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Simple English definitions for legal terms
circular note
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A quick definition of circular note:
A circular note, also known as a letter of credit, is a document issued by a bank that promises to pay a third party (the beneficiary) if they meet certain conditions. This is often used in international trade to ensure that the seller gets paid even if the buyer doesn't fulfill their obligations. There are different types of letters of credit, such as those that require specific documents to be presented or those that can be transferred to another party. It's important to understand the terms and conditions of a letter of credit before using it.A more thorough explanation:
Definition: A circular note is a type of letter of credit used in commercial law. It is an instrument issued by a bank at the request of a customer, which guarantees payment to a third party (beneficiary) as long as certain conditions are met, regardless of whether the underlying agreement between the customer and beneficiary is fulfilled. Circular notes are governed by Article 5 of the UCC and are also known as letters of credit, bill of credit, or circular letter of credit.
Example: A company in the United States wants to purchase goods from a supplier in China. The supplier requires payment before shipping the goods, but the buyer does not want to pay until they receive the goods. To solve this problem, the buyer can request a circular note from their bank, which guarantees payment to the supplier once the goods are shipped and certain conditions are met. The supplier can then use the circular note to receive payment from the bank, even if the buyer does not fulfill their payment obligation.
This example illustrates how a circular note can be used to facilitate international trade by providing a secure payment method for both the buyer and the supplier.