CODE OF COMMERCE LETTERS OF CREDIT Pertinent Provisions under the Code of Commerce Arts. 567 to 572 Art.

. 567 Letters of credit are = those issued by one merchant to another = or for the purpose of attending to commercia transaction. !his is considered obso ete = modern etters of credit are strict y ban"#to#ban" transactions Art. 568 !he essentia conditions of etters of credit sha be$ a. !o be issued in favor of a definite person and not to order b. !o be imited to a fi%ed and specified amount = or to one or more undetermined amounts = but &ithin a ma%imum imits of &hich has to be e%act y stated. !o those &hich do not have any of these ast circumstances = sha be considered as mere etters of recommendation. Art. 569. !he dra&er of a etter of credit = sha be iab e to the person on &hom it &as issued' = for the amount paid by virtue thereof' = &ithin the ma%imum fi%ed therein. Letters of credit may = not be protested even shou d they not be paid' = nor sha the bearer thereof ac(uire any right of action by reason of such non#payment against the person &ho issued it. !he person paying = sha have the right to demand the proof of identity of the person in &hose favor the etter of credit &as issued. Art. 570. !he dra&er of a etter of credit may annu it' = informing the bearer and the person to &hom it is addressed = of said revocation. Art. 571. !he ho der of a etter of credit sha pay the amount received to the dra&er &ithout de ay. )hou d he not do so' = an action invo ving e%ecution may be brought to recover it' = &ith ega interest and the current e%change in the p ace &here payment &as made = on the p ace &here it is repaid. Art. 572. *f the bearer of a etter of credit does not ma"e use thereof &ithin the fo o&ing period' it sha be void in fact and in a&$ = &ithin the period agreed upon &ith the dra&er = in defau t of a period fi%ed' counted from its date = &ithin 6 months = in any point in the Phi ippines'

= &ithin +2 months = outside the Phi ippines. Governing L !" a. Code of Commerce Art. 567 to Art. 572 b. Commercia usages and practices' universa y acceptab e = such as those no& institutiona i,ed in &hat is no& a so "no&n -niform Customs and Practice for .ocumentary Credits /-CP0 = issued by the *nternationa Chamber of Commerce = in 1eati 2an" vs. CA = the )C accepted the app ication in our 3urisdiction of this internationa commercia credit regu atory set of ru es. = *n 2P* vs. .e 4eny 1abric *ndustries = )C said that the observance of the -CP is 3ustified by Art. 2 of the Code of Commerce = &hich e%presses that in the absence of any particu ar provision in the Code of Commerce = commercia transactions sha be governed by usages and customs genera y observed. = there being no specific provisions &hich govern the ega comp e%ities arising from transactions invo ving etters of credit = not on y bet&een or among ban"s themse ves = but a so bet&een ban"s and the se er or the buyer' as the case may be' = the app icabi ity of the -CP has been he d as undeniab e. = *n 2an" of America' 5! vs. *nter#4esin *ndustria Corp = )C has sanctioned the app ication of Art. +6 of the -CP' &hich states$ = 2an"s assume no iabi ity or responsibi ity for the conse(uence arising out of the de ay and7or oss in transit of any messages' etters or documents' = or for the de ay' muti ation or other errors arising in the transmission of any te ecommunication %%%'8 =and that an advising ban" is bound on y to chec" the # $$ rent %t&enti'it() of the etter of credit. De*inition = an engagement by a ban" or other person made at the re(uest of a customer = that the issuer &i honor drafts or other demands = for payment upon comp iance &ith conditions specified in the credit. A etter of credit = is an instrument issued by the ban" = that guarantees its c ient9s abi ity to pay for imported goods or services' = authori,ing an individua or a firm to dra& drafts on the ban" or on its correspondents for ban"9s account under certain conditions of the credit. 2an" of America vs. Court of Appea s /226 )C4A :57' +;;:0 !ransfie d Phi ippines' *nc.' vs. Lu,on <ydro /==: )C4A :>7' 2>>=0 = a etter of credit is a financia devise deve oped by merchants = a convenient and re ative y safe mode of dea ing &ith sa es of goods = to satisfy the seeming y irreconci ab e = interests of a se er = &ho refuses to part &ith his goods before he is paid' = and a buyer = &ho &ants to have contro of the goods before paying. = to brea" the impasse = the buyer may be re(uired to contract &ith a ban" to issue a etter of credit in favor of the se er' so that' by virtue thereof' = the issuing ban" authori,es the se er to dra& draft and engage to pay them upon their presentment' simu taneous y &ith the tender of documents re(uired by the etter of credit' &hich basica y are the shipping documents of the goods purchased. = &hat characteri,es etters of credit' as distinguished from other accessory contracts'

= is the engagement of the issuing ban" to pay the se er once the draft and the re(uired shipping documents are presented to it. E""enti + Con,ition" o* Letter o* Cre,itArt. 566 Code of Commerce !he essentia conditions of a etter of credit are the fo o&ing$ a. !o be issued in favor of a definite person and not to order? and b. !o be imited to a fi%ed and specified amount = or to one or more undetermined amounts = but &ithin a ma%imum imits of &hich has to be e%act y stated = *f any of these essentia conditions is not present' =the instrument is mere y considered as a etter of recommendation. . t%re o* t&e Letter o* Cre,it = the primary purpose of a etter of credit is$ = to substitute for' and therefore support' the agreement of the buyer importer to pay money under a contract or other arrangement? = but it does not necessari y constitute as a condition for the perfection of such arrangement. *n a etter of credit arrangement' there are t&ree ,i"tin't a. Contract of Sale between buyer and seller n, in,e$en,ent 'ontr 't" $

b. Contract of buyer with issuing bank = in this contract' the ban" agrees to issue the etter of credit in favor of the se er = sub3ect to reimbursement or payment by the buyer of &hatever is paid to the se er = p us proper consideration agreed upon by the parties c. Letter of credit proper = in &hich the ban" promises to pay se er pursuant to the terms and conditions stated therein. = in the Letter of Credit proper = the ban" ob igates itse f to pay the se er or to the order of the se er /that is' it &i honor the bi s or drafts dra&n by the se er0 = after presentation to the ban" or tender documents stipu ated upon' = &hich norma y inc udes the document of tit e = it is sett ed in a& that the three contracts &hich ma"e up the etter of credit arrangement = to be maintained in a state of perpetua separation? = a transaction invo ving the purchase of goods may a so re(uire' apart from the etter of credit' = a contract of transportation specia y &hen the se er and the buyer are not in the same oca e or country' = and the goods purchased have to be transported to the buyer. 1eati 2an" vs. Court of Appea s /+;6 )C4A 576' +;;+0 = mere opening of a etter of credit' = does not invo ve a specific appropriation of a sum of money in favor of the beneficiary. = it on y signifies that the beneficiary may be ab e to dra& funds upon the etter of credit up to the designated amount specified therein. = it does not convey the notion that a particu ar sum of money has been specifica y reserved or has been he d in trust.

/in," o* Letter" o* Cre,it A. C ean LoC /according to @itug 2oo"0

= the draft need not be accompanied by any stated documents 2. Confirmed LoC = &henever the beneficiary stipu ates that the ob igation of the opening ban" = sha a so be made the ob igation of another ban" /a so notifying ban"0 to himse f /both the *ssuing 2an" and the 5otifying 2an" sha have the same ob igation0 = the opening ban"9s payment of the ob igation is assured by the notifying ban". = pertains to the "ind of ob igation assumed by the correspondent ban"' = &hich means that the correspondent ban" gives an abso ute assurance to the beneficiary that it &i underta"e the issuing ban"9s ob igation as its o&n according to the terms and conditions of the credit C. *rrevocab e LoC = is a definite underta"ing on the part of the *ssuing 2an" = and constitutes the engagement of that ban" to the beneficiary = and bona fide ho ders of drafts dra&n and or documents presented thereunder = that the provisions for payment' acceptance or negotiation contained in the etter of credit = &i be du y fu fi ed' provided that a terms and conditions of the credit are comp ied &ith. = issuing ban" &aives revocation = &hen the etter of credit is irrevocab e' it cannot' &ithout the consent of the beneficiary' be cance ed or modified during the ifetime thereof. = it refers to the duration of the etter of credit' = and simp e means that the issuing ban" may not &ithout the consent of the beneficiary /se er0 and the app icant /buyer0 revo"e his underta"ing under the etter' because the issuing ban" does not reserve the right to revo"e the credit. An irrevo' 0+e +etter o* 're,it i" not "(non(1o%" !it& 're,it. 'on*ir1e, +etter o*

<ence' the mere fact that a etter of credit is irrevocab e = does not necessari y imp y that the correspondent ban" in accepting the instructions of the issuing ban" = has a so confirmed the etter of credit. Conse(uent y' = if the terms of the etter of credit re(uires a certification from beneficiary' = the issuing ban" cannot be compe ed to pay &hen no such certification is issued. .. 4evo ving LoC = one that provides for rene&ed credit to become avai ab e = as soon as the opening ban" has advised that the negotiating or paying ban" that the drafts a ready dra&n by the beneficiary have been reimbursed to the opening ban" by the buyer. A. 2ac"#to#2ac" LoC' = a credit &ith identica documentary re(uirements = and covering the same merchandise as another etter of credit' = e%cept for a difference in the price of the merchandise as sho&n by the invoice and the draft. = the second etter of credit can be negotiated on y after the first is negotiated. 1. )tandy LoC = a security arrangement for the performance of certain ob igations = it can be dra&n against on y if another business transaction is not performed.

= it may be issued in ieu of performance bond !hus' this shou d be distinguished from ordinary commercia credit = &here the beneficiary &i recover if can sho& that he performed his ob igation /de ivery of the purchased goods0 *n a )tandby LoC = the beneficiary &i prove that the ob igor fai ed to perform the secured ob igation Ag. !he contractor fai ed to construct the bui ding on time. Letter" o* Cre,it Di"ting%i"&e, *ro1 Ot&er Contr 't" n, Arr nge1ent

As distinguished from guarantee a. -n i"e in guarantee = the sett ement of dispute bet&een the parties is not a pre#re(uisite for the re ease of funds under a etter of credit b. !he guarantee theory = destroys the independence of the ban"9s responsibi ity from the contract upon &hich it &as opened Bhi e in a etter of credit' under the *ndependent Princip e = it iberates the issuing ban" from the duty of ascertaining comp iance by the parties in the main contract = the ob igation under the etter of credit is independent of the re ated and originating contract = the etter of credit is separate and distinct from the under ying transaction. = etter of credit is not a contract of suretyship or guarantee' = because it entai s a primary iabi ity on the part of the *ssuer fo o&ing a defau t. c. *n a contract of guarantee' = the guarantor9s ob igation is mere y co atera = and it arises on y upon the defau t of the person primari y iab e Bhi e in irrecovab e credit' = the ban" underta"es a primary ob igation Distinguishing Commercial Credits from Standby Credits !here are three$
Commercia Credits )tandby Credits

+. invo ve the payment of money under a contract of sa e = such credits become payab e upon the presentation by the se er#beneficiary of documents = that sho& that he has ta"en affirmative steps to comp y &ith the sa es agreement 2. the beneficiary of a commercia credit = must demonstrate by documents that he has performed his contract.

+. *n the standby type = the credit payab e upon certification of a party9s non#performance of the agreement

2. the documents that accompany a beneficiary9s draft = tend to sho& that the app icant has not performed :. the beneficiary of the standby credit = must certify that his ob igor has not performed the contract

2er*e'tion o* t&e Letter o* Cre,it 2e man' *nc. vs. Centra 2an" /+>= Phi . 677' +;560 = a etter of credit is perfected = the moment &hen the correspondent ban" = pays to the person in &hose favor the etter of credit has been opened. I++%"tr tion- 3.ote i++%"tr tion ,in ito ng Letter o* Cre,it4Tr%"t Re'ei$t Tr n" 'tion"5 6%(er #A) = in Cani a agrees to buy Se++er #6) = in 5e& Dor"' offers to se merchandise &orth E+>'>>> 1F2 5e& Dor" )ince 2uyer A has no faci ities &ith &hich to transmit do ars to the -)' = he contacts a ban"' say Cerchant9s 2an" of Cani a = &hich has a correspondent ban" in 5e& Dor"' &hich is the Chemica 2an" of 5e& Dor" = so' Cerchant 2an" here is the *ssuing 2an" = and the Chemica 2an" is the Correspondent or the 5otifying 2an" = A etter of credit is made not bet&een natura persons? = it is a ban" to ban" transaction. = 2et&een Cerchant9s 2an" /*ssuing 2an"0 = and Chemica 2an" /the Correspondent 2an"0 = there is an e ement of trust. = !he correspondence is a mutua arrangement &hereby = Cerchant9s 2an" can as" Chemica 2an" in 5e& Dor" to pay )e er 2 in 5e& Dor" E+>'>>> = Chemica 2an" &i pay because it trusts Cerchant9s 2an" = *n other &ords' the credit of Cerchant Gs 2an" is good &ith Chemica 2an". H*t &or"s both &ays' = thus' if the )e er in Cani a has sugar &hich he offers to se = and &hich 2uyer in 5e& Dor" agrees to buy = Chemica 2an" can re(uest Cerchant9s 2an" to pay se er in Cani a. = the credit of either ban" is good &ith each other.I )o then' = 2uyer A &i be re(uired to deposit &ith Cerchant9s 2an" ;>J /margina deposit0 of the amount of the transaction' or E;'>>> = so that 2uyer A &ou d sti o&e Cerchant9s 2an" E+'>>>. = 2uyer A having deposited said amount' Cerchant9s 2an" cab es Chemica 2an" in 5e& Dor"$ KFpen an irrevocab e etter of credit for KE+>'>>>.8 = Chemica 2an" &i re(uire )e er 2 = to produce genuine shipping papers' such as pac"ing ist' before paying him. = Chemica 2an" &i no& then debit Cerchant9s 2an"9s account the sum of E+>'>>>. 2ut because 2uyer A sti o&es Cerchant9s 2an" E+'>>>' = the bi of ading covering the goods &i be de ivered to Cerchant9s 2an" and not to 2uyer A' = so as to protect the ban" against 2uyer A. = &hen the goods arrive in Cani a' = Cerchant9s 2an" &i advise 2uyer A? = but 2uyer A must first pay E+'>>> before he can ta"e possession of the goods 2ut if 2uyer A does not have the money yet' = Cerchant9s 2an" may re ease the goods to 2uyer A = under a !rust 4eceipt'

5ote$ !he procedure &hereby the Cerchant9s 2an" i(uidates its ob igation &ith Chemica 2an" is ca ed = K1or&ard A%change8 In"o* r " t&e $er*e'tion o* +etter o* 're,it i" 'on'erne,7 0 "e, on t&e 0ove i++%"tr tion= the etter of credit is perfected the moment &hen the correspondent ban"' &hich is Chemica 2an" = pays the person in &hose favor the etter of credit has been opened' in this case )e er 2 = hence' in this case' = &hen Chemica 2an" of 5e& Dor" pays )e er 2 E+>'>>> = and debits E+>'>>> do ars to the account of Cerchant9s 2an"' the etter of credit is perfected Lohannes )chubac" M )ons vs. Court of Appea s /227 )C4A 7+7' +;;:0 = opening of a etter of credit in favor of a vendor = is on y a mode of payment' = but it is not among the essentia re(uirements of a contract of sa e enumerated in Arts. +:>5 and +=75 of the Civi Code = that is' consent' ob3ect or sub3ect matter' and cause or consideration = and therefore' the non#opening of the etter of credit does not prevent the perfection of the contract of sa e bet&een the parties /&hen not specifica y provided as suspensive condition0 2 rtie" to Letter o* Cre,it !here are at east : parties in a etter of credit . T&e 6%(er = &ho procures the etter of credit = and ob iges himse f to reimburse the issuing ban" upon receipt of the documents of tit e? 0. T&e I""%ing 6 n8 = the ban" issuing the etter of credit is "no&n as K*ssuing 2an"'8 = &hich underta"es to pay the se er upon receipt of the draft and proper documents of tit es and to surrender the documents to the buyer upon reimbursement. -n ess the contrary is e%press y provided for' = the iabi ity of the I""%ing 6 n8 i" "o+i, r( !it& t&e 0%(er4 $$+i' nt '. T&e Se++er = &ho in comp iance &ith the contract of sa e = ships the goods to the buyer and de ivers the documents of tit e and draft to the issuing ban" to recover payment. !he number of parties may be increased and may inc ude$ 1eati 2an" vs. CA' /+;6 )C4A 576' +;;+0 1unctions assumed by a correspondent ban"' c assified according to the ob igations ta"en up by it' &hether$ a. as a notifying ban"' b. a negotiation ban" c. or as a confirming ban"

= = = =

&hich is a document issued by the ban" in favor of 2uyer A &hereby 2uyer A admits that the goods sti be ong to Cerchant9s 2an"' and &hich authori,es to se the goods and app y the proceeds thereof to the payment of his debt &ith Cerchant9s 2an"

d. An Advising /notifying0 ban" = may be uti i,ed to convey to the se er the e%istence of the credit = it assumes no iabi ity e%cept to notify the beneficiary of the etter of credit *t is a correspondent ban"' acting as an Advising or 5otifying 2an"$ O0+ig tion"= it assumes no iabi ity' = e%cept$ = to notify and7or transmit to the beneficiary the e%istence of the etter of credit' thus$ +. a notifying ban" is not iab e to pay the drafts dra&n against the etter of credit? 2. suggests to se er its &i ingness to negotiate' = but this fact a one does not imp y that the notifying ban" promises to accept the draft dra&n under the documentary credit :. it has no privity to the sa e bet&een buyer and se er' = and its re ationship is on y &ith that of the issuing ban". e. A confirming ban" = &hich &i end credence to the etter of credit issued by a esser "no&n issuing ban"? = the confirming ban" is direct y iab e to pay the se er#beneficiary? O0+ig tion"= assumes a direct ob igation to the se er as if the correspondent ban" itse f had issued the etter of credit. f. A paying ban" = &hich underta"es to encash the draft dra&n by the e%porter7se er

g. 5egotiating ban" = instead of going to the p ace of the issuing ban" to c aim payment = the buyer may approach another ban"' termed the negoti ting 0 n8' = to have the draft discounted. = &hich buys or discounts a draft under a etter of credit = and &hose iabi ity depends on the stage of the negotiation? O0+ig tion"= if before negotiation' = it has no iabi ity &ith respect to the se er = but if after negotiation = a contractua re ationship &i then prevai bet&een the negotiating ban" and

the se er.

S%11 r( R%+e" 2ert ining to Letter" o* Cre,it 2an" of America vs. CA /226 )C4A :57' +;;:0 !he fo o&ing ru es app y to etters of credit$ A. 2eing a product of internationa commerce = it is not uncommon to find a dearth /shortage' ac"0 of nationa a& that can ade(uate y provide for the governance of the etters of credit' = and therefore' = the observance of the -niform Customs and Practice /-CP0

= is 3ustified in the absence of any particu ar provision in the Code of Commerce' = commercia transactions sha be governed by usages and customs genera y observed?

2. An Advising or 5otifying 2an" = does not incur any ob igation by such notification = and is on y bound to chec" the apparent authenticity of the etter of credit C. 5egotiating 2an" = has right of recourse against the *ssuing 2an" and' = unti reimbursement is obtained' = the dra&er continues to assume a contingent iabi ity thereon. .. 2et&een )e er and the 5egotiating 2an" = there is the usua re ationship e%isting bet&een a dra&er and the purchaser of drafts? = the invo ved ban" dea s on y &ith the documents and not on the goods described in the documents Rig&t" n, O0+ig tion" o* 2 rtie" a. Fb igations of the App icant? Fb igation of Correspondent 2an" b. Fb igations of the *ssuing 2an"? 4ights of the 2eneficiary /)e er0 A. Special Relations Created; Special Rules Applicable Tr n"*ie+, 2&i+i$$ine"7 In'. v". L%9on :(,or Cor$. 3;;< SCRA <077 200;5 !he etter of credit evo ved as a mercanti e specia ty' and the on y &ay to understand a its facets is to recogni,e that it is an entity unto itse f$ a. 4e ationship bet&een 2eneficiary#)e er and the *ssuer /*ssuing 2an"0 = is not strict y contractua = because both privity and a meeting of the minds are ac"ing = yet strict comp iance &ith its terms is an enforceab e right b. 5everthe ess' = the etter of credit is not a third#party beneficiary contract /pour autrui0 = because the *ssuer must honor drafts dra&n against the etter of credit = regard ess of the prob ems subse(uent y arising in the under ying contract c. )ince the ban"9s customer /App icant#2uyer0' cannot dra& on the etter' = it does not function as an assignment by the customer to the 2eneficiary d. *f proper y used' = etter of credit is not a contract of suretyship or guarantee' = because it entai s a primary iabi ity on the part of the *ssuer fo o&ing defau t? e. A letter of credit is not a negotiable instrument = because it is not payab e to order or bearer' = and is genera y conditiona = yet' the draft presented under it is often negotiab e 1eati 2an" vs. Court of Appea s /+;6 )C4A 576' +;;+0 *t is a fundamenta ru e = that an *rrevocab e LoC is independent = not on y of the contract bet&een the buyer#app icant and the se er#beneficiary /meaning the contract of sa e0

= but a so of the credit agreement bet&een the *ssuing 2an" and the 2uyer#App icant. = the non#comp iance by buyer &ith its contract &ith *ssuing 2an" = has no bearing &ith the agreement bet&een the buyer and the se er. = Fn the other hand' = the re ationship bet&een the *ssuing 2an" and the 5otifying 2an" = is more simi ar to that of an agency and not that of a guarantee' = since the atter is mere y to fo o& the instructions of the *ssuing ban" &hich is to notify or to transmit the etter of credit to the beneficiary. The Rule of Strict Compliance = it is a sett ed ru e in commercia transactions invo ving etters of credit = that the documents tendered must strict y conform to the terms of the etter of credit. = the tender of documents by the beneficiary#se er must inc ude a documents re(uired' = and that a correspondent ban" &hich departs from &hat has been stipu ated under the etter of credit' as &hen it accepts a fau ty tender' = acts on its o&n ris"s and it may not therefore be ab e to recover from the buyer or the issuing ban"' as the case may be' = the money thus paid to the beneficiary#se er B. Obligations of the Applicant; Obligations of the Correspondent Bank 2P* vs. .e 4eny 1abrics /:5 )C4A 256' +;7+0 1acts$ .e 4eny 1abrics /App icant#2uyer0 as"ed 2P* /*ssuing 2an"0 to open a etter of credit &ith its -) correspondent ban" = for the payment of chemica dyes ordered from a -) 1actory /2eneficiary#)e er0. Bhen the proper documents of -) )e er &ere presented' 2P*9s correspondent ban" paid the se er. 2ut &hen the crates arrived in Cani a' it &as found that the -) factory s&ind ed .e 4eny' as the crates on y contained co ored cha "s. .e 4eny refused to pay 2P*' a eging that the atter9s -) correspondent ban" &as neg igent in not seeing to it that the shipping documents actua y ta ied &ith &hat &as oaded aboard the ship. *t &as proven that -) correspondent ban" made payment on y after presentation of genuine shipping documents by -) factory. *ssue$ Bhether or not .e 4eny is iab e. <e d. Des' .e 4eny is iab e. App ication for the etter of credit contained the stipu ation that the correspondent ban" &i pay upon presentation of genuine shipping documents' = to &hich stipu ation .e 4eny must be bound. A custom in internationa ban"ing and financing = negates any duty on the part of a ban" to verify &hether &hat is described in the etters of credit of shipping documents actua y ta y &ith &hat is oaded aboard a ship. t is merely the obligation of the bank to pay upon the presentation of genuine documents. The correspondent bank ! is not duty bound to open and inspect the crates to see "hether the contents thereof tally "ith the description in the letter of credit. NNBhi e the ban" is bound to honor the credit'

= it is the beneficiary &ho has the right to as" ban" to honor the credit by a o&ing him to dra& thereon' = and not the buyer#app icant.

C. Obligations of the ssuing Bank; Rights of the Beneficiary #Seller$ Letter of credit constitute the primary obligation' = and not mere y an accessory contract' of the issuing ban" from the under ying contract that it may support. = Conse(uent y' 2eneficiary of a etter of credit issued to secure payment of a oan' = may co ect on its entirety' even if borro&er c aims it made partia payments a ready. Fb igation of the ban"s issuing etters of credit = is so idary &ith that of the person or entity re(uesting for its issuance' /App icant#2uyer0 = the same being a direct primary' abso ute and definite underta"ing to pay the beneficiary upon the presentation of the set of documents re(uired therein. ndependent %rinciple = engagement of the *ssuing 2an" is to pay se er#beneficiary of the credit once the draft and the re(uired documents are presented to it. = the so#ca ed K*ndependent Princip e8 = assures the se er or the beneficiary of prompt payment = independent of any breach of the main contract = and prec udes the *ssuing 2an" from determining &hether the main contract is actua y accomp ished or not. = -nder the independent princip e = ban"s assumes no iabi ity or responsibi ity for the =form' = sufficiency = accuracy' = genuineness = fa sification = or ega effect of any documents = or for the genera and7or particu ar conditions stipu ated in the documents or superimposed thereon = nor do they assume any iabi ity or responsibi ity for the description' (uantity' &eight' (ua ity' condition' pac"ing' de ivery' va ue or e%istence of the goods represented by any documents = or for the good faith or acts and7or omissions' so vency' performance or standing of the consignor' the carriers' or the insurers of the goods' or any other person &hatsoever. A etter of credit is dra&ab e on its o&n terms' and comp iance there&ith cannot be avoided because of pending issues &ith respect to the main contract. ndependence %rinciple = it is important to emphasi,e in this connection that fe& things are more c ear y sett ed in a& = than that contracts invo ved in a etter of credit arrangement = are to be maintained in a state of perpetua separation. = the underta"ing of the ban" to pay' accept and pay drafts or negotiate and7or fu fi any ob igation under the Credit = is not "%0=e't to '+ i1" or ,e*en"e" 0( t&e A$$+i' nt>6%(er resu ting from his re ationship &ith the *ssuing ban" or the 2eneficiary7)e er = in the same manner' the beneficiary can in no case avai himse f of the contractua re ationships = e%isting bet&een the ban"s or bet&een the App icant and the *ssuing 2an"

!he direct conse(uence of the K*ndependence Princip e8 = is the ru e that ban"s on y dea &ith documents and not &ith goods' services or ob igations to &hich they re ate. A%amp e$ !he ban" has no duty to verify &hether &hat has been described in the etters credit or drafts or hat &as shipping documents actua y ta ies &ith &hat &as oaded aboard the ship.

D. ndependent Doctrine; &raud as %roper Defense !ransfie d Phi s. @s. Lu,on <ydro /==: )C4A :>7' 2>>=0 1acts$ !P* as contractor under a turn"ey construction agreement' submitted to L<C standby etters of credit to secure the performance of its /!P*0 ob igations. .e ays in the comp etion of the pro3ect resu ted in the fi ing of arbitration proceedings on &hether !P* cou d benefit from force ma3eure for non#comp etion of the pro3ect on due date. Bhi e the arbitra proceedings &ere pending' and despite !P*9s notice to the ban"s that L<C cannot ca on the etters of credit unti fina sett ement of the issues' neverthe ess' the ban"s notified !P* that they &ou d pay on the etters of credit upon demand of L<C' based on the de ay of comp etion. *ssues$ +. Can L<C ca on the etters of credit despite the pendency of the reso ution of the issue &hether !P* has defau ted in its ob igation to comp ete the pro3ect on due dateO 2. Fn y the issuing ban" and not L<C can c aim the K*ndependence Princip e.8 <e d$ +. Des.

= the independence princip e iberates the *ssuing 2an" from the duty of ascertaining comp iance by the parties in the main contract. = as the princip e9s nomenc ature c ear y suggests' = the ob igation under the etter of credit is independent of the re ated and originating contract. = in brief' the etter of credit is separate and distinct from the under ying transaction. = the argument that any dispute must first be reso ved by the parties through negotiations or arbitration before the beneficiary is entit ed to ca on the etter of credit in essence &ou d convert the etter of credit into a mere guarantee.

2. 5o.

= to say that the independence princip e may on y be invo"ed by the issuing ban"s = &ou d render nugatory the purpose for &hich etters of credit are used in commercia transactions. = as it is' the independence doctrine &or"s to the benefit both of the issuing ban" and the beneficiary. !ransfie d Phi s. @s. Lu,on <ydro /==: )C4A :>7' 2>>=0 &raud as %roper Defense -nder the *ndependence Princip e Penera 4u e$ = the app icant /buyer0 cannot en3oin the payment of the ob igation of the *ssuing 2an" under the etter of credit = based on any irregu arity or non#performance of an ob igation.

A%ception$ = is &hen there is fraud or forgery in the under ying transaction or the tender documents. !he independent nature of the etter of credit may be$ a. independent in toto = &here the credit is independent from the 3ustification aspect = and is a separate ob igation from the under ying agreement = i"e for instance a typica standby LoC b. independence may only be as to the justification aspect = i"e in a commercia etter of credit or repayment standby = &hich is identica &ith the same ob igations under the under ying agreement = *n both cases' = the payment may be en3oined if in the ight of the purpose of the credit = the payment of the credit &ou d constitute fraudu ent abuse of credit. Fr %, i" n e?'e$tion to t&e In,e$en,en'e 2rin'i$+e = it has been opined that the untruthfu ness of a certificate accompanying a demand for payment under a standby credit = may (ua ify as fraud sufficient to support an in3unction against payment. !he remedy for fraudu ent abuse is an in3unction &hich shou d not be granted un ess$ a. there is c ear proof of fraud? b. fraud constitutes fraudu ent abuse of the independent purpose of the etter of credit = and not on y fraud under the main agreement? c. irreparab e in3ury might fo o& if in3unction is not granted = or the recovery of damages &ou d be serious y damaged E**e't o* A$$+i' nt 6eing %n,er Re& 0i+it tion 2ro'ee,ing" Cetropo itan Bater&or"s vs. .a&ay /=:2 )C4A 55;' 2>>=0 = the effect of the stay order under )ec. 6/b0' 4u e = of the *nterim 4u es of Procedure for Corporate 4ehabi itation = &hich en3oins the enforcement of a c aims against guarantors and sureties = K&ho are not so idari y iab e &ith the debtor8 = cannot app y to the etter of credit issued in beha f of the debtor#app icant = since the ob igation of the issuing ban"s under the etter of credit is primary and so idary. M rgin Fee = is a ta% on sa e of foreign e%change = and sa e being consensua ' = it fa s due as soon as the oca ban" opens the etter of credit the 'arginal Deposit re(uirement of the 2)P measure to cut off e%cess currency i(uidity &hich &ou d create inf ationary pressure it is a co atera security given by the debtor' = and is supposed to be returned to him upon comp iance &ith his ob igation the app icant for a etter of credit = is entit ed to have the margina deposit first deducted from the principa ob igation under the etter of credit and for interest to accrue on y on the ba ance' = and such deposit is supposed to be returned upon the buyer9s comp iance &ith his ob igation' = since compensation ta"es effect by operation of a&

Letter o* Cre,it @ Tr%"t Re'ei$t Tr n" 'tion" -nder a etter of credit trust receipt transaction = a ban" e%tends to a borro&er a oan covered by a etter of credit

= &ith the trust receipt as security of the oan. A Tr%"t Re'ei$t = *s a security transaction intended to aid in financing importers and retai dea ers = &ho do not have sufficient funds or resources to finance the importation or purchase of merchandise' = and &ho may not be ab e to ac(uire credit e%cept thru uti i,ation' as co atera ' of the merchandise imported or purchased. *n contracts contained in trust receipts = the contracting parties may estab ish agreements' terms and conditions they may deem advisab e' = provided they are not contrary to a&' mora s or pub ic order. (etter of Credit and Trust Receipt Distinguished A etter of credit is a separate document from a trust receipt. = a trust receipt may have been e%ecuted as security on the etter of credit' = sti the t&o documents invo ve different underta"ings and ob igations. = Conse(uent y' a c ause in the etter of credit ma"ing a party so idary iab e therein' = cannot be e%tended to app y to the trust receipt. A Letter of Credit = is an engagement by a ban" or other persons made at the re(uest of a customer = that the issuer &i honor draft or other demands for payment = upon comp iance &ith the conditions specified in the credit. = !hrough a etter of credit' = the ban" mere y substitutes its o&n promise to pay = for the promise to pay of one of its customers = &ho in return promises to pay the ban" the amount of funds mentioned in the etter of credit = p us credit or commitment fees mutua y agreed upon. 2y contrast' a !rust 4eceipt = is one &here Antruster' = &ho ho ds an abso ute tit e or security interest over certain goods' documents or instruments' = re eased the same to the Antrustee = Antrustee = is one &ho e%ecutes a trust receipt = binding himse f to ho d the goods' documents or instruments in trust for the entruster = and to se or other&ise dispose of the goods' documents and instruments = &ith the ob igation to turn over to the entruster the proceeds thereof = to the e%tent of the amount o&ing the entruster' or as appears in the trust receipt' = or return the goods' documents or instruments themse ves if they are unso d' or not other&ise dispose of = in accordance &ith the terms and conditions specified in the trust receipt. I++%"tr tion6%(er #A) = in Cani a agrees to buy Se++er #6) = in 5e& Dor"' offers to se merchandise &orth E+>'>>> 1F2 5e& Dor" )ince 2uyer A has no faci ities &ith &hich to transmit do ars to the -)' = he contacts a ban"' say Cerchant9s 2an" of Cani a = &hich has a correspondent ban" in 5e& Dor"' &hich is the Chemica 2an" of 5e& Dor"

= so' Cerchant 2an" here is the *ssuing 2an" = and the Chemica 2an" is the Correspondent or the 5otifying 2an" = A etter of credit is made not bet&een natura persons? = it is a ban" to ban" transaction. = 2et&een Cerchant9s 2an" /*ssuing 2an"0 = and Chemica 2an" /the Correspondent 2an"0 = there is an e ement of trust. = !he correspondence is a mutua arrangement &hereby = Cerchant9s 2an" can as" Chemica 2an" in 5e& Dor" to pay )e er 2 in 5e& Dor" E+>'>>> = Chemica 2an" &i pay because it trusts Cerchant9s 2an" = *n other &ords' the credit of Cerchant Gs 2an" is good &ith Chemica 2an". H*t &or"s both &ays' = thus' if the )e er in Cani a has sugar &hich he offers to se = and &hich 2uyer in 5e& Dor" agrees to buy = Chemica 2an" can re(uest Cerchant9s 2an" to pay se er in Cani a. = the credit of either ban" is good &ith each other.I )o then' = 2uyer A &i be re(uired to deposit &ith Cerchant9s 2an" ;>J /margina deposit0 of the amount of the transaction' or E;'>>> = so that 2uyer A &ou d sti o&e Cerchant9s 2an" E+'>>>. = 2uyer A having deposited said amount' Cerchant9s 2an" cab es Chemica 2an" in 5e& Dor"$ KFpen an irrevocab e etter of credit for KE+>'>>>.8 = Chemica 2an" &i re(uire )e er 2 = to produce genuine shipping papers' such as pac"ing ist' before paying him. = Chemica 2an" &i no& then debit Cerchant9s 2an"9s account the sum of E+>'>>>. 2ut because 2uyer A sti o&es Cerchant9s 2an" E+'>>>' = the bi of ading covering the goods &i be de ivered to Cerchant9s 2an" and not to 2uyer A' = so as to protect the ban" against 2uyer A. = &hen the goods arrive in Cani a' = Cerchant9s 2an" &i advise 2uyer A? = but 2uyer A must first pay E+'>>> before he can ta"e possession of the goods 2ut if 2uyer A does not have the money yet' = Cerchant9s 2an" may re ease the goods to 2uyer A = under a !rust 4eceipt' = &hich is a document issued by the ban" in favor of 2uyer A = &hereby 2uyer A admits that the goods sti be ong to Cerchant9s 2an"' = and &hich authori,es to se the goods and app y the proceeds thereof = to the payment of his debt &ith Cerchant9s 2an" 5ote$ !he procedure &hereby the Cerchant9s 2an" i(uidates its ob igation &ith Chemica 2an" is ca ed = KFor! r, E?'& nge8

6 r A%e"tion"Co,e o* Co11er'e a. Bhat do you understand by the term Kcommercia transaction8O = *s it essentia that at east one party to a contract be a merchant in order to consider such a commercia transactionO