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COMMON PROVISIONS ON LOAN

G.R. No. L-24968 . April 27, 1972



SAURA IMPORT and EXPORT CO., INC vs. DEVELOPMENT BANK OF THE PHILIPPINES



USURY LAW
G.R. No. 109563 July 9, 1996
PHILIPPINE NATIONAL BANK vs. COURT OF APPEALS, BASCOS



































































































G.R. No. 154183 August 7, 2003
SPOUSES TOH vs. SOLID BANK CORP

For the same reason, the grace period granted by respondent Bank represents unceremonious abandonment and
forfeiture of the fifteen percent (15%) marginal deposit and the twenty-five percent (25%) partial payment as fixed in the
"letter-advise." These payments are unmistakably additional securities intended to protect both respondent Bank and the
sureties in the event that the principal debtor FBPC becomes insolvent during the extension period. Compliance with
these requisites was not waived by petitioners in the Continuing Guaranty. For this unwarranted exercise of discretion,
respondent Bank bears the loss; due to its unauthorized extensions to pay granted to FBPC, petitioner-spouses Luis Toh
and Vicky Tan Toh are discharged as sureties under the Continuing Guaranty.
Finally, the foregoing omission or negligence of respondent Bank in failing to safe-keep the security provided by the
marginal deposit and the twenty-five percent (25%) requirement results in the material alteration of the principal
contract, i.e., the "letter-advise," and consequently releases the surety.
61
This inference was admitted by the Bank
through the testimony of its lone witness that "[w]henever this obligation becomes due and demandable, except when
you roll it over, (so) there is novation there on the original obligations." As has been said, "if the suretyship contract was
made upon the condition that the principal shall furnish the creditor additional security, and the security being furnished
under these conditions is afterwards released by the creditor, the surety is wholly discharged, without regard to the value
of the securities released, for such a transaction amounts to an alteration of the main contract."
62


G.R. No. 119800 November 12, 2003
FILIPINAS TEXTILE MILLS, INC. vs. COURT OF APPEALS
As regards the purported material alteration of the terms and conditions of the comprehensive surety agreement, we
rule that the extension of time granted to Filtex to pay its obligation did not release Villanueva from his liability. As thi s
Court held in Palmares vs. Court of Appeals:
32

"The neglect of the creditor to sue the principal at the time the debt falls due does not discharge the surety, even if such
delay continues until the principal becomes insolvent
The raison d'etre for the rule is that there is nothing to prevent the creditor from proceeding against the principal at any
time. At any rate, if the surety is dissatisfied with the degree of activity displayed by the creditor in the pursuit of his
principal, he may pay the debt himself and become subrogated to all the rights and remedies of the creditor.
It may not be amiss to add that leniency shown to a debtor in default, by delay permitted by the creditor without
change in the time when the debt might be demanded, does not constitute an extension of the time of payment, which
would release the surety. In order to constitute an extension discharging the surety, it should appear that the extension
was for a definite period, pursuant to an enforceable agreement between the principal and the creditor, and that it was
made without the consent of the surety or with a reservation of rights with respect to him. The contract must be one
which precludes the creditor from, or at least hinders him in, enforcing the principal contract within the period during
which he could otherwise have enforced it, and precludes the surety from paying the debt."


G.R. No. 34642 September 24, 1931
SEVERINO vs. SEVERINO
A guarantor or surety is bound by the same consideration that makes the contract effective between the principal
parties thereto. (Pyle vs. Johnson, 9 Phil., 249.) The compromise and dismissal of a lawsuit is recognized in law as a
valuable consideration; and the dismissal of the action which Felicitas Villanueva and Fabiola Severino had instituted
against Guillermo Severino was an adequate consideration to support the promise on the part of Guillermo Severino to
pay the sum of money stipulated in the contract which is the subject of this action. The promise of the appellant Echaus
as guarantor therefore binding. It is never necessary that the guarantor or surety should receive any part of the benefit, if
such there be, accruing to his principal. But the true consideration of this contract was the detriment suffered by the
plaintiffs in the former action in dismissing that proceeding, and it is immaterial that no benefit may have accrued either
to the principal or his guarantor.

G.R. No. 103066 April 25, 1996
WILLEX PLASTIC INDUSTRIES, CORPORATION vs. HON. COURT OF APPEALS

On the other hand, in Dio v. Court of Appeals the issue was whether the sureties could be held liable for an obligation
contracted after the execution of the continuing surety agreement. It was held that by its very nature a continuing
suretyship contemplates a future course of dealing. "It is prospective in its operation and is generally intended to provide
security with respect to future transactions." By no means, however, was it meant in that case that in all instances a
contrast of guaranty or suretyship should be prospective in application.
Indeed, as we also held in Bank of the Philippine Islands v. Foerster,
13
although a contract of suretyship is ordinarily not to
be construed as retrospective, in the end the intention of the parties as revealed by the evidence is controlling.
[4] Willex Plastic says that in any event it cannot be proceeded against without first exhausting all property of Inter-Resin
Industrial. Willex Plastic thus claims the benefit of excussion. The Civil Code provides, however:
Art. 2059. This excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;
The pertinent portion of the "Continuing Guaranty" executed by Willex Plastic and Inter-Resin Industrial in favor of IUCP
(now Interbank) reads:
If default be made in the payment of the NOTE/s herein guaranteed you and/or your principal/s may directly
proceed against Me/Us without first proceeding against and exhausting DEBTOR/s propertiesin the same manner as if
all such liabilities constituted My/Our direct and primary obligations. (emphasis supplied)
This stipulation embodies an express renunciation of the right of excussion.

G.R. No. 89775 November 26, 1992
DIO vs. HON. COURT OF APPEALS
Under the Civil Code, a guaranty may be given to secure even future debts, the amount of which may not known at the
time the guaranty is executed. 8 This is the basis for contracts denominated as continuing guaranty or suretyship. A
continuing guaranty is one which is not limited to a single transaction, but which contemplates a future course of
dealing, covering a series of transactions, generally for an indefinite time or until revoked. It is prospective in its operation
and is generally intended to provide security with respect to future transactions within certain limits, and contemplates a
succession of liabilities, for which, as they accrue, the guarantor becomes liable.
9
Otherwise stated, a continuing
guaranty is one which covers all transactions, including those arising in the future, which are within the description or
contemplation of the contract, of guaranty, until the expiration or termination thereof.
10
A guaranty shall be construed
as continuing when by the terms thereof it is evident that the object is to give a standing credit to the principal debtor to
be used from time to time either indefinitely or until a certain period, especially if the right to recall the guaranty is
expressly reserved. Hence, where the contract of guaranty states that the same is to secure advances to be made "from
time to time" the guaranty will be construed to be a continuing one.
11

In other jurisdictions, it has been held that the use of particular words and expressions such as payment of "any debt,"
"any indebtedness," "any deficiency," or "any sum," or the guaranty of "any transaction" or money to be furnished the
principal debtor "at any time," or "on such time" that the principal debtor may require, have been construed to indicate
a continuing guaranty.
12

Petitioners maintain, however, that their Continuing Suretyship Agreements cannot be made applicable to the 1979
obligation because the latter was not yet in existence when the agreements were executed in 1977; under Article 2052
of the Civil Code, a guaranty "cannot exist without a valid obligation." We cannot agree. First of all, the succeeding
article provides that "[a] guaranty may also be given as security for future debts, the amount of which is not yet known."
Secondly, Article 2052 speaks about a valid obligation, as distinguished from a void obligation, and not an existing or
current obligation. This distinction is made clearer in the second paragraph of Article 2052: Nevertheless, a guaranty may
be constituted to guarantee the performance of a voidable or an unenforceable contract. It may also guarantee a
natural obligation.

G.R. No. 138544 October 3, 2000
SECURITY BANK AND TRUST COMPANY vs. CUENCA
Being an onerous undertaking, a surety agreement is strictly construed against the creditor, and every doubt is resolved
in favor of the solidary debtor. The fundamental rules of fair play require the creditor to obtain the consent of the surety
to any material alteration in the principal loan agreement, or at least to notify it thereof. Hence, petitioner bank cannot
hold herein respondent liable for loans obtained in excess of the amount or beyond the period stipulated in the original
agreement, absent any clear stipulation showing that the latter waived his right to be notified thereof, or to give consent
thereto. This is especially true where, as in this case, respondent was no longer the principal officer or major stockholder
of the corporate debtor at the time the later obligations were incurred. He was thus no longer in a position to compel
the debtor to pay the creditor and had no more reason to bind himself anew to the subsequent obligations.
An obligation may be extinguished by novation, pursuant to Article 1292 of the Civil Code Novation of a contract is
never presumed. It has been held that "[i]n the absence of an express agreement, novation takes place only when the
old and the new obligations are incompatible on every point."
15
Indeed, the following requisites must be established: (1)
there is a previous valid obligation; (2) the parties concerned agree to a new contract; (3) the old contract is
extinguished; and (4) there is a valid new contract.
16
At the outset, we should emphasize that an essential alteration in the terms of the Loan Agreement without the consent
of the surety extinguishes the latters obligation. As the Court held in National Bank v. Veraguth,
30
"[i]t is fundamental in
the law of suretyship that any agreement between the creditor and the principal debtor which essentially varies the
terms of the principal contract, without the consent of the surety, will release the surety from liability."
Contending that the Indemnity Agreement was in the nature of a continuing surety, petitioner maintains that there was
no need for respondent to execute another surety contract to secure the 1989 Loan Agreement.
This argument is incorrect. That the Indemnity Agreement is a continuing surety does not authorize the bank to extend
the scope of the principal obligation inordinately.
37
In Dino v. CA,
38
the Court held that "a continuing guaranty is one
which covers all transactions, including those arising in the future, which are within the description or contemplation of
the contract of guaranty, until the expiration or termination thereof."
To repeat, in the present case, the Indemnity Agreement was subject to the two limitations of the credit
accommodation: (1) that the obligation should not exceed P8 million, and (2) that the accommodation should expire
not later than November 30, 1981. Hence, it was a continuing surety only in regard to loans obtained on or before the
aforementioned expiry date and not exceeding the total of P8 million.

G.R. No. L-34539 July 14, 1986
PRUDENCIO vs. THE HONORABLE COURT OF APPEALS
The mortgage cannot be separated from the promissory note for it is the latter which is the basis of determining whether
the mortgage should be foreclosed or cancelled. Without the promissory note which determines the amount of
indebtedness there would have been no basis for the mortgage.
True, if the Bank had not been the assignee, then the petition petitioners would be obliged to pay the Bank as their
creditor on the promissory note, irrespective of whether or not the deed of assignment had been violated. However, the
assignee and the creditor in this case are one and the samethe Bank itself. When the Bank violated the deed of
assignment, it prejudiced itself because its very violation was the reason why it was not paid on time in its capacity as
creditor in the promissory note. It would be unfair to make the petitioners now answer for the debt or to foreclose on their
property.

G.R. No. L-43862 January 13, 1989
MERCANTILE INSURANCE CO vs. YSMAEL, JR.,
It must be stressed that in the case at bar, the principal debtors, defendants-appellants herein, are simultaneously the
same persons who executed the Indemnity Agreement. Thus, the position occupied by them is that of a principal debtor
and indemnitor at the same time, and their liability being joint and several with the plaintiff-appellee's, the Philippine
National Bank may proceed against either for fulfillment of the obligation as covered by the surety bonds. There is,
therefore, no principle of guaranty involved and, therefore, the provision of Article 2071 of the Civil Code does not apply.
Otherwise stated, there is no more need for the plaintiff-appellee to exhaust all the properties of the principal debtor
before it may proceed against defendants-appellants.

G.R. No. L-10168 July 22, 1916
ARROYO, vs. JUNGSAY
The property pointed out by the sureties is not sufficient to pay the indebtedness; it is not salable; it is so incumbered that
third parties have, as we have indicated, full possession under claim of ownership without leaving to the absconding
guardian a fractional or reversionary interest without determining first whether the claim of one or more of the occupants
is well founded. In all these respects the sureties have failed to meet the requirements of article 1832 of the Civil Code.
Where a guardian absconds or is beyond the jurisdiction of the court, the proper method, under article 1834 of the Civil
Code and section 577 of the Code of Civil Procedure, in order to ascertain whether such guardian is liable and to what
extent, in order to bind the sureties on his official bond, is by a proceeding in the nature of a civil action wherein the
sureties are made parties and given an opportunity to be heard. All this was done in the instant case.

G.R. No. L-26449 May 15, 1969
LUZON STEEL CORPORATION vs. SIA
The surety's contention is untenable. The counterbond contemplated in the rule is evidently an ordinary guaranty where
the sureties assume a subsidiary liability. This is not the case here, because the surety in the present case bound itself
"jointly and severally" (in solidum) with the defendant; and it is prescribed in Article 2059, paragraph 2, of the Civil Code
of the Philippines that excusion (previous exhaustion of the property of the debtor) shall not take place "if he (the
guarantor) has bound himself solidarily with the debtor". The rule heretofore quoted cannot be construed as requiring
that an execution against the debtor be first returned unsatisfied even if the bond were a solidary one; for a procedural
rule may not amend the substantive law expressed in the Civil Code, and further would nullify the express stipulation of
the parties that the surety's obligation should be solidary with that of the defendant.
A second reason against the stand of the surety and of the court below is that even if the surety's undertaking were not
solidary with that of the principal debtor, still he may not demand exhaustion of the property of the latter, unless he can
point out sufficient leviable property of the debtor within Philippine territory. There is no record that the appellee surety
has done so. Says Article 2060 of the Civil Code of the Philippines:
ART. 2060. In order that the guarantor may make use of the benefit of excussion, he must set it up against the
creditor upon the latter's demand for payment from him, and point out to the creditor available property of the
debtor within Philippine territory, sufficient to cover the amount of the debt.
A third reason against the thesis of appellee is that, under the rule and its own terms, the counter-bond is only
conditioned upon the rendition of the judgment. Payment under the bond is not made to depend upon the delivery or
availability of the property previously attached, as it was under Section 440 of the old Code of Civil Procedure. Where
under the rule and the bond the undertaking is to pay the judgment, the liability of the surety or sureties attaches upon
the rendition of the judgment, and the issue of an execution and its return nulla bona is not, and should not be, a
condition to the right to resort to the bond.
3

It is true that under Section 17 recovery from the surety or sureties should be "after notice and summary hearing in the
same action". But this requirement has been substantially complied with from the time the surety was allowed to move
for the quashal of the writ of execution and for the cancellation of their obligation.

G.R. No. L-45848 November 9,1977
TOWERS ASSURANCE CORPORATION vs. ORORAMA SUPERMART
We hold that the lower court acted with grave abuse of discretion in issuing a writ of execution against the surety without
first giving it an opportunity to be heard as required in Rule 57 of tie Rules of Court which provides:
SEC. 17. When execution returned unsatisfied, recovery had upon bound. If the execution be
returned unsatisfied in whole or in part, the surety or sureties on any counterbound given pursuant to
the provisions of this rule to secure the payment of the judgment shall become charged on such
counterbound, and bound to pay to the judgment creditor upon demand, the amount due under
the judgment, which amount may be recovered from such surety or sureties after notice and
summary hearing in the same action.
Under section 17, in order that the judgment creditor might recover from the surety on the counterbond, it is necessary
(1) that execution be first issued against the principal debtor and that such execution was returned unsatisfied in whole
or in part; (2) that the creditor made a demand upon the surety for the satisfaction of the judgment, and (3) that the
surety be given notice and a summary hearing in the same action as to his liability for the judgment under his
counterbond.
The first requisite mentioned above is not applicable to this case because Towers Assurance Corporati on assumed a
solidary liability for the satisfaction of the judgment. A surety is not entitled to the exhaustion of the properties of the
principal debtor (Art. 2959, Civil Code; Luzon Steel Corporation vs. Sia, L-26449, May 15, 1969, 28 SCRA 58, 63).
But certainly, the surety is entitled to be heard before an execution can be issued against him since he is not a party in
the case involving his principal. Notice and hearing constitute the essence of procedural due process. (Martinez vs.
Villacete 116 Phil. 326; Insurance & Surety Co., Inc. vs. Hon. Piccio, 105 Phil. 1192, 1200, Luzon Surety Co., Inc. vs. Beson, L-
26865-66, January 30. 1970. 31 SCRA 313).

G.R. No. L-47369 June 30, 1987
COCHINGYAN, JR. vs. R & B SURETY AND INSURANCE COMPANY
The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without the surety
of his right to pay the creditor and to be immediately subrogated to the creditor's remedies against the principal debtor
upon the original maturity date. The surety is said to be entitled to protect himself against the principal debtor upon the
orginal maturity date. The surety is said to be entitled to protect himself against the contingency of the principal debtor
or the indemnitors becoming insolvent during the extended period. The underlying rationale is not present in the instant
case. As this Court has held,
merely delay or negligence in proceeding against the principal will not discharge a surety unless there
is between the creditor and the principal debtor a valid and binding agreement therefor, one which
tends to prejudice [the surety] or to deprive it of the power of obtaining indemnity by presenting a
legal objection for the time, to the prosecution of an action on the original security. 12
In the instant case, there was nothing to prevent the petitioners from tendering payment, if they were so minded, to PNB
of the matured obligation on behalf of R & B Surety and thereupon becoming subrogated to such remedies as R & B
Surety may have against PAGRICO.
The petitioners lose sight of the fact that the Indemnity Agreements are contracts of indemnification not only against
actual loss but against liability as well. 14 While in a contract of indemnity against loss as indemnitor will not be liable until
the person to be indemnified makes payment or sustains loss, in a contract of indemnity against liability, as in this case,
the indemnitor's liability arises as soon as the liability of the person to be indemnified has arisen without regard to whether
or not he has suffered actual loss. 15 Accordingly, R & B Surety was entitled to proceed against petitioners not only for
the partial payments already made but for the full amount owed by PAGRICO to the PNB.

G.R. No. 80078 May 18, 1993
ATOK FINANCE CORPORATION vs. COURT OF APPEALS,
Article 1629 of the Civil Code invoked by private respondents and accepted by the Court of Appeals is not, in the case
at bar, material. The liability of Sanyu Chemical to Atok Finance rests not on the breach of the warranty of solvency; the
liability of Sanyu Chemical was not ex lege (ex Article 1629) but rather ex contractu. Under the Deed of Assignment, the
effect of non-payment by the original trade debtors was breach of warranty of solvency by Sanyu Chemical, resulting in
turn in the assumption of solidary liability by the assignor under the receivables assigned. In other words, the assignor
Sanyu Chemical becomes a solidary debtor under the terms of the receivables covered and transferred by virtue of the
Deed of Assignment. And because assignor Sanyu Chemical became, under the terms of the Deed of Assignment,
solidary obligor under each of the assigned receivables, the other private respondents (the Arrieta spouses, Pablito
Bermundo and Leopoldo Halili), became solidarily liable for that obligation of Sanyu Chemical, by virtue of the operation
of the Continuing Suretyship Agreement. Put a little differently, the obligations of individual private respondent officers
and stockholders of Sanyu Chemical under the Continuing Suretyship Agreement, were activated by the resulting
obligations of Sanyu Chemical as solidary obligor under each of the assigned receivables by virtue of the operation of
the Deed of Assignment. That solidary liability of Sanyu Chemical is not subject to the limiting period set out in Article 1629
of the Civil Code.

G.R. No. 136603 January 18, 2002
TAEDO vs. ALLIED BANKING CORPORATION
Resolving the first issue, we note that the amendatory agreement between the respondent Allied Banking Corporation
and Cheng Ban Yek & Co., Inc. extended the maturity of the promissory notes without notice or consent of the petitioner
as surety of the obligations. However, the "continuing guarantee" executed by the petitioner provided that he consents
and agrees that the bank may, at any time or from time to time extend or change the time of payments and/or the
manner, place or terms of payment of all such instruments, loans, advances, credits or other obligations guaranteed by
the surety. Hence, the extensions of the loans did not release the surety.
11


TRUST RECEIPTS LAW
G.R. No. 90828 September 5, 2000
COLINARES vs. HONORABLE COURT OF APPEALS
A thorough examination of the facts obtaining in the case at bar reveals that the transaction intended by the parties
was a simple loan, not a trust receipt agreement.
Petitioners received the merchandise from CM Builders Centre on 30 October 1979. On that day, ownership over the
merchandise was already transferred to Petitioners who were to use the materials for their construction project. It was
only a day later, 31 October 1979, that they went to the bank to apply for a loan to pay for the merchandise.
This situation belies what normally obtains in a pure trust receipt transaction where goods are owned by the bank and
only released to the importer in trust subsequent to the grant of the loan. The bank acquires a "security interest" in the
goods as holder of a security title for the advances it had made to the entrustee.
35
The ownership of the merchandise
continues to be vested in the person who had advanced payment until he has been paid in full, or if the merchandise
has already been sold, the proceeds of the sale should be turned over to him by the importer or by his representative or
successor in interest.
36
To secure that the bank shall be paid, it takes full title to the goods at the very beginning and
continues to hold that title as his indispensable security until the goods are sold and the vendee is called upon to pay for
them; hence, the importer has never owned the goods and is not able to deliver possession.
37
In a certain manner, trust
receipts partake of the nature of a conditional sale where the importer becomes absolute owner of the imported
merchandise as soon as he has paid its price.
38

LETTERS OF CREDIT
G.R. No. 146717 November 22, 2004
TRANSFIELD PHILIPPINES, INC. vs. LUZON HYDRO CORPORATION
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

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

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."
Petitioner's 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 obligor's
nonperformance. They function, however, in distinctly different ways.
Traditionally, upon the obligor's default, the surety undertakes to complete the obligor's 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 surety's 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 applicant's 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 obligor's 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 beneficiary's 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 petitioner's 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.
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

Generally, injunction is a preservative remedy for the protection of one's 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

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.

G.R. No. 94209 April 30, 1991
FEATI BANK & TRUST COMPANY vs. THE COURT OF APPEALS
The pertinent provisions of the U.C.P. (1962 Revision) are:
Article 3.
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. .
. .
Article 7.
Banks must examine all documents with reasonable care to ascertain that they appear on their face to be in
accordance with the terms and conditions of the credit,"
Article 8.
Payment, acceptance or negotiation against documents which appear on their face to be in accordance with the
terms and conditions of a credit by a bank authorized to do so, binds the party giving the authorization to take up
documents and reimburse the bank which has effected the payment, acceptance or negotiation. (Emphasis
Supplied)
Under the foregoing provisions of the U.C.P., 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 the petitioner, 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.
The trial court appears to have overlooked the fact that an irrevocable credit is not synonymous with a confirmed credit.
These types of letters have different meanings and the legal relations arising from there varies. A credit may be
an irrevocable credit and at the same time a confirmed credit or vice-versa.
An irrevocable credit refers to the duration of the letter of credit. What is simply means is that the issuing bank may not
without the consent of the beneficiary (seller) and the applicant (buyer) revoke his undertaking under the letter. The
issuing bank does not reserve the right to revoke the credit. On the other hand, a confirmed letter of credit pertains to
the kind of obligation assumed by the correspondent bank. In this case, the correspondent bank gives an absolute
assurance to the beneficiary that it will undertake the issuing bank's obligation as its own according to the terms and
conditions of the credit. (Agbayani, Commercial Laws of the Philippines, Vol. 1, pp. 81-83)
Hence, the mere fact that a letter of credit is irrevocable does not necessarily imply that the correspondent bank in
accepting the instructions of the issuing bank has also confirmed the letter of credit. Another error which the lower court
and the Court of Appeals made was to confuse the obligation assumed by the petitioner.
In commercial transactions involving letters of credit, the functions assumed by a correspondent bank are classified
according to the obligations taken up by it. The correspondent bank may be called a notifying bank, a negotiating
bank, or a confirming bank.
In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or transmit to the
beneficiary the existence of the letter of credit. (Kronman and Co., Inc. v. Public National Bank of New York, 218 N.Y.S.
616 [1926]; Shaterian, Export-Import Banking, p. 292, cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76).
A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft under the letter of
credit. Its liability is dependent upon the stage of the negotiation. If before negotiation, it has no liability with respect to
the seller but after negotiation, a contractual relationship will then prevail between the negotiating bank and the seller.
(Scanlon v. First National Bank of Mexico, 162 N.E. 567 [1928]; Shaterian, Export-Import Banking, p. 293, cited in Agbayani,
Commercial Laws of the Philippines, Vol. 1, p. 76)
In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller and its liability is a
primary one as if the correspondent bank itself had issued the letter of credit. (Shaterian, Export-Import Banking, p. 294,
cited in Agbayani Commercial Laws of the Philippines, Vol. 1, p. 77)
In this case, the letter merely provided that the petitioner "forward the enclosed original credit to the beneficiary."
(Records, Vol. I, p. 11) Considering the aforesaid instruction to the petitioner by the issuing bank, the Security Pacific
National Bank, it is indubitable that the petitioner is only a notifying bank and not a confirming bank as ruled by the
courts below.
Since the petitioner was only a notifying bank, its responsibility was solely to notify and/or transmit the documentary of
credit to the private respondent and its obligation ends there.
The notifying bank may suggest to the seller its willingness to negotiate, but this fact alone does not imply that the
notifying bank promises to accept the draft drawn under the documentary credit.
A notifying bank is not a privy to the contract of sale between the buyer and the seller, its relationship is only with that of
the issuing bank and not with the beneficiary to whom he assumes no liability. It follows therefore that when the
petitioner refused to negotiate with the private respondent, the latter has no cause of action against the petitioner for
the enforcement of his rights under the letter. (See Kronman and Co., Inc. v. Public National Bank of New York, supra)
Whether therefore the petitioner is a notifying bank or a negotiating bank, it cannot be held liable. Absent any definitive
proof that it has confirmed the letter of credit or has actually negotiated with the private respondent, the refusal by the
petitioner to accept the tender of the private respondent is justified.
The concept of a trust presupposes the existence of a specific property which has been conferred upon the person for
the benefit of another. In order therefore for the trust theory of the private respondent to be sustained, the petitioner
should have had in its possession a sum of money as specific fund advanced to it by the issuing bank and to be held in
trust by it in favor of the private respondent. This does not obtain in this case.
The mere opening of a letter of credit, it is to be noted, does not involve a specific appropriation of a sum of money in
favor of the beneficiary. It only signifies that the beneficiary may be able to draw funds upon the letter of credit up to
the designated amount specified in the letter. It does not convey the notion that a particular sum of money has been
specifically reserved or has been held in trust.
What actually transpires in an irrevocable credit is that the correspondent bank does not receive in advance the sum of
money from the buyer or the issuing bank. On the contrary, when the correspondent bank accepts the tender and pays
the amount stated in the letter, the money that it doles out comes not from any particular fund that has been advanced
by the issuing bank, rather it gets the money from its own funds and then later seeks reimbursement from the issuing
bank.