THIRD DIVISION
, the complaint states no cause of action;
G.R. No. 74886 December 8, 1992
PRUDENTIAL BANK, petitioner, vs.
INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON MILLS, INC. and ANACLETO R. CHI,
respondents.
 DAVIDE, JR., J.:
Petitioner seeks to review and set aside the decision 1 of public respondent; Intermediate
Appellate Court (now Court of Appeals), dated 10 March 1986, in AC-G.R. No. 66733 which
affirmed in toto the 15 June 1978 decision of Branch 9 (Quezon City) of the then Court of First
Instance (now Regional Trial Court) of Rizal in Civil Case No. Q-19312. The latter involved an
action instituted by the petitioner for the recovery of a sum of money representing the
amount paid by it to the Nissho Company Ltd. of Japan for textile machinery imported by the
defendant, now private respondent, Philippine Rayon Mills, Inc. (hereinafter Philippine
Rayon), represented by co-defendant Anacleto R. Chi.
The facts which gave rise to the instant controversy are summarized by the public respondent
as follows:
On August 8, 1962, defendant-appellant Philippine Rayon Mills, Inc. entered into a contract
with Nissho Co., Ltd. of Japan for the importation of textile machineries under a five-year
deferred payment plan (Exhibit B, Plaintiff's Folder of Exhibits, p 2). To effect payment for said
machineries, the defendant-appellant applied for a commercial letter of credit with the
Prudential Bank and Trust Company in favor of Nissho. By virtue of said application, the
Prudential Bank opened Letter of Credit No. DPP-63762 for $128,548.78 (Exhibit A, Ibid., p. 1).
Against this letter of credit, drafts were drawn and issued by Nissho (Exhibits X, X-1 to X-11,
Ibid., pp. 65, 66 to 76), which were all paid by the Prudential Bank through its correspondent
in Japan, the Bank of Tokyo, Ltd. As indicated on their faces, two of these drafts (Exhibit X and
X-1, Ibid., pp. 65-66) were accepted by the defendant-appellant through its president,
Anacleto R. Chi, while the others were not (Exhibits X-2 to X-11, Ibid., pp. 66 to 76).
Upon the arrival of the machineries, the Prudential Bank indorsed the shipping documents to
the defendant-appellant which accepted delivery of the same. To enable the defendant-
appellant 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 (sic) of defendant-appellant company (Exhibit C, Ibid., p. 13).
At the back of the trust receipt is a printed form to be accomplished by two sureties who, by
the very terms and conditions thereof, were to be jointly and severally liable to the Prudential
Bank should the defendant-appellant fail to pay the total amount or any portion of the drafts
issued by Nissho and paid for by Prudential Bank. The defendant-appellant was able to take
delivery of the textile machineries and installed the same at its factory site at 69 Obudan
Street, Quezon City.
Sometime in 1967, the defendant-appellant ceased business operation (sic). On December 29,
1969, defendant-appellant's factory was leased by Yupangco Cotton Mills for an annual rental
of P200,000.00 (Exhibit I, Ibid., p. 22). The lease was renewed on January 3, 1973 (Exhibit J,
Ibid., p. 26). On January 5, 1974, all the textile machineries in the defendant-appellant's
factory were sold to AIC Development Corporation for P300,000.00 (Exhibit K, Ibid., p. 29).
The obligation of the defendant-appellant arising from the letter of credit and the trust
receipt remained unpaid and unliquidated. Repeated formal demands (Exhibits U, V, and W,
Ibid., pp. 62, 63, 64) for the payment of the said trust receipt yielded no result Hence, the
present action for the collection of the principal amount of P956,384.95 was filed on October
3, 1974 against the defendant-appellant and Anacleto R. Chi. In their respective answers, the
defendants interposed identical special defenses, viz.
if there is, the same has prescribed; and the plaintiff is guilty of laches. 2
On 15 June 1978, the trial court rendered its decision the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered sentencing the defendant Philippine Rayon Mills,
Inc. to pay plaintiff the sum of P153,645.22, the amounts due under Exhibits "X" & "X-1", with
interest at 6% per annum beginning September 15, 1974 until fully paid.
Insofar as the amounts involved in drafts Exhs. "X" (sic) to "X-11", inclusive, the same not
having been accepted by defendant Philippine Rayon Mills, Inc., plaintiff's cause of action
thereon has not accrued, hence, the instant case is premature.
Insofar as defendant Anacleto R. Chi is concerned, the case is dismissed. Plaintiff is ordered to
pay defendant Anacleto R. Chi the sum of P20,000.00 as attorney's fees.
With costs against defendant Philippine Rayon Mills, Inc.
SO ORDERED. 3
Petitioner appealed the decision to the then Intermediate Appellate Court. In urging the said
court to reverse or modify the decision, petitioner alleged in its Brief that the trial court erred
in (a) disregarding its right to reimbursement from the private respondents for the entire
unpaid balance of the imported machines, the total amount of which was paid to the Nissho
Company Ltd., thereby violating the principle of the third party payor's right to
reimbursement provided for in the second paragraph of Article 1236 of the Civil Code and
under the rule against unjust enrichment; (b) refusing to hold Anacleto R. Chi, as the
responsible officer of defendant corporation, liable under Section 13 of P.D No 115 for the
entire unpaid balance of the imported machines covered by the bank's trust receipt (Exhibit
"C"); (c) finding that the solidary guaranty clause signed by Anacleto R. Chi is not a guaranty at
all; (d) controverting the judicial admissions of Anacleto R. Chi that he is at least a simple
guarantor of the said trust receipt obligation; (e) contravening, based on the assumption that
Chi is a simple guarantor, Articles 2059, 2060 and 2062 of the Civil Code and the related
evidence and jurisprudence which provide that such liability had already attached; (f)
contravening the judicial admissions of Philippine Rayon with respect to its liability to pay the
petitioner the amounts involved in the drafts (Exhibits "X", "X-l" to "X-11''); and (g)
interpreting "sight" drafts as requiring acceptance by Philippine Rayon before the latter could
be held liable thereon. 4
In its decision, public respondent sustained the trial court in all respects. As to the first and
last assigned errors, it ruled that the provision on unjust enrichment, Article 2142 of the Civil
Code, applies only if there is no express contract between the parties and there is a clear
showing that the payment is justified. In the instant case, the relationship existing between
the petitioner and Philippine Rayon is governed by specific contracts, namely the application
for letters of credit, the promissory note, the drafts and the trust receipt. With respect to the
last ten (10) drafts (Exhibits "X-2" to "X-11") which had not been presented to and were not
accepted by Philippine Rayon, petitioner was not justified in unilaterally paying the amounts
stated therein. The public respondent did not agree with the petitioner's claim that the drafts
were sight drafts which did not require presentment for acceptance to Philippine Rayon
because paragraph 8 of the trust receipt presupposes prior acceptance of the drafts. Since the
ten (10) drafts were not presented and accepted, no valid demand for payment can be made.
Public respondent also disagreed with the petitioner's contention that private respondent Chi
is solidarily liable with Philippine Rayon pursuant to Section 13 of P.D. No. 115 and based on
his signature on the solidary guaranty clause at the dorsal side of the trust receipt. As to the
first contention, the public respondent ruled that the civil liability provided for in said Section
13 attaches only after conviction. As to the second, it expressed misgivings as to whether Chi's
1
signature on the trust receipt made the latter automatically liable thereon because the so-
called solidary guaranty clause at the dorsal portion of the trust receipt is to be signed not by
one (1) person alone, but by two (2) persons; the last sentence of the same is incomplete and
unsigned by witnesses; and it is not acknowledged before a notary public. Besides, even
granting that it was executed and acknowledged before a notary public, Chi cannot be held
liable therefor because the records fail to show that petitioner had either exhausted the
properties of Philippine Rayon or had resorted to all legal remedies as required in Article 2058
of the Civil Code. As provided for under Articles 2052 and 2054 of the Civil Code, the
obligation of a guarantor is merely accessory and subsidiary, respectively. Chi's liability would
therefore arise only when the principal debtor fails to comply with his obligation. 5
Its motion to reconsider the decision having been denied by the public respondent in its
Resolution of 11 June 1986, 6 petitioner filed the instant petition on 31 July 1986 submitting
the following legal issues:
I. WHETHER OR NOT THE RESPONDENT APPELLATE COURT GRIEVOUSLY ERRED IN DENYING
PETITIONER'S CLAIM FOR FULL REIMBURSEMENT AGAINST THE PRIVATE RESPONDENTS FOR
THE PAYMENT PETITIONER MADE TO NISSHO CO. LTD. FOR THE BENEFIT OF PRIVATE
RESPONDENT UNDER ART. 1283 OF THE NEW CIVIL CODE OF THE PHILIPPINES AND UNDER
THE GENERAL PRINCIPLE AGAINST UNJUST ENRICHMENT;
II. WHETHER OR NOT RESPONDENT CHI IS SOLIDARILY LIABLE UNDER THE TRUST RECEIPT
(EXH. C);
III. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS OF RESPONDENT CHI HE IS
LIABLE THEREON AND TO WHAT EXTENT;
IV. WHETHER OR NOT RESPONDENT CHI IS MERELY A SIMPLE GUARANTOR; AND IF SO; HAS
HIS LIABILITY AS SUCH ALREADY ATTACHED;
V. WHETHER OR NOT AS THE SIGNATORY AND RESPONSIBLE OFFICER OF RESPONDENT PHIL.
RAYON RESPONDENT CHI IS PERSONALLY LIABLE PURSUANT TO THE PROVISION OF SECTION
13, P.D. 115;
VI. WHETHER OR NOT RESPONDENT PHIL. RAYON IS LIABLE TO THE PETITIONER UNDER THE
TRUST RECEIPT (EXH. C);
VII. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS RESPONDENT PHIL.
RAYON IS LIABLE TO THE PETITIONER UNDER THE DRAFTS (EXHS. X, X-1 TO X-11) AND TO
WHAT EXTENT;
VIII. WHETHER OR NOT SIGHT DRAFTS REQUIRE PRIOR ACCEPTANCE FROM RESPONDENT
PHIL. RAYON BEFORE THE LATTER BECOMES LIABLE TO PETITIONER. 7
In the Resolution of 12 March 1990, 8 this Court gave due course to the petition after the
filing of the Comment thereto by private respondent Anacleto Chi and of the Reply to the
latter by the petitioner; both parties were also required to submit their respective
memoranda which they subsequently complied with.
As We see it, the issues may be reduced as follows:
1. Whether presentment for acceptance of the drafts was indispensable to make Philippine
Rayon liable thereon;
2. Whether Philippine Rayon is liable on the basis of the trust receipt;
3. Whether private respondent Chi is jointly and severally liable with Philippine Rayon for the
obligation sought to be enforced and if not, whether he may be considered a guarantor; in
the latter situation, whether the case should have been dismissed on the ground of lack of
cause of action as there was no prior exhaustion of Philippine Rayon's properties.
Both the trial court and the public respondent ruled that Philippine Rayon could be held liable
for the two (2) drafts, Exhibits "X" and "X-1", because only these appear to have been
accepted by the latter after due presentment. The liability for the remaining ten (10) drafts
(Exhibits "X-2" to "X-11" inclusive) did not arise because the same were not presented for
acceptance. In short, both courts concluded that acceptance of the drafts by Philippine Rayon
was indispensable to make the latter liable thereon. We are unable to agree with this
proposition. The transaction in the case at bar stemmed from Philippine Rayon's application
for a commercial letter of credit with the petitioner in the amount of $128,548.78 to cover
the former's contract to purchase and import loom and textile machinery from Nissho
Company, Ltd. of Japan under a five-year deferred payment plan. Petitioner approved the
application. As correctly ruled by the trial court in its Order of 6 March 1975: 9
. . . By virtue of said Application and Agreement for Commercial Letter of Credit, plaintiff bank
10 was under obligation to pay through its correspondent bank in Japan the drafts that Nisso
(sic) Company, Ltd., periodically drew against said letter of credit from 1963 to 1968, pursuant
to plaintiff's contract with the defendant Philippine Rayon Mills, Inc. In turn, defendant
Philippine Rayon Mills, Inc., was obligated to pay plaintiff bank the amounts of the drafts
drawn by Nisso (sic) Company, Ltd. against said plaintiff bank together with any accruing
commercial charges, interest, etc. pursuant to the terms and conditions stipulated in the
Application and Agreement of Commercial Letter of Credit Annex "A".
A letter of credit is defined as an engagement by a bank or other person made at the request
of a customer that the issuer will honor drafts or other demands for payment upon
compliance with the conditions specified in the credit. 11 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. 12 In the instant case then, the drawee was necessarily the herein
petitioner. It was to the latter that the drafts were presented for payment. 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). 13 The said section reads:
Sec. 143. When presentment for acceptance must be made. — Presentment for acceptance
must be made:
(a) Where the bill is payable after sight, or in any other case, where presentment for
acceptance is necessary in order to fix the maturity of the instrument; or
(b) Where the bill expressly stipulates that it shall be presented for acceptance; or
(c) Where the bill is drawn payable elsewhere than at the residence or place of business of
the drawee.
In no other case is presentment for acceptance necessary in order to render any party to the
bill liable.
Obviously then, sight drafts do not require presentment for acceptance.
The acceptance of a bill is the signification by the drawee of his assent to the order of the
drawer; 14 this may be done in writing by the drawee in the bill itself, or in a separate
instrument. 15
The parties herein agree, and the trial court explicitly ruled, that the subject, drafts are sight
drafts. Said the latter:
. . . In the instant case the drafts being at sight, they are supposed to be payable upon
acceptance unless plaintiff bank has given the Philippine Rayon Mills Inc. time within which to
pay the same. The first two drafts (Annexes C & D, Exh. X & X-1) were duly accepted as
indicated on their face (sic), and upon such acceptance should have been paid forthwith.
These two drafts were not paid and although Philippine Rayon Mills
ought to have paid the same, the fact remains that until now they are still unpaid. 16
2
Corollarily, they are, pursuant to Section 7 of the NIL, payable on demand. Section 7 provides:
Sec. 7. When payable on demand. — An instrument is payable on demand —
(a) When so it is expressed to be payable on demand, or at sight, or on presentation; or
(b) In which no time for payment in expressed.
Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the
person so issuing, accepting, or indorsing it, payable on demand. (emphasis supplied)
Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment at maturity of any
accepted draft, bill of exchange or indebtedness shall not be extinguished or modified" 17
does not, contrary to the holding of the public respondent, contemplate prior acceptance by
Philippine Rayon, but by the petitioner. Acceptance, however, was not even necessary in the
first place because the drafts which were eventually issued were sight drafts And even if these
were not sight drafts, thereby necessitating acceptance, it would be the petitioner — and not
Philippine Rayon — which had to accept the same for the latter was not the drawee.
Presentment for acceptance is defined an the production of a bill of exchange to a drawee for
acceptance. 18 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 thereon upon petitioner's payment thereof. 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. The typical setting and purpose of a letter of credit are
described in Hibernia Bank and Trust Co. vs. J. Aron & Co., Inc., 19 thus:
Commercial letters of credit have come into general use in international sales transactions
where much time necessarily elapses between the sale and the receipt by a purchaser of the
merchandise, during which interval great price changes may occur. Buyers and sellers struggle
for the advantage of position. The seller is desirous of being paid as surely and as soon as
possible, realizing that the vendee at a distant point has it in his power to reject on trivial
grounds merchandise on arrival, and cause considerable hardship to the shipper. Letters of
credit meet this condition by affording celerity and certainty of payment. Their purpose is to
insure to a seller payment of a definite amount upon presentation of documents. The bank
deals only with documents. It has nothing to do with the quality of the merchandise. Disputes
as to the merchandise shipped may arise and be litigated later between vendor and vendee,
but they may not impede acceptance of drafts and payment by the issuing bank when the
proper documents are presented.
The trial court and the public respondent likewise erred in disregarding the trust receipt and
in not holding that Philippine Rayon was liable thereon. In People vs. Yu Chai Ho, 20 this Court
explains the nature of a trust receipt by quoting In re Dunlap Carpet Co., 21 thus:
By this arrangement a banker advances money to an intending importer, and thereby lends
the aid of capital, of credit, or of business facilities and agencies abroad, to the enterprise of
foreign commerce. Much of this trade could hardly be carried on by any other means, and
therefore it is of the first importance that the fundamental factor in the transaction, the
banker's advance of money and credit, should receive the amplest protection. Accordingly, in
order to secure that the banker shall be repaid at the critical point — that is, when the
imported goods finally reach the hands of the intended vendee — the banker takes the full
title to the goods at the very beginning; he takes it as soon as the goods are bought and
settled for by his payments or acceptances in the foreign country, and he continues to hold
that title as his indispensable security until the goods are sold in the United States and the
vendee is called upon to pay for them. This security is not an ordinary pledge by the importer
to the banker, for the importer has never owned the goods, and moreover he is not able to
deliver the possession; but the security is the complete title vested originally in the bankers,
and this characteristic of the transaction has again and again been recognized and protected
by the courts. Of course, the title is at bottom a security title, as it has sometimes been called,
and the banker is always under the obligation to reconvey; but only after his advances have
been fully repaid and after the importer has fulfilled the other terms of the contract.
As further stated in National Bank vs. Viuda e Hijos de Angel Jose, 22 trust receipts:
. . . [I]n a certain manner, . . . partake of the nature of a conditional sale as provided by the
Chattel Mortgage Law, that is, the importer becomes absolute owner of the imported
merchandise as soon an he has paid its price. The ownership of the merchandise continues to
be vested in the owner thereof or in the person who has advanced payment, until he has
been paid in full, or if the merchandise has already been sold, the proceeds of the sale should
be turned over to him by the importer or by his representative or successor in interest.
Under P.D. No. 115, otherwise known an the Trust Receipts Law, which took effect on 29
January 1973, a trust receipt transaction is defined as "any transaction by and between a
person referred to in this Decree as the entruster, and another person referred to in this
Decree as the entrustee, whereby the entruster, who owns or holds absolute title or security
interests' over certain specified goods, documents or instruments, releases the same to the
possession of the entrustee upon the latter's execution and delivery to the entruster of a
signed document called the "trust receipt" wherein the entrustee binds himself to hold the
designated goods, documents or instruments in trust for the entruster and to sell or
otherwise dispose of the goods, documents or instruments with the obligation to turn over to
the entruster the proceeds thereof to the extent of the amount owing to the entruster or as
appears in the trust receipt or the goods, instruments themselves if they are unsold or not
otherwise disposed of, in accordance with the terms and conditions specified in the trusts
receipt, or for other purposes substantially equivalent to any one of the following: . . ."
It is alleged in the complaint that private respondents "not only have presumably put said
machinery to good use and have profited by its operation and/or disposition but very recent
information that (sic) reached plaintiff bank that defendants already sold the machinery
covered by the trust receipt to Yupangco Cotton Mills," and that "as trustees of the property
covered by the trust receipt, . . . and therefore acting in fiduciary (sic) capacity, defendants
have willfully violated their duty to account for the whereabouts of the machinery covered by
the trust receipt or for the proceeds of any lease, sale or other disposition of the same that
they may have made, notwithstanding demands therefor; defendants have fraudulently
misapplied or converted to their own use any money realized from the lease, sale, and other
disposition of said machinery." 23 While there is no specific prayer for the delivery to the
petitioner by Philippine Rayon of the proceeds of the sale of the machinery covered by the
trust receipt, such relief is covered by the general prayer for "such further and other relief as
may be just and equitable on the premises." 24 And although it is true that the petitioner
commenced a criminal action for the violation of the Trust Receipts Law, no legal obstacle
prevented it from enforcing the civil liability arising out of the trust, receipt in a separate civil
action. Under Section 13 of the Trust Receipts Law, the failure of an entrustee to turn over
the proceeds of the sale of goods, documents or instruments covered by a trust receipt to the
extent of the amount owing to the entruster or as appear in the trust receipt or to return said
goods, documents or instruments if they were not sold or disposed of in accordance with the
terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions
3
of Article 315, paragraph 1(b) of the Revised Penal Code. 25 Under Article 33 of the Civil Code,
a civil action for damages, entirely separate and distinct from the criminal action, may be
brought by the injured party in cases of defamation, fraud and physical injuries. Estafa falls
under fraud.
We also conclude, for the reason hereinafter discussed, and not for that adduced by the
public respondent, that private respondent Chi's signature in the dorsal portion of the trust
receipt did not bind him solidarily with Philippine Rayon. The statement at the dorsal portion
of the said trust receipt, which petitioner describes as a "solidary guaranty clause", reads:
In consideration of the PRUDENTIAL BANK AND TRUST COMPANY complying with the
foregoing, we jointly and severally agree and undertake to pay on demand to the
PRUDENTIAL BANK AND TRUST COMPANY all sums of money which the said PRUDENTIAL
BANK AND TRUST COMPANY may call upon us to pay arising out of or pertaining to, and/or in
any event connected with the default of and/or non-fulfillment in any respect of the
undertaking of the aforesaid:
PHILIPPINE RAYON MILLS, INC.
We further agree that the PRUDENTIAL BANK AND TRUST COMPANY does not have to take
any steps or exhaust its remedy against aforesaid:
before making demand on me/us.
(Sgd.) Anacleto R. Chi
ANACLETO R. CHI 26
Petitioner insists that by virtue of the clear wording of the statement, specifically the clause ".
. . we jointly and severally agree and undertake . . .," and the concluding sentence on
exhaustion, Chi's liability therein is solidary.
In holding otherwise, the public respondent ratiocinates as follows:
With respect to the second argument, we have our misgivings as to whether the mere
signature of defendant-appellee Chi of (sic) the guaranty agreement, Exhibit "C-1", will make
it an actionable document. It should be noted that Exhibit "C-1" was prepared and printed by
the plaintiff-appellant. A perusal of Exhibit "C-1" shows that it was to be signed and executed
by two persons. It was signed only by defendant-appellee Chi. Exhibit "C-1" was to be
witnessed by two persons, but no one signed in that capacity. The last sentence of the
guaranty clause is incomplete. Furthermore, the plaintiff-appellant also failed to have the
purported guarantee clause acknowledged before a notary public. All these show that the
alleged guaranty provision was disregarded and, therefore, not consummated.
But granting arguendo that the guaranty provision in Exhibit "C-1" was fully executed and
acknowledged still defendant-appellee Chi cannot be held liable thereunder because the
records show that the plaintiff-appellant had neither exhausted the property of the
defendant-appellant nor had it resorted to all legal remedies against the said defendant-
appellant as provided in Article 2058 of the Civil Code. The obligation of a guarantor is merely
accessory under Article 2052 of the Civil Code and subsidiary under Article 2054 of the Civil
Code. Therefore, the liability of the defendant-appellee arises only when the principal debtor
fails to comply with his obligation. 27
Our own reading of the questioned solidary guaranty clause yields no other conclusion than
that the obligation of Chi is only that of a guarantor. This is further bolstered by the last
sentence which speaks of waiver of exhaustion, which, nevertheless, is ineffective in this case
because the space therein for the party whose property may not be exhausted was not filled
up. Under Article 2058 of the Civil Code, the defense of exhaustion (excussion) may be raised
by a guarantor before he may be held liable for the obligation. Petitioner likewise admits that
the questioned provision is a solidary guaranty clause, thereby clearly distinguishing it from a
contract of surety. It, however, described the guaranty as solidary between the guarantors;
this would have been correct if two (2) guarantors had signed it. The clause "we jointly and
severally agree and undertake" refers to the undertaking of the two (2) parties who are to
sign it or to the liability existing between themselves. It does not refer to the undertaking
between either one or both of them on the one hand and the petitioner on the other with
respect to the liability described under the trust receipt. Elsewise stated, their liability is not
divisible as between them, i.e., it can be enforced to its full extent against any one of them.
Furthermore, any doubt as to the import, or true intent of the solidary guaranty clause should
be resolved against the petitioner. The trust receipt, together with the questioned solidary
guaranty clause, is on a form drafted and prepared solely by the petitioner; Chi's participation
therein is limited to the affixing of his signature thereon. It is, therefore, a contract of
adhesion; 28 as such, it must be strictly construed against the party responsible for its
preparation. 29
Neither can We agree with the reasoning of the public respondent that this solidary guaranty
clause was effectively disregarded simply because it was not signed and witnessed by two (2)
persons and acknowledged before a notary public. While indeed, the clause ought to have
been signed by two (2) guarantors, the fact that it was only Chi who signed the same did not
make his act an idle ceremony or render the clause totally meaningless. By his signing, Chi
became the sole guarantor. The attestation by witnesses and the acknowledgement before a
notary public are not required by law to make a party liable on the instrument. The rule is
that contracts shall be obligatory in whatever form they may have been entered into,
provided all the essential requisites for their validity are present; however, when the law
requires that a contract be in some form in order that it may be valid or enforceable, or that it
be proved in a certain way, that requirement is absolute and indispensable. 30 With respect
to a guaranty, 31 which is a promise to answer for the debt or default of another, the law
merely requires that it, or some note or memorandum thereof, be in writing. Otherwise, it
would be unenforceable unless ratified. 32 While the acknowledgement of a surety before a
notary public is required to make the same a public document, under Article 1358 of the Civil
Code, a contract of guaranty does not have to appear in a public document.
And now to the other ground relied upon by the petitioner as basis for the solidary liability of
Chi, namely the criminal proceedings against the latter for the violation of P.D. No. 115.
Petitioner claims that because of the said criminal proceedings, Chi would be answerable for
the civil liability arising therefrom pursuant to Section 13 of P.D. No. 115. Public respondent
rejected this claim because such civil liability presupposes prior conviction as can be gleaned
from the phrase "without prejudice to the civil liability arising from the criminal offense."
Both are wrong. The said section reads:
Sec. 13. Penalty Clause. — The failure of an entrustee to turn over the proceeds of the sale of
the goods, documents or instruments covered by a trust receipt to the extent of the amount
owing to the entruster or as appears in the trust receipt or to return said goods, documents
or instruments if they were not sold or disposed of in accordance with the terms of the trust
receipt shall constitute the crime of estafa, punishable under the provisions of Article Three
hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and
fifteen, as amended, otherwise known as the Revised Penal Code. If the violation or offense is
committed by a corporation, partnership, association or other juridical entities, the penalty
provided for in this Decree shall be imposed upon the directors, officers, employees or other
officials or persons therein responsible for the offense, without prejudice to the civil liabilities
arising from the criminal offense.
4
A close examination of the quoted provision reveals that it is the last sentence which provides
for the correct solution. It is clear that if the violation or offense is committed by a
corporation, partnership, association or other juridical entities, the penalty shall be imposed
upon the directors, officers, employees or other officials or persons therein responsible for
the offense. The penalty referred to is imprisonment, the duration of which would depend on
the amount of the fraud as provided for in Article 315 of the Revised Penal Code. The reason
for this is obvious: corporations, partnerships, associations and other juridical entities cannot
be put in jail. However, it is these entities which are made liable for the civil liability arising
from the criminal offense. This is the import of the clause "without prejudice to the civil
liabilities arising from the criminal offense." And, as We stated earlier, since that violation of a
trust receipt constitutes fraud under Article 33 of the Civil Code, petitioner was acting well
within its rights in filing an independent civil action to enforce the civil liability arising
therefrom against Philippine Rayon.
The remaining issue to be resolved concerns the propriety of the dismissal of the case against
private respondent Chi. The trial court based the dismissal, and the respondent Court its
affirmance thereof, on the theory that Chi is not liable on the trust receipt in any capacity —
either as surety or as guarantor — because his signature at the dorsal portion thereof was
useless; and even if he could be bound by such signature as a simple guarantor, he cannot,
pursuant to Article 2058 of the Civil Code, be compelled to pay until
after petitioner has exhausted and resorted to all legal remedies against the principal debtor,
Philippine Rayon. The records fail to show that petitioner had done so 33 Reliance is thus
placed on Article 2058 of the Civil Code which provides:
Art. 2056. The guarantor cannot be compelled to pay the creditor unless the latter has
exhausted all the property of the debtor, and has resorted to all the legal remedies against
the debtor.
Simply stated, there is as yet no cause of action against Chi.
We are not persuaded. Excussion is not a condition sine qua non for the institution of an
action against a guarantor. In Southern Motors, Inc. vs. Barbosa, 34 this Court stated:
4. Although an ordinary personal guarantor — not a mortgagor or pledgor — may demand
the aforementioned exhaustion, the creditor may, prior thereto, secure a judgment against
said guarantor, who shall be entitled, however, to a deferment of the execution of said
judgment against him until after the properties of the principal debtor shall have been
exhausted to satisfy the obligation involved in the case.
There was then nothing procedurally objectionable in impleading private respondent Chi as a
co-defendant in Civil Case No. Q-19312 before the trial court. As a matter of fact, Section 6,
Rule 3 of the Rules of Court on permissive joinder of parties explicitly allows it. It reads:
Sec. 6. Permissive joinder of parties. — All persons in whom or against whom any right to
relief in respect to or arising out of the same transaction or series of transactions is alleged to
exist, whether jointly, severally, or in the alternative, may, except as otherwise provided in
these rules, join as plaintiffs or be joined as defendants in one complaint, where any question
of law or fact common to all such plaintiffs or to all such defendants may arise in the action;
but the court may make such orders as may be just to prevent any plaintiff or defendant from
being embarrassed or put to expense in connection with any proceedings in which he may
have no interest.
This is the equity rule relating to multifariousness. It is based on trial convenience and is
designed to permit the joinder of plaintiffs or defendants whenever there is a common
question of law or fact. It will save the parties unnecessary work, trouble and expense. 35
However, Chi's liability is limited to the principal obligation in the trust receipt plus all the
accessories thereof including judicial costs; with respect to the latter, he shall only be liable
for those costs incurred after being judicially required to pay. 36 Interest and damages, being
accessories of the principal obligation, should also be paid; these, however, shall run only
from the date of the filing of the complaint. Attorney's fees may even be allowed in
appropriate cases.37
In the instant case, the attorney's fees to be paid by Chi cannot be the same as that to be paid
by Philippine Rayon since it is only the trust receipt that is covered by the guaranty and not
the full extent of the latter's liability. All things considered, he can be held liable for the sum
of P10,000.00 as attorney's fees in favor of the petitioner.
Thus, the trial court committed grave abuse of discretion in dismissing the complaint as
against private respondent Chi and condemning petitioner to pay him P20,000.00 as
attorney's fees.
In the light of the foregoing, it would no longer necessary to discuss the other issues raised by
the petitioner
WHEREFORE, the instant Petition is hereby GRANTED.
The appealed Decision of 10 March 1986 of the public respondent in AC-G.R. CV No. 66733
and, necessarily, that of Branch 9 (Quezon City) of the then Court of First Instance of Rizal in
Civil Case No. Q-19312 are hereby REVERSED and SET ASIDE and another is hereby entered:
1. Declaring private respondent Philippine Rayon Mills, Inc. liable on the twelve drafts in
question (Exhibits "X", "X-1" to "X-11", inclusive) and on the trust receipt (Exhibit "C"), and
ordering it to pay petitioner: (a) the amounts due thereon in the total sum of P956,384.95 as
of 15 September 1974, with interest thereon at six percent (6%) per annum from 16
September 1974 until it is fully paid, less whatever may have been applied thereto by virtue
of foreclosure of mortgages, if any; (b) a sum equal to ten percent (10%) of the aforesaid
amount as attorney's fees; and (c) the costs.
2. Declaring private respondent Anacleto R. Chi secondarily liable on the trust receipt and
ordering him to pay the face value thereof, with interest at the legal rate, commencing from
the date of the filing of the complaint in Civil Case No. Q-19312 until the same is fully paid as
well as the costs and attorney's fees in the sum of P10,000.00 if the writ of execution for the
enforcement of the above awards against Philippine Rayon Mills, Inc. is returned unsatisfied.
Costs against private respondents.
SO ORDERED.
Gutierrez, Jr., Bidin, Romero and Melo, JJ., concur.
 Footnotes
1 Rollo, 39-47; per Associate Justice Crisolito Pascual, concurred in by Associate Justices Jose
C. Campos, Jr. and Serafin E. Camilon.
2 Rollo, 39-41.
3 Rollo, 81-83.
4 Brief for Appellant, 1-4; Rollo, 85, et seq.
5 Rollo, 45-46.
6 Id., 48.
7 Rollo, 16.
8 Id., 131.
9 Record on Appeal, 123.
10 Herein petitioner.
11 Black's Law Dictionary, Fifth ed., 813; DAVIDSON, KNOWLES, FORSYTHE AND JESPERSEN
Business Law, Principles, and Cases, 1984 ed., 390.
5
12 ROSE, Money and Capital Markets, 1983 ed., 692.
13 Act No. 2031.
14 Section 132, NIL.
15 Sections 133 and 134, Id.
16 Rollo, 66.
17 Id., 17.
18 AGBAYANI, A.F., Commercial Laws of the Philippines, 1987 ed., vol. 1, 409, citing Windham
Bank vs. Norton, 22 Conn. 213, 56 Am. Dec. 397,
19 134 Misc. 18, 21-22, 233 N.Y.S. 486, 490-491, cited in Johnston vs. State Bank, 195 N.W. 2d
126, 130-131 (Iowa 1972), and excerpted in CORMAN, Commercial Law, Cases and Materials,
1976 ed., 622.
20 53 Phil. 874, 876-877 [1928]; see also, Samo vs. People, 115 Phil. 346 [1962].
21 206 Fed., 126.
22 63 Phil. 814, 82l [1936].
23 Record on Appeal, 6-7.
24 Id., 9.
25 Even before P.D. No. 115, these acts covered by Section 13 were already considered as
estafa; see People vs. Yu Chai Ho. supra.; Samo vs. People, supra.; Robles vs. Court of Appeals,
199 SCRA 195 [1991].
26 Record on Appeal, 43.
27 Rollo, 45-46.
28 Sweet Lines, Inc. vs. Teves, 83 SCRA 361 [1978]; Angeles vs. Calasanz, 135 SCRA 323 [1985].
29 Western Guaranty Corp. vs Court of Appeals, 187 SCRA 652 [1990]; BPI Credit Corp. vs.
Court of Appeals, 204 SCRA 601, [1991].
30 Article 1356, Civil Code.
31 Article 2047 of the Civil Code defines it as follows
"By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so."
32 Article 1403 (2) (b), Civil Code.
33 Rollo, 75,
34 99 Phil. 263, 268 [1956].
35 FRANCISCO, V.J., The Revised Rules of Court, vol. I, 1973 ed., 258.
36 Second paragraph, (Article 2055, Civil Code; see National Marketing Corp. vs. Marquez, 26
SCRA 722 [1969]; Republic vs. Pal-Fox Lumber Co., Inc., 43 SCRA 365 [1972].
37 Plaridel Surety & Insurance Co., Inc. vs. P.L. Galang. Machinery Co., Inc., 100 Phil. 679
[1957]; Philippine National Bank vs. Luzon Surety Co., Inc., 68 SCRA 207. [1975].
THIRD DIVISION
 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

6
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 facie
evidence 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
7
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." 24 This 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
8
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.
Feliciano, Bidin, Romero and Melo, JJ., concur.
# Footnotes
1 Decision in Civil Case No. 41021 of Regional Trial Court, Branch 134, Makati,
p. 15.
2 The Bank of Ayudhya expressed impossibility of availment against the above-mentioned letter of credit
because the same had been issued, for the account of Siam Union Metal L.P. (not General Chemicals of
Thailand), for a different amount covering "zinc highgrade," and in favor of Electrolytic Zinc Co. of
Australasia Ltd. (not Inter-Resin) (Exh. "Q", Record, p. 27).
3 The Bank of America, Bangkok, in an answer to the inquiry of the Bank of America, Manila, stated that
General Chemicals of Thailand received the bill of lading but denied having ordered them. However, Bank
of America, Bangkok, doubted that it could hold the merchandise in favor of Bank of America, Manila, as it
did not have the documents (Exhs. "R" and "R-1," Record, pp. 28-29).
4 The dispositive portion reads : "WHEREFORE, in view of the foregoing, judgment is hereby rendered as
follows: 1. ordering the dismissal of the complaint for lack of merit; 2. defendant's counterclaim with the
Court found to be tenable and meritorious; 3. plaintiff BA is hereby ordered to pay the defendants the Peso
equivalent of US$1,461,400.00 with interests counted from April 21, 1981, until fully paid; 4. plaintiff is
hereby ordered to pay the defendants attorney's fees in the amount of P30,000.00; 5. ordering the
dissolution and lifting of the attachment issued by the Court against defendants' properties' and 6. with
costs against plaintiff" (Decision in Civil case No. 41021, p. 209).
5 Decision in Civil Case No. 41021, p. 21.
6 Decision in Civil Case No. 41021, pp. 23-24.
7 CA-G.R. CV No. 24236, prom. 28 January 1992; Lapeña, Jr., ponente, Guingona and Santiago, concurring.
8 Petition, pp. 13-14.
9 See extensive discussions in William S. Shaterian Export-Import Banking: The Instruments and Operations
Utilized by American Exporters and Importers and their Banks in Financing Foreign Trade (The Ronal Press
Company: New York, 1947, pp. 284-374), James J. White and Robert S. Summers (eds) Uniform Commercial
Code (West Publishing Co.: St. Paul, 1988) pp. 806-883, and John H. Jackson and William J. Davey Legal
Problems of International Economic Relations: Cases, Materials and Text on the National and International
Economic Relations, 2nd Ed. (West Publishing Co., St. Paul, pp. 52-63).
10 Article 10 of the U.C.P. defines an irrevocable letter of credit as one that "constitutes a definite
undertaking of the issuing bank, provided that the stipulated documents are presented and that the terms
and conditions of the credit are complied with: i. if the credit provides for sight payment — to pay, or that
payment will be made; ii. if the credit provides for deferred payment — to pay, or that payment will be
made, on the date(s) determinable in accordance with the stipulations of the credit; iii. if the credit
provides for acceptance — to accept drafts drawn by the beneficiary if he credit stipulates that they are to
be drawn on the issuing bank, or to be responsible for their acceptance and payment at maturity if the
credit stipulates that they are to be drawn on the applicant for the credit or any other drawee stipulated in
the credit; iv. if the credit provides for negotiation — to pay without recourse to drawers and/or bona fide
holders, draft(s) drawn by the beneficiary, at sight or at a tenor, on the applicant for the credit or on any
other drawee stipulated in the credit other than the issuing bank itself, or to provide for negotiation by
another bank and to pay, as above, if such negotiation is not effected.
11 Article 17 of the U.C.P. states: "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."
According to White and Summers, op. cit.: ". . . Bankers . . . (describe) the transaction between the bank
and the beneficiary as a "paper transaction." By that they mean the bank issuer's agent should be able to
sit with a necktie and a white shirt at a desk in a bank and by looking at papers that are presented to him
determine whether the bank is obliged to make payment or not. He is not obligated and, indeed, is
foreclosed from donning his overalls and going into the field to determine whether the underlying contract
has been performed. This is the principal reason why careful courts and lawyers state that the letter of
credit is not a guarantee. In a typical guarantee the guarantor will are to make payments if, and openly if,
the customer has failed to fulfill his obligation on the underlying contract. If his obligation has been avoided
because of the acts of the beneficiary, typically there would be no obligation to guarantee and thus no duty
on the guarantor to pay. Letters of credit are different, and they are explicitly and consciously designed to
9
be different in this respect. In effect, the beneficiary under a letter of credit has bargained for the right to
be paid and thus often to be the defendant instead of the plaintiff in the ensuing litigation on the
underlying contract, to be sued at home instead of being a plaintiff abroad . . . ."
12 "The buyer of the merchandise, who is also the buyer of the credit instrument, is the party who initiates
the operation. His contract is with the bank which is to issue the instrument and is represented by the
Commercial Credit of Agreement form which he signs, supported by a mutually made promises contained
in the Agreement" (Shaterian, op. cit. pp. 291-292).
13 "The Opening Bank, usually the buyer's bank, is the bank which actually issues the instrument. It is also
known as the Issuing Bank. The selection of the opening bank is important. It should be a strong bank, well
known and well regarded in international trading circles. This is the reason . . . smaller banks do not
attempt to issue their own commercial credit instruments but take advantage of the facilities of . . . much
larger, stronger, and better known correspondent banks . . . The purpose of commercial credit may not be
readily accomplished unless the opening bank is well known and well regarded" (Shaterian, op. cit., p. 292).
14 "The seller of the merchandise is called the Beneficiary of the credit instrument. The instrument is
addressed to him and in his favor. It is a written contract of the bank which cannot compel the beneficiary
to ship and avail himself of the benefits of the instrument, the seller may recover from the bank the value
of his shipment if made within the terms of the instrument, even though he has not given the bank any
direct consideration for the bank's promises contained in the instrument. By a stretch of imagination, as in
order to support the instrument as a two-sided contract, supported by mutually given considerations, the
courts seem to hold that the commission paid or to be paid by the buyer of the bank is also the
consideration flowing from the seller to the bank" (Shaterian, op. cit., p. 292).
15 "Whenever the instrument is not delivered to the buyer and by him mailed to the beneficiary, the
opening bank will advise the existence of the credit to the beneficiary through its corresponding bank
operating in the same locality as the seller. Such correspondent bank becomes the Notifying Bank. The
services of a notifying bank must always be utilized if the credit is to be advised to the beneficiary by cable .
. ." (Shaterian, op. cit., p. 292).
16 "Whenever the beneficiary stipulates that the obligation of the opening bank shall be also made the
obligation of a bank himself, we have what is known as the a confirmed commercial credit and the bank
local to the beneficiary becomes the Confirming Bank. In view of the fact that commercial credits issued by
American banks in favor of foreign sellers are invariably issued only by . . . larger well known banks, no
seller requests that they be confirmed by another bank. The standing of the . . . opening bank is good
enough. But many foreign banks are not particularly strong or well known, compared with . . . banks issuing
these credit instruments. Indeed, many banks operating abroad are only known through the Banker's
Almanac. They serve a useful purpose in their own small communities and perhaps maintain dollars
account with the larger . . . banks. But their names are quite meaningless to the . . . . exporter, and when
the foreign buyer offers to his . . . seller a credit instrument issued by such a bank, the seller may not
receive the protection and other facilities which an instrument issued by a large, strong, and well known
bank will give him. To overcome this, he requests that the credit as issued by the local bank of the foreign
buyer be confirmed by a well known . . . bank, which will turn out to be (a) . . . bank with which the local
bank of the buyer carries a dollar account. The liability of the confirming bank is a primary one and is not
contingent in any sense of the word. It is as if the credit were issued by the opening and confirming banks
jointly, thus giving the beneficiary or a holder for value of drafts drawn under the credit, the right to
proceed against either or both banks, the moment the credit instrument has been breached. The
confirming bank receives a commission for its confirmation from the opening bank which the opening
bank, in turn, passes on to the buyer of the merchandise" (Shaterian, op. cit., pp. 294-295).
17 "The Paying Bank is the bank on which the drafts are to be drawn. It may be the opening bank, it may be
a bank other than the opening bank and not inn the city of the beneficiary, or it may be a bank in the city of
the beneficiary, usually the advising bank. If the beneficiary is to draw and receive payment in his own
currency, the notifying bank will be indicated as the paying bank also. When the draft is to be paid in this
manner, the paying bank assumes no responsibility but merely pays the beneficiary and debits the
payment immediately to the account which the opening bank has with it. If the opening bank maintains no
account with the paying bank, the paying bank reimburses itself by drawing a bill of exchange on the
opening bank, in dollars, for the equivalent of the local currency paid to the beneficiary, at its buying rate
for dollar exchange. The beneficiary is entirely out of the transaction because his draft is completely
discharged by payment, and the credit arrangement between the paying bank and the opening bank does
not concern him" (Shaterian, op. cit., pp. 293-294).
18 "If the draft contemplated by the credit instrument is to be drawn on the opening bank or on another
designated bank not in the city of the seller, any bank in the city of the seller which buys or discounts the
draft of the beneficiary becomes a Negotiating Bank. As a rule, whenever the facilities of a notifying bank
are used, the beneficiary is apt to offer his drafts to the notifying bank for negotiation, thus giving the
notifying bank the character of a negotiating bank also. By negotiating the beneficiary's drafts, the
negotiating bank becomes "an endorser and bona fide holder" of the drafts and within the protection of
the credit instrument. It is also protected by the drawer's a signature, as the drawer's contingent liability,
as drawer, continues until discharged by the actual payment of the bills of exchange" (Shaterian, op. cit., p.
293).
19 G.R. No. 94209, prom. 30 April 1991; 196 SCRA 576.
20 "The Uniform Customs and Practices for documentary credits were first published in 1933. The current
version was adopted by the International Chamber of Commerce Council in 1983 and published as
Publication No. 400 in July of that year. This current version has the blessing of the United Nations
Commission on International Trade Law (UNCITRAL). The Uniform Customs and Practices are not 'law'
because of the act of any legislature or court, but because they have been explicitly and implicitly made
part of the contract of letters of credit. . . . [M]any of the letters of credit in the United States are governed
by the Uniform Custom and Practices and not by the UCC (Uniform Commercial Code) . . .
"In general, the UCP is much more detailed than the UCC. It clearly shows the tracks of many bankers and
bank lawyers walking back and forth across its surface . . .
"Every lawyer who deals at any time with a letter of credit should have read the UVCP at least once. The
lawyer who deals routinely with such letters or who advises a bank or beneficiary in a circumstance where
litigation is threatened or commenced should look more closely at the UCP." (White and Summers, op. cit.,
pp. 881-883).
21 No. L-24821, 16 October 1970; 35 SCRA 256.
22 See Feati Bank vs. Court of Appeals, 196 SCRA 576.
23 76 SCRA 61; see also Roman Catholic Archbishop vs. Court of Appeals, 198 SCRA 300; Macenas vs. Court
of Appeals, 180 SCRA 83; Sociedad Europea de Financiacion vs. Court of Appeals, 193 SCRA 105; Lianga
Lumber Co. vs. Lianga Timber Co., Inc. 76 SCRA 223.
24 Exh. "C," Records, p. 17.
25 "The banks involved charge a modest commission for their various services. The higher the risk that the
bank assumes, the higher the commission (e.g., to confirm an L/C is riskier than merely transmitting an
advise of credit) (Jackson and Davey, op. cit., p. 53).
26 See Art. 1878 (9) and (11) of the Civil Code, respectively, provides that a special power of attorney is
required "[T]o bind the principal to render some service without compensation" and "[T]o obligate the
principal as a guarantor or surety." Art. 1887 states that "the agent shall act in accordance with the
instructions of the principal". Moreover, Art. 1888 enjoins the agent from carrying out "an agency if its
execution would manifestly result in loss or damage to the principal."
27 In fact, Inter-Resin's pro forma invoice (Exh. "A") sent to General Chemicals, on the basis of which the
letter of credit was apparently issued, demanded for a confirmed and irrevocable letter of credit.
28 The suspicion that no contract of sale was perfected between Inter-Resin and General Chemicals may
find support in the absence of a written memorandum of the sale or any other document showing that
General Chemicals ordered the goods, and the Comment of Inter-Resin detailing the material events of this
case but, surprisingly, failed to categorically state or show that such contract was consented to by the
parties.
29 Article 8 of U.C.P. states : "A credit may be advised to a beneficiary through another bank (the advising
bank) without engagement on the part of the advising bank, but that bank shall take reasonable care to
check the apparent authenticity of the credit which it advises. (Revised 1983, ICC No. 400; reproduced in
Jackson and Davey, op. cit., p. 54); TSN, 13 May 1982, Darley Wijiesekara on cross-examination.
30 1983 ed., p. 96.
31 See Shaterian, op. cit., p. 293.
32 In this respect, its belated theory before us and its motion for reconsideration of the assailed decision
should be rejected for being iniquitous under the circumstances. In fact, Bank of America has failed to
10
present the draft and, more substantially, Inter-Resin has not been afforded full opportunity to refute by
evidence this new argument of Bank of America. In short, we find the records insufficient to arrive at a just
determination on this fact that can allow us to apply the Negotiable Instruments Law thereon.
33 Philip W. Thayer, "Irrevocable Credits on International Commerce: Their Legal Effects," Columbia Law
Review (1937), vol. 37, pp. 1357-1358.
34 "Both in the application form for import credits and in the regulations governing our export credits, it is
definitely provided that the banks involved shall not be made responsible for the genuineness of the
documents submitted under commercial credits. If the buyer of merchandise has sufficient confidence in
the integrity of the seller against shipping documents to be tendered to the bank by the seller, as provided
by the credit instrument, it follows that the same confidence should extend to the tendering of genuine
documents. If the seller is dishonest, he need not attempt to defraud the buyer by the tender of forged
documents. he can obtain the desired evil end with less opportunity for prompt detection by shipping
inferior goods or no goods at all. The carrier does not pry into the cases and packages to make sure that the
merchandise is, in fact, as described in the bill of lading and invoices which are prepared by the shipper.
The tender of forged documents for the purpose of obtaining money is a crime and the seller who commits
such crime is prosecuted and jailed.
". . . Neither can the interested banks assume responsibility for the character or quality of the goods
shipped nor for the terms of the sale contract not incorporated and made part of the credit instrument.
How could they? While the parties to the sale contract may be experts as to the involved merchandise the
banks are not, generally speaking, sufficiently versed in the fine points of each and every class of
merchandise which they finance. Even assuming the bank has men in its employ who can qualify as experts
in certain lines of merchandising, it would not wish to extend this sort of service without adequate
compensation but such service is not a banking function.
". . . Because of this credit should describe the goods in general terms only and the buyer should trust that
the seller will ship the exact merchandise ordered. If the buyer is not satisfied with the moral standing of
the seller, he should not open the credit but buy on open account basis, or subject the draft terms with the
additional requirement that the draft need not be paid until after the buyer has had an opportunity to
examine the gods to make sure that he has received exactly what he ordered" (Shaterian, op. cit., pp. 352-
354).

THIRD DIVISION
G.R. No. 94209             April 30, 1991
FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING CORPORATION), petitioner, vs.
THE COURT OF APPEALS, and BERNARDO E. VILLALUZ, respondents.
Pelaez, Adriano & Gregorio for petitioner.
Ezequiel S. Consulta for private respondent.
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,

11
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
12
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.
13
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.
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The trial court wrongly mixed up the meaning of an irrevocable credit with that of a
confirmed credit. In its decision, the trial court ruled that the petitioner, in accepting the
obligation to notify the respondent that the irrevocable credit has been transmitted to the
petitioner on behalf of the private respondent, has confirmed the letter.
The trial court appears to have overlooked the fact that an irrevocable credit is not
synonymous with a confirmed credit. These types of letters have different meanings and the
legal relations arising from there varies. A credit may be an irrevocable credit and at the same
time a confirmed credit or vice-versa.
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.
15
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.
(See National Bank of Eagle Pass, Tex v. American National Bank of San Francisco, 282 F. 73
[1922])
The relationship between the issuing bank and the notifying bank, on the contrary, is more
similar to that of an agency and not that of a guarantee. It may be observed that the notifying
bank is merely to follow the instructions of the issuing bank which is to notify or to transmit
the letter of credit to the beneficiary. (See Kronman v. Public National Bank of New York,
supra). Its commitment is only to notify the beneficiary. It does not undertake any assurance
that the issuing bank will perform what has been mandated to or expected of it. As an agent
of the issuing bank, it has only to follow the instructions of the issuing bank and to it alone is
it obligated and not to buyer with whom it has no contractual relationship.
In fact the notifying bank, even if the seller tenders all the documents required under the
letter of credit, may refuse to negotiate or accept the drafts drawn thereunder and it will still
not be held liable for its only engagement is to notify and/or transmit to the seller the letter
of credit.
Finally, even if we assume that the petitioner is a confirming bank, the petitioner cannot be
forced to pay the amount under the letter. As we have previously explained, there was a
failure on the part of the private respondent to comply with the terms of the letter of credit.
The failure by him to submit the certification was fatal to his case.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
16
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.
Feliciano, Bidin and Davide, Jr., JJ., concur.
Fernan, C.J., took no part.

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