PARTIES:

Keng Hua Paper Products consignee, receiver of shipment

Sea-Land Service Inc. shipping company, transporter of waste paper
Ho Kee Waste Paper shipper

DEFINITIONS:
Bill of lading - document issued by a carrier to a shipper, acknowledging that specified goods have been received on
board as cargo for conveyance to a named place for delivery to the consignee who is usually identified.

Demurrage an allowance or compensation for the delay or detention of a ship/vessel; has reference to the ships
expenses, wear and tear, and common employment.

FACTS:
- Keng Hua purchased from Ho Kee fifty tons of waste paper, with partial shipment permitted.
- On June 29, 1982, Sea-Land received at its Hong Kong terminal a sealed container containing 67 bales of unsorted
waste paper for shipment to Keng Hua in Manila. A bill of lading to cover the shipment was issued by Sea-Land.
- However, the June 29 shipment was 10 tons more than the remaining balance of the purchase/order, as
manifested under the letter of credit. (Keng Hua ordered 50 tons. 10 tons na lang dapat yung kulang/balance. Pero
yung June 29 shipment, 20 tons of waste paper.)
- On July 9, 1982, the shipment was discharged at the Manila International Container Port. Notices of arrival were
transmitted to Keng Hua but it failed to discharge the shipment from the container during the free time or grace
period. The waste paper remained inside Sea-Lands container from the expiration of the free time period (July 29)
until the shipment was unloaded on November 22, 1983 (481 days).
- During the 481-day period, demurrage charges accrued. Numerous demands for Keng Hua to pay but it refused to
settle its obligation.

PROCEDURAL HISTORY:
- Sea-Land sued Keng Hua for collection and damages.
- The Regional Trial Court of Manila rendered judgment in favor of Sea-Land, and ordered Keng Hua to pay P67,340
as demurrage charges with interest at the legal rate from the date of the extrajudicial demand. Also, Keng Hua must
pay 10% of the total amount due as attorneys fees/litigation expenses.
- Court of Appeals affirmed in toto the RTC.

ISSUES:
1) WoN Keng Hua accepted the bill of lading.
2) WoN the award of P67,340 to Sea-Land was proper
3) WoN Keng Hua was correct in not accepting the overshipment
4) WoN the award of legal interest from the date of Sea-Lands extrajudicial demand was proper

PETITIONERS ARGUMENTS:
- If Keng Hua accepted the shipment, it would be violating Central Bank rules and regulations and custom and tariff
laws. It would be tantamount to smuggling. It would make Keng Hua vulnerable to legal sanctions.
- Sea-Land has no cause of action against Keng Hua because Keng Hua did not hire Sea-Land. The cause of action
should be against the shipper, Ho Kee. The demurrage was a consequence of the shippers mistake of shipping more
than wahat was bought.
- Keng Hua duly notified Sea-Land about the wrong shipment through a letter dated January 24, 1983.
- Keng Hua is not bound by the bill of lading because it never gave its consent. It admits physical acceptance of the
bill of lading, but argues that its subsequent actions belie the finding that it accepted the terms.
- Notice of Refused or On Hand Freight: proof that Keng Hua declined to accept the shipment.

RESPONDENTS ARGUMENTS:
- None really, just that Keng Hua should pay demurrage charges since it delayed Sea-Lands vessel by failing to
unload the shipment during the free time period.

RATIO:
1) YES, Keng Hua accepted and is thus bound by the bill of lading.
- A bill of lading has two functions:
a) receipt for the goods shipped,
b) a contract by which three parties (shipper, carrier, and consignee) undertake specific responsibilities
and assume stipulated obligations.
- A bill of lading delivered and accepted constitutes the contract of carriage even though not signed because the
acceptance of a paper containing the terms of a proposed contract generally constitutes an acceptance of the
contract and of all its terms and conditions of which the acceptor has actual or constructive notice.
- Acceptance = perfect and binding contract
- The bill of lading between Ho Kee, Keng Hua, and Sea-Land was a valid and PERFECTED contract. Section 17 of
the bill of lading provides that the shipper and consignee were liable for demurrage charges for the failure to
discharge the shipment within the grace period.
- SC not persuaded by Keng Huas arguments. Keng Hua did not immediately object to or dissent from any term or
stipulated in the bill of lading. It waited for SIX MONTHS to send a letter to Sea-Land saying that it would not accept
the shipment.
- The inaction for such a long period conveys the clear inference that it accepted the terms and conditions of
the bill of lading.
- Re: Notice of Refused or On Hand Freight: said notice was not written by Keng Hua; it was sent by Sea-Land to
Keng Hua four months after it received the bill of lading. Its only significance is to highlight Keng Huas prolonged
failure to object to the bill of lading.
- Issue of WoN Keng Hua accepted the bill of lading is raised for the first time in the SC (not raised in the lower
courts). Hence, it is barred by estoppel.
- Prolonged failure to receive and discharge cargo -> violation of terms of bill of lading -> liability for demurrage

2) YES, it is proper
- Keng Hua argued that Sea-Land made no demand for the sum of P67,340. Also, Sea-Lands loss and prevention
manager (P50,260) and its counsel (P37,800) asked for different amounts.
- The amount fo P67,340 was a factual conclusion of the trial court, affirmed by the Court of Appeals, and is
therefore binding on the SC. Such finding is supported by extant evidence.
- Re: discrepancy in amounts demanded: result of the variance of dates when the demands were made. The longer
the cargo remained unclaimed, the higher the demurrage. Thus when counsel demanded on April 24, 1983 P37,800,
it already ballooned to P67,340 by November 22.

3) NO.
- Re: violation of laws: mere apprehension of violating said laws, without a clear demonstration that taking delivery of
the shipment has become legally impossible, cannot defeat Keng Huas obligations under the bill of lading.

4) NO.
- Based on NCC 2209: interest rate is six percent per annum.
- Bill of lading did not specify the amount of demurrage; this was only established during the trial court decision.
Hence, the rate is 6% to be computed from the trial court decision (Sept. 28, 1990), plus 12% on the total then
outstanding from the time judgment becomes final and executory until its satisfaction.

* In a letter of credit, there are three distinct and independent contracts:
a) contract of sale between buyer and seller
b) contract of buyer with issuing bank
c) letter of credit proper where bank promises to pay seller

- These three are to be maintained in perpetual separation.
- The contract of carriage in the bill of lading must be TREATED INDEPENDENTLY of the contract of sale and
contract with issuing bank. Any discrepancy between the contract of sale and letter of credit will NOT AFFECT the
validity of the contract of carriage in the bill of lading.
- The carrier cannot be expected to go beyond the representation of the shipper in the bill of ladi ng and to verify their
accuracy vis--vis the contract of sale and the letter of credit.
- Carrier had no knowledge of the contents of the container.

DISPOSITIVE:
- CA decision is AFFIRMED, legal interest MODIFIED to 6% to be computed from the trial court decision (Sept. 28,
1990), plus 12% on the total then outstanding from the time judgment becomes final and executory until its
satisfaction







Prudential Bank v. IAC (1992)

DOCTRINE:
Through a letter of credit, the bank merely substitutes its own promise to pay for one of its customers who in return
promises to pay the bank the amount of funds mentioned in the letter of credit plus credit or commitment fees
mutually agreed upon.

FACTS:
Philippine Rayon Mills, Inc.(PRMI) entered into a contract with Nissho Co., Ltd. of Japan for the importation of textile
machineries under a 5-year deferred payment plan. To effect the payment, PRMI applied for a commercial letter of
credit with the Prudential Bank and Trust Company in favor of Nissho. Prudential Bank opened Letter of Credit No.
DPP-63762 for $128,548.78 Against this letter of credit, drafts were drawn and issued by Nissho, which were all paid
by the Prudential Bank through its correspondent in Japan, the Bank of Tokyo, Ltd. Two of the original drafts were
accepted by PRMI through its president, Anacleto R. Chi, while the others were not. Upon the arrival of the
machineries, the Prudential Bank indorsed the shipping documents to the PRMI which accepted delivery of the same.
To enable PRMI to take delivery of the machineries, it executed, by prior arrangement with the Prudential Bank, a
trust receipt which was signed by Anacleto R. Chi in his capacity as President of PRMI company

At the back of the trust receipt was printed a form to be accomplished by 2 sureties who, by the very terms and
conditions thereof, were to be jointly and severally liable to the Prudential Bank should the PRMI fail to pay the total
amount or any portion of the drafts issued by Nissho and paid for by Prudential Bank. . PRMI was able to take
delivery of the textile machineries and installed the same at its factory site. Chi argued that presentment for
acceptance was necessary to make PRMI liable. The trial court ruled that that presentment for acceptance was an
indispensable requisite for Philippine Rayons liability on the drafts to attach.

ISSUE: WON presentment for acceptance of the drafts was indispensable to make Philippine Rayon liable thereon.

HELD: NO. (Philippine Rayon can still be liable even without presentment)

Both the trial court and the public respondent ruled that Philippine Rayon could be held liable for the two (2) drafts
because only these appear to have been accepted by the latter after due presentment. The liability for the remaining
ten (10) drafts did not arise because the same were not presented for acceptance. In short, both courts concluded
that acceptance of the drafts by Philippine Rayon was indispensable to make the latter liable thereon.

They are both in error. The transaction in the case at bar stemmed from Philippine Rayon's application for a
commercial letter of credit with the petitioner in the amount of $128,548.78 to cover the former's contract to purchase
and import loom and textile machinery from Nissho Company, Ltd. of Japan under a five-year deferred payment plan.
Petitioner approved the application. As correctly ruled by the trial court in its Order of 6 March 1975:

. . . By virtue of said Application and Agreement for Commercial Letter of Credit, plaintiff bank 10 was under
obligation to pay through its correspondent bank in Japan the drafts that Nisso (sic) Company, Ltd.,
periodically drew against said letter of credit from 1963 to 1968, pursuant to plaintiff's contract with the
defendant Philippine Rayon Mills, Inc. In turn, defendant Philippine Rayon Mills, Inc., was obligated to pay
plaintiff bank the amounts of the drafts drawn by Nisso (sic) Company, Ltd. against said plaintiff bank
together with any accruing commercial charges, interest, etc. pursuant to the terms and conditions stipulated
in the Application and Agreement of Commercial Letter of Credit Annex "A".

A letter of credit is defined as an engagement by a bank or other person made at the request of a customer that the
issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit.
Through a letter of credit, the bank merely substitutes its own promise to pay for one of its customers who in return
promises to pay the bank the amount of funds mentioned in the letter of credit plus credit or commitment fees
mutually agreed upon.

In the instant case, the drawee was the herein petitioner. It was to the latter that the drafts were presented for
payment. In fact, there was no need for acceptance as the issued drafts are sight drafts. Presentment for acceptance
is necessary only in the cases expressly provided for in Section 143 of the Negotiable Instruments Law (NIL). The
said section reads that presentment for acceptance must be made where the bill is payable after sight, or in any other
case, where presentment for acceptance is necessary in order to fix the maturity of the instrument and that in no
other case is presentment for acceptance necessary in order to render any party to the bill liable.

Sight drafts do not require presentment for acceptance.

The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer; this may be done in
writing by the drawee in the bill itself, or in a separate instrument.

The parties herein agree, and the trial court explicitly ruled, that the subject, drafts are sight drafts. Said the latter:

. . . In the instant case the drafts being at sight, they are supposed to be payable upon acceptance unless
plaintiff bank has given the Philippine Rayon Mills Inc. time within which to pay the same. The first two drafts
(Annexes C & D, Exh. X & X-1) were duly accepted as indicated on their face (sic), and upon such
acceptance should have been paid forthwith. These two drafts were not paid and although Philippine Rayon
Mills ought to have paid the same, the fact remains that until now they are still unpaid.

They are then, pursuant to Section 7 of the NIL, payable on demand. Section 7 provides that an instrument is payable
on demand when so it is expressed to be payable on demand, or at sight, or on presentation.

Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment at maturity of any accepted draft, bill of
exchange or indebtedness shall not be extinguished or modified" 17 does not, contrary to the holding of the public
respondent, contemplate prior acceptance by Philippine Rayon, but by the petitioner.

Acceptance, however, was not even necessary in the first place because the drafts which were eventually issued
were sight drafts. And even if these were not sight drafts, thereby necessitating acceptance, it would be the petitioner
and not Philippine Rayon which had to accept the same for the latter was not the drawee. Presentment for
acceptance is defined as the production of a bill of exchange to a drawee for acceptance. The trial court and the
public respondent, therefore, erred in ruling that presentment for acceptance was an indispensable requisite for
Philippine Rayon's liability on the drafts to attach.

Contrary to both courts' pronouncements, Philippine Rayon immediately became liable thereon upon petitioner's
payment thereof. Such is the essence of the letter of credit issued by the petitioner. A different conclusion would
violate the principle upon which commercial letters of credit are founded because in such a case, both the beneficiary
and the issuer, Nissho Company Ltd. and the petitioner, respectively, would be placed at the mercy of Philippine
Rayon even if the latter had already received the imported machinery and the petitioner had fully paid for it. The
typical setting and purpose of a letter of credit are described in Hibernia Bank and Trust Co. vs. J. Aron & Co., Inc.,
thus:

Commercial letters of credit have come into general use in international sales transactions where much time
necessarily elapses between the sale and the receipt by a purchaser of the merchandise, during which
interval great price changes may occur. Buyers and sellers struggle for the advantage of position. The seller
is desirous of being paid as surely and as soon as possible, realizing that the vendee at a distant point has it
in his power to reject on trivial grounds merchandise on arrival, and cause considerable hardship to the
shipper. Letters of credit meet this condition by affording celerity and certainty of payment. Their purpose is
to insure to a seller payment of a definite amount upon presentation of documents. The bank deals only with
documents. It has nothing to do with the quality of the merchandise. Disputes as to the merchandise shipped
may arise and be litigated later between vendor and vendee, but they may not impede acceptance of drafts
and payment by the issuing bank when the proper documents are presented.