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Governing Laws:
1st Transaction
- contract of sale between the buyer and the seller
- the contract may require that the buyer obtain a
LoC from a third party acceptable to the seller.
2nd Transaction
– the issuance of a LoC between the buyer and
the issuing bank
- the buyer requests the issuing bank to issue a
LoC naming the seller as the beneficiary
3rd Transaction
- between the seller and the issuing bank.
- the issuing bank issues the LoC for the benefit of
the seller.
Kinds of LoC:
1. Commercial LoC
– used in the trade of goods.
2. Standby LoC
– secures the performance of some service
of work.
- the beneficiary will prove that the obligor
failed to perform the secured obligation.
Example:
The contractor failed to construct the
building on time.
Kinds of Commercial LoC:
1. Confirmed LoC
– the correspondent bank gives an absolute
assurance to the beneficiary that it will
undertake the issuing bank's obligation as its
own according to the terms and conditions of
the credit.
2. Irrevocable LoC
– issuing bank may not, without the consent
of the beneficiary (seller) and the applicant
(buyer) revoke his undertaking under the letter,
because the issuing bank does not reserve the
right to revoke the credit.
Kinds of Commercial LoC:
3. Revolving LoC
- credit that provides for renewed credit to
become available as soon as the issuing bank
has advised that the negotiating or paying bank
that the drafts already drawn by the beneficiary
have been reimbursed to the issuing bank by
the buyer.
4. Back-to-Back LoC
- credit with identical documentary
requirements and covering the same
merchandise as another LoC, except for a
difference in the price of the merchandise as
shown by the invoice and the draft.
Kinds of Commercial LoC:
5. General LoC
- one addressed to any and all persons
without naming any one in particular.
6. Special LoC
- addressed to a particular individual, firm or
corporation by name.
7.Straight LoC
- one does not run in favor of purchasers of
drafts drawn thereunder.
Kinds of Commercial LoC:
5. General LoC
- one addressed to any and all persons
without naming any one in particular.
9. Sight LoC
- is payable on demand as distinguished
from Time LoC which is payable within a certain
period.
Quiz: