Test 2: Chapter 7 Review

buyer of goods

Drawer =

seller

payee =

Documentary draft can serve as an important financing or credit device, providing the seller and buyer with a mechanism for financing the international sale.

12. How are Documentary Drafts used in Trade Finances? How are they helpful to Financial Institutions?

Used to expedite payment in a documentary sale

How is a Documentary Draft used?

negotiable instrument

a signed writing, containing an unconditional promise or order to pay a fixed sum of money, to order or to bearer, on demand or at a definite time - Usually checks or promissory notes

bank

drawee =

Standby Letter of Credit

issuer is obligated to pay beneficiary upon presentation of documents indicating a default by the account party in payment of debt or performance of the obligation

Documentary Letter of Credit

- The definite undertaking of a bank (not exactly a contract) - Issued in accordance with the instructions of their customer (aka buyer), - In favor to the beneficiary (aka seller), - Wherein bank promises to pay a certain sum of money in the stated currency, - Within the prescribed time limits, - Upon the complying presentation - Of the required and conforming documents The requirement that the bank will pay the seller only on the presentation of documents is what gives the documentary credit its name.

money, goods

A negotiable instrument moves _____ and a negotiable document moves ___________.

In LOC, "100% acrylic yarn". In commercial invoice, "imported acrylic yarn". - The description of the goods in the invoice did not match the description of the goods in the credit. Bank was correct in refusing to pay when the documents did not match.

Courtaulds North America, Inc. v. North Carolina National Bank

Cash Against Documents

Example: Seller sends all the documents along with a sight draft to his bank who sends them to a buyers bank with collection letter/instruction. Once funds are taken from buyer's account, the buyer gets the documents so can get goods.

The word draft is more frequently used in US law and banking practice, while the term is bill of exchange is more frequently in use outside the US, particularly in England.

How is a Bill of Exchange different from a regular draft?

5 banking days

How many days are allowed by the Buyer's bank to inspect the documents?

within 21 days

How many days within shipment must the LOC be presented?

buyer's bank can refuse to pay; Description of goods in commercial invoice must correspond exactly to that in LOC

If the Rule of Strict Compliance is in effect, what can happen if there is a discrepancy between the documents? What provision must match up exactly in which two docs?

1) Buyer's advising bank sends the LOC to the beneficiary (seller) via a bank in seller's country ('correspondent bank'). 2) Seller must read terms and conditions of the LOC very carefully before manufacture or ship goods. 3) Seller's documents and draft are delivered to seller's bank or directly to the (buyer's) issuing bank). 4) After buyer's bank gets the documents, they need to inspect the paperwork

Layout the steps to a Letter of Credit Transaction

Bank was in error for not paying, based on the paper's weight. Bank's obligation is to pay when presented with the documents called for in the letter of credit.

Maurice O'Meara Co v. National Park Bank of New York

SWIFT System

Society for Worldwide Interbank Financial Transfer = high-speed communications network between banks, set up to transfer funds worldwide Facilitates funds transfers between 9000+ banks (normally larger banks) Works cooperatively with transport and logistics industry, have created the Bolero Project which moves documents electronically

Functional Standard of Compliance vs. Rule of Strict Compliance

Some courts in the US and in some European countries have used a more practical "functional standard" of compliance. - Relax strict compliance rule - Banks don't have to reject docs due to obviously minor typos.

Seller shipped cow hair instead of hog bristles and buyer sued bank to restrain from paying on letter of credit. Bank was prohibited from honoring draft as it learned its customer would have suffered irreparable harm as a result of fraud Where there is credible evidence of active fraud on the seller's part before the bank has paid on the LOC, the court may enjoin payment

Sztejn v. J. Henry Schroder Banking Corp.

UCP 600 Rule

Takes a modified strict compliance rule Data doesn't have to be identical but can't conflict. However, description of goods in commercial invoice must correspond with LOC.

trade acceptance or banker's acceptance

The buyer agrees to pay unconditionally at the time stated on the draft. Bank will check credit worthiness, etc. and bank agrees to pay (negotiable instrument - one more level of assurance).

the independence principle of LOC

The letter of credit is independent of the sales transaction a general rule of law stating that the letter of credit is independent of the sales contract between buyer and seller - Issuing bank's only concern is that the buyer presents to the issuing bank certain 'documents' required by the letter of credit

Rule of Strict Compliance

The terms of the documents presented to the issuing bank must strictly conform to the requirements of the letter of credit and the UCP - Prevailing standard - If discrepancy between BOL, invoice, insurance, etc., then buyer's bank can refuse to pay. - Description of goods in commercial invoice must correspond exactly to that in the LOC.

1) An unconditional order in writing 2) From one person to another 3) Signed by the person giving it 4) To pay on demand or at a certain time 5) A fixed sum of money 6) To the order or bearer

What are the brief requirements for a Bill of Exchange or a Draft? (6)

1) Has a negotiable instrument 2) Takes for value 3) In good faith 4) Without notice of dishonor or overdue, and 5) Without notice of alteration or unauthorized signature

What are the requirements/characteristics of a Holder in Due Course when a Documentary Draft is used? (5)

1) Substitute for money 2) A financing or credit device

What are the two purposes that Bills of Exchange and Documentary Drafts serve?

1. Draft 2. Commercial invoice 3. Ocean BOL 4. Certificates of analysis or inspection 5. Insurance policy 6. Certificate of origin

What documents are usually required by the buyer and included in a transaction? (6)

It needs to be delivered

What is required of a negotiable order instrument for it to be negotiated or transferred? (payable to bearer)

It needs to be endorsed and delivered.

What is required of a negotiable order instrument for it to be negotiated or transferred? (payable to order of person)

Article 5 of UCC

What law applies to LOC transactions in the US?

Uniform Customs & Practice (UCP)

What law applies to LOC transactions internationally?

1. Ask buyer if want to waive discrepancies 2. If buyer decides to refuse, bank must give notice no later than 7 banking days after receipt of the documents.

What procedures must the bank follow if they want to dishonor? (2)

1) Drawer = buyer of goods 2) Drawee = bank 3) Payee = seller

Who are the 3 parties on a draft?

1. Issuing bank (buyer's bank) 2. Account party (buyer) 3. Beneficiary (seller)

Who are the parties involved when using a Letter of Credit? (3)

gives an extra level of assurance.

Why would you want to use a LOC instead of a documentary sale with banker's acceptance?

Letter of Credit

an obligation of a bank, usually irrevocable, issued on behalf of one of its customers and promising to pay a sum of money to a beneficiary upon the happening of a certain event or events - Loan money on buyer's behalf to seller - Kind of like a back-up

Confirmed letter of credit

bank in seller's country 'confirms' and agrees to purchase docs and honor drafts on LOC on same terms as issuing bank - Much more expensive, but gives seller funds much quicker - If bank won't do it, then seller might need to reconsider underlying transaction

Trade finance

banks and other financial institutions involved in commercial lending provide a wide range of financial packages for international trade - ______ _________not only assists the buyer in financing its purchase but also provides immediate cash to the seller for the sale and is profitable for the lending institution

Draft

signed order of drawer given to drawee to pay sum of money to third party, on demand or definite time - Drawer orders his bank to pay payee - Like a check

Bill of Exchange

specialized type of international draft used to expedite foreign money payments 1) An unconditional order in writing 2) From one person to another 3) Signed by the person giving it 4) To pay on demand or at a certain time 5) A fixed sum of money 6) To the order or bearer