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2012 Bar Reviewer in Mercantile Law

2012 Bar Reviewer in Mercantile Law

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Published by Mark Anatalio

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Published by: Mark Anatalio on Jun 30, 2012
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06/12/2013

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1
 A. Letters of Credit
 
1. Definition/Concept 
 That issued by one merchant to another for the purpose of attending to acommercial transaction.
1
  An instrument issued by a bank on behalf of one of its customers, authorizing anindividual or a firm to draw drafts on the bank or one of its correspondents for its accountunder certain conditions of the credit.
2
  An engagement by a bank or other person made at the request of a customer that theissuer will honor drafts or other demands for payment upon compliance with the conditionsspecified in the credit.
3
Through it, the bank merely substitutes its own promise to pay forthe promise to pay of one of its customers who in return promises to pay the bank theamount of funds mentioned in the letter of credit plus credit or commitment fees mutually agreed upon.
2. Governing laws
a.
 
Code of Commerceb.
 
Uniform Customs and Practice for Documentary Credits
4
 
3. Nature of letter of credit 
 The LC is a financial device
5
developed as a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, whorefuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying.
4. Parties to a letter of credit 
a. Applicant/buyer/importer
 – 
one who purchases the goods, procures the LC, andobliges himself to reimburse the issuing bank upon receipt of the documents of title.b. Issuing/opening bank 
 – 
one which issues the LC, and undertakes to pay the sellerupon receipt of the draft and proper documents of title from the seller and to surrenderthem to the buyer upon reimbursement; and
1
Art. 567
2
 
Commercial Law Review, C. Villanueva, 2004 ed.
3
 
Prudential Bank vs. CA
, 216 SCRA 257
4
The Uniform Commercial Practice for Documentary Credits allow Letters of Credit to be payable toorder.
5
mode of payment
 
2
c. Seller/exporter/beneficiary 
 – 
one who sells the goods to the buyer, and whodelivers the draft and documents to the issuing bank to recover payment.
6
 d. Advising/notifying bank 
 – 
the correspondent bank 
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of the opening bank through which it advises the beneficiary of the LC.e. Confirming bank 
 – 
bank which, upon the request of the beneficiary, confirms theLC issued.f. Paying bank 
 – 
bank on which the drafts are to be drawn, which may be theopening bank or another bank not in the city of the beneficiary.g. Negotiating bank 
 – 
bank in the city of the beneficiary which buys or discounts thedrafts contemplated by the LC, if such draft is to be drawn on the opening bank or onanother designated bank not in the city of the beneficiary.
a. Rights and obligations of parties
1. Drawer is liable to person on whom it was issued provided identity proven, forthe amount paid within fixed maximum.2. Bearer has no right of action if not paid by person who issued it.3. Drawer may annul the letter of credit, informing the bearer and to whomit is addressed.4. Bearer shall pay the amount received to drawer, otherwise action for executionmay be filed with interest and current exchange in place where payment made on place where repaid.5. If a bearer does not make use of letter of credit within agreed period, or if none, within 6 months from date if in the Philippines, and 12 months if outside the Philippines, itshall be void.
8
 
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The number of parties may be increased. Modern letters of credit are usually not made between naturalpersons. They involve bank-to-bank transactions.
7
agent
8
Arts. 569-572
 
3
5. Basic Principles of letter of credit 
a. Doctrine of independence
 The three (3) basic contracts are distinct and independent, and the undertakings of the respective parties in each are neither subject to claims and defenses nor affected by thebreach in the others.
b. Fraud exception principle
 When the beneficiary, for the purpose of drawing on the credit, fraudulently presentsto the confirming bank, documents that contain, expressly or by implication, materialrepresentations of fact that to his knowledge are untrue.
9
 
c. Doctrine of strict compliance
It espouses that the documents tendered by the seller/beneficiary must strictly conform to the terms of the LC.
10
 
9
 
Transfield Phils, Inc. vs. Luzon Hydro Corporation, Australia and New Zealand Banking Group Limited and Security Bank Corp
., G.R. No. 146717, November 22, 2004
10
 
i.e. they must include all the documents required by the LC (
Feati Bank vs. CA
)

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