Letters of Credit power point presentation; negotiable instruments

8/12/2019 Letters of Credit power point presentation; negotiable instruments

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Letters of are those issued by

one merchant to another or for the

purpose of attending to acommercial transaction.


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A letter of credit is aninstrument by a bank in behalf of a customer

authorizing a beneficiary to draw a draft/s

which will be honored on presentation to the

bank if drawn in accordance with the terms

and conditions specified in the letter of

credit.


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Underlying Idea of a Letter of Credit Roughly at least 85% of importations are financed by letters

of credit.

The underlying idea of a letter of credit is to ensure certaintyof payment .

Seller is assured of payment because the bank intervenesand makes the commitment to pay.

It is like your credit card. You walk into a department storeand they sell to you on credit although youre a totalstranger because you show your credit card, which meansthat the bank which issued the credit card tells the sellerthat it will pay the goods being bought.


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1) The buyer who pro cures the letter of credit and

obliges himself to reimburse the issuing bank uponreceipt of the documents of title;

2) The bank issuing the letter of credit, which

undertakes to pay the seller upon receipt of thedraft and proper documents of titles and tosurrender the documents to the buyer uponreimbursement; and

3) The seller, who in compliance with the contract ofsale ships the goods to the buyer and delivers thedocuments of title and draft to the issuing bank torecover payment.


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How are the respective relationshipsof the parties governed?

Issuing bank and applicant/buyer/importer> Their relationship is governed by the terms of

the application and agreement for the issuance ofthe letter of credit by the bank.

Issuing bank and beneficiary/seller/exporter> Their relationship is governed by the terms of

the letter of credit issued by the bank.

Applicant and beneficiary> Their relationship is governed by the sales

contract.


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Governing Rules: Articles 567-572 of the Code of

Commerce

Uniform Customs on Documentary

Credits issued by the InternationalChamber of Commerce


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ESSENTIAL CONDITIONS OF A LETTEROF CREDIT

That it be issued in favor of a definite personand not to order; and

That it be limited to a fixed and specifiedamount, or to one or more undeterminedamounts, but within a maximum the limits ofwhich has to be stated exactly.


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When does a letter of credit become

void? A letter of credit becomes VOID if the bearer

of a letter of credit does not make use thereofwithin the period agreed upon with thedrawer, or, in default of a period fixed, within6 months, counted from its date, in any point

in the Philippines, and within 12 monthanywhere outside thereof, it shall be void infact and in law.


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INDEPENDENCE PRINCIPLE means that a bank in determining compliance with

the terms of a letter of credit is required to examineonly the shipping documents presented by the sellerand is precluded from determining whether the maincontract is actually accomplished or not

this arrangement assures the seller of promptpayment independent of any breach of the mainsales contract


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RULE OF STRICT COMPLIANCE

means that the documents tendered by the selleror beneficiary must strictly conform to the terms ofthe letter of credit,

i.e., they must include all documents required by theletter of credit

Thus, a correspondent bank which departs fromwhat has been stipulated under the letter of credit,as when it accepts a faulty tender, acts on its ownrisk and may not thereafter be able to recover fromthe buyer or the issuing bank, as the case may be,the money thus paid to the beneficiary.


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Common Types of Letters ofCredit

(1) Revocable

- can be cancelled or amended at any time before payment- it is intended to serve as a means of arranging payment but not as aguarantee of payment

(2) Irrevocable- obligates the issuing bank to honor drafts drawn in compliance with thecredit and- can be neither cancelled nor modified without the consent of allparties, including in particular the beneficiary/exporter

(3) Confirmed

- a letter of credit issued by one bank can be confirmed by another, inwhich case both banks are obligated to honor drafts drawn incompliance with the credit

(4) Unconfirmed- is the obligation only of the issuing bank


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Q: Why would an exporter want a foreignbanks letter of credit confirmed by a

domestic bank?A: One reason could be if he has doubts

about the foreign banks ability to pay. Such

doubts may arise if the exporter is unsure ofthe financial standing of the foreign bank, orif political or economic conditions in the

foreign country are unstable. An underlyingassumption is that a confirming bank isbetter able to judge the credibility of a bankissuing a letter of credit than is a merchant.


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(5) Revolving- is one that is valid for several transactions over a given period oftime such as a week or a month

- most are issued in revocable form

(6) Non-Revolving- is one that is valid for one transaction only

(7) Cumulative- in which case undrawn amounts carry over to future periods

(8) Non-Cumulative- in which case any amount not used by the beneficiary during thespecified period may not be drawn against in a later period


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(9) Standby- is a bank-issued option on a loan involving 3 parties:

a. the bank issuing the credit,b. the party requesting for such issuance(otherwise known as the account party) andc. the beneficiary

- the beneficiary has the right to trigger the loanoption ( referred to as taking down the loan ) ifthe account party fails to meet its commitment,in which case the issuing bank disburses aspecified sum to the beneficiary and books anequivalent loan to its customers


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Important Points: A basic principle in letters of credit is that the bank deals with

documents only .= Aside from certain conditions, the seller will be required to submitcertain documents together with the draft that he will draw inorder to collect.

= These documents shall be negotiated and agreed upon betweenthe buyer and the seller.

= Normally, the seller would have to submit together with the drafta bill of lading, packing list, commercial invoice.

= As banks deal with documents only, they are not qualified to dealwith goods. Theyre not competent to deal with a thousand andone types of goods. They will act on the basis of the documentsonly.


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BPI vs De Reny Fabrics Gr No. L-24821

October 16, 1970

FACTS: De Reny Fabrics imported dyes. It applied for a letter ofcredit for its payment with BPI. Upon submission of therequired documents by the seller, BPI paid the seller. Whenthe crates arrived, it was found that they did not containdyes, but chalk. De Reny Fabric thus refused to pay.

HELD: No! BPI as a bank deals with documents only. So long asthe seller submitted the documents required, the bank hasto pay, and the customer has to reimburse the bank. Thebank will not guarantee that the goods as delivered by theseller comply with the terms and conditions of thecontract.


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Fraud in letters of credit = Its possible to commit fraud because the seller can submit forged or falsedocuments.= To minimize the risk, the seller can be required to submit a certification by

a reputable surveyor who will say that he examined the goods and foundthem to be in accordance with the specifications.

Letters of credit are interpreted strictly = Example: Where a letter of credit was issued for the importation ofnoodles, and the invoice said woodle , the bank can refuse to pay, becausethe bank doesnt know. It might think that a woodle is some exotic foodcoming from Timbuktu.

Procedure when with discrepancy = Seller, to collect, will draw a bill of exchange, addressed to the bank whichissued the letter of credit. Then he will submit the documents required. Buttypographical errors can happen. When the bank receives the documents,the bank will now forward that to the buyer. In the cover letter, the bankwill state the discrepancies that they discovered, and will ask the buyer if heagrees to waive the discrepancy. If the buyer waives, bank will pay. If herefuses, bank will not pay.


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Cojack case Mrs. Cora Jacob made native bags. Buyer ordered

P3million worth of bags from her, to be sold to Hawaii.Buyer inspected the bags and found the qualityimpressive. Buyer applied for a letter of credit to pay,which stated that among the documents to besubmitted to collect was a commercial invoice issuedby Cojac , the name of Mrs. Jacobs business.However in the invoice, the buyer deliberatelymisspelled Cojac, by adding a k. So when Mrs. Jacobsubmitted the invoice, the bank refused to pay,

claiming discrepancy. The bank asked the buyer if it willwaive the discrepancy. The buyer refused. The bankdishonored the letter of credit. Later, the buyer offeredto pay only P1million to Mrs. Jacob.


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Red Clause This phrase means that the beneficiary can get payment in advance

although the goods being sold has not yet been delivered.

In the old days, the American companies would produce mink coats,so they would send their representatives to China to buy the skinsand fur from the hunters in the mountains. Since these hunters onlyaccepted cash, the manufacturers would apply for letters of credit,

where the beneficiaries would be their representatives who will buythe furs in the mountains. The letter of credit would allow thebeneficiary to collect the money in advance although he has not yetshipped the skin and the fur.

So why red ? Because in those days, the said clause was written in redink. This is common in sugar trading. An American company will buysugar here. Company will open a letter of credit with the trader asbeneficiary, who will in turn buy from the sugar central. If thebeneficiary fails to deliver the goods, thats just too bad. Buyer willhave to reimburse the bank.


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Evergreen Clause =This phrase means that the bank commits to continue renewing the

letter of credit.

So why evergreen ? Because its always fresh. For instance, a foreigncorporation not doing business in the Phils sues here asking for aprovisional remedy. The court required it to post a bond. Surety will

go, E teka muna, youre not doing business here! Supposing we payhuh, how will we get reimbursement from you?! Youre not here!We need security! Get a stand-by letter of credit! Bank will thenissue the letter of credit, telling the surety, Ok, if you submit acertification that you have been held liable, together with that draft,we will pay. Now its possible that the case drags on beyond the

expiration date of the letter of credit. Surety will then say, Bank,make an undertaking that you will keep renewing the letter of credituntil the case has been finally decided! The bank will then use anevergreen clause.


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Feati Bank vs. CA GR No. 94209 April 30, 1991

FACTS: The letter of credit was issued in California, and Feati Bank wasthe correspondent bank, so it was the one who received the telexand notified the seller about the letter of credit. Seller sued FeatiBank.

HELD: No! The notifying bank is not liable. It will only be jointly andseverally liable with the opening bank if it confirmed the letter ofcredit.

A letter of credit may be revocable or irrevocable.

= Usually the beneficiary insists that it should be an irrevocableletter of credit for certainty of payment.= If revocable, which is very very rare, the bank can revoke itanytime, without need of notifying the beneficiary.


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Phil. Virginia TobaccoAdministration Case

FACTS: Phil Tobaccco sold tobacco to someone, whopaid through a domestic letter of credit. Buyersued, and obtained a court order ordering the

bank not to pay the said beneficiary, and insteadturn over the proceeds to the buyer.

HELD: That order is void! It goes against theinherent nature of an irrevocable letter of credit.


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Revolving letter of credit is automatically renewed.= It may be revolving as to month, as when the bank every monthmakes available P50,000. It may also be revolving as to amount as

when the bank makes available P50,000, subject to renewal uponconsumption of the entire amount in a month. It may becumulative, as when you used up only P40,000 of the allotedP50,000 for the month, in the next month, another P50,000 shall beavailable, plus the amount which was not used up.

A letter of credit is a contract with a stipulation for the benefit of a 3 rd person. = It is a contract between the customer who applied for it and thebank which issued it for the benefit of the beneficiary of the letterof credit.

A letter of credit is a primary, absolute and unconditional obligation . = It is not an accessory obligation.


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Philamlife Case FACTS: A couple took a housing loan from Philamlife. Philamlife,

dissatisfied with the real estate mortgage executed by the spouses,required them to get a stand-by letter of credit. Insular Bank of Asiain America issued the letter of credit, agreeing to pay uponpresentment of Philamlife of a certification that the spouses haddefaulted on the loan. Philamlife later drew a draft and submittedthe certification. Insular Bank refused to pay the entire face amount

of the letter of credit, claiming that it was told by the spouses thatsome payments have been made. It thus insists that the saidpayments should be deducted from the amount due.

HELD: No! A letter of credit is not an accessory obligation. It issupposed to be independent of the underlying transaction whichgave rise to its issuance. Thats why the bank will have to pay even ifthere be a deficiency or defect in the goods. The couple thus wouldhave to reimburse the bank. Their remedy would be to run afterPhilamlife for reimbursement of overpayment. But meanwhile, theywould have to reimburse the bank.


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Bank of America vs. CA

FACTS: A Philippine company sold rope to a buyer in Thailand.To pay for it, the buyer applied for a letter of credit from abank in Thailand. The correspondent bank in RP was Bankof America and so it notified the seller here that a letter ofcredit had been opened in the Thai bank. The seller thus

drew a bill of exchange to collect, and then they indorsed itto Bank of America, which credited them the proceeds rightaway. But when the bill of exchange was presented, theThai Bank dishonored it, saying that the letter of credit isfake. Bank of America sued the beneficiary to recover.

HELD: Bank of America liable! Under negotiable instrumentslaw, the drawer warrants that the bill of exchange will bepaid.


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Marginal Deposits= In the old days, the marginal deposits were one ofthe tools used by the Central Bank to reduce thedemand for dollars.= For example, it was then required that for everyletter of credit, marginal deposit of say 30% must begiven to the bank. But now, banks do not requiremarginal deposits unless the financial standing of thecustomer is in bad shape.

Stipulation on Banks Lien on Applicants Property= Whenever you apply for any transaction in the bank,there is a usually a stipulation in the application givingthe bank the right of lien on money or property youown which it may have in its possession.


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PNB Case FACTS: Somebody applied for a letter of credit in the Phil.

National Bank, having the said stipulation in theappliaction. PNB has the right to set-off or demandreimbursement with any deposit. Later, the applicantassigned his time deposit to a 3 rd party. When theamount fell due, the question was who has a betterright to collect the money, assignee or PNB?

HELD: PNB! It had lien on the deposit. The assigneemerely stepped into the shoes of the assignor, and so itmust honor the lien.

Letters of Credit power point presentation; negotiable instruments

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