Letters of Credit

A. Definition/Concept 1. Bank of America v. CA A letter of credit is a financial device of the delivery before paying. 2. Transfield Philippines, Inc. v. Luzon Hydro Corp A letter of credit is a written whereby instrument the writer

developed by merchants as a convenient &

relatively safe mode of dealing w/sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part w/his goods before he is paid, & a buyer, who wants to have

requests or authorizes the addressee to pay money or deliver goods to a 3rd person &

assumes

responsibility of debt to the

for payment therefor addressee. 3. Prudential Bank v. IAC

control of the goods before paying. (ecsalao.blogspot) an LC is a financial device to serve as a safe way of dealing with sales of goods to satisfy the

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 a draft or other demands for payments or other complaints w/the

seemingly irreconcilable interest of the seller, who want to be paid first before he/she delivers the goods, and the buyer, who wants to be assured

conditions specified in the credit.

4. A

letter

of

credit

is

an

once the draft & the required shipping documents are

instrument issued by a bank that guarantees its clients ability to pay for imported goods or services, authorizing an

presented to it. 2. Primary Purpose To substitute for, &

individual or a firm to draw drafts on the bank or on its correspondents for banks

therefore support, the agreement of the buyerimporter to pay money under a contract or other arrangement; but it does not necessarily constitute as a condition for the perfection arrangement. 3. 3 Distinct & Independent of such

account under certain conditions of the credit. B. Governing Laws 1. Uniform Customs and Practice for Documentary Credits of the International Commerce Justified under Art 2 of the Code of Commerce: In the absence of any particular therein, transactions provision commercial shall be Chamber of

Contracts a. Sale bet buyer & seller b. Contract of buyer

w/issuing bank c. LC proper, in which the bank promises to pay seller pursuant to the terms & conditions

governed by usages & customs observed. C. Nature of Letter of Credit 1. What characterizes LC, as generally

stated therein. It is clearly stated in law that the 3 contracts which make up LC

distinguished fr other accessory contracts, is the engagement of the issuing bank to pay the seller

arrangement are to be

maintained in a state of perpetual separation. 4. Ewqe 5. Dewedw 6. Dwdw 7. Dwwd 8. dwd D. Parties to a Letter of Credit 1. Buyer (Applicant) Procures the letter of credit & obliges himself to reimburse Issuing Bank upon receipt of the

But the parties may increase, such requiring the services of: 4. Advising (notifying) bank To convey to Seller the existence of the credit 5. Confirming bank Which will lend credence to the lc issued by a lesser Bank 6. Paying bank Which undertakes to known Issuing

encash the drafts drawn by the exporter 7. Negotiation bank Where instead of going to the place of the Issuing Bank to claim payment, Seller may approach

documents of title 2. Issuing Bank (Bank issuing the letter of credit) Undertakes to pay Seller upon receipt of the draft & proper documents of titles & to surrender the documents to Buyer

Negotiating Bank to have draft discounted E. Rights & Obligations of Parties 1. Obligations of the Applicant; Obligations of Correspondent Bank

upon reimbursement 3. Seller (Beneficiary) In compliance with the contract of sale ships the goods to Buyer & delivers the documents of title & draft to the Issuing Bank to recover payment.

2. Obligations of the Issuing Bank; Rights of the Beneficiary (Seller) F. Basic Principles of Letter of Credit