You are on page 1of 3

FEATI BANK v CA 196 SCRA 576 Villaluz (seller) of logs to Christiansen (buyer) who got a letter of credit with

the Irrevocable Letter of Credit issued by Security Pacific National Bank. The letter of credit was mailed to Feati Bank and Trust Company with the instruction that it be forwarded to the beneficiary (Villaluz) upon certain conditions; Christiansen however never gave a certification required thus Feati never gave the letter of credit to Villaluz. TC/CA: both ruled in favor of Villaluz. ISSUE: is whether or not a correspondent bank is to be held liable under the letter of credit despite non-compliance by the beneficiary with the terms thereof. The Supreme Court held that Feati Bank is not liable. It is settled rule in commercial transactions involving letters of credit that the documents tendered must strictly conform to the terms of the letter of credit. The tender of documents by the beneficiary (seller) must include all documents required by the letter. A correspondent bank which departs from what has been stipulated under the letter of credit, as when it accepts a faulty tender, acts on its own risks and it may not thereafter be able to recover from the buyer or the issuing bank, as the case may be, the money thus paid to the beneficiary. Thus the rule of strict compliance. RULE OF STRICT COMPLAINCE: letters of credit are to be strictly complied with, which documents and shipping documents must be followed as stated in the letter. There is no discretion in the bank or trust company to waive any requirements. The terms of the letter constitutes an agreement between the purchaser and the bank. Under the UCP, an irrevocable credit is a definite undertaking on the part of the issuing bank and constitutes the engagement of that bank to the beneficiary and bona fide holders of drafts drawn and/or documents presented thereunder, that the provisions for payment, acceptance or negotiation contained in the credit will be duly fulfilled, provided that all the terms and conditions of the credit are complied with. An irrevocable credit may be advised to a beneficiary through another bank (the advising bank) without engagement on the part of that bank, but when an issuing bank authorizes or requests another bank to confirm its irrevocable credit and the latter does so, such confirmation constitutes a definite undertaking of the confirming bank. Under the foregoing provisions, the bank may only negotiate, accept or pay, if the documents tendered to it are on their face in accordance with the terms and conditions of the documentary credit. And since a correspondent bank, like Feati Bank, principally deals only with documents, the absence of any document required in the documentary credit justifies the refusal by the correspondent bank to negotiate, accept or pay the beneficiary, as it is not its obligation to look beyond the documents. It merely has to rely on the

completeness of the documents tendered by the beneficiary. (1) CA was incorrect in stating that letter of credit was a confirmed credit a. Irrevocable refers to duration of letter of credit; i. Issuing bank may not without the consent of seller and applicant revoke his undertaking under the applicant. b. Confirmed obligation assumed; gives absolute assurance that he will undertake obligation to beneficiary. i. Notifying notify of existence of letter of credit ii. Negotiating buys or discounts a draft under the letter of credit iii. Confirming assumes direct obligation to seller (beneficiary) c. In this case was merely notifying, and at best negotiating but still without liability since it didnt negotiate yet. d. Never showed that bank confirmed the letter of credit i. (X) loan (2) Not a trust a. Money given by correspondent bank does NOT come from funds by issuing bank but gets the money from own funds and seeks reimbursement later. (3) Not a guarantor a. Relationship between issuing bank and buyer is independent from letter of credit b. Irrevocable credit is a PRIMARY obligation -> more of an agency [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.

FACTS: Transfield undertook to render services for a hydro-electric power station to Luzon Hydro. To secure his obligation, he issued two stand-by letters of credit. Transfield and Luzon had a disagreement, and while in arbitration, Luzon tried to collect from the securities which the bank refused due to Transfields order. ISSUE: WON Luzon Hydro had a right to collect under the stand by letters of credit? YES (1) AS TO LETTERS OF CREDIT (DEFINITION)

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.[ 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. 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. The However, credits are also. Generally, credits in the non-sale settings have come to be known as standby credits (2) Kinds of LETTERS OF CREDIT (DISTINGUISH) Commercial Letters of Credit 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. Standby letters of credit used in non-sale settings where they serve to reduce the risk of nonperformance (other obligations)

he 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. (X) third-party beneficiary contract - the issuer must honor drafts drawn against a letter regardless of problems subsequently arising in the underlying contract. (X) assignment - banks customer cannot draw on the letter, it does not function as an assignment by the customer to the beneficiary. (X) guaranty/surety - entails a primary liability following a default. (X) negotiable instrument - not payable to order or bearer and is generally conditional, yet the draft presented under it is often negotiable. (4) INDEPENDENCE PRINCIPLE:

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

(contract of sale/import-export) Involve the payment of money under a contract of sale. the credit is payable upon certification of a party's nonperformance of the agreement

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

(3) Distinguish:

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.

(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. WHO MAY INVOKE: 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. But in this case, the applicants 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. 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.

In the instant case, petitioner failed to show that it has a clear and unmistakable right to restrain LHCs call on the Securiti es which would justify the issuance of preliminary injunction. 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. 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.

(5) FRAUD EXCEPTION 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]