Transfield Philippines vs Luzon Hydro Electric Corp.

GR No 146717, Nov 22, 2004

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.

Facts: Transfield Philippines (Transfield) entered into a turn-key contract with Luzon Hydro Corp.
(LHC).Under the contract, Transfield were to construct a hydro-electric plants in Benguet and Ilocos. Transfield
was given the sole responsibility for the design, construction, commissioning, testing and completion of the
Project. The contract provides for a period for which the project is to be completed and also allows for the
extension of the period provided that the extension is based on justifiable grounds such as fortuitous event. In
order to guarantee performance by Transfield, two stand-by letters of credit (securities) were required to be
opened. During the construction of the plant, Transfield requested for extension of time citing typhoon and
various disputes delaying the construction. LHC did not give due course to the extension of the period prayed
for but referred the matter to arbitration committee. Because of the delay in the construction of the plant, LHC
called on the stand-by letters of credit because of default. However, the demand was objected by Transfield on
the ground that there is still pending arbitration on their request for extension of time.

Issue: Whether or not LHC can collect from the letters of credit despite the pending arbitration case

Held: Transfield’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.

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.

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.

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.
DOCTRINE:

As a fundamental point, the pendency of arbitral proceedings does not foreclose resort to the courts for
provisional reliefs. The rules of the ICC, which governs the parties’ arbitral dispute, allows the application of a
party to a judicial authority for interim or conservatory measures. Likewise, Section 14 of R.A. 876 (The
Arbitration Law) recognizes the rights of any party to petition the court to take measures to safeguard and/or
conserve any matter which is the subject of the dispute in arbitration. In addition, R.A. 9285, otherwise known
as the “Alternative Dispute Resolution Act of 2004,” allows the filing of provisional or interim measures with
the regular courts whenever the arbitral tribunal has no power to act or to act effectively.