CA AGRO-INDUSTRIAL DEVELOPMENT CORP. v.

THE HONORABLE COURT OF

APPEALS and SECURITY BANK AND TRUST COMPANY
G.R. No. 90027, March 3, 1993, THIRD DIVISION (DAVIDE, JR., J.)

FACTS:

CA Agro-Industrial Development Corp. (CA Agro) purchased two (2) parcels of land from
the spouses Ramon and Paula Pugao (Pugaos). CA Agro paid a downpayment and issued
three (3) post-dated checks covering the balance of the price. It was contracted that the titles to
the lots shall be transferred to CA Agro upon full payment of the purchase price and that the
owner's copies of the certificates of titles thereto shall be deposited in a safety deposit box of
any bank. The same could be withdrawn only upon the joint signatures of a representative of CA
Agro and the Pugaos upon full payment of the purchase price.

Forthwith, CA Agro and the Pugaos rented Safety Deposit Box of Security Bank and
Trust Company (Bank). For this purpose, they both signed a contract of lease containing the
following conditions:
13. The bank is not a depositary of the contents of the safe and it has neither the
possession nor control of the same.
14. The bank has no interest whatsoever in said contents, except herein
expressly provided, and it assumes absolutely no liability in connection therewith.

After the execution of the contract, two (2) renter's keys were given to the renters — one
to CA Agro and the other to the Pugaos. A guard key remained in the possession of the Bank.
The safety deposit box has two (2) keyholes, one for the guard key and the other for the renter's
key, and can be opened only with the use of both keys.

Thereafter, a certain Mrs. Margarita Ramos (Ramos) offered to buy from CA Agro the
two (2) lots at a price that will yield a profit for the latter. Accordingly, Ramos demanded the
execution of a deed of sale which necessarily entailed the production of the certificates of title.
In view thereof, CA Agro, accompanied by the Pugaos, then proceeded to the bank to open the
safety deposit box and get the certificates of title. However, when opened in the presence of the
Bank's representative, the box yielded no such certificates. As a result, Ramos withdrew her
offer to buy the lots.

As a consequence, CA Agro failed to realize the expected profit, thus, it filed a complaint
for damages against the Bank. The Bank in its answer with a counterclaim invoked paragraphs
13 and 14 of the contract of lease for its defense.

In due course, the trial court rendered a decision against CA Agro on the ground that the
provisions of the contract of lease are binding on the parties, and that under said paragraphs,
the Bank has no liability for the loss of the certificates of title.

On Appeal, the Court of Appeals affirmed the appealed decision principally on the theory
that the contract executed by CA Agro and the Bank is in the nature of a contract of lease by
virtue of which CA Agro and its co-renter were given control over the safety deposit box and its
contents while the Bank retained no right to open the said box because it had neither the
possession nor control over it and its contents, thus, the contract is governed by Article 1643 in
relation to Article 1975 of the Civil Code.

Hence, CA Agro elevated the case to the Supreme Court under Rule 45 of the Rules of
Court maintaining that regardless of nomenclature, the contract for the rent of the safety deposit
box is actually a contract of deposit governed by Title XII, Book IV of the Civil Code.
ISSUE:

Whether the contractual relation between a commercial bank and another party in a
contract of rent of a safety deposit box with respect to its contents placed by the latter one of
bailor and bailee or one of lessor and lessee

HELD:

Petition PARTIALLY GRANTED

The contractual relation between a commercial bank and another party in a contract of
rent of a safety deposit box with respect to its contents placed by the latter is one of a bailor and
bailee, the bailment being for hire and mutual benefit, and it is not an ordinary deposit but
special kind of deposit.

The contract for the rent of the safety deposit box is not an ordinary contract of lease as
defined in Article 1643 of the Civil Code. It cannot be characterized as an ordinary contract of
lease under Article 1643 because the full and absolute possession and control of the safety
deposit box was not given to the joint renters. However, the Court does not fully subscribe to the
view that the same is a contract of deposit that is to be strictly governed by the provisions in the
Civil Code on deposit; the contract in this case is a special kind of deposit.

Neither could Article 1975 be invoked as an argument against the deposit theory.
Obviously, the first paragraph of such provision cannot apply to a depositary of certificates,
bonds, securities or instruments which earn interest if such documents are kept in a rented
safety deposit box.

The prevailing rule in American Jurisprudence is that the relation between a bank renting
out safe-deposit boxes and its customer with respect to the contents of the box is that of a bailor
and bailee, the bailment being for hire and mutual benefit. While, in the context of our laws,
particularly Section 72(a) of the General Banking Act (now Section 52) which authorizes banking
institutions to rent out safety deposit boxes, it is clear that the prevailing rule in the United States
has been adopted.
Sec. 72. In addition to the operations specifically authorized elsewhere in this
Act, banking institutions other than building and loan associations may perform
the following services:
(a) Receive in custody funds, documents, and valuable objects, and rent safety
deposit boxes for the safeguarding of such effects.
xxx xxx xxx
The banks shall perform the services permitted under subsections (a), (b)
and (c) of this section as depositories or as agents. . . .

Nevertheless, the primary function is still found within the parameters of a contract of
deposit, and, in relation to Article 1306 of the Civil Code, the parties thereto 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. Thus, the depositary's
responsibility for the safekeeping of the objects deposited in this case is governed by Title I,
Book IV of the Civil Code. Accordingly, the depositary would be liable if, in performing its
obligation, it is found guilty of fraud, negligence, delay or contravention of the tenor of the
agreement, and in the absence of any stipulation prescribing the degree of diligence required,
that of a good father of a family is to be observed. Corollary, any stipulation exempting the
depositary from any liability arising from the loss of the thing deposited on account of fraud,
negligence or delay would be void for being contrary to law and public policy.
Furthermore, it is not correct to assert that the Bank has neither the possession nor
control of the contents of the box since in fact; the safety deposit box itself is located in its
premises and is under its absolute control. Moreover, the Bank keeps the guard key to the said
box and renters cannot open their respective boxes unless the Bank cooperates by presenting
and using this guard key. Clearly then, to the extent above stated, conditions 13 and 14 in the
contract in question are void and ineffective.
However, the Court reached the same conclusion which the Court of Appeals arrived at
but on grounds quite different from those relied upon by the latter. The Bank's exoneration
cannot be based on or proceed from a characterization of the impugned contract as a contract
of lease, but rather on the fact that no competent proof was presented to show that Bank was
aware of the agreement between CA Agro and the Pugaos to the effect that the certificates of
title were withdrawable from the safety deposit box only upon both parties' joint signatures, and
that no evidence was submitted to reveal that the loss of the certificates of title was due to the
fraud or negligence of the Bank. Since both CA Agro and the Pugaos agreed that each should
have one (1) renter's key, it was obvious that either of them could ask the Bank for access to the
safety deposit box and, with the use of such key and the Bank's own guard key, could open the
said box, without the other renter being present.
Since, however, CA Agro cannot be blamed for the filing of the complaint and no bad
faith on its part had been established, the trial court erred in condemning the CA Agro to pay the
Bank attorney's fees. To this extent, the Decision of Court of Appeals was modified.

LUZAN SIA v. CA AND SECURITY BANK AND TRUST COMPANY

G.R. No. 102970, May13, 1993, Davide, Jr., J.

A contract for the use of a safety deposit box is a special kind of deposit in which the relation
between a bank renting out safe deposit boxes and its customer with respect to the contents of
the box is that of a bailor and bailee.

Facts:

Sia rented a Safety Deposit Box of Security Bank and Trust Company (SBTC) where he placed
his collection of stamps. The safety deposit box rented was at the lowest level of the safety
deposit boxes of SBTC. During the floods that took place, floodwater entered into SBTC’s
premises, seeped into the safety deposit box of Sia and damaged his stamps collection. SBTC
rejected Sia’s claim for compensation for his damaged stamps collection hence Sia filed for
damages against SBTC which denied liability based on the ‘Rules and Regulations Governing
the Lease of Safe Deposit Boxes’ which states in paragraphs 9 and 13 that the liability of SBTC
is limited to the exercise of the diligence to prevent the opening of the safe by any person other
than the renter or his agent; and that SBTC not a depository of the contents of the safe and has
neither the possession nor the control of the same. Moreover, SBTC also contended that its
contract was a lease and not deposit, that the cause of the destruction was beyond its control
and there was no obligation to notify Sia about the flood.

Issue:

Whether the agreement entered into by the parties is just a contract of lease.
Ruling:

NO. In the recent case of CA Agro-Industrial Development Corp. vs. Court of Appeals(G.R. No.
90027, March 3,1993), this Court explicitly rejected the contention that a contract for the use of
a safety deposit box is a contract of lease governed by Title VII, Book IV of the Civil Code. Nor
did We fully subscribe to the view that it is a contract of deposit to be strictly governed by the
Civil Code provision on deposit; it is, as We declared, a special kind of deposit. The prevailing
rule in American jurisprudence -- that the relation between a bank renting out safe deposit boxes
and its customer with respect to the contents of the box is that of a bailor and bailee, the
bailment being for hire and mutual benefit -- has been adopted in this jurisdiction, thus:

“In the context of our laws which authorize banking institutions to rent out safety deposit boxes,
it is clear that in this jurisdiction, the prevailing rule in the United States has been adopted.
Section 72 of the General Banking Act [R.A. 337, as amended] pertinently provides: ‘SEC. 72. In
addition to the operations specifically authorized elsewhere in this Act, banking institutions other
than building and loan associations may perform the following services: (a) Receive in custody
funds, documents, and valuable objects, and rent safety deposit boxes for the safeguarding of
such effects.The banks shall perform the services permitted under subsections (a), (b) and (c)
of this section as depositories or as agents.’

It must be noted that conditions No. 13 and No. 14 in the Contract of Lease of Safety Deposit
Box in CA Agro-Industrial Development Corp. are strikingly similar to condition No. 13 in the
instant case. On the other hand, both condition No. 8 in CA Agro-Industrial Development
Corp. and condition No. 9 in the present case limit the scope of the exercise of due diligence by
the banks involved to merely seeing to it that only the renter, his authorized agent or his legal
representative should open or have access to the safety deposit box. In short, in all other
situations, it would seem that SBTC is not bound to exercise diligence of any kind at all.
Assayed in the light of Our aforementioned pronouncements in CA Agro-Industrial Development
Corp., it is not at all difficult to conclude that both conditions No. 9 and No. 13 of the “Lease
Agreement” covering the safety deposit box in question must be stricken down for being
contrary to law and public policy as they are meant to exempt SBTC from any liability for
damage, loss or destruction of the contents of the safety deposit box which may arise from its
own or its agents’ fraud, negligence or delay. Accordingly, SBTC cannot take refuge under the
said conditions.

UNITED COCONUT PLANTERS BANK v. SPOUSES SAMUEL and ODETTE BELUSO

G.R. No. 159912, August 17, 2007, CHICO-NAZARIO, J.

Sec. 2. Of Truth in Lending Act states that it is hereby declared to be the policy of the State to
protect its citizens from a lack of awareness of the true cost of credit to the user by assuring a
full disclosure of such cost with a view of preventing the uninformed use of credit to the
detriment of the national economy.

Facts:

UCPB granted the spouses Beluso a Promissory Notes Line under a P2.35 Million Credit
Agreement . To completely avail themselves of the credit line extended to them by UCPB, the
spouses Beluso executed two more promissory notes. UCPB applied interest rates on the
different promissory notes ranging from 18% to 34%. Unfortunately, Spouses Beluso failed to
make any payment of the foregoing amounts. This prompted UCPB to foreclose the properties
mortgaged by the spouses Beluso. As a result, spouses Beluso filed a Petition for Annulment,
Accounting and Damages against UCPB with the RTC. UCPB countered that while the interest
rate was not numerically quantified in the face of the promissory notes, it was nonetheless
categorically fixed, at the time of execution thereof, at the rate indicative of the DBD retail rate.
According to UCPB, the imposition of the questioned interest rates did not infringe on the
principle of mutuality of contracts, because the spouses Beluso had the liberty to choose
whether or not to renew their credit line at the new interest rates pegged by petitioner. RTC
ruled in favor of the spouses Beluso declaring that the interest rate used by UCPB void and the
foreclosure and Sheriffs Certificate of Sale void.

Issue:

Whether the imposition of interest in the following provision found in the promissory notes of the
spouses Beluso is void, as the interest rates and the bases were determined solely by petitioner
UCPB.

Ruling:

YES.The provision in the loan stating that the interest shall be at the rate indicative of DBD retail
rate or as determined by the Branch Head is indeed dependent solely on the will of petitioner
UCPB. Under such provision, petitioner UCPB has two choices on what the interest rate shall
be: (1) a rate indicative of the DBD retail rate; or (2) a rate as determined by the Branch
Head. As UCPB is given this choice, the rate should be categorically determinable
in both choices. If either of these two choices presents an opportunity for UCPB to fix the rate at
will, the bank can easily choose such an option, thus making the entire interest rate provision
violative of the principle of mutuality of contracts.

The interest rate provisions in the case at bar are illegal not only because of the provisions of
the Civil Code on mutuality of contracts, but also, violate the Truth in Lending Act. Not disclosing
the true finance charges in connection with the extensions of credit is, furthermore, a form of
deception which the Court cannot countenance. Moreover, while the spouses Beluso indeed
agreed to renew the credit line, the offending provisions are found in the promissory notes
themselves, not in the credit line. In fixing the interest rates in the promissory notes to cover the
renewed credit line, UCPB still reserved to itself the same two options (1) a rate indicative of the
DBD retail rate; or (2) a rate as determined by the Branch Head.

TRANSFIELD PHILIPPINES INC. v. LUZON HYDRO CORPORATION, AUSTRALIA and NEW

ZEALAND BANKING GROUP LIMITED and SECURITY BANK CORPORATION
G.R. No. 146717, November 22, 2004, TINGA, J.

A standby letter of credit, while a security arrangement, is not an accessory contract such as
guaranty. Obligations to pay arise upon proof that the principal obligor has failed to meet his
obligation, without need of other proceedings.

Facts:

Transfield and Luzon Hydro Corporation (LHC) entered into a Turnkey contract whereby
Transfield undertook to construct a hydro-electric power station (project). To secure
performance of its obligation, Transfield opened in favor of LHC 2 standby letters ofcredit
(securities), one with Australia and New Zealand Banking Group Limited (ANZ Bank) and one
with Security Bank Corporation (SBC).

Transfield sought various extensions of time to complete the project, due to factors such as
force majeure occasioned by typhoon Zeb, barricades and demonstrations. LHC denied the
requests. LHC filed before the Construction Industry Arbitration Commission (CIAC) a Request
for Arbitration. Transfield filed the same with the International Chamber of Commerce (ICC).

Foreseeing that LHC would call on the securities, Transfield advised ANZ Bank and SBC
(banks) of the arbitration proceedings, and that LHC had no right to call on the securities until
resolution of the disputes. Transfield warned the banks that any transfer or release of the
securities in favor of LHC would make the banks liable for damages

LHC sent notice to Transfield that it failed to comply with its obligation to complete the project.
LHC then declared Transfield in default/delay. LHC served notice that it would call on the
securities for the payment of damages for the delay. In response, Transfield filed a comlaint for
injunction, seeking to restrain LHC from calling on the securities.

Issue:

Whether the beneficiary may call on the letters of credit.

Ruling:

YES. To start, there is a distinction between a commercial credit and a standby credit. The
former is a letter of credit that refers to the payment of money under a contract of sale, and is
payable upon presentation by the seller-beneficiary of documents that show he has taken
affirmative steps to comply with the sales agreement. Meanwhile, the latter is an undertaking to
pay for non-performance of an agreement, and is payable upon showing that the principal
obligor has not performed the related contract. Such letters of credit are separate contracts from
the contracts by which they are based, even if such contracts are referenced in the credit (the
independence principle).

The letter of credit in this case is a standby letter of credit. By its nature, it is practically
ministerial for LHC to call on the securities upon Transfield's default. To require a prior
negotiation or arbitration would be to convert the same into a guarantee, which is not the nature
of a letter of credit. Note that the securities admit their liability.

Moreover, LHC's right is not only rooted in the law and usages in business, but the contract
itself. All in all, Transfield cannot pursue the injunction.

THE HONGKONG & SHANGHAI BANKING CORPORATION, LIMITED, Petitioner, v.

NATIONAL STEEL CORPORATION AND CITYTRUST BANKING CORPORATION (NOW
BANK OF THE PHILIPPINE ISLANDS), Respondents.
G.R. No. 183486, February 24, 2016, JARDELEZA, J.

Letters of credit are governed primarily by their own provisions, by laws specifically applicable to
them, and by usage and custom. Consistent with the rulings in several cases, usage and
custom refers to UCP400.
 Article 17 of UCP 400 explains that under this principle, an issuing bank assumes no liability
ormresponsibility "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..." Thus, as long as the proper documents are presented, the issuing
bank has an obligation to pay even if the buyer should later on refuse payment. To allow issuing
bank to refuse to honor the Letter of Credit simply because it could not collect first from the
buyer is to countenance a breach of the Independence Principle.
A bank such as HSBC has the duty to observe the highest degree of diligence. HSBC ought to
have noticed the discrepancy between City Trust's request for collection under URC 322 and the
terms of the Letter of Credit requiring application of UCP 400. Regardless of any error that City
Trust may have committed, the standard of care expected of HSBC dictates that it should have
made a separate determination of the significance of the presentment of the Letter of Credit and
the attached documents.

FACTS:
Respondent National Steel Corporation (NSC) entered into an Export Sales Contract (the
Contract) with Klockner East Asia Limited (Klockner). NSC sold 1,200 metric tons of prime cold
rolled coils to Klockner. In accordance with the requirements in the Contract, Klockner applied
for an irrevocable letter of credit with HSBC in favor of NSC as the beneficiary in the amount of
US$468,000. HSBC issuedan irrevocable and onsight letter of credit no. HKH 239409 (the
Letter of Credit) in favor of NSC. The Letter of Credit stated that it is governed by the
International Chamber of Commerce Uniform Customs Page 6 and Practice for Documentary
Credits, Publication No. 400 (UCP 400). Under UCP 400, HSBC as the issuing bank, has the
obligation to immediately pay NSC upon presentment of the documents listed in the Letter of
Credit.

NSC coursed the collection of its payment from Klockner through City Trust Banking
Corporation (City Trust). City Trust sent a collection order (Collection Order) to HSBC respecting
the collection of payment from Klockner. The Collection Order also contained the following
statement: "Subject to Uniform Rules for the Collection of Commercial Paper Publication No.
322."

HSBC sent a cablegram advising that Klockner had refused payment. CityTrust requested
HSBC to inform it of Klockner's reason for refusing payment so that it may refer the matter to
NSC. City Trust insisted that a demand for payment must be made from Klockner since the
documents "were found in compliance with LC terms and conditions." HSBC replied on the
same day stating that in accordance with CityTrust's instruction in its Collection Order, HSBC
treated the transaction as a matter under URC 322. Thus, it demanded payment from Klockner
which unfortunately refused payment for unspecified reasons. It then noted that under URC 322,
Klockner has no duty to provide a reason for the refusal.

Klockner continued to refuse payment and HSBC notified CityTrust in a cablegram that should
Klockner still refuse to accept the bill, it will return the full set of documents to City Trust with all
the charges for the account of the drawer.

HSBC then returned the documents to City Trust. In a letter accompanying the returned
documents, HSBC stated that it considered itself discharged of its duty under the transaction. In
response, CityTrust sent a cablegram to HSBC stating that it is "no longer possible for
beneficiary to wait for you to get paid by applicant." It explained that since the documents
required under the Letter of Credit have been properly sent to HSBC, Citytrust demanded
payment from it. CityTrust also stated, for the first time in all of its correspondence with HSBC,
that "re your previous telexes, ICC Publication No. 322 is not applicable." HSBC insisted that
CityTrust sent documents which clearly stated that the collection was being made under URC
322. Thus, with the continued refusal of Klockner to pay, it opted to return the documents.
Unable to collect from HSBC, NSC filed a complaint against it for collection of sum of money
(Complaint). HSBC filed its Answer denying any liability under the Letter of Credit. It argued in
its Answer that CityTrust modified the obligation when it stated in its Collection Order that the
transaction is subject to URC 322 and not under UCP 400.

RTC Makati rendered a decision (RTC Decision) declaring that HSBC is not liable to pay NSC
the amount stated in the Letter of Credit. It ruled that the applicable law is URC 322 as it was
the law which CityTrust intended to apply to the transaction. Under URC 322, HSBC has no
liability to pay when Klockner refused payment.

The CA found that it is UCP 400 and not URC 322 which governs the transaction. According to
the CA, the terms of the Letter of Credit clearly stated that UCP 400 shall apply. Further, the CA
explained that even if the Letter of Credit did not state that UCP 400 governs, it nevertheless
finds application as this Court has consistently recognized it under Philippine jurisdiction. Thus,
applying UCP 400 and principles concerning letters of credit, the CA explained that the
obligation of the issuing bank is to pay the seller or beneficiary of the credit once the draft and
the required documents are properly presented. Under the independence principle, the issuing
bank's obligation to pay under the letter of credit is separate from the compliance of the parties
in the main contract.

ISSUE:
The central question in this case is who among the parties bears the liability to pay the amount
stated in the Letter of Credit. This requires a determination of which between UCP 400 and URC
322 governs the transaction. The obligations of the parties under the proper applicable rule will,
in turn, determine their liability.

RULING:
UCP 400 shall govern and hence, HSBC is liable to pay the amount stated in the LC.

Article 2 of the Code of Commerce states that acts of commerce are governed by their
provisions, by the usages and customs generally observed in the particular place and, in the
absence of both rules, by civil law.

The International Chamber of Commerce (ICC) drafted a set of rules to govern transactions
involving letters of credit. This set of rules is known as the Uniform Customs and Practice for
Documentary Credits (UCP). Since its first issuance in 1933, the UCP has seen several
revisions, the latest of which was in 2007, known as the UCP 600. However, for the period
relevant to this case, the prevailing version is the 1993 revision called the UCP 400.

For the purpose of clarity, letters of credit are governed primarily by their own provisions, by
laws specifically applicable to them, and by usage and custom. Consistent with the rulings in
several cases, usage and custom refers to UCP 400. When the particular issues are not
covered by the provisions of the letter of credit, by laws specifically applicable to them and by
UCP 400, our general civil law finds suppletory application.

Applying this set of laws and rules, this Court rules that HSBC is liable under the provisions of
the Letter of Credit, in accordance with usage and custom as embodied in UCP 400, and under
the provisions of general civil law.

The Letter of Credit categorically stated that it is subject to UCP 400, to wit:
Except so far as otherwise expressly stated, this documentary credit is subject to uniform
Customs and Practice for Documentary Credits (1983 Revision), International Chamber of
Commerce Publication No. 400.
From the moment that HSBC agreed to the terms of the Letter of Credit - which states that UCP
400 applies - its actions in connection with the transaction automatically became bound by the
rules set in UCP 400. Even assuming that URC 322 is an international custom that has been
recognized in commerce, this does not change the fact that HSBC, as the issuing bank of a
letter of credit, undertook certain obligations dictated by the terms of the Letter of Credit itself
and by UCP 400.

URC 322 is a set of norms compiled by the ICC. A bank acting in accordance with the terms of
URC 322 merely facilitates collection. Its duty is to forward the letter of credit and the required
documents from the entity seeking payment to another entity which has the duty to pay. The
bank incurs no obligation other than as a collecting agent. This is different in the case of an
issuing bank acting in accordance with UCP 400. In this case, the issuing bank has the duty to
pay the amount stated in the letter of credit upon due presentment.

Page 8 HSBC claims that while UCP 400 applies to letters of credit, it is also common for
beneficiaries of such letters to seek collection under URC 322. HSBC further claims that URC
322 is an accepted custom in

commerce. However, HSBC failed to present evidence to prove that URC 322 constitutes
custom and usage recognized in commerce. Neither was there sufficient evidence to prove that
beneficiaries under a letter of credit commonly resort to collection under URC 322 as a matter of
industry practice.

The entire system of letters of credit rely on the assurance that upon presentment of the proper
documents, the beneficiary has an enforceable right and the issuing bank a demandable
obligation, to pay the amount agreed upon. Any law or custom governing letters of credit should
have, at its core, an emphasis on the imperative that issuing banks respect their obligation to
pay and that seller-beneficiaries may reasonably expect payment in accordance with the terms
of a letter of credit.

Having arrived at the applicability of UCP 400, the Independence Principle can now be applied
in this case. Article 17 of UCP 400 explains that under this principle, an issuing bank assumes
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..." Thus, as long as the proper documents are presented,
the issuing bank has an obligation to pay even if the buyer should later on refuse payment.
Hence, Klockner's refusal to pay carries no effect whatsoever on HSBC's obligation to pay
under the Letter of Credit. To allow HSBC to refuse to honor the Letter of Credit simply because
it could not collect first from Klockner is to countenance a breach of the Independence Principle.

Further, as a bank, HSBC has the duty to observe the highest degree of diligence. Thus, upon
receipt of City Trust's Collection Order with the Letter of Credit, HSBC had the obligation to
carefully examine the documents it received. Had it observed the standard of care expected of
it, HSBC would have discovered that the Letter of Credit is the very same document which it
issued upon the request of Klockner, its client. Had HSBC taken the time to perform its duty with
the highest degree of diligence, it would have been alerted by the fact that the documents
presented to it corresponded with the documents stated in the Letter of Credit, to which HSBC
freely and knowingly agreed. HSBC ought to have noticed the discrepancy between City Trust's
request for collection under URC 322 and the terms of the Letter of Credit. Regardless of any
error that City Trust may have committed, the standard of care expected of HSBC dictates that it
should have made a separate determination of the significance of the presentment of the Letter
of Credit and the attached documents. A bank exercising the appropriate degree of diligence
would have, at the very least, inquired if NSC was seeking payment under the Letter of Credit or
merely seeking collection under URC 322. In failing to do so, HSBC fell below the standard of
care imposed upon it.