Transfield Philippines vs Luzon Hydro

Electric Corp.
Facts: Transfield Philippines (Transfield) entered into a turn-key contract
with Luzon Hydro Corp. (LHC).Under the contract, Transfield were to
construct a hydro-electric plants in Benguet and Ilocos. Transfield was given
the sole responsibility for the design, construction, commissioning, testing
and completion of the Project. The contract provides for a period for which
the project is to be completed and also allows for the extension of the period
provided that the extension is based on justifiable grounds such as fortuitous
event. In order to guarantee performance by Transfield, two stand-by letters
of credit were required to be opened. During the construction of the plant,
Transfield requested for extension of time citing typhoon and various
disputes delaying the construction. LHC did not give due course to the
extension of the period prayed for but referred the matter to arbitration
committee. Because of the delay in the construction of the plant, LHC called
on the stand-by letters of credit because of default. However, the demand
was objected by Transfield on the ground that there is still pending
arbitration on their request for extension of time.

Issue: Whether or not LHC can collect from the letters of credit despite the
pending arbitration case

Held: Transfield’s argument that any dispute must first be resolved by the
parties, whether through negotiations or arbitration, before the beneficiary is
entitled to call on the letter of credit in essence would convert the letter of
credit into a mere guarantee.

The independent nature of the letter of credit may be: (a) independence in
toto where the credit is independent from the justification aspect and is a
separate obligation from the underlying agreement like for instance a typical
standby; or (b) independence may be only as to the justification aspect like
in a commercial letter of credit or repayment standby, which is identical with
the same obligations under the underlying agreement. In both cases the
payment may be enjoined if in the light of the purpose of the credit the
payment of the credit would constitute fraudulent abuse of the credit.
Jurisprudence has laid down a clear distinction between a letter of credit and
a guarantee in that the settlement of a dispute between the parties is not a
pre-requisite for the release of funds under a letter of credit. In other words,
the argument is incompatible with the very nature of the letter of credit. If a
letter of credit is drawable only after settlement of the dispute on the
contract entered into by the applicant and the beneficiary, there would be no
practical and beneficial use for letters of credit in commercial transactions.

The engagement of the issuing bank is to pay the seller or beneficiary of the
credit once the draft and the required documents are presented to it. The
so-called “independence principle” assures the seller or the beneficiary of
prompt payment independent of any breach of the main contract and
precludes the issuing bank from determining whether the main contract is
actually accomplished or not. Under this principle, banks assume no liability
or responsibility for the form, sufficiency, accuracy, genuineness, falsification
or legal effect of any documents, or for the general and/or particular
conditions stipulated in the documents or superimposed thereon, nor do they
assume any liability or responsibility for the description, quantity, weight,
quality, condition, packing, delivery, value or existence of the goods
represented by any documents, or for the good faith or acts and/or
omissions, solvency, performance or standing of the consignor, the carriers,
or the insurers of the goods, or any other person whomsoever.