International Business Law and Its Environment 8th Edition by Schaffer Test Bank

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International Business Law and Its Environment 8th Edition by Schaffer Test Bank

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CHAPTER 7BANK COLLECTIONS, TRADE FINANCE, AND LETTERS OF CREDIT

TRUE/FALSE

1. The American Bell International v. Islamic Republic of Iran case involved the issue of whether there was irreparable injury to the plaintiff.

ANS: T PTS: 1

2. A Bill of Exchange is a specialized type of non-negotiable instrument used to expedite payment in a documentary sale.

ANS: F PTS: 1

3. A documentary draft payable by terms other than cash against documents is called a time draft.

ANS: T PTS: 1

4. Under a documentary collection, the banks are acting as the agent of the buyer for collection purposes.

ANS: F PTS: 1

5. Letters of credit are recognized in all modern legal systems of the world.

ANS: T PTS: 1

6. Letters of credit are a banks conditional promise to pay cash on the documents.

ANS: T PTS: 1

7. Upon advising the seller that a letter of credit has been issued in its favor, the advising bank has assumed conditional responsibility for payment.

ANS: F PTS: 1

8. Terms of the sales contract must be reflected in the letter of credit, if not the buyer must clear all discrepancies upon examination of the letter of credit.

ANS: F PTS: 1

9. The obligation of the issuing bank to honor the beneficiarys draft under a letter of credit is totally independent of the sales contract between the buyer and seller.

ANS: T PTS: 1

10. The issuing bank will honor the draft as long as the documents appear to be in good order on their face and correspond to the terms of the letter of credit, regardless of the conditions of the goods received.

ANS: T PTS: 1

11. If the issuing bank buys documents that contain a discrepancy, the bank cannot seek reimbursement from the account party, its customer.

ANS: T PTS: 1

12. Under the UCP, banks are responsible for the consequences of delay or loss in transit of any messages, credits, or documents, or for errors of any telecommunication.

ANS: F PTS: 1

13. Expiration dates are an optional term of a letter of credit.

ANS: F PTS: 1

14. Letters of credit drawn with no specified expiration date are required to be submitted within 21 days or a discrepancy occurs.

ANS: T PTS: 1

15. A red clause in a letter of credit is a promise by the advising bank to reimburse the sellers bank for loans made to the seller.

ANS: F PTS: 1

16. A back-to-back letter of credit is actually two letters of credit used as a financing device.

ANS: T PTS: 1

17. Government agencies in the U.S. are not allowed to insure payments made to a U.S. bank if the underlying contract between the buyer and seller is entirely independent from the letter of credit.

ANS: F PTS: 1

18. Bill of exchange and international draft are two names for the same type of negotiable instrument.

ANS: T PTS: 1

19. The Convention on Bills of Exchange as well as U.S. and English domestic laws require the language bill of exchange to appear clearly and prominently on the face of the instrument.

ANS: F PTS: 1

20. In order to negotiate an order instrument, it must be indorsed and delivered.

ANS: T PTS: 1

21. The holder of a bankers acceptance may convert it to cash immediately at a discount rate, sell it on the discount market, or hold it until it matures.

ANS: T PTS: 1

22. Under accounts receivable financing, the factor is protected from contract claims for defective goods by the holder in due course rules.

ANS: F PTS: 1

MULTIPLE CHOICE

1. Maurice OMeara Co. v. National Park Bank of New York involved a letter of credit for a shipment of newsprint. The bank was concerned that the shipment was not as represented in the documents. In finding in favor of the sellers assignee, the court:
a.
Emphasized the independence principle in letter of credit transactions.
b.
Focused on the banks legal right to refuse documents that do not strictly comply with the terms of the letter of credit.
c.
Upheld the banks right to have an inspection to test the tensile strength of the newsprint.
d.
A and C only.

ANS: A PTS: 1

2. Suppose that an issuing bank pays on documents that are conforming to the requirements of the letter of credit, but the seller has shipped worthless goods to the buyer. Which of the following statements, if any, are true?
a.
As long as the documents strictly comply with the letter of credit requirements, the bank will not have to reimburse the buyer.
b.
If there is fraud in the transaction, the bank will have to reimburse the buyer and seek its remedies against the seller.
c.
The strict compliance principle insulates the bank from liability, since it assures the bank that the underlying contract between the buyer and seller is entirely independent from the letter of credit contract.
d.
A and C.

ANS: C PTS: 1

3. An international draft is an order from the seller to the buyer or the buyers bank to pay the seller upon delivery of goods or the presentation of documents. Thus, the seller is both:
a.
The drawer and the drawee.
b.
The drawer and the payee.
c.
The drawee and the payee.
d.
The seller is only the drawer.

ANS: B PTS: 1

4. Which of the following institutions does not provide credit guarantees to back trade finance lending by commercial institutions?
a.
The Federal Reserve Bank.
b.
The Eximbank.
c.
The Commodity Credit Corporation.
d.
The Agency for International Development.

ANS: A PTS: 1

5. A documentary draft issued for the purchase of goods by ABC Co. payable to XYZ Co., payable upon presentation, defines ABC Co. as the ____, XYZ Co. as the ____, and the specialized name for the documentary draft is ____.
a.
Drawee; drawer; sight draft.
b.
Drawer; drawee; sight draft.
c.
Drawee; drawer; documents against acceptance.
d.
Drawer; drawee; cash against documents.

ANS: A PTS: 1

6. A draft due at a future date or after a specified period of time that has been signed by the buyer is called:
a.
Sight draft.
b.
Time draft.
c.
Trade acceptance.
d.
All of the above.

ANS: C PTS: 1

7. If the buyers or sellers bank stamps its name, date, and signature on the face of a draft, it becomes a:
a.
Trade Acceptance.
b.
Bankers Acceptance.
c.
Letter of Credit.
d.
None of the above.

ANS: B PTS: 1

8. Bills of exchange are governed in the U.S. by the ____, in England by the ____, and in over 20 other countries by the ____:
a.
Bills of Exchange Act; Convention on Bills of Exchange and Promissory Notes; The Uniform Commercial Code.
b.
Uniform Commercial Code; Convention on Bills of Exchange and Promissory Notes; Bills of Exchange Act.
c.
Convention on Bills of Exchange and Promissory Notes; Bills of Exchange Act; Uniform Commercial Code.
d.
Uniform Commercial Code; Bills of Exchange Act; Convention on Bills of Exchange and Promissory Notes.

ANS: D PTS: 1

9. A letter of credit is a contract between:
a.
The seller and the buyers bank.
b.
The buyers bank and the sellers bank.
c.
The sellers and their own bank.
d.
The buyers and their own bank.

ANS: D PTS: 1

10. The internationally accepted body of rules pertaining to letters of credit is:
a.
Article 5 of the Uniform Commercial Code.
b.
Uniform Customs and Practices for Documentary Credits.
c.
Convention on Bills of Exchange and Promissory Notes.
d.
Uniform Code of Practice for Letters of Credit.

ANS: B PTS: 1

11. The bank that is responsible for inspecting the documents to be sure they are in order, remitting payment to the seller, and negotiating the documents to the buyer is called:
a.
Issuing bank.
b.
Negotiating bank.
c.
Advising bank.
d.
Lading bank.

ANS: A PTS: 1

12. The rule that usually prevails for interpreting documents that are submitted to a bank for payment under a letter of credit is commonly called the:
a.
Good faith rule.
b.
Reasonable compliance rule.
c.
Strict compliance rule.
d.
Holder in due course rule.

ANS: C PTS: 1

13. In the event that a discrepancy is found in the documents presented under a letter of credit, the bank may request a waiver or:
a.
Resubmit the draft.
b.
Void the transaction.
c.
Refuse delivery.
d.
Refuse to pay against documents.

ANS: D PTS: 1

14. The issuing bank is required to pay on documents in case of ____, but not in the event of:
a.
Fraud; breach of warranty.
b.
Delivery of the goods; non-delivery of the goods.
c.
Breach of warranty; fraud.
d.
Issuing banks are not the paying banks.

ANS: A PTS: 1

15. A letter of credit whose payment is assured by two banks is a(n):
a.
Confirmed Letter of Credit.
b.
Irrevocable Letter of Credit.
c.
Letter of Credit with Stipulations.
d.
Standby Letter of Credit.

ANS: A PTS: 1

16. The type of letter of credit issued to guarantee that a party will fulfill its obligations under a service, construction, or sales contract is called:
a.
An Irrevocable Letter of Credit.
b.
Standby Letter of Credit.
c.
Letter of Warranty Credit.
d.
Confirmed Letter of Credit.

ANS: B PTS: 1

17. The type of letter of credit that can be split up between many suppliers, each able to present their own documents for payment and allowing the trader to take his profits from the balance of the credit, is called:
a.
An irrevocable credit.
b.
A revolving credit.
c.
Standby credit.
d.
Transferable credit.

ANS: D PTS: 1

18. The type of credit that allows the use of one credit instead of many to be used with the maximum amount available during a certain period of time is called:
a.
A revolving credit.
b.
An irrevocable credit.
c.
A standby credit.
d.
A transferable credit.

ANS: A PTS: 1

19. The U.S. Export-Import Bank is the largest U.S. export financing agency that can provide:
a.
Financing through the World Bank.
b.
Financing for imports by U.S. firms.
c.
Guarantees on loans made by commercial banks.
d.
All of the above.

ANS: C PTS: 1

20. The risk of loss due to the default of the buyer based on his or her inability to pay is known as:
a.
Commercial risk.
b.
Compensatory risk.
c.
Default risk.
d.
Currency risk.

ANS: D PTS: 1

21. Risk due to the confiscation of goods by a government, nonconvertibility of the buyers currency, war expropriations, and the inability of the buyer to obtain an import license is called:
a.
Transaction risk.
b.
Import risk.
c.
Political risk.
d.
Commercial risk.

ANS: C PTS: 1

22. The term used to describe transactions that involve an exchange of goods rather than payment of currency for goods is:
a.
Reverse trade.
b.
Counter trade.
c.
Contrapurchase.
d.
None of the above.

ANS: B PTS: 1

23. The form of counter trade that involves a sale of goods to a buyer who required as a condition of sale that the seller buys other goods produced in that country is called:
a.
Contratrade.
b.
Reverse trade.
c.
Barter.
d.
Counter purchase.

ANS: D PTS: 1

24. The form of counter trade that is the direct exchange of goods for goods or goods for services is called:
a.
Contratrade.
b.
Counter purchase.
c.
Barter.
d.
None of the above.

ANS: C PTS: 1

25. Under the UCP, the description of the goods in the commercial invoice must correspond with the description in the credit. In all other documents, the goods may be described ____:
a.
In perfect conformance with the credit.
b.
In general terms not inconsistent with the description of the goods in the credit.
c.
In specific terms as requested by the buyer.
d.
In general terms consistent with the contract for the sale of goods.

ANS: B PTS: 1

26. If a U.S. exporter is concerned about political and economic stability in the buyers country, the exporter should request which of the following payment terms:
a.
Cash against documents.
b.
Irrevocable letter of credit.
c.
Confirmed letter of credit.
d.
Open account terms.

ANS: C PTS: 1

27. The U.S. government agency that provides guarantees on loans or credit terms made by U.S. commercial banks or U.S. exporters to foreign buyers of U.S. made merchandise is called:
a.
The World Bank.
b.
Eximbank.
c.
Commodity Credit Corporation.
d.
The Foreign Credit Insurance Association.

ANS: B PTS: 1

28. The buyer in a letter of credit transaction is called the:
a.
Account Party.
b.
Beneficiary.
c.
Exporter.
d.
Issuer.

ANS: A PTS: 1

29. The seller in a letter of credit transaction is called the:
a.
Account Party.
b.
Beneficiary.
c.
Importer.
d.
Issuer.

ANS: B PTS: 1

30. Most documentary discrepancies that occur in a letter of credit transaction are:
a.
A result of fraud and misrepresentation.
b.
A result of the desire to profit from the transaction.
c.
A result of incomplete or inconsistent information.
d.
Banking errors.

ANS: C PTS: 1

31. A holder in due course, as defined by the UCC, includes which of the following? A holder in due course:
a.
Must have given a just price as consideration for the document or instrument.
b.
Must be unrelated to the original document holder.
c.
Must have taken the instrument for value and without notice it is overdue or has been dishonored.
d.
A and C only.
e.
None of the above.

ANS: C PTS: 1

32. Assume that DownPillow sells pillows to a Japanese buyer and forwards documents and a draft for acceptance. Assume also that DownPillow discounts the trade acceptance to a U.S. bank, which then discounts the instrument in the credit markets. If the pillows turn out to be moldy and worthless, which of the following statement(s) is (are) true?
a.
The Japanese buyer does not have to pay because the pillows are damaged.
b.
The U.S. bank must reimburse whoever bought the instrument and can bring a lawsuit for payment against DownPillow.
c.
The Japanese buyer must still honor and pay the acceptance upon presentation.
d.
A and B.
e.
All of the above.

ANS: C PTS: 1

33. A holder of an instrument cannot be a holder in due course if (s)he:
a.
Possesses a negotiable instrument.
b.
Knows the instrument is overdue.
c.
Unknowingly holds an instrument with a forged signature.
d.
Takes the instrument free from disputes between the drawer and drawee.

ANS: B PTS: 1

34. Which of the following is (are) true concerning the UCP?
a.
The UCP is a standardized set of rules in virtually all nations.
b.
Because the UCP was drafted by the ICC and is recognized in most states, it automatically governs international letters of credit.
c.
The UCP will govern a letter of credit only if its provisions are incorporated into the letter of credit by reference.
d.
A and C only.
e.
A and B only.

ANS: C PTS: 1

35. Seller receives a letter of credit from a foreign buyer covering 1,000 standard-sized bed pillows. Sellers export manager completes an invoice for 1,000 bed pillows, size 20 by 26 inches (this is the internationally accepted standard size for pillows). Which of the following is false:
a.
If the issuing bank accepts or pays against documents, it will be liable to the account party.
b.
The issuing bank must accept or pay against documents because 20 by 26 is standard and the goods conform to the contract.
c.
The issuing bank may refuse to accept or to pay the draft upon presentation of the invoice.
d.
If the buyer waives the defect in the invoice, the bank must accept or pay the draft.

ANS: B PTS: 1

SHORT ANSWER

1. Compare and contrast the holdings pertaining to fraud in Sztejn and United City Merchants.

ANS:
Answer not provided.

PTS: 1 OBJ: Comparative Analytical Questions

2. Compare and contrast OMeara with Sztejn.

ANS:
Answer not provided.

PTS: 1 OBJ: Comparative Analytical Questions

3. As a seller to a foreign market, assess whether you would prefer to use a documentary sale than a sale on open account terms.

ANS:
Answer not provided.

PTS: 1 OBJ: Comparative Analytical Questions

4. Compare and contrast the documentary letter of credit with the standby letter of credit.

ANS:
Answer not provided.

PTS: 1 OBJ: Comparative Analytical Questions

5. In what ways is the strict compliance rule of documents similar to and dissimilar to the contractual rule of perfect tender?

ANS:
Answer not provided.

PTS: 1 OBJ: Comparative Analytical Questions

6. Describe the benefits and risks of bankers acceptance financing and accounts receivable financing. Under which form of financing will a bank be liable for defective goods?

ANS:
Answer not provided.

PTS: 1 OBJ: Comparative Analytical Questions

7. Compare and contrast the liabilities of a confirming bank and an issuing bank on a letter of credit.

ANS:
Answer not provided.

PTS: 1 OBJ: Comparative Analytical Questions

8. How are a red clause and a revolving letter of credit similar as compared to a red clause and a back-to-back letter of credit?

ANS:
Answer not provided.

PTS: 1 OBJ: Comparative Analytical Questions

9. In what ways does countertrade resemble and differ from back-to-back letter of credit financing?

ANS:
Answer not provided.

PTS: 1 OBJ: Comparative Analytical Questions

10. Weigh the benefits and detriments of counterpurchase, barter, and buy-back agreements.

ANS:
Answer not provided.

PTS: 1 OBJ: Comparative Analytical Questions

ESSAY

1. Global MegaBank (GMB) issued an irrevocable letter of credit on behalf of its customer Beer Importers of America, Inc. (BIA) for up to $150,000 covering shipments of Belgian Trappist Ales from Beer of the World Distributor (BWD). BWD subsequently presented its draft and commercial invoice with its name properly spelled as Beers of the World Distributor. The submitted documents also referred to the shipment of Belgian Abbey Ales although the shipments themselves were of Belgian Trappist Ales. GMB refused to accept these documents because of these discrepancies. GMB noted that use of the name Trappist is limited by Belgian law to 6 breweries operated by monastic orders in Belgium. By contrast, abbey ales are brewed by non-monastic entities under licenses to use the names of monasteries or religious icons in their titles. BWD claimed that GMB wrongfully dishonored the documents. BWD claimed the difference in names was excusable as a minor typographical error and that abbey and trappist ales are brewed in the same manner and thus so closely resemble one another as to excuse the discrepancy between the letter of credit and documents.

Who would prevail in litigation between GMB and BWD? Please explain your answer. Would the result be different if the court was to apply UCP 600 or the functional standard of compliance? Why or why not?

ANS:
The rule of strict compliance requires the terms of the document presented to the issuing bank to strictly conform to the letter of credit and the Uniform Customs and Practice for Documentary Credits (UCP). Even a small discrepancy can cause the bank to reject the documents. Utilizing this rule, the discrepancy in the name of the seller may be excused as a minor typographical error, but the discrepancy in the description of the goods would most likely result in its rejection. The result utilizing UCP 600 would be the same. If the discrepancy occurred in any document other than the commercial invoice, it would be governed by Article 14, which provides that [d]ata in a documentneed not be identical to, but must not conflict with [other data in the same document], any other stipulated document or the credit. The distinction between Belgian trappist and abbey ales is significant enough to create a conflict prohibited by Article 14. If the discrepancy was in the commercial invoice, Article 18 would require rejection as it provides [t]he description of the goods, services or performance in a commercial invoice must correspond with that appearing in the credit. The functional standard of compliance in which a court examines the whole of the documents rather than requiring the mirror image of the letter of credit may provide some relief although the product descriptions are different enough to present problems for the seller.

PTS: 1

OTHER

1. Draft a letter of credit.

ANS:
Answer not provided.

PTS: 1 OBJ: Essay/Writing Assignments

2. Draft a specialized letter of credit, recalling some of the uses noted in the text.

ANS:
Answer not provided.

PTS: 1 OBJ: Essay/Writing Assignments

3. Outline a proposal for a countertrade deal with a developing country (perhaps in Eastern or Central Europe).

ANS:
Answer not provided.

PTS: 1 OBJ: Essay/Writing Assignments

4. Draft a letter of credit compliant with the standards of the UCP.

ANS:
Answer not provided.

PTS: 1 OBJ: Essay/Writing Assignments

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