ATENEO CENTRAL BAR OPERATIONS 2018 ETTERS OF CREDIT. ‘A. DEFINITION AND NATURE OF LETTER OF CREDIT Q: What is a letter of credit? A: itis a written instrument whereby the writer (i.e. @ bank client) requests or authorizes the addressee (i., a bank) to pay money or deliver ‘goods to a third person and assumes responsibility for payment of debt therefor to the addressee. (Transfield Philippines, Inc. v. Luzon Hydro Corporation, G.R. 146717, 2004) B, PARTIES TO A LETTER OF CREDIT @: Can a bank refuse payment if the proper documents have been presented to it? fo. The purpose of a commercial letter of credit is to insure payment of a definite amount upon presentation of documents, The bank only deals with documents; it has nothing to do with the quality of the merchandise. (Prudential Bank v. JAC, GR. No. 74886, 1992) What are the three distinct and independent contracts in a letter of credit? (SBL) a). Sale between the Seller and the buyer; ) Contract of Buyer wit issuing bank; and ©) The Letter of credit itself, wherein the bank promises to pay pursuant to the terms and Conditions ofthe letters of credit. This assures seller of prompt payment, independent of any breach of the main sales contract. (Keng Hua Paper Products Co.. Inc. v. Court of Appeals, GR. No. 116863, 1998) COMMERCIAL LAW aletter ‘What are the rights of the Pa of credit? a) The person paying shall have the right to demand proof of identity of the person in whose favor the letter of credit was issued (Code of Commerce, Art, 569(3)) b) In case of non-payment, person to whom the: letter of credit is addressed may institute an action involving execution (Code of Commerce, Art 571(2). Q: What are the obligations of the parties in a letter of credit? A 1. DRAWER of the letter of credit ‘+ Liable to the person on whom it was issued for the amount paid (Code of Commerce, Art. 569, par. 1) ‘+ Incase of revocation, he must inform the bearer and the person to whom it is addressed (Code of Commerce, Art. 570) 2, BEARER of letter of credit Pay the amount received without delay (Code of Commerce, Art. 871, par. 1) 3. NOTIFYING BANK + To notify and/or transmit the documentary of credit to the seller-beneficiary ‘= Assumes no liability 4, NEGOTIATING BANK ‘+ Buys/discounts a draft under the letter of credit ‘+ Liability depends upon the negotiation © Before negotiation, it has no liability with respect to the seller © After negotiation, there is a contractual relationship prevailing between the negotiating and the seller 5. CONFIRMING BANK ‘+ Assumes a direct obligation to the seller PAGE 10F 110ATENEO CENTRAL BAR OPERATIONS 2018 COMMERCIAL LAW Q: Distinguish the liabilities of a notifying bank, a negotiating bank and a confirming bank? A: Anolilying bank undertakes tv infoun the seller beneficiary that a letter of credit exists. Its obligation is limited to this duly and assumes no liability to pay under the letter of credit ‘A negotiating bank purchases drafts at a discount from the seller-beneficiary and presents them to the issuing bank for payment. Prior to negotiation, a negotiating bank has no obligation. A contractual relationship between the negotiating bank and the seller-beneficiary arises only after the negotiating bank purchases or discounts the drafts. ‘A confirming bank confirms that the letter of credit will be honored by the issuing bank. A confirming bank, by such confirmation, insures that the letter Of credit will be paid in accordance with its terms It therefore assumes a direct obligation to the seller-beneficiary. (HSBC v. National Stee! Corporation, 2016) C. BASIC PRINCIPLES OF LETTER OF CREDIT Q: What is the independence principle in letters of credit? A: It means that in determining if the beneficiary of the letter of credit complied with it, the bank is required to examine only the documents presented. It is precluded from determining whether or not the beneficiary actually complied with the underlying contract. (Bank of America v. Court of Appeals, G.R. No. 105395, 1993) : What is the exception to the independence principle in letters of credit transactions? A: Fraud Exception Rule - Fraud (fraudulent abuse of the credit, in case of collusion between the correspondentipaying bank andthe exporteriseller of the goods) is an exception to the independence principle. Thatis, the untruthfulness of a certificate accompanying a demand for payment under a letter of credit may qualify as fraud sufficient to support an injunction against payment. (Transfield Philippines v. Luzon Hydro Corp., G.R. No. 146717, 2004) Q: What is the doctrine of strict compliance? A: The documents tendered by the seller or beneficiary must strictly conform to the terms of ie lellers of creuil, Le, they must include all documents required by the letter of credit. Thus, correspondent bank which departs from what has been stipulated in the letter of credit, as when it accepts a faulty tender, acts at its own risk and may not be able to recover from the buyer or the issuing bank, as the case may be, the money paid to the beneficiary. (Feati Bank v. CA, GR. No, 94209, 1991) : Distinguish 2 commercial letter of credit from a standby letter of credit. (Transfield Philippines, Inc. v. Luzon Hydro Corporation, GR. No. 146717, 2004) COST asks NATURE Bru aia izes ‘Apayment mechanism | A security mechanism = payable upon | ~ itis payable to seller presentation by seller- | upon certification of a beneficiary of | party's on: documents showing | performance of an. that he has complied | agreement. with sales agreement. DOCUMENTATION Seller-beneficiary must | Seller-beneficiary must show documents that | show that applicant has he has performed his | NOT performed his, contract contract. ‘CERTIFICATION Selier-beneficiary need | Seller-beneficiary must not make any | certify obligor has not certification performed his contract. PAGE 2 OF 110ATENEO CENTRAL BAR OPERATIONS 2018 Q: Bank XYZ granted credit accommodations to X. Bank XYZ filed a case against X due to his failure to pay his obligations despite receipt of a written demand. X alleged that Bank XYZ’s claim is unsubstantiated. Bank XYZ on the other hand submits that it has presented sufficient evidence to support its pecuniary claim. It claims that the Statement of Account properly reflected the respondent's obligation. Is the Statement of Account sent to X sufficient evidence of respondent's obligation? ‘A: Corporations extending credit accommodations must adduce sufficient evidence such as credit history and loan transactions to be able to show the court, a party not privy to the transactions, its claim. While XYZ's claim may be well-founded, it is not enough as to allow judgment in its favor on the basis of extant evidence. It must prove the validity of its claim; this it may do by amending its Complaint and adducing additional evidence of respondent's credit history and proving the loan transactions between them. Credit card arrangements are simple loan arrangements between the card issuer and the card holder. (Bankard v. Alarte, G.R. No, 202573, April 19, 2017) COMMERCIAL LAW Ul, TRUST RECEIPTS LAW ‘A. DEFINITION AND CONCEPT OF A TRUST RECEIPT TRANSACTION Q: What is a trust receipt transaction? AA: Itis a transaction by and between the entruster and the entrustee, where the entruster, who owns and holds absolute title to or security interest over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latter’s execution and, delivery to the entruster and the trust receipt (Trust Receipts Law, P.D. No. 115, Sec. 4) The nature of a trust receipt transaction is inconsistent with that of an assignment of credit as the latter necessarily involves an absolute conveyance of title. (Bangko Sentral ng Pilipinas v. Libo-ob, G,R, No, 173864, November 23, 2015) B. RIGHTS OF THE ENTRUSTER : What are the rights of the entruster? 1. Entitled to the proceeds from the sale of goods, documents or instruments 2. Entitled to the return of the goods, ete. In case of non-sale 3. To enforce all other rights conferred to him under TRL. 4. To cancel the trust, take possession of the {goods or instruments or of proceeds realized therefrom upon the default of the entrustee. 5. To sell the goods in a public or private sale upon notice to the entrustee in case of default 6. May purchase at the intended public sale (TRL, Sec. 7) 7. Extent of security interest: ‘© As against innocent purchaser for value: not preferred (TRL, Sec. 11) © As against creditors of the entrustee: preferred (TRL, Sec. 12) PAGE 3 OF 110