2015 BAR EXAMINATION
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
(Prudential Bank v.
Intermediate Appellate Court, 1992).
– 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).
Composite of three distinct contracts
– An L/C transaction involves three distinct but
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).
Second Contract between the buyer and the issuing bank. This contract is sometimes called
the "Application and Agreement" or the "Reimbursement Agreement".
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
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
contract with the bank
which is to issue the instrument and is represented by
—usually the buyer’s bank which issues the letter of credit
draft and proper documents of titles to surrender the
documents to the buyer