COMMERCIAL LAW REVIEW

Syllabus
AY 2018-19

I. LETTERS OF CREDIT
a. Definition and Nature
b. Parties
c. Basic Principles

II. TRUST RECEIPTS LAW

a. Definition/Concept
b. Rights of the Entruster
c. Obligation and Liability of Entrustee
d. Remedies Available
e. Warehouseman’s Lien

I. LETTERS OF CREDIT

Cases:

1. HSBC v NSC, GR No. 183486, 24 Feb 2016

2. BPI v De Reny Fabric Industries Inc., 35 SCRA 253 (1970)
3. FEATI Bank and Trust Co v. Court of Appeals, 196 SCRA 576 (1991)
4. Transfield Phils Inc v. Luzon Hydro Corp, 443 SCRA 307 (2004)
5. MWSS v Hon. Daway, 432 SCRA 559 (2004)
6. Bank of America v. Court of Appeals, 228 SCRA 357 (1993)
7. PNB v San Miguel Corp, G.R. No. 186063, January 15, 2014

II. TRUST RECEIPTS LAW

Cases:

1. People v. Nitafan, 207 SCRA 726 (1992)

2. Lee v. Court of Appeals, 375 SCRA 579 (2002)
3. Colinares v. Court of Appeals, 339 SCRA 609 (2000)
4. Ng v. People, G.R. No. 173905, 23 April 2010
5. Land Bank of the Phils v. Perez, G.R. No. 166884, 13 June 2012
I. LETTERS OF CREDIT

Cases:

1. HSBC v NSC, GR No. 183486, 24 Feb 2016

FACTS:

2. BPI v De Reny Fabric Industries Inc., 35 SCRA 253 (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.

3. FEATI Bank and Trust Co v. Court of Appeals, 196 SCRA 576 (1991)

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.

4. Transfield Phils Inc v. Luzon Hydro Corp, 443 SCRA 307 (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.

5. MWSS v Hon. Daway, 432 SCRA 559 (2004)

The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to the
the standby letter of credit issued by the bank as the former prohibition is on the
enforcement of claims against guarantors or sureties of the debtors whose
obligations are not solidary with the debtor.

The concept of guarantee vis-à-vis the concept of an irrevocable letter of credit are
inconsistent with each other. The guarantee theory destroys the independence of
the bank’s responsibility from the contract upon which it was opened and the
nature of both contracts is mutually in conflict with each other. A Standby Letter of
Credit is not a guaranty because under a Standby Letter of Credit, the bank
undertakes a primary obligation. On the other hand, a guarantor undertakes a
collateral obligation which arises only upon the debtor’s default. A Standby Letter
of Credit is a primary obligation and not an accessory contract.
Facts: Maynilad obtained a 20-year concession to manage, repair, refurbish, and
upgrade existing Metropolitan Waterworks and Sewerage System (MWSS) water
delivery and sewerage services in Metro Manila’s west zone. Maynilad, under the
concession agreement undertook to pay concession fees and itsforeign loans. To
secure its obligations, Maynilad was required under Section 9 of the concession contract
to put up a bond, bank guarantee or other security acceptable to MWSS. Pursuant to
this requirement, Maynilad arranged on for a three-year facility with a number of foreign
banks led by Citicorp Intl for the issuance of an irrevocable standby letter of credit (SLC)
in the amount of $ 120 million in favor of MWSS for the full and prompt payment of
Maynilad’s obligations to MWSS. Due to devaluation of the peso and other business
reversals of Maynilad, MWSS filed a notice of early termination of the concession
contract. Upon certification of the non performance of Maynilad obligation, the MWSS
moved to collect from Citicorp on the standby letters of credit issued. Maynilad filed for
corporate rehabilitation. Judge Daway stayed the payment of the letter of credit by
Citicorp pursuant to Sec 6 (b) of Rule 4 of the Interim Rules on Corporate Rehabilitation.

Issue: Whether or not the payment of the standby of letter of credit can be stayed by
filing of a petition for rehabilitation

Held: No. The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to
the the standby letter of credit issued by the bank as the former prohibition is on the
enforcement of claims against guarantors or sureties of the debtors whose obligations
are not solidary with the debtor.

The participating bank’s obligation under the letter of credit are solidary with respondent
Maynilad in that it is a primary, direct, definite and an absolute undertaking to pay and is
not conditioned on the prior exhaustion of the debtors assets. These are the same
characteristics of a surety or solidary obligor. And being solidary, the claims against them
can be pursued separately from and independently of the rehabilitation case.

Issuing banks under the letters of credit are not equivalent to guarantors. The concept of
guarantee vis-à-vis the concept of an irrevocable letter of credit are inconsistent with
each other. The guarantee theory destroys the independence of the bank’s
responsibility from the contract upon which it was opened and the nature of both
contracts is mutually in conflict with each other. In contracts of guarantee, the
guarantor’s obligation is merely collateral and it arises only upon the default of the
person primarily liable. On the other hand, in an irrevocable letter of credit, the bank
undertakes a primary obligation. We have also defined a letter of credit as an
engagement by a bank or other person made at the request of a customer that the issuer
shall honor drafts or other demands of payment upon compliance with the conditions
specified in the credit.
A Standby Letter of Credit is not a guaranty because under a Standby Letter of Credit,
the bank undertakes a primary obligation. On the other hand, a guarantor undertakes a
collateral obligation which arises only upon the debtor’s default. A Standby Letter of
Credit is a primary obligation and not an accessory contract.

6. Bank of America v. Court of Appeals, 228 SCRA 357 (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.

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

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). U
nder 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