Letters of Credit
Letters of Credit
Letters of Credit
I. DEFINITION
Letters of credit are those issued by one merchant to another, or for the purpose of
attending to a commercial transaction. [Art.567, Code of Commerce]
A letter of credit however, changes its nature as different transactions occur and if
carried to completion ends up as a binding contract between the issuing and honoring
banks without any regard or relation to the underlying contract or disputes between the
parties thereto.[Transfield v. Luzon Hydro, G.R. No. 146717, November 22,
2004]
NOTE:[ 24 A Words and Phrases 590, Permanent Edition, Cited in Transfield v. Luzon
Hydro, G.R. No. 146717, November 22, 2004]
IV. PURPOSE
The primary purpose of letters of credit is to substitute for, and therefore support,
the agreement of the buyer-importer to pay money under a contract or other agreement,
but it does not necessarily constitute as a condition for the perfection of such agreement.
[Reliance Commodities vs. Daewoo Industries, G.R. No. L-100831, December
17, 1993]
The use of credits, in commercial transactions, is to reduce the risk of non-payment
of the purchase price under the contract for the sale of goods. However, letters of credit
are also used in non-sale settings where they serve to reduce the risk of non-performance.
Generally, credits in the non-sale settings have come to be known as standby credits.
[Transfield v. Luzon Hydro, G.R. No. 146717, November 22, 2004]
V. NATURE
The letter of credit evolved as a mercantile specialty, and it is an entity unto itself.
The relationship between the beneficiary and the issuer of a letter of credit is not strictly
contractual, because both privity and a meeting of the minds are lacking, yet strict
compliance with its terms is an enforceable right.
Letters of Credit is not a contract with stipulation pour autrui.
A letter of credit is not a third-party beneficiary contract, because the issuer must
honor drafts drawn against a letter regardless of problems subsequently arising in the
underlying contract. Since the bank's customers cannot draw on the letter, it does not
function as an assignment by the customer to the beneficiary.
A letter of credit is nothing more than a commitment by the issuer that the party in
whose favor it is issued and who can collect upon it, will have his credit against the
applicant of the letter duly paid in the amount specified therein. a letter of credit which
states that the bill shall be duly honored on presentation is not a contract between the
applicant and the issuing bank or between the applicant and the Central Bank. The
contract in which the applicant is a party and on which he can claim a violation of vested
rights is his application for the issuance of the letter of Credit [Climaco vs. Central
Bank of the Phils. Vol. *, Court of Appeals Reports 414, No. 34, 691-R, Sept.
16, 1965]
Letters of credit were developed for the purpose of insuring to a seller payment of a
definite amount upon the presentation of documents and is thus a commitment by the
issuer that the party in whose favor it is issued an who can collect upon it will have his
credit against the applicant of the letter, duly paid in the amount specified in the letter.
They are effect absolute undertakings to pay the money advanced or the amount for which
credit is given on the faith of the instrument. They are primary obligations and not
accessory contracts and while they are security arrangements, they are not converted
thereby into contracts of guaranty. What distinguishes letters of credit from other
accessory contracts, is the engagement of the issuing bank to pay the seller once the draft
and other required shipping documents are presented to it. They are definite undertakings
to pay at sight once the documents stipulated therein are presented. [MWSS v. Daway,
GR. No. 160732, June 21, 2004]
A letter of credit, does not involve a specific appropriation of money in favour of the
beneficiary. It only signifies that the beneficiary be able to draw funds upon the letter of
credit up to the designated amount specifically reserved or has been held in trust. [Feati
Bank v. Court of Appeals, G.R. No. 94209, April 30, 1991]
VI. DURATION
1) within the period agreed upon with the drawer of the same; or
2) If none is fixed:
a. Six (6) months from its date in any point in the Philippines; or
b. Twelve (12) months if used abroad.[Art.572, Code of Commerce]
The three (3) distinct but intertwined contract relationships that are indispensable in a
letter of credit transaction are:
The bank obligates itself to pay the seller or to the order of the seller (that is,
it will honor the bills or drafts drawn by the seller) after presentation to the bank of
tender documents stipulated upon, which normally includes document of title.
The bank agrees to issue the letter of credit in favor of the seller subject to
reimbursement or payment by the buyer of whatever paid to the seller plus proper
consideration agreed upon by the parties.
B. AS TO REVOCABILITY
(1) Revocable L/C One which can be revoked by the issuing bank without the
consent of the buyer and seller.
(2) Irrevocable L/C a definite undertaking on the part of the issuing bank and
constitutes the engagement of that bank to the beneficiary and bona fide holders of
drafts drawn and or documents presented thereunder, that the provisions for
payment, acceptance or negotiation contained in the credit will be duly fulfilled,
provided that all the terms and conditions of the credit are complied with. One
which the issuing bank cannot revoke without the consent of the buyer and seller
[Feati Bank and Trust Co. v. CA, 1991]
(1) Unconfirmed L/C One which continues to be the obligation of the issuing
bank
(2) Confirmed L/C One which is supported by the absolute assurance to the
beneficiary that the confirming bank will undertake the issuing bank's obligation as
its own according to the terms and conditions of the credit (Feati Bank and Trust
Co. v. CA, 1991)
2. Obligations of the banks issuing letters of credit is solidary with that of the
person or entity requesting for its issuance, the same being the direct, primary,
absolute, and definite undertaking to pay the beneficiary upon the presentation
of the set of documents required therein. [Metropolitan Waterworks and
Sewerage System (MWSS) v. Daway, G.R. No. 160732, June 21, 2004]
Right of the Beneficiary The beneficiary, after complying with the contract of
sale with the buyer of the goods, can recover payment by drawing drafts against
the letters of credit. [See Bank of America, NT &SA v. Court of Appeals,
G.R. No. 105395, December 10, 1993]
Depending on the transaction, the number of parties to the letter of credit may be
increased. Thus, the different types of correspondent banks:
The bank may suggest to the seller its willingness to negotiate, but this fact
alone does not imply that the notifying bank promises to accept the draft drawn
under the documentary credit. [Feati Bank and Trust Co. v. CA, (1991)]
5. Confirming Bank - the bank which lends credence to the letter of credit
issued by a lesser known issuing bank.
The bank assumes a direct obligation to the seller and its liability is a primary
one as if the bank itself had issued the letter of credit. [Feati Bank and Trust
Co. v. CA, (1991)]
6. Negotiating Bank the bank which discounts the draft presented by the
seller.
The bank buys or discount a draft under the letter of credit. Its liability is
dependent upon the stage of negotiation. If before negotiation, it has no
liability with respect to the seller but after negotiation, a contractual
relationship will then prevail between the negotiating bank and the seller.
[Feati Bank and Trust Co. v. CA, (1991)]
7. Paying Bank the bank which undertakes to encash the drafts drawn by the
seller.
The Advising Bank is the bank in the country of the beneficiary which
communicates to the beneficiary the notice of the credit issued by the issuing
bank
The Confirming Bank- is the bank that undertakes that the letter of credit
will be fully paid.
Usually the confirming bank is also the advising bank, otherwise it is utilized
to lend credence to the letter of credit issued by a lesser known issuing bank
and is directly liable to the beneficiary.
Independence Principle
The independence principle in a letter of credit transaction means that a bank,
in determining compliance with the terms of a letter of credit is required to
examine only the shipping documents presented by the seller and is precluded
from determining whether the main contract is actually accomplished or not.
This arrangement assures the seller of prompt payment, independent of any
breach of the main sales contract
Under the independence principle, the obligation under the letter of credit is
independent of the related and originating (usually a contract of sale). In brief of
credit is separate and distinct from the underlying transaction.
Credits, by their nature, are separate transactions from the sales or other
contract(s) on which they may be based and banks are in no way concerned with or
bound by such contract(s), even if any reference whatsoever to such contract(s) is
included in the credit. Consequently, the undertaking of a bank to pay, accept and
pay draft(s) or negotiate and/or fulfil any other obligation under the credit is not
subject to claims or defences by the applicant resulting from his relationships with
the issuing bank or the beneficiary. A beneficiary can in no case avail himself of the
contractual relationship existing between the banks or between the applicant and
the issuing bank.
This principle assures the seller or the beneficiary prompt payment
independent of any breach of the main contract and precludes the issuing bank
from determining whether the main contract is actually accomplished or not.
Banks assume no liability or responsibility for the form, sufficiency,
accuracy, genuineness, falsification, or legal effect of any documents, or for the
general and/or particular conditions stipulated in the documents or superimposed
thereon, nor do they assume any liability or responsibility for the description,
weight, quality, condition, packing, delivery, value, or existence of the goods
represented by any documents, or for the good faith or acts and/or omissions,
solvency, performance of standing of the consignor, the carriers, or the insurers of
the goods, or any other person whomsoever.[Bank of The Philippine Islands
vs. De Reny Fabric Industries, Inc., et al, G.R. No. L 24821, October
16, 1970]
Who can invoke the Independence Principle?
The issuing bank can invoke the independence principle but it is not only
party who can do so. While it is the bank which is bound to honor the credit, it is
the beneficiary who has the right to ask the bank to honor the credit by allowing
him to draw thereon.
It cannot be reasonably argued that only the issuing bank may invoke the
principle. To say that the independence principle may only be invoked by the
issuing banks would render nugatory the purpose of which the letters of credit are
used in commercial transactions. As it is, the independence doctrine works to the
benefit of both the issuing bank and the beneficiary. Letters of credit are employed
by the parties desiring to enter into commercial transactions, not for the benefit of
the issuing bank but mainly for the benefit of the parties to the original
transactions. With the letter of credit from the issuing bank, the party who applied
for and obtained it may confidently present the letter of credit to the beneficiary as
a security to convince the beneficiary to enter into the business transaction. On the
other hand, the other party to the business transaction, i.e., the beneficiary of the
letter of credit can be rest assured of being empowered to call on the letter of credit
as a security in case the commercial transaction does not push through, or the
applicant fails to perform his part of the transaction. It is for this reason that the
party who entitled to the proceeds of the letter of credit is appropriately called
beneficiary.[Transfield v. Luzon Hydro, G.R. No. 146717, November 22,
2004]
The fraud exception maintains that despite the banks unconditional obligation
to pay the seller upon presentation of the required documents, the issuing bank
is not bound to pay when there has been fraud by the seller. The test is whether,
standing in the shoes of the paying bank at the time of payment, the fraud was
clear and obvious. If [the] fraud was clear and obvious, the bank pays the
beneficiary at its own peril and it is not entitled to reimbursement. But if [the]
fraud is not clear and obvious, then it is not for a bank to question why the
parties involved had chosen to conduct their business in any particular way.
Fraud is an exception to the independence principle applicable to letters of
credit, which provides that the letter of credit is separate and distinct from the
underlying transaction from which the letter of credit arose. Under this exception,
where there is fraud or forgery in the underlying transaction or the tender of
documents, payment of the credit may be enjoined, and the issuing bank is not
obliged to pay. [Transfield v. Luzon Hydro, G.R. No. 146717, November
22, 2004]
The independent nature of a letter of credit may be:
1. Independent in toto where credit is independent from the justification aspect
and is a separate obligation from the underlying agreement like for instance a
typical standby; or
2. Independence may only be as to the justification aspect like in commercial
credit or repayment standby, which is identical with the same obligations under
the underlying agreement.
In both cases, the payment may be enjoined if in the light of the purposes of the
credit the payment of it constitute fraudulent abuse of the credit. Professor
Dolan opines that the untruthfulness of a certificate accompanying a demand for
payment under a standby credit may qualify as fraud sufficient to support an
injunction against payment.
The remedy for fraudulent abuse is an injunction. However, injunction
should not be granted unless:
a) There is clear proof of fraud;
b) The fraud constitutes fraudulent abuse of the independence purpose
of the letter of credit and not only fraud under the main agreement; and
c) Irreparable injury might follow if injunction is not granted or the
recovery of damages would be seriously damaged.
[See Transfield v. Luzon Hydro, G.R. No. 146717, November 22, 2004]
Prescriptive Period Since the cause of action arises from a contract and
not from solutio indebiti, the prescriptive period is ten (10) years. [National
Commercial Bank of Saudi Arabia v. Court of Appeals, G.R. No. 124267,
January 31, 2003]
ANSWER:
A letter of credit is a financial device developed by merchants as a convenient and
relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable
interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who
wants to have control of the goods before paying. To break the impasse, the buyer may be
required to contract a bank to issue a letter of credit in favor of the seller so that, by virtue
of the letter of credit, the issuing bank can authorize the seller to draw drafts and engage
to pay them upon their presentment simultaneously with the tender of documents
required by the letter of credit. The buyer and the seller agree on what documents are to
be presented for payment, but ordinarily they are documents of title evidencing or
attesting to the shipment of the goods to the buyer. Once the credit is established, the
seller ships the goods to the buyer and in the process secures the required shipping
documents or documents of title.
To get paid, the seller executes a draft and present it together with the required
documents to the issuing bank. The issuing bank redeems draft and pays cast to the seller
if it finds that the documents submitted by the seller conform with what the letter of credit
requires. The bank then obtains possession of the documents upon paying the seller. The
transaction is completed when the buyer reimburses the issuing bank and acquires the
documents entitling him to the goods. Under this arrangement, the seller gets paid only if
he delivers the documents of title over the goods, while the buyer acquires the said
documents and control over the goods only after reimbursing the bank. (Bank of
America NT & SA v. CA, et al., G.R. No. 105395, December 10,1993)
However, letters of credit are also used in non-sale settings where they serve to reduce the
risk of nonperformance. Generally, letters of credit in non-sale settings have come to be
known as standby letters of credit. (Transfield Philippines, Inc. v. Luzon Hydro
Corporation, et al., G.R. No. 146717, November 22,2004)
The Supreme Court has held that fraud is an exception to the independence
principle governing letters of credit. Explain this principle and give an example of how
fraud can be an exception. (3%)
ANSWER:
The independence principle posits that the obligations of the parties to a letter of
credit are independent of the obligations of the parties to the underlying transaction.
Thus, the beneficiary of the letter of credit, which is able to comply with the documentary
requirements under the letter of credit, must be paid by the issuing or confirming bank,
notwithstanding the existence of a dispute between the parties to the underlying
transaction, say a contract of sale of goods where the buyer is not satisfied with the quality
of the goods delivered by the seller.
(A) Can Atlantic Bank refuse payment due to the unresolved controversy?
Explain. (3%)
ANSWER:
No, Atlantic Bank cannot refuse payment to the unresolved controversy between
the two companies. The Bank is solidarily liable to pay based on the terms and conditions
of the Letter of Credit. In FEATI Bank v. Court of Appeals, G.R. No.94209, 30 April 1991,
the Court held that an irrevocable letter of credit is independent of the contract between
the buyer-applicant and the seller-beneficiary.
Yes, X Corporation can claim directly from PT Construction Corp. The irrevocable
letter of credit was merely a security arrangement that did not replace the main contract
between the two companies. In FEATI Bank c. CA, G.R. No. 94209, 30 April 1991, opening
a letter of credit does not involve a specific appropriation of money in favor of the
beneficiary. It only signifies that the beneficiary may draw funds up to the designated
amount. It does not mean that a particular sum of money has been specifically reserved of
held in trust.
The outboard motors arrived and were delivered to Ricardo, but he was not able to pay the
purchase price thereof. a) Can AC Bank take possession of the outboard motors?
Why?
b) Can AC Bank also foreclose the mortage over the fishpond? Explain. (5%)
Answer:
a) No, for AC Bank has no legal standing, much less a lien, on the outboard motors.
Insofar as AC bank is concerned, it has privity with the person of Ricardo under Surety
Agreement, and a lien on the fishpond based on the real estate mortgage constituted
therein.
b) Yes, but only to enforce payment of the principal loan of P1 Million secured by the real
estate mortgage on the fishpond.
Explain the three (3) Distinct but intertwined contract relationships that are
indispensable in a letter of credit transaction.
Answer:
The three (3) distinct but intertwined contract relationships that are indispensable in a
letter of credit transaction are:
1) Between the applicant/buyer/importer and the
beneficiary/seller/exporter. -
The applicant/buyer/importer is the one who procures the letter of credit and
obliges himself to reimburse the issuing bank upon receipt of the documents of title, while
the beneficiary/seller/exporter is the one who in compliance with the contract of sale
ships the goods to the buyer and delivers the documents of title and draft to the issuing
bank to recover payment for the goods. Their relationship is governed by the contract of
sale.
Answer:
In case anything wrong happens to the letter of credit, a confirming bank incurs
liability for the amount of the letter of credit, while a notifying bank does not incur any
liability.
BV agreed to sell to Ac, a Ship and Merchandise Broker, 2,500 cubic meters of logs
at $27 per cubic meter FOB. After inspecting the logs, CD issued a purchase order.
2) Under the facts above, the seller, BV, argued that FE Bank, by accepting
the obligation to notify him that the irrevocable letter of credit has been
transmitted to it on his behalf, has confirmed the letter of credit. Is the
argument tenable? Explain.
Answer:
1) No. The letter of credit provides as a condition a certification of AC, Without such
certification, there is no obligation on the part of FE Bank to advance payment of the letter
of credit. (Feati Bank v. CA 196 SCRA 576)
2) No. FE Bank may have confirmed the letter of credit when it notified BV, that an
irrevocable letter of credit has been confirmed to it on its behalf. But the conditions in the
letter of credit must first be complied with, namely that the draft be accompanied by a
certification from AC. Further, confirmation of a letter of credit must be expressed. (Feati
Bank v. CA, 196 SCRA 576)
FOR REFERENCE: FROM SECTION B
LETTERS OF CREDIT
Abstract
Letters of credit are employed by the parties desiring to enter into commercial
transactions, not for the benefit of the issuing bank but mainly for the benefit of the
parties to the original transactions. With the letter of credit from the issuing bank, the
party who applied for and obtained it may confidently present the letter of credit to the
beneficiary as a security to convince the beneficiary to enter into the business
transaction. On the other hand, the other party to the business transaction, i.e., the
beneficiary of the letter of credit, can be rest assured of being empowered to call on the
letter of credit as a security in case the commercial transaction does not push through,
or the applicant fails to perform his part of the transaction. It is for this reason that the
party who is entitled to the proceeds of the letter of credit is appropriately called
beneficiary. (Transfield Philippines, Inc. vs. Luzon Hydro Corporation, et al., G.R. No.
146717, November 22, 2004,)
A notifying bank is not a privy to the contract of sale between the buyer and the
seller, its relationship is only with that of the issuing bank and not with the beneficiary to
whom he assumes no liability. It follows therefore that when the petitioner refused to
negotiate with the private respondent, the latter has no cause of action against the
petitioner for the enforcement of his rights under the letter. (Kronman and Co., Inc. v.
Public National Bank of New York)
As earlier stated, there must have been an absolute assurance on the part of the
petitioner that it will undertake the issuing banks obligation as its own. Verily, the loan
agreement it entered into cannot be categorized as an emphatic assurance that it will
carry out the issuing banks obligation as its own.
The case of Scanlon v. First National Bank perspicuously explained the relationship
between the seller and the negotiating bank, viz:
It may buy or refuse to buy as it chooses. Equally, it must be true that it owes no
contractual duty toward the person for whose benefit the letter is written to
discount or purchase any draft drawn against the credit. No relationship of agent
and principal, or of trustee and cestui, between the receiving bank and the
beneficiary of the letter is established. (P.568)
The relationship between the issuing bank and the notifying bank, on the
contrary, is more similar to that of an agency and not that of a guarantee. It may be
observed that the notifying bank is merely to follow the instructions of the issuing bank
which is to notify or to transmit the letter of credit to the beneficiary. (See Kronman v.
Public National Bank of New York). Its commitment is only to notify the beneficiary. It
does not undertake any assurance that the issuing bank will perform what has been
mandated to or expected of it. As an agent of the issuing bank, it has only to follow the
instructions of the issuing bank and to it alone is it obligated and not to buyer with whom
it has no contractual relationship.
In fact the notifying bank, even if the seller tenders all the documents required
under the letter of credit, may refuse to negotiate or accept the drafts drawn thereunder
and it will still not be held liable for its only engagement is to notify and/or transmit to the
seller the letter of credit.
Finally, even if we assume that the petitioner is a confirming bank, the petitioner
cannot be forced to pay the amount under the letter. As we have previously explained,
there was a failure on the part of the private respondent to comply with the terms of the
letter of credit. (Feati Bank & Trust Company vs. CA, G.R. No. 94209, April 30, 1991)
Laws Governing LC
It is the Uniform Customs and Practice (UCP) for documentary Credits for International
Chamber of Commerce governs the Letters of credit (Metropolitan Waterworks vs.
Daway, G.R. No. 160723, July 21, 2004).
Articles 567 to 572 of the Code of Commerce on Letters of Credit are obsolete.
However, in the absence of any provision in the Code of Commerce, commercial
transaction shall be governed by the usages and customs generally observed. (Sec. 2,
Code of Commerce)
(c) Applicant and beneficiary Their relationship is governed by the sales contract.
Process:
The buyer may be required to contract a bank to issue a letter of credit, the
issuing bank can authorize the seller to raw drafts and engage to pay
them upon their presentment simultaneously with the tender of documents
required by the letter of credit. The buyer and seller agree on what
documents are to be presented for payment, but ordinarily they are
documents of title evidencing or attesting to the shipment of the goods to the
buyer.
Once the letter of credit is established, the seller ships the goods to the
buyer and in the process secures the required shipping documents and
documents of title. To get paid, the seller executes a draft and presents it
together with the required documents to the issuing bank.
The issuing bank redeems the draft and pays cash to the seller if it finds
that the documents submitted by the seller conform with what the letter of
credit requires. The bank then obtains possession of the documents upon paying
the seller. The transaction is completed when the buyer reimburses the issuing
bank and acquires the documents entitling him to the goods. The seller gets
paid only if he delivers the documents of title over the goods while the buyer
acquires the said documents and control over the goods only after
reimbursing the bank.
2. Explain banks are responsible for examining documents in LC
The issuing bank in determining compliance with the terms of the letter of credit
is required to examine only the shipping documents presented by the seller and
is precluded from determining whether the main contract is actually
accomplished or not. This arrangement assures the seller of prompt payment,
independent of any breach of the main sales contract.
3. Definition of LC
They are intended generally to facilitate the purchase and sale of goods by
providing assurance to the seller of prompt payment upon compliance with
specified conditions or presentation of stipulated documents without the seller
having to rely upon the solvency and good faith of the buyer.
Payment can be made in several different ways: by the buyer remitting cash
with his order; by open account whereby the buyer remits payment at an agreed
time after receiving the goods; or by documentary collection through a bank in
which case the buyer pays the collecting bank for account of the seller in
exchange for shipping documents which would include, in most cases, the
document of title to the goods. In the aforementioned methods of payment, the
seller relies entirely on the willingness and ability of the buyer to effect payment.
To the Importer/Buyer
Payment will only be made to the seller when the terms and conditions of the
letter of credit are complied with.
The importer can control the shipping dates for the goods being purchased.
Cash resources are not tied up.
7. Two kinds of LC
(a) The Buyer- he is the one who procures the letter of credit and obliges himself
to reimburse the issuing bank upon receipt of the documents of title
(b) The Issuing Bank- is the bank from whom the letter of credit is procured and
which undertakes to pay the seller upon receipt of the draft and proper
documents of titles and to surrender the documents to the buyer upon
reimbursement, and
(c) The seller- who in compliance with the contract of sale ships the goods to
the buyer and deliver the documents of title and draft to the issuing bank to
recover payment.
B. INTERNATIONAL
(a) The Customer- who is the party who applies to a bank in one country for the
opening of a letter of credit in favor of the seller in another country
(b) The Issuing Bank- is the bank in the country of the customer to which the
customer applies for the issuance of a letter of credit
(c) The Beneficiary- who is the party in another country who is the creditor of
the customer. Usually, he is the one selling goods to the customer
(d) The Advising Bank is the bank in the country of the beneficiary which
communicates to the beneficiary the notice of the credit issued by the issuing
bank
(e) The Confirming/Correspondent Bank- is the bank that undertakes that the
letter of credit will be fully paid. Usually the confirming bank is also the advising
bank, otherwise it is utilized to lend credence to the letter of credit issued by a
lesser known issuing bank and is directly liable to the beneficiary.
It is clearly settled in law that there are thus three contracts which make up the
letter of credit transaction: The contract between buyer and seller, buyer and
issuing bank, and the letter of credit proper. These transactions are to be
maintained in a state of perpetual separation.
9. INDEPENDENCE PRINCIPLE
The issuing bank in determining compliance with the terms of the letter of credit
is required to examine only the shipping documents presented by the seller and
is precluded from determining whether the main contract is actually
accomplished or not. This arrangement assures the seller of prompt payment,
independent of any breach of the main sales contract. This known as the
independence principle in a letter of credit transaction.
The relationship of the buyer and the bank is separate and distinct from the
relationship of the buyer and seller in the main contract; the bank is not required
to investigate if the contract underlying the LC has been fulfilled or not because
in transactions involving LC, banks deal only with documents and not goods (BPI
v. De Reny Fabric Industries, Inc., L-2481, Oct. 16, 1970). In effect, the buyer
has no course of action against the issuing bank.
Thus, a correspondent bank which departs from what has been stipulated under
the LC acts on its own risk and may not thereafter be able to recover from the
buyer or the issuing bank, as the case may be, the money thus paid to the
beneficiary. (Feati Bank and Trust Company v. CA, G.R. No. 940209, Apr. 30,
1991)
Requisites:
Those which do not have any of the essential conditions shall be considered
merely as a letter of recommendation.
The bank or drawer of a letter of credit shall be liable to the person on whom it
was issued for the amount paid by virtue thereof, within the maximum fixed
therein, while a notifying bank does not incur any liability except to notify the
beneficiary of the letter of credit. Before paying, it shall have the right to demand
the proof of the identity of the person in whose favor the letter of credit is issued.
The drawer of a letter of credit may annul it, informing the bearer and the person
to whom it is addressed of such revocation. The waiver of the right to annul
makes the letter of credit irrevocable.
A letter of credit becomes void if the bearer of a letter of credit does not make
use thereof within the period agreed upon with the drawer, or, in default of a
period fixed,
a. within 6 months counted from its date, in any point in the Philippines,
b. within 12 months anywhere outside thereof, it shall be void in fact and in law.
16. RED CLAUSE LC
Under a deferred payment letter of credit, the applicant does not pay until a
future date determined in accordance with the terms of the letter of credit.
19. TRANSFERRABLE LC
An irrevocable letter of credit obligates the issuing bank to honor drafts drawn in
compliance with the credit and can be neither cancelled nor modified without the
consent of all parties, including in particular the beneficiary/exporter.
A letter of credit issued by one bank can be confirmed by another, in which case
both banks are obligated to honor drafts drawn in compliance with the credit.
An unconfirmed letter of credit is the obligation only of the issuing bank provided
all terms and condition of LC have been complied with.
Why would an exporter want a foreign banks letter of credit confirmed by a
domestic bank? One reason could be if he has doubts.
23. CIRCULAR LC
The document is called a circular letter of credit when it is not addressed to any
particular correspondent. In effect, a letter of credit is a draft, save that the
amount is merely stated as a maximum not to be exceeded. Letters of credit,
mainly used by travellers, greatly simplify non-local business transactions.
24. NEGOTIATION LC
Under UCP 600 (Uniform Customs and Practice for Documentary Credits, 2007
revision, article 2) negotiation means the purchase by the nominated bank of
drafts (drawn on a bank other than the nominated bank) and/or documents under
a complying presentation, by advancing or agreeing to advance funds to the
beneficiary on or before the banking day on which reimbursement is due to the
nominated bank.
Unfortunately, the term "negotiable credit" is understood and applied in different
ways in different parts of the world.
25. REIMBURSEMENT LC
Any standard lc having special payment conditions that, the negotiating bank is
authorized to claim and get the payment against the lc directly from the opening
bank's nominated agency bank after presentation of credit confirmed documents
is known as reimbursement LC or direct reimbursement Lc. In most of the cases
payment of the import, thus is already effected prior to receipt of the documents
and consignment by the importer.
26. REVOLVING LC
Revolving letter of credit - is established when there are regular shipments of the
same commodity between supplier and customer. Eliminates the need to issue
an letter of credit for each transaction
27. CUMULATIVE/NON-CUMULATIVE
For a non-cumulative revolving letter of credit, the beneficiary can draw each
revolving amount for any given period, and any unused portions cannot be
drawn on the subsequent periods.
Cumulative revolving letter of credit means that the unused sums in the L/C
can be added to the upcoming shipments.
A type of letter of credit. A straight credit can only be paid at the counters of the
paying bank or a named drawee bank that has been authorized to make
payment. Payment can only be made to the beneficiary named in the letter
of credit, and not to an intermediary or negotiating bank. The beneficiary named
in a straight credit must present documents at the paying bank or named drawee
bank on or before the expiration date stipulated in the letter of credit. The term is
derived from the fact that payment is made straight or directly to the beneficiary.
Letter of Credit | SPECIAL COMMERCIAL LAW
A straight credit differs from a negotiable credit because payment in the latter
can be made to a negotiating bank. A straight credit contains clauses such as
we engage with you that all drafts drawn in compliance with the credit terms
will be duly honored upon presentation, which basically highlight the restriction
of payment to the beneficiary only.
30. DOCUMENTARY LC
A documentary letter of credit is an obligation of the bank that opens the letter
of credit (the issuing bank) to pay the agreed amount to the seller on behalf of
the buyer, upon receipt of the documents specified in the letter of credit. The
letter of credit is opened by the bank on the basis of the buyers (importers)
instructions, which are compiled in accordance with the terms of the contract.
Both the importer and exporter should take into account that the letters of
credit constitute a transaction separate from the purchase and sale agreement
or other agreements on which they are based. The banks obligations under
the letter of credit are set forth in the letter of credit itself, and the bank deals
exclusively with documents, not with goods or services.
Documentary letters of credit are the safest means for international trade
settlement both for importers and exporters of goods.
31. CLEAN LC
A letter of credit payable upon presentation of the draft, without any supporting
document being required.
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