[G.R. No. 146717.

November 22, 2004]

TRANSFIELD PHILIPPINES, INC., petitioner, vs. LUZON HYDRO CORPORATION, AUSTRALIA and NEW ZEALAND
BANKING GROUP LIMITED and SECURITY BANK CORPORATION, respondents.
DECISION
TINGA, J.:
Subject of this case is the letter of credit which has evolved as the ubiquitous and most important device in international trade.
A creation of commerce and businessmen, the letter of credit is also unique in the number of parties involved and its supranational
character.
Petitioner has appealed from the Decision[1] of the Court of Appeals in CA-G.R. SP No. 61901 entitled Transfield Philippines,
Inc. v. Hon. Oscar Pimentel, et al., promulgated on 31 January 2001.[2]
On 26 March 1997, petitioner and respondent Luzon Hydro Corporation (hereinafter, LHC) entered into a Turnkey
Contract[3] whereby petitioner, as Turnkey Contractor, undertook to construct, on a turnkey basis, a seventy (70)-Megawatt hydroelectric power station at the Bakun River in the provinces of Benguet and Ilocos Sur (hereinafter, the Project). Petitioner was given
the sole responsibility for the design, construction, commissioning, testing and completion of the Project. [4]
The Turnkey Contract provides that: (1) the target completion date of the Project shall be on 1 June 2000, or such later date
as may be agreed upon between petitioner and respondent LHC or otherwise determined in accordance with the Turnkey Contract;
and (2) petitioner is entitled to claim extensions of time (EOT) for reasons enumerated in the Turnkey Contract, among which are
variations, force majeure, and delays caused by LHC itself.[5] Further, in case of dispute, the parties are bound to settle their
differences through mediation, conciliation and such other means enumerated under Clause 20.3 of the Turnkey Contract. [6]
To secure performance of petitioners obligation on or before the target completion date, or such time for completion as may be
determined by the parties agreement, petitioner opened in favor of LHC two (2) standby letters of credit both dated 20 March 2000
(hereinafter referred to as the Securities), to wit: Standby Letter of Credit No. E001126/8400 with the local branch of respondent
Australia and New Zealand Banking Group Limited (ANZ Bank) [7] and Standby Letter of Credit No. IBDIDSB-00/4 with respondent
Security Bank Corporation (SBC)[8] each in the amount of US$8,988,907.00.[9]
In the course of the construction of the project, petitioner sought various EOT to complete the Project. The extensions were
requested allegedly due to several factors which prevented the completion of the Project on target date, such as force
majeure occasioned by typhoon Zeb, barricades and demonstrations. LHC denied the requests, however. This gave rise to a series
of legal actions between the parties which culminated in the instant petition.
The first of the actions was a Request for Arbitration which LHC filed before the Construction Industry Arbitration Commission
(CIAC) on 1 June 1999.[10] This was followed by another Request for Arbitration, this time filed by petitioner before the International
Chamber of Commerce (ICC)[11] on 3 November 2000. In both arbitration proceedings, the common issues presented were: [1)
whether typhoon Zeb and any of its associated events constituted force majeure to justify the extension of time sought by petitioner;
and [2) whether LHC had the right to terminate the Turnkey Contract for failure of petitioner to complete the Project on target date.
Meanwhile, foreseeing that LHC would call on the Securities pursuant to the pertinent provisions of the Turnkey Contract,
petitionerin two separate letters[13] both dated 10 August 2000advised respondent banks of the arbitration proceedings already
pending before the CIAC and ICC in connection with its alleged default in the performance of its obligations. Asserting that LHC had
no right to call on the Securities until the resolution of disputes before the arbitral tribunals, petitioner warned respondent banks that
any transfer, release, or disposition of the Securities in favor of LHC or any person claiming under LHC would constrain it to hold
respondent banks liable for liquidated damages.
[12]

As petitioner had anticipated, on 27 June 2000, LHC sent notice to petitioner that pursuant to Clause 8.2 [14] of the Turnkey
Contract, it failed to comply with its obligation to complete the Project. Despite the letters of petitioner, however, both banks informed
petitioner that they would pay on the Securities if and when LHC calls on them.[15]
LHC asserted that additional extension of time would not be warranted; accordingly it declared petitioner in default/delay in the
performance of its obligations under the Turnkey Contract and demanded from petitioner the payment of US$75,000.00 for each day
of delay beginning 28 June 2000 until actual completion of the Project pursuant to Clause 8.7.1 of the Turnkey Contract. At the same
time, LHC served notice that it would call on the securities for the payment of liquidated damages for the delay.[16]
On 5 November 2000, petitioner as plaintiff filed a Complaint for Injunction, with prayer for temporary restraining order and writ
of preliminary injunction, against herein respondents as defendants before the Regional Trial Court (RTC) of Makati. [17] Petitioner
sought to restrain respondent LHC from calling on the Securities and respondent banks from transferring, paying on, or in any
manner disposing of the Securities or any renewals or substitutes thereof. The RTC issued a seventy-two (72)-hour temporary

restraining order on the same day. The case was docketed as Civil Case No. 00-1312 and raffled to Branch 148 of the RTC of
Makati.
After appropriate proceedings, the trial court issued an Order on 9 November 2000, extending the temporary restraining order
for a period of seventeen (17) days or until 26 November 2000.[18]
The RTC, in its Order[19] dated 24 November 2000, denied petitioners application for a writ of preliminary injunction. It ruled
that petitioner had no legal right and suffered no irreparable injury to justify the issuance of the writ. Employing the principle of
independent contract in letters of credit, the trial court ruled that LHC should be allowed to draw on the Securities for liquidated
damages. It debunked petitioners contention that the principle of independent contract could be invoked only by respondent banks
since according to it respondent LHC is the ultimate beneficiary of the Securities. The trial court further ruled that the banks were
mere custodians of the funds and as such they were obligated to transfer the same to the beneficiary for as long as the latter could
submit the required certification of its claims.
Dissatisfied with the trial courts denial of its application for a writ of preliminary injunction, petitioner elevated the case to the
Court of Appeals via a Petition for Certiorari under Rule 65, with prayer for the issuance of a temporary restraining order and writ of
preliminary injunction.[20] Petitioner submitted to the appellate court that LHCs call on the Securities was premature considering that
the issue of its default had not yet been resolved with finality by the CIAC and/or the ICC. It asserted that until the fact of delay could
be established, LHC had no right to draw on the Securities for liquidated damages.
Refuting petitioners contentions, LHC claimed that petitioner had no right to restrain its call on and use of the Securities as
payment for liquidated damages. It averred that the Securities are independent of the main contract between them as shown on the
face of the two Standby Letters of Credit which both provide that the banks have no responsibility to investigate the authenticity or
accuracy of the certificates or the declarants capacity or entitlement to so certify.
In its Resolution dated 28 November 2000, the Court of Appeals issued a temporary restraining order, enjoining LHC from
calling on the Securities or any renewals or substitutes thereof and ordering respondent banks to cease and desist from transferring,
paying or in any manner disposing of the Securities.
However, the appellate court failed to act on the application for preliminary injunction until the temporary restraining order
expired on 27 January 2001. Immediately thereafter, representatives of LHC trooped to ANZ Bank and withdrew the total amount of
US$4,950,000.00, thereby reducing the balance in ANZ Bank to US$1,852,814.00.
On 2 February 2001, the appellate court dismissed the petition for certiorari. The appellate court expressed conformity with
the trial courts decision that LHC could call on the Securities pursuant to the first principle in credit law that the credit itself is
independent of the underlying transaction and that as long as the beneficiary complied with the credit, it was of no moment that he
had not complied with the underlying contract. Further, the appellate court held that even assuming that the trial courts denial of
petitioners application for a writ of preliminary injunction was erroneous, it constituted only an error of judgment which is not
correctible by certiorari, unlike error of jurisdiction.
Undaunted, petitioner filed the instant Petition for Review raising the following issues for resolution:
WHETHER THE INDEPENDENCE PRINCIPLE ON LETTERS OF CREDIT MAY BE INVOKED BY A BENEFICIARY THEREOF WHERE
THE BENEFICIARYS CALL THEREON IS WRONGFUL OR FRAUDULENT.
WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE SECURITIES BEFORE THE RESOLUTION OF PETITIONERS AND
LHCS DISPUTES BY THE APPROPRIATE TRIBUNAL.
WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN RELEASING THE AMOUNTS DUE UNDER THE SECURITIES
DESPITE BEING NOTIFIED THAT LHCS CALL THEREON IS WRONGFUL.
WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND IRREPARABLE DAMAGE IN THE EVENT THAT:
A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ BANK AND SECURITY BANK ARE ALLOWED
TO RELEASE, THE REMAINING BALANCE OF THE SECURITIES PRIOR TO THE RESOLUTION OF
THE DISPUTES BETWEEN PETITIONER AND LHC.
B. LHC DOES NOT RETURN THE AMOUNTS IT HAD WRONGFULLY DRAWN FROM THE SECURITIES. [21]
Petitioner contends that the courts below improperly relied on the independence principle on letters of credit when this case
falls squarely within the fraud exception rule. Respondent LHC deliberately misrepresented the supposed existence of delay despite
its knowledge that the issue was still pending arbitration, petitioner continues.
Petitioner asserts that LHC should be ordered to return the proceeds of the Securities pursuant to the principle against unjust
enrichment and that, under the premises, injunction was the appropriate remedy obtainable from the competent local courts.
On 25 August 2003, petitioner filed a Supplement to the Petition[22] and Supplemental Memorandum,[23] alleging that in the
course of the proceedings in the ICC Arbitration, a number of documentary and testimonial evidence came out through the use of
different modes of discovery available in the ICC Arbitration. It contends that after the filing of the petition facts and admissions were
discovered which demonstrate that LHC knowingly misrepresented that petitioner had incurred delays notwithstanding its knowledge

and admission that delays were excused under the Turnkey Contractto be able to draw against the Securities. Reiterating that fraud
constitutes an exception to the independence principle, petitioner urges that this warrants a ruling from this Court that the call on the
Securities was wrongful, as well as contrary to law and basic principles of equity. It avers that it would suffer grave irreparable
damage if LHC would be allowed to use the proceeds of the Securities and not ordered to return the amounts it had wrongfully
drawn thereon.
In its Manifestation dated 8 September 2003,[24] LHC contends that the supplemental pleadings filed by petitioner present
erroneous and misleading information which would change petitioners theory on appeal.
In yet another Manifestation dated 12 April 2004,[25] petitioner alleges that on 18 February 2004, the ICC handed down its
Third Partial Award, declaring that LHC wrongfully drew upon the Securities and that petitioner was entitled to the return of the sums
wrongfully taken by LHC for liquidated damages.
LHC filed a Counter-Manifestation dated 29 June 2004,[26] stating that petitioners Manifestation dated 12 April 2004 enlarges
the scope of its Petition for Review of the 31 January 2001 Decision of the Court of Appeals. LHC notes that the Petition for
Review essentially dealt only with the issue of whether injunction could issue to restrain the beneficiary of an irrevocable letter of
credit from drawing thereon. It adds that petitioner has filed two other proceedings, to wit: (1) ICC Case No. 11264/TE/MW,
entitled Transfield Philippines Inc. v. Luzon Hydro Corporation, in which the parties made claims and counterclaims arising from
petitioners performance/misperformance of its obligations as contractor for LHC; and (2) Civil Case No. 04-332, entitled Transfield
Philippines, Inc. v. Luzon Hydro Corporation before Branch 56 of the RTC of Makati, which is an action to enforce and obtain
execution of the ICCs partial award mentioned in petitioners Manifestation of 12 April 2004.
In its Comment to petitioners Motion for Leave to File Addendum to Petitioners Memorandum, LHC stresses that the question
of whether the funds it drew on the subject letters of credit should be returned is outside the issue in this appeal. At any rate, LHC
adds that the action to enforce the ICCs partial award is now fully within the Makati RTCs jurisdiction in Civil Case No. 04-332. LHC
asserts that petitioner is engaged in forum-shopping by keeping this appeal and at the same time seeking the suit for enforcement of
the arbitral award before the Makati court.
Respondent SBC in its Memorandum, dated 10 March 2003 [27] contends that the Court of Appeals correctly dismissed the
petition for certiorari. Invoking the independence principle, SBC argues that it was under no obligation to look into the validity or
accuracy of the certification submitted by respondent LHC or into the latters capacity or entitlement to so certify. It adds that the act
sought to be enjoined by petitioner was already fait accompli and the present petition would no longer serve any remedial purpose.
In a similar fashion, respondent ANZ Bank in its Memorandum dated 13 March 2003[28] posits that its actions could not be
regarded as unjustified in view of the prevailing independence principle under which it had no obligation to ascertain the truth of
LHCs allegations that petitioner defaulted in its obligations. Moreover, it points out that since the Standby Letter of Credit No.
E001126/8400 had been fully drawn, petitioners prayer for preliminary injunction had been rendered moot and academic.
At the core of the present controversy is the applicability of the independence principle and fraud exception rule in letters of
credit. Thus, a discussion of the nature and use of letters of credit, also referred to simply as credits, would provide a better
perspective of the case.
The letter of credit evolved as a mercantile specialty, and the only way to understand all its facets is to recognize that it is an
entity unto itself. The relationship between the beneficiary and the issuer of a letter of credit is not strictly contractual, because both
privity and a meeting of the minds are lacking, yet strict compliance with its terms is an enforceable right. Nor is it a third-party
beneficiary contract, because the issuer must honor drafts drawn against a letter regardless of problems subsequently arising in the
underlying contract. Since the banks customer cannot draw on the letter, it does not function as an assignment by the customer to
the beneficiary. Nor, if properly used, is it a contract of suretyship or guarantee, because it entails a primary liability following a
default. Finally, it is not in itself a negotiable instrument, because it is not payable to order or bearer and is generally conditional, yet
the draft presented under it is often negotiable.[29]
In commercial transactions, 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. [30] 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. However,
credits are also used in non-sale settings where they serve to reduce the risk of nonperformance. Generally, credits in the non-sale
settings have come to be known as standby credits.[31]
There are three significant differences between commercial and standby credits. First, commercial credits involve the payment
of money under a contract of sale. Such credits become payable upon the presentation by the seller-beneficiary of documents that
show he has taken affirmative steps to comply with the sales agreement. In the standby type, the credit is payable upon certification
of a party's nonperformance of the agreement. The documents that accompany the beneficiary's draft tend to show that the
applicant has not performed. The beneficiary of a commercial credit must demonstrate by documents that he has performed his
contract. The beneficiary of the standby credit must certify that his obligor has not performed the contract. [32]
By definition, a letter of credit is a written instrument whereby the writer requests or authorizes the addressee to pay money or
deliver goods to a third person and assumes responsibility for payment of debt therefor to the addressee. [33] A letter of credit,
however, changes its nature as different transactions occur and if carried through to completion ends up as a binding contract
between the issuing and honoring banks without any regard or relation to the underlying contract or disputes between the parties
thereto.[34]
Since letters of credit have gained general acceptability in international trade transactions, the ICC has published from time to
time updates on the Uniform Customs and Practice (UCP) for Documentary Credits to standardize practices in the letter of credit

area. The vast majority of letters of credit incorporate the UCP.[35] First published in 1933, the UCP for Documentary Credits has
undergone several revisions, the latest of which was in 1993.[36]
In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,[37] this Court ruled that the observance of the UCP is
justified by Article 2 of the Code of Commerce which provides that in the absence of any particular provision in the Code of
Commerce, commercial transactions shall be governed by usages and customs generally observed. More recently, in Bank of
America, NT & SA v. Court of Appeals,[38] this Court ruled that there being no specific provisions which govern the legal complexities
arising from transactions involving letters of credit, not only between or among banks themselves but also between banks and the
seller or the buyer, as the case may be, the applicability of the UCP is undeniable.
Article 3 of the UCP provides that credits, by their nature, are separate transactions from the sales or other contract(s) on
which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever
to such contract(s) is included in the credit. Consequently, the undertaking of a bank to pay, accept and pay draft(s) or negotiate
and/or fulfill any other obligation under the credit is not subject to claims or defenses by the applicant resulting from his relationships
with the issuing bank or the beneficiary. A beneficiary can in no case avail himself of the contractual relationships existing between
the banks or between the applicant and the issuing bank.
Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once the draft and the required
documents are presented to it. The so-called independence principle assures the seller or the beneficiary of prompt payment
independent of any breach of the main contract and precludes the issuing bank from determining whether the main contract is
actually accomplished or not. Under this principle, banks assume no liability or responsibility for the form, sufficiency, accuracy,
genuineness, falsification or legal effect of any documents, or for the general and/or particular conditions stipulated in the
documents or superimposed thereon, nor do they assume any liability or responsibility for the description, quantity, weight, quality,
condition, packing, delivery, value or existence of the goods represented by any documents, or for the good faith or acts and/or
omissions, solvency, performance or standing of the consignor, the carriers, or the insurers of the goods, or any other person
whomsoever.[39]
The independent nature of the letter of credit may be: (a) independence in toto where the credit is independent from the
justification aspect and is a separate obligation from the underlying agreement like for instance a typical standby; or (b)
independence may be only as to the justification aspect like in a commercial letter of credit or repayment standby, which is identical
with the same obligations under the underlying agreement. In both cases the payment may be enjoined if in the light of the purpose
of the credit the payment of the credit would constitute fraudulent abuse of the credit. [40]
Can the beneficiary invoke the independence principle?
Petitioner insists that the independence principle does not apply to the instant case and assuming it is so, it is a defense
available only to respondent banks. LHC, on the other hand, contends that it would be contrary to common sense to deny the
benefit of an independent contract to the very party for whom the benefit is intended. As beneficiary of the letter of credit, LHC
asserts it is entitled to invoke the principle.
As discussed above, in a letter of credit transaction, such as in this case, where the credit is stipulated as irrevocable, there is
a definite undertaking by the issuing bank to pay the beneficiary provided that the stipulated documents are presented and the
conditions of the credit are complied with.[41] Precisely, the independence principle liberates the issuing bank from the duty of
ascertaining compliance by the parties in the main contract. As the principles nomenclature clearly suggests, the obligation under
the letter of credit is independent of the related and originating contract. In brief, the letter of credit is separate and distinct from the
underlying transaction.
Given the nature of letters of credit, petitioners argumentthat it is only the issuing bank that may invoke the independence
principle on letters of creditdoes not impress this Court. To say that the independence principle may only be invoked by the issuing
banks would render nugatory the purpose for which the letters of credit are used in commercial transactions. As it is, the
independence doctrine works to the benefit of both the issuing bank and the beneficiary.
Letters of credit are employed by the parties desiring to enter into commercial transactions, not for the benefit of the issuing
bank but mainly for the benefit of the parties to the original transactions. With the letter of credit from the issuing bank, the party who
applied for and obtained it may confidently present the letter of credit to the beneficiary as a security to convince the beneficiary to
enter into the business transaction. On the other hand, the other party to the business transaction, i.e., the beneficiary of the letter of
credit, can be rest assured of being empowered to call on the letter of credit as a security in case the commercial transaction does
not push through, or the applicant fails to perform his part of the transaction. It is for this reason that the party who is entitled to the
proceeds of the letter of credit is appropriately called beneficiary.
Petitioners argument that any dispute must first be resolved by the parties, whether through negotiations or arbitration, before
the beneficiary is entitled to call on the letter of credit in essence would convert the letter of credit into a mere guarantee.
Jurisprudence has laid down a clear distinction between a letter of credit and a guarantee in that the settlement of a dispute
between the parties is not a pre-requisite for the release of funds under a letter of credit. In other words, the argument is
incompatible with the very nature of the letter of credit. If a letter of credit is drawable only after settlement of the dispute on the
contract entered into by the applicant and the beneficiary, there would be no practical and beneficial use for letters of credit in
commercial transactions.
Professor John F. Dolan, the noted authority on letters of credit, sheds more light on the issue:

The standby credit is an attractive commercial device for many of the same reasons that commercial credits are attractive. Essentially, these
credits are inexpensive and efficient. Often they replace surety contracts, which tend to generate higher costs than credits do and are usually
triggered by a factual determination rather than by the examination of documents.
Because parties and courts should not confuse the different functions of the surety contract on the one hand and the standby credit on the other,
the distinction between surety contracts and credits merits some reflection. The two commercial devices share a common purpose. Both ensure
against the obligors nonperformance. They function, however, in distinctly different ways.
Traditionally, upon the obligors default, the surety undertakes to complete the obligors performance, usually by hiring someone to complete that
performance. Surety contracts, then, often involve costs of determining whether the obligor defaulted (a matter over which the surety and the
beneficiary often litigate) plus the cost of performance. The benefit of the surety contract to the beneficiary is obvious. He knows that the surety,
often an insurance company, is a strong financial institution that will perform if the obligor does not. The beneficiary also should understand that
such performance must await the sometimes lengthy and costly determination that the obligor has defaulted. In addition, the suretys performance
takes time.
The standby credit has different expectations. He reasonably expects that he will receive cash in the event of nonperformance, that he will receive
it promptly, and that he will receive it before any litigation with the obligor (the applicant) over the nature of the applicants performance takes
place. The standby credit has this opposite effect of the surety contract: it reverses the financial burden of parties during litigation.
In the surety contract setting, there is no duty to indemnify the beneficiary until the beneficiary establishes the fact of the obligors performance.
The beneficiary may have to establish that fact in litigation. During the litigation, the surety holds the money and the beneficiary bears most of
the cost of delay in performance.
In the standby credit case, however, the beneficiary avoids that litigation burden and receives his money promptly upon presentation of the
required documents. It may be that the applicant has, in fact, performed and that the beneficiarys presentation of those documents is not rightful.
In that case, the applicant may sue the beneficiary in tort, in contract, or in breach of warranty; but, during the litigation to determine whether the
applicant has in fact breached the obligation to perform, the beneficiary, not the applicant, holds the money. Parties that use a standby credit and
courts construing such a credit should understand this allocation of burdens. There is a tendency in some quarters to overlook this distinction
between surety contracts and standby credits and to reallocate burdens by permitting the obligor or the issuer to litigate the performance question
before payment to the beneficiary.[42]
While it is the bank which is bound to honor the credit, it is the beneficiary who has the right to ask the bank to honor the credit
by allowing him to draw thereon. The situation itself emasculates petitioners posture that LHC cannot invoke the independence
principle and highlights its puerility, more so in this case where the banks concerned were impleaded as parties by petitioner itself.
Respondent banks had squarely raised the independence principle to justify their releases of the amounts due under the
Securities. Owing to the nature and purpose of the standby letters of credit, this Court rules that the respondent banks were left with
little or no alternative but to honor the credit and both of them in fact submitted that it was ministerial for them to honor the call for
payment.[43]
Furthermore, LHC has a right rooted in the Contract to call on the Securities. The relevant provisions of the Contract read,
thus:
4.2.1. In order to secure the performance of its obligations under this Contract, the Contractor at its cost shall on the Commencement
Date provide security to the Employer in the form of two irrevocable and confirmed standby letters of credit (the Securities), each in the amount
of US$8,988,907, issued and confirmed by banks or financial institutions acceptable to the Employer. Each of the Securities must be in form and
substance acceptable to the Employer and may be provided on an annually renewable basis. [44]
8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to the Employer by way of liquidated damages (Liquidated
Damages for Delay) the amount of US$75,000 for each and every day or part of a day that shall elapse between the Target Completion Date and
the Completion Date, provided that Liquidated Damages for Delay payable by the Contractor shall in the aggregate not exceed 20% of the
Contract Price. The Contractor shall pay Liquidated Damages for Delay for each day of the delay on the following day without need of demand
from the Employer.
8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount of such damages from any monies due, or to
become due to the Contractor and/or by drawing on the Security.[45]
A contract once perfected, binds the parties not only to the fulfillment of what has been expressly stipulated but also to all the
consequences which according to their nature, may be in keeping with good faith, usage, and law. [46] A careful perusal of the
Turnkey Contract reveals the intention of the parties to make the Securities answerable for the liquidated damages occasioned by
any delay on the part of petitioner. The call upon the Securities, while not an exclusive remedy on the part of LHC, is certainly an
alternative recourse available to it upon the happening of the contingency for which the Securities have been proffered. Thus, even
without the use of the independence principle, the Turnkey Contract itself bestows upon LHC the right to call on the Securities in the
event of default.

Next, petitioner invokes the fraud exception principle. It avers that LHCs call on the Securities is wrongful because it
fraudulently misrepresented to ANZ Bank and SBC that there is already a breach in the Turnkey Contract knowing fully well that this
is yet to be determined by the arbitral tribunals. It asserts that the fraud exception exists when the beneficiary, for the purpose of
drawing on the credit, fraudulently presents to the confirming bank, documents that contain, expressly or by implication, material
representations of fact that to his knowledge are untrue. In such a situation, petitioner insists, injunction is recognized as a remedy
available to it.
Citing Dolans treatise on letters of credit, petitioner argues that the independence principle is not without limits and it is
important to fashion those limits in light of the principles purpose, which is to serve the commercial function of the credit. If it does
not serve those functions, application of the principle is not warranted, and the commonlaw principles of contract should apply.
It is worthy of note that the propriety of LHCs call on the Securities is largely intertwined with the fact of default which is the
self-same issue pending resolution before the arbitral tribunals. To be able to declare the call on the Securities wrongful or
fraudulent, it is imperative to resolve, among others, whether petitioner was in fact guilty of delay in the performance of its obligation.
Unfortunately for petitioner, this Court is not called upon to rule upon the issue of defaultsuch issue having been submitted by the
parties to the jurisdiction of the arbitral tribunals pursuant to the terms embodied in their agreement. [47]
Would injunction then be the proper remedy to restrain the alleged wrongful draws on the Securities?
Most writers agree that fraud is an exception to the independence principle. Professor Dolan opines that the untruthfulness of
a certificate accompanying a demand for payment under a standby credit may qualify as fraud sufficient to support an injunction
against payment.[48] The remedy for fraudulent abuse is an injunction. However, injunction should not be granted unless: (a) there is
clear proof of fraud; (b) the fraud constitutes fraudulent abuse of the independent purpose of the letter of credit and not only fraud
under the main agreement; and (c) irreparable injury might follow if injunction is not granted or the recovery of damages would be
seriously damaged.[49]
In its complaint for injunction before the trial court, petitioner alleged that it is entitled to a total extension of two hundred fiftythree (253) days which would move the target completion date. It argued that if its claims for extension would be found meritorious
by the ICC, then LHC would not be entitled to any liquidated damages.[50]
Generally, injunction is a preservative remedy for the protection of ones substantive right or interest; it is not a cause of action
in itself but merely a provisional remedy, an adjunct to a main suit. The issuance of the writ of preliminary injunction as an ancillary
or preventive remedy to secure the rights of a party in a pending case is entirely within the discretion of the court taking cognizance
of the case, the only limitation being that this discretion should be exercised based upon the grounds and in the manner provided by
law.[51]
Before a writ of preliminary injunction may be issued, there must be a clear showing by the complaint that there exists a right
to be protected and that the acts against which the writ is to be directed are violative of the said right. [52] It must be shown that the
invasion of the right sought to be protected is material and substantial, that the right of complainant is clear and unmistakable and
that there is an urgent and paramount necessity for the writ to prevent serious damage. [53] Moreover, an injunctive remedy may only
be resorted to when there is a pressing necessity to avoid injurious consequences which cannot be remedied under any standard
compensation.[54]
In the instant case, petitioner failed to show that it has a clear and unmistakable right to restrain LHCs call on the Securities
which would justify the issuance of preliminary injunction. By petitioners own admission, the right of LHC to call on the Securities
was contractually rooted and subject to the express stipulations in the Turnkey Contract. [55] Indeed, the Turnkey Contract is plain and
unequivocal in that it conferred upon LHC the right to draw upon the Securities in case of default, as provided in Clause 4.2.5, in
relation to Clause 8.7.2, thus:
4.2.5 The Employer shall give the Contractor seven days notice of calling upon any of the Securities, stating the nature of the default for which
the claim on any of the Securities is to be made, provided that no notice will be required if the Employer calls upon any of the Securities for the
payment of Liquidated Damages for Delay or for failure by the Contractor to renew or extend the Securities within 14 days of their expiration in
accordance with Clause 4.2.2.[56]
8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount of such damages from any monies due, or to
become due, to the Contractor and/or by drawing on the Security.[57]
The pendency of the arbitration proceedings would not per se make LHCs draws on the Securities wrongful or fraudulent for
there was nothing in the Contract which would indicate that the parties intended that all disputes regarding delay should first be
settled through arbitration before LHC would be allowed to call upon the Securities. It is therefore premature and absurd to conclude
that the draws on the Securities were outright fraudulent given the fact that the ICC and CIAC have not ruled with finality on the
existence of default.
Nowhere in its complaint before the trial court or in its pleadings filed before the appellate court, did petitioner invoke the fraud
exception rule as a ground to justify the issuance of an injunction. [58] What petitioner did assert before the courts below was the fact
that LHCs draws on the Securities would be premature and without basis in view of the pending disputes between them. Petitioner
should not be allowed in this instance to bring into play the fraud exception rule to sustain its claim for the issuance of an injunctive
relief. Matters, theories or arguments not brought out in the proceedings below will ordinarily not be considered by a reviewing court
as they cannot be raised for the first time on appeal. [59] The lower courts could thus not be faulted for not applying the fraud
exception rule not only because the existence of fraud was fundamentally interwoven with the issue of default still pending before

the arbitral tribunals, but more so, because petitioner never raised it as an issue in its pleadings filed in the courts below. At any rate,
petitioner utterly failed to show that it had a clear and unmistakable right to prevent LHCs call upon the Securities.
Of course, prudence should have impelled LHC to await resolution of the pending issues before the arbitral tribunals prior to
taking action to enforce the Securities. But, as earlier stated, the Turnkey Contract did not require LHC to do so and, therefore, it
was merely enforcing its rights in accordance with the tenor thereof. Obligations arising from contracts have the force of law
between the contracting parties and should be complied with in good faith. [60] More importantly, pursuant to the principle of autonomy
of contracts embodied in Article 1306 of the Civil Code, [61] petitioner could have incorporated in its Contract with LHC, a proviso that
only the final determination by the arbitral tribunals that default had occurred would justify the enforcement of the Securities.
However, the fact is petitioner did not do so; hence, it would have to live with its inaction.
With respect to the issue of whether the respondent banks were justified in releasing the amounts due under the Securities,
this Court reiterates that pursuant to the independence principle the banks were under no obligation to determine the veracity of
LHCs certification that default has occurred. Neither were they bound by petitioners declaration that LHCs call thereon was
wrongful. To repeat, respondent banks undertaking was simply to pay once the required documents are presented by the
beneficiary.
At any rate, should petitioner finally prove in the pending arbitration proceedings that LHCs draws upon the Securities were
wrongful due to the non-existence of the fact of default, its right to seek indemnification for damages it suffered would not normally
be foreclosed pursuant to general principles of law.
Moreover, in a Manifestation,[62] dated 30 March 2001, LHC informed this Court that the subject letters of credit had been fully
drawn. This fact alone would have been sufficient reason to dismiss the instant petition.
Settled is the rule that injunction would not lie where the acts sought to be enjoined have already become fait accompli or an
accomplished or consummated act.[63] In Ticzon v. Video Post Manila, Inc.[64] this Court ruled that where the period within which the
former employees were prohibited from engaging in or working for an enterprise that competed with their former employerthe very
purpose of the preliminary injunction has expired, any declaration upholding the propriety of the writ would be entirely useless as
there would be no actual case or controversy between the parties insofar as the preliminary injunction is concerned.
In the instant case, the consummation of the act sought to be restrained had rendered the instant petition mootfor any
declaration by this Court as to propriety or impropriety of the non-issuance of injunctive relief could have no practical effect on the
existing controversy.[65] The other issues raised by petitioner particularly with respect to its right to recover the amounts wrongfully
drawn on the Securities, according to it, could properly be threshed out in a separate proceeding.
One final point. LHC has charged petitioner of forum-shopping. It raised the charge on two occasions. First, in its CounterManifestation dated 29 June 2004[66] LHC alleges that petitioner presented before this Court the same claim for money which it has
filed in two other proceedings, to wit: ICC Case No. 11264/TE/MW and Civil Case No. 04-332 before the RTC of Makati. LHC argues
that petitioners acts constitutes forum-shopping which should be punished by the dismissal of the claim in both forums. Second, in
its Comment to Petitioners Motion for Leave to File Addendum to Petitioners Memorandum dated 8 October 2004, LHC alleges that
by maintaining the present appeal and at the same time pursuing Civil Case No. 04-332wherein petitioner pressed for judgment on
the issue of whether the funds LHC drew on the Securities should be returnedpetitioner resorted to forum-shopping. In both
instances, however, petitioner has apparently opted not to respond to the charge.
Forum-shopping is a very serious charge. It exists when a party repetitively avails of several judicial remedies in different
courts, simultaneously or successively, all substantially founded on the same transactions and the same essential facts and
circumstances, and all raising substantially the same issues either pending in, or already resolved adversely, by some other court.
[67]
It may also consist in the act of a party against whom an adverse judgment has been rendered in one forum, of seeking another
and possibly favorable opinion in another forum other than by appeal or special civil action of certiorari, or the institution of two or
more actions or proceedings grounded on the same cause on the supposition that one or the other court might look with favor upon
the other party.[68] To determine whether a party violated the rule against forum-shopping, the test applied is whether the elements
of litis pendentia are present or whether a final judgment in one case will amount to res judicata in another.[69] Forum-shopping
constitutes improper conduct and may be punished with summary dismissal of the multiple petitions and direct contempt of court. [70]
Considering the seriousness of the charge of forum-shopping and the severity of the sanctions for its violation, the Court will
refrain from making any definitive ruling on this issue until after petitioner has been given ample opportunity to respond to the
charge.
WHEREFORE, the instant petition is DENIED, with costs against petitioner.
Petitioner is hereby required to answer the charge of forum-shopping within fifteen (15) days from notice.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur.