Commercial letters of credit, the most frequent method of payment for goods in international trade transactions, have frequently been described as the lifeblood of international commerce. However, it can be argued that another, related method of payment is of equal importance, namely the independent or "on-demand" payment undertaking. This form of payment encompasses standby letters of credit, independent or on-demand bank guarantees and performance bonds.

This chapter considers the basic features of letters of credit (also known as documentary credits), how commercial letters of credit work and how they are used in international trade, how standby letters of credit work and considers international standby practice, the basic principles of performance bonds and bank/on-demand guarantees, and outlines their use in international trade, their effectiveness and the establishment of uniform rules in this area. From an English law perspective, other negotiable instruments that are used in trade finance to effect payment, in particular, bills of exchange, promissory notes, forfaiting and advance payment bonds and guarantees. It also considers the use of these instruments in international trade.

This article is part of the PLC multi-jurisdictional guide to finance. For a full list of contents visit www.practicallaw.com/finance-mjg.