Legal Definitions - LC

The acronym LC can refer to two distinct legal and diplomatic terms:

• Letter of Credit

  A Letter of Credit is a financial instrument, typically issued by a bank, that guarantees a buyer's payment to a seller. It assures the seller that they will receive payment up to a specified amount, provided they meet certain conditions, such as shipping goods or presenting specific documents. This mechanism significantly reduces the risk of non-payment, especially in international trade where trust and legal recourse can be complex.

  • Example 1: International Trade
    A clothing manufacturer in Vietnam agrees to sell a large shipment of apparel to a retail chain in the United States. The Vietnamese manufacturer is hesitant to ship the goods without assurance of payment from an overseas buyer they don't know well. The U.S. retail chain's bank issues a Letter of Credit in favor of the Vietnamese manufacturer. This LC guarantees that once the manufacturer ships the clothes and provides the required shipping documents to their bank, the U.S. bank will pay them, even if the retail chain defaults. This allows the transaction to proceed with reduced risk for both parties.

  • Example 2: Large Equipment Purchase
    A construction company in Canada wants to purchase a specialized, custom-built crane from a German engineering firm. The crane is expensive and requires significant upfront investment from the German firm to manufacture. To ensure payment upon completion and delivery, the German firm requests a Letter of Credit from the Canadian construction company's bank. This LC assures the German firm that they will receive payment for the crane once it is built and ready for shipment, provided they meet the agreed-upon terms and conditions.

  • Example 3: Domestic Project Financing
    A small, innovative tech startup secures a contract to develop a complex software system for a large government agency. The agency requires a guarantee that the startup will complete the project on time and to specification, or that funds will be available to cover potential losses. The startup's bank might issue a Letter of Credit (often a standby LC in this context) to the government agency. This LC acts as a backup payment mechanism, assuring the agency that if the startup fails to meet its contractual obligations, the bank will pay a specified amount to compensate for the breach.

• Letter of Credence

  A Letter of Credence is a formal diplomatic document issued by a head of state (such as a president or monarch) to officially appoint and authorize an ambassador or other high-ranking diplomatic representative to serve in another sovereign country. When presented to the head of state of the receiving country, it formally establishes the diplomat's authority and legitimacy to represent their nation.

  • Example 1: Ambassadorial Appointment
    After being appointed as the new Ambassador of Brazil to the United Kingdom, the diplomat travels to London. Upon arrival, one of their first official duties is to present their Letter of Credence, signed by the President of Brazil, to the King of the United Kingdom. This formal ceremony officially recognizes the ambassador's authority and allows them to begin their diplomatic duties, establishing formal relations between the two nations.

  • Example 2: Special Diplomatic Mission
    The President of South Africa decides to send a special envoy to mediate a complex regional conflict in a neighboring country. To ensure the envoy's authority is recognized and respected by all parties involved, the President issues a Letter of Credence specifically for this mission. When the envoy meets with the heads of state and other key figures in the conflict zone, presenting this document confirms that they are acting with the full backing and authority of the South African President.