CODE OF COMMERCE ART.

567 - 572

LETTERS OF CREDIT
WHAT IS A LETTER OF CREDIT?

• Are those issued by one merchant to

another for the purpose of attending to
a commercial transaction.
ESSENTIAL CONDITIONS

• To be issued in favour of a definite person

and not to order.

• To be limited to a fixed and specified

amount.

• Or to one or more undetermined amounts,

but within a maximum the limits of which
has to be exactly stated.
ESSENTIAL CONDITIONS

• NOTE: Those which do not have any of

these circumstances shall be
considered as mere letters of
recommendation.
PARTIES TO A LETTER OF CREDIT

• BUYER

• ISSUING BANK

• SELLER
ADDITIONAL PARTIES

• ADVISING (NOTIFYING BANK)

• CONFIRMING BANK

• PAYING BANK

• NEGOTIATING BANK
INDEPENDENT CONTRACTS

• Contract of Sale between the Buyer

and Seller

• Contract of the Buyer with the Issuing

Bank

• The Letter of Credit itself

INDEPENDENCE PRINCIPLE

• The relationship of the buyer and the bank

is separate and distinct from the relationship
of the buyer and seller in the main contract.
EXCEPTION

• FRAUD

• FORGERY
TRANSFIELD PHILS. V. LUZON
HYDRO CORP.
• Transfield entered into a turn-key contract with
Luzon.

• The contract provides for a period for which the

project is to be completed and also allows for the
extension of the period provided that the extension is
based on justifiable grounds such as fortuitous
event.

• In order to guarantee performance by Transfield, two

stand-by letters of credit were required to be opened
which were issued by ANZ and Security Bank.
TRANSFIELD PHILS. V. LUZON
HYDRO CORP.
• During the construction of the plant, Transfield
requested for extension of time citing typhoon and
various disputes delaying the construction. Luzon
referred the matter to arbitration committee.

• Due to delay in the construction of the plant,

Luzon called on the stand-by letters of credit
because of default. However, the demand was
objected by Transfield on the ground that there is
still pending arbitration on their request for
extension of time.
TRANSFIELD PHILS. V. LUZON
HYDRO CORP.

• ISSUE: Whether or not LHC can collect

from the letters of credit despite the pending
arbitration case
TRANSFIELD PHILS. V. LUZON
HYDRO CORP.

• HELD: YES

• Transfield’s contention would make the LC

a mere guarantee.

• Independence Principle

• Fraud Exception not applicable.

STRICT COMPLIANCE DOCTRINE

• The Issuing Bank must examine the Tender

Documents and must make sure that the
terms and conditions of the LC are strictly
complied with.
KINDS OF LETTERS OF CREDIT

• Confirmed

• Irrevocable

• Revolving

• Back-to-Back

• Standby
RIGHTS AND LIABILITIES

• The drawer of a letter of credit shall be

liable to the person to whom it was issued.

• Letters of Credit may not be protested.

• The person paying shall have the right to

demand the proof of identity in whose favor
the LC was issued.
RIGHTS AND LIABILITIES

• The Drawer of a LC may annul it, informing

the bearer and the person to whom it is
addressed of such revocation.

• The bearer of a letter of credit shall pay the

amount received to the drawer without
delay.
RIGHTS AND LIABILITIES

• NOTE: Should he not do so, an action

involving execution may be brought to
recover it.
PERIOD

If the bearer of the LC does not make use of the:

• Period agreed upon with the drawer, or

• In default of a period fixed, within 6 months,

counted from its date, in any point in the
Philippines, and

• Within 12 months outside thereof

It shall be VOID.