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Spcl - Divina eBook

Spcl - Divina eBook

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Published by Henry Tamayo
Special Commercial Laws
Special Commercial Laws

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Published by: Henry Tamayo on Sep 02, 2013
Copyright:Attribution Non-commercial


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Marc Roby de Chavez (MARX)Marc Roby de Chavez (MARX)Marc Roby de Chavez (MARX)Marc Roby de Chavez (MARX)
Mon Cristhoper Pasia (MON)
Dean Nilo T. Divina
Special Commercial Laws Notes by MARX and MON
1 |Page
What is a letter of credit? 
Any arrangement however named of described,whereby a bank acting upon the request of its clientor in its own behalf, agrees to pay another, against astipulated documents provided that the terms of thecredit are complied with.The definition of letter of credit based on theNational Chamber of Commerce
Can there ever be a letter of credit were there is no salesetting? 
Yes, Let say a debtor wants to obtain a loan fromcreditor, the creditor is willing to lend money to thedebtor under the condition that there is a securityarrangement issued by a bank. So the creditor iscomfortable with any collateral coming from thedebtor; the creditor is not comfortable with anyguaranty agreement that would be executed by anordinary person; he wants a security coming from abank. So in that case, there is a letter of credit issuedin favor of the creditor. It is a non-sale setting. It is acontract of loan, then the bank issues a letter of credit. So it is not correct to say then that the letterof credit always presupposes for a sale setting.
Commercial letter of credit
conforms to sale setting. Thetransaction underlying the letter of credit is sale.
Standby letter of credit
conforms to non-sale setting. Thetransaction underlying the letter of credit is non-sale.
Example of Commercial Letter of credit 
Buyer is a company based in the Philippines, it wants topurchase equipment from a company based in Japan. Onlythis company based in Japan has the capability or technicalknowhow to manufacture this equipment that the Buyerneeds for his business. The only problem is they reside indifferent jurisdiction the Buyer is on the Philippines the selleris in abroad. If the buyer advance payment there is apossibility that he will not get the equipment, on the otherhand if the seller causes the shipment of the equipment thereis a possibility that the buyer may not pay. In that case thereis a risk on the part of either the buyer or the seller. Througha letter of credit we can solve the deadlock. So the buyer willapply with the Issuing Bank to issue a letter of credit in favorof the seller, now the beneficiary of the letter of credit, so thebuyer, now called the applicant of the letter of credit willapply to the issuing bank a letter of credit. We he makes anapplication he pays a certain deposit, before the bank can beinduced or encourage to issue an undertaking to pay in favorof a beneficiary, the buyer-applicant pays a certain amountrepresenting a certain percentage of the total obligation tobe incurred under the letter of credit, it is called a marginaldeposit. Buyer-applicant pays 30% of the total obligation andpay fees and commission to the issuing bank. Of course, thebank will not issue a letter of credit without an income, thereis a gain and the gain or income comes in the form of payment of commission and interest charges on theobligation to be paid in favor of the seller-beneficiary lateron. As the buyer applicant pays the marginal deposit andagrees on the terms and conditions that the issuing bank mayimpose, the issuing bank will now undertake to pay the seller-beneficiary for issuing a letter of credit. The undertaking topay by the issuing bank is conditioned on submission of certain stipulated documents, that why earlier in ourdefinition “Any arrangement however named of described,whereby a bank acting upon the request of its client or in itsown behalf, agrees to pay another, against a stipulateddocuments” which means the obligation of the issuing bankto pay, the commitment of the issuing bank to pay thebeneficiary is on the condition or against the stipulateddocument meaning on the condition that the seller-beneficiary will submit certain stipulated documents. Thisdocuments stipulated by the parties usually are the shippingdocuments, the same documents to show that the seller-beneficiary has complied with his obligation under thecontract of sale with the buyer and the same documents thatthe buyer-applicant will need later on to obtain delivery of the equipment. The shipping documents are the Bill of lading(issued by a common carrier acknowledging receipt of thegoods with the obligation to deliver the same to theconsignee), sale invoices (contains the description of theequipment, the purchase price) and a draft to be drawn bythe issuing bank etc. once the document have been definedor verified, these documents are submitted to the issuingbank, upon receipt of the issuing bank of those documents,the issuing bank will pay the seller-beneficiary. The issuingbank will release the documents of title to the buyer-applicant, so the buyer-applicant will be able to obtaindelivery of equipment from the common carrier or thecustoms as the case may be. But the issuing bank will not justrelease the documents, it has to be reimburse by the buyer-applicant of the total amount paid under the letter of credit.So the issuing bank pays $10,000.00 and the buyer-applicantpaid only 30%. The issuing bank has to be reimburse theremaining balance and other charges. Once the charges andreimbursement are effected, then the issuing bank will nowrelease the documents in favor of the buyer. By the receipt of such documents the buyer will go to the common carrier orthe customs as the case may be, present such documents andmade delivery of the equipments. The buyer got theequipment, the seller got paid, and the issuing bank got thebusiness.
Example of stand-by letter of credit 
Debtor would like to obtain a loan from a creditor on theamount of Php 5M. the creditor will issue the money to the
Special Commercial Laws Notes by MARX and MON
2 |Page
debtor on the condition that the debtor will have to procure asecurity arrangement to be issued by a bank. So the creditoris not comfortable in granting a loan to the debtor with anysecurity, at the same time the creditor is not comfortablegranting loan to the debtor simply on the strength of itsmortgage on his properties or the creditor is not comfortablegranting loan to the debtor with a guaranty agreement to besigned by a third party. So the creditor will only be comfortedin granting a loan to the debtor in a security arrangementcomes from a bank, the bank is presumably with resources orwith the ability to pay the debtor’s obligation. So the debtornow procures a standby letter of credit in favor of thecreditor, he pays the marginal deposit and agrees with thecommission. The issuing bank will now open the letter of credit in favor of the creditor. Undertaking to pay the creditorupon submission of the stipulated documents. In standbyletter of credits the documents to be submitted aredocuments showing that the obligor did not perform hisobligation under the contract supporting the letter of credit.In a
commercial letter of credit,
the documents submitted bythe seller-beneficiary are documents showing that he hastaken the required steps to comply with his obligations underthe contract of sale. So by shipping that equipment heobtained the bill of lading, so he has taken the positive stepsto comply with his obligation.In a
standby letter of credit
the documents submitted by thecreditor that the debtor did not perform his obligation underthe contract that supports the letter of credit. So, it is either acertificate of non-payment or certificate of default orcertificate of non-performance. So once the documents hasbeen submitted and identified and documents have beensubmitted by the creditor, such creditor can now draw on thestandby letter of credit. The payment is made by the issuingbank to the creditor, then the bank must be reimburse fromthe debtor. So, whatever is the amount paid to the creditorplus the charges and the commission.A letter of credit by itself does not come into operationwithout a contract supporting it. It is not a contract that canstand on its own, it needs a supporting contract. In acommercial letter of credit it is a sale in standby letter of credit, it is a non-sale transaction.If we remove the issuing bank, what we’ll have is a promise topay made by the buyer in favor of the seller to pay thepurchase price without the issuing bank. By introducing theissuing bank, the promise to pay by the buyer is substitutedby the promise to pay made by the bank. The bank ispresumably with resources, the seller finds comfort in dealingwith the bank not just with the buyer.Without the issuing bank in the equation, what we have is apromise to pay by debtor to the creditor, in a standby letterof credit, by introducing an issuing bank in the equation, thepromise to pay by the debtor is substituted by a betterpromise to pay made by the issuing bank.In both cases, whether commercial or standby letter of credit,they conform or fits the definition of letter of credit.
Who are the parties to the letter of credit? 
Issuing bank
When we say in the definition “against stipulated documents” what does it mean? What is the condition that thesestipulated are submitted? 
Provided that the terms of the credit are compliedwith
Who are the parties to the letter of credit? (Basic Parties)
Applicant/Account party
 – he may be a buyer,importer or obligor. The person who procures theopening of letter of credit and who agrees toreimburse the issuing bank any and all amountshould be paid under the letter of credit once theissuing bank is compelled to pay because thebeneficiary is able to submit the documentstipulated.
Issuing Bank
– the one that undertakes to pay thebeneficiary upon submission of the beneficiary of these stipulated documents and compliance with theterms of the credit
– the one titled to payment from theissuing bank upon his submission of the documentstipulated and compliance with the terms of thecredit.
Other Party 
Correspondent Bank of the issuing bank
Why do we need a Correspondent Bank? If the account party is in the Philippines, the beneficiary is in abroad. How will thebeneficiary know that there is a letter of credit, if the bank isPhilippine based? In payment time, how will the beneficiary be paid? 
Thru a Correspondent Bank of the issuing bank
Kinds of Correspondent Bank 
Advising/Notifying Bank
– is not liable to pay thebeneficiary; it does not have any contractualrelations with the beneficiary. Its only obligation is todetermine the apparent authenticity of the letter of credit; to check if at first glance that the same isgenuine or valid. If at first glance the letter of credit

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