Purpose, requirement and payment - article 5

Question 1

Describe the process of letters of credit in an international setting

Answer 1

1. )Both uyer and seller contract to sell with a letter of credit to finance.
2. )The buyer applies to his/her bank for a letter of credit.
3. )The bank issues the letter and forwards it to the correspondent bank in the seller’s country.
4. )The correspondent bank sends the letter to the seller.
5. )The seller prepares the shipment and sends documents to the correspondent bank.
6. )If the documents are in order, the bank sends to the buyer’s bank and pays the seller.
7. )The buyer’s bank charges the buyer’s account, releases documents, and reimburses the correspondent bank.

Question 2

What are the requirements for transferring a letter of credit?

Answer 2

1. )Cannot transfer unless stated in letter

2. )Proceeds from the letter are assignable

Question 3

What purpose do letters of credit serve?

Answer 3

To ensure performance and payment under a contract

Question 4

Describe what happens if a bank ignores the requirements for payment on a letter of credit

Answer 4

The bank is liable for any damages because it cannot vary the terms of the letter of credit.

Question 5

List the basic characteristics of a letter of credit

Answer 5

1. )Issued in any form that is a record.
2. )Consideration is not required to issue.
3. )Can be revocable (international is irrevocable).
4. )Letter expires one year after date of issue, five years if time is perpetual.