Transfield Philippines vs Luzon Hydro Electric Corp.

(GR No 146717, Nov 22, 2004, Tinga)Transfield entered into a turn-key contract with Luzon Hydro Corp. (LHC).Under the contract, Transfield were to construct a hydro-electric plants inBenguet and Ilocos. The contract provides for a period for which the projectis to be completed and also allows for the extension of the period providedthat the extension is based on justifiable grounds such as fortuitous event.In order to guarantee performance by Transfield, two stand-by letters of credit were required to be opened. During the construction of the plant,Transfield requested for extension of time citing fortuitous events broughtabout by typhoon, barricades and demonstration. LHC did not give duecourse to the extension of the period prayed for but referred the matter toarbitration committee.In the meanwhile, because of the delay in the construction of the plant, LHCcalled on the stand-by letters of credit because of default. However, thedemand was objected by Transfield on the ground that there is still pendingarbitration on their request for extension of time. LHC invoked the independence principle. On the other hand, Transfield claims fraud on thepart of LHC on calling the stand-by letters of credit.Under the independence principle, a LC accommodation is entirely distinctand separate, independent agreement. It is not supposed to be affected bythe main contract upon which it rests.The court held for the LHC. Following the independence principle, evengranting that there is still issue to be resolved arising from the turn-keyproject. This issue is not supposed to affect the obligation of the bank to paythe letter of credit in question. The court stressed that a LC accommodationis intended to benefit not only the beneficiary therein but the applicantthereon. On the issue of fraud, the SC held that there is nothing in the turn-key contract which states that all issues between the parties must beresolved first before LHC can call on the stand-by LC but the contractprovides that if Transfield defaults, then LHC can call on these stand-by LC.