Special Commercial Laws Notes by MARX and MON
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?
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)
– 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.
– 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.
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
– 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