1. TRANSFIELD PHILIPPINES vs. LUZON HYDRO CORP., G.R. No.

146717, November 22, 2004

FACTS:

Petitioner asked for several extensions in completing construction due to different reasons but were denied by
Luzon Hydro. These resulted to different legal actions. And upon foreseeing that Luzon Hydro would call on the
standby letters of credit, petitioner advised the banks that proceedings were pending between the two parties and
that Luzon Hydro doesn’t have any right to call on the LCs. And like a self-fulfilling prophecy, Luzon did notified
petitioner of its failure to comply with the contract and that it would call in the standby letters of credit. Petitioner
filed a complaint for injunction but this was denied ultimately.

RATIO DECIDENDI:

At the core of the present controversy is the applicability of the “independence principle” and “fraud exception
rule” in letters of credit. Thus, a discussion of the nature and use of letters of credit, also referred to simply as
“credits,” would provide a better perspective of the case.

The letter of credit evolved as a mercantile specialty, and the only way to understand all its facets is to recognize
that it is an entity unto itself. The relationship between the beneficiary and the issuer of a letter of credit is not
strictly contractual, because both privity and a meeting of the minds are lacking, yet strict compliance with its
terms is an enforceable right. Nor is it a third-party beneficiary contract, because the issuer must honor drafts
drawn against a letter regardless of problems subsequently arising in the underlying contract. Since the bank’s
customer cannot draw on the letter, it does not function as an assignment by the customer to the beneficiary.
Nor, if properly used, is it a contract of suretyship or guarantee, because it entails a primary liability following a
default. Finally, it is not in itself a negotiable instrument, because it is not payable to order or bearer and is
generally conditional, yet the draft presented under it is often negotiable.