I.

LETTERS OF CREDIT

A. Definition and Nature of Letter of Credit

Art. 567 – Letters of credit are those issued by one merchant to another, for the
purpose of attending to a commercial transaction

A letter of credit is an engagement by a bank or other person made at the request of a

customer that the issuer will honor drafts or other demands for payment upon
compliance with the conditions specified in the credit

B. Parties to a Letter of Credit

1. Rights and Obligations of Parties

There are atleast three (3) parties in a Letter of Credit Transaction

a. The buyer, who procures the letter of credit and obliges himself to reimburse
the issuing bank upon receipt of the documents of title
b. The bank issuing the letter of credit known as the “issuing bank”, which
undertakes to pay the seller upon receipt of the draft and proper documents of
titles and to surrender to the buyer upon reimbursement
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 number of parties may be increased and may include:

i. An advising (notifying) bank which may be utilized to convey to the seller

the existence of the credit
ii. A confirming bank which will lend credence to the letter of credit issued by
a lesser known issuing bank; the confirming bank is directly liable to pay to
the seller beneficiary
iii. A paying bank which undertakes to encash the drafts drawn by the
exporter/seller

C. Basic Principles of Letter of Credit

1. Doctrine of Independence

There are at least three distinct and independent contracts involved in a letter of
credit namely: (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 the second contract, that between the buyer and the issuing bank, the bank
agrees to issue the letter of credit in favor of the seller subject to reimbursement or
payment by the buyer of whatever is paid to the seller plus proper consideration
 agreed upon by the parties. In the third contract which is the letter of credit proper,
the bank obligates itself to pay the seller or the order of the seller after presentation
to the bank of tender documents stipulated upon, which normally includes the
document of title.

INDEPENDECE PRINCIPLE

It is important to emphasize in this connection that few things are more clearly
settled in law that that the contracts involved in a letter of credit arrangement are
to be maintained in a state of perpetual separation. The undertaking of a bank to
pay, accept, and pay drafts or negotiate and/or fulfill any obligation under the credit
is not subject to claims or defenses of the applicant resulting from his relationship
with the issuing bank or the beneficiary. In the same manner, the beneficiary can, in
no case, avail himself of the contractual relationships existing between the banks or
between the applicant and the issuing bank.

A direct consequence of the “independence principle” is the rule that banks

only deal with documents and not with goods, services or obligations to which they
relate.

2. Fraud Exception Principle

Under the “independence principle,” the applicant cannot enjoin the payment of
the obligation of the issuing bank under the Letter of Credit based on any
irregularity or non-performance of an obligation. The exception is when there is
fraud or forgery in the underlying transaction or the tender documents.

3. Doctrine of Strict Compliance

The Issuing bank or Confirming bank, as the case may be, must examine the Tender
Documents (including shipping documents) and must make sure that the terms and
conditions of the Letter of Credit are strictly complied with. There is no discretion
on the part of the bank to waive any requirement. The tender of document must
not only be complete, but they must be on their faces in compliance with the terms
of the credit. Documents that are not stipulated as tender documents will not be
examined.

II. TRUST RECEIPTS LAW

A. Definition/Concept of a Trust Receipt Transaction

A trust receipt transaction, within the meaning of this Decree, is any transaction by and
between a person referred to in this Decree as entruster, and another person referred
to in this decree as entrustee, whereby the entruster, who owns or holds absolute title
or security interests over certain specified goods, documents or instruments, releases
the same to the possession of the entrustee upon the latter’s execution and delivery to
the entruster of a signed document called a trust receipt wherein the entrustee binds
himself to hold the designated goods, documents or instruments in trust for the
entruster and to sell or otherwise dispose of the goods, documents instrument or
otherwise dispose of the goods, documents or instruments with the obligation to turn
over to the to the entruster the proceeds thereof to the extent of the amount owing to
the entruster or as appears in the trust receipt or the goods, documents or instruments
themselves if they are unsold or not otherwise disposed of, in accordance with the
terms and conditions specified in the trust receipt, or for other purposes .