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BASIC PRINCIPLES OF LETTERS OF CREDIT

DOCTRINE OF INDEPENDENCE
The relationship of the buyer and the bank is separate and distinct from the
relationship of the buyer and seller in the main contract; the bank is not
required to investigate if the contract underlying the LC has been fulfilled or
not because in transactions involving LC, banks deal only with documents
and not goods (BPI v. De Reny Fabric Industries, Inc., L2481, Oct. 16,
1970). In effect, the buyer has no course of action against the issuing bank.
Effect of the buyers failure to procure an LC to the main contract.
The LC is independent from the contract of sale. Failure of the buyer to
open the Letter of Credit does not prevent the birth of the Sales Contract.
(Reliance Commodities, Inc. v. Daewoo Industrial Co. Ltd., G.R. No. 100831,
Dec. 17, 1993) The opening of the LC is only a mode of payment. The LC is
not an essential requisite to the contract of sale.
In a contract of loan secured by a standby LC, the partial payments made on
the loan cannot be added in computing the issuing banks liability under its
own standby letter of credit.
Although these payments could result in the reduction of the actual
amount, which, could ultimately be collected from the issuing bank, the
latters separate undertaking under its letters of credit remain. This is
because the letter of credit is an absolute and primary undertaking which is
separate and distinct from the contract underlying it. (Insular Bank of Asia &
America v. IAC, Nov. 17, 1988)

FRAUD EXCEPTION PRINCIPLE


The Fraud exception rule. It provides that the untruthfulness of a certificate
accompanying a demand for payment under a standby letter of credit may
qualify as fraud sufficient to support an injunction against payment.
(Transfield v. Luzon Hydro, G.R. No. 146717, Nov. 22, 2004)

DOCTRINE OF STRICT COMPLIANCE


The documents tendered by the seller/beneficiary must strictly conform to
the terms of the letter of credit. The tender of documents must include all
documents required by the letter. Thus, a correspondent bank which departs

from what has been stipulated under the LC acts on its own risk and may not
thereafter be able to recover from the buyer or the issuing bank, as the case
may be, the money thus paid to the beneficiary. (Feati Bank and Trust
Company v. CA, G.R. No. 940209, Apr. 30, 1991)