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Feati Bank VS CA

In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or transmit to the beneficiary
the existence of the letter of credit.

A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft under the letter of credit.
Its liability is dependent upon the stage of the negotiation. If before negotiation, it has no liability with respect to the seller
but after negotiation, a contractual relationship will then prevail between the negotiating bank and the seller.

In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller and its liability is a
primary one as if the correspondent bank itself had issued the letter of credit.

Facts: Bernardo Villaluz entered into a contract of sale with Axel Christiansen in which Villaluz agreed to deliver to
Christiansen 2,000 cubic meters of lauan logs at $27.00 per cubic meter FOB. On the arrangements made and upon the
instructions of consignee, Hanmi Trade Development, Ltd., the Security Pacific National Bank of Los Angeles, California
issued an irrevocable letter of credit 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 with the instruction to the latter that it “forward the
enclosed letter of credit to the beneficiary.” The letter of credit also provided that the draft to be drawn is on Security
Pacific National Bank and that it be accompanied by certain documents. The logs were thereafter loaded on a vessel but
Christiansen refused to issue the certification required in paragraph 4 of the letter of credit, despite repeated requests by
the private respondent. The logs however were still shipped and received by consignee, to whom Christiansen sold the
logs. Because of the absence of the certification by Christiansen, the Feati Bank and Trust company refused to advance
the payment on the letter of credit until such credit lapsed. Since the demands by Villaluz for Christiansen to execute the
certification proved futile, he filed an action for mandamus and specific performance against Christiansen and Feati Bank
and Trust Company before the Court of First Instance of Rizal. Christiansen however left the Philippines and Villaluz filed
an amended complaint making Feati Bank and Trust Company.

Issue: Whether or not Feati Bank is liable for Releasing the funds to Christiansen

Held: In commercial transactions involving letters of credit, the functions assumed by a correspondent bank are classified
according to the obligations taken up by it. The correspondent bank may be called a notifying bank, a negotiating bank, or
a confirming bank.

In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or transmit to the beneficiary
the existence of the letter of credit.

A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft under the letter of credit.
Its liability is dependent upon the stage of the negotiation. If before negotiation, it has no liability with respect to the seller
but after negotiation, a contractual relationship will then prevail between the negotiating bank and the seller.

In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller and its liability is a
primary one as if the correspondent bank itself had issued the letter of credit.

In this case, the letter merely provided that the petitioner “forward the enclosed original credit to the beneficiary.”
(Records, Vol. I, p. 11) Considering the aforesaid instruction to the petitioner by the issuing bank, the Security Pacific
National Bank, it is indubitable that the petitioner is only a notifying bank and not a confirming bank as ruled by the courts
below.

A notifying bank is not a privy to the contract of sale between the buyer and the seller, its relationship is only with that of
the issuing bank and not with the beneficiary to whom he assumes no liability. It follows therefore that when the petitioner
refused to negotiate with the private respondent, the latter has no cause of action against the petitioner for the
enforcement of his rights under the letter.

Since the Feati was only a notifying bank, its responsibility was solely to notify and/or transmit the documentary of credit
to the private respondent and its obligation ends there.

At the most, when the petitioner extended the loan to the private respondent, it assumed the character of a negotiating
bank. Even then, the petitioner will still not be liable, for a negotiating bank before negotiation has no contractual
relationship with the seller. Whether therefore the petitioner is a notifying bank or a negotiating bank, it cannot be held
liable. Absent any definitive proof that it has confirmed the letter of credit or has actually negotiated with Feati, the refusal
by the petitioner to accept the tender of the private respondent is justified.
Bank of America NT & SA v Court of Appeals and Francisco et. al G.R. No. 105395 December
10, 1993
There would at least be three (3) parties: (a) the buyer, who procures the letter of credit and obliges himself to reimburse
the issuing bank upon receipts of the documents of title; (b) the bank issuing the letter of credit, which undertakes to pay
the seller upon receipt of the draft and proper document of titles and to surrender the documents to the buyer upon
reimbursement; and, (c) the seller, who in compliance with the contract of sale ships the goods to the buyer and delivers
the documents of title and draft to the issuing bank to recover payment.

Facts : Bank of America received an Irrevocable Letter of Credit issued by Bank of Ayudhya for the Account of General
Chemicals Ltd., Inc. for the sale of plastic ropes and agricultural files. Under the letter of credit, Bank of America acted as
an advising bank and Inter-Resin Industrial Corp. (IR) acted as the beneficiary. Upon receipt of the letter advice, Inter-
Resin told Bank of America to confirm the letter of credit.

Notwithstanding such instruction, Bank of America failed to confirm the letter of credit. Inter-Resin made a partial
availment of the Letter of Credit after presentment of the required documents to Bank of America. After confirmation of
all the documents Bank of America issued a check in favor of IR. BA advised Bank of Ayudhya of IR’s availment under the
letter of credit and asked for the corresponding reimbursement. IR presented documents for the second availment under
the same letter of credit. However, BA stopped the processing of such after they received a telex from Bank of Ayudhya
delaring that the LC fraudulent. BA sued IR for the recovery of the first LC payment.

The IR contended that Bank of America should have first checked the authenticity of the letter of credit with bank of
Ayudhya

Issue: Whether or not Bank of America may recover what it has paid under the letter of credit to Inter-Resin

Held : May Bank of America then recover what it has paid under the letter of credit when the corresponding draft

There would at least be three (3) parties: (a) the buyer, who procures the letter of credit and obliges himself to reimburse
the issuing bank upon receipts of the documents of title; (b) the bank issuing the letter of credit, which undertakes to pay
the seller upon receipt of the draft and proper document of titles and to surrender the documents to the buyer upon
reimbursement; and, (c) the seller, who in compliance with the contract of sale ships the goods to the buyer and delivers
the documents of title and draft to the issuing bank to recover payment.

The services of an advising (notifying) bank may be utilized to convey to the seller the existence of the credit; or, of a
confirming bank 16 which will lend credence to the letter of credit issued by a lesser known issuing bank; or, of a paying
bank, which undertakes to encash the drafts drawn by the exporter. Further, instead of going to the place of the issuing
bank to claim payment, the buyer may approach another bank, termed the negotiating bank, 18 to have the draft
discounted.

Bank of America has acted independently as a negotiating bank, thus saving Inter-Resin from the hardship of presenting
the documents directly to Bank of Ayudhya to recover payment. As a negotiating bank, Bank of America has a right to
recourse against the issuer bank and until reimbursement is obtained, Inter-Resin, as the drawer of the draft, continues
to assume a contingent liability thereon.

Furthermore, bringing the letter of credit to the attention of the seller is the primordial obligation of an advising bank. The
view that Bank of America should have first checked the authenticity of the letter of credit with bank of Ayudhya, by using
advanced mode of business communications, before dispatching the same to Inter-Resin finds no real support.

Rodzssen Supply Company v Far East Bank and Trust Company G.R. No. 109087. 9 May 2001
When the letter of Credit expires, the bank can still collect from the plaintiff, not on the letter of credit, but on the grounds
of solutio indebiti

Facts: Rodzssen Supply, Inc. (Rodzssen) opened with plaintiff Far East Bank and Trust Co. (Far East Bank) a 30-day domestic
letter of credit, in the amount of P190,000.00 in favor of Ekman and Company, Inc. (Ekman) for the purchase from the
latter of five units of hydraulic loaders, to expire on February 15, 1979.

The three loaders were delivered to defendant for which Far East Bank paid Ekman and which defendant paid plaintiff
before expiry date of LC. The remaining two loaders were delivered to defendant but the latter refused to pay. Ekman
pressed payment to plaintiff. Rodzssen paid Ekman for the two loaders and later demanded from defendant such amount
as it paid Ekman. Far East Bank refused payment contending that there was a breach of contract by Rodzssen who in bad
faith paid Ekman, knowing that the two units of hydraulic loaders had been delivered to defendant after the expiry date
of subject Letter of Credit.

Issue: Whether or not Far East Bank can still collect from Rodzssen despite the expiration of the letters of Credit

Held: Far East Bank can still collect from Rodzssen not on the letter of credit but on the grounds of solutio indebiti

Far East Bank’s right to seek recovery from Rodzssen is anchored not upon the inefficacious Letter of Credit, but on Article
2142 of the Civil Code, which reads;

“Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-contract to the end that no one
shall be unjustly enriched or benefited at the expense of another.”

Ekman for the last 2 loaders on March 14, 1980, which was five months after the expiration of the LC on October 16, 1979.
Respondent even informed petitioner in December 1979 of the cancellation of the LC and credited P22800 to the account
of petitioner, which represented the marginal deposit which petitioner had been required to put up for the unnegotiated
portion of the LC. The subject LC had become invalid upon the lapse of the period fixed therein. Thus, respondent should
not have paid Ekman since it was not obliged to do so.

When both parties to a transaction are mutually negligent in the performance of their obligations, the fault of one cancels
the negligence of the other, as in this case, and their rights and obligations may be determined equitably under the law
proscribing unjust enrichment.

Bank of Philippine Islands v De Reny Fabric Industries G.R. No. L-24821 October
16, 1970

Doctrine: Under the terms of their Commercial Letter of Credit Agreements with the Bank, the appellants agreed that the
Bank shall not be responsible for the “existence, character, quality, quantity, conditions, packing, value, or delivery of the
property purporting to be represented by documents; for any difference in character, quality, quantity, condition, or value
of the property from that expressed in documents. Having been positively proven as a fact, the appellants are bound by
this established usage.

Facts:: De Reny Fabric Industries, Inc. (De Reny) applied for, and was granted, four (4) irrevocable commercial letters of
credit with the Bank of Philippine Islands (BPI). The letter of credits was used to cover the purchase of goods by De Reny
from its American supplier, the J.B. Distributing Company. As each shipment arrived in the Philippines, the De Reny Fabric
Industries, Inc. made partial payments to the Bank amounting to 12,000. Further payments were, however, subsequently
discontinued by the corporation when it became established, as a result of a chemical test conducted by the National
Science Development Board, that the goods that arrived in Manila were colored chalks instead of dyestuffs. The
corporation also refused to take possession of these goods, and for this reason, the Bank caused them to be deposited
with a bonded warehouse paying therefor the amount of P12,609.64 up to the filing of its complaint with the court.

Issue : Whether or not De Reny fabrics is liable under the letter of Credit

Held : Even without the stipulation recited above, the appellants cannot shift the burden of loss to the Bank on account
of the violation by their vendor of its prestation. It was uncontrovertibly proven by the Bank during the trial below that
banks, in providing financing in international business transactions such as those entered into by the appellants, do not
deal with the property to be exported or shipped to the importer, but deal only with documents. The existence of a custom
in international banking and financing circles negating any duty on the part of a bank to verify whether what has been
described in letters of credits or drafts or shipping documents actually tallies with what was loaded aboard ship, having
been positively proven as a fact, the appellants are bound by this established usage. They were, after all, the ones who
tapped the facilities afforded by the Bank in order to engage in international business.

Under the terms of their Commercial Letter of Credit Agreements with the Bank, the appellants agreed that the Bank shall
not be responsible for the “existence, character, quality, quantity, conditions, packing, value, or delivery of the property
purporting to be represented by documents; for any difference in character, quality, quantity, condition, or value of the
property from that expressed in documents,” or for “partial or incomplete shipment, or failure or omission to ship any or
all of the property referred to in the Credit,” as well as “for any deviation from instructions, delay, default or fraud by the
shipper or anyone else in connection with the property the shippers or vendors and ourselves [purchasers] or any of us.”
Having agreed to these terms, the appellants have, therefore, no recourse but to comply with their covenant.

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 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.
PNB v San Miguel Corporation
G.R. No. 186063, January 15, 2014

Facts:
SMC entered into an Exclusive Dealership Agreement with a certain Rodolfo R. Goroza, wherein the latter was given by
SMC the right to trade, deal, market or otherwise sell its various beer products. Goroza applied for a credit line with SMC,
but one of the requirements for the credit line was a letter of credit. Thus, Goroza applied for and was granted a letter of
credit by the PNB in the amount of two million pesos(₱2,000,000.00). Under the credit agreement, the PNB has the
obligation to release the proceeds of Goroza's credit line to SMC upon presentation of the invoices and official receipts of
Goroza's purchases of SMC beer products to the PNB, Butuan Branch. On February 11, 1997, Goroza applied for an
additional credit line with the PNB. The latter granted Goroza a one (1) year revolving credit line in the amount not
exceeding two million four hundred thousand pesos (₱2,400,000.00). Demands to pay the amount of three million seven
hundred twenty-two thousand four hundred forty pesos and 88/100 (₱3,722,440.88) were made by SMC against Goroza
and PNB, but neither of them paid. After summons, herein petitioner filed its Answer,while Goroza did not. Upon
respondent's Motion to Declare Defendant in Default,5 Goroza was declared in default.

Issue:
WON PNB is liable to SMB under the Letter of Credit.

Held:
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
xxx“

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. 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. PNB cannot evade
responsibility on the sole ground that the RTC judgment found Goroza liable and ordered him to pay the amount sought
to be recovered by SMC. PNB's liability, if any, under the letter of credit is yet to be determined.