notes from weekday class

8/9/2019 NOTES From Weekday Class

1/12

Special Commercial Laws

Letters of Credit

Context: Security Transactions

Credit: an individual's ability to borrow money by virtue of thecondence or trust reposed by a lender that he will pay what he maypromise. (eople v. Concepcion! "#$$%

&enition and ature insurin) to a seller payment of a denite amount upon the

presentation of documents (&e Leon! $*"*% an instrument issued by one merchant to another! or for the

purpose of attendin) to a commercial transaction (Code ofCommerce! +rt. ,-%

+n ori)inal underta/in) by the issuer to substitute its nancial

stren)th for that of another (the applicant% with the underta/in) tobe conditioned on the presentation of a draft or demand forpayment (by the beneciary% (&olan! "##"%

0s this denition still relevant1 +rticles ,- to ,$ of the Code of Commerce on Letters of Credit

are obsolete. 2odern Letters of Credit are strictly ban/toban/transactions. (3illanueva%

+ letter of credit is... an instrumentissued by a ban/

that guaranteesits client's ability to pay for... )oods or services authorizingan individual or a rm to draw drafts on the ban/ or on

its correspondents for ban/'s account under certain conditions ofthe credit. (3illanueva%

Prudential Bank v. IAC (216 SCRA 257) + letter of credit is dened as an engagement by a bank or

other person made at the request of a customer that theissuer will honor drafts or other demands for payment uponcompliance with the conditions specied in the credit.Throu)h a letter of credit! the bank merely substitutes its own

promise to pay for one of its customers who in returnpromises to pay the bank the amount of funds mentioned inthe letter of credit plus credit or commitment fees mutuallya)reed upon.

Bank of America !. " SA v. CA (#.R. o. 1$5%&5' ecemer 1$' 1&&%) + letter of credit is a nancial device developed by merchants

as a convenient and relatively safe mode of dealing withsales of goods to satisfy the seemingly irreconcilableinterests of a seller, who refuses to part with his goodsbefore he is paid, and a buyer, who wants to have control of

the goods before paying. To brea/ the impasse! the buyer maybe re4uired to contract a ban/ to issue a letter of credit in favor ofthe seller so that! by virtue of the latter of credit! the issuin) ban/can authori5e the seller to draw drafts and en)a)e to pay themupon their presentment simultaneously with the tender ofdocuments re4uired by the letter of credit. The buyer and the sellera)ree on what documents are to be presented for payment! but


2/12

ordinarily they are documents of title evidencin) or attestin) to theshipment of the )oods to the buyer.

*+SS v. a,a- (#.R. o. 16$7%2' une 21' 2$$/) + letter of credit as an en)a)ement by a ban/ or other person made

at the re4uest of a customer that the issuer shall honor drafts orother demands of payment upon compliance with the conditionsspecied in the credit.

6inds of Letters of Credit

Commercial Standby

0nvolve the payment ofmoney under a contractof sale.

&oes not involve thepayment of money.

ayable upon thepresentation by thesellerbeneciary ofdocuments that show hehas ta/en a7rmativesteps to comply with thesales a)reement.

ayable upon certication ofa party8s non performanceof the a)reement. Thedocuments that accompanytend to show that theapplicant has notperformed.

&emonstrate that thebeneciary hasperformed his contract.

Certify that thebeneciary8s obli)or has notperformed the contract.

+n exporter sells )oods to a forei)n buyer who promises to pay within -*days.

+ contractor a)rees to complete a construction pro9ect within acertain timeframe. hen the deadline arrives! the pro9ect has notbeen completed.

!"#C$%L! &!"#C$%L!

- L;C that may berevo/ed ormodied for nayreason! at anytime by theissuin) ban/withoutnotication andcannot beconrmed.

2ay not be revo/ed oramended without thea)reement of the issuin)ban/! the conrmin)ban/ and the beneciary.

Conrmed 'and (nconrmed) Letters of Credit

hen a letter of credit is conrmed! another ban/ (presumably onethat the beneciary trusts% )uarantees that payment will be made.

Sight Letter of Credit ayment under a si)ht letter of credit occurs as soon as the

beneciary submits acceptable documents to the appropriate ban/.The ban/ has a few days to review the documents and ensure thatthey meet the re4uirements in the letter of credit. 0f the documents


3/12

are compliant! payment is made immediately.

Sta)es


4/12

The letter of credit is separate and distinct from the underlyin) orprincipal obli)ation.

The settlement of a dispute between the parties is not a prere4uisite for the release of funds. 0f a letter of credit is drawableonly after settlement of the dispute on the contract entered into by

the applicant and the beneciary! there would be no practicaland benecial use for letters of credit in commercialtransactions.

The independent nature of the letter of credit may be: (a%independence in toto where the credit is independent from the9ustication aspect and is a separate obli)ation from the underlyin)a)reement li/e for instance a typical standby@ or (b% independencemay be only as to the +ustication aspect li/e in a commercialletter of credit or repayment standby! which is identical with thesame obli)ations under the underlyin) a)reement.

0n both cases the payment may be en+oined if in the light of thepurpose of the credit the payment of the credit wouldconstitute fraudulent abuse of the credit.

Araud Bxception rinciple The untruthfulness of a certicate may 4ualify as fraud! su7cient to

support an in9unction a)ainst payment.

owever! in9unction should not be )ranted unless:"% There is clear proof of fraud

$% The fraud constitutes fraudulent abuse of the independent purpose of theletter of credit and not only fraud under the underlyin) obli)ation@ and

=% 0rreparable in9ury mi)ht follow if in9unction is not )ranted or the recoveryof dama)es would be seriously aDected.

artiesBank of America !. " SA v. CA(#.R. o. 1$5%&5' ecemer 1$' 1&&%)

There would at least be three (=% parties:

". Euyer (+pplicant%$. 0ssuin) ban/ (Euyer's Ean/%=. Seller (Eeneciary%

ow does it wor/1 2ost common in international transactions. Let's assume that inoy Company sells furniture in the hilippines

and 0taliano Company manufactures furniture in 0taly. inoyCompany wants to import F"**!*** worth of furnituremanufactured by 0taliano Company ! but 0taliano Company isconcerned about inoy Company's ability to pay for them.

ho applies for the letter of credit1inoy Company from 0t8s ban/! +EC Ean/. 0ndicatin) thatGinoy Company will ma/e )ood on the F"**!*** payment in the numberof days a)reed or +EC Ean/ will pay the bill itself.+EC Ean/ will then send the letter of credit to 0taliano Company which


5/12

then ships the furniture.

+fter shipment! 0taliano Company or 0taliano Company8s Ean/ will thenas/ for payment of its F"**!*** by

resentin) a written draft (also /nown as a bill of exchan)e% to H

+EC Ean/.ho is protected


6/12

to the beneciary the existence of the letter of credit.

e)otiatin) Ean/ H depends on the sta)e of ne)otiation. Eefore: noliability. +fter: contractual relation will exist.

Conrmin) Ean/ H direct obli)ation to the seller and its liability isprimary one as if the correspondent ban/ itself issued the letter ofcredit.

Letter of CreditTrust Ieceipt TransactionEan/ extends a loan covered by the letter of credit with trust receipt assecurity for the loan.The two are separate and involve diDerent underta/in)s and obli)ations.

*rust eceipts Law(.&. o. "",%

;ri)in of Trust Ieceipts The device rst came into )eneral use in importing transactions!

where )oods were consi)ned directly to a ban/ which paid a draftfor the price on the credit of the intended buyer who en)a)ed torepay the ban/8s advances

olicy ;b9ectives


7/12

obli)ation.

Aorm of TI Aormal Contract ritten or rinted

o other formality of execution or authentication shall be necessaryfor the validity of a TI.Contents

("% description of the )oods! documents or instruments($% the total invoice value of the )oods and the amount of the draft to

be paid by the entrustee@(=% an underta/in) or a commitment of the entrustee:

(a% to hold in trust for the entruster the )oods! documents orinstruments

(b% to dispose of them in the manner provided for in the trustreceipt

(c% to turn over the proceeds of the sale to the entruster to theextent of the amount owin) or as appears in the trust receipt or toreturn the )oods! documents or instruments in the event of theirnonsale within the period specied

arties

Iwants to buy in)redients and supplies for her new restaurant.Eut she doesn't have enou)h money as she is only startin).er friend T tells her: Kou can borrow money from the ban/MNIapplies for a letter of credit the ban/.The ban/ nance I8s purchases of supplies.

I receives the in)redients.I executes a Trust receipt in favor of the ban/.

ow does it wor/1

*rust eceipts Letters of Credit

ban/ releases the )oodsto the entrustee! whopromises to deliver theproceeds or return the

)oods to the ban/

ban/ substitutes its promiseto pay for the promise of acustomer who in turnpromises to pay the ban/

Concept of Trust Ieceipt Transaction a real security transaction where a person who owns or holds

absolute title or security interests over certain specied )oods!documents or instruments releases the same to the possession ofanother person who binds himself to hold the )oods etc in trust and


8/12


9/12

0t is not a chattel mort)a)e because: it does not re4uire the formalities set forth in the Chattel 2ort)a)e Law!

such as the a7davit and oath (Sec. %(=) and 5' cf. Sec. 5' Act 15$%

it does not have to be re)istered with the Ie)ister of &eeds (Sec. %(=)'cf. Sec. 1&' Admin. Code%

TI vs. Conditional Sale

0t is not a conditional sale per se because:

the entruster is not a seller as contemplated by law. e does not ta/e onthe obli)ations and warranties of a seller (Sec. ' cf. Art. 1/&5>151'Civil Code%

the transaction between the entruster and the entrustee is more a/in toa credit transaction than a sale.

TI vs. led)e

0t is not a pled)e because: the entrustee


10/12

conditionsreceive the proceeds in trustturn over the proceeds to enstrusterinsure the goods for their total value a)ainst re! theft! pilfera)e

or other casualties

keep the goods or proceeds separate and capable ofidentication as property of entrusterreturnin the event of nonsale or upon demandobserve all other terms and conditions of the TI

Iemedies +vailableBntrustee always bound to pay loan.

Sec. ! & "", expressly provides that entrustee shall be liable toentruster for any deciency.

o ;ption to +bandon Ooods to SetoD Loan

Bntrusteeborrower cannot be relieved of his obli)ation to pay theloan simply by abandonin) property with ban/.

enalty for Ereach of Bntrustee

Bntrustor may Aile Bstafa Char)es +)ainst Bntrustee+rt. =", Ievised enal Codeith unfaithfulness or abuse of condence! namely:P(b% Ey misappropriatin) or convertin)! to the pre9udice of another!money! )oods! or any other personal property received by the oDenderin trust or on commission! or for administration! or under any otherobli)ation involvin) the duty to ma/e delivery of or to return the same!even thou)h such obli)ation be totally or partially )uaranteed by abond@ or by denyin) havin) received such money! )oods! or otherproperty.

Prudential v. IAC+lthou)h it is true that the petitioner commenced a criminal action forthe violation of the Trust Ieceipts Law! no le)al obstacle prevented itfrom enforcin) the civil liability arisin) out of the trust receipt in aseparate civil action.

?nder Section "= of the Trust Ieceipts Law! the failure of an entrustee toturn over the proceeds of the sale of )oods! documents or instrumentscovered by a trust receipt to the extent of the amount owin) to theentruster or as appear in the trust receipt or to return said )oods!documents or instruments if they were not sold or disposed of in

accordance with the terms of the trust receipt shall constitute the crimeof estafa! punishable under the provisions of +rticle =",! para)raph "(b%of the Ievised enal Code. ?nder +rticle == of the Civil Code! a civilaction for dama)es! entirely separate and distinct from the criminalaction! may be brou)ht by the in9ured party in cases of defamation!fraud and physical in9uries. Bstafa falls underfraud.

Colinare v. CA and Peole


11/12

+ thorou)h examination of the facts obtainin) in the case at bar revealsthat the transaction intended by the parties was a simple loan! not atrust receipt a)reement .

The Trust Ieceipts Law does not see/ to enforce payment of the loan!

rather it punishes the dishonesty and abuse of condence in thehandlin) of money or )oods to the pre9udice of another re)ardless ofwhether the latter is the owner.

!iomico v. CA

The Court has repeatedly upheld the validity of the Trust Ieceipts Lawand consistently declared that the said law does not violate theconstitutional proscription a)ainst imprisonment for nonpayment ofdebts.& "", is a declaration by the le)islative authority that! as a matter of

public policy! the failure of a person to turn over the proceeds of the saleof )oods covered by a trust receipt or to return said )oods if not sold is apublic nuisance to be abated by the imposition of penal sanctions.

P0il. Bloomin4 v. CAThe entruster may cancel the trust and take possession of thegoods, documents or instruments subject of the trust or of theproceeds realized therefrom at any time upon default or failureof the entrustee to comply with any of the terms and conditionsof the trust receipt or any other agreement between theentruster and the entrustee,and the entruster in possession of the

)oods! documents or instruments may! on or after default! )ive notice tothe entrustee of the intention to sell! and may! not less than ve daysafter servin) or sendin) of such notice! sell the )oods! documents orinstruments at public or private sale! and the entruster may! at a publicsale! become a purchaser.

Thus! even thou)h TIE too/ possession of the )oods covered by thetrust receipts! E2 and Chin) remained liable for the entire amount ofthe loans covered by the trust receipts.

Sarmiento r. v. CA

The entruster8s complaint a)ainst entrustee was based on the failure ofthe latter to comply with their obli)ation as spelled out in the TrustIeceipt executed by them.

This breach of obli)ation is separate and distinct from any criminalliability for Nmisuse and


12/12

provided they are not contrary to law! morals or public order. 0n thecase at bar! there are specic amounts of interest! service char)es andpenalties a)reed upon by the parties.

Bxception to: emo at @uod on aet

+lthou)h the entrustee is not the owner of the )oods! anyone whoac4uires the )oods from the entrustee ac4uires )ood title over the)oods.

Bxception to: Re Perit omino

+lthou)h the entrustee is not the owner of the )oods covered by atrust receipt! should the )oods be lost while in his possession!

entrustee will bear the loss.

notes from weekday class

Documents