Question

Read the following scenario:

Flyby Knight [FK] contracts to sell 12 helicopters to Air Nigeria, for US$ 8 million each. Payment is to be made by irrevocable letter of credit issued by the Bank of Nigeria and confirmed by Citibank in New York. The letter of credit is payable when the confirming bank receives: a. bill of lading indicating that all 12 helicopters are loaded on board a ship ready for sailing to Nigeria, b. a commercial invoice for US$ 96 million and c. a draft payable to FK for $96 million. FK loads the aircraft on board a ship ready for sailing to Nigeria and receives from the ship captain an on-board bill of lading. The next day, FK delivers the on-board bill of lading, a commercial invoice for US $96 million and a draft payable to FK for US$96 million to Citibank. Later the same day, Air Nigeria informs FK that its inspectors on board the ship have discovered serious mechanical problems with the rotator blades and fuel lines of the helicopters.  Air Nigeria informs FK that it will neither accept nor pay for the helicopters.

Submit via the on-line submission tool the best answer by midnight on Wednesday, October 7th to part one: [5 points for best answer]

1. FK is entitled to no money.

2. FK is entitled to no money, provided Air Nigeria can prove the helicopters are defective.

3. Air Nigeria is obligated to pay FK the full price.

4. Bank of Nigeria is obligated to pay FK the full price.

5. Citibank is obligated to pay FK the full price.

6. FK is entitled to only the reduced value of the helicopters, provided Air Nigeria can prove the helicopters are defective.

and

Part 2: Your Reason for answer chosen [5 points for correct reason]:

Answer 1

Answer to the first part -

4. Bank of Nigeria is obligated to pay FK the full price.

Reason -

Facts of the case -

1. Payment is to be made by irrevocable letter of credit issued by the Bank of Nigeria and confirmed by Citibank in New York. and;

2. The letter of credit is payable when the confirming bank receives -

1. FK delivers the on-board bill of lading,
2. a commercial invoice for US $96 million and
3. a draft payable to FK for US$96 million to Citibank.

3. It is nowhere mentioned in the given case that payment is subject to delivery of the helicopters, let alone quality of the products delivered.

What is the role of issuing bank and a confirming bank?

• The seller may require a second letter of credit or a confirmed letter of credit.
• This second letter requires the backing of more than one bank by a buyer in a domestic or international transaction.
• A confirmed letter may be required if the seller is not satisfied with the creditworthiness of the first letter of credit.
• In many cases, the second bank is the seller's bank.
• When the buyer gets the second letter, it confirms the first one and qualifies it as a confirmed letter of credit.
• The second bank promises to pay the seller the amount stated if the first bank fails to do so when it issues the confirmed letter of credit.
• The buyer must find a second bank to back its purchase in case of default.

Also - The issuing bank is obligated to pay not only the beneficiary, but also any bank nominated by the beneficiary.

An irrevocable letter of credit (ILOC) is a guarantee for payment issued by a bank for goods and services purchased, which cannot be cancelled during some specified time period.

Hence irrespective of the dispute, Bank of Nigeria will have to release the payment.

In case of any discrepancy, Air Nigeria shall have right to address the issue as per terms of the agreement.