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> A letter of credit is a financial device developed by merchants as a convenient
and relatively safe mode of dealing with sales of goods to satisfy the seemingly
irreconcilable interests of the seller, who refuses to part with his goods before he is
paid, and a buyer, who wants to have control of the goods before paying
> To break the impasse, the buyer may be required to contract a bank to issue a letter
of credit, the issuing bank can authorize the seller to raw drafts and engage to
pay them upon their presentment simultaneously with the tender of documents
required by the letter of credit. The buyer and seller agree on what documents are
to be presented for payment, but ordinarily they are documents of title evidencing
or attesting to the shipment of the goods to the buyer
> Once the letter of credit is established, the seller ships the goods to the buyer
and in the process secures the required shipping documents and documents of title.
To get paid, the seller executes a draft and presents it together with the required
documents to the issuing bank
> The issuing bank redeems the draft and pays cash to the seller if it finds that
the documents submitted by the seller conform with what the letter of credit
requires. The bank then obtains possession of the documents upon paying the seller. The
transaction is completed when the buyer reimburses the issuing bank and acquires
the documents entitling him to the goods. The seller gets paid only if he delivers the
documents of title over the goods while the buyer acquires the said documents
and control over the goods only after reimbursing the bank.

> What characterizes letters of credit, as distinguished from other accessory


> Uniform Customs and Practice for Documentary Credits (UCP) issued by the
International Chamber of Commerce


1. Buyerprocures the letter of credit and obliges himself to reimburse the
issuing bank upon receipt of the documents of title. He is the one initiating the operation
of the transaction as buyer of the merchandise and also of the credit instrument.
His contract with the bank which is to issue the instrument and is represented by the
Commercial Credit Agreement form which he signs, supported by the mutually
made promises contained in the agreement
2. Opening bankusually the buyers bank which issues the letter of credit and
undertakes to pay the seller upon receipt of the draft and proper documents of titles
to surrender the documents to the buyer upon reimbursement. As it is the one
issuing the instrument, it should be a strong bank, well known and well regarded
in international trading circles.
3. Sellerin compliance with the contract of sale, ships the goods to the buyer and
delivers the documents of title and draft to the issuing bank to recover payment. He
is also the beneficiary of the credit instrument because the instrument is addressed to him
and is in his favor. While the bank cannot compel the seller to ship the goods
and avail of the benefits of the instruments, however, the seller may recover from the
bank the value of his shipment is made within the terms of the instrument, even though
he hasnt given the bank any direct consideration for the banks promises contained
in the instrument
4. Correspondent bank/advising bankto convey to the seller the existence of
the credit or a confirming bank which will lend credence to the letter of credit issued
by the lesser known issuing bank or paying bank which undertakes to encash the drafts
drawn by the exporter. Furthermore, another bank known as the negotiating bank
may be approached by the buyer to have the draft discounted instead of going to the
place of the issuing bank to claim payment


> If the beneficiary is to be advised by the issuing bank by cable, the services of
an ADVISING OR NOTIFYING BANK must always be utilized
> The responsibility of the NOTIFYING BANK is merely to convey or transmit
to the seller or beneficiary the existence of the credit. However, if the beneficiary
requires that the obligation of the issuing bank shall also be made the obligation of the
bank to himself, there is what is known as a CONFIRMED COMMERCIAL
CREDIT and the bank notifying the beneficiary of the credit shall become a
CONFIRMING BANK. In this case, the liability of the confirming bank is primary and
it is as if the credit were issued by the issuing and confirming banks jointly, thus giving
the beneficiary or a holder for value of drafts drawn under the credit, the right to proceed
against either or both banks, the moment the credit instrument has been breached.
> The paying bank on which the drafts are to be drawn it may be the issuing
bank or the advising bank. If the beneficiary is to draw and receive payment in
his own currency, the advising bank may be indicated as the paying bank also.
When the draft is to be paid in this manner, the paying bank assumes no
responsibility but merely pays the beneficiary and debits the payment immediately
to the account which the issuing bank has with it. IF THE ISSUING BANK
HAS NO ACCOUNT WITH THE PAYING BANK, the paying bank reimburses itself
by drawing a bill of exchange on the issuing bank, in dollars, for the equivalent of the
local currency paid to the beneficiary, at the buyeing rate for dollar exchange. The
beneficiary is entirely out of the transaction because his draft is completely discharged
by the payment, and the credit arrangement between the paying bank and issuing bank
doesnt concern him.
> If the draft contemplated by the credit instrument, is to be drawn on the issuing bank
or on other designated banks not in the city of the seller, any bank in the city
of the seller which buys or discounts the draft of the beneficiary becomes a
negotiating bank. As a rule, whenever, the facilities of an advising or notifying bank
are used, the beneficiary is apt to offer his drafts to the advising bank for
negotiation, thus giving the advising bank the character of a negotiating
bank becomes an endorser and bona fide holder of the drafts and within the
protection of the credit instrument. It is also protected by the drawers signature,
as the drawers contingent
liability, as drawer, continues until discharged by the actual payment of the bills of


> A commercial bank which departs from what has been stipulated under the letter of
credit, as when it accepts a faulty tender, acts on its own risk, and it may not
thereafter be able to recover from the buyer or issuing bank, as the case may be,
the money thus paid to the beneficiary
> In the case of a discounting arrangement, wherein a negotiating bank pays the draft of a
beneficiary of a letter of credit in order to save such beneficiary from the hardship of
presenting the documents directly to the issuing bank, the negotiating bank can seek
reimbursement of what has been paid to the beneficiary who as drawer of the
draft continues to assume a contingent liability thereon. Thus, the negotiating bank
has the ordinary right of recourse against the seller or beneficiary in the event of dishonor
by the issuing bank.


1. PROFORMA INVOICEall the particulars for the proposed shipment
which are then known to the buyer
2. PRICE QUOTATION FAS AND CIFFAS stands for free along side which
means that the seller will be responsible for the cost and risks of the goods
along side an overseas vessel at the stated location: the buyer bears the costs and
risks from that point. CIF on the other hand means cost, freight and insurance,
that in exchange for this stated price, the seller undertakes not only to supply the
goods but also to obtain and pay for insurance and bear the freight charges to the
stated pointy.
a. One way for a seller to be assured of payment is to ship goods under a negotiable bill
of lading and arrange for a bank in buyers city to hold the bill of lading until the
buyer pays the draft in the usual foreign sale this arrangement for securing
payment of the price is not adequate
b. In some situations, sellers may need assurance of payment even before the time
of payment. This problem arises in contracts which call for the manufacture of
goods to the buyers specifications.
c. Although the proforma invoice may not specify, the seller will expect the letter of
credit to be confirmed by the local bank in its location. But why does a local
bank confirm rather than issue a letter of credit? The bank that issues the letter of
credit needs assurance that it will be reimbursed by the buyer, on whose behalf it pays
the seller. The buyers bank can take steps to minimize or
remove the hazards. It will receive the negotiable bill of lading controlling the goods
which will provide security for the customers obligation to reimburse the bank; in
addition, the buyers own bank can judge in the light of its knowledge of his financial
standing whether added security is needed and can insist on such security before it
issues the letter of credit
d. To meet the sellers letter of credit requirements, the buyer will request its bank
to arrange for the issuance of a letter of credit which will comply with the terms of the
proforma invoice. The buyer will then sign a detailed application and
agreement for commercial credit prepared by the bank. The issuing bank, after
approving the buyers credit standing transmits a letter of credit by cable to the
confirming bank. This confirming bank will then deliver to seller a document
advising the latter that the issuing bank opened a letter of credit in its favor and adding
the confirming banks confirmation. In this arrangement, the seller is assured of
payment of its sight drafts drawn on the confirming bank in the amount of the total
amount of the sale, provided it presents the documents called for in the letter
of credit. An examination of the letter of credit will also reveal that the bill of lading
is to be consigned to the order of the buyers bank, thereby giving the bank control
over the goods, with the consequent security for its claim against the buyer.
a. On the receipt of the confirmed letter of credit, the seller will send the order
acknowledgment. This document will repeat the description and price of the goods
which has also appeared on the proforma invoice and states the number and
expiration date of the letter of credit.
b. Further, the arrival of the letter of credit is the go-signal for the seller to send the
goods. The seller then prepares the COMMERCIAL INVOICE which provides a
complete record of the transaction and is an important source of information to
such interested parties as a bank discounting a draft or an underwriting
extending issuance.
c. As the time of shipment approaches, the seller will contact its forwarder and
give its shipping instructions. It will inform that to comply with the requirements
of the letter of credit, the bill of lading must be made to the order of the issuing
bank. It will also send copies of the commercial invoice, a packing list, and a Shippers
export declaration. When the forwarder receives these documents, he takes
over all further documentation as the agent of the shipper, the latter merely has to
dispatch the goods from the factory in accordance with the forwarders instructions.
d. The seller will then send the truck to the pier where they are delivered to the
ocean carriers receiving clerk who signs the dock receipt. The dock receipt is a
form supplied by the ocean carrier which contains information relevant to the shipping
of the bearings such as the number of the pier, and the name of the ship. The dock
receipt is NON-NEGOTIABLE and serves as a temporary receipt for the goods until
they are loaded on board.
e. The ocean carrier is soon ready to receive the cargo. When the goods are
loaded on board, the steamship line issues a bill of lading which, to comply with the
letter of credit, is CONSIGNED TO ORDER OF THE ISSUING BANK. The bill of
lading is initially prepared by the forwarder on a form supplied by the ocean carrier,
it sets forth the markings and numbers of the packages, description of the goods,
and the number and weight of the packages. On its dorsal side, it will state that the
goods are received for shipment, but a statement FREIGHT PREPAID ON BOARD
is initiated by a representative of the steamship line after loading. The forwarder
then delivers the bill of lading and the commercial invoice to the seller.
a. The confirming bank stated in their letter that the estimated CIF price would be
available by your drafts on us at sight when accompanied by the listed documents
b. Seller accordingly draws a sight draft on the confirming bank. The sight
draft together with the commercial invoice, insurance certificate, full set of bills
of lading, and the packing list are presented to the confirming bank. When the
bank receives these documents, it issues its bank draft to sellers order and
transmits the documents by air mail to issuing bank, which will
reimburse the confirming bank.
c. The documents, sent by airmail, will reach the buyers bank well ahead of
the ocean shipment. The time for release of the documents to buyer and
reimbursement to the bank will depend upon the arrangement which was made
between the bank and buyer when the letter of
credit was initially established.
d. If the buyer plans to resell the goods, he may not be able to reimburse the bank
until the goods arrive and he resells the goods. In this event, the issuing bank
may need to take further steps to secure its claim against the buyer.


> Sometime ago, it is common in international dealings to require the furnishing
of a cash deposit as security, but with the expansion of international trade this
became prohibitively expensive for the counterparty and in due course gave
way to a more convenient safeguard, the provision of a written undertaking by a bank
in favor of the buyer or employer payable on demand
> Demand guarantees as substitute for cash are designed to provide the beneficiary with
a speedy monetary remedy against the counterparty to the underlying contract and
to that end are primary in form and documentary in character.
> The demand guarantee is expressed to be payable solely on presentation of
a written demand and any other specified documents. Accordingly, any demand within
the maximum amount stated must in principle be paid by the guarantor, regardless
whether the underlying contract has in fact been broken and regardless of the loss
actually suffered by the beneficiary


> Undertaking given for payment of a stated or maximum sum of money on
presentation to the party giving the undertaking of a demand or payment and
such other documents as may be specified in the guarantee within the period
and in conformity with the other conditions of the guarantee
> Procured by the seller in favor of the buyer for the latter to be paid in case the seller
doesnt comply with contract provisions. The economic burder is upon the party who
breaches the contract

> Employed typically in construction contracts and contracts for international

sale of goods
> Demand guarantees are intended to safeguard the other party against non-performance
or late or defective performance by the supplier or contractor


> Involves a minimum of three parties
1. Account party/principalparty to the underlying contract whose performance
is required to be covered by the guarantee and who gives instruction for its
2. Issuer/guarantorthe bank or other party issuing the guarantee on behalf of
the customer the principal
3. The beneficiarythe other party to the underlying contract, in whose favor the
guarantee is issued
> Usually the guarantee in the 3-party structure is the principals bank and carries
on business in the same country as the principal, whilst the beneficiary carries on
business in a foreign country
> Known as direct guarantees because the guarantee is issued to directly by the
principals bank, not by the local bank in the beneficiarys country


1. Tender or bid guarantee
a. Where tenders are invited it is often a condition of consideration of the tender
that the tenderer undertakes to sign the contract if its awarded to him, to procure the issue
of any performance or other guarantee required by the guarantee and not to modify or
withdraw his tender in the meantime
b. Purposesafeguard the beneficiary against breach of such an undertaking
c. If the tenderer is successful and fails to sign the contract and to furnish the
requisite performance or other guarantee, or withdraws his tender before its expiry,
the beneficiary can call upon the guarantor to pay a specified sum designed to
compensate him for the trouble and
expense he suffered in reawarding the contract, as well as any additional cost of the
2. Performance guarantee
a. Guarantee of the central performance of the contract from commencement to
b. Given for a specified percentage of the contract sum
c. But there are stages in the relationship between the parties which precede
and follow the central performance, and there may be distinct segments of
liability to be covered within that performance
3. Advance payment or repayment guarantee
a. Underlying contract may entitle the principal to payment of stated sums in advance
of performance
b. The advance payment guarantee is designed to secure the beneficiarys right to
repayment of the advance if the performance to which it relates is not furnished
4. Retention guarantee
a. Construction contracts usually provide for stage payments against
architects or engineers certificate and for a specified percentage of the amount certified
in each certificate to be retained by the employer for a specified period of time as
safeguard against defects
b. The employer may be willing to release such retention moneys against a
retention guarantee securing repayment of the released retention moneys if
defects are later found or if the contractor fails to complete the contract
5. Maintenance or warranty guarantee
a. Construction contracts usually provide that on completion part of the retention
moneys are to be retained for a specified period to cover the cost of any defects
or malfunction which become manifest during that period


> Not all guarantees are meant to be in favor of a party in the underlying contract
> For example are customs guarantees which are issued to the customs to cover any
duty that may become payable when imported goods which would be exempt from
duty if reexported within a specified time are not in fact reexported within that time


> A demand guarantee is an abstract payment undertaking that is, a promise of
payment which, though intended to preserve the beneficiary from loss in
connection with the underlying transaction is detached from the underlying
contract between principal and beneficiary and is in form a primary undertaking
between the guarantor and beneficiary which becomes binding solely by virtue of its
> A secondary guarantee is both secondary in form and intent. The intention of
the parties is that the guarantor will be called upon to pay only if the principal defaults
in performance, and then only to the extent of the principals liability and subject to
any defenses available to the principal
> A documentary credit is both primary in intent and form. The parties to the underlying
contract intend that the bank issuing the credit is a to be the first port of call for
payment, and this is the effect of the agreement between them. Whereas in the
case of a suretyship guarantee, the beneficiary cannot look to the guarantor
without establishing default by the principal, the reverse is true of the
documentary credit. The parties have designated payment by the bank as the
primary payment method and only if it fails without fault on the part of the beneficiary is
the first instance from the principal, and the guarantee is intended to be resorted to
only if the principal has failed to perform. But though this is the intent of the parties, the
guarantee isnt in form linked to default under the underlying contract, nor there
is any question of performance to hold the beneficiary harmless up to the
agreed maximum; and the sole condition of the guarantors payment liability is the
presentation of a demand and other documents specified in the guarantee in the
manner of and within the period of the guarantee


> Undertaking primary in form but intended to be used only as a fallback in the event of
default by the principal under the underlying contract
> Standby credit in legal perspective is simply another term for demand guarantees
> The standby credit has developed into an all-purpose financial support instrument
embracing a much wider range of uses than the normal demand guarantee. Thus,
standby credits are used to support financial and non-financial obligations of the
principal and to provide credit enhancement for the primary financial undertaking


1. The parties
2. A reference to the underlying contract
3. The amount or maximum amount of the guarantee and any agreement for
reduction or increase
4. The currency of payment
5. The documents, if any, to be presented for the purpose of a demand or of
reduction or expiry
6. The expiry date or other expiry provisions as well as any agreement for
> Where it is intended that the guarantee shall not commence until presentation of
a particular document, this fact should be specified
> Direct guarantee: principal, guarantor, and beneficiary should be identified
> Indirect guarantee: principal, instructing party, beneficiary, and counter-
> Central to the demand guarantee is its documentary character: the rights and
obligations it creates are to be determined solely from the terms of the guarantee
and from any document presented in accordance with the guarantee, without the
need to ascertain external facts


> Guarantors commitment to the beneficiary arises solely by virtue of the issue of
the guarantee and his duty to pay is conditioned only on presentation of demand and
other specified documents in conformity with the terms and within the duration of the
> Principal is not concerned with the contract between the guarantor and beneficiary
> Beneficiary has no concern with the contract between the principal and guarantor
> The relationship of principal and guarantor has an internal mandatethe guarantor is
obliged to act in accordance with the terms of the contract, failing which he may
forfeit his right to reimbursement but those terms are of no concern to the
beneficiary, whose right to payment depends solely on his acting on conformity with
the terms of the guarantee
> In indirect contracts, there is an additional mandate which has 2 facetsthe
mandate from the instructing party to the guarantor as to the issue of the guarantee,
which the guarantor as mandatory must comply with if he accepts the instruction;
and two, the counter-guarantee which the guarantor exacts from the instructing party as
a precondition of issuing the guarantee and which is separate from the mandate
1. Abstract character of the payment undertakingbinding solely by virtue of
issue of the guarantee, subject to the beneficiary not rejecting it
2. Independence of the guarantee from the underlying transaction
> Guarantee is separate from that contract and the rights and obligations created
by the guarantee are independent of those arising under the underlying contract
> In the absence of established fraud by the beneficiary, the guarantor is not
entitled to refuse payment and the principal is not entitled to have payment
restrained merely because of a dispute between the principal and beneficiary
3. Independence of the guarantee from the principal-guarantor relationshipthe
guarantee is separate from the contract between the principal and the guarantor is
not entitled to invoke a breach of that contract
4. Documentary character of guaranteeamount and duration of the duty to pay, the
conditions of payment and termination of payment obligation depend solely on the
terms of the guarantee itself and presentation of required documents
5. Requirement of compliance of the demand with the terms of the guarantee
6. Guarantors duty of examination limited to apparent good order of the
7. Guarantors duty limited the exercise of good faith and reasonable care
8. Independence of counter-guarantee from guarantee
9. Independence of counter-guarantee from mandate received from instructing party
Section 1. This Act shall be known by the short title of "BONDED WAREHOUSE ACT."

Sec. 2. As used in this Act, the term "warehouse" shall be deemed to mean every building, structure, or
other protected inclosure in which rice is kept for storage. The term "rice" shall be deemed to mean
either palay in bundles, or in grains, or clean rice, or both. "Person" including corporation or
partnership or two or more persons having joint or common interest; "warehouseman" means a person
engaged in the business receiving rice for storage; and "receipt" means any receipt issued by a
warehouseman for rice delivered to him. For the purpose of this Act, the business of receiving rice for
storage shall include (1) any contract or transaction wherein the warehouseman is obligated to return
the very same rice delivered to him or pay its value;(2) any contract or transaction wherein the rice
delivered is to be milled for and on account of the owner thereof; (3) any contract or transaction wherein
the rice delivered is commingled with the rice delivered by or belonging to other persons and the
warehouseman is obligated to return the rice of the same kind or pay its value.

Sec. 3. No person shall engage in the business of receiving rice for storage without first securing a license
therefore from the Director of the Bureau of Commerce and Industry. Said license shall be annual and
shall expire on the thirty-first day of December.

Sec. 4. Any person applying for a license to engage in the business of receiving rice for storage shall set
forth in the application the place or places where the business and warehouse are to be established or
located and the maximum quantity of rice to be received. The application shall be accompanied by a
cash bond or a bond secured by real estate or signed by a duly authorized bonding company, the amount
of which shall be fixed by the Director of the Bureau of Commerce and Industry at not less than thirty-
three and one third percent of the market value of the maximum quantity or rice to be received. Said
bond shall be so conditioned as to respond for the market value of the rice actually delivered and
received at any time the warehouseman is unable to return the rice or to pay its value. The bond shall be
approved by the Director of the Bureau of Commerce and Industry before issuing a license under this
Act, to satisfy himself concerning the sufficiency of such bond, and to determine whether the warehouse
for which such license is applied for is suitable for the proper storage of rice.

Sec. 5. Whenever the Director of the Bureau of Commerce and Industry shall determine that a bond
approved by him, is or any cause, has become insufficient, he may require an additional bond or bonds
to be given by the warehouseman concerned, conforming with the requirements of the preceding section,
and unless the same be given within the time fixed by a written demand therefor the license of such
warehouse may be suspended or revoked.

Sec. 6. Every person licensed under this Act to engage in the business of receiving rice for storage shall
insure the rice so received and stored against fire.

Sec. 7. Any person injured by the breach of any obligation to secure which a bond is given, under the
provisions of this Act, shall be entitled to sue on the bond in his own name in any court of competent
jurisdiction to recover the damages he may have sustained by such breach. Nothing contained herein
shall except any property of assets of any warehouseman from being sued on in case the bond given is
not sufficient to respond for the full market value of the rice received by such warehouseman.

Sec. 8. Every warehouseman licensed under this Act shall receive for storage, so far as his license and the
capacity of his warehouse permit, any rice, of the kind customarily stored therein by him, which may be
tendered to him in a suitable condition for warehousing, in the usual manner and in the ordinary and
usual course of business, without making any discrimination between persons desiring to avail
themselves of warehouse facilities.

Sec. 9. Every warehouseman licensed under this Act shall keep a complete record of the rice received by
him, of the receipts issued therefor of the withdrawals, of the liquidations and of all receipts returned to
and cancelled by him. He shall make reports to the Director of Bureau of Commerce and Industry
concerning his warehouse and the conditions, contents, operations, and business thereof in such form
and at such time as the said Director may require, and shall conduct said warehouse in all other respects
in compliance with this Act and the rules and regulations made in accordance therewith.

Sec. 10. The Director of Bureau of Commerce and Industry shall from time to time make such rules and
regulations as he may deem necessary for the efficient execution of the provisions of this Act.

Sec. 11. Any person engaging in the business of receiving rice for storage in violation of Section three of
this Act shall be deemed guilty of misdemeanor, and upon conviction thereof shall be punished by
imprisonment of not less than one month or by a fine of not more than five thousand pesos, or both, in
the discretion of the court.

Sec. 12. Any warehouseman licensed under this Act receiving a quantity of rice greater than that
specified in his application and license, shall, upon conviction, be fined double the market value of the
rice so received in excess of the quantity of rice he is authorized to receive.

Sec. 13. Any person entering into connivance or combination with any warehouseman that is not
licensed under this Act, with the purpose of evading the provisions of section three of this Act, shall be
deemed guilty of misdemeanor, and upon conviction thereof, shall be fined not more than two hundred
pesos or imprisonment for not more than one months, or both, in the discretion of the court.

Sec. 14. The Director of the Bureau of Commerce and Industry may, after opportunity for hearing has
been afforded to the license concerned, suspend or revoke any license issued to any warehouseman,
conducting a warehouse under this Act, for any violation or failure to comply with any provision of this
Act or of the rules and regulations made by virtue thereof.

Sec. 15. This Act shall not be applicable to cooperative marketing associations of rice producers
organized under Act Numbered Three Thousand Four Hundred and Twenty-five known as the
"Cooperative Marketing Law," provided such associations shall not receive, for storage, rice from non-
members which is greater in quantity than one-half of the total quantity of rice received from members,
at any time.

Sec. 16. If any clause, sentence, or paragraph, or part of this Act shall, for any reason, be adjusted by
any court of competent jurisdiction to be invalid, such judgment shall not affect, impair, or invalidate
the remainder thereof, but shall be confined in his operation to the clause, sentence, paragraph or part
thereof directly involved in the controversy in which such judgment shall have been rendered.

Sec. 17. This Act shall take effect on January First, nineteen hundred and thirty-two.