LETTERS OF CREDIT 3. Seller one who in compliance with the
contract of sale ships the goods to the buyer Definition: and delivers the documents of title and draft to Q: What is a letter of credit? the issuing bank to recover payment. 4. Advising (notifying) Bank may be utilized to A: Letters of Credit is an engagement by a bank or other convey to the seller the existence of the credit. person made at the request of a customer that the 5. Confirming Bank which will lend credence to issuer will honor drafts or other demands for payment the letter of credit issued by a lesser known upon compliance with the conditions specified in the issuing bank; the confirming bank is directly credit. liable to pay the seller-beneficiary. Example: importation of purchase of goods 6. Paying Bank which undertakes to encash the Q: Are you applying a loan when you open a letter of drafts drawn by the exporter/seller. credit? 7. Negotiating Bank A: YES. *Most common parties are the buyer, seller and issuing Reasons why businessmen open letter of credit: bank. 1. Lack of funds 2. Security purposes Transactions involved in a Letter of Credit: 3. Dont want to part his money until the goods are received a. Independence Principle This principle provides that the three contracts Q: What are the relationships may arise in a letter of entered into in this transaction, the contracts credit? are: 1. Contract of sale between the buyer and A: General Rule: Three relationships they are: 1. Buyer- seller; 2. Contract of the buyer with the issuing seller (contract of sale); 2. Issuing bank-beneficiary; and bank; and 3. Letter of Credit proper, are 3. Issuing bank-buyer (contract of loan) separate from each other thus any infirmity Usual conditions imposed by the bank: 1. Financial from one contract does not affect the other capacity; 2. collateral contracts. Applicable Laws: A direct consequence of this principle is the rule that banks only deal with documents and not 1. Code of Commerce of Letters of Credit with goods, services or obligations to which Article 568 of the Code of Commerce provides they relate. that: A letter of credit shall: 1. Be issued in *In BPI v De Reny, the SC held that the bank has favor of a definite person and not to orders; and no obligation to inquire the specifications of the 2. Be limited to a fixed and specified amount or goods. to one or more undetermined amount but with b. Fraud Exception Principle maximum limit stated exactly. c. Rule of Strict Compliance *Letter of credit is not a negotiable instrument. This rule provides that the documentary 2. Customs, primarily those embodied in the requirements imposed by the issuing bank must Uniform Customs and Practice for Documentary be strictly complied with by the beneficiary Credits which was adopted by the International otherwise the issuing bank cannot ask for Chamber of Commerce reimbursement. Usual documents submitted to the bank: Parties to a Letter of Credit: 1. Vouchers; 2. Contract of sale; and 1. Buyer one who procures the letter of credit 3. Purchase orders and obliges himself to reimburse the issuing bank upon receipt of the document of title. Types of Letters of Credit: 2. Issuing Bank one which undertakes to pay the seller upon receipt of the draft and proper a. Irrevocable Letter of Credit is a definite documents of titles and to surrender the undertaking on the part of the issuing bank and documents to the buyer upon reimbursement. constitutes the engagement of that bank to the beneficiary and bona fide holders of drafts 1 Commercial Law Review Letters of Credit Maria Zarah Villanueva - Castro
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. b. Confirmed Letter of Credit whenever the beneficiary stipulates that the obligation of the opening bank shall also be made the obligation of another bank (also bank that notifies) to himself. c. Standby Letter of Credit a security arrangement for the performance of certain obligations. It can be drawn against only if another business transaction is not performed. It may also be issued in lieu of a performance bond. *This type of letter of credit involves an obligation to do. *In Transfield v Luzon, the SC held that Luzon can ran after the Letter of Credit despite the pending arbitration of before the Commission because of the independence principle. *Upon default, the bank pay the beneficiary. d. Revolving Letter of Credit one that provides for renewed credit to become available as soon as the opening bank has advised that the negotiating or paying bank that the drafts already drawn by the beneficiary have been reimbursed to the opening bank by the buyer. e. Back-to-Back Letter of Credit a credit with identical documentary requirements and covering the same merchandise as another letter of credit, except for a difference in the price of the merchandise as shown by the invoice and the draft. The second letter of credit can be negotiated only after the first is negotiated.