UAE letters of credit: legal framework, documentary requirements, and dispute resolution

International trade built the UAE into what it is today. With trade volumes surpassing AED 2.2 trillion in 2024, the country stands as one of the world's most connected commercial hubs, linking manufacturers in Asia with buyers in Europe, connecting African commodity producers with global markets, and serving as the transactional crossroads for businesses spanning every continent.

For thousands of companies moving goods through Jebel Ali, Abu Dhabi, and Sharjah ports every day, letters of credit represent the difference between getting paid and hoping to get paid.

At Kayrouz & Associates, we have spent nearly two decades advising importers, exporters, and trading companies on these cross-border transactions. This guide shares what actually goes wrong in practice and how to structure letters of credit so they work for you, not against you.

Who this guide is for

• Importers using UAE banks to open letters of credit for international purchases
• Exporters shipping goods into the UAE or receiving UAE-issued credits
• Trading companies using the UAE as a regional or global hub
• In-house legal and trade finance teams managing documentary credit operations
• CFOs and finance directors overseeing cross-border payment risk

At a glance: what you need to know

Before diving into the details, here are the key points this guide covers:

• Why LCs still dominate UAE trade despite alternative payment methods
• What rules actually govern your LC (hint: UCP 600, not just UAE law)
• The three most common reasons documents get rejected and how to avoid them
• Real costs and timelines based on what we see in practice
• When you actually need a lawyer versus when your bank can handle it

Why letters of credit still matter in modern trade

You might wonder whether letters of credit remain relevant in an age of instant global payments and sophisticated credit insurance products. The answer depends entirely on context.

For repeat transactions between trusted partners with years of trading history, open account terms often make sense. But for new relationships, large transactions, or trades involving counterparties in unfamiliar jurisdictions, letters of credit continue to solve a fundamental problem: how do you trust someone you have never met, operating under a different legal system, to hold up their end of a deal?

The numbers tell the story. According to UAE Central Bank data, letters of credit facilitated over 40% of the UAE's import-export transactions in 2024. That percentage has remained remarkably stable despite the proliferation of alternative payment methods.

Here is what a letter of credit actually does:

• Substitutes bank creditworthiness for commercial risk between unfamiliar parties
• Gives sellers confidence they will be paid against compliant documents
• Gives buyers confidence their bank will only pay when shipment is proven
• Creates a neutral verification mechanism that neither party controls

When a UAE machinery importer agrees to purchase EUR 2 million worth of equipment from a German manufacturer they have never worked with, neither party wants to move first. The German company will not ship without payment assurance. The UAE buyer will not wire funds to a company they found at a trade exhibition. A letter of credit breaks this deadlock by inserting bank promises into the transaction.

This substitution of bank credit for commercial credit explains why letters of credit remain the backbone of international trade finance, particularly in markets like the UAE where cross-border commerce represents core economic activity.

The legal framework you actually need to understand

Letters of credit in the UAE operate within a legal framework that combines domestic legislation with international rules. Understanding how these pieces fit together helps you anticipate how disputes will be resolved and what standards your documents must meet.

UAE commercial transactions law

The primary domestic legislation is Federal Decree Law No. 50 of 2022, which replaced the original Commercial Transactions Law from 1993. This updated law provides the foundational framework for commercial transactions including documentary credits and banking operations.

Key features of the updated law:

• Part 6 specifically regulates transactions involving Islamic financial institutions
• Clarifications on co-extensive liability for guarantees
• Updated provisions on payment guarantees issued by financial institutions
• Alignment with the UAE's position as a global centre for Islamic banking and finance

The Commercial Transactions Law establishes basic principles, but the detailed rules governing how letters of credit actually operate come from elsewhere.

UCP 600: the rules that actually govern your transaction

The Uniform Customs and Practice for Documentary Credits, published by the International Chamber of Commerce as UCP 600, represents the most successful set of private commercial rules ever developed. These 39 articles govern approximately USD 1 trillion of trade annually across 175 countries.

UAE banks routinely incorporate UCP 600 into letters of credit by express reference. When your letter of credit states that it is subject to UCP 600, every requirement for document presentation, every deadline, and every bank obligation flows from those rules rather than from UAE domestic law.

The practical implication: Whether you are presenting documents to a bank in Dubai, Singapore, or Frankfurt, the same rules apply. This standardisation reduces the friction of international trade and provides predictability that domestic laws alone could never achieve.

For those wanting to understand UCP 600 in greater depth, the ICC Academy offers comprehensive trade finance training that covers documentary credit operations in detail.

The autonomy principle: why banks pay even when deals go wrong

One concept trips up newcomers to trade finance more than any other: the autonomy principle. This principle holds that the bank's payment obligation under a letter of credit is completely independent from the underlying commercial contract between buyer and seller.

What this means in practice:

• If documents comply with credit terms, the bank must pay
• It does not matter if goods turned out defective
• It does not matter if the buyer claims breach of contract
• It does not matter if the buyer is now insolvent

We have had clients struggle with this concept, particularly buyers who discover problems with shipped goods and expect their bank to simply refuse payment. That is not how letters of credit work. The bank examines documents, not goods. If the documents comply, payment follows.

This autonomy provides the certainty that makes letters of credit effective. UAE courts and the DIFC Courts consistently uphold this principle, intervening only when clear fraud is established.

Types of letters of credit and when to use each

Not all letters of credit serve the same purpose. Understanding the different structures helps you choose the right instrument for your transaction.

Irrevocable credits: the standard for serious trade

Under UCP 600, a credit is irrevocable even if it does not explicitly say so. This means it cannot be amended or cancelled without agreement from the beneficiary, the issuing bank, and any confirming bank.

Revocable credits exist in theory but are almost never used. If someone offers you a revocable letter of credit, treat it as a red flag about the transaction.

Confirmed credits: adding a second bank's promise

In a confirmed letter of credit, a second bank adds its own undertaking to pay against compliant documents.

Confirmation becomes valuable when:

• You have concerns about the issuing bank's creditworthiness
• The issuing bank is located in a jurisdiction with political or economic instability
• You have no relationship with the issuing bank and prefer dealing with a known institution
• Country risk warrants additional security

UAE banks frequently act as confirming banks for credits issued elsewhere. The additional security comes at a cost, typically 0.25% to 1.5% per quarter depending on the issuing bank's profile and country risk.

Sight credits vs. deferred payment credits

Sight credits require payment immediately upon presentation of compliant documents. You ship goods, present documents, and receive payment within days of compliance determination.

Deferred payment credits provide for payment at a future date, typically 30, 60, 90, or 180 days after document presentation or shipment. These credits effectively provide the buyer with trade financing.

From a seller's perspective, deferred payment credits carry additional risk. However, you can often discount the deferred payment obligation with your bank, receiving immediate funds at a cost.

Transferable credits: essential for trading companies

If you operate as a trading intermediary, transferable credits deserve your attention. A transferable credit allows you to transfer all or part of the credit to your supplier, using the buyer's letter of credit as the payment mechanism for your own purchase.

Key limitations to understand:

• Must be explicitly designated as transferable
• Can only be transferred once
• Terms of the transferred credit must mirror the original (with limited exceptions)
• First beneficiary may substitute their own invoice and draft

For situations where a transferable credit does not work, back-to-back letters of credit provide an alternative with more flexibility but greater complexity and cost.

The letter of credit process: what actually happens

Understanding the operational flow helps you anticipate requirements and avoid delays that can derail transactions.

Before you start: getting the commercial terms right

The letter of credit process begins long before anyone contacts a bank. It starts with your sales contract.

Your sales contract should specify:

• That payment will be by letter of credit
• Credit amount and currency
• Required documents (be specific)
• Shipment and presentation deadlines
• Whether confirmation is required
• Any special conditions
• Who bears bank fees

We cannot overstate the importance of sellers reviewing documentary requirements before agreeing to them. We have seen transactions collapse because sellers agreed to provide documents they could not actually obtain.

The step-by-step process

Phase 1: Application and issuance

1. UAE importer applies to their bank for a letter of credit
2. Bank assesses creditworthiness and determines collateral requirements
3. Bank issues the credit via SWIFT to the advising bank
4. Credit becomes effective upon issuance

Typical timing: 1-3 business days for established customers

Phase 2: Advising and confirmation

1. Advising bank receives and authenticates the credit
2. Advising bank notifies beneficiary of credit terms
3. If confirmation requested, confirming bank adds its undertaking
4. Beneficiary reviews all terms for compliance capability

Critical action: Review the credit immediately and request amendments for any problematic terms before shipping

Phase 3: Shipment and document presentation

1. Beneficiary ships goods in accordance with credit terms
2. Beneficiary assembles all required documents
3. Beneficiary presents documents to nominated bank within deadline
4. Presentation must occur before credit expiry

Default presentation deadline under UCP 600: 21 days after shipment

Phase 4: Examination and payment

1. Bank examines documents against credit terms
2. Bank determines compliance within five banking days
3. If compliant: bank honours the credit (immediate or deferred)
4. If discrepant: bank issues refusal notice specifying each discrepancy

Documentary requirements: where transactions succeed or fail

The documents required under a letter of credit determine whether you get paid. Banks examine documents strictly against credit terms, and even minor discrepancies can justify refusal.

The documents you will typically need

Commercial invoice

• Must describe goods corresponding to credit description
• Show correct prices and quantities
• Made out to applicant unless otherwise permitted
• Goods description must match credit precisely

Transport documents

• Bills of lading, air waybills, or multimodal transport documents
• Must show shipment within required period
• Name correct ports or places
• Often must be clean, to order, and properly endorsed

Insurance documents

• Cover specified risks
• Minimum 110% of CIF value typically required
• Dated no later than shipment date
• Certificates acceptable only if credit permits

Certificates of origin

• Identify goods and origin country as specified
• May require issuance by chambers of commerce or government authorities

Inspection certificates

• Confirm specified matters
• Must be issued by named inspection company

The three most common reasons documents get rejected

According to ICC surveys, roughly 60-70% of document presentations contain discrepancies on first submission. After handling hundreds of these situations, we see the same three problems repeatedly:

1. Timing failures

Late shipment (goods shipped after the latest permitted date) and late presentation (documents submitted after the deadline or credit expiry) account for a significant portion of rejections. The fix is simple in theory but requires discipline: build realistic buffers into your deadlines and present documents immediately after shipment.

2. Data inconsistencies

Information conflicts between documents cause constant problems. The bill of lading shows one quantity, the invoice shows another. The certificate of origin spells the company name differently than the credit. Banks apply strict compliance standards, and even minor inconsistencies justify rejection. Cross-reference every document against every other document before presentation.

3. Description mismatches

The invoice must describe goods in terms corresponding to the credit description. Not similar terms. Not better terms. Corresponding terms. We have seen rejections over differences as minor as "steel pipes" versus "steel tubes" when the credit specified one and the invoice used the other. Copy the credit description exactly.

Practical steps for compliant presentations

Immediately upon receiving the credit:

• Read every clause carefully
• Identify any requirements you cannot meet
• Request amendments before shipping if terms are problematic
• Clarify anything unclear with your bank

When preparing documents:

• Use checklists for every credit
• Cross-reference each document against every other document
• Ensure names, addresses, dates, and descriptions are consistent
• Review against UCP 600 and ISBP 745 standards

When presenting:

• Submit early, not on the last possible day
• Early presentation allows time to address issues while credit remains valid
• Retain copies of everything submitted

Islamic trade finance: Sharia-compliant solutions

The UAE's position as a global Islamic finance centre means many businesses require trade finance solutions that comply with Sharia principles. Islamic letters of credit operate on similar principles to conventional credits but avoid interest (riba) and excessive uncertainty (gharar).

Murabaha-based trade finance

The most common Islamic trade finance structure combines a letter of credit with a Murabaha arrangement.

How it works:

1. Islamic bank issues letter of credit on customer's behalf
2. When documents presented, bank purchases goods from seller
3. Bank immediately sells goods to customer at marked-up price
4. Customer pays bank over agreed period

The bank's profit comes from the markup on goods rather than interest on a loan. Murabaha-based facilities account for approximately 60% of Sharia-compliant trade financing globally.

Where to access Islamic trade finance in the UAE

Major providers include:

• Emirates NBD Islamic
• Dubai Islamic Bank
• Abu Dhabi Islamic Bank
• Sharjah Islamic Bank

For companies setting up operations and requiring Islamic banking relationships, understanding these structures from the outset ensures trade finance arrangements align with broader corporate requirements.

What companies actually experience: costs, timing, and practical realities

After advising on hundreds of UAE trade finance transactions since 2006, we see the same patterns repeat. Three issues cause the most friction: cost surprises, timing assumptions, and documentary mistakes. Here is what you should actually expect.

The real cost picture

Bank fees vary significantly based on your relationship, transaction size, and credit terms. Published tariffs provide a starting point, but established customers negotiate substantially better rates.

Beyond bank fees, factor in:

• Time spent preparing documents
• Potential discrepancy fees if presentations rejected
• Opportunity cost of cash tied up in margin requirements
• Costs of amendments if credit terms need changes

For US companies trading with UAE counterparties, the U.S. Commercial Service's guide to UAE trade financing provides additional context on banking practices in the region.

Realistic timing expectations

Credit issuance: 1-3 business days for customers with established facilities; 1-2 weeks for new customers or those requiring collateral

Document examination: Up to 5 banking days under UCP 600, though many banks complete faster

Payment on sight credits: Same day or next business day after compliance determination

The wild card: Discrepancies. If documents are rejected, obtaining waivers or correcting and re-presenting can add days or weeks.

Payment recovery challenges

One reality about doing business in the UAE that catches some foreign companies off guard: payment recovery can be slower than in the United States or Europe. When things go wrong, resolution takes time.

This reinforces the value of letters of credit for significant transactions. Rather than shipping goods and hoping for payment, the letter of credit ensures you have bank security before goods leave your control.

For companies that do encounter payment disputes, understanding the UAE litigation landscape becomes essential.

When letter of credit disputes arise

Despite the security that letters of credit provide, disputes happen. Understanding common scenarios and resolution options helps you protect your interests.

Document disputes: the most common battleground

The majority of letter of credit disputes involve disagreements about whether documents comply with credit terms.

Key principles to remember:

• Banks must specify each discrepancy in their refusal notice
• Vague rejections that do not identify specific problems are improper
• Banks must give notice within five banking days
• Failure to give proper notice may preclude reliance on discrepancies
• Even minor defects can justify rejection under strict compliance standards

The fraud exception

Fraud represents one of the few grounds on which courts may restrain payment under an otherwise compliant letter of credit. However, fraud must be clearly established.

What is NOT sufficient:

• Mere suspicion of wrongdoing
• Breach of contract allegations
• Disputes about goods quality

What IS typically required:

• Clear evidence of fraud (not merely breach of contract)
• Fraud directly connected to the letter of credit demand
• Bank knowledge of the fraud

UAE courts and DIFC/ADGM courts recognise the fraud exception but apply it restrictively to preserve commercial certainty.

Where to resolve disputes

UAE onshore courts: Apply UAE law; proceedings in Arabic; jurisdiction over local parties

DIFC Courts: English-language proceedings; apply DIFC law or other laws as agreed; parties can opt in by agreement

ADGM Courts: Similar common law proceedings in Abu Dhabi; accept jurisdiction by agreement

Arbitration: Available under DIAC, ICC, LCIA rules; offers confidentiality; awards enforceable under New York Convention

For businesses facing cross-border enforcement challenges, understanding how foreign judgments are enforced in the UAE provides important context.

When to call a lawyer, not just your bank

Your bank's trade finance team handles routine matters competently. But certain situations require legal involvement:

• Documents rejected and you believe the refusal is improper. Banks sometimes raise discrepancies that do not withstand scrutiny under UCP 600. A lawyer can assess whether you have grounds to challenge.
• Bank missed UCP 600 deadlines or gave vague discrepancy notices. Procedural failures by banks can preclude them from relying on discrepancies. This requires legal analysis.
• Allegations of fraud around a demand or presentation. Fraud claims trigger court involvement and require immediate legal response.
• Parallel litigation or arbitration about the underlying contract. When the commercial deal is disputed alongside the LC, coordination between proceedings becomes critical.
• Cross-border enforcement questions. Determining which courts have jurisdiction and how to enforce judgments across UAE, DIFC, ADGM, and foreign jurisdictions requires specialist guidance.
• Significant amounts at stake. When the transaction value justifies the cost, having a lawyer review credit terms before issuance can prevent problems that cost far more to fix later.

Standby letters of credit and bank guarantees

While documentary letters of credit secure payment for goods, standby letters of credit and bank guarantees serve as security for performance obligations. The distinction matters for businesses involved in construction, project finance, and similar contexts.

Standby credits

Standby letters of credit function as backup payment mechanisms, drawn upon only if the applicant fails to perform.

Common uses:

• Performance security for construction contracts
• Bid bonds for tender processes
• Payment guarantees supporting open account trade
• Lease security

Unlike documentary credits requiring shipping documents, standbys typically require only a simple demand stating the applicant has failed to perform.

Bank guarantees

UAE banks issue various guarantee types including performance bonds, advance payment guarantees, and tender guarantees. These typically operate on demand, meaning the beneficiary can call the guarantee without proving breach.

UAE courts generally uphold the autonomy of demand guarantees, making wrongful calls difficult to stop unless clear fraud or abuse of rights is established.

Strategic considerations for UAE businesses

After nearly two decades advising on trade finance matters, we have developed views on how businesses should approach letters of credit strategically.

When letters of credit make sense

Use letters of credit when:

• Trading with unfamiliar counterparties
• Transaction values are significant relative to your risk tolerance
• Goods are customised or difficult to resell if buyer defaults
• Counterparty or their country presents elevated credit risk
• Complex contract terms require documentary verification

Consider alternatives when:

• Established relationships with trusted partners exist
• Transaction values are modest
• Speed is more important than payment security
• Cost of letter of credit outweighs risk mitigation benefit

Negotiating credit terms

Do not treat letter of credit terms as non-negotiable boilerplate.

For sellers:

• Ensure documentary requirements are achievable before agreeing
• Push back on requirements for documents you cannot obtain
• Build realistic buffers into shipment and presentation deadlines

For buyers:

• Ensure terms protect your interests without creating impossible compliance burdens
• Overly restrictive terms may cause discrepancies that delay your receipt of goods

For both parties:

• Explicitly address who bears bank fees
• Clarify amendment procedures
• Specify dispute resolution mechanisms

Building internal capabilities

Companies that regularly use letters of credit benefit from:

• Training staff on UCP 600 and documentary requirements
• Establishing document preparation procedures and checklists
• Building relationships with trade finance teams at banks
• Knowing when to seek legal advice

The cost of developing this capability pays for itself through reduced discrepancies, faster transactions, and better outcomes when disputes arise.

How Kayrouz & Associates supports trade finance clients

We have spent nearly two decades helping importers, exporters, and trading companies navigate cross-border transactions in the UAE.

Our services include:

• Transaction structuring on letter of credit terms, documentary requirements, and risk allocation
• Documentary review to identify compliance issues before goods ship
• Dispute representation before UAE courts, DIFC Courts, ADGM Courts, and arbitral tribunals
• Fraud matters including applications to restrain payment and defence against allegations
• Banking relationships assistance with trade finance facility agreements
• Regulatory compliance ensuring transactions meet CBUAE requirements, sanctions, and AML obligations

Since 2006, we have successfully resolved more than 570 matters across diverse practice areas. Our corporate and commercial practice provides the broader transactional expertise that supports our trade finance work.

Conclusion

Letters of credit remain essential instruments for UAE cross-border trade, providing the payment security and commercial certainty that enable international commerce to function. For companies importing goods through UAE ports, exporting to global markets, or using the UAE as a trading hub, understanding how documentary credits operate directly affects commercial success.

The difference between smooth transactions and costly delays usually comes down to preparation. Understanding documentary requirements before agreeing to them, preparing documents systematically, and knowing when to seek professional guidance prevents most problems before they occur.

If you are negotiating a significant letter of credit, facing repeated document discrepancies, or concerned about a potential dispute, schedule a consultation with our trade finance team to review your position before risk escalates.

Kayrouz & Associates maintains offices in the UAE and serves clients throughout the Middle East. This guide provides general information regarding letters of credit in UAE cross-border trade and should not be construed as legal advice applicable to any specific situation.

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