MEMEBERS:

Mark Oliver Quitos

Nor Rashid D. Batugan
Rosa Lynne V. Almonte
Mamonie M. Natangcop
Charlotte Joanne P. Fortin
Jaber D. Talon
Rommel P. Abas

LETTERS OF CREDIT
DEFINITION:

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
therefore to the addressee.

A financial device 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 this goods before he is paid, and a buyer, who wants to have control of the
goods before paying.

PURPOSE

Letters of Credit were developed for the purpose of insuring to a seller payment of a
definite amount upon the presentation of documents and is thus a commitment by the issuer
that the party in whose favor it is issued. It is the engagement of the issuing bank to pay the
seller once the draft and other required shipping documents are presented to it. They are
definite undertakings to pay at sight once the documents stipulated therein are presented.

STANDBY CREDITS

Letters of Credit are NOT limited to the sale of goods. The use of credits in commercial
transactions serves to reduce the risk of nonpayment of the purchase price under the contract
for the sale of goods. However, credits are also used in the non-sale settings where they serve
to reduce the risk of nonperformance. Generally, credits in the non-sale settings have come to
be known as standby credits.
PARTIES TO A LETTER OF CREDIT

1. Buyer
2. Seller
3. Issuing Bank

IRREVOCABLE LOC vs CONFIRMED LETTERS OF CREDIT

In an irrevocable LOC, the issuing bank may not, without the consent of the beneficiary
and the applicant, revoke its undertaking under the letter. Whereas, in a confirmed LOC, the
correspondent bank gives as absolute assurance to the beneficiary that it will undertake the
issuing bank’s obligation as its own according to the terms and conditions of the credit.

TRANSACTIONS IN AN LOC

1. The first transaction which constitutes the underlying transaction in a Letter of Credit, is
the contract of sale between the buyer and the seller.

2. The second transaction is the issuance of a letter of credit between the buyer and the
issuing bank.

3. The third transaction takes place between the seller and the issuing bank.

INDEPENDENCE PRINCIPLE

The so-called “independence principle” assures the seller of the beneficiary of the
prompt payment independent of any breach of the main contract and precludes the issuing
bank from determining whether the main contract is actually accomplished or not.

Each of the three contracts above are independent of each other.

FRAUD EXCEPTION PRINCIPLE

The “fraud exception” exists when the beneficiary, for the purpose of drawing on the
credit, fraudulently presents to the confirming bank, documents that contain, expressly or by
implication, material representation of fact that to his knowledge are untrue.

This is an exception to the independence principle. In such case, the issuing bank may
refuse to pay such beneficiary, notwithstanding the independence principle. The issuing bank
will not be held liable to the seller
DOCTRIN OF STRICT COMPLIANCE

It is the doctrine that states that in commercial transactions involving letters of credit,
the documents tendered must strictly conform to the terms of the letter of credit.

The bank is not supposed to pay the seller if the documents submitted is not in
accordance with what was required in the letters of credit.

The tender of documents by the beneficiary (seller) must include all documents required
by the letter. A correspondent bank which departs from what has been stipulated under the
letter of credit, as when it accepts a faulty tender, acts on its own risk and it 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. Thus, the rule is strict compliance.

LETTER OF CREDIT VS GUARRANTEE

These two commercial devices share a common purpose. Both ensure against the
obligor’s non-performance. They function, however, in distinctly different ways.

The settlement of a dispute between the parties is NOT a pre-requisite for the release of
funds under a letter of credit.

Inn guarantee, upon the obligor’s default, the guarantor or the surety undertakes to
complete the obligor’s performance. Thus, the obligor must first default in his obligation.

In contracts of guarantee, the guarantor’s obligation is merely collateral and it arises

only upon the default of the person primarily liable. On the other hand, in an irrevocable letter
of credit, the bank undertakes a primary obligation. A letter of credit is defined as an
engagement by a bank of 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.
 TRUST RECEIPT

GOVERNING LAW
P.D. 115

DEFINITION

It is the written of printed document signed by the entrustee in favor of the entruster
containing terms and conditions substantially complying with the provisions of PD 115.

It is a written or printed document signed and delivered by the entrustee in favor of the
entruster, whereby the latter releases the goods, documents or instruments over which he
holds absolute title or a security interest to the possession of the former, upon the entrustee’s
promise to hold said goods in trust for the entruster, and to sell of otherwise dispose of the
goods, etc. with the obligation to turn over the proceeds thereof to the extent of what is owing
to the entruster; or return the goods if unsold.

PURPOSE

1. To encourage and promote the use of trust receipts as an additional and convenient aid
to commerce and trade.

2. To provide for the regulation of trust receipts transactions in order to assure the
protection of the rights and enforcement of obligations of the parties involved therein.

3. To declare the misuse or misappropriation of goods or proceeds realized from the sale of
goods, documents or instruments released under trust receipts as a criminal offense
punishable as estafa.

TRUST RECEIPT TRANSACTION

Is any transaction between the entruster and entrustee:

1. Whereby the entruster who owns or holds absolute title or security or interests over
certain specified goods, documents or instruments, releases the same to the possession
of entrustee upon the latter’s execution of a Trust Receipt Agreement.
 2. Wherein the entrustee binds himself to hold the designated goods in trust for the
entruster and, in case of default, to sell such goods, documents or instruments with the
obligation to turn over to the entruster the proceeds to the extent of the amount owing
to it or to turn over the goods, documents or instruments itself if not sold. (sec 4 of PD
115)

A trust receipt transaction is one where the entrustee has the obligation to deliver to the
entruster the price of the sale, or if the merchandise is not sold, to return the merchandise to
the entruster.

There are two obligations in a trust receipt transaction: the first refers to the money
received under the obligation involving the duty to turn it over to the owner of the merchandise
sold, while the second refers to the merchandise received under the obligation to “return” it to
the owner.

VIOLATIONS OF TRUST RECEIPT TRANSACTIONS

Failure of the entrustee to turn over the proceeds of the sale of the goods, cevered by
the trust receipt to the entruster or to return said goods if they were not disposed of in
accordance with the terms of the trust receipt shall be punishable as estafa under Article 315 of
the Revised Penal Code, without need of proving intent to defraud.

VIOLATIONS OF TRUST RECEIPT AGREEMENT BY A CORPORATION

Corporations cannot be charged with Estafa.

If the violation of offense is committed by a corporation, the penalty provided for under
the law shall be imposed upon the directors, officers, employees or other officials or persons
responsible for the offense, without prejudice to the civil liabilities arising from the criminal
offense.

PRINCIPAL PARTIES

1.) Entruster

The entruster is the one entitled to the proceeds from the sale of goods,
documents or instruments released under a trust receipt to the entrustee to the
extent of the amount owed to the entruster or as appears in the trust receipt; of
to the return of the goods, documents or instruments in case of non-sale; and to
the enforcement of all other rights conferred on him in the trust receipt,
provided these are not contrary to the provisions of the document.
 2.) Entrustee

An entrustee is one having or taking possession of goods, documents or

instruments under a trust receipt transaction, and any successor in interest of
such person for the purpose of payment specified in the trust receipt agreement

OWNER OF THE ARTICLES SUBJECT OF A TRUST RECEIPT

The entruster. A trust receipt has two features, the loan and security features. The loan
is brought about by the fact that the entruster financed the importation or purchase of the
goods under trust receipt.

Until and unless this loan is paid, the obligation to pay subsists. If the entrustee is made
to appear as the owner, it was but an artificial expedient, more of legal fiction than fact, for if it
were really so, it could dispose of the goods in any manner that it wants, which it cannot do. To
consider the entrustee as the true owner from the inception of the transaction would be to
disregard the loan feature thereof.

OBLIGATIONS OF THE ENTRUSTEE

1. To hold the goods, documents or insturments in trust for the entruster and shall dispose
of them strictly in accordance with the terms and conditions of the receipt;

2. To receive the proceeds in trust for the entruster and turn over the same fo the
entruster to the extent of the amount owed to the entruster or as appears in the trust
receipt;

3. To insure the goods for their total value against loss from fire, theft, pilferage or other
casualties;

4. To keep said goods or the proceeds therefrom whether in money or whatever form,
separate and capable of identification as property of entruster;

5. To return the goods, documents or instruments in the event of non-sale or upon

demand of the entruster; and

6. To observe all other terms and conditions of the trust receipt not contrary to the
provisions of P.D. 115.
LOAN AND SECURITY FEATURES OF A TRUST RECEIPT TRANSACTION

A trust receipt arrangement is endowed with its own distinctive features and
characteristics. Under that set-up, a bank extends a loan covered by the Letter of Credit, with
the trust receipt as a security for the loan. In other words, the transaction involves a loan
feature represented by the letter of credit, and a security feature which is in the covering trust
receipt.

A trust receipt, therefore is a security agreement, pursuant to which a bank acquires a

“security interest” in the foods. It secures an indebtedness and there can be no such thing as
security interest that secures no obligation.

EFFECT OF NOVATION IN A TRUST AGREEMENT

Where the entruster and entrustee entered into an agreement which provides for the
conditions incompatible with the trust receipt agreement, the obligation under the trust receipt
is extinguished. Hence, the breach in the subsequent agreement does not give rise to a criminal
liability under P.D. 115 but only civil liability.

CAN DEPOSITS IN SAVINGS ACCOUNT BE APPLIED TO OUTSTANDING OBLIGATIONS UNDER A

TRUST RECEIPT TRANSACTION

No, the receipt of the bank of a sum of money withour reference to the trust receipt
obligation does not oblige the bank to apply the money received against the trust receipt
obligation. Neither does compensation arise because compensation is not proper when one of
the debts consists in civil liability arising from a criminal offense.

LOAN VS TRUST RECEIPT

When both parties enter into an agreement knowing that the return of goods subject of
the trust receipt is not possible even without any fault on the part of the trustee, it is not a trust
receipt transaction penalized under Section 13 of P.D. 115; the only obligation actually agreed
upon by the parties would be the return of the proceeds of the sale transaction.

This transaction becomes a mere loan, where the borrower is obligated to pay the bank
the amount spent for the purchase of the goods.
 SUMMARY

 In LOCs, the Doctrine of Independence is an established principle.

 The Fraud Principle serves as an exception to the Doctrine of Independence.

 All requirements stated in the LOC must strictly be complied with.

 Breach of the terms of the TR by the entrustee may result to criminal liability for Estafa.

 If the violation of offense is committed by a corporation, the penalty shall be imposed

upon the directors, officers, employees or other officials or persons responsible for the
offense.

 When the TR agreement was signed but the parties know that the return of the goods
subject of the trust receipt is not possible even without any fault on the part of the
trustee, it is not a trust receipt transaction but a simple loan.