1.Letter from Financial Institution promising to pay stated sum upon receipt of specified documents.

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LETTER OF CREDIT (Payment System)

• 1. Letter from Financial Institution promising to
  pay stated sum upon receipt of specified
  documents.
• The effect of the letter-of-credit is that a
  financial institution provides an advance
  commitment that it will make the required payment
  to the payee when due.
• 3. The transaction payor/buyer has no right to
  cancel payment any time after the financial
  institute makes the payment commitment.
• Payee faces small risk of nonpayment.
• 5. No other payment system provides an advance
  assurance of payment as firm as the letter of
  credit.
• 6. Most prominent application is in providing
  payment in international transactions for the
  sale of goods.
• 7. The use of letters-of-credit in international
  transaction, signaled the need for a reliable
  uniform international principles. Financial
  institutions incorporated the UCP (Uniform
  Customs and Practice for Documentary Credits).
  Current revised Article 5 conforms to the UCP.

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LETTER OF CREDIT (Payment System) Typical
Transaction
Hong Kong Toy Manufacturing Company Promise to
Deliver Goods
Contracted to Purchase Toys from Hong Kong Toy
Manufacturing Company for 250,000
Missouri Toy Company (Toy Importing, Inc.)
Hong Kong Co. (Toy Manufacturing, Inc.)
Payment provides a problem for both
companies. The Hong Kong company is unwilling to
ship until payment is received. The Missouri
company is unwilling to pay unless it has
received the goods.
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LETTER OF CREDIT, A SOLUTION TO THE PROBLEM
Issuer (Boatmens Bank) 5-102(a)(9)
Bank located where Beneficiary That Process
Payment to Beneficiary
Nominated Person or Bank, 5-102(a)(11)
Ask Issuer to issue Letter of Credit in favor of
Hong Kong Co. 5-102(a)(9)

• Expeditious Notification
• Of Issuers issuance
• Of Letter-of-Credit,
• Electronic transmission

Adviser when issued 5-102(a)(1)
SAMPLE LETTER OF CREDIT

• Underlying Sales Contract
• Applicant Purchasing
• from Hong Kong Seller

Beneficiary/Seller Hong Kong Co. 5-102(a)(3)
Applicant/ Purchaser 5-102(a)(2)
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ADVISING CONFIRMING BANKS
Nominated Person or Bank, 5-102(a)(11)
Issuer (Boatmens Bank) 5-102(a)(9)

• If Hong Kong Bank Serves as Nominated Person To
  Process Payment
• Does Nominated Bank have obligation to honor
  request for payment of letter-of-credit?
• UCC' 5-107(b), (c) The role is purely procedural.
• In transaction involving imports to the US,
  foreign beneficiary is satisfied with advice of
  issuance.

Beneficiary/Seller Hong Kong Co. 5-102(a)(3)
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ADVISING CONFIRMING BANKS
Confirmer 5-102(a)(4)
Issuer (Boatmens Bank) 5-102(a)(9)
What is a Confirmer of Confirming Bank?

1. Under 5-102(a)(4), a nominated person who
   undertakes to honor presentment.
2. Is the Confirming Bank directly liable for
   payment of the letter-of-credit.
3. Under 5-107(a), a confirmer is directly obligated
   on a letter-of-credit.
4. Company exporting from the U.S., the American
   beneficiary may want more assurance of payment.
5. The American beneficiary may seek a direct
   commitment on the letter-of-credit from its local
   bank.

Beneficiary/Seller Hong Kong Co. 5-102(a)(3)
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THE TERMS OF THE CREDIT
Confirmer 5-102(a)(4)
Issuer (Boatmens Bank) 5-102(a)(9)
What does the term independence principle mean?

1. Under 5-103(d), the rights and obligations of
   issuer to beneficiary are independent of their
   contract..
2. The beneficiary is entitled to payment if it
   meets the conditions of the letter-of-credit.
3. The conditions are documentary, objective
   relieving the issuer from reviewing the
   underlying contract..
4. The issuer pays upon presentment of draft and
   documents proving shipment of goods.
5. Unless the beneficiary has committed fraud, it
   will not be able to produce the document w/o
   shipment.
6. Why is this independence principle essential to
   the success of letters-of-credit as a payment
   system?

Beneficiary/Seller Hong Kong Co. 5-102(a)(3)
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DRAWING ON THE CREDIT
Confirmer 5-102(a)(4)
Issuer (Boatmens Bank) 5-102(a)(9)
Would substantial performance by the beneficiary
entitle beneficiary to payment under the
letter-of-credit?

1. Under 5-108(a), the beneficiary must strictly
   comply with the conditions in the
   letter-of-credit.
2. Why must the beneficiary strictly comply the
   conditions in the letter-of-credit?
3. Strict compliance is closely related to the
   independence principle. Why is that?
4. By requiring strict compliance and ignoring
   circumstances other than conditions, issuer
   insulated.
5. Samuel Case
6. Can the strict compliance doctrine be a pretense
   for bad faith dishonor of letter-of-credit?
7. How does the Code prevent this bad faith
   dishonor?
8. Under 5-108(e), the issuer is required to observe
   standard practice of financial institutions
   regularly issuing letters.
9. If the issuer honors the letter-of-credit, what
   rights does it have against the applicant?
10. Under 5-108(i)(1) and 5-107(a).

Beneficiary/Seller Hong Kong Co. 5-102(a)(3)
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LETTER OF CREDIT (Payment System)
III. Issues Letter of Credit
Issuer
Seeks reimbursement From issuing bank
II. Applies for Letter of Credit
Nominated Person or Bank, 5-102(a)(11) Adviser
when issued 5-102(a)1)
Ask Issuer to issue Letter of Credit in favor of
Hong Kong Co. 5-102(a)(9)

• Process
• Payment to
• Beneficiary or
• advising when
• issued

Payment of L.C. Begins with Beneficiarys
Presentment of Draft for Payment documents

• Underlying Sales Contract
• Applicant Purchasing
• from Hong Kong Seller

Beneficiary/Seller Hong Kong Co. 5-102(a)(3)
Applicant/ Purchaser 5-102(a)(2)
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ERROR AND FRAUD
Seek reimbursement
Seek reimbursement
Confirmer 5-102(a)(4)
reimbursement
Issuer (Boatmens Bank)
Applicant
Payment
Presentment

1. The letter-of-credit transaction can go awry in
   major ways.
2. Beneficiary fails to perform and, in reliance
   thereon, issuer justifies refusal to pay.
3. Wrongful honor Issuer honors a draft despite
   beneficiary failure to present required
   documents.
4. Wrongful dishonor Issuer dishonor draft even
   though beneficiary presented required documents.
5. Fraud Beneficiary presents fraudulent documents
   that comply even though beneficiary did not
   perform.

Beneficiary/Seller Hong Kong Co. 5-102(a)(3)
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WRONGFUL HONOR
Seek reimbursement
Seek reimbursement
Confirmer 5-102(a)(4)
reimbursement
Issuer (Boatmens Bank)
Applicant
Payment
Presentment

1. What are rights of Applicant for Wrongful honor?
2. How is this question answered by 5-108(i)?
3. What are the rights of Issuing Bank for wrongful
   honor by Confirming Bank?
4. How does 5-107(a) answer this question. 5-108(i)
5. Right to reimbursement is implicitly limited to
   the case of rightful honor.
6. If the Issuing Bank wrongfully honors a
   letter-of-credit, does the Applicant have an
   unlimited right of recovery?
7. Issuing bank is subrogated to rights of
   beneficiary on the underlying obligation.
   5-117(a).
8. Remedies for wrongful honor are controlled by
   5-111(c), NO CONSEQUENTIAL DAMAGES.

Beneficiary/Seller Hong Kong Co. 5-102(a)(3)
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WRONGFUL DISHONOR
Seek reimbursement
Seek reimbursement
Confirmer 5-102(a)(4)
reimbursement
Issuer (Boatmens Bank)
Applicant
Payment
Presentment

1. Article 5 provides a strong remedial framework
   for wrongful dishonor.
2. May the Issuer who wrongfully dishonor be
   subrogated to the beneficiarys claims against
   the applicant?
3. Under 5-117(d), subrogation rights do not arise
   unless the issuer or confirmer pays the
   letter-of-credit.
4. What remedies are available for wrongful
   dishonor?
5. Specific performance. 5-111(a).
6. The amount subject to the dishonor. 5-111(a).
7. Incidental but not consequential damages.
   5-111(b)
8. Interest on the amount owed from the date of
   dishonor. 511(d).
9. Reasonable attorney fees. 5-111(e).
10. Why not consequential damages?
11. Comment 4, 5-111, rests on the fear that
    consequential damage would raise the cost to
    issuers.

Beneficiary/Seller Hong Kong Co. 5-102(a)(3)
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FRAUD FORGED DRAFTS
Seek reimbursement
Seek reimbursement
Confirmer 5-102(a)(4)
reimbursement
Issuer (Boatmens Bank)
Applicant
Payment
Presentment

1. What if a party, not acting on behalf of the
   beneficiary, deceives issuer to pay on forged
   draft?
2. Under 5-108(i)(5), the issuer is discharged
   unless honors draft with forged beneficiarys
   signature.
3. May the issuer honor forged draft?.
4. Under 5-109(a) the provides that the issuer may
   honor or dishonor if acting in good faith.
5. According to comment 12, 5-108, the issuer is
   entitled to reimbursement even on forged drafts.

Interloper Deceives Issuer w/ forged draft
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FRAUDULENT SUBMISSION BY BENEFICIARY
Seek reimbursement
Seek reimbursement
Confirmer 5-102(a)(4)
reimbursement
Issuer (Boatmens Bank)
Applicant
Payment
Presentment

1. This case unusually involves beneficiary who fail
   to perform underlying obligation, but
   fraudulently present draft.
2. Under 5-109(a)(2), issuer need only act in good
   faith.
3. Is the issuer required to honor a fraudulent
   presentment solely because there is facial
   compliance?
4. Under 5-109(a) gives the issuer latitude where
   the document is forged or materially fraudulent.
5. Under 5-109(a), the issuer has latitude where the
   document would facilitate a material fraud.
6. According to comment 1, 5-109, fraud must be so
   severe that the beneficiary has no colorable
   right to expect honor.
7. What right does applicant have upon payment on
   forged documents?
8. Under 5-110(a)(2), may sue beneficiary for breach
   of warranty.
9. Applicant may protect itself under 5-109(b), by
   seeking an injunction to prevent payment on
   forged documents.

Interloper Deceives Issuer w/ forged draft
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ASSIGNING LETTER-OF-CREDIT
Seek reimbursement
Seek reimbursement
Confirmer 5-102(a)(4)
reimbursement
Issuer (Boatmens Bank)
Applicant
Payment
Presentment

1. May beneficiary assign its rights under an issued
   letter-of-credit?
2. Under 5-112(a), unless the letter provides,
   letters not assignable.
3. Letter-of-credit was issued to Dimension Graphic
   for 1,500,00. The company merges with Mickey,
   Inc.
4. May issuer dishonor presentment?
5. Section 5-113 is the exception to 5-112s denial
   of transferability.
6. Is issuer required to determine the authenticity
   of successor right to payment of
   letter-of-credit?.
7. 5-113(c), does not so require. Under 5-113(d)
   such presentment is treated as proper payment
   under 5-108(i).
8. Dimension Graphics, before the merger, assigns
   its rights to the proceeds of the
   letter-of-credit, is the enforceable?
9. Under 5-114(b).
10. Under what circumstance would such an assignment
    occur?
11. Where letter-of-credit assigns proceeds as
    security to obtain funds to pay operating or
    other manufacturing costs.
12. Under 5-114(c), the issuer is under no obligation
    to recognize such assignment of proceeds.
13. Choice of Law Rules.
14. What are the choice of law rules for
    letters-of-credit transactions?
15. Section 5-116.

Interloper Deceives Issuer w/ forged draft
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STANDBY LETTER OF CREDIT
I. Underlying Debt
Creditor/ Beneficiary
III. Payment on Letter of Credit
II. Draft
IV. Reimbursement
Debtor/Principal/Applicant
Bank/Guarantor/ Issuer