UCC-Article 5: Letters of Credit

Question 1

List the basic characteristics of a letter of credit.

Answer 1

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.

Question 2

Describe the process of letters of credit in an international setting.

Answer 2

1. Buyer and Seller contract to sell with Letter of Credit to finance;
2. Buyer applies to bank for Letter of Credit;
3. Bank issues Letter and forwards to correspondent bank - Seller’s country;
4. Correspondent bank sends Letter to Seller;
5. Seller prepares shipment and sends documents to correspondent bank;
6. If in order, bank sends to Buyer’s bank and pays Seller; 7. Buyer’s bank charges Buyer’s account, releases documents, and reimburses correspondent bank.

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

What are the requirements for transferring a letter of credit?

Answer 5

1. Cannot transfer unless stated in letter;

2. Proceeds from letter are assignable.