Prudential Bank v Intermediate Appellate

Court and Anacleto Chi G.R. No. 74886

December 8, 1992
MARCH 15, 2014LEAVE A COMMENT
Through a letter of credit, the bank merely substitutes its own promise to pay for one of its customers
who in return promises to pay the bank the amount of funds mentioned in the letter of credit plus credit
or commitment fees mutually agreed upon.
Facts: Philippine Rayon Mills, Inc.(PRMI) entered into a contract with Nissho Co., Ltd. of Japan for the
importation of textile machineries under a 5-year deferred payment plan. To effect the payment, PRMI applied
for a commercial letter of credit with the Prudential Bank and Trust Company in favor of Nissho. Prudential
Bank opened Letter of Credit No. DPP-63762 for $128,548.78 Against this letter of credit, drafts were drawn
and issued by Nissho, which were all paid by the Prudential Bank through its correspondent in Japan, the Bank
of Tokyo, Ltd. Two of the original drafts were accepted by PRMI through its president, Anacleto R. Chi, while
the others were not. Upon the arrival of the machineries, the Prudential Bank indorsed the shipping documents
to the PRMI which accepted delivery of the same. To enable PRMI to take delivery of the machineries, it
executed, by prior arrangement with the Prudential Bank, a trust receipt which was signed by Anacleto R. Chi
in his capacity as President of PRMI company

At the back of the trust receipt was printed a form to be accomplished by 2 sureties who, by the very terms and
conditions thereof, were to be jointly and severally liable to the Prudential Bank should the PRMI fail to pay the
total amount or any portion of the drafts issued by Nissho and paid for by Prudential Bank. . PRMI was able to
take delivery of the textile machineries and installed the same at its factory site. Chi argued that presentment
for acceptance was necessary to make PRMI liable. The trial court ruled that that presentment for acceptance
was an indispensable requisite for Philippine Rayon’s liability on the drafts to attach.

Issue : Whether or not presentment for acceptance was needed in order for PRMI to be liable under the draft.

HELD : Presentment for acceptance is defined an the production of a bill of exchange to a drawee for
acceptance. Acceptance, however, was not even necessary in the first place because the drafts which were
eventually issued were sight drafts. Even if these were not sight drafts, thereby necessitating acceptance, it
would be the Bank (Bank of America) — and not Philippine Rayon — which had to accept the same for the
latter was not the drawee.

The trial court and the public respondent, therefore, erred in ruling that presentment for acceptance was an
indispensable requisite for Philippine Rayon’s liability on the drafts to attach. Contrary to both courts’
pronouncements, Philippine Rayon immediately became liable upon Bank of America’s payment on the letter
of credit. Such is the essence of the letter of credit issued by the petitioner. A different conclusion would violate
the principle upon which commercial letters of credit are founded because in such a case, both the beneficiary
and the issuer, Nissho Company Ltd. and the petitioner, respectively, would be placed at the mercy of Philippine
Rayon even if the latter had already received the imported machinery and the petitioner had fully paid for it.

In fact, there was no need for acceptance as the issued drafts are sight drafts. Presentment for acceptance is
necessary only in the cases expressly provided for in Section 143 of the Negotiable Instruments Law (NIL).

In the instant case then, the drawee was necessarily the herein the Bank of America. It was to the latter that the
drafts were presented for payment.
Bank of America NT & SA v Court of
Appeals and Francisco et. al G.R. No.
105395 December 10, 1993
MARCH 15, 2014LEAVE A COMMENT
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 and Sewerage

System V. Hon. Reynaldo B. Daway G.R.
No. 160732. June 21, 2004
MARCH 15, 2014LEAVE A COMMENT
The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to the the standby letter
of credit issued by the bank as the former prohibition is on the enforcement of claims against
guarantors or sureties of the debtors whose obligations are not solidary with the debtor.
The concept of guarantee vis-à-vis the concept of an irrevocable letter of credit are inconsistent with each
other. The guarantee theory destroys the independence of the bank’s responsibility from the contract
upon which it was opened and the nature of both contracts is mutually in conflict with each other. A
Standby Letter of Credit is not a guaranty because under a Standby Letter of Credit, the bank undertakes
a primary obligation. On the other hand, a guarantor undertakes a collateral obligation which arises
only upon the debtor’s default. A Standby Letter of Credit is a primary obligation and not an accessory
contract.
Facts: Maynilad obtained a 20-year concession to manage, repair, refurbish, and upgrade existing Metropolitan
Waterworks and Sewerage System (MWSS) water delivery and sewerage services in Metro Manila’s west
zone. Maynilad, under the concession agreement undertook to pay concession fees and itsforeign loans. To
secure its obligations, Maynilad was required under Section 9 of the concession contract to put up a bond, bank
guarantee or other security acceptable to MWSS. Pursuant to this requirement, Maynilad arranged on for a
three-year facility with a number of foreign banks led by Citicorp Intl for the issuance of an irrevocable standby
letter of credit (SLC) in the amount of $ 120 million in favor of MWSS for the full and prompt payment of
Maynilad’s obligations to MWSS. Due to devaluation of the peso and other business reversals of Maynilad,
MWSS filed a notice of early termination of the concession contract. Upon certification of the non performance
of Maynilad obligation, the MWSS moved to collect from Citicorp on the standby letters of credit issued.
Maynilad filed for corporate rehabilitation. Judge Daway stayed the payment of the letter of credit by Citicorp
pursuant to Sec 6 (b) of Rule 4 of the Interim Rules on Corporate Rehabilitation.

Issue: Whether or not the payment of the standby of letter of credit can be stayed by filing of a petition for
rehabilitation

Held: No. The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to the the standby letter
of credit issued by the bank as the former prohibition is on the enforcement of claims against guarantors or
sureties of the debtors whose obligations are not solidary with the debtor.

The participating bank’s obligation under the letter of credit 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.
Issuing banks under the letters of credit are not equivalent to guarantors. The concept of guarantee vis-à-vis
the concept of an irrevocable letter of credit are inconsistent with each other. The guarantee theory destroys
the independence of the bank’s responsibility from the contract upon which it was opened and the nature of
both contracts is mutually in conflict with each other. In contracts of guarantee, the guarantor’s obligation is
merely collateral and it arises only upon the default of the person primarily liable. On the other hand, in an
irrevocable letter of credit, the bank undertakes a primary obligation. We have also defined a letter of credit as
an engagement by a bank or other person made at the request of a customer that the issuer shall honor drafts
or other demands of payment upon compliance with the conditions specified in the credit.

A Standby Letter of Credit is not a guaranty because under a Standby Letter of Credit, the bank undertakes a
primary obligation. On the other hand, a guarantor undertakes a collateral obligation which arises only upon
the debtor’s default. A Standby Letter of Credit is a primary obligation and not an accessory contract.

G.R. No. L-10195 November 29, 1958

BELMAN COMPAÑIA INCORPORADA, plaintiff-appellee,

vs.
CENTRAL BANK OF THE PHILIPPINES, defendant-appellant.

Bienvenido L. Garcia and Eutiquiano Garcia for appellee.

Nat. M. Balboa and Luis M. Kasilag for appellant.

PADILLA, J.:

In a complaint filed on 18 March 1955 in the Court of First Instance of Manila the plaintiff, a
corporation, alleges that having been a successful bidder to supply the Republic of the Philippines
with 1,000 reams of onion skin paper, on 21 September 1950 it applied to the Philippine National
Bank for a letter of credit in the sum of $4,300, United States currency, in favor of Getz Bros. & Co.,
San Francisco, California, U.S.A., to pay for such reams, and the Philippine National Bank approved
and granted the application for the letter of credit; that the Philippine National Bank, through the
Crocker First National Bank, its correspondent in the United States, paid to the payee the sum of
$4,300, United States Currency; that on 26 April 1951 when the plaintiff paid its account to the
Philippine National Bank in Manila, the defendant, pursuant to Republic Act No. 601, as amended,
assessed and collected from it 17% special excise tax on the amount in Philippine peso of foreign
exchange sold, amounting to P1,474.70 which the plaintiff paid to the defendant under protest for the
reason that as the letter of credit was approved and granted on 21 September 1950, or before 28
March 1951, the date of the enactment or approval of Republic Act No. 601, as amended, the
amount of foreign exchange sold by the defendant bank by the letter of credit to the plaintiff
corporation was not subject to such excise tax; that on 28 December 1954 the plaintiff corporation
made a demand in writing upon the defendant bank for the refund of the aforesaid sum; and that
notwithstanding repeated demands the defendant bank refused to make the refund. The plaintiff
corporation prays that the 17% special excise tax assessed and collected from it on the amount in
Philippine peso of foreign exchange sold on 21 September 1950, be declared illegal; and that the
defendant bank be ordered to refund to it the sum of P1,474.70 illegally assessed and collected (civil
No. 25708).

On 25 March 1955 the defendant bank moved for the dismissal of the complaint on the ground that
—

1. The assessment and collection from the plaintiff of the sum of P1,474.70 as 17% special
excise tax is in accordance with law, because it was a tax collected after March 28, 1951,
when the 17% special excise tax law went into effect, when the plaintiff paid to the Philippine
 National Bank on April 25, 1951 the peso equivalent of the draft in U. S. dollars accepted by
the plaintiff.

2. The transaction in which foreign exchange was sold subject to the 17% excise tax is not
one of those exempted or refundable under Section 2, 3, 4, and 8 of said 17% tax law,
Republic Act No. 601.

On 1 April 1955 the plaintiff corporation objected to the motion to dismiss; on 5 April the defendant
bank filed a reply thereto; and on 11 April the plaintiff a "rejoinder to defendant's reply." On 19 April
the Court denied the motion to dismiss.

On 28 April 1955 the defendant filed its answer reiterating that although the plaintiff corporation had
applied for and been granted a commercial letter of credit on 21 September 1950, before the
effectivity of Republic Act No. 601, as amended, no sale of foreign exchange took place on that date,
because such sale actually took place on 26 April 1951, when the plaintiff paid to the Philippine
National Bank the amount in Philippine currency of the foreign exchange sold. Hence it was subject
to the 17% special excise tax.

After hearing and filing by the parties of their respective memoranda, the Court rendered judgment
ordering the defendant bank to refund to the plaintiff corporation the sum of P1,474.70, with legal
interest thereon from 25 April 1951 until fully paid and to pay the costs. A motion to set aside the
judgment thus rendered was denied. The defendant has appealed.

Foreign exchange is the conversion of an amount of money or currency of one country into an
equivalent amount of money or currency of another.1 The appellant claims that the grant or approval
on an application for a letter of credit for an amount payable in foreign currency is only an executory
contract, in the sense that until payment, return, or settlement of the amount paid and delivered by,
or collected from, the bank in foreign currency be made by the debtor, the contract is not executed or
consummated. Hence, if on the date of payment by the debtor to the bank of the amount of foreign
exchange sold the law imposing the excise tax was already in force, such tax must be collected. On
the other hand, the appellee contends that, upon the approval or grant of an application for a letter of
credit for an amount payable in foreign currency, the contract is perfected or consummated. Hence,
if on the date of such approval or grant the law imposing the excise tax was not yet in existence,
such tax can not be assessed and collected. Both contentions cannot be sustained.

An irrevocable letter of credit granted by a bank, which authorizes a creditor in a foreign country to
draw upon a debtor of another and to negotiate the draft through the agent or correspondent bank or
any bank in the country of the creditor, is a consummated contract, when the agent or correspondent
bank or any bank in the country of the creditor pays or delivers to the latter the amount in foreign
currency, as authorized by the bank in the country of the debtor in compliance with the letter of credit
granted by it. It is the date of the payment of the amount in foreign currency to the creditor in his
country by the agent or correspondent bank of the bank in the country of the debtor that turns from
executory to executed or consummated contract. It is not the date of payment by the debtor to the
bank in his country of the amount of foreign exchange sold that makes the contract executed or
consummated, because the bank may grant the debtor extension of time to pay such debt. The
contention of the appellee that as there was a meeting of the minds and of contracting parties as to
price and object of the contract2 upon the approval or grant of an application for a letter of credit for
an amount payable in payable in foreign currency, the contract was a valid and executed contract of
sale of foreign exchange. True, there was such a contract in the sense that one party who has
performed his part may compel the other to perform his.3 Still until payment be made in foreign
currency of the amount applied for in the letter of credit and approved and granted by the bank, the
same is not an executed or consummated contract. The payment of the amount in foreign currency
to the creditor by the bank or its agent or correspondent is necessary to consummate the contract.
Hence the date of such payment or delivery of the amount in foreign currency to the creditor
determines whether such amount of foreign currency is subject to the tax imposed by the
Government of the country where such letter of credit was granted.

It appearing that the draft authorized by the letter of credit applied for by the appellee and granted by
the appellant must be drawn and presented or negotiated in San Francisco, California, U.S.A., not
later than 19 October 1950 (Exhibit H), it may be presumed that the payment of $4,300 in favor of
Getz Bros., Inc. in San Francisco, California, U.S.A., for the account of the appellee was paid by the
Crocker First National Bank, as agent or correspondent of the Philippine National Bank, on or before
19 October 1950. Such being the case, the excise tax at the rate of 17% on the amount to be paid
by the appellant in Philippine currency for the foreign exchange sold is not subject to such tax,
because Republic Act No. 601 imposing such tax took effect only on 28 March 1951.4

The judgment appealed from is affirmed, without pronouncement as to costs.5

Keng Hua Paper Products Co. Inc. vs. Court of Appeals, RTC Manila and Sea-land
Service, Inc.
G.R. No. 116863, February 12, 1998
286 SCRA 257
FACTS:
Shipper – Ho Kee Waste Paper
Consignee – Petitioner, Keng Hua Paper Products, Co.
Carrier – Private Respondent Sea-land Service, Inc.
On June 29, 1982, the carrier received at its Hong Kong terminal a sealed container
containing seventy-six bales of “unsorted waste paper” for shipment to consignee in
Manila. The shipment was covered by a bill of lading which the consignee received
immediately after arrival but it refused to accept the shipment because the merchandise
was in excess of 10 metric tons.

The shipment was discharged at the Manila International Container Port. However, the
consignee failed to discharge the shipment from the container during the grace period
despite notices of arrival. The shipment remained inside the shipper’s container for four
hundred eighty-one (481) days – from the moment the grace period expired until the
time when the shipment was unloaded from the container. During the 481-day period,
demurrage charges accrued. Meanwhile, the shipper demanded payment but the
consignee refused to settle its obligation.

ISSUES and RULING:

What is the nature of bill of lading? When does a bill of lading become binding on a
consignee?
A bill of lading serves two functions.
1. It is a receipt for the goods shipped.
2. It is a contract by which three parties, namely, the shipper, the carrier, and the
consignee undertake specific responsibilities and assume stipulated obligations.
A “bill of lading delivered and accepted constitutes the contract of carriage even though
not signed,” because the “acceptance of a paper containing the terms of a proposed
contract generally constitutes an acceptance of the contract and of all of its terms and
conditions of which the acceptor has actual or constructive notice.” The acceptance of a
bill of lading by the shipper and the consignee, with full knowledge of its contents, gives
rise to the presumption that the same was a perfected and binding contract.
Was the bill of lading a valid and perfected contract between the shipper, the consignee and
the carier?
Yes. Both lower courts held that the bill of lading was a valid and perfected contract
between the shipper, the consignee, and the carrier. Section 17 of the bill of lading
provided that the shipper and the consignee were liable for the payment of demurrage
charges for the failure to discharge the containerized shipment beyond the grace period
allowed by tariff rules.
Will an alleged overshipment justify the consignee’s refusal to receive the goods described in
the bill of lading?
No. The consignee’s remedy in case of overshipment lies against the seller/shipper, not
against the carrier. The contract of carriage, as stipulated in the bill of lading is separate
and distinct from the contract of sale between the seller and the buyer in which the
amount of goods is indicated. In the present case, the contract of carriage was under
the arrangement known as “Shipper’s Load And Count,” and the shipper was solely
responsible for the loading of the container while the carrier was oblivious to the
contents of the shipment. The carrier had no knowledge of the contents of the container.
When may interest be computed on unpaid demurrage charges?
The legal interest of six percent per annum shall be computed from September 28,
1990, the date of the trial court’s decision until its full payment before finality of
judgment. The rate of interest shall be adjusted to twelve percent per annum, computed
from the time said judgment became final and executory until full satisfaction.
NOTES:
LETTERS OF CREDIT
In a letter of credit, there are three distinct and independent contracts:
(1) the contract of sale between the buyer and the seller,
(2) the contract of the buyer with the issuing bank, and
(3) the letter of credit proper in which the bank promises to pay the seller pursuant to
the terms and conditions stated therein. “Few things are more clearly settled in law than
that the three contracts which make up the letter of credit arrangement are to be
maintained in a state of perpetual separation.” A transaction involving the purchase of
goods may also require, apart from a letter of credit, a contract of transportation
specially when the seller and the buyer are not in the same locale or country, and the
goods purchased have to be transported to the latter.

APPEAL
Questions raised on appeal must be within the issues framed by the parties and,
consequently, issues not raised in the trial court cannot be raised for the first time on
appeal.

ATTORNEY’S FEES
The text of the decision should state the reason for the award of attorney’s fees – The
Court notes that the matter of attorney’s fees was taken up only in the dispositive
portion of the trial court’s decision. This falls short of the settled requirement that the
text of the decision should state the reason for the award of attorney’s fees, for without
such justification, its award would be a “conclusion without a premise, its basis being
improperly left to speculation and conjecture.

JOHANNES SCHUBACK & SONS PHILIPPINE TRADING

CORPORATION, petitioner,
vs.
THE HON. COURT OF APPEALS, RAMON SAN JOSE, JR., doing business under
the name and style “PHILIPPINE SJ INDUSTRIAL TRADING,” respondents.
G.R. No. 105387 November 11, 1993
FACTS:
Sometime in 1981, the defendant established a contract with plaintiff through
the Philippine Consulate General in Hamburg, West Germany, because he
wanted to purchase MAN bus spare parts from Germany. Plaintiff
communicated with its trading partner, JOHANNES SCHUBACK & SONS
PHILIPPINE TRADING CORPORATION (Schuback Hamburg) regarding the
spare parts defendant wanted to order. Defendant submitted to plaintiff a list
of the parts he wanted to purchase with specific part numbers and description.
Plaintiff sent to defendant a letter dated 25 November, 1981, enclosing its
offer on the items listed by defendant.

Plaintiff submitted its formal offer containing the item number, quantity, part
number, description, unit price and total to defendant. On December, 24,
1981, defendant informed plaintiff of his desire to avail of the prices of the
parts at that time.

Plaintiff immediately ordered the items needed by defendant from Schuback

Hamburg to enable defendant to avail of the old prices. Schuback Hamburg in
turn ordered the items from NDK, a supplier of MAN spare parts in West
Germany. On January 4, 1982, Schuback Hamburg sent plaintiff a proforma
invoice to be used by defendant in applying for a letter of credit. Said invoice
required that the letter of credit be opened in favor of Schuback Hamburg.

On October 18, 1982, Plaintiff again reminded defendant of his order and
advised that the case may be endorsed to its lawyers. Defendant replied that
he did not make any valid Purchase Order and that there was no definite
contract between him and plaintiff. Plaintiff sent a rejoinder explaining that
there is a valid Purchase Order and suggesting that defendant either proceed
with the order and open a letter of credit or cancel the order and pay the
cancellation fee of 30% of F.O.B. value, or plaintiff will endorse the case to its
lawyers.
Consequently, petitioner filed a complaint for recovery of actual or
compensatory damages, unearned profits, interest, attorney’s fees and costs
against private respondent.

In its decision dated June 13, 1988, the trial court ruled in favor of petitioner
by ordering private respondent to pay petitioner, among others, actual
compensatory damages in the amount of DM 51,917.81, unearned profits in
the amount of DM 14,061.07, or their peso equivalent.

Thereafter, private respondent elevated his case before the Court of Appeals.
On February 18, 1992, the appellate court reversed the decision of the trial
court and dismissed the complaint of petitioner. It ruled that there was no
perfection of contract since there was no meeting of the minds as to the price
between the last week of December 1981 and the first week of January 1982.

Issue:
Whether or not a contract of sale has been perfected between the parties

Held:
The Supreme Court reversed the decision of the Court of Appeals and
reinstated the decision of the trial court. It bears emphasizing that a “contract
of sale is perfected at the moment there is a meeting of minds upon the thing
which is the object of the contract and upon the price.”

Article 1319 of the Civil Code states: “Consent is manifested by the meeting of
the offer and acceptance upon the thing and the cause which are to constitute
the contract. The offer must be certain and the acceptance absolute. A
qualified acceptance constitutes a counter offer.” The facts presented to us
indicate that consent on both sides has been manifested.

The offer by petitioner was manifested on December 17, 1981 when petitioner
submitted its proposal containing the item number, quantity, part number,
description, the unit price and total to private respondent. On December 24,
1981, private respondent informed petitioner of his desire to avail of the prices
of the parts at that time and simultaneously enclosed its Purchase Order No.
0l01 dated December 14, 1981. At this stage, a meeting of the minds between
vendor and vendee has occurred, the object of the contract: being the spare
parts and the consideration, the price stated in petitioner’s offer dated
December 17, 1981 and accepted by the respondent on December 24,1981.

When petitioner forwarded its purchase order to NDK, the price was still
pegged at the old one. Thus, the pronouncement of the Court Appeals that
there as no confirmed price on or about the last week of December 1981
and/or the first week of January 1982 was erroneous.

On the part of the buyer, the situation reveals that private respondent failed to
open an irrevocable letter of credit without recourse in favor of Johannes
Schuback of Hamburg, Germany. This omission, however, does not prevent
the perfection of the contract between the parties.

The opening of a letter of credit in favor of a vendor is only a mode of

payment. It is not among the essential requirements of a contract of sale
enumerated in Article 1305 and 1474 of the Civil Code, the absence of any of
which will prevent the perfection of the contract from taking place.

To adopt the Court of Appeals’ ruling that the contract of sale was dependent
on the opening of a letter of credit would be untenable from a pragmatic point
of view because private respondent would not be able to avail of the old prices
which were open to him only for a limited period of time.

WHEREFORE, the petition is GRANTED and the decision of the trial court
dated June 13, 1988 is REINSTATED with modification.

Transfield Philippines vs Luzon Hydro

Electric Corp. GR No 146717, Nov 22, 2004
MARCH 15, 2014LEAVE A COMMENT
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.
Facts: Transfield Philippines (Transfield) entered into a turn-key contract with Luzon Hydro Corp. (LHC).Under
the contract, Transfield were to construct a hydro-electric plants in Benguet and Ilocos. Transfield was given
the sole responsibility for the design, construction, commissioning, testing and completion of the Project. The
contract provides for a period for which the project is to be completed and also allows for the extension of the
period provided that the extension is based on justifiable grounds such as fortuitous event. In order to
guarantee performance by Transfield, two stand-by letters of credit were required to be opened. During the
construction of the plant, Transfield requested for extension of time citing typhoon and various disputes
delaying the construction. LHC did not give due course to the extension of the period prayed for but referred
the matter to arbitration committee. Because of the delay in the construction of the plant, LHC called on the
stand-by letters of credit because of default. However, the demand was objected by Transfield on the ground
that there is still pending arbitration on their request for extension of time.

Issue: Whether or not LHC can collect from the letters of credit despite the pending arbitration case
Held: Transfield’s argument that any dispute must first be resolved by the parties, whether through
negotiations or arbitration, before the beneficiary is entitled to call on the letter of credit in essence would
convert the letter of credit into a mere guarantee.

The independent nature of the letter of credit may be: (a) independence in toto where the credit is independent
from the justification aspect and is a separate obligation from the underlying agreement like for instance a
typical standby; or (b) independence may be only as to the justification aspect like in a commercial letter of
credit or repayment standby, which is identical with the same obligations under the underlying agreement. In
both cases the payment may be enjoined if in the light of the purpose of the credit the payment of the credit
would constitute fraudulent abuse of the credit.

Jurisprudence has laid down a clear distinction between a letter of credit and a guarantee in that the settlement
of a dispute between the parties is not a pre-requisite for the release of funds under a letter of credit. In other
words, the argument is incompatible with the very nature of the letter of credit. If a letter of credit is drawable
only after settlement of the dispute on the contract entered into by the applicant and the beneficiary, there
would be no practical and beneficial use for letters of credit in commercial transactions.

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

Feati Bank and Trust Company v Court of

Appeals G.R. No. 94209 April 30, 1991
MARCH 15, 2014LEAVE A COMMENT
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.
Bank of Philippine Islands v De Reny Fabric
Industries G.R. No. L-24821 October
16, 1970
MARCH 15, 2014LEAVE A COMMENT
Doctrine: Under the terms of their Commercial Letter of Credit Agreements with the Bank, the appellants
agreed that the Bank shall not be responsible for the “existence, character, quality, quantity, conditions,
packing, value, or delivery of the property purporting to be represented by documents; for any difference
in character, quality, quantity, condition, or value of the property from that expressed in documents.
Having been positively proven as a fact, the appellants are bound by this established usage.
Facts:: De Reny Fabric Industries, Inc. (De Reny) applied for, and was granted, four (4) irrevocable commercial
letters of credit with the Bank of Philippine Islands (BPI). The letter of credits was used to cover the purchase
of goods by De Reny from its American supplier, the J.B. Distributing Company. As each shipment arrived in the
Philippines, the De Reny Fabric Industries, Inc. made partial payments to the Bank amounting to 12,000.
Further payments were, however, subsequently discontinued by the corporation when it became established,
as a result of a chemical test conducted by the National Science Development Board, that the goods that arrived
in Manila were colored chalks instead of dyestuffs. The corporation also refused to take possession of these
goods, and for this reason, the Bank caused them to be deposited with a bonded warehouse paying therefor the
amount of P12,609.64 up to the filing of its complaint with the court.

Issue : Whether or not De Reny fabrics is liable under the letter of Credit

Held : Even without the stipulation recited above, the appellants cannot shift the burden of loss to the Bank on
account of the violation by their vendor of its prestation. It was uncontrovertibly proven by the Bank during
the trial below that banks, in providing financing in international business transactions such as those entered
into by the appellants, do not deal with the property to be exported or shipped to the importer, but deal only
with documents. The existence of a custom in international banking and financing circles negating any duty on
the part of a bank to verify whether what has been described in letters of credits or drafts or shipping
documents actually tallies with what was loaded aboard ship, having been positively proven as a fact, the
appellants are bound by this established usage. They were, after all, the ones who tapped the facilities afforded
by the Bank in order to engage in international business.

Under the terms of their Commercial Letter of Credit Agreements with the Bank, the appellants agreed that the
Bank shall not be responsible for the “existence, character, quality, quantity, conditions, packing, value, or
delivery of the property purporting to be represented by documents; for any difference in character, quality,
quantity, condition, or value of the property from that expressed in documents,” or for “partial or incomplete
shipment, or failure or omission to ship any or all of the property referred to in the Credit,” as well as “for any
deviation from instructions, delay, default or fraud by the shipper or anyone else in connection with the
property the shippers or vendors and ourselves [purchasers] or any of us.” Having agreed to these terms, the
appellants have, therefore, no recourse but to comply with their covenant.

Insular Bank of America (Now

International Bank) v Intermediate
Appelate Court and Philippine American
General Life Insurance G.R. No. 74834
November 17, 1988
MARCH 15, 2014LEAVE A COMMENT
The standby Letters of Credits are, “in effect an absolute undertaking to pay the money advanced or the
amount for which credit is given on the faith of the instrument.
Facts : Spouses Mendoza obtained a loan from Philippine American Life Insurance Co. (PHILAM) to finance the
construction of their residential house. PHILAM required that the amortization be guaranteed by an irrevocable
Letter of Credit of a commercial bank. The Mendoza’s contracted Insular Bank of Asia and America (IBAA) for
the issuance of a standby Letter of Credit in favor of PHILAM. The Letter of Credit issued by IBAA was secured
by a real mortgage on the property of spouses in favor of IBAA. The Mendoza’s executed promissory notes in
favor of IBAA. Both Notes authorized IBAA “to sell at public or private sale such securities or things for the
purpose of applying their proceeds to such payments” of many particular obligation or obligations” the
Mendozas may have to IBAA.

The Mendozas failed to pay Philam Life the amortization and informed IBAA that it was declaring the entire
balance outstanding on both loans, including liquidated damages, “immediately due and payable.” Philam Life
then demanded the payment of P274,779.56 from IBAA but the latter took the position that, as a melee
guarantor of the Mendozas who are the principal debtors. The Real Estate Mortgage, which secured the two (2)
standby L/Cs. was extrajudicially foreclosed by, and sold at public auction for P775,000.00, to petitioner IBAA
as the lone and highest bidder.

Issue : Whether or not IBAA can validly foreclose the real estate mortgage

Held : In construing the terms of a Letter of Credit, as in other contracts, it is the intention of the parties that
must govern. Letters of credit and contracts for the issuance of such letters are subject to the same rules of
construction as are ordinary commercial contracts. They are to receive a reasonable and not a technical
construction and although usage and custom cannot control express terms in letters of credit, they are to be
construed with reference to all the surrounding facts and circumstances, to the particular and often varying
terms in which they may be expressed, the circumstances and intention of the parties to them, and the usages
of the particular trade of business contemplated.

Unequivocally, the subject standby Letters of Credit secure the payment of any obligation of the Mendozas to
Philam Life including all interests, surcharges and expenses thereon but not to exceed P600,000.00. But while
they are a security arrangement, they are not converted thereby into contracts of guaranty. That would make
them ultra vires rather than a letter of credit, which is within the powers of a bank. The standby Letters of
Credits are, “in effect an absolute undertaking 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. Being separate
and independent agreements, the payments made by the Mendozas cannot be added in computing IBAA’s
liability under its own standby letters of credit. Payments made by the Mendozas directly to PHILAM Life are
in compliance with their own prestation under the loan agreements. And although these payments could result
in the reduction of the actual amount which could ultimately be collected from IBAA, the latter’s separate
undertaking under its Letters of Credits remains. That there still remains a balance on the loan, Pursuant to its
absolute undertaking under the L/Cs, therefore, IBAA cannot escape the obligation to pay PHILAM Life for this
unexpended balance.