Letters of credit occupy a distinctive space in Canadian commercial law, serving as instruments that transform the creditworthiness of a buyer into the creditworthiness of a bank. Unlike ordinary payment promises that depend entirely on one party's willingness and ability to pay, a letter of credit interposes a financial institution as an independent obligor, creating certainty in transactions where the parties may not know each other well, where goods must travel long distances before payment becomes due, or where the amounts involved are simply too large to risk on mutual trust alone. For Canadian business owners engaged in importing, exporting, or substantial domestic transactions, understanding how letters of credit function is essential to managing both opportunity and risk in commercial relationships that extend beyond immediate local networks.
The foundation of letter of credit law in Canada rests on principles developed through centuries of mercantile practice, now largely codified in international rules that Canadian banks and courts recognize as governing these instruments. The International Chamber of Commerce publishes the Uniform Customs and Practice for Documentary Credits, commonly known as UCP 600, which represents the current version as of the date of authorship and provides the rules that govern most letters of credit issued by Canadian banks. These rules are not legislation in the traditional sense but rather become binding through incorporation by reference, as virtually every letter of credit issued in Canada explicitly states that it is subject to UCP 600. This means that when a Canadian importer arranges for a letter of credit through a Canadian chartered bank, the terms and conditions governing how that credit operates, when payment becomes due, and what documents must be presented are determined primarily by this international framework rather than by domestic statute.