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Case Digest for Comrev

LETTERS OF CREDIT

I. HSBC v. NSC

Facts:

- NSC entered into an Export Sales Contract (contract) with Klockner on october 12, 1993

-NSC sold 1,200 metric tons of prime cold rolled coils to Klockner under FOB ST Iligan terms.

-In compliance of the contract, klockner applied for an IRREVOCABLE LETTER OF CREDIT with HSBC in
favor of NSC

-NSC as the beneficiary ($468K)

- HSBC then issued an irrevocable and on sight letter of credit in favor of NSC

- NSC coursed the collection of its payment throught CITY TRUST

-City Trust sent a collection order to HSBC

The Collection Order instructed as follows:

1. deliver documents against payment;

2. Cable advice of non-payment with reason

3. X x x x

4. X x x x

5. SUBJECT TO UNIFORM FULES FOR THE COLLECTION OF COMMERCIAL PAPER PUBLICATION NO.
322

6. That the payment should be forwarded to SCB-M

- At the same time City trust sent the documents required under the Letter of Credit for the collection
of the payment.

-HSBC acknoeldege the receipt of the collection Order from City

- HSBC also stated that it will be collected under URC 322 (for two occassions)

-HSBC informed SCB that Klockner refused payment

-City Trust then requested HSBC to inform it of Klockner’s reason

-HSBC replied that it treated the transaction as under URC 322 as stated in the collection order and
under URC 322 a reason is not required

- CITY TRUST then informed NSC of Klockner’s refusal and it has complied iwth NSC’s instructions to
send ON COLEECTION bases the export documents
-But NSC said that CITY trust misinterpreted the instruction

- NSC said that it NEGOTIATED with CITY trust the export documents

-Klockner still refused to pay, thus HSBC returened the documents to City Trust

-HSBC considered itself discharged of its duty under the transaction and asked for payment of
Handling Charges

- For the first time then CITY TRUST demanded payment from HSBC in accordance with the LC

- but HSBC insisted that URC 322 governs and CITY instructed it to collect payment under such rule.

-then NSC itself demanded payment from HSBC four months after the expiration of the LC

CASE FILED BY NSC: Collection of Sum of Money v. HSBC.

RTC: HSBC not liable since the applicable law is URC 322

CA: reversed the decision , URC 400 should apply and not URC 322

HSBC filed a petition for certiorari

ISSUE(S)

1. Who among the parties bears laibility to pay the amount in the LC

2. UCP 400 or URC 322?

SC: CA is correct

I. Nature of Letter of Credit

- commercial instrument devloped to address the uniques needs of certain commercial transactions

- it is a financial device developed by merchants as a convenient and relatively sale mode of dealing
with sales of goods to satistfy the seemingly irroconcilable insterests of a 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

- through a letter of credit, a buyer obtains the credit of a third party, usually a bank, to provide
assurance of payment.

- a letters of credit generally arises out of a separate contract requiring the assurance of payment of a
third party.

Usual transactions involved in LC


1st - contract of sale between buyer and seller

2nd- issuance of a letter of credit between the buyer and the issuing bank

- the buyer requests the issuing bank to issue a letter of credit naming the seller as the beneficiary

- the issuing bank undertaks to pay the seller upon presentation of the docuemnts identified in the LC

-the buyer then obliges himself to reimburse the issuing bank for the payment made

- the issuing bank may require a fee for this kind of service

3rd- issuing bank issues the LC for the benefit SELLER

- This relationship is not strictyl ocntractual since there is no privity of contract nor meeting of the
minds between them - nor is this considered a stipulation pour a trui

- form its inception only the seller can demand payment under the LC

- not a contract of suretyship or guaranty since it involves primary liability in the vent of default

- due to the complexity of the LC, there may be a correcpondent ban