Professional Documents
Culture Documents
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 bank’s 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 bank’s obligation as its own.
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)
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 bank’s 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.
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 buyer’s (importer’s) 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 bank’s 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.