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CASES UNDER L/C

Transfield Philippines vs Luzon Hydro Electric Corp.


(GR No 146717, Nov 22, 2004, Tinga)
Transfield entered into a turn-key contract with Luzon Hydro Corp. (LHC).Under the contract, Transfield were to
construct a hydro-electric plants in Benguet and Ilocos. The contract provides for a period for which the project is to
be completed and also allows for the extension of the period provided that the extension is based on justifiable
grounds such as fortuitous event. In order to guarantee performance by Transfield, two stand-by letters of credit
were required to be opened. During the construction of the plant,T ransfield requested for extension of time citing
fortuitous events brought about by typhoon, barricades and demonstration. LHC did not give due course to the
extension of the period prayed for but referred the matter to arbitration committee.
In the meanwhile, because of the delay in the construction of the plant, LHC called on the stand-by letters of credit
because of default. However, the demand was objected by Transfield on the ground that there is still pending
arbitration on their request for extension of time. LHC invoked the independence principle. On the other hand,
Transfield claims fraud on the part of LHC on calling the stand-by letters of credit. Under the independence
principle, a LC accommodation is entirely distinct and separate, independent agreement. It is not supposed to be
affected by the main contract upon which it rests.
The court held for the LHC. Following the independence principle, even granting that there is still issue to be
resolved arising from the turn-key project. This issue is not supposed to affect the obligation of the bank to pay the
letter of credit in question. The court stressed that a LC accommodation is intended to benefit not only the
beneficiary therein but the applicant thereon. On the issue of fraud, the SC held that there is nothing in the turn-key
contract which states that all issues between the parties must be resolved first before LHC can call on the stand-by
LC but the contract provides that if Transfield defaults, then LHC can call on these stand-by LC.
G.R. No. L-46658

May 13, 1991

PHILIPPINE NATIONAL BANK, petitioner,


vs.
HON. GREGORIO G. PINEDA, in his capacity as Presiding Judge of the Court of First Instance of Rizal,
Branch XXI and TAYABAS CEMENT COMPANY, INC., respondents.
FACTS:
1. The Sps. Arroyo obtained a loan of P580,000 from PNB to purchase 60% of the subscribed capital stock and
thereby acquire the controlling interest of Tayabas Cement Company, Inc. (TCC). As security for the loan, the Sps.
mortgage their real property in La Vista.
2. Thereafter, TCC filed with PNB an application and agreement for the establishment of an 8 year deferred LC for
USD$7.0 million in favor of Toyo Menka Kaisha Ltd. of Tokyo (Toyo) to cover the imporation of a cement plant
machinery and equipment.
3. Upon approval of said application and the opening of an L/C by PNB in favor of Toyo, the Sps. executed a surety
agreement to secure the accommodation.
4. The imported cement plant machinery and equipment arrived from Japan and were released to TCC under a trust
receipt agreement. Toyo correspondingly made drawings against the LCs as scheduled.
5. TCC, however failed to remit and /or pay the corresponding amount covered by the drawings. Thus, PNB
notified TCC of its intention to repossess , as it later did, the imported machinery .
6. On July 18, 1975, PNB filed with the City Sheriff of QC a petition for extra-judicial foreclosure under PD 385 of
the La Vista property. PNB was the highest bidder at P1.0 million. The Sps. wanted the difference to be remitted to

them between their personal loan with the bank of P499,060.25 and the P1.0 million since such did not involve the
TCC account.
7. PNB filed a supplemental petition requesting the Sheriffs office to proceed with the sale of the real properties to
satisfy not only the account of P499,000 but also the amount of P35 million , as sureties for TCC.
8. Before the City Sheriff could conduct the sale, TCC filed for the issuance of a writ of preliminary injunction to
restrain the foreclosure of the La Vista property and to declare that the obligation with PNB has been fully paid, by
reason of the repossession of the imported machinery and equipment.
ISSUE: Whether or not TCCs liability has been extinguished by the repossession by PNB of the imported cement
plant machinery and equipment.
HELD: NO.
1. The ruling is in favor of PNB. It must be remembered that PNB took possession of the imported cement plant
machinery and equipment pursuant to the trust receipt agreement executed by and between PNB and TCC, giving
PNB the unqualified right to the possession and disposal of all property shipped under the L/C until such time as all
the liabilities and obligations under said letter had been discharged.
2. PNB's possession of the subject machinery and equipment being precisely as a form of security for the advances
given to TCC under the Letter of Credit, said possession by itself cannot be considered payment of the loan
secured thereby. Payment would legally result only after PNB had foreclosed on said securities, sold the same and
applied the proceeds thereof to TCC's loan obligation. Mere possession does not amount to foreclosure for
foreclosure denotes the procedure adopted by the mortgagee to terminate the rights of the mortgagor on the property
and includes the sale itself.
3. Neither can said repossession amount to dacion en pago. Dation in payment takes place when property is
alienated to the creditor in satisfaction of a debt in money and the same is governed by sales. Dation in payment is
the delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the
performance of the obligation. As aforesaid, the repossession of the machinery and equipment in question was
merely to secure the payment of TCC's loan obligation and not for the purpose of transferring ownership thereof to
PNB in satisfaction of said loan. Thus, no dacion en pago was ever accomplished.
4. Proceeding from this finding, PNB has the right to foreclose the mortgages executed by the spouses Arroyo as
sureties of TCC. A surety is considered in law as being the same party as the debtor in relation to whatever is
adjudged touching the obligation of the latter, and their liabilities are interwoven as to be inseparable. As sureties,
the Arroyo spouses are primarily liable as original promissors and are bound immediately to pay the creditor the
amount outstanding.

FEATI BANK VS. CA


FACTS:
Note: Feati as a notifying bank is only obliged to notify and transmit to the seller the LC.
Bernardo Villaluz (seller) agreed to sell to Christiansen (buyer) 2,000 cubic meters of lauan logs at a price of $27 per
cubic meter FOB. Security Pacific National Bank of LA (Security) issued an Irrevocable Letter of Credit. Said letter
of credit was mailed to FEATI bank and one of the documents required to be submitted by the seller to the bank is
the Certification from Han Axel Christiansen that the logs have been approved prior to shipping in accordance
with terms and conditions of corresponding purchase order. Also incorporated by reference in the letter of credit is
the Uniform Customs and Practice for Documentary Credits (UCP).

The logs were thereafter loaded on the vessel Zenlin Glory which was chartered by Christiansen. It was certified to
be in good condition and exportable. The logs arrived at Korea and were received by the consignee Hanmi Trade
Devt Comp. and were subsequently sold to another party.
However Christiansen failed and refused to issue the certificate despite repeated demands by Villaluz. Due to the
absence of the said certificate, Feati Bank refused to advance the payment on the letter of credit. because of the
situation of Villaluz, Central Bank issued a memorandum declaring that the requirement of CERTIFICATION is not
allowed. However such memo only came out after the letter of credit has already lapsed.
RTC ruled in favor of Villaluz and held Feati Bank and Christiansen solildarily liable, it held that:
1.

Feati Bank is liable because it failed to negotiate the letter of credit in the absence of the certification even
if the Central Bank held such requirement as void.

2.

That because the LC is irrevocable, the issuing bank, Security, is deemed to honor the LC upon
presentment. And by accepting the instructions from the issuing bank Feati assumed the same undertaking.

3.

Under the principles and laws on both trust and estoppels. When Feati Bank accepted its role as the
notifying and negotiating bank in behalf of the issuing bank, it in effect accepted a trust reposed on it and
became a trustee in relation to Villaluz.

CA affirmed and further held:


1.

The LC was a confirmed LC in which the notifying bank gives its assurance also that the opening banks
obligation will be performed. The notifying bank in such a case will not simply transmit but will confirm
the opening banks obligation by making it also its own understanding, commitment or guaranty or
obligation.

ISSUE:
1.

W/N Feati Bank can be held liable for the LC absence the certification required by the LC.

RULING:
NO, Feati Bank is not liable. It is already a settled rule in Commercial transaction involving letter of credit that the
documents tendered must strictly conform to the terms of the LC. In this case, the mere fact that the certification was
required by the LC means that the document is of vital importance to the buyer and therefore must be submitted
before the notifying bank is compelled to honor the LC. Thus failure of Villaluz to surrender the Certification is
fatal.
Under the UCP1 the bank may 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 Feati Bank deals only with
documents, the absence of any document required in the LC justifies the refusal by the correspondent bank to
1

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)

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.
SC also held that the decision of the TC was wrong in holding that irrevocable and confirmed credit is synonymous.
It held that an irrevocable credit refers to the duration of the LC. On the other hand confirmed letter pertains to the
obligation assumed by the bank, in this case, the correspondent bank gives an assurance to the beneficiary that it will
undertake the issuing banks obligation as its own according to the terms and conditions of the credit. Hence it does
not mean that the mere fact that a LC is irrevocable imply that the Correspondent bank in accepting the instructions
of the issuing bank has also confirmed the LC.
The SC also held that in this case Feati Bank was merely a notifying bank 2 and not a negotiating bank 3 nor a
confirming bank4. In this case the LC merely provided Feati Bank forward the enclosed original credit to Villaluz.
As a notifying bank, its responsibility was solely to notify and/or transmit the documentary of credit to Villaluz and
its obligation ends there. There is neither proof that Feati Bank confirmed the letter, the $75,000 loan granted by
Feati Bank to Villaluz was not in anticipation of the loan but was an isolated transaction, the logical conclusion is
that the LC was merely a collateral. By extending the loan it assumed the character of a negotiating bank but even
then Feati bank was still not liable because there was no contractual relationship between Feati and Villaluz.
Neither was there a trust5 between Feati Bank (trustee) and Villaluz (beneficiary). the mere opening of a LC 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 LC. The
correspondent bank does not receive in advance the sum of money from the issuing bank. On the contrary, when
they accept the tender and pays the amount, it gets the money from its own funds and then later seeks reimbursement
from the issuing bank. Also as notifying bank it cannot be held liable even if there is a trust created.
Neither was there a guarantee. It is fundamental that an irrevocable credit is independent not only of the contract
between the buyer and the seller but also of the credit agreement between the issuing bank and the buyer. Feati Bank
has no business with the relationship of Christiansen and Security it merely being a notifying bank. Feati Bank was
only following instruction of the issuing bank.
But even if all of this argument existed (trust, guarantee, and confirming bank, Feati Bank cannot be compelled to
pay because there was a failure on the part of Villaluz to comply with the terms of the LC which is the absence of
the certificate. It cannot be argued that such a requirement is illegal because such pronouncement by the Central
Bank was only done after the issuance of the LC, when the LC was issued there was still no such prohibition.

RELIANCE COMMODITIES V. DAEWOO

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. (no contractual relationship with seller/benificiary)

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. (no contractual relationship
with seller/benificiary)

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.

trust has been defined as the "right, enforceable solely in equity, to the beneficial enjoyment of property the legal title to which is
vested to another." Therefore, In order therefore for the trust theory to be sustained, Feati Bank 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 Viallaluz.
This does not obtain in this case.

DIGEST:
The failure of a buyer seasonably to furnish an agreed letter of credit is a breach of the contract between
buyer and seller. Where the buyer fails to open a letter of credit as stipulated, the seller or exporter is entitled
to claim damages for such breach.
Facts: Reliance Commodities, Inc. (Reliance) and Daewoo Industrial Co Ltd (Daewoo) entered into a contract of
sale where Reliance undertook to ship and deliver to Daewoo 2,000 tons of foundry pig iron. First contract was
consummated and completed but Daewoo fell short of 135.655 metric tons. Second contract for 2,000 metric tons
was also perfected. However, Reliances application for a letter of credit was denied by the China Banking
Corporation, and it was shown later that the reason for this is that it has exceeded its foreign exchange allocation.
Because of the failure of Reliance to comply with its undertaking under the contract, Daewoo was forced to sell the
foundry pig irons to another buyer at a lower price. Reliance filed an action for damages against Daewoo for the
recovery of P226,370.48 representing the value of the short delivery of 135.655 metric tons of foundry pig iron
under the first contract. Daewoo filed a counterclaim, contending that Reliance was guilty of breach of contract
when it failed to open a letter of credit as required in the second contract.
Issue: Whether or not Reliance is liable for breach of contract by failing to obtain the letter of credit
Held: Daewoo is liable for damages because the contract to deliver the goods were already perfected. The opening
of an L/C upon application of Reliance was not a condition precedent for the birth of the obligation of Reliance to
purchase foundry pig iron from Daewoo. As a rule, the failure of to open the appropriate letter of credit did not
prevent the birth of the contract, and neither did such failure extinguish the contract.
In the instant case, the opening of the letter of credit in favor of Daewoo was an obligation of Reliance and the
performance of that obligation by Reliance was a condition for enforcement of the reciprocal obligation of Daewoo
to ship the subject matter of the contract the foundry pig iron to Reliance. But the contract itself between
Reliance and Daewoo had already sprung into legal existence and was enforceable.
Thus the failure of a buyer seasonably to furnish an agreed letter of credit is a breach of he contract between buyer
and seller. Where the buyer fails to open a letter of credit as stipulated, the seller or exporter is entitled to claim
damages for such breach. Damages for failure to open a commercial credit may, in appropriate cases, include the
loss of profit which the seller would reasonably have made had the transaction been carried out.
Once the credit is established, the seller ships the goods to the buyer and in the process secures the required shipping
documents or documents of title. To get paid, the seller executes a draft and pays cash to the seller if it finds that the
documents submitted by the seller conform with what the letter of credit requires. The bank then obtains possession
of the documents upon paying the seller. The transaction is completed when the buyer reimburses the issuing bank
and acquires the documents entitling him to the goods. Under this arrangement, the seller gets paid only if he
delivers the documents of title over the goods, while the goods only after reimbursing the bank