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Letters of Credit: Prudential Bank V IAC
Letters of Credit: Prudential Bank V IAC
Governed by Arts 567-572 of the Code of Commerce over the goods before paying.
4. Negotiating Bank – any bank in the place of the seller w/c In HSBC v National Steel A letter of credit generally arises out
buys or discounts the seller’s draft. Its liability depends on of a separate contract requiring the assurance of payment of a
the stage of negotiation. If BEFORE negotiation, such that third party. In a transaction involving a letter of credit, there are
it suggests its willingness to negotiate, it has no liability w/ usually three transactions and three parties. The first transaction,
respect to the seller. But if AFTER negotiation, a contractual which constitutes the underlying transaction in a letter of credit, is
relationship will then prevail between them. a contract of sale between the buyer and the seller. The contract
may require that the buyer obtain a letter of credit from a third
Essential Conditions of LC: (2) party acceptable to the seller. The obligations of the parties under
1. Issued in favor of determinate person not to order this contract are governed by our law on sales.
2. Limited to
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The second transaction is the issuance of a letter of credit between negotiating bank or a confirming bank depending on the nature of
the buyer and the issuing bank. The buyer requests the issuing the obligations assumed. 77 A notifying bank undertakes to inform
bank to issue a letter of credit naming the seller as the beneficiary. the seller-beneficiary that a letter of credit exists. It may also have
In this transaction, the issuing bank undertakes to pay the seller the duty of transmitting the letter of credit. As its obligation is
upon presentation of the documents identified in the letter of limited to this duty, it assumes no liability to pay under the letter
credit. The buyer, on the other hand, obliges himself or herself to of credit. 78 A negotiating bank, on the other hand, purchases
reimburse the issuing bank for the payment made. In addition, this drafts at a discount from the seller-beneficiary and presents them
transaction may also include a fee for the issuing bank's to the issuing bank for payment. 79 Prior to negotiation, a
services. 68 This transaction constitutes an obligation on the part negotiating bank has no obligation. A contractual relationship
of the issuing bank to perform a service in consideration of the between the negotiating bank and the seller-beneficiary arises
buyer's payment. The obligations of the parties and their remedies only after the negotiating bank purchases or discounts the
in cases of breach are governed by the letter of credit itself and by drafts. 80 Meanwhile, a confirming bank may honor the letter of
our general law on obligations, as our civil law finds suppletory credit issued by another bank or confirms that the letter of credit
application in commercial documents. 69 will be honored by the issuing bank. 81 A confirming bank
essentially insures that the credit will be paid in accordance with
The third transaction takes place between the seller and the
the terms of the letter of credit.82 It therefore assumes a direct
issuing bank. The issuing bank issues the letter of credit for the
obligation to the seller-beneficiary. 83
benefit of the seller. The seller may agree to ship the goods to the
buyer even before actual payment provided that the issuing bank
informs him or her that a letter of credit has been issued for his or Types of Letter Credit
her benefit. This means that the seller can draw drafts from the
issuing bank upon presentation of certain documents identified in
the letter of credit.
The relationship between the issuing bank and the seller is not
strictly contractual since there is no privity of contract nor meeting
of the minds between them. 70 It also does not constitute a
stipulation pour autrui in favor of the seller since the issuing bank
must honor the drafts drawn against the letter of credit regardless
of any defect in the underlying contract.71 Neither can it be
considered as an assignment by the buyer to the seller-beneficiary
as the buyer himself cannot draw on the letter. 72 From its
inception, only the seller can demand payment under the letter of
credit. It is also not a contract of suretyship or guaranty since it
involves primary liability in the event of default. 73
Nevertheless, while the relationship between the seller-
beneficiary and the issuing bank is not strictly contractual, strict
payment under the terms of a letter of credit is an enforceable
right.
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