G.R. No. 74834 November 17, 1988INSULAR BANK OF ASIA & AMERICA v IACFACTS:
The Mendoza spouses obtained 2 loans from Philam Life amounting to P600k. Tosecure payment, Philam Life required that amortizations be guaranteed by anirrevocable standby letter of credit of a commercial bank. The Mendozas contracted with Insular Bank of Asia and America (IBAA) for theissuance of 2 irrevocable standby Letters of Credit (L/Cs) in favor of Philam Life forthe total amount of P600k. These L/Cs were, in turn, secured by a real estatemortgage on the property of the Mendozas in favor of IBAA.Later, the Mendozas executed PNs in favor of IBAA and authorized IBAA "to sell atpublic or private sale such securities or things for the purpose of applying theirproceeds to such payments" of many particular obligation or obligations" theMendozas may have to IBAA. The Mendozas failed to pay so Philam Life demanded payment from IBAA. PhilamLife demanded payment from IBAA but the latter took the position that, as aguarantor of the Mendozas who are the principal debtors, its remaining outstandingobligation under the two (2) standby L/Cs was less than what was claimed by PhilamLife. According to the IBAA, they made an overpayment of 52,520.76.Later, the Real Estate Mortgage, was foreclosed by, and sold at public auction forP775,000.00, to petitioner IBAA as the lone and highest bidder.
W/N the direct and partial payments made by the the Mendozas wouldreduce the liability of IBAA under the terms of the standby LCs
IBAA stresses that it has no more liability to Philam Life under the two (2) standbyLetters of Credit and, instead, is entitled to a refund. Whereas Philam Life and theMendoza spouses separately maintain that IBAA's obligation under said two (2) L/Csis original and primary and is not reduced by the direct payments made by theMendozas to Philam Life.In construing the terms of a Letter of Credit, as in other contracts, it is the intentionof the parties that must govern.Letters of credit and contracts for the issuance of such letters are subject to thesame rules of construction as are ordinary commercial contracts. They are toreceive a reasonable and not a technical construction and although usage andcustom cannot control express terms in letters of credit, they are to be construed