Nego LOC TR Warehouse

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LETTER OF CREDIT

WHAT IS A LETTER OF CREDIT?

It is any arrangement, however named or described, whereby a bank ( issuing bank, not

the advising bank), acting at the request and on the instructions of a customer

(applicant) or on its own behalf, binds itself to:

1. Pay to the order of, or accept and pay drafts drawn by a third party (Beneficiary), or

2. Authorize another bank to pay or to accept and pay such drafts, or

3. Authorizes another bank to negotiate, against stipulated document(s),

Provided, the terms and conditions of the credit are complied with.

Note: They are in effect absolute undertakings to pay the money advanced or for the

amount for which the credit is given on the faith of the instrument.

Breaks the impasse between:

Seller: who refuses to part with his goods before he is paid

Buyer: who wants to have control of the goods before paying.

IS IRREVOCABLE LETTER OF CREDIT AND CONFIRMED LETTER OF CREDIT

SYNONYMOUS?

An irrevocable letter of credit is not synonymous with a confirmed letter of credit. In an

irrevocable letter of credit, the issuing bank may not, without the consent of the

beneficiary and the applicant, revoke its undertaking under the letter, whereas, in a

confirmed letter of credit, the correspondent bank gives an absolute assurance to thebeneficiary that it will undertake the issuing banks obligation as its own according to the

terms and condition of the credit. (Prudential Bank and Trust Company v. IAC, G.R. No.

74886, Dec. 8, 1992)


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IN CASE THE BUYER WAS NOT ABLE TO PAY ITS OBLIGATION UNDER THE

LETTER OF CREDIT, CAN THE BANK TAKE POSSESSION OVER THE GOODS

COVERED BY THE SAID LETTER OF CREDIT?

No. The opening of a Letter of Credit did not vest ownership of the goods in the bank in

the absence of a trust receipt agreement. A letter of credit is a mere financial device

developed by merchants as a convenient and relatively safe mode of dealing with the

sales of goods to satisfy the seemingly irreconcilable interests 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. (Transfield Philippines, Inc. v. Luzon Hydro Corporation, G.R.

No. 146717, Nov. 22, 2004)

WHAT IS THE 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; the bank is not required to investigate if the

contract underlying the LC has been fulfilled or not because in transactions involving

LC, banks deal only with documents and not goods (BPI v. De Reny Fabric Industries,

Inc., L-2481, Oct. 16, 1970). In effect, the buyer has no course of action against the

issuing bank.

Bank determines compliance with the letter of credit only by examining the shipping

documents presented; it is precluded from determining whether the main contract is

actually accomplished or not.

Distinct Contracts

1. Contract of sale between the buyer and the seller2. Contract of the buyer with the issuing bank3. Letter of credit in which the bank promises to pay the seller pursuant to the

terms and conditions stated therein: discrepancy between amount of goods

described in the invoice/letter of credit and the amount in the bill of lading

will not affect the validity of contract of carriage

4. Contract of carriage between shipper, carrier, and consignee


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WHO ARE THE PARTIES TO A LETTER OF CREDIT?

1. Buyer: procures the letter of credit and obliges himself to reimburse the issuing bank

upon receipts of the documents of title

2. Issuing bank: undertakes to pay the seller upon receipt of the draft and proper

document of titles and to surrender the documents to the buyer upon reimbursement

3. Seller/Beneficiary: ships the goods to the buyer and delivers the documents of title

and draft to the issuing bank to recover payment

Other parties:

1. Advising/notifying bank: conveys to the seller the existence of credit; onlyresponsibility is to notify and/or transmit to the beneficiary the existence of the letter of

credit

2. Confirming bank: lends credence to the letter of credit issued by a lesser known

issuing bank; assumes a direct obligation to the seller, as if the correspondent bank

itself had issued the letter of credit

3. Paying bank: undertakes to encash the drafts drawn by the seller

4. Negotiating bank: buys and discounts the draft; (negotiating bank has recourse

against the seller in case issuing bank dishonors the draft- Bank of America vs. CA)

WHAT IS THE EFFECT OF THE BUYERS FAILURE TO PROCURE A LETTER OF

CREDIT TO THE MAIN CONTRACT?

The Letter of Credit is independent from the contract of sale. Failure of the buyer to

open the Letter of Credit does not prevent the birth of the Sales Contract. (Reliance

Commodities, Inc. v. Daewoo Industrial Co. Ltd., G.R. No. 100831, Dec. 17, 1993) The

opening of the Letter of Credit is only a mode of payment. The LC is not an essential

requisite to the contract of sale.

WHAT IS THE DOCTRINE OF STRICT COMPLIANCE?


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The documents tendered by the seller/beneficiary must strictly conform to the terms of

the letter of credit. The tender of documents must include all documents required by the

letter. Thus, a correspondent bank which departs from what has been stipulated under

the LC acts on its own risk and may not thereafter be able to recover from the buyer or

the issuing bank, as the case may be, the money thus paid to the beneficiary. (Feati

Bank and Trust Company v. CA, G.R. No. 940209, Apr. 30, 1991)

WAREHOUSE RECEIPTS LAW

WHAT IS A WAREHOUSE RECEIPT?

A written acknowledgment by the warehouseman that he has received and

holds certain goods therein described in his warehouse for the person to whom

the document is issued. The warehouse receipt has two-fold functions, that is, it is a

contract and a receipt. (Telengtan Bros. & Sons v. CA, G.R. No. L-110581, Sept 21,

1994)

Q: Coco was issued by a warehouseman a negotiable receipt for safekeeping by the

latter of his goods. Can the judgment creditor of Coco levy by execution the goods

covered by the negotiable receipt?

A: The goods cannot, while in the possession of the warehouseman, be attached by

garnishment or otherwise, or be levied upon under an execution unless the receipt be

first surrendered to the warehouseman, or its negotiation enjoined. The warehouseman

cannot be compelled to deliver the actual possession of the goods until the receipt is

surrendered to it or impounded by the court.

Q: Bon took the goods of Angela without her consent and deposited the same with awarehouseman. The latter issued to Bon a negotiable receipt which she indorsed for

value to Ryan. Between Angela and Ryan, who has better right over the goods? Why?

A: Ryan has better right to the goods. The goods are covered by a negotiable

warehouse receipt which was indorsed to Ryan for value. The negotiation to Ryan was


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not impaired by the fact that Bon took the goods without the consent of Angela, as

Ryan had no notice of such fact. Moreover, Ryan is in possession of the warehouse

receipt and only he can surrender it to the warehouseman. (Sec. 8, WRL)

TRUST RECEIPTS LAW

WHAT IS A TRUST RECEIPT TRANSACTION?

It is any transaction between the entruster and entrustee:

1. Whereby the entruster who owns or holds absolute title or security interests over

certain specified goods, documents or instrument, releases the same to the possession

of entrustee upon the latters execution of a TR agreement.2. Wherein the entrustee binds himself to hold the designated goods in trust for the

entruster and, in case of default, to sell such goods, documents or instrument with the

obligation to turn over to the entruster the proceeds to the extent of the amount owing

to it or to turn over the goods, documents or instrument itself if not sold. (Sec. 4, P.D.

115)

WHAT IS A TRUST RECEIPT (TR)?

It is the written or printed document signed by the entrustee in favor of the entruster

containing terms and conditions substantially complying with the provisions of PD 115.

Q: What is the loan and security feature of the trust receipt transaction?

A: A trust receipt arrangement is endowed with its own distinctive features and

characteristics. Under that set-up, a bank extends a loan covered by the Letter of

Credit, with the trust receipt as a security for the loan. In other words, the transaction

involves a loan feature represented by the letter of credit, and a security feature which isin the covering trust receipt. A trust receipt, therefore, is a security agreement, pursuant

to which a bank acquires a "security interest" in the goods. It secures an indebtedness

and there can be no such thing as security interest that secures no obligation. (Sps.

Vintola vs. Insular Bank of Asia and America, G.R. No. 73271, May 29, 1987)


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Q: Who is the owner of the articles subject of the TR?

A: The entrustee. A trust receipt has two features, the loan and security features. The

loan is brought about by the fact that the entruster financed the importation or purchase

of the goods under TR. Until and unless this loan is paid, the obligation to pay subsists.

If the entrustee is made to appear as the owner, it was but an artificial expedient, more

of legal fiction than fact, for if it were really so, it could dispose of the goods in any

manner that it wants, which it cannot do. To consider the entrustee as the true owner

from the inception of the transaction would be to disregard the loan feature thereof.

(Rosario Textile Mills Corp. v. Home Bankers Savings and Trust Company, G.R. No.

137232. June 29, 2005)

Q: What is the penal sanction if offender is a corporation?

A: The Trust Receipts Law recognizes the impossibility of imposing the penalty of

imprisonment on a corporation. Hence, if the entrustee is a corporation, the law makes

the officers or employees or other persons responsible for the offense liable to suffer the

penalty of imprisonment. The reason is obvious, corporations, partnerships,

associations and other juridical entities cannot be put to jail. Hence, the criminal liability

falls on the human agent responsible for the violation of the Trust Receipts Law. (Ong

vs. CA, G.R. No. 119858, April 29, 2003)

Q: In the event of default by the entrustee on his obligation under the trust receipt

agreement, is it absolutely necessary for the entruster to cancel the trust and take

possession of the goods to be able to enforce his right thereunder?

A: The law uses the word "may" in granting to the entruster the right to cancel the trust

and take possession of the goods. Consequently, the entrustee has the discretion to

avail of such right or seek any alternative action, such as a third party claim or a

separate civil action which it deems best to protect its right, at any time upon default or

failure of the entrustee to comply with any of the terms and conditions of the trust

agreement. (South City Homes, Inc. v. BA Finance Corporation, G.R. No. 135462, Dec.

7, 2001)

Q. What is the effect of novation of a trust agreement?


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A. Where the entruster and entrustee entered into an agreement which provides for

conditions incompatible with the trust receipt agreement, the obligation under the trust

receipt is extinguished. Hence, the breach in the subsequent agreement does not give

rise to a criminal liability under P.D. 115 but only civil liability. (Philippine Bank v. Ong,

G.R. No. 133176, Aug. 8, 2002)

Q: Can deposits in a savings account opened by the buyer subsequent to the TR

transaction be applied to outstanding obligations under the TR account?

A: No, the receipt of the bank of a sum of money without reference to the trust receipt

obligation does not obligate the bank to apply the money received against the trust

receipt obligation. Neither does compensation arise because compensation is not

proper when one of the debts consists in civil liability arising from criminal. (MetropolitanBank and Trust Co. v. Tonda, G.R. No. 134436, Aug. 16, 2000).

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