Letter of Credit- ubiquitous and most important device in international trade, unique in number of arties involved and its

supranational
character

Luzon Hydro Corporation (LHC) entered into a Turnkey Contrct with Transfield Philippines Inc., who undertok to construct a 70-
MegaWat hydro-electric power station at the Bakun River on a trnkey basis, in the Province of Benguet and Ilocos Sur. Transfield
Philippines was given the sole responsibility for the design, construction, commissioning, testing and completion of project.

The contract states the

 Target Completion Date- 1 June 2000, or a later date which shall be agreed upon by LHC and Transfield or otherwise
determined by the turnkey contract
 Transfield is entitled to claim Extensions of Time (EOT) for reasons stated in the Contract
o Variations
o Force Majeure
o Delays caused by LHC
 In case of dispute- parties are bound to settle their differences through mediation, concillation and such other means as stated
in the contract

To provide better security for the performance of the obligations and completion before the target date, Transfield opened in favor of
LHC 2 standdby letters of credit dated March 20 2000 with the local branch of Australia and New Zealand Banking Group Ltd and with
Securirty Bank Corporation each for the amount of 8,988,907.00 USD.

Throughout the construction period, Transfield sought various EOT to complete the porject, which are requested allegedly due to
several factors such as due to typhoon Zeb, barricades andd demonstrations. LHC denied the request for EOT which gave rise to
series of legal actions between Transfield and LHC
 Request for Arbitration which LHC filed before the CIAC
 Request for Arbritration which Transfield filed before ICC
o Issuess: WON typhoon Zeb and any of its associatedd events constitute force majeure to justify the EOT
o WON LHC had the right to terminate turnkey cntrct for failure of completion

Meanwhile, Transfield advised the banks of the arbitration proceedings, in separate letters dated August 2000. Transfield asserted that
LHC had no right to call on the letters of credit until the resolution of disputes. Transfield warned the banks that ny transfer, release, or
disposition of the letters of credit in favor of LHC would constrain it to hold the banks liable for liquidated damages

LHC then sent notice to Transfield of its failure to comply to its obligation to complete as stated in the contract. Despite the letters sent
by Transfield, the banks said that they would pay on the letters of credit if and when LHC calls on them

LHC asserted that the EOT is not possible to be extended, thus declaring Transfield in default of its perforamance of obligation and
demands for payment of 75,000 USD per day of delay until actual completion, and called on the letters of credit for the payment of
liquidated damages for the delay.

Transfield filed a complaint for injuction with TRO and writ of preliminary injunction against the banks in order to restrain LHC from
calling on the letters of credit and for bansk to refrain from disposing the letters of credit. RTC issued 72 hrs TRO, and was extended for
17 days.

RTC denied Transfield writ of preliminary injunction ruling that the petitioner has no legal right to justify the issuance of writ. With the
rule of "independent contract", RTC rules that the LHC is allowed to draw on the letters of credit for liquidated damages, and that the
banks are mere custodians of the funds nd as such were obligated to transfer as long as LHC can provide the required certifications.

Transfield elevated the case to CA for writ of preliminary injunction with TRO stating that LHC's call on the letters of credit was
premature considering that the issue of default is not yet resolved, and until the fct of delay is established, LHC cannot draw on the
letters of credit. LHC refutes Transfield's contention stating that Transfield has no right to restrain its right to draw on the letters of credit
as payment for liquidating damages, and that the letters of credit are independent since the letters shows on its fce that the banks have
no responsibility to investigate the authenticity of the letters of creits or the declarants capacity or entitlement to so certify.

CA failed to act on the appeal and when the TRO expires, LHC went to ANZ and withdrew the total of 4,950,000.00 reducing the ANZ
balance to 1,852,814.00. CA dismissed the petition and expressed its conformity with the decision of RTC that LHC has the right to
draw on the letters of credit as the principle of credit is independent of the underlying transaction and that as long as the LHC can
comply with the requirements of the bank, it may exercise its right to draw.

With this, Transfield filed for Petition for Review.

Transfield also asserts that the RTC should have used the principle of fraud exception rather that independence principle.

Issue: WON LHC may invoke the principle of independence in letters of credit whose call is wrongful or fraudulent, WON LHC has the
right to call and draw on the letters of credit before resolution, WON ANZ and SB are justified in releasing the amounts due, WON
Transfield will suffer grave and irreparable damage in the event that LHC is allowed to call and the banks are allowed to release or
when LHC does not return the amounts itt had wrongfully withdrawn

Ruling: LHC has the right to invoke the principle of indeependence in letters of credit,
It is improper to issue injunction in order to restrain LHC's right to draw on the letters of credit.

In letters of credit, the relationship between the beneficiary and the issuer of a letter of credit is not strictly contractual, since both privity
and meeting of minds are lacking yet strict compliance with its terms is an enforceable right. Letters of credit is also not a third-party
beneficiary contratc, since the issuer must honor drafts drawn against the letter of credit regardless of problems subsequently arising in
the underlying contract.

In a standby letter of credit, the credit is payable ipon certification of a party's nonperformance of the agreement.

It is provided in Article 3 of UCP that credits are separate transactions from the sales or other contracts on which they may be based
and banks are in no way cncerned with or bound by such contracts. The obligation of the bank to pay under the credit is not subject to
claims or defenses by the applicant resulting from his relationships with the issuing bank or beneficiary.

Independence principle- assures the seller of prompt payment independent of any breach of the main contract and precludes the
issuing bank from determining WON the main contract is actually accomplished or not.
 Independent in toto- credit is independent from the justification aspect and is separate obligation from the underlying
agreement
 Independece as to justification aspect- identical witht he same obligations under the underlying agreement.

The letter of credit is separate and distinct from the underlying transaction.

The independent principle may be invoked by the beneficiary and the issuing bank.

Letters of credit works in a way that the party who applied for it may confidently show to the beneficiary the letter as a security to
convince the beneficiary to enter into a contract, and the benefiicary to be empowered to call on the letter of credit as a security in case
the applicant fails to perform his part of transaction.

Jurisprudence has laid down a clear distinction between a letter of credit and a mere guarantee in that the settlement of a dispute
between the parties is not a pre-requisite for the release of funds under the letter of credit.

Surety Contracts vs Letters of Credit

 In surety contracts- upon failure of obligor to perform, the surety undertakes to complete the performance, there is no duty to
indemnify the benificiary until the fact of obligor's performace is established, and such must be established in litigation where
the surety holds the money and the beneficiary holds the costs.
 In letters of credit- expectation to receive cash in case of non-performance, reverses the financial burden of parties during
litigation, beneficiary avoids litigation by receiving his money from the bank. If the beneficiary wrongfully withdraws money, the
applicant may sue the beneficiary, but the beneficiary holds the money during such litigation.

LHC has the right to call on the letters which is rooted on the contract which states that LHC can deduct the amount of liquidating
damages by drawing on the security, since the parties made it their intention to make the letters answerable for liquidating damages.

For the fraud exception rule, it must be first resolved if WON Transfield is guilty of default. The Court cannot rule on such since it is
submitted for arbitration

For the injunction, there are conditions that must be estblished:

 Clear proof of raud
 Fraud constitutes fraudulent abuse of the independent purpose of the letter of credit and not of the main contract
 Irreparable injury might follow if not granted

Injunction is not a cause of action but merely a provisional remedy.

In order for writ to be issued:

 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
 Invasion of right sought to be protected is material and substantial
 Right to complaint is clear nd unmistakable
 Urgent and paramaount necessity for the writ to prevent serious damage
 Pressing necessity to avoid injurious cosequences which cannot be remedied under standard compensation

Transfield failed to establish the clear and unmistakeable right to restrain LHC's call on the letters since it admitted that such right
of LHC is rooted in the express stipualtion of the contract. The pendency of the arbitration would not make LHC's draws wrongful
or fraudulent as there was no stipulation in the contract that the parties intended to resolved any disputes regarding delay before
LHC can make drawings on the letters of credit.

Banks were justified in releasing the amounts since they are under no obligation to determine the validity of the LHC's certification
that default occurred.

The facct that the subject letters of credit is drawn should have immediatle dismissed the case.