Engagement Clauses in Letters of Credit

Engagement clauses are found in some Letters of Credit.  They indicate to a seller what actions the banks in the transaction are willing to take. Banks can issue, advise, negotiate, examine, accept, confirm and pay Letters of Credit. Any bank that issues, accepts, confirms or pays a letter of credit will indicate its intentions with specific wording. The specific wording that will be used to indicate the bank's intentions can vary, but banks will normally use words similar to these, "We hereby engage with you to honor any and all drafts drawn under this letter of credit if presented within the terms of this credit."

If the Letter of Credit is solely Advised and is available to be paid by negotiation or examination then engagement language will be different. The language will read something like this: "This Letter of Credit carries no engagement on our part."

The word "engagement" is the key to understanding a bank's obligation in a letter of credit transaction. Sellers are often unaware of what this language means, and they ship product thinking they are protected by the banks when the opposite may be true.

Edited by Michael Zininberg & Michael Dennis.  Mr. Zininberg is a credit professional with experience monitoring, managing and collecting from customers worldwide.  He can be reached by email at mzininberg@gmail.com