Reimbursement for Letter of Credit with Boycott Provision
Question
Issuing Bank, a foreign bank, maintains an account with First National Bank, a U.S. bank. Issuing Bank issues a letter of credit in favor of ABC, Inc., a U.S. corporation. The letter of credit contains a boycott provision. The letter of credit provides that any negotiating bank may obtain reimbursement from Issuing Bank's account at First National Bank by certifying that the conditions of the letter of credit have been met. Issuing Bank does not send First National Bank a copy of the letter of credit. May First National Bank reimburse negotiating banks for the letter of credit when it contains a boycott provision?
Answers
Explanations
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A. B. C. D.A
The correct answer is B. No. First National Bank is under a duty to determine the underlying conditions of any letter of credit it pays.
A letter of credit is a common financing tool used in international trade transactions. It is a written commitment issued by a bank on behalf of its customer (the importer or buyer) to pay a specified amount of money to a third party (the exporter or seller) upon the satisfaction of certain conditions.
In this scenario, Issuing Bank, a foreign bank, issues a letter of credit in favor of ABC, Inc., a U.S. corporation. The letter of credit contains a boycott provision. A boycott provision is a clause that requires the beneficiary of the letter of credit to confirm that it is not engaging in any boycotts of certain countries or entities. The provision is designed to comply with U.S. laws that prohibit U.S. companies from participating in boycotts of Israel and other countries.
The letter of credit also provides that any negotiating bank may obtain reimbursement from Issuing Bank's account at First National Bank by certifying that the conditions of the letter of credit have been met. In other words, if a negotiating bank complies with the terms of the letter of credit, it can get paid from Issuing Bank's account at First National Bank.
The question asks whether First National Bank may reimburse negotiating banks for the letter of credit when it contains a boycott provision. The answer is no. First National Bank is under a duty to determine the underlying conditions of any letter of credit it pays. This duty arises from the principle of strict compliance in letters of credit.
Strict compliance means that banks must pay only when the beneficiary presents documents that strictly comply with the terms and conditions of the letter of credit. If the documents are not in strict compliance, the bank is not obligated to pay.
In this case, the boycott provision is a material condition of the letter of credit. It affects the rights and obligations of the parties to the transaction. If a negotiating bank were to present documents that comply with the terms of the letter of credit but do not comply with the boycott provision, First National Bank would be paying in violation of U.S. law. Therefore, First National Bank must determine whether the letter of credit contains a boycott provision and ensure that any negotiating bank complies with it before reimbursing them.
In conclusion, the correct answer is B. No. First National Bank is under a duty to determine the underlying conditions of any letter of credit it pays. If First National Bank discovers that the letter of credit contains a boycott provision, it should not reimburse negotiating banks unless they comply with the provision.
