Question

Deutche Bank

South African firm applied for a revolving letter of credit in favor of a German exporter at a branch of Barclays Bank in Johannesburg. The letter of credit was issued covering shipments of pharmaceuticals and was confirmed by Deutsche Bank in Germany. Shipments proceeded with no problem, growing larger and more frequent. Barclays increased the amount of the letter of credit on several occasions to accommodate the growing business. To Barclays’ knowledge, their account party had always taken possession of the goods and sold them quickly for a profit. Barclays was pleased with their customer’s history and increased their financing. In the last shipment, the largest of all, Deutsche Bank honored the seller’s sight draft for the full amount of the letter of credit and presented the documents to Barclays. While Barclays was inspecting the documents, it learned that the South African buyer had ceased business. In the meantime, Deutsche Bank discovered that the seller has ceased business also. On inspection by Barclays, the cargo containers were found to contain only worthless junk. The investigative reports placed both buyer and seller as now being in Brazil.

Explain what happened in this case?

What are the rights and liabilities of the advising and confirming banks in this case?

Who is ultimately liable in this case?

Who will end up paying in this case?

How should banks handle problems like this?

Answer 1

Q1. South African firm applied for a revolving letter of credit in favor of a German businessperson at a branch of Barclays Bank in city. The letter of credit was issued covering shipments of pharmaceuticals and was confirmed by Deutsche Bank in Federal Republic of Germany. Shipments proceeded with no downside, growing larger and additional frequent. Barclays inflated the quantity of the letter of credit on many occasions to accommodate the growing business. To Barclays’ information, their account party had perpetually taken possession of the products and sold-out them quickly for a profit. Barclays was happy with their customer’s history and inflated their funding. within the last cargo, the most important of all, Deutsche Bank honored the seller’s order of payment for the complete quantity of the letter of credit and conferred the documents to Barclays. whereas Barclays was inspecting the documents, it learned that the South African vendee had ceased business. within the meanwhile, Deutsche Bank discovered that the vendor has ceased business additionally. On review by Barclays, the product containers were found to contain solely worthless junk. The investigatory reports placed each vendee and merchant as currently being in Brazil.

Q2.

At the request of the issuing bank, the correspondent bank may confirm the letter of credit for the seller-beneficiary and obligates itself to insure payment under the letter of credit. The confirming bank is usually the advising bank.

There are two main types of Letters of credit:

(1) Revocable :

Revocable letter of credit isn't a usually used sort of the letters of credit. this sort of letter of credit may be revoked by the supply bank at any time, while not notification to the beneficiary, for any reason. Such sort of letter of credit can't be confirmed by the correspondent bank and also the bank can act as associate advising bank solely.

A voidable letter of credit can't be revoked when the presentation of the documents, if the documents square measure orthodox to the terms and conditions of the letter of credit and also the payment has been created.

(2) Irrevocable: Use of irrevocable letters of credit is extremely common in international trade. irrevocable letter of credit cannot be revoked or modified while not the consent of the beneficiary. issue bank can create the payment to the vendor, if the vendor presents the documents compliant with the terms of the credit, as united between marketer and client. Such a letter of credit will solely be modified with the permission of each client and marketer. If it's not clear from the letter of credit that whether or not it's rescindable or irrevocable , it mechanically considers as irrevocable .

Q.3. Barclays is liable in this case.

Q.4 Barclays will end up paying in this case.

Q.5 Banks handle problems like this by cease the business or property of the owner until he pay his total amount.