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LETTER OF CREDIT
Sellers refusal to part with his goods before being paid coupled with the Buyers
want of ownership over the goods before paying.
Note: The opening of a LC does not involve specific appropriation of money in favor
of the beneficiary. The correspondent bank does not receive in advance the money
form the buyer or issuing bank but pays the amount out of its own funds and then
later on seek reimbursement from the issuing bank. It does not convey the notion
that a particular sum of money has been specifically reserved or has been held in
trust.
Is LC a commercial transaction?
2.Issuing Bank is usually the buyers bank; it issues the letter of credit and
undertakes to pay the seller upon receipt of the draft and proper documents to the
buyer upon reimbursement.
3.Seller/beneficiary is the one who in compliance w/ the contract of sale ships the
goods to the buyer and delivers the documents of title and drafts to the issuing
bank to recover payment. He is the beneficiary of the instrument because the
instrument is addressed to him and in his favor.
4. Correspondent Bank
1.Advising/Notifying Bank does not have any contractual relations w/ the buyer but
merely serves as an agent of the issuing bank. Its only responsibility is to transmit
the LC. Thus, it could validly refuse to negotiate or accept, even if the seller
tenders all the documents required under the LC and it does not become liable as
the beneficiary has no cause of action against the bank.
4.Negotiating Bank any bank in the place of the beneficiary w/c buys or discounts
the sellers draft. Its liability depends on the stage of negotiation. If BEFORE
negotiation, such that it suggests its willingness to negotiate, it has no liability w/
respect to the seller. But if AFTER negotiation, a contractual relationship will then
prevail between them.
Note: A bank does not become a negotiating bank unless he pays the draft and
becomes the holder of said document.
As such, the IB may notify the seller of the opening of the LC either directly or
through a correspondent bank, w/c may either be a mere advising bank or a
Confirming Bank.
INDEPENDENCE PRINCIPLE-
The bank in determining compliance with the terms of the LC is required only to
examine the shipping document presented by the seller and is precluded from
determining whether the main contract is accomplished or not
The document tendered by the seller must strictly conform to the terms of the LC .
The correspondent bank which departs from what has been stipulated under the LC,
as when it accepts a faulty tender , acts on his own risk and may not thereafter
recover from the buyer or issuing bank , the money paid to the benefic
In short, the documents presented must comply w/ those stipulated on. In a LC, the
banks only deals w/ documents and not w/ goods.
Note: A loan transaction may give rise to LC. An LC does not arise only because of
sale or importation. Example: Standby LC.
Under the terms of a SLC, the beneficiary has the right to trigger the loan
option (referred to as TAKING DOWN THE LOAN) if the account party fails to meet its
commitment, in w/c case the issuing bank disburses a specified sum to the
beneficiary and books an equivalent loan to its customer.
When may the Advising Bank (AB) be equally liable with the Issuing Bank (IB)?
It accepts or gives value to the draft and w/c later on sells the draft to the IB. The IB
then reimburses the NB. What happens is that the NB buys the draft at a
discounted price and then sells it to the IB for its face value.
If LC is disowned by the IB, can the Negotiating Bank ask reimbursement from the
seller? Under what principle?
YES. Seller is a drawer of the draft accepted and paid by the Negotiating Bank.
Therefore, the seller has contingent liability on such draft.
NEVER, because they have different liabilities. The CBs liability is primary while the
NBs liability comes only after negotiation (Before negotiation, there is no liability).
It is the application for the opening of a LC w/c governs the relationship between
the buyer and the IB. This implies that the buyer/applicant is not concerned w/ the
terms of the LC between the IB and the seller/beneficiary.
As to the IB, it is not a guarantor because its liability is not subsidiary since the
condition of the submission of the document is determinative of the liability not the
nonpayment of the buyer.
The IB opens a LC for a consideration w/c comes in the form of a commission.
If the IB does not advance the payment in favor of the seller/beneficiary, may the
buyer/applicant recover the commission paid?
No More because this is the consideration. But he may recover the margin fee
What among other things, should be stipulated upon the application for a LC?
In LC transactions, the IB deals only w/ the documents, not w/ goods. The IB is not
bound or required to examine the goods. For as long as the required documents are
submitted by the seller, the IB pays the seller.
If the goods turned out to be defective, is this a valid defense to avoid payment by
the IB to the seller?
NO. As long as the documents submitted by the seller are complete and in
conformity w/ what the LC requires, the IB is bound to pay the seller. This is true
even if the goods turned out to be defective.
How about the buyer, is he still bound to reimburse the IB despite the defective
goods received by him?
YES. The buyer has no course of action against the IB. The buyer has a COA against
the seller.
If the documents submitted by the seller are incomplete and the IB still pays the
seller, is the buyer still bound to pay the IB?
NO. Because the IB should not have paid the seller knowing the documents to be
incomplete. The IB deals only w/ documents.
If the beneficiary proceeds against the CB, the CB may ask reimbursement from the
IB. But if the beneficiary proceeds directly against the CB; it has no right to collect
from the IB. The beneficiary may compel the CB to accept drafts it has drawn.
Note: If the drawee doesnt pay, go to the drawer who is secondarily liable.
Apart form the bill of lading, what additional documents may be needed as a
condition of the LC for honoring a draft?
Note: Documents to be passed are not unilaterally determined by the bank but
agreed upon by the buyer and seller.
Document of Title (Bill of Lading) given to the seller upon shipment of goods. This
is to be given to the IB to be able for the seller to get payment.
Is there a scheme where the IB may release the documents of title to the buyer w/o
being reimbursed first by the buyer?