided for by law. If the issuing bank or the confirming bank (if applicable), or the executing bank acting on their behalf, unjustifiably refuses to release the funds after the beneficiary has presented documents that comply with the letter of credit terms, it is liable to the beneficiary. If the confirming bank (if applicable) and/or the executing bank improperly release funds under the letter of credit in violation of its terms, they are liable to the payer, unless otherwise stipulated in the agreement between the payer and the issuing bank.

Advantages of a Letter of Credit for the seller (exporter):

1. Ensures payment to the seller for the services provided or goods shipped;
2. Provides protection against potential insolvency of the buyer (if the buyer becomes insolvent, their bank is obliged to make the payment);
3. The buyer cannot refuse to pay if documents that meet the terms and conditions of the letter of credit are presented to the bank;
4. The seller can plan the date of payment for the shipped goods.

Advantages of a Letter of Credit for the buyer (importer):

1. Guarantees the delivery of goods to the importer, including in the Republic of Lithuania;
2. Allows the buyer to control the shipping deadlines;
3. By issuing a letter of credit, the buyer proves their solvency, which may lead to more favorable terms from the seller in the future.

Closure of the Letter of Credit:

1. Upon the expiration of its validity period;
2. When the issuing bank cancels the letter of credit;
3. When the bank pays the beneficiary the amount specified in the letter of credit or performs other operations before its expiration date.