LETTERS OF CREDIT

A commercial, financial device that allows transaction to push through because it secures both concerns
of buyer and seller. Usually used in cross-border transactions.
BUYER/IMPORTER (PHILIPPINES) SELLER/EXPORTER (SINGAPORE)
Wants security of goods Wants security of payment

Q: Who issues the letter of credit?

The Issuing Bank issues the letter of credit upon application of the applicant/buyer/importer.

Q: Is the liability of an Issuing Bank in the form of a Guaranty?

No, because the liability of the Issuing Bank is direct and primary even if there’s no privity of contract
between the IB and the parties of the main contract.

Q. Is a Letter of Credit a contract por atrui?

No, it’s an independent contract providing for separate, independent obligations from the main
contract between the buyer and seller.

CORRESPONDENT BANKS
Notifying Bank Negotiating Bank Confirming Bank
LIABILITY
BEFORE NEGOTIATION
No liability with respect to the seller Assumes a direct
obligation to the
AFTER NEGOTIATION seller and its liability
Assumes no There’s liability because a contractual relationship will is a primary one as if
liability to Seller. then prevail between the negotiating bank and the seller. the corres-pondent
a) Upfront, pay the seller; or bank itself had
b) Ask first for reimbursement from IB, after which it issued the letter of
will pay seller. Upon delay by IB, NB has the obligation credit.
to timely pay seller.
OBLIGATION

To notify and/or
transmit to the Acts as if itself had
beneficiary the Buys or discounts a draft under the letter of credit issued the letter of
existence of the credit.
letter of credit

Feati Bank and Trust Company v. CA

The letter by Issuing Bank merely provided that the petitioner “forward the enclosed original credit to the
beneficiary.” Thus, it is indubitable that the petitioner is only a notifying bank and not a confirming bank
as ruled by the courts below. A notifying bank is not a privy to the contract of sale between the buyer and
the seller, its relationship is only with that of the issuing bank and not with the beneficiary to whom he
assumes no liability.
Q. What is a Bill of Lading?
The Contract of Carriage between the shipper (S) and the carrier (ship). It function also as a receipt by
the carrier of the goods. It is a tendered document submitted to the IB for the release of payment to
S. As a requirement, the consignee must be the buyer such that the only person who can retrieve the
cargo is the consignee (B).

KINDS OF LC
COMMERCIAL LC STAND-BY LC
Non-sale contract, serves as a guarantee that the
Associated with a contract of sale; serves as a
other party will perform its obligation under the
guarantee for the payment of money
contract

Triggered by fulfillment on the part of seller Triggered by non-fulfillment

PROCESS PROCESS
1. Main contract 1. Main contract
2. Application by B 2. Application by B
3. Issuance of LC by IB 3. Issuance of LC by IB
4. IB will give LC to S 4. IB will give LC to S
5. Shipping of goods by S 5. Shipping of goods by S
6. Redemption of payment and obtaining of 6. Redemption of payment and obtaining of
documents by IB documents by IB
7. Reimbursement to IB and obtaining of 7. Reimbursement to IB and obtaining of
documents by S documents by S

Transfield Philippines vs Luzon Hydro Electric Corp

Independence Principle
Provides that the obligation under the LC is independent from the obligation in the main contract.

GR: The independent nature of the letter of credit may be:

(a) independence in toto where the credit is independent from the justification aspect and is a
separate obligation from the underlying agreement like for instance a typical standby; or
(b) independence may be only as to the justification aspect like in a commercial letter of credit or
repayment standby, which is identical with the same obligations under the underlying agreement.
In both cases the payment may be enjoined if in the light of the purpose of the credit the payment
of the credit would constitute fraudulent abuse of the credit.

XPN. Fraud exception rule.*

1.
2.
3.

*Determined by the court upon filing of injunction.

* The fraud contemplated is Dolo Incidente, such as when the tendered document is defrauded or fake.
Q. What if there are defects in the goods?
Under the independence principle, regardless of any defect in the main contract, the IB will not look
at it as long as the presentment is valid and complete.