Case Digest (Letter of Credit)
Case Digest (Letter of Credit)
Case Digest (Letter of Credit)
CA
Facts: Bank of America received an irrevocable letter of credit issued by Bank of Ayudha located in Thailand in the
amount of $2, 782,000 to cover the sale of plastic ropes and agricultural files. Bank of America being the advising bank
and the private respondent Inter-resin Industrial Corporation as the beneficiary.
Upon receipt of the mail, B.A informed the private respondent regarding the letter of credit, then upon receipt of such
letter-advice with the letter of credit, the Inter-resin sent Atty. Tanay to the B.A to have the letter of credit confirmed,
however, it was explained to Atty. Tanay that there was no need for confirmation because the letter of credit would not
have been transmitted if it were not genuine.
Inter-resin sought to make partial availment under the letter of credit by submitting to the B.A invoices, covering the
shipment of 24,000 bales of polyethylene rope to General Chemicals and other pertinent documents required under the
letter of credit. The bank, upon checking that all the documents required were all complied by Inter-resin released a
cashier’s check. Then, B.A wrote Bank of Ayudha advising the latter of the availment under the letter of credit and
sought the corresponding reimbursement.
Thereafter, Inter-resin presented to B.A the document for the second availment under the same letter of credit which
still consists of the documents requires therein. However, B.A received a telex from Bank of Ayudha that the letter of
credit was fraudulent, hence, B.A stopped the processing of Inter-resin’s documents and sent a telex to its branch in
Thailand, requesting for the assistance in determining the authenticity of the letter of credit. Then, B.A sought the help
the NBi with the assistance of Phil. Embassy in Thailand, they discovered that what was exported by inter-resin did not
contain ropes but instead plastic strips, waste materials, wrappers and the like. Then, upon investigation, the president
and the executive vice president of inter-resin were charged for estafa.
B.A sued inter-resin for the recovery of the P10,219,093 equivalent of the draft on the partial availment of the letter of
credit. However, the lower court ruled in favor of inter-resin, on the ground that B.A made assurances that enticed inter-
resin to send merchandise to Thailand and the telex that they received was unverified, thus, a hearsay, and that the loss
should borne by BA which was careless and negligent for failing to utilize its modern means of communication to verify
with Bank of Ayudha the authenticity of the letter of credit before sending the same to inter-resin. Upon appeal, the CA
affirms the decision of the lower court. Hence, petition.
Issue: Whether or not BA may recover what it has paid under the letter of credit.
Held. Yes. 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 interest 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.
The crucial point of dispute in this case is whether under the "letter of credit," Bank of America has incurred any
liability to the "beneficiary" thereof, an issue that largely is dependent on the bank's participation in that transaction;
as a mere advising or notifying bank, it would not be liable, but as a confirming bank, had this been the case, it
could be considered as having incurred that liability.
In this case, B.A only acted as advising or notifying bank, thus it did not incur any obligation more than just notifying
inter-resin of the letter of credit issued in its favor. Bringing the letter of credit to the attention of the seller is the
primordial obligation of the advising bank. B.A is only bound to check the apparent authenticity of the letter of credit,
which it did.
May Bank of America then recover what it has paid under the letter of credit when the corresponding draft for partial
availment thereunder and the required documents were later negotiated with it by Inter-Resin? The answer is yes.
This kind of transaction is what is commonly referred to as a discounting arrangement. This time, Bank of America
has acted independently as a negotiating bank, thus saving Inter-Resin from the hardship of presenting the
documents directly to Bank of Ayudhya to recover payment. (Inter-Resin, of course, could have chosen other banks
with which to negotiate the draft and the documents.) As a negotiating bank, Bank of America has a right to
recourse against the issuer bank and until reimbursement is obtained, Inter-Resin, as the drawer of the draft,
continues to assume a contingent liability thereon.
FACTS: Belman is the successful bidder to supply the Republic of the Philippines with 1,000 reams of union
skin paper, it applied to the PNB for a letter of credit in the sum of $4,3000 in favor of Getz Bros and Co in
California, USA to pay for such reams. The PNB approved and granted the application of the petitioner. The
PNB through the Crocker First National Bank, its correspondent in the US, paid the payee the sum of $4,300.
Now, when the petitioner paid its account to the PNB, the defendant pursuant to RA 601 collected 17% special
excise tax on the amount in Phil. Peso of foreign exchange sold which the plaintiff paid under protest.
Plaintiff made a demand for the refund of the sum of money it paid to the bank, alleged that the letter of credit
was approved before the enactment of RA 601, thus, it was not subject to such excise tax. Despite repeated
demand, the respondent bank refused to make such refund. Hence, the herein petition.
The plaintiff prays that the amount of excise tax assessed and collected by the defendant be declared illegal.
The defendant bank moved for the dismissal of the complaint, on the ground that the assessment and collection
from the plaintiff of the special excise tax is in accordance to law because it was a tax collected after the
effectivity of the law.
Held: Yes. An irrevocable letter of credit 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, is 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
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