Question

On March 20, 2000, a customer approaches a to Star Bank, a hypothetical company, and requests to purchase him a quadbike. On March 25, 2000 both agrees that the bank will buy the quadbike to the customer at the market price of $4,000 but the customer will have to pay back $5,000 to the bank in 3 years on deferred payments basis. What kind of sales contract is this? Why?

Answer 1

This is a contract of Direct pay Letter of Credit (LC). A Direct pay Letter of Credit is a facility wherin the bank automatically pays the agreed amount to the seller and acquire an agreed amount from the customer from whom the Letter of Credit is drawn. In Direct pay Letter of Credit, the seller never have contact with the customer.

The case given is also the same. Here, a customer approaches the bank to purchase a quadbike on behalf of the customer. The bank directly pays the amount to the seller for the quadbike and later acquire an agreed amount from the customer on behalf of whom the Letter of Credit was drawn.