LETTER OF CREDIT 2) LC BENEFICIARY must demonstrate by

documents that he has performed his

Letter of Credit – An issuing bank’s undertaking
contract whereas, beneficiary of
promise to pay the beneficiary provided all the
standby credit must certify that his
terms and conditions in said undertaking are
obligor has not performed the contract.
strictly complied with.
DISTINGUISHED TRUST VS LC
-an issuing bank’s promise to seller/exporter
to unconditionally pay in behalf of a local TRUST presupposes the existence of a specific
buyer/importer for specific goods provided property which has been conferred upon a
the exporter follows strictly the terms and person for the benefit of another while LC has
conditions of the LC. no trust relationship created under the LC
arrangement since the Correspondent Bank
-It is an instrument issued by a bank that
does not have in its possession a sum of money
guarantees its client’s ability to pay for
as the specified fund advances to it by the
imported goods or services, by authorizing a
issuing bank and to be held in trust in favor of
person to draw drafts on the bank or its
the SELLER BENEFICIARY.
correspondents for the bank’s account, under
conditions specified in the letter of credit. TWO TYPES OF LETTERS OF CREDIT

- Consummated only when the 1) IRREVOCABLE LC – AN LC where the issuing

correspondent bank delivers or pays to Bank’s promise cannot be changed nor
the beneficiary the amount authorized to withdrawn without the sellers (beneficiary) and
be paid under the terms of the LC. the buyer’s applicant’s consent.
- Opening an LC in favor of seller is only a
2) REVOCABLE LC – An LC where the issuing
mode of payment. It is not among the
bank reserves the right to cancel the LC before
essential requirement for perfection of a
actual shipment is made even without the
contract of sale.
consent of any party.
DISTINGUISHED GUARANTY VS IRREVOCABLE
Actual shipment may be evidence with
CREDIT
the bill of lading – the reckoning point
Guarantor’s obligation is merely whether a Letter of credit can be
collateral and it arises only upon the revoke.
default of the person primarily liable
The importer is the buyer – applicant and the
while in an irrevocable credit bank
issuing bank is its bank.
undertakes a primary obligation.
The exporter is the seller-beneficiary and the
DISTINGUISHED LC VS STANDBY CREDITS
correspondent bank is its bank.
1) LCs involve payment of money under a
Confirmed letter of credit – a letter of credit
contract of sale, which become due
where the correspondent bank guarantees the
upon presentation by SELLER
beneficiary bank that the issuing bank will pay
BENEFICIARY documents that show he
its obligation according to the letter of credit
has complied with sale agreement
terms and conditions.
whereas, standby credits are payable
upon certification of party’s non-
performance of the agreement.
PROCESS FLOW in Letters of Credit 10) Advising correspondent bank – pays the
letter of credit proceeds to the foreign supplier;
Importer/buyer
11) Foreign exporter – receives the proceeds of
1) negotiates and finalizes a purchase order
this sales via letter of credit.
with a foreign supplier

2) applies with a local bank to open a letter of

credit for a named foreign supplier PARTIES TO A LETTER OF CREDIT
ARRANGEMENT:
- sets up the required marginal deposit
Merchant buying – selling
-pays ½ of 1.0% Letter of credit opening
Importer – exporter
charges.

3) opening bank - issues the irrevocable letter Banks Opening/issuing Correspondent

of credit to the foreign supplier thru a Bank Bank
nominated correspondent bank
1) BUYER, who procures the LC and
4) Advising correspondent bank – informs and obliges himself to reimburse Issuing
sends the letter of credit to the named foreign Bank upon receipt of title. –ISSUING
supplier. BANK, which undertakes to pay SELLER
5) Foreign Exporter – manufactures and ships upon receipt of the draft and proper
the ordered goods per letter of credit. documents to buyer upon
reimbursement and
6) Foreign exporter – submits the letter of 2) SELLER (BENEFICIARY), who in
credit required documents to the opening bank compliance with the terms of sale
thru the advising bank, to include draft bill of transports the goods to the buyer and
exchange, invoice packing list, bill of lading, delivers the draft and other documents
official documents, insurance documents, of title to the Issuing Bank to recover
7) Opening bank – checks the received letter of payment. Its bank is called
credit documents for compliance; correspondent bank.

- Advises the importer to pay its importation to BUT Parties may be increased, such
receive the negotiable bill of lading requiring services of a CORRESPONDENT
BANK which may act as:
8) Importer – Receives the goods shipped from
the carrier through the bill of lading; a) Advising bank/notifying bank: to
convey to seller existence of credit
- Pays the customs duties and vat/local taxes; b) CONFIRMING BANK: Which lends
credence to confirmed LC issued by a
-brings in the in-bound shipment as receipts of
lesser known Issuing Bank. It is a surety
goods purchased.
bank primarily liable in case of non-
9) Opening bank – pays the letter of credit payment of the issuing bank
amount to the foreign exporter thru the c) Paying Bank: Undertakes to encash
correspondent bank; drafts drawn by exporter
d) NEGOTIATION BANK: Which Seller
approaches to have draft discounted,
 instead of going to Issuing Bank to claim It does not incur any obligation by such
payment. notification and is only bound to check
the apparent authenticity of the LC and
*Obligation of Issuing Bank on the LC is solidary
the required documents;
with that of the buyer applicant requesting for
-it is not liable on drafts drawn against
its issuance, the same being a direct primary,
LC
absolute and definite undertaking to pay Seller-
-It has no privity to the sale between
Beneficiary upon presentation of set of
BUYER and SELLER, and its relationship
documents required therein.
is only with that of the ISSUING BANK.
“transfeild Philippines vs Luzon hydro corp” -It may suggest to SELLER-BENEFICIARY
its willingness to negotiate, but this
1)Relationship between SELLER-BENEFICIARY alone does not imply that it promises to
AND ISSUING BANK is not strictly contractual accept a draft drawn under the LC.
because privity is lacking, yet strict compliance
with its terms is an enforceable right. B) As NEGOTIATING BANK: If it buys or
discounts a draft drawn under the LC:
NEVERTHELESS: LC is not a contract pour autri
because issuing bank must honor drafts drawn *BEFORE NEGOTIATION, it has no liability to
against LC regardless of problems subsequently SELLER-BENEFICIARY
arising in underlying contract.
*AFTER NEGOTIATION, it bears a contractual
2)While ISSUING BANK is bound to honor the relationship with SELLER-BENEFICIARY
credit, it is SELLER-BENEFICIARY, not BUYER-
BETWEEN BENEFICIARY AND NEGOTIATING
APPLICANT, who has right to ask issuing bank’s
BANK there is the usual relationships existing
client, BUYER APPLICANT, cannot draw on the
between a drawer and the purchaser of drafts:
LC, it does not function as an assignment by
involved bank deals only with the documents
BUYER-APPLICANT to SELLER-BENEFICIARY.
and not on the goods described in those
3) If properly used, LC is not a contract of surety documents.
ship or guarantee, because it entails a primary
It has no right of recourse against the issuing
liability on part of Issuing Bank following a
bank and until reimbursement is obtained,
default.
drawer continues to assume a contingent
4) LC is not a negotiable instrument, because it liability thereon.
is not payable to bearer and is generally
NOTE: The fact that the Correspondent BANK
conditional yet the draft presented under it is
and the Negotiating BANK are one and the same
often negotiable.
does not affect its rights and obligations in
“BANK OF AMERICA VS CA either capacity, although a special agreement is
always a possibility.
In LC arrangements, the functions assumed by
the Correspondent Bank are classified B) As CONFIRMING BANK: it expressly assumes
according to the obligations taken up by it. the direct and primary obligation to pay on the
LC to SELLER-BENEFICIARY as if it had issued the
A) As ADVISING BANK: it undertakes only to LC.
notify and/or transmit to BENEFICIARY
existence of the LC, as such: *LC ARRANGEMENT, THERE are three distinct
and independent contracts instituted:
1) CONTRACT OF SALE between BUYER and CONFIRMING BANK:
SELLER, whereby the seller obliges himself to
– assumes a direct obligation to the
ship the goods to the buyer and delivers the
seller, and its liability is a primary one as if the
documents of title and draft to the ISSUING
bank itself had issued the letter of credit.
BANK to recover payment.

2) CONTRACT OF BUYER WITH THE ISSUING

BANK, whereby the buyer obliges himself to BASIC PRINCIPLES OF LETTER OF CREDIT (BY
reimburse Issuing BANK upon receipt of the Dean Atty. Joe Santos Bisquera)
documents of title.
DOCTRINE OF INDEPENDENCE – the opening
3) LETTER OF CREDIT PROPER, where the bank assures the seller/beneficiary of prompt
Issuing Bank promises to pay seller pursuant to payment, independent of any breach of the
terms and conditions stated therein. main contract, to preclude the issuing bank
from determining whether the main contract is
actually accomplished or not.
Rights and Obligations of Parties
DOCTRINE OF STRICT COMPLIANCE – the
Notifying Bank: beneficiary (seller) must tender all documents
required by the LC, strictly to conform with the
-assumes no liability except to notify
LC terms.
and/or transmit to the beneficiary the
existence of the letter of credit. - A correspondent bank, which accepts a
faulty tender not stipulated in the LC,
-may suggest to the seller its willingness
may not recover from the buyer/issuing
to negotiate, but this fact alone does
bank, any payment made to the
not imply that the notifying bank
beneficiary.
promises to accept the draft under the
- The bank cannot pay on the LC when the
documentary credit.
required Certification in the LC, on the
-is not a privy to the contract of sale acceptability of the logs shipped, is not
between the buyer and the seller, its tendered. The inspection certificates from
relationship is only with that of the the bureau of customs and bureau of
issuing bank and not with the forestry cannot be used as substitutes for
beneficiary to whom he assumes no the specified LC Certification.
liability.
FRAUD EXCEPTION PRINCIPLE – is an exception
NEGOTIATING BANK: to the independence principle where there is
untruthfulness of a certificate for LC payment to
-buys or discounts a draft under the merit an injunction;
letter of credit. Its liability is dependent
upon the stage of the negotiation. INJUNCTION is the remedy for fraudulent abuse
in LC negotiation when:
BEFORE NEGOTIATION – it has no
liability with respect to the seller. - The fraud with clear proof, constitutes
fraudulent abuse of the LC’s Independent
AFTER NEGOTIATION – a contractual purpose and not only fraud under the
relationship will prevail between the main agreement.
negotiating bank and the seller.
 - Irreparable injury or recovery of damages he opened a letter of credit with the same bank
can be seriously damaged when no for 5m in favour of HS BANK, a foreign bank, to
injunction. purchase cutboards motors likewise ricardo
executed surety agreement in favour of AC
LIABILITIES OF THE CORRESPONDENT BANK:
BANK. The cutboards motors arrived and
AS AN ADVISING BANK – no liability as delivered but ricardo wasn’t able to pay the
regards the settlement of the LC. purchase price thereof.

As a CONFIRMING BANK – assumes the Issue: is AC BANK can take possession?

liability of a surety.
Can AC BANK also foreclose the
AS A NEGOTIATING BANK – discounts cutboards?
the demand draft.
RULING: NO, ac bank CANNOT take possession
GOVERNING LAWS IN LETTERS OF CREDIT of the cutboards. A mere opening of LC does
not vest an ownership of the cutboard motors
- The UNIFORM CUSTOMS AND PRACTICE in the bank in the absence of the trust receipt
FOR DOCUMENTARY CREDITS (UCP) is a agreement.
set of rules on the issuance and use of
letters of credit, which bankers and -AC BANK can foreclose the cutboard to
commercial parties used in more than enforce payment.
175 countries or 11-15% of international
trade.
- INTERNATIONAL CHAMBER OF
COMMERCE (ICC) composed mostly of
banks, has developed the techniques and
methods for handling letters of credit in
international trade finance by publishing
UCP.

CASES

Note: determine and know their liabilities:

Issuing bank

Confirming bank

Advising bank

Negotiating bank

TRANSFIELD VS LUZON HYDRO

Facts: ricardo mortgaged his fishpond to AC

BANK to secure a 1m. in a separate transaction,