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    Law Is Law 2

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    PJ Corporation obtained a loan from ABC Bank to purchase ecodoors. A letter of credit was issued in favor of the supplier, Scrap Metal Corp. PJ then sold the ecodoors but used the proceeds to order more goods from Scrap Metal, using another bank. PJ refused to pay ABC Bank, claiming the original goods were defective. ABC Bank asks if it should grant PJ's instruction not to pay Scrap Metal under the original letter of credit. The advisor says no, because under the independence principle, ABC Bank's obligation is only conditioned on receiving proper documents from the beneficiary, not on disputes over the underlying transaction.

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    Law Is Law 2

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    james
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    PJ Corporation obtained a loan from ABC Bank to purchase ecodoors. A letter of credit was issued in favor of the supplier, Scrap Metal Corp. PJ then sold the ecodoors but used the proceeds to order more goods from Scrap Metal, using another bank. PJ refused to pay ABC Bank, claiming the original goods were defective. ABC Bank asks if it should grant PJ's instruction not to pay Scrap Metal under the original letter of credit. The advisor says no, because under the independence principle, ABC Bank's obligation is only conditioned on receiving proper documents from the beneficiary, not on disputes over the underlying transaction.

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    PJ Corporation obtained a loan from ABC Bank to purchase ecodoors. A letter of credit was issued in favor of the supplier, Scrap Metal Corp. PJ then sold the ecodoors but used the proceeds to order more goods from Scrap Metal, using another bank. PJ refused to pay ABC Bank, claiming the original goods were defective. ABC Bank asks if it should grant PJ's instruction not to pay Scrap Metal under the original letter of credit. The advisor says no, because under the independence principle, ABC Bank's obligation is only conditioned on receiving proper documents from the beneficiary, not on disputes over the underlying transaction.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    57 views2 pages

    Law Is Law 2

    Uploaded by

    james
    PJ Corporation obtained a loan from ABC Bank to purchase ecodoors. A letter of credit was issued in favor of the supplier, Scrap Metal Corp. PJ then sold the ecodoors but used the proceeds to order more goods from Scrap Metal, using another bank. PJ refused to pay ABC Bank, claiming the original goods were defective. ABC Bank asks if it should grant PJ's instruction not to pay Scrap Metal under the original letter of credit. The advisor says no, because under the independence principle, ABC Bank's obligation is only conditioned on receiving proper documents from the beneficiary, not on disputes over the underlying transaction.

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    c Principles of Letter of Credit

    1. Doctrine of Independence

    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.

    [a] Explain what is a "Letter of Credit" as a financial device and a "Trust Receipt"

    as a security to the Letter of Credit.

    [b] As counsel of ABC, you are asked for advice on whether or not to grant the

    instruction of PJ. What will be your advice? (2016 Bar)

    SUGGESTED ANSWER

    (A) A letter of credit is It is any arrangement, however named or described, whereby the

    issuing bank acting at the request and on the instructions of a customer (applicant) or

    on its own behalf, binds itself to: (a) pay to the order of, or accept and pay drafts drawn

    by a third party (Beneficiary); (b) authorize another bank to pay or to accept and pay

    such drafts; or (3) authorize another bank to negotiate, against stipulated documents,

    provided, the terms and conditions of the credit are complied with (Art. 2, Uniform

    Customs & Practice for Documentary Credits).

    Whereas, a Trust receipt is a commercial document whereby the bank releases the

    goods in the possession of the entrustee but retains ownership thereof while the
    Page 4 of 205

    Mercantile Law

    entrustee shall sell the goods and apply the proceeds for the full payment of his liability

    with the bank. It is a security arragement to which a bank acquires ownership of the

    imported personal property (Garcia vs. CA G.R. No. 119845, July 5, 1996).

    ALTERNATIVE ANSWER:

    (A) A letter of credit is an instrument issued by a bank that guarantees its client’s ability

    to pay for imported goods or services, by authorizing a person to draw drafts on the

    bank or its correspondents for the bank’s account, under conditions specified in the L/C.

    (Prudential Bank V. IAC, 216 SCRA 257)

    Whereas, a trust receipt is a document which expresses a security transaction where

    the lender, having no prior title to the goods on which the lien is to be constituted, and

    not having possession over the same since possession thereof remains in the borrower,

    lends him money to the borrower on security of the goods which borrower is privileged

    to sell, clear of the lien, and with an agreement to pay all or part of the sale proceeds to

    the lender (Metropolitan Bank vs. Go, G.R. No. 155647, November 23, 2007).

    (B) No, I will not grant the instruction of PJ. Under the indepence principle, the

    obligation of the bank to pay the Scrap Metal Corporation is not dependent upon the

    fulfilment or non-fulfillment of the main contract underlying the letter of credit but

    conditioned only on its submission of the stipulated documents to ABC Bank.

    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. Can ABC Bank

    refuse to honor the certificate of default? Explain. (2015

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