[G.R. No. 146717.

November 22, 2004]

TRANSFIELD PHILIPPINES, INC., petitioner, vs. LUZON HYDRO

CORPORATION, AUSTRALIA and NEW ZEALAND BANKING
GROUP
LIMITED
and
SECURITY
BANK
CORPORATION, respondents.
DECISION
TINGA, J.:

Subject of this case is the letter of credit which has evolved as the
ubiquitous and most important device in international trade. A creation of
commerce and businessmen, the letter of credit is also unique in the number
of parties involved and its supranational character.
Petitioner has appealed from the Decision[1] of the Court of Appeals in CAG.R. SP No. 61901 entitled Transfield Philippines, Inc. v. Hon. Oscar
Pimentel, et al., promulgated on 31 January 2001.[2]
On 26 March 1997, petitioner and respondent Luzon Hydro Corporation
(hereinafter, LHC) entered into a Turnkey Contract [3] whereby petitioner, as
Turnkey Contractor, undertook to construct, on a turnkey basis, a seventy
(70)-Megawatt hydro-electric power station at the Bakun River in the
provinces of Benguet and Ilocos Sur (hereinafter, the Project). Petitioner was
given the sole responsibility for the design, construction, commissioning,
testing and completion of the Project.[4]
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.[6]
To secure performance of petitioners obligation on or before the target
completion date, or such time for completion as may be determined by the

parties agreement, petitioner opened in favor of LHC two (2) standby letters of
credit both dated 20 March 2000 (hereinafter referred to as the Securities), to
wit: Standby Letter of Credit No. E001126/8400 with the local branch of
respondent Australia and New Zealand Banking Group Limited (ANZ Bank)
[7]
and Standby Letter of Credit No. IBDIDSB-00/4 with respondent Security
Bank Corporation (SBC)[8] each in the amount of US$8,988,907.00.[9]
In the course of the construction of the project, petitioner sought various
EOT to complete the Project. The extensions were requested allegedly 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. This gave rise to a series
of legal actions between the parties which culminated in the instant petition.
The first of the actions was a Request for Arbitration which LHC filed
before the Construction Industry Arbitration Commission (CIAC) on 1 June
1999.[10] This was followed by another Request for Arbitration, this time filed by
petitioner before the International Chamber of Commerce (ICC) [11] on 3
November 2000. In both arbitration proceedings, the common issues
presented were: [1) whether typhoon Zeb and any of its associated events
constituted force majeure to justify the extension of time sought by petitioner;
and [2) whether LHC had the right to terminate the Turnkey Contract for failure
of petitioner to complete the Project on target date.
Meanwhile, foreseeing that LHC would call on the Securities pursuant to
the pertinent provisions of the Turnkey Contract, [12] petitionerin two separate
letters[13] both dated 10 August 2000advised respondent banks of the
arbitration proceedings already pending before the CIAC and ICC in
connection with its alleged default in the performance of its obligations.
Asserting that LHC had no right to call on the Securities until the resolution of
disputes before the arbitral tribunals, petitioner warned respondent banks that
any transfer, release, or disposition of the Securities in favor of LHC or any
person claiming under LHC would constrain it to hold respondent banks liable
for liquidated damages.
As petitioner had anticipated, on 27 June 2000, LHC sent notice to
petitioner that pursuant to Clause 8.2[14] of the Turnkey Contract, it failed to
comply with its obligation to complete the Project. Despite the letters of
petitioner, however, both banks informed petitioner that they would pay on the
Securities if and when LHC calls on them.[15]
LHC asserted that additional extension of time would not be warranted;
accordingly it declared petitioner in default/delay in the performance of its
obligations under the Turnkey Contract and demanded from petitioner the

payment of US$75,000.00 for each day of delay beginning 28 June 2000 until
actual completion of the Project pursuant to Clause 8.7.1 of the Turnkey
Contract. At the same time, LHC served notice that it would call on the
securities for the payment of liquidated damages for the delay.[16]
On 5 November 2000, petitioner as plaintiff filed a Complaint for Injunction,
with prayer for temporary restraining order and writ of preliminary injunction,
against herein respondents as defendants before the Regional Trial Court
(RTC) of Makati.[17] Petitioner sought to restrain respondent LHC from calling
on the Securities and respondent banks from transferring, paying on, or in any
manner disposing of the Securities or any renewals or substitutes thereof. The
RTC issued a seventy-two (72)-hour temporary restraining order on the same
day. The case was docketed as Civil Case No. 00-1312 and raffled to Branch
148 of the RTC of Makati.
After appropriate proceedings, the trial court issued an Order on 9
November 2000, extending the temporary restraining order for a period of
seventeen (17) days or until 26 November 2000.[18]
The RTC, in its Order[19] dated 24 November 2000, denied petitioners
application for a writ of preliminary injunction. It ruled that petitioner had no
legal right and suffered no irreparable injury to justify the issuance of the writ.
Employing the principle of independent contract in letters of credit, the trial
court ruled that LHC should be allowed to draw on the Securities for liquidated
damages. It debunked petitioners contention that the principle of independent
contract could be invoked only by respondent banks since according to it
respondent LHC is the ultimate beneficiary of the Securities. The trial court
further ruled that the banks were mere custodians of the funds and as such
they were obligated to transfer the same to the beneficiary for as long as the
latter could submit the required certification of its claims.
Dissatisfied with the trial courts denial of its application for a writ of
preliminary injunction, petitioner elevated the case to the Court of
Appeals via a Petition for Certiorari under Rule 65, with prayer for the
issuance of a temporary restraining order and writ of preliminary injunction.
[20]
Petitioner submitted to the appellate court that LHCs call on the Securities
was premature considering that the issue of its default had not yet been
resolved with finality by the CIAC and/or the ICC. It asserted that until the fact
of delay could be established, LHC had no right to draw on the Securities for
liquidated damages.
Refuting petitioners contentions, LHC claimed that petitioner had no right
to restrain its call on and use of the Securities as payment for liquidated
damages. It averred that the Securities are independent of the main contract

between them as shown on the face of the two Standby Letters of Credit
which both provide that the banks have no responsibility to investigate the
authenticity or accuracy of the certificates or the declarants capacity or
entitlement to so certify.
In its Resolution dated 28 November 2000, the Court of Appeals issued a
temporary restraining order, enjoining LHC from calling on the Securities or
any renewals or substitutes thereof and ordering respondent banks to cease
and desist from transferring, paying or in any manner disposing of the
Securities.
However, the appellate court failed to act on the application for preliminary
injunction until the temporary restraining order expired on 27 January 2001.
Immediately thereafter, representatives of LHC trooped to ANZ Bank and
withdrew the total amount of US$4,950,000.00, thereby reducing the balance
in ANZ Bank to US$1,852,814.00.
On 2 February 2001, the appellate court dismissed the petition for
certiorari. The appellate court expressed conformity with the trial courts
decision that LHC could call on the Securities pursuant to the first principle in
credit law that the credit itself is independent of the underlying transaction and
that as long as the beneficiary complied with the credit, it was of no moment
that he had not complied with the underlying contract. Further, the appellate
court held that even assuming that the trial courts denial of petitioners
application for a writ of preliminary injunction was erroneous, it constituted
only an error of judgment which is not correctible by certiorari, unlike error of
jurisdiction.
Undaunted, petitioner filed the instant Petition for Review raising the
following issues for resolution:
WHETHER THE INDEPENDENCE PRINCIPLE ON LETTERS OF CREDIT MAY
BE INVOKED BY A BENEFICIARY THEREOF WHERE THE BENEFICIARYS
CALL THEREON IS WRONGFUL OR FRAUDULENT.
WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE SECURITIES
BEFORE THE RESOLUTION OF PETITIONERS AND LHCS DISPUTES BY THE
APPROPRIATE TRIBUNAL.
WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN
RELEASING THE AMOUNTS DUE UNDER THE SECURITIES DESPITE BEING
NOTIFIED THAT LHCS CALL THEREON IS WRONGFUL.

WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND IRREPARABLE

DAMAGE IN THE EVENT THAT:
A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ BANK AND
SECURITY BANK ARE ALLOWED TO RELEASE, THE REMAINING
BALANCE OF THE SECURITIES PRIOR TO THE RESOLUTION OF THE
DISPUTES BETWEEN PETITIONER AND LHC.
B. LHC DOES NOT RETURN THE AMOUNTS IT HAD WRONGFULLY
DRAWN FROM THE SECURITIES.[21]

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.
On 25 August 2003, petitioner filed a Supplement to the
Petition[22] and Supplemental Memorandum,[23] alleging that in the course of the
proceedings in the ICC Arbitration, a number of documentary and testimonial
evidence came out through the use of different modes of discovery available
in the ICC Arbitration. It 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.
In its Manifestation dated 8 September 2003,[24] LHC contends that the
supplemental pleadings filed by petitioner present erroneous and misleading
information which would change petitioners theory on appeal.
In yet another Manifestation dated 12 April 2004,[25] petitioner alleges that
on 18 February 2004, the ICC handed down its Third Partial Award, declaring
that LHC wrongfully drew upon the Securities and that petitioner was entitled
to the return of the sums wrongfully taken by LHC for liquidated damages.

LHC filed a Counter-Manifestation dated 29 June 2004,[26] stating that

petitioners Manifestation dated 12 April 2004 enlarges the scope of its Petition
for Review of the 31 January 2001 Decision of the Court of Appeals. LHC
notes that the Petition for Review essentially dealt only with the issue of
whether injunction could issue to restrain the beneficiary of an irrevocable
letter of credit from drawing thereon. It adds that petitioner has filed two other
proceedings, to wit: (1) ICC Case No. 11264/TE/MW, entitled Transfield
Philippines Inc. v. Luzon Hydro Corporation, in which the parties made claims
and counterclaims arising from petitioners performance/misperformance of its
obligations as contractor for LHC; and (2) Civil Case No. 04-332,
entitled Transfield Philippines, Inc. v. Luzon Hydro Corporation before Branch
56 of the RTC of Makati, which is an action to enforce and obtain execution of
the ICCs partial award mentioned in petitioners Manifestation of 12 April 2004.
In its Comment to petitioners Motion for Leave to File Addendum to
Petitioners Memorandum, LHC stresses that the question of whether the
funds it drew on the subject letters of credit should be returned is outside the
issue in this appeal. At any rate, LHC adds that the action to enforce the ICCs
partial award is now fully within the Makati RTCs jurisdiction in Civil Case No.
04-332. LHC asserts that petitioner is engaged in forum-shopping by keeping
this appeal and at the same time seeking the suit for enforcement of the
arbitral award before the Makati court.
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 latters 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 LHCs 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, petitioners 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 banks 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.[34]
Since letters of credit have gained general acceptability in international
trade transactions, the ICC has published from time to time updates on the
Uniform Customs and Practice (UCP) for Documentary Credits to standardize
practices in the letter of credit area. The vast majority of letters of credit
incorporate the UCP.[35] First published in 1933, the UCP for Documentary
Credits has undergone several revisions, the latest of which was in 1993.[36]
In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,[37] this
Court ruled that the observance of the UCP is justified by Article 2 of the Code
of Commerce which provides that in the absence of any particular provision in
the Code of Commerce, commercial transactions shall be governed by
usages and customs generally observed. More recently, in Bank of America,
NT & SA v. Court of Appeals,[38] this Court ruled that there being no specific
provisions which govern the legal complexities arising from transactions
involving letters of credit, not only between or among banks themselves but
also between banks and the seller or the buyer, as the case may be, the
applicability of the UCP is undeniable.
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 principles
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, petitioners 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.
Petitioners argument that any dispute must first be resolved by the parties,
whether through negotiations or arbitration, before the beneficiary is entitled to
call on the letter of credit in essence would convert the letter of credit into a
mere guarantee. Jurisprudence has laid down a clear distinction between a
letter of credit and a guarantee in that the settlement of a dispute between the
parties is not a pre-requisite for the release of funds under a letter of credit. In
other words, the argument is incompatible with the very nature of the letter of
credit. If a letter of credit is drawable only after settlement of the dispute on
the contract entered into by the applicant and the beneficiary, there would be
no practical and beneficial use for letters of credit in commercial transactions.
Professor John F. Dolan, the noted authority on letters of credit, sheds
more light on the issue:
The standby credit is an attractive commercial device for many of the same reasons
that commercial credits are attractive. Essentially, these credits are inexpensive and
efficient. Often they replace surety contracts, which tend to generate higher costs than
credits do and are usually triggered by a factual determination rather than by the
examination of documents.
Because parties and courts should not confuse the different functions of the surety
contract on the one hand and the standby credit on the other, the distinction between
surety contracts and credits merits some reflection. The two commercial devices share
a common purpose. Both ensure against the obligors nonperformance. They function,
however, in distinctly different ways.
Traditionally, upon the obligors default, the surety undertakes to complete the obligors
performance, usually by hiring someone to complete that performance. Surety
contracts, then, often involve costs of determining whether the obligor defaulted (a
matter over which the surety and the beneficiary often litigate) plus the cost of
performance. The benefit of the surety contract to the beneficiary is obvious. He
knows that the surety, often an insurance company, is a strong financial institution that
will perform if the obligor does not. The beneficiary also should understand that such

performance must await the sometimes lengthy and costly determination that the
obligor has defaulted. In addition, the suretys performance takes time.
The standby credit has different expectations. He reasonably expects that he will
receive cash in the event of nonperformance, that he will receive it promptly, and that
he will receive it before any litigation with the obligor (the applicant) over the nature
of the applicants performance takes place. The standby credit has this opposite effect
of the surety contract: it reverses the financial burden of parties during litigation.
In the surety contract setting, there is no duty to indemnify the beneficiary until the
beneficiary establishes the fact of the obligors performance. The beneficiary may have
to establish that fact in litigation. During the litigation, the surety holds the money and
the beneficiary bears most of the cost of delay in performance.
In the standby credit case, however, the beneficiary avoids that litigation burden and
receives his money promptly upon presentation of the required documents. It may be
that the applicant has, in fact, performed and that the beneficiarys presentation of
those documents is not rightful. In that case, the applicant may sue the beneficiary in
tort, in contract, or in breach of warranty; but, during the litigation to determine
whether the applicant has in fact breached the obligation to perform, the beneficiary,
not the applicant, holds the money. Parties that use a standby credit and courts
construing such a credit should understand this allocation of burdens. There is a
tendency in some quarters to overlook this distinction between surety contracts and
standby credits and to reallocate burdens by permitting the obligor or the issuer to
litigate the performance question before payment to the beneficiary.[42]
While it is the bank which is bound to honor the credit, it is the beneficiary
who has the right to ask the bank to honor the credit by allowing him to draw
thereon. The situation itself emasculates petitioners 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 LHCs
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 Dolans 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 principles 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 commonlaw principles of contract should
apply.
It is worthy of note that the propriety of LHCs 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.[47]
Would injunction then be the proper remedy to restrain the alleged
wrongful draws on the Securities?
Most writers agree that fraud is an exception to the independence
principle. Professor Dolan opines that the untruthfulness of a certificate
accompanying a demand for payment under a standby credit may qualify as
fraud sufficient to support an injunction against payment. [48] The remedy for
fraudulent abuse is an injunction. However, injunction should not be granted
unless: (a) there is clear proof of fraud; (b) the fraud constitutes fraudulent
abuse of the independent purpose of the letter of credit and not only fraud
under the main agreement; and (c) irreparable injury might follow if injunction
is not granted or the recovery of damages would be seriously damaged.[49]
In its complaint for injunction before the trial court, petitioner alleged that it
is entitled to a total extension of two hundred fifty-three (253) days which
would move the target completion date. It argued that if its claims for
extension would be found meritorious by the ICC, then LHC would not be
entitled to any liquidated damages.[50]
Generally, injunction is a preservative remedy for the protection of ones
substantive right or interest; it is not a cause of action in itself but merely a
provisional remedy, an adjunct to a main suit. The issuance of the writ of
preliminary injunction as an ancillary or preventive remedy to secure the rights
of a party in a pending case is entirely within the discretion of the court taking
cognizance of the case, the only limitation being that this discretion should be
exercised based upon the grounds and in the manner provided by law.[51]

Before a writ of preliminary injunction may be issued, there must be a

clear showing by the complaint that there exists a right to be protected and
that the acts against which the writ is to be directed are violative of the said
right.[52] It must be shown that the invasion of the right sought to be protected
is material and substantial, that the right of complainant is clear and
unmistakable and that there is an urgent and paramount necessity for the writ
to prevent serious damage.[53] Moreover, an injunctive remedy may only be
resorted to when there is a pressing necessity to avoid injurious
consequences which cannot be remedied under any standard compensation.
[54]

In the instant case, petitioner failed to show that it has a clear and
unmistakable right to restrain LHCs call on the Securities which would justify
the issuance of preliminary injunction. By petitioners own admission, the right
of LHC to call on the Securities was contractually rooted and subject to the
express stipulations in the Turnkey Contract.[55] Indeed, the Turnkey Contract
is plain and unequivocal in that it conferred upon LHC the right to draw upon
the Securities in case of default, as provided in Clause 4.2.5, in relation to
Clause 8.7.2, thus:
4.2.5 The Employer shall give the Contractor seven days notice of calling upon any of
the Securities, stating the nature of the default for which the claim on any of the
Securities is to be made, provided that no notice will be required if the Employer calls
upon any of the Securities for the payment of Liquidated Damages for Delay or for
failure by the Contractor to renew or extend the Securities within 14 days of their
expiration in accordance with Clause 4.2.2. [56]
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.[57]
The pendency of the arbitration proceedings would not per se make LHCs
draws on the Securities wrongful or fraudulent for there was nothing in the
Contract which would indicate that the parties intended that all disputes
regarding delay should first be settled through arbitration before LHC would
be allowed to call upon the Securities. It is therefore premature and absurd to
conclude that the draws on the Securities were outright fraudulent given the
fact that the ICC and CIAC have not ruled with finality on the existence of
default.
Nowhere in its complaint before the trial court or in its pleadings filed
before the appellate court, did petitioner invoke the fraud exception rule as a
ground to justify the issuance of an injunction.[58] What petitioner did assert

before the courts below was the fact that LHCs draws on the Securities would
be premature and without basis in view of the pending disputes between
them. Petitioner should not be allowed in this instance to bring into play the
fraud exception rule to sustain its claim for the issuance of an injunctive relief.
Matters, theories or arguments not brought out in the proceedings below will
ordinarily not be considered by a reviewing court as they cannot be raised for
the first time on appeal.[59] The lower courts could thus not be faulted for not
applying the fraud exception rule not only because the existence of fraud was
fundamentally interwoven with the issue of default still pending before the
arbitral tribunals, but more so, because petitioner never raised it as an issue in
its pleadings filed in the courts below. At any rate, petitioner utterly failed to
show that it had a clear and unmistakable right to prevent LHCs call upon the
Securities.
Of course, prudence should have impelled LHC to await resolution of the
pending issues before the arbitral tribunals prior to taking action to enforce the
Securities. But, as earlier stated, the Turnkey Contract did not require LHC to
do so and, therefore, it was merely enforcing its rights in accordance with the
tenor thereof. Obligations arising from contracts have the force of law between
the contracting parties and should be complied with in good faith. [60] More
importantly, pursuant to the principle of autonomy of contracts embodied in
Article 1306 of the Civil Code, [61] petitioner could have incorporated in its
Contract with LHC, a proviso that only the final determination by the arbitral
tribunals that default had occurred would justify the enforcement of the
Securities. However, the fact is petitioner did not do so; hence, it would have
to live with its inaction.
With respect to the issue of whether the respondent banks were justified in
releasing the amounts due under the Securities, this Court reiterates that
pursuant to the independence principle the banks were under no obligation to
determine the veracity of LHCs certification that default has occurred. Neither
were they bound by petitioners declaration that LHCs call thereon was
wrongful. To repeat, respondent banks undertaking was simply to pay once
the required documents are presented by the beneficiary.
At any rate, should petitioner finally prove in the pending arbitration
proceedings that LHCs draws upon the Securities were wrongful due to the
non-existence of the fact of default, its right to seek indemnification for
damages it suffered would not normally be foreclosed pursuant to general
principles of law.

Moreover, in a Manifestation,[62] dated 30 March 2001, LHC informed this

Court that the subject letters of credit had been fully drawn. This fact alone
would have been sufficient reason to dismiss the instant petition.
Settled is the rule that injunction would not lie where the acts sought to be
enjoined have already become fait accompli or an accomplished or
consummated act.[63] In Ticzon v. Video Post Manila, Inc. [64] this Court ruled
that where the period within which the former employees were prohibited from
engaging in or working for an enterprise that competed with their former
employerthe very purpose of the preliminary injunction has expired, any
declaration upholding the propriety of the writ would be entirely useless as
there would be no actual case or controversy between the parties insofar as
the preliminary injunction is concerned.
In the instant case, the consummation of the act sought to be restrained
had rendered the instant petition mootfor any declaration by this Court as to
propriety or impropriety of the non-issuance of injunctive relief could have no
practical effect on the existing controversy.[65] The other issues raised by
petitioner particularly with respect to its right to recover the amounts
wrongfully drawn on the Securities, according to it, could properly be threshed
out in a separate proceeding.
One final point. LHC has charged petitioner of forum-shopping. It raised
the charge on two occasions. First, in its Counter-Manifestation dated 29 June
2004[66] LHC alleges that petitioner presented before this Court the same claim
for money which it has filed in two other proceedings, to wit: ICC Case No.
11264/TE/MW and Civil Case No. 04-332 before the RTC of Makati. LHC
argues that petitioners acts constitutes forum-shopping which should be
punished by the dismissal of the claim in both forums. Second, in
its Comment to Petitioners Motion for Leave to File Addendum to Petitioners
Memorandum dated 8 October 2004, LHC alleges that by maintaining the
present appeal and at the same time pursuing Civil Case No. 04-332wherein
petitioner pressed for judgment on the issue of whether the funds LHC drew
on the Securities should be returnedpetitioner resorted to forum-shopping. In
both instances, however, petitioner has apparently opted not to respond to the
charge.
Forum-shopping is a very serious charge. It exists when a party
repetitively avails of several judicial remedies in different courts,
simultaneously or successively, all substantially founded on the same
transactions and the same essential facts and circumstances, and all raising
substantially the same issues either pending in, or already resolved adversely,
by some other court.[67] It may also consist in the act of a party against whom

an adverse judgment has been rendered in one forum, of seeking another and
possibly favorable opinion in another forum other than by appeal or special
civil action of certiorari, or the institution of two or more actions or proceedings
grounded on the same cause on the supposition that one or the other court
might look with favor upon the other party.[68] To determine whether a party
violated the rule against forum-shopping, the test applied is whether the
elements of litis pendentia are present or whether a final judgment in one case
will amount to res judicata in another.[69] Forum-shopping constitutes improper
conduct and may be punished with summary dismissal of the multiple
petitions and direct contempt of court.[70]
Considering the seriousness of the charge of forum-shopping and the
severity of the sanctions for its violation, the Court will refrain from making any
definitive ruling on this issue until after petitioner has been given ample
opportunity to respond to the charge.
WHEREFORE, the instant petition is DENIED, with costs against
petitioner.
Petitioner is hereby required to answer the charge of forum-shopping
within fifteen (15) days from notice.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario,
JJ., concur.