Letters of Credit Flashcards
What is the primary role of a letter of credit in international commerce?
To provide a mechanism for payment.
What are the three contracts involved in a typical documentary sale of goods?
- Sales contract
- Contract of affreightment
- Letter of credit
What is the historical origin of the letter of credit?
Traceable to practices in the twelfth century.
What are the principal sources of law for the international letter of credit?
- Uniform Customs and Practice for Documentary Credits (UCP)
- Article 5 of the Uniform Commercial Code (UCC)
What does Article 1 of the UCP 600 state about documentary credits?
The UCP are rules that apply to any documentary credit when expressly indicated.
What are the two types of letters of credit discussed in this chapter?
- Documentary credit
- Standby letter of credit
In a typical letter of credit transaction, who is the applicant?
The party establishing the credit, usually the buyer.
Who is the beneficiary in a letter of credit transaction?
The party entitled to payment under the credit, usually the seller.
What is the role of the issuing bank in a letter of credit?
To honor the letter of credit against the presentation of specified documents.
What are the two types of letters of credit based on their revocability?
- Revocable
- Irrevocable
What is the difference between straight and negotiation credits?
- Straight credit: runs only to the named beneficiary.
- Negotiation credit: runs to the beneficiary and any nominated bank.
What is the function of an advising bank?
To notify the beneficiary of the terms of the credit and check its authenticity.
What is the purpose of a confirming bank?
To independently assume all obligations of the issuing bank.
What is a nominated bank?
A bank authorized by the issuing bank to pay under the letter of credit.
What are the four methods of settlement in a letter of credit?
- Payment
- Acceptance
- Negotiation
- Deferred payment
What is a payment credit?
A credit that requires the bank to honor the draft immediately.
What distinguishes an acceptance credit?
It is payable within a stipulated period after the bank accepts the draft.
Under what condition does a beneficiary present documents under a straight credit?
The beneficiary submits a draft to the issuing bank.
What is the key difference in payment obligations under a straight credit versus a negotiation credit?
Under a straight credit, the issuing bank pays only the named beneficiary; under a negotiation credit, it pays the nominated bank.
What is the significance of timely presentation of documents in a letter of credit?
It must occur before the credit expires to meet presentation requirements.
What does a transferable credit allow a seller to do?
Transfer the right to perform obligations and receive payments under the credit.
What is the difference between a transfer and an assignment of credit?
- Transfer: acquires rights to enforce payment.
- Assignment: acquires rights to receive payment after conditions are met.
True or False: The UCP 600 is designed to be more accessible to non-specialists compared to its predecessors.
True
Fill in the blank: The letter of credit is an undertaking by the issuing bank to honor drafts if accompanied by _______.
[specified documents]
What type of letter of credit is opened by the buyer in favor of the seller?
Transferable letter of credit
What is the amount of the transferable letter of credit issued by the buyer?
$100,000
How much does the seller pay the third party to manufacture the goods?
$80,000
What documents does the third party present to the issuing bank?
Draft for $80,000, invoice, bill of lading, and other documents required by the letter of credit
What happens if the issuing bank finds the documents to be in order?
The issuing bank pays the seller’s draft for $100,000
What is the profit earned by the seller from this transaction?
$20,000
What are back-to-back credits used for?
To keep the identity of the buyer and third-party supplier confidential and to pay several suppliers
What does the seller assign to the seller’s bank for the back-to-back credit?
The right to receive the proceeds under the prime letter of credit
What amount does the seller’s bank issue for the second letter of credit?
$80,000
True or False: The documents required for the second letter of credit must match those of the first letter.
False
What must the seller’s bank ensure about the documents for the second letter of credit?
They must be tailored to meet the requirements of the first letter of credit
What is a potential issue with the draft submitted by the third-party supplier?
It is likely drawn on the seller’s bank and names the third party as the beneficiary
Fill in the blank: A negotiable bill of lading must name the _______ as the shipper to satisfy the prime letter of credit.
seller
What can the seller request from the carrier if the seller and the third party are in the same location?
To switch the bill
What does the seller’s bank do after receiving the documents from the third-party supplier?
Pays $80,000 to the supplier and forwards documents to the issuing bank
What does the seller’s bank receive from the issuing bank after forwarding the documents?
$100,000 under the prime letter of credit
How does the seller obtain funds for manufacturing goods without using its own funds?
Through back-to-back credit
What is the independence principle in letter of credit law?
The independence principle states that the letter of credit is independent from the underlying sales contract.
What does UCP 600 Article 4(a) state regarding letters of credit?
A credit is a separate transaction from the sale or other contract, and banks are not bound by such contracts.
What is the strict compliance principle in letter of credit law?
The strict compliance principle requires that documents submitted for payment must conform to the terms of the credit.
According to UCP 600 Article 5, what do banks deal with?
Banks deal with documents and not with goods, services, or performance to which the documents may relate.
What was the buyer’s instruction to KNB regarding the first shipment?
The buyer instructed KNB to pay for the first shipment minus a set-off for the costs of testing and sterilization.
True or False: The seller must retest the devices with trained staff for the buyer to receive payment on the second shipment.
True.
What concern does the buyer have regarding the medical devices?
The buyer is concerned about receiving medical devices that are not suitable for use.
What is one potential solution suggested to alleviate the buyer’s concerns in the letter of credit transaction?
The buyer could structure the letter of credit to include more stringent inspection requirements.
According to UCP 600 Article 3, can the buyer simply revoke the credit?
No, the buyer cannot simply revoke the credit.
What was the nature of the contract between Urquhart Lindsay and the Benjamin Jute Mills?
The contract involved the manufacture of machinery with specific terms regarding price adjustments for increased costs.
What did the defendants in Urquhart Lindsay’s case argue regarding the letter of credit?
They argued that the letter of credit must incorporate the sales contract, affecting payment conditions.
What was the court’s response to the argument that the letter of credit incorporated the sales contract terms?
The court held that the letter of credit must be paid as presented, independent of the sales contract.
What was the outcome of the Maurice O’Meara Co. case regarding the letter of credit?
The defendants refused to pay due to lack of satisfactory evidence regarding paper specifications.
Fill in the blank: A credit by its nature is a _______ from the sale or other contract.
[separate transaction]
What documents were required under the letter of credit in the Maurice O’Meara case?
Documents included commercial invoices, weight returns, and a negotiable dock delivery order.
What was the effect of a confirmed irrevocable credit in the context of Urquhart’s case?
It meant that the credit could not be altered or revoked without mutual consent.
What does the term ‘strict compliance’ imply for documents presented under a letter of credit?
Documents must exactly match the terms specified in the letter of credit.
In the Urquhart case, what did the plaintiffs claim regarding the breach of contract?
They claimed damages due to the defendants’ refusal to pay invoices as presented.
What was the amount of the draft presented to the defendant?
$46,301.71
What did the defendant notify the plaintiff regarding the evidence presented?
There had not been presented ‘evidence reasonably satisfactory’ showing the paper’s tensile or bursting strength.
What agreement was made between the plaintiff and the defendant regarding the paper?
The defendant would cause a test to be made of the paper, and if it met the specifications, payment would be made.
What was the first separate defense claimed by the defendant?
The paper tendered was not of the tensile or bursting strength specified in the letter of credit.
What did the Sun-Herald Corporation offer to the plaintiff regarding the newsprint paper?
To accept the paper and pay 8 ½ cents per pound if the plaintiff could prove that the paper met the specifications.
What was the outcome of the plaintiff’s motion for summary judgment?
The motion for summary judgment was denied.
What was the basis of the bank’s obligation under the irrevocable letter of credit?
To pay sight drafts when presented with the specified documents.
What was the primary purpose of such letters of credit?
An assurance to the seller of merchandise of prompt payment against documents.
True or False: The bank is obligated to check if the documents presented match the actual merchandise.
False
What was the sole reason stated by the defendant for refusing to pay the draft?
There has arisen a reasonable doubt regarding the quality of the newsprint paper.
What expressions were criticized in the documents when the second draft was presented?
‘in test 11/12, 32 lbs.’ and ‘paper equal to original sample in test 11/12, 32 pounds.’
According to the general rule, when is an obligation to present documents considered complied with?
If any of the documents attached to the draft contain the required description.
Fill in the blank: The order of the Appellate Division and the Special Term should be _______.
reversed
What did Cardozo, J. dissenting, argue regarding the bank’s role?
The bank acts upon the credit of both its customer and the merchandise as security.
What did Cardozo, J. believe about the bank’s obligation regarding misrepresentation?
A bank that pays a draft on a misrepresented bill of lading may recover the payment when the misrepresentation is discovered.
What was the conclusion of the dissenting opinion regarding the defendant’s answer?
It was sufficient to permit a finding that the plaintiff’s assignors misrepresented the nature of the shipment.
