Transfield v.
Luzon Hydro COMMREV – Letters of Credit stipulated documents are presented and the conditions of the credit are complied
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G.R. No. 146717 Nov. 22, 2004 J. Tinga Anton Tensuan
Petitioner: Respondents:
Transfield Philippines, Inc. Luzon Hydro Corporation (“LHC”),
(“Transfield”) Australia and New Zealand Banking
Group, Ltd. (“ANZ Bank”), Security Bank
Corporation (“SBC”)
Recit-Ready Summary
Transfield and LHC entered into a Turnkey Contract, whereby the former was to
construct a hydro-electric power station at Bakun River for the latter. Under the
contract, Transfield was obliged to (a) finish the project within a timespan of about
1 year, (b) provide LHC with letters of credit to secure its obligation, and (c) in
case of default, pay LHC liquidated damages in the amount of $75,000 per day
of delay.
Transfield thus opened 2 standby letters of credit in favor of LHC — one with ANZ
Bank, and the other with SBC (each in the amount of about $8.9 million).
Transfield was unable to finish the project in time due, as it alleged, to force
majeure such as Typhoon Zeb, barricades, and demonstrations. The parties then
brought the dispute in relation to the issue of whether an extension of time was
permissible under the contract to different arbitral tribunals (LHC went to the
CIAC, while Transfield went to the ICC).
Meanwhile, Transfield obtained a TRO from the RTC, which prevented LHC from
drawing on the letters of credit. The RTC later denied the injunction on the basis
of the principle of “independent contracts” in letters of credit. The CA affirmed the
RTC.
1. Could LHC draw on the letters of credit? – Yes
Letters of credit are written instruments whereby the writer requests or authorizes
the addressee to pay money or deliver goods to a third person and assumes
responsibility for payment of debt therefor to the addressee.
Credits, by their nature, are separate transactions from the sales or other
contracts on which they may be based. The obligation under the letter of credit is
independent of the related and originating contract (i.e., a letter of credit is
separate and distinct from the underlying transaction).
Banks are in no way concerned with or bound by such contracts — thus, there is
a definite undertaking by the issuing bank to pay the beneficiary provided that the
1
A contract whereby a builder agrees to build a facility such that it is ready for use when delivered
to the other contracting party.
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with.
Here, the letters of credit issued by the banks were independent from the main
contract between Transfield and LHC. Furthermore, LHC had a contractual right
to draw upon the letters of credit.
2. Was an injunction proper? – No
The issuance of an injunction requires that (a) there is a right to be protected, (b)
the acts against which an injunction is directed are violative of the right, and (c)
there is an urgent need for the injunction to prevent serious damage.
Here, Transfield FAILED to show that it has a right to restrain LHC’s call on the
letters of credit (again, LHC had the right to do this under the contract).
Furthermore, the pendency of the arbitration proceedings would not per se make
LHC’s draws on the letters of credit fraudulent — there was nothing in the contract
which required that any disputes regarding delay should first be settled through
arbitration before LHC could draw on the same.
HELD: Petition denied, costs against Transfield. LHC cannot be prevented from
drawing on the letters of credit.
Facts
1. In March 1997, Transfield and LHC entered into a Turnkey Contract (the
“contract”)1 whereby the former was to construct a 70-Megawatt hydro-
electric power station at Bakun River, which runs through the provinces of
Benguet and Ilocos Sur. Transfield was responsible for the project’s design,
construction, commissioning, testing, and completion.
Some relevant provisions in the contract:
o The target completion date was June 2000, unless a later date is
agreed.
o Transfield was entitled to claim extensions of time under specific
conditions, among which was force majeure.
o In case of dispute, the parties were bound to settle their differences
through mediation or conciliation.
o Rights:
a) Transfield SHALL provide LHC with letters of credit to
secure its obligation (see below).
b) If Transfield fails to finish the project in time, it SHALL pay
LHC liquidated damages in the amount of $75,000 per day
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 of delay without need for demand (but the total amount In February 2001, the CA dismissed the petition. It agreed with the RTC on
cannot exceed 20% of the contract price). In such event, the application of the principle of “independent contracts.”
LHC can deduct the amount of damages by drawing on the
letters of credit. 8. Transfield thus filed a Petition for Review with the SC.

2. Transfield opened 2 standby letters of credit in favor of LHC — one with Points of Contention
ANZ Bank, and the other with SBC (collectively, the “banks”). Each was in
the amount of $8,988,907.00. Transfield alleged that…
a) The lower courts improperly relief on the “independent contract”
3. Over the course of the project, Transfield sought various extensions of time principle, because the case falls under the “fraud exception rule” —
due to several factors which delayed the target completion date (e.g., force particularly, it claimed that LHC knowingly misrepresented to the banks
majeure due to Typhoon Zeb, barricades, demonstrations). LHC denied that it incurred delays, even if they were excusable under the contract.
these requests. b) Only the issuing banks — not the beneficiary (LHC) — can invoke the
“independence principle.”
4. The parties then separately filed Requests for Arbitration — LHC filed with
the Construction Industry Arbitration Commission (“CIAC”) in June 1999, Issues Ruling
while Transfield filed with the International Chamber of Commerce (“ICC”) 1. Could LHC draw on the letters of credit? 1. Yes.
in November 2000. 2. Was an injunction proper? 2. No.
Rationale
In both proceedings, the issues were: (a) whether Typhoon Zeb and other
associated events constituted force majeure to justify the extensions of time, RULES APPLICABLE FOR BOTH ISSUES
and (b) whether LHC had the right to terminate the contract for failure of
Transfield to complete the project in time. What is a Letter of Credit?
- It is a “written instrument whereby the writer requests or authorizes the
5. Foreseeing that LHC would call on the letters of credit, it advised the banks addressee to pay money or deliver goods to a third person and assumes
of the pending arbitration proceedings and warned that it would hold them responsibility for payment of debt therefor to the addressee.” Thus, it
liable for liquidated damages if they released the amounts to LHC. However, involves three parties:
the banks signified that they would release the amounts if and when LHC a) Writer – Debtor (buyer); owner of bank account (usually). Applies
presents the respective letters of credit. for and issues the letter of credit.
b) Addressee – Source of debtor’s money, usually a bank. Can also
6. In November 2000, Transfield filed a Complaint for Injunction with the be an insurance company.
RTC2 in the hopes of restraining (a) LHC from calling on the letters of credit, c) Beneficiary – Creditor (seller). Receives letter of credit.
and (b) the banks from releasing the funds. The RTC issued a 72-hour TRO, - It is NOT…
which was later extended by 17 days. o A contract, because there is no privity and meeting of minds
(although strict compliance with its terms is an enforceable right).
However, the RTC ultimately dismissed the application for injunction on the o A suretyship or guarantee, because it entails primary liability
basis of the principle of “independent contracts” in letters of credit (see following a default.
below). o A negotiable instrument, because it is not payable to order or
bearer and is generally conditional (although it is often
7. Transfield filed a Petition for Certiorari with the CA, which issued a similar negotiable).
TRO. However, the CA failed to act on the application for injunction until the - Rationale:
TRO expires in January 2001 — immediately thereafter, representatives of o Convenient and relatively safe mode of dealing with sales of
LHC went to ANZ Bank and withdrew $4,950,000.00. goods to satisfy the seemingly irreconcilable interests of (a) a
seller, who refuses to part with his goods before he is paid, and

2
RTC Makati, Br. 148. The presiding judge therein was… Judge P!

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 (b) a buyer, who wants to have control of the goods before GR – “Independent Contract” Principle (or “Independent Principle”)
paying.
o Reduces the risk of non-payment or non-performance. Speaking - Art. 3 of the UCP, summarized:
of which… o Credits, by their nature, are separate transactions from the
sales or other contracts on which they may be based.
Two Kinds: o Banks are in no way concerned with or bound by such contracts,
Standby Credits Commercial Credits even if any reference whatsoever to such contracts is included
Used in non-sale settings Used where sales are involved in the credit.
Payable upon a party’s non- Payable upon presentation by o Consequently…
performance under an the seller-beneficiary of • The undertaking of a bank to pay, accept and pay drafts
agreement documents that show that or negotiate and/or fulfill any other obligation under the
affirmative steps were taken to credit is not subject to claims or defenses by the
comply with the sales applicant resulting from his relationships with the issuing
agreement bank or the beneficiary.
• Thus, a beneficiary can in no case avail himself of the
Also: contractual relationships existing between the banks or
Letter of Credit Surety between the applicant and the issuing bank.
The beneficiary reasonably Duty to indemnify the
expects that he will receive beneficiary only arises AFTER - There is a definite undertaking by the issuing bank to pay the
cash in the event of non- the beneficiary establishes the beneficiary provided that the stipulated documents are presented
performance, BEFORE any fact of the obligor’s non- and the conditions of the credit are complied with.
litigation with the obligor (i.e., performance (i.e., default). o The independence principle liberates the issuing bank from the
only upon presentation of the This must be determined in duty of ascertaining compliance by the parties in the main
required documents). Mabilis! litigation. Matagal! contract.
During litigation, the During litigation, the surety o The obligation under the letter of credit is independent of the
beneficiary holds the money. holds the money and the related and originating contract. I.e., the letter of credit is
beneficiary bears most of the separate and distinct from the underlying transaction.
cost of delay in performance. o This…
• Assures the seller or the beneficiary of prompt payment
Since letters of credit have gained general acceptability in international trade independent of any breach of the main contract, and
transactions, the ICC has published from time to time updates on the Uniform • Precludes the issuing bank from determining whether
Customs and Practice (“UCP”) for Documentary Credits to standardize the main contract is actually accomplished or not.
practices in relation thereto.
- Observance of the UCP is justified by Art. 2 of the Code of Commerce, Letters of credit are employed by the parties desiring to enter into
which provides that in the absence of any particular provision in the Code commercial transactions, not for the benefit of the issuing bank but
of Commerce, commercial transactions shall be governed by usages and mainly for the bene􏰀t of the parties to the original transactions. With the
customs generally observed. (BPI v. De Reny Fabric Industries, Inc.) letter of credit from the issuing bank, the party who applied for and
- The applicability of the UCP is undeniable, given that there are no obtained it may confidently present the letter of credit to the beneficiary
specific provisions which govern the legal complexities arising from as a security to convince the beneficiary to enter into the business
transactions involving letters of credit, not only between or among banks transaction. On the other hand, the other party to the business
themselves but also between banks and the seller or the buyer. (Bank of transaction, i.e., the beneficiary of the letter of credit, can be rest assured
America v. CA) of being empowered to call on the letter of credit as a security in case the
commercial transaction does not push through, or the applicant fails to
perform his part of the transaction. It is for this reason that the party who
is entitled to the proceeds of the letter of credit is appropriately called
"beneficiary."

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EX – “Fraud Exception Principle”
Payment under a letter of credit MAY be enjoined if the payment of the credit
would constitute fraudulent abuse of credit.
Most writers agree that fraud is an exception to the independence
principle. Professor Dolan opines that the untruthfulness of a certificate
accompanying a demand for payment under a standby credit may qualify
as fraud sufficient to support an injunction against payment. The remedy
for fraudulent abuse is an injunction.
APPLICATION
1. LHC could validly draw on the letters of credit.
A. LHC was within its rights to draw on the letters of credit
(accordingly, ANZ Bank was right to release the funds to LHC).
b) The fraud constitutes fraudulent abuse of the independent purpose of the
letter of credit (i.e., it is NOT only concerned with the main agreement),
and
c) Irreparable injury will follow if the injunction is not granted.
Here, Transfield FAILED to show that it has a right to restrain LHC’s call on the
letters of credit (again, LHC had the right to do this under the contract).
The pendency of the arbitration proceedings would not per se make LHC’s draws
on the letters of credit fraudulent — there was nothing in the contract which
required that any disputes regarding delay should first be settled through
arbitration before LHC could draw on the same.
SIDE NOTE
LHC charged Transfield with forum shopping, considering that it maintained the
present appeal with the SC (application for TRO/Injunction) at the same time as
the ICC arbitration.

The “independent contract” principle applies.
- The letters of credit issued by the banks were INDEPENDENT from the
main contract between Transfield and LHC.
- Thus, the banks did not have to first determine the fact of non-compliance
on the part of Transfield. They were obliged to release funds to LHC if
and when (and in the amounts demanded) it presented the respective
letters of credit.
In any case, LHC had a contractual right to draw upon the letters of credit — see
“Rights” (under the Turnkey Contract) in the Facts.
B. The SC cannot rule on whether the “fraud exception” principle
applies.
To determine whether a party violated the rule against forum-shopping, the test
applied is whether the elements of litis pendentia are present — i.e., whether a
final judgment in one case will amount to res judicata in the other.
However, considering the seriousness of the charge, the SC refrained from ruling
on this allegation until after Transfield is given enough time to respond thereto.
Disposition
Petition denied, costs against Transfield. LHC cannot be prevented from drawing
on the letters of credit.

This issue of whether Transfield is guilty of delay was submitted for resolution
before the arbitral tribunals, NOT the SC. To be clear, the SC was only asked to
rule on whether an injunction should be issued. Thus…

2. An injunction is improper.

The issuance of an injunction requires that (a) there is a right to be protected, (b)
the acts against which an injunction is directed are violative of the right, and (c)
there is an urgent need for the injunction to prevent serious damage.

For an injunction restraining any payment under a letter of credit to issue, the
following requirements must be met:
a) There is clear proof of fraud,

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