IRREVOCABLE LC VERSUS REVOCABLE LC

A letter of credit (L/C) can be irrevocable or revocable. The L/C usually indicates whether it is an irrevocable or revocable letter of credit. In the absence of such indication, the L/C is deemed to be irrevocable.

Irrevocable Letter of Credit
An irrevocable letter of credit cannot be amended or cancelled without the consent of the issuing bank, the confirming bank, if any, and the beneficiary. The payment is guaranteed by the bank if the credit terms and conditions are fully met by the beneficiary. The words "irrevocable documentary credit" or "irrevocable credit" may be indicated in the L/C. In some cases, an irrevocable L/C received by the beneficiary may become invalid without the amendment or cancellation of such L/C, for example, when the trade between importing and exporting countries is suspended such as in a trade sanction, or when the issuing bank has ceased operation.

There have been cases of an irrevocable L/C being amended without the consent of the beneficiary in the OEM arrangements. The beneficiaries affected were export-manufacturers from a developing country. The importers were able to convince and instruct the issuing bank to amend the latest date for shipment in the L/C, changing to a date earlier than the agreed upon date, at which time the beneficiary would not be able to ship the OEM products. The importers used sneaky tactics that aimed to cause the beneficiaries to default in the delivery. The intention of the importers was to cancel the orders from the existing OEM suppliers and buy from other suppliers in another developing country where the prices had become lower.

In the event of an amendment like the above-mentioned case, the beneficiary must give notification of rejection of amendment to the bank that advised the amendment at once.

Irrevocable and Without Recourse Letter of Credit
The irrevocable letter of credit received from an advising bank may be indicated as "irrevocable and without recourse documentary credit". The words "without recourse" mean that the advising bank will not be able to recover the money paid to the beneficiary in case the issuing bank does not pay the advising bank.

Revocable Letter of Credit
A revocable letter of credit can be amended or cancelled by the issuing bank at any time without the consent of the beneficiary, often at the request and on the instructions of the applicant. There is no security of payment in a revocable letter of credit (L/C). The words "this credit is subject to cancellation without notice", "revocable documentary credit" or "revocable credit" usually are indicated in the L/C.
The revocable L/C was not uncommon in the 1970's and earlier when dealing with less developed countries. It is rarely seen these days in international trade.