I.

Letters of Credit A. Definition and nature of letter of credit A letter of credit is an instrument issued by a bank on behalf of one of its customers, authorizing an individual or a firm to draw drafts on the bank or one of its correspondents for its account under certain conditions of the credit. In a letter of credit, there are three distinct and independent contracts: 1. Contract of sale between buyer and seller; 2. Contact of the buyer with the issuing bank; 3. Letter of credit proper in which the bank promises to pay the seller pursuant to the terms and conditions stated therein. B. Parties to a Letter of Credit; obligations and rights 1. The buyer, who procures the letter of credit and obliges himself to reimburse the issuing bank upon receipt of the documents of title; 2. The bank issuing the letter of credit, which undertakes to pay the seller upon receipt of the draft and proper documents of title and to surrender the documents to the buyer upon reimbursement; and 3. 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. C. Basic principles of letter of credit 1. Doctrine of Independence The independent nature of a letter of credit may be: i. 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 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 purpose of the credit the payment of the credit would constitute fraudulent abuse of the credit.

ii.

2. Fraud exception principle The untruthfulness of a certificate accompanying a demand for payment under a standby credit may qualify as fraud sufficient to support an injunction against payment. 3. Doctrine of strict compliance documents tendered by the seller/beneficiary must strictly conform with the terms of the Letter of Credit.

II.

Trust Receipts Law A. B. A.