the goods, while the buyer acquires said documents and control over the goods

COMMREV – Letters of only after reimbursing the bank.

Bank of America v. CA
Credit
9 ISSUE 2: Whether under the LOC, Bank of America has incurred any liability
228 SCRA 357 December 10, J. Vitug Mulingtapang
1993
Petitioner/s: Respondent/s:
BANK OF AMERICA, NT & SA COURT OF APPEALS
INTER-RESIN CORPORATION
FRANCISCO TRAJANO
JOHN DOE and JANE DOE
Recit Ready Summary
Bank of America (BOA) received a letter of credit (LOC) issued by Bank of
Ayudhya (issuing bank) for the account of General Chemicals Ltd of Thailand
(buyer), worth close to 3M USD (US$2,782,000.00) to cover the sale of ropes and
other agricultural files with BOA as advising bank, and Inter-Resin is to be the
beneficiary. BOA then wrote to Inter-Resin to inform them of the LOC. Upon
receipt, Inter-Resin had the LOC confirmed. They were advised however by BOA
that a confirmation is not needed. A bank employee explained that there was no
need for confirmation because the letter of credit would not have been transmitted
were it not genuine.
Later on, Inter-Resin sought to avail of the LOC for the first time (first availment),
for the shipment of ropes to General Chemicals close to 1.4M USD. After being
satisfied by the documents they presented, BOA issued a Cashier’s check for the
PHP equivalent, 10M. It was picked up by the VP of Inter-Resin. BOA then
informed Bank of Ayudhya that Inter-Resin availed.
Inter-Resin again wanted to avail (second availment), but this time, BOA refused
to process the documents because they got a telex that the LOC was fraudulent.
BOA eventually discovered that there was fraud involved; they sued to recover the
10M PHP.
ISSUE 1: What is a letter of credit? It is an agreement where the buyer may be
required to contract a bank to issue an LOC in favor of the seller. That way, by
virtue of the LOC, 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 LOC. 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 documents conform to what the LOC 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 documents of title over
to the beneficiary Inter-Resin? – NO, Bank of America has acted merely as an
ADVISING/ notifying bank and did not assume the responsibility of a confirming
bank;
This is made obvious by the provisions of the LOC itself, BOA’s letter of advice,
BOA’s request for payment of the advising fee, and the admission of Inter-Resin
that it had paid the advising fee. That BOA asked Inter-Resin to submit documents
required for the LOC, and paid the proceeds, did not make it a confirming bank.
The fact that the draft required in the LOC 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. AGAIN, a letter of credit is an engagement
of the issuing bank, not the advising bank, to pay the draft. As an advising bank
only, BOA then did not incur any obligation more than just notifying Inter-
Resin of the LOC issued in its favor. BOA is not obliged to confirm the LOC.
Bringing the letter of credit to the attention of the seller is the primordial
obligation of an advising bank. As advising bank, Bank of America is bound
only to check the "apparent authenticity" of the letter of credit, which it did.
Disposition: In the end, Inter-Resin Industrial Corporation is ordered to refund to
petitioner Bank of America 10M PHP with legal interest from the filing of the
complaint until fully paid.Inter-Resin admits having received 10M PHP from Bank
of America on the letter of credit and in having executed the corresponding draft.
The payment to Inter-Resin has given 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.
Facts
1. In 1981, Bank of America (BOA) received by registered mail an Irrevocable
Letter of Credit, purportedly issued by Bank of Ayudhya, Samyaek Branch
for the account of General Chemicals Ltd of Thailand, worth close to 3M USD
(US$2,782,000.00 ) to cover the sale of ropes and other agricultural files with
BOA as advising bank, and Inter-Resin is to be the beneficiary.
2. BOA wrote to Inter-Resin informing them of the Letter of Credit, along with
the bank’s communication of their credit with BOA. Upon receipt of Inter-
Resin, Inter-Resin sent Atty. Tanay to BOA to have the letter of credit
confirmed. However, BOA did not confirm. Bank employee Dueñas explained
that there was no need for confirmation because the letter of credit would not
have been transmitted were it not genuine.
3. Later on, Inter-Resin sought to avail of the LOC for their first availment.
They submitted to BOA invoices covering the shipment of 24,000 bails of

1 ALS B2021
 rope to General Chemicals valued at close to 1.4 M USD (US$1,320,600.00),
the packing list, export declaration, and bill of lading.
a. After being satisfied with this, BOA issued to them a Cashier’s
Check worth 10M PHP (P10,219,093.20), the peso equivalent of
the 1.4 M USD.
b. The check was picked up the VP of Inter-Resin Tio.
c. BOA then informed Bank of Ayudhya that Inter-Resin availed.
4. Meanwhile, Inter-Resin through VP Tio, presented to BOA the documents
for their second availment under the same LOC. BOA however
apparently got a telex from Bank of Ayudha that the LOC was fraudulent.
Because of this, BOA stopped processing the documents.
a. They sent a telex to the Thailand branch, requesting assistance
in determining the authenticity of the LOC.
b. BOA kept Inter-Resin abreast with info.
c. Sensing fraud, BOA then asked NBI for help.
d. Eventually, they discovered that the vans exported by Inter-Resin
did not contain the ropes. The officers, VP Tio and President
Trajano were then charged with estafa. It was dismissed though.
5. BOA sued Inter-Resin for the recover of the 10M PHP.
a. Inter-Resin claimed that it was entitled to all the money—that is,
not just the 10M they availed, but the extra that they haven’t yet.
6. The lower courts held that
a. BOA made assurances that enticed Inter-Resin
b. The telex saying that the LOC was fraudulent was not verified,
and therefore hearsay.
c. The loading of plastic products into the vands were under strict
supervision
d. BOA failed to prove the participation of Inter-Resin in the fraud.
Procedural History
1. BOA sued Inter-Resin for the recovery of 10MPHP, the peso equivalent
of the draft for 1.4 USD on the partial availment of the now disowned
LOC.
2. On the other hand, Inter-Resin claimed that not only was it entitled to
retain 10m on its first shipment but also to the balance 1.4 USD covering
the second shipment.
3. RTC ruled:
- BOA made assurances that enticed Inter-Resin to send the
merchandise to Thailand
- the telex declaring the LOC 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 BOA which was careless
and negligent" 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;
2 ALS B2021
- the loading of plastic products into the vans were under strict
supervision, inspection and verification of government officers.
- and BOA 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.
4. Court of Appeals sustained the trial court; hence, this present recourse
by BOA.
Point/s of Contention
Inter-Resin holds that: (a) BOA cannot, on appeal, belatedly raise the issue of
being only an advising bank; (b) the findings of the RTC that the ropes have
actually been shipped is binding on the Court; and, (c) BOA cannot recover from
Inter-Resin because the drawer of the LOC is the Bank of Ayudhya and not
Inter-Resin.
Issue/s Ruling
1. What is a letter of credit? 1. See
2. MAIN: Whether under the LOC, Bank of America has Ratio
incurred any liability to the beneficiary Inter-Resin? 2. NO
3. May Bank of America recover what it has paid under the 3. YES
letter of credit when the corresponding draft for partial
availment and the required documents were later
negotiated with it by Inter-Resin?
Rationale
1. A letter of credit is a financial device developed by merchants as a
convenient and relatively safe mode of dealing with the sale of goods, to
satisfy the seemingly irreconcilable interests of the 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.
- In this agreement, the buyer may be required to contract a bank to
issue an LOC in favour of the seller. That way, by virtue of the LOC,
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 LOC
- 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 documents conform to what the LOC 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 documents of title over the goods, while the
buyer acquires said documents and control over the goods only after
reimbursing the bank.
- What distinguishes LOC from others is the engagement of the
issuing bank to pay the seller of the draft, and the required shipping
documents presented to it. Thus, there are 3 parties:
o Buyer, who procures the LOC and obliges himself to
reimburse the issuing bank
o The issuing bank, which undertakes to pay the seller upon
receipt of the draft
o Seller, who ships the goods to the buyer, and delivers the
draft to the issuing bank to recover payment.
2. Bank of America did not incur liability because it is only an advising
bank.
- This is made obvious by the provisions of the LOC itself, BOA’s
letter of advice, BOA’s request for payment of the advising fee, and
the admission of Inter-Resin that it had paid the advising fee.
- That BOA asked Inter-Resin to submit documents required for the
LOC, and paid the proceeds, did not make it a confirming bank.
- The fact that the draft required in the LOC 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
- AGAIN, a letter of credit is an engagement of the issuing bank, not
the advising bank, to pay the draft.
- BOA’s letter in March 1981 has expressly stated that "the enclosure
is solely an advise of credit opened by the abovementioned
correspondent and conveys no engagement by us." 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.(Uniform Customs and Practice for Documentary Credits
("U.C.P.") issued by the International Chamber of Commerce)
- As advising bank only, BOA then did not incur any obligation
more than just notifying Inter-Resin of the LOC issued in its
favor. BOA is not obliged to confirm the LOC.
- The bare statement of the bank employees in responding to the
inquiry made by Atty. Tanay, Inter-Resin's representative, on the
authenticity of the LOC certainly did not have the effect of novating
the letter of credit and BOA’s letter of advise, 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 LOC should have obviously
3 ALS B2021
been a great concern to it. It would have, in fact, been strange if it did
not, prior to the LOC, enter into a contract, or negotiated at the every
least, with General Chemicals. 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.
3. BOA can recover what it has paid under the LOC when the draft was later
negotiated by Inter-Resin.
- This kind of transaction is what is commonly referred to as a
discounting arrangement. This time, BOA has acted independently as
a negotiating bank, thus saving Inter-Resin from the hardship of
presenting the documents directly to Bank of Ayudhya to recover
payment. (Inter-Resin, of course, could have chosen other banks with
which to negotiate the draft and the documents.)
- As a negotiating bank, BOA 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.
- While BOA 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, 3nonetheless, does not preclude
petitioner bank's right (as negotiating bank) of recovery from Inter-
Resin itself.
- Inter-Resin admits having received 10M PHP 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.
- Lastly, the additional ground raised by BOA, 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.

Disposition
- Bank of America has acted merely as a notifying bank and did not
assume the responsibility of a confirming bank; and
- Bank of America, 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.
- 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.

4 ALS B2021