Cases on Letters of Credit: 

Bank of America, NT & SA vs. Court of Appeals, G.R. No. 105395, December 10, 1993

BANK OF AMERICA, NT & SA, petitioners, 

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 Guevarra for private respondents.

VITUG, J.:

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.

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 latter 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 issuance." 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 the 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 facieevidence to
warrant prosecution.

Bank of America sued Inter-Resin for the recovery of P10,219,093.20, the peso equivalent of
the draft for US$1,320,600.00 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.8

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 latter 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 said documents and control over the goods only after reimbursing the bank.

What characterizes letters of credit, as distinguished from other accessory contracts, is the
engagement of the issuing bank to pay the seller of 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 receipts 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 document 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.
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 contract rules. 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 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
observances 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 with the petitioner, i.e., that it has in this instance merely been 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 "beneficiary" thereof,
an issue that largely is dependent on the bank's 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 could be considered as having incurred that liability. 22

In Insular Life Assurance Co. Ltd. Employees Association — Natu vs. Insular Life Assurance

Co., Ltd., 23 the Court said: Where the issues already raised also rest on other issues not
specifically presented, as long as the latter issues bear relevance and close relation to the
former and as long as they arise from the matters on record, the court has the authority to
include them in its discussion of the controversy and to pass upon them just as well. In brief, in
those cases where questions not particularly raised by the parties surface as necessary for the
complete adjudication of the rights and obligations of the parties, the interests of justice dictate
that the court should consider and resolve them. The rule that only issues or theories raised in
the initial proceedings may be taken up by a party thereto on appeal should only refer to
independent, not concomitant matters, to support or oppose the cause of action or defense. The
evil that is sought to be avoided, i.e., surprise to the adverse party, is in reality not existent on
matters that are properly litigated in the lower court and appear on record.

It cannot seriously be disputed, looking at this case, that Bank of America has, in fact, only been
an advising, not confirming, bank, and this much is clearly evident, among other things, by the
provisions of the letter of credit itself, the petitioner bank's letter of advice, its request for
payment of advising fee, and the admission of Inter-Resin that it has paid the same. That Bank
of America has asked Inter-Resin to submit documents required by the letter of credit and
eventually has paid the proceeds thereof, did not obviously make it a confirming bank. The fact,
too, that the draft required by the letter of credit is to be drawn under the account of General
Chemicals (buyer) only means 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.

No less important is that Bank of America's letter of 11 March 1981 has expressly stated that
"[t]he enclosure is solely an advise of credit opened by the abovementioned correspondent
and conveys no engagement by us." 24This written reservation by Bank of America in limiting its
obligation only to being an advising bank is in consonance with the provisions of U.C.P.

As an advising or notifying bank, Bank of America did not incur any obligation more than just
notifying Inter-Resin of the letter of credit issued in its favor, let alone to confirm the letter of
credit. 25 The bare statement of the bank employees, aforementioned, in responding to the
inquiry made by Atty. Tanay, Inter-Resin's representative, on the authenticity of the letter of
credit certainly did not have the effect of novating the letter of credit and Bank of America's letter
of advise, 26 nor can it justify the conclusion that the bank must now assume total liability on the
letter of credit. Indeed, Inter-Resin itself cannot claim to have been all that free from fault. As the
seller, the issuance of the letter of credit should have obviously been a great concern to it. 27 It
would have, in fact, been strange if it did not, prior to the letter of credit, enter into a contract, or
negotiated at the every least, with General Chemicals. 28 In the ordinary course of business, the
perfection of contract precedes the issuance of a letter of credit.

Bringing the letter of credit to the attention of the seller is the primordial obligation of an advising
bank. The view that Bank of America should have first checked the authenticity of the letter of
credit with bank of Ayudhya, by using advanced mode of business communications, before
dispatching the same to Inter-Resin finds no real support in U.C.P. Article 18 of the U.C.P.
states that: "Banks assume no liability or responsibility for the consequences arising out of the
delay and/or loss in transit of any 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."

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 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 to 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 possible then allowed
it to even go after the indorsers of the draft, this failure, 32/ nonetheless, does not preclude
petitioner bank's right (as 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 and in
having executed the corresponding draft. The 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, would 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

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 then 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.

No costs.

SO ORDERED.

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 receipts 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 document 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.
Facts : Bank of America received an Irrevocable Letter of Credit issued by Bank of Ayudhya for
the Account of General Chemicals Ltd., Inc. for the sale of plastic ropes and agricultural files.
Under the letter of credit, Bank of America acted as an advising bank and Inter-Resin Industrial
Corp. (IR) acted as the beneficiary. Upon receipt of the letter advice, Inter- Resin told Bank of
America to confirm the letter of credit.

Notwithstanding such instruction, Bank of America failed to confirm the letter of credit. Inter-
Resin made a partial availment of the Letter of Credit after presentment of the required
documents to Bank of America. After confirmation of all the documents Bank of America issued
a check in favor of IR. BA advised Bank of Ayudhya of IR’s availment under the letter of credit
and asked for the corresponding reimbursement. IR presented documents for the second
availment under the same letter of credit. However, BA stopped the processing of such after
they received a telex from Bank of Ayudhya delaring that the LC fraudulent. BA sued IR for the
recovery of the first LC payment.

The IR contended that Bank of America should have first checked the authenticity of the letter of
credit with bank of Ayudhya

Issue: Whether or not Bank of America may recover what it has paid under the letter of credit to
Inter-Resin

Held : May Bank of America then recover what it has paid under the letter of credit when the
corresponding draft

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 receipts 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 document 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 services of an advising (notifying) bank 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,  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.

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. As a
negotiating bank, Bank of America has a right to 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.
Furthermore, bringing the letter of credit to the attention of the seller is the primordial obligation
of an advising bank. The view that Bank of America should have first checked the authenticity of
the letter of credit with bank of Ayudhya, by using advanced mode of business communications,
before dispatching the same to Inter-Resin finds no real support.

Metropolitan Waterworks Sewerage System [MWSS] vs. Daway, G.R. No. 160723, July 21,
2004

METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, Petitioner, v. 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.:

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 Order1 which states, in part, that the court was
thereby:

x x xx x xx x x

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;chanroblesvirtuallawlibrary

3. Prohibiting the petitioner from selling, encumbering, transferring, or disposing in any manner
any of its properties except in the ordinary course of business;chanroblesvirtuallawlibrary

4. Prohibiting the petitioner from making any payment of its liabilities, outstanding as at the date
of the filing of the petition;

x x xx x xx x x

Subsequently, on November 27, 2003, public respondent, acting on two Urgent Ex

Parte motions2 filed by respondent Maynilad, issued the herein questioned Order3 which stated
that it thereby:chanroblesvirtua1awlibrary

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 Courts 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 courts 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 agreement5 which,
among other things, consisted of payments of petitioners mostly foreign loans.

To secure the concessionaires 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 Credit6 in the amount of US$120,000,000 in favor of MWSS for the
full and prompt performance of Maynilads 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:chanroblesvirtua1awlibrary

a) infuse the amount of UD$80.0 million as additional funding support from its
stockholders;chanroblesvirtuallawlibrary

b) resume payment of the concession fees; andcralawlibrary

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
Maynilads 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 notice11 on November 24, 2003, to Citicorp International Limited, as agent
for the participating banks, that by virtue of Maynilads 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

Petitioners Case

Petitioner hereby raises the following issues:chanroblesvirtua1awlibrary

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 Maynilads Case

Respondent Maynilad seeks to refute this argument by alleging that:chanroblesvirtua1awlibrary

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 records13 and that public respondent had the authority to issue the
same;chanroblesvirtuallawlibrary

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 cralawred

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;chanroblesvirtuallawlibrary

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 x x x 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?chanroblesvirtualawlibrary
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 courts 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 Maynilads 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
Maynilads 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 Maynilads 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 Appeals16 that the concept of
guarantee vis--vis the concept of an irrevocable letter of credit are inconsistent with each
other.The guarantee theory destroys the independence of the banks 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 guarantors 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 cralawred

Letters of credit were developed for the purpose of insuring to a seller payment of a definite
amount upon the presentation of documents18 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 cralawred

We have accepted, in Feati Bank and Trust Company v. Court of Appeals[23 and Bank of

America NT & SA v. Court of Appeals,24to 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. Nery25 was justified under Art. 2
of the Code of Commerce, which states:chanroblesvirtua1awlibrary

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 debtors 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 Appeals26 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 Agreement28 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 cralawred

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:chanroblesvirtua1awlibrary

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.31The 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 equally beneficial, speedy and sufficient, not only a remedy
which at some 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 cralawred

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.Respondents 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 voidand 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.

No costs.

SO ORDERED.

FACTS: MWSS granted Maynilad under a Concession Agreement 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 which, among other things, consisted of payments of petitioners mostly foreign loans.
To secure the concessionaires performance of its obligations, 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 for a three-year facility with a number of
foreign banks, led by Citicorp Int’l Ltd., for the issuance of an Irrevocable Standby Letter of
Credit in favor of MWSS for the full and prompt performance of Maynilads obligations to MWSS
as aforestated.

Later, the parties agreed to resolve the issues between them [Maynilad is asking 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 and in filing
to get what it desired, Maynilad unilaterally suspended the payment of the concession fees]
through an amendment of the Concession Agreement which was based on the terms set down
in MWSS Board of Trustees Resolution 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.
However  Maynilad served upon MWSS a Notice of Event of Termination, claiming that MWSS
failed to comply with its obligations under the Concession Agreement and its Amendment
regarding the adjustment mechanism that would cover Maynilads foreign exchange losses.
Maynilad filed a Notice of Early Termination of the concession, which was challenged by
MWSS. This matter was eventually brought before the Appeals Panel by MWSS. 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. MWSS, thereafter, submitted a written notice to
Citicorp Int’l Ltd, as agent for the participating banks, that by virtue of Maynilads failure to
perform its obligations under the Concession Agreement, it was drawing on the Irrevocable
Standby Letter of Credit and thereby demanded payment.

Prior to this, however, Maynilad had filed on a petition for rehabilitation before the RTC of
Quezon City which resulted in the issuance of the Stay Order and the disputed Order of
November 27, 2003.

ISSUE: WON 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
HELD: the petition for certiorari is granted.The Order of November 27, 2003 of the RTC of
Quezon City 90, is hereby declared null and voidand set aside.
YES

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 Maynilads claim that the banks are not
solidarily liable with the debtor does not find support in jurisprudence.
Letters of credit were developed for the purpose of insuring to a seller payment of a definite
amount upon the presentation of documentsand 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 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. 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.
They are definite undertakings to pay at sight once the documents stipulated therein are
presented.

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 debtors assets. These
are the same characteristics of a surety or solidary obligor. And being solidary, the claims
against them can be pursued separately from and independently of the rehabilitation case.
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 in favor of the MWSS as a bond for the full and
prompt performance of the obligations by the concessionaire under the Concession Agreement
and herein MWSS 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 of the Letter of Credit.

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.

NOTES:
We held in Feati Bank & Trust Company v. Court of Appeals that the concept of guarantee vis–
vis the concept of an irrevocable letter of credit are inconsistent with each other.The guarantee
theory destroys the independence of the banks 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 guarantors 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.
Marphil Export Corporation vs. Allied Banking Corporation, G.R. No. 187922, September 21,
2016

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) Agreements9 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
Agreement12 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.13chanrobleslaw

The transaction involved in this petition is the export of cashew nuts to Intan Trading Ltd.
Hongkong (Intan) in Llong 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.

When Intan placed a second order for cashew nuts, Marphil availed additional loans in their
credit line evidenced by PN No. 0100-88-0246316 (PN No. 2463) for P500,000.00 and PN No.
0100-88-0273017 (PNNo. 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.19chanrobleslaw

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 Complaint25cralawred 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.

On May 7, 1990, Allied Bank filed its Answer with Compulsory Counterclaim and Petition for
Writ of Preliminary Attachment.28Allied 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
4202.29chanrobleslaw

On September 14, 1990, Allied Bank filed a Complaint with Petition for Writ of Preliminary
Attachment30 (Collection Case) against Lim and Lim Shao Tong which was raffled to Branch 145
of RTC Makati. Allied Bank sued them 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 Answer31 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 arid
the gross value of the thirty-two (32) transactions between them amounted to
US$640,188.51.33chanrobleslaw

On March 15, 1994, Branch 145 of RTC Makati granted ex parte the prayer for preliminary
attachment in the Collection Case.34chanrobleslaw

On May 7, 1991, Allied Bank filed a Motion to Consolidate/Be Accepted35 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.38chanrobleslaw

On May 9, 2007, petitioners filed a Notice of Appeal39 with the RTC. Allied Bank did not appeal
the RTC decision. Records were then forwarded to the CA, which began
proceedings.40chanrobleslaw
The CA rendered its Decision41 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. 21970.42chanrobleslaw

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.44chanrobleslaw

In a Resolution45 dated May 12, 2009, the CA denied petitioners Motion for Partial
Reconsideration46 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 Address47 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
Resolution48 dated December 4, 2013.

Issues

The issues are as follows:

I. Whether Allied Bank's debit memo on Maprhil'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 P1,913,763.45.

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.49Bearing this in mind, we proceed to dispose of the issues.

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
Appeals50 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 x x x."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.52chanrobleslaw

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:ChanRoblesVirtualawlibrary
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 as 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. x x x55chanroblesvirtuallawlibrary
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:ChanRoblesVirtualawlibrary

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

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 thereto, together with your
commission, interest and other charges, as well as to reimburse yourself therefrom x x x 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.59chanroblesvirtuallawlibrary
The case of Velasquez v. Solidbank Corporation60 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.63chanrobleslaw

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. 21970. 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 Banti '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.66chanrobleslaw
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.67chanrobleslaw

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.

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 when1 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 busiriess 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 Frames68 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.69chanrobleslaw

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.70chanrobleslaw

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.74chanrobleslaw

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.76chanrobleslaw
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 cause1 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 Bank79 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.81chanrobleslaw

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:ChanRoblesVirtualawlibrary

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 Attachment83 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:ChanRoblesVirtualawlibrary

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:

chanRoblesvirtualLawlibraryx x x  
 
(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
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.85chanrobleslaw

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:ChanRoblesVirtualawlibrary

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 of Court which pertinently reads:

chanRoblesvirtualLawlibrary
xxx

For a writ of attachment to issue under this rule, the applicant must sufficiently show the factual
circumstances of the alleged fraud because fraudulent intent cannot be inferred from the
debtor's mere non-payment of the debt or failure to comply with his obligation. The applicant
must then be able to demonstrate that the debtor has intended to defraud the creditor. In Liberty
Insurance Corporation v. Court of Appeals, we explained as follows:ChanRoblesVirtualawlibrary
"To sustain an attachment on triis ground, it must be shown that the debtor in contracting the
debt or incurring the obligation intended to defraud the creditor. The fraud must relate to the
execution of the agreement and must have been the reason which induced the other party into
giving consent which he would not have otherwise given. To constitute a ground for attachment
in Section 1 (d), Rule 57 of the Rules of Court, fraud should be committed upon contracting the
obligation sued upon. A debt is fraudulently contracted if at the time of contracting it the debtor
has a preconceived plan or intention not to pay, as it is in this case. Fraud is a state of mind and
need not be proved by direct evidence but may be inferred1 from the circumstances attendant in
each case."
In the instant case, petitioner's October 12, 2000 Affidavit is bereft of any factual statement that
respondent committed a fraud. The affidavit narrated only the alleged fraudulent transaction
between Wincorp and Virata and/or Power Merge, which, by the way, explains why this Court, in
G.R. No. 162928, affirmed the writ of attachment issued against the latter. As to the participation
of respondent in the said transaction, the affidavit merely states that respondent, an officer and
director of Wincorp, connived with the other defendants in the civil case to defraud petitioner of
his money placements. No other factual averment or circumstance details how respondent
committed a fraud or how he connived with the other defendants to commit a fraud in the
transaction sued upon. In other words, petitioner has not shown any specific act or deed to
support the allegation that respondent is guilty of fraud.

The affidavit, being the foundation of the writ, must contain such particulars as to how the fraud
imputed to respondent was committed for the court to decide whether or not to issue the writ.
Absent any statement of other factual circumstances to show that respondent, at the time of
contracting the obligation, had a preconceived plan or intention not to pay, or without any
showing of how respondent committed the alleged fraud, the general averment in the affidavit
that respondent is an officer and director of Wincorp who allegedly 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.90chanrobleslaw

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 the
cashew nuts at a volume less than that which was required by the foreign buyer, relates to the
sale between Marphil and Intan, and not to the loan between Marphil and Allied Bank.

From the foregoing, Allied Bank was not able to sufficiently establish the factual circumstances
of the alleged fraud in contracting the obligation. Thus, there being no ground for its issuance,
the writ of preliminary attachment should be dissolved.

WHEREFORE, the petition for review on certiorari is PARTLY GRANTED. The January 12,
2009 Decision and May 12, 2009 Resolution of the Court of Appeals are MODIFIED. Marphil
Export Corporation and 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.

SO ORDERED.chanRoblesvirtualLawlibrary
MARPHIL EXPORT CORPORATION AND IRENEO LIM, PETITIONERS, V. ALLIED
BANKING CORPORATION, SUBSTITUTED BY PHILIPPINE NATIONAL BANK,
RESPONDENT. G.R. No. 187922, THIRD DIVISION, September 21, 2016, JARDALEZA J.

Allied Bank did not act as confirming bank in 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,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 as 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. Nanyang Bank's obligations in the letter of credit.

FACTS

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).
These loans were in the nature of advances to finance the exporter's working capital
requirements and export bills. The loans were secured by three (3) Continuing Guaranty or
Continuing Surety (CG/CS) Agreements executed by Lim, Lim Shiao Tong and Enrique Ching.
Apart from the CG/CS Agreements, irrevocable letters of credits also served as collaterals for
the loans obtained to pay export bills. In turn, Allied Bank required Marphil, through its
authorized signatories Lim and Rebecca Lim So, to execute a Letter of Agreement 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.13chanrobleslaw
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. 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.

When Intan placed a second order for cashew nuts, Marphil availed additional loans in their
credit line. 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. 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.

However, on July 2, 1988, Allied Bank informed Marphil that it received a cable from Nanyang
Bank noting some discrepancies in the shipping documents. 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. 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. Lim was made to sign a blank promissory
note to cover for the amount. This was later filled up by Allied Bank in the amount of P1,
505,391.36.

On March 6, 1990, Marphil filed a Complaint for declaratory relief and damages against Allied
Bank (Declaratory' Relief Case) raffled to Branch 61 of RTC Makati. 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. 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.

On May 7, 1990, Allied Bank filed its Answer with Compulsory Counterclaim and Petition for
Writ of Preliminary Attachment. 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.

On September 14, 1990, Allied Bank filed a Complaint with Petition for Writ of Preliminary
Attachment (Collection Case) against Lim and Lim Shao Tong which was raffled to Branch 145
of RTC Makati. Allied Bank sued them 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 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
arid the gross value of the thirty-two (32) transactions between them amounted to
US$640,188.51.

RTC rendered an Omnibus Decision. 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.

The CA modified 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. 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, 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. Hence, this petition.

ISSUE

Whether or not Allied Bank is a confirming bank which undertakes Nanyang Bank's obligation
as issuing bank?

RULING

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.

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 as 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.

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.

The case of Velasquez v. Solidbank Corporation60 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.63chanrobleslaw

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. 21970. 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. As an independent obligation, Marphil is bound to fulfill this obligation to reimburse
Allied Bank.

Transfield Philippines, Inc. vs. Luzon Hydro Corporation, G.R. No. 146717, November 22, 2004

TRANSFIELD PHILIPPINES, INC., Petitioner, v. LUZON HYDRO CORPORATION,

AUSTRALIA and NEW ZEALAND BANKING GROUP LIMITED and SECURITY BANK
CORPORATION, Respondents.

DECISION

TINGA, J.:

Subject of this case is the letter of credit which has evolved as the ubiquitous and most
important device in international trade. A creation of commerce and businessmen, the letter of
credit is also unique in the number of parties involved and its supranational character.

Petitioner has appealed from the Decision1 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 Contract3 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. 

Meanwhile, foreseeing that LHC would call on the Securities pursuant to the pertinent provisions
of the Turnkey Contract,12 petitioner in two separate letters13 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 8.214 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 Order19 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 issued a temporary restraining
order, enjoining LHC from calling on the Securities or any renewals or substitutes thereof and
ordering respondent banks to cease and desist from transferring, paying or in any manner
disposing of the Securities.

However, the appellate court failed to act on the application for preliminary injunction until the
temporary restraining order expired on 27 January 2001. Immediately thereafter,
representatives of LHC trooped to ANZ Bank and withdrew the total amount of
US$4,950,000.00, thereby reducing the balance in ANZ Bank to US$1,852,814.00.

On 2 February 2001, the appellate court dismissed the petition for certiorari . The appellate
court expressed conformity with the trial court's decision that LHC could call on the Securities
pursuant to the first principle in credit law that the credit itself is independent of the underlying
transaction and that as long as the beneficiary complied with the credit, it was of no moment
that he had not complied with the underlying contract. Further, the appellate court held that even
assuming that the trial court's denial of petitioner's application for a writ of preliminary injunction
was erroneous, it constituted only an error of judgment which is not correctible by certiorari ,
unlike error of jurisdiction.

Undaunted, petitioner filed the instant Petition for Review raising the following issues for
resolution:

WHETHER THE "INDEPENDENCE PRINCIPLE" ON LETTERS OF CREDIT MAY BE

INVOKED BY A BENEFICIARY THEREOF WHERE THE BENEFICIARY'S CALL THEREON IS
WRONGFUL OR FRAUDULENT.

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.

WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN RELEASING THE
AMOUNTS DUE UNDER THE SECURITIES DESPITE BEING NOTIFIED THAT LHC'S CALL
THEREON IS WRONGFUL.

WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND IRREPARABLE DAMAGE IN

THE EVENT THAT:

A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ BANK AND SECURITY BANK
ARE ALLOWED TO RELEASE, THE REMAINING BALANCE OF THE SECURITIES PRIOR
TO THE RESOLUTION OF THE DISPUTES BETWEEN PETITIONER AND LHC.

B. LHC DOES NOT RETURN THE AMOUNTS IT HAD WRONGFULLY DRAWN FROM THE
SECURITIES.21

Petitioner contends that the courts below improperly relied on the "independence principle" on
letters of credit when this case falls squarely within the "fraud exception rule." Respondent LHC
deliberately misrepresented the supposed existence of delay despite its knowledge that the
issue was still pending arbitration, petitioner continues. 

Petitioner asserts that LHC should be ordered to return the proceeds of the Securities pursuant
to the principle against unjust enrichment and that, under the premises, injunction was the
appropriate remedy obtainable from the competent local courts.

On 25 August 2003, petitioner filed a Supplement to the Petition22 and Supplemental

Memorandum,23 alleging that in the course of the proceedings in the ICC Arbitration, a number
of documentary and 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 Manifestation dated 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 200327 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 200328posits 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.
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?chanroblesvirtualawlibrary

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.

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.

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?chanroblesvirtualawlibrary

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.48The
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.55Indeed, 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.

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.65The
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 200466 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.

Transfield Philippines, Inc. v. Luzon Hydro Corp.

GR No. 146717 (22 November 2004)
Tinga J. kmd

SUBJECT MATTER: Special Laws; Letters of Credit; Independence Principle

CASE SUMMARY:
Transfield, as a contractor, undertook to construct a hydro-electric power station and complete
the same on or before June 1, 2000. To secure the performance of its obligation. Transfield
opened 2 letters of credits from ANZ Banking Group and Security Bank in favor of Luzon.
Nonetheless, Transfield was unable to complete the project on the target date allegedly due to
force majeure. Both Transfield and Luzon filed before separate arbitration tribunals, ICC and
CIAC respectively, to determine whether force majeure would justify the delay. Pending the
arbitration proceeding, Transfield filed a complaint for preliminary injunction against the
respondent banks to restrain them from paying on the securities and also against Luzon to
prevent it from calling on the securities. RTC issued a TRO but denied the application for writ of
preliminary injunction. CA affirmed RTC. N.B. When the TRO expired, Luzon was able to
withdraw from ANZ.
DOCTRINES:
Under the independence principle, banks assume no liability or responsibility for the form,
sufficiency, accuracy, genuineness, falsification or legal effect of any document, 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.
The independence principle liberates the issuing bank from the duty of ascertaining compliance
by the parties in the main contract.
PARTIES:
Petitioner: Transfield Philippines, Inc. (Transfield)
Luzon Hydro Corporation (Luzon)
Australia and New Zealand Banking Group Ltd.
Respondents:
(ANZ)
Security Bank Corporation (SBC)
FACTS:
Transfield and Luzon entered into a Turnkey Contract whereby Transfield undertook, as a
contractor, to construct a 70-Megawatt hydro-electric power station at the Bakun River in
Benguet and Ilocos Sur.
The contract provides that:
(1) the target completion date of the project is on June 1, 2000, or such date as may be
agreed upon; and
(2) petitioner is entitled to claim extensions of time (EOT) for reasons enumerated in the
contract e.g. variations, force majeure, and delays caused by Luzon itself.
It was also agreed upon that in case of dispute, the parties are bound to settle their
differences through mediation, conciliation and such other means enumerated in the
contract.
To secure the performance of the obligation, Transfield opened in favor of Luzon, 2 standby
letters of credits with ANZ and SBC, each in the amount of US$8.99M.
Nonetheless, in the course of construction, Transfield sought various EOT to complete the
project. The request for extensions were allegedly due to force majeure occasioned by typhoon
Zeb, barricades, and demonstrations, which prevented the on-time completion of the project.
Luzon denied Transfield’s requests for EOT.
Luzon filed a Request for Arbitration before the Construction Industry Arbitration Commission
(CIAC), while Transfield filed a Request for Arbitration before the International Chamber of
Commerce (ICC). These arbitration proceedings would resolve the issues: (1)WON the alleged
forcemajeure would justify the EOT sought by Transfield, (2)WON Luzon had the right to
terminate the contract for Transfield’s failure to complete the project on target date.
Meanwhile, Transfield wrote letters to ANZ and SBC advising them of the arbitration
proceedings. Transfield asserted that Luzon had no right to call on the securities until the
resolution of the issued before CIAC and ICC. Transfield also warned the banks that any
transfer, release, or disposition of the securities in favor of Luzon would constrain it to hold
respondent banks liable for liquidated damages.
Despite the Transfield’s letters, the banks informed Transfield that they would pay on the
Securities if and when Luzon calls on them.
Transfield filed a complaint for injunction with prayer for TRO and writ of preliminary injunction
before the RTC. Transfield sought to restraint banks from calling on the securities and the
respondent banks from paying on the securities.
RTC –denied the application for writ of preliminary injunction. Applying the “Independent
Contract” principle, Luzon should be allowed to draw on the securities for liquidated damages.
Banks were mere custodians of the funds and were obligated to transfer the same to the
beneficiary for as long as the latter could submit the required certification of its claims. Luzon, as
the ultimate beneficiary, may also invoke the “independent contract” principle.
CA - issued a TRO but failed to act on the application for preliminary injunction until the TRO
expired.
N.B. As soon as the TRO expired, Luzon went to ANZ bank and withdrew US$ 4.9M.
- CA affirmed RTC decisions; Luzon could call on the securities pursuant to the first principle
in credit law that the credit itself is independent of the underlying transaction and that as long as
the beneficiary complied with the credit.

ISSUE/S:
1. WON the “Independence Principle” on Letter of Credit may be invoked by a beneficiary.
(YES)
2. WON injunction is the proper remedy to restrain the allegedly wrongful draws on the
securities. (NO)
Petitioner’s argument:
 RTC and CA improperly relied on the “independence principle” on the letters of credit
when this case falls within the “fraud exception rule”.
 Luzon knowing misinterpreted the existence of delay despite its knowledge that the
issue was still pending arbitration to be able to draw against the securities.
 Luzon should be ordered to return proceeds of the securities.
 Injunction was the appropriate remedy obtainable from the local courts.
Respondent SBC’s argument:
 Invoking the independence principle, it was under no obligation to look into the validity or
accuracy of the certification submitted by Luzon or into the latter’s capacity or
entitlement to so certify.
Respondent ANZ’s argument:
 Its actions could not be regarded as unjustified in the view of the prevailing
independence principle under which it had no obligation to ascertain the truth of Luzon’s
allegations (Similar to SBC)

HOLDING/RATIO:
 1. Yes, the beneficiary can invoke the independence principle.

In a letter of credit transaction 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, and particularly, the independence principle liberates the issuing bank from
the duty of ascertaining compliance by the parties of the main contract. As it is, the
independence doctrine works for the benefit of both issuing bank and the beneficiary.

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. 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 of the original transaction. With the letter of credit, the party who
obtained the letter of credit may present it to the beneficiary as a security to convince the
latter to enter into the business transaction. On the other hand, the beneficiary 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 party who presented the letter of
credit fails to perform his part.

Prior resolution of any dispute before beneficiary is entitled to call on the letter of credit
would convert it into a mere guarantee.

In this case, the Court ruled that ANZ and SBC banks were left with little or no
alternative but to honor the credit and that it was “ministerial for them to honor the call for
payment. Also, Luzon’s right to call on the securities was rooted on the following
provisions of the contract:
… provide security to the Employer in the form of 2 irrevocable and confirmed
standby letters of credit …
… if the contractor fails to comply, the contractor shall pay the Employer by way
of liquidated damages …
… Employer may deduct the amount of such damages by drawing on the
security …

2. No, injunction is not a remedy in this case.

Fraud is an exception to the independence principle and the remedy for fraudulent
abuse is injunction. However, injunction should not be granted unless: (a) there is a 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.

In this case, Transfield failed to show that it has a clear and unmistakable right to
restrain Luzon’s call on the securities. The contract was plain and unequivocal in that it
conferred upon Luzon the right to draw upon the securities in case of default. Also,
nothing in the contract would indicate that all disputes regarding delay should first be
settled through arbitration before Luzon would be allowed to call upon the securities.

WHEREFORE, the instant petition is DENIED, with costs against petitioner.

Notes:
 Letter of Credit is:
o Not strictly contractual because privity and meeting of the minds are lacking.
o Not a contract of suretyship or guaranty because it entails a primary liability
following a default.
o Not a negotiable instrument because it is not payable to order or bearer, and is
generally conditional.
o 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.
Commercial credits Standby Credits

Involve payment of money under a

contract of sale

Becomes payable upon presentation by Payable upon certification of a party’s

the seller-beneficiary of the documents nonperformance of the agreement;
that show he has taken affirmative steps to Documents that accompany the
comply with the sales agreement. beneficiary’s draft tend to show that the
applicant has not performed.

Beneficiary of commercial credit must Beneficiary of the standby credit must

demonstrate by documents that he has certify that his obligor has not performed
performed his contract. the contract.

 In a standby type of letter of credit, the credit is payable upon certification of a party’s
nonperformance of the agreement.
 The independence principle assures 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.
o Bank assumes no liability or responsibility for the form, sufficiency, accuracy,
genuineness, falsification or legal effect of any documents, or for the generals
and/or particular conditions stipulates in the documents.
 Independent nature maybe:
o Independence in toto – credit is independent from the underlying agreement (e.g.
standby letter of credit).
o Independence as to the justification aspect only – e.g in a commercial letter of
credit or repayment standby, which is identical with the same obligations under
the underlying agreement.

Feati Bank & Trust Company vs. Court of Appeals, 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.

GUTIERREZ, JR., J.:

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:

On June 3, 1971, Bernardo E. Villaluz agreed to sell to the then defendant Axel Christiansen
2,000 cubic meters of lauan logs at $27.00 per cubic meter FOB.

After inspecting the logs, Christiansen issued purchase order No. 76171.

On the arrangements made and upon the instructions of the consignee, Hanmi Trade
Development, Ltd., de Santa Ana, California, the Security Pacific National Bank of Los Angeles,
California issued Irrevocable Letter 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.
 c. One set of non-negotiable documents was airmailed to Han Mi Trade
Development Company and one set to Consignee and Parties to be advised by
Hans-Axel Christiansen, Ship and Merchandise Broker.

2. Tally sheets in quadruplicate.

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.

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, Hanmi 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 plaintiffs 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).

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 even 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.

x x x           x x x          x x x

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 damages 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:

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.

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 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 & Hatfield, 28-29,
cited in Agbayani, Commercial Laws, 1978 edition, p. 77).

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 RESPONDENTS 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?

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 America 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.

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 credithas 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.

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 necessarily imply that the
correspondent bank in accepting the instructions of the issuing bank has also confirmed the
letter of credit. Another error which the lower court and the Court of Appeals made was to
confuse the obligation assumed by the petitioner.

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 bank, on the
other hand, is a correspondent bank which buys or discounts a draft under the letter of credit. 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. (Scanlon v. First National Bank of Mexico, 162
N.E. 567 [1928]; Shaterian, Export-Import Banking, p. 293, cited in Agbayani, Commercial Laws
of the Philippines, Vol. 1, p. 76)

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 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.

If the petitioner was a confirming bank, then a categorical declaration should have been stated
in the letter of credit that the petitioner is to honor all drafts drawn in conformity with the letter of
credit. What was simply stated therein was the instruction that the petitioner forward the original
letter of credit to the beneficiary.

Since the petitioner was only a notifying bank, its responsibility was solely to notify and/or
transmit the documentary of credit to the private respondent and its obligation ends there.

The notifying bank may suggest to the seller its willingness to negotiate, but this fact alone does
not imply that the notifying bank promises to accept the draft drawn under the documentary
credit.

A notifying bank is not a privy to the contract of sale between the buyer and the seller, its
relationship is only with that of the issuing bank and not with the beneficiary to whom he
assumes no liability. It follows therefore that when the petitioner refused to negotiate with the
private respondent, the latter has no cause 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
York, supra)

In order that the petitioner may be held liable under the letter, there should be proof that the
petitioner confirmed the letter of credit.

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.
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 non-compliance 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.

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. (SeeNational 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.1âwphi1 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.

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.

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.
A negotiating bank, on the other hand, is a correspondent bank which buys or discounts
a draft under the letter of credit. 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.
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 correspondent bank itself had issued
the letter of credit.
 Facts: Bernardo Villaluz entered into a contract of sale with Axel Christiansen in which Villaluz
agreed to deliver to Christiansen 2,000 cubic meters of lauan logs at $27.00 per cubic meter
FOB. On the arrangements made and upon the instructions of consignee, Hanmi Trade
Development, Ltd., the Security Pacific National Bank of Los Angeles, California issued an
irrevocable letter of credit 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  with the instruction to the
latter that it “forward the enclosed letter of credit to the beneficiary.” The letter of credit also
provided that the draft to be drawn is on Security Pacific National Bank and that it be
accompanied by certain documents. The logs were thereafter loaded on a vessel but
Christiansen refused to issue the certification required in paragraph 4 of the letter of credit,
despite repeated requests by the private respondent. The logs however were still shipped and
received by consignee, to whom Christiansen sold the logs. 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 until such credit lapsed. Since the demands by Villaluz for
Christiansen to execute the certification proved futile, he filed an action for mandamus and
specific performance against Christiansen and Feati Bank and Trust Company before the Court
of First Instance of Rizal. Christiansen however left the Philippines and Villaluz filed an
amended complaint making Feati Bank and Trust Company.

 Issue: Whether or not Feati Bank is liable for Releasing the funds to Christiansen

 Held: 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.
A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft
under the letter of credit. 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.

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 correspondent bank itself had issued the letter of
credit.

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.

A notifying bank is not a privy to the contract of sale between the buyer and the seller, its
relationship is only with that of the issuing bank and not with the beneficiary to whom he
assumes no liability. It follows therefore that when the petitioner refused to negotiate with the
private respondent, the latter has no cause of action against the petitioner for the enforcement
of his rights under the letter.

Since the Feati was only a notifying bank, its responsibility was solely to notify and/or transmit
the documentary of credit to the private respondent and its obligation ends there.

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. 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 Feati, the refusal by
the petitioner to accept the tender of the private respondent is justified.

Rodzssen Supply Co., Inc. vs. Far East Bank & Trust Co., G.R. No. 109087, May 9, 2001

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.chanrob1es virtua1 1aw 1ibrary

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:jgc:chanrobles.com.ph
"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:chanrob1es virtual 1aw library

‘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 

On the other hand, the trial court had rendered this judgment:jgc:chanrobles.com.ph

"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 by the Court of Appeals as
follows:jgc:chanrobles.com.ph

"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."cralaw virtua1aw library

Hence, this Petition. 7 

Issues

Petitioner presents the following issues for resolution:jgc:chanrobles.com.ph

"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:chanrob1es virtual 1aw library

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.chanrob1es virtua1 1aw 1ibrary

Second Issue:chanrob1es virtual 1aw library

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:jgc:chanrobles.com.ph

"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."cralaw
virtua1aw library
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:chanrob1es virtua1 1aw 1ibrary

"x       x       x

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."cralaw virtua1aw library

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:chanrob1es virtual 1aw library

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.chanrob1es virtua1 1aw 1ibrary

2. The award of attorney’s fees in favor of respondent is DELETED.

3. No pronouncement as to costs.

SO ORDERED.

When the letter of Credit expires, the bank  can still collect from the plaintiff, not on the
letter of credit, but on the grounds of solutio indebiti
Facts: Rodzssen Supply, Inc. (Rodzssen) opened with plaintiff Far East Bank and Trust Co. (Far
East Bank) a 30-day domestic letter of credit, 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.

The three loaders were delivered to defendant for which Far East Bank paid Ekman and which
defendant paid plaintiff before expiry date of LC. The remaining two loaders were delivered to
defendant but the latter refused to pay. Ekman pressed payment to plaintiff. Rodzssen paid
Ekman for the two loaders and later demanded from defendant such amount as it paid Ekman.
Far East Bank refused payment contending that there was a breach of contract by Rodzssen
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 Letter of Credit.

Issue: Whether or not Far East Bank can still collect from Rodzssen despite the expiration of the
letters of Credit

Held: Far East Bank can still collect from Rodzssen not on the letter of credit but on the grounds
of solutio indebiti

Far East Bank’s right to seek recovery from Rodzssen is anchored not upon the inefficacious
Letter of Credit, but on Article 2142 of the Civil Code, which reads;

“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.”
Ekman for the last 2 loaders on March 14, 1980, which was five months after the expiration of
the LC on October 16, 1979. Respondent even informed petitioner in December 1979 of the
cancellation of the LC and credited P22800 to the account of petitioner, which represented the
marginal deposit which petitioner had been required to put up for the unnegotiated portion of the
LC. The subject LC had become invalid upon the lapse of the period fixed therein. Thus,
respondent should not have paid Ekman since it was not obliged to do so.

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, as in this case, and their rights
and obligations may be determined equitably under the law proscribing unjust enrichment.