MERCANTILE LAW

LETTERS OF CREDIT
LETTERS OF CREDIT (L/C)
Letters of credit (L/C) are those issued by one merchant to another, or for the
purpose of attending to a commercial transaction. (Art. 567, Code of Commerce)
A letter of credit is one whereby one person requests some other person to
advance money or give credit to a third person, and promises that he will repay
the same to the person making the advancement, or accept the bills drawn upon
himself for the like amount. (Campos, Notes and Selected Cases on Negotiable
Instruments Law)
A written instrument whereby the writer requests or authorizes the addressee to
pay money or deliver goods to a third person and assumes responsibility for
payment of debt therefor to the addressee (Transfield Philippines v. Luzon Hydro,
2004)
TYPES OF LETTERS OF CREDIT
AS TO THE TYPE OF THE MAIN CONTRACT
COMMERCIAL L/C
The main transaction involves a contract of sale. The credit is payable upon the
presentation by the seller of documents that show he has taken affirmative
steps to comply with the sales agreement. The beneficiary of a commercial
credit must demonstrate by documents that he has performed his contract
(Transfield Philippines v. Luzon Hydro, 2004).
STANDBY L/C
Used in non-sale settings. The credit is payable upon certification of a party's
nonperformance of the agreement. The creditor-beneficiary of the standby
credit must certify that the debtor-applicant has not performed the principal
obligation. (Transfield Philippines v. Luzon Hydro, 2004).
AS TO REVOCABILITY
REVOCABLE L/C
One which can be revoked by the issuing bank without the consent of the
buyer and seller
IRREVOCABLE L/C
One which the issuing bank cannot revoke without the consent of the buyer
and seller
AS TO THE OBLIGATION ASSUMED BY CORRESPONDENT BANK
UNCONFIRMED L/C
One which continues to be the obligation of the issuing bank

CONFIRMED L/C
One which is supported by the absolute assurance to the beneficiary that the
confirming bank will undertake the issuing bank's obligation as its own
according to the terms and conditions of the credit
BASIC PRINCIPLES OF LETTERS OF CREDIT
DOCTRINE OF INDEPENDENCE
The principle of independence assures the seller or the beneficiary of prompt
payment independent of any breach of the main contract and precludes the
issuing bank from determining whether the main contract is actually
accomplished or not.
DOCTRINE OF STRICT COMPLIANCE
The settled rule in commercial transactions involving letters of credit requires
that the documents tendered by the seller must strictly conform to the terms of
the letter of credit.
FRAUD EXCEPTION PRINCIPLE
The principle that limits the application of the independence principle only to
instances where it would serve the commercial function of the credit and not
when fraud attends the transaction. Otherwise, the issuing bank or the
concerned correspondent bank is not obliged to perform its undertaking under
the contract.
The tender of documents by the beneficiary (seller) must include all documents
required by the letter. A correspondent bank which departs from what has been
stipulated under the letter of credit, as when it accepts a faulty tender, acts on
its own risks and it may not thereafter be able to recover from the buyer or the
issuing bank, as the case may be, the money thus paid to the beneficiary.