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LETTER OF CREDIT

Commerce – branch of human activity the purpose of which is to bring products to the consumer by
means of exchanges or operations which tend to supply and extend them to him, habitually, with intent
to gain, at the proper time and place, and in good quality and quantity.

Commercial transactions – those entered into by merchants to pursue activities as merchants

Merchants – one whose business is buying and selling goods for profit; a person or entity that holds
itself out as having expertise peculiar to the goods in which it deals, and is therefore held by the law to a
higher standard than a consumer or other non-merchant is held

Who are merchants? (Art.1, Code of Commerce)

1. Those who having capacity to engage in commerce, habitually devote themselves to it

2. Commercial or industrial companies which may be created in accordance with existing legislation

Essential requisites of a merchant:

 Filipino Individual

1. Legal capacity to engage in commerce

2. Habitually engages himself therein

 A single act of a party or person may be considered a habitual act.

3. Must be at least 18 years old (RA 6809)

4. Must have free disposition of his property

 Filipino Association

1. Commercial or industrial company

2. Created in accordance with existing legislations

3. With legal capacity to engage in commerce

4. Habitually engaged therein

Rule on Minors

General Rule: Minors may not engage in commerce

Exceptions:

1. When the minor continues the business of his parents or predecessors through a guardian
2. Investment in stocks of a corporation

 A minor at least 7 years old may open a bank savings account or time deposit and withdraw the
same without assistance of his parent or guardian (PD 734)

Persons disqualified in engaging in commercial transactions

A. Absolutely Disqualified

1. Persons suffering the penalty of civil interdiction

2. Persons declared as bankrupt

3. Persons disqualified by special laws or provisions

B. Relatively Disqualified

1. Justices of the SC, judges, and officials of the department of public prosecutors in actual service

2. Administrative, economic or military heads of districts, provinces or posts

3. Employees engaged in the collection and administration of public funds of the State, appointed by the
government

4. Stock or brokers of any class

5. Those who by virtue of laws or special provisions, may engage in commerce in a determinate territory

6. Members of Congress

7. President, Vice-President, members of Cabinet and their deputies or assistants

8. Members of Constitutional Commission

9. President, Vice-President, members of the Cabinet, Congress, Supreme Court and the Constitutional
Commission, Ombudsman with respect to any loan, guaranty or other form of financial accommodation
for any business purpose by any government-owned or controlled bank to them

Commercial contract – an agreement between two or more merchants or non-merchants binding


themselves to give or to do something in commercial transactions

Macariola v. Asuncion: Art. 14 of the Code of Commerce (a Spanish law) providing for the relative
disqualification of judges is political in nature as it regulates the relationship between the government
and certain public officers and employees like justices and judges. Upon the transfer of sovereignty from
Spain to US and later on US to Philippines, said provision must be deemed abrogated because where
there is change of sovereignty, political laws of the former sovereign, whether compatible or not with
those of the new sovereign are automatically abrogated. There being no explicit re-enactment by the
new sovereign, disqualification should be considered to have since lost its legal and binding force on
judges. Hence, the Court ruled in the said case that there was no violation of the said rule when
Asuncion associated himself with a company as a stockholder while being concurrently a CFI judge.

Jose Berin v. Judge Felixberto Barte:

The Court ruled that Barte committed an impropriety in acting as a broker in the sale of a real estate.
This is so since while Sec. 14 of the Code of Commerce had already been abrogated as ruled in Macariola
v. Asuncion, the Code of Judicial Conduct which took effect on October 20, 1989, refrained judges from
entering into financial and business dealings that tend to reflect adversity o the court’s impartiality.

Letter of Credit - a letter issued by one merchant to another for purpose of attending to a commercial
transaction (Art. 567, Code of Commerce)

Modern concepts:

- an engagement by a bank or other person made at the request of a customer that the issuer will honor
drafts or other demands for payment upon compliance with the conditions specified in the credit
(Prudential Bank v. IAC; Bank of Commerce v. Serrano)

- one wherein the bank merely substitutes its own promise to pay for the promise to pay of one of its
customers who in return promises to pay the bank the amount of funds mentioned in the letter of credit
plus credit or commitment fees mutually agreed upon

- one issued by a bank in order to aid a person who may not have a capital for the importation of goods
and merchandise

- a request by one bank (addressed usually to another bank) to advance money or credit to a third
person, upon fulfillment of certain conditions, usually by the latter on the promise of the issuer bank to
repay the same; issuer in turn look for the person applying for the same for satisfaction

Conditions of a Letter of Credit: (Art. 568, Code of Commerce)

1. to be issued in favor of a definite person and not to order

2. to be limited to a fixed and specified amount or to one or more undetermined amounts, but within a
maximum the limits of which has to be stated exactly

When does the letter of credit become void (Art. 572, Code of Commerce)

1. If the bearer of a letter of credit does not make use of it within the period agreed upon with the
drawer

2. If there is no period stipulated,

 within 6 months counted from the date – in any point in the Philippines
 within 12 months – outside the Philippines
Basic parties to a Letter of Credit

1. Buyer – procures the letter of credit and obliges himself to reimburse the issuing bank upon receipt of
the documents of title

2. Bank (issuing/opening) – undertakes to pay the seller upon receipt of the draft and proper
documents of title and to surrender the documents to buyer upon reimbursement

3. Seller (payee/beneficiary) – 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

Other parties:

1. Paying bank – bank on which the drafts are to be drawn

2. Confirming bank – notifies the beneficiary, assumes the direct obligation to the seller; has primary
liability

3. Notifying bank – correspondent bank of the issuing bank, assumes no liability except to notify and/or
transmit to the beneficiary the existence of a letter of credit, check authenticity of credit

4. Negotiating bank – correspondent bank which buys or discounts a draft under the letter of credit;
liability is dependent upon the stage of negotiation

 Before negotiation – no liability to seller


 After negotiation – has contractual relationship with seller

Three contracts in a Letter of Credit

1. Contract between buyer and seller

 governed by the contract of sale executed by them

2. Contract between issuing bank and buyer

 governed by the terms of application and agreement for the issuance of letter of credit

3. Contract between issuing bank and seller

- Governed by the terms of the letter of credit itself

Independence Principle

- 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
- assures the seller of prompt payment independent of any breach of the main sales contract
- the contract of sale between buyer and seller is independent from the letter of credit itself; the
issuing bank need only to determine the tender documents presented by seller and has the
obligation to pay upon compliance with the terms of the letter of credit
- works to the benefit of both issuing bank and beneficiary/seller

Rule of Strict Compliance

- the documents tendered by the seller or beneficiary must strictly conform to the terms of the
letter of credit, i.e. they must include all documents required by the letter of credit

Fraud exception:

- exists when the beneficiary for the purpose of drawing on the credit, fraudulently presents to
the confirming bank documents that contain expressly or by implication material
representations of fact that to his knowledge are untrue
- effect: court may issue injunction to bar payment by the issuing bank
- requirements of injunction:
o There is clear proof of fraud
o Fraud constitutes fraudulent abuse of the independent purpose of the letter of credit
and not only fraud under the main agreement
o Irreparable injury might follow if injunction is not granted or recovery of damages would
seriously be damaged

Kinds of Letter of Credit

1. Confirmed letter of credit – whenever beneficiary stipulates that the obligation of the opening bank
shall also be made the obligation of a bank to himself

2. Unconfirmed letter of credit – obligation only of the issuing bank

3. Irrevocable letter of credit – obligates the issuing bank to honor drafts drawn in compliance with the
credit and can neither be cancelled nor modified without the consent of all parties including in particular
the beneficiary/exporter

4. Revocable letter of credit – can be cancelled at anytime before payment; intended to serve as a
means of arranging payment but not as a guarantee of payment

5. Revolving letter of credit – valid for several transactions over a given period of time such as a week or
month

6. Non-revolving letter of credit – one that is valid for one transaction only

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