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Letters of Credit Case Digests SPCL Letters of Credit

SPECIAL COMMERCIAL LAWS A. LETTER OF CREDIT 1. Bank of the Philippine Islands v. De Reny Fabric Industries, Inc., 35 SCRA 253 (1970) 2. Philippine Virginia Tobacco Administration v. De los Angeles, 164 SCRA 543 (1988) 3. Insular Bank of Asia and America v. IAC, 167 SCRA 450 (1988) 4. Feati Bank and Trust Company v. Court of Appeals, 196 SCRA 576 (1991) 5. Prudential Bank and Trust Company v. IAC, 216 SCRA 257 (1992) 6. Bank of America v. Court of Appeals, 228 SCRA 357 (1993) 7. Reliance Commodities, Inc. V. Daewoo Industrial Co., Ltd., 228 SCRA 545 (1993) 8. Rodzssen Supply Company, Inc.v. Far East Bank and Trust Company, 357 SCRA 618 (2001) 9. Abad v. Court of Appeals, 181 SCRA 191 (1990) 10. MWSS v. Hon. Daway, 432 SCRA 559 (2004) 11. Transfield Philippines, Inc. v. Luzon Hydro Corp., 443 SCRA 307 (2004) 12. Bank of Commerce v. Serrano, 451 SCRA 484 (2005) 13. Land Bank of the Philippines v. Monet s Export and Manufacturing Corp. 453 SCRA 173 (2005) Page 1 of 21 SPCL Letters of Credit 1. Bank of the Philippine Islands v. De Reny Fabric Industries, Inc., 35 SCRA 253 (1970) FACTS: -On four (4) diffierent occasions in 1961, the De Reny Fabric Industries, Inc., a Philippine corporation, applied to the Bank for four (4) irrevocable commercial letters of credit to cover the purchase by the corporation of goods described in the covering L/C applications as "dyestuffs of various colors" from its American supplier, the J.B. Distributing Company. -All the applications of the corporation were approved, and the corresponding Commercial L/C Agreements were executed pursuant to banking procedures. -Pursuant to banking regulations then in force, the corporation delivered to the Bank peso marginal deposits as each letter of credit was opened. -By virtue of the foregoing transactions, the Bank issued irrevocable commercial letters of credit addressed to its correspondent banks in the United States, with uniform instructions for them to notify the beneficiary thereof, the JB. Distributing Company, that they have been authorized to negotiate the latter's sight drafts up to the amounts mentioned therein, respectively, if accompanied, upon presentation, by a full set of negotiable clean "on board" ocean bills of lading, covering the merchandise appearing in the L/Cs, that is, dyestuffs of various colors, Consequently, the J.B. Distributing Company drew upon, presented to and negotiated with these banks, its sight drafts covering the amounts of the merchandise ostensibly being exported by it, together with clean bills of lading, and collected the full value of the drafts up to the amounts appearing in the L/ Cs as above indicated. -These correspondent banks then debited the account of the Bank of the Philippine Islands with them up to the full value of th drafts presented by the J.B. Distributing Company, thereafter, endorsed and forwarded all documents to the Bank of the Philippine Islands. -In the meantime, as each shipment (covered by the above-mentioned letters of credit) arrived in the Philippines, the De Reny Fabric 1

do not deal with the property to be exported or shipped to the importer.000. no claim for recoupment against the defendantsappellants. and for this reason. the appellants have. -Further payments were. the appellants cannot shift the burden of loss to the Bank on account of the violation by their vendor of its prestation. value. Inc. Page 2 of 21 SPCL Letters of Credit HELD: Under the terms of their Commercial Letter of Credit Agreements with the Bank. quality. condition. default or fraud by the shipper or anyone else in connection with the property or the shipping thereof. or delivery of the property purporting to be represented by documents. no recourse but to comply with their covenant to the rules of evidence. and whether specified in this Code or not. all parties concerned deal in documents and not in goods." to which the Philippines is a signatory nation. or value of the property front that expressed in documents. that the foreign banks having failed to perform this duty." as well as "for any deviation from instructions. likewise provides that "Acts of commerce. acceptance and payment of letters of credit arc specifically provided for in the Code of Commerce." or for "partial or incomplete shipment. conditions. could accrue. the appellants agreed that the Bank shall not be responsible for the "existence. in providing financing in international business transactions such as those entered into by the appellants. Banks. therefore.64 up to the filing of its complaint with the court below on December 10. negotiation or acceptance against documents in accordance with the terms and conditions of a credit by a Bank authorized to do so 2 . payment. however. or failure or omission to ship my or all of the property referred to in the Credit. should be governed by the provisions contained in it. for any difference in character. b) the usages of commerce generally observed in each place. and in the absence of both rules. quality. Article 10 thereof provides: "Its documentary credit operations. chancier. DEFENSE OF DE RENY: It was the duty of the foreign correspondent banks of the Bank of the Philippine Islands to take the necessary precautions to insure that the goods shipped under the covering L/Cs conformed with the item appearing therein. to P90. in the aggregate. quantity." The Code of Commerce. delay.Industries. quantity. made partial payments to the Bank amounting." It must be noted that certain principles governing the issuance. But even without the stipulation recited above. but deal only with documents. the Bank caused them to be deposited with a bonded warehouse paying therefor the amount of P12.609. by those of the civil law" "Those acts contained in this Code and all Others of analogous character. in their absence." Having agreed to these terms. arising from the losses incurred for the non-delivery or defective delivery of the articles ordered. whether those who execute them be merchants or not. LOWER COURT: Ordered the corporation and its co-defendants (the herein appellants) to pay BPI the amount of the LC agreement. packing. as a result of a chemical test conducted by the National Science Development Board. that the goods that arrived in Manila were colored chalks instead of dyestuffs. subsequently discontinued by the corporation when it became established. and. shall be deemed acts of commerce. -The corporation also refused to take possession of these goods. 1962." and "for any breach of contract between the shippers or vendors and ourselves. in its Article 2. [purchasers] or any of us. The Bank introduced in evidence a provision contained in the "Uniform Customs and Practices for Commercial Documentary Credits Fixed for the Thirteenth Congress of International Chamber of Commerce.

An irrevocable letter of credit cannot during 3 . 1964. -While Revilla was trying to negotiate the reduction of the procurement cost of the 2.binds the party giving the authorization to take up the documents and reimbursed the Bank making the payment. -Sevilla then filed a complaint for damages with preliminary injunction. to make the questioned release of funds from the Letter of Credit. 2. Virginia Tobacco Administration vs. in favor of the PVTA to secure the payment of said balance. petitioner prepared two drafts to be drawn against said letter of credit for amounts which have already become due and demandable. subject to conditions. -Sevilla filed an urgent Motion for Reconsideration. drawable upon the release from the Bureau of Customs of the imported Virginia blending tobacco. 4155 was passed and took effect on June 20. after all. Before petitioner could file a motion for reconsideration of said order. 1963 because of the prevailing export or world market price under which respondent will be exporting at a loss. 1967 directing the Prudential Bank & Trust Co. respondent Judge violated the irrevocability of the letter of credit issued by respondent Bank in favor of petitioner. -Before Sevilla could import the counterpart blending Virginia tobacco. was further amended to grant respondent the privileges under aforesaid law. 1967. xxx HELD: In issuing the Order of July 17. 1967. 1965 subject contract which was already amended on December 14. ISSUE: 1.479 kilos of PVTA tobacco already exported which attempt was denied by petitioner and also by the Office of the President. proprietor and General Manager of the Philippine Associated Resources (PAR) was awarded in a public bidding the right to import Virginia leaf tobacco for blending purposes and exportation by them of PVTA and farmer's low-grade tobacco at a rate of one (1) kilo of imported tobacco for every nine (9) kilos of leaf tobacco actually exported. one of which is that respondent Sevilla would open an irrevocable letter of credit No. They were. -Pending Resolution. having been positively proven as a fact. Republic Act No. 164 SCRA 543 (1988) FACTS: Page 3 of 21 SPCL Letters of Credit -Timoteo Sevilla. the appellants me bound by this established usage. on the ground: (a) the letter of credit issued by respondent bank is irrevocable.101. Respondent Judge acted without or in excess of jurisdiction or with grave abuse of discretion when he issued the Order of July 17.000.00 and the rest of the amount." The existence of a custom in international banking and financing circles negating any duty on the part of a bank to verify whether what has been described in letters of credits or drafts or shipping documents actually tallies with what was loaded aboard ship. on September 14. respondent judge issued the assailed Order of July 17. respondent Sevilla was able to secure the release of P300. Phil. 6232 with the Prudential Bank and Trust Co. -The Lower Court dismissed the complaint and lifted the preliminary injunction issued. the ones who tapped the facilities afforded by the Bank in order to engage in international business. Delos Angeles. negotiation or acceptance. -Thus. authorizing the PVTA to grant import privileges at the ratio of 4 to I instead of 9 to 1 and to dispose of all its tobacco stock at the best price available.

Thus.00. as the principal debtors. for brevity). its remaining outstanding obligation under the two (2) standby L/Cs was only P30. IBAA corrected the latter and demanded refund because the partial payment by Mendozas have the effect of reducing its liability as guarantor or surety under the terms of the standby L/Cs in question. with a 14% nominal interest rate. it is the intention of the parties that must govern. The said loans. -To secure payment. Philam Life again informed IBAA that it was declaring the entire balance outstanding on both loans. because IBAA contested the propriety of calling in the entire loan. Philam Life required that amortizations be guaranteed by an irrevocable standby letter of credit of a commercial bank. IAC. ISSUE: Whether or not the partial payments made by the principal obligors (respondent MENDOZAS) would have the corresponding effect of reducing the liability of the petitioner as guarantor or surety under the terms of the standby LCs in question. -The real Estate Mortgage. as a mere guarantor of the Mendozas who are the principal debtors. 3." Philam Life then demanded the payment of P274. Philam Life.779. Mendoza and Juanita M. Mendoza (the Mendozas.60. and sold at public auction to petitioner IBAA as the lone and highest bidder. Later. Page 5 of 21 4 . -These two (2) irrevocable standby L/Cs were. Philam Life desisted and resumed availing of the L/Cs by drawing on them for five (5) more amortizations. in turn.56 from IBAA but the latter took the position that. However.000. "immediately due and payable. were to be liquidated in equal amortizations over a period of five (5) years.100. COURT OF APPEALS: Reversed the Trial Court and ruled instead that IBAA's liability was not reduced by virtue of the payments made by the Mendozas. was extrajudicially foreclosed by. TRIAL COURT: Trial Court took the position that IBAA. which secured the two (2) standby L/Cs. including liquidated damages. -The Mendozas failed to pay Philam Life the amortization that fell due on I June 1978 so that Philam Life informed IBAA that it was declaring both loans as "entirely due and demandable" and demanded payment of P492. HELD: In construing the terms of a Letter of Credit." was discharged of its liability to the extent of the payment made by the Mendozas. the Mendozas contracted with petitioner Insular Bank of Asia and America (IBAA) for the issuance of two (2) irrevocable standby Letters of Credit in favor of Philam Life for the total amount of P600. obtained two (2) loans from Philippine American Life Insurance Co.00 to finance the construction of their residential house at Mandaue City.its lifetime be cancelled or modified without the express permission of the beneficiary. 167 SCRA 450 (1988) FACTS: Page 4 of 21 SPCL Letters of Credit -Sometime in 1976 and 1977 spouses Ben S. -Because the Mendozas defaulted again on their amortization due on.000. "as surety. to the creditor.996. secured by a real estate mortgage for the same amount on the property of Respondent Spouses in favor of IBAA. as in other contracts.30. Insular Bank of Asia & America vs. (Philam Life) in the total amount of P600.

Christiansen issued purchase order. the Security Pacific National Bank of Los Angeles. the total purchase price of the lauan logs. California. de Santa Ana. therefore. which is within the powers of a bank. Court of Appeals. Specially so. -On the arrangements made and upon the instructions of the consignee. As between IBAA and the Mendozas.386.00. -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.000 cubic meters of lauan logs at $27. surcharges and expenses thereon but not to exceed P600. is now IBAA's sole responsibility to pay to Philam Life by virtue of its absolute and irrevocable undertaking under the standby L/Cs.00 on the loan of the Mendozas. the circumstances and intention of the parties to them.00 per cubic meter FOB.000. That would make them ultra vires rather than a letter of credit.95 representing its clean loans to the Mendozas plus accrued interest besides the fact that it now has the foreclosed property. to the particular and often varying terms in which they may be expressed. Ltd. Payments made by the Mendozas directly to Philam Life are in compliance with their own prestation under the loan agreement. there has been full liquidation. the subject standby Letters of Credit secure the payment of any obligation of the Mendozas to Philam Life including all interests. The remaining obligation of P222. 4. Villaluz agreed to sell to the then defendant Axel Christiansen 2. But while they are a security arrangement. upon their application for the opening and issuance of the Irrevocable Standby Letters of Credit in favor of Philam Life. -After inspecting the logs." Unequivocally. California issued Irrevocable Letter of Credit available at sight in favor of Villaluz for the sum of $54..000." In addition.07 when it foreclosed on the mortgaged property of said spouses in the concept of "principal (unpaid advances under the 2 standby LCs plus interest and charges).000. The standby L/Cs are. They are to receive a reasonable and not a technical construction and although usage and custom cannot control express terms in letters of credit. 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 documents specified therein. Also incorporated by reference is the Uniform Customs and Practice for Documentary Credits). it bears recalling that the Mendozas. Hanmi Trade Development.364. and the usages of the particular trade of business contemplated. Being separate and independent agreements. Feati Bank & Trust Company vs. "in effect an absolute undertaking to pay the money advanced or the amount for which credit is given on the faith of the instrument. and that IBAA had recovered from the Mendozas the amount of P432. As to the liability of the Mendozas to IBAA. 196 SCRA 576 (1991) FACTS: -Bernardo E. therefore. -The logs were thereafter 5 .00.SPCL Letters of Credit "Letters of credit and contracts for the issuance of such letters are subject to the same rules of construction as are ordinary commercial contracts. they are to be construed with reference to all the surrounding facts and circumstances. since the promissory notes executed by the Mendozas in favor of IBAA authorized the sale of the mortgaged security "for the purpose of applying their proceeds to x x x payments" of their obligations to IBAA. had executed a Real Estate Mortgage as security to IBAA for any payment that the latter may remit to Philam Life on the strength of said Letters of Credit. IBAA had recovered P255." They are primary obligations and not accessory contracts. the payments made by the Mendozas cannot be added in computing IBAA's liability under its own standby letters of credit. they are not converted thereby into contracts of guaranty.

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 certifica tion. the logs arrived at Inchon. the same holds true. filed an amended complaint make the petitioner solidarily liable with Christiansen. IAC. this theory could lead to dangerous precedents. Hanmi Trade Development Company. instituted an action for mandamus and specific performance against Christiansen and the Feati Bank and Trust Company (now Citytrust). In the United States. Prudential Bank v. Ltd. The-same rule must also be followed. Thus the rule of strict compliance. the Feati Bank and Trust Company refused to advance the payment on the letter of credit. The tender of documents by the beneficiary (seller) must include all documents required by the letter.loaded on the vessel "Zenlin Glory" which was chartered by Christiansen.Because of the absence of the certification by Christiansen. The mere fact that the document was specified therein readily means that the document is of vital importance to the buyer. Before its loading. -Meanwhile. Christiansen left the Philippines without informing the Court and his counsel. 216 SCRA 257 (1992) FACTS: Philippine Rayon Mills. banks are granted a little discretion to accept a faulty tender as when the other documents may be considered immaterial or superfluous. entered into a contract with Nissho Co. Page 6 of 21 SPCL Letters of Credit -However. Korea.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. Villaluz. -Since the demands by the private respondent for Christiansen to execute the certification proved futile. ISSUE: 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 thereon.. on the other hand sold the logs to Taisung Lumber Company at Inchon. the logs were inspected by custom inspectors. the money thus paid to the beneficiary. as when it accepts a faulty tender. Villaluz. it is not in a position to determine whether or not the documents required by the letter of credit Are material or superfluous. commercial transactions involving letters of credit are governed by the rule of strict compliance. as the case may be. Korea and were received by the consignee. and the loading was completed. -While the case was still pending trial. HELD: Commercial transactions involving letter of credits are governed by the rule on strict compliance-. Although in some American decisions. despite several requests made by the private respondent. Since a bank deals only with documents. all of whom certified to the good condition and exportsbility of the logs. acts on its own risks and it may not thereafter be able to recover from the buyer or the issuing bank. Christiansen refused to issue the certification as required in paragraph 4 of the letter of credit. Hanmi Trade Development Company. Inc. Hence. A correspondent bank which departs from what has been stipulated under the letter of credit. Page 7 of 21 6 . to whom Christiansen sold the logs and obtained profit. 5. In the Philippines. of Japan for the importation of textile machineries under a five-year deferred payment plan.

Anacleto R. by prior arrangement with the Prudential Bank. however disregarded the latter drafts as those drafts were not accepted by Rayon. It was to the latter that the drafts were presented for payment. Upon the arrival of the machineries. The defendant-appellant was able to take delivery of the textile machineries and installed the same at its factory site at 69 Obudan Street. TC: -Ordered Philippine Rayon to pay. ISSUE: Whether or not sight drafts require prior acceptance before Rayon can be held liable thereon. there was no need for acceptance as the issued drafts are sight drafts. Chi in his capacity as President .-. a trust receipt which was signed by Anacleto R. by the very terms and conditions thereof. the bank merely substitutes its own promise to pay for the promise to pay of 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. Presentment for acceptance not required for sight drafts. Presentment for acceptance is necessary only in the cases expressly provided for in Section 143 of the Negotiable Instruments Law (NIL). Ltd.13 The said section reads: "SEC. prudential Bank was not justified in unilaterally paying the amounts therein.-Presentment for acceptance must be made: (a) Where 7 . which were all paid by the Prudential Bank through its correspondent in Japan.11 Through a letter of credit. Prudential Bank: Trial Court erred in interpreting sight drafts as requiring acceptance by Rayon before it could be held liable thereon. were to be jointly and severally liable to the Prudential Bank should the Rayon fail to pay the total amount or any portion of the drafts issued by Nissho and paid for by Prudential Bank. the drawee was necessarily the herein petitioner. By virtue of said application. while the others were not. it executed. HELD: Page 8 of 21 SPCL Letters of Credit Letters of Credit. At the back of the trust receipt is a printed form to be accomplished by two sureties who. The last drafts which had not been presented and accepted by Rayon. Quezon City. two of these drafts were accepted by the Rayon through its president. the Bank of Tokyo. In fact. When presentment for acceptance must be made. Rayon ceased business operation. The obligation of Rayon arising from the letter of credit and the trust receipt remained unpaid and unliquidated. To enable Rayon to take delivery of the machineries. the Prudential Bank opened Utter of Credit Against this letter of credit.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. Chi. Subsequently. the Prudential Bank indorsed the shipping documents to Rayon which accepted delivery of the same. drafts were drawn and issued by Nissho.SPCL Letters of Credit Rayon applied for a commercial letter of credit with the Prudential Bank and Trust Company in favor of Nissho. All the textile machineries in its factory were sold to AIC Development Corporation. CA: -Sustained the Trial Court. In the instant case then. As indicated on their faces. 143. Repeated formal demands for the payment of the said trust receipt yielded no result.

Sarnyaek Branch. HELD: It cannot seriously be disputed. among other things. Bank of America issued in favor of Inter-Resin a Cashier's Check the peso equivalent of the draft. sight drafts do not require presentment for acceptance.600. however. or in any other ease. bank. holding that (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. Thailand. Bank of America wrote Bank of Ayudhya advising the latter of the availment under the letter of credit and sought the corresponding reimbursernent therefor." Obviously then. Inter-Resin. presented to Bank of America the documents for the second availment under the same letter of credit. by the 8 . and this much is clearly evident. where presentment for acceptance is necessary in order to fix the maturity of the instrument. after being satisfied that Inter-Resin's documents conformed with the conditions expressed in the letter of credit.320. that Bank of America has. Finally.000 bales of polyethylene rope to General Chemicals valued at US$1. requesting assistance in determining the authenticity of the letter of credit. export declaration and bill of lading. that Bank of America made assurances that enticed Inter-Resin and the merchandise to Thailand. Inter-Resin sought to make a partial availment under the letter of credit by submitting to Bank of America invoices. corollarily. of Thailand in the amount to cover the sale of Plastic ropes and "agricultural files. NT & SA v. 228 SCRA 357 (1993) FACTS: Bank of America. or (b)Where the bill expressly stipulates that it shall be presented for acceptance. covering the shipment of 24.00. Immediately upon receipt of a telex from Bank of Ayudhya declaring the letter of credit fraudulent. In no other case is presentment for acceptance necessary in order to render any party to the bill liable. Meanwhile.. Bank of America. ISSUE: Whether or not the Bank of America acted merely as an advising bank or a confirming bank. only been an advising. the corresponding packing list. Ltd.the bill is payable after sight. Presentment is not a condition sine qua non for reimbursement. NT & SA. The bank employee in charge of letters of credit. Manila. Court of Appeals. CA: -Sustained the Trial Court. Page 9 of 21 SPCL Letters of Credit TC: -Ruled for Inter-Resin. Bank of America can recover from Inter-Resin. (c) Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee. Inter-Resin sent its lawyer to Bank of America to have the letter of credit confirmed. The bank did not. explained to that there was no need for confirmation because the letter of credit would not have been transmitted if it were not genuine. received by registered mail art Irrevocable Letter of Credit purportedly issued by Bank of Ayudhya. Bank of America stopped the processing of Inter-Resin's documents and sent a telex to its branch office in Bangkok. Upon receipt of the letter-advice with the letter of credit. not confirming. 6. looking at this case. Bank of America sued Inter-Resin for the recovery of the peso equivalent of the draft on the partial availment of the now disowned letter of credit. in fact." with the Bank of America as advising bank and Inter-Resin Industrial Corporation as beneficiary. for the account of General Chemicals.

228 SCRA 545 (1993) Facts: Page 10 of 21 SPCL Letters of Credit -Reliance Commodities and Daewoo Industrial entered into a contract of sale of foundry pig iron. It may be significant to recall that the letter of credit is an engagement of the issuing bank. -The application was endorsed to the Iron Steel Authority (ISA) for approval. did not obviously make it a confirming bank. -An examination of the exhibits' presented by Reliance in the trial court shows that only 9 . in fact.900 metric tons. but the application was denied. or negotiated at the very least.655 metric tons.. -The agreement was made part of the subsequent contract.000 metric tons of foundry pig iron for delivery to its consignee Reliance. and the admission of InterResin that it has paid the same. Reliance alleges that it was able to raise purchase orders for 1.000 metric tons. Inter-Resin itself cannot claim to have been all that free from fault.P.. contends that reliance was only able to raise purchase orders for 900 metric tons. prior to the letter of credit. enter into a contract. In the ordinary course. That Bank of America has asked Inter-Resin to submit documents required by the letter of credit and eventually has paid the proceeds thereof.provisions of the letter of credit itself.Reliance filed with the China Banking Corporation. . bank) for payment. another contract was entered into between the same parties for the purchase of another 2. It would have. As the seller. Daewoo shipped from Pohang.Subsequently. Republic of Korea. the petitioner bank's letter of advice. too. 2. to pay the draft. and to compensate Reliance therefore. upon the other hand.The shipment was fully paid for. an application for a letter of credit in favor of Daewoo. Inc. Reliance was not able to raise purchase orders for 2. 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. its request for payment of advising fee. 7. the perfection of contract precedes the issuance of a letter of credit.Reliance was instead asked to submit purchase orders from end-users to support its application for a letter of credit. Bank of Amenca did not incur any obligation more than just notifying Inter-Resin of the letter of credit issued in its favor. Daewoo Industrial Co. however. Inter-Resin's representative. nor can it justify the conclusion that the bank must now assume total liability on the letter of credit. the cargo was found to be short of 135. Indeed. V. Reliance Commodities. Pursuant to this. been strange if it did not. Ltd. Tanay. that contract was not consummated and was later superseded by still another contract. bound itself to reduce the price. As an advising or notifying bank. The bare statement of the bank employee. not the advising bank. -Daewoo. the issuance of the letter of credit should have obviously been a great concern to it. let alone to confirm the letter of credit. The fact. .Upon arrival in Manila. with General Chemicals. -Daewoo acknowledged the short shipment.C. aforementioned. . that the draft required by the letter of credit is to be drawn under the account of General Chemicals (buyer) only means that the same had to be presented to Bank of Ayudhya (issuing. 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." 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. of business. .000 metric tons of foundry pig iron. -However. in responding to the inquiry made by Atty.

Affirmed TC ISSUE: -Whether or not the failure of an importer (Reliance) to open a letter of credit on the date agreed upon makes him liable to the exporter (Daewoo) for damages. contending that Reliance was guilty of breach of contract when it failed to open and L/C as required in the 31 July 1980 contract. Where the buyer fails to open a letter of credit as stipulated. the appropriate L/C did not prevent the birth of that contract. Damages for failure to open a commercial credit may. include 10 . -Not being heeded. representing the value of the short delivery of 135. in appropriate capes. Daewoo responded. Reliance withdrew the application for the L/C. HELD: -Failure of Reliance to open the appropriate letter of credit did not prevent the birth of the contract and neither did such failure extinguish that contract. and other principal provisions.655 metric tons of foundry pig iron under the 1st contract.48. Whatever the exact amount of the purchase orders was. to cut losses and expenses Daewoo had begun to incur due to its inability to ship the 2000 metric tons to Reliance under their contract. the price thereof (US $380. -Reliance. The opening of the L/C in favor of Daewoo was an obligation of Reliance and the performance of that obligation by Reliance was a condition for enforcement of the reciprocal obligation of Daewoo to ship the subject matter of the contract-the foundry pig iron-to Reliance. with a counterclaim for damages. and neither did the failure extinguish that contract.000 metric tons to another buyer at a lower price.000 metric tons allegedly sent by prospective end-users to Reliance were not shown to have been duly sent and exhibited to the ISA.370. Reliance filed an action for damages against Daewoo with the trial court. The other purchase orders for 1."they had a perfected contract. Daewoo rejected the proposed L/C for the reason that the goods covered fell short of the contracted tonnage. But the contract itself between Reliance and Daewoo had already sprung into legal existence and was enforceable.00).600. -Subsequently. Thus. wrote Daewoo requesting of the amount of P226.purchase orders for 900 metric tons were stamped "Received" by the ISA. Daewoo learned that the failure of Reliance to open the LC was due to the fact that Reliance had already exceeded its foreign exchange allocation.failure of Reliance to open. Failure of a buyer seasonably to furnish an agreed letter of credit is a breach of the contract between buyer and seller. -Because of the failure of Reliance to comply with its undertaking. having reached "a meeting of minds" in respect of the subject matter of the contract (2000 metric of foundry pig iron with a specified chemical composition). inter alia. Reliance and Daewoo. CA: . the seller or exporter is entitled to claim damages for such breach. through its counsel. Daewoo was compelled to sell the 2. TC: Page 11 of 21 SPCL Letters of Credit -Reliance is in turn liable for breach of contract for its failure to open a letter of credit in favor of Daewoo pursuant to their contract and must therefore pay the latter actual damages with legal interest plus attorney's fees.

of all the documents necessary for collection. -For the first three hydraulic loaders that were delivered.TOMCO.v. When both parties to a transaction are mutually negligent in the performance of their obligations. 357 SCRA 618 (2001) FACTS: -Rodzssen Supply opened an irrevocable letter 30-day domestic letter of credit from Far East Bank and Trust in favor of Ekman and Company. because the letter of credit has already expired five months ago. but on Article 2142 of the Civil Code which reads as follows: Certain lawful. ISSUE: 1. to pay for one Skagit Yarder with accessories. HELD: 1. -Rodzssen refused to pay and instead offered to return the last two pieces of equipment. 2. True. voluntary and unilateral acts give rise to the juridical relation of quasi-contract to the end that no one shall be unjustly enriched or benefited at the expense of another. Inc. nevertheless. 9. In the same vein. Page 12 of 21 SPCL Letters of Credit TC and CA: . FBTC should not have paid Ekman. -The last two hydraulic loaders were delivered late. Be that as it may. The subject Letter of Credit had become invalid upon the lapse of the period fixed therein.Ordered Rodzssen to pay FBTC. It must be noted that the latter had voluntarily received and kept the loaders. 181 SCRA 191 (1990) FACTS: . Thus. the Bank paid for the amount specified in the letter of credit. Abad v. -After making the required marginal deposit. of no moment was Ekman s presentation. TOMCO. their rights and obligations may be determined equitably under the law proscribing unjust enrichment. Rodzssen accepted the same. with a right to sell the same for 11 . but Rodzssen itself was not without fault in the transaction. not upon the inefficacious Letter of Credit. and was granted by the Philippine Commercial and Industrial Bank (hereafter called "PCIB"). within the prescribed period. Whether or not it is proper for a banking institution to pay a letter of credit which has long expired or been cancelled. subsequent amendments extended the validity of the said LC for eight months. we agree with the CA that Rodzssen should pay FBTC the amount the latter expended for the equipment belatedly delivered by Ekman and voluntarily received and kept by petitioner. for the purchase of five units of hydraulic loaders. FBTC s right to seek recovery from petitioner is anchored. 2. as the Letter of Credit had already expired and had in fact been cancelled. a domestic letter of credit in favor of its supplier. Whether or not Rodzssen is liable to reimburse FBTC.. Inc. FBTC paid even if it was no longer bound to do so. Inc. -FBTC demanded payment from Rodzssen. PCIB paid to Oregon Industries the cost of the machinery against a bill of exchange . signed and delivered to the bank a trust receipt acknowledging receipt of the merchandise in trust for the bank. 8. with the obligation "to hold the same in storage" as property of PCIB.applied for.the loss of profit which the seller would reasonably have made had the transaction been carried out. Far East Bank and Trust Company. -Upon Ekman s presentation of documents. Inc. Rodzssen Supply Company. Oregon Industries. Indeed. it erred in paying Ekman. it was not obliged to do so. Inc. equitable considerations behoove us to allow recovery by FBTC. the fault of one cancels the negligence of the other and. Court of Appeals. as in this case.

and is supposed to be returned to him upon his compliance with his secured obligation.000 marginal deposit in the bank. Inc. and Abad -TOMCO did not deny its liability to PCIB under the letter of credit but it alleged that inasmuch as it made a marginal deposit the same should have been deducted from its principal obligation. Ramon Abad signed an undertaking entitled. on the P80.000 letter of credit. It would be onerous to compute interest and other charges on the face value of the letter of credit which the bank issued. As a matter of fact. bank charges. or its surety. Inc. should be set off against his debt. on which the bank should have computed the interest.It is only fair then that the marginal deposit (if one was made. to be applied against acceptance(s) and any other indebtedness of TOMCO. Page 13 of 21 SPCL Letters of Credit -In consideration of the release to TOMCO. TC: -in favor of PCIB ordering TOMCO and ABAD to pay jointly and severally to PCIB with the marginal deposit still included in the computation of the obligation. also earns interest on the money it loaned to the importer. and attorney's fees.cash provided that the entire proceeds thereof are turned over to the bank. the marginal deposit requirement for letters of credit has been discontinued. for while the importer earns no interest on his marginal deposit. HELD: . Inc. no payment has been made to PCIB by either TOMCO. the bank. unlike an ordinary bank deposit which earns interest in the bank. Consequently. the bank pays no interest on the marginal deposit. Inc. CA: . 12 . To allow such would be a clear case of unjust enrichment. Inc. except in those cases where the applicant for a letter of credit is not known to the bank or does not maintain a good credit standing therein.Whether or not the marginal deposit paid for should first be deducted from its principal before computing interests and other charges.The marginal deposit requirement is a Central Bank measure to cut off excess currency liquidity which would create inflationary pressure.Affirmed in toto decision of TC. whereby he Promised to pay the obligation jointly and severally with TOMCO. Abad. . by PCIB of the machinery covered by the trust receipt. the bank sued TOMCO. It is a collateral security given by the debtor. ISSUE: . without first crediting or setting off the marginal deposit which the importer paid to the bank. -Consequently. apart from being able to use said deposit for its own purposes. "Deed of Continuing Guaranty" appearing on the back of the trust receipt. -Except for TOMCO s P28. as in this case).

They are primary obligations and not accessory contracts and while they are security arrangements. MWSS v. .Prior to that Maynilad had filed a petition for rehabilitation. . ISSUE: -Whether or not Court has the authority to issue order enjoining MWSS from proceeding against the Stand-by Letter of Credit. Maynilad arranged for a 3 year facility with a number of foreign banks. the parties entered into a Memorandum of Agreement wherein Maynilad was allowed to recover foreign exchange losses under a formula agreed upon between them.When MWSS demanded payment and commenced drawing on the irrevocable standby letter of credit. because it is under rehabilitation. It effectively stopped the commencing process of payment by the bank to MWSS. duly paid in the amount specified in the letter.RTC issued an order staying the enforcement of the claims and stopping payment of liabilities. another order was issued by the RTC declaring such act of MWSS as violative of stay order earlier issued. Letters of credit were developed for the purpose of insuring to a seller payment of a definite amount upon the presentation of documents and is thus a commitment by the issuer that the party in whose favor it is issued and who can collect upon it will have his credit against the applicant of the letter. . . . for which Maynilad undertook to pay the corresponding concession fees on the date agreed upon in the said agreement which consisted of the payments of MWSS foreign loans. They are in effect absolute undertakings to pay the money advanced or the amount for which credit is given on the faith of the instrument.Aggrieved. . Maynilad incurred losses and issued a force majeure notice and unilaterally suspend payment of the concession fees. decommission and refurbish the existing MWSS water delivery and sewerage services in the west zone service area.In compliance with this requirement. repair. . of the depreciation of the Philippine Peso against US dollar. MWSS filed this petition for review by way of certiorari under rule 65. they are primary obligations and not accessory contracts and while they are security arrangements. . HELD: -Letters of credit are in effect absolute undertakings to pay the money advanced or the amount for which credit is given on the faith of the instrument. .Maynilad filed again another force majeure notice and since MWSS could not agree with the terms of the notice.In an effort to salvage the concession agreement. led by Citicorp International Limited for the issuance of an irrevocable Standby Letter of Credit for the full and prompt performance of Maynilad s obligations under MWSS.year period to manage. bank guarantee or other security acceptable to MWSS. Daway.As a result. . the same was referred to the Appeals Panel for arbitration. Maynilad was required to put up a bond.To secure the concessionaire s performance of it s obligation under the Concession Agreement.MWSS granted Maynilad a 20.New term was agreed upon. they are not converted into contracts of guaranty.10. Hon. they are not Page 15 of 21 13 . 432 SCRA 559 (2004) FACTS: Page 14 of 21 SPCL Letters of Credit . operate.

Whether or not injunction is the proper remedy to restrain wrongful draws on the securities. 2. a seventy Megawatt Hydro-Electric power station at the Bakun River in the provinces of Benguet and Ilocos Sur. LHC served notice that it would call on the securities for payment of liquidated damages for the delay.SPCL Letters of Credit converted thereby into contracts of guaranty. on a turnkey basis. LHC denied the requests. Transfield Philippines. -Asserting that LHC had no right to call on the securities until the resolution of disputes before the arbitration tribunals. release or disposition of the securities in favor of LHC would constrain it to hold them liable for damages. Transfield filed a complaint for injunction against LHC and the banks. undertook to construct. -The obligation of the banks issuing letters of credit are solidary with that of the person or entity requesting for its issuance. 4. among which are variations. the letter of credit is excluded from the jurisdiction of the rehabilitation and therefore in enjoining MWSS from proceeding against the Standby Letters of Credit to which it had a clear right under the law and the terms of said Standby Letter of credit.. -To secure performance of Transfield s obligation on or before target completion date. Whether or not there is necessity of resolving first any dispute by the parties before the beneficiary is entitled to call on the letter of credit. -Subsequently. Luzon Hydro Corp. -Transfield was given the sole responsibility for the design. primary. such as force majeure occasioned by typhoon Zeb. absolute and definite undertaking to pay the beneficiary upon the presentation of the set of documents required therein.Being a solidary obligation. Arbitration proceeding were initiated. Hon. force majeure and delays caused by LHC itself. Page 16 of 21 SPCL Letters of Credit ISSUES: 1. Inc. The extensions were requested allegedly due to several factors which prevented the completion of the project on the target date. Transfield sought various extension of time to complete the project. LHC declared Transfield in default and demanded payment for the delay until actual completion of the project pursuant to the turnkey contract. Transfield warned the banks that any transfer. construction. the same being a direct. . -Hence. Whether or not it is only the issuing bank that may invoke the independence principle on letters of credit. as turnkey contractor. Whether the banks were justified in releasing the amounts due under the securities. -Also. barricades and demonstration. -In the course of construction of the project. however. testing and completion of the project. 14 . 3. v. the banks informed Transfield that they would pay on the securities if and when LHC calls on them. 443 SCRA 307 (2004) FACTS: -Transfield and Luzon Hydro Corporation entered into a Turnkey contract whereby Transfield. Transfield opened in favor of LHC two stand-by letters of credit. What distinguishes letters of credit from other accessory contracts is the engagement of the issuing bank to pay the seller once draft and other required shipping documents are presented to it. They are definite undertakings to pay at sight once the documents stipulated therein are presented. -Despite warning. commissioning. -The turnkey contract entitled Transfield to claim extensions of time for reasons enumerated in the turnkey contract. Daway acted in excess of his jurisdiction 11.

value or existence of the goods represented by any documents. the carriers. a seventy (70) megawatt hydro electric power station. the performance of which is secured by a standby letter of credit.As beneficiary of the letter of credit. . The beneficiary of a commercial credit must demonstrate by documents that he has performed his contract. There are three significant differences between commercial and standby credits. In both cases the payment may be enjoined if in the light of the purpose of the credit the payment of the credit would constitute fraudulent abuse of the credit. banks assume no liability or responsibility for the form.HELD: . -The fraud exception principle is an exception to the independence principle. or (b) independence may be only as to the justification aspect like in a commercial letter of credit or repayment standby. performance or standing of the consignor. packing. delivery. -Where the applicant entered into a Turnkey contract whereby it undertook to construct. quantity. The beneficiary of the standby credit must certify that his obligor has not performed the contract.Letters of credit are also used in non-sale settings where they serve to reduce the risk of non-performance. LHC is entitled to invoke the principle. weight. falsification or legal effect of any documents. or for the good faith or acts and/or omissions. However. which is identical with the same obligations under the underlying agreement. solvency. The untruthfulness of a certificate accompanying a demand for payment under a standby letter of credit may qualify as fraud sufficient to support an injunction against payment. quality. nor do they assume any liability or responsibility for the description. genuineness. condition. sufficiency. accuracy. or any other person whomsoever. injunction should not be granted unless: Page 17 of 21 SPCL Letters of Credit (a) there is a clear proof of fraud. . Letters of credit in non-sale settings are known as standby letters of credit. (b) the fraud constitutes fraudulent abuse of the independent purpose of the letter of credit and not only fraud in the main agreement.The so-called independence principle assures the seller or the beneficiary of prompt payment independent of any breach of the main contract and precludes the issuing bank from determining whether the main contract is actually accomplished or not. the resort to arbitration by the applicant/ contractor to arbitration to determine if the latter is guilty of delay does not preclude the beneficiary to draw on the letter of 15 . First. Under this principle. on a turnkey basis. commercial credits involve the payment of money under a contract of sale. and (3) irreparable injury might follow if injunction is not granted or the recovery of damages would be seriously damaged. The remedy for fraudulent abuse is an injunction. or the insurers of the goods. In the standby type. The documents that accompany the beneficiary's draft tend to show that the applicant has not performed. Such credits become payable upon the presentation by the seller-beneficiary of documents that show he has taken affirmative steps to comply with the sales agreement. or for the general and/or particular conditions stipulated in the documents or superimposed thereon. the credit is payable upon certification of a party's nonperformance of the agreement. The independent nature of the letter of credit may be: (a) independence in toto where the credit is independent from the justification aspect and is a separate obligation from the underlying agreement like for instance a typical standby.

in representation of Via Moda. CA: -Reversed the decision of TC. or to return the goods covered by Trust Receipt within 5 days from receipt. The proceeds of the entrusted goods sold were not credited to the trust receipt but. through Serrano. 16 . executed Trust Receipt . -The demand was not heeded. Bank of Commerce (BOC) secured by a Deed of Assignment over Irrevocable Transferable Letter of Credit. were applied by the bank to the principal. but not later than the maturity date. to return the goods in case of non-sale. the proceeds are to be remitted to the bank as soon as it is received.credit upon the issuance of certificate of default because whether or not the issuance of certification of default amounted to fraud was not raised in the lower court and the parties did not stipulate that all dispute regarding delay should first be settled through arbitration before the beneficiary would be allowed to call upon the letter of credit. To secure the release of the goods covered. While the trust receipt may have been executed as a security on the letter of credit. USA.A letter of credit is a separate document from a trust receipt. penalties and interest of the export packing loan.Via Moda International. The excess was applied to the trust receipt.Whether or not Serrano is jointly and severally liable with Via Moda under the guarantee of the Letter of Credit secured by the Trust Receipt. who sent an Export Letter of Credit issued by the Bank of New York. -The goods covered by the trust receipt were shipped by Via Moda to its consignee in New Jersey. -BOC issued to Via Moda. -Serrano was charged with the crime of estafa under Article 315 (b) of the Revised Penal Code in relation to Presidential Decree No. Serrano executed in favor of BOC Promissory Note. 12. ISSUE: . 451 SCRA 484 (2005) FACTS: . Said proceeds are to be applied to the relative acceptances. obtained an export packing loan from. HELD: . 115. Irrevocable Letter of Credit for the purchase and importation of fabric and textile products from Tiger Ear Fabric Co. Ltd. of Taiwan. the right of the applicant to seek indemnification for damages it suffered would not normally be foreclosed pursuant to general principle of law. A letter of credit is 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. Page 18 of 21 SPCL Letters of Credit TC: -Serrano guilty and ordered to pay civil liability to BOC. in favor of BOC. Via Moda agreed to hold the goods in trust for BOC as the latter s property and to sell the same for the latter s account. Serrano. -Under the terms of the trust receipt. with interest and penalty or in the alternative. leaving a balance. Serrano. still the two documents involve different undertakings and obligations. In case of sale. If drawing upon the letter of credit was wrongful due to the non-existent of the fact of default. .BOC sent a demand letter to Via Moda to pay the said amount plus interest and penalty charges. Via Moda then opened a deposit account for the proceeds of the said loan. The Regional Operations Officer of BOC signed the export declarations to show consent to the shipment. Bank of Commerce v.

The parties stipulated during the pre-trial that respondent Serrano executed the trust receipt in representation of Via Moda. By contrast. Monet s Export and Manufacturing Corp.00. documents or instruments themselves if they are unsold. and petitioner BOC failed to show sufficient reason to justify the piercing of the veil of corporate fiction. the continuing guaranty of the spouses Vicente V. That because of the non. and the third party mortgage. which has a separate personality from Serrano. and Monet's Export and Manufacturing Corporation (Monet) executed an Export Packing Credit Line Agreement under which Monet was given a credit line in the amount of P250.19 a complaint for collection of sum of money with prayer for preliminary attachment was filed by Land Bank. DEFENSE OF MONET AND TAGLE SPOUSES: . or return the goods.464. documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods.Land Bank failed and refused to collect the receivables on their export letter of credit against Wishbone Trading Company. Tagle. or not otherwise disposed of. who holds an absolute title or security interests over certain goods.Through a letter of credit.. in accordance with the terms and conditions specified in the trust receipt.Land Bank of the Philippines (Land Bank).000. LC AND CA: .000. Tagle. and Ma. Inc. notwithstanding repeated demands. -Owing to the continued failure and refusal of Monet. ISSUE: . a trust receipt transaction is one where the entruster. 453 SCRA 173 (2005) FACTS: . to pay its indebtedness to Land Bank.Whether or not fault or acts of mismanagement can be attributed to Land Bank relative to Monet's import letter of credit 17 . which have ballooned to P11.246. Sr. who executes a trust receipt binding himself to hold the goods. while it made unauthorized payment on their import letter of credit to Beautilike Limited which seriously damaged the business interests of Monet.collection and unauthorized payment made by Land Bank on behalf of Monet and considering that the latter could no longer draw from its credit line with Land Bank. Consuelo G. Page 19 of 21 SPCL Letters of Credit -The credit line agreement was renewed and amended several times until it was increased to P5. documents or instruments. Serrano cannot be held civilly liable under the trust receipt since she was not made personally liable nor was she a guarantor therein. or as appears in the trust receipt.000.Land Bank was responsible for the mismanagement of the Wishbone and Beautilike accounts of Monet. 13. released the same to the entrustee. secured by the proceeds of its export letters of credit. it suffered from lack of financial resources sufficient to buy the needed materials to fill up the standing orders from its customers.00. It thus ruled that this was not Serrano s personal obligation but that of Via Moda and there was no basis of finding her solidarily liable with Via Moda. Land Bank of the Philippines v. the bank merely substitutes its own promise to pay for the promise to pay of 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. documents and instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster.

The engagement of the issuing bank is to pay the seller or beneficiary of the credit once the draft and the required documents are presented to it. upon receipt by Land Bank of the documents of title which conform to what the letter of credit requires. The relationship between the beneficiary and the issuer of a letter of credit is not strictly contractual. no fault or acts of mismanagement can be attributed to Land Bank relative to Monet's import letter of credit 18 . Thus. The so-called 'independence principle assures the seller or the beneficiary of prompt payment independent of any breach of the main contract and precludes the issuing bank from determining whether the main contract is actually accomplished or not. as it did in this case. Accordingly. we find merit in the contention of Land Bank that. as the issuing bank in the Beautilike transaction involving an import letter of credit.HELD: . it is duty bound to pay the seller. it only deals in documents and it is not involved in the contract between the parties. because both privity and a meeting of the minds are lacking. -Thus.