1. Buyer submits Purchase Order or Contract to Seller. 2. Buyer places application for Letter of Credit with buyers bank.

3. Buyers bank sends confirmation of Letter of Credit to Sellers confirming bank. 4. Confirming bank sends copy of Letter of Credit to Seller. 5. Seller sends order confirmation to Buyer. 6. Seller sends order to freight forwarder. 7. Freight forwarder exports order to Buyer. Freight forwarder sends export documents to Seller 8. Seller presents Letter of Credit and export documentation to confirming bank for settlement. 9. Confirming bank confirms authenticity of Letter of Credit and export documents, pays Seller per terms of the Letter of Credit. 10. Confirming bank forwards export documents to Buyers Bank. 11. Buyers bank presents copies of export documents to Buyer; 12. Buyer pays bank under terms of the Letter of Credit; Buyers bank releases original export documents to Buyer. 13. Buyer presents original export documents to local customs authorities. 14. Customs authorities verify authenticity of documents and release goods to Buyer.

Letters of Credit in International Transactions

April 6, 2009 By AK & EL Law Firm

Published Articles Commercial credits are most commonly used in the international transactions areas. Its main future is that; it gives security both the exporter (seller) and the importer (buyer). The Seller knows that, he will get paid if he completes his duty properly. The buyer, on the other hand, can ensure to part his money before the goods are received. According to Professor RM Goode, describes it as the most successful harmonising measure in the history of international commerce." A letter of credit can be explained, as an undertaking by a bank to make payment to the beneficiary within specified time, against the presentation of the documents, which is described in the underlying contract.

The most significance feature of the letter of credit is that all parties in the commercial credit transaction deal with documents and not goods.

A commercial credit transaction involves a number of stages. First one is the underlying contract for the sale of goods act between the buyer and the seller. Second is that, the contract between buyer and issuing bank. Third stage is the contract between the issuing bank and the intermediary bank. Next stage is the contract between the issuing bank and the seller. The last one is that, if the credit has been confirmed, the contract between the confirming bank and the seller.

The underlying contract must determine of the credit requirements in details such as the type of the credit, whether it is revocable or irrevocable, confirmed or unconfirmed.

In addition, according to the principle of the autonomous, those contracts, which have been made under the commercial credit transaction, are independent from underlying contract and also separate transaction of each other. This means, if any dispute existed

between the seller and the buyer, it would not direct effect to the commercial credit transaction.

1- The Contract Between the Buyer and the Issuing Bank

Second stage of the commercial transaction is that the contract between the issuing bank and the applicant.

According to the contract of sale, the applicant has to request his own bank (the issuing bank) to open a letter of credit in favour of the beneficiary. The issuing bank must follow the instructions given by the applicant. Those instructions must be clear, precise, and unambiguous. When he does not give clear instructions, the issuing bank has to refer back to the applicant for further instructions and clarification. The banks duty is to comply with the applicants instruction strictly.

Furthermore, the issuing bank must also follow the instruction; when he is in the acceptance or rejection of the documents. So he has to check the documents which tendered by the beneficiary for payment, with reasonable care to ascertain that it comply with the terms and conditions of the credit. According to the UCP article 13(b) the examination must be conducted within a reasonable time not to exceeding seven banking days following the receipt of the documents. So the issuing bank fails to follow the instructions with reasonable care, he is in a position of breach of the contract with the applicant.

On the other hand, the applicants main duty is to reimburse to the issuing bank the amount which the bank has already paid to the beneficiary under the letter of credit. However, the right to reimbursement is not accurate. The banks duty is only not to open the credit and also operate and complete it. If the bank failed to comply with it, he would be lost the right to reimbursement.

Moreover, the issuing bank can benefit from exempting clauses, which exempt the issuing bank from liability for matters arising to his out of control. Such as by act of god, wars, riots or any other causes.

In addition, the issuing banks duty is not to check the condition of the goods. He has to deal

with documents. Important thing is to constitute a good tender of documents. If the documents are faulty, the bank cannot claim to reimbursement.

2- The Contract between the Issuing Bank and the Correspondent Bank

The other stage of the letter of credit is the contract between the issuing bank and the correspondent bank. The issuing bank instructs the corresponding bank where is employed from the beneficiary country. The corresponding bank role has been given by the issuing bank and has to follow his instruction under the letter of credit. As I mentioned before, when the correspondent bank has received unclear instruction, he has to give primary notification to the beneficiary for information only and without responsibility. After that the correspondent bank must request to necessary information from the issuing bank. The credit will be acted only when clear instruction have been received.

According to the role of the correspondent bank given by the issuing bank, he has to work as an advising or confirming bank. If the issuing bank instructs the correspondent bank to confirm the credit, the correspondent bank is then known as the confirming bank. The confirming bank has to add his undertaking to honour the credit. On the other hand, when the correspondent bank has not added his undertaking to honour the credit, he is known as the advising bank. His role is only to accept the tendered documents and to make payment against to these documents.

The differences between the advising bank and the confirming bank is that, the former works as an agent of the issuing bank, but the latter assumes the role of the principle. In addition to this that there are three different situation for the confirming bank; First one is that, when the confirming bank makes a payment to the beneficiary against to the confirming documents, he has a right to be reimbursement. However, the issuing bank fails to reimburse to the confirming bank, the former could be liable to the latter in damages between the amounts paid to the beneficiary and the amounts recovered on the sale of the goods act.

Second one is that, according to the Mance J if the confirming bank pays on a late presentation of documents where time had not been properly extended under article 44(a) UCP 500 or by agreement, the issuing bank could clearly recover any money paid to the confirming bank as money paid under a mistake of fact.

The last one is that, when the confirming bank has accepted a nonconforming documents as a result of mistake, they can take an action against the beneficiary.

3- The Contract Issuing Bank and Seller

According to the underlying contract, the applicant has to inform the issuing bank to open a letter of credit. After that, the issuing banks duty is to notice the beneficiary that the credit has been opened. Having received to notice, the beneficiary can obtain a payment when he tendered the documents in which must comply with the terms and conditions of the letter of credit.

The credit can be either revocable or irrevocable credits. It should be stated in the contract whether revocable or irrevocable. If there was no indication a type of the credit, it presumed to be irrevocable credit.

In the case of revocable credit, the issuing bank can cancel the credit at any time and without given notice the beneficiary. On the other hand, an irrevocable credit has not been cancelled without given prior notice the beneficiary. Moreover, opening an irrevocable credit makes the contract independent between the issuing bank and the beneficiary. According to Rowlatt J.An irrevocable credit is not qualified by or subject to the terms of the contract of sale made between the buyer and the seller.

As regards to the principle of the autonomy, those contracts are separate from each other. In the any event of a dispute between the seller and the buyer will not effect to the contracts which have been made under the commercial transaction. The only exception to this rule occurs in the case of fraud. When the credit is procured by the beneficiary, the bank has a right to refuse payment. However, the fraud must be properly proved and not to be merely alleged. According to Sir John Donaldson MR said but the evidence must be clear, both as to the fact of fraud and as to the banks knowledge

On the other hand, the fraud did not properly proved or it was not committed by the beneficiary, the issuing bank has to pay against confirming documents, because, in this case, the beneficiary was deemed to be innocent.

Furthermore, if the issuing bank refuses the documents as a result of the non-conformity with instructions, the issuing bank must give notice the beneficiary without delay and no later than seventh banking days. However, the issuing banks decision was made wrongly about refusing the documents; the beneficiary could bring action against the bank for the value of the credit together with interest. When the beneficiary has been received payment which is an indefensible delay, the bank is responsible for the loss or damage is happened to the beneficiary as a result of the delay payment.

In addition, when the issuing bank accepts a faulty tender of documents, it will be rejected by the applicant. On this basis, according to the common law, the issuing bank has a right of recourse against the beneficiary. Alternatively, it can be argued that, under the UCP 500, article 14(e), the issuing bank does not have a right to recourse against the beneficiary, because the issuing bank has been accepted a tender of documents, the beneficiarys right to the amount of credit in respect of the documentary credits.

4- The Contract between the Confirming Bank and the Seller

Relationship between the correspondent bank and the beneficiary depends on the role of the former, which has been given to him by the issuing bank.

As I mentioned before, when the correspondent bank is performed as a confirming bank, his duty is similar the position of the issuing bank. He promises to make a payment to the beneficiary. According to Jenkins LJ, the opening of a confirmed letter of credit constitutes a bargain between the banker and the vendor of the goods, which imposes upon the banker an absolute obligation to pay, irrespective of any dispute there maybe between the parties as to whether the goods are up to contract or not In this situation, the beneficiary can by no means look at the bank for payment and he can in no circumstances look to the applicant.

On the other hand, the advising bank cannot be a party of the contractual relationship, because he does not confirm the credit.

In addition, the confirming bank can accept the documents under the reserve. The documents

could be tendered by faulty. On this basis, the problem only arises between the beneficiary and the confirming bank, because such a contract between the confirming bank and the beneficiary is independent. So the beneficiary would be bound to repay the amount on demand, if the faulty documents were rejected by the issuing bank or the applicant.

In conclusion, letters of credit are still important instruments in the field of international trade. They provide security for both the buyer, which he can ensure to get the goods and for the seller, which he can ensure to get payment when he sends the goods. The instrument of letters of credit also makes the international transactions to work smoothly. It gives the mechanism stability; especially from the buyers and the sellers perspective. For instance, there is little or no previous trading relationship among the parties; the letters of credit provide them to work with confidence and security.

AUTHOR: Ramazan Zorlu-Attorney at Law, LL,M

Copyright AK & EL Law Firm More information about AK & EL Law Firm

letter of credit substitutes the credit of a bank for the credit of an applicant. Specifically, it is a written instrument issued by banks stating that payments will be made on behalf of applicants to beneficiaries, provided that the beneficiary fulfills all of the conditions described in the letter of credit. The typical bank customer for a letter of credit is someone engaged in international trade and who is a purchaser of international goods. According to the Uniform Customs and Practices for Documentary Credits (the "UCP"), a letter of credit is "an arrangement, however named or described, whereby the issuing bank acting at the request and on the instructions of its customer (the applicant for the credit): 1. is to make payment to or to the order of a third party (the beneficiary) or is to pay or accept bills of exchange (drafts) drawn by the beneficiary, or

2. authorizes another bank to effect such payment, or to accept and pay such bills of exchange (drafts) or 3. authorizes another bank to negotiate against stipulated document(s), provided that the terms and conditions of the credit are complied with."

The parties involved

A letter of credit is three-dimensional since it traditionally involves three parties: a bank (the issuing bank), a customer on whose behalf the letter of credit is issued (the applicant), and a person to whom payment from the letter of credit will flow (the beneficiary).

How letters of credit work

The bank receives fees for issuing and handling letters of credit. In issuing the letter of credit, the bank becomes entitled to reimbursement from the applicant for any payments that the bank makes. The applicant may provide collateral to the bank to secure the repayment of the reimbursement obligations, or the bank may use the customer's line of credit with the bank to obtain reimbursement. A typical letter of credit applicant is an importer of goods who has been requested by the seller to provide a letter of credit, usually covering a specific order. The applicant's bank issues a letter of credit at the applicant's request within a line of credit held at its disposal. The letter of credit constitutes the bank's irrevocable obligation to pay the seller (beneficiary) at sight against documents stipulated by the applicant. The documents usually include shipping documents that enable the importer to take delivery of the goods. The issuing bank incurs a contingent liability until such time as documents conforming to the letter of credit terms are presented. The letter of credit is forwarded to the beneficiary directly or through a correspondent bank in the beneficiary's country (the advising bank). It is a self-contained instrument, and compliance is determined solely by whether the required documents appear on their face to conform to the stated terms. Accordingly, the beneficiary can determine before shipment whether a letter of credit must be amended to conform to the underlying commercial contract and request such an amendment.

Usually, a required document would be a transport document (ocean vessel bill of lading, airway bill, or parcel post receipt) consigned to the issuing bank. This way, the issuing bank has control of the goods at issue at the time it has to make payment on a draft. Federal banking authorities have set forth the following five standards for banks to follow when issuing letters of credit: 1. Each letter of credit should be conspicuously entitled as such. 2. The letter of credit should have an expiration date. 3. The bank's undertaking should be limited in amount. 4. The bank's obligation to pay should only be on the presentation of specified documents and should not involve the bank in disputes of fact or law between the account party and the beneficiary. 5. The customer should have an unqualified obligation to reimburse the bank for moneys paid under the credit.

Documents, not merchandise or performance

The bank deals in documents only, not merchandise or performance. Therefore, the bank cannot ensure that the underlying transaction has been fulfilled to the satisfaction of the applicant. In letter of credit transactions, banks are concerned with representations, not with ultimate truth. When all stipulated documents are presented, the issuing bank must pay the beneficiary. Therefore, the applicant (the bank's customer), cannot rely on the letter of credit for protection from the beneficiary's performance problems. The bank's responsibility is only to examine documents with reasonable care and to ascertain that they appear to comply with the requirements of the letter of credit. Thus, once the letter of credit is issued, the applicant faces the risk that the letter of credit may be paid through improper and even fraudulent actions of the beneficiary. The bank, however, cannot refuse to pay on the letter of credit based on such actions unless those type of actions are stipulated as conditions on the letter of credit instrument itself.

This is often a source of confusion for the unsophisticated importer, who may ask the bank not to pay on a letter of credit due to disputes with the exporter/beneficiary, or due to the fact that they changed their mind about the transaction. As much as the bank may want to cooperate with the importer, it cannot do so. Its role is confined to the review of documents. Although many large companies are quite familiar with the letter of credit process, the smaller businesses will be very dependent on the bank's letter of credit department for expertise in international trade. Again, however, the bank's sole role is to determine whether presenting drafts are accompanied by the documents required by the letter of credit and whether all conditions set forth in the letter of credit have been satisfied.

Restriction on amendments to issued letters of credit

Once a letter of credit is issued, any suggested amendment must be accepted by all parties to the transaction (in other words, to the issuer, applicant, and beneficiary). Otherwise, a court will construe the amendment as unilateral and completely unenforceable. For this reason, letters of credit are considered to be irrevocable.

Commercial Letters of Credit

Commercial letters of credit are trade related and they are used to carry out specific trade transactions involving the sale or purchase of goods. Sellers want to know that if they deliver the goods that they will be paid. A letter of credit from a commercial bank gives the seller (the beneficiary), the assurance that payment will be made. By providing this assurance, the bank takes on the credit risk, instead of the buyer of the goods. This kind of letter of credit creates a contingent liability for the issuing bank since it is the only party that is liable to pay when the required documents are presented. In order for a seller-beneficiary of goods to claim payment under a letter of credit, the beneficiary's documents must conform exactly to those required by the letter of credit. The letter of credit sets forth many details including the description of the goods, insurance and form of notification. Every letter of credit will also specify two key dates: the expiry date and the payment date.

A. Expiry Dates

Every letter of credit has a date of expiration. In the absence of other set dates for shipment or presentation, the expiration date is the last possible date by which the beneficiary may ship goods and present document to the specified bank for payment. Generally, a commercial letter of credit should expire within 120 days (4 months) of issuance. There may be cases, such as a letter of credit covering the payment of goods shipped from different overseas ports for an unusual item, in which the time needed to complete and ship the goods is more than 120 days. However, this will be unusual and when it does happen, the bank should view the longer shipment period as a warning sign of a possible problem.

B. Payment Dates Most of the time, requests for payment under a letter of credit are made via a "draft" form and any other required documents sent by the beneficiary to the issuing bank. The draft is an order to pay and is a specific type of demand for payment. The letter of credit will often specify payment at "sight." This means that upon receipt (sight) of all conforming documents, the bank will immediately pay the draft and debit the applicant for the amount at issue.

C. Pros and Cons of Commercial Letters of Credit For beneficiaries, commercial letters of credit are a very useful form of protection. Sellers of goods can open new markets without worrying about the financial strength of new customers, and they do not have to investigate the credit of smaller customers. The prospect of fraud by a beneficiary always exists. A beneficiary might decide not to ship the goods at issue and simply present fraudulent documents to the issuing bank to receive payment. Notwithstanding the fear of a fraudulent beneficiary, the commercial letter of credit is a useful tool to applicants, as well. Applicants may be able to purchase certain goods only through a letter of credit. The applicant can also control the shipment date and lot size of the goods through the letter of credit. Quality, however, is something that is beyond the scope of a letter of credit. For the bank issuing a letter of credit, the following are risks that should always be analyzed:

1. Credit Risk: The bank will be underwriting the applicant's credit risk unless the letter of credit is secured by cash. 2. Issuance Error Risk: If the bank prepares a letter of credit with terms that are different from those set forth in the application for the credit, the bank will face financial exposure for departing from the application. The solution is to merge the letter of credit with the application; in other words, make the applicant sign off on the letter of credit. 3. Payment Error Risk: If the bank fails to properly check documents, the bank may make an error in paying against documents. The most common area for this kind of error is in the description of the goods. As an example, if the letter of credit describes the goods and says the goods are yellow in color, but the invoice does not state a color, the bank will be liable for the applicant's loss if it pays on this letter of credit. 4. Discrepancies: There is almost always something wrong with every letter of credit that would justify the bank in refusing to honor a presented draft. However, unless the bank wants to risk compromising its relationship with customers and correspondent banks, it is best if the bank notifies the beneficiary to cure the deficiency before the letter of credit expiry date. Also, the applicant may nevertheless waive the discrepancy, and such waivers should be made by the applicant in writing to protect the bank. D. Types of Commercial Letters of Credit 1. Documentary Letters of Credit This is the most common form of commercial letter of credit. The letter of credit, as discussed above, will usually require that drafts presented under the credit be accompanied by certain documents. Payment is made to the beneficiary as soon as the draft and the appropriate conforming documents are presented to the issuing bank. 2. Clean Letters of Credit If the letter of credit conspicuously states that it is a letter of credit or is conspicuously so entitled, the beneficiary's draft must be honored without the presentation of documents if the letter of credit does not specify that documents have to be presented. 3. Banker's Acceptances

A banker's acceptance exists when a letter of credit is drafted with time payment terms, instead of sight terms. Banker's acceptances create a much higher risk for banks than documentary letters of credit. Standard commercial letters of credit, as mentioned above, create contingent liabilities for the bank. Banker's acceptances, however, create actual liabilities for the bank. If a letter of credit states that payment is due "90 days on sight," this means that payment is not made to the beneficiary until 90 days after the bank receives conforming documents. This is different from the practice under a standard documentary letter of credit, where documents are presented by the beneficiary and inspected by the bank. The is automatically paid by the bank assuming all conforming documents are presented, and the applicant must automatically reimburse the bank. When the letter of credit contains time terms for payment, known as a banker's acceptance, the series of events that unfold is different. As in the standard documentary letter of credit practice, the beneficiary presents to the bank all conforming documents and the bank inspects those documents. However, unlike the standard documentary letter of credit practice, assuming that the documents are conforming, the bank stamps "accepted" on the face of the beneficiary's draft order for payment. The bank is now obligated to pay the face amount of the draft to its holder (commonly the beneficiary) at maturity. The maturity date of the accepted draft (now a "banker's acceptance") will conform to the payment terms specified in the original letter of credit. In other words, if the letter of credit payment terms were "90 days sight," the maturity of the draft will be 90 days after the documents are presented and accepted. Following acceptance of the draft, the documents (and thus title to the goods) are released to the applicant. However, the applicant has no obligation to pay the bank for the goods that have been released to it until one day prior to the maturity of the draft. The main reason for using a banker's acceptance is to take advantage of the delayed payment mechanism. The applicant can obtain release of the goods and then sell them before having to pay for them. The beneficiary seller likes the banker's acceptance because it provides more flexibility to its customer, the applicant, without compromising the guarantee of payment from the commercial bank issuing the letter of credit. Virtually all of the downside to a banker's acceptance deals with the bank's risk. In effect, the bank is making a 100% advance on inventory by surrendering the goods to the applicant before reimbursement is made on the letter of credit. One way of protecting against this risk is to obtain other collateral from the applicant. 4. Revolving Letters of Credit

These are similar to but different from revolving lines of credit. If an applicant plans to make multiple purchases from one beneficiary, a revolving letter of credit may be used. The bank sets a maximum amount covered under the revolving letter of credit and the beneficiary can then make multiple shipments up to the limit of the revolving letter of credit. As shipments arrive and the applicant reimburses the issuing bank, new availability opens up that the beneficiary can ship against. 5. Partial Shipments Here, the letter of credit does not prohibit or limit partial shipments. As a result, the beneficiary may ship goods as they become ready and may obtain payment for whatever portion of the goods that are shipped. 6. Installment Letters of Credit Under an installment letter of credit, the applicant controls the number and size of partial shipments. The letter of credit specifies the installment of goods that must be shipped. If the beneficiary misses the deadline for one shipment, the remaining installments are canceled. 7. Back-to-Back Letters of Credit The main function of a standard letter of credit is to ensure payment. However, in a back-to-back letter of credit, the main purpose is to provide financing. This is a high risk transaction. By way of illustration, the bank's customer may have a letter of credit under which he is the beneficiary. The bank's customer then applies to the bank for a letter of credit, using the first letter of credit under which he is the beneficiary as collateral for the repayment of letter of credit for which he is the applicant. 8. Export Letters of Credit With an export letter of credit, the bank becomes an advising bank, and the bank's customer becomes the beneficiary (exporter). The bank receives a letter of credit from a foreign correspondent representing the applicant. The bank then authenticates and mails to the customer the original letter of credit and a cover memo stating that a letter of credit has been established in his favor for the export of the goods. Once the beneficiary, the bank's customer, has a draft and the documents are in order, as specified in the letter of credit, the documents will be negotiated and sent to the foreign issuing bank for examination and payment. Once the funds are collected, a deposit will be made to the customer's account. The beneficiary should be informed of the deposit immediately.

9. Bills of Exchange and Trade Acceptances Bills of exchange are similar to but different from sight drafts drawn under commercial letters of credit. In a bill of exchange, there is no letter of credit (in other words, the bank does not guarantee payment) and the draft order for payment represents an obligation of the importer only. Extended terms can also be arranged through bills of exchange that convert to trade acceptances when accepted by the importer (again, there is no guarantee by the bank). In these cases, the bill of exchange is drawn under time terms, just as banker's acceptances are. Instead of the bank accepting the documents and guaranteeing payment, however, the trade acceptance represents an obligation of the importer only. Trade acceptance financing is much cheaper than banker's acceptance financing and may be acceptable to the seller (exporter), provided the seller has a great deal of confidence in the buyer (importer). The bank can obtain fees for processing documents, referred to as foreign collections.

E. Standby Letters of Credit The difference between commercial letters of credit and standby letters of credit can be reduced to one word: default. Commercial letters of credit typically involve payment under a contract of sale. Payment is made upon presentation of conforming documents purportedly evidencing the movement of goods, the satisfactory performance of the beneficiary. The shipping documents triggering payment are standardized and enjoy nearly universal acceptance and use. In contrast, however, standby letters of credit can take the form of a surety device. Specifically, they become payable to the beneficiary upon the assertion of the applicant's nonperformance. The beneficiary of a standby letter of credit can trigger payment simply by making an assertion that a breach of performance has occurred. It is very difficult to draft a standby letter of credit in such a way that gives the applicant any protection against having the letter of credit drawn upon. Commercial letters of credit are expected to be paid by the issuer. Payment is consistent with normal performance. With a standby letter of credit, however, the bank does not expect to pay. Payment demands under a standby letter of credit usually mean that something is wrong. Because the standby letter of credit is only paid when there is a problem, it is probably true that the applicant does not want the standby letter of credit paid.

Commercial letters of credit usually follow a pattern with the same documents accompanying the draft in case after case. The standby letter of credit follows no such pattern. A standby letter of credit is in substance a loan by the bank issuing it. However, it poses much more danger than a loan agreement presents. With a loan, a bank can immediately move against collateral once an event of default has occurred. With a standby letter of credit, the bank may have to wait until the standby letter of credit is drawn upon by the beneficiary before moving against any collateral. This is so even if the bank knows that the applicant's financial condition has deteriorated to the point where there soon may be nothing left.

Trade Finance

Trade financing under letters of credit are usually self-liquidating. This means that as the goods move from inventory to the ultimate buyer, payment received by the applicant is used to repay the bank. Typically, the applicant reimburses the bank on the letter of credit payment by an advance on a revolving credit agreement. By the time the applicant has received payment on the goods brought in under the letter of good that he sells to his ultimate customer, the advance on the revolving credit agreement that was used to reimburse the bank is due.

A literature review is a body of text that aims to review the critical points of current knowledge including substantive findings as well as theoretical and methodological contributions to a particular topic. Literature reviews are secondary sources, and as such, do not report any new or original experimental work. Simai Haji Mati was quoted saying that literature review should be referred to as reviewing and analyzing the work of literature in relation to the specified topic in research. Most often associated with academic-oriented literature, such as a thesis, a literature review usually precedes a research proposal and results section. Its ultimate goal is to bring the reader up to date with current literature on a topic and forms the basis for another goal, such as future research that may be needed in the area.

A well-structured literature review is characterized by a logical flow of ideas; current and relevant references with consistent, appropriate referencing style; proper use of terminology; and an unbiased and comprehensive view of the previous research on the topic.