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Basic Principles of Letters of Credit: Independence Principle

Under the Independence Principle, the obligation under the letter of credit is independent of the related
and originating contract (usually a contract of sale). In brief, the letter of credit is separate and distinct
from the underlying transaction.

Credits, by their nature, are separate transactions from the sales or other contract(s) on which they may
be based and banks are in no way concerned with or bound by such contract(s), even if any reference
whatsoever to such contract(s) is included in the credit. Consequently, the undertaking of a bank to pay,
accept and pay draft(s) or negotiate and/or fulfill any other obligation under the credit is not subject to
claims or defenses by the applicant resulting from his relationships with the issuing bank or the
beneficiary. A beneficiary can in no case avail himself of the contractual relationships existing between
the banks or between the applicant and the issuing bank.

This principle assures the seller or the beneficiary prompt payment independent of any breach of the
main contract and precludes the issuing bank from determining whether the main contract is actually
accomplished or not.

Under this principle, banks assume no liability or responsibility for the form, sufficiency, accuracy,
genuineness, falsification, or legal effect of any documents, or for the general and/or particular conditions
stipulated in the documents or superimposed thereon, nor do they assume any liability or responsibility
for the description, weight, quality, condition, packing, delivery, value, or existence of the goods
represented by any documents, or for the good faith or acts and/or omissions, solvency, performance of
standing of the consignor, the carriers, or the insurers of the goods, or any other person whomsoever.

[See Bank of America, NT & SA v. Court of Appeals, G.R. No. 105395, December 10, 1993;
Transfield v. Luzon Hydro, G.R. No. 146717, November 22, 2004]

This principle may be invoked by the other parties to the letter of credit transaction, and not just by the
issuing bank. To say that the independence principle may only be invoked by the issuing banks would
render nugatory the purpose for which the letters of credit are used in commercial transactions. As it is,
the independence doctrine works to the benefit of both the issuing bank and the beneficiary. Letters of
credit are employed by the parties desiring to enter into commercial transactions, not for the benefit of
the issuing bank but mainly for the benefit of the parties to the original transactions. With the letter of
credit from the issuing bank, the party who applied for and obtained it may confidently present the letter
of credit to the beneficiary as a security to convince the beneficiary to enter into the business transaction.
On the other hand, the other party to the business transaction, i.e., the beneficiary of the letter of credit,
can be rest assured of being empowered to call on the letter of credit as a security in case the
commercial transaction does not push through, or the applicant fails to perform his part of the transaction.
It is for this reason that the party who is entitled to the proceeds of the letter of credit is appropriately
called "beneficiary." [Transfield v. Luzon Hydro, G.R. No. 146717, November 22, 2004]
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