THIRD DIVISION redeems the draft and pays cash to the seller if it finds that the documents
submitted by the seller conform with what the letter of credit requires. The
[G.R. No. 105395. December 10, 1993.]
BANK OF AMERICA, NT &
SA, petitioner, vs. COURT OF APPEALS,
INTER-RESIN INDUSTRIAL CORPORATION,
FRANCISCO TRAJANO, JOHN DOE AND JANE
DOE, respondents.
Agcaoili & Associates for petitioner.
Valenzuela Law Center, Victor Fernandez and Ramon M. Guevara for
private respondents.
SYLLABUS
1. COMMERCIAL LAW; CODE OF COMMERCE; LETTERS OF
CREDITS; DEFINED AND CONSTRUED. — A letter of credit is a financial
device developed by merchants as a convenient and relatively safe mode of
dealing with sales of goods to satisfy the seemingly irreconcilable interests
of a seller, who refuses to part with his goods before he is paid, and a buyer,
who wants to have control of the goods before paying. To break the
impasse, the buyer may be required to contract a bank to issue a letter of
credit in favor of the seller so that, by virtue of the letter of credit, the
issuing bank can authorize the seller to draw drafts and engage to pay them
upon their presentment simultaneously with the tender of documents
required by the letter of credit. The buyer and the seller agree on what
documents are to be presented for payment, but ordinarily they are
documents of title evidencing or attesting to the shipment of the goods to
the buyer. Once the credit is established, the seller ships the goods to the
buyer and in the process secures the required shipping documents or
documents of title. To get paid, the seller executes a draft and presents it
together with the required documents to the issuing bank. The issuing bank
bank then obtains possession of the documents upon paying the seller. The
transaction is completed when the buyer reimburses the issuing bank and
acquires the documents entitling him to the goods. Under this
arrangement, the seller gets paid only if he delivers the documents of title
over the goods, while the buyer acquires the said documents and control
over the goods only after reimbursing the bank.
2. ID.; ID.; ID.; DISTINGUISHED. — What characterizes letters of
credit, as distinguished from other accessory contracts, is the engagement
of the issuing bank to pay the seller once the draft and the required
shipping documents are presented to it. In turn, this arrangement assures
the seller of prompt payment, independent of any breach of the main sales
contract. By this so-called "independence principle," the bank determines
compliance with the letter of credit only by examining the shipping
documents presented; it is precluded from determining whether the main
contract is actually accomplished or not.
3. ID.; ID.; ID.; PARTIES THERETO. — 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 receipt 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 documents 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 number of the parties, not infrequently and almost invariably
in international trade practice, may be increased. Thus, 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 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, to "beneficiary" thereof, an issue that largely is dependent on the bank's
have the draft discounted. participation in that transaction; as a mere advising or notifying bank, it
would not be liable, but as a confirming bank, had this been the case, it
4. ID.; ID.; ID.; UNIFORM CUSTOMS AND PRACTICE FOR
could be considered as having incurred that liability. Bank of America has,
DOCUMENTARY CREDITS (U.C.P.); APPLICATION TO PHILIPPINE CODE
only been an advising, not confirming, bank, and this much is clearly
OF COMMERCE. — Being a product of international commerce, the impact
evident, among other things, by the provisions of the letter of credit itself,
of this commercial instrument transcends national boundaries, and it is
the petitioner bank's letter of advice, its request for payment of advising
thus not uncommon to find a dearth of national law that can adequately
fee, and the admission of Inter-Resin that it has paid the same. That Bank
provide for its governance. This country is no exception. Our own Code of
of America has asked Inter-Resin to submit documents required by the
Commerce basically introduces only its concept under Articles 567-572,
letter of credit and eventually has paid the proceeds thereof, did not
inclusive, thereof. It is no wonder then why great reliance has been placed
obviously make it a confirming bank. The fact, too, that the draft required
on commercial usage and practice, which, in any case, can be justified by
by the letter of credit is to be drawn under the account of General
the universal acceptance of the autonomy of contracts rule. The rules were
Chemicals (buyer) only means that the same had to be presented to Bank
later developed into what is now known as the Uniform Customs and
of Ayudhya (issuing bank) for payment. It may be significant to recall that
Practice for Documentary Credits ("U.C.P.") issued by the International
the letter of credit is an engagement of the issuing bank, not the advising
Chamber of Commerce. It is by no means a complete text by itself, for, to
bank, to pay the draft. No less important is that Bank of America's letter of
be sure, there are other principles, which, although part of lex mercatoria,
11 March 1981 has expressly stated that "[t]he enclosure is solely an advise of
are not dealt with in the U.C.P. In FEATI Bank and Trust Company v. Court
credit opened by the abovementioned correspondent and conveys no
of Appeals, (G.R. No. 94209, prom. 30 April 1991; 196 SCRA 576) the Supreme
engagement by us." This written reservation by Bank of America in limiting
Court have accepted, to the extent of their pertinency, the application in
its obligation only to being an advising bank is in consonance with the
our jurisdiction of this international commercial credit regulatory set of
provisions of U.C.P. As an advising or notifying bank, Bank of America did
rules. In Bank of Phil. Islands v. De Nery, (G.R. No. L-24821, 16 October 1970;
not incur any obligation more than just notifying Inter-Resin of the letter
35 SCRA 256) the Court has said that the observance of the U.C.P. is justified
of credit issued in its favor, let alone to confirm the letter of credit. Bringing
by Article 2 of the Code of Commerce which expresses that, in the absence
the letter of credit to the attention of the seller is the primordial obligation
of any particular provision in the Code of Commerce, commercial
of an advising bank. The view that Bank of America should have first
transactions shall be governed by usages and customs generally observed.
checked the authenticity of the letter of credit with Bank of Ayudhya, by
The Court have further observed that there being no specific provisions
using advanced mode of business communications, before dispatching the
which govern the legal complexities arising from transactions involving
same to Inter-Resin finds no real support in U.C.P. Article 18 of the U.C.P.
letters of credit not only between or among banks themselves but also
states that: "Banks assume no liability or responsibility for the
between banks and the seller or the buyer, as the case may be, the
consequences arising out of the delay and/or loss in transit of any
applicability of the U.C.P. is undeniable.
messages, letters or documents, or for delay, mutilation or other errors
5. ID.; ID.; ID.; ADVISING OR NOTIFYING BANK; CONSTRUED; CASE arising in the transmission of any telecommunication . . ." As advising bank,
AT BAR. — The crucial point of dispute in this case is whether under the Bank of America is bound only to check the "apparent authenticity" of the
"letter of credit," Bank of America has incurred any liability to the letter of credit, which it did.
 6. ID.; ID.; ID.; ID.; RIGHT OF RECOURSE, WHEN AVAILABLE. — May
Bank of America then recover what it has paid under the letter of credit
when the corresponding draft for partial availment thereunder and the
required documents therefor were later negotiated with it by Inter-Resin?
The answer is yes. This kind of transaction is what is commonly referred to
as a discounting arrangement. This time, 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. (Inter-Resin, of course, could have chosen other banks
with which to negotiate the draft and the documents.) As a negotiating
bank, Bank of America has a right of 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.
7. ID.; ID.; ID.; NATURE OF OPERATION. — In the operation of a letter
of credit, the involved banks deal only with documents and not on goods
described in those documents.
DECISION
VITUG, J :p
A "fiasco," involving an irrevocable letter of credit, has found the
distressed parties coming to court as adversaries in seeking a definition of
their respective rights or liabilities thereunder.
On 05 March 1981, petitioner Bank of America, NT & SA, Manila,
received by registered mail an Irrevocable Letter of Credit No. 20272/81
purportedly issued by Bank of Ayudhya, Samyaek Branch, for the account
of General Chemicals, Ltd., of Thailand in the amount of US$2,782,000.00
to cover the sale of plastic ropes and "agricultural files," with the petitioner
as advising bank and private respondent Inter-Resin Industrial Corporation
as beneficiary.prcd
On 11 March 1981, Bank of America wrote Inter-Resin informing the
latter of the foregoing and transmitting, along with the bank's
communication, the letter of credit. Upon receipt of the letter-advice with
the letter of credit, Inter-Resin sent Atty. Emiliano Tanay to Bank of
America to have the letter of credit confirmed. The bank did not. Reynaldo
Dueñas, bank employee in charge of letters of credit, however, explained to
Atty. Tanay that there was no need for confirmation because the letter of
credit would not have been transmitted if it were not genuine.
Between 26 March to 10 April 1981, Inter-Resin sought to make a
partial availment under the letter of credit by submitting to Bank of America
invoices, covering the shipment of 24,000 bales of polyethylene rope to
General Chemicals valued at US$1,320,600.00, the corresponding packing
list, export declaration and bill of lading. Finally, after being satisfied that
Inter-Resin's documents conformed with the conditions expressed in the
letter of credit, Bank of America issued in favor of Inter-Resin a Cashier's
Check for P10,219,093.20, "the Peso equivalent of the draft (for)
US$1,320,600.00 drawn by Inter-Resin, after deducting the costs for
documentary stamps, postage and mail insurance." 1 The check was picked
up by Inter-Resin's Executive Vice-President Barcelina Tio. On 10 April 1981,
Bank of America wrote Bank of Ayudhya advising the latter of the availment
under the letter of credit and sought the corresponding reimbursement
therefor.
Meanwhile, Inter-Resin, through Ms. Tio, presented to Bank of
America the documents for the second availment under the same letter of
credit consisting of a packing list, bill of lading, invoices, export declaration
and bills in set, evidencing the second shipment of goods. Immediately
upon receipt of a telex from Bank of Ayudhya declaring the letter of credit
fraudulent, 2 Bank of America stopped the processing of Inter-Resin's
documents and sent a telex to its branch office in Bangkok, Thailand,
requesting assistance in determining the authenticity of the letter of
credit. 3 Bank of America kept Inter-Resin informed of the developments.
Sensing a fraud, Bank of America sought the assistance of the National
Bureau of Investigation (NBI). With the help of the staff of the Philippine
Embassy at Bangkok, as well as the police and customs personnel of
Thailand, the NBI agents, who were sent to Thailand, discovered that the
vans exported by Inter-Resin did not contain ropes but plastic strips,
wrappers, rags and waste materials. Here at home, the NBI also investigated
Inter-Resin's President Francisco Trajano and Executive Vice President
Barcelina Tio, who, thereafter, were criminally charged for estafa through
falsification of commercial documents. The case, however, was eventually
dismissed by the Rizal Provincial Fiscal who found no prima facie evidence
to warrant prosecution.
LLpr
Bank of America sued Inter-Resin for the recovery of P10,219,093.20
the peso equivalent of the draft for US$320,600.00 on the partial availment
of the now disowned letter of credit. On the other hand, Inter-Resin
claimed that not only was it entitled to retain P10,219,093.20 on its first
shipment but also to the balance US$1,461,400.00 covering the second
shipment.
On 28 June 1989, the trial court ruled for Inter-Resin, 4 holding that:
(a) Bank of America made assurances that enticed Inter-Resin to send the
merchandise to Thailand; (b) the telex declaring the letter of credit
fraudulent was unverified and self-serving, hence hearsay, but even
assuming that the letter of credit was fake, "the fault should be borne by
the BA which was careless and negligent" 5 for failing to utilize its modern
means of communication to verify with Bank of Ayudhya in Thailand the
authenticity of the letter of credit before sending the same to Inter-Resin;
(c) the loading of plastic products into the vans were under strict
supervision, inspection and verification of government officers who have in
their favor the presumption of regularity in the performance of official
functions; and (d) Bank of America failed to prove the participation of Inter-
Resin or its employees in the alleged fraud as, in fact, the complaint for
estafa through falsification of documents was dismissed by the Provincial
Fiscal of Rizal. 6
On appeal, the Court of Appeals 7 sustained the trial court; hence, this
present recourse by petitioner Bank of America.
The following issues are raised by Bank of America: (a) whether it has
warranted the genuineness and authenticity of the letter of credit and,
corollarily, whether it has acted merely as an advising bank or as a
confirming bank; (b) whether Inter-Resin has actually shipped the ropes
specified by the letter of credit; and, (c) following the dishonor of the letter
of credit by Bank of Ayudhya, whether Bank of America may recover against
Inter-Resin under the draft executed in its partial availment of the letter of
credit. 8llcd
In rebuttal, Inter-Resin holds that: (a) Bank of America cannot, on
appeal, belatedly raise the issue of being only an advising bank; (b) the
findings of the trial court that the ropes have actually been shipped is
binding on the Court; and, (c) Bank of America cannot recover from Inter-
Resin because the drawer of the letter of credit is the Bank of Ayudhya and
not Inter-Resin.
If only to understand how the parties, in the first place, got
themselves into the mess, it may be well to start by recalling how, in its
modern use, a letter of credit is employed in trade transactions.
A letter of credit is a financial device developed by merchants as a
convenient and relatively safe mode of dealing with sales of goods to satisfy
the seemingly irreconcilable interests of a seller, who refuses to part with
his goods before he is paid, and a buyer, who wants to have control of the
goods before paying. 9 To break the impasse, the buyer may be required to
contract a bank to issue a letter of credit in favor of the seller so that, by
virtue of the letter of credit, the issuing bank can authorize the seller to
draw drafts and engage to pay them upon their presentment
simultaneously with the tender of documents required by the letter of
credit. 10 The buyer and the seller agree on what documents are to be
presented for payment, but ordinarily they are documents of title
evidencing or attesting to the shipment of the goods to the buyer.
Once the credit is established, the seller ships the goods to the buyer
and in the process secures the required shipping documents or documents
of title. To get paid, the seller executes a draft and presents it together with
the required documents to the issuing bank. The issuing bank redeems the
draft and pays cash to the seller if it finds that the documents submitted by
the seller conform with what the letter of credit requires. The bank then
obtains possession of the documents upon paying the seller. The
transaction is completed when the buyer reimburses the issuing bank and
acquires the documents entitling him to the goods. Under this
arrangement, the seller gets paid only if he delivers the documents of title
over the goods, while the buyer acquires the said documents and control
over the goods only after reimbursing the bank.
LexLib
What characterizes letters of credit, as distinguished from other
accessory contracts, is the engagement of the issuing bank to pay the seller
once the draft and the required shipping documents are presented to it. In
turn, this arrangement assures the seller of prompt payment, independent
of any breach of the main sales contract. By this so-called "independence
principle," the bank determines compliance with the letter of credit only by
examining the shipping documents presented; it is precluded from
determining whether the main contract is actually accomplished or not. 11
There would at least be three (3) parties: (a) the buyer, 12 who
procures the letter of credit and obliges himself to reimburse the issuing
bank upon receipt of the documents of title; (b) the bank issuing the letter
of credit, 13 which undertakes to pay the seller upon receipt of the draft and
proper documents of titles and to surrender the documents to the buyer
upon reimbursement; and, (c) the seller, 14 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 number of the parties, not infrequently and almost invariably in
international trade practice, may be increased. Thus, the services of
an advising (notifying) bank 15 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 17 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. llcd
Being a product of international commerce, the impact of this
commercial instrument transcends national boundaries, and it is thus not
uncommon to find a dearth of national law that can adequately provide for
its governance. This country is no exception. Our own Code of Commerce
basically introduces only its concept under Articles 567-572, inclusive,
thereof. It is no wonder then why great reliance has been placed on
commercial usage and practice, which, in any case, can be justified by the
universal acceptance of the autonomy of contracts rule. The rules were
later developed into what is now known as the Uniform Customs and
Practice for Documentary Credits ("U.C.P.") issued by the International
Chamber of Commerce. It is by no means a complete text by itself, for, to
be sure, there are other principles, which, although part of lex mercatoria,
are not dealt with in the U.C.P.
In FEATI Bank and Trust Company v. Court of
Appeals, 19 we have accepted, to the extent of their
pertinency, the application in our jurisdiction of this
international commercial credit regulatory set of
rules. 20 In Bank of Phil. Islands v. De Nery, 21 we have said
that the observance of the U.C.P. is justified by Article 2
of the Code of Commerce which expresses that, in the
absence of any particular provision in the Code of
Commerce, commercial transactions shall be governed
by usages and customs generally observed. We have
further observed 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 U.C.P. is undeniable.
 The first issue raised by the petitioner, i.e., that it has in this instance
merely been an advising bank, is outrightly rejected by Inter-Resin and is
thus sought to be discarded for having been raised only on appeal. We
cannot agree. The crucial point of dispute in this case is whether under the
"letter of credit," Bank of America has incurred any liability to the
by the letter of credit is to be drawn under the account of General
Chemicals (buyer) only means that the same had to be presented to Bank
of Ayudhya (issuing bank) for payment. It may be significant to recall that
the letter of credit is an engagement of the issuing bank, not the advising
bank, to pay the draft. LLjur

"beneficiary" thereof, an issue that largely is dependent on the bank's

No less important is that Bank of America's letter of 11 March 1981 has
participation in that transaction; as a mere advising or notifying bank, it
expressly stated that "[t]he enclosure is solely an advise of credit opened by
would not be liable, but as a confirming bank, had this been the case, it
the abovementioned correspondent and conveys no engagement by
could be considered as having incurred that liability. 22
us." 24 This written reservation by Bank of America in limiting its obligation
LexLib

In Insular Life Assurance Co. Ltd. Employees Association- Natu vs. only to being an advising bank is in consonance with the provisions of U.C.P.
Insular Life Assurance Co., Ltd., 23 the Court said: Where the issues already
As an advising or notifying bank, Bank of America did not incur
raised also rest on other issues not specifically presented, as long as the
any obligation more than just notifying Inter-Resin of the letter of credit
latter issues bear relevance and close relation to the former and as long as
issued in its favor, let alone to confirm the letter of credit. 25 The bare
they arise from matters on record, the court has the authority to include
statement of the bank employee, aforementioned, in responding to the
them in its discussion of the controversy and to pass upon them just as well.
inquiry made by Atty. Tanay, Inter-Resin's representative, on the
In brief, in those cases where questions not particularly raised by the
authenticity of the letter of credit certainly did not have the effect of
parties surface as necessary for the complete adjudication of the rights and
novating the letter of credit and Bank of America's letter of advise, 26 nor
obligations of the parties, and such questions fall within the issues already
can it justify the conclusion that the bank must now assume total liability
framed by the parties, the interests of justice dictate that the court should
on the letter of credit. Indeed, Inter-Resin itself cannot claim to have been
consider and resolve them. The rule that only issues or theories raised in
all that free from fault. As the seller, the issuance of the letter of credit
the initial proceedings may be taken up by a party thereto on appeal should
should have obviously been a great concern to it. 27 It would have, in fact,
only refer to independent, not concomitant matters, to support or oppose
been strange if it did not, prior to the letter of credit, enter into a contract,
the cause of action or defense. The evil that is sought to be avoided, i.e.,
or negotiated at the very least, with General Chemicals. 28 In the ordinary
surprise to the adverse party, is in reality not existent on matters that are
course of business, the perfection of contract precedes the issuance of a
properly litigated in the lower court and appear on record.
letter of credit.
It cannot seriously be disputed, looking at this case, that Bank of
Bringing the letter of credit to the attention of the seller is the
America has, in fact, only been an advising, not confirming, bank, and this
primordial obligation of an advising bank. The view that Bank of America
much is clearly evident, among other things, by the provisions of the letter
should have first checked the authenticity of the letter of credit with Bank
of credit itself, the petitioner bank's letter of advice, its request for payment
of Ayudhya, by using advanced mode of business communications, before
of advising fee, and the admission of Inter-Resin that it has paid the same.
dispatching the same to Inter-Resin finds no real support in U.C.P. Article
That Bank of America has asked Inter-Resin to submit documents required
18 of the U.C.P. states that: "Banks assume no liability or responsibility for
by the letter of credit and eventually has paid the proceeds thereof, did not
the consequences arising out of the delay and/or loss in transit of any
obviously make it a confirming bank. The fact, too, that the draft required
messages, letters or documents, or for delay, mutilation or other errors
arising in the transmission of any telecommunication . . ." As advising bank,
Bank of America is bound only to check the "apparent authenticity" of the
letter of credit, which it did. 29 Clarifying its meaning, Webster's Ninth New
Collegiate Dictionary 30 explains that the word "APPARENT suggests
appearance to unaided senses that is not or may not be borne out by more
rigorous examination or greater knowledge." prcd
May Bank of America then recover what it has paid under the letter
of credit when the corresponding draft for partial availment thereunder
and the required documents therefor were later negotiated with it by Inter-
Resin? The answer is yes. This kind of transaction is what is commonly
referred to as a discounting arrangement. This time, 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. (Inter-Resin, of course, could have chosen other banks
with which to negotiate the draft and the documents.) As a negotiating
bank, Bank of America has a right of 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. 31
While Bank of America has indeed failed to allege material facts in its
complaint that might have likewise warranted the application of the
Negotiable Instruments Law and possibly then allowed it to even go after
the indorsers of the draft, this failure, 32 nonetheless, does not preclude
petitioner bank's right (as a negotiating bank) of recovery from Inter-Resin
itself. Inter-Resin admits having received P10,219,093.20 from Bank of
America on the letter of credit transaction and in having executed the
corresponding draft. That payment to Inter-Resin has given, as aforesaid,
Bank of America the right of reimbursement from the issuing bank, Bank of
Ayudhya which, in turn, could then seek indemnification from the buyer
(the General Chemicals of Thailand). Since Bank of Ayudhya disowned the
letter of credit, however, Bank of America may now turn to Inter-Resin for
restitution.
"Between the seller and the negotiating bank
there is the usual relationship existing between a
drawer and purchaser of drafts. Unless drafts drawn
in pursuance of the credit are indicated to be
without recourse therefore, the negotiating bank
has the ordinary right of recourse against the seller
in the event of dishonor by the issuing bank . . . The
fact that the correspondent and the negotiating
bank may be one and the same does not affect its
rights and obligations in either capacity, although a
special agreement is always a possibility . . ." 33
LLpr
The additional ground raised by the petitioner, i.e., that Inter-Resin
sent waste instead of its products, is really of no consequence. In the
operation of a letter of credit, the involved banks deal only with documents
and not on goods described in those documents. 34
The other issues raised in the instant petition, for instance, whether
or not Bank of Ayudhya did issue the letter of credit and whether or not the
main contract of sale that has given rise to the letter of credit has been
breached, are not relevant to this controversy. They are matters, instead,
that can only be of concern to the herein parties in an appropriate recourse
against those who, unfortunately, are not impleaded in these proceedings.
In fine, we hold that —
First, given the factual findings of the courts below, we conclude that
petitioner Bank of America has acted merely as a notifying bank and did not
assume the responsibility of a confirming bank; and
Second, petitioner bank, as a negotiating bank, is entitled to recover
on Inter-Resin's partial availment as beneficiary of the letter of credit which
has been disowned by the alleged issuer bank.
No judgment of civil liability against the other defendants, Francisco
Trajano and other unidentified parties, can be made, in this instance, there
being no sufficient evidence to warrant any such finding.
 WHEREFORE, the assailed decision is SET ASIDE, and respondent
Inter-Resin Industrial Corporation is ordered to refund to petitioner Bank
of America NT & SA the amount of P10,219,093.20 with legal interest from
the filing of the complaint until fully paid.
LibLex

No costs.
SO ORDERED.
 FIRST DIVISION
[G.R. No. 160732. June 21, 2004.]
METROPOLITAN WATERWORKS AND SEWE
RAGE SYSTEM, petitioner, vs. HON.
REYNALDO B. DAWAY, in his capacity as
Presiding Judge of the Regional Trial Court of
Quezon City, Branch 90 and MAYNILAD
WATER SERVICES, INC., respondents.
DECISION
AZCUNA, J :
p
On November 17, 2003, the Regional Trial Court (RTC) of Quezon City,
Branch 90, made a determination that the Petition for Rehabilitation with
Prayer for Suspension of Actions and Proceedings filed by Maynilad Water
Services, Inc. (Maynilad) conformed substantially to the provisions of Sec.
2, Rule 4 of the Interim Rules of Procedure on Corporate
Rehabilitation (Interim Rules). It forthwith issued a Stay Order 1 which
states, in part, that the court was thereby:
xxx xxx xxx
2. Staying enforcement of all claims, whether for
money or otherwise and whether such
enforcement is by court action or otherwise,
against the petitioner, its guarantors and
sureties not solidarily liable with the
petitioner;
3. Prohibiting the petitioner from selling,
encumbering, transferring, or disposing in
any manner any of its properties except in
the ordinary course of business;
4. Prohibiting the petitioner from making any
payment of its liabilities, outstanding as at
the date of the filing of the petition;
xxx xxx xxx
Subsequently, on November 27, 2003, public respondent, acting on
two Urgent Ex Parte motions 2 filed by respondent Maynilad, issued the
herein questioned Order 3 which stated that it thereby:
"1. DECLARES that the act of MWSS in
commencing on November 24, 2003 the process for
the payment by the banks of US$98 million out of
the US$120 million standby letter of credit so the
banks have to make good such call/drawing of
payment of US$98 million by MWSS not later than
November 27, 2003 at 10:00 P.M. or any similar act
for that matter, is violative of the above-quoted
sub-paragraph 2.) of the dispositive portion of this
Court's Stay Order dated November 17, 2003.
2. ORDERS MWSS through its
officers/officials to withdraw under pain of
contempt the written certification/notice of draw
to Citicorp International Limited dated November
24, 2003 and DECLARES void any payment by the
banks to MWSS in the event such written
certification/notice of draw is not withdrawn by
MWSS and/or MWSS receives payment by virtue of
the aforesaid standby letter of credit."
Aggrieved by this Order, petitioner
Manila Waterworks & Sewerage System (MWSS) filed this petition for
review by way of certiorari under Rule 65 of the Rules of Court questioning
the legality of said order as having been issued without or in excess of the
lower court's jurisdiction or that the court a quo acted with grave abuse of
discretion amounting to lack or excess of jurisdiction. 4
Antecedents of the Case
On February 21, 1997, MWSS granted Maynilad under a Concession
Agreement a twenty-year period to manage, operate, repair, decommission
and refurbish the existing MWSS water delivery and sewerage services in
the West Zone Service Area, for which Maynilad undertook to pay the
corresponding concession fees on the dates agreed upon in said
agreement 5 which, among other things, consisted of payments of
petitioner's mostly foreign loans.
To secure the concessionaire's performance of its obligations under
the Concession Agreement, Maynilad was required under Section 6.9 of
said contract to put up a bond, bank guarantee or other security acceptable
to MWSS.
In compliance with this requirement, Maynilad arranged on July 14,
2000 for a three-year facility with a number of foreign banks, led by
Citicorp International Limited, for the issuance of an Irrevocable Standby
Letter of Credit 6 in the amount of US$120,000,000 in favor of MWSS for
the full and prompt performance of Maynilad's obligations to MWSS as
aforestated.
Sometime in September 2000, respondent Maynilad requested
MWSS for a mechanism by which it hoped to recover the losses it had
allegedly incurred and would be incurring as a result of the depreciation of
the Philippine Peso against the US Dollar. Failing to get what it desired,
Maynilad issued a Force Majeure Notice on March 8, 2001 and unilaterally
suspended the payment of the concession fees. In an effort to salvage the
Concession Agreement, the parties entered into a Memorandum of
Agreement (MOA) 7 on June 8, 2001 wherein Maynilad was allowed to
recover foreign exchange losses under a formula agreed upon between
them. Sometime in August 2001 Maynilad again filed another Force Majeure
Notice and, since MWSS could not agree with the terms of said Notice, the
matter was referred on August 30, 2001 to the Appeals Panel for arbitration.
This resulted in the parties agreeing to resolve the issues through an
amendment of the Concession Agreement on October 5, 2001, known as
Amendment No. 1, 8 which was based on the terms set down in MWSS Board
of Trustees Resolution No. 457-2001, as amended by MWSS Board of
Trustees Resolution No. 487-2001, 9 which provided inter alia for a formula
that would allow Maynilad to recover foreign exchange losses it had
incurred or would incur under the terms of the Concession Agreement.
As part of this agreement, Maynilad committed, among other things,
to:
a) infuse the amount of UD$80.0 million as
additional funding support from its
stockholders;
b) resume payment of the concession fees; and
c) mutually seek the dismissal of the cases pending
before the Court of Appeals and with Minor
Dispute Appeals Panel.
However, on November 5, 2002, Maynilad served upon MWSS a
Notice of Event of Termination, claiming that MWSS failed to comply with
its obligations under the Concession Agreement and Amendment No. 1
regarding the adjustment mechanism that would cover Maynilad's foreign
exchange losses. On December 9, 2002, Maynilad filed a Notice of Early
Termination of the concession, which was challenged by MWSS. This
matter was eventually brought before the Appeals Panel on January 7, 2003
by MWSS. 10 On November 7, 2003, the Appeals Panel ruled that there was
no Event of Termination as defined under Art. 10.2 (ii) or 10.3 (iii) of the
Concession Agreement and that, therefore, Maynilad should pay the
concession fees that had fallen due.
The award of the Appeals Panel became final on November 22, 2003.
MWSS, thereafter, submitted a written notice 11 on November 24, 2003, to
Citicorp International Limited, as agent for the participating banks, that by
virtue of Maynilad's failure to perform its obligations under the Concession
Agreement, it was drawing on the Irrevocable Standby Letter of Credit and
thereby demanded payment in the amount of US$98,923,640.15.
Prior to this, however, Maynilad had filed on November 13, 2003, a
petition for rehabilitation before the court a quo which resulted in the
issuance of the Stay Order of November 17, 2003 and the disputed Order of
November 27, 2003. 12
Petitioner's Case
Petitioner hereby raises the following issues:
1. DID THE HONORABLE PRESIDING JUDGE
GRAVELY ERR AND/OR ACT PATENTLY
WITHOUT JURISDICTION OR IN EXCESS OF
JURISDICTION OR WITH GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR
EXCESS OF JURISDICTION IN
CONSIDERING THE PERFORMANCE BOND
OR ASSETS OF THE ISSUING BANKS AS PART
OR PROPERTY OF THE ESTATE OF THE
PRIVATE RESPONDENT MAYNILAD
SUBJECT TO REHABILITATION.
2. DID THE HONORABLE PRESIDING JUDGE ACT
WITH LACK OR EXCESS OF JURISDICTION
OR COMMIT A GRAVE ERROR OF LAW IN
HOLDING THAT THE PERFORMANCE BOND
OBLIGATIONS OF THE BANKS
WERE NOT SOLIDARY IN NATURE.
3. DID THE HONORABLE PRESIDING JUDGE
GRAVELY ERR IN ALLOWING MAYNILAD TO
IN EFFECT SEEK A REVIEW OR APPEAL OF
THE FINAL AND BINDING DECISION OF THE
APPEALS PANEL.
In support of the first issue, petitioner maintains that as a matter of
law, the US$120 Million Standby Letter of Credit and Performance Bond are
not property of the estate of the debtor Maynilad and, therefore, not
subject to the in rem rehabilitation jurisdiction of the trial court.
Petitioner argues that a call made on the Standby Letter of Credit
does not involve any asset of Maynilad but only assets of the banks.
Furthermore, a call on the Standby Letter of Credit cannot also be
considered a "claim" falling under the purview of the stay order as alleged
by respondent as it is not directed against the assets of respondent
Maynilad.
Petitioner concludes that the public respondent erred in declaring
and holding that the commencement of the process for the payment of
US$98 million is a violation of the order issued on November 17, 2003.
Respondent Maynilad's Case
Respondent Maynilad seeks to refute this argument by alleging that:
a) the order objected to was strictly and precisely worded and issued
after carefully considering/evaluating the import of the arguments and
documents referred to by Maynilad, MWSS and/or creditors Chinatrust
Commercial Bank and Suez in relation to admissions, pleadings and/or
pertinent records 13 and that public respondent had the authority to issue
the same;
b) public respondent never considered nor held that the Performance
bond or assets of the issuing banks are part or property of the estate of
respondent Maynilad subject to rehabilitation and which respondent
Maynilad has not and has never claimed to be; 14
c) what is relevant is not whether the performance bond or assets of
the issuing banks are part of the estate of respondent Maynilad but whether
the act of petitioner in commencing the process for the payment by the
banks of US$98 million out of the US$120 million performance bond is
covered and/or prohibited under sub-paragraphs 2.) and 4.) of the stay
order dated November 17, 2003; HATICc
 d) the jurisdiction of public respondent extends not only to the assets
of respondent Maynilad but also over persons and assets of "all those
affected by the proceedings . . . upon publication of the notice of
commencement; 15 " and
e) the obligations under the Standby Letter of Credit are not solidary
and are not exempt from the coverage of the stay order.
Our Ruling
We will discuss the first two issues raised by petitioner as these are
interrelated and make up the main issue of the petition before us which is,
did the rehabilitation court sitting as such, act in excess of its authority or
jurisdiction when it enjoined herein petitioner from seeking the payment
of the concession fees from the banks that issued the Irrevocable Standby
Letter of Credit in its favor and for the account of respondent Maynilad?
The public respondent relied on Sec. 1, Rule 3 of the Interim Rules on
Corporate Rehabilitation to support its jurisdiction over the Irrevocable
Standby Letter of Credit and the banks that issued it. The section reads in
part "that jurisdiction over those affected by the proceedings is considered
acquired upon the publication of the notice of commencement of
proceedings in a newspaper of general circulation" and goes further to
define rehabilitation as an in rem proceeding. This provision is a logical
consequence of the in rem nature of the proceedings, where jurisdiction is
acquired by publication and where it is necessary that the assets of the
debtor come within the court's jurisdiction to secure the same for the
benefit of creditors. The reference to "all those affected by the
proceedings" covers creditors or such other persons or entities holding
assets belonging to the debtor under rehabilitation which should be
reflected in its audited financial statements. The banks do not hold any
assets of respondent Maynilad that would be material to the rehabilitation
proceedings nor is Maynilad liable to the banks at this point.
Respondent Maynilad's Financial Statement as of December 31, 2001
and 2002 do not show the Irrevocable Standby Letter of Credit as part of
its assets or liabilities, and by respondent Maynilad's own admission it is
not. In issuing the clarificatory order of November 27, 2003, enjoining
petitioner from claiming from an asset that did not belong to the debtor
and over which it did not acquire jurisdiction, the rehabilitation court acted
in excess of its jurisdiction.
Respondent Maynilad insists, however, that it is Sec. 6(b), Rule 4 of
the Interim Rules that supports its claim that the commencement of the
process to draw on the Standby Letter of Credit is an enforcement of claim
prohibited by and under the Interim Rules and the order of public
respondent.
Respondent Maynilad would persuade us that the above provision
justifies a leap to the conclusion that such an enforcement is prohibited by
said section because it is a "claim against the debtor, its guarantors and
sureties not solidarily liable with the debtor" and that there is nothing in
the Standby Letter of Credit nor in law nor in the nature of the obligation
that would show or require the obligation of the banks to be solidary with
the respondent Maynilad.
We disagree.
First, the claim is not one against the debtor but against an entity that
respondent Maynilad has procured to answer for its non-performance of
certain terms and conditions of the Concession Agreement, particularly the
payment of concession fees.
Secondly, Sec. 6(b) of Rule 4 of the Interim Rules does not enjoin the
enforcement of all claims against guarantors and sureties, but only those
claims against guarantors and sureties who are not solidarily liable with the
debtor. Respondent Maynilad's claim that the banks are not solidarily liable
with the debtor does not find support in jurisprudence.
We held in Feati Bank & Trust Company v. Court of Appeals 16 that 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. 17
Letters of credit were developed for the purpose of insuring to a
seller payment of a definite amount upon the presentation of
documents 18 and is thus a commitment by the issuer that the party in
whose favor it is issued and who can collect upon it will have his credit
against the applicant of the letter, duly paid in the amount specified in the
letter. 19 They are in effect absolute undertakings to pay the money
advanced or the amount for which credit is given on the faith of the
instrument. They are primary obligations and not accessory contracts and
while they are security arrangements, they are not converted thereby into
contracts of guaranty. 20 What distinguishes letters of credit from other
accessory contracts, is the engagement of the issuing bank to pay the seller
once the draft and other required shipping documents are presented to
it. 21 They are definite undertakings to pay at sight once the documents
stipulated therein are presented.
Letters of Credits have long been and are still governed by the
provisions of the Uniform Customs and Practice for Documentary Credits
of the International Chamber of Commerce. In the 1993 Revision it provides
in Art. 2 that "the expressions Documentary Credit(s) and Standby Letter(s)
of Credit mean any arrangement, however made or described, whereby a
bank acting at the request and on instructions of a customer or on its own
behalf is to make payment against stipulated document(s)" and Art. 9
thereof defines the liability of the issuing banks on an irrevocable letter of
credit as a "definite undertaking of the issuing bank, provided that the
stipulated documents are presented to the nominated bank or the issuing
bank and the terms and conditions of the Credit are complied with, to pay
at sight if the Credit provides for sight payment." 22
We have accepted, in Feati Bank and Trust Company v. Court of
Appeals 23 and Bank of America NT & SA v. Court of Appeals, 24 to the extent
that they are pertinent, the application in our jurisdiction of the
international credit regulatory set of rules known as the Uniform Customs
and Practice for Documentary Credits (U.C.P) issued by the International
Chamber of Commerce, which we said in Bank of the Philippine Islands v.
Nery 25 was justified under Art. 2 of the Code of Commerce, which states:
"Acts of commerce, whether those who
execute them be merchants or not, and whether
specified in this Code or not should be governed by
the provisions contained in it; in their absence, by
the usages of commerce generally observed in each
place; and in the absence of both rules, by those of
the civil law."
The prohibition under Sec. 6(b) of Rule 4 of the Interim Rules does
not apply to herein petitioner as the prohibition is on the enforcement of
claims against guarantors or sureties of the debtors whose obligations are
not solidary with the debtor. The participating banks' obligation 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 debtor's assets. These are the same characteristics of a
surety or solidary obligor.
Being solidary, the claims against them can be pursued separately
from and independently of the rehabilitation case, as held in Traders Royal
Bank v. Court of Appeals 26 and reiterated in Philippine Blooming Mills,
Inc. v. Court of Appeals, 27 where we said that property of the surety cannot
be taken into custody by the rehabilitation receiver (SEC) and said surety
can be sued separately to enforce his liability as surety for the debts or
obligations of the debtor. The debts or obligations for which a surety may
be liable include future debts, an amount which may not be known at the
time the surety is given.
The terms of the Irrevocable Standby Letter of Credit do not show
that the obligations of the banks are not solidary with those of respondent
Maynilad. On the contrary, it is issued at the request of and for the account
of Maynilad Water Services, Inc., in favor of
the Metropolitan Waterworks and Sewerage System, as a bond for the full
and prompt performance of the obligations by the concessionaire under
the Concession Agreement 28 and herein petitioner is authorized by the
banks to draw on it by the simple act of delivering to the agent a written
certification substantially in the form Annex "B" of the Letter of Credit. It
provides further in Sec. 6, that for as long as the Standby Letter of Credit is
valid and subsisting, the Banks shall honor any written Certification made
by MWSS in accordance with Sec. 2, of the Standby Letter of Credit
regardless of the date on which the event giving rise to such Written
Certification arose. 29
Taking into consideration our own rulings on the nature of letters of
credit and the customs and usage developed over the years in the banking
and commercial practice of letters of credit, we hold that except when a
letter of credit specifically stipulates otherwise, the obligation of the banks
issuing letters of credit are solidary with that of the person or entity
requesting for its issuance, the same being a direct, primary, absolute and
definite undertaking to pay the beneficiary upon the presentation of the set
of documents required therein.
The public respondent, therefore, exceeded his jurisdiction, in
holding that he was competent to act on the obligation of the banks under
the Letter of Credit under the argument that this was not a solidary
obligation with that of the debtor. Being a solidary obligation, the letter of
credit is excluded from the jurisdiction of the rehabilitation court and
therefore in enjoining petitioner from proceeding against the Standby
Letters of Credit to which it had a clear right under the law and the terms
of said Standby Letter of Credit, public respondent acted in excess of his
jurisdiction.
Additional Issues
We proceed to consider the other issues raised in the oral arguments
and included in the parties' memoranda:
1. Respondent Maynilad argues that petitioner had a plain, speedy and
adequate remedy under the Interim Rules itself which provides in Sec. 12,
Rule 4 that the court may on motion or motu proprio, terminate, modify or
set conditions for the continuance of the stay order or relieve a claim from
coverage thereof. We find, however, that the public respondent had already
accomplished this during the hearing set for the two Urgent Ex
Parte motions filed by respondent Maynilad on November 21 and 24,
2003, 30 where the parties including the creditors, Suez and Chinatrust
Commercial "presented their respective arguments." 31 The public
respondent then ruled, "after carefully considering/evaluating the import
of the arguments and documents referred to by Maynilad, MWSS and/or
the creditors Chinatrust Commercial Bank and Suez in relation to the
admissions, the pleadings, and/or pertinent portions of the records, this
court is of the considered and humble view that the issue must perforce be
resolved in favor of Maynilad." 32 Hence to pursue their opposition before
the same court would result in the presentation of the same arguments and
issues passed upon by public respondent.
Furthermore, Sec. 5, Rule 3 of the Interim Rules would preclude any
other effective remedy questioning the orders of the rehabilitation court
since they are immediately executory and a petition for review or an appeal
therefrom shall not stay the execution of the order unless restrained or
enjoined by the appellate court." In this situation, it had no other remedy
but to seek recourse to us through this petition for certiorari.
In Silvestre v. Torres and Oben, 33 we said that it is not enough that a
remedy is available to prevent a party from making use of the extraordinary
remedy of certiorari but that such remedy be an adequate remedy which is No costs.
equally beneficial, speedy and sufficient, not only a remedy which at some
SO ORDERED. AIaSTE

time in the future may offer relief but a remedy which will promptly relieve
the petitioner from the injurious acts of the lower tribunal. It is the
inadequacy — not the mere absence — of all other legal remedies and the
danger of failure of justice without the writ, that must usually determine
the propriety of certiorari. 34
2. Respondent Maynilad argues that by commencing the process for
payment under the Standby Letter of Credit, petitioner violated an
immediately executory order of the court and, therefore, comes to Court
with unclean hands and should therefore be denied any relief.
It is true that the stay order is immediately executory. It is also true,
however, that the Standby Letter of Credit and the banks that issued it were
not within the jurisdiction of the rehabilitation court. The call on the
Standby Letter of Credit, therefore, could not be considered a violation of
the Stay Order.
3. Respondent's claim that the filing of the petition pre-empts the
original jurisdiction of the lower court is without merit. The purpose of the
initial hearing is to determine whether the petition for rehabilitation has
merit or not. The propriety of the stay order as well as the clarificatory
order had already been passed upon in the hearing previously had for that
purpose. The determination of whether the public respondent was correct
in enjoining the petitioner from drawing on the Standby Letter of Credit
will have no bearing on the determination to be made by public respondent
whether the petition for rehabilitation has merit or not. Our decision on
the instant petition does not pre-empt the original jurisdiction of the
rehabilitation court.
WHEREFORE, the petition for certiorari is GRANTED. The Order of
November 27, 2003 of the Regional Trial Court of Quezon City, Branch 90,
is hereby declared NULL AND VOID and SET ASIDE. The status quo Order
herein previously issued is hereby LIFTED. In view of the urgency attending
this case, this decision is immediately executory.
 THIRD DIVISION
[G.R. No. 187922. September 21, 2016.]
MARPHIL EXPORT CORPORATION and
IRENEO LIM, petitioners, vs. ALLIED BANKING
CORPORATION substituted by PHILIPPINE
NATIONAL BANK, respondent.
DECISION
JARDELEZA, J : p
This is a petition 1 seeking to nullify the Court of
Appeals' (CA) January 12, 2009 Decision 2 and May 12, 2009
Resolution 3 in CA-G.R. CV No. 89481. The CA
modified 4 the April 23, 2007 Omnibus Decision 5 of
Branch 61 of the Regional Trial Court (RTC), Makati City in
the consolidated cases of petition for declaratory relief
filed by petitioner Marphil Export Corporation (Marphil)
against Allied Banking Corporation (Allied Bank), and the
complaint for collection of sum of money with application
for writ of attachment filed by Allied Bank against
Marphil's surety, petitioner Ireneo Lim (Lim). HTcADC
Facts
Marphil is a domestic company engaged in the
exportation of cuttlefish, cashew nuts and similar
agricultural products. 6 To finance its purchase and export
of these products, Allied Bank granted Marphil a credit line
from which Marphil availed of several loans evidenced by
promissory notes (PN). 7 These loans were in the nature of
advances to finance the exporter's working capital
requirements and export bills. 8 The loans were secured by
three (3) Continuing Guaranty or Continuing Surety
(CG/CS) Agreements 9 executed by Lim, Lim Shiao Tong
and Enrique Ching. 10 Apart from the CG/CS Agreements,
irrevocable letters of credits also served as collaterals for
the loans obtained to pay export bills. 11 In turn, Allied Bank
required Marphil, through its authorized signatories Lim
and Rebecca Lim So, to execute a Letter of
Agreement 12 where they undertake to reimburse Allied
Bank in the event the export bills/drafts covering the
letters of credit are refused by the drawee. Upon
negotiations of export bills/drafts that Allied Bank
purchases from Marphil, the amount of the face value of
the letters of credit is credited in favor of the latter. 13
The transaction involved in this petition is the
export of cashew nuts to Intan Trading Ltd. Hongkong
(Intan) in Hong Kong. Upon application of Intan, Nanyang
Commercial Bank (Nanyang Bank), a bank based in China,
issued irrevocable letters of credit. These were Letter of
Credit (L/C) No. 22518 and L/C No. 21970, with Marphil as
beneficiary and Allied Bank as correspondent
bank. 14 These covered two (2) separate purchase
contracts/orders for cashew nuts made by Intan.
The first order of cashew nuts was covered by L/C
No. 22518. After the first shipment was made, Marphil
presented export documents including drafts to Allied
Bank. The latter credited Marphil's credit line the peso
equivalent of the face value of L/C No. 22518 in the amount
of P1,986,702.70 and this amount was deducted from the
existing loans of Marphil. 15 There were no problems
encountered for the shipment covered by L/C No. 22518.
It was the second order covered by L/C No. 21970 that
encountered problems. CAIHTE
 When Intan placed a second order for cashew nuts,
Marphil availed additional loans in their credit line
evidenced by PN No. 0100-88-02463 16 (PN No. 2463) for
P500,000.00 and PN No. 0100-88-02730 17 (PN No. 2730)
for P500,000.00. Similar to the previous transaction, Intan
applied for and opened L/C No. 21970 with Nanyang Bank
in the amount of US$185,000.00, with Marphil as the
beneficiary and Allied Bank as correspondent bank. 18 After
receiving the export documents including the draft issued
by Marphil, Allied Bank credited Marphil in the amount of
P1,913,763.45, the peso value of the amount in the letter of
credit. 19
However, on July 2, 1988, Allied Bank informed
Marphil that it received a cable from Nanyang Bank noting
some discrepancies in the shipping documents. 20 On July
16, 1988, Allied Bank again informed Marphil that it
received another cable from Nanyang Bank still noting the
discrepancies and that Intan refused to accept the
discrepancies. 21 Consequently, Nanyang Bank refused to
reimburse Allied Bank the amount the latter had credited
in Marphil's credit line. In its debit memo, Allied Bank
informed Marphil of the dishonor of L/C No. 21970 and
that it was reversing the earlier credit entry of
P1,913,763.45. 22 Lim was made to sign a blank promissory
note, PN No. 0100-88-04202, 23 (PN No. 4202) on
September 9, 1988 to
cover for the amount. 24 This was later filled up by Allied
Bank in the amount of P1,505,391.36.
On March 6, 1990, Marphil filed a Complaint 25 for
declaratory relief and damages against Allied Bank
(Declaratory Relief Case) raffled to Branch 61 of RTC
Makati. 26 In its Complaint, Marphil asked the court to
declare PN No. 4202 void, to declare as fully paid its other
obligations to Allied Bank, and to award it actual, moral
and exemplary damages, and attorney's fees.27 Marphil
maintained that it had fully paid its account with Allied
Bank, and that PN No. 4202, which Lim executed on
September 9, 1988, was void for lack of consideration.
Marphil alleged that it was constrained to send back the
shipment to the Philippines thereby incurring expenses
and tremendous business losses. It attributed bad faith to
Allied Bank because the latter did nothing to protect its
interest; Allied Bank merely accepted Nanyang Bank's
position despite L/C No. 21970 being irrevocable, and
Allied Bank allegedly confirmed Nanyang Bank's
revocation. DETACa
On May 7, 1990, Allied Bank filed its Answer with
Compulsory Counterclaim and Petition for Writ of
Preliminary Attachment. 28 Allied Bank maintained that PN
No. 4202 was supported by consideration, and denied that
Marphil has fully paid its obligation to it. As counterclaim,
Allied bank sought to collect on three (3) promissory notes,
PN Nos. 2463, 2730 and 4202. 29
On September 14, 1990, Allied Bank filed a Complaint
with Petition for Writ of Preliminary
Attachment 30 (Collection Case) against Lim and Lim Shao
Tong which was raffled to Branch 145 of RTC Makati. Allied
Bank sued there as sureties under the CG/CS Agreements
for the loan obligations of Marphil under three (3)
promissory notes, PN Nos. 2463, 2730 and 4202, in the
total amount of P2,505,391,36. It also prayed for the
issuance of a writ of preliminary attachment on the
ground that Lim was guilty of fraud in contracting his
obligations.
On February 7, 1992, Lim filed his Answer 31 in the
Collection Case. He raised as defense that Marphil had
fully paid the loans covered by PN Nos. 2463, 2730, while
PN No. 4202 is null and void. 32 He likewise maintained he
could not be held personally liable for the CG/CS
Agreements because he could not remember signing
them. Lim claimed that the issuance of the writ of
preliminary attachment was improper because he never
had any preconceived intention not to pay his obligations
with the bank. He had been transacting with the bank for
six (6) years and the gross value of the thirty-two (32)
transactions between them amounted to US$640,188.51. 33
On March 15, 1994, Branch 145 of RTC Makati
granted ex parte the prayer for preliminary attachment in
the Collection Case. 34
On May 7, 1991, Allied Bank filed a Motion to
Consolidate/Be Accepted 35 with Branch 61 of RTC Makati,
which was granted by Order dated June 25, 1991. 36 The
two civil cases were jointly heard before Branch 61 of RTC
Makati.
On April 23, 2007, the RTC rendered the Omnibus
Decision. 37 The RTC granted Marphil's complaint for
declaratory relief, and declared PN No. 4202 void.
However, it held Marphil and/or Ireneo Lim jointly and
severally liable for any balance due on their obligation
under PN Nos. 2463 and 2730, and additionally for the
amount of P1,913,763.45 with interest rate fixed at 12%
per annum until fully paid. 38
On May 9, 2007, petitioners filed a Notice of
Appeal 39 with the RTC. Allied Bank did not appeal the RTC
decision. Records were then forwarded to the CA, which
began proceedings. 40 HEITAD
The CA rendered its Decision 41 on January 12, 2009
modifying the RTC decision. The CA declared PN Nos. 2463
and 2730 fully paid, but held petitioners liable for the
amount of P1,913,763.45, the amount equal to the face
value of L/C No. 21970. 42
The CA found that Allied Bank is not directly liable
for the P1,913,763.45 under L/C No. 21970 because it was
not a confirming bank and did not undertake to assume
the obligation of Nanyang Bank to Marphil as its own. At
most, it could only be a discounting bank which bought
drafts under the letter of credit. Following the ruling
in Bank of America, NT & SA v. Court of Appeals, 43 it held
that Allied Bank, as the negotiating bank, has the ordinary
right of recourse against the exporter in the event of
dishonor by the issuing bank. A negotiating bank has a
right of recourse against the issuing bank, and until
reimbursement is obtained, the drawer of the draft
continues to assume a contingent liability on the draft.
That there is no assumption of direct obligation is further
affirmed by the terms of the Letter Agreement. The CA
also declared PN Nos. 2463 and 2730 as fully paid. The CA
held that with these payments, the only obligation left of
Marphil was the amount of the reversed credit of
P1,913,763.45. On the writ of preliminary attachment, the
CA noted that petitioners did not file any motion to
discharge it on the ground of irregular issue. The CA found
that no forum shopping existed because the causes of
actions for declaratory relief and collection suit are
different. 44
In a Resolution 45 dated May 12, 2009, the CA denied
petitioners Motion for Partial Reconsideration 46 dated
January 22, 2009.
Hence, this petition.
 Meanwhile, Allied Bank and Philippine National Bank
(PNB) jointly filed a Motion for Substitution of Party with
Notice of Change of Address 47 on October 22, 2013
informing this Court that the Securities and Exchange
Commission approved a merger between Allied Bank and
PNB, with the latter as the surviving corporation. They
prayed that Allied Bank be dropped and substituted by
PNB as party respondent in this petition. This was granted
by this Court in a Resolution 48 dated December 4, 2013.
Issues
The issues are as follows:
I. Whether Allied Bank's debit memo on Marphil's
credit line in the amount of P1,913,763.45 is
valid.
II. Whether the RTC and CA created a new obligation
when it held Marphil liable for the amount of
P1,913,761.45.
III. Whether Allied Bank committed forum shopping
in filing the Collection Case.
IV. Whether the writ of preliminary attachment
should be dissolved.
Ruling
We partly grant the petition.
At the outset, Allied Bank did not appeal from the
decisions of the RTC and CA respecting the nullification of
PN No. 4202, and the extinguishment by payment of PN
Nos. 2730 and 2463. Allied Bank (now PNB) can thus no
longer seek their modification or reversal, but may only
oppose the arguments of petitioners on grounds
consistent with the judgment of the RTC and
CA. 49 Bearing this in mind, we proceed to dispose of the
issues.aDSIHc
I. Validity of the debit memo
a. Allied Bank as correspondent bank in L/C No. 21970
Both the RTC and CA found that Allied Bank is not a
confirming bank which undertakes Nanyang Bank's
obligation as issuing bank, but at most, buys the drafts
drawn by Marphil as exporter at a discount.
Marphil, however, argues that the RTC and CA erred
in ruling that Allied Bank is not a confirming bank. It insists
that Allied Bank as correspondent bank assumed the risk
when it confirmed L/C No. 21970. It invokes the ruling
in Feati Bank & Trust Company v. Court of Appeals 50 on the
rule of strict compliance in letters of credit stating that "[a]
correspondent bank which departs from what has been
stipulated under the letter of credit, as when it accepts a
faulty tender, acts on its own risks and it may not
thereafter be able to recover from the buyer or the issuing
bank . . . ." 51 Thus, Marphil claims that Allied Bank had no
authority to debit the amount equivalent to the face value
of L/C No. 21970 since the latter is directly liable for it.
We affirm the RTC and CA's findings that Allied Bank
did not act as confirming bank in L/C No. 21970.
As noted by the CA, Feati is not in all fours with this
case. The correspondent bank in that case refused to
negotiate the letter of credit precisely because of the
beneficiary's non-compliance with its terms. Here, it is
Nanyang Bank, the issuing bank, which refused to make
payment on L/C No. 21970 because there was no strict
compliance by Marphil. 52
 Further, while we said in Feati that a correspondent
bank may be held liable for accepting a faulty tender under
the rule of strict compliance, its liability is necessarily
defined by the role it assumed under the terms of the
letter of credit. In order to consider a correspondent bank
as a confirming bank, it must have assumed a direct
obligation to the seller as if it had issued the letter of credit
itself. 53 We said that "[i]f the [correspondent bank] was a
confirming bank, then a categorical declaration should
have been stated in the letter of credit that the
[correspondent bank] is to honor all drafts drawn in
conformity with the letter of credit." 54 Thus, if we were to
hold Allied Bank liable to Marphil (which would result in a
finding that the former's debit from the latter's account is
wrong) based on the rule of strict compliance, it must be
because Allied Bank acted as confirming bank under the
language of L/C No. 21970.
In finding that Allied Bank, as correspondent bank,
did not act as confirming bank, the CA reviewed the
instructions of Nanyang Bank to Allied Bank in L/C No.
21970. It found that based on the instructions, there is
nothing to support Marphil's argument that Allied Bank
undertook, as its own, Nanyang Bank's obligations in the
letter of credit:
In the case of [Bank of America], the
functions assumed by a correspondent bank are
classified according to the obligations taken up by
it. In the case of a notifying bank, the
correspondent bank assumes no liability except to
notify and/or transmit to the beneficiary the
existence of the L/C. A negotiating bank is a
correspondent bank which buys or discounts a
draft under the L/C. 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. A confirming bank is a correspondent bank
which assumes a direct obligation to the seller and
its liability is a primary one as if the correspondent
bank itself had issued the L/C.
In the instant case, the letter of Nanyang to
Allied provided the following instructions: 1) the
negotiating bank is kindly requested to forward all
documents to Nanyang in one lot; 2) in
reimbursement for the negotiation(s), Nanyang
shall remit cover to Allied upon receipt of
documents in compliance with the terms and
conditions of the credit; 3) the drafts drawn must
be marked "drawn under Nanyang Commercial
Bank"; and 4) to advise beneficiary.
From the above-instructions, it is clear that
Allied did not undertake to assume the obligation
of Nanyang to Marphil is its own, as if it had itself
issued the L/C. At most, it can only be a
discounting bank which bought the drafts under
the L/C. Following then the rules laid down in the
case of Bank of America, a negotiating bank has a
right of recourse against the issuing bank, and
until reimbursement is obtained, the drawer of the
draft continues to assume a contingent liability
thereon. . . . 55
ATICcS
In this regard, this issue of whether Allied Bank
confirmed L/C No. 21970 and assumed direct obligation
on it is a question of fact that was resolved by both RTC
and CA in the negative. This Court is not a trier of facts and
does not normally undertake the re-examination of the
evidence. 56 This is especially true where the trial court's
factual findings are adopted and affirmed by the
CA. 57 Factual findings of the trial court affirmed by the CA
are final and conclusive and may not be reviewed on
appeal. 58 Here, there is no reason to deviate from these
findings of the RTC and CA.
In any event, we find that Allied Bank may seek
reimbursement of the amount credited to Marphil's
account on an independent obligation it undertook under
the Letter Agreement.
b. Allied Bank's right to reimbursement under the
Letter Agreement
To recall, Marphil and Allied Bank executed the
Letter Agreement dated June 24, 1988 the subject of which
is the draft equivalent to the face value of L/C No. 21970.
In the Letter Agreement, Marphil expressly bound
itself to refund the amount paid by Allied Bank in
purchasing the export bill or draft, in case of its dishonor
by the drawee bank:
Purchase of the Draft shall be with recourse
to me/us in the event of non-payment for any
reason whatsoever. Notice of dishonor, non-
acceptance, non-payment, protest and
presentment for payment are hereby waived.
xxx xxx xxx
If, for any reason, my/our Draft is not
finally honored or retired by the drawee, I/we
hereby further undertake and bind
myself/ourselves to refund to you, on demand,
the full amount of this negotiation, together with
the corresponding interest thereon as well as your
or your correspondent's charges and expenses
thereon, if any; and to compensate you fully for
any damages that you might incur arising out of
any suit, action or proceedings, whether judicial
or extra-judicial that might be instituted by the
buyer or importer on the ground of lack of faithful
performance of the contract between said buyer
or importer and myself/ourselves. Likewise,
should my/our Draft be dishonored for any cause
whatsoever, I/we hereby authorize you, at your
discretion and without any responsibility on your
part, to sell, or cause to be sold, either publicly or
privately, the underlying goods, wherever they
may be found, and, from the proceeds thereof,
I/we hereby empower you to collect all expenses
incident thereof, together with your commission,
interest and other charges, as well as to reimburse
yourself therefrom . . . the full amount of this
negotiation, interest, charges and other expenses
thereon, returning to me/us only whatever
amount that may remain thereafter; and, should
there be any deficiency still in your favor,
notwithstanding the sale made as herein
authorized, I/we likewise bind myself/ourselves
to pay the said deficiency to you upon demand. 59
The case of Velasquez v. Solidbank Corporation 60 is
instructive as to the nature of obligations arising from this
form of undertaking. In that case, we ruled that the
obligation under a letter of undertaking, where the drawer
undertakes to pay the full amount of the draft in case of
dishonor, is independent from the liability under the sight
draft. 61 The letter of undertaking of this tenor is a
separate contract the consideration for which is the
promise to pay the bank the value of the sight draft if it
was dishonored for any reason. 62 The liability provided is
direct and primary, without need to establish collateral
facts such as the violation of the letter of credit connected
to it. 63
ETHIDa
Similarly, the Letter of Agreement is a contract
between Marphil and Allied Bank where the latter agreed
to purchase the draft and credit the former its value on the
undertaking that Allied Bank will be reimbursed in case the
draft is dishonored. This obligation is direct, and is
independent, not only from the obligation under the draft,
but also from the obligation under L/C No. 2 1970. In this
connection, the CA is incorrect to say that the Letter
Agreement bolsters the bank's claim that it did not
undertake direct obligation under the letter of credit. The
Letter Agreement simply creates a separate obligation on
Marphil's part to refund the amount of the proceeds, in
case of dishonor. 64 As an independent obligation, Marphil
is bound to fulfill this obligation to reimburse Allied Bank.
However, a conflict arose because instead of waiting
for Marphil's own initiative to return the amount, Allied
Bank on its own debited from the former's credit line.
c. Allied Bank's right to debit Marphil's account
We now proceed to determine whether Allied Bank
may unilaterally debit the amount it credited to Marphil's
account.
In the case of Associated Bank v. Tan, 65 we upheld
the right of a collecting bank to debit a client's account for
the value of a dishonored check it previously credited by
virtue of the principle of legal compensation. Since the
relationship between banks and depositors has been held
to be that of creditor and debtor in a simple loan, legal
compensation may take place when the conditions in
Article 1279 of the Civil Code are present: (1) that each one
of the obligors be bound principally, and that he be at the
same time a principal creditor of the other; (2) that both
debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same
quality if the latter has been stated; (3) that the two debts
be due; (4) that they be liquidated and demandable; and (5)
that over neither of them there be any retention or
controversy, commenced by third persons and
communicated in due time to the debtor. 66
In this case, when Allied Bank credited the amount
of P1,913,763.45 to Marphil's account, it became the debtor
of Marphil. However, once Nanyang Bank dishonored the
export documents and draft for L/C No. 21970, Marphil
became the debtor of Allied Bank for the amount by virtue
of its obligation to reimburse the bank under the Letter
Agreement. This obligation consisting of sum of money
became demandable upon notice of the dishonor by
Nanyang Bank. Thus, legal compensation may take place
between the two debts.
In Associated Bank, we nevertheless emphasized
that while the bank has the right to set off, the exercise of
such right must be consistent with the required degree of
diligence from banks, i.e., highest degree of care. Thus, the
question that needs to be resolved now is whether Allied
Bank properly exercised its right to set off. 67
We rule that Allied Bank properly exercised its right
to set off. Firstly, having signed the Letter Agreement,
Marphil expressly undertook that in case of dishonor of
the draft for the letter of the credit, it will refund to Allied
Bank whatever the latter has credited in its favor. This
places Marphil on its guard that the dishonor will create
an obligation to refund the amount credited. Secondly,
prior to debiting the amount, Allied Bank informed Marphil
twice of Nanyang Bank's refusal to honor the tender of
documents on L/C No. 21970. Thirdly, it immediately
informed Marphil that it was debiting the amount of the
dishonored draft from the credit line. TIADCc
Most importantly, the debiting of the account was
not the proximate cause of the loss to Marphil brought
about by the reshipment of goods back to Manila. The
proximate cause of the loss is the subsequent dishonor of
the documents by Nanyang Bank, which came before the
debiting of the account. The P1,913,763.45 subject of the
debit memo was already the costs incurred in relation to
the financing and shipping of the goods to Hong Kong, and
do not refer to the loss incurred when the goods were
shipped back to Manila. Thus, the debiting of Marphil's
account did not result in additional losses for Marphil.
In sum, we affirm that Allied Bank is not a confirming
bank under L/C No. 21970. In any case, whether Allied
Bank is directly liable as confirming bank will not affect
Marphil's obligation to reimburse Allied Bank the amount
of P1,913,763.45 because its liability to refund the amount
arose under an independent contract, i.e. the Letter
Agreement. And while Allied Bank is the debtor of Marphil
for the amount it credited under the draft, the obligation
under the Letter Agreement made Allied Bank the creditor
of Marphil for the same amount. Being debtor and creditor
of each other, Allied Bank was entitled to legal
compensation by debiting the amount, which did not
result in any loss to Marphil.
II. Obligation of P1,913,763.45 to Allied Bank
Marphil next argues that the RTC and CA
erroneously held it liable to Allied for P1,913,763.45 as a
new obligation.
We rule that there is no new obligation created
when both the RTC and CA held petitioners liable for the
P1,913,763.45. This was a prior and existing obligation of
Marphil separate from the amount covered by the draft
under L/C No. 21970. In filing the Declaratory Relief Case,
Marphil asked the court not only to determine the status
of its obligations evidenced by PN Nos. 2463, 2730 and
4202, but also to determine the status of its existing loans
with Allied Bank, regardless of the counterclaim of the
latter.
To recall, the arrangement between Marphil and
Allied Bank is that advances were made by the bank in the
form of loans to finance the exportation business of
Marphil. When Allied Bank purchases the drafts for the
letters of credit from Marphil, it credits the amount to the
latter's credit line and deducts from the total amount of
Marphil's existing loans from Allied Bank. This is what
Allied Bank did in this case; it credited to Marphil's account
the amount of P1,913,763.45 upon purchase of the draft.
However, when L/C No. 21970 was dishonored by
Nanyang Bank, it reversed the credit memo thereby
leaving the parties in their situation prior to the credit
memo — that Marphil has existing loan obligations arising
from the advances made by Allied Bank. Simply put,
Marphil is liable for the amount of P1,913,763.45 because
this is the only amount not proven to be paid in the many
loans obtained by Marphil in the credit line.
The CA imposed the legal interest rate of twelve
percent (12%) on this loan obligation. Notably, the CA made
no factual determination that the amount of P1,913,763.45
was subject to any stipulated interest between the parties.
Likewise, Allied Bank neither claimed for the application of
a stipulated interest nor questioned the imposition of legal
interest on the loan, as it no longer appealed the decision.
Considering this, we are constrained to uphold that the
amount of P1,913,763.45, as a loan obligation, is only
subject to the legal interest applicable as of the time of this
decision. This is in line with our ruling in Nacar v. Gallery
Frames 68 that in the absence of a stipulated interest, a
loan obligation shall earn legal interest from the time of
default, i.e., from judicial or extrajudicial demand. 69
We, however, modify the rate of legal interest
imposed by the CA also in conformity with Nacar. The
amount of P1,913,763.45 shall earn legal interest at the rate
of six percent (6%) per annum computed from the time of
judicial demand, i.e. from the date of the filing of the
counterclaim in the Declaratory Relief Case on May 7,
1990, until the date of finality of this judgment. The total
amount shall thereafter earn interest at the rate of six
percent (6%) per annum from such finality of judgment
until its satisfaction. 70
cSEDTC
III. Forum Shopping
Marphil argues that in determining that Allied Bank
committed forum shopping upon filing the Collection
Case, the RTC and CA should have considered the
counterclaim filed in the Declaratory Relief Case, and not
the main petition itself. Marphil contends that Allied Bank
is collecting on the same three promissory notes in its
counterclaim in the two cases.
Forum shopping exists "when a party repetitively
avails of several judicial remedies in different courts,
simultaneously or successively, all substantially founded
on the same transactions and the same essential facts and
circumstances, and all raising substantially the same
issues either pending in or already resolved adversely by
some other court." 71 Forum shopping is proscribed by the
rules because of the vexation caused to the courts and
parties-litigants by the filing of similar cases to claim the
same reliefs. 72 The rule against forum shopping aims to
avoid the grave evil that may result in the rendition by two
competent tribunals of two separate and contradictory
decisions. 73 Thus, any violation of the rule against forum
shopping results in the dismissal of a case, or can result in
holding of direct contempt against the actor. 74
There is forum shopping when the elements of litis
pendentia are present, or when a final judgment in one
case amounts to res judicata in the other. 75 It must be
shown that the following elements are present: (a) identity
of parties, or at least such parties representing the same
interests in both actions; (b) identity of rights asserted and
reliefs prayed for, the relief being founded on the same
facts; and (c) the identity of the two preceding particulars,
such that any judgment rendered in the other action will,
regardless of which party is successful, amounts to res
judicata in the action under consideration. 76 AIDSTE
We rule that there is no forum shopping, albeit for a
reason different from that explained by the CA.
The CA concluded that there is no forum shopping
because the cases involve different causes of action: the
first case is a petition for declaratory relief while the
second case is one of collection of sum of money. We find
this analysis too sweeping and erroneous. The CA failed to
take into account that it was Allied Bank who is being
charged with violating the rule on forum shopping. As
such, the cause of action that should have been considered
is the counterclaim of Allied Bank in the Declaratory Relief
Case, which is essentially a collection suit against the
principal debtor Marphil. Subsequently, it also filed
another Collection Case seeking to collect also on the
surety Lim under the same three (3) promissory notes.
These cases are the actions that the CA should have
considered in deciding whether Allied Bank committed
forum shopping.
We rule that Allied Bank did not commit forum
shopping when it initiated the Collection Case against Lim
despite the pendency of the counterclaim in the
Declaratory Relief Case, because there is no identity of
parties and cause of action.
In Gilat Satellite Networks, Ltd. v. United Coconut
Planters Bank General Insurance Co., Inc., 77 we explained
that while a surety contract is merely ancillary to a
principal obligation, the surety's liability is direct, primary
and absolute. The surety's obligation is joint and solidary
with that of the principal, and he becomes liable for the
debt and duty of the principal, even without possessing a
direct or personal interest in the principal obligation. As
such, a surety may be sued separately or together with
principal. 78 We emphasized this in Ong v. Philippine
Commercial International Bank 79 where we held that the
right to collect payment from the surety exists
independently of its right to proceed directly against the
principal debtor. 80 In fact, the creditor bank may go
against the surety alone without prior demand for
payment on the principal debtor. 81
SDAaTC
Here, the parties in the counterclaim in the
Declaratory Relief Case are Allied Bank, as creditor, and
Marphil, as principal debtor. On the other hand, the
parties in the Collection Case are Allied Bank, as creditor,
and Lim, as surety. There is no identity of parties. Also, the
causes of action pleaded are different because the
counterclaim in the Declaratory Relief Case involves
collection on the loan obligations, while Allied Bank in its
complaint in the Collection Case seeks to collect on the
surety obligation of Lim under the CG/CS Agreements.
Another reason why forum shopping does not obtain here
is the circumstance that the two cases were subsequently
consolidated, jointly heard, and a single decision was
rendered. Thus, the evil that the rule against forum
shopping avoids, and the vexation on the court and
parties-litigant, are wanting.
IV. Validity of the writ of preliminary attachment
In its application for a writ of preliminary
attachment in the Collection Case against the surety Lim,
Allied Bank alleged:
25. Defendants in conspiracy with Marphil and with
one another, committed fraud in
contracting the obligations upon which the
first, second and third causes of action are
brought (Sec. 1, par. (d) Rule 57, Rules of
Court) when:
a.) There is a preconceived intention not to
pay their obligations as further
manifested by the premature and
unjust filing of a complaint by Marphil
against the plaintiff in Civil Case No.
90-640 before RTC, Makati, Branch 61;
b.) To induce plaintiff to grant the credit
accommodation, defendants and
Marphil represented to the plaintiff
that they would present the proper
and sufficient documents to the
issuing bank when in truth and in fact,
there were discrepancies noted in the
 documents presented to the issuing
bank by Marphil.
c.) Further, defendants and Marphil
committed misrepresentation in
shipping the cashew nuts at a volume
less than that which was required by
the foreign buyer. 82 (Emphasis
supplied.)
Subsequently, Branch 145 of RTC Makati issued the
writ of preliminary attachment ex parte. When the case
reached it, the CA summarily disposed of the issue of the
propriety of the writ by stating that petitioners did not file
any motion to discharge. However, the records show that
Lim filed his Motion to Discharge Attachment 83 dated
May 20, 1994 before Branch 61 of RTC Makati where Lim
raised that no ground exists for the writ of attachment,
making it irregularly and improperly issued.
We grant the petition as to the dissolution of the
writ of preliminary attachment.
A writ of preliminary attachment is "a provisional
remedy issued upon order of the court where an action is
pending to be levied upon the property or properties of
the defendant therein, the same to be held thereafter by
the sheriff as security for the satisfaction of whatever
judgment might be secured in said action by the attaching
creditor against the defendant." 84 Section 1, Rule 57 of
the Revised Rules of Court provides for the grounds upon
which the writ may issue. For this case, it is grounded
under Section 1(d) of Rule 57 of the Revised Rules of
Court: AaCTcI
Sec. 1. Grounds upon which attachment may
issue. — At the commencement of the action or at
any time before entry of judgment, a plaintiff or
any proper party may have the property of the
adverse party attached as security for the
satisfaction of any judgment that may be
recovered in the following cases:
xxx xxx xxx
(d) In an action against a party who has
been guilty of a fraud in contracting the debt or
incurring the obligation upon which the action is
brought, or in the performance thereof;
xxx xxx xxx
Once issued, a writ of attachment may be dissolved
or discharged on the following grounds: (a) the debtor has
posted a counter-bond or has made the requisite cash
deposit; (b) the attachment was improperly or irregularly
issued as where there is no ground for attachment, or the
affidavit and/or bond filed therefor are defective or
insufficient: (c) the attachment is excessive, but the
discharge shall be limited to the excess; (d) the property
attachment is exempt from preliminary attachment; or (e)
the judgment is rendered against the attaching creditor. 85
In Ng Wee v. Tankiansee, 86 we explained that to
justify the attachment of the debtor's property under
Section 1 (d) of Rule 57 of the Rules of Court, the applicant
must show that in incurring the obligation sued upon,
fraud must be the reason which induced the other party
into giving its consent. In addition, the particular acts
constituting the fraud imputed to the defendant must be
alleged with specificity. We held:
In the case at bench, the basis of
petitioner's application for the issuance of the writ
of preliminary attachment against the properties
of respondent is Section 1(d) of Rule 57 of the Rules inferred from the circumstances
of Court which pertinently reads: attendant in each case." acEHCD

xxx xxx xxx In the instant case, petitioner's October 12,

2000 Affidavit is bereft of any factual statement
For a writ of attachment to issue under this
that respondent committed a fraud. The affidavit
rule, the applicant must sufficiently show the
narrated only the alleged fraudulent transaction
factual circumstances of the alleged fraud
between Wincorp and Virata and/or Power
because fraudulent intent cannot be inferred from
Merge, which, by the way, explains why this Court,
the debtor's mere non-payment of the debt or
in G.R. No. 162928, affirmed the writ of attachment
failure to comply with his obligation. The
issued against the latter. As to the participation of
applicant must then be able to demonstrate that
respondent in the said transaction, the affidavit
the debtor has intended to defraud the creditor.
merely states that respondent, an officer and
In Liberty Insurance Corporation v. Court of
director of Wincorp, connived with the other
Appeals, we explained as follows:
defendants in the civil case to defraud petitioner
"To sustain an attachment on of his money placements. No other factual
this ground, it must be shown that averment or circumstance details how
the debtor in contracting the debt or respondent committed a fraud or how he
incurring the obligation intended to connived with the other defendants to commit a
defraud the creditor. The fraud must fraud in the transaction sued upon. In other
relate to the execution of the words, petitioner has not shown any specific act
agreement and must have been the or deed to support the allegation that respondent
reason which induced the other is guilty of fraud.
party into giving consent which he
The affidavit, being the foundation of the
would not have otherwise given. To
writ, must contain such particulars as to how the
constitute a ground for attachment
fraud imputed to respondent was committed for
in Section 1 (d), Rule 57 of the Rules of
the court to decide whether or not to issue the
Court, fraud should be committed
writ. Absent any statement of other factual
upon contracting the obligation sued
circumstances to show that respondent, at the
upon. A debt is fraudulently
time of contracting the obligation, had a
contracted if at the time of
preconceived plan or intention not to pay, or
contracting it the debtor has a
preconceived plan or intention not without any showing of how respondent
committed the alleged fraud, the general
to pay, as it is in this case. Fraud is a
averment in the affidavit that respondent is an
state of mind and need not be proved
officer and director of Wincorp who allegedly
by direct evidence but may be
connived with the other defendants to commit a
 fraud, is insufficient to support the issuance of a
writ of preliminary attachment. In the application
for the writ under the said ground, compelling is
the need to give a hint about what constituted the
fraud and how it was perpetrated because
established is the rule that fraud is never
presumed. Verily, the mere fact that respondent is
an officer and director of the company does not
necessarily give rise to the inference that he
committed a fraud or that he connived with the
other defendants to commit a fraud. While under
certain circumstances, courts may treat a
corporation as a mere aggroupment of persons, to
whom liability will directly attach, this is only done
when the wrongdoing has been clearly and
convincingly established. 87 (Citations omitted.)
We also reiterated in Ng Wee that the rules on the
issuance of the writ of preliminary attachment as a
provisional remedy are strictly construed against the
applicant because it exposes the debtor to humiliation and
annoyance. 88 The applicant must show that all requisites
are present. 89 Otherwise, if issued on false or insufficient
allegations, the court acts in excess of its jurisdiction
which must be corrected. 90 EcTCAD
In this case, the writ of preliminary attachment was
improperly or irregularly issued because there is no
ground for the attachment.
To begin with, Allied Bank filed the application for
the writ of preliminary attachment in the Collection Case
against Lim as surety. However, the allegations of fraud
refer to the execution of the promissory notes, and not on
the surety agreement. The application was bereft of any
allegation as to Lim's participation in the alleged
conspiracy of fraud. Also, the writ of preliminary
attachment was granted in the Collection Case against Lim
as surety, yet there was no allegation on Lim's fraudulent
intention in incurring its obligation under the CG/CS
Agreements. It cannot be inferred that Lim had, at the time
of contracting the obligation, the preconceived intention
to renege on his obligation under the CG/CS Agreements.
Continuing guaranty and surety agreements are normally
required by a bank or financing company anticipating to
enter into a series of credit transactions with a particular
principal debtor. 91 This avoids a need to execute a
separate surety contract or bond for each financing or
credit accommodation extended to the principal
debtor. 92 Here, the CG/CS Agreements were executed
prior to the issuance of L/C No. 21970, and were in force
during other transactions including the one involving L/C
No. 22518 which encountered no problem. Thus, this
transaction cannot be singled out to justify that the surety
agreement has been contracted through fraud.
Moreover, the filing of the Declaratory Relief Case
cannot be evidence of a preconceived intention not to pay
the surety's obligation because it was filed by Marphil, and
not Lim. In any case, the filing of the case is a legitimate
means resorted to by Marphil in seeking to clarify its
existing obligations with Allied Bank. If its intention was to
renege on its obligations, it would not have submitted
itself to the jurisdiction of the court where it can be
ordered to pay any existing obligations. The allegation that
petitioners made representations to induce it to grant
them a credit line is belied by the fact that it is only in the
transaction involving L/C No. 21970 where Allied Bank
encountered problems, because of Nanyang Bank's
dishonor of the draft and documents. Also, the allegation
that petitioners committed misrepresentation in shipping 3.Id. at 53-55.
the cashew nuts at a volume less than that which was 4.Id. at 50. The fallo of the CA Decision reads:
required by the foreign buyer, relates to the sale between
Marphil and Intan, and not to the loan between Marphil WHEREFORE, the foregoing considered, the appeal is
and Allied Bank. hereby PARTLY GRANTED. The assailed decision
dated 23 April 2007 is hereby MODIFIED declaring
From the foregoing, Allied Bank was not able to appellants liable to Allied in the amount of
sufficiently establish the factual circumstances of the [P]1,913,763.45 with interest fixed at the legal rate of
alleged fraud in contracting the obligation. Thus, there 12% per annum from the time of the filing of the
being no ground for its issuance, the writ of preliminary collection suit until the same is fully paid. The
attachment should be dissolved. obligations of appellants under promissory notes Nos.
WHEREFORE, the petition for review 2463 and 2730 are hereby declared fully paid. The
assailed decision is AFFIRMED in all other aspects.
on certiorari is PARTLY GRANTED. The January 12, 2009
Decision and May 12, 2009 Resolution of the Court of No costs.
Appeals are MODIFIED. Marphil Export Corporation and
SO ORDERED.
Ireneo Lim are ordered to pay jointly and severally Allied
Banking Corporation (now Philippine National Bank) the
principal amount of P1,913,763.45, with interest at the rate
of six percent (6%) per annum computed from May 7, 1990,
until the date of finality of this judgment. The total amount
shall thereafter earn interest at the rate of six percent (6%)
per annum from the finality of judgment until its
satisfaction. Let the writ of preliminary attachment issued
against Ireneo Lim's property be DISSOLVED. SDHTEC

SO ORDERED.
Velasco, Jr., Peralta, Perez and Reyes, JJ., concur.
Footnotes

1.Rollo, pp. 8-32.

2.Id. at 34-51; penned by Associate Justice Josefina Guevara-
Salonga and concurred in by Associate Justices Isaias P.
Dicdican and Marlene Gonzales-Sison.
 SECOND DIVISION
[G.R. No. 146717. November 22, 2004.]
TRANSFIELD PHILIPPINES,
INC., petitioner, vs. LUZON HYDRO
CORPORATION, AUSTRALIA and NEW
ZEALAND BANKING GROUP LIMITED and
SECURITY BANK
CORPORATION, respondents.
DECISION
TINGA, J :
p
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.
Petitioner has appealed from the Decision 1 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 2001. 2
On 26 March 1997, petitioner and respondent Luzon Hydro
Corporation (hereinafter, LHC) entered into a Turnkey Contract 3 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 provinces of Benguet and Ilocos Sur (hereinafter, the Project).
Petitioner was given the sole responsibility for the design, construction,
commissioning, testing and completion of the Project. 4
The Turnkey Contract provides that: (1) the target completion date of
the Project shall be on 1 June 2000, or such later date as may be agreed
upon between petitioner and respondent LHC or otherwise determined in
accordance with the Turnkey Contract; and (2) petitioner is entitled to
claim extensions of time (EOT) for reasons enumerated in the Turnkey
Contract, among which are variations, force majeure, and delays caused by
LHC itself. 5 Further, in case of dispute, the parties are bound to settle their
differences through mediation, conciliation and such other means
enumerated under Clause 20.3 of the Turnkey Contract. 6
To secure performance of petitioner's obligation on or before the
target completion date, or such time for completion as may be determined
by the parties' agreement, petitioner opened in favor of LHC two (2)
standby letters of credit both dated 20 March 2000 (hereinafter referred to
as "the Securities"), to wit: Standby Letter of Credit No. E001126/8400 with
the local branch of respondent Australia and New Zealand Banking Group
Limited (ANZ Bank) 7 and Standby Letter of Credit No. IBDIDSB-00/4 with
respondent Security Bank Corporation (SBC) 8 each in the amount of
US$8,988,907.00. 9
In the course of the construction of the project, petitioner sought
various EOT to complete the Project. The extensions were requested
allegedly due to several factors which prevented the completion of the
Project on target date, such as force majeure occasioned by typhoon Zeb,
barricades and demonstrations. LHC denied the requests, however. This
gave rise to a series of legal actions between the parties which culminated
in the instant petition.
The first of the actions was a Request for Arbitration which LHC filed
before the Construction Industry Arbitration Commission (CIAC) on 1 June
1999. 10 This was followed by another Request for Arbitration, this time filed
by petitioner before the International Chamber of Commerce (ICC) 11 on 3
November 2000. In both arbitration proceedings, the common issues
presented were: [1] whether typhoon Zeb and any of its associated events
constituted force majeure to justify the extension of time sought by
petitioner; and [2] whether LHC had the right to terminate the Turnkey
Contract for failure of petitioner to complete the Project on target date. CcHDSA
 Meanwhile, foreseeing that LHC would call on the Securities
pursuant to the pertinent provisions of the Turnkey Contract, 12 petitioner
— in two separate letters 13 both dated 10 August 2000 — advised
respondent banks of the arbitration proceedings already pending before
the CIAC and ICC in connection with its alleged default in the performance
of its obligations. Asserting that LHC had no right to call on the Securities
until the resolution of disputes before the arbitral tribunals, petitioner
warned respondent banks that any transfer, release, or disposition of the
Securities in favor of LHC or any person claiming under LHC would
constrain it to hold respondent banks liable for liquidated damages.
As petitioner had anticipated, on 27 June 2000, LHC sent notice to
petitioner that pursuant to Clause 8.2 14 of the Turnkey Contract, it failed
to comply with its obligation to complete the Project. Despite the letters of
petitioner, however, both banks informed petitioner that they would pay
on the Securities if and when LHC calls on them. 15
LHC asserted that additional extension of time would not be
warranted; accordingly it declared petitioner in default/delay in the
performance of its obligations under the Turnkey Contract and demanded
from petitioner the payment of US$75,000.00 for each day of delay
beginning 28 June 2000 until actual completion of the Project pursuant to
Clause 8.7.1 of the Turnkey Contract. At the same time, LHC served notice
that it would call on the securities for the payment of liquidated damages
for the delay. 16
On 5 November 2000, petitioner as plaintiff filed a Complaint for
Injunction, with prayer for temporary restraining order and writ of
preliminary injunction, against herein respondents as defendants before
the Regional Trial Court (RTC) of Makati. 17 Petitioner sought to restrain
respondent LHC from calling on the Securities and respondent banks from
transferring, paying on, or in any manner disposing of the Securities or any
renewals or substitutes thereof. The RTC issued a seventy-two (72)-hour
temporary restraining order on the same day. The case was docketed as
Civil Case No. 00-1312 and raffled to Branch 148 of the RTC of Makati.
After appropriate proceedings, the trial court issued an Order on 9
November 2000, extending the temporary restraining order for a period of
seventeen (17) days or until 26 November 2000. 18
The RTC, in its Order 19 dated 24 November 2000, denied petitioner's
application for a writ of preliminary injunction. It ruled that petitioner had
no legal right and suffered no irreparable injury to justify the issuance of
the writ. Employing the principle of "independent contract" in letters of
credit, the trial court ruled that LHC should be allowed to draw on the
Securities for liquidated damages. It debunked petitioner's contention that
the principle of "independent contract" could be invoked only by
respondent banks since according to it respondent LHC is the ultimate
beneficiary of the Securities. The trial court further ruled that the banks
were mere custodians of the funds and as such they were obligated to
transfer the same to the beneficiary for as long as the latter could submit
the required certification of its claims.
Dissatisfied with the trial court's 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 temporary restraining order and writ of preliminary
injunction. 20 Petitioner submitted to the appellate court that LHC's 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 petitioner's 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
declarant's capacity or entitlement to so certify.
 In its Resolution dated 28 November 2000, the Court of Appeals WHETHER ANZ BANK AND SECURITY BANK ARE
issued a temporary restraining order, enjoining LHC from calling on the JUSTIFIED IN RELEASING THE AMOUNTS DUE
Securities or any renewals or substitutes thereof and ordering respondent UNDER THE SECURITIES DESPITE BEING
banks to cease and desist from transferring, paying or in any manner NOTIFIED THAT LHC'S CALL THEREON IS
disposing of the Securities. WRONGFUL.

However, the appellate court failed to act on the application for WHETHER OR NOT PETITIONER WILL SUFFER
preliminary injunction until the temporary restraining order expired on 27 GRAVE AND IRREPARABLE DAMAGE IN THE EVENT
THAT:
January 2001. Immediately thereafter, representatives of LHC trooped to
ANZ Bank and withdrew the total amount of US$4,950,000.00, thereby A. LHC IS ALLOWED TO CALL AND DRAW
reducing the balance in ANZ Bank to US$1,852,814.00. ON, AND ANZ BANK AND SECURITY
BANK ARE ALLOWED TO RELEASE,
On 2 February 2001, the appellate court dismissed the petition
THE REMAINING BALANCE OF THE
for certiorari. The appellate court expressed conformity with the trial SECURITIES PRIOR TO THE
court's decision that LHC could call on the Securities pursuant to the first RESOLUTION OF THE DISPUTES
principle in credit law that the credit itself is independent of the underlying BETWEEN PETITIONER AND LHC.
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. B. LHC DOES NOT RETURN THE AMOUNTS
Further, the appellate court held that even assuming that the trial court's IT HAD WRONGFULLY DRAWN FROM
THE SECURITIES. 21
denial of petitioner's application for a writ of preliminary injunction was
erroneous, it constituted only an error of judgment which is not correctible Petitioner contends that the courts below improperly relied on the
by certiorari, unlike error of jurisdiction. "independence principle" on letters of credit when this case falls squarely
within the "fraud exception rule." Respondent LHC deliberately
Undaunted, petitioner filed the instant Petition for Review raising the
misrepresented the supposed existence of delay despite its knowledge that
following issues for resolution:
the issue was still pending arbitration, petitioner continues.
WHETHER THE "INDEPENDENCE PRINCIPLE" ON
LETTERS OF CREDIT MAY BE INVOKED BY A
Petitioner asserts that LHC should be ordered to return the proceeds
BENEFICIARY THEREOF WHERE THE of the Securities pursuant to the principle against unjust enrichment and
BENEFICIARY'S CALL THEREON IS WRONGFUL OR that, under the premises, injunction was the appropriate remedy
FRAUDULENT. obtainable from the competent local courts.

WHETHER LHC HAS THE RIGHT TO CALL AND
DRAW ON THE SECURITIES BEFORE THE
RESOLUTION OF PETITIONER'S AND LHC'S
DISPUTES BY THE APPROPRIATE TRIBUNAL.
On 25 August 2003, petitioner filed a Supplement to the
Petition 22 and Supplemental Memorandum, 23 alleging that in the course of
the proceedings in the ICC Arbitration, a number of documentary and
HAaScT testimonial evidence came out through the use of different modes of
discovery available in the ICC Arbitration. It contends that after the filing
of the petition facts and admissions were discovered which demonstrate
that LHC knowingly misrepresented that petitioner had incurred delays —
notwithstanding its knowledge and admission that delays were excused
under the Turnkey Contract — to be able to draw against the Securities.
Reiterating that fraud constitutes an exception to the independence
principle, petitioner urges that this warrants a ruling from this Court that
the call on the Securities was wrongful, as well as contrary to law and basic
principles of equity. It avers that it would suffer grave irreparable damage
if LHC would be allowed to use the proceeds of the Securities and not
ordered to return the amounts it had wrongfully drawn thereon.
In its Manifestationdated 8 September 2003, 24 LHC contends that
the supplemental pleadings filed by petitioner present erroneous and
misleading information which would change petitioner's theory on appeal.
In yet another Manifestation dated 12 April 2004, 25 petitioner alleges
that on 18 February 2004, the ICC handed down its Third Partial Award,
declaring that LHC wrongfully drew upon the Securities and that petitioner
was entitled to the return of the sums wrongfully taken by LHC for
liquidated damages.
LHC filed a Counter-Manifestation dated 29 June 2004, 26 stating that
petitioner's Manifestation dated 12 April 2004 enlarges the scope of
its Petition for Review of the 31 January 2001 Decision of the Court of
Appeals. LHC notes that the Petition for Review essentially dealt only with
the issue of whether injunction could issue to restrain the beneficiary of an
irrevocable letter of credit from drawing thereon. It adds that petitioner
has filed two other proceedings, to wit: (1) ICC Case No. 11264/TE/MW,
entitled "Transfield Philippines Inc. v. Luzon Hydro Corporation," in which
the parties made claims and counterclaims arising from petitioner's
performance/misperformance of its obligations as contractor for LHC; and
(2) Civil Case No. 04-332, entitled "Transfield Philippines, Inc. v. Luzon
Hydro Corporation" before Branch 56 of the RTC of Makati, which is an
action to enforce and obtain execution of the ICC's partial award
mentioned in petitioner's Manifestation of 12 April 2004.
In its Comment to petitioner's Motion for Leave to File Addendum to
Petitioner's Memorandum, LHC stresses that the question of whether the
funds it drew on the subject letters of credit should be returned is outside
the issue in this appeal. At any rate, LHC adds that the action to enforce the
ICC's partial award is now fully within the Makati RTC's jurisdiction in Civil
Case No. 04-332. LHC asserts that petitioner is engaged in forum-shopping
by keeping this appeal and at the same time seeking the suit for
enforcement of the arbitral award before the Makati court.
Respondent SBC in its Memorandum, dated 10 March
2003 27 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 latter's 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 dated
13 March 2003 28 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 LHC's 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, petitioner's 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 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. 29
In commercial transactions, a letter of credit is a financial device
developed by merchants as a convenient and relatively safe mode of dealing
with sales of goods to satisfy the seemingly irreconcilable interests of a
seller, who refuses to part with his goods before he is paid, and a buyer,
who wants to have control of the goods before paying. 30 The use of credits
in commercial transactions serves to reduce the risk of nonpayment of the
purchase price under the contract for the sale of goods. However, credits
are also used in non-sale settings where they serve to reduce the risk of
nonperformance. Generally, credits in the non-sale settings have come to
be known as standby credits. 31
There are three significant differences between commercial and
standby credits. First, commercial credits involve the payment of money
under a contract of sale. Such credits become payable upon the
presentation by the seller-beneficiary of documents that show he has taken
affirmative steps to comply with the sales agreement. In the standby type,
the credit is payable upon certification of a party's nonperformance of the
agreement. The documents that accompany the beneficiary's draft tend to
show that the applicant has not performed. The beneficiary of a commercial
credit must demonstrate by documents that he has performed his contract.
The beneficiary of the standby credit must certify that his obligor has not
performed the contract. 32
By definition, a letter of credit is a written instrument whereby the
writer requests or authorizes the addressee to pay money or deliver goods
to a third person and assumes responsibility for payment of debt therefor
to the addressee. 33 A letter of credit, however, changes its nature as
different transactions occur and if carried through to completion ends up
as a binding contract between the issuing and honoring banks without any
regard or relation to the underlying contract or disputes between the
parties thereto. 34
Since letters of credit have gained general acceptability in
international trade transactions, the ICC 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. 35 First published in 1933,
the UCP for Documentary Credits has undergone several revisions, the
latest of which was in 1993. 36
In Bank of the Philippine Islands v. De Reny Fabric Industries,
Inc., 37 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, 38 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. IaSAHC
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 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. 39
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. 40
Can the beneficiary invoke the independence principle?
Petitioner insists that the independence principle does not apply to
the instant case and assuming it is so, it is a defense available only to
respondent banks. LHC, on the other hand, contends that it would be
contrary to common sense to deny the benefit of an independent contract
to the very party for whom the benefit is intended. As beneficiary of the
letter of credit, LHC asserts it is entitled to invoke the principle.
As discussed above, 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. 41 Precisely, the independence principle liberates the
issuing bank from the duty of ascertaining compliance by the parties in the
main contract. As the principle's 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, petitioner's 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."
 Petitioner'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. 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.
Professor John F. Dolan, the noted authority on letters of credit,
sheds more light on the issue:
The standby credit is an attractive
commercial device for many of the same reasons
that commercial credits are attractive. Essentially,
these credits are inexpensive and efficient. Often
they replace surety contracts, which tend to
generate higher costs than credits do and are
usually triggered by a factual determination rather
than by the examination of documents. HTCISE
Because parties and courts should not
confuse the different functions of the surety
contract on the one hand and the standby credit on
the other, the distinction between surety contracts
and credits merits some reflection. The two
commercial devices share a common purpose. Both
ensure against the obligor's nonperformance. They
function, however, in distinctly different ways.
Traditionally, upon the obligor's default, the
surety undertakes to complete the obligor's
performance, usually by hiring someone to
complete that performance. Surety contracts, then,
often involve costs of determining whether the
obligor defaulted (a matter over which the surety
and the beneficiary often litigate) plus the cost of
performance. The benefit of the surety contract to
the beneficiary is obvious. He knows that the surety,
often an insurance company, is a strong financial
institution that will perform if the obligor does not.
The beneficiary also should understand that such
performance must await the sometimes lengthy and
costly determination that the obligor has defaulted.
In addition, the surety's performance takes time.
The standby credit has different
expectations. He reasonably expects that he will
receive cash in the event of nonperformance, that
he will receive it promptly, and that he will receive
it before any litigation with the obligor (the
applicant) over the nature of the applicant's
performance takes place. The standby credit has
this opposite effect of the surety contract: it
reverses the financial burden of parties during
litigation.
In the surety contract setting, there is no
duty to indemnify the beneficiary until the
beneficiary establishes the fact of the obligor's
performance. The beneficiary may have to establish
that fact in litigation. During the litigation, the
surety holds the money and the beneficiary bears
most of the cost of delay in performance.
In the standby credit case, however, the
beneficiary avoids that litigation burden and
receives his money promptly upon presentation of
the required documents. It may be that the
applicant has, in fact, performed and that the
beneficiary's presentation of those documents is
 not rightful. In that case, the applicant may sue the
beneficiary in tort, in contract, or in breach of
warranty; but, during the litigation to determine
whether the applicant has in fact breached the
obligation to perform, the beneficiary, not the
applicant, holds the money. Parties that use a
standby credit and courts construing such a credit
should understand this allocation of burdens. There
is a tendency in some quarters to overlook this
distinction between surety contracts and standby
credits and to reallocate burdens by permitting the
obligor or the issuer to litigate the performance
question before payment to the beneficiary. 42
While it is the bank which is bound to honor the credit, it is the
beneficiary who has the right to ask the bank to honor the credit by
allowing him to draw thereon. The situation itself emasculates petitioner's
posture that LHC cannot invoke the independence principle and highlights
its puerility, more so in this case where the banks concerned were
impleaded as parties by petitioner itself.
Respondent banks had squarely raised the independence principle to
justify their releases of the amounts due under the Securities. Owing to the
nature and purpose of the 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 that it was "ministerial" for them
to honor the call for payment. 43
Furthermore, LHC has a right rooted in the Contract to call on the
Securities. The relevant provisions of the Contract read, thus:
4.2.1. In order to secure the performance of
its obligations under this Contract, the Contractor
at its cost shall on the Commencement Date provide
security to the Employer in the form of two
irrevocable and confirmed standby letters of credit
(the "Securities"), each in the amount of
US$8,988,907, issued and confirmed by banks or
financial institutions acceptable to the Employer.
Each of the Securities must be in form and
substance acceptable to the Employer and may be
provided on an annually renewable basis. 44
8.7.1 If the Contractor fails to comply with
Clause 8.2, the Contractor shall pay to the Employer
by way of liquidated damages ("Liquidated Damages
for Delay") the amount of US$75,000 for each and
every day or part of a day that shall elapse between
the Target Completion Date and the Completion
Date, provided that Liquidated Damages for Delay
payable by the Contractor shall in the aggregate not
exceed 20% of the Contract Price. The Contractor
shall pay Liquidated Damages for Delay for each day
of the delay on the following day without need of
demand from the Employer.
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 become
due to the Contractor and/or by drawing on the
Security." 45
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. 46 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.
Next, petitioner invokes the "fraud exception" principle. It avers that
LHC's call on the Securities is wrongful because it fraudulently
misrepresented to ANZ Bank and SBC that there is already a breach in the
Turnkey Contract knowing fully well that this is yet to be determined by
the arbitral tribunals. It asserts that the "fraud exception" exists when the
beneficiary, for the purpose of drawing on the credit, fraudulently presents
to the confirming bank, documents that contain, expressly or by
implication, material representations of fact that to his knowledge are
untrue. In such a situation, petitioner insists, injunction is recognized as a
remedy available to it.ICTHDE
Citing Dolan's treatise on letters of credit, petitioner argues that the
independence principle is not without limits and it is important to fashion
those limits in light of the principle's purpose, which is to serve the
commercial function of the credit. If it does not serve those functions,
application of the principle is not warranted, and the commonlaw
principles of contract should apply.
It is worthy of note that the propriety of LHC's call on the Securities
is largely intertwined with the fact of default which is the self-same issue
pending resolution before the arbitral tribunals. To be able to declare the
call on the Securities wrongful or fraudulent, it is imperative to resolve,
among others, whether petitioner was in fact guilty of delay in the
performance of its obligation. Unfortunately for petitioner, 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
pursuant to the terms embodied in their agreement. 47
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 qualify
as fraud sufficient to support an injunction against payment. 48 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. 49
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, then LHC
would not be entitled to any liquidated damages. 50
Generally, injunction is a preservative remedy for the protection of
one's 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 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. 51
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 against which the writ is to be directed are violative of the
said right. 52 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 and paramount necessity for
the writ to prevent serious damage. 53 Moreover, an injunctive remedy may
only be resorted to when there is a pressing necessity to avoid injurious
consequences which cannot be remedied under any standard
compensation. 54
 In the instant case, petitioner failed to show that it has a clear and
unmistakable right to restrain LHC's call on the Securities which would
justify the issuance of preliminary injunction. By petitioner's own
admission, the right of LHC to call on the Securities was contractually
rooted and subject to the express stipulations in the Turnkey
Contract. 55 Indeed, the Turnkey Contract is plain and unequivocal in that
it conferred upon LHC the right to draw upon the Securities in case of
default, as provided in Clause 4.2.5, in relation to Clause 8.7.2, thus:
4.2.5 The Employer shall give the Contractor
seven days' 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 14 days of their expiration in
accordance with Clause 4.2.2. 56
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
become due, to the Contractor and/or by drawing
on the Security. 57
The pendency of the arbitration proceedings would not per se make
LHC's draws on the Securities wrongful or fraudulent for there was nothing
in the Contract which would indicate that the parties intended that all
disputes regarding delay should first be settled through arbitration before
LHC would be allowed to call upon the Securities. It is therefore premature
and absurd to conclude that the draws on the Securities were outright
fraudulent given the fact that the ICC and CIAC have not ruled with finality
on the existence of default.
Nowhere in its complaint before the trial court or in its pleadings filed
before the appellate court, did petitioner invoke the fraud exception rule
as a ground to justify the issuance of an injunction. 58 What petitioner did
assert before the courts below was the fact that LHC's draws on the
Securities would be premature and without basis in view of the pending
disputes between them. Petitioner should not be allowed in 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 court as they cannot be raised for the first time on appeal. 59 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 LHC's 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 the contracting parties and should be complied
with in good faith. 60 More importantly, pursuant to the principle of
autonomy of contracts embodied in Article 1306 of the Civil
Code, 61 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 Securities.
However, the fact is petitioner did not do so; hence, it would have to live
with its inaction.
With respect to the issue of whether the respondent banks were
justified in releasing the amounts due under the Securities, this Court
reiterates that pursuant to the independence principle the banks were
under no obligation to determine the veracity of LHC's certification that
default has occurred. Neither were they bound by petitioner's declaration
that LHC's call thereon was wrongful. To repeat, respondent banks'
undertaking was simply to pay once the required documents are presented
by the beneficiary.
At any rate, should petitioner finally prove in the pending arbitration
proceedings that LHC's draws upon the Securities were wrongful due to
the non-existence of the fact of default, its right to seek indemnification for
damages it suffered would not normally be foreclosed pursuant to general
principles of law.
Moreover, in a Manifestation, 62 dated 30 March 2001, LHC informed
this Court that the subject letters of credit had been fully drawn. This fact
alone would have been sufficient reason to dismiss the instant petition. HAICTD
Settled is the rule that injunction would not lie where the acts sought
to be enjoined have already become fait accompli or an accomplished or
consummated act. 63 In Ticzon v. Video Post Manila, Inc. 64 this Court ruled
that where the period within which the former employees were prohibited
from engaging in or working for an enterprise that competed with their
former employer — the very purpose of the preliminary injunction — has
expired, any declaration upholding the propriety of the writ would be
entirely useless as there would be no actual case or controversy between
the parties insofar as the preliminary injunction is concerned.
In the instant case, the consummation of the act sought to be
restrained had rendered the instant petition moot — for any declaration by
this Court as to propriety or impropriety of the non-issuance of injunctive
relief could have no practical effect on the existing controversy. 65 The
other issues raised by petitioner particularly with respect to its right to
recover the amounts wrongfully drawn on the Securities, according to it,
could properly be threshed out in a separate proceeding.
One final point. LHC has charged petitioner of forum-shopping. It
raised the charge on two occasions. First, in its Counter-
Manifestation dated 29 June 2004 66 LHC alleges that petitioner presented
before this Court the same claim for money which it has filed in two other
proceedings, to wit: ICC Case No. 11264/TE/MW and Civil Case No. 04-332
before the RTC of Makati. LHC argues that petitioner's acts constitutes
forum-shopping which should be punished by the dismissal of the claim in
both forums. Second, in its Comment to Petitioner's Motion for Leave to File
Addendum to Petitioner's Memorandum dated 8 October 2004, LHC alleges
that by maintaining the present appeal and at the same time pursuing Civil
Case No. 04-332 — wherein petitioner pressed for judgment on the issue of
whether the funds LHC drew on the Securities should be returned —
petitioner resorted to forum-shopping. In both instances, however,
petitioner has apparently opted not to respond to the charge.
Forum-shopping is a very serious charge. It exists when a party
repetitively avails of several judicial remedies in different courts,
simultaneously or successively, all substantially founded on the same
transactions and the same essential facts and circumstances, and all raising
substantially the same issues either pending in, or already resolved
adversely, by some other court. 67 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 that one or the other court might look with favor upon the
other party. 68 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 will amount
to res judicata in another. 69 Forum-shopping constitutes improper
conduct and may be punished with summary dismissal of the multiple
petitions and direct contempt of court. 70
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.
SO ORDERED.
 THIRD DIVISION
[G.R. No. 94209. April 30, 1991.]
FEATI BANK & TRUST COMPANY (now
CITYTRUST BANKING
CORPORATION), petitioner, vs. THE COURT
OF APPEALS, and BERNARDO E.
VILLALUZ, respondents.
Pelaez, Adriano & Gregorio for petitioner.
Ezequiel S. Consulta for private respondent.
SYLLABUS
1. COMMERCIAL LAW; BANKING LAWS; LETTER OF CREDIT;
DOCUMENTS TENDERED MUST STRICTLY CONFORM TO THE TERMS
OF LETTER OF CREDIT. — It is a settled rule in commercial transactions
involving letters of credit that the documents tendered must strictly
conform to the terms of the letter of credit. The tender of documents by
the beneficiary (seller) must include all documents required by the letter.
A correspondent bank which departs from what has been stipulated under
the letter of credit, as when it accepts a faulty tender, acts on its own
risks and it may not thereafter be able to recover from the buyer or the
issuing bank, as the case may be, the money thus paid to the beneficiary.
Thus the rule of strict compliance.
2. ID.; ID.; ID.; UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY
CREDIT (U.C.P.); APPLICABILITY JUSTIFIED BY ARTICLE 2 OF THE CODE
OF COMMERCE. — Moreover, the incorporation of the Uniform Customs
and Practice for Documentary Credit (U.C.P. for short) in the letter of
credit resulted in the applicability of the said rules in the governance of
the relations between the parties. And even if the U.C.P. was not
incorporated in the letter of credit, we have already ruled in the
affirmative as to the applicability of the U.C.P. in cases before us. In Bank
of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the
observance of the U.C.P. in this jurisdiction is justified by Article 2 of the
Code of Commerce. Article 2 of the Code of Commerce enunciates that in
the absence of any particular provision in the Code of commerce,
commercial transactions shall be governed by the usages and customs
generally observed. There being no specific provision which governs the
legal complexities arising from transactions involving letters of credit not
only between the banks themselves but also between banks and seller
and/or buyer, the applicability of the U.C.P. is undeniable.
3. ID.; ID.; ID.; IRREVOCABLE CREDIT AND CONFIRMED LETTER OF
CREDIT, DIFFERENTIATED.— An irrevocable credits refers to the duration
of the letter of credit. What it simply means is that the issuing bank may
not without the consent of the beneficiary (seller) and the applicant
(buyer) revoke his undertaking under the letter. The issuing bank does not
reserve the right to revoke the credit. On the other hand, a confirmed
letter of credit pertains to the kind of obligation assumed by the
correspondent bank. In this case, the correspondent bank gives an
absolute assurance of the beneficiary that it will undertake the issuing
bank's obligation as its own according to the terms and conditions of the
credit. (Agbayani, Commercial Laws of the Philippines, Vol. 1, pp. 81-83)
Hence, the mere fact that a letter of credit is irrevocable does not
necessarily imply that the correspondent bank in accepting the
instructions of the issuing bank has also confirmed the letter of credit.
4. ID.; ID.; ID.; CLASSIFICATIONS OF CORRESPONDENT BANK'S
FUNCTIONS. — 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. (Kronman and Co., Inc. v. Public National Bank of New York, 218
N.Y.S. 616 [1926]; Shaterian, Export-Import Banking, p. 292, cited in
Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76) A negotiating money as specific fund advanced to it by the issuing bank and to be held
bank, on the other hand, is a correspondent bank which buys or discounts in trust by it in favor of the private respondent. This does not obtain in
a draft under the letter of credit. Its liability is dependent upon the stage this case.
of the negotiation. If before negotiation, it has no liability with respect to
7. ID.; ID.; ID.; A LETTER OF CREDIT DOES NOT CONVEY THAT A SUM OF
the seller but after negotiation, a contractual relationship will then prevail
MONEY IS BEING HELD IN TRUST. — The mere opening of a letter of
between the negotiating bank and the seller. (Scanlon v. First National
credit, it is to be noted, does not involve a specific appropriation of a sum
Bank of Mexico, 162 N.E. 567 [1928]; Shaterian, Export-Import Banking, p.
of money in favor of the beneficiary. It only signifies that the beneficiary
293, cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76) In
may be able to draw funds upon the letter of credit up to the designated
the case of a confirming bank, the correspondent bank assumes a direct
amount specified in the letter. It does not convey the notion that a
obligation to the seller and its liability is a primary one as if the
particular sum of money has been specifically reserved or has been held in
correspondent bank itself had issued the letter of credit. (Shaterian,
trust.
Export-Import Banking, p. 294, cited in Agbayani, Commercial Laws of the
Philippines, Vol. 1, p. 77) 8. ID.; ID.; GUARANTY; INCONSISTENT WITH AN IRREVOCABLE
CREDIT. — The theory of guarantee relied upon the by the Court of
5. ID.; ID.; ID.; ID.; NOTIFYING BANK; CASE AT BAR. — In this case, the
Appeals has to necessarily fail. The concept of guarantee vis-a-vis the
letter merely provided that the petitioner "forward the enclosed original
concept of an irrevocable credit are inconsistent with each other. In the
credit to the beneficiary." Considering the aforesaid instruction to the
first place, the guarantee theory destroys the independence of the bank's
petitioner by the issuing bank, the Security Pacific National Bank, it is
responsibility from the contract upon which it was opened. In the second
indubitable that the petitioner is only a notifying bank and not a
place, the nature of both contracts is mutually in conflict with each other.
confirming bank as ruled by the courts below. A notifying bank is not privy
In contracts of guarantee, the guarantor's obligation is merely collateral
to the contract of sale between the buyer and the seller, its relationship is
and it arises only upon the default of the person primarily liable. On the
only with that of the issuing bank and not with the beneficiary to whom
other hand, in an irrevocable credit the bank undertakes a primary
he assumes no liability. It follows therefore that when the petitioner
obligation. (See National Bank of Eagle Pass, Tex. v. American National
refused to negotiate with the private respondent, the latter has no cause
Bank of San Francisco, 282 F. 73 [1922])
of action against the petitioner for the enforcement of his rights under
the letter. (See Kronman and Co., Inc. v. Public National Bank of New 9. ID.; ID.; AGENCY; RELATIONSHIP BETWEEN ISSUING BANK AND
York, supra) NOTIFYING BANK IS SIMILAR TO AGENCY. — The relationship between
the issuing bank and the notifying bank, on the contrary, is more similar
6. CIVIL LAW; OBLIGATIONS AND CONTRACT; TRUST; EXPLAINED. — A
to that of an agency and not that of a guarantee. It may be observed that
trust has been defined as the "right, enforceable solely in equity, to the
the notifying bank is merely to follow the instructions of the issuing bank
beneficial enjoyment of property the legal title to which is vested to
which is to notify or to transmit the letter of credit to the beneficiary. (See
another." The concept of a trust presupposes the existence of a specific
Kronman v. Public National Bank of New York, supra). Its commitment is
property which has been conferred upon the person for the benefit of
only to notify the beneficiary. It does not undertake any assurance that
another. In order therefore for the trust theory of the private respondent
the issuing bank will perform what has been mandated to or expected of
to be sustained, the petitioner should have had in its possession a sum of
it. As an agent of the issuing bank, it has only to follow the instructions of
the issuing bank and to it alone is it obligated and not to the buyer with
whom it has no contractual relationship.
10. STATUTORY CONSTRUCTION; CONTROVERSY IS DECIDED ON
WHAT THE LAW IS; LAW IS ALSO TO GOVERN FUTURE RELATIONS
AMONG PEOPLE. — We are aware of the injustice committed by
Christiansen on the private respondent but we are deciding the
controversy on the basis of what the law is, for the law is not meant to
favor only those who have been oppressed, the law is to govern future
relations among people as well. Its commitment is to all and not to a
single individual. The faith of the people in our justice system may be
eroded if we are to decide not what the law states but what we believe it
should declare. Dura lex sed lex.
DECISION
GUTIERREZ, JR., J : p
This is a petition for review seeking the reversal of the decision of the
Court of Appeals dated June 29, 1990 which affirmed the decision of the
Regional Trial Court of Rizal dated October 20, 1986 ordering the
defendants Christiansen and the petitioner, to pay various sums to
respondent Villaluz, jointly and severally.
The facts of the case are as follows:
of Credit No. IC-46268 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 (now
Citytrust) with the instruction to the latter that it "forward the enclosed
letter of credit to the beneficiary." (Records, Vol. I, p. 11)
The letter of credit further provided that the draft to be drawn is on
Security Pacific National Bank and that it be accompanied by the following
documents:
"1. Signed Commercial Invoice in four copies
showing the number of the purchase order and
certifying that —
a. All terms and conditions of the
purchase order have been complied with
and that all logs are fresh cut and quality
equal to or better than that described in H.A.
Christiansen's telex #201 of May 1, 1970, and
that all logs have been marked "BEV-EX".
b. One complete set of documents,
including 1/3 original bills of lading was
airmailed to Consignee and Parties to be
advised by Hans-Axel Christiansen, Ship and
Merchandise Broker. cdll

On June 3, 1971, Bernardo E. Villaluz agreed to sell to the then defendant c. One set of non-negotiable
Axel Christiansen 2,000 cubic meters of lauan logs at $27.00 per cubic documents was airmailed to Han Mi Trade
meter FOB. Development Company and one set to
Consignee and Parties to be advised by
After inspecting the logs, Christiansen issued purchase order No. 76171. Hans-Axel Christiansen, Ship and
Merchandise Broker.
On the arrangements made and upon the instructions of the consignee,
Hanmi Trade Development, Ltd., de Santa Ana, California, the Security 2. Tally sheets in quadruplicate.
Pacific National Bank of Los Angeles, California issued Irrevocable Letter
 3. 2/3 Original Clean on Board Ocean Bills of
Lading with Consignee and Parties to be advised by
Hans Axel Christiansen, showing Freight Prepaid
and marked Notify:
Han Mi Trade Development Company, Ltd., Santa
Ana, California.
Letter of Credit No. 46268 dated June 7, 1971.
Han Mi Trade Development Company, Ltd., P.O.
Box 10480, Santa Ana, California 92711 and Han Mi
Trade Development Company, Ltd., Seoul, Korea.
4. Certification from Han-Axel Christiansen, Ship
and Merchandise Broker, stating that logs have
been approved prior to shipment in accordance
with terms and conditions of corresponding
purchase Order. (Record, Vol. 1 pp. 11-12)
Also incorporated by reference in the letter of credit is the Uniform
Customs and Practice for Documentary Credits (1962 Revision).
The logs were thereafter loaded on the vessel "Zenlin Glory" which was
chartered by Christiansen. Before its loading, the logs were inspected by
custom inspectors Nelo Laurente, Alejandro Cabiao, Estanislao Edera from
the Bureau of Customs (Records, Vol. I, p. 124) and representatives Rogelio
Cantuba and Jesus Tadena of the Bureau of Forestry (Records, Vol. I, pp.
16-17) all of whom certified to the good condition and exportability of the
logs.
After the loading of the logs was completed, the Chief Mate, Shao Shu
Wang issued a mate receipt of the cargo which stated the same are in
good condition (Records, Vol. I, p. 363). However, Christiansen refused to
issue the certification as required in paragraph 4 of the letter of credit,
despite several requests made by the private respondent.
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.
The letter of credit lapsed on June 30, 1971, (extended, however up to July
31, 1971) without the private respondent receiving any certification from
Christiansen. LLpr
The persistent refusal of Christiansen to issue the certification prompted
the private respondent to bring the matter before the Central Bank. In a
memorandum dated August 16, 1971, the Central Bank ruled that:
". . . pursuant to the Monetary Board Resolution
No. 1230 dated August 3, 1971, in all log exports, the
certification of the lumber inspectors of the
Bureau of Forestry . . . shall be considered final for
purposes of negotiating documents. Any provision
in any letter of credit covering log exports
requiring certification of buyer's agent or
representative that said logs have been approved
for shipment as a condition precedent to
negotiation of shipping documents shall not be
allowed." (Records, Vol. I, p. 367)
Meanwhile, the logs arrived at Inchon, Korea and were received by the
consignee, Hamni Trade Development Company, to whom Christiansen
sold the logs for the amount of $37.50 per cubic meter, for a net profit of
$10 per cubic meter. Hanmi Trade Development Company, on the other
hand sold the logs to Taisung Lumber Company at Inchon, Korea. (Rollo,
p. 39)
Since the demands by the private respondent for Christiansen to execute
the certification proved futile, Villaluz, on September 1, 1971, instituted an
action for mandamus and specific performance against Christiansen and
the Feati Bank and Trust Company (now Citytrust) before the then Court
of First Instance of Rizal. The petitioner was impleaded as defendant
before the lower court only to afford complete relief should the court a
quo order Christiansen to execute the required certification.
The complaint prayed for the following:
1. Christiansen be ordered to issue the certification
required of him under the Letter of Credit;
2. Upon issuance of such certification, or, if the
court should find it unnecessary, FEATI BANK be
ordered to accept negotiation of the Letter of
Credit and make payment thereon to Villaluz;
3. Order Christiansen to pay damages to the
plaintiff. (Rollo, p. 39)
On or about 1979, while the case was still pending trial, Christiansen left
the Philippines without informing the Court and his counsel. Hence,
Villaluz, filed an amended complaint to make the petitioner solidarily
liable with Christiansen.
The trial court, in its order dated August 29, 1979, admitted the amended
complaint.
After trial, the lower court found:
"The liability of the defendant CHRISTIANSEN is
beyond dispute, and the plaintiff's right to demand
payment is absolute. Defendant CHRISTIANSEN
having accepted delivery of the logs by having
them loaded in his chartered vessel the 'Zenlin
Glory' and shipping them to the consignee, his
buyer Han Mi Trade in Inchon, South Korea (Art.
1585, Civil Code), his obligation to pay the purchase
order had clearly arisen and the plaintiff may sue
and recover the price of the goods (Art. 1595, id).
prLL
"The Court believes that the defendant
CHRISTIANSEN acted in bad faith and deceit and
with intent to defraud the plaintiff, reflected in and
aggravated by, not only his refusal to issue the
certification that would have enabled without
question the plaintiff to negotiate the letter of
credit, but his accusing the plaintiff in his answer
of fraud, intimidation, violence and deceit. These
accusations said defendant did not attempt to
prove, as in fact he left the country without ever
notifying his own lawyer. It was to the Court's
mind a pure swindle.
"The defendant Feati Bank and Trust Company, on
the other hand, must be held liable together with
his (sic) co-defendant for having, by its wrongful
act, i.e., its refusal to negotiate the letter of credit
in the absence of CHRISTIANSEN's certification (in
spite of the Central Bank's ruling that the
requirement was illegal), prevented payment to the
plaintiff. The said letter of credit, as may be seen
on its face, is irrevocable and the issuing bank, the
Security Pacific National Bank in Los Angeles,
California, undertook by its terms that the same
shall be honored upon its presentment. On the
other hand, the notifying bank, the defendant Feati
Bank and Trust Company, by accepting the
instructions from the issuing bank, itself assumed
the very same undertaking as the issuing bank
under the terms of the letter of credit.
xxx xxx xxx
"The Court likewise agrees with the plaintiff that
the defendant BANK may also be held liable under
the principles and laws on both trust and estoppel.
When the defendant BANK accepted its role as the
notifying and negotiating bank for and in behalf of
the issuing bank, it in effect accepted a trust
reposed on it, and became a trustee in relation to
plaintiff as the beneficiary of the letter of credit. As
trustee, it was then duty bound to protect the
interests of the plaintiff under the terms of the
letter of credit, and must be held liable for damage
and loss resulting to the plaintiff from its failure to
perform that obligation.
"Furthermore, when the defendant BANK assumed
the role of a notifying and negotiating BANK it in
effect represented to the plaintiff that, if the
plaintiff complied with the terms and conditions of
the letter of credit and presents the same to the
BANK together with the documents mentioned
therein the said BANK will pay the plaintiff the
amount of the letter of credit. The Court is
convinced that it was upon the strength of this
letter of credit and this implied representation of
the defendant BANK that the plaintiff delivered the
logs to defendant CHRISTIANSEN, considering that
the issuing bank is a foreign bank with whom
plaintiff had no business connections and
CHRISTIANSEN had not offered any other Security
for the payment of the logs. Defendant BANK
cannot now be allowed to deny its commitment
and liability under the letter of credit:Cdpr
'A holder of a promissory note given
because of gambling who indorses the same
to an innocent holder for value and who
assures said party that the note has no legal
defect, is in estoppel from asserting that
there had been an illegal consideration for
the note, and so, he has to pay its value.'
(Rodriguez v. Martinez, 5 Phil. 67).'
"The defendant BANK, in insisting upon the
certification of defendant CHRISTIANSEN as a
condition precedent to negotiating the letter of
credit, likewise in the Court's opinion acted in bad
faith, not only because of the clear declaration of
the Central Bank that such a requirement was
illegal, but because the BANK with all the legal
counsel available to it, must have known that the
condition was void since it depended on the sole
will of the debtor, the defendant CHRISTIANSEN.
(Art. 1182, Civil Code)" (Rollo, pp. 29-31)
On the basis of the foregoing the trial court on October 20, 1986, ruled in
favor of the private respondent. The dispositive portion of its decision
reads:
'WHEREFORE, judgment is hereby rendered for the
plaintiff, ordering the defendants to pay the
plaintiff, jointly and severally, the following sums:
"a) $54,000.00 (US), or its peso
equivalent at the prevailing rate as of the
time payment is actually made, representing
the purchase price of the logs;
"b) P17,340.00, representing
government fees and charges paid by
plaintiff in connection with the logs
shipment in question;
"c) P10,000.00 as temperate damages
(for trips made to Bacolod and Korea).
"All three foregoing sums shall be with interest
thereon at 12% per annum from September 1, 1971,
when the complaint was filed, until fully paid:
 "d) P70,000.00 as moral damages;
"e) P30,000.00 as exemplary damages;
and
"f) P30,000.00 as attorney's fees and
litigation expense." (Rollo, p. 28)
The petitioner received a copy of the decision on November 3, 1986. Two
days thereafter, or on November 5, 1986, it filed a notice of appeal.
On November 10, 1986, the private respondent filed a motion for the
immediate execution of the judgment on the ground that the appeal of the
petitioner was frivolous and dilatory.
The trial court ordered the immediate execution of its judgment upon the
private respondent's filing of a bond.
The petitioner then filed a motion for reconsideration and a motion to
suspend the implementation of the writ of execution. Both motions were,
however, denied. Thus, petitioner filed before the Court of Appeals a
petition for certiorari and prohibition with preliminary injunction to
enjoin the immediate execution of the judgment. LibLex
The Court of Appeals in a decision dated April 9, 1987 granted the petition
and nullified the order of execution, the dispositive portion of the
decision states:
"WHEREFORE, the petition for certiorari is
granted. Respondent Judge's order of execution
dated December 29, 1986, as well as his order
dated January 14, 1987 denying the petitioner's
urgent motion to suspend the writ of execution
against its properties are hereby annulled and set
aside insofar as they are sought to be enforced and
implemented against the petitioner Feati Bank &
Trust Company, now Citytrust Banking
Corporation, during the pendency of its appeal
from the adverse decision in Civil Case No. 15121.
However, the execution of the same decision
against defendant Axel Christiansen who did not
appeal said decision may proceed unimpeded. The
Sheriff's levy on the petitioner's properties, and the
notice of sale dated January 13, 1987 (Annex M), are
hereby annulled and set aside. (Rollo, p. 44)
A motion for reconsideration was thereafter filed by the private
respondent. The Court of Appeals, in a resolution dated June 29, 1987
denied the motion for reconsideration.
In the meantime, the appeal filed by the petitioner before the Court of
Appeals was given due course. In its decision dated June 29, 1990, the
Court of Appeals affirmed the decision of the lower court dated October
20, 1986 and ruled that:
1. Feati Bank admitted in the "special and negative
defenses" section of its answer that it was the bank
to negotiate the letter of credit issued by the
Security Pacific National Bank of Los Angeles,
California. (Record, pp. 156, 157). Feati Bank did
notify Villaluz of such letter of credit. In fact, as
such negotiating bank, even before the letter of
credit was presented for payment, Feati Bank had
already made an advance payment of P75,000.00
to Villaluz in anticipation of such presentment. As
the negotiating bank, Feati Bank, by notifying
Villaluz of the letter of credit in behalf of the
issuing bank (Security Pacific), confirmed such
letter of credit and made the same also its own
obligation. This ruling finds support in the
authority cited by Villaluz:
"A confirmed letter of credit is one in which the
notifying bank gives its assurance also that the
opening bank's obligation will be performed. In
such a case, the notifying bank will not simply
transmit but will confirm the opening bank's
obligation by making it also its own undertaking, or
commitment, or guaranty or obligation." (Ward &
Harfield, 28-29, cited in Agbayani, Commercial
Laws, 1978 edition, p. 77).
LLphil
Feati Bank argues further that it would be
considered as the negotiating bank only upon
negotiation of the letter of credit. This stance is
untenable. Assurance, commitments or guaranties
supposed to be made by notifying banks to the
beneficiary of a letter of credit, as defined above,
can be relevant or meaningful only with respect to
a future transaction, that is, negotiation. Hence,
even before actual negotiation, the notifying bank,
by the mere act of notifying the beneficiary of the
letter of credit, assumes as of that moment the
obligation of the issuing bank.
2. Since Feati Bank acted as guarantor of the
issuing bank and in effect also of the latter's
principal or client, i.e. Hans Axel-Christiansen. (sic)
Such being the case, when Christiansen refused to
issue the certification, it was as though refusal was
made by Feati Bank Itself Feati Bank should have
taken steps to secure the certification from
Christiansen; and, if the latter should still refuse to
comply, to hale him to court. In short, Feati Bank
should have honored Villaluz's demand for
payment of his logs by virtue of the irrevocable
letter of credit issued in Villaluz's favor and
guaranteed by Feati Bank.
3. The decision promulgated by this Court in CA-
G.R. Sp No. 11051, which contained the statement
"Since Villaluz' draft was not drawn strictly in
compliance with the terms of the letter of credit,
Feati Bank's refusal to negotiate it was justified,"
did not dispose of this question on the merits. In
that case, the question involved was jurisdiction or
discretion, and not judgment. The quoted
pronouncement should not be taken as a
preemptive judgment on the merits of the present
case on appeal.
4. The original action was for "mandamus and/ or
specific performance." Feati Bank may not be a
party to the transaction between Christiansen and
Security Pacific National Bank on the one hand,
and Villaluz on the other hand; still, being
guarantor or agent of Christiansen and or Security
Pacific National Bank which had directly dealt with
Villaluz, Feati Bank may be sued properly on
specific performance as a procedural means by
which the relief sought by Villaluz may be
entertained. (Rollo, pp. 32-33)
The dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, the decision appealed from is
affirmed; and accordingly, the appeal is hereby
dismissed. Costs against the petitioner. (Rollo. p.
33)
Hence, this petition for review.
The petitioner interposes the following reasons for the allowance of the
petition.
First Reason
THE RESPONDENT COURT ERRONEOUSLY
CONCLUDED FROM THE ESTABLISHED FACTS
AND INDEED, WENT AGAINST THE EVIDENCE
AND DECISION OF THIS HONORABLE COURT,
THAT PETITIONER BANK IS LIABLE ON THE
 LETTER OF CREDIT DESPITE PRIVATE
RESPONDENT'S NON-COMPLIANCE WITH THE
TERMS THEREOF.
Second Reason
THE RESPONDENT COURT COMMITTED AN
ERROR OF LAW WHEN IT HELD THAT
PETITIONER BANK, BY NOTIFYING PRIVATE
RESPONDENT OF THE LETTER OF CREDIT,
CONFIRMED SUCH CREDIT AND MADE THE
SAME ALSO ITS OBLIGATION AS GUARANTOR OF
THE ISSUING BANK.
Third Reason
THE RESPONDENT COURT LIKEWISE
COMMITTED AN ERROR OF LAW WHEN IT
AFFIRMED THE TRIAL COURT'S DECISION. (Rollo,
p. 12)
The principal issue in this case is whether or not a correspondent bank is
to be held liable under the letter of credit despite non-compliance by the
beneficiary with the terms thereof?
llcd
The petition is impressed with merit.
It is a settled rule in commercial transactions involving letters of credit
that the documents tendered must strictly conform to the terms of the
letter of credit. The tender of documents by the beneficiary (seller) must
include all documents required by the letter. A correspondent bank which
departs from what has been stipulated under the letter of credit, as when
it accepts a faulty tender, acts on its own risks and it may not thereafter
be able to recover from the buyer or the issuing bank, as the case may be,
the money thus paid to the beneficiary. Thus the rule of strict compliance.
In the United States, commercial transactions involving letters of credit
are governed by the rule of strict compliance. In the Philippines, the same
holds true. The same rule must also be followed.
The case of Anglo-South American Trust Co. v. Uhe et al. (184 N.E. 741
[1933]) expounded clearly on the rule of strict compliance.
"We have heretofore held that these letters of
credit are to be strictly complied with, which
documents, and shipping documents must be
followed as stated in the letter. There is no
discretion in the bank or trust company to waive
any requirements. The terms of the letter
constitutes an agreement between the purchaser
and the bank." (p. 743)
Although in some American decisions, banks are granted a little discretion
to accept a faulty tender as when the other documents may be considered
immaterial or superfluous, this theory could lead to dangerous
precedents. Since a bank deals only with documents, it is not in a position
to determine whether or not the documents required by the letter of
credit are material or superfluous. The mere fact that the document was
specified therein readily means that the document is of vital importance
to the buyer.
Moreover, the incorporation of the Uniform Customs and Practice for
Documentary Credit (U.C.P. for short) in the letter of credit resulted in
the applicability of the said rules in the governance of the relations
between the parties.
And even if the U.C.P. was not incorporated in the letter of credit, we have
already ruled in the affirmative as to the applicability of the U.C.P. in cases
before us.
In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the
observance of the U.C.P. in this jurisdiction is justified by Article 2 of the
Code of Commerce. Article 2 of the Code of Commerce enunciates that in
the absence of any particular provision in the Code of Commerce,
commercial transactions shall be governed by the usages and customs
generally observed.
There being no specific provision which governs the legal complexities
arising from transactions involving letters of credit not only between the
banks themselves but also between banks and seller and or buyer, the
applicability of the U.C.P. is undeniable.LibLex
The pertinent provisions of the U.C.P. (1962 Revision) are:
Article 3.
"An irrevocable credit is a definite undertaking on
the part of the issuing bank and constitutes the
engagement of that bank to the beneficiary and
bona fide holders of drafts drawn and or
documents presented thereunder, that the
provisions for payment, acceptance or negotiation
contained in the credit will be duly
fulfilled, provided that all the terms and conditions
of the credit are complied with.
"An irrevocable credit may be advised to a
beneficiary through another bank (the advising
bank) without engagement on the part of that
bank, but when an issuing bank authorizes or
requests another bank to confirm its irrevocable
credit and the latter does so, such confirmation
constitutes a definite undertaking of the
confirming bank . . ."
Article 7.
"Banks must examine all documents with
reasonable care to ascertain that they appear on
their face to be in accordance with the terms and
conditions of the credit."
Article 8.
"Payment, acceptance or negotiation against
documents which appear on their face to be in
accordance with the terms and conditions of a
credit by a bank authorized to do so, binds the
party giving the authorization to take up
documents and reimburse the bank which has
effected the payment, acceptance or negotiation."
(Emphasis Supplied)
Under the foregoing provisions of the U.C.P., the bank may only negotiate,
accept or pay, if the documents tendered to it are on their face in
accordance with the terms and conditions of the documentary credit. And
since a correspondent bank, like the petitioner, principally deals only with
documents, the absence of any document required in the documentary
credit justifies the refusal by the correspondent bank to negotiate, accept
or pay the beneficiary, as it is not its obligation to look beyond the
documents. It merely has to rely on the completeness of the documents
tendered by the beneficiary.
In regard to the ruling of the lower court and affirmed by the Court of
Appeals that the petitioner is not a notifying bank but a confirming bank,
we find the same erroneous.
The trial court wrongly mixed up the meaning of an irrevocable credit
with that of a confirmed credit. In its decision, the trial court ruled that
the petitioner, in accepting the obligation to notify the respondent that
the irrevocable credit has been transmitted to the petitioner on behalf of
the private respondent, has confirmed the letter.
The trial court appears to have overlooked the fact that an irrevocable
credit is not synonymous with a confirmed credit. These types of letters
have different meanings and the legal relations arising from there varies. A
credit may be an irrevocable credit and at the same time a confirmed
credit or vice-versa.cdphil
An irrevocable credit refers to the duration of the letter of credit. What is
simply means is that the issuing bank may not without the consent of the
beneficiary (seller) and the applicant (buyer) revoke his undertaking under
the letter. The issuing bank does not reserve the right to revoke the
credit. On the other hand, a confirmed letter of credit pertains to the kind
of obligation assumed by the correspondent bank. In this case, the
correspondent bank gives an absolute assurance to the beneficiary that it
will undertake the issuing bank's obligation as its own according to the
terms and conditions of the credit. (Agbayani, Commercial Laws of the
Philippines, Vol. 1, pp. 81-83)
Hence, the mere fact that a letter of credit is irrevocable does not
correspondent bank itself had issued the letter of credit. (Shaterian,
Export-Import Banking, p. 294, cited in Agbayani Commercial Laws of the
Philippines, Vol. 1, p. 77)
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. cdphil

necessarily imply that the correspondent bank in accepting the

If the petitioner was a confirming bank, then a categorical declaration
instructions of the issuing bank has also confirmed the letter of credit.
should have been stated in the letter of credit that the petitioner is to
Another error which the lower court and the Court of Appeals made was
honor all drafts drawn in conformity with the letter of credit. What was
to confuse the obligation assumed by the petitioner.
simply stated therein was the instruction that the petitioner forward the
In commercial transactions involving letters of credit, the functions original letter of credit to the beneficiary.
assumed by a correspondent bank are classified according to the
Since the petitioner was only a notifying bank, its responsibility was solely
obligations taken up by it. The correspondent bank may be called a
to notify and or transmit the documentary of credit to the private
notifying bank, a negotiating bank, or a confirming bank.
respondent and its obligation ends there.
In case of a notifying bank, the correspondent bank assumes no liability
The notifying bank may suggest to the seller its willingness to negotiate,
except to notify and or transmit to the beneficiary the existence of the
but this fact alone does not imply that the notifying bank promises to
letter of credit. (Kronman and Co., Inc. v. Public National Bank of New
accept the draft drawn under the documentary credit.
York, 218 N.Y.S. 616 [1926]; Shaterian, Export-Import Banking, p. 292, cited
in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76) A A notifying bank is not a privy to the contract of sale between the buyer
negotiating bank, on the other hand, is a correspondent bank which buys and the seller, its relationship is only with that of the issuing bank and not
or discounts a draft under the letter of credit. Its liability is dependent with the beneficiary to whom he assumes no liability. It follows therefore
upon the stage of the negotiation. If before negotiation, it has no liability that when the petitioner refused to negotiate with the private respondent,
with respect to the seller but after negotiation, a contractual relationship the latter has no cause of action against the petitioner for the
will then prevail between the negotiating bank and the seller. (Scanlon v. enforcement of his rights under the letter. (See Kronman and Co., Inc. v.
First National Bank of Mexico, 162 N.E. 667 [1928]; Shaterian, Export- Public National Bank of New York, supra)
Import Banking, p. 293, cited in Agbayani, Commercial Laws of the
In order that the petitioner may be held liable under the letter, there
Philippines, Vol. 1, p. 76)
should be proof that the petitioner confirmed the letter of credit.
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
The records are, however, bereft of any evidence which will disclose that
the petitioner has confirmed the letter of credit The only evidence in this
case, and upon which the private respondent premised his argument, is
the P75,000.00 loan extended by the petitioner to him.
The private respondent relies on this loan to advance his contention that
the letter of credit was confirmed by the petitioner. He claims that the
loan was granted by the petitioner to him, "in anticipation of the
presentment of the letter of credit."
The proposition advanced by the private respondent has no basis in fact
or law. That the loan agreement between them be construed as an act of
confirmation is rather far-fetched, for it depends principally on
speculative reasoning.
As earlier stated, there must have been an absolute assurance on the part
of the petitioner that it will undertake the issuing bank's obligation as its
own. Verily, the loan agreement it entered into cannot be categorized as
an emphatic assurance that it will carry out the issuing bank's obligation
as its own.
The loan agreement is more reasonably classified as an isolated
transaction independent of the documentary credit.
Of course, it may be presumed that the petitioner loaned the money to
the private respondent in anticipation that it would later be paid by the
latter upon the receipt of the letter. Yet, we would have no basis to rule
definitively that such "act" should be construed as an act of confirmation.
The private respondent no doubt was in need of money in loading the logs
on the ship "Zenlin Glory" and the only way to satisfy this need was to
borrow money from the petitioner which the latter granted. From these
circumstances, a logical conclusion that can be gathered is that the letter
of credit was merely to serve as a collateral.
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.
The case of Scanlon v. First National Bank (supra) perspicuously explained
the relationship between the seller and the negotiating bank, viz:
"It may buy or refuse to buy as it chooses. Equally,
it must be true that it owes no contractual duty
toward the person for whose benefit the letter is
written to discount or purchase any draft drawn
against the credit. No relationship of agent and
principal, or of trustee and cestui, between the
receiving bank and the beneficiary of the letter is
established." (P. 568)
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 the private respondent,
the refusal by the petitioner to accept the tender of the private
respondent is justified.
In regard to the finding that the petitioner became a "trustee in relation to
the plaintiff (private respondent) as the beneficiary of the letter of credit,"
the same has no legal basis.
A trust has been defined as the "right, enforceable solely in equity, to the
beneficial enjoyment of property the legal title to which is vested to
another." (89 C.J.S. 712)
The concept of a trust presupposes the existence of a specific property
which has been conferred upon the person for the benefit of another. In
order therefore for the trust theory of the private respondent to be
sustained, the petitioner should have had in its possession a sum of
money as specific fund advanced to it by the issuing bank and to be held
in trust by it in favor of the private respondent. This does not obtain in
this case.LibLex
The mere opening of a letter of credit, it is to be noted, does not involve a
specific appropriation of a sum of money in favor of the beneficiary. It
only signifies that the beneficiary may be able to draw funds upon the
letter of credit up to the designated amount specified in the letter. It does
not convey the notion that a particular sum of money has been
specifically reserved or has been held in trust.
What actually transpires in an irrevocable credit is that the correspondent
bank does not receive in advance the sum of money from the buyer or the
issuing bank. On the contrary, when the correspondent bank accepts the
tender and pays the amount stated in the letter, the money that it doles
out comes not from any particular fund that has been advanced by the
Issuing bank, rather it gets the money from its own funds and then later
seeks reimbursement from the issuing bank.
Granting that a trust has been created, still, the petitioner may not be
considered a trustee. As the petitioner is only a notifying bank, its
acceptance of the instructions of the issuing bank will not create estoppel
on its part resulting in the acceptance of the trust. Precisely, as a notifying
bank, its only obligation is to notify the private respondent of the
existence of the letter of credit. How then can such create estoppel when
that is its only duty under the law?
We also find erroneous the statement of the Court of Appeals that the
petitioner "acted as a guarantor of the issuing bank and in effect also of
the latter's principal or client, i.e., Hans Axel Christiansen."
It is a fundamental rule that an irrevocable credit is independent not only
of the contract between the buyer and the seller but also of the credit
agreement between the issuing bank and the buyer. (See Kingdom of
Sweden v. New York Trust Co., 96 N.Y.S. 2d 779 [1949]) The relationship
between the buyer (Christiansen) and the issuing bank (Security Pacific
National Bank) is entirely independent from the letter of credit issued by
the latter.
The contract between the two has no bearing as to the noncompliance by
the buyer with the agreement between the latter and the seller. Their
contract is similar to that of a contract of services (to open the letter of
credit) and not that of agency as was intimated by the Court of Appeals.
The unjustified refusal therefore by Christiansen to issue the certification
under the letter of credit should not likewise be charged to the issuing
bank.
As a mere notifying bank, not only does the petitioner not have any
contractual relationship with the buyer, it has also nothing to do with the
contract between the issuing bank and the buyer regarding the issuance
of the letter of credit.
LibLex
The theory of guarantee relied upon by the Court of Appeals has to
necessarily fail. The concept of guarantee vis-a-vis the concept of an
irrevocable credit are inconsistent with each other.
In the first place, the guarantee theory destroys the independence of the
bank's responsibility from the contract upon which it was opened. In the
second place, 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 credit the bank undertakes a primary
obligation. (See National Bank of Eagle Pass, Tex v. American National
Bank of San Francisco, 282 F. 73 [1922])
The relationship between the issuing bank and the notifying bank, on the
contrary, is more similar to that of an agency and not that of a guarantee.
It may be observed that the notifying bank is merely to follow the
instructions of the issuing bank which is to notify or to transmit the letter
of credit to the beneficiary. (See Kronman v. Public National Bank of New
York, supra). Its commitment is only to notify the beneficiary. It does not
undertake any assurance that the issuing bank will perform what has been
mandated to or expected of it. As an agent of the issuing bank, it has only
to follow the instructions of the issuing bank and to it alone is it obligated
and not to buyer with whom it has no contractual relationship.
In fact the notifying bank, even if the seller tenders all the documents
required under the letter of credit, may refuse to negotiate or accept the
drafts drawn thereunder and it will still not be held liable for its only
engagement is to notify and or transmit to the seller the letter of credit.
Finally, even if we assume that the petitioner is a confirming bank, the
petitioner cannot be forced to pay the amount under the letter. As we
have previously explained, there was a failure on the part of the private
respondent to comply with the terms of the letter of credit.
The failure by him to submit the certification was fatal to his case. The
U.C.P. which is incorporated in the letter of credit ordains that the bank
may only pay the amount specified under the letter if all the documents
tendered are on their face in compliance with the credit. It is not tasked
with the duty of ascertaining the reason or reasons why certain
documents have not been submitted, as it is only concerned with the
documents. Thus, whether or not the buyer has performed his
responsibility towards the seller is not the bank's problem.
We are aware of the injustice committed by Christiansen on the private
respondent but we are deciding the controversy on the basis of what the
law is, for the law is not meant to favor only those who have been
oppressed, the law is to govern future relations among people as well. Its
commitment is to all and not to a single individual. The faith of the people
in our justice system may be eroded if we are to decide not what the law
states but what we believe it should declare. Dura lex sed lex. llcd
Considering the foregoing, the materiality of ruling upon the validity of
the certificate of approval required of the private respondent to submit
under the letter of credit, has become insignificant.
In any event, we affirm the earlier ruling of the Court of Appeals dated
April 9, 1987 in regard to the petition before it for certiorari and
prohibition with preliminary injunction, to wit:
"There is no merit in the respondent's contention
that the certification required in condition No. 4 of
the letter of credit was "patently illegal." At the
time the letter of credit was issued there was no
Central Bank regulation prohibiting such a
condition in the letter of credit. The letter of credit
(Exh. C) was issued on June 7, 1971, more than two
months before the issuance of the Central Bank
Memorandum on August 16, 1971 disallowing such a
condition in a letter of credit. In fact the letter of
credit had already expired on July 30, 1971 when
the Central Bank memorandum was issued. In any
event, it is difficult to see how such a condition
could be categorized as illegal or unreasonable
since all that plaintiff Villaluz, as seller of the logs,
could and should have done was to refuse to load
the logs on the vessel "Zenlin Glory", unless
Christiansen first issued the required certification
that the logs had been approved by him to be in
accordance with the terms and conditions of his
purchase order. Apparently, Villaluz was in too
much haste to ship his logs without taking all due
precautions to assure that all the terms and
conditions of the letter of credit had been strictly
complied with, so that there would be no hitch in
its negotiation." (Rollo, p. 8)
WHEREFORE, the COURT RESOLVED to GRANT the petition and hereby
NULLIFIES and SETS ASIDE the decision of the Court of Appeals dated
June 29, 1990. The amended complaint in Civil Case No. 15121 is
DISMISSED.
SO ORDERED.
 THIRD DIVISION
On the other hand, the trial court had rendered this judgment:
[G.R. No. 109087. May 9, 2001.]
RODZSSEN SUPPLY CO. INC., petitioner, vs.
FAR EAST BANK & TRUST CO., respondent.
DECISION
PANGANIBAN, J : p
When both parties to a transaction are mutually negligent in the
performance of their obligations, the fault of one cancels the negligence of
the other. Thus, their rights and obligations may be determined equitably.
No one shall enrich oneself at the expense of another.
by the Court of Appeals as follows:
The Case
Before us is a Petition for Review on Certiorari 1 under Rule 45 of the
Rules of Court, assailing the January 21, 1993 Decision 2 of the Court of
Appeals 3 (CA) in CA-GR CV No. 26045. The challenged Decision affirmed
with modification the ruling of the Regional Trial Court of Bacolod City in
Civil Case No. 2296. The CA ruled as follows:
"WHEREFORE, the decision under appeal
should be, as it is hereby affirmed in all its aspects,
except for the deletion of paragraph 2 of its
dispositive portion, which paragraph shall be
replaced by a new paragraph which shall read as
follows:
'2. ordering the defendant to pay the
plaintiff the sum equivalent to 10% of the
total amount due and collectible, as
attorney's fees; and'
"No pronouncement as to costs." 4
"1. Ordering the defendant to pay the plaintiff
the sum of P76,000.00, representing the principal
amount being claimed in this action, plus interest
thereon at the rate of 12% per annum counted from
October 1979 until fully paid;
"2. Ordering the defendant to pay the plaintiff
the sum equivalent to 25% of the total amount due
and collectible; and
"3. Ordering the defendant to pay the costs of
the suit." 5
The Facts
The factual and procedural antecedents of the case are summarized
"In the complaint from which the present
proceedings originated, it is alleged that on January
15, 1979, defendant Rodzssen Supply, Inc. opened
with plaintiff Far East Bank and Trust Co. a 30-day
domestic letter of credit, LC No. 52/0428/79-D, in
the amount of P190,000.00 in favor of Ekman and
Company, Inc. (Ekman) for the purchase from the
latter of five units of hydraulic loaders, to expire on
February 15, 1979; that subsequent amendments
extended the validity of said LC up to October 16,
1979; that on March 16, 1979, three units of the
hydraulic loaders were delivered to defendant for
which plaintiff on March 26, 1979, paid Ekman the
sum of P114,000.00, which amount defendant paid
plaintiff before the expiry date of the LC; that the
shipment of the remaining two units of hydraulic
loaders valued at P76,000.00 sent by Ekman was
'readily received by the defendant' before the expiry
date [of] subject LC; that upon Ekman's
presentation of the documents for the P76,000.00
'representing final negotiation' on the LC before the
expiry date, and 'after a series of negotiations',
plaintiff paid to Ekman the amount of P76,000.00;
and that upon plaintiff's demand on defendant to
pay for said amount (P76,000.00), defendant'
refused to pay . . . without any valid reason'. Plaintiff
prays for judgment ordering defendant to pay the
abovementioned P76,000.00 plus due interest
thereon, plus 25% of the amount of the award as
attorney's fees.
"In the Answer, defendant interposed, inter
alia, by way of special and affirmative defenses that
plaintiff ha[d] no cause of action against defendant;
that there was a breach of contract by plaintiff who
in bad faith paid Ekman, knowing that the two units
of hydraulic loaders had been delivered to
defendant after the expiry date of subject LC; and
that in view of the breach of contract, defendant
offered to return to plaintiff the two units of
hydraulic loaders, 'presently still with the
defendant' but plaintiff refused to take possession
thereof.
"The trial court's ruling that plaintiff [was]
entitled to recover from defendant the amount of
P76,000.00 was based on its following
findings/conclusions: (1) under the contract of sale
of the five loaders between Ekman and defendant,
upon Ekman's delivery to, and acceptance by,
defendant of the two remaining units of the five
loaders, defendant became liable to Ekman for the
payment of said two units. However, as defendant
did not pay Ekman, the latter pressed plaintiff for
the payment of said two loaders in the amount of
P76,000.00. In the honest belief that it was still
under obligation to Ekman for said amount,
considering that Ekman had presented all the
necessary documents, plaintiff voluntarily paid the
said amount to Ekman. Plaintiff's . . . voluntary and
lawful act of payment g[a]ve rise to a quasi-contract
between plaintiff and defendant; and if defendant
should escape liability for said amount, the result
would be to allow defendant to enrich itself at
plaintiff's expense . . . .
SEHTA.
". . . . While defendant, indeed offered to
return the two loaders to plaintiff, . . . this offer was
made 3 years after defendant's receipt of the goods,
when plaintiff pressed for payment. By said
voluntary acceptance of the two loaders, estoppel
works against defendant who should have refused
delivery of, and/or immediately offered to return,
the goods.
"Accordingly, judgment was rendered in
favor of the plaintiff and against the defendant . . .
." 6
The CA Ruling
The CA rejected petitioner's imputation of bad faith and negligence
to respondent bank for paying for the two hydraulic loaders, which had
been delivered after the expiration of the subject letter of credit. The
appellate court pointed out that petitioner received the equipment after
the letter of credit had expired. "To absolve defendant from liability for the
price of the same," the CA explained, "is to allow it to get away with its
unjust enrichment at the expense of the plaintiff."
Hence, this Petition. 7
Issues
 Petitioner presents the following issues for resolution:
"1. Whether or not it is proper for a banking
institution to pay a letter of credit which has long
expired or been cancelled.
"2. Whether or not respondent courts were
correct in their conclusion that there was a
consummated sale between petitioner and Ekman
Co.
"3. Whether or not Respondent Court of
Appeals was correct in evading the issues raised in
the appeal that under the trust receipt, petitioner
was merely the depositary of private respondent
with respect to the goods covered by the trust
receipt." 8
The Court's Ruling
We affirm the Court of Appeals, but lower the interest rate to only 6
percent and delete the award of attorney's fees.
First Issue:
Efficacy of Letter of Credit
Petitioner asserts that respondent bank was negligent in paying for
the two hydraulic loaders, when it no longer had any obligation to do so in
view of the expiration and cancellation of the Letter of Credit.
Petitioner Rodzssen Supply Inc. applied for and obtained an
irrevocable 30-day domestic Letter of Credit from Far East Bank and Trust
Company Inc. on January 15, 1979, in favor of Ekman and Company Inc., in
order to finance the purchase of five units of hydraulic loaders in the
amount of P190,000. Originally set to expire on February 15, 1979, the
subject Letter of Credit was amended several times to extend its validity
until October 16, 1979.
The Letter of Credit expressly restricted the negotiation to
respondent bank and specifically instructed Ekman and Company Inc. to
tender the following documents: (1) delivery receipt duly acknowledged by
the buyer, (2) accepted draft, and (3) duly signed commercial invoices.
Likewise, the instrument contained a provision with regard to its expiration
date. 9
For the first three hydraulic loaders that were delivered, the bank
paid the amount specified in the letter of credit. The present dispute
pertains only to the last two hydraulic loaders.
Clearly, the bank paid Ekman when the former was no longer bound
to do so under the subject Letter of Credit. The records show that
respondent paid the latter P76,000 for the last two hydraulic loaders on
March 14, 1980, 10 five months after the expiration of the Letter of Credit on
October 16, 1979. 11 In fact, on December 27, 1979, the bank had informed
Rodzssen of the cancellation of the commercial paper and credited P22,800
to the account of the latter. The amount represented the marginal deposit,
which petitioner had been required to put up for the unnegotiated portion
of the Letter of Credit — P76,000 for the two hydraulic loaders. 12
The subject Letter of Credit had become invalid upon the lapse of the
period fixed therein. 13 Thus, respondent should not have paid Ekman; it
was not obliged to do so. In the same vein, of no moment was Ekman's
presentation, within the prescribed period, of all the documents necessary
for collection, as the Letter of Credit had already expired and had in fact
been cancelled.
Second Issue:
Was Petitioner Liable to Respondent?
Be that as it may, we agree with the CA that petitioner should pay
respondent bank the amount the latter expended for the equipment
belatedly delivered by Ekman and voluntarily received and kept by
petitioner.
 Respondent bank's right to seek recovery from petitioner is
anchored, not upon the inefficacious Letter of Credit, but on Article 2142 of
the Civil Code which reads as follows:
"Certain lawful, voluntary and unilateral acts
give rise to the juridical relation of quasi-contract
to the end that no one shall be unjustly enriched or
benefited at the expense of another."
Indeed, equitable considerations behoove us to allow recovery by
respondent. True, it erred in paying Ekman, but petitioner itself was not
without fault in the transaction. It must be noted that the latter had
voluntarily received and kept the loaders since October 1979.
Petitioner claims that it accepted the late delivery of the equipment,
only because it was bound to accept it under the company's trust receipt
arrangement with respondent bank.
Granting that petitioner was bound under such arrangement to
accept the late delivery of the equipment, we note its unexplained inaction
for almost four years with regard to the status of the ownership or
possession of the loaders. Bewildering was its lack of action to validate the
ownership and possession of the loaders, as well as its stolidity over the
purported failed sales transaction. Significant too is the fact that it
formalized its offer to return the two pieces of equipment only after
respondent's demand for payment, which came more than three years after
it accepted delivery.
When both parties to a transaction are mutually negligent in the
performance of their obligations, the fault of one cancels the negligence of
the other and, as in this case, their rights and obligations may be
determined equitably under the law proscribing unjust enrichment.
Payment of Interest
We, however, disagree with both the CA and the trial court's
imposition of 12 percent interest on the sum to be paid by petitioner.
In Eastern Shipping Lines v. CA, 14 the Court laid down the following
guidelines in the imposition of interest:
"xxx xxx xxx
2. When an obligation, not constituting a loan
or forbearance of money, is breached, an interest on
the amount of damages awarded may be imposed at
the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or
until the demand can be established with
reasonable certainty. Accordingly, where the
demand is established with reasonable certainty,
the interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art. 1169,
Civil Code) but when such certainty cannot be so
reasonably established at the time the demand is
made, the interest shall begin to run only from the
date the judgment of the court is made (at which
time the quantification of damages may be deemed
to have been reasonably ascertained). The actual
base for the computation of legal interest shall, in
any case, be on the amount finally adjudged.
3. When the judgment of the court awarding
a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12% per
annum from such finality until its satisfaction, this
interim period being deemed to be by then an
equivalent to a forbearance of credit."
Although the sum of money involved in this case was payable to a
bank, the present factual milieu clearly shows that it was not a loan or
forbearance of money. Thus, pursuant to established jurisprudence
and Article 2009 of the Civil Code, petitioner is bound to pay interest at 6
percent per annum, computed from April 7, 1983, the time respondent bank
demanded payment from petitioner. From the finality of the judgment until
its satisfaction, the interest shall be 12 percent per annum.
Attorney's Fees
Considering that negligence is imputable to both parties, both should
bear their respective costs of the suit. We also delete the award of
attorney's fees in favor of respondent bank. 15
WHEREFORE, the Petition is DENIED and the assailed Decision of the
Court of Appeals AFFIRMED with the following MODIFICATIONS:
1. Petitioner Rodzssen Supply Co., Inc. is
ORDERED to reimburse Respondent Far East Bank
and Trust Co., Inc. P76,000 plus interest thereon at
the rate of 6 percent per annum computed from
April 7, 1983. After this judgment becomes final, the
interest shall be 12 percent per annum. HDITCS

2. The award of attorney's fees in favor of

respondent is DELETED.
3. No pronouncement as to costs.
SO ORDERED.