Letters of Credit Case

G.R. No. L-24821 October 16, 1970

BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellee,

vs.
DE RENY FABRIC INDUSTRIES, INC., AURORA T. TUYO and AURORA
CARCERENY alias AURORA C. GONZALES, defendants-appellants.

Material Facts

De Reny Fabric and J.B. Distributing Company, An American Company had a

contract of sale where the former shall buy from dyestuffs of various colors from the
latter.

To secure payment, De Reny applied to BPI for four (4) irrevocable commercial
letters of credit to cover the purchase by the former of goods described in the
contract of sale. BPI approved the application of the former and issued irrevocable
letters of credit addressed to its correspondent bank in the U.S., obliging the latter
bank to notify J.B. Distributing Company, the beneficiary.

After the presentation of the drafts by J.B., the correspondent bank paid the said
company and debited BPI’s account with them.

Partial payments amounting to 90,000 were made by De Reny but the said company
stop paying BPI when , after a chemical test conducted by the National Science
Development Board, the company found out that the goods delivered were colored
chalks. Because of this De Reny refused to take possession of the said goods and
BPI incurred additional expenses in the form of warehouse fees.

De Reny argued that BPI’s correspondent bank had the duty to insure that the goods
covered by the letters of credit conformed with the item appearing therein. BPI
countered that under the terms of the LOC, De Reny agreed that the Bank shall not
be liable for any difference in character, quality, quantity, condition, or value of the
property from that expressed in documents.

Issue

So, does BPI have the right to compel De Reny to pay its indebtedness, considering
the fact that there was breach in the contract of sale between De Reny and J.B.
Company

Ratio Decidendi

Yes, BPI has the right to compel appellant.

The Supreme Court held that when De Reny agreed to the terms of the Letter of
Credit, it was bound to respect the stipulation that BPI has no liability for the
difference of the character of the goods from that expressed in documents. The
Court added that even if no stipulation exists, De Reny cannot pass the burden
cause by the violation of the prestation of J.B Company to BPI. Furthermore, De
Reny is bound by the established usage that international banking and financing
circles are not bound to verify whether what has been described in letters of credits
or drafts or shipping documents actually tallies with what was loaded aboard ship