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TITLE BANK OF AMERICA, NT & SA v. CA, INTER-RESIN INDUSTRIAL CORPORATION, FRANCISCO


Bold, Center TRAJANO, JOHN DOE AND JANE DOE
G.R. No. 105395, December 10, 1993, VITUG, J.

A letter of credit is a financial device developed to facilitate commercial transactions.


DOCTRINE Banks play different roles in such transactions, each of which carries different rights and liabilities;
Full Block if a bank is an advising bank based on the provisions in the letter of credit, and other documents
Italicize presented as evidence, it incurs no liability under the letter of credit as its only role is to inform a
possible client of the existence of the letter of credit, nothing more.
BODY Facts:
Full Block
Bank of America entered into an Irrevocable Letter of Credit purportedly issued by Bank
of Ayudhya for the account of General Chemicals Ltd. to cover the sale of plastic ropes and
agricultural files, with Bank of America as the advising bank and Inter-Resin as the beneficiary.
Bank of America wrote Inter-Resin of the foregoing and transmitted the letter of credit. Inter-
Resin then sought to confirm the letter of credit, but Bank of America did not, as they explained
that there was no need for confirmation because the letter would not be transmitted if it were
not genuine.

Relying on this, Inter-Resin sought to avail of the letter of credit, using it to ship rope to
General Chemicals. Bank of America then issued checks in favor of Inter-Resin, after which it
informed Bank of Ayudhya of the availment of the letter of credit, seeking reimbursement in the
process. Bank of Ayudhya declared the letter of credit fraudulent, so Bank of America stopped the
processing of Inter-Resin's documents.

Issue:

Whether or not Bank of America incurred any liability to the beneficiary (Inter-Resin)
under the letter of credit.

Ruling:

NO. Bank of America merely acted as an advising bank. A letter of credit is a financial
device developed by merchants to facilitate commercial transactions. It was developed as an
attempt to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his
goods before he is paid, and a buyer, who wants to have control of the goods before paying.

To break the impasse, the buyer (here, General Chemicals) may be required to contract a
bank to issue a letter of credit in favor of the seller so that, by virtue of the letter, the issuing bank
(here, Bank of Ayudhya) can authorize the seller (here, Inter-Resin) to draw drafts and engage to
pay them upon presentment along with tender of documents required by the letter of credits
(such documents are those evidencing the shipment). Once the credit is established, the seller
ships the goods to the buyer and in the process the required shipping documents. To get paid, the
seller executes a draft and presents it together with the required documents to the issuing bank.
The issuing bank redeems the draft and pays cash to the seller if it finds that the documents
submitted by the seller conform with what the letter of credit requires. The bank then obtains
possession of the documents upon paying the seller. The transaction is completed when the
buyer reimburses the issuing bank and acquires the documents entitling him to the goods. Under
this arrangement, the seller gets paid only if he delivers the documents of title over the goods,
while the buyer acquires said documents and control over the goods only after reimbursing the
bank.