Risks of Letter of Credit Versus Escrow?

[Will]

What are the pros and cons of using escrow versus letter of credit as a way
to secure funds for payment of a high priced item? I've used escrow
services quite successfully in the past, and those have typically cost less
than 1% of the gross purchase price. I've never used letter of credit,
but have read some bad things about those, and I'm curious to see the legal
perspective on the risks associated with each tool.

For escrow, I have seen the main advantages being that funds are secured in
advance of shipping, and the terms by which the buyer can reverse the
transaction are very narrowly defined and clear. What concerns me about
letters of credit is that the funds are not really secured, and the promise
is from the bank. Typically banks are cowards who take on no risk for
themselves. I imagine that the letter of credit would be carefully worded
with 40 loopholes to let both the bank and the buyer off the hook, as well
as exit clauses for reversing the transaction that might not be well
understood or agreed to by the seller. But that's my perception and it
might all be wrong.

Is there a good legal reason to prefer letter of credit to escrow, from
buyer's perspective or from seller's?

[Barry Gold]

Post by Will
What are the pros and cons of using escrow versus letter of credit as a way
to secure funds for payment of a high priced item? I've used escrow
services quite successfully in the past, and those have typically cost less
than 1% of the gross purchase price. I've never used letter of credit,
but have read some bad things about those, and I'm curious to see the legal
perspective on the risks associated with each tool.

Are you sure you mean "letter of credit"? A letter of credit is a
negotiable instrument, like a check, only better. It's effectively a
check drawn on the bank itself, with the buyer having the ability to
sign it over to whoever he wants. A "traveler's check" is effectively
a Loc, and even those are becoming rare with Visa and Mastercard being
international.

Post by Will
For escrow, I have seen the main advantages being that funds are secured in
advance of shipping, and the terms by which the buyer can reverse the
transaction are very narrowly defined and clear. What concerns me about
letters of credit is that the funds are not really secured, and the promise
is from the bank.

Well, that's pretty good, at least if it's a US bank. I wouldn't take
one from a bank in Nigeria, and if offered one on a US bank I would
phone the bank and ask them if they actually issued it. A forged one
isn't worth the paper it's written on.

Post by Will
Typically banks are cowards who take on no risk for
themselves. I imagine that the letter of credit would be carefully worded
with 40 loopholes to let both the bank and the buyer off the hook, as well
as exit clauses for reversing the transaction that might not be well
understood or agreed to by the seller. But that's my perception and it
might all be wrong.

If it's really a LoC, it's unconditional. It just says the bank will
pay (named person) or order/bearer the specified sum. It's possible
that the bank will still withold payment if the buyer claims you
cheated him, but most of the time all that matters is that the LoC was
validly issued and that the buyer countersigned it.

Even if the buyer _does_ manage to "stop payment" on the LoC, the
money is _really_ there. If you have to sue and win, the bank will
still pay you on the LoC. Not like a check, where the buyer might
have the money in his account -- or might not. And if he doesn't, you
have to look around for some way to collect from him if you win a
lawsuit.

Bottom line: if it's really a LoC and not forged, it's better for the
seller than an escrow service, because it's unconditional(*). An
escrow service is usually better for the buyer, because the money
isn't actually transferred until the buyer accepts delivery and
inspects the item to be sure it's as agreed.

(*) But the buyer could still sue _you_ if he decides the item isn't
what he was promised.

[Dick Adams]

Post by Will
What are the pros and cons of using escrow versus letter of credit as a way
to secure funds for payment of a high priced item? I've used escrow
services quite successfully in the past, and those have typically cost less
than 1% of the gross purchase price. I've never used letter of credit,
but have read some bad things about those, and I'm curious to see the legal
perspective on the risks associated with each tool.
For escrow, I have seen the main advantages being that funds are secured in
advance of shipping, and the terms by which the buyer can reverse the
transaction are very narrowly defined and clear. What concerns me about
letters of credit is that the funds are not really secured, and the promise
is from the bank. ....

Note that I never was an attorney! Buyers prefer title transferred
upon approval of goods received. Sellers prefer title transferred
FOB shipping point. It is a negotiable issue.

To cash a letter of credit, the seller simply has to meet the minimum
requirements of the letter of credit while funds in escrow can be
subject to a process similar to a house closing. Based on that, the
choice between the two is blatantly obvioud (at least to me.

I made a large overseas purchase several years ago. An excellent
attorney advised me to use an escrow. The goods were worse than
sub-standard and I was able to void the contract before I released
any funds to the seller! It was 1981. The attorney charged me $200
and saved me just under $25,000 plus the cost of m international
lawsuit.

Dick