LETTERS OF CREDIT

Letter of Credit
- letter from one bank to address to another bank in another
country to request to pay to the bank or to a third party.

What to do in a Letter of Credit?

- to purchase from another country.
- to buy materials from another country which is unknown to
the buyer.

Seller
- afraid that the buyer will not pay.

Buyer
- afraid that the seller will not deliver.

Thus, there is a Letter of Credit to solve such fear.

Issuing Bank
- issues the Letter of Credit

A Letter of Credit is usually done by parties who do not know

each other.
Letter of Credit
- letter from one bank
- letter between the buyer and the issuing bank.

Issuing Bank
- also called Opening Bank.
- usually the bank of the buyer.
- undertakes to pay the seller upon receipt of the documents.

Letter of Credit
- a primary obligation not an accessory obligation.

Some companies have Standby Letter of Credit.

Issuing Bank
- notifies the seller’s bank through telex.
- in some cases, does not have any contact with other banks.
= there is Advising Bank, Confirming
Bank, etc.

Letter of Credit
- can be rediscounted because it is a commercial instrument.
= ibaligja in advance

If there is defect between the buyer and the seller,

- DOCTRINE OF INDEPENDENCE

DOCTRINE OF INDEPENDENCE
- the bank is not liable with any defect in the contract between
the buyer and the seller.
- the bank only deals with documents.

As long as the documents are complete, the bank is free from

liability.

If there is defect, go back to the remedies of a Contract of Sale.

 The bank is only required to examine the shipping documents.

It assumes prompt payment because it does not concern of

handling the goods.

Except:
- FRAUD EXCEPTION THEORY
- untruthfulness
- there is fraud

If the issuing bank finds out that the bill of lading is fraudulent, it
can stop payment on the grounds of fraud.

DOCTRINE OF STRICT COMPLIANCE

- because the Letter of Credit is a contract, the parties
should strictly comply to the contract.

Effect of Letter of Credit

- eliminates risk because there is an issuing bank.

Buyer There will be shipment.

Seller There will be payment because there is a

guarantee in the issuing bank.

ONLY Letters of Credit are applicable to commercial

transactions.
 Banks can get:
1. interest/commission
2. Banks have accounts with each other

• Banks can offer Letter of Credit for international transaction.

Relationships in a Letter of Credit

1. between the Buyer and the Seller
- Contract of Sale
2. between the Buyer and the Issuing Bank
- Letter of Credit
3. between the Issuing Bank and the Seller
- Letter of Credit (proper)

Essential Conditions for a Letter of Credit

• payable to a definite person; and
• has a fixed amount

Usually, payment is upon the receipt of the goods at the port.

If there is a breach of contract,

- you can stop the payment of the Letter of Credit in
junction.

If one of the parties does not comply,

- madaut ang ilang reputation because it involves
international trade.

If there is trust and confidence,

- no need of Letter of Credit
 GUARANTY AND SURETYSHIP

PURPOSE of Guaranty
- to secure the fulfillment of the principal obligation of the
debtor.

GUARANTY
- a contract whereby a person, called the guarantor, binds
himself to the creditor to fulfill the principal obligation of the
principal debtor.

For whose benefit?

- the Creditor

the Credit principal contract

Guaranty accessory contract

also a subsidiary contract

If the principal contract is null and void,

- the guaranty is also null and void.
= cancelled

The guarantor personally fulfills the obligation. Thus, Guaranty is

a personal contract.

SURETYSHIP
- a contract whereby the surety binds himself solidarily to fulfill
the obligation or to pay the debt.

Solidary Liability
- the creditor can go directly to the surety if the debtor does not
pay.
Guarantor only liable if the debtor cannot pay

Surety liable like a debtor

- the creditor may demand.

Generally, a guaranty is essentially gratuitous. It only becomes

onerous if stipulated.

The debtor may or may not know the guaranty contract.

Guaranty
- can actually insure the fulfillment of any obligation including
future obligation.

Guarantor
- is liable depend upon the amount that he guarantees.
- can guarantee for less of the principal obligation but not more.

QUALIFICATIONS TO BE A GUARANTOR
1. has integrity
2. has sufficient property
3. has a good credit standing

The creditor should know the guarantor to evaluate if the

guarantor has the integrity and the capacity.

When is the guarantor liable for the principal obligation of the debtor?
- after when he has exhausted the means of the debtor.

Principle of Exposure
- the creditor must exhaust first the properties of the
debtor.
 Except:
in Article 2059
= e.g.
• if he expressly allows or
binds himself
• insolvency of the debtor

Guarantor
- allowed to point out the debtor his property or in any way the
debtor can pay.
- can put against the creditor for non-exhaustion.
- can refuse the payment for failure to expose the debtor.

When the guarantor paid on time,

- the principal obligation is extinguished and the guaranty
is also extinguished.
- can ask the reimbursement to the debtor.

The guarantor can become the creditor.

- the guarantor is subrogated to the rights of the
creditor.

The debt of the debtor is secured, can the guarantor pay to obtain the
land?
- No!

Guarantor
- cannot pay for subrogation of the property.

When the guarantor paid in advance,

- the debtor is not obliged to pay until the maturity date.
If the debtor does not know the guarantor,
- the debtor already paid P5k and the guarantor paid P10k
= can only reimburse P5k, only
up to the extent of the debtor.

Debtor
- liable for the remaining amount.

If there are many guarantors,

- the obligation is divided/proportionate equally.

Creditor
- not obliged to collect from all of the guarantors.
- can collect full from any of them.

Guarantor
- can reimburse from other co-guarantors.

EXTINGUISHMENT
- when the guarantor fully pays the creditor.

The guaranty can be extinguished by one of the methods of

extinguishing an ordinary contract.

What if co-guarantor/s is/are released:

- without the consent of other guarantors?
= the liability is the same.

- with the consent of other guarantors?

= the liability will increase proportionately.

BONDS
Judicial Bonds
- the court will require bonds.

Bail Bondsman
- the person shall be liable to the court if in case not appears in court.
 PERSONAL PROPERTY SECURITY ACT
(RA 11057)

RA 11057
- Personal Property Security Act
- signed on August 17, 2018
- applies to all transactions of any form that secure an obligation
with movable collateral, except interests in aircrafts and ships.
- repealed the laws on conventional pledges and chattel mortgage
and replaced with a framework for secured transactions.

What are the OBJECTS of the PPSA?

-a security interest may be created over all forms of tangible or
intangible asset or personal property as defined by the Civil
Code.
e.g.
• Rights arising from contracts
• Equipment
• Inventory
• Intellectual Property
• Livestock

NOTE:
- A security interest can ONLY be created on the asset over
which the grantor has a legal right.

SECURITY INTEREST
- a property right in collateral that:
a. secures payment or other performance of an
obligation, regardless of whether the parties
have denominated it as a security interest,
and regardless of the type of asset, the status
of the grantor or secured creditor, or the
nature of the secured obligation
b. buyer of accounts receivable
c. lessor under an operating lease for not less
than one (1) year.
- the form of the collateral that would secure the payment of a
personal obligation.
 A security interest shall be created by a security agreement or
the lease of an operating lease for not less than 1 year. A security
agreement is likewise created by the sale of an account
receivable, unless otherwise stipulated by all the parties in the
document sale.

SECURITY AGREEMENT
- must be contained in a written contract signed by the
parties.
- may consist of one or more writings that, taken together,
establish the intent of the parties to create a security interest.

Who are the PARTIES in a Security Agreement?

1. the Grantor (may be the debtor or a third party)
2. the Secured Creditor

Grantor
- may be any of the following:
a. the person who grants a security interest in
collateral to secure its own obligation or that
of another person
b. a buyer or other transferee of a collateral
that acquires its right subject to a security
interest
c. a transferor in an outright transfer of an
accounts receivable
d. a lessee of goods

Secured Creditor
- a person that has a security interest.
- for the purposes of registration and priority only, it
includes a buyer of account receivable and a lessor of
goods under an operation lease for not less than one (1)
year.

GENERAL RULE:
- Security interest in personal property extend to its identifiable
or traceable proceeds and continues in collateral not withstanding any
sale, lease, license, exchange, or other disposition of the collateral.
When is a Security Interest EXTNIGUISHED?
- when all secured obligations have been discharged and there
are no outstanding commitments to extend credit secured by the
security interest.

PERFECTION OF A SECURITY INTEREST

A security interest may be perfected by:
1. Registration of a notice with the
Registry
2. Possession of the collateral by
the secured creditor
3. Control of investment property
and deposit account

Upon the disposition of a collateral, a security interest extends

to proceeds of the collateral and is continuously perfected if the
proceeds are in the form of money, accounts receivable,
negotiable instruments, or deposit account.

The priority of security interest and liens in the same collateral is

determined according to the time of registration of a notice or
perfection by other means regardless of the order of the
creation of the security interest.

The law enumerates the rules on the priority for purchase money
security interest
REGISTRY
- the centralized and nationalized electronic registry established
in the Land Registration Authority (LRA) where notice of a
security interest and a lien in personal property may be
registered.
- administered by the Land Registration Authority (LRA).

PURPOSE:
- shall provide electronic means for registration and
searching of notices.

NOTICE
- a statement of information that is registered in the Registry
relating to a security interest or lien.
- includes an initial notice, amendment notice, and termination
notice.

- shall be effective for the duration of the term indicated in the

notice, unless a continuation notice is registered before the term
lapses.

However,
- a notice may not be retrieved in a search of
the Registry against the correct identifier of
the grantor shall be ineffective with respect
to the grantor.

Any person who is entitled to receive a notification of disposition

is entitled to redeem the collateral by paying or otherwise
performing the secured obligation in full including all the
expenses and cost.

Secured Creditor
- may take possession of the collateral without judicial proceeds
if the security agreement so stipulated. Provided that possession
can be taken peacefully.
 REAL ESTATE MORTGAGE

REAL ESTATE MORTGAGE

- Real Mortgage/Mortgage
- a contract whereby the debtor secures to the creditor the
fulfillment of a principal obligation especially subjecting to such
security immovable property or real rights over immovable
property in case the principal obligation is not complied with.

Real Mortgage
- applicable only to the following property:
1. Immovable property
2. Alienable real rights in
accordance with the real
property

Real Mortgage
- a real contract because it needs delivery.
- an accessory contract because there has to be a principal
obligation.
- a subsidiary contract because it would depend upon a principal
contract.
- a unilateral contract because it created an obligation only the
part of the creditor who must free the property from
encumbrance over the obligation is fulfilled.

Mortgage
- an accessory contract.
= Consideration:
- the principal contract from
which it receives its life.
KINDS OF MORTGAGE
1. Voluntary Mortgage
- agreed upon between the parties.

2. Legal Mortgage
- required by law.
- to be executed in favor of a certain person.

3. Equitable Mortgage
- discussed in Sales Law
- one which, although lacks the formalities of a
mortgage, shows the intention of the parties to
make the property as a security of debt.

ESSENTIAL REQUISITES OF A MORTGAGE

- indispensable
- must valuably constituted
- should appear in a public document duly recorded in the
Registry of Deeds.

EFFECT OF A MORTGAGE
- it creates a real right.
= enforceable against the whole world.

Mortgage follows the property wherever it goes.

Mortgage
- merely an encumbrance.
- does not result to a transfer of ownership.

Any stipulation for bidding the Mortgagor to sell the property is

null and void.

Mortgage constituted on Immovable Property,

- not limited to the property itself but also extends to all its
accessions, improvements, growing fruits, rent, or income as well
as the proceeds of insurance should the property be destroyed or
should be expropriated by the government.
 Any stipulation for bidding the owner or the Mortgagor from
alienating the property shall be null and void.

However,
- If the Mortgagor alienates the property, the
transferee is bound to respect the encumbrance because
being a real right the property remains subject to the
fulfillment of the obligation for whose guarantee it was
constituted.

If the debt becomes due and the debtor/mortgagor cannot pay,

- the remedy of the Mortgagee is foreclosure.

FORECLOSURE
- a remedy available to the Mortgagee by
which he subject the mortgage property to the
satisfaction of the obligation to secure which the
mortgage was given.

Kinds of Foreclosure
1. Judicial Foreclosure
- discussed in Sales Law
- by bringing an action for such
purpose in court.

2. Extrajudicial Foreclosure
- when there is certain in the
mortgage, a clause given the
mortgagee the power upon
default of the debtor foreclose
the mortgage by extrajudicial
sale.

Because there is foreclosure, there is also the

right to redeem.
- the right to buy back the property.
RIGHT OF REDEMPTION
- right of the Mortgagee to redeem the mortgage property
within a certain period after it was sold for the satisfaction
of the mortgage debt.

If the Mortgagee cannot claim the possession of the mortgage property

nor can foreclose it,
- Remedy of Mortgagee
- to bring a civil action to recover possession as a
preliminary step to the sale or to obtain judicial
foreclosure.

If there is no redemption within the prescribed period,

- the purchaser becomes the absolute owner of the
property.

In foreclosure, when the Mortgagee foreclose the property,

- the bidding price usually will be equivalent to the
principal obligation and expenses.

If the Mortgagee chooses foreclosure, he cannot go against the

Mortgagor for any deficiency.