LETTERS OF CREDIT

A.

B.

C.

DEFINITION
1. A letter of credit is a letter from a merchant
or bank or banker in one place, addressed to
another, in another place or country,
requesting the addressee to pay money or
deliver goods to a third party named,
therein the writer of the letter undertaking
to provide him money for the goods or to
repay him.
2. It is a letter requesting one person to make
advances to a third person on the credit of
the writer.
CONTRACTS INVOLVED
1. In a letters of credit, there are three distinct
and independent contracts:
a. The contract of sale between the buyer
and the seller;
b. The contract of the buyer with the
issuing bank; and
c. The letter of credit proper in which the
bank promises to pay the seller
pursuant to the terms and conditions
stated therein.
2. Apart from the letter of credit, it also
involves 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 letter.
PARTIES TO THE LETTER OF CREDIT
1. The buyer or the importer 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 for which he signs, supported by
the mutually made promises contained in
the agreement;
2. The seller or the beneficiary in
compliance with the contract of sale, he
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 hasnt given the bank any
direct consideration for
the
banks
promises contained in the instrument.
3. The opening bank it is usually the
buyers bank which actually issues the letter
of credit;
4. The notifying bank the corresponding
bank of the opening bank through which
advises the beneficiary of the letter of
credit;

5.

D.

E.

F.

G.

H.

The paying bank buys or discounts the

drafts contemplated by the letter of credit, if
such draft is to be drawn on the opening
bank or on another designated bank not in
the city of the beneficiary.
a. RULE: Whenever the facilities of
the opening bank are used, the
beneficiary is supposed to present
his drafts to the notifying bank for
negotiation;
6. The confirming bank confirms the letter
of credit issued by the opening bank, upon
the request of the beneficiary.
NATURE
1. It is nothing more than a commitment by
the issuer that the party in whose favor it is
issued and who can collect upon it, will have
his credit against the applicant of the letter
duly paid in the amount stated therein.
2. It is in a nature of guaranty but not itself a
contract of guaranty;
3. Under the Code of Commerce, the letters
are not negotiable instruments being issued
in favor of a specified person and not to
order;
4. The bearer of the letter is not considered
bound to receive money, he may only use
the letter as he pleases, and the contracts
an obligation only by receiving the money.
PURPOSE
Its purpose is to insure to a seller they
payment of a definite amount upon the
presentation of documents and is thus a
commitment by the issuer that the party in
whose favor it is issued and who can collect
upon will have his credit against the
applicant of the letter, duly paid in the
amount specified in the letter. They are
absolute undertakings to pay the money in
advanced. They are primary obligations and
not accessory contracts.
KINDS OF LETTER OF CREDIT
1. Commercial Letters of Credit Used as a
method of payment in a contract of sale of
goods.
2. Standby Letters of Credit:
a. In non-sale transactions, it is used
to guaranty or secure, either a
monetary
or
nonmonetary
obligation, whereby the issuer
agrees to pay the creditor if the
debtor defaults the obligation.
b. To reduce the risk of nonperformance.
DISCUSSION
1. Failure to open a letter of credit within the
period agreed upon suffices to prevent a
binding juridical tie from being created. To
bind the offeror, the offeree must comply
with the obligations of the offer.
2. Nature of legal relations arising from letter
of credit:
a.
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