FINANCING THE SALES TRANSACTION delivered goods which forced the bank to deposit them in a bonded warehouse
incurring additional expenses.
1. SEVERIANO S. TABIOS, Letters of Credit in Banking De Reny argued that it was the duty of the foreign correspondent banks of Transactions BPI to take the necessary precautions to insure that the goods shipped under the a. Just talks about letters of credit in general and the various case letters of credits conformed with the item appearing therein and that since the said doctrines. foreign banks failed to perform this duty, no claim for recoupment against De Reny arising from the losses incurre3d for the non-delivery or defective delivery could 2. NATIONAL MARKETING CORPORATION v. ATLAS TRADING accrue. DEVELOPMENT CORPORATION The Supreme Court ruled that the foreign banks and BPI had no liability Atlas and Namarco entered into an agreement whereby the former and should not incur losses because of the defective delivery. First of all, the would sell to the latter 8,000 metric tons of galvanized sheets CIF Manila. Atlas parties agreed in the letters of credit that the bank would not be responsible for the (agent of West India Commercial Corporation) was required to furnish a quality and defect in the goods. Furthermore, Article 2 of the Code of Commerce $100,000 performance bond which for which Alto was surety. Atlas, however, also provided that “Acts of commerce, whether those who execute them be failed to deliver the galvanized sheets. Namarco demanded 20% of the total merchants or not, and whether specified in this Code or not, should be contract price (amount to be paid under the contract in case of non-delivery) and governed by the provision contained in it, in their absence, by the usages of $100,000 from Alto. It should be noted that there was a discrepancy between the commerce generally observed in each place, and in the absence of both rules, purchase contract and the letter of credit. Under the purchase contract, a 60-day by those of civil law. grace period was given for the delivery of the goods. No such provision, De Reny cannot shift the burden of loss to BPI on account of the violation however, was in the letter of credit. of their vendor of its prestations. Banks do not deal with the property to be The trial court justified the non-delivery because of the discrepancy exported or shipped to the importer, but deal only with documents. Article 10 of between what was provided for in the contract of the purchase and sale and the the UCP provides that “In documentary credit operations, all parties concerned deal letter of credit. The failure to open a letter of credit within the period agreed in documents and not in goods. Payment, negotiation or acceptance against upon suffices to prevent a binding juridical tie from being created. In short, the documents in accordance with the terms and conditions of a credit by a bank offeree must comply with the conditions of the offer or else there is no valid authorized to do so binds the party giving the authorization to take up the agreement. As such, Atlas was not liable (also because it was just an agent and documents and reimburse the bank making the payment, negotiation or acceptance. the principal was not impleaded). Alto was not liable because its liability was based on Atlas’s liability. 4. PHILIPPINE VA. TOBACCO ADMIN. V. DE LOS ANGELES The Supreme Court upheld the decision of the trial court. Namarco Philippine Associated Resources (PAR) was awarded the right to import sought to avoid the application of the cited principle by alleging that a letter of Virginia leaf tobacco for blending purposes and exportation by them of PVYA and credit cannot contain all the particulars nor can it embody all the agreements farmer’s low-grade tobacco. PVTA and PAR entered into a contract for the previously entered into by the parties for the terms and conditions of their importation of 85M kilos of Virginia leaf tobacco and a counterpart exportation of agreement are contained already in separate documents. A letter of credit 5.1M kilos of farmer’s and/or PVTA. contains the entire contract of the parties and their resulting obligations RA 4155 was enacted authorizing PVTA to grant import privileges at the should be measured by its provisions. It constitutes the complete agreement ratio of 4:1 instead of 9:1 and to dispose of all its tobacco at the best price and is independent of the contract of sale between the buyer and the seller, available. and is unaffected by any breach of contract on the part of the seller or the PAR obtained an injunction enjoining PVTA from drawing against the buyer or by any controversy which may arise between the buyer and seller letter of credit. The basic issue is can the judge do that. or by any other transaction between the buyer and seller. The Supreme Court ruled that the judge violated the irrevocability of the letter of credit. An irrevocable letter of credit cannot, during its lifetime, be 3. BPI v. DE REMY FABRIC INDUSTRIES cancelled or modified without the express permission of the beneficiary. In De Remy opened 4 irrevocable letters of credit to cover purchases of this case, PAR cannot cause cancellation of the letter of credit without the consent dyestuffs from its American supplier JB Distributing Company. The first of the PVTA. Note: If it was the issuing bank who wanted to cancel the letter of shipment covered by the letters of credit, however, merely contained colored credit, it should obtain the consent of both the buyer and the seller. chalk instead of the dyestuffs. De Remy already paid P90,000 as initial payment for the goods. It discontinued payment and refused to take possession of the 5. INSULAR BANK OF ASIA & AMERICA v. CA RTC had no jurisdiction over the claim because such was an arbitrable one. It The Mendoza spouses obtained a loan from Philamlife. A standby letter claimed that the Insurer was subject to the provisions of the Bill of Lading which of credit was required so the spouses obtained one from IBAA. The Mendoza provided that the shipment was carried under and pursuant to the terms of the spouses were unable to pay the first amortization. As such, Philamlife demanded Charter Party entered into by the Shipper with Parcel Tankers. The Insurer, on the the whole amount from IBAA. IBAA refused claiming it was just a guarantor. other hand, claimed that it was not bound to submit the claim of arbitration because As such, it only had subsidiary liability and such liability is subject to payments such arbitration clause provided in the Charter Party was not incorporated into the already made by the spouses. Philamlife, on the other hand, claimed that in a Bill of Lading. Furthermore, as an insurer, it was subrogee only with respect to the letter of credit, the liability was primary and original. The letter of credit was not Bill of Lading and that only said Bill of Lading should regulate the relation among merely an accessory contract. the Insurer and the Carrier. The Supreme Court ruled that IBAA was liable for the whole amount. The RTC deferred the resolution of the Carrier’s Motion to Dismiss and The subject of Standby Letters of Credit secure the payment of any obligation of ordered Insurer to refer its claims for arbitration. The proceedings were suspended the Mendozas to Philamlife including all interests, surcharges and expenses pending the arbitral award. thereon but not to exceed P600,000. But while they are a security arrangement, The basic issue is “Are the terms of the Charter Party, particularly the they are not converted thereby into contracts of guaranty. They are primary provision on arbitration, binding on the Insurer? obligations and not accessory contracts. Being separate and independent The Supreme Court ruled that the Insurer was bound by the arbitration agreements, the payments made by the Mendozas cannot be added in computing clause. The Bill of Lading incorporates by reference the terms of the Charter Party. IBAA’s liability under its own standby letters of credit. Payment made by the It is settled law that the charter may be made part of the contract under which Mendozas directly to Philamlife are in compliance with their own prestations the goods are carried by an appropriate reference in the Bill of Lading. This under the loan agreement. Although the said payments could result in the should include the provision on arbitration even without a specific stipulation reduction of the actual amount which could ultimately be collected from IBAA, to that effect. In cases where a Bill of Lading has been issued by a Carrier the latter’s separate undertaking under its letters of credit remain. covering goods shipped aboard a vessel under a charter party, and the charterer is also the holder of the Bill of Lading, the Bill of Lading operates as the receipt 6. NATIONAL UNION FIRE INSURANCE CO. v. CA for the goods, and as document of title passing the property of the goods, but Parties not as varying the contract between the charter and the ship owner. The Bill a. Shipper –United Coconut Chemicals (Philippines) of Lading becomes only a receipt and not the contract of carriage in a charter. b. Carrier – Stolt-Nielsen Philippines The Insurer cannot feign ignorance of the arbitration clause since it was c. Consignee – Nieuwe Matex in Rotterdam, already charged with notice of the existence of the Charter Party due to an Netherlands appropriate reference thereof in the Bill of Lading. Furthermore, if it had exercised d. Insurer – National Union Fire Insurance Company ordinary diligence, it could have easily obtained a copy of the Charter Party. By United Coconut shipped 404,724 metric tons of distilled c16-c18 fatty subrogation, the Insurer became privy to the Charter Party as fully as the Shipper acid on board a tanker (Stolt Scepter) owned by Stolt-Nielsen from Batangas to before the latter was indemnified, because as subrogee, it stepped into the shoes of Netherlands (to consignee Nieuwe Matex). It had a marine cargo policy with the Shipper and is subrogated merely to the latter’s rights. Since the Shipper was National Union Fire Insurance Company. bound by the Charter Party, the Insurer should also be bound. Stolt-Nielsen (Carrier) issued a Bill of Lading which contained a Arbitration, as an alternative mode of settling disputes, has long been general statement of incorporation of the terms of a Charter Party between recognized and accepted in our jurisdiction. RA 876 (The Arbitration Law) Shipper and Parcel Tankers Inc. The said Charter Party contained an arbitration expressly authorizes arbitration of domestic disputes. Foreign arbitration as a clause that arguments would be settled through arbitration in New York. system of settling commercial disputes of an international character was likewise When the cargo reached the Consignee in the Netherlands, it was found recognized when the Philippines adhered to the United Nations “Convention on the to be discolored and totally contaminated. United Coconut (Shipper) filed a Recognition and the Enforcement of Foreign Arbitral Awards of 1958.” claim against Stolt-Nielson (Carrier) but such was denied. National Union (Insurer) paid the Shipper pursuant to the marine cargo policy covering the 7. FEATI BANK & TRUST CO. v. CA shipment. As such, the insurer became the subrogee of the shipper. Villaluz (seller) sold to Christiansen (buyer) 2,000 lauan logs for Insurer filed a case against Carrier for the recovery of a sum of money $27/cubic meter. Security Pacific National Bank of LA issued a letter of credit in with interest representing the amount paid by the former to the latter in the RTC favor of Villaluz for the price of the logs. The letter of credit was mailed to FEATI of Makati. The Carrier moved to dismiss the proceedings on the ground that the with instructions to forward it to Villaluz. The letter of credit further required certification by Christiansen that the logs were in good order. There was also assurance to the beneficiary that it will undertake the issuing bank’s obligations as incorporation by reference of the UCP. its own according to the terms and conditions of the credit. The mere fact that the Christiansen refused to give the required certification so FEATI refused letter of credit is irrevocable does not necessarily imply that the correspondent to pay on the letter of credit. FEATI went to the Central Bank which declared the bank in accepting the instructions of the issuing bank has also confirmed the letter requirement of stipulation illegal. Villaluz filed an action for specific of credit. In this case, FEATI was merely a notifying bank, at most a negotiating performance to compel FEATI to pay the letter of credit and for Christiansen to bank. It was not a confirming bank because there was no proof of confirmation. give the certification. There was no trust because it presupposes the existence of specific The basic issue is can a correspondent bank be held liable of non- property which was been conferred on a person for the benefit of another. The compliance of beneficiary with the letter of credit. opening of a letter of credit does not satisfy this requirement and the money to be The Supreme Court ruled: forwarded by the bank is its own money. The irrevocable letter of credit does not FEATI was justified in not paying the letter of credit. It is a settled rule establish a guaranty. in commercial transactions involving letters of credit that the documents tendered The moral of the story is: If you’re the counsel for the seller, do not must strictly conform to the terms of the letter of credit. The tender of documents advise your client to get a document from the buyer such as a certification. by the seller must include ALL the documents required by the letter. A This gives him control over the transaction and when the seller is paid. The correspondent bank which departs from this rule acts on its own risk and cannot main reason you’re using a letter of credit is you do not want to rely on the recover from the buyer. This is the rule of STRICT COMPLIANCE. The buyer but on the bank. If you’re on the buyer’s side, however, insist that one bank deals only with documents and it is not in a position to determine whether of the documents required comes from your client. or not the documents required by the letter of credit are material or superfluous. In this case, the court had no choice but to rule in favor of FEATI despite Since the UCP was incorporated by reference, its provisions apply. the fact that Villaluz committed a bad thing. Besides, even if there was no incorporation by reference, the UCP would still apply as provided in the case of BPI v. De Reny. In this case, the pertinent 8. MAGELLAN MANUFACTURING CORP. v. CA provisions are: Magellan entered into a contract with Choiu (Japanese company) to export 136,000 1) Article 3: An irrevocable credit is a definite undertaking on the part of the issuing bank anahaw fans for $23,220. The buyer issued a letter of credit to the seller. The and constitutes the engagement of that bank to the beneficiary and bona fide holders of letter of credit specifically required that there be an on-board bill of lading and that 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 transshipment was not allowed. In entered into an agreement with Zuelig (shipping the terms and conditions of the credit are complied with. An irrevocable credit may be agent) with the same conditions. While in Hong Kong, the goods were transferred advised to a beneficiary through another bank (advising bank) without engagement on the from one ship to another. The two ships, however, were owned by the same owner. part of that bank, but when an issuing bank authorizes or requests another bank to confirm its irrevocable credit and the latter does so, such confirmation constitutes a The Japanese buyer then refused to accept the shipment because there was definite undertaking of the confirming bank. transshipment. Magellan claims that there was no transshipment but merely a 2) Article 7: Banks must examine all documents with reasonable care to ascertain that they transfer because the owner of the two vessels was the same. The Japanese buyer, appear on their face to be in accordance with the terms and conditions of the credit. however, claims that there was transshipment and still refused to accept the goods. 3) Article 8: Payment, acceptance or negotiation against documents which appear on their face to be in accordance with the terms and conditions of the credit by a bank authorized Zuellig then billed Magellan for demurrage and gave the latter the option of paying to do so, binds the party giving the authorization to take up documents and reimburse the or abandoning the fans. Magellan opted to abandon but filed an action against bank which has effected the payment, acceptance or negotiation. Zuellig for lost profits. Under the cited provisions, the bank has the duty to pay the letter of The Supreme Court ruled that there was transshipment because such is credit only if the documents tendered are on their face in accordance with the defined as “the act of taking cargo out of one ship and loading it in another.” It is terms and conditions of the documentary credit. Since FEATI was merely a immaterial that the two ships are owned by one entity. However, Magellan was notifying bank, the only obligation it had was to notify Villaluz that a letter of estopped from claiming it did not know of the transshipment. The bill of lading credit was opened in his favor. operates both as a receipt and as a contract. It is a receipt for the goods An irrevocable letter of credit is not synonymous with a confirmed shipped and a contract to transport and deliver the same as therein stipulated. credit. An irrevocable letter of credit refers to the duration of the letter of As a contract, it names the parties, which includes the consignee, fixes the credit. It means that issuing bank may not without the consent of the seller route, destination, and freight rates or charges, and stipulates the rights and and the buyer, revoke his undertaking in the letter. On the other hand, a obligations assumed by the parties. A shipper who receives a bill of lading confirmed letter of credit pertains to the kind of obligation assumed by the without objection after an opportunity to inspect it and permits the carrier to correspondent bank. In this case, the correspondent bank gives absolute act on it by proceeding with the shipment is presumed to have accepted it as correctly stating the contract and so have assented to its terms. In the case at sale of plastic ropes and agricultural tiles. BOA was the advising bank while Inter- bar, Magellan signed the bill of lading despite the fact that it stated that there Resin Industrial Corporation was the beneficiary. Pursuant to the letter of credit, would be transshipment in Hong Kong. Thus, it cannot claim that there was a BOA informed Inter-Resin of the letter of credit opened in its favor. breach of contract by the carrier Zuellig when the latter was just following the Inter-Resin availed of the letter of credit by submitting invoices covering bill of lading agreed upon. Magellan clearly knew that the bill issued to it the shipment of polyethylene rope to General Chemicals. BOA sought contained terms and conditions clearly violative of the requirement of the letter reimbursement from the Bank of Ayudhya but was informed by the latter that the of credit. letter of credit was spurious. BOA made an investigation and learned that Inter- Note: Another reason for the Japanese buyer’s refusal to accept Resin exported wrappers, rags and waste chemicals instead of the rope. BOA sued is the fact that there was no on-board bill of lading. There was just a certification Inter-Resin for the amount paid to the latter. Inter-Resin, on the other hand, by Zuellig that the goods “were received for shipment only.” Clearly, this was claimed the whole amount in the letter of credit. not an on-board bill of lading. An on-board bill of lading is one in which it is The Supreme Court ruled: stated that the goods have been received on board the vessel which is to carry the A letter of credit is a financial device developed by merchants as a goods whereas a received for shipment bill of lading is one in which it is stated convenient and relatively safe mode of dealing with sales of goods to satisfy the that the goods have been received for shipment with or without specifying the seemingly irreconcilable interests of a seller, who refuses to part with his goods vessel by which the goods are to be shipped. Clearly, the buyer would prefer an before he is paid, and a buyer, who wants to have control of the goods before on-board bill of lading rather than a received for shipment bill of lading. 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, 9. J. SCHUBACK & SONS v. CA the issuing bank can authorize the seller to draw drafts and engage to pay them Philippine Industrial Trading wanted to purchase MAN bus spare parts upon their presentment simultaneously with the tender of documents required by from Germany. It communicated with J. Schuback and submitted a list of parts the letter of credit. The buyer and the seller agree on what documents are to be specific part numbers and descriptions. J. Schuback then sent quotations for the presented for payment, but ordinarily, they are the documents of title evidencing or specified parts. Philippine Industrial Trading then submitted its formal offer attesting to the shipment of the goods to the buyer. containing the item number, quantity, part number, description, unit price and Once the credit is established, the seller ships the goods to the buyer and total to J. Schuback. Simultaneously, it made a purchase order but the quantity in the process secures the required shipping documents or documents of title. To was not indicated. They agreed that a letter of credit should be opened. get paid, the seller executes a draft and presents it together with the required However, Philippine Industrial Trading could not open a letter of credit because it documents to the issuing bank. The issuing bank redeems the draft and pays cash already exceeded its dollar allocations. to the seller if it finds that the documents submitted b y the seller conform with Philippine Industrial Trading then opted to get out of the contract what the letter of credit requires. The bank then obtains possession of the claiming that there was no definite contract between it and J. Schuback. documents upon paying the seller. The transaction is completed when the buyer The Supreme Court ruled that there was already a valid contract reimburses the issuing bank and acquires the documents entitling him to the goods. between the parties. Although the purchase order did not contain the quantity, Under this arrangement, the seller gets paid only if he delivers the documents of Philippine Industrial Trading made good on his promise to communicate the title over the goods, while the buyer acquires the said documents and control over same. As we know, quantity is immaterial in the perfection of a sales contract. the goods only after reimbursing the bank. What is important is the meeting of the minds as to the object and cause, which What characterizes letters of credit, as distinguished from other accessory from the facts disclosed, show that the essential elements had been met. contracts, is the engagement of the issuing bank to pay the seller once the draft and The fact that Philippine Industrial Trading failed to open an irrevocable the required shipping documents are presented to it. In turn, this arrangement letter of credit does not prevent the perfection of the contract between the parties assures the seller of prompt payment independent of any breach of the main sales for the opening of a letter of credit is not a suspensive condition. The opening of contract. By this so called “Independence Principle,” the bank determines a letter of credit in favor of a vendor is only a mode of payment. It is not compliance with the letter of credit only by examining the shipping documents among the essential requirements of a contract of sale. presented; it is precluded from determining whether the main contract is actually accomplished or not. 10. BANK OF AMERICA v. CA In the FEATI case, the Supreme Court has accepted, to the extent of their pertinency, the application in our jurisdiction of this international commercial BOA received an irrevocable letter of credit by registered mail credit regulatory set of rules. In BPI v. De Reny, it was ruled that the observance purportedly issued by Ayudyha Bank in favor of General Chemicals to cover the of the UCP is justified by Article 2 of the Code of Commerce which expresses that in the absence of any particular provision in the Code of Commerce, commercial 1) There is a relationship between the applicant and the transactions shall be governed by the usages and customs generally observed. beneficiary of the letter of credit. In this case, BOA was merely an advising bank. It fact that is was not a 2) There is a relationship between the applicant and the issuing confirming bank which could be seen in the terms of the letter of credit itself. bank. The BOA had not only informed Inter-Resin of the letter of credit but also asked 3) There is a relationship between the issuing bank and the for submission of documents and eventually paid the proceeds. These acts do not beneficiary. automatically make it a confirming bank. The case at bar refers to the first relationship. There was already a The view that BOA should have first checked the authenticity of the contract between the parties when they decided to transact business as regards the letter of credit with Bank of Ayudhya by using advanced mode of business pig iron. The opening of the letter of credit was not a condition precedent of communications before dispatching the same to Inter-Resin finds no real support the birth of the obligation of Reliance to purchase foundry pig iron from in the UCP. Article 18 of the UCP states that “Banks assume no liability or Daewoo. The failure of Reliance to open the appropriate letter of credit did responsibility for the consequences arising out of the delay and/or loss in transit not prevent extinguish the contract. The letter of credit was merely a mode of of any telecommunication. As advising bank, BOA is bound only to check the payment. (This is the independence principle.) “apparent authenticity” of the letter of credit which it did. Since the contract provided for specific tonnage, Daewoo had the right to As such, BOA was really a negotiating bank. It could therefore recover reject the letter of credit. Although the underlying contract is still binding, what it had paid Inter-Resin. BOA can recover from Bank of Ayudhya which in Reliance is liable for damages. turn can recover from the buyer General Chemicals. However, since Bank of Ayudhya disowned the letter of credit, BOA can go after Inter-Resin. 12. NACU v. CA The fact that Inter-Resin sent waste instead of its products is really of no Nacu spouses entered into a Home Construction Joint Venture with 2 consequence. In the operation of a letter of credit, the involved banks deal only more couples. They obtained a loan from Pilipinas Bank for P4.4M for which 5 with documents and not goods described in those documents. parcels of land owned by Nacu spouses were mortgaged as security. The loan was subsequently extinguished but the Nacu spouses did not immediately request for 11. RELIANCE COMMODITIES, INC. v. DAEWOO, INDUSTRILA the issuance of the corresponding certificate of cancellation of mortgage. CO., LTD. Ramon Nacu (husband) secured from Pilipinas Bank, under letters of Reliance entered into a contract with Daewoo wherein the latter credit, a loan accommodation for the importation of several pieces of construction undertook to ship and deliver to the former 2,000 metric tons of foundry pig iron machinery and equipment to be used by JBS Construction of which he was for $404,000. Pursuant to the contract, Daewoo shipped 2,000 tons of foundry president. Nacu was made to sign trust receipts in favor of Pilipinas Bank. pig iron. Upon arrival, however, the cargo was found to be short of 135,655 Nacu spouses then asked for the certification of the release of the metric tons. To compensate for the deficiency, Reliance bound itself to reduce mortgage of the 5 parcels of land. This was denied by the bank saying it was the price for the succeeding orders. security for the JBS construction loan. Nacu spouses filed an action against the Reliance then applied for a letter of credit with China Bank in favor of bank claiming that the two loans were different and that the wife was not part of Daewoo. The Iron and Steel Authority required to present purchase orders for the second loan. 2,000 metric tons but was only able to produce purchase orders for 900 metric The Supreme Court ruled that the two transactions involved entirely tons. Daewoo rejected the letter of credit because the goods covered fell short of separate sets of parties. Although Ramon Nacu was a party to both transactions, be the contract of tonnage. Reliance withdrew the application for the letter of credit. acted in different capacities. Since Reliance was unable to open a letter of credit, Daewoo was forced to sell Under pertinent laws, the trust receipt is a separate and independent the foundry pig iron. Reliance then demanded the value of the short delivery of security transaction intended to aid in financing importers where by the imported foundry pig iron. It then filed an action for damages against Daewoo. goods are held as security by the lending institution for the loan obligation. The issue is whether or not the failure of an importer (Reliance) to open A letter of credit-trust arrangement is endowed with its own distinctive a letter of credit on the date agreed upon makes him liable to the exporter features and characteristics. Under that setup, a bank extends a loan covered by the (Daewoo) for damages. letter of credit, with the trust receipt as a security for the loan. In other words, the The Supreme Court ruled: transaction involves a loan feature represented by the letter of credit, and as a The letter of credit is composed of at least 3 distinct but intertwined security feature which is in the covering trust receipt. A trust receipt is therefore, a relationships. security agreement, pursuant to which a bank acquires a security interest in the goods. It secures an indebtedness and there can be no such thing as security interest in the goods. It secures an indebtedness and there can be no such thing as security interest that secures no obligation. A trust receipt is considered as a security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except through utilization, as collateral, of the merchandise imported or purchased. Since the trust receipts were only signed by Ramon Nacu and not by his wife, the mortgage is voidable because the husband cannot encumber or alienate real property of the conjugal partnership without his wife’s consent.
SUMMARY OF LETTERS OF CREDIT
De Reny, BOA and FEATI
o Justifies the use of UCP o Banks deal only with DOCUMENTS not goods o Independence Principle – all the relationships are independent of each other Buyer o Prevent the issuing bank from paying Seller o You ensure the banks pay you. o FEATI says you make sure the buyer does not have any document required except invoices or else you give him the power to determine when the seller would be paid. To prevent fraud o Use a standby letter of credit. o Use a letter of credit with a term. (90 days) Customs o Banks are expected to know the relevant customs. o Trust receipts Strict Compliance o Means literal compliance o If a bank pays a letter of credit which does not comply with the documentary requirements, it pays at its own risk