BASIC PRINCIPLES OF LETTERS OF CREDITDOCTRINE OF INDEPENDENCEThe
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 PRINCIPLEThe 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 COMPLIANCEThe 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)
