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LETTERS OF CREDIT
I. HSBC v. NSC
Facts:
- NSC entered into an Export Sales Contract (contract) with Klockner on october 12, 1993
-NSC sold 1,200 metric tons of prime cold rolled coils to Klockner under FOB ST Iligan terms.
-In compliance of the contract, klockner applied for an IRREVOCABLE LETTER OF CREDIT with HSBC in
favor of NSC
- HSBC then issued an irrevocable and on sight letter of credit in favor of NSC
3. X x x x
4. X x x x
5. SUBJECT TO UNIFORM FULES FOR THE COLLECTION OF COMMERCIAL PAPER PUBLICATION NO.
322
- At the same time City trust sent the documents required under the Letter of Credit for the collection
of the payment.
- HSBC also stated that it will be collected under URC 322 (for two occassions)
-HSBC replied that it treated the transaction as under URC 322 as stated in the collection order and
under URC 322 a reason is not required
- CITY TRUST then informed NSC of Klockner’s refusal and it has complied iwth NSC’s instructions to
send ON COLEECTION bases the export documents
-But NSC said that CITY trust misinterpreted the instruction
- NSC said that it NEGOTIATED with CITY trust the export documents
-Klockner still refused to pay, thus HSBC returened the documents to City Trust
-HSBC considered itself discharged of its duty under the transaction and asked for payment of
Handling Charges
- For the first time then CITY TRUST demanded payment from HSBC in accordance with the LC
- but HSBC insisted that URC 322 governs and CITY instructed it to collect payment under such rule.
-then NSC itself demanded payment from HSBC four months after the expiration of the LC
RTC: HSBC not liable since the applicable law is URC 322
CA: reversed the decision , URC 400 should apply and not URC 322
ISSUE(S)
1. Who among the parties bears laibility to pay the amount in the LC
SC: CA is correct
- commercial instrument devloped to address the uniques needs of certain commercial transactions
- it is a financial device developed by merchants as a convenient and relatively sale mode of dealing
with sales of goods to satistfy the seemingly irroconcilable insterests of a seller who refuses to part
with his goods before he is paid, and a buyer, who wants to have control of the goods before paying
- through a letter of credit, a buyer obtains the credit of a third party, usually a bank, to provide
assurance of payment.
- a letters of credit generally arises out of a separate contract requiring the assurance of payment of a
third party.
2nd- issuance of a letter of credit between the buyer and the issuing bank
- the buyer requests the issuing bank to issue a letter of credit naming the seller as the beneficiary
- the issuing bank undertaks to pay the seller upon presentation of the docuemnts identified in the LC
-the buyer then obliges himself to reimburse the issuing bank for the payment made
- the issuing bank may require a fee for this kind of service
- This relationship is not strictyl ocntractual since there is no privity of contract nor meeting of the
minds between them - nor is this considered a stipulation pour a trui
- form its inception only the seller can demand payment under the LC
- not a contract of suretyship or guaranty since it involves primary liability in the vent of default