Laws & Jurisprudence
BASIC PRINCIPLES OF LETTERS OF CREDIT
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DOCTRINE OF INDEPENDENCE
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.
Effect of the buyer’s failure to procure an LC to the main contract.
The LC 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 LC is only a mode of
payment. The LC is not an essential requisite to the contract of sale.
In a contract of loan secured by
a standby LC, the partial payments made on the loan cannot be added in
computing the issuing bank’s liability under its own standby letter of credit.
Although these payments could result in the reduction
of the actual amount, which, could ultimately be collected from the issuing
bank, the latter’s separate undertaking under its letters of credit remain.
This is because the letter of credit is an absolute and primary undertaking
which is separate and distinct from the contract underlying it. (Insular Bank
of Asia & America v. IAC, Nov. 17, 1988)
FRAUD EXCEPTION PRINCIPLE
The “Fraud exception rule.” It provides that the untruthfulness of a
certificate accompanying a demand for payment under a standby letter of credit
may qualify as fraud sufficient to support an injunction against payment.
(Transfield v. Luzon Hydro, G.R. No. 146717, Nov. 22, 2004)
DOCTRINE OF STRICT COMPLIANCE
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)
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