VOL.

443, NOVEMBER 22, 2004 307

Transfield Philippines, Inc. vs. Luzon Hydro Corporation

*
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.

Commercial Law; Banks and Banking; Letters of Credit; Standby

Credits; Words and Phrases; 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; Generally, credits in non-sale settings have come to be known as
standby credits.—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. 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. 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
nonperfor-
_______________

* SECOND DIVISION.

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mance. Generally, credits in the non-sale settings have come to be known as

standby credits.
Same; Same; Same; Same; Commercial Credits and Standby Credits,
Distinguished.—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.
Same; Same; Same; A letter of credit 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.—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. 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.
Same; Same; Same; Uniform Customs and Practice (UCP) for
Documentary Credits; Since letters of credit have gained general
acceptability in international trade transactions, the International Chamber
of Commerce (ICC) has published from time to time updates on the Uniform
Customs and Practice for Documentary Credits to standardize practices in
the letter of credit area; 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.—Since letters
of credit have gained general acceptability in international trade
transactions, the ICC

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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. First published in 1933, the UCP for Documentary Credits has
undergone several revisions, the latest of which was in 1993. In Bank of the
Philippine Islands v. De Reny Fabric Industries, Inc., 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, 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.
Same; Same; Same; “Independence Principle”; Under the
“independence 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.—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
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310 SUPREME COURT REPORTS ANNOTATED

Transfield Philippines, Inc. vs. Luzon Hydro Corporation

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.
Same; Same; Same; Same; 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; or (b) independence may be only as to the justification aspect,
though 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.—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.
Same; Same; Same; Same; The independence principle liberates the
issuing bank from the duty of ascertaining compliance by the parties in the
main contract; As it is, the independence doctrine works to the benefit of
both the issuing bank and the beneficiary.—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. Precisely, the independence
principle liberates the issuing bank from the duty of ascertaining compliance
by

311
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Transfield Philippines, Inc. vs. Luzon Hydro Corporation

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 argument—that it is only the issuing bank that may invoke the
independence principle on letters of credit—does 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.
Same; Same; Same; Same; 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 prerequisite for the
release of funds under a letter of credit.—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.
Same; Same; Same; Same; Owing to the nature and purpose of standby
letters of credit, banks are left with little or no alternative but to honor the
credit or the call for payment.—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

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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.
Same; Same; Same; Same; Contracts; 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.— 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. 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.
Same; Same; Same; Same; Injunction; Requisites; Most writers agree
that fraud is an exception to the independence principle; The remedy for
fraudulent abuse is an injunction.—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. 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.
Same; Same; Same; Same; Same; 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.—Generally, injunction is a preservative remedy for the
protection of one’s substantive right or interest;

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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. 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. 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. 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.
Same; Same; Same; Same; It is premature and absurd to conclude that
the draws on the Securities were outright fraudulent where the International
Chamber of Commerce and the Construction Industry Authority
Commission have not ruled with finality on the existence of default.—The
pendency of the arbitration proceedings would not per se make LHC’s
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.
Same; Same; Same; Same; Actions; Appeals; Pleadings and Practice;
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.—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. What petitioner did assert before the courts below was the fact
that LHC’s draws on the Securities would be premature and without basis in
view of the

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Transfield Philippines, Inc. vs. Luzon Hydro Corporation

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. 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 LHC’s call upon the Securities.
Same; Same; Same; Same; Obligations and Contracts; Obligations
arising from contracts have the force of law between the contracting parties
and should be complied with in good faith.— 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. More
importantly, pursuant to the principle of autonomy of contracts embodied in
Article 1306 of the Civil Code, 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.
Actions; Injunction; 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.—In a Manifestation, 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. In Ticzon v. Video Post Manila, Inc. this
Court ruled that where the period within which the former employees were

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prohibited from engaging in or working for an enterprise that competed with

their former employer—the 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 moot—for 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. 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.
Same; Pleadings and Practice; Forum Shopping; 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 the issue until the party alleged to have committed forum shopping
has been given ample opportunity 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. 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. 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. Forum Shopping constitutes
improper conduct and may be punished with summary dismissal of the
multiple petitions and direct contempt of court. 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.

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Transfield Philippines, Inc. vs. Luzon Hydro Corporation

PETITION for review on certiorari of a decision of the Court of

Appeals.

The facts are stated in the opinion of the Court.

       Romulo, Mabanta, Buenaventura, Sayoc and Delos Angeles
and M. B. Tomacruz & Associates Law Offices for petitioner.
          Castro, Yan Binas, Ortile, Samillano & Mangrobang for
respondent Security Bank.
     Quasha, Ancheta, Peña & Nolasco for respondent ANZ Bank.
     Sycip, Salazar, Hernandez & Gatmaitan for respondent LHC.

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. 1
Petitioner has appealed from the Decision of the Court of
Appeals in CA-G.R. SP No. 61901 entitled “Transfield Philippines,
Inc. v. Hon. Oscar Pimentel, et al.,” promulgated on 31 January
2
2001.
On 26 March 1997, petitioner and respondent Luzon Hydro3
Corporation (hereinafter, LHC) entered into a Turnkey Contract
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 prov-

_______________

1 Penned by Justice Candido V. Rivera, concurred in by Justices Conchita Carpio-

Morales and Rebecca de Guia-Salvador.
2 Rollo, pp. 52-61.
3 Id., at pp. 62-252.

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inces of Benguet and Ilocos Sur (hereinafter, the Project). Petitioner

was given the sole responsibility for the design,4 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 Turn-key Contract, among which 5
are variations,
force majeure, and delays caused by LHC itself. Further, in case of
dispute, the parties are bound to settle their differences through
mediation, conciliation and such other6
means enumerated under
Clause 20.3 of the Turnkey Contract.
To secure performance of petitioner’s 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

_______________
 4 Id., at pp. 75-76.
5 Clause 1.1, Volume II of the Turnkey Contract, Rollo, p. 81.
6 20.3 Dispute Resolution.
If at anytime any dispute or difference shall arise between the Employer and the
Contractor in connection with or arising out of this Contract or the carrying out of the
Works, the parties together shall in good faith exert all efforts to resolve such dispute
or difference by whatever means they deem appropriate, including conciliation,
mediation and seeking the assistance of technical, accounting or other experts. At the
request of any party, the chief executives of the Employer and the Contractor shall
meet in a good-faith effort to reach an amicable settlement of the dispute or
difference. Any dispute or difference that the parties are unable to resolve within a
reasonable time may, at the option of either party, be referred to arbitration in
accordance with Clause 20.4. (Id., at p. 179)

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Transfield Philippines, Inc. vs. Luzon Hydro Corporation

the local branch of respondent7 Australia and New Zealand Banking

Group Limited (ANZ Bank) and Standby Letter of Credit No.8
IBDIDSB-00/4 with respondent Security 9
Bank Corporation (SBC)
each in the amount of US$8,988,907.00.
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
10
Industry Arbitration Commission
(CIAC) on 1 June 1999. This was followed by another Request for
Arbitration, this time filed by 11petitioner before the International
Chamber of Commerce (ICC) 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 12
pursuant to the pertinent provisions 13
of the Turnkey Contract,
petitioner—in two separate letters both dated 10 August 2000—
advised respondent banks of the arbitration

_______________
 7 Annex “C”, Rollo, pp. 254-256.
8 Annex “D”, Id., at pp. 257-259.
9 Clause 4.2.1, Volume II of the Turnkey Contract, Id., at p. 94.
10 Id., at pp. 261-265.
11 Id., at pp. 359-382.
12 Turnkey Contract, Clause 4.2.5, Rollo, p. 94, in relation to Clause 8.7.1., Rollo,
p. 132.
13 Annex “H”, Rollo, pp. 287-289; Annex “H-1”, Rollo, pp. 320-322.

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Transfield Philippines, Inc. vs. Luzon Hydro Corporation

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 14June 2000, LHC sent notice
to petitioner that pursuant to Clause 8.2 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
15
they would pay on the Securities if and when LHC calls on them.
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 16on the securities for
the payment of liquidated damages for the delay.

_______________

14 Clause 8.2. Time for Completion. The Contractor shall complete all the Works,
including the Tests on Completion, in accordance with the Program on or before the
Target Completion Date. (Rollo, p. 125)
15 Vol. 1, Rollo, pp. 355-357.
16 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 Liq
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Transfield Philippines, Inc. vs. Luzon Hydro Corporation

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 17
as defendants
before the Regional Trial Court (RTC) of Makati. 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 18
for a
period of seventeen (17) days or until 26 November 2000.
19
The RTC, in its Order dated 24 November 2000, denied
petitioner’s 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 petitioner’s 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.

_______________

uidated Damages for Delay for each day of the delay on the following day without
need of demand from the Employer.
17 Annex “L”, Rollo, pp. 383-402.
18 Annex “N”, Id., at pp. 406-409.
19 Annex “O”, Id., at pp. 412-423.

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Transfield Philippines, Inc. vs. Luzon Hydro Corporation

Dissatisfied with the trial court’s 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
20
injunction. Petitioner submitted to the appellate court that LHC’s
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 petitioner’s 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 declarant’s 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
court’s decision that LHC could call on the Se-

_______________

20 Docketed as CA-G.R. SP No. 61901.

322

322 SUPREME COURT REPORTS ANNOTATED

Transfield Philippines, Inc. vs. Luzon Hydro Corporation

curities 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 court’s denial of
petitioner’s 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 BENEFICIARY’S
CALL THEREON IS WRONGFUL OR FRAUDULENT.

WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE

SECURITIES BEFORE THE RESOLUTION OF PETITIONER’S AND
LHC’S 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 LHC’S 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
21
WRONGFULLY DRAWN FROM THE SECURITIES.

_______________

21 Rollo, pp. 25-26.

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Transfield Philippines, Inc. vs. Luzon Hydro Corporation

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.
22
On 25 August 2003, petitioner23filed a Supplement to the Petition
and Supplemental Memorandum, 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 Contract—to 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.
24
In its Manifestation dated 8 September 2003, LHC contends
that the supplemental pleadings filed by petitioner

_______________

22 Vol. II; Id., at pp. 2-78.

23 Id., at pp. 79-92.
24 Id., at pp. 95-98.

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324 SUPREME COURT REPORTS ANNOTATED

Transfield Philippines, Inc. vs. Luzon Hydro Corporation

present erroneous and misleading information which would change

petitioner’s theory on appeal.
25
In yet another Manifestation dated 12 April 2004, 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. 26
LHC filed a Counter-Manifestation dated 29 June 2004, stating
that petitioner’s 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 petitioner’s
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 ICC’s partial award mentioned in petitioner’s
Manifestation of 12 April 2004.
In its Comment to petitioner’s Motion for Leave to File
Addendum to Petitioner’s 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 ICC’s partial award is now
fully within the Makati RTC’s jurisdiction in Civil Case No. 04-332.
LHC asserts that petitioner is engaged in forum shopping by keeping
this appeal and at the

_______________

25 Id., at pp. 109-113.

26 Id., at pp. 666-671.

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Transfield Philippines, Inc. vs. Luzon Hydro Corporation

same time seeking the suit for enforcement of the arbitral award
before the Makati court.
27
Respondent SBC in its Memorandum, dated 10 March 2003
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
28
dated 13 March 2003 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

_______________

27 Id., at pp. 598-607.

28 Id., at pp. 619-630.

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326 SUPREME COURT REPORTS ANNOTATED

Transfield Philippines, Inc. vs. Luzon Hydro Corporation

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
29
conditional, yet the draft presented under it is often
negotiable.
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
30
paying. 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
31
standby credits.
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 be-

_______________

29 Joseph, Letters of Credit: The Developing Concepts and Financing Functions,

94 BANKING LAW JOURNAL 850-851 [1977] cited in M. KURKELA, LETTERS
OF CREDIT UNDER INTERNATIONAL TRADE LAW, 321 (1985).
30 Bank of America v. Court of Appeals, G.R. No. 105395, 10 December 1993, 228
SCRA 357 citing William S. Shaterian, EXPORT-IMPORT BANKING: THE
INSTRUMENTS AND OPERATIONS UTILIZED BY AMERICAN EXPORTERS AND
IMPORTERS AND THEIR BANKS IN FINANCING FOREIGN TRADE, 284-374
(1947).
 31 E&H Partners v. Broadway Nat’l. Bank, 39 F. Supp. 2d 275, (United States
Circuit Court, S.D. New York) No. 96 Civ. 7098 (RLC), 19 October 1998
<http://www.westlaw.com>.

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Transfield Philippines, Inc. vs. Luzon Hydro Corporation

come 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
32
obligor has not performed the contract.
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
33
payment of debt therefor to the addressee. 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
34
underlying contract or disputes between the parties thereto.
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
35
area. The vast majority of letters of credit incorporate the UCP.
First published in 1933, the UCP for Documentary Credits has
36
undergone several revisions, the latest of which was in 1993.

_______________

32 J. DOLAN, THE LAW OF LETTERS OF CREDIT, REVISED Ed. (2000).

33 24 A WORDS AND PHRASES 590, Permanent Edition.
34 Ibid.
35 JACKSON & DAVEY, INTERNATIONAL ECONOMIC RELATIONS, 53 (2nd
ed.).
36 ICC Publication No. 500.

328

328 SUPREME COURT REPORTS ANNOTATED

Transfield Philippines, Inc. vs. Luzon Hydro Corporation
In Bank of the Philippine Islands v. De Reny Fabric Industries,
37
Inc., 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.
38
Court of Appeals, 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, falsifica-

_______________

37 146 Phil. 269; 35 SCRA 256 (1970).

38 G.R. No. 105395, 10 December 1993, 228 SCRA 357.

329

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Transfield Philippines, Inc. vs. Luzon Hydro Corporation

tion 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,
39
or any other person whomsoever.
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
40
credit.
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 pre-

_______________

39 Article 15, UCP.

40 KURKELA, LETTERS OF CREDIT UNDER INTERNATIONAL TRADE LAW,
286-287 (1985).

330

330 SUPREME COURT REPORTS ANNOTATED

Transfield Philippines, Inc. vs. Luzon Hydro Corporation

41
sented and the conditions of the credit are complied with. 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 argument—that
it is only the issuing bank that may invoke the independence
principle on letters of credit—does 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

_______________

41 Art. 10, UCP.

331

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Transfield Philippines, Inc. vs. Luzon Hydro Corporation

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 prerequisite 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
obligor’s nonperformance. They function, however, in distinctly different
ways.
Traditionally, upon the obligor’s default, the surety undertakes to
complete the obligor’s 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 surety’s performance takes
time.

332

332 SUPREME COURT REPORTS ANNOTATED

Transfield Philippines, Inc. vs. Luzon Hydro Corporation

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 applicant’s 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 obligor’s
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
beneficiary’s 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
42
beneficiary.

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

_______________

42 Supra note 32 at pp. 1-27.

333

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Transfield Philippines, Inc. vs. Luzon Hydro Corporation

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
43
that it was “ministerial” for them to honor
the call for payment.
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
44
basis.
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
45
drawing on the Security.”

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 according46to their nature, may be in keeping
with good faith, usage, and law. A careful perusal

_______________

43 Rollo, pp. 604 and 624.

44 Italics supplied; Id., at p. 94.
45 Italics supplied; Id., at p. 132.
46 Art. 1315, Civil Code.

334

334 SUPREME COURT REPORTS ANNOTATED

Transfield Philippines, Inc. vs. Luzon Hydro Corporation

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 apply.
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,

335

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Transfield Philippines, Inc. vs. Luzon Hydro Corporation

this Court is not called upon to rule upon the issue of default—such
issue having been submitted by the parties to the jurisdiction of the
arbitral tribunals
47
pursuant to the terms embodied in their
agreement.
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 48
qualify as fraud sufficient to support an injunction against
payment. 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
49
or the recovery of damages would be
seriously damaged.
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
50
damages.
Generally, injunction is a preservative remedy for the protection
of one’s 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

_______________

47 Clause 20.4.1, Turnkey Contract, Rollo, p. 179.

48 Supra note 32 at pp. 2-63.
49 M. KURKELA, LETTERS OF CREDIT UNDER INTERNATIONAL TRADE
LAW, 309 (1985).
50 Rollo, p. 391.
 336

336 SUPREME COURT REPORTS ANNOTATED

Transfield Philippines, Inc. vs. Luzon Hydro Corporation

the court taking cognizance of the case, the only limitation being
that this discretion should be exercised based upon the grounds and
51
in the manner provided by law.
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
52
which the writ is to be directed
are violative of the said right. 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
53
paramount necessity for the writ to prevent serious
damage. Moreover, an injunctive remedy may only be resorted to
when there is a pressing necessity to avoid injurious consequences54
which cannot be remedied under any standard compensation.
In the instant case, petitioner failed to show that it has a clear and
unmistakable right to restrain LHC’s call on the Securities which
would justify the issuance of preliminary injunction. By petitioner’s
own admission, the right of LHC to call on the Securities was
contractually rooted 55
and subject to the express stipulations in the
Turnkey Contract. Indeed, the Turnkey Contract is plain and
unequivocal in that it conferred upon LHC the right to draw upon
the Securities in case

_______________

51 Batangas Laguna Tayabas Bus Company, Inc. v. Bitanga, 415 Phil. 43; 362
SCRA 635, 651 (2001).
52 Shin v. Court of Appeals, G.R. No. 113627, 6 February 2001, 351 SCRA 257.
53 Zabat v. Court of Appeals, G.R. No. 122089, 23 August 2000, 338 SCRA 551;
Philippine Economic Zone Authority v. Vianzon, G.R. No. 131020, 20 July 2000, 336
SCRA 309; Valencia v. Court of Appeals, G.R. No. 119118, 19 February 2001, 352
SCRA 72; Crystal v. Cebu International School, G.R. No. 135433, 4 April 2001, 356
SCRA 296; Ong Ching Kian Chuan v. Court of Appeals, 415 Phil. 365; 363 SCRA
145 (2001).
54 Philippine National Bank v. Ritratto Group, Inc., 414 Phil. 494; 362 SCRA 216
(2001).
55 Rollo, p. 31.

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Transfield Philippines, Inc. vs. Luzon Hydro Corporation
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 within5614 days
of their expiration in accordance with Clause 4.2.2.
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 become57 due, to the Contractor and/or by
drawing on the Security.”

The pendency of the arbitration proceedings would not per se make

LHC’s 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
58
exception rule as a ground to justify the issuance of an injunction.
What petitioner did assert before the courts below was the fact that
LHC’s draws on the Securities would be premature and without
basis in view of the pending disputes between them. Petitioner
should not be allowed in

_______________

56 Italics supplied; Id., at pp. 94-95.

57 Id., at p. 132.
58 Vide Annex “L”, Rollo. pp. 392-399; Petition for Certiorari, CA Rollo, pp. 7-43.

338

338 SUPREME COURT REPORTS ANNOTATED

Transfield Philippines, Inc. vs. Luzon Hydro Corporation

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
59
 59
the first time on appeal. 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 LHC’s 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
60
contracting parties and should be complied with in good faith.
More importantly, pursuant to the principle of61autonomy of contracts
embodied in Article 1306 of the Civil Code, 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

_______________

59 Salafranca v. Philamlife Village Homeowners Association, Inc., 360 Phil. 652;

300 SCRA 469 (1998); Ruby Industrial Corporation v. Court of Appeals, 348 Phil.
480; 284 SCRA 445 (1998); Victorias Milling Co., Inc. v. Court of Appeals, 389 Phil.
184; 333 SCRA 663 (2000).
60 Article 1159, Civil Code.
61 Art. 1306. The contracting parties may establish such stipulations, clauses,
terms and conditions as they may deem convenient, provided they are not contrary to
law, morals, good customs, public order, or public policy.

339

VOL. 443, NOVEMBER 22, 2004 339

Transfield Philippines, Inc. vs. Luzon Hydro Corporation

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 LHC’s certification
that default has occurred. Neither were they bound by petitioner’s
declaration that LHC’s 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 LHC’s 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.
62
Moreover, in a Manifestation, 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 63
become fait accompli or an
accomplished or consummated act. In Ticzon v. Video Post Manila,
64
Inc. 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 employer—the very
purpose of the preliminary

_______________

62 Rollo, p. 493.
63 Aznar Brothers Realty Company v. Court of Appeals, G.R. No. 128102, 7 March
2000, 327 SCRA 359; Soriano v. Court of Appeals, 416 Phil. 226; 363 SCRA 725
(2001); Rodil Enterprises v. Court of Appeals, G.R. No. 129609, 29 November 2001,
371 SCRA 79; Unionbank of the Philippines v. Court of Appeals, 370 Phil. 837; 311
SCRA 795 (1999).
64 389 Phil. 20; 333 SCRA 472 (2000).

340

340 SUPREME COURT REPORTS ANNOTATED

Transfield Philippines, Inc. vs. Luzon Hydro Corporation

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 moot—for any
declaration by this Court as to propriety or impropriety of the non-
issuance of injunctive65 relief could have no practical effect on the
existing controversy. 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-
66
Manifestation dated 29 June 2004 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 petitioner’s acts constitutes forum shopping which should be
punished by the dismissal of the claim in both forums. Second, in its
Comment to Petitioner’s Motion for Leave to File Addendum to
Petitioner’s Memorandum dated 8 October 2004, LHC alleges that
by maintaining the present appeal and at the same time pursuing
Civil Case No. 04-332—wherein petitioner pressed for judgment on
the issue of whether the funds LHC drew on the Securities should be
returned—petitioner 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

_______________

65 BLACK’S LAW DICTIONARY, p. 1008, citing Leonhart v. McCormick, D.C.

Pa., 395 F. Supp. 1073.
66 Vol. II, Rollo, pp. 666-669.

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Transfield Philippines, Inc. vs. Luzon Hydro Corporation

founded on the same transactions and the same essential facts and
circumstances, and all raising substantially the same issues either67
pending in, or already resolved adversely, by some other court. 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 that68one or the other court might look with favor upon
the other party. 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 69a final judgment in one case
will amount to res judicata in another. Forum shopping constitutes
improper conduct and may be punished with summary dismissal of
70
the multiple petitions and direct contempt of court.
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.

_______________

67 Tantoy, Sr. v. Court of Appeals, G.R. No. 141427, April 20, 2001, 357 SCRA
329.
68 Bangko Silangan Development Bank v. Court of Appeals, 412 Phil. 755; 360
SCRA 422 (2001).
69 Tirona v. Alejo, G.R. No. 129313, October 10, 2001, 367 SCRA 17; Manalo v.
Court of Appeals, G.R. No. 141297, October 8, 2001, 366 SCRA 752.
70 Tantoy, Sr. v. Court of Appeals, supra note 67; Caviles v. Seventeenth Division,
Court of Appeals, G.R. No. 126857, September 18, 2002, 389 SCRA 306.

342

342 SUPREME COURT REPORTS ANNOTATED

National Power Corporation vs. Alonzo-Legasto

SO ORDERED.

     Puno (Chairman), Austria-Martinez, Callejo, Sr. and Chico-

Nazario, JJ., concur.

Petition denied.

Notes.—Being a product of international commerce, it is not

uncommon to find a dearth of national law that can adequately
provide for the governance of letters of credit. (Bank of America, NT
& SA vs. Court of Appeals, 228 SCRA 357 [1993])
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. (Salafranca v.
Philamlife (Pamplona) Village Homeowners Association, Inc., 300
SCRA 469 [1998])

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