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Question 211

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?

Yes. First National Bank did not know of it, so it may reimburse a negotiating bank.

No. First National Bank is under a duty to determine the underlying conditions of any letter of credit it pays.

No. First National Bank should request a copy of the letter of credit at the time of its payment and then refuse to pay once it is aware of the provision.

Yes, provided ABC Company is not a participant in the boycott.

Correct Answer: C

First National Bank should request a copy of the letter of credit at the time of its payment to ensure compliance with relevant laws and regulations. Once it is aware of the boycott provision, it should refuse to pay as participating in a boycott could be legally prohibited and violate its duty to determine the underlying conditions of the letter of credit.

Discussion

Dex24Option: A

A, page 1075.

Cam22Option: B

In this scenario, First National Bank is obligated to ensure that it does not violate any laws or regulations, including those related to boycott provisions. Even if it did not receive a copy of the letter of credit from the Issuing Bank, it is still responsible for determining the terms and conditions of the letter of credit before reimbursing negotiating banks. Therefore, it cannot reimburse negotiating banks for a letter of credit containing a boycott provision without violating its duty to determine the underlying conditions of the letter of credit.