TRANSFIELD PHILIPPINES, INC. VERSUS LUZON HYDRO CORPORATION, ET.AL.

[G. R. No. 146717. November 22, 2004]

Doctrine: Independence Principle; Fraud Exception Principle

Facts: On 26 March 1997, petitioner and respondent Luzon Hydro 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 provinces of Benguet and Ilocos Sur. The Turnkey Contract provides that:
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 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. Further, in case of dispute, the parties are bound to settle their
differences through mediation, conciliation and such other means enumerated under Clause
20.3 of the Turnkey Contract. To secure performance, petitioner applied Standby Letter of
Credit No. E001126/8400 with the local branch of respondent Australia and New Zealand
Banking Group Limited (ANZ Bank) and Standby Letter of Credit No. IBDIDSB-00/4 with
respondent Security Bank Corporation (SBC) each in the amount of US$8,988,907.00.
Petitioner defaulted, thus Luzon Hydro collected the proceeds of the Standby Letter of Credit
upon presenting a certification of non-performance by the petitioner.

Issue: 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.

Ruling: 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.
Under 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.
In Fraud Exception Principle, 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 which 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.

FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING CORPORATION) VERSUS
THE COURT OF APPEALS, and BERNARDO E. VILLALUZ.
G. R. No. 94209, April 30, 1991

Doctrine:Commercial transactions involving letters of credit that the documents tendered must strictly
conform to the terms of the letter of credit.

Facts: On June 3, 1971, Bernardo E. Villaluz agreed to sell to the then defendant Axel Christiansen
2,000 cubic meters of lauan logs at $27.00 per cubic meter FOB. After inspecting the logs,
Christiansen issued purchase order No. 76171.On the arrangements made and upon the
instructions of the consignee, Hanmi Trade Development, Ltd., de Santa Ana, California, the
Security Pacific National Bank of Los Angeles, California issued Irrevocable Letter of Credit
No. IC-46268 available at sight in favor of Villaluz for the sum of $54,000.00,the total
purchase price of the lauan logs. The letter of credit was mailed to the Feati Bank and Trust
Company (now Citytrust) with the instruction to the latter that it forward the enclosed letter of
credit to the beneficiary. After the delivery of the logs, Christiansen refused to issue
certification that the were approved for shipment, a requirement in the letter of credit. Hence,
Villaluz filed for mandamus and specific performance against the Feati Bank and
Christiansen.

Issue: Whether or not a correspondent bank (Feati Bank) is to be held liable under the letter of credit
despite non-compliance by the beneficiary with the terms thereof.

Ruling: It is a settled rule in commercial transactions involving letters of credit that the documents
tendered must strictly conform to the terms of the letter of credit. The tender of documents by
 the beneficiary (seller) must include all documents required by the letter. Under the foregoing
provisions of the U.C.P., the bank may only negotiate, accept or pay, if the documents tendered
to it are on their face in accordance with the terms and conditions of the documentary credit.
And since a correspondent bank, like the petitioner, principally deals only with documents, the
absence of any document required in the documentary credit justifies the refusal by the
correspondent bank to negotiate, accept or pay the beneficiary, as it is not its obligation to look
beyond the documents. It merely has to rely on the completeness of the documents tendered by
the beneficiary. Thus, a correspondent bank which departs from what has been stipulated under
the letter of credit, as when it accepts a faulty tender, acts on its own risks and it may not
thereafter be able to recover from the buyer or the issuing bank.

LANDL AND COMPANY (PHIL.) INC., PERCIVAL G. LLABAN and MANUEL P. LUCENTE
VERSUS METROPOLITAN BANK AND TRUST COMPANY (METROBANK)
G.R. No. 159622. July 30, 2004

Doctrine:Trust Receipt Law: The entruster shall be entitled to the proceeds from the sale of the goods,
documents or instruments released under a trust receipt to the entrustee to the extent of the
amount owing to the entruster or as appears in the trust receipt, or to the return of the goods,
documents or instruments in case of non-sale, and to the enforcement of all other rights
conferred on him in the trust receipt provided such are not contrary to the provisions of this
Decree.

Facts: Petitioner corporation is engaged in the business of selling imported welding rods and
alloys. On June 17, 1983, it opened Commercial Letter of Credit No. 4998 with respondent
 bank, in the amount of US$19,606.77, which was equivalent to P218,733.92 in Philippine
currency at the time the transaction was consummated. To secure the indebtedness of petitioner
corporation, respondent bank required the execution of a Trust Receipt in an amount equivalent
to the letter of credit, on the condition that petitioner corporation would hold the goods in trust
for respondent bank, with the right to sell the goods and the obligation to turn over to
respondent bank the proceeds of the sale, if any. If the goods remained unsold, petitioner
corporation had the further obligation to return them to respondent bank on or before
November 23, 1983.

Issue: Whether or not, in a trust receipt transaction, an entruster which had taken actual and juridical
possession of the goods covered by the trust receipt may subsequently avail of the right to
demand from the entrustee the deficiency of the amount covered by the trust receipt.

Ruling: Pursuant to Section 7 of Trust Receipts Law: Sec. 7. Rights of the entruster. - The entruster
shall be entitled to the proceeds from the sale of the goods, documents or instruments released
under a trust receipt to the entrustee to the extent of the amount owing to the entruster or as
appears in the trust receipt, or to the return of the goods, documents or instruments in case of
non-sale, and to the enforcement of all other rights conferred on him in the trust receipt
provided such are not contrary to the provisions of this Decree. The entruster may cancel the
trust and take possession of the goods, documents or instruments subject of the trust or of the
proceeds realized therefrom at any time upon default or failure of the entrustee to comply with
any of the terms and conditions of the trust receipt or any other agreement between the
entruster and the entrustee, and the entruster in possession of the goods, documents or
instruments may, on or after default, give notice to the entrustee of the intention to sell, and
may, not less than five days after serving or sending of such notice, sell the goods, documents
or instruments at public or private sale, and the entruster may, at a public sale, become a
purchaser. The proceeds of any such sale, whether public or private, shall be applied (a) to the
payment of the expenses thereof; (b) to the payment of the expenses of re-taking, keeping and
storing the goods, documents or instruments; (c) to the satisfaction of the entrustees
indebtedness to the entruster. The entrustee shall receive any surplus but shall be liable to the
entruster for any deficiency. Notice of sale shall be deemed sufficiently given if in writing, and
either personally served on the entrustee or sent by post-paid ordinary mail to the entrustees
last known business address.
ALFREDO VILLAMOR, JR. VERSUS JOHN UMALE, IN SUBSTITUTION OF HERNANDO
BALMORES, G.R. NO. 172843, 172881, SEPTEMBER 14, 2014

Doctrine: The essence of a derivative suit is that it must be filed on behalf of the corporation. This is
because the cause of action belongs, primarily, to the corporation. The stockholder who
sues on behalf of a corporation is merely a nominal party.
Facts: Balmores complained (intra-corporate complaint) about the alleged inaction of Pasig
Printing Corporation (PPC’s) directors in his letter informing them that Villamor should
be made to deliver to PPC and account for MC Home Depot’s checks or their equivalent
value. He alleged that these are devices or schemes amounting to fraud or
misrepresentation detrimental to the corporation’s and the stockholders’ interests. He
also alleged that the directors’ inaction placed PPC’s assets in Imminent and/or actual
dissipation, loss, wastage, and destruction. The complaint was instituted, without proving
alleged devices or schemes amounting to fraud or misrepresentation “detrimental to the
interest of the corporation and its stockholders”, and without exhausting other available
remedies, in his own individual capacity. The Court of Appeals granted appointment of a
receiver or the creation of a management committee.

Issue: Whether or not the complaint of Balmores is a derivative suit and whether creation of
management committee is in order.

Ruling: Rule 8, Section 1 of the Interim Rules of Procedure for Intra-Corporate Controversies
(Interim Rules) provides the five (5) requisites for filing derivative suits:

SECTION 1. Derivative action. – A stockholder or member may bring an action in the

name of a corporation or association, as the case may be, provided, that:
(1) He was a stockholder or member at the time the acts or transactions subject of the
action occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in the
complaint, to exhaust all remedies available under the articles of incorporation, by-laws,
laws or rules governing the corporation or partnership to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.

In case of nuisance or harassment suit, the court shall forthwith dismiss the case.The fifth
requisite for filing derivative suits, while not included in the enumeration, is implied in the
first paragraph of Rule 8, Section 1 of the Interim Rules: The action brought by the
stockholder or member must be in the name of the corporation or association.