MERCANTILE LAW REVIEWER.docx - COVERAGE MERCANTILE LAW 2015...

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COVERAGE MERCANTILE LAW 2015 BAR EXAMINATION I. LETTERS OF CREDIT A. Definition and Nature of Letter of Credit Letters of credit (L/C) are those issued by one merchant to another, or for the purpose of attending to a commercial transaction. (Art. 567, Code of Commerce) A letter of credit is one whereby one person requests some other person to advance money or give credit to a third person, and promises that he will repay the same to the person making the advancement, or accept the bills drawn upon himself for the like amount. (Campos, Notes and Selected Cases on Negotiable Instruments Law) A written instrument whereby the writer requests or authorizes the addressee to pay money or deliver goods to a third person and assumes responsibility for payment of debt therefor to the addressee (Transfield Philippines v. Luzon Hydro, 2004). An engagement by a bank or other person made at the request of a customer that the issuer shall honor drafts or other demands of payment upon compliance with the conditions specified in the credit (Prudential Bank v. Intermediate Appellate Court, 1992). NATURE 1. Financial device – L/Cs are developed by merchants as a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying. (Bank of America, NT&SA v. Court of Appeals, 1993) A letter of credit is one of the modes of payment, set out in Sec. 8, Central Bank Circular No. 1389, "Consolidated Foreign Exchange Rules and Regulations," dated 13 April 1993, by which commercial banks sell foreign exchange to service payments for, e.g., commodity imports (Reliance Commodities v. Daewoo, 1993). 2. Composite of three distinct contracts – An L/C transaction involves three distinct but intertwined relationships: a) First Contract between the party applying for the L/C (buyer/importer/account party) and the party for whose benefit the L/C is issued (seller/exporter/beneficiary). b) Second Contract between the buyer and the issuing bank. This contract is sometimes called the "Application and Agreement" or the "Reimbursement Agreement". c) Third Contract between the issuing bank and the seller, in order to support the contract, under (a) above (Reliance Commodities v. Daewoo, 1993). B. Parties to a Letter of Credit Rights and Obligations of Parties 1. Buyer —procures the letter of credit and obliges himself to reimburse the issuing bank upon receipt of the documents of title. He is the one initiating the operation of the transaction as buyer of the merchandise and also of the credit instrument. His contract with the bank which is to issue the instrument and is represented by the Commercial Credit Agreement form which he signs, supported by the mutually made promises contained in the agreement 2. Opening bank —usually the buyer’s bank which issues the letter of credit and undertakes to pay the seller upon receipt of the draft and proper documents of titles to surrender the documents to the buyer upon reimbursement. As

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