Introduction

In most international commercial transactions, importers usually do not have sufficient capital to pay in full the purchase price of the imported goods. Exporters, on the other hand, demand an assurance of prompt payment.

Letters of Credit as the Solution

In a letter of credit transaction, basically the following are the parties: a) the buyer/importer/applicant referred to as the importer; b) the seller/exporter/beneficiary referred to as the exporter; and c) the bank.

The exporter sells imported goods to the importer. Once the latter decides to purchase such goods, they will then agree on the payment terms. In case the importer does not have enough capital to pay the purchase price, he can now seek help from the bank.

The importer must then apply for the issuance of a letter of credit (L/C) in favour of the exporter. Once the bank approves his application, it will undertake the payment of the purchase price in full to said exporter.

Consequently, the exporter now becomes a beneficiary of the L/C. As such, he must first furnish the following documents prior to the bank's full payment:

a. A bill of exchange, that is, a piece of paper ordering the importer or his representative to pay a certain amount of money at a specific time; and
b. All the pertinent documents required by the L/C which are usually the documents of title, proofs concerning the shipment of the goods, and similar others.

In the case of the importer, he must first reimburse the bank of the amount it paid to the above exporter before he gains title and ownership over the imported goods.

Other Important Points

What Governs the Relationship of the Parties

1. Between the seller/exporter/beneficiary and the buyer/importer/applicant--the sales agreement or the contract of sale
2. Between the seller/exporter/beneficiary and the bank--terms of the letter of credit issued by the bank
3. Between the buyer/importer/applicant and the bank--terms of the agreement concerning the issuance of the L/C

From the above enumeration, it is clear that the relationship between and among the parties are independent of each other. Simply put, once the seller/exporter/beneficiary furnishes the bank the documents required, the bank must pay him the purchase price in full, regardless of whether a shipment actually occurred. Therefore, in cases where said seller fails to comply with the terms of the sales agreement despite the bank's payment, the buyer/importer/applicant cannot sue the bank.

Idamae H. Fajardo is a legal writer of Manila Visa Immigration Consultants International, Inc.. Her educational background includes a law degree from San Sebastian College-Recoletos (SSC-R) Law, and an undergraduate degree in Business Administration at University of the Philippines Diliman. Among her notable writing achievements are serving as the Associate Editor of The Luzon Tip, her high school organ, and winning the Best Health Page at the National Secondary Schools Press Conference (NSSPC) in 1997. See more of her articles at http://www.manila-legal.com.