Q: Explain the nature of Letters of Q: Explain the nature of Letters of Credit as a financial devise.

(2012 Bar)

A: 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. 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 and to reduce the risk of nonperformance of an obligation in a non-sale setting.
(Transfield Philippines Inc. vs. Luzon Hydro Corp., November 22, 2004)

Q: 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? (2015 Bar)

A: Yes, the Supreme Court held that the observance of the Uniform Customs and Practice in the Philippines is
justified by Article 2 of the Code of Commerce which enunciates that in the absence of any particular
provision in the Code of Commerce, commercial transaction shall be governed by usage and customs
generally observed. (Bank of the Philippine Islands v. De Reny Fabric Industries, Inc. 35 SCRA 253)

Q: Explain what is a “Letter of Credit” as a financial device and a “Trust Receipt” as a security to the Letter of
Credit. (2016 Bar)

A: 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.

Credit as a financial devise. (2012 Bar)

A: 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. 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 and to reduce the risk of nonperformance of an obligation in a non-sale setting.
(Transfield Philippines Inc. vs. Luzon Hydro Corp., November 22, 2004)

Q: 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? (2015 Bar)

A: Yes, the Supreme Court held that the observance of the Uniform Customs and Practice in the Philippines is
justified by Article 2 of the Code of Commerce which enunciates that in the absence of any particular
provision in the Code of Commerce, commercial transaction shall be governed by usage and customs
generally observed. (Bank of the Philippine Islands v. De Reny Fabric Industries, Inc. 35 SCRA 253)

Q: Explain what is a “Letter of Credit” as a financial device and a “Trust Receipt” as a security to the Letter of
Credit. (2016 Bar)

A: 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.