Letters of Credit

Question 1

What is the primary role of a letter of credit in international commerce?

Answer 1

To provide a mechanism for payment.

Question 2

What are the three contracts involved in a typical documentary sale of goods?

Answer 2

• Sales contract
• Contract of affreightment
• Letter of credit

Question 3

What is the historical origin of the letter of credit?

Answer 3

Traceable to practices in the twelfth century.

Question 4

What are the principal sources of law for the international letter of credit?

Answer 4

• Uniform Customs and Practice for Documentary Credits (UCP)
• Article 5 of the Uniform Commercial Code (UCC)

Question 5

What does Article 1 of the UCP 600 state about documentary credits?

Answer 5

The UCP are rules that apply to any documentary credit when expressly indicated.

Question 6

What are the two types of letters of credit discussed in this chapter?

Answer 6

• Documentary credit
• Standby letter of credit

Question 7

In a typical letter of credit transaction, who is the applicant?

Answer 7

The party establishing the credit, usually the buyer.

Question 8

Who is the beneficiary in a letter of credit transaction?

Answer 8

The party entitled to payment under the credit, usually the seller.

Question 9

What is the role of the issuing bank in a letter of credit?

Answer 9

To honor the letter of credit against the presentation of specified documents.

Question 10

What are the two types of letters of credit based on their revocability?

Answer 10

• Revocable
• Irrevocable

Question 11

What is the difference between straight and negotiation credits?

Answer 11

• Straight credit: runs only to the named beneficiary.
• Negotiation credit: runs to the beneficiary and any nominated bank.

Question 12

What is the function of an advising bank?

Answer 12

To notify the beneficiary of the terms of the credit and check its authenticity.

Question 13

What is the purpose of a confirming bank?

Answer 13

To independently assume all obligations of the issuing bank.

Question 14

What is a nominated bank?

Answer 14

A bank authorized by the issuing bank to pay under the letter of credit.

Question 15

What are the four methods of settlement in a letter of credit?

Answer 15

• Payment
• Acceptance
• Negotiation
• Deferred payment

Question 16

What is a payment credit?

Answer 16

A credit that requires the bank to honor the draft immediately.

Question 17

What distinguishes an acceptance credit?

Answer 17

It is payable within a stipulated period after the bank accepts the draft.

Question 18

Under what condition does a beneficiary present documents under a straight credit?

Answer 18

The beneficiary submits a draft to the issuing bank.

Question 19

What is the key difference in payment obligations under a straight credit versus a negotiation credit?

Answer 19

Under a straight credit, the issuing bank pays only the named beneficiary; under a negotiation credit, it pays the nominated bank.

Question 20

What is the significance of timely presentation of documents in a letter of credit?

Answer 20

It must occur before the credit expires to meet presentation requirements.

Question 21

What does a transferable credit allow a seller to do?

Answer 21

Transfer the right to perform obligations and receive payments under the credit.

Question 22

What is the difference between a transfer and an assignment of credit?

Answer 22

• Transfer: acquires rights to enforce payment.
• Assignment: acquires rights to receive payment after conditions are met.

Question 23

True or False: The UCP 600 is designed to be more accessible to non-specialists compared to its predecessors.

Answer 23

True

Question 24

Fill in the blank: The letter of credit is an undertaking by the issuing bank to honor drafts if accompanied by _______.

Answer 24

[specified documents]

Question 25

What type of letter of credit is opened by the buyer in favor of the seller?

Answer 25

Transferable letter of credit

Question 26

What is the amount of the transferable letter of credit issued by the buyer?

Answer 26

$100,000

Question 27

How much does the seller pay the third party to manufacture the goods?

Answer 27

$80,000

Question 28

What documents does the third party present to the issuing bank?

Answer 28

Draft for $80,000, invoice, bill of lading, and other documents required by the letter of credit

Question 29

What happens if the issuing bank finds the documents to be in order?

Answer 29

The issuing bank pays the seller’s draft for $100,000

Question 30

What is the profit earned by the seller from this transaction?

Answer 30

$20,000

Question 31

What are back-to-back credits used for?

Answer 31

To keep the identity of the buyer and third-party supplier confidential and to pay several suppliers

Question 32

What does the seller assign to the seller's bank for the back-to-back credit?

Answer 32

The right to receive the proceeds under the prime letter of credit

Question 33

What amount does the seller's bank issue for the second letter of credit?

Answer 33

$80,000

Question 34

True or False: The documents required for the second letter of credit must match those of the first letter.

Answer 34

False

Question 35

What must the seller's bank ensure about the documents for the second letter of credit?

Answer 35

They must be tailored to meet the requirements of the first letter of credit

Question 36

What is a potential issue with the draft submitted by the third-party supplier?

Answer 36

It is likely drawn on the seller’s bank and names the third party as the beneficiary

Question 37

Fill in the blank: A negotiable bill of lading must name the _______ as the shipper to satisfy the prime letter of credit.

Answer 37

seller

Question 38

What can the seller request from the carrier if the seller and the third party are in the same location?

Answer 38

To switch the bill

Question 39

What does the seller's bank do after receiving the documents from the third-party supplier?

Answer 39

Pays $80,000 to the supplier and forwards documents to the issuing bank

Question 40

What does the seller’s bank receive from the issuing bank after forwarding the documents?

Answer 40

$100,000 under the prime letter of credit

Question 41

How does the seller obtain funds for manufacturing goods without using its own funds?

Answer 41

Through back-to-back credit

Question 43

What is the independence principle in letter of credit law?

Answer 43

The independence principle states that the letter of credit is independent from the underlying sales contract.

Question 44

What does UCP 600 Article 4(a) state regarding letters of credit?

Answer 44

A credit is a separate transaction from the sale or other contract, and banks are not bound by such contracts.

Question 45

What is the strict compliance principle in letter of credit law?

Answer 45

The strict compliance principle requires that documents submitted for payment must conform to the terms of the credit.

Question 46

According to UCP 600 Article 5, what do banks deal with?

Answer 46

Banks deal with documents and not with goods, services, or performance to which the documents may relate.

Question 47

What was the buyer's instruction to KNB regarding the first shipment?

Answer 47

The buyer instructed KNB to pay for the first shipment minus a set-off for the costs of testing and sterilization.

Question 48

True or False: The seller must retest the devices with trained staff for the buyer to receive payment on the second shipment.

Answer 48

True.

Question 49

What concern does the buyer have regarding the medical devices?

Answer 49

The buyer is concerned about receiving medical devices that are not suitable for use.

Question 50

What is one potential solution suggested to alleviate the buyer's concerns in the letter of credit transaction?

Answer 50

The buyer could structure the letter of credit to include more stringent inspection requirements.

Question 51

According to UCP 600 Article 3, can the buyer simply revoke the credit?

Answer 51

No, the buyer cannot simply revoke the credit.

Question 52

What was the nature of the contract between Urquhart Lindsay and the Benjamin Jute Mills?

Answer 52

The contract involved the manufacture of machinery with specific terms regarding price adjustments for increased costs.

Question 53

What did the defendants in Urquhart Lindsay's case argue regarding the letter of credit?

Answer 53

They argued that the letter of credit must incorporate the sales contract, affecting payment conditions.

Question 54

What was the court's response to the argument that the letter of credit incorporated the sales contract terms?

Answer 54

The court held that the letter of credit must be paid as presented, independent of the sales contract.

Question 55

What was the outcome of the Maurice O'Meara Co. case regarding the letter of credit?

Answer 55

The defendants refused to pay due to lack of satisfactory evidence regarding paper specifications.

Question 56

Fill in the blank: A credit by its nature is a _______ from the sale or other contract.

Answer 56

[separate transaction]

Question 57

What documents were required under the letter of credit in the Maurice O'Meara case?

Answer 57

Documents included commercial invoices, weight returns, and a negotiable dock delivery order.

Question 58

What was the effect of a confirmed irrevocable credit in the context of Urquhart's case?

Answer 58

It meant that the credit could not be altered or revoked without mutual consent.

Question 59

What does the term 'strict compliance' imply for documents presented under a letter of credit?

Answer 59

Documents must exactly match the terms specified in the letter of credit.

Question 60

In the Urquhart case, what did the plaintiffs claim regarding the breach of contract?

Answer 60

They claimed damages due to the defendants' refusal to pay invoices as presented.

Question 61

What was the amount of the draft presented to the defendant?

Answer 61

$46,301.71

Question 62

What did the defendant notify the plaintiff regarding the evidence presented?

Answer 62

There had not been presented 'evidence reasonably satisfactory' showing the paper's tensile or bursting strength.

Question 63

What agreement was made between the plaintiff and the defendant regarding the paper?

Answer 63

The defendant would cause a test to be made of the paper, and if it met the specifications, payment would be made.

Question 64

What was the first separate defense claimed by the defendant?

Answer 64

The paper tendered was not of the tensile or bursting strength specified in the letter of credit.

Question 65

What did the Sun-Herald Corporation offer to the plaintiff regarding the newsprint paper?

Answer 65

To accept the paper and pay 8 ½ cents per pound if the plaintiff could prove that the paper met the specifications.

Question 66

What was the outcome of the plaintiff's motion for summary judgment?

Answer 66

The motion for summary judgment was denied.

Question 67

What was the basis of the bank's obligation under the irrevocable letter of credit?

Answer 67

To pay sight drafts when presented with the specified documents.

Question 68

What was the primary purpose of such letters of credit?

Answer 68

An assurance to the seller of merchandise of prompt payment against documents.

Question 69

True or False: The bank is obligated to check if the documents presented match the actual merchandise.

Answer 69

False

Question 70

What was the sole reason stated by the defendant for refusing to pay the draft?

Answer 70

There has arisen a reasonable doubt regarding the quality of the newsprint paper.

Question 71

What expressions were criticized in the documents when the second draft was presented?

Answer 71

'in test 11/12, 32 lbs.' and 'paper equal to original sample in test 11/12, 32 pounds.'

Question 72

According to the general rule, when is an obligation to present documents considered complied with?

Answer 72

If any of the documents attached to the draft contain the required description.

Question 73

Fill in the blank: The order of the Appellate Division and the Special Term should be _______.

Answer 73

reversed

Question 74

What did Cardozo, J. dissenting, argue regarding the bank's role?

Answer 74

The bank acts upon the credit of both its customer and the merchandise as security.

Question 75

What did Cardozo, J. believe about the bank's obligation regarding misrepresentation?

Answer 75

A bank that pays a draft on a misrepresented bill of lading may recover the payment when the misrepresentation is discovered.

Question 76

What was the conclusion of the dissenting opinion regarding the defendant's answer?

Answer 76

It was sufficient to permit a finding that the plaintiff’s assignors misrepresented the nature of the shipment.