Special Commercial Laws by the beneficiary (seller) must include all documents

Atty Fe Becina-Macalino required by the letter.

Q: What are Letters of Credit? Q: What is the role of the buyer-importer?

A: an engagement by a bank or other person made at the A: it is the person who applies for and for whose benefit
request of a customer that the issuer will honor drafts for the issuing bank issues the letters of credit. The buyer
payment upon compliance with the conditions specified in obligates itself to reimburse the issuing bank when the
the credit. latter complies with the terms of the letter.

ART. 568, CODE OF COMMERCE: Q: What is the nature of Letters of Credit?

The essential conditions of letters of credit shall be: A: it is a financial device developed by merchants as a
1. To be issued in favor of a definite person and not safe mode of dealing with sales of goods to satisfy the
to order. seemingly irreconcilable interests of a seller.
2. To be limited to a fixed and specified amount, or
to one or more indeterminate amounts, but all Q: What is the purpose of Letters of Credit?
within a maximum sum the limit of which must be A: To break the impasse.
exactly stated. !"#$%"&'(%)"*+("&%")%,'-)%."#/"0/1#)+0#"+"&+12"#/"-33'%"+"
Letters of credit which do not have one of these conditions
shall be considered as simply letters of recommendation. 4%##%)"/5"0)%.-#"-1"5+6/)"/5"#$%"3%44%)"+/"#$+#7"&("6-)#'%"/5"#$%"
4%##%)"/5"0)%.-#7"#$%"-33'-18"&+12"0+1"+'#$/)-9%"#$%"3%44%)"#/"
Q: Who are the parties in a Commercial Letter of
Credit? .)+:" .)+5#3" +1." %18+8%" #/" ;+(" #$%*" ';/1" #$%-)"
A: ;)%3%1#*%1#"3-*'4#+1%/'34(":-#$"#$%"#%1.%)"/5"./0'*%1#3"
a. The buyer, who procures the letter of credit and
obliges himself to reimburse the issuing bank )%,'-)%."&("#$%"4%##%)"/5"0)%.-#<"
upon receipt of documents.
b. The bank, issuing the letters of credit which Q: What are the particular elements of a Letter of
undertakes to pay the seller. Credit?
c. The seller, who in compliance with the contract A:
of sale, ships the goods to the buyer and delivers 1. It must be issued to a definite person
the documents to the issuing bank. He is the 2. It is limited to a fixed and specified amount.
beneficiary of the credit instrument. !"-#"*+("&%"+"1+#')+4";%)3/1"/)"+"=')-.-0+4";%)3/1">&+123?

Q: Is the issuing bank the same as the paying bank?

Q: What is the difference between a Negotiable
A: Not all the time. There are instances wherein another
Instrument and Letters of Credit?
bank pays the beneficiary. If the beneficiary is to draw and
A: In NI, it is payable to the order or bearer while in L/C,
receive payment in his own currency, the notifying bank
it is payable to a specific person.
will be indicated as the paying bank.
!" @%10%7" A%##%)3" /5" B)%.-#" +)%" 1/#" +" 1%8/#-+&4%"
Q:What are the responsibilities of a paying bank/ -13#)'*%1#<"
notifying bank?
A: The paying bank assumes no responsibility but merely
Q: As to the 2nd element:
pays the beneficiary and debits the payment immediately
A:
to the account of the opening bank/issuing bank.
ART. 568, PAR. 2, CODE OF COMMERCE:
To be limited to a fixed and specified amount, or to one or
Q: What is the responsibility of the seller when he
more indeterminate amounts, but all within a maximum
avails the letters of credit?
sum the limit of which must be exactly stated.
A: His obligation is to deliver the tender documents to the
paying bank whether it is the issuing bank or notifying
Q: Since, it is actually a payment. The other element
bank.
is the amount. Should it be a definite amount also?
A: It means that the payment/amount should be written in
Note: The documents tendered must strictly conform to
the letter of credit.
the terms of the letter of credit. The tender of documents
DBV Notes (2021-2022)
Q: What must be the nature of the payment in a fixed be able to part with his money unless the goods are with
amount? What should it be? him. So, that is the reason why they need the intervention
A: It must be indicated or stated in the letter of credit. It of a bank and the issuing bank is going to issue the L/C
may be unspecified provided that there is a MAXIMUM but what is the nature? Of course, BDO has no branch in
AMOUNT of the liability. China. So does it effected? NO. There must be a
confirming bank. So how does it effected?
Q: What are the 3 distinct contracts involved in a letter
of credit? Example:
A: The buyer (applicant of L/C) has to engage himself to a
1. Contract of sale between buyer and the seller bank. But the seller now will become the beneficiary of the
2. Contract of the buyer with the issuing bank L/C. Remember that a L/C is actually a documentary
- Bank agrees to issue the letter of credit transaction whereby it is a means of payment. It being a
in favor of the seller subject to means of payment, the issuing bank will now have to
reimbursement of the buyer issue that in favor of the seller who will become the
3. Letter of credit proper. beneficiary. The L/C is issued, of course the seller would
- Bank obligates itself to pay the seller or not know who this issuing bank is and that is the reason
to the order of the seller after why the issuing bank must have a CORRESPONDENT
presentation to the bank of tender BANK, which is in China, and allowed to operate in China.
documents stipulated upon. That correspondent bank will be the confirming
Bank.
Q: What is the lifespan of a Letter of credit (the
validity)? Q: What is the so-called Independence Principle?
A: It depends on the stipulation of the parties. The A: Letters of Credit “constitutes the complete agreement,
duration of the L/C must be stipulated. and is independent of the contract of sale between the
buyer and the seller, and is unaffected by any breach on
Q: Are you saying that the parties can agree that the the part of the seller or the buyer or by any controversy
L/C is for an indefinite period of time? which may arise between the buyer and the seller or by
A: No. It is within 6 months from the date of any other transaction between the buyer and the seller.”
the stipulation.
!" &+12" .%#%)*-1%3" 0/*;4-+10%" :-#$" #$%" 4%##%)" /5" 0)%.-#"
Q: What about if it is over 6 months? Are you saying
that it is no longer validly enforced? /14("&("%C+*-1-18"#$%"3$-;;-18"./0'*%1#3";)%3%1#%.D"-#"
A: When you speak of the validity of a letter of credit, we -3";)%04'.%."5)/*".%#%)*-1-18":$%#$%)"#$%"*+-1"0/1#)+0#"
refer to the drawings of the letter of credit or on the
demand to pay because in every letter of credit, it must be -3"+0#'+44("+00/*;4-3$%."/)"1/#<"
in the nature of payment. It is actually not a substitute for
payment, it is not actually a collateral. It is a security for Q: What is the consequence of the “independence
payment. principle”?
A: banks only deal with documents and not with goods,
Q: What is the term involving the L/C? When is it due? services or obligations to which they relate. What is only
A: When credit is due. necessary is for the bank to make sure that the tinder
documents are complete and the seller strictly complies
Q: How does this issuing bank gonna pay? with the terms of the letters of credit.
A: The credit is going to be payable upon certain
stipulations. But in reality, remember that the issuing bank Q: Who can invoke the independence principle?
[for example] is in the Philippines and the seller is based A:
in China. a. Issuing bank
b. beneficiary
For example:
The buyer is in Manila and the seller is in China. They Q: IS there an exemption in the Independence
don’t know each other, they just communicate through Principle?
emails. China man is not going to send his products A: Yes, the Fraud Exception.
without being paid and neither the Filipino buyer here will

DBV Notes (2021-2022)

!" #$-3" %C-3#3" :$%1" #$%" &%1%5-0-+)(7" 5/)" #$%" ;');/3%" /5" presentation by seller of documents that show he
has taken affirmative steps to comply with sales
.)+:-18" /1" #$%" 0)%.-#7" 5)+'.'4%1#4(" ;)%3%1#3" #/" #$%" agreement.
0/15-)*-18" &+12<" E/0'*%1#3" #$+#" 0/1#+-1" *+#%)-+4" Standby - payable upon certification of a party’s
nonperformance of agreement
)%;)%3%1#+#-/1"/5"5+0#"#$+#"#/"$-3"21/:4%.8%"-3"'1#)'%<" b. On beneficiaries:
- Commercial- must demonstrate by
Q: Res Perit Domino does not apply because the documents that he has performed his
liability of an issuing bank to the beneficiary is contract.
separate and distinct from the transactions between - Standby credit- must certify that his
the buyer and seller. Is it the direct liability of the obligor has not performed the contract.
issuing bank?
A: There are 2 modes of payment in L/C: Q: For example, if the provisions of Art. 568 is not
1. The payment to the seller will have to be complied with. What will happen?
advanced by the correspondent bank or the A: It is merely considered as a letter of recommendation.
confirming bank.
2. The payment which will be collected from the
bank account of the issuing bank abroad. So all
banks in the Philippines have correspondent
banks.

Q: Is Letter of Credit a guarantee?

A: No.

Q: What is the difference between a reimbursement

and payment?
A:

PAYMENT REIMBURSEMENT

The direct obligation of the The liability of the buyer to

issuing bank is to pay the the issuing bank is just to
seller. reimburse.

In other words, in the concept of reimbursement, there

must really be a payment made. In that regard, before the
bank is able to collect from the buyer there must be really
a proof of payment and that is the bank draft.

Q: What are the kinds of letters of credit?

A:
a. Confirmed LC
b. Irrevocable LC
c. Other Kinds

Q: What is the difference between commercial credit

and standby credit?
A: 3 significant differences:
a. Commercial credit - involve payment of money
under a contract of sale payable upon
DBV Notes (2021-2022)