Eloise

Case No. 11 | Transfield Philippines Inc. v.Luzon Hydro Corp. (2004)

Facts: Transfield Philippines entered into a turn-key contract with Luzon Hydro Corp.. As security, 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.

Issue: Whether Luzon Hydro Corp. has the right to collect from the letters of credit despite the pending arbitration
case.

Ruling: YES. The letter of credit is separate and distinct from the underlying transaction. “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. 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 light of the purpose, the payment of the credit would constitute
fraudulent abuse of the credit—noted jurists opine as an example that the untruthfulness of a certificate
accompanying a demand for payment under a standby credit may qualify as fraud.