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Case Title:
TRANSFIELD PHILIPPINES, INC.,
petitioner, vs. LUZON HYDRO
CORPORATION, AUSTRALIA and VOL. 443, NOVEMBER 22, 2004 307
NEW ZEALAND BANKING GROUP
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
LIMITED and SECURITY BANK
CORPORATION, respondents. *
Citation: 443 SCRA 307 G.R. No. 146717. November 22, 2004.
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TRANSFIELD PHILIPPINES, INC., petitioner, vs. LUZON
HYDRO CORPORATION, AUSTRALIA and NEW ZEALAND
Search Result BANKING GROUP LIMITED and SECURITY BANK
CORPORATION, respondents.
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* SECOND DIVISION.
308
309
has published from time to time updates on the Uniform Customs and
Practice (UCP) for Documentary Credits to standardize practices in the
letter of credit area. The vast majority of letters of credit incorporate the
UCP. First published in 1933, the UCP for Documentary Credits has
undergone several revisions, the latest of which was in 1993. In Bank of
the Philippine Islands v. De Reny Fabric Industries, Inc., this Court ruled
that the observance of the UCP is justified by Article 2 of the Code of
Commerce which provides that in the absence of any particular provision
in the Code of Commerce, commercial transactions shall be governed by
usages and customs generally observed. More recently, in Bank of
America, NT & SA v. Court of Appeals, this Court ruled that there being
no specific provisions which govern the legal complexities arising from
transactions involving letters of credit, not only between or among banks
themselves but also between banks and the seller or the buyer, as the case
may be, the applicability of the UCP is undeniable.
Same; Same; Same; „Independence Principle‰; Under the
„independence 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.·Article 3 of the UCP provides
that credits, by their nature, are separate transactions from the sales or
other contract(s) on which they may be based and banks are in no way
concerned with or bound by such contract(s), even if any reference
whatsoever to such contract(s) is included in the credit. Consequently, the
undertaking of a bank to pay, accept and pay draft(s) or negotiate and/or
fulfill any other obligation under the credit is not subject to claims or
defenses by the applicant resulting from his relationships with the issuing
bank or the beneficiary. A beneficiary can in no case avail himself of the
contractual relationships existing between the banks or between the
applicant and the issuing bank. Thus, 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
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311
VOL. 443, NOVEMBER 22, 2004 311
312
respondent banks were left with little or no alternative but to honor the
credit and both of them in fact submitted that it was „ministerial‰ for them
to honor the call for payment.
Same; Same; Same; Same; Contracts; A contract once perfected, binds
the parties not only to the fulfillment of what has been expressly stipulated
but also to all the consequences which according to their nature, may be in
keeping with good faith, usage, and law.· A contract once perfected, binds
the parties not only to the fulfillment of what has been expressly
stipulated but also to all the consequences which according to their nature,
may be in keeping with good faith, usage, and law. A careful perusal of the
Turnkey Contract reveals the intention of the parties to make the
Securities answerable for the liquidated damages occasioned by any delay
on the part of petitioner. The call upon the Securities, while not an
exclusive remedy on the part of LHC, is certainly an alternative recourse
available to it upon the happening of the contingency for which the
Securities have been proffered. Thus, even without the use of the
„independence principle,‰ the Turnkey Contract itself bestows upon LHC
the right to call on the Securities in the event of default.
Same; Same; Same; Same; Injunction; Requisites; Most writers agree
that fraud is an exception to the independence principle; The remedy for
fraudulent abuse is an injunction.·Most writers agree that fraud is an
exception to the independence principle. Professor Dolan opines that the
untruthfulness of a certificate accompanying a demand for payment under
a standby credit may qualify as fraud sufficient to support an injunction
against payment. The remedy for fraudulent abuse is an injunction.
However, injunction should not be granted unless: (a) there is clear proof
of fraud; (b) the fraud constitutes fraudulent abuse of the independent
purpose of the letter of credit and not only fraud under the main
agreement; and (c) irreparable injury might follow if injunction is not
granted or the recovery of damages would be seriously damaged.
Same; Same; Same; Same; Same; The issuance of the writ of
preliminary injunction as an ancillary or preventive remedy to secure the
rights of a party in a pending case is entirely within the discretion of the
court taking cognizance of the case, the only limitation being that this
discretion should be exercised based upon the grounds and in the manner
provided by law.·Generally, injunction is a preservative remedy for the
protection of oneÊs substantive right or interest;
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TINGA, J.:
Subject of this case is the letter of credit which has evolved as the
ubiquitous and most important device in international trade. A
creation of commerce and businessmen, the letter of credit is also
unique in the number of parties involved and its supranational
character. 1
Petitioner has appealed from the Decision of the Court of
Appeals in CA-G.R. SP No. 61901 entitled „Transfield Philippines,
Inc. v. Hon. Oscar Pimentel, et al.,‰ promulgated on 31 January
2
2001.
On 26 March 1997, petitioner and respondent Luzon Hydro3
Corporation (hereinafter, LHC) entered into a Turnkey Contract
whereby petitioner, as Turnkey Contractor, undertook to construct,
on a turnkey basis, a seventy (70)-Megawatt hydro-electric power
station at the Bakun River in the prov-
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317
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If at anytime any dispute or difference shall arise between the Employer and
the Contractor in connection with or arising out of this Contract or the carrying out
of the Works, the parties together shall in good faith exert all efforts to resolve
such dispute or difference by whatever means they deem appropriate, including
conciliation, mediation and seeking the assistance of technical, accounting or other
experts. At the request of any party, the chief executives of the Employer and the
Contractor shall meet in a good-faith effort to reach an amicable settlement of the
dispute or difference. Any dispute or difference that the parties are unable to
resolve within a reasonable time may, at the option of either party, be referred to
arbitration in accordance with Clause 20.4. (Id., at p. 179)
318
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12 Turnkey Contract, Clause 4.2.5, Rollo, p. 94, in relation to Clause 8.7.1., Rollo,
p. 132.
13 Annex „H‰, Rollo, pp. 287-289; Annex „H-1‰, Rollo, pp. 320-322.
319
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14 Clause 8.2. Time for Completion. The Contractor shall complete all the Works,
16 8.7.1. If the Contractor fails to comply with Clause 8.2, the Contractor shall
320
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uidated Damages for Delay for each day of the delay on the following day
without need of demand from the Employer.
17 Annex „L‰, Rollo, pp. 383-402.
321
Dissatisfied with the trial courtÊs denial of its application for a writ
of preliminary injunction, petitioner elevated the case to the Court
of Appeals via a Petition for Certiorari under Rule 65, with prayer
for the issuance of a 20 temporary restraining order and writ of
preliminary injunction. Petitioner submitted to the appellate court
that LHCÊs call on the Securities was premature considering that
the issue of its default had not yet been resolved with finality by the
CIAC and/or the ICC. It asserted that until the fact of delay could
be established, LHC had no right to draw on the Securities for
liquidated damages.
Refuting petitionerÊs contentions, LHC claimed that petitioner
had no right to restrain its call on and use of the Securities as
payment for liquidated damages. It averred that the Securities are
independent of the main contract between them as shown on the
face of the two Standby Letters of Credit which both provide that
the banks have no responsibility to investigate the authenticity or
accuracy of the certificates or the declarantÊs capacity or
entitlement to so certify.
In its Resolution dated 28 November 2000, the Court of Appeals
issued a temporary restraining order, enjoining LHC from calling
on the Securities or any renewals or substitutes thereof and
ordering respondent banks to cease and desist from transferring,
paying or in any manner disposing of the Securities.
However, the appellate court failed to act on the application for
preliminary injunction until the temporary restraining order
expired on 27 January 2001. Immediately thereafter,
representatives of LHC trooped to ANZ Bank and withdrew the
total amount of US$4,950,000.00, thereby reducing the balance in
ANZ Bank to US$1,852,814.00.
On 2 February 2001, the appellate court dismissed the petition
for certiorari. The appellate court expressed conformity with the
trial courtÊs decision that LHC could call on the Se-
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322
curities pursuant to the first principle in credit law that the credit
itself is independent of the underlying transaction and that as long
as the beneficiary complied with the credit, it was of no moment
that he had not complied with the underlying contract. Further, the
appellate court held that even assuming that the trial courtÊs denial
of petitionerÊs application for a writ of preliminary injunction was
erroneous, it constituted only an error of judgment which is not
correctible by certiorari, unlike error of jurisdiction.
Undaunted, petitioner filed the instant Petition for Review
raising the following issues for resolution:
WHETHER THE „INDEPENDENCE PRINCIPLE‰ ON
LETTERS OF CREDIT MAY BE INVOKED BY A BENEFICIARY
THEREOF WHERE THE BENEFICIARYÊS CALL THEREON IS
WRONGFUL OR FRAUDULENT.
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325
same time seeking the suit for enforcement of the arbitral award
before the Makati court. 27
Respondent SBC in its Memorandum, dated 10 March 2003
contends that the Court of Appeals correctly dismissed the petition
for certiorari. Invoking the independence principle, SBC argues
that it was under no obligation to look into the validity or accuracy
of the certification submitted by respondent LHC or into the latterÊs
capacity or entitlement to so certify. It adds that the act sought to
be enjoined by petitioner was already fait accompli and the present
petition would no longer serve any remedial purpose.
In a similar fashion, respondent ANZ Bank in its Memorandum
28
dated 13 March 2003 posits that its actions could not be regarded
as unjustified in view of the prevailing independence principle
under which it had no obligation to ascertain the truth of LHCÊs
allegations that petitioner defaulted in its obligations. Moreover, it
points out that since the Standby Letter of Credit No. E001126/8400
had been fully drawn, petitionerÊs prayer for preliminary injunction
had been rendered moot and academic.
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
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326
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Circuit Court, S.D. New York) No. 96 Civ. 7098 (RLC), 19 October 1998
<http://www.westlaw.com>.
327
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ed.).
36 ICC Publication No. 500.
328
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329
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330
41
sented and the conditions of the credit are complied with.
Precisely, the independence principle liberates the issuing bank
from the duty of ascertaining compliance by the parties in the main
contract. As the principleÊs nomenclature clearly suggests, 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.
Given the nature of letters of credit, petitionerÊs argument·that
it is only the issuing bank that may invoke the independence
principle on letters of credit·does not impress this Court. To say
that the independence principle may only be invoked by the issuing
banks would render nugatory the purpose for which the letters of
credit are used in commercial transactions. As it is, the
independence doctrine works to the benefit of both the issuing bank
and the beneficiary.
Letters of credit are employed by the parties desiring to enter
into commercial transactions, not for the benefit of the issuing bank
but mainly for the benefit of the parties to the original transactions.
With the letter of credit from the issuing bank, the party who
applied for and obtained it may confidently present the letter of
credit to the beneficiary as a security to convince the beneficiary to
enter into the business transaction. On the other hand, the other
party to the business transaction, i.e., the beneficiary of the letter of
credit, can be rest assured of being empowered to call on the letter
of credit as a security in case the commercial transaction does not
push through, or the applicant fails to perform his part of the
transaction. It is for this reason that the party who is entitled to the
proceeds of the letter of credit is appropriately called „beneficiary.‰
PetitionerÊs 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
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331
332
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standby letters of credit, this Court rules that the respondent banks
were left with little or no alternative but to honor the credit and
both of them in fact submitted
43
that it was „ministerial‰ for them to
honor the call for payment.
Furthermore, LHC has a right rooted in the Contract to call on
the Securities. The relevant provisions of the Contract read, thus:
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334
335
this Court is not called upon to rule upon the issue of default·such
issue having been submitted by the parties to the jurisdiction of the
arbitral tribunals
47
pursuant to the terms embodied in their
agreement.
Would injunction then be the proper remedy to restrain the
alleged wrongful draws on the Securities?
Most writers agree that fraud is an exception to the
independence principle. Professor Dolan opines that the
untruthfulness of a certificate accompanying a demand for payment
under a standby credit may 48qualify as fraud sufficient to support an
injunction against payment. The remedy for fraudulent abuse is an
injunction. However, injunction should not be granted unless: (a)
there is clear proof of fraud; (b) the fraud constitutes fraudulent
abuse of the independent purpose of the letter of credit and not only
fraud under the main agreement; and (c) irreparable injury might
follow if injunction is not
49
granted or the recovery of damages would
be seriously damaged.
In its complaint for injunction before the trial court, petitioner
alleged that it is entitled to a total extension of two hundred fifty-
three (253) days which would move the target completion date. It
argued that if its claims for extension would be found meritorious
by the ICC,50
then LHC would not be entitled to any liquidated
damages.
Generally, injunction is a preservative remedy for the protection
of oneÊs substantive right or interest; it is not a cause of action in
itself but merely a provisional remedy, an adjunct to a main suit.
The issuance of the writ of preliminary injunction as an ancillary or
preventive remedy to secure the rights of a party in a pending case
is entirely within the discretion of
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336
the court taking cognizance of the case, the only limitation being
that this discretion should be exercised
51
based upon the grounds and
in the manner provided by law.
Before a writ of preliminary injunction may be issued, there
must be a clear showing by the complaint that there exists a right
to be protected and that the acts against52
which the writ is to be
directed are violative of the said right. It must be shown that the
invasion of the right sought to be protected is material and
substantial, that the right of complainant is clear and unmistakable
and that there is an urgent
53
and paramount necessity for the writ to
prevent serious damage. Moreover, an injunctive remedy may only
be resorted to when there is a pressing necessity to avoid injurious
consequences 54which cannot be remedied under any standard
compensation.
In the instant case, petitioner failed to show that it has a clear
and unmistakable right to restrain LHCÊs call on the Securities
which would justify the issuance of preliminary injunction. By
petitionerÊs own admission, the right of LHC to call on the
Securities was contractually rooted and55 subject to the express
stipulations in the Turnkey Contract. Indeed, the Turnkey
Contract is plain and unequivocal in that it conferred upon LHC the
right to draw upon the Securities in case
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51 Batangas Laguna Tayabas Bus Company, Inc. v. Bitanga, 415 Phil. 43; 362
53 Zabat v. Court of Appeals, G.R. No. 122089, 23 August 2000, 338 SCRA 551;
Philippine Economic Zone Authority v. Vianzon, G.R. No. 131020, 20 July 2000,
336 SCRA 309; Valencia v. Court of Appeals, G.R. No. 119118, 19 February 2001,
352 SCRA 72; Crystal v. Cebu International School, G.R. No. 135433, 4 April 2001,
356 SCRA 296; Ong Ching Kian Chuan v. Court of Appeals, 415 Phil. 365; 363
SCRA 145 (2001).
54 Philippine National Bank v. Ritratto Group, Inc., 414 Phil. 494; 362 SCRA 216
(2001).
55 Rollo, p. 31.
337
„4.2.5 The Employer shall give the Contractor seven daysÊ notice of
calling upon any of the Securities, stating the nature of the
default for which the claim on any of the Securities is to be
made, provided that no notice will be required if the
Employer calls upon any of the Securities for the payment of
Liquidated Damages for Delay or for failure by the
Contractor to renew or extend the Securities within 56
14 days
of their expiration in accordance with Clause 4.2.2.
8.7.2 The Employer may, without prejudice to any other method
of recovery, deduct the amount of such damages from any
monies due, or to become57 due, to the Contractor and/or by
drawing on the Security.‰
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338
this instance to bring into play the fraud exception rule to sustain
its claim for the issuance of an injunctive relief. Matters, theories or
arguments not brought out in the proceedings below will ordinarily
not be considered by a reviewing
59
court as they cannot be raised for
the first time on appeal. The lower courts could thus not be faulted
for not applying the fraud exception rule not only because the
existence of fraud was fundamentally interwoven with the issue of
default still pending before the arbitral tribunals, but more so,
because petitioner never raised it as an issue in its pleadings filed
in the courts below. At any rate, petitioner utterly failed to show
that it had a clear and unmistakable right to prevent LHCÊs call
upon the Securities.
Of course, prudence should have impelled LHC to await
resolution of the pending issues before the arbitral tribunals prior
to taking action to enforce the Securities. But, as earlier stated, the
Turnkey Contract did not require LHC to do so and, therefore, it
was merely enforcing its rights in accordance with the tenor
thereof. Obligations arising from contracts have the force of law
between the60 contracting parties and should be complied with in
good faith. More importantly, pursuant to the principle of 61
autonomy of contracts embodied in Article 1306 of the Civil Code,
petitioner could have incorporated in its Contract with LHC, a
proviso that only the final determination by the arbitral tribunals
that default had occurred would justify the enforcement of the
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300 SCRA 469 (1998); Ruby Industrial Corporation v. Court of Appeals, 348 Phil.
480; 284 SCRA 445 (1998); Victorias Milling Co., Inc. v. Court of Appeals, 389 Phil.
184; 333 SCRA 663 (2000).
60 Article 1159, Civil Code.
61 Art. 1306. The contracting parties 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.
339
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62 Rollo, p. 493.
63 Aznar Brothers Realty Company v. Court of Appeals, G.R. No. 128102, 7
March 2000, 327 SCRA 359; Soriano v. Court of Appeals, 416 Phil. 226; 363 SCRA
725 (2001); Rodil Enterprises v. Court of Appeals, G.R. No. 129609, 29 November
2001, 371 SCRA 79; Unionbank of the Philippines v. Court of Appeals, 370 Phil.
837; 311 SCRA 795 (1999).
64 389 Phil. 20; 333 SCRA 472 (2000).
340
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341
founded on the same transactions and the same essential facts and
circumstances, and all raising substantially the same issues either 67
pending in, or already resolved adversely, by some other court. It
may also consist in the act of a party against whom an adverse
judgment has been rendered in one forum, of seeking another and
possibly favorable opinion in another forum other than by appeal or
special civil action of certiorari, or the institution of two or more
actions or proceedings grounded on the same cause on the
supposition that68one or the other court might look with favor upon
the other party. To determine whether a party violated the rule
against forum shopping, the test applied is whether the elements of
litis pendentia are present or whether a final judgment in one case
69
will amount to res judicata in another. Forum shopping constitutes
improper conduct and may be punished with summary 70
dismissal of
the multiple petitions and direct contempt of court.
Considering the seriousness of the charge of forum shopping and
the severity of the sanctions for its violation, the Court will refrain
from making any definitive ruling on this issue until after
petitioner has been given ample opportunity to respond to the
charge.
WHEREFORE, the instant petition is DENIED, with costs
against petitioner.
Petitioner is hereby required to answer the charge of forum
shopping within fifteen (15) days from notice.
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67 Tantoy, Sr. v. Court of Appeals, G.R. No. 141427, April 20, 2001, 357 SCRA
329.
68 Bangko Silangan Development Bank v. Court of Appeals, 412 Phil. 755; 360
Court of Appeals, G.R. No. 141297, October 8, 2001, 366 SCRA 752.
70 Tantoy, Sr. v. Court of Appeals, supra note 67; Caviles v. Seventeenth Division,
Court of Appeals, G.R. No. 126857, September 18, 2002, 389 SCRA 306.
342
SO ORDERED.
Petition denied.
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