1.

letter of credit is a written instrument whereby the writer requests or authorizes the addressee
to pay money or deliver goods to a third person and assumes responsibility for payment of debt
therefor to the addressee.

2. PARTIES TO A LETTER OF CREDIT TRANSACTION

 Buyer—procures 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

 Opening bank—usually the buyer’s 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.

 Seller—in 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 hasn’t given the bank any direct
consideration for the bank’s promises contained in the instrument

 Correspondent bank/advising bank—to 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

3. Kinds:

 Common Letter of Credit—an instrument by which a bank, for the account of a buyer of
merchandise, gives formal evidence to a seller, of its willingness to permit the seller to draw bills
against it, and stipulates in legal form that all such bills will be honored.

 Traveler’s Letter of Credit—a letter from a bank addressed to its correspondents stating that
drafts up to a certain sum drawn by the beneficiary will be honored by the bank.
 4. Cases:

NATIONAL MARKETING CORPORATION vs. ATLAS TRADING DEVELOPMENT CORPORATION and the
ALTO SURETY and INSURANCE CO.
G.R. No. L-21979/September 19, 1967

DOCTRINE. Where, therefore, legal relations arise from a letter of credit, such letter contains the entire
contract of the parties, and their resulting obligations should be measured by its provisions. It
constitutes the complete agreement, and is independent of the contract of sale between the buyer and
the seller, and is unaffected by any breach of contract on the part of the seller or the buyer or by any
controversy which may arise between the buyer and seller or by any other transaction between the
buyer and seller.

FACTS.
• Atlas offered to sell to National Marketing 8,000 metric tons of galvanized sheets at the price of
U.S. $247 per ton of 1,000 kilos. National made an order and agreed to purchase the galvanized sheets
offered by defendant Atlas with the condition that the seller should furnish a performance bond in favor
of the plaintiff in the amount of P100,000.00

• National and defendant Atlas as sales brokers for West India Commercial Corp. of New York City,
N.Y., U.S.A. executed a contract of purchase and sale wherein the said defendant obligated itself to sell
8,000 metric tons of galvanized steel sheets, at the price of U. S. $247 per ton of 1,000 kilos.

• Neither Atlas nor its principal the West India Commercial Corp. of New York delivered the 8,000
metric tons of galvanized steel sheets involved in the contract. Plaintiff sought to recover liquidated
damages from Atlas. It likewise prayed that defendant Alto be condemned to pay the plaintiff the
amount of P100,000.00, the amount of the performance bond.

• Defendant Atlas admitted making the offer adding however that plaintiff was duly informed of
that it was acting in its representative capacity and that the letter of credit being in favor of the
beneficiary, West India Commercial Company of New York, New York, U. S. A., could not be utilized in
view of what was considered "serious discrepancies between the terms of the said letter of credit and
the contract;" no delivery of the 8,000 metric tons of galvanized steel sheets, was made as there was no
obligation to do so, but even if it arose, "delivery was made impossible by the prior rescission of the
contracts by plaintiff."

• Defendant Alto denied the allegations of the complaint claiming that it never incurred any
obligation at all under the contract which was the basis of the complaint "as it was never a party to it,
nor did it authorize anyone to obligate it in any manner whatsoever," and that plaintiff "having
discharged the West India Commercial Corporation of New York from liability on said contract,
[defendant Alto] is and must likewise be discharged, the obligation of the surety being merely accessory
to that of the principal."

• The lower court dismissed the complaint on the ground that because there was a discrepancy
concerning the needed letter of credit (which the court ruled as a condition precedent), no liability could
attach to defendant Atlas.
ISSUES & RATIO.

WON Atlas Trading may be held liable? – NO.

The failure to open a letter of credit within a period agreed upon suffices to prevent a binding juridical
tie from being created. That case, dealing with offer and acceptance, reiterated the principle that to bind
the offer or, "the offeree must comply with the conditions of the offer." The situation before us deals
with a perfected contract.

In this case, the time element does not enter into the failure of one party to live up to the terms of the
contract. What was manifest was the discrepancy between what was agreed upon in the contract and
the letter of credit, the effectivity of which requires that "all conditions contained [in it] be strictly
complied with, however, onerous they may be."

Plaintiff-appellant must have been mindful of the force and applicability of the above controlling
principle. In its Brief, it sought to avoid its application by alleging that by its very nature "a letter of credit
cannot contain all the particulars nor can it embody all the agreements previously entered into by the
parties for the terms and conditions of their agreement are already contained in separate documents.

Where, therefore, legal relations arise from a letter of credit, such letter contains the entire contract of
the parties, and their resulting obligations should be measured by its provisions. It constitutes the
complete agreement, and is independent of the contract of sale between the buyer and the seller, and is
unaffected by any breach of contract on the part of the seller or the buyer or by any controversy which
may arise between the buyer and seller or by any other transaction between the buyer and seller.

Bank of Philippine Islands v De Reny Fabric Industries G.R. No. L-24821 October 16, 1970

Doctrine: Under the terms of their Commercial Letter of Credit Agreements with the Bank, the appellants agreed
that the Bank shall not be responsible for the “existence, character, quality, quantity, conditions, packing, value, or
delivery of the property purporting to be represented by documents; for any difference in character, quality,
quantity, condition, or value of the property from that expressed in documents. Having been positively proven as a
fact, the appellants are bound by this established usage.

Facts: De Reny Fabric Industries, Inc. (De Reny) applied for, and was granted, four (4) irrevocable commercial letters
of credit with the Bank of Philippine Islands (BPI). The letter of credits was used to cover the purchase of goods by
De Reny from its American supplier, the J.B. Distributing Company. As each shipment arrived in the Philippines, the
De Reny Fabric Industries, Inc. made partial payments to the Bank amounting to 12,000. Further payments were,
however, subsequently discontinued by the corporation when it became established, as a result of a chemical test
conducted by the National Science Development Board, that the goods that arrived in Manila were colored chalks
instead of dyestuffs. The corporation also refused to take possession of these goods, and for this reason, the Bank
caused them to be deposited with a bonded warehouse paying there for the amount of P12,609.64 up to the filing
of its complaint with the court.

Issue: Whether or not De Reny fabrics is liable under the letter of Credit

Held: Even without the stipulation recited above, the appellants cannot shift the burden of loss to the Bank on
account of the violation by their vendor of its prestation. It was uncontrovertibly proven by the Bank during the
trial below that banks, in providing financing in international business transactions such as those entered into by
the appellants, do not deal with the property to be exported or shipped to the importer, but deal only with
documents. The existence of a custom in international banking and financing circles negating any duty on the part
of a bank to verify whether what has been described in letters of credits or drafts or shipping documents actually
tallies with what was loaded aboard ship, having been positively proven as a fact, the appellants are bound by this
established usage. They were, after all, the ones who tapped the facilities afforded by the Bank in order to engage
in international business.
Under the terms of their Commercial Letter of Credit Agreements with the Bank, the appellants agreed that the
Bank shall not be responsible for the “existence, character, quality, quantity, conditions, packing, value, or delivery
of the property purporting to be represented by documents; for any difference in character, quality, quantity,
condition, or value of the property from that expressed in documents,” or for “partial or incomplete shipment, or
failure or omission to ship any or all of the property referred to in the Credit,” as well as “for any deviation from
instructions, delay, default or fraud by the shipper or anyone else in connection with the property the shippers or
vendors and ourselves [purchasers] or any of us.” Having agreed to these terms, the appellants have, therefore, no
recourse but to comply with their covenant.

PRUDENTIAL BANK vs. INTERMEDIATE APPELLATE COURT

G.R. No. 74886 December 8, 1992, 216 scra 257

--presentment for payment

FACTS:

Philippine Rayon Mills, Inc. entered into a contract with Nissho Co., Ltd. of Japan for the importation of
textile machineries under a five-year deferred payment plan. To effect payment for said machineries,
Philippine Rayon Mills opened a commercial letter of credit with the Prudential Bank and Trust Company
in favor of Nissho. Against this letter of credit, drafts were drawn and issued by Nissho, which were all
paid by the Prudential Bank through its correspondent in Japan. Two of these drafts were accepted by
Philippine Rayon Mills while the others were not. Petitioner instituted an action for the recovery of the
sum of money it paid to Nissho as Philippine Rayon Mills was not able to pay its obligations arising from
the letter of credit. Respondent court ruled that with regard to the ten drafts which were not presented
and accepted, no valid demand for payment can be made. Petitioner however claims that the drafts
were sight drafts which did not require presentment for acceptance to Philippine Rayon.

ISSUE:

Whether presentment for acceptance of the drafts was indispensable to make Philippine Rayon liable
thereon.

RULING:

In the case at bar, the drawee was necessarily the herein petitioner. It was to the latter that the drafts
were presented for payment. There was in fact no need for acceptance as the issued drafts are sight
drafts. Presentment for acceptance is necessary only in the cases expressly provided for in Section 143
of the Negotiable Instruments Law (NIL). The said section provides that presentment for acceptance
must be made:
 (a) Where the bill is payable after sight, or in any other case, where presentment for acceptance is
necessary in order to fix the maturity of the instrument; or

(b) Where the bill expressly stipulates that it shall be presented for acceptance; or

(c) Where the bill is drawn payable elsewhere than at the residence or place of business of the
drawee.

In no other case is presentment for acceptance necessary in order to render any party to the bill liable.
Obviously then, sight drafts do not require presentment for acceptance.

Bank of America NT & SA v Court of Appeals and Francisco et. al G.R. No. 105395 December 10, 1993

There would at least be three (3) parties: (a) the buyer, who procures the letter of credit and obliges
himself to reimburse the issuing bank upon receipts of the documents of title; (b) the bank issuing the
letter of credit, which undertakes to pay the seller upon receipt of the draft and proper document of
titles and to surrender the documents to the buyer upon reimbursement; and, (c) the seller, who in
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.

Facts : Bank of America received an Irrevocable Letter of Credit issued by Bank of Ayudhya for the
Account of General Chemicals Ltd., Inc. for the sale of plastic ropes and agricultural files. Under the letter
of credit, Bank of America acted as an advising bank and Inter-Resin Industrial Corp. (IR) acted as the
beneficiary. Upon receipt of the letter advice, Inter- Resin told Bank of America to confirm the letter of
credit.

Notwithstanding such instruction, Bank of America failed to confirm the letter of credit. Inter-Resin made
a partial availment of the Letter of Credit after presentment of the required documents to Bank of
America. After confirmation of all the documents Bank of America issued a check in favor of IR. BA
advised Bank of Ayudhya of IR’s availment under the letter of credit and asked for the corresponding
reimbursement. IR presented documents for the second availment under the same letter of credit.
However, BA stopped the processing of such after they received a telex from Bank of Ayudhya delaring
that the LC fraudulent. BA sued IR for the recovery of the first LC payment.

The IR contended that Bank of America should have first checked the authenticity of the letter of credit
with bank of Ayudhya
Issue: Whether or not Bank of America may recover what it has paid under the letter of credit to Inter-
Resin

Held : May Bank of America then recover what it has paid under the letter of credit when the
corresponding draft

There would at least be three (3) parties: (a) the buyer, who procures the letter of credit and obliges
himself to reimburse the issuing bank upon receipts of the documents of title; (b) the bank issuing the
letter of credit, which undertakes to pay the seller upon receipt of the draft and proper document of
titles and to surrender the documents to the buyer upon reimbursement; and, (c) the seller, who in
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.

The services of an advising (notifying) bank may be utilized to convey to the seller the existence of the
credit; or, of a confirming bank 16 which will lend credence to the letter of credit issued by a lesser
known issuing bank; or, of a paying bank, which undertakes to encash the drafts drawn by the exporter.
Further, instead of going to the place of the issuing bank to claim payment, the buyer may approach
another bank, termed the negotiating bank, 18 to have the draft discounted.

Bank of America has acted independently as a negotiating bank, thus saving Inter-Resin from the
hardship of presenting the documents directly to Bank of Ayudhya to recover payment. As a negotiating
bank, Bank of America has a right to recourse against the issuer bank and until reimbursement is
obtained, Inter-Resin, as the drawer of the draft, continues to assume a contingent liability thereon.

Furthermore, bringing the letter of credit to the attention of the seller is the primordial obligation of an
advising bank. The view that Bank of America should have first checked the authenticity of the letter of
credit with bank of Ayudhya, by using advanced mode of business communications, before dispatching
the same to Inter-Resin finds no real support.

Keng Hua Paper Products Co. Inc. vs. Court of Appeals, RTC Manila and Sea-land Service, Inc.

G.R. No. 116863, February 12, 1998

286 SCRA 257

FACTS:

Shipper – Ho Kee Waste Paper

Consignee – Petitioner, Keng Hua Paper Products, Co.

Carrier – Private Respondent Sea-land Service, Inc.

On June 29, 1982, the carrier received at its Hong Kong terminal a sealed container containing seventy-
six bales of “unsorted waste paper” for shipment to consignee in Manila. The shipment was covered by a
bill of lading which the consignee received immediately after arrival but it refused to accept the
shipment because the merchandise was in excess of 10 metric tons.

The shipment was discharged at the Manila International Container Port. However, the consignee failed
to discharge the shipment from the container during the grace period despite notices of arrival. The
shipment remained inside the shipper’s container for four hundred eighty-one (481) days – from the
moment the grace period expired until the time when the shipment was unloaded from the container.
During the 481-day period, demurrage charges accrued. Meanwhile, the shipper demanded payment but
the consignee refused to settle its obligation.

ISSUES and RULING:

What is the nature of bill of lading? When does a bill of lading become binding on a consignee?

A bill of lading serves two functions.

1. It is a receipt for the goods shipped.

2. It is a contract by which three parties, namely, the shipper, the carrier, and the consignee undertake
specific responsibilities and assume stipulated obligations.

A “bill of lading delivered and accepted constitutes the contract of carriage even though not signed,”
because the “acceptance of a paper containing the terms of a proposed contract generally constitutes an
acceptance of the contract and of all of its terms and conditions of which the acceptor has actual or
constructive notice.” The acceptance of a bill of lading by the shipper and the consignee, with full
knowledge of its contents, gives rise to the presumption that the same was a perfected and binding
contract.
Was the bill of lading a valid and perfected contract between the shipper, the consignee and the carier?

Yes. Both lower courts held that the bill of lading was a valid and perfected contract between the
shipper, the consignee, and the carrier. Section 17 of the bill of lading provided that the shipper and the
consignee were liable for the payment of demurrage charges for the failure to discharge the
containerized shipment beyond the grace period allowed by tariff rules.

Will an alleged overshipment justify the consignee’s refusal to receive the goods described in the bill of
lading?

No. The consignee’s remedy in case of overshipment lies against the seller/shipper, not against the
carrier. The contract of carriage, as stipulated in the bill of lading is separate and distinct from the
contract of sale between the seller and the buyer in which the amount of goods is indicated. In the
present case, the contract of carriage was under the arrangement known as “Shipper’s Load And Count,”
and the shipper was solely responsible for the loading of the container while the carrier was oblivious to
the contents of the shipment. The carrier had no knowledge of the contents of the container.

When may interest be computed on unpaid demurrage charges?

The legal interest of six percent per annum shall be computed from September 28, 1990, the date of the
trial court’s decision until its full payment before finality of judgment. The rate of interest shall be
adjusted to twelve percent per annum, computed from the time said judgment became final and
executory until full satisfaction.

NOTES:

LETTERS OF CREDIT

In a letter of credit, there are three distinct and independent contracts:

(1) the contract of sale between the buyer and the seller,

(2) the contract of the buyer with the issuing bank, and

(3) the letter of credit proper in which the bank promises to pay the seller pursuant to the terms and
conditions stated therein. “Few things are more clearly settled in law than that the three contracts which
make up the letter of credit arrangement are to be maintained in a state of perpetual separation.” A
transaction involving the purchase of goods may also require, apart from a letter of credit, a contract of
transportation specially when the seller and the buyer are not in the same locale or country, and the
goods purchased have to be transported to the latter.

Transfield Philippines vs Luzon Hydro Electric Corp. GR No 146717, Nov 22, 2004

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.

Facts: Transfield Philippines (Transfield) entered into a turn-key contract with Luzon Hydro Corp.
(LHC).Under the contract, Transfield were to construct a hydro-electric plants in Benguet and Ilocos.
Transfield was given the sole responsibility for the design, construction, commissioning, testing and
completion of the Project. The contract provides for a period for which the project is to be completed
and also allows for the extension of the period provided that the extension is based on justifiable
grounds such as fortuitous event. In order to guarantee performance by Transfield, two stand-by letters
of credit were required to be opened. During the construction of the plant, Transfield requested for
extension of time citing typhoon and various disputes delaying the construction. LHC did not give due
course to the extension of the period prayed for but referred the matter to arbitration committee.
Because of the delay in the construction of the plant, LHC called on the stand-by letters of credit because
of default. However, the demand was objected by Transfield on the ground that there is still pending
arbitration on their request for extension of time.

Issue: Whether or not LHC can collect from the letters of credit despite the pending arbitration case

Held: Transfield’s argument that any dispute must first be resolved by the parties, whether through
negotiations or arbitration, before the beneficiary is entitled to call on the letter of credit in essence
would convert the letter of credit into a mere guarantee.

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.

Jurisprudence has laid down a clear distinction between a letter of credit and a guarantee in that the
settlement of a dispute between the parties is not a pre-requisite for the release of funds under a letter
of credit. In other words, the argument is incompatible with the very nature of the letter of credit. If a
letter of credit is drawable only after settlement of the dispute on the contract entered into by the
applicant and the beneficiary, there would be no practical and beneficial use for letters of credit in
commercial transactions.

The engagement of the issuing bank is to pay the seller or beneficiary of the credit once the draft and
the required documents are presented to it. The so-called “independence principle” assures the seller or
the beneficiary of 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, quantity, 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 or
standing of the consignor, the carriers, or the insurers of the goods, or any other person whomsoever.

Feati Bank & Trust Company vs. Court of Appeals, 196 SCRA 576 (1991)

FACTS:

Bernardo E. Villaluz agreed to sell to the then defendant Axel Christiansen 2,000 cubic meters of lauan
logs at$27.00 per cubic meter FOB.-After inspecting the logs, Christiansen issued purchase order.-On the
arrangements made and upon the instructions of the consignee, Hanmi Trade Development, Ltd., de
Santa Ana, California, the Security Pacific National Bank of Los Angeles, California issued
Irrevocable Letter of Credit available at sight in favor of Villaluz for the sum of $54,000.00, the total
purchase price of the lauan logs.-The letter of credit was mailed to the Feati Bank and Trust Company
(now City trust) with the instruction to the latter that it "forward the enclosed letter of credit to the
beneficiary.” The letter of credit further provided that the draft to be drawn is on Security Pacific
National Bank and that it be accompanied by the documents specified therein. Also incorporated by
reference is the Uniform Customs and Practice for Documentary Credits).-The logs were thereafter
loaded on the vessel "Zenlin Glory" which was chartered by Christiansen. Before its loading, the logs
were inspected by custom inspectors, all of whom certified to the good condition and exports ability of
the logs, and the loading was completed.

However, Christiansen refused to issue the certification as required in paragraph 4 of the letter of credit,
despite several requests made by the private respondent. Because of the absence of the certification by
Christiansen, the Feati Bank and Trust Company refused to advance the payment on the letter of credit.-
Meanwhile, the logs arrived at Inchon, Korea and were received by the consignee, Hanmi Trade
Development Company, to whom Christiansen sold the logs and obtained profit. Hanmi Trade
Development Company, on the other hand sold the logs to Taisung Lumber Company at Inchon, Korea.-
Since the demands by the private respondent for Christiansen to execute the certification proved futile,
Villaluz, instituted an action for mandamus and specific performance against Christiansen and the Feati
Bank and Trust Company (now City trust).The petitioner was impleaded as defendant before the lower
court only to afford complete relief should the court a quo order Christiansen to execute the required
certifica tion.

While the case was still pending trial, Christiansen left the Philippines without informing the Court and
his counsel. Hence, Villaluz, filed an amended complaint make the petitioner solidarily liable
with Christiansen.

ISSUE: Whether or not a correspondent bank is to be held liable under the letter of credit despite non-
compliance by the beneficiary with the terms thereon.

HELD: Commercial transactions involving letter of credits are governed by the rule on strict compliance--

It is a settled rule in commercial transactions involving letters of credit that the documents tendered
must strictly conform to the terms of the letter of credit. The tender of documents by the beneficiary
(seller) must include all documents required by the letter. A correspondent bank which departs from
what has been stipulated under the letter of credit, as when it accepts a faulty tender, acts on its own
risks and it may not thereafter be able to recover from the buyer or the issuing bank, as the case may be,
the money thus paid to the beneficiary. Thus the rule of strict compliance.

In the United States, commercial transactions involving letters of credit are governed by the rule of strict
compliance. In the Philippines, the same holds true. The-same rule must also be followed. Although in
some American decisions, banks are granted a little discretion to accept a faulty tender as when the
other documents may be considered immaterial or superfluous, this theory could lead to dangerous
precedents. Since a bank deals only with documents, it is not in a position to determine whether or not
the documents required by the letter of credit are material or superfluous. The mere fact that the
document was specified therein readily means that the document is of vital importance to the buyer.