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Sea-land, a shipping company, a foreign corporation licensed to do business in the PH, received
at its HK terminal a sealed container containing 76 bales of unsorted waste paper for
shipment to Keng Hua in Manila. Accordingly, a bill of lading was issued.
The shipment was discharged at the Manila Intl Container Port. Notices of arrival were
transmitted to Sea-land but it failed to discharge the shipment from the container during the
grace period. The said shipment remained inside Sea-lands container from the expiry of grace
period until the time when the shipment was unloaded (481 days). During that period,
demurrage charges accrued. Within the same period, Sea-land sent demand of payment to
Keng Hua who, however, refused to settle its obligation (P67,430). Numerous demands were
made on Keng Hua but the obligation remained unpaid. Hence, Sea-lands action for collection
and damages.
Keng Hua, in its answer, alleged that it purchased 50 tons of waste paper from the shipper in
HK, Ho Kee Waste Paper, as manifested in the Letter of Credit issued by Equitable Banking
Corp, with partial shipment permitted; under the same letter, the remaining balance of the
shipment was only 10 metric tons; that the shipment Sea-land was asking Keng Hua to accept
was 20 metric tons which is 10 metric tons more than the remaining balance; that if Keng Hua
were to accept the shipment, it would be violating Central Bank rules and regulations and
custom and tariff laws; that Sea-land had no cause of action should be against the shipper
which contracted Sea-lands services and not against Keng Hua; and that Keng Hua duly
notified Sea-land about the wrong shipment through a letter.
RTC: Keng Hua liable for demurrage, attorneys fees and expenses of litigation. KH appealed to
Whether or not Keng Hua was bound under the Bill of Lading
A bill of lading serves two functions. First, it is a receipt for the goods shipped. Second, it is a
contract by which three parties, namely, the shipper, the carrier, and the consignee undertake
specific responsibilities and assume stipulated obligations. 9 A "bill of lading delivered and
accepted constitutes the contract of carriage even though not signed," 10 because the
"(a)cceptance of a paper containing the terms of a proposed contract generally constitutes an
acceptance of the contract and of all of its terms and conditions of which the acceptor has
actual or constructive notice." 11 In a nutshell, the acceptance of a bill of lading by the shipper
and the consignee, with full knowledge of its contents, gives rise to the presumption that the
same was a perfected and binding contract. 12
In the case at bar, both lower courts held that the bill of lading was a valid and perfected
contract between the shipper (Ho Kee), the consignee (Petitioner Keng Hua), and the carrier
(Private Respondent Sea-Land). Section 17 of the bill of lading provided that the shipper and
the consignee were liable for the payment of demurrage charges for the failure to discharge
the containerized shipment beyond the grace period allowed by tariff rules. Applying said
stipulation, both lower courts found petitioner liable. The aforementioned section of the bill of
lading reads:
17. COOPERAGE FINES. The shipper and consignee shall be liable for, indemnify the carrier
and ship and hold them harmless against, and the carrier shall have a lien on the goods for,
all expenses and charges for mending cooperage, baling, repairing or reconditioning the
goods, or the van, trailers or containers, and all expenses incurred in protecting, caring for
or otherwise made for the benefit of the goods, whether the goods be damaged or not, and
for any payment, expense, penalty fine, dues, duty, tax or impost, loss, damage, detention,

demurrage, or liability of whatsoever nature, sustained or incurred by or levied upon the

carrier or the ship in connection with the goods or by reason of the goods being or having
been on board, or because of shipper's failure to procure consular or other proper permits,
certificates or any papers that may be required at any port or place or shipper's failure to
supply information or otherwise to comply with all laws, regulations and requirements of
law in connection with the goods of from any other act or omission of the shipper or
consignee: (Emphasis supplied.)
Petitioner contends, however, that it should not be bound by the bill of lading because it never
gave its consent thereto. Although petitioner admits "physical acceptance" of the bill of lading,
it argues that its subsequent actions belie the finding that it accepted the terms and conditions
printed therein.
We are not persuaded. Petitioner admits that it "received the bill of lading immediately after
the arrival of the shipment" 16 on July 8, 1982. 17 Having been afforded an opportunity to
examine the said document, petitioner did not immediately object to or dissent from any term
or stipulation therein. It was only six months later, on January 24, 1983, that petitioner sent a
letter to private respondent saying that it could not accept the shipment. Petitioner's inaction
for such a long period conveys the clear inference that it accepted the terms and conditions of
the bill of lading. Moreover, said letter spoke only of petitioner's inability to use the delivery
permit, i.e. to pick up the cargo, due to the shipper's failure to comply with the terms and
conditions of the letter of credit, for which reason the bill of lading and other shipping
documents were returned by the "banks" to the shipper. 18 The letter merely proved petitioner's
refusal to pick up the cargo, not its rejection of the bill of lading.
Petitioner's reliance on the Notice of Refused or On Hand Freight, as proof of its nonacceptance
of the bill of lading, is of no consequence. Said notice was not written by petitioner; it was sent
by private respondent to petitioner in November 1982, or four months after petitioner received
the bill of lading. If the notice has any legal significance at all, it is to highlight petitioner's
prolonged failure to object to the bill of lading. Contrary to petitioner's contention, the notice
and the letter support not belie the findings of the two lower courts that the bill of lading
was impliedly accepted by petitioner.
Bill of Lading Separate from
Other Letter of Credit Arrangements
In a letter of credit, there are three distinct and independent contracts:
(1) the contract of sale between the buyer and the seller, (2) the contract of the buyer with the
issuing bank, and (3) the letter of credit proper in which the bank promises to pay the seller
pursuant to the terms and conditions stated therein. "Few things are more clearly settled in law
than that the three contracts which make up the letter of credit arrangement are to be
maintained in a state of perpetual separation." 28 A transaction involving the purchase of goods
may also require, apart from a letter of credit, a contract of transportation specially when the
seller and the buyer are not in the same locale or country, and the goods purchased have to be
transported to the latter.
Hence, the contract of carriage, as stipulated in the bill of lading in the present case, must be
treated independently of the contract of sale between the seller and the buyer, and the
contract for the issuance of a letter of credit between the buyer and the issuing bank. Any
discrepancy between the amount of the goods described in the commercial invoice in the
contract of sale and the amount allowed in the letter of credit will not affect the validity and
enforceability of the contract of carriage as embodied in the bill of lading. As the bank cannot
be expected to look beyond the documents presented to it by the seller pursuant to the letter
of credit, 29 neither can the carrier be expected to go beyond the representations of the shipper
in the bill of lading and to verify their accuracy vis-a-viz the commercial invoice and the letter
of a credit. Thus, the discrepancy between the amount of goods indicated in the invoice and
the amount in the bill of lading cannot negate petitioner's obligation to private respondent
arising from the contract of transportation. Furthermore, private respondent, as carrier, had no
knowledge of the contents of the container. The contract of carriage was under the
arrangement known as "Shipper's Load And Count," and shipper was solely responsible for the

loading of the container while carrier was oblivious to the contents of the shipment. Petitioner's
remedy in case of overshipment lies against the seller/shipper, not against the carrier.
The action was originally started by NMCs predecessor, Philippine Relief and Trade
Rehabilitation Admin (PRATRA). It alleged in its complaint:that Atlas offered to sell to Pratra
8000 metric tons of galvanized sheets at the price of $247 per ton of 1000 kilos to be shipped
beginning Aug 1948; that on Jul 24 1948, Pratra made an order and agreed to purchase the
same with the condition that the seller should furnish a performance bond in favor of Pratra in
the amount of P100,000; that on Aug 5 1948, Pratra and Atlas as sales brokers for West India
Commercial Corp of NY, USA executed a contract of purchase and sale wherein Atlas obligated
itself to sell 8000 metric tons of galvanized sheets, at the price of $247 per ton of 1000 kilos
CIF Manila.; that under the contract Atlas obligated itself to furnish in favor of Pratra the
performance bond to guarantee full compliance of all the terms and conditions, with Alto as
surety; that in compliance with its undertakings, Pratra on Aug 26 1948 opened a letter of
credit with the PNB for the amount of $1,976,000 in favor of West India.
Neither Atlas nor West India delivered the 8000 metric tons of galvanized steel sheets. The
contract having provided that in case of violation of any of its terms and conditions, the buyer
will be entitled to recover liquidated damages in the amount of 20% of the total contractual
value of $1,976,000 ($395,200), Pratra sought to recover the same from Atlas. It likewise
prayed that Alto be condemned to pay Pratra the amount of P100,000 (perf. bond).
Atlas admitted making the offer, adding however that Pratra was duly informed that it was
acting in its representative capacity; that an order to purchase the galvanized steel sheets was
in fact made by Pratra; that such contract of purchase and sale was in fact executed, although
the date of execution was not on Aug 5 but on Aug 21, with the further allegation that its terms
and conditions were modified, altered and supplemented by another agreement date Aug 20
1948.; that while there was opened on Aug 26 a letter of credit for the amount of $1,976,000 in
favor of West India by the PNB, acting on Pratras application, such letter being in favor of the
beneficiary, West India, it could not be utilized in view of what was considered serious
discrepancies between the terms of the said letter of credit and the contract; that no delivery
of 8000 metric tons of galvanized sheets was made as there was no obligation do so, but even
if it arose, delivery was made impossible by the prior recission of the contracts by Pratra.
Alto denied the allegations on the ground that it had no knowledge or information sufficient to
form a belief as to what was therein contained except the execution of the bond for and on
behalf of the West India to guarantee the latters performance of its obligation if any. On the
assumption however that the latte contract could be the one referred to in the bond, it alleged
that it did so for and on behalf of West India to guarantee the performance of its obligation, if
any, and that it never incurred any obligation at all under the contract which was the basis of
the complaint as it was never a party to it, nor did it authorize anyone to obligate it in any
manner whatsoever, and that Pratra having discharged the West India from liability on said
contract, Alto is and must likewise be discharged, the obligation of the surety being merely
accessory to that of the principal.
Lower court: dismissed the complaint, absolved Alto ruling that it was duly authorized to act a
agent or broker of West India in entering into the contact of purchase and sale. Even if its
liability could be held to be direct, Pratra, having demanded payment of damages from West
India and not from it, waived whatever claim it might have against Atlas. It further found out
that there was discrepancy in the letter of credit in favor of West India, that such contained no
grace period of 60 days for delivery having been provided for, although subsequently corrected
but only after the first delivery was already impossible physically for the West India to make on
time led it to conclude that for all legal intents and purposes, such contract of purchase and
sale had not been operative up to the time it was rescinded by the Pratra on Sep 23, 1948, due
to the failure of the latter to perform the condition precedent of establishing a sufficient letter
of credit. No liability could therefore attach to Atlas.

Whether or not liability arose.
Under the contract, the shipment of the galvanized steel sheets could be made during a period
from August, 1948 to February, 1949 with a grace of 60 days, i.e., "all shipments within 60
days of the above schedule would be accepted as good delivery." 16 The letter of credit on the
other hand did not provide for such a period of grace of 60 days for late shipment. The
corrected letter of credit was received by the West India Commercial Corporation only on
September 7, 1948. As the first shipment was supposed to have been made in August, it was
impossible for the West India Commercial Corporation to make it on time. Under the above
circumstances the correctness of the assertion in a radiogram of West India Commercial
Corporation sent to defendant Atlas stating that serious discrepancy "from contract" would
prevent it from "using letter of credit in present form" cannot be denied.
In a decision of this Court,17 it was held that the failure to open a letter of credit within a period
agreed upon suffices to prevent a binding juridical tie from being created. That case, dealing
with offer and acceptance, reiterated the principle that to bind the offer or, "the offeree must
comply with the conditions of the offer." The situation before us deals with a perfected
contract. Here the time element does not enter into the failure of one party to live up to the
terms of the contract. What was manifest was the discrepancy between what was agreed upon
in the contract and the letter of credit, the effectivity of which requires that "all conditions
contained [in it] be strictly complied with, however, onerous they may be." 18 The above
principle is deemed "absolutely necessary for the protection of the banking and mercantile
community." There is a New York Supreme Court decision to the effect that a "material variance
between the letter of credit and the sales agreement would excuse non-performance by the
Bernardo Villaluz agreed to sell to Axel Christiansen, a ship and merchandise broker, 2,000
cubic meters of lauan logs. After inspecting the logs, Christiansen issued a purchase order for
the said logs.
On the arrangements made and upon the instructions of the consignee, Hanmi Trade
Development, Ltd. (HTDL), Santa Ana, California, the Security Pacific National Bank (SPNB),
California issued an Irrevocable Letter of Credit (L/C) available at sight in favor of Villaluz for the
total purchase price of the logs. The L/C was mailed to FEATI Bank and Trust Company (FBTC)
with instruction that the draft to be drawn is on SPNB and that it be accompanied by the
following documents, among others: a Certification from Christiansen stating that the logs have
been approved prior to shipment in accordance with terms and conditions of corresponding
purchase order.
Consequently, the logs were thereafter loaded to the vessel chartered by Christiansen. After
the loading of the logs was completed, the Chief Mate of the vessel issued a mate receipt of
the cargo which stated the same are in good condition. However, Christiansen refused to issue
the certification as required in the L/C despite several requests made by Villaluz. Because of
the absence of the certification by Christiansen, FBTC refused to advance the payment on the
L/C. It eventually lapsed without BV receiving any certification from Christiansen.
Since Villaluzs demands for Christiansen to execute the certification proved futile, he instituted
an action for mandamus and specific performance against Christiansen and FBTC before the
then CFI of Rizal. Unfortunately, while the case was pending, Christiansen left the Philippines
without informing the CFI and his counsel; hence, Villaluz filed an amended complaint to make
FBTC solidarily liable with Christiansen.

Whether or not FBTC, as correspondent bank, is to be held liable under the L/C despite noncompliance by the beneficiary, Villaluz, with the terms thereof?
It is a settled rule in commercial transactions involving L/Cs that the documents tendered must
strictly conform to its terms. The tender of documents by the beneficiary (seller) must include
all documents required by the L/C. A correspondent bank which departs from what has been
stipulated under the L/C, 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.
Moreover, under the Uniform Customs and Practices for Documentary Credit, 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
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.
An irrevocable credit refers to the duration of the L/C. What it 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 L/C 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. Hence, the mere fact that a L/C is irrevocable does not necessarily
imply that the correspondent bank in accepting the instructions of the issuing bank has also
confirmed the L/C.

On 4 different occasions in 1961, De Reny (Phil. corp.), through its co-defendants, Aurora
Carcereny and Aurora Tuyo, president and secretary, respectively of the corporation, applied to
the Bank for 4 irrevocable commercial letters of credit to cover the purchase by the corp of
goods (dyestuffs of carious colors) from its American supplier, JB Distributing Company. All the
applications of the corp were approved, and the corresponding commercial L/C agreements
were executed pursuant to banking procedures. Under the agreements, the officers of the corp
bound themselves personally as joint and solitary debtors with the corp. Pursuant to banking
regulations then in force, the corp delivered to the Bank peso marginal deposits as each letter
of credit was opened.
By virtue of the transactions, the Bank issued irrevocable commercial letters of credit dressed
to its correspondent banks in the US, with uniform instructions for them to notify the
beneficiary thereof, the JB Dist. Co., that they have been authorized to negotiate the latters
sight drafts up to the amounts, if accompanied upon presentation, by a full set of negotiable
clean on board ocean bills of lading covering the merchandise appearing the LCs that is,
dyestuffs of various colors. Consequently, the JB Distributing Co drew upon, presented to and
negotiated with these banks, its sight drafts covering the amounts of the merchandise
ostensibly being exported by it, together with clean bills, and collected the full value of the
drafts up to the amounts appearing in the LCs . The banks debited the account of the BPI with
them up to the full value of the drafts presented by JB, plus commission thereon, and,
thereafter, endorsed and forwarded all documents to the BPI.

In the meantime, as each shipment arrived in the PH, the De Reny made partial payments to
the Bank amounting to P90,000. Further payments were however subsequently discontinued by
the corporation when it became established, as a result of a chemical test conducted by the
National Science Devt Board, that the goods that arrived in Manila were chalks instead of
The corporation also refused to take possession of these goods, and for this reason, BPI caused
them to be deposited with a bonded warehouse paying therefor the amount of P12,609.64 up
to the filing of its complaint with the court.
Lower court: ordered the corporation and the other defendants to pay BPI.
Whether or not the foreign correspondent banks of the BPI are liable for their failure to perform
their duty in taking necessary precaution to insure that the goods shipped conformed with the
item appearing in the LCs.
Under the terms of their Commercial Letter of Credit Agreements with the Bank, the appellants
agreed that the Bank shall not be responsible for the "existence, character, quality, quantity,
conditions, packing, value, or delivery of the property purporting to be represented by
documents; for any difference in character, quality, quantity, condition, or value of the property
from that expressed in documents," or for "partial or incomplete shipment, or failure or
omission to ship any or all of the property referred to in the Credit," as well as "for any
deviation from instructions, delay, default or fraud by the shipper or anyone else in connection
with the property the shippers or vendors and ourselves [purchasers] or any of us." Having
agreed to these terms, the appellants have, therefore, no recourse but to comply with their
covenant. 2
But even without the stipulation recited above, the appellants cannot shift the burden of loss to
the Bank on account of the violation by their vendor of its prestation.
It was uncontrovertibly proven by the Bank during the trial below that banks, in providing
financing in international business transactions such as those entered into by the appellants,
do not deal with the property to be exported or shipped to the importer, but deal only with
documents. The Bank introduced in evidence a provision contained in the "Uniform Customs
and Practices for Commercial Documentary Credits Fixed for the Thirteenth Congress of
International Chamber of Commerce," to which the Philippines is a signatory nation. Article 10
thereof provides: .
In documentary credit operations, all parties concerned deal in documents and not in
goods. Payment, negotiation or acceptance against documents 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 the documents and reimburse the Bank making the payment,
negotiation or acceptance.
The existence of a custom in international banking and financing circles negating any duty on
the part of a bank to verify whether what has been described in letters of credits or drafts or
shipping documents actually tallies with what was loaded aboard ship, having been positively
proven as a fact, the appellants are bound by this established usage. They were, after all, the
ones who tapped the facilities afforded by the Bank in order to engage in international


On Mar 26 1997, Transfield and Luzon Hydro Corp (LHC) entered into a Turnkey Contract,
whereby Transfield, as Turnkey Contractor, undertook to construct, on a turnkey basis, a 70-

megawatt hydro-electric power station at the Bakun river in the provinces of Benguet and
Ilocos Sur. Trans was given the sole responsibility of the design, construction, commissioning,
testing and completion of the project.
The Turnkey contract provides that: (1) the target completion date of the Project shall be on 1
June 2000, or such later date as may be agreed upon between petitioner and respondent LHC
or otherwise determined in accordance with the Turnkey Contract; and (2) petitioner is entitled
to claim extensions of time (EOT) for reasons enumerated in the Turnkey Contract, among
which are variations, force majeure, and delays caused by LHC itself. 5 Further, in case of
dispute, the parties are bound to settle their differences through mediation, conciliation and
such other means enumerated under Clause 20.3 of the Turnkey Contract.
To secure performance of its obligations, Trans opened in favor of LHC 2 standby LCs both
dated Mar 20 2000: (1) with the local branch of ANZ Bank, and (2) with Security Bank, each in
the amount of $8,988,907.00.
Trans requested various extensions of time to complete the Project. The extensions were
requested due to several factors which prevented the completion of the project on target date,
such as force majeure occasioned by typhoon Zeb, barricades and demonstrations. LHC denied
the requests, however. LHC referred the matter to the arbitration committee.
In the meanwhile, because of the delay in the construction of the plant, LHC called on the
stand-by LCs because of default. However, the demand was objected by Trans on the ground
that there is still pending arbitration on their request for extension of time. LHC invoked the
independence rule. On the other hand, Trans claims fraud on the part of LHC on calling the
stand-by LCs.
Lower court and CA: relied on the independence principles on letters of credit, under which 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.
Whether or not the independence rule on letters of credit may be invoked by a beneficiary
thereof where the beneficiarys call thereon is wrongful or fraudulent.
Petitioner contends that the courts below improperly relied on the "independence principle" on
letters of credit when this case falls squarely within the "fraud exception rule." Respondent LHC
deliberately misrepresented the supposed existence of delay despite its knowledge that the
issue was still pending arbitration, petitioner continues.
Petitioner asserts that LHC should be ordered to return the proceeds of the Securities pursuant
to the principle against unjust enrichment and that, under the premises, injunction was the
appropriate remedy obtainable from the competent local courts.
It further contends that after the filing of the petition facts and admissions were discovered
which demonstrate that LHC knowingly misrepresented that petitioner had incurred delays
notwithstanding its knowledge and admission that delays were excused under the Turnkey
Contractto be able to draw against the Securities. Reiterating that fraud constitutes an
exception to the independence principle, petitioner urges that this warrants a ruling from this
Court that the call on the Securities was wrongful, as well as contrary to law and basic
principles of equity. It avers that it would suffer grave irreparable damage if LHC would be
allowed to use the proceeds of the Securities and not ordered to return the amounts it had
wrongfully drawn thereon.
Respondent SBC in its Memorandum, dated 10 March 2003 27 contends that the Court of
Appeals correctly dismissed the petition for certiorari. Invoking the independence principle, SBC
argues that it was under no obligation to look into the validity or accuracy of the certification
submitted by respondent LHC or into the latter's capacity or entitlement to so certify. It adds

that the act sought to be enjoined by petitioner was already fait accompli and the present
petition would no longer serve any remedial purpose.
In a similar fashion, respondent ANZ Bank in its Memorandum dated 13 March 2003 28 posits
that its actions could not be regarded as unjustified in view of the prevailing independence
principle under which it had no obligation to ascertain the truth of LHC's allegations that
petitioner defaulted in its obligations. Moreover, it points out that since the Standby Letter of
Credit No. E001126/8400 had been fully drawn, petitioner's prayer for preliminary injunction
had been rendered moot and academic.
At the core of the present controversy is the applicability of the "independence principle" and
"fraud exception rule" in letters of credit. Thus, a discussion of the nature and use of letters of
credit, also referred to simply as "credits," would provide a better perspective of the case.
The letter of credit evolved as a mercantile specialty, and the only way to understand all its
facets is to recognize that it is an entity unto itself. The relationship between the beneficiary
and the issuer of a letter of credit is not strictly contractual, because both privity and a meeting
of the minds are lacking, yet strict compliance with its terms is an enforceable right. Nor is it a
third-party beneficiary contract, because the issuer must honor drafts drawn against a letter
regardless of problems subsequently arising in the underlying contract. Since the bank's
customer cannot draw on the letter, it does not function as an assignment by the customer to
the beneficiary. Nor, if properly used, is it a contract of suretyship or guarantee, because it
entails a primary liability following a default. Finally, it is not in itself a negotiable instrument,
because it is not payable to order or bearer and is generally conditional, yet the draft presented
under it is often negotiable.29
In commercial transactions, a letter of credit is a financial device developed by merchants as a
convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly
irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a
buyer, who wants to have control of the goods before paying. 30 The use of credits in
commercial transactions serves to reduce the risk of nonpayment of the purchase price under
the contract for the sale of goods. However, credits are also used in non-sale settings where
they serve to reduce the risk of nonperformance. Generally, credits in the non-sale settings
have come to be known as standby credits.31
There are three significant differences between commercial and standby credits. First,
commercial credits involve the payment of money under a contract of sale. Such credits
become payable upon the presentation by the seller-beneficiary of documents that show he
has taken affirmative steps to comply with the sales agreement. In the standby type, the credit
is payable upon certification of a party's nonperformance of the agreement. The documents
that accompany the beneficiary's draft tend to show that the applicant has not performed. The
beneficiary of a commercial credit must demonstrate by documents that he has performed his
contract. The beneficiary of the standby credit must certify that his obligor has not performed
the contract.32
By definition, a letter of credit is a written instrument whereby the writer requests or authorizes
the addressee to pay money or deliver goods to a third person and assumes responsibility for
payment of debt therefor to the addressee. 33 A letter of credit, however, changes its nature as
different transactions occur and if carried through to completion ends up as a binding contract
between the issuing and honoring banks without any regard or relation to the underlying
contract or disputes between the parties thereto.
Article 3 of the UCP provides that credits, by their nature, are separate transactions from the
sales or other contract(s) on which they may be based and banks are in no way concerned with
or bound by such contract(s), even if any reference whatsoever to such contract(s) is included
in the credit. Consequently, the undertaking of a bank to pay, accept and pay draft(s) or
negotiate and/or fulfill any other obligation under the credit is not subject to claims or defenses
by the applicant resulting from his relationships with the issuing bank or the beneficiary. A
beneficiary can in no case avail himself of the contractual relationships existing between the
banks or between the applicant and the issuing bank.

Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once
the draft and the required documents are presented to it. The so-called "independence
principle" assures the seller or the beneficiary of prompt payment independent of any breach
of the main contract and precludes the issuing bank from determining whether the main
contract is actually accomplished or not. Under this principle, banks assume no liability or
responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any
documents, or for the general and/or particular conditions stipulated in the documents or
superimposed thereon, nor do they assume any liability or responsibility for the description,
quantity, weight, quality, condition, packing, delivery, value or existence of the goods
represented by any documents, or for the good faith or acts and/or omissions, solvency,
performance or standing of the consignor, the carriers, or the insurers of the goods, or any
other person whomsoever.39
The independent nature of the letter of credit may be: (a) independence in toto where the
credit is independent from the justification aspect and is a separate obligation from the
underlying agreement like for instance a typical standby; or (b) independence may be only as
to the justification aspect like in a commercial letter of credit or repayment standby, which is
identical with the same obligations under the underlying agreement. In both cases the
payment may be enjoined if in the light of the purpose of the credit the payment of the credit
would constitute fraudulent abuse of the credit.40
Can the beneficiary invoke the independence principle?
Petitioner insists that the independence principle does not apply to the instant case and
assuming it is so, it is a defense available only to respondent banks. LHC, on the other hand,
contends that it would be contrary to common sense to deny the benefit of an independent
contract to the very party for whom the benefit is intended. As beneficiary of the letter of
credit, LHC asserts it is entitled to invoke the principle.
As discussed above, in a letter of credit transaction, such as in this case, where the credit is
stipulated as irrevocable, there is a definite undertaking by the issuing bank to pay the
beneficiary provided that the stipulated documents are presented and the conditions of the
credit are complied with.41 Precisely, the independence principle liberates the issuing bank from
the duty of ascertaining compliance by the parties in the main contract. As the principle's
nomenclature clearly suggests, the obligation under the letter of credit is independent of the
related and originating contract. In brief, the letter of credit is separate and distinct from the
underlying transaction.
Given the nature of letters of credit, petitioner's argumentthat it is only the issuing bank that
may invoke the independence principle on letters of creditdoes not impress this Court. To say
that the independence principle may only be invoked by the issuing banks would render
nugatory the purpose for which the letters of credit are used in commercial transactions. As it
is, the independence doctrine works to the benefit of both the issuing bank and the beneficiary.
Letters of credit are employed by the parties desiring to enter into commercial transactions,
not for the benefit of the issuing bank but mainly for the benefit of the parties to the original
transactions. With the letter of credit from the issuing bank, the party who applied for and
obtained it may confidently present the letter of credit to the beneficiary as a security to
convince the beneficiary to enter into the business transaction. On the other hand, the other
party to the business transaction, i.e., the beneficiary of the letter of credit, can be rest assured
of being empowered to call on the letter of credit as a security in case the commercial
transaction does not push through, or the applicant fails to perform his part of the transaction.
It is for this reason that the party who is entitled to the proceeds of the letter of credit is
appropriately called "beneficiary."
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.
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.
Respondent banks had squarely raised the independence principle to justify their releases of
the amounts due under the Securities. Owing to the nature and purpose of the standby letters
of credit, this Court rules that the respondent banks were left with little or no alternative but to
honor the credit and both of them in fact submitted that it was "ministerial" for them to honor
the call for payment.43
Furthermore, LHC has a right rooted in the Contract to call on the Securities. The relevant
provisions of the Contract read, thus:
4.2.1. In order to secure the performance of its obligations under this Contract, the
Contractor at its cost shall on the Commencement Date provide security to the Employer in
the form of two irrevocable and confirmed standby letters of credit (the "Securities"), each
in the amount of US$8,988,907, issued and confirmed by banks or financial institutions
acceptable to the Employer. Each of the Securities must be in form and substance
acceptable to the Employer and may be provided on an annually renewable basis. 44
8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to the
Employer by way of liquidated damages ("Liquidated Damages for Delay") the amount of
US$75,000 for each and every day or part of a day that shall elapse between the Target
Completion Date and the Completion Date, provided that Liquidated Damages for Delay
payable by the Contractor shall in the aggregate not exceed 20% of the Contract Price. The
Contractor shall pay Liquidated Damages for Delay for each day of the delay on the
following day without need of demand from the Employer.
8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the
amount of such damages from any monies due, or to become due to the Contractor and/or
by drawing on the Security."45
A contract once perfected, binds the parties not only to the fulfillment of what has been
expressly stipulated but also to all the consequences which according to their nature, may be
in keeping with good faith, usage, and law. 46 A careful perusal of the Turnkey Contract reveals
the intention of the parties to make the Securities answerable for the liquidated damages
occasioned by any delay on the part of petitioner. The call upon the Securities, while not an
exclusive remedy on the part of LHC, is certainly an alternative recourse available to it upon
the happening of the contingency for which the Securities have been proffered. Thus, even
without the use of the "independence principle," the Turnkey Contract itself bestows upon LHC
the right to call on the Securities in the event of default.
Next, petitioner invokes the "fraud exception" principle. It avers that LHC's call on the
Securities is wrongful because it fraudulently misrepresented to ANZ Bank and SBC that there
is already a breach in the Turnkey Contract knowing fully well that this is yet to be determined
by the arbitral tribunals. It asserts that the "fraud exception" exists when the beneficiary, for
the purpose of drawing on the credit, fraudulently presents to the confirming bank, documents
that contain, expressly or by implication, material representations of fact that to his knowledge
are untrue. In such a situation, petitioner insists,
injunction is recognized as a remedy available to it.
Citing Dolan's treatise on letters of credit, petitioner argues that the independence principle is
not without limits and it is important to fashion those limits in light of the principle's purpose,
which is to serve the commercial function of the credit. If it does not serve those functions,
application of the principle is not warranted, and the common law principles of contract should
It is worthy of note that the propriety of LHC's call on the Securities is largely intertwined with
the fact of default which is the self-same issue pending resolution before the arbitral tribunals.

To be able to declare the call on the Securities wrongful or fraudulent, it is imperative to

resolve, among others, whether petitioner was in fact guilty of delay in the performance of its
obligation. Unfortunately for petitioner, this Court is not called upon to rule upon the issue of
defaultsuch issue having been submitted by the parties to the jurisdiction of the arbitral
tribunals pursuant to the terms embodied in their agreement.
(Presiding Judge of RTC of QC) and MAYNILAD WATER SERVICES, INC.
MWSS granted Maynilad a 20-year period to manage, operate, repair, decommission and
refurbish the existing MWSS water delivery and sewerage services in the West Zone Service
Area, for which Maynilad undertook to pay the corresponding concession fees on the dares
agreed upon in said agreement (concession agreement) which, among others, consisted of
payments of MWSSs mostly foreign loans.
To secure the concessionaires performance of its obligations, Maynilad was required under Sec
6.9 of the the contract to put up a bond, bank guarantee or other security acceptable to MWSS.
Accordingly, MWSS arranged for a 3-year facility with a number of foreign banks, led by
Citicorp, for the issuance of an irrevocable standby LC in the amount of $120,000,000 in favor
of MWSS for the full and prompt performance of Maynilads obligations to MWSS as aforestated.
Sometime in Sep 2000, Maynilad requested MWSS for a mechanism by which it hoped to
recover the losses it had allegedly incurred and would be incurring as result of the depreciation
of the PH peso against the US Dollar. Failing to get what it desired, Maynilad issued a Force
Majeure Notice and unilaterally suspended the payment of the concession fees. To salvage the
Concession Agreement, the parties entered into a MOA wherein Maynilad was allowed to
recover foreign exchange losses. Sometime in Aug 2001, Maynilad again filed another Force
Majeure Notice and, since MWSS could not agree with the terms of said Notice, the matter was
referred for arbitration. Accordingly, the parties agreed to resolve the issued through an
amendment of the agreement on Oct 5 2001 (Amendment No. 1), as amended by the MWSS
Board of Trustees Resolution, which provided inter alia for a formula that would allow Maynilad
to recover foreign exchange losses it had incurred or would incur under the terms of the
Concession Agreement.
As part of this agreement, Maynilad committed, among other things, to:
a) infuse the amount of UD$80.0 million as additional funding support from its stockholders;
b) resume payment of the concession fees; and
c) mutually seek the dismissal of the cases pending before the Court of Appeals and with
Minor Dispute Appeals Panel.
However, on November 5, 2002, Maynilad served upon MWSS a Notice of Event of Termination,
claiming that MWSS failed to comply with its obligations under the Concession Agreement and
Amendment No. 1 regarding the adjustment mechanism that would cover Maynilads foreign
exchange losses. Maynilad filed a Notice of Early Termination of the concession, which was
challenged by MWSS. This matter was eventually brought before the Appeals Panel by MWSS.
The panel ruled that there was no Event of Termination as defined under Art. 10.2 (ii) or 10.3
(iii) of the Concession Agreement and that, therefore, Maynilad should pay the concession fees
that had fallen due.
The award of the Appeals Panel became final. MWSS, thereafter, submitted a written notice to
Citicorp, as agent of the participating banks, that by virtue of Maynilads failure to perform its
obligations under the agreement, it was drawing on the Irrevocable Standby Letter of Credit
and thereby demanded payment.
Prior to this, however, Maynilad had filed on a petition fore rehabilitation before the RTC of QC
which resulted in the issuance of a Stay Order.

Whether or not the rehabilitation court acted in excess of its authority or jurisdiction when it
enjoined MWSS from seeking the payment of the concession fees from the banks that issued
the Irrevocable Stanby Letter of Credit in its favor.
First, the claim is not one against the debtor but against an entity that respondent Maynilad
has procured to answer for its non-performance of certain terms and conditions of the
Concession Agreement, particularly the payment of concession fees.
Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the enforcement of all claims
against guarantors and sureties, but only those claims against guarantors and sureties who are
not solidarily liable with the debtor. Respondent Maynilads claim that the banks are not
solidarily liable with the debtor does not find support in jurisprudence.
Letters of credit were developed for the purpose of insuring to a seller payment of a definite
amount upon the presentation of documentsand is thus a commitment by the issuer that the
party in whose favor it is issued and who can collect upon it will have his credit against the
applicant of the letter, duly paid in the amount specified in the letter They are in effect
absolute undertakings to pay the money advanced or the amount for which credit is given on
the faith of the instrument. They are primary obligations and not accessory contracts and while
they are security arrangements, they are not converted thereby into contracts of guaranty.
What distinguishes letters of credit from other accessory contracts, is the engagement of the
issuing bank to pay the seller once the draft and other required shipping documents are
presented to it. They are definite undertakings to pay at sight once the documents stipulated
therein are presented.
The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to herein
petitioner as the prohibition is on the enforcement of claims against guarantors or sureties of
the debtors whose obligations are not solidary with the debtor. The participating banks
obligation are solidary with respondent Maynilad in that it is a primary, direct, definite and an
absolute undertaking to pay and is not conditioned on the prior exhaustion of the debtors
assets. These are the same characteristics of a surety or solidary obligor. And being solidary,
the claims against them can be pursued separately from and independently of the
rehabilitation case.
The terms of the Irrevocable Standby Letter of Credit do not show that the obligations of the
banks are not solidary with those of respondent Maynilad. On the contrary, it is issued at the
request of and for the account of Maynilad in favor of the MWSS as a bond for the full and
prompt performance of the obligations by the concessionaire under the Concession Agreement
and herein MWSS is authorized by the banks to draw on it by the simple act of delivering to the
agent a written certification substantially in the form of the Letter of Credit.
Taking into consideration our own rulings on the nature of letters of credit and the customs and
usage developed over the years in the banking and commercial practice of letters of credit, we
hold that except when a letter of credit specifically stipulates otherwise, the obligation of the
banks issuing letters of credit are solidary with that of the person or entity requesting for its
issuance, the same being a direct, primary, absolute and definite undertaking to pay the
beneficiary upon the presentation of the set of documents required therein.
The public respondent, therefore, exceeded his jurisdiction, in holding that he was competent
to act on the obligation of the banks under the Letter of Credit under the argument that this
was not a solidary obligation with that of the debtor. Being a solidary obligation, the letter of
credit is excluded from the jurisdiction of the rehabilitation court and therefore in enjoining
petitioner from proceeding against the Standby Letters of Credit to which it had a clear right
under the law and the terms of said Standby Letter of Credit, public respondent acted in excess
of his jurisdiction.
We held in Feati Bank & Trust Company v. Court of Appeals that the concept of guarantee vis
vis the concept of an irrevocable letter of credit are inconsistent with each other.The guarantee
theory destroys the independence of the banks responsibility from the contract upon which it

was opened and the nature of both contracts is mutually in conflict with each other. In
contracts of guarantee, the guarantors obligation is merely collateral and it arises only upon
the default of the person primarily liable. On the other hand, in an irrevocable letter of credit,
the bank undertakes a primary obligation. We have also defined a letter of credit as an
engagement by a bank or other person made at the request of a customer that the issuer shall
honor drafts or other demands of payment upon compliance with the conditions specified in the
MICO Metals Corporation, through its President, Chares Lee requested from Philippine Bank of
Communication a discounting loan/credit line in the amount of P3,000,000.000 for the purpose
of carrying out MICOs line of business as well as to maintain its volume of business, and
another discounting loan/credit line for the purpose of opening letters of credit and trust
Both requests were supported by a resolution that the President, Charles Lee, and the Vice
President and General Manager, Mr. Mariano Sio, are authorized and empowered to apply for,
negotiate and secure the approval of commercial loans x x x x x but not limited to discount
loans, letters of credit, trust receipts, lines for marginal deposits on foreign and domestic
letters of credit x x x x for a total amount of not to exceed P10,000,000.00.
The request was approved by the Bank PBCom, and first availment in the amount of
P1,000,000.00 was made on March 26, 1979. Total availment has reached P3,000,000.00,
which upon maturity, were rolled-over or renewed.
As security to the loan, a Real Estate Mortgage over MICOs properties was executed by its VP
Mariano Sio. Further, Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap and Richard
Velasco, executed in their personal capacity a Surety Agreement in favor of PBCom in the
amount of P3,000,000.00.
Another P4,0000,000.00 was requested by the President Charles Lee from PBCom for the
purpose of expansion and modernization of the companies machineries. The request was
consequently approved and availed in full. Another surety agreement was executed by the
same set of officers-persons in favor of PBCom and their liability shall not at any one time
exceed the sum of P7,500,000.00/
Later, MICO furnished PBCom a copy of its notarized certification issued by its corporate
secretary stating therein that Chio Siok Suy was the duly authorized person, unanimously
approved by the Board of Directors, to negotiate with PBCom on behalf of MICO for loans and
other credit availments.
After the receipt of this secretarys certificate, foreign letters of credits, domestic letter of
credits and loans were further requested, approved and availed. Upon maturity of all the credit
availments, PBCom demanded for payment but MICO failed to settle despite repeated
demands, reason for the Bank to foreclose extrajudicially the properties, and later sold them in
public auction. The price however, was not sufficient to fully pay the total outstanding. PBCom
demanded from the petitioners-sureties the deficiency, which the latter refused to
acknowledge. Thus, the filing with the court of the complaint and for attachment on the
properties of the petitioners-sureties contending that MICO is no longer in operation and it has
no other properties to settle for the deficiency. The trial court denied the complaint for failure
on the part of the Bank to prove that the proceeds of the loans were ever delivered to MICO,
which the Court of Appeals reversed, hence this petition.
a. Whether or not the proceeds of the loans and letters of credit transactions were ever
delivered to MICO
b. Whether or not the individual petitioners, as sureties, may be held liable under the two
surety agreements executed.

Both, yes.
In civil cases, the party having the burden of proof must establish his case by preponderance of
evidence, which can be established by the operation of presumption or by the probative value,
which the law attaches to a specific state of facts, thereby creating a prima facie case. If there
is no proof to the contrary, the prima facie case or evidence will prevail.
The Negotiable Instruments Law clearly provides that every negotiable instrument is deemed
prima facie to have been issued for valuable consideration and every person whose signature
appears thereon are also presumed to have become a party for value. Negotiable instruments
include promissory notes, bills of exchange and checks. Letters of credit and trust receipts are
however, not negotiable instruments, but drafts issued in connection with letters of credit are
negotiable instruments.
All documents presented by PBCom have not merely created a prima facie case but have
actually proved the solidary obligation of MICO and the petitioners-sureties. While the
presumption found under the Negotiable Instruments Law may not necessarily be applicable to
trust receipts and letters of credit, the presumption that the drafts drawn in connection with the
letters of credit have sufficient consideration. The fact that the letters of credit show that the
pertinent materials/merchandise have been received by MICO and with drafts signed by the
beneficiary/suppliers proved that there was a consideration for value.
Therefore, the contention of the petitioner that the contracts on loans and letters of credits
were not binding on the premise that there were no consideration for value and if there was,
the Bank failed to present evidence as to the crediting of the proceeds to its account is
untenable. It was the petitioner who has been preventing the Bank in presenting the evidence.
But from the fact itself that MICO has requested for an additional loan of P4M, impliedly, is a
prima facie case which showed that the proceeds of the earlier loans were delivered to MICO.
The court also found no merits on the latters contention that the contracts were executed
fraudulently by the unauthorized person Chua Siok Suy. The fact that it was MICO which
furnished PBCom the Secretarys Certificate, notarized by its own corporate secretary suffices
for the PBCom to believe that it was valid and binding, hence the granting of the request for
further availments.
Anent petitioners-sureties contention that they obtained no consideration whatsoever on the
surety agreements, the Court pointed out that the consideration for the surety is the very
consideration for the principal obligor, MICO, in the contracts of loan. In the case of Willex
Plastic Industries Corporation vs. CA, it ruled that the consideration necessary to support a
surety obligation need not pass directly to the surety, a consideration moving to the principal
alone being sufficient. For a guarantor or surety is bound by the same consideration that
makes the contract effective between the parties thereto. It is not necessary that a guarantor
or surety should receive any part or benefit, if such there be, accruing to his principal.