LETTER OF CREDIT BAR Q AND A 1990-2017

Letter of Credit: Mortgage (2005)

Ricardo mortgaged his fishpond to AC Bank to secure a P1 Million loan. In a separate transaction, he opened a letter
of credit with the same bank for $500,000.00 in favor of HS Bank, a foreign bank, to purchase outboard motors.
Likewise, Ricardo executed a Surety Agreement in favor of AC Bank. The outboard motors arrived and were delivered
to
Ricardo, but he was not able to pay the purchase price thereof.

a) Can AC Bank take possession of the outboard motors? Why?

SUGGESTED ANSWER:
a) No, for AC Bank has no legal standing, much less a lien, on the outboard motors. Insofar as AC Bank is
concerned, it has privity with the person of Ricardo under the Surety Agreement, and a lien on the fishpond
based on the real estate mortgage constituted therein.
b) If what Ricardo executed is a trust receipt, AC Bank can take possession of the outboard motors so that it can
exercise its lien and sell them. If what Ricardo executed is a Surety Agreement, AC Bank cannot take
possession of the outboard motors, because it has no lien on them.

b) Can AC Bank also foreclose the mortgage over the fishpond? Explain. (5%)

SUGGESTED ANSWER:
b) Yes, but only to enforce payment of the principal loan of P1million secured by the real estate mortgage on the
fishpond.

Letter of Credit; Certification from Consignee (1993)

BV agreed to sell to AC, a Ship and Merchandise Broker, 2,500 cubic meters of logs at $27 per cubic meter FOB.
After inspecting the logs, CD issued a purchase order. On the arrangements made upon instruction of the consignee,
H&T Corporation of LA, California, the SP Bank of LA issued an irrevocable letter of credit available at sight in favor of
BV for the total purchase price of the logs. The letter of credit was mailed to FE Bank with the instruction ―to forward
it to the beneficiary. The letter of credit provided that the draft to be drawn is on SP Bank and that it be accompanied
by, among other things, a certification from AC, stating that the logs have been approved prior shipment in accordance
with the terms and conditions of the purchase order.

Before loading on the vessel chartered by AC, the logs were inspected by custom inspectors and representatives of
the Bureau of Forestry, who certified to the good condition and exportability of the logs. After the loading was
completed, the Chief Mate of the vessel issued a mate receipt of the cargo which stated that the logs are in good
condition. However, AC refused to issue the required certification in the letter of credit. Because of the absence of
certification, FE Bank refused to advance payment on the letter of credit.

1) May Fe Bank be held liable under the letter of credit? Explain.

SUGGESTED ANSWER:
1) No. The letter of credit provides as a condition a certification of AC. Without such certification, there is no
obligation on the part of FE Bank to advance payment of the letter of credit. (Feati Bank v CA 196 S 576)

FE Bank cannot be held liable under the letter of credit since the certificate is not issued by BV. It is a settled
rule in commercial transactions involving letters of credit that the documents tendered must strictly conform to
the terms of the letter 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 risks 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
of strict compliance. (Feati Bank and Trust Company v. CA, supra).

2) Under the facts above, the seller, BV, argued that FE Bank, by accepting the obligation to notify him that the
irrevocable letter of credit has been transmitted to it on his behalf, has confirmed the letter of credit. Consequently,
FE Bank is liable under the letter of credit. Is the argument tenable? Explain.

SUGGESTED ANSWER:
2) No. FE Bank may have confirmed the letter of credit when it notified BV, that an irrevocable letter of credit has
been transmitted to it on its behalf. But the conditions in the letter of credit must first be complied with, namely
that the draft be accompanied by a certification from AC. Further, confirmation of a letter of credit must be
expressed. (Feati Bank v CA 196 s 576)
 The argument made by BV is untenable. The FE Bank in this case is only a notifying bank and not a
confirming bank. It is tasked only to notify and/or transmit the required documents and its obligation ends
there. It is not privy to the contract between the parties, its relationship is only with that of the issuing bank and
not with the beneficiary to whom he assumes no liability.

Letters of Credit; Three Distinct Contract Relationships (2002)

Explain the three (3) distinct but intertwined contract relationships that are indispensable in a letter of credit
transaction.

SUGGESTED ANSWER:
The three (3) distinct but intertwined contract relationships that are indispensable in a letter of credit transaction are:

1. Between the applicant/buyer/importer and the beneficiary/seller/exporter – The applicant/buyer/importer is the

one who procures the letter of credit and obliges himself to reimburse the issuing bank upon receipt of the
documents of title, while the beneficiary/seller/exporter is the one who in compliance with the contract of sale
ships the goods to the buyer and delivers the documents of title and draft to the issuing bank to recover
payment for the goods. Their relationship is governed by the contract of sale.

2. Between the issuing bank and the beneficiary/seller/exporter – The issuing bank is the one that issues the
letter of credit and undertakes to pay the seller upon receipt of the draft and proper documents of title and To
surrender the documents to the buyer upon reimbursement. Their relationship is governed by the terms of the
letter of credit issued by the bank.

3. Between the issuing bank and the applicant/buyer/importer – Their relationship is governed by the terms of
the application and agreement for the issuance of the letter of credit by the bank.

Independence Principle (2010)

No.XVII. The Supreme Court has held that fraud is an exception to the ―independence principle governing letters of
credit. Explain this principle and give an example of how fraud can be an exception. (3%)

SUGGESTED ANSWER:
The “independence principle” posits that the obligations of the parties to a letter of credit are independent of the
obligations of the parties to the underlying transaction. Thus, the beneficiary of the letter of credit, which is able to
comply with the documentary requirements under the letter of credit, must be paid by the issuing or confirming bank,
notwithstanding the existence of a dispute between the parties to the underlying transaction, say a contract of sale of
goods where the buyer is not satisfied with the quality of the goods delivered by the seller. The Supreme Court in
Transfield Philippines, Inc. v. Luzon Hydro Corporation, 443 SCRA 307 (2004) for the first time declared that fraud is
an exception to the independence principle. For instance, if the beneficiary fraudulently presents to the issuing or
confirming bank documents that contain material facts that, to his knowledge, are untrue, then payment under the
letter of credit may be prevented through a court injunction.

Letter of Credit (2012)

No.I. ABC Company filed a Petition for Rehabilitation with the Court. An Order was issued by the Court,
(1) staying enforcement of all claims, whether money or otherwise against ABC Company, its guarantors and sureties
not solidarily liable with the company; and
(2) prohibiting ABC Company from making payments of its liabilities, outstanding as of the date of the filing of the
Petition.

XYC Company is a holder of an irrevocable Standby Letter of Credit which was previously procured by ABC Company
in favor of XYC Company to secure performance of certain obligations. In the light of the Order issued by the Court.

a. In the light of the Order issued by the Court, can XYC Company still be able to draw on their Irrevovable Standby
Letter of Credit when due? Explain your answer. (2012 Bar)

SUGGESTED ANSWER:
XYC Company, the beneficiary of the standby letter of credit, can draw on the letter of credit despite filing of petition
for corporate rehabilitation. The liability of the bank that issued the letter of credit is primary and solidary. Being
solidary, the claims against them can be pursued separately from and independently of the rehabilitation case (MWSS
v. Daway, supra).

b. Explain the nature of Letters of Credit as a financial devise. (5%)

SUGGESTED ANSWER:
A letter of credit is 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 his goods before he
is paid, and a buyer, who wants to have control of the goods before paying.
To break the impasse, the buyer may be required to contract a bank to issue a letter of credit in favor of the seller so
that, by virtue of the letter of credit, the issuing bank can authorize the seller to draw drafts and engage to pay them
upon their presentment simultaneously with the tender of documents required by the letter of credit. The buyer and the
seller agree on what documents are to be presented for payment, but ordinarily they are documents of title evidencing
or attesting to the shipment of the goods to the buyer.

Once the credit is established, the seller ships the goods to the buyer and in the process secures the required
shipping documents or documents of title. To get paid, the seller executes a draft and present it together with the
required documents to the issuing bank. The issuing bank redeems draft and pays cash to the seller if it finds that the
documents submitted by the seller conform with what the letter of credit requires. The bank then obtains possession of
the documents upon paying the seller.

The transaction is completed when the buyer reimburses the issuing bank and acquires the documents entitling him to
the goods. Under this arrangement, the seller gets paid only if he delivers the documents of title over the goods, while
the buyer acquires the said documents and control over the goods only after reimbursing the bank. (Bank of America
NT & SA v. CA, et al., G.R. No. 105395, December 10, 1993)

However, letters of credit are also used in non-sale settings where they serve to reduce the risk of non-performance.
Generally, letters of credit in non-sale settings have come to be known as standby letters of credit. (Transfield
Philippines, Inc. v. Luzon Hydro Corporation, et al., G.R. No. 146717, November 22, 2004)

Letters of Credit; Liability of a confirming and notifying bank (1994)

In letters of credit in banking transactions, distinguish the liability of a confirming bank from a notifying bank.

SUGGESTED ANSWER:
In case anything wrong happens to the letter of credit, a confirming bank incurs liability for the amount of the letter of
credit, while a notifying bank does not incur any liability.

Letters of Credit; Liability of a Notifying Bank (2003)

a) What liability, if any is incurred by an advising or notifying bank in a letter of credit transaction?

SUGGESTED ANSWER:
It incurs no liability unless it is also the negotiating bank.

Letter of Credit; Liabilities of a Confirming and Notifying Bank (2008)

No.I. X Corporation entered into a contract with PT Construction Corp. for the latter to construct and build a sugar mill
with six (6) months. They agreed that in case of delay, PT Construction Corp. will pay X Corporation P100, 000 for
every day of delay. To ensure payment of the agreed amount of damages, PT Construction Corp. secured from
Atlantic Bank a confirmed and irrevocable letter of credit which was accepted by X Corporation in due time. One week
before the expiration of the six (6) month period, PT Construction Corp. requested for an extension of time to deliver
claiming that the delay was due to the fault of X Corporation. A controversy as to the cause of the delay which
involved the workmanship of the building ensued. The controversy remained unresolved. Despite the controversy, X
Corporation presented a claim against Atlantic Bank by executing a draft against the letter of credit.

(A) Can Atlantic Bank refuse payment due to the unresolved controversy? Explain. (3%)

SUGGESTED ANSWER:
No, Atlantic Bank cannot refuse payment to the unresolved controversy between the two companies. The Bank is
solidarily liable to pay based on the terms and conditions of the Letter of Credit. In FEATI Bank v. Court of Appeals,
G.R. No.94209, 30 April 1991, the Court held that an irrevocable letter of credit is independent of the contract between
the buyer-applicant and the seller-beneficiary.

Atlantic Bank cannot refuse to pay X Corporation. This is because of the Doctrine of Independence which provides
that the obligation of the issuing bank to pay the beneficiary does not depend on the fulfillment or non-fulfillment of the
contract supporting the letter of credit. The only instance where Atlantic Bank can refuse payment is when X
Corporation was not able to strictly comply with the letter of credit.

(B) Can X Corporation claim directly from PT Construction Corp.? Explain. (3%)

SUGGESTED ANSWER:

Yes, X Corporation can claim directly from PT Construction Corp. The irrevocable letter of credit was merely a security
arrangement that did not replace the main contract between the two companies. In FEATI Bank c. CA, G.R. No.
94209, 30 April 1991, opening a letter of credit does not involve a specific appropriation of money in favor of the
beneficiary. It only signifies that the beneficiary may draw funds up to the designated amount. It does not mean that a
particular sum of money has been specifically reserved of held in trust.

A letter of credit by itself does not come into operation without a contract supporting it. It is not a contract that can
stand on its own, it needs a supporting contract. It is merely an alternative course and does not in any way prevent the
beneficiary from directly claiming from the applicant (Transfield Philippines, Inc. v. Luzon Hydro Corporation, supra)

IRREVOCABLE LETTER OF CREDIT (2003)

b) Bravo Bank received from Cisco Bank by registered mail an irrevocable letter of credit issued by
Delta Bank for the account of Y Company in the amount of US$10,000,000 to cover the sale of canned fruit juices.
The beneficiary of the letter of credit was X Corporation which later on partially availed itself of the letter of credit by
submitting to Bravo Bank all documents relative to the shipment of the cans of fruit juices. Bravo Bank paid X
Corporation for its partial availment. Later, however, it refused further availment because of suspicions of fraud being
practiced upon it and, instead, sued X Corporation to recover what it had paid the latter.

How would you rule if you were the judge to decide the controversy? (6%)

SUGGESTED ANSWER:
An irrevocable letter of credit is granted by a bank which authorizes a creditor in a foreign country to draw upon a
debtor of another and to negotiate the draft through the agent or correspondent bank or any bank in the country of the
creditor (Belman Inc. v. Central Bank, G.R. No. L-10195, November 29, 1958)

An irrevocable letter of credit becomes a consummated contract when the agent or correspondent bank or any bank in
the country of the creditor pays or delivers to the latter the amount in foreign currency, as authorized by the bank in
the country of the debtor in compliance with the letter of credit granted by it. It is the date of the payment of the
amount in foreign currency to the creditor in his country by the agent or correspondent bank of the bank in the country
of the debtor that turns from executory to executed or consummated contract. It is not the date of payment by the
debtor to the bank in his country of the amount of foreign exchange sold that makes the contract executed or
consummated, because the bank may grant the debtor extension of time to pay such debt. (Belman Inc. v. Central
Bank, supra.)

Courts cannot order the release to the applicant of the proceeds of an Irrevocable Letter of Credit without the consent
of the Beneficiary. Such order violates the irrevocable nature of the L/C. The terms of an irrevocable letter of credit
cannot be changed without the consent of the parties, particularly the beneficiary thereof (Phil. Virginia Tobacco
Administration v. De Los Angeles, G.R. No. L-27829, August 19, 1988).

2012 MCQ
1. Letters of Credit are financial devices in commercial transactions which will ensure that the seller of the goods is
sure to be paid when he parts with the goods and the buyer of the goods gets control of the goods upon payment.
Which statement is most accurate?

a. The use of the Letter of Credit serves to reduce the risk of nonpayment of the purchase price in a sale
transaction.
b. The Letters of Credit can only be used exclusively in a sales transaction.
c. The Letters of Credit are issued for the benefit of the seller only.
d. (a), (b) and (c) are all correct.

2. Letter of Credit which is used in non-sale transaction, where it serves to reduce the risk of non-performance is
called

a. irrevocable letter of credit;

b. standby letter of credit;
c. confirmed letter of credit;
d. None of the above.

3. At the instance of CCC Corporation, AAA Bank issued an irrevocable Letter of Credit in favor of BBB Corporation.
The terms of the irrevocable Letter of Credit state that the beneficiary must present certain documents including a
copy of the Bill of Lading of the importation for the bank to release the funds. BBB Corporation could not find the
original copy of the Bill of Lading so it instead presented to the bank a xerox copy of the Bill of Lading. Would you
advise the bank to allow the drawdown on the Letter of Credit?

a. No, because the rule of strict compliance in commercial transactions involving letters of credit, requiring
documents set as conditions for the release of the fund, has to be strictly complied with or else funds will not
be released.
b. Yes, because an irrevocable letter of credit means that the issuing bank undertakes to release the fund anytime
when claimed by the beneficiary, regardless of the kind of document presented.
c. Yes, because the issuing bank can always justify to CCC Corporation that xerox copies are considered as faithful
reproduction of the original copies.
d. Yes, because the issuing bank really has no discretion to determine whether the documents presented by the
beneficiary are sufficient or not.

4. AAA Carmakers opened an irrevocable Letter of Credit with BBB Banking Corporation with CCC Cars Corporation
as beneficiary. The irrevocable Letter of Credit was opened to pay for the importation of ten (10) units of Mercedes
Benz S class. Upon arrival of the cars, AAA Carmakers found out that the cars were all not in running condition and
some parts were missing. As a consequence, AAA Carmakers instructed BBB Banking Corporation not to allow
drawdown on the Letter of Credit. Is this legally possible?

a. No, because under the "Independence Principle", conditions for the drawdown on the Letters of Credit are
based only on documents, like shipping documents, and not with the condition of the goods subject of the
importation.
b. Yes, because the acceptance by the importer of the goods subject of importation is material for the drawdown of the
Letter of Credit.
c. Yes, because under the "Independence Principle", the seller or the beneficiary is always assured of prompt
payment if there is no breach in the contract between the seller and the buyer.
d. No, because what was opened was an irrevocable letter of credit and not a confirmed letter of credit.

2013 MCQ
XIV. Muebles Classico, Inc. (MC), a Manila-based furniture shop, purchased hardwood lumber from Surigao Timber,
Inc. (STI), a Mindanao-based logging company. MC was pay STI the amount of P5.0 million for 50 tons of lumber. To
pay STI, MC opened a letter of credit with Baco de Plata (BDP). BDP duly informed STI of the opening of a letter of
credit in its favor. In the meantime, MC- which had been undergoing financial reverses - filed a petition for corporate
rehabilitation. The rehabilitation court issued a Stay Order to stay the enforcement of all claims against MC. After
shipping the lumber, STI went to BDP, presented the shipping documents, and demanded payment of the letter of
credit opened in its favor. MC, on the other hand, informed the bank of the Stay Order and instructed it to deny
payment to STI because of the Stay Order. BDP comes to you for advice. Your best advice is to... (1%)
(A) Grant STI’s claim, Under the ―Independence Principle,‖ the bank deals only with the documents and not the
underlying circumstances; hence, the presentation of the letter of credit is sufficient.
(B) Deny STI’s claim. The Stay Order covers all claims against the debtor and binds all its creditors. The letter of credit
is a claim against the debtor that is covered by the Stay Order.
(C) Grant STI’s claim. The letter of credit is not a claim against the debtor under rehabilitation, but against the
bank which has assumed a solidary obligation. (Metropolitan Waterworks and Sewerage System v. Daway,
432 SCRA 559, 2004)
(D) Deny STI’s claim. If the bank disregards the Stay Order, it may be subject to contempt by the rehabilitation court.
STI should file its claim with the rehabilitation court.
(E) File an action for interpleader to resolve the parties’ competing claims

Q: Rodzssen Supply, Inc. (Rodzssen) applied for and obtained an irrevocable 30-day domestic Letter of Credit from
Far East Bank and Trust Company Inc. (FEBTC) on January 15, 1979, in favor of Ekman and Company Inc. (Ekman),
in order to finance the purchase of five units of hydraulic loaders in the amount of P190,000. Originally set to expire on
February 15, 1979, the subject Letter of Credit was amended several times to extend its validity until October 16,
1979. Three units of the hydraulic loaders were delivered to Rodzssen for which FEBTC on March 26, 1979, paid
Ekman the sum of P114,000.00, which amount Rodzssen paid FEBTC before the expiry date of the LC. FEBTC paid
Ekman for the last two hydraulic loaders on March 14, 1980 or five months after the expiration of the Letter of Credit.
Was FEBTC justified in paying Ekman?
A: NO. Clearly, the bank paid Ekman when the former was no longer bound to do so under the subject Letter of
Credit. The subject Letter of Credit had become invalid upon the lapse of the period fixed therein. Thus, respondent
should not have paid Ekman; it was not obliged to do so. (Rodzssen Supply Co. Inc. v. Far East Bank & Trust Co.,
G.R. No. 109087. May 9, 2001)

Q: SMC entered into an Exclusive Dealership Agreement with Goroza wherein the latter was given by SMC the right
to trade, deal and market or otherwise sell its various beer products. Goroza applied for a credit line with SMC, but
one of the requirements for the credit line was a letter of credit. Thus, Goroza applied for and was granted a letter of
credit by the PNB in the amount of P2, 000,000.00 and subsequently an additional credit line of P2, 400,000.00 which
the latter approved.

Under the credit agreement, the PNB has the obligation to release the proceeds of Goroza's credit line to SMC upon
presentation of the invoices and official receipts of Goroza's purchases of SMC beer products to PNB. Initially, Goroza
was able to pay his credit purchases with SMC. However, Goroza started to become delinquent with his accounts.
Demands were made by the SMC against Goroza and PNB but neither of them paid. SMC filed a Complaint for
collection of sum of money against PNB and Goroza. RTC rendered a decision in favor of the plaintiff ordering Goroza
to pay. In the meantime, trial continued with respect to PNB.
PNB moved to terminate the proceedings on the ground that a decision was already rendered finding Goroza solely
liable. The RTC denied the PNB's motion and issued a Supplemental Judgment which stated that the RTC omitted by
inadvertence to insert in its decision the phrase "without prejudice to the decision that will be made against the other
co-defendant, PNB, which was not declared in default." The CA affirmed the Resolution of RTC.

Was the CA incorrect in affirming the RTC despite complete adjudication of relief to SMC and the perfection of appeal
by Goroza?

A: NO. It is clear from the proceedings held before and the orders issued by the RTC that the intention of the trial court
is to conduct separate proceedings to determine the respective liabilities of Goroza and PNB, and thereafter, to render
several and separate judgments for or against them.

The propriety of a several judgment is borne by the fact that SMC's cause of action against PNB stems from the
latter's alleged liability under the letters of credit which it issued. On the other hand, SMC's cause of action against
Goroza is the latter's failure to pay his obligation to the former. As to the separate judgment, PNB has a counterclaim
against SMC which is yet to be resolved by the RTC. The so-called "independence principle" assures the seller or the
beneficiary of 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. As the principle's nomenclature clearly
suggests, the obligation under the letter of credit is independent of the related and originating contract. In brief, the
letter of credit is separate and distinct from the underlying transaction.

In other words, PNB cannot evade responsibility on the sole ground that the RTC judgment found Goroza liable and
ordered him to pay the amount sought to be recovered by SMC. PNB's liability, if any, under the letter of credit is yet to
be determined (Philippine National Bank vs San Miguel Corporation, GR No. 186063, January 15, 2014).

Standby Letter of Credit (2015)

V. A. A standby letter of credit was issued by ABC Bank to secure the obligation of X Company to Y Company. Under
the standby letter of credit, if there is failure on the part of X Company to perform its obligation, then Y Company will
submit to ABC Bank a certificate of default (in the form prescribed under the standby letter of credit) and ABC Bank
will have to pay Y Company the defaulted amount. Subsequently, Y Company submitted to ABC Bank a certificate of
default notwithstanding the fact that X Company was not in default.

A. Can ABC Bank refuse to honor the certificate of default? Explain. (3%)

SUGGESTED ANSWER:
No. Under the Doctrine of Independence in a Letter of Credit, the obligation of the issuing bank to pay the beneficiary
is distinct and independent from the main and originating contract underlying the letter of credit. Such obligation to pay
does not depend on the fulfilment and non-fulfilment of the originating contract. It arises upon tender of the stipulated
documents under the letter of credit. In the present case, the tender of the certificate of default entitles Y to payment
under the standby letter of credit notwithstanding the fact that X Company was not in default. This is without prejudice
to the right of X Company to proceed against Y Company under the law on contracts and damages. (Insular Bank of
Asia and America vs. IAC, 167 SCRA 450, 1988)

ALTERNATIVE ANSWER:
Under the fraud exception principle, the beneficiary may be enjoined from collecting on the letter of credit in case of
fraudulent abuse of credit. The issuance of a certificate of default despite the fact that X Company is not in default
constitutes fraudulent abuse of credit. (Transfield Philippines v. Luzon Hydro Corporation, 443 SCRA 307)

B. Is the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce
applicable to commercial letters of credit issued by a domestic bank even if not expressly mentioned in such
letters of credit? What is the basis for your answer? (3%)

SUGGESTED ANSWER:
Yes, the Supreme Court has held that the observance of the Uniform Customs and Practice for Documentary Credits
in the Philippines is justified by Article 2 of the Code of Commerce which enunciated that in the absence of any
particular provision in the Code of Commerce, commercial transactions shall be governed by generally-observed
usages and customs. (BPI vs. De Reny Fabric Industries, Inc. 35 SCRA 253, 1970)

Letter of Credit as a financial device (2016)

XVII. PJ Corporation (PJ) obtained a loan from ABC Bank (ABC) in the amount of P10 million for the purchase of 100
pieces of ecodoors. Thereafter, a Letter of Credit was obtained by PJ against such loan. The beneficiary of the Letter
of Credit is Scrap Metal Corp. (Scrap Metal) in Beijing, China. Upon arrival of 100 pieces of ecodoors, PJ executed a
Trust Receipt in favor of ABC to cover for the value of the ecodoors for its release to PJ. The terms of the Trust
Receipt is that any proceeds from the sale of the ecodoors will be delivered to ABC as payment. After the ecodoors
were sold, PJ, instead of paying ABC, used the proceeds of the sale to order from Scrap Metal another 100 pieces of
ecodoors but using another bank to issue a new Letter of Credit fully covered by such proceeds.
PJ refused to pay the proceeds of the sale of the first set of ecodoors to ABC, claiming that the ecodoors that were
delivered were defective. It then instructed ABC not to negotiate the Letter of Credit that was issued in favor of Scrap
Metal.

Q: Explain what is a “Letter of Credit” as a financial device and a “Trust Receipt” as a security to the Letter of Credit.
(2.5%)

SUGGESTED ANSWER:
A letter of credit is any arrangement however named or described whereby a bank acting upon the request of its client
or on its behalf agrees to pay another against stipulated documents provided that the terms of the credit are complied
with (Section 2 of the Uniform Customs and Practices for Documentary Credit). A trust receipt is an arrangement
whereby the issuing bank (referred to as the entruster under the trust receipt) releases the imported goods to the
importer (referred to as the entrustee) but that the latter in case of sale must deliver the proceeds thereof to the
entruster up to the extent of the amount owing to the entruster or to return the goods in case of non-sale.