Legal Definitions - letter of advice

In commercial law, a letter of advice is a formal notification sent by the party who has issued a payment instruction (known as the drawer) to the party responsible for making that payment (known as the drawee).

The primary purpose of this letter is to inform the drawee that a specific payment order, such as a draft or bill of exchange, has been created and sent. This advance notice allows the drawee to anticipate the upcoming transaction, verify its legitimacy, and prepare the necessary funds or accounting entries, thereby facilitating a smoother and more secure payment process, especially in complex commercial transactions.

Here are a few examples to illustrate this concept:

• International Trade Scenario: Imagine a textile importer in the United States orders a large shipment of fabric from a supplier in India. To pay for the goods, the U.S. importer (the drawer) issues a draft instructing their U.S. bank (the drawee) to pay the Indian supplier a specific amount upon presentation of the draft. Simultaneously, the U.S. importer sends a separate letter of advice directly to their U.S. bank. This letter informs the bank that the draft has been issued and will soon be presented for payment by the Indian supplier, allowing the bank to prepare for the transaction and verify its details.

• Corporate Treasury Management: A multinational corporation headquartered in London needs to transfer a substantial sum of money to its subsidiary in Singapore to fund a new project. The corporate treasury department in London (the drawer) issues a draft on its primary bank in London (the drawee), instructing the bank to pay the Singapore subsidiary. To ensure the bank is fully aware of this significant upcoming payment and can allocate the funds accordingly, the treasury department also dispatches a letter of advice to the London bank, detailing the draft and its impending presentation.

• Government Contract Payment: A government agency (the drawer) awards a major construction contract and issues a large payment draft to the contractor for an initial phase of work. To prevent any delays or potential fraud when the contractor presents the draft for payment, the government agency sends a letter of advice to its designated bank (the drawee). This letter serves as an official heads-up, confirming that the draft is legitimate and that the bank should honor it when presented.