Financing: Letter of credit
9 important questions on Financing: Letter of credit
Name + explain the law that governs letter of credit
Explain purpose + define Letter of credit (L/O)
- Issued by a bank or other person (issuer)
- At the request of a customer/buyer (account part)
- Which obliges the issuer to pay a bill of exchange (drawn by the account party) up to certain sum within a period of time
- Upon the sellers (beneficiary's) presentation of documents specified by the account party.
Purpose is assurance for the seller that he will be paid for goods delivered to the buyer
Name 2 reasons for using L/C
- Assurance of payment once goods are delivered meaning buyer is serious about sales contract
- Has expenses to pay in relation to goods thus can be used to pay those goods
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Name + explain the 2 types of L/C
- Irrevocable —>
- Cannot be altered without beneficiary consent
- Preferred by most beneficiary's as it provides most security
- Revocable by the issuing bank
- Disliked by the beneficiaries as it provides least security
Define applications for L/C + when a bank will refuse application
Bank will refuse application:
- Based on applicant having insufficient funds on deposit
- The bank has not already extended a line of credit to applicant.
Name + explain the legal consequenses of not obtaining L/C > stage of negotiations vs contract exists
- Stage of negotiation ( no contract)
- Issuing of L/C is nessesary condition to formation of contract:
- No L/C issued —> no contract but is no breach to contract might be potential tort, depends on lvl of negotiations
- Contract exists
- Issuing of L/C is a condition to performance of contract
- no L/C issued os breach of contract (non-performance is fail to pay thus injured party is entitled to sue for damages)
Name + explain the 3 types of cross border payments of banks
- Issuing bank: They issue L/C + deliver it to correspondent bank (advising bank) located in the beneficiaries country
- Advising bank: Delivers the L/C to the beneficiary + ensures that beneficiary is advised and their credit is delivered. Also assumes no liability for paying the L/C
- Confirming bank: Confirms the L/C —> conformation is an independent promise (obligation) to accept/negotiate + pay L/C (to beneficiary/ seller). They are paid after delivery of document specified in credit (bill of lading) and other terms + conditions of credit have been complied with.
Name + explain the beneficiary (seller) rights + obligations
- Contractual obligation from sales contract with buyer
- Commercial practices (not law): to collect on L/C
- Non (contractual) rights with respect to L/C transaction (UPC, article 6)
Obligations are based on:
- Must comply either terms + conditions of L/C
- Present to the issuer or it's agent the docs designated in the credit (bill of lading)
Define counter trade + reasons
- Trade transaction which involves the sale of goods or services for goods/services not for monetary price
Reasons:
- The buyer lacks commercial credit or a convertible currency
- The buyer wants to exploit a favourable market position to obtain better terms
- Government purchaser seeks to protect or stimulate the output of domestic industries or maintain the balance of its overseas trade
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