As well, independent of the commercial transaction, there is the corresponding documentary transaction. A buyer instructing a bank to issue a letter of credit is known as the account party or the applicant. A bank issuing the letter of credit is the issuing bank. On issue, the bank will transmit the letter of credit to a correspondent bank, which is either an advising bank or a confirming bank. The advising bank merely advises the beneficiary about the opening of a letter of credit in his favor, while a confirming bank will add to the documentary credit its own independent obligation to honor the letter of credit against tender by the seller of documents conforming with the credit.
Letters of credit have an old and long established history.
As early as 1933, the International Chamber of Commerce codified for the first time the customs and practices developed by banks issuing letters of credit and published its first Uniform Customs and Practices for Documentary Credits. The UCP stipulates some basic principles. The most important of these is the independence of the documentary transaction. This means that the exchange of documents against payment is entirely independent from the commercial transaction, i.e., the sales transaction covering the goods. A second principle of equal importance is that documents to be tendered by the beneficiary must comply strictly on their face with the terms of the credit, in particular with the documents stipulated in the credit.