An international trading transaction starts with a sale of goods by a seller in one country to a buyer in another; and then calls for follow-up action to give practical effect to the contract of sale and purchase. The goods have to be moved from seller to buyer; money in settlement has to pass from buyer to seller; and in determining the timing of these movements the parties are influenced by factors of a complicating nature peculiar to international trade. Buyer and seller are separated by geographical distance—and by political frontiers. Their legal systems may therefore differ; and they are unlikely to have a common currency. The credit risk is not merely the normal one of the credit-worthiness of the buyer; it is also that of the buyer’s country and its available foreign exchange resources. The seller may therefore hesitate to deliver the goods and rely on the buyer paying later; the buyer may be hesitant about making payment before he gets delivery of the goods; and a compromise solution will be needed. The obvious one, that of making time of payment coincide with time of delivery, will also be a practicable one—because both goods and money can be represented by “documents.”

The buyer will think in terms of a transport document. He will want one which will ensure that the goods will be delivered to him on arrival at destination and which will give him rights against the issuer if the goods are lost or damaged in transit. He may therefore be satisfied with a non-negotiable document providing for automatic delivery to a named consignee, or he may prefer a negotiable document of title which he must surrender at destination in order to obtain delivery of the goods. The seller’s interest will be in a banking document. He will want one which will ensure that the money will be paid to him in exchange for the transport document; and he could well be satisfied with a banking document in the form of a documentary credit, with a bank supervising the exchange of the goods—represented, or evidenced, by the transport document—for money in settlement—provided through the banking document.

The documentary credit can thus assist both parties. It interposes the bank’s expertise on behalf of the buyer to secure constructive delivery in the form of documents of title representing the goods, or of non-negotiable documents evidencing their movement to the buyer. It substitutes the credit-worthiness of the bank for that of the buyer to assure the seller of payment, conditional upon him providing the required documents and complying with all the other conditions set out in the credit.