Reliance v. Daewoo [CommRev] - [LCTR][LC] from Daewoo.
The SC agrees with the CA that the parties had a meeting of
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[G.R. No. [Dec. 17, [Feliciano] [JTSY]
100831] 1993]
Petitioner/s: Respondent/s:
Reliance Commodities Inc. Daewoo Industrial Co., Ltd.
Recit Ready Summary
Reliance and Daewoo entered into a contract of sale on Jan. 9, 1980, under
which Daewoo undertook to deliver 2,000 metric tons of foundry pig iron to
Reliance for USD 404,000.00, but the cargo it delivered was short 135.655
metric tons. They entered into another contract for another 2,000 metric tons on
July 31, by which Daewoo undertook to reduce the price, and was to be paid by
an irrevocable sight letter of credit (LC). Reliance applied for an LC with
Chinabank, which application was endorsed to the Iron and Steel Authority for
approval but was denied (because Reliance had already exceeded its foreign
exchange allocation for the year 1980, and was unable to present enough
purchase orders from end-users). Daewoo rejected the proposed LC because
the covered quantity fell short of the required tonnage, and Reliance
withdrew the application (Daewoo subsequently sold the 2,000 metric tons to
another buyer at a further reduced price). Reliance wrote Daewoo asking it to
pay for the short shipment; when Daewoo ignored the letter, Reliance filed suit.
Daewoo counterclaimed, claiming that Reliance was guilty of breach of
contract when it failed to open a LC per the July 31 contract. The trial court
ruled that Daewoo had to pay for the short delivery, and Reliance was liable for
breach of contract when it failed to open a LC and thus had to pay
damages; the CA affirmed.
I: If the importer fails to open a LC in favor of the exporter, will he be liable for
damages? YES
A LC transaction is a composite of at least three distinct but interrelated
relationships:
a. Between the party applying for the LC (the account party or buyer or
importer) and the party for whose benefit the LC is issued (the
beneficiary or seller or exporter). In this contract, the former (Reliance)
agrees to pay money to the latter (Daewoo)
b. Between the account party and the issuing bank. Under this contract, the
former applies to the issuing bank for a specified LC and agrees to
reimburse the bank for amounts paid by that bank pursuant to the LC
c. Between the issuing bank and the beneficiary, in order to support the
contract under (a) to pay certain monies to the latter
The issue in this case refers to the first relationship (between buyer-importer and
seller-exporter). Examining the terms of the July 31 contract, the SC concludes
that the opening of a LC upon application of Reliance was not a condition
precedent for the birth of the obligation of Reliance to purchase foundry pig iron
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the minds with respect of the subject matter of the contract, the price, and
other provisions. The opening of the LC in favor of Daewoo was an
obligation of Reliance, and the performance of that obligation was a
condition for enforcement of the reciprocal obligation of Daewoo to ship
the subject matter of the contract.
The Central Bank of the Philippines required, among others, the need of permits
or clearances from appropriate government agencies as one of the requirements
for opening a LC. Reliance entered into a transaction to import foundry pig iron,
which is a regulated commodity that requires permission from the ISA, the
appropriate government agency. The record shows that the opening of the LC
became difficult because Reliance already exceeded its foreign exchange
allocation. As a rule, when the importer has exceeded the foreign exchange
allocation, the application will be denied; but, the ISA can reconsider on a case-
by-case basis. Thus, ISA required Reliance to support its application by
submitting purchase orders from end-users for the same quantity that it wished
to import (but it was only able to present purchase order for 900 metric tons, not
the total 2,000). For having exceeded its foreign exchange allocation and failed
to secure end-users purchase orders equivalent to 2,000 metric tons, only
Reliance should be held responsible.
Daewoo had the right to demand compliance with the terms of the basic
contract, and had no duty to accept any unilateral modification of that
contract. Compliance with Philippine legal requirements was the duty of
Reliance, not Daewoo, and the non-opening of the LC was due to
Reliance’s failure to comply with its duty under the contract. The failure of
the buyer seasonably to furnish an agreed LC is a breach of contract
between buyer and seller. When the buyer fails to open a LC as stipulated,
the seller or exporter is entitled to claim damages for such breach.
Damages may include, in appropriate cases, the loss of profit which the seller
would reasonably have made had the transaction been carried out.
Facts + Procedural History
1. Jan. 9, 1980 – Reliance and Daewoo entered into a contract of sale, under
which Daewoo undertook to deliver 2,000 metric tons of foundry pig iron to
Reliance for USD 404,000.00. Pursuant to this, Daewoo shipped 2,000
metric tons of foundry pig iron, but upon arrival in Manila, the cargo was
found to be short 135.655 metric tons (only 1,864.345 metric tons were
discharged and delivered to Reliance)
2. May 2, 1980 – Reliance and Daewoo entered into another contract of sale.
Daewoo acknowledged the previous short shipment and bound itself to
reduce the price by USD1 to USD2 per metric ton. However, this contract
was not consummated and later superseded
3. July 31, 1980 – Reliance and Daewoo entered into a third contract, which
provided that Daewoo would send 2,000 metric tons at USD 190.30 per
metric ton (total price USD 380,600.00), to be paid by an irrevocable sight
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 letter of credit.
4. Aug. 1, 1980 – Reliance applied with Chinabank for a Letter of Credit (LC)
worth USD 380,600.00 in favour of Daewoo. The application was endorsed
to the Iron and Steel Authority (ISA) for approval but was denied; Reliance
was instead asked to submit purchase orders from end-users to support its
application for a LC but was unable to do so. Whatever the exact amount of
the purchase orders was,1 Daewoo rejected the proposed LC because the
covered quantity fell short of the contracted tonnage, and Reliance
withdrew the application for the LC
5. Daewoo subsequently learned that Reliance failed to open the LC as
stipulated in the July 31 contract because it exceeded its 1980 foreign
exchange allocation as early as May, and because of the failure of Reliance
to comply with its undertaking, Daewoo sold the 2,000 metric tons to a
different buyer at a lower price
6. Sept. 3, 1980 – Reliance, through counsel, wrote Daewoo requesting
payment of PHP 226,370.48, representing the value of the short delivery of
135.655 metric tons of foundry pig iron under the January 9 contract
7. Daewoo did not pay, so Reliance filed suit. Daewoo counterclaimed for
damages, contending that Reliance was guilty of breach of contract when it
failed to open a LC as required in the July 31 contract
8. The trial court ruled that (1) the July 31 contract did not extinguish
Daewoo’s obligation for the short delivery 2 and (2) Reliance is liable for
breach of contract for failure to open the LC and thus has to pay actual
damages3
9. Reliance appealed the 2nd part of the decision, but the CA denied
Issue/s Ruling
1. Does the failure of the importer (Reliance) to open a letter 1. Yes
of credit on the date agreed upon make him liable to the
exporter (Daewoo) for damages?
Rationale
1. The failure of the importer to open a LC on the date agreed upon
makes him liable to the exporter for damages
• The nature of a letter of credit was extensively discussed in Bank of
America v. CA. It is one of the modes of payment by which
commercial banks sell foreign exchange to service payments
• A letter of credit transaction is thus a composite of at least three
distinct but intertwined relationships, each relationship being
concretized in a contract:
a. Between the party applying for the LC (the account party or
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Reliance claimed that it was able to raise purchase orders for 1,900 metric tons,
but Daewoo contends that Reliance was only able to raise 900 metric tons
2 metric tons, only Reliance should be held responsible.
Daewoo has to pay Reliance PHP 226,370.48
3 •
Reliance has to pay Daewoo PHP 331,920.97
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buyer or importer) and the party for whose benefit the LC is
issued (the beneficiary or seller or exporter). In this contract,
the former (Reliance) agrees to pay money to the latter
(Daewoo)
b. Between the account party and the issuing bank. Under this
contract, the former applies to the issuing bank for a specified
LC and agrees to reimburse the bank for amounts paid by that
bank pursuant to the LC
c. Between the issuing bank and the beneficiary, in order to
support the contract under (a) to pay certain monies to the
latter
• The issue in this petition relates primarily to the first contractual
relationship: that between the account party or importer Reliance
and the beneficiary or exporter Daewoo
• Examining the terms of the July 31 contract, the SC concludes that
the opening of a LC upon application of Reliance was not a
condition precedent for the birth of the obligation of Reliance to
purchase foundry pig iron from Daewoo. The SC agrees with the
CA that the parties had a meeting of the minds with respect of the
subject matter of the contract, the price, and other provisions. The
failure of Reliance to open the appropriate LC did not prevent the
birth of the contract nor extinguish it. The opening of the LC in favor
of Daewoo was an obligation of Reliance, and the performance of
that obligation was a condition for enforcement of the reciprocal
obligation of Daewoo to ship the subject matter of the contract. But
the contract itself between Reliance and Daewoo already existed
and was enforceable
• The Central Bank of the Philippines required, among others, the
need of permits or clearances from appropriate government
agencies as one of the requirements for opening a LC
• Reliance entered into a transaction to import foundry pig iron, which
is a regulated commodity that requires permission from the ISA, the
appropriate government agency. Prior to the issuance of the permit,
the ISA asks the importer to comply with certain requirements
• The record shows that the opening of the LC became difficult
because Reliance already exceeded its foreign exchange
allocation. As a rule, when the importer has exceeded the foreign
exchange allocation, the application will be denied; but, the ISA can
reconsider on a case-by-case basis. Thus, ISA required Reliance to
support its application by submitting purchase orders from end-
users for the same quantity that it wished to import (but it was only
able to present purchase order for 900 metric tons, not the total
2,000). For having exceeded its foreign exchange allocation and
failed to secure end-users purchase orders equivalent to 2,000
Daewoo had the right to demand compliance with the terms of the
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 basic contract, and had no duty to accept any unilateral
modification of that contract. Compliance with Philippine legal
requirements was the duty of Reliance, not Daewoo, and the non-
opening of the LC was due to Reliance’s failure to comply with its
duty under the contract
• The failure of the buyer seasonably to furnish an agreed LC is a
breach of contract between buyer and seller. When the buyer fails
to open a LC as stipulated, the seller or exporter is entitled to claim
damages for such breach. Damages may include, in appropriate
cases, the loss of profit which the seller would reasonably have
made had the transaction been carried out

Disposition

Petition denied, CA affirmed

Annex: discussion of nature of letter of credit

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. 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 letter of credit, the issuing
bank can authorize the seller to draw drafts and engage to pay them upon their
presentment simultaneously with tender of documents required by the letter of
credit. The buyer and 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 the said documents
and control over the goods only after reimbursing the bank.

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