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LETTERS OF CREDIT (LoC)

Governing Laws:

1. Code of Commerce (CoC)


- Articles 567-572 (concepts only)

2. Uniform Customs and Practice (UCP 600)


- Uniform Customs and Practice for
Documentary Credits (UCP for short)
- adopted by the International Chamber of
Commerce
- Art. 2 of CoC, in the absence of any particular
provision in the CoC, commercial transactions shall
be governed by usages and customs generally
observed.
LETTERS OF CREDIT
A letter of credit is a commercial
instrument developed to address the
unique needs of certain commercial
transactions. It is recognized in our
jurisdiction and is sanctioned under Article
567 of the Code of Commerce and in
numerous jurisprudence defining a letter of
credit, the principles relating to it, and the
obligations of parties arising from it. (The
HSBC v. National Steel Corp., G.R. No. 183486,
February 24, 2016)
LETTERS OF CREDIT
- a financial device developed by
merchants as a convenient and
relatively safe mode of dealing with
sales of goods 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. (Bank of
America, NT & SA v. CA, G.R. No. 105395, Dec. 10,
1993)
Parties in a LoC:

1. Buyer (Applicant) - who procures the LoC


and obliges himself to reimburse the Issuing
Bank upon receipt of the documents of title;
2. Issuing Bank - undertakes to pay the seller
upon receipt of the draft and proper documents
of titles and to surrender the documents to the
buyer upon reimbursement; and
3. Seller (Beneficiary) – 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.
Other Parties in LoC:

1. Advising (notifying) bank - to convey to


the seller the existence of the credit.
2. Confirming bank – lend credence to the
LoC issued by a lesser known issuing bank;
the confirming bank is directly liable to pay
the seller-beneficiary;
3. Paying bank - undertakes to encash the
drafts drawn by the exporter/seller.
4. Negotiation bank - where instead of
going to the place of the issuing bank to claim
payment, the buyer may approach the
negotiating bank to have the draft discounted.
3 Independent Contracts involved in LoC:

1st Transaction
- contract of sale between the buyer and the seller
- the contract may require that the buyer obtain a
LoC from a third party acceptable to the seller.
2nd Transaction
– the issuance of a LoC between the buyer and
the issuing bank
- the buyer requests the issuing bank to issue a
LoC naming the seller as the beneficiary
3rd Transaction
- between the seller and the issuing bank.
- the issuing bank issues the LoC for the benefit of
the seller.
Kinds of LoC:

1. Commercial LoC
– used in the trade of goods.

2. Standby LoC
– secures the performance of some service
of work.
- the beneficiary will prove that the obligor
failed to perform the secured obligation.

Example:
The contractor failed to construct the
building on time.
Kinds of Commercial LoC:
1. Confirmed LoC
– the correspondent bank gives an absolute
assurance to the beneficiary that it will
undertake the issuing bank's obligation as its
own according to the terms and conditions of
the credit.
2. Irrevocable LoC
– issuing bank may not, without the consent
of the beneficiary (seller) and the applicant
(buyer) revoke his undertaking under the letter,
because the issuing bank does not reserve the
right to revoke the credit.
Kinds of Commercial LoC:
3. Revolving LoC
- credit that provides for renewed credit to
become available as soon as the issuing bank
has advised that the negotiating or paying bank
that the drafts already drawn by the beneficiary
have been reimbursed to the issuing bank by
the buyer.
4. Back-to-Back LoC
- credit with identical documentary
requirements and covering the same
merchandise as another LoC, except for a
difference in the price of the merchandise as
shown by the invoice and the draft.
Kinds of Commercial LoC:

5. General LoC
- one addressed to any and all persons
without naming any one in particular.

6. Special LoC
- addressed to a particular individual, firm or
corporation by name.

7.Straight LoC
- one does not run in favor of purchasers of
drafts drawn thereunder.
Kinds of Commercial LoC:

5. General LoC
- one addressed to any and all persons
without naming any one in particular.

9. Sight LoC
- is payable on demand as distinguished
from Time LoC which is payable within a certain
period.
Quiz:

Apple Corp. opened an irrevocable


LoC with Bank of America with
Samsung Corp. as beneficiary. The
irrevocable LoC was opened to pay for
the importation of chipsets in cellular
phones. Upon arrival of the chipsets,
Apple Corp. found out that the chipsets
were defective. As a consequence,
Apple Corp. instructed Bank of
America not to allow drawdown on the
LoC. Is this legally possible?