LETTERS OF CREDIT

VITUG
- A letter of credit is a request by one bank (addressed
usually to another bank) to advance money or credit
to a third person, upon fulfillment of certain
conditions, usually by the latter (third person), on the
promise of the issuer bank to repay the same. The
issuer, in turn, can look to the person applying for
such issuance for satisfaction.
- The letter of credit becomes void upon the lapse of
the period fixed by the parties; in its absence after six
months from its date in the Philippines and twelve
months outside thereof.
- A letter of credit may constitute three distinct and
independent contracts (1) The contract of sale between the buyer and
the seller
(2) The contract of the buyer with the issuing
bank
(3) The letter of credit proper in which the bank
promises to pay the seller pursuant to the terms and
conditions therein stated.
- On letters of credit, the Code of Commerce
introduces merely its concept under Article 567-572;
reliance is instead placed on commercial usages and
practices, universally applicable, the Uniform
Customs and Practice for documentary credits (UCP)
issued by the International Chamber of Commerce
- The court has said that the observance of the UCP is
justified by Article 2 of the Code of Commerce which
expresses that in the absence of any particular
provision in the Code of Commerce, commercial
transactions shall be governed by usages and customs
generally observe. There being no specific provisions
which govern the legal complexities arising from
transactions involving letters of credit not only
between or among banks themselves but also
between banks and the seller or the buyer, as the case
may be, the applicability of the UCP has been held to
be undeniable.
- Commercial letters of credit may be:
A) Clean - the draft need not be accompanied by
any stated document
B) Confirmed - the opening bank's payment of
the obligation is assured by the notifying bank
C) Irrevocable - issuing bank waives revocation;

When the letter of credit is irrevocable, it cannot,

without the consent of the beneficiary, be cancelled
or modified during the lifetime thereof.
D) Or of any other nature or kind as their terms
and conditions may so dictate
- A correspondent bank may be:
A) Notifying Bank - assumes no liability except
to notify the beneficiary of the letter of credit
B) Negotiating Bank - Buys or discount a draft
under a letter of credit and whose liability depends on
the stage of the negotiation
C) Confirming Bank - Assumes a direct
obligation to the seller as if the correspondent bank
itself had issued the letter of credit.