205629817 scl i letters of credit

8/18/2019 205629817 SCL I Letters of Credit

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SCL – I. Letters of Credit | 1

Letters of Credit (LC)

• any arrangement, however named or described, wherebya bank also known as the issuing bank, acting upon thereuest or instruction of another!applicant or customer"or on its own behalf, binds itself to#o $ay to the order of a % rd person known as bene&ciary

'(o )ccepts and pay any draft that may be drawn by the

bene&ciary, '(o )uthori*e another bank to#

$ay to the order of a %rd person known as thebene&ciary.

)ccept and pay any draft by the bene&ciary, '(

o )uthori*e another bank to negotiate against thestipulated documents.

Note# +his is the internationally accepted de&nition of a LC asprovided in the niform Customs and $ractices for-ocumentary Credit !C$-C".

• e are bound by the C$-C issued by the InternationalChamber of Commerce. Sec. / of the Code of Commercestates that in the absence of any particular provision inthe code of Commerce, commercial transactions shall begoverned by the usages and customs generally observed!0$I vs. 1ery".

• In e2ect, are absolute undertakings to pay the moneyadvanced or the amount for which credit is given on thefaith of the instrument. +hey are primary obligations andnot accessory contracts, and while they are securityarrangements, they are not converted thereby intocontracts of guaranty !3SS v. -away"

• Purpose# to insure to a seller payment of a de&nite uponpresentation of documents !$rudential 0ank v. I)C, 4(.1o. 56778, -ec. 7, 9::/"

• Essential conditions !absence of any makes theinstrument merely as a letter of recommendation"#o Issued in favour of a de&nite person !and not to

order" +he C$-C allows LC to be payable

to ordero Limited to a &;ed or speci&ed amount, or to one or

more amounts, but with a ma;imum stated limit !)rt.


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SCL – I. Letters of Credit |

Note# +he number of parties may be increased.

• 3odern LCs are usually not made between naturalpersons but involve bank>to>bank transactions.

Rights and obligations of the parties

(ights 'bligations0uyerG

applicantG

importer

)cuires thedocuments of title

and control over

goods

•

$urchases the goods• $rocures the LC

• (eimburses the I0

upon receipt of

document of title

Issuing or

opening

bank

(eceives

reimbursement from

0

SellerG

e;porterG

bene&ciary

Corresponde

nt or

advising

bank

Note: an LC does not arise only because of sale orimportation – see Standby LC

%tages of a LC transation:

9. Contract of sale between buyer and seller/. )pplication for LC by buyer with the bank%. Issuance of LC by the bank6. Shipment of goods by the seller


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SCL – I. Letters of Credit | ,

• Note: $ursuant to the Independent principle, irreparableinJury might follow if inJunction is not granted or therecovery of damages would be seriously damaged!+rans&eld $hil. v. Lu*on Mydro Corp."

otrine of %trit Co!pliane

• +he document tendered by the seller must strictlyconform to the terms of the LC.o +he correspondent bank which departs from what

has been stipulated in the LC !e.g. when it accepts afaulty tender" acts on his own risk and may notthereafter recover from the buyer or issuing bank,the money paid to the bene&ciary

o +he documents presented must comply with thosestipulated !in a LC, the banks only deals withdocuments and not with the goods"

Q: Can breach of contract be invoked against issuing bank?

A: 1'@ independence principle

Additional Notes:

%tand#y Letter of Credit (%LC) - it is a bank issued optionon loan involving % parties# the bank issuing the credit, theparty reuesting for such issuance !otherwise known as theaccount party" and the bene&ciary.

nder the terms of a SLC, the bene&ciary has the rightto trigger the loan option !referred to as +)NI14 -'1 +MBL')1" if the account party fails to meet its commitment, inwGc case the issuing bank disburses a speci&ed sum to thebene&ciary and books an euivalent loan to its customer.

SLCFs may support non>&nancial obligations such asthose of bidders, or &nancial obligations such as those of borrowers. In the latter case, the borrower purchases an SLCand names the lender as bene&ciary. Should the borrower

default, the bene&ciary has the right to take down the SLCand receive the principal balance from the issuing bank. +heborrowerFs loan obligation is then passed to the bank.

Q: hen the 1otifying 0ank !10" may be held liable#A: hen >9. It did not notify the seller of the opening of the LC, or/. It did not determine the apparent authenticity of the

reuired documents

Note: 'nly the )$$)(B1+ )+MB1+ICI+A is to bedetermined. +he 10 does not warrant the authenticity of theLC but only its apparent authenticity. So if the LC turns out tobe spurious, 10 is not liable for damages unless obvious thatit is not authentic.

+herefore, 1otifying 0ankG)dvising 0ank is liable if it actsbeyond the scope of its authority.

Q: hen may the )dvising 0ank !)0" be eually liable withthe Issuing 0ank !I0"?A: 'rdinarily, an )0, whose obligation is merely to advise thesellerGbene&ciary of the opening of a LC has no liability. +heopening of a LC does not make the I0 liable at once becausethere is no liability. +he liability is conditioned and dependenton the tender or submission of the documents stipulated uponby the parties. If the bene&ciary reuires that the obligationof the I0 shall also be made the obligation of the )0 to him,there is what is known as a C'1I(3B- C'33B(CI)L C(B-I+and the )0 shall become a Con&rming 0ank. In this situation,the liability of the C0 is primary and it is as if the credit were

issued by the I0 and the C0 Jointly, thus giving the bene&ciaryor holder for value of the drafts drawn under the credit, theright to proceed against either or both banks, the moment thecredit instrument has been breached. +he C0 is liable only when the documents aresubmitted and gets reimbursed by the I0 because there is noprivity of contract with the applicant. +hus, an )0 becomes a C0 when the above mentionedconditions occur. In such a case, the C0 acuires the sameliabilities as the Issuing 0ank and is bound by the sameconditions as an I0.

*untion of a Negotiating Ban$ (NB):It accepts or gives value to the draft and wGc later on

sells the draft to the I0. +he I0 then reimburses the 10. hahappens is that the 10 buys the draft at a discounted priceand then sells it to the I0 for its face value.

Q: If LC is disowned by the I0, can the 1egotiating 0ank askreimbursement from the seller? nder what principle?A: ABS. Seller is a drawer of the draft accepted and paid bythe 1egotiating 0ank. +herefore, the seller has contingenliability on such draft.

Q: Can a Con&rming 0ank become a 1otifying 0ank?A: 1BOB(, because they have di2erent liabilities. +he C0Fsliability is primary while the 10Fs liability comes only after

negotiation !0efore negotiation, there is no liability".• It is the application for the opening of a LC wGc

governs the relationship between the buyer and theI0. +his implies that the buyerGapplicant is noconcerned wG the terms of the LC between the I0 andthe sellerGbene&ciary.

• )s to the I0, it is not a guarantor because its liabilityis not subsidiary since the condition of thesubmission of the document is determinative of theliability not the nonpayment of the buyer.

• +he I0 opens a LC for a consideration wGc comes inthe form of a commission.

If t.e "B does not advane t.e pay!ent in favor of t.eseller/#ene'iary !ay t.e #uyer/appliant reover t.eo!!ission paid0

1o 3ore because this is the consideration. 0ut he mayrecover the margin fee.

.at a!ong ot.er t.ings s.ould #e stipulated upont.e appliation for a LC0

+he documents wGc the seller should submit to the I0.

In LC transactions, the I0 deals only wG the documents, not wGgoods. +he I0 is not bound or reuired to e;amine the goods.or as long as the reuired documents are submitted by theseller, the I0 pays the seller.

"f t.e goods turned out to #e defetive is t.is a validdefense to avoid pay!ent #y t.e "B to t.e seller01'. )s long as the documents submitted by the seller arecomplete and in conformity wG what the LC reuires, the I0 is

bound to pay the seller. +his is true even if the goods turnedout to be defective.

2ow a#out t.e #uyer is .e still #ound to rei!#urse t.e"B despite t.e defetive goods reeived #y .i!0

ABS. +he buyer has no course of action against the I0. +hebuyer has a C') against the seller.

"f t.e dou!ents su#!itted #y t.e seller areino!plete and t.e "B still pays t.e seller is t.e #uyerstill #ound to pay t.e "B01'. 0ecause the I0 should not have paid the seller knowingthe documents to be incomplete. +he I0 deals only wdocuments.


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SCL – I. Letters of Credit | 3

Can t.e #ene'iary de!and pay!ent for! t.e CB0 ABS. Since the C0 is eually liable wG the I0.If the bene&ciary proceeds against the C0, the C0 may askreimbursement from the I0. 0ut if the bene&ciary proceedsdirectly against the C0= it has no right to collect from the I0.

+he bene&ciary may compel the C0 to accept drafts it hasdrawn.

2ow is pay!ent !ade #y t.e "ssuing Ban$0$ayment by the I0 is done through#

. -irect payment or wire transfer or credit in theaccount of the bene&ciary

. -rawing of a draft by the bene&ciary against the I0 –pay to my order

. I0 may authori*e the Con&rming 0ank to pay

. )uthori*e Correspondent 0ank to accept and pay anydraft drawn

. )uthori*e the negotiation of any draft drawn by thebene&ciary.

Note: If the drawee doesnFt pay, go to the drawer who issecondarily liable.

Apart for! t.e #ill of lading w.at additionaldou!ents !ay #e needed as a ondition of t.e LC for

.onoring a draft0

. Co!!erial invoie – it is a document signed andissued by the seller and contains a precise description of themerchandise and the terms of the sale such as unit prices,amount due form the buyer and shipping conditions related tocharges such as '0 !ree on 0oard", )S !ree )longside", Cand !Cost and reight" or CI !Cost, Insurance, reight".

/. Consular invoie – document issued by theconsulate of the importing country to provide customsinformation and statistics for that country and to help preventfalse declaration of value.

%. Certi'ate of analysis – may be reuired toascertain that certain speci&cations of weight, puritysanitation, etc., have been met. +hese speci&cations may bereuired by health or other oKcials of the importing countryor they may be insisted by the importer as assurance that it isreceiving what it ordered.

6. +&port delaration – it is a document prepared bythe e;porter to assist the government to prepare e;porstatistics.

Note: -ocuments to be passed are not unilaterallydetermined by the bank but agreed upon by the buyer andseller.

ou!ent of 4itle !0ill of Lading" – given to the seller uponshipment of goods. +his is to be given to the I0 to be able fothe seller to get payment.

"s t.ere a s.e!e w.ere t.e "B !ay release t.e

dou!ents of title to t.e #uyer w/o #eing rei!#ursed'rst #y t.e #uyer0 ABS. 0y the I0 letting the buyer e;ecute a trust receipt.

ailure of the buyer to open the Letter of Contract does notprevent the birth of the Sales Contract.

+he opening of the letter of credit is only a mode of payment +he letter of the credit is not an essential reuisite to thecontract of sale.

205629817 scl i letters of credit

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