Legal Definitions - circular note

Definition: A circular note is a type of letter of credit used in commercial law. It is an instrument issued by a bank at the request of a customer, which guarantees payment to a third party (beneficiary) as long as certain conditions are met, regardless of whether the underlying agreement between the customer and beneficiary is fulfilled. Circular notes are governed by Article 5 of the UCC and are also known as letters of credit, bill of credit, or circular letter of credit.

Example: A company in the United States wants to purchase goods from a supplier in China. The supplier requires payment before shipping the goods, but the buyer does not want to pay until they receive the goods. To solve this problem, the buyer can request a circular note from their bank, which guarantees payment to the supplier once the goods are shipped and certain conditions are met. The supplier can then use the circular note to receive payment from the bank, even if the buyer does not fulfill their payment obligation.

This example illustrates how a circular note can be used to facilitate international trade by providing a secure payment method for both the buyer and the supplier.