LML4807 EXAM PACK ANSWERS () AND 2020 BRIEF NOTES

LML4807 EXAM PACK ANSWERS () AND 2020 BRIEF NOTES LML4807 BANKING LAW AND USAGE PAST EXAM PACK QUESTIONS AND ANSWERS (2019 – 2014) SUMMARISED NOTES 2020 LML 4807 BANKING LAW EXAM MEMO 1. Name and explain the roles of the various parties involved in documentary letters of credit. Depending on the circumstances a large number of different parties may be involved in a letter of credit. These include: -The applicant This is usually the buyer(importer) in terms of the contract of sale and who applies to the issuing bank for the issuance of the letter of credit. -The issuing bank or opening bank This bank issues or opens the letter of credit. The issuing and opening banks are usually one and the same bank, but that is not necessarily the case. Occasionally an opening bank approaches an issuing bank on behalf of the applicant to issue a letter of credit, in such a case the opening bank merely acts as messenger and does not assume any liability on the credit. Usually the issuing or opening bank is situated in the same country as the applicant or buyer, and the latter is usually an existing client of the issuing or opening bank. The issuing or opening bank assumes independent and separate liability toward the beneficiary on the letter of credit. -The Beneficiary According to the letter of credit the beneficiary is the party in whose favour the credit is issued. Usually the beneficiary is the seller (exporter) in terms of the contract of sale. -The advising or notifying bank Merely acts to advise or notify the beneficiary of the issuance of the letter of credit. Often the advising or notifying bank and the issuing bank are co-subsidiaries of the same holding company (bank). Alternatively, they may simply be branch offices of a correspondent bank of the issuing or opening bank. Usually they are situated in the same country as the beneficiary. The advising or notifying bank does not bind itself toward the beneficiary for the payment on the credit. -The confirming bank Confirming banks are only involved in the case of confirmed letters of credit and never in the case of unconfirmed letters of credit. The confirming bank is usually situated in the same country as the beneficiary. The confirming bank assumes a separate and independent liability on the credit in favour of the beneficiary. -The presenting bank Acts as a courier bank for the beneficiary in presenting the shipping documents to the issuing bank and does not assume any liability for the letter of credit. -The collecting bank The collecting bank is appointed by the beneficiary to collect payment on its behalf from the issuing, confirming or paying bank, as the case may be. -The paying or nominated bank The bank is appointed by the issuing or confirming bank to effect actual payment to the beneficiary. The paying bank does not assume any independent and separate liability toward the beneficiary, but only toward the bank that has appointed it to pay the beneficiary. The paying or nominated bank therefore acts as the payment mandatory of the issuing or confirming bank. Question 2 (a) Our courts have described a fixed deposit as a loan to a bank repayable on a certain date (the maturity date), usually bearing interest. Discuss the legal position where a customer needs the amount of a fixed deposit before the maturity date of the deposit. (10) (b) S When a customer makes a deposit at a bank over the counter, he will receive a deposit slip, which amounts to an admission of receipt by the bank and as such would serve as an evidential advantage to the customer in the event of a dispute. Discuss in detail whether this is also the position in respect of auto teller deposits. (10) The answer is No they are different because of the following  The transaction slip supplied by the machine has no evidential value, because it is simply a record of what the customer has keyed into the machine.  A question that may be important is whether the payment takes place when the deposit amount is inserted into the machine, or only when the deposit envelope is opened and its contents are accepted by the bank.  With a cheque it is clear that payment only takes place when the cheque is honoured.  When cash is deposited into an atm. It seems that payment of such amount takes place only when the contents of the envelope are removed by the bank official.  If this view is correct, only a contract of deposit (depositum) exists while the envelope is in the auto teller.  As banks receive amounts on loan, it is better to regard it as deposit for reward. X is an entrepreneur and the owner of various businesses. X's businesses include, amongst others, the following: 1. XFinancial Safe Services which offers safekeeping facilities for clients for small amounts of cash against a fee; 2. XSA Retail which imports fabric from India for the local market; and 3. XCredit Facilities which supplies credit guarantees on behalf of clients on request. X approaches you for legal advice. Answer the following questions in detail: (a) Is the Banks Act 94 of 1990 applicable to the services being offered to the public by XFinancial Safe Services? Explain. (10) X financial is not a bank because it does not follow the activities of a bank as stipulated in the Bank Act 94 of 1990 Section 18 A  The acceptance of deposits from the general public. The person concerned must carry on the “business” of deposit taking without soliciting or advertising for deposits. Employees of the person taking the deposit are also regarded as members of the general public. General public does not include a registered bank  The soliciting of or advertising for deposits. Someone who solicits or advertises for deposits is irrebuttably presumed o be carrying on the business of a bank. It is a question of degree whether or not one is dealing with soliciting or advertising  The utilisation of money, or the interest or other income earned on money for certain described purposes  The obtaining of money, as a regular feature of the business in question, through the sale of an asset to any person other than a bank, subject to an agreement in terms of which seller undertakes to purchase from the buyer at a future date the asset so sole or any other asset. The effect is that someone who concludes “repurchase agreements” as a business is deemed to be conducting the business of a bank.  The legislator’s viewpoint on a repurchase agreement is defective in that it maintains that the “second contract of sale” is only concluded at later stage. However, this is not true. Only performance in terms of the “second contract of sale” is delayed  Any other activity which the registrar has after consultation with the governor of the reserve bank, declared to be the business of a bank by notice in the government gazette. This gives the registrar draconian powers  After the consultation with the governor of the reserve bank, the registrar declared certain activities regarding specific business practises to be the business of a bank. These include:  Any agreement, arrangement or undertaking, whether legally enforceable or not, between two or more persons; or  Any scheme, practice or method of trading, including any method of marketing or distribution The activities of such a practice which are declared as the business of a bank which are the acceptance of money, directly or indirectly, from members of the public, as a regular feature of a business practise, with the prospect of such members receiving payments or other money-related benefits directly or indirectly- On or after the introduction of other members of the public to the business practice, from which new participating members, in their turn, money is accepted or obtained, directly or indirectly as a regular feature of the business whether or not- “ I. The introduction of the new participating members is limited to their introduction by participating members or extends to the introduction of the new participating members by other persons; or II. New participating members are required to acquire moveable or immovable property, rights or services; On or after the promotions, transfer or change of status of the participating members or new participating members in terms of the business practice” The activities of soliciting, or advertising, directly or indirectly for money and/or persons for introduction into or participation in such a business practice are also declared to be the business of a bank (b) Which methods of payment are available to the parties to a contract of international sale? (5)  The documentary letter of credit is most common type of letter of credit and the most popular method by which payment is effected in terms of international contracts of sale.  3 main types: the documentary letter of credit, the standby letter of credit and the acceptance credit.  Documentary letters of credit are also increasingly being used to effect payment in domestic commercial transactions.  They may be employed to effect payment in a large number of commercial contracts- lease, carriage and mandate for eg. (c) X employs documentary letters of credit as method of paying the purchase price for the imported Indian fabric. May X revoke payment of a letter of credit if the imported fabrick is of an inferior quality? (10)  Parties can expressly or tacitly agree that payment of the purchase price has to take place by means of a letter of credit.  In theory there are always at least 3 parties involved in a letter of credit: the buyer, the issuing bank and the seller, in practise however 4 parties are usually involved: the advising or notifying bank.  The buyer (the importer) is obliged to arrange for the issuance of a letter of credit in favour of the seller (the exporter). The contract of sale is known as the underlying contract or exchange contract.  After the conclusion of the contract of sale, the buyer proceeds to arrange with a bank for the issuance of a letter of credit in favour of the seller.  The buyer’s application for the issuance of a letter of credit takes place by the completion of a standard and lengthy application form. Any nonstandard terms must be added to the standard terms in the application form: amount to be paid, currency, documents to be submitted eg.  The application form constitutes an offer by the applicant (the buyer) to the issuing bank to conclude a contract involving the issuance of a letter of credit in favour of the seller  The next step is for the issuing bank to open a letter of credit in favour of the beneficiary (the seller). By issuing the letter of credit, the bank accepts the applicants offer to contract with it. The letter of credit is forwarded to the beneficiary or a bank in the beneficiary’s country.  The local bank in the beneficiary’s country may serve different functions:  To advise or notify the beneficiary of the issuance of the letter of credit without itself giving any undertaking toward the beneficiary that it will pay on credit. The role of the advising or notifying bank is merely to act as conduit for all documentation involved in the presentation and payment in terms of the credit.  The bank to which the letter of credit is forwarded to by the issuing bank may also confirm the credit (confirming bank). By its confirmation, the bank itself assumes an independent liability toward the beneficiary to effect payment on the credit.  An opening bank may arrange with the issuing bank to issue a letter of credit, without the opening bank becoming personally involved in the credit.  A presenting bank is sometimes employed by the beneficiary to present the documents to the issuing bank for payment.  The issuing bank may arrange with another bank in the beneficiary’s country to effect actual payment.  After the beneficiary has been advised by the issuing bank that the letter of credit has been issued, he or she aggress to the terms and condition contained in the credit, the beneficiary will ship the goods.  The beneficiary will submit all the necessary shipping documents to the issuing bank or to the local confirming or advising bank, in which case the document is then forwarded by the latter bank to the issuing bank.  The issuing bank will then inspect the documents to ascertain whether they are in strict conformity with the terms stipulated in the letter of credit. If they are, the issuing bank (or the paying bank, if one is involved) then pays the beneficiary cash or accepts his bill of exchange.  The only function of the issuing bank is to check whether the documents conform to the requirements stipulated in the letter of credit.  The issuing bank is reimbursed by the applicant for paying the beneficiary of the credit, where a paying or confirming bank is involved in paying the beneficiary; it is reimbursed by the issuing bank, which, in turn, is reimbursed by the applicant.  A letter of credit is a conditional undertaking in writing, issued by the bank, to pay a specific amount in a stated currency to a specified beneficiary, within the prescribed time limit and against presentation of stipulated documents.  Involves 3 contracts: the underlying contract of sale between the buyer and the seller; between the buyer and the bank that issues the letter of credit and between the issuing bank and the seller.  each of these contracts gives rise to a separate set of legal relationships between the parties involved (d) Is the National Credit Act 34 of 2005 applicable to the services which XCredit Facilities offers to the public? Explain. (5) No it is not because it does not meet all the requirements of Section 4 of the National Credit Act 34 of 2005  Under the common law a credit agreement any contract in terms of which the parties agree that payment will take place at future date  In terms of the act an agreement will be a credit agreement for the purpose of the act provided that some deferral of repayment or payment is present as well as a fee, charge, or interest imposed with respect to a deferred payment or a discount given where prepayments are made  The act aims at providing an umbrella piece of legislation to create a single system of regulation and a national credit regulator to administer the credit industry in South Africa.  The act aims at advancing the social and economic welfare of South African consumers, and creating a fair, transparent, competitive, efficient and accessible credit market.  The act further aims at providing a credit market for those South Africans who have historically been unable to access credit under sustainable market conditions and to protect consumers against unscrupulous credit marketing practises Question Y wants to purchase XFinancial Safe Services from X for R900 000. X and Y agree that payment will occur on transfer. The contract between X and Y further stipulates that Y will deliver to X a guarantee for the purchase price of R900 000 before 1 December 2007. X is informed that Y obtained a letter of undertaking from his bank. (a) Describe the legal nature of a letter of undertaking issued by Y's bank to X. (5) Documentary Letters of Credit  3 main types: the documentary letter of credit, the standby letter of credit and the acceptance credit.  The documentary letter of credit is most common type of letter of credit and the most popular method by which payment is effected in terms of international contracts of sale.  Documentary letters of credit are also increasingly being used to effect payment in domestic commercial transactions.  They may be employed to effect payment in a large number of commercial contracts- lease, carriage and mandate for eg. (b) Explain the role of a letter of undertaking to X. In your answer you must refer to relevant case law. (15)  Parties can expressly or tacitly agree that payment of the purchase price has to take place by means of a letter of credit.  In theory there are always at least 3 parties involved in a letter of credit: the buyer, the issuing bank and the seller, in practise however 4 parties are usually involved: the advising or notifying bank.  The buyer (the importer) is obliged to arrange for the issuance of a letter of credit in favour of the seller (the exporter). The contract of sale is known as the underlying contract or exchange contract.  After the conclusion of the contract of sale, the buyer proceeds to arrange with a bank for the issuance of a letter of credit in favour of the seller.  The buyer’s application for the issuance of a letter of credit takes place by the completion of a standard and lengthy application form. Any nonstandard terms must be added to the standard terms in the application form: amount to be paid, currency, documents to be submitted eg.  The application form constitutes an offer by the applicant (the buyer) to the issuing bank to conclude a contract involving the issuance of a letter of credit in favour of the seller  The next step is for the issuing bank to open a letter of credit in favour of the beneficiary (the seller). By issuing the letter of credit, the bank accepts the applicants offer to contract with it. The letter of credit is forwarded to the beneficiary or a bank in the beneficiary’s country. QUESTION X must pay various bills each month. He is considering a variety of payment mechanisms. Explain to X the nature of his obligations under the following payment mechanisms: (a) Credit cards; (10)  Two types of credit card: two-party and three-party credit cards  Two-party credit cards are usually issued to their clients by large chain stores. The card issuer and the supplier are one of the same. Only 2 parties involved: the issuer and the cardholder  In the case of a three-party credit card, the card is issued by a financial institution such as a bank to its client, who may use the card to effect purchases from the suppliers. The bank acts as payment intermediary between the card holder and the supplier. Three contractual relationships are involved: 1. issuer and card holder 2. issuer and supplier 3. card holder and supplier  Neither the credit card nor the billing slip is a negotiable instrument.  In the case of credit cards these relationships are exclusively regulated by agreements (b) Stop orders; (5)  Is a payment mechanism employed in conjunction with a current or transmission account  Contains a written instruction from the account holder to the bank to pay a fixed amount on a regular basis to a specified 3rd party and to debit the customer’s account with the amount  The legal relationship between the bank and the account holder is founded on mandatum, and the obligation of the bank is that of a mandatory  The banks obligations to perform the payment instruction is subject to the condition that there are specific funds to the credit of the account against which the paid amount may be set off, or that an agreement on payment by the customer has been made  A cheque reaches the bank indirectly via the creditor, a stop order is handed directly to the bank by the debtor (c) Debit orders. (5) [20]  A debit order is used by an account holder to effect regular payments to a 3rd party via the account holder’s bank. It differs from the stop order in that the completed debit-order form is handed to the creditor to request the amount from the bank, apart from an authorisation to the bank to pay the amount to the creditor  The ordinary debit order: is a form in which the account holders requests the 3rd party to make periodic withdrawals from his bank account, and directs the bank to debit that account with these withdrawals  Transfer of the amount takes place by means of a mail-transfer slip which the debtor’s bank makes out in favour of the creditor/beneficiary.  Multi-data debit orders: the company multi-data (pty) Ltd undertakes to prepare debit slips and mail-transfer slips on behalf of firms participating in the system, and to send these to the bank. The debtor: requests multi-data to withdraw the amounts requested; requests the bank to debit his account with the amounts drawn on it by multi-data; requests the creditor to ask multi-data for the amounts for collection from his bank  Multi-data mails the debit slips and mail-transfer slips in respect of accounts held at every bank branch to that branch. The creditor/beneficiaries receive payment from multi-data  Manumatic debits: the Manumatic system was founded by the South African clearance banks. A company must first apply to one of the banks to become a user of the system.  If the application is approved, such a company may pass debits against cheques and transmission accounts held with any of these clearance banks. However, it must give indemnity against liability to all the banks concerned, which has to be covered by an indemnity of the bank that approved its application. QUESTION Write a short note where you discuss the following: (a) Credit agreements which are illegal in terms of the National Credit Act 34 of 2005; (5)  Under the common law a credit agreement any contract in terms of which the parties agree that payment will take place at future date  In terms of the act an agreement will be a credit agreement for the purpose of the act provided that some deferral of repayment or payment is present as well as a fee, charge, or interest imposed with respect to a deferred payment or a discount given where prepayments are made  The act aims at providing an umbrella piece of legislation to create a single system of regulation and a national credit regulator to administer the credit industry in South Africa.