Letters of Credit

THIRD DIVISION
[G.R. No. 105395. December 10, 1993.] BANK OF AMERICA, NT & SA, petitioner, vs. COURT OF APPEALS, INTER-RESIN INDUSTRIAL CORPORATION, FRANCISCO TRAJANO, JOHN DOE AND JANE DOE, respondents.

Agcaoili & Associates for petitioner. Valenzuela Law Center, Victor Fernandez and Ramon M. Guevara for private
respondents.

SYLLABUS 1.COMMERCIAL LAW; CODE OF COMMERCE; LETTERS OF CREDITS; DEFINED AND CONSTRUED. 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 the tender of documents required by the letter of credit. 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 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. 2.ID.; ID.; ID.; DISTINGUISHED. What characterizes letters of credit, as distinguished from other accessory contracts, is the engagement of the issuing bank to pay the seller once the draft and the required shipping documents are presented to it. In turn, this arrangement assures the seller of prompt payment, independent of any breach of the main sales contract. By this so-called "independence principle," the bank determines compliance with the letter of credit only by examining the shipping documents presented; it is precluded from determining whether the main contract is actually accomplished or not. 3.ID.; ID.; ID.; PARTIES THERETO. There would at least be three (3) parties: (a) the buyer, who procures the letter of credit and obliges himself to reimburse the issuing bank upon receipt of the documents of title; (b) the bank issuing the letter of credit, which undertakes to pay the seller upon receipt of the draft and proper documents of titles and to surrender the documents to the buyer upon reimbursement; and, (c) the seller, who in compliance with the contract of sale ships the goods to the buyer and delivers the documents of title and draft to the issuing bank to recover payment. The number of the parties, not infrequently and almost invariably in international trade practice, may be increased. Thus, the services of an advising (notifying) bank may be utilized to convey to the seller the existence of the credit; or, of aconfirming bank which will lend credence to the letter of credit issued by a lesser known issuing bank; or, of a paying bankwhich undertakes to encash the drafts drawn by the exporter. Further, instead of going to the place of the issuing bank to claim payment, the buyer may approach another bank, termed the negotiating bank, to have the draft discounted. 4.ID.; ID.; ID.; UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS (U.C.P.); APPLICATION TO PHILIPPINE CODE OF COMMERCE. Being a product of international commerce, the impact of this commercial instrument transcends national boundaries, and it is thus not uncommon to find a dearth of national law that can adequately provide for its governance. This country is no exception. Our own Code of Commerce basically introduces only its concept under Articles 567-572, inclusive, thereof. It is no wonder then why great reliance has been placed on commercial usage and practice, which, in any case, can be justified by the universal acceptance of the autonomy of contracts rule. The rules were later developed into what is now known as the Uniform Customs and Practice for Documentary Credits ("U.C.P.") issued by the International Chamber of Commerce. It is by no means a complete text by itself, for, to be

sure, there are other principles, which, although part of lex mercatoria, are not dealt with in the U.C.P. In FEATI Bank and Trust Company v. Court of Appeals, (G.R. No. 94209, prom. 30 April 1991; 196 SCRA 576) the Supreme Court have accepted, to the extent of their pertinency, the application in our jurisdiction of this international commercial credit regulatory set of rules. In Bank of Phil. Islands v. De Nery, (G.R. No. L-24821, 16 October 1970; 35 SCRA 256) the Court has said that the observance of the U.C.P. is justified by Article 2 of the Code of Commerce which expresses that, in the absence of any particular provision in the Code of Commerce, commercial transactions shall be governed by usages and customs generally observed. The Court have further observed that there being no specific provisions which govern the legal complexities arising from transactions involving letters of credit not only between or among banks themselves but also between banks and the seller or the buyer, as the case may be, the applicability of the U.C.P. is undeniable. 5.ID.; ID.; ID.; ADVISING OR NOTIFYING BANK; CONSTRUED; CASE AT BAR. The crucial point of dispute in this case is whether under the "letter of credit," Bank of America has incurred any liability to the "beneficiary" thereof, an issue that largely is dependent on the bank's participation in that transaction; as a mere advising or notifying bank, it would not be liable, but as a confirming bank, had this been the case, it could be considered as having incurred that liability. Bank of America has, only been an advising, not confirming, bank, and this much is clearly evident, among other things, by the provisions of the letter of credit itself, the petitioner bank's letter of advice, its request for payment of advising fee, and the admission of Inter-Resin that it has paid the same. That Bank of America has asked Inter-Resin to submit documents required by the letter of credit and eventually has paid the proceeds thereof, did not obviously make it a confirming bank. The fact, too, 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 bank) for payment. It may be significant to recall that the letter of credit is an engagement of the issuing bank, not the advising bank, to pay the draft. No less important is that Bank of America's letter of 11 March 1981 has expressly stated that "[t]he enclosure is solely an adviseof 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. As an advising or notifying bank, Bank of America did not incur any obligation more than just notifying Inter-Resin of the letter of credit issued in its favor, let alone to confirm the 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. 6.ID.; ID.; ID.; ID.; RIGHT OF RECOURSE, WHEN AVAILABLE. May Bank of America then recover what it has paid under the letter of credit when the corresponding draft for partial availment thereunder and the required documents therefor were later negotiated with it by Inter-Resin? The answer is yes. This kind of transaction is what is commonly referred to as a discounting arrangement. This time, Bank of America, 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, Bank of America has a right of 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. 7.ID.; ID.; ID.; NATURE OF OPERATION. In the operation of a letter of credit, the involved banks deal only with documents and not on goods described in those documents. DECISION VITUG, J :
p

A "fiasco," involving an irrevocable letter of credit, has found the distressed parties coming to court as adversaries in seeking a definition of their respective rights or liabilities thereunder. On 05 March 1981, petitioner Bank of America, NT & SA, Manila, received by registered mail an Irrevocable Letter of Credit No. 20272/81 purportedly issued by Bank of Ayudhya, Samyaek Branch, for the account of General Chemicals, Ltd., of Thailand in the amount of US$2,782,000.00 to cover the sale of plastic

ropes and "agricultural files," with the petitioner as advising bank and private respondent Inter-Resin Industrial Corporation as beneficiary.
prcd

On 11 March 1981, Bank of America wrote Inter-Resin informing the latter of the foregoing and transmitting, along with the bank's communication, the letter of credit. Upon receipt of the letter-advice with the letter of credit, Inter-Resin sent Atty. Emiliano Tanay to Bank of America to have the letter of credit confirmed. The bank did not. Reynaldo Dueas, bank employee in charge of letters of credit, however, explained to Atty. Tanay that there was no need for confirmation because the letter of credit would not have been transmitted if it were not genuine. Between 26 March to 10 April 1981, Inter-Resin sought to make a partial availment under the letter of credit by submitting to Bank of America invoices, covering the shipment of 24,000 bales of polyethylene rope to General Chemicals valued at US$1,320,600.00, the corresponding packing list, export declaration and bill of lading. Finally, after being satisfied that Inter-Resin's documents conformed with the conditions expressed in the letter of credit, Bank of America issued in favor of Inter-Resin a Cashier's Check for P10,219,093.20, "the Peso equivalent of the draft (for) US$1,320,600.00 drawn by Inter-Resin, after deducting the costs for documentary stamps, postage and mail insurance." 1 The check was picked up by Inter-Resin's Executive Vice-President Barcelina Tio. On 10 April 1981, Bank of America wrote Bank of Ayudhya advising the latter of the availment under the letter of credit and sought the corresponding reimbursement therefor. Meanwhile, Inter-Resin, through Ms. Tio, presented to Bank of America the documents for the second availment under the same letter of credit consisting of a packing list, bill of lading, invoices, export declaration and bills in set, evidencing the second shipment of goods. Immediately upon receipt of a telex from Bank of Ayudhya declaring the letter of credit fraudulent, 2 Bank of America stopped the processing of Inter-Resin's documents and sent a telex to its branch office in Bangkok, Thailand, requesting assistance in determining the authenticity of the letter of credit. 3 Bank of America kept Inter-Resin informed of the developments. Sensing a fraud, Bank of America sought the assistance of the National Bureau of Investigation (NBI). With the help of the staff of the Philippine Embassy at Bangkok, as well as the police and customs personnel of Thailand, the NBI agents, who were sent to Thailand, discovered that the vans exported by Inter-Resin did not contain ropes but plastic strips, wrappers, rags and waste materials. Here at home, the NBI also investigated Inter-Resin's

President Francisco Trajano and Executive Vice President Barcelina Tio, who, thereafter, were criminally charged for estafa through falsification of commercial documents. The case, however, was eventually dismissed by the Rizal Provincial Fiscal who found no prima facie evidence to warrant prosecution.
LLpr

Bank of America sued Inter-Resin for the recovery of P10,219,093.20 the peso equivalent of the draft for US$320,600.00 on the partial availment of the now disowned letter of credit. On the other hand, Inter-Resin claimed that not only was it entitled to retain P10,219,093.20 on its first shipment but also to the balance US$1,461,400.00 covering the second shipment. On 28 June 1989, the trial court ruled for Inter-Resin, 4 holding that: (a) Bank of America made assurances that enticed Inter-Resin to send the merchandise to Thailand; (b) the telex declaring the letter of credit 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 BA which was careless and negligent" 5 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; (c) the loading of plastic products into the vans were under strict supervision, inspection and verification of government officers who have in their favor the presumption of regularity in the performance of official functions; and (d) Bank of America 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. 6 On appeal, the Court of Appeals 7 sustained the trial court; hence, this present recourse by petitioner Bank of America. The following issues are raised by Bank of America: (a) whether it has warranted the genuineness and authenticity of the letter of credit and, corollarily, whether it has acted merely as an advising bank or as a confirming bank; (b) whether Inter-Resin has actually shipped the ropes specified by the letter of credit; and, (c) following the dishonor of the letter of credit by Bank of Ayudhya, whether Bank of America may recover against Inter-Resin under the draft executed in its partial availment of the letter of credit. 8
llcd

In rebuttal, Inter-Resin holds that: (a) Bank of America cannot, on appeal, belatedly raise the issue of being only an advising bank; (b) the findings of the trial court that the ropes have actually been shipped is binding on the Court; and, (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.

If only to understand how the parties, in the first place, got themselves into the mess, it may be well to start by recalling how, in its modern use, a letter of credit is employed in trade transactions. 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. 9 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 the tender of documents required by the letter of credit. 10 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 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.
LexLib

What characterizes letters of credit, as distinguished from other accessory contracts, is the engagement of the issuing bank to pay the seller once the draft and the required shipping documents are presented to it. In turn, this arrangement assures the seller of prompt payment, independent of any breach of the main sales contract. By this so-called "independence principle," the bank determines compliance with the letter of credit only by examining the shipping documents presented; it is precluded from determining whether the main contract is actually accomplished or not. 11 There would at least be three (3) parties: (a) the buyer, 12 who procures the letter of credit and obliges himself to reimburse the issuing bank upon receipt of the documents of title; (b) the bank issuing the letter of credit, 13 which undertakes to pay the seller upon receipt of the draft and proper documents of

titles and to surrender the documents to the buyer upon reimbursement; and, (c) the seller, 14 who in compliance with the contract of sale ships the goods to the buyer and delivers the documents of title and draft to the issuing bank to recover payment. The number of the parties, not infrequently and almost invariably in international trade practice, may be increased. Thus, the services of an advising (notifying) bank 15 may be utilized to convey to the seller the existence of the credit; or, of aconfirming bank 16 which will lend credence to the letter of credit issued by a lesser known issuing bank; or, of a paying bank 17 which undertakes to encash the drafts drawn by the exporter. Further, instead of going to the place of the issuing bank to claim payment, the buyer may approach another bank, termed the negotiating bank, 18 to have the draft discounted.
llcd

Being a product of international commerce, the impact of this commercial instrument transcends national boundaries, and it is thus not uncommon to find a dearth of national law that can adequately provide for its governance. This country is no exception. Our own Code of Commerce basically introduces only its concept under Articles 567-572, inclusive, thereof. It is no wonder then why great reliance has been placed on commercial usage and practice, which, in any case, can be justified by the universal acceptance of the autonomy of contracts rule. The rules were later developed into what is now known as the Uniform Customs and Practice for Documentary Credits ("U.C.P.") issued by the International Chamber of Commerce. It is by no means a complete text by itself, for, to be sure, there are other principles, which, although part of lex mercatoria, are not dealt with in the U.C.P.

In FEATI Bank and Trust Company v. Court of Appeals, 19 we have accepted, to the extent of their pertinency, the application in our jurisdiction of this international commercial credit regulatory set of rules. 20 In Bank of Phil. Islands v. De Nery, 21 we have said that the observance of the U.C.P. is justified by Article 2 of the Code of Commerce which expresses that, in the absence of any particular provision in the Code of Commerce, commercial transactions shall be governed by usages and customs generally observed. We have further observed that there being no specific provisions which govern the legal complexities arising from transactions involving letters of credit not only between or among banks themselves but also between banks and the seller or the buyer, as the case may be, the applicability of the U.C.P. is undeniable.

The first issue raised by the petitioner, i.e., that it has in this instance merely been an advising bank, is outrightly rejected by Inter-Resin and is thus sought to be discarded for having been raised only on appeal. We cannot agree. The crucial point of dispute in this case is whether under the "letter of credit," Bank of America has incurred any liability to the "beneficiary" thereof, an issue that largely is dependent on the bank's participation in that transaction; as a mere advising or notifying bank, it would not be liable, but as a confirming bank, had this been the case, it could be considered as having incurred that liability. 22
LexLib

In Insular Life Assurance Co. Ltd. Employees Association- Natu vs. Insular Life Assurance Co., Ltd., 23 the Court said: Where the issues already raised also rest on other issues not specifically presented, as long as the latter issues bear relevance and close relation to the former and as long as they arise from matters on record, the court has the authority to include them in its discussion of the controversy and to pass upon them just as well. In brief, in those cases where questions not particularly raised by the parties surface as necessary for the complete adjudication of the rights and obligations of the parties, and such questions fall within the issues already framed by the parties, the interests of justice dictate that the court should consider and resolve them. The rule that only issues or theories raised in the initial proceedings may be taken up by a party thereto on appeal should only refer to independent, not concomitant matters, to support or oppose the cause of action or defense. The evil that is sought to be avoided, i.e., surprise to the adverse party, is in reality not existent on matters that are properly litigated in the lower court and appear on record. It cannot seriously be disputed, looking at this case, that Bank of America has, in fact, only been an advising, not confirming, bank, and this much is clearly evident, among other things, by the provisions of the letter of credit itself, the petitioner bank's letter of advice, its request for payment of advising fee, and the admission of Inter-Resin that it has paid the same. That Bank of America has asked Inter-Resin to submit documents required by the letter of credit and eventually has paid the proceeds thereof, did not obviously make it a confirming bank. The fact, too, 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 bank) for payment. It may be significant to recall that the letter of credit is an engagement of the issuing bank, not the advising bank, to pay the draft.
LLjur

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." 24 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. As an advising or notifying bank, Bank of America did not incur any obligation more than just notifying Inter-Resin of the letter of credit issued in its favor, let alone to confirm the letter of credit. 25 The bare statement of the bank employee, aforementioned, in responding to the inquiry made by Atty. Tanay, Inter-Resin's representative, 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, 26 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 letter of credit should have obviously been a great concern to it. 27 It would have, in fact, been strange if it did not, prior to the letter of credit, enter into a contract, or negotiated at the very least, with General Chemicals. 28 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. 29 Clarifying its meaning, Webster's Ninth New Collegiate Dictionary 30 explains that the word "APPARENT suggests appearance to unaided senses that is not or may not be borne out by more rigorous examination or greater knowledge."
prcd

May Bank of America then recover what it has paid under the letter of credit when the corresponding draft for partial availment thereunder and the required documents therefor were later negotiated with it by Inter-Resin? The answer is yes. This kind of transaction is what is commonly referred to as a discounting arrangement. This time, Bank of America, 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, Bank of America has a right of 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.31 While Bank of America has indeed failed to allege material facts in its complaint that might have likewise warranted the application of the Negotiable Instruments Law and possibly then allowed it to even go after the indorsers of the draft, this failure, 32 nonetheless, does not preclude petitioner bank's right (as a negotiating bank) of recovery from Inter-Resin itself. Inter-Resin admits having received P10,219.093.20 from Bank of America on the letter of credit transaction and in having executed the corresponding draft. That 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, could 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 . . . The fact that the correspondent and the negotiating bank may be one and the same does not affect its rights and obligations in either capacity, although a special agreement is always a possibility . . ." 33
LLpr

The additional ground raised by the petitioner, 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. 34 The other issues raised in the instant petition, for instance, whether or not Bank of Ayudhya did issue the letter of credit and whether or not the main contract of sale that has given rise to the letter of credit has been breached, are not relevant to this controversy. They are matters, instead, that can only be of concern to the herein parties in an appropriate recourse against those who, unfortunately, are not impleaded in these proceedings. In fine, we hold that First, given the factual findings of the courts below, we conclude that petitioner Bank of America has acted merely as anotifying bank and did not assume the responsibility of a confirming bank; and

Second, petitioner bank, as a negotiating bank, is entitled to recover on InterResin's partial availment as beneficiary of the letter of credit which has been disowned by the alleged issuer bank. No judgment of civil liability against the other defendants, Francisco Trajano and other unidentified parties, can be made, in this instance, there being no sufficient evidence to warrant any such finding. WHEREFORE, the assailed decision is SET ASIDE, and respondent 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.
LibLex

No costs. SO ORDERED.

Feliciano, Bidin, Romero and Melo, JJ ., concur.

Footnotes

1.Decision in Civil Case No. 41021 of Regional Trial Court, Branch 134, Makati. p.15. 2.The Bank of Ayudhya expressed impossibility of availment against the abovementioned letter of credit because the same had been issued, for the account of Siam Union Metal L.P. (not General Chemicals of Thailand), for a different amount covering "zinc highgrade," and in favor of Electrolytic Zinc Co. of Australasia Ltd. (not Inter Resin) (Exh. "Q," Record p. 27). 3.The Bank of America, Bangkok, in an answer to the inquiry of the Bank of America, Manila, stated that General Chemicals of Thailand received the bill of lading but denied having ordered them. However, Bank of America, Bangkok, doubted that it could hold the merchandise in favor of Bank of America, Manila, as it did not have the documents (Exhs. "R" and "R-1," Record, pp. 28-29). 4.The dispositive portion reads: "WHEREFORE, in view of the foregoing, judgment is hereby rendered as follows: 1. ordering the dismissal of the complaint for lack of merit; 2. defendants' counterclaim with the Court found to be tenable and meritorious; 3. plaintiff BA is hereby ordered to pay the defendants the Peso equivalent of US$1,461,400.00 with interests counted from April 21, 1981, until fully paid; 4. plaintiff is hereby ordered to pay the defendants attorney's fees in the amount of P30,000.00; 5. ordering the dissolution and lifting of the

attachment issued by the Court against defendants' properties' and 6. with costs against plaintiff" (Decision in Civil Case No. 41021, p. 209). 5.Decision in Civil Case No. 41021, p. 21. 6.Decision in Civil Case No. 41021, pp. 23-24. 7.CA-G.R. CV No. 24236, prom. 28 January 1992; Lapea, Jr., ponente, Guingona and Santiago, concurring. 8.Petition, pp. 13-14. 9.See extensive discussions in William S. Shaterian, Export-Import Banking: The Instruments and Operations Utilized by American Exporters and Importers and their Banks in Financing Foreign Trade (The Ronald Press Company: New York, 1947, pp. 284-374), James J. White and Robert S. Summers (eds) Uniform Commercial Code (West Publishing Co.: St. Paul, 1988) pp. 806-883, and John H. Jackson and William J. Davey Legal Problems of International Economic Relations: Cases, Materials and Text on the National and International Economic Relations, 2nd Ed. (West Publishing Co., St. Paul, pp. 52-63). 10.Article 10 of the U.C.P. defines an irrevocable letter of credit as one that "constitutes a definite undertaking of the issuing bank, provided that the stipulated documents are presented and that the terms and conditions of the credit are complied with: i. if the credit provides for sight payment to pay, or that payment will be made; ii. if the credit provides for deferred payment to pay, or that payment will be made, on the date(s) determinable in accordance with the stipulations of the credit; iii. if the credit provides for acceptance to accept drafts drawn by the beneficiary if the credit stipulates that they are to be drawn on the issuing bank, or to be responsible for their acceptance and payment at maturity if the credit stipulates that they are to be drawn on the applicant for the credit or any other drawee stipulated in the credit; iv. if the credit provides for negotiation to pay without recourse to drawers and/or bona fide holders, draft(s) drawn by the beneficiary, at sight or at a tenor, on the applicant for the credit or on any other drawee stipulated in the credit other than the issuing bank itself, or to provide for negotiation by another bank and to pay, as above, if such negotiation is not effected." 11.Article 17 of the U.C.P. states: "Banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the general and/or particular conditions stipulated in the documents or superimposed thereon; nor do they assume any liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any documents, or for

the good faith or acts and/or omissions, solvency, performance or standing of the consignor, the carriers, or the insurers of the goods, or any other person whomsoever." According to White and Summers, op. cit.: ". . . Bankers . . . (describe) the transaction between the bank and the beneficiary as a 'paper transaction.' By that they mean the bank issuer's agent should be able to sit with a necktie and a white shirt at a desk in a bank and by looking at papers that are presented to him determine whether the bank is obliged to make payment or not. He is not obligated and, indeed, is foreclosed from donning his overalls and going into the field to determine whether the underlying contract has been performed. This is the principal reason why careful courts and lawyers state that the letter of credit is not a guarantee. In a typical guarantee the guarantor will agree to make payments if, and only if, the customer has failed to fulfill his obligation on the underlying contract. If his obligation has been avoided because of the acts of the beneficiary, typically there would be no obligation to guarantee and thus no duty on the guarantor to pay. Letters of credit are different, and they are explicitly and consciously designed to be different in this respect. In effect, the beneficiary under a letter of credit has bargained for the right to be paid and thus often to be the defendant instead of the plaintiff in the ensuing litigation on the underlying contract, to be sued at home instead of being a plaintiff abroad . . ." 12."The buyer of the merchandise, who is also the buyer of the credit instrument, is the party who initiates the operation. His contract is with the bank which is to issue the instrument and is represented by the Commercial Credit of Agreement form which he signs, supported by the mutually made promises contained in the Agreement" (Shaterian, op. cit. pp. 291-292). 13."The Opening Bank, usually the buyer's bank, is the bank which actually issues the instrument. It is also known as the Issuing Bank. The selection of the opening bank is important. It should be a strong bank, well known and well regarded in international trading circles. This is the reason . . . smaller banks do not attempt to issue their own commercial credit instruments but take advantage of the facilities of . . . much larger, stronger, and better known correspondent banks . . . The purposes of commercial credit may not be readily accomplished unless the opening bank is well known and well regarded" (Shaterian, op. cit., p. 292). 14."The seller of the merchandise is called the Beneficiary of the credit instrument. The instrument is addressed to him and is in his favor. It is the written contract of the bank which has created the instrument. While the bank cannot compel the beneficiary to ship and avail himself of the benefits of the instrument, the seller may recover from the bank the value of his shipment if made within the

terms of the instrument, even though he has not given the bank any direct consideration for the bank's promises contained in the instrument. By a stretch of imagination, and in order to support the instrument as a two-sided contract, supported by mutually given considerations, the courts seem to hold that the commission paid or to be paid by the buyer to the bank is also the consideration flowing from the seller to the bank" (Shaterian, op. cit., p. 292). 15."Whenever the instrument is not delivered to the buyer and by him mailed to the beneficiary, the opening bank will advise the existence of the credit to the beneficiary through its correspondent bank operating in the same locality as the seller. Such correspondent bank becomes the Notifying Bank. The services of a notifying bank must always be utilized if the credit is to be advised to the beneficiary by cable . . ." (Shaterian, op. cit., p. 292). 16."Whenever the beneficiary stipulates that the obligation of the opening bank shall also be made the obligation of a bank to himself, we have what is known as a confirmed commercial credit and the bank local to the beneficiary becomes the Confirming Bank. In view of the fact that commercial credits issued by American banks in favor of foreign sellers are invariably issued only by . . . larger well known banks, no seller requests that they be confirmed by another bank. The standing of the . . . opening bank is good enough. But many foreign banks are not particularly strong or well known, compared with . . . banks issuing these credit instruments. Indeed, many banks operating abroad are only known through the Banker's Almanac. 'They serve a useful purpose in their own small communities and perhaps maintain dollars account with the larger . . . banks. But their names are quite meaningless to the . . . exporter, and when the foreign buyer offers to his . . . seller a credit instrument issued by such a bank, the seller may not receive the protection and other facilities which an instrument issued by a large, strong, and well known bank will give him. To overcome this, he requests that the credit as issued by the local bank of the foreign buyer be confirmed by a well known . . . bank, which will turn out to be (a) . . . bank with which the local bank of the buyer carries a dollar account. The liability of the confirming bank is a primary one and is not contingent in any sense of the word. It is as if the credit were issued by the opening and confirming banks jointly, thus giving the beneficiary or a holder for value of drafts drawn under the credit, the right to proceed against either or both banks, the moment the credit instrument has been breached. The confirming bank receives a commission for its confirmation from the opening bank which the opening bank, in turn, passes on to the buyer of the merchandise" (Shaterian, op. cit., pp. 294-295).

17."The Paying Bank is the bank on which the drafts are to be drawn. It may be the opening bank, it may be a bank other than the opening bank and not in the city of the beneficiary, or it may be a bank in the city of the beneficiary, usually the advising bank. If the beneficiary is to draw and receive payment in his own currency, the notifying bank will be indicated as the paying bank also. When the draft is to be paid in this manner, the paying bank assumes no responsibility but merely pays the beneficiary and debits the payment immediately to the account which the opening bank has with it. If the opening bank maintains no account with the paying bank, the paying bank reimburses itself by drawing a bill of exchange on the opening bank, in dollars, for the equivalent of the local currency paid to the beneficiary, at its buying rate for dollar exchange. The beneficiary is entirely out of the transaction because his draft is completely discharged by payment, and the credit arrangement between the paying bank and the opening bank does not concern him" (Shaterian, op. cit., pp. 293-294). 18."If the draft contemplated by the credit instrument is to be drawn on the opening bank or on another designated bank not in the city of the seller, any bank in the city of the seller which buys or discounts the draft of the beneficiary becomes a Negotiating Bank. As a rule, whenever the facilities of a notifying bank are used, the beneficiary is apt to offer his drafts to the notifying bank for negotiation, thus giving the notifying bank the character of a negotiating bank also. By negotiating the beneficiary's drafts, the negotiating bank becomes "an endorser and bona fide holder" of the drafts and within the protection of the credit instrument. It is also protected by the drawer's signature, as the drawer's contingent liability, as drawer, continues until discharged by the actual payment of the bills of exchange" (Shaterian, op. cit., p. 293). 19.G.R. No. 94209, prom. 30 April 1991; 196 SCRA 576. 20."The Uniform Customs and Practices for documentary credits were first published in 1933. The current version was adopted by the International Chamber of Commerce Council in 1983 and published as Publication No. 400 in July of that year. This current version has the blessing of the United Nations Commission on International Trade Law (UNCITRAL). The Uniform Customs and Practices are not 'law' because of the act of any legislature or court, but because they have been explicitly and implicitly made part of the contract of letters of credit . . . [M]any of the letters of credit in the United States are governed by the Uniform Customs and Practices and not by the UCC (Uniform Commercial Code) . . . "In general, the UCP is much more detailed than the UCC. It clearly shows the tracks of many bankers and bank lawyers walking back and forth across its surface . . .

"Every lawyer who deals at any time with a letter of credit should have read the UCP at least once. The lawyer who deals routinely with such letters or who advises a bank or beneficiary in a circumstance where litigation is threatened or commenced should look more closely at the UCP." (White and Summers, op. cit., pp. 881-883). 21.No. L-24821, 16 October 1970; 35 SCRA 256. 22.See Feati Bank vs. Court of Appeals, 196 SCRA 576. 23.76 SCRA 61; see also Roman Catholic Archbishop vs. Court of Appeals, 198 SCRA 300; Macenas vs. Court of Appeals, 180 SCRA 83; Sociedad Europea de Financiacion vs. Court of Appeals, 193 SCRA 105; Lianga Lumber Co. vs. Lianga Timber Co., Inc. 76 SCRA 223. 24.Exh. "C," Records, p.17. 25."The banks involved charge a modest commission for their various services. The higher the risk that the bank assumes, the higher the commission (e.g., to confirm an L/C is riskier than merely transmitting an advice of credit) (Jackson and Davey, op. cit, p. 53). 26.See Art. 1878 (9) and (11) of the Civil Code, respectively, provides that a special power of attorney is required "[T]o bind the principal to render some service without compensation" and "[T]o obligate the principal as a guarantor or surety". Art. 1887 states that "the agent shall act in accordance with the instructions of the principal". Moreover, Art. 1888 enjoins the agent from carrying out "an agency if its execution would manifestly result in loss or damage to the principal." 27.In fact, Inter-Resin's pro forma invoice (Exh. "A") sent to General Chemicals, on the basis of which the letter of credit was apparently issued, demanded for a confirmed and irrevocable letter of credit. 28.The suspicion that no contract of sale was perfected between Inter-Resin and General Chemicals may find support in the absence of a written memorandum of the sale or any other document showing that General Chemicals ordered the goods, and the Comment of Inter-Resin detailing the material events of this case but, surprisingly, failed to categorically state or show that such contract was consented to by the parties. 29.Article 8 of U.C.P. states: "A credit may be advised to a beneficiary through another bank (the advising bank) without engagement on the part of the advising bank, but that bank shall take reasonable care to check the apparent authenticity of the credit which it advises. (Revised 1983, ICC No. 400;

reproduced in Jackson and Davey, op. cit., p. 54); TSN, 13 May 1982, Darley Wijiesekara on cross-examination. 30.1983 ed., p. 96. 31.See Shaterian, op. cit., p. 293. 32.In this respect, its belated theory before us and in its motion for reconsideration of the assailed decision should be rejected for being iniquitous under the circumstances. In fact, Bank of America has failed to present the draft and, more substantially, Inter-Resin has not been afforded full opportunity to refute by evidence this new argument of Bank of America. In short, we find the records insufficient to arrive at a just determination on this fact that can allow us to apply the Negotiable Instruments Law thereon. 33.Philip W. Thayer, "Irrevocable Credits in International Commerce: Their Legal Effects," Columbia Law Review (1937), vol. 37, pp. 1357-1358. 34."Both in the application form for import credits and in the regulations governing our export credits, it is definitely provided that the banks involved shall not be responsible for the genuineness of the documents submitted under commercial credits. It the buyer of merchandise has sufficient confidence in the integrity of the seller to provide payment to the seller against shipping documents to be tendered to the bank by the seller, as provided by the credit instrument, it follows that the same confidence should extend to the tendering of genuine documents. If the seller is dishonest, he need not attempt to defraud the buyer by the tender of forged documents. He can obtain the desired evil end with less opportunity for prompt detection by shipping inferior goods or no goods at all. The carrier does not pry into the cases and packages to make sure that the merchandise is, in fact, as described in the bill of lading and invoices which are prepared by the shipper. The tender of forged documents for the purpose of obtaining money is a crime and the seller who commits such crime is prosecuted and jailed. ". . . Neither can the interested banks assume responsibility for the character or quality of the goods shipped nor for the terms of the sale contract not incorporated and made part of the credit instrument. How could they? While the parties to the sale contract may be experts as to the involved merchandise the banks are not, generally speaking, sufficiently versed in the fine points of each and every class of merchandise which they finance. Even assuming the bank has men in its employ who can qualify as experts in certain lines of merchandising, it would not wish to extend this sort of service without adequate compensation but such service is not a banking function.

". . . Because of this the credit should describe the goods in general terms only and the buyer should trust that the seller will ship the exact merchandise ordered. If the buyer is not satisfied with the moral standing of the seller, he should not open the credit but buy on open account basis, or subject the draft terms with the additional requirement that the draft need not be paid until after the buyer has had an opportunity to examine the goods to make sure that he has received exactly what he ordered" (Shaterian, op. cit., pp. 352-354).

THIRD DIVISION
[G.R. No. 94209. April 30, 1991.] FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING CORPORATION), petitioner, vs.THE COURT OF APPEALS, and BERNARDO E. VILLALUZ, respondents.

Pelaez, Adriano & Gregorio for petitioner. Ezequiel S. Consulta for private respondent.
SYLLABUS 1.COMMERCIAL LAW; BANKING LAWS; LETTER OF CREDIT; DOCUMENTS TENDERED MUST STRICTLY CONFORM TO THE TERMS OF LETTER OF CREDIT. 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. The tender of documents by the beneficiary (seller) must include all documents required by the letter. A correspondent bank which departs from what has been stipulated under the letter of credit, as when it accepts a faulty tender, acts on its own risks and it may not thereafter be able to recover from the buyer or the issuing bank, as the case may be, the money thus paid to the beneficiary. Thus the rule of strict compliance. 2.ID.; ID.; ID.; UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDIT (U.C.P.); APPLICABILITY JUSTIFIED BY ARTICLE 2 OF THE CODE OF COMMERCE. Moreover, the incorporation of the Uniform Customs and Practice for Documentary Credit (U.C.P. for short) in the letter of credit resulted in the applicability of the said rules in the governance of the relations between the

parties. And even if the U.C.P. was not incorporated in the letter of credit, we have already ruled in the affirmative as to the applicability of the U.C.P. in cases before us. In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the observance of the U.C.P. in this jurisdiction is justified by Article 2 of the Code of Commerce. Article 2 of the Code of Commerce enunciates that in the absence of any particular provision in the Code of commerce, commercial transactions shall be governed by the usages and customs generally observed. There being no specific provision which governs the legal complexities arising from transactions involving letters of credit not only between the banks themselves but also between banks and seller and/or buyer, the applicability of the U.C.P. is undeniable. 3.ID.; ID.; ID.; IRREVOCABLE CREDIT AND CONFIRMED LETTER OF CREDIT, DIFFERENTIATED. An irrevocable credits refers to the duration of the letter of credit. What it simply means is that the issuing bank may not without the consent of the beneficiary (seller) and the applicant (buyer) revoke his undertaking under the letter. The issuing bank does not reserve the right to revoke the credit. On the other hand, a confirmed letter of credit pertains to the kind of obligation assumed by the correspondent bank. In this case, the correspondent bank gives an absolute assurance of the beneficiary that it will undertake the issuing bank's obligation as its own according to the terms and conditions of the credit. (Agbayani, Commercial Laws of the Philippines, Vol. 1, pp. 81-83) Hence, the mere fact that a letter of credit is irrevocable does not necessarily imply that the correspondent bank in accepting the instructions of the issuing bank has also confirmed the letter of credit. 4.ID.; ID.; ID.; CLASSIFICATIONS OF CORRESPONDENT BANK'S FUNCTIONS. In commercial transactions involving letters of credit, the functions assumed by a correspondent bank are classified according to the obligations taken up by it. The correspondent bank may be called a notifying bank, a negotiating bank, or a confirming bank. In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or transmit to the beneficiary the existence of the letter of credit. (Kronman and Co., Inc. v. Public National Bank of New York, 218 N.Y.S. 616 [1926]; Shaterian, Export-Import Banking, p. 292, cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76) A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft under the letter of credit. Its liability is dependent upon the stage of the negotiation. If before negotiation, it has no liability with respect to the seller but after negotiation, a contractual relationship will then prevail between the negotiating bank and the seller. (Scanlon v. First National Bank of Mexico, 162 N.E. 567 [1928]; Shaterian, Export-Import Banking, p. 293, cited in Agbayani, Commercial

Laws of the Philippines, Vol. 1, p. 76) In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller and its liability is a primary one as if the correspondent bank itself had issued the letter of credit. (Shaterian, Export-Import Banking, p. 294, cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 77) 5. ID.; ID.; ID.; ID.; NOTIFYING BANK; CASE AT BAR. In this case, the letter merely provided that the petitioner "forward the enclosed original credit to the beneficiary." Considering the aforesaid instruction to the petitioner by the issuing bank, the Security Pacific National Bank, it is indubitable that the petitioner is only a notifying bank and not a confirming bank as ruled by the courts below. A notifying bank is not privy to the contract of sale between the buyer and the seller, its relationship is only with that of the issuing bank and not with the beneficiary to whom he assumes no liability. It follows therefore that when the petitioner refused to negotiate with the private respondent, the latter has no cause of action against the petitioner for the enforcement of his rights under the letter. (See Kronman and Co., Inc. v. Public National Bank of New York, supra) 6.CIVIL LAW; OBLIGATIONS AND CONTRACT; TRUST; EXPLAINED. A trust has been defined as the "right, enforceable solely in equity, to the beneficial enjoyment of property the legal title to which is vested to another." The concept of a trust presupposes the existence of a specific property which has been conferred upon the person for the benefit of another. In order therefore for the trust theory of the private respondent to be sustained, the petitioner should have had in its possession a sum of money as specific fund advanced to it by the issuing bank and to be held in trust by it in favor of the private respondent. This does not obtain in this case. 7.ID.; ID.; ID.; A LETTER OF CREDIT DOES NOT CONVEY THAT A SUM OF MONEY IS BEING HELD IN TRUST. The mere opening of a letter of credit, it is to be noted, does not involve a specific appropriation of a sum of money in favor of the beneficiary. It only signifies that the beneficiary may be able to draw funds upon the letter of credit up to the designated amount specified in the letter. It does not convey the notion that a particular sum of money has been specifically reserved or has been held in trust. 8.ID.; ID.; GUARANTY; INCONSISTENT WITH AN IRREVOCABLE CREDIT. The theory of guarantee relied upon the by the Court of Appeals has to necessarily fail. The concept of guarantee vis-a-vis the concept of an irrevocable credit are inconsistent with each other. In the first place, the guarantee theory destroys the independence of the bank's responsibility from the contract upon which it was

opened. In the second place, the nature of both contracts is mutually in conflict with each other. In contracts of guarantee, the guarantor's obligation is merely collateral and it arises only upon the default of the person primarily liable. On the other hand, in an irrevocable credit the bank undertakes a primary obligation. (See National Bank of Eagle Pass, Tex. v. American National Bank of San Francisco, 282 F. 73 [1922]) 9.ID.; ID.; AGENCY; RELATIONSHIP BETWEEN ISSUING BANK AND NOTIFYING BANK IS SIMILAR TO AGENCY. The relationship between the issuing bank and the notifying bank, on the contrary, is more similar to that of an agency and not that of a guarantee. It may be observed that the notifying bank is merely to follow the instructions of the issuing bank which is to notify or to transmit the letter of credit to the beneficiary. (See Kronman v. Public National Bank of New York, supra). Its commitment is only to notify the beneficiary. It does not undertake any assurance that the issuing bank will perform what has been mandated to or expected of it. As an agent of the issuing bank, it has only to follow the instructions of the issuing bank and to it alone is it obligated and not to the buyer with whom it has no contractual relationship. 10.STATUTORY CONSTRUCTION; CONTROVERSY IS DECIDED ON WHAT THE LAW IS; LAW IS ALSO TO GOVERN FUTURE RELATIONS AMONG PEOPLE. We are aware of the injustice committed by Christiansen on the private respondent but we are deciding the controversy on the basis of what the law is, for the law is not meant to favor only those who have been oppressed, the law is to govern future relations among people as well. Its commitment is to all and not to a single individual. The faith of the people in our justice system may be eroded if we are to decide not what the law states but what we believe it should declare. Dura lex sed lex. DECISION GUTIERREZ, JR., J :
p

This is a petition for review seeking the reversal of the decision of the Court of Appeals dated June 29, 1990 which affirmed the decision of the Regional Trial Court of Rizal dated October 20, 1986 ordering the defendants Christiansen and the petitioner, to pay various sums to respondent Villaluz, jointly and severally. The facts of the case are as follows:

On June 3, 1971, Bernardo E. Villaluz agreed to sell to the then defendant Axel Christiansen 2,000 cubic meters of lauan logs at $27.00 per cubic meter FOB. After inspecting the logs, Christiansen issued purchase order No. 76171. On the arrangements made and upon the instructions of the consignee, Hanmi Trade Development, Ltd., de Santa Ana, California, the Security Pacific National Bank of Los Angeles, California issued Irrevocable Letter of Credit No. IC-46268 available at sight in favor of Villaluz for the sum of $54,000.00, the total purchase price of the lauan logs.

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." (Records, Vol. I, p. 11) 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 following documents:
"1.Signed Commercial Invoice in four copies showing the number of the purchase order and certifying that a.All terms and conditions of the purchase order have been complied with and that all logs are fresh cut and quality equal to or better than that described in H.A. Christiansen's telex #201 of May 1, 1970, and that all logs have been marked "BEV-EX". b.One complete set of documents, including 1/3 original bills of lading was airmailed to Consignee and Parties to be advised by Hans-Axel Christiansen, Ship and Merchandise Broker.
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c.One set of non-negotiable documents was airmailed to Han Mi Trade Development Company and one set to Consignee and Parties to be advised by Hans-Axel Christiansen, Ship and Merchandise Broker. 2.Tally sheets in quadruplicate. 3.2/3 Original Clean on Board Ocean Bills of Lading with Consignee and Parties to be advised by Hans Axel Christiansen, showing Freight Prepaid and marked Notify:

Han Mi Trade Development Company, Ltd., Santa Ana, California. Letter of Credit No. 46268 dated June 7, 1971. Han Mi Trade Development Company, Ltd., P.O. Box 10480, Santa Ana, California 92711 and Han Mi Trade Development Company, Ltd., Seoul, Korea. 4.Certification from Han-Axel Christiansen, Ship and Merchandise Broker, stating that logs have been approved prior to shipment in accordance with terms and conditions of corresponding purchase Order. (Record, Vol. 1 pp. 11-12)

Also incorporated by reference in the letter of credit is the Uniform Customs and Practice for Documentary Credits (1962 Revision). The logs were thereafter loaded on the vessel "Zenlin Glory" which was chartered by Christiansen. Before its loading, the logs were inspected by custom inspectors Nelo Laurente, Alejandro Cabiao, Estanislao Edera from the Bureau of Customs (Records, Vol. I, p. 124) and representatives Rogelio Cantuba and Jesus Tadena of the Bureau of Forestry (Records, Vol. I, pp. 16-17) all of whom certified to the good condition and exportability of the logs. After the loading of the logs was completed, the Chief Mate, Shao Shu Wang issued a mate receipt of the cargo which stated the same are in good condition (Records, Vol. I, p. 363). However, Christiansen refused to issue the certification as required in paragraph 4 of the letter of credit, despite several requests made by the private respondent. Because of the absence of the certification by Christiansen, the Feati Bank and Trust Company refused to advance the payment on the letter of credit. The letter of credit lapsed on June 30, 1971, (extended, however up to July 31, 1971) without the private respondent receiving any certification from Christiansen.
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The persistent refusal of Christiansen to issue the certification prompted the private respondent to bring the matter before the Central Bank. In a memorandum dated August 16, 1971, the Central Bank ruled that:
". . . pursuant to the Monetary Board Resolution No. 1230 dated August 3, 1971, in all log exports, the certification of the lumber inspectors of the Bureau of Forestry . . . shall be considered final for purposes of

negotiating documents. Any provision in any letter of credit covering log exports requiring certification of buyer's agent or representative that said logs have been approved for shipment as a condition precedent to negotiation of shipping documents shall not be allowed." (Records, Vol. I, p. 367)

Meanwhile, the logs arrived at Inchon, Korea and were received by the consignee, Hamni Trade Development Company, to whom Christiansen sold the logs for the amount of $37.50 per cubic meter, for a net profit of $10 per cubic meter. Hanmi Trade Development Company, on the other hand sold the logs to Taisung Lumber Company at Inchon, Korea. (Rollo, p. 39) Since the demands by the private respondent for Christiansen to execute the certification proved futile, Villaluz, on September 1, 1971, instituted an action for mandamus and specific performance against Christiansen and the Feati Bank and Trust Company (now Citytrust) before the then Court of First Instance of Rizal. 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 certification. The complaint prayed for the following:
1.Christiansen be ordered to issue the certification required of him under the Letter of Credit; 2.Upon issuance of such certification, or, if the court should find it unnecessary, FEATI BANK be ordered to accept negotiation of the Letter of Credit and make payment thereon to Villaluz; 3.Order Christiansen to pay damages to the plaintiff. (Rollo, p. 39)

On or about 1979, while the case was still pending trial, Christiansen left the Philippines without informing the Court and his counsel. Hence, Villaluz, filed an amended complaint to make the petitioner solidarily liable with Christiansen. The trial court, in its order dated August 29, 1979, admitted the amended complaint. After trial, the lower court found:
"The liability of the defendant CHRISTIANSEN is beyond dispute, and the plaintiff's right to demand payment is absolute. Defendant CHRISTIANSEN having accepted delivery of the logs by having them

loaded in his chartered vessel the 'Zenlin Glory' and shipping them to the consignee, his buyer Han Mi Trade in Inchon, South Korea (Art. 1585, Civil Code), his obligation to pay the purchase order had clearly arisen and the plaintiff may sue and recover the price of the goods (Art. 1595, id).
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"The Court believes that the defendant CHRISTIANSEN acted in bad faith and deceit and with intent to defraud the plaintiff, reflected in and aggravated by, not only his refusal to issue the certification that would have enabled without question the plaintiff to negotiate the letter of credit, but his accusing the plaintiff in his answer of fraud, intimidation, violence and deceit. These accusations said defendant did not attempt to prove, as in fact he left the country without ever notifying his own lawyer. It was to the Court's mind a pure swindle. "The defendant Feati Bank and Trust Company, on the other hand, must be held liable together with his (sic) co-defendant for having, by its wrongful act, i.e., its refusal to negotiate the letter of credit in the absence of CHRISTIANSEN's certification (in spite of the Central Bank's ruling that the requirement was illegal), prevented payment to the plaintiff. The said letter of credit, as may be seen on its face, is irrevocable and the issuing bank, the Security Pacific National Bank in Los Angeles, California, undertook by its terms that the same shall be honored upon its presentment. On the other hand, the notifying bank, the defendant Feati Bank and Trust Company, by accepting the instructions from the issuing bank, itself assumed the very same undertaking as the issuing bank under the terms of the letter of credit. xxx xxx xxx "The Court likewise agrees with the plaintiff that the defendant BANK may also be held liable under the principles and laws on both trust and estoppel. When the defendant BANK accepted its role as the notifying and negotiating bank for and in behalf of the issuing bank, it in effect accepted a trust reposed on it, and became a trustee in relation to plaintiff as the beneficiary of the letter of credit. As trustee, it was then duty bound to protect the interests of the plaintiff under the terms of the letter of credit, and must be held liable for damage and loss resulting to the plaintiff from its failure to perform that obligation. "Furthermore, when the defendant BANK assumed the role of a notifying and negotiating BANK it in effect represented to the plaintiff that, if the plaintiff complied with the terms and conditions of the letter of credit and presents the same to the BANK together with the documents

mentioned therein the said BANK will pay the plaintiff the amount of the letter of credit. The Court is convinced that it was upon the strength of this letter of credit and this implied representation of the defendant BANK that the plaintiff delivered the logs to defendant CHRISTIANSEN, considering that the issuing bank is a foreign bank with whom plaintiff had no business connections and CHRISTIANSEN had not offered any other Security for the payment of the logs. Defendant BANK cannot now be allowed to deny its commitment and liability under the letter of credit:
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'A holder of a promissory note given because of gambling who indorses the same to an innocent holder for value and who assures said party that the note has no legal defect, is in estoppel from asserting that there had been an illegal consideration for the note, and so, he has to pay its value.' (Rodriguez v. Martinez, 5 Phil. 67).' "The defendant BANK, in insisting upon the certification of defendant CHRISTIANSEN as a condition precedent to negotiating the letter of credit, likewise in the Court's opinion acted in bad faith, not only because of the clear declaration of the Central Bank that such a requirement was illegal, but because the BANK with all the legal counsel available to it, must have known that the condition was void since it depended on the sole will of the debtor, the defendant CHRISTIANSEN. (Art. 1182, Civil Code)" (Rollo, pp. 29-31)

On the basis of the foregoing the trial court on October 20, 1986, ruled in favor of the private respondent. The dispositive portion of its decision reads:
'WHEREFORE, judgment is hereby rendered for the plaintiff, ordering the defendants to pay the plaintiff, jointly and severally, the following sums: "a)$54,000.00 (US), or its peso equivalent at the prevailing rate as of the time payment is actually made, representing the purchase price of the logs;

"b)P17,340.00, representing government fees and charges paid by plaintiff in connection with the logs shipment in question; "c)P10,000.00 as temperate damages (for trips made to Bacolod and Korea).

"All three foregoing sums shall be with interest thereon at 12% per annum from September 1, 1971, when the complaint was filed, until fully paid: "d)P70,000.00 as moral damages; "e)P30,000.00 as exemplary damages; and "f)P30,000.00 as attorney's fees and litigation expense." (Rollo, p. 28)

The petitioner received a copy of the decision on November 3, 1986. Two days thereafter, or on November 5, 1986, it filed a notice of appeal. On November 10, 1986, the private respondent filed a motion for the immediate execution of the judgment on the ground that the appeal of the petitioner was frivolous and dilatory. The trial court ordered the immediate execution of its judgment upon the private respondent's filing of a bond. The petitioner then filed a motion for reconsideration and a motion to suspend the implementation of the writ of execution. Both motions were, however, denied. Thus, petitioner filed before the Court of Appeals a petition for certiorari and prohibition with preliminary injunction to enjoin the immediate execution of the judgment.
LibLex

The Court of Appeals in a decision dated April 9, 1987 granted the petition and nullified the order of execution, the dispositive portion of the decision states:
"WHEREFORE, the petition for certiorari is granted. Respondent Judge's order of execution dated December 29, 1986, as well as his order dated January 14, 1987 denying the petitioner's urgent motion to suspend the writ of execution against its properties are hereby annulled and set aside insofar as they are sought to be enforced and implemented against the petitioner Feati Bank & Trust Company, now Citytrust Banking Corporation, during the pendency of its appeal from the adverse decision in Civil Case No. 15121. However, the execution of the same decision against defendant Axel Christiansen who did not appeal said decision may proceed unimpeded. The Sheriff's levy on the petitioner's properties, and the notice of sale dated January 13, 1987 (Annex M), are hereby annulled and set aside. (Rollo, p. 44)

A motion for reconsideration was thereafter filed by the private respondent. The Court of Appeals, in a resolution dated June 29, 1987 denied the motion for reconsideration. In the meantime, the appeal filed by the petitioner before the Court of Appeals was given due course. In its decision dated June 29, 1990, the Court of Appeals affirmed the decision of the lower court dated October 20, 1986 and ruled that:
1.Feati Bank admitted in the "special and negative defenses" section of its answer that it was the bank to negotiate the letter of credit issued by the Security Pacific National Bank of Los Angeles, California. (Record, pp. 156, 157). Feati Bank did notify Villaluz of such letter of credit. In fact, as such negotiating bank, even before the letter of credit was presented for payment, Feati Bank had already made an advance payment of P75,000.00 to Villaluz in anticipation of such presentment. As the negotiating bank, Feati Bank, by notifying Villaluz of the letter of credit in behalf of the issuing bank (Security Pacific), confirmed such letter of credit and made the same also its own obligation. This ruling finds support in the authority cited by Villaluz: "A confirmed letter of credit is one in which the notifying bank gives its assurance also that the opening bank's obligation will be performed. In such a case, the notifying bank will not simply transmit but will confirm the opening bank's obligation by making it also its own undertaking, or commitment, or guaranty or obligation." (Ward & Harfield, 28-29, cited in Agbayani, Commercial Laws, 1978 edition, p. 77).
LLphil

Feati Bank argues further that it would be considered as the negotiating bank only upon negotiation of the letter of credit. This stance is untenable. Assurance, commitments or guaranties supposed to be made by notifying banks to the beneficiary of a letter of credit, as defined above, can be relevant or meaningful only with respect to a future transaction, that is, negotiation. Hence, even before actual negotiation, the notifying bank, by the mere act of notifying the beneficiary of the letter of credit, assumes as of that moment the obligation of the issuing bank. 2.Since Feati Bank acted as guarantor of the issuing bank and in effect also of the latter's principal or client, i.e. Hans Axel-Christiansen. (sic) Such being the case, when Christiansen refused to issue the certification, it was as though refusal was made by Feati Bank Itself Feati Bank should have taken steps to secure the certification from Christiansen; and, if the latter should still refuse to comply, to hale him to court. In short, Feati Bank should have honored Villaluz's demand for

payment of his logs by virtue of the irrevocable letter of credit issued in Villaluz's favor and guaranteed by Feati Bank. 3.The decision promulgated by this Court in CA-G.R. Sp No. 11051, which contained the statement "Since Villaluz' draft was not drawn strictly in compliance with the terms of the letter of credit, Feati Bank's refusal to negotiate it was justified," did not dispose of this question on the merits. In that case, the question involved was jurisdiction or discretion, and not judgment. The quoted pronouncement should not be taken as a preemptive judgment on the merits of the present case on appeal. 4.The original action was for "mandamus and/ or specific performance." Feati Bank may not be a party to the transaction between Christiansen and Security Pacific National Bank on the one hand, and Villaluz on the other hand; still, being guarantor or agent of Christiansen and or Security Pacific National Bank which had directly dealt with Villaluz, Feati Bank may be sued properly on specific performance as a procedural means by which the relief sought by Villaluz may be entertained. (Rollo, pp. 32-33)

The dispositive portion of the decision of the Court of Appeals reads:

WHEREFORE, the decision appealed from is affirmed; and accordingly, the appeal is hereby dismissed. Costs against the petitioner. (Rollo. p. 33)

Hence, this petition for review. The petitioner interposes the following reasons for the allowance of the petition.
First Reason
THE RESPONDENT COURT ERRONEOUSLY CONCLUDED FROM THE ESTABLISHED FACTS AND INDEED, WENT AGAINST THE EVIDENCE AND DECISION OF THIS HONORABLE COURT, THAT PETITIONER BANK IS LIABLE ON THE LETTER OF CREDIT DESPITE PRIVATE RESPONDENT'S NON-COMPLIANCE WITH THE TERMS THEREOF.

Second Reason
THE RESPONDENT COURT COMMITTED AN ERROR OF LAW WHEN IT HELD THAT PETITIONER BANK, BY NOTIFYING PRIVATE RESPONDENT OF THE LETTER OF CREDIT, CONFIRMED SUCH CREDIT AND MADE

THE SAME ALSO ITS OBLIGATION AS GUARANTOR OF THE ISSUING BANK.

Third Reason
THE RESPONDENT COURT LIKEWISE COMMITTED AN ERROR OF LAW WHEN IT AFFIRMED THE TRIAL COURT'S DECISION. (Rollo, p. 12)

The principal issue in this case is 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 thereof?
llcd

The petition is impressed with merit. 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. The tender of documents by the beneficiary (seller) must include all documents required by the letter. A correspondent bank which departs from what has been stipulated under the letter of credit, as when it accepts a faulty tender, acts on its own risks and it may not thereafter be able to recover from the buyer or the issuing bank, as the case may be, the money thus paid to the beneficiary. Thus the rule of strict compliance. In the United States, commercial transactions involving letters of credit are governed by the rule of strict compliance. In the Philippines, the same holds true. The same rule must also be followed. The case of Anglo-South American Trust Co. v. Uhe et al. (184 N.E. 741 [1933]) expounded clearly on the rule of strict compliance.
"We have heretofore held that these letters of credit are to be strictly complied with, which documents, and shipping documents must be followed as stated in the letter. There is no discretion in the bank or trust company to waive any requirements. The terms of the letter constitutes an agreement between the purchaser and the bank." (p. 743)

Although in some American decisions, banks are granted a little discretion to accept a faulty tender as when the other documents may be considered immaterial or superfluous, this theory could lead to dangerous precedents. Since a bank deals only with documents, it is not in a position to determine whether or not the documents required by the letter of credit are material or superfluous.

The mere fact that the document was specified therein readily means that the document is of vital importance to the buyer. Moreover, the incorporation of the Uniform Customs and Practice for Documentary Credit (U.C.P. for short) in the letter of credit resulted in the applicability of the said rules in the governance of the relations between the parties. And even if the U.C.P. was not incorporated in the letter of credit, we have already ruled in the affirmative as to the applicability of the U.C.P. in cases before us. In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the observance of the U.C.P. in this jurisdiction is justified by Article 2 of the Code of Commerce. Article 2 of the Code of Commerce enunciates that in the absence of any particular provision in the Code of Commerce, commercial transactions shall be governed by the usages and customs generally observed. There being no specific provision which governs the legal complexities arising from transactions involving letters of credit not only between the banks themselves but also between banks and seller and or buyer, the applicability of the U.C.P. is undeniable.
LibLex

The pertinent provisions of the U.C.P. (1962 Revision) are:

Article 3. "An irrevocable credit is a definite undertaking on the part of the issuing bank and constitutes the engagement of that bank to the beneficiary and bona fide holders of drafts drawn and or documents presented thereunder, that the provisions for payment, acceptance or negotiation contained in the credit will be duly fulfilled, provided that all the terms and conditions of the credit are complied with. "An irrevocable credit may be advised to a beneficiary through another bank (the advising bank) without engagement on the part of that bank, but when an issuing bank authorizes or requests another bank to confirm its irrevocable credit and the latter does so, such confirmation constitutes a definite undertaking of the confirming bank . . ." Article 7.

"Banks must examine all documents with reasonable care to ascertain that they appear on their face to be in accordance with the terms and conditions of the credit." Article 8. "Payment, acceptance or negotiation against documents which appear on their face to be in accordance with the terms and conditions of a credit by a bank authorized to do so, binds the party giving the authorization to take up documents and reimburse the bank which has effected the payment, acceptance or negotiation." (Emphasis Supplied)

Under the foregoing provisions of the U.C.P., the bank may only negotiate, accept or pay, if the documents tendered to it are on their face in accordance with the terms and conditions of the documentary credit. And since a correspondent bank, like the petitioner, principally deals only with documents, the absence of any document required in the documentary credit justifies the refusal by the correspondent bank to negotiate, accept or pay the beneficiary, as it is not its obligation to look beyond the documents. It merely has to rely on the completeness of the documents tendered by the beneficiary. In regard to the ruling of the lower court and affirmed by the Court of Appeals that the petitioner is not a notifying bank but a confirming bank, we find the same erroneous. The trial court wrongly mixed up the meaning of an irrevocable credit with that of a confirmed credit. In its decision, the trial court ruled that the petitioner, in accepting the obligation to notify the respondent that the irrevocable credit has been transmitted to the petitioner on behalf of the private respondent, has confirmed the letter. The trial court appears to have overlooked the fact that an irrevocable credit is not synonymous with a confirmed credit. These types of letters have different meanings and the legal relations arising from there varies. A credit may be an irrevocable credit and at the same time a confirmed credit or vice-versa.
cdphil

An irrevocable credit refers to the duration of the letter of credit. What is simply means is that the issuing bank may not without the consent of the beneficiary (seller) and the applicant (buyer) revoke his undertaking under the letter. The issuing bank does not reserve the right to revoke the credit. On the other hand, a confirmed letter of credit pertains to the kind of obligation assumed by the correspondent bank. In this case, the correspondent bank gives an absolute

assurance to the beneficiary that it will undertake the issuing bank's obligation as its own according to the terms and conditions of the credit. (Agbayani, Commercial Laws of the Philippines, Vol. 1, pp. 81-83) Hence, the mere fact that a letter of credit is irrevocable does not necessarily imply that the correspondent bank in accepting the instructions of the issuing bank has also confirmed the letter of credit. Another error which the lower court and the Court of Appeals made was to confuse the obligation assumed by the petitioner. In commercial transactions involving letters of credit, the functions assumed by a correspondent bank are classified according to the obligations taken up by it. The correspondent bank may be called a notifying bank, a negotiating bank, or a confirming bank. In case of a notifying bank, the correspondent bank assumes no liability except to notify and or transmit to the beneficiary the existence of the letter of credit. (Kronman and Co., Inc. v. Public National Bank of New York, 218 N.Y.S. 616 [1926]; Shaterian, Export-Import Banking, p. 292, cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76) A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft under the letter of credit. Its liability is dependent upon the stage of the negotiation. If before negotiation, it has no liability with respect to the seller but after negotiation, a contractual relationship will then prevail between the negotiating bank and the seller. (Scanlon v. First National Bank of Mexico, 162 N.E. 667 [1928]; Shaterian, Export-Import Banking, p. 293, cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76) In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller and its liability is a primary one as if the correspondent bank itself had issued the letter of credit. (Shaterian, Export-Import Banking, p. 294, cited in Agbayani Commercial Laws of the Philippines, Vol. 1, p. 77) In this case, the letter merely provided that the petitioner "forward the enclosed original credit to the beneficiary." (Records, Vol. I, p. 11) Considering the aforesaid instruction to the petitioner by the issuing bank, the Security Pacific National Bank, it is indubitable that the petitioner is only a notifying bank and not a confirming bank as ruled by the courts below.
cdphil

If the petitioner was a confirming bank, then a categorical declaration should have been stated in the letter of credit that the petitioner is to honor all drafts

drawn in conformity with the letter of credit. What was simply stated therein was the instruction that the petitioner forward the original letter of credit to the beneficiary. Since the petitioner was only a notifying bank, its responsibility was solely to notify and or transmit the documentary of credit to the private respondent and its obligation ends there. The notifying bank may suggest to the seller its willingness to negotiate, but this fact alone does not imply that the notifying bank promises to accept the draft drawn under the documentary credit. A notifying bank is not a privy to the contract of sale between the buyer and the seller, its relationship is only with that of the issuing bank and not with the beneficiary to whom he assumes no liability. It follows therefore that when the petitioner refused to negotiate with the private respondent, the latter has no cause of action against the petitioner for the enforcement of his rights under the letter. (See Kronman and Co., Inc. v. Public National Bank of New York, supra) In order that the petitioner may be held liable under the letter, there should be proof that the petitioner confirmed the letter of credit. The records are, however, bereft of any evidence which will disclose that the petitioner has confirmed the letter of credit The only evidence in this case, and upon which the private respondent premised his argument, is the P75,000.00 loan extended by the petitioner to him. The private respondent relies on this loan to advance his contention that the letter of credit was confirmed by the petitioner. He claims that the loan was granted by the petitioner to him, "in anticipation of the presentment of the letter of credit." The proposition advanced by the private respondent has no basis in fact or law. That the loan agreement between them be construed as an act of confirmation is rather far-fetched, for it depends principally on speculative reasoning. As earlier stated, there must have been an absolute assurance on the part of the petitioner that it will undertake the issuing bank's obligation as its own. Verily, the loan agreement it entered into cannot be categorized as an emphatic assurance that it will carry out the issuing bank's obligation as its own.

The loan agreement is more reasonably classified as an isolated transaction independent of the documentary credit. Of course, it may be presumed that the petitioner loaned the money to the private respondent in anticipation that it would later be paid by the latter upon the receipt of the letter. Yet, we would have no basis to rule definitively that such "act" should be construed as an act of confirmation. The private respondent no doubt was in need of money in loading the logs on the ship "Zenlin Glory" and the only way to satisfy this need was to borrow money from the petitioner which the latter granted. From these circumstances, a logical conclusion that can be gathered is that the letter of credit was merely to serve as a collateral. At the most, when the petitioner extended the loan to the private respondent, it assumed the character of a negotiating bank. Even then, the petitioner will still not be liable, for a negotiating bank before negotiation has no contractual relationship with the seller. The case of Scanlon v. First National Bank (supra) perspicuously explained the relationship between the seller and the negotiating bank, viz:
"It may buy or refuse to buy as it chooses. Equally, it must be true that it owes no contractual duty toward the person for whose benefit the letter is written to discount or purchase any draft drawn against the credit. No relationship of agent and principal, or of trustee and cestui, between the receiving bank and the beneficiary of the letter is established." (P. 568)

Whether therefore the petitioner is a notifying bank or a negotiating bank, it cannot be held liable. Absent any definitive proof that it has confirmed the letter of credit or has actually negotiated with the private respondent, the refusal by the petitioner to accept the tender of the private respondent is justified. In regard to the finding that the petitioner became a "trustee in relation to the plaintiff (private respondent) as the beneficiary of the letter of credit," the same has no legal basis.

A trust has been defined as the "right, enforceable solely in equity, to the beneficial enjoyment of property the legal title to which is vested to another." (89 C.J.S. 712) The concept of a trust presupposes the existence of a specific property which has been conferred upon the person for the benefit of another. In order therefore for the trust theory of the private respondent to be sustained, the petitioner should have had in its possession a sum of money as specific fund advanced to it by the issuing bank and to be held in trust by it in favor of the private respondent. This does not obtain in this case.
LibLex

The mere opening of a letter of credit, it is to be noted, does not involve a specific appropriation of a sum of money in favor of the beneficiary. It only signifies that the beneficiary may be able to draw funds upon the letter of credit up to the designated amount specified in the letter. It does not convey the notion that a particular sum of money has been specifically reserved or has been held in trust. What actually transpires in an irrevocable credit is that the correspondent bank does not receive in advance the sum of money from the buyer or the issuing bank. On the contrary, when the correspondent bank accepts the tender and pays the amount stated in the letter, the money that it doles out comes not from any particular fund that has been advanced by the Issuing bank, rather it gets the money from its own funds and then later seeks reimbursement from the issuing bank. Granting that a trust has been created, still, the petitioner may not be considered a trustee. As the petitioner is only a notifying bank, its acceptance of the instructions of the issuing bank will not create estoppel on its part resulting in the acceptance of the trust. Precisely, as a notifying bank, its only obligation is to notify the private respondent of the existence of the letter of credit. How then can such create estoppel when that is its only duty under the law? We also find erroneous the statement of the Court of Appeals that the petitioner "acted as a guarantor of the issuing bank and in effect also of the latter's principal or client, i.e., Hans Axel Christiansen." It is a fundamental rule that an irrevocable credit is independent not only of the contract between the buyer and the seller but also of the credit agreement between the issuing bank and the buyer. (See Kingdom of Sweden v. New York Trust Co., 96 N.Y.S. 2d 779 [1949]) The relationship between the buyer

(Christiansen) and the issuing bank (Security Pacific National Bank) is entirely independent from the letter of credit issued by the latter. The contract between the two has no bearing as to the noncompliance by the buyer with the agreement between the latter and the seller. Their contract is similar to that of a contract of services (to open the letter of credit) and not that of agency as was intimated by the Court of Appeals. The unjustified refusal therefore by Christiansen to issue the certification under the letter of credit should not likewise be charged to the issuing bank. As a mere notifying bank, not only does the petitioner not have any contractual relationship with the buyer, it has also nothing to do with the contract between the issuing bank and the buyer regarding the issuance of the letter of credit.
LibLex

The theory of guarantee relied upon by the Court of Appeals has to necessarily fail. The concept of guarantee vis-a-vis the concept of an irrevocable credit are inconsistent with each other. In the first place, the guarantee theory destroys the independence of the bank's responsibility from the contract upon which it was opened. In the second place, the nature of both contracts is mutually in conflict with each other. In contracts of guarantee, the guarantor's obligation is merely collateral and it arises only upon the default of the person primarily liable. On the other hand, in an irrevocable credit the bank undertakes a primary obligation. (See National Bank of Eagle Pass, Tex v. American National Bank of San Francisco, 282 F. 73 [1922]) The relationship between the issuing bank and the notifying bank, on the contrary, is more similar to that of an agency and not that of a guarantee. It may be observed that the notifying bank is merely to follow the instructions of the issuing bank which is to notify or to transmit the letter of credit to the beneficiary. (See Kronman v. Public National Bank of New York, supra). Its commitment is only to notify the beneficiary. It does not undertake any assurance that the issuing bank will perform what has been mandated to or expected of it. As an agent of the issuing bank, it has only to follow the instructions of the issuing bank and to it alone is it obligated and not to buyer with whom it has no contractual relationship. In fact the notifying bank, even if the seller tenders all the documents required under the letter of credit, may refuse to negotiate or accept the drafts drawn thereunder and it will still not be held liable for its only engagement is to notify and or transmit to the seller the letter of credit.

Finally, even if we assume that the petitioner is a confirming bank, the petitioner cannot be forced to pay the amount under the letter. As we have previously explained, there was a failure on the part of the private respondent to comply with the terms of the letter of credit. The failure by him to submit the certification was fatal to his case. The U.C.P. which is incorporated in the letter of credit ordains that the bank may only pay the amount specified under the letter if all the documents tendered are on their face in compliance with the credit. It is not tasked with the duty of ascertaining the reason or reasons why certain documents have not been submitted, as it is only concerned with the documents. Thus, whether or not the buyer has performed his responsibility towards the seller is not the bank's problem. We are aware of the injustice committed by Christiansen on the private respondent but we are deciding the controversy on the basis of what the law is, for the law is not meant to favor only those who have been oppressed, the law is to govern future relations among people as well. Its commitment is to all and not to a single individual. The faith of the people in our justice system may be eroded if we are to decide not what the law states but what we believe it should declare. Dura lex sed lex.
llcd

Considering the foregoing, the materiality of ruling upon the validity of the certificate of approval required of the private respondent to submit under the letter of credit, has become insignificant. In any event, we affirm the earlier ruling of the Court of Appeals dated April 9, 1987 in regard to the petition before it for certiorari and prohibition with preliminary injunction, to wit:
"There is no merit in the respondent's contention that the certification required in condition No. 4 of the letter of credit was "patently illegal." At the time the letter of credit was issued there was no Central Bank regulation prohibiting such a condition in the letter of credit. The letter of credit (Exh. C) was issued on June 7, 1971, more than two months before the issuance of the Central Bank Memorandum on August 16, 1971 disallowing such a condition in a letter of credit. In fact the letter of credit had already expired on July 30, 1971 when the Central Bank memorandum was issued. In any event, it is difficult to see how such a condition could be categorized as illegal or unreasonable since all that plaintiff Villaluz, as seller of the logs, could and should have done was to refuse to load the logs on the vessel "Zenlin Glory", unless Christiansen first issued the required certification that the logs had been approved by

him to be in accordance with the terms and conditions of his purchase order. Apparently, Villaluz was in too much haste to ship his logs without taking all due precautions to assure that all the terms and conditions of the letter of credit had been strictly complied with, so that there would be no hitch in its negotiation." (Rollo, p. 8)

WHEREFORE, the COURT RESOLVED to GRANT the petition and hereby NULLIFIES and SETS ASIDE the decision of the Court of Appeals dated June 29, 1990. The amended complaint in Civil Case No. 15121 is DISMISSED. SO ORDERED.

Feliciano, Bidin and Davide, Jr., JJ., concur. Fernan, C.J., took no part.

SECOND DIVISION
[G.R. No. 74834. November 17, 1988.] INSULAR BANK OF ASIA & AMERICA (NOW PHILIPPINE COMMERCIAL INTERNATIONAL BANK), petitioner, vs. HON. INTERMEDIATE APPELLATE COURT THE PHILIPPINE AMERICAN LIFE INSURANCE CO., SPS. BEN MENDOZA & JUANITA M. MENDOZA, respondents.

Balili, Parado, Cavada & Maamo for petitioner. Romulo, Mabanta, Buenaventura, Sayoc & Delos Angeles for respondent Spouses
Mendozas.

Francisco, Zulueta & Associates for respondent Philam Life.

SYLLABUS 1.COMMERCIAL LAW; GENERAL BANKING ACT; LETTER OF CREDIT; TERMS THEREOF CONSTRUED, GUIDED BY THE INTENTION OF THE PARTIES. "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 receive a reasonable and not a technical construction and although usage and custom cannot control express terms in letters of credit, they are to be construed with reference to all the surrounding facts and circumstances, to the particular and often varying terms in which they may be expressed, the circumstances and intention of the parties to them, and the usages of the particular trade of business contemplated." (International Banking Corp. vs. Irving National Bank, CCA N.Y. 283 F. 103, affirming DC 274 F. 122; Old Colong Trust Co. vs. Lawyers' Title and Trust Co. CAA NY, 297 F. 152, cited in Vol. 72, CJS sec. 178, pp. 387388). 2.ID.; ID.; ID.; UNEQUIVOCAL TERMS OF THE LETTERS OF CREDIT SECURED PAYMENT OF ANY OBLIGATION OF ACCOUNTEE. Unequivocally, the subject standby Letters of Credit secure the payment of any obligation of the Mendozas to Philam Life including all interests, surcharges and expenses thereon but not to exceed P600,000.00. But while they are a security arrangement, they are not converted thereby into contracts of guaranty. That would make them ultra vires rather than a letter of credit, which is within the powers of a bank (Section 74[e], RA 337, General Banking Act). 3.ID.; ID.; STANDBY L/Cs, ABSOLUTE SEPARATE AND INDEPENDENT AGREEMENTS. The standby L/Cs are, "in effect an absolute undertaking to pay the money advanced or the amount for which credit is given on the faith of the instrument." (Scribner v. Rutherford, 22 N.W. 670, 65 Iowa 551; Duval v. Trask, 12 Mass. 154, cited in 38 CJS, Sec. 7, p. 1142). They are primary obligations and not accessory contracts. Being separate and independent agreements, the payments made by the Mendozas cannot be added in computing IBAA's liability under its own standby letters of credit. Payments made by the Mendozas directly to Philam Life are in compliance with their own prestation under the loan agreements. And although these payments could result in the reduction of the actual amount which could ultimately be collected from IBAA, the latter's separate undertaking under its L/Cs remains. 4.ID.; ID.; LETTERS OF CREDIT; STRICTLY CONSTRUED AGAINST THE WRITER. The amount of P222,000.00, therefore, considered as "any obligation of the accountee" under the L/Cs will still have to be paid by IBAA under the explicit terms thereof, which IBAA had itself supplied. Letters of credit are strictly construed to the end that the rights of those directly parties to them may be preserved and their interest safeguarded (Moss vs. Old Colony Trust Co., 140 N.E. 803, 246 Mass. 138, 152). Like any other writing, it will be construed most strongly against the writer and so as to be reasonable and consistent with honest

intentions. On the whole, the construction will be generally a strict one (Lamborn vs. National Park Bank of New York, 208 N.Y.S. 428, 212 App. Div. 25, affirming Id., 204 N Y.S. 557, 123 Misc. 211, affirmed Id., 148 N.E. 664, 240 N.Y. 520). As found by the Appellate Court, however, the amount payable should not exceed P296,294.05 (P600,000.00 less P303,705.95, the total amount found by the Appellate Court to have been paid by IBAA to Philam Life). 5.REMEDIAL LAW; APPEAL; SUPREME COURT'S JURISDICTION LIMITED TO REVIEWING ERRORS OF LAW COMMITTED BY LOWER COURTS. Whether or not documentary evidence was disregarded by the Appellate Court regarding the amount actually paid by IBAA to Philam Life, or P303,705.95 (not P342,127.05 as found by the Trial Court), questions a finding of fact, which should be accorded not only respect but even finality. It is not the function of this Court to analyze or weigh such evidence all over again, its jurisdiction being limited to reviewing errors of law that might have been committed by lower Courts. 6.ID.; CIVIL PROCEDURE; PLEADING AND PRACTICE; COURTS NOT REQUIRED TO RESOLVE ALL ISSUES RAISED IN PLEADINGS. The third issue faults respondent Appellate Court with having passed sub-silencio over certain points raised by petitioner IBAA in his Brief sustaining the Decision of the Trial Court. It is accepted judicial practice, however, that Courts are not required to resolve all issues raised in pleadings unless necessary for the resolution of the case. Apparently, respondent Appellate Court deemed it unnecessary to pass upon those points. 7.CIVIL LAW; ATTORNEY'S FEES; AWARD, REASONABLE. The award of attorney's fees of P25,000.00 appears reasonable under the circumstances of the case specially considering that in the foreclosure of the mortgage in its favor IBAA charged the Mendozas attorney's fees in the amount of P86,477.20. DECISION MELENCIO-HERRERA, J :
p

An appeal by certiorari under Rule 45 of the Rules of Court by petitioner, the Insular Bank of Asia and America (IBAA) [now the Philippine Commercial International Bank], from the judgment of the public respondent, then the Intermediate Appellate Court, * in CA-G.R. CV No. 03224.

Briefly, the antecedent facts disclose that sometime in 1976 and 1977 respondent spouses Ben S. Mendoza and Juanita M. Mendoza (the Mendozas, for brevity), obtained two (2) loans from respondent Philippine American Life Insurance Co. (Philam Life) in the total amount of P600,000.00 to finance the construction of their residential house at Mandaue City. The said loans, with a 14% nominal interest rate, were to be liquidated in equal amortizations over a period of five (5) years from March 1977 to March 1982. To secure payment, Philam Life required that amortizations be guaranteed by an irrevocable standby letter of credit of a commercial bank. Thus, 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 P600,000.00. The first L/C for P500,000.00 was to expire on 1 October 1981 (Exhibit "7", IBAA), and the second for P100,000.00 on 1 January 1982 (Exhibit "8", IBAA). These two (2) irrevocable standby L/Cs were, in turn, secured by a real estate mortgage for the same amount on the property of Respondent Spouses in favor of IBAA. On 11 May 1977, the Mendozas executed a promissory note (No. L-562/77) in favor of IBAA promising to pay the sum of P100,000.00 plus 19% p.a. interest on 31 May 1979. Again, on 3 June 1977, Respondent Spouses executed another Promissory Note (No. 564/77) binding themselves to pay IBAA P100,000.00 plus 19% p.a. interest on 23 June 1979. Both Notes authorized IBAA "to sell at public or private sale such securities or things for the purpose of applying their proceeds to such payments" of "any particular obligation or obligations" the Mendozas may have to IBAA. (Exhibits "34" and "35" IBAA, Annex "D" p. 131, Rollo) The Mendozas failed to pay Philam Life the amortization that fell due on 1 June 1978 so that Philam Life informed IBAA that it was declaring both loans as "entirely due and demandable" and demanded payment of P492,996.30 (Exhibit "H"). However, because IBAA contested the propriety of calling in the entire loan, Philam Life desisted and resumed availing of the L/Cs by drawing-on them for five (5) more amortizations. On 7 September 1979, because the Mendozas defaulted on their amortization due on 1 September 1979, Philam Life again informed IBAA that it was declaring the entire balance outstanding on both loans, including liquidated damages, "immediately due and payable." Philam Life then demanded the payment of P274,779.56 from IBAA but the latter took the position that, as a mere guarantor of the Mendozas who are the principal debtors, its remaining outstanding

obligation under the two (2) standby L/Cs was only P30,100.60. Later, IBAA corrected the latter amount and showed instead an overpayment arrived at as follows:
Limit of LiabilityP600,000.00 Less: a)Payment of MendozasP280,293.11 b)Payment of IBAA372 127.05P652,520.76 ____________________ Overpayment by IBAA(P52,520.76) =========

On 21 April 1980 the Real Estate Mortgage, which secured the two (2) standby L/Cs, was extrajudicially foreclosed by, and sold at public auction for P775,000.00, to petitioner IBAA as the lone and highest bidder (Exhibit "17 Mendoza"). The bid price of P775,000.00 by petitioner IBAA was arrived at as follows:
Principal (unpaid advances under the 2 standby LCs) plus interest & chargesP432,386.07 Add: a)Stipulated Attorney's fees (20%)P 86,477.20 b)Principals (clean loans) plus accrued interest under P/Ns Nos. 562/77 and 564/77P255,346.95 c)Expenses of foreclosureP 772.20 __________ TOTALP775,000.42 =========

On a date that does not appear of record, Philam Life filed suit against Respondent Spouses and IBAA before the Regional Trial Court of Manila, Branch XXXXI, for the recovery of the sum of P274,779.56, the amount allegedly still owing under the loan. After trial, said Court rendered a Decision finding that IBAA had paid Philam Life only P342,127.05 and not P372,227.65, as claimed by IBAA, because of a stale IBAA Manager's check in the amount of P30,100.60,

which had to be deducted. With this deduction, the Trial Court arrived at the following computation:
Limit of Liability of IBAAP600,000.00 Less: a)Payment by MendozasP280,293.11 b)Payment by IBAAP342.127 .05P622,420.16 ____________________ Overpayment by IBAAP 22,420.16 =========

Thus, the Trial Court ruled:

"ACCORDINGLY, judgment is hereby rendered ordering: "(1)Defendants-spouses Ben S. Mendoza and Juanita M. Mendoza to pay plaintiff Philippine American Life Insurance Company the sum of P322,000.00 plus 2% per month as penalty interest from September 12, 1979 until the whole amount is fully paid, P10,000 as attorney's fees, and costs. "(2)Plaintiff Philippine American Life Insurance Company to refund the sum of P22,420.16 to the defendant Insular Bank of Asia and America plus legal interest from March 31, 1980 until the whole amount is fully paid; and "(3)Dismissal of the counterclaim and crossclaim filed by the defendants-spouses against the plaintiff and the defendant IBAA, as well as the counterclaim filed by defendant IBAA against the plaintiff." (pp. 28-29, Rollo)

In so deciding, the Trial Court took the position that IBAA, "as surety," was discharged of its liability to the extent of the payment made by the Mendozas, as the principal debtors, to the creditor, Philam Life. Both Philam Life and Respondent Spouses appealed to respondent Appellate Court, which reversed the Trial Court and ruled instead that IBAA's liability was not reduced by virtue of the payments made by the Mendozas. Accordingly, the Appellate Court decreed:

"WHEREFORE, premises considered, judgment is hereby rendered ordering: 1.Defendants-appellant spouses Ben S. Mendoza and Juanita M. Mendoza and defendant-appellee IBM to pay jointly and severally plaintiff-appellant Philamlife, the sum of P222,000.00 plus 2% per month as penalty interest from September 12, 1979 until the whole amount is fully paid; plus P25,000.00, as attorney's fees, and costs; however, defendant-appellee IBAA shall only be liable up to the amount of P296,294.05; 2.Dismissal of the claim by the IBAA for a refund of P22,420.16 from the Phil-American Life Insurance Co.; and 3.Dismissal of the counterclaim and cross-claim filed by the defendantspouses against the plaintiff and the defendant IBAA, as well as the counterclaim filed by defendant IBAA against the plaintiff. "No special pronouncement as to costs in this instance." (p. 51, Rollo).

Availing of the instant Petition, IBAA seeks a reversal of the aforesaid judgment and the affirmance instead of that of the Trial Court. We resolved to give due course. The issues addressed, as posited by IBAA, are:
"1.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. "2.Whether or not respondent Intermediate Appellate Court is collect in disregarding a documentary evidence (O.R. No. 74323, Exhibit 28-IBAA) showing the amount paid by petitioner and which was admitted as evidence without objection on the part of the counsel for the respondent Philam. "3.Whether or not the Intermediate Appellate Court is correct in passing sub-silencio the following points raised by the petitioner in its Brief to sustain the decision of the Trial Court on some other grounds. a.Effective rate of interest imposed by respondent Philam exceeded the allowable ceiling;

b.Respondent Philam has no right to call in at one time the two standby letters of credit; c.Respondent Philam failed to follow the condition in the two (2) standby letters of credit which could have otherwise altered the result of the decision. "4.Whether or not the award of attorney's fees to respondent Philam is proper in so far as petitioner is affected." (p. 15, Rollo)

The pivotal issue is the first one. IBAA stresses that it has no more liability to Philam Life under the two (2) standby Letters of Credit and, instead, is entitled to a refund. Whereas Philam Life and the Mendoza spouses separately maintain that IBAA's obligation under said two (2) L/Cs is original and primary and is not reduced by the direct payments made by the Mendozas to Philam Life. 1.In construing the terms of a Letter of Credit, as in other contracts, it is the intention of the parties that must govern.
"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 receive a reasonable and not a technical construction and although usage and custom cannot control express terms in letters of credit, they are to be construed with reference to all the surrounding facts and circumstances, to the particular and often varying terms in which they may be expressed, the circumstances and intention of the parties to them, and the usages of the particular trade of business contemplated." (International Banking Corp. vs. Irving National Bank, CCA N.Y. 283 F. 103, affirming DC 274 F. 122; Old Colony Trust Co. vs. Lawyers' Title and Trust Co. CAA NY, 297 F. 152, cited in Vol. 72, CJS sec. 178, pp. 387-388).

The terms of the subject Irrevocable Standby Letters of Credit read, in part, as follows:
"This credit secures the payment of any obligation of the accountee to you under that Loan Agreement hereto attached as Annex 'A' and made a part hereof, including those pertaining to (a) surcharges on defaulted installments, (b) increased interest charges (in the event the law should authorize this increase), and (c) liabilities connected with taxes stipulated to be for Accountee's account; provided, however, that our maximum liabilities hereunder shall not exceed the amount of P500,000.00 (P100,000.00 for the other LC).

"Each drawing under this credit shall be available at any time after one (1) day from due date of the obligations therein secured. Each drawing under this credit shall be accomplished by your signed statement in duplicate that the amount drawn represents payment due and unpaid by the accountee. (pp. 11-12, Decision, pp. 38-39, Rollo). [Emphasis ours].

Unequivocally, the subject standby Letters of Credit secure the payment of any obligation of the Mendozas to Philam Life including all interests, surcharges and expenses thereon but not to exceed P600,000.00. But while they are a security arrangement, they are not converted thereby into contracts of guaranty. That would make them ultra vires rather than a letter of credit, which is within the powers of a bank (Section 74[e], RA 337, General Banking Act). 1 The standby L/Cs are, "in effect an absolute undertaking to pay the money advanced or the amount for which credit is given on the faith of the instrument." (Scribner v. Rutherford, 22 N.W. 670, 65 Iowa 551; Duval v. Trask, 12 Mass. 154, cited in 38 CJS, Sec. 7, p. 1142). They are primary obligations and not accessory contracts. Being separate and independent agreements, the payments made by the Mendozas cannot be added in computing IBAA's liability under its own standby letters of credit. Payments made by the Mendozas directly to Philam Life are in compliance with their own prestation under the loan agreements. And although these payments could result in the reduction of the actual amount which could ultimately be collected from IBAA, the latter's separate undertaking under its L/Cs remains. Both the Trial Court and the Appellate Court found, as a fact, that there still remains a balance on the loan. Pursuant to its absolute undertaking under the L/Cs, therefore, IBAA cannot escape the obligation to pay Philam Life for this unexpended balance. The Appellate Court found it to be P222,000.00, arrived at by the Trial Court and adopted by the Appellate Court, as follows:
". . . In the summary of application of payments (Exhibit `KK') the plaintiff applied P1,918.00 as commitment fee, P4,397.66 as surcharges, P199,683.40 as interests, and P320,000.00 on the principal. The P58,000.00 which is covered by OR No. 74396 was also applied `against the total loan.' Since plaintiff applied P376,000.00 against the total indebtedness of P600,000.00 there still remains an outstanding balance on the principal P322,000.00 (should be P222,000.00) aside from the agreed penalty interest until the whole amount is fully paid . . . " (Decision, Trial Court, p. 50, Rollo)

The amount of P222,000.00, therefore, considered as "any obligation of the accountee" under the L/Cs will still have to be paid by IBAA under the explicit terms thereof, which IBAA had itself supplied. Letters of credit are strictly construed to the end that the rights of those directly parties to them may be preserved and their interest safeguarded (Moss vs. Old Colony Trust Co., 140 N.E. 803, 246 Mass. 138, 152). Like any other writing, it will be construed most strongly against the writer and so as to be reasonable and consistent with honest intentions. On the whole, the construction will be generally a strict one (Lamborn vs. National Park Bank of New York, 208 N.Y.S. 428, 212 App. Div. 25, affirming Id., 204 N Y.S. 557, 123 Misc. 211, affirmed Id., 148 N.E. 664, 240 N.Y. 520). As found by the Appellate Court, however, the amount payable should not exceed P296,294.05 (P600,000.00 less P303,705.95, the total amount found by the Appellate Court to have been paid by IBAA to Philam Life). 2.The second issue as to whether or not documentary evidence was disregarded by the Appellate Court regarding the amount actually paid by IBAA to Philam Life, or P303,705.95 (not P342,127.05 as found by the Trial Court), questions a finding of fact, which should be accorded not only respect but even finality. It is not the function of this Court to analyze or weigh such evidence all over again, its jurisdiction being limited to reviewing errors of law that might have been committed by lower Courts. 3.The third issue faults respondent Appellate Court with having passed subsilencio over certain points raised by petitioner IBAA in his Brief sustaining the Decision of the Trial Court. It is accepted judicial practice, however, that Courts are not required to resolve all issues raised in pleadings unless necessary for the resolution of the case. Apparently, respondent Appellate Court deemed it unnecessary to pass upon those points. Be that as it may, suffice it to state:

a)It is a matter of common knowledge in lending procedures that the nominal interest is different from the effective rate of interest and that the discounting interest scheme as well as the principal amortization scheme are practices commonly resorted to by lending institutions. If IBAA disagreed with the computation scheme adopted by Philam Life, which could have been detected in the early stages of the controversy, IBAA could have interposed its objections. b)The right to call in at one time the two standby L/Cs was specifically provided for in the Loan Agreement, which was specifically made an integral part of the L/Cs. Section 8 thereof read:

". . . 8. The Lender shall have the right to declare the entire balance of the loans and all obligations of the borrower to the lender as immediately due and payable in case the borrower fails for any reason to comply with any payment or other obligations of the Lender." (p. 248, Rollo)

c)The omission by Philam Life to draw the required drafts on the standby L/Cs can be explained by the fact that all the drafts were pre-prepared, pre-dated and pre-accepted by the Mendozas. Philam Life, therefore, could not have complied to the letter with the provision in the L/Cs that drawings therefrom were to be made by drafts for each due and unpaid amortization. Besides, the acceleration of the entire balance of the loan was sufficient notice of dishonor of the predrawn and pre-accepted drafts. 4.Coming now to the award of attorney's fees of P25,000.00 the same appears reasonable under the circumstances of the case specially considering that in the foreclosure of the mortgage in its favor IBAA charged the Mendozas attorney's fees in the amount of P86,477.20, supra. As to the liability of the Mendozas to IBAA, it bears recalling that the Mendozas, upon their application for the opening and issuance of the Irrevocable Standby Letters of Credit in favor of Philam Life, 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; and that IBAA had recovered from the Mendozas the amount of P432,386.07 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)." In addition, IBAA had recovered P255,364.95 representing its clear loans to the Mendozas plus accrued interest besides the fact that it now has the foreclosed property. As between IBAA and the Mendozas, therefore, there has been full liquidation. The remaining obligation of P222,000.00 on the loan of the Mendozas, therefore, is now IBAA's sole responsibility to pay to Philam Life by virtue of its absolute and irrevocable undertaking under the standby L/Cs. Specially so, 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 . . . payments" of their obligations to IBAA. WHEREFORE, the Decision of respondent Intermediate Appellate Court, dated 20 December 1985, is hereby MODIFIED. Petitioner IBAA (now the Philippine Commercial International Bank) shall pay Philippine American Life Insurance Company the sum of P222,000.00 plus 2% per month as penalty interest from

12 September 1979 until the whole amount is fully paid, but in no case to exceed P296,294.05, plus P25,000.00 as attorney's fees. No costs. SO ORDERED.

Paras, Sarmiento and Regalado, JJ., concur. Padilla, J., took no part in the deliberations.
Footnotes

*Penned by Justice Ramon B. Britanico and concurred in Justices Porfirio V. Sison, Abdulwahid A. Bidin and Marcelino Veloso. 1."Section 74. No bank or banking institution shall enter directly or indirectly, into any contract of guaranty or surety, or shall guarantee the interest or principal of any obligation of any person, partnership, association, corporation or other entity. The provisions of this section shall, however, not apply to the following: (a). . . (e)letters of credit transaction, including standby arrangements:

FIRST DIVISION
[G.R. No. 116863. February 12, 1998.] KENG HUA PAPER PRODUCTS CO. INC., petitioner, vs. COURT OF APPEALS, REGIONAL TRIAL COURT OF MANILA, BR. 21, and SEA-LAND SERVICE, INC., respondents.

Cabio Rabanes Law Office and Romeo B. Perez for petitioner. Sycip Salazar Hernandez & Gatmaitan for private respondents.
SYNOPSIS Sea-Land Service, Inc. (petitioner herein) received at its Hong Kong terminal a sealed container, containing seventy-six bales of "unsorted waste paper" for

shipment to defendant, Keng Hua Paper Products. Co. in Manila. A bill of lading to cover the shipment was issued by Sea-Land. Notices of arrival were transmitted to Keng Hua but the latter failed to discharge the shipment from the container during the "free time" or grace period. The said shipment remained inside the plaintiff's container from the moment the free time period expired until the time when the shipment was unloaded from the container. During the period, demurrage charges accrued. Numerous demands were made on Keng Hua but the obligation remained unpaid. Sea-Land thereafter commenced this civil action for collection and damages. The RTC found petitioner liable for demurrage, attorney's fees and expenses of litigation. The petitioner appealed to the Court of Appeals. Respondent Court of Appeals denied the appeal and affirmed the lower court's decision in toto. It also denied the petitioner's motion for reconsideration. Hence, this petition for review. In the main, the case revolves around the question of whether petitioner was bound by the bill of lading. The assailed decision was affirmed by the Supreme Court with modification as to the rate of interest paid. Both lower courts held that the bill of lading was a valid and perfected contract between the shipper (Ho Kee), the consignee (Keng Hua), and the carrier (Sea-Land). In the case at bar, the prolonged failure of petitioner to receive and discharge the cargo from the private respondent's vessel constitutes a violation of the terms of the bill of lading. It should thus be liable for demurrage to the former. As to the rate of interest, this case involves an obligation not arising from a loan or forbearance of money; thus, pursuant to Article 2209 of the Civil Code, the applicable interest rate is six percent per annum, computed from the date of the trial court's decision.
TEDaAc

SYLLABUS 1.COMMERCIAL LAW; CODE OF COMMERCE; BILL OF LADING, CONSTRUED. A bill of lading serves two functions.First, it is a receipt for the goods shipped. Second, it is a contract by which three parties, namely, the shipper, the carrier, and the consignee undertake specific responsibilities and assume stipulated obligations. A "bill of lading delivered and accepted constitutes the contract of carriage even though not signed," because the "(a)cceptance of a paper containing the terms of a proposed contract generally constitutes an acceptance of the contract and of all of its terms and conditions of which the acceptor has actual or constructive notice." In a nutshell, the acceptance of a bill of lading by the shipper and the consignee, with full knowledge of its contents, gives rise to the presumption that the same was a perfected and binding contract.
IEcaHS

2.ID.; ID.; DEMURRAGE, DEFINED. In The Apollon, 22 U.S. (9 Wheat.) 362; 6L Ed. 111 (1824) Justice Story made the following relevant comment on the nature of demurrage: "In truth, demurrage is merely an allowance or compensation for the delay or detention of a vessel. It is often a matter of contract, but not necessarily so. The very circumstance that in ordinary commercial voyages, a particular sum is deemed by the parties a fair compensation for delays, is the very reason why it is, and ought to be, adopted as a measure of compensation, in cases ex delicto. What fairer rule can be adopted than that which founds itself upon mercantile usage as to indemnity, and fixes a recompense upon the deliberate consideration of all the circumstances attending the usual earnings and expenditures in common voyages? It appears to us that an allowance, by way of demurrage, is the true measure of damages in all cases of mere detention, for that allowance has reference to the ship's expenses, wear and tear, and common employment." (22 U.S. at 378.) 3.ID.; TRANSPORTATION; LETTER OF CREDIT; NATURE THEREOF; CASE AT BAR. In a letter of credit, there are three distinct and independent contracts: (1) the contract of sale between the buyer and the seller, (2) the contract of the buyer with the issuing bank, and (3) the letter of credit proper in which the bank promises to pay the seller pursuant to the terms and conditions stated therein. "Few things are more clearly settled in law than that of the three contracts which make up the letter of credit arrangement are to be maintained in a state of perpetual separation." A transaction involving the purchase of goods may also require, apart from a letter of credit, a contract of transportation specially when the seller and the buyer are not in the same locale or country, and the goods purchased have to be transported to the latter. Hence, the contract of carriage, as stipulated in the bill of lading in the present case, must be treated independently of the contract of sale between the seller and the buyer, and the contract for the issuance of a letter of credit between the buyer and the issuing bank. Any discrepancy between the amount of the goods described in the commercial invoice in the contract of sale and the amount allowed in the letter of credit will not affect the validity and enforceability of the contract of carriage as embodied in the bill of lading. As the bank cannot be expected to look beyond the documents presented to it by the seller pursuant to the letter of credit, neither can the carrier be expected to go beyond the representations of the shipper in the bill of lading and to verify their accuracy vis-a-vis the commercial invoice and the letter of credit. 4.CIVIL LAW; OBLIGATIONS; INTEREST; LEGAL RATE; WHEN APPLICABLE. Jurisprudence teaches us: "2. When an obligation, not constituting a loan or

forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or

damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable

certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot

be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged. 3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit." 5.ID.; DAMAGES; LEGAL INTEREST RATE; APPLICATION IN CASE AT BAR. The case before us involves an obligation not arising from a loan or forbearance of money; thus, pursuant to Article 2209 of the Civil Code, the applicable interest rate is six percent per annum. Since the bill of lading did not specify the amount of demurrage, and the sum claimed by private respondent increased as the days went by, the total amount demanded cannot be deemed to have been established with reasonable certainty until the trial court rendered its judgment. Indeed, "(u)nliquidated damages or claims, it is said, are those which are not or cannot be known until definitely ascertained, assessed and determined by the courts after presentation of proof." Consequently, the legal interest rate is six percent, to be computed from September 28, 1990, the date of the trial court's decision. And in accordance with Philippine National Bank, 263 SCRA at 772, and Eastern Shipping, 234 SCRA at 97, the rate of twelve percent per annum shall be charged on the total then outstanding, from the time the judgment becomes final and executory until its satisfaction. 6.ID.; ID.; ATTORNEY'S FEES; TEXT OF DECISION SHOULD STATE REASON FOR THE AWARD; ABSENT IN CASE AT BAR. The Court notes that the matter of attorney's fees was taken up only in the dispositive portion of the trial court's decision. This falls short of the settled requirement that the text of the decision should state the reason for the award of attorney's fees, for without such justification, its award would be a "conclusion without a premise, its basis being improperly left to speculation and conjecture."
aIcTCS

DECISION PANGANIBAN, J :
p

What is the nature of a bill of lading? When does a bill of lading become binding on a consignee? Will an alleged overshipment justify the consignee's refusal to receive the goods described in the bill of lading? When may interest be computed on unpaid demurrage charges?
LLphil

Statement of the Case

These are the main questions raised in this petition assailing the Decision 1 of the Court of Appeals 2 promulgated on May 20, 1994 in C.A.-G.R. CV No. 29953 affirming in toto the decision 3 dated September 28, 1990 in Civil Case No. 8533269 of the Regional Trial Court of Manila, Branch 21. The dispositive portion of the said RTC decision reads:
"WHEREFORE, the Court finds by preponderance of evidence that Plaintiff has proved its cause of action and right to relief. Accordingly, judgment is hereby rendered in favor of the Plaintiff and against Defendant, ordering the Defendant to pay plaintiff: 1.The sum of P67,340.00 as demurrage charges, with interest at the legal rate from the date of the extrajudicial demand until fully paid;

2.A sum equivalent to ten (10%) percent of the total amount due as Attorney's fees and litigation expenses. Send copy to respective counsel of the parties. SO ORDERED."
4

The Facts
The factual antecedents of this case as found by the Court of Appeals are as follows:
"Plaintiff (herein private respondent), a shipping company, is a foreign corporation licensed to do business in the Philippines. On June 29, 1982,

plaintiff received at its Hong Kong terminal a sealed container, Container No. SEAU 67523, containing seventy-six bales of "unsorted waste paper" for shipment to defendant (herein petitioner), Keng Hua Paper Products, Co. in Manila. A bill of lading (Exh. A) to cover the shipment was issued by the plaintiff. On July 9, 1982, the shipment was discharged at the Manila International Container Port. Notices of arrival were transmitted to the defendant but the latter failed to discharge the shipment from the container during the "free time" period or grace period. The said shipment remained inside the plaintiff's container from the moment the free time period expired on July 29, 1982 until the time when the shipment was unloaded from the container on November 22, 1983, or a total of four hundred eighty-one (481) days. During the 481-day period, demurrage charges accrued. Within the same period, letters demanding payment were sent by the plaintiff to the defendant who, however, refused to settle its obligation which eventually amounted to P67,340.00. Numerous demands were made on the defendant but the obligation remained unpaid. Plaintiff thereafter commenced this civil action for collection and damages. In its answer, defendant, by way of special and affirmative defense, alleged that it purchased fifty (50) tons of waste paper from the shipper in Hong Kong, Ho Kee Waste Paper, as manifested in Letter of Credit No. 824858 (Exh. 7, p. 110, Original Record) issued by Equitable Banking Corporation, with partial shipment permitted; that under the letter of credit, the remaining balance of the shipment was only ten (10) metric tons as shown in Invoice No. H-15/82 (Exh. 8, p. 111, Original Record); that the shipment plaintiff was asking defendant to accept was twenty (20) metric tons which is ten (10) metric tons more than the remaining balance; that if defendant were to accept the shipment, it would be violating Central Bank rules and regulations and custom and tariff laws; that plaintiff had no cause of action against the defendant because the latter did not hire the former to carry the merchandise; that the cause of action should be against the shipper which contracted the plaintiff's services and not against defendant; and that the defendant duly notified the plaintiff about the wrong shipment through a letter dated January 24, 1983 (Exh. D for plaintiff, Exh. 4 for defendant, p. 5. Folder of Exhibits)."

As previously mentioned, the RTC found petitioner liable for demurrage, attorney's fees and expenses of litigation. The petitioner appealed to the Court of Appeals, arguing that the lower court erred in (1) awarding the sum of P67,340 in favor of the private respondent, (2) rejecting petitioner's contention that there

was overshipment, (3) ruling that petitioner's recourse was against the shipper, and (4) computing legal interest from date of extrajudicial demand. 5 Respondent Court of Appeals denied the appeal and affirmed the lower court's decision in toto. In a subsequent resolution,6 it also denied the petitioner's motion for reconsideration.
cdphil

Hence, this petition for review.

The Issues
In its memorandum, petitioner submits the following issues:
"I.Whether or not petitioner had accepted the bill of lading; II.Whether or not the award of the sum of P67,340.00 to private respondent was proper; III.Whether or not petitioner was correct in not accepting the overshipment; IV.Whether or not the award of legal interest from the date of private respondent's extrajudicial demand was proper." 8

In the main, the case revolves around the question of whether petitioner was bound by the bill of lading. We shall, thus, discuss the above four issues as they intertwine with this main question.

The Court's Ruling

The petition is partly meritorious. We affirm petitioner's liability for demurrage, but modify the interest rate thereon.

Main Issue: Liability Under the Bill of Lading

A bill of lading serves two functions. First, it is a receipt for the goods shipped. Second, it is a contract by which three parties, namely, the shipper, the carrier, and the consignee undertake specific responsibilities and assume stipulated obligations. 9 A "bill of lading delivered and accepted constitutes the contract of carriage even though not signed," 10because the "(a)cceptance of a paper containing the terms of a proposed contract generally constitutes an acceptance of the contract and of all of its terms and conditions of which the acceptor has actual or constructive notice." 11 In a nutshell, the acceptance of a

bill of lading by the shipper and the consignee, with full knowledge of its contents, gives rise to the presumption that the same was a perfected and binding contract. 12 In the case at bar, both lower courts held that the bill of lading was a valid and perfected contract between the shipper (Ho Kee), the consignee (Petitioner Keng Hua), and the carrier (Private Respondent Sea-Land). Section 17 of the bill of lading provided that the shipper and the consignee were liable for the payment of demurrage charges for the failure to discharge the containerized shipment beyond the grace period allowed by tariff rules. Applying said stipulation, both lower courts found petitioner liable. The aforementioned section of the bill of lading reads:
"17.COOPERAGE FINES. The shipper and consignee shall be liable for, indemnify the carrier and ship and hold them harmless against, and the carrier shall have a lien on the goods for, all expenses and charges for mending cooperage, baling, repairing or reconditioning the goods, or the van, trailers or containers, and all expenses incurred in protecting, caring for or otherwise made for the benefit of the goods, whether the goods be damaged or not, and for any payment, expense, penalty fine, dues, duty, tax or impost, loss, damage, detention,demurrage, or liability of whatsoever nature, sustained or incurred by or levied upon the carrier or the ship in connection with the goods or by reason of the goods being or having been on board, or because of shipper's failure to procure consular or other proper permits, certificates or any papers that may be required at any port or place or shipper's failure to supply information or otherwise to comply with all laws, regulations and requirements of law in connection with the goods of from any other act or omission of the shipper or consignee." (Emphasis supplied.)

Petitioner contends, however, that it should not be bound by the bill of lading because it never gave its consent thereto. Although petitioner admits "physical acceptance" of the bill of lading, it argues that its subsequent actions belie the finding that it accepted the terms and conditions printed therein. 13 Petitioner cites as support the "Notice of Refused or On Hand Freight" it received on November 2, 1982 from private respondent, which acknowledged that petitioner declined to accept the shipment. Petitioner adds that it sent a copy of the said notice to the shipper on December 29, 1982. Petitioner points to its January 24, 1983 letter to the private respondent, stressing "that its acceptance of the bill of lading would be tantamount to an act of smuggling as the amount it had imported (with full documentary support) was only (at that time) for 10,000 kilograms and not for 20,313 kilograms as stated in the bill of lading" and "could

lay them vulnerable to legal sanctions for violation of customs and tariff as well as Central Bank laws." 14 Petitioner further argues that the demurrage "was a consequence of the shipper's mistake" of shipping more than what was bought. The discrepancy in the amount of waste paper it actually purchased, as reflected in the invoice vis-a-vis the excess amount in the bill of lading, allegedly justifies its refusal to accept the shipment. 15

Petitioner Bound by the Bill of Lading

We are not persuaded. Petitioner admits that it "received the bill of lading immediately after the arrival of the shipment" 16on July 8, 1982. 17 Having been afforded an opportunity to examine the said document, petitioner did not immediately object to or dissent from any term or stipulation therein. It was only six months later, on January 24, 1983, that petitioner sent a letter to private respondent saying that it could not accept the shipment. Petitioner's inaction for such a long period conveys the clear inference that it accepted the terms and conditions of the bill of lading. Moreover, said letter spoke only of petitioner's inability to use the delivery permit, i.e. to pick up the cargo, due to the shipper's failure to comply with the terms and conditions of the letter of credit, for which reason the bill of lading and other shipping documents were returned by the "banks" to the shipper. 18 The letter merely proved petitioner's refusal to pick up the cargo, not its rejection of the bill of lading. Petitioner's reliance on the Notice of Refused or On Hand Freight, as proof of its nonacceptance of the bill of lading, is of no consequence. Said notice was not written by petitioner; it was sent by private respondent to petitioner in November 1982, or four months after petitioner received the bill of lading. If the notice has any legal significance at all, it is to highlight petitioner's prolonged failure to object to the bill of lading. Contrary to petitioner's contention, the notice and the letter support not belie the findings of the two lower courts that the bill of lading was impliedly accepted by petitioner.

As aptly stated by Respondent Court of Appeals:

"In the instant case, (herein petitioner) cannot and did not allege nonreceipt of its copy of the bill of lading from the shipper. Hence, the terms and conditions as well as the various entries contained therein were brought to its knowledge. (Herein petitioner) accepted the bill of

lading without interposing any objection as to its contents. This raises the presumption that (herein petitioner) agreed to the entries and stipulations imposed therein. Moreover, it is puzzling that (herein petitioner) allowed months to pass, six (6) months to be exact, before notifying (herein private respondent) of the 'wrong shipment.' It was only on January 24, 1983 that (herein petitioner) sent (herein private respondent) such a letter of notification (Exh. D for plaintiff, Exh. 4 for defendant; p. 5, Folder of Exhibits). Thus, for the duration of those six months (herein private respondent never knew the reason for (herein petitioner's) refusal to discharge the shipment.
LLpr

After accepting the bill of lading, receiving notices of arrival of the shipment, failing to object thereto, (herein petitioner) cannot now deny that it is bound by the terms in the bill of lading. If it did not intend to be bound, (herein petitioner) would not have waited for six months to lapse before finally bringing the matter to (herein private respondent's attention. The most logical reaction in such a case would be to immediately verify the matter with the other parties involved. In this case, however, (herein petitioner) unreasonably detained (herein private respondent's) vessel to the latter's prejudice." 19

Petitioner's attempt to evade its obligation to receive the shipment on the pretext that this may cause it to violate customs, tariff and central bank laws must likewise fail. Mere apprehension of violating said laws, without a clear demonstration that taking delivery of the shipment has become legally impossible, 20 cannot defeat the petitioner's contractual obligation and liability under the bill of lading. In any event, the issue of whether petitioner accepted the bill of lading was raised for the first time only in petitioner's memorandum before this Court. Clearly, we cannot now entertain an issue raised for the very first time on appeal, in deference to the well-settled doctrine that "(a)n issue raised for the first time on appeal and not raised timely in the proceedings in the lower court is barred by estoppel. Questions raised on appeal must be within the issues framed by the parties and, consequently, issues not raised in the trial court cannot be raised for the first time on appeal." 21 In the case at bar, the prolonged failure of petitioner to receive and discharge the cargo from the private respondent's vessel constitutes a violation of the terms of the bill of lading. It should thus be liable for demurrage to the former.

In The Apollon, 22 Justice Story made the following relevant comment on the nature of demurrage:
"In truth, demurrage is merely an allowance or compensation for the delay or detention of a vessel. It is often a matter of contract, but not necessarily so. The very circumstance that in ordinary commercial voyages, a particular sum is deemed by the parties a fair compensation for delays, is the very reason why it is, and ought to be, adopted as a measure of compensation, in cases ex delicto. What fairer rule can be adopted than that which founds itself upon mercantile usage as to indemnity, and fixes a recompense upon the deliberate consideration of all the circumstances attending the usual earnings and expenditures in common voyages? It appears to us that an allowance, by way of demurrage, is the true measure of damages in all cases of mere detention, for that allowance has reference to the ship's expenses, wear and tear, and common employment." 23

Amount of Demurrage Charges

Petitioner argues that it is not obligated to pay any demurrage charges because, prior to the filing of the complaint, private respondent made no demand for the sum of P67,340. Moreover, private respondent's loss and prevention manager, Loi Gillera, demanded P50,260; but its counsel, Sofronio Larcia, subsequently asked for a different amount of P37,800.
cda

Petitioner's position is puerile. The amount of demurrage charges in the sum of P67,340 is a factual conclusion of the trial court that was affirmed by the Court of Appeals and, thus, binding on this Court. 24 Besides, such factual finding is supported by the extant evidence. 25 The apparent discrepancy was a result of the variance of the dates when the two demands were made. Necessarily, the longer the cargo remained unclaimed, the higher the demurrage. Thus, while in his letter dated April 24, 1983, 26 private respondent's counsel demanded payment of only P37,800, the additional demurrage incurred by petitioner due to its continued refusal to receive delivery of the cargo ballooned to P67,340 by November 22, 1983. The testimony of Counsel Sofronio Larcia as regards said letter of April 24, 1983 elucidates, viz:
"QNow, after you sent this letter, do you know what happened? ADefendant continued to refuse to take delivery of the shipment and the shipment stayed at the port for a longer period. QSo, what happened to the shipment?

AThe shipment incurred additional demurrage charges which amounted to P67,340.00 as of November 22, 1983 or more than a year after almost a year after the shipment arrived at the port. QSo, what did you do? AWe requested our collection agency to pursue the collection of this amount." 27

Bill of Lading Separate from Other Letter of Credit Arrangements

In a letter of credit, there are three distinct and independent contracts: (1) the contract of sale between the buyer and the seller, (2) the contract of the buyer with the issuing bank, and (3) the letter of credit proper in which the bank promises to pay the seller pursuant to the terms and conditions stated therein. "Few things are more clearly settled in law than that the three contracts which make up the letter of credit arrangement are to be maintained in a state of perpetual separation." 28 A transaction involving the purchase of goods may also require, apart from a letter of credit, a contract of transportation specially when the seller and the buyer are not in the same locale or country, and the goods purchased have to be transported to the latter. Hence, the contract of carriage, as stipulated in the bill of lading in the present case, must be treated independently of the contract of sale between the seller and the buyer, and the contract for the issuance of a letter of credit between the buyer and the issuing bank. Any discrepancy between the amount of the goods described in the commercial invoice in the contract of sale and the amount allowed in the letter of credit will not affect the validity and enforceability of the contract of carriage as embodied in the bill of lading. As the bank cannot be expected to look beyond the documents presented to it by the seller pursuant to the letter of credit, 29 neither can the carrier be expected to go beyond the representations of the shipper in the bill of lading and to verify their accuracy visa-vis the commercial invoice and the letter of credit. Thus, the discrepancy between the amount of goods indicated in the invoice and the amount in the bill of lading cannot negate petitioner's obligation to private respondent arising from the contract of transportation. Furthermore, private respondent, as carrier, had no knowledge of the contents of the container. The contract of carriage was under the arrangement known as "Shipper's Load And Count," and the shipper was solely responsible for the loading of the container while the carrier was

oblivious to the contents of the shipment. Petitioner's remedy in case of overshipment lies against the seller/shipper, not against the carrier.
prLL

Payment of Interest
Petitioner posits that it "first knew" of the demurrage claim of P67,340 only when it received, by summons, private respondent's complaint. Hence, interest may not be allowed to run from the date of private respondent's extrajudicial demands on March 8, 1983 for P50,260 or on April 24, 1983 for P37,800, considering that, in both cases, "there was no demand for interest." 30 We agree. Jurisprudence teaches us:
"2.When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged. 3.When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit." 31

The case before us involves an obligation not arising from a loan or forbearance of money; thus, pursuant to Article 2209 of the Civil Code, the applicable interest rate is six percent per annum. Since the bill of lading did not specify the amount of demurrage, and the sum claimed by private respondent increased as the days went by, the total amount demanded cannot be deemed to have been established with reasonable certainty until the trial court rendered its judgment. Indeed, "(u)nliquidated damages or claims, it is said, are those which are not or cannot be known until definitely ascertained, assessed and determined by the courts after presentation of proof." 32 Consequently, the legal interest rate is six

percent, to be computed from September 28, 1990, the date of the trial court's decision. And in accordance with Philippine National Bank 33 and Eastern Shipping, 34 the rate of twelve percent per annum shall be charged on the total then outstanding, from the time the judgment becomes final and executory until its satisfaction.

Finally, the Court notes that the matter of attorney's fees was taken up only in the dispositive portion of the trial court's decision. This falls short of the settled requirement that the text of the decision should state the reason for the award of attorney's fees, for without such justification, its award would be a "conclusion without a premise, its basis being improperly left to speculation and conjecture." 35 WHEREFORE, the assailed Decision is hereby AFFIRMED with the MODIFICATION that the legal interest of six percent per annum shall be computed from September 28, 1990 until its full payment before finality of judgment. The rate of interest shall be adjusted to twelve percent per annum, computed from the time said judgment became final and executory until full satisfaction. The award of attorney's fees is DELETED.
LLphil

SO ORDERED.

Davide, Jr., Bellosillo, Vitug and Quisumbing, JJ ., concur.

Footnotes

1.Rollo, pp. 20-32. 2.Tenth Division, composed of J . Fermin A. Martin, Jr., ponente; and JJ . Emeterio C. Cui (chairman) and Eugenio S. Labitoria, concurring. 3.Rollo, pp. 15-18. The RTC decision was penned by Judge Lourdes K. Tayao-Jaguros, who was later appointed to the Court of Appeals, from where she has now retired. 4.Ibid., pp. 17-18. 5.Petitioner's brief before the Court of Appeals, pp. 5-8; record of the Court of Appeals, pp. 21-24. 6.Rollo, p. 35.

7.The case was deemed submitted for resolution on June 3, 1996 upon this Court's receipt of petitioner's memorandum. 8.Petitioner's memorandum, p. 4; Rollo, p. 87. 9.Magellan Mftg. Marketing Corp. vs. Court of Appeals, 201 SCRA 102, 110, August 22, 1991, per Regalado, J . 10.13 C.J.S. 239. See also Pan American World Airways, Inc. vs. IAC , 164 SCRA 268, 275, August 11, 1988; citing Ong Yiu vs. Court of Appeals, 91 SCRA 223, 231, June 29, 1979. 11.17 C.J.S. 672. 12.Saludo, Jr. vs. Court of Appeals, 207 SCRA 498, 527-528, March 23, 1992. 13.Ibid., p. 5; Rollo, p. 88. 14.Ibid., pp. 5-6; Rollo, pp. 88-89. 15.Petitioner's memorandum, pp. 9-10; Rollo, pp. 92-93. 16.See petitioner's motion for reconsideration before the Court of Appeals, p. 2; record of the Court of Appeals, p. 81. 17.See Exhibit B, Folder of Exhibits, p. 2. 18.See Exhibit D, Folder of Exhibits, p. 5. 19.Decision of the Court of Appeals, pp. 4-5; Rollo, pp. 23-24. 20.Art. 1266 of the Civil Code provides: "Art. 1266.The debtor in obligations to do shall also be released when the prestation becomes legally or physically impossible without the fault of the obligor." 21.Sanchez vs. Court of Appeals, G.R. No. 108947, p. 28, September 29, 1997, per Panganiban, J .; quoting Caltex (Philippines), Inc. vs. Court of Appeals, 212 SCRA 448, 461, August 10, 1992, per Regalado, J . 22.22 U.S. (9 Wheat.) 362; 6 L. Ed. 111 (1824). 23.22 U.S. at 378.

24.Fuentes vs. Court of Appeals, G.R. No. 109849, p. 9, February 26, 1997, per Panganiban, J . 25.See computation of CBCS Guaranteed Fast Collection Services, Exh. F-1, Folder of Exhibits, p. 8. 26.Exh. E, Folder of Exhibits, p. 6. 27.TSN, pp. 5-6, August 31, 1988. 28.Gilmore, Grant and Black, Charles, The Law of Admiralty, p. 120, 2nd ed. (1975). 29.See Irrevocable Letter of Credit No. 82-1858, rollo, p. 11. 30.Petitioner's memorandum, p. 10; Rollo, p. 93. 31.Eastern Shipping Lines, Inc. vs. Court of Appeals, 234 SCRA 88, July 12, 1994, per Vitug, J . See also Philippine National Bank vs. Court of Appeals, 263 SCRA 766, 770, October 30, 1996. 32.Central Azucera de Bais vs. Court of Appeals, 188 SCRA 328, 339, August 3, 1990, per Regalado, J . 33.263 SCRA at 772. 34.234 SCRA at 97. 35.Francel Realty Corporation vs. Court of Appeals, 252 SCRA 127, 134, January 22, 1996, per Mendoza, J .; citing Buan vs. Camaganacan, 16 SCRA 321, February 28, 1966.

FIRST DIVISION
[G.R. No. 161865. March 10, 2005.] LAND BANK OF THE PHILIPPINES, petitioner, vs. MONET'S EXPORT AND MANUFACTURING CORPORATION, SPOUSES VICENTE V. TAGLE, SR. and MA. CONSUELO G. TAGLE, respondents.

DECISION YNARES-SANTIAGO, J :
p

This is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the October 9, 2003 Decision 1 of the Court of Appeals 2 in CA-G.R. CV No. 57436, and its January 20, 2004 Resolution 3 denying petitioner's motion for reconsideration. The factual antecedents are as follows: On June 25, 1981, petitioner, Land Bank of the Philippines (Land Bank), and Monet's Export and Manufacturing Corporation (Monet) executed an Export Packing Credit Line Agreement 4 under which Monet was given a credit line in the amount of P250,000.00, secured by the proceeds of its export letters of credit, 5 the continuing guaranty of the spouses Vicente V. Tagle, Sr. and Ma. Consuelo G. Tagle, 6 and the third party mortgage executed by Pepita C. Mendigoria. 7 The credit line agreement was renewed and amended several times 8 until it was increased to P5,000,000.00. 9 Owing to the continued failure and refusal of Monet, notwithstanding repeated demands, to pay its indebtedness to Land Bank, which have ballooned to P11,464,246.19 10 by August 31, 1992, a complaint 11 for collection of sum of money with prayer for preliminary attachment was filed by Land Bank with the Regional Trial Court of Manila, docketed as Civil Case No. 93-64350. 12 In their joint Answer with Compulsory Counterclaim, 13 Monet and the Tagle spouses alleged that Land Bank failed and refused to collect the receivables on their export letter of credit against Wishbone Trading Company of Hong Kong in the sum of US$33,434.00, while it made unauthorized payments on their import letter of credit to Beautilike (H.K.) Ltd. in the amount of US$38,768.40, which seriously damaged the business interests of Monet.
SACHcD

On July 15, 1997, the trial court rendered decision, which reads:

14

the dispositive portion of

WHEREFORE, in view of the foregoing, judgment is hereby rendered as follows:

1.Recognizing the obligation of the defendants as stated in the "Schedule of Amortization from the Loans and Discount Department of LAND BANK" (Exh. "39"), as well as the interest mentioned therein, but deleting the penalty thereof as no penalty should be charged and sentencing defendants jointly and severally to pay the amounts stated therein as verified; 2.Granting the counterclaim interposed by the defendants in the amount of US$30,000.00 payable in Philippine Pesos at the official exchange rate when payment is to be made, to compensate for the defendants' lost income opportunities occasioned by defendants' transaction with Wishbone Trading Corporation and with Beautilike, the same to be deducted from the confirmed and computed obligation mentioned in No. 1 hereof; and 3.Denying the claim for attorney's fees for lack of merit.
15

From the foregoing decision, Land Bank filed an appeal Appeals.

cdtai2005

16

with the Court of

On October 9, 2003, the Court of Appeals promulgated the decision subject of the present petition for review. In affirming the trial court, the Court of Appeals found that, indeed, Land Bank was responsible for the mismanagement of the Wishbone and Beautilike accounts of Monet. It held that because of the noncollection 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, it suffered from lack of financial resources sufficient to buy the needed materials to fill up the standing orders from its customers.
TacSAE

The Court of Appeals disposed of Land Bank's appeal in this wise:

WHEREFORE, premises considered, and finding no reversible error in the assailed Decision of the Regional Trial Court of Manila, Branch 49, in Civil Case No. 93-64350 dated July 15, 1997, said Decision is hereby AFFIRMED and UPHELD and the appeal is DISMISSED for lack of merit. SO ORDERED.
17

Land Bank's Motion for Reconsideration 18 was denied by the Court of Appeals on January 20, 2004, 19 hence, this petition raising the following issues:
1.Whether or not the respondent Court seriously erred in upholding the findings and conclusion of the trial court limiting the liability of

private respondents based on [the] Summary of Availment and Schedule of Amortization and granting the latter opportunity losses anchored on the theory that petitioner disrupted the cas[h] flow of respondent MONET's which led to its decline; 2.Whether or not the respondent Court palpably erred in not clearly establishing petitioner's right to collect payment from private respondents' loan validly obtained in the sum of P11,464,246.19 Million which has become long overdue and demandable. 20

The petition is partly impressed with merit. As regards the Beautilike account, the trial court and the Court of Appeals erred in holding that Land Bank failed to protect Monet's interest when it paid the suppliers despite discrepancies in the shipment vis--vis the order specifications of Monet. Our ruling in Bank of America, NT & SA v. Court of Appeals,
21

is pertinent:

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 the tender of documents required by the letter of credit. 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.
HcACTE

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. What characterizes letters of credit, as distinguished from other accessory contracts, is the engagement of the issuing bank to pay the seller once the draft and the required shipping documents are presented to it. In turn, this arrangement assures the seller of prompt payment, independent of any breach of the main sales contract. By this so-called "independence principle," the bank determines compliance with the letter of credit only by examining the shipping documents presented; it is precluded from determining whether the main contract is actually accomplished or not . (Emphasis supplied)

Moreover, Article 3 of the Uniform Customs and Practice (UCP) for Documentary Credits provides that credits, by their nature, are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the credit. Consequently, the undertaking of a bank to pay, accept and pay draft(s) or negotiate and/or fulfill any other obligation under the credit is not subject to claims or defenses by the applicant resulting from his relationships with the issuing bank or the beneficiary. In particular, Article 15 of the UCP states:
Banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the general and/or particular conditions stipulated in the documents or superimposed thereon; nor do they assume any liability or responsibility for the description, weight, quality, condition, packing, delivery, value or existence of the goods represented by any documents, or for the good faith or acts and/or omissions, solvency, performance or standing of the consignor, the carriers, or the insurers of the goods, or any other person whomsoever. (Emphasis supplied)
EHSIcT

In Transfield Philippines, Inc. v. Luzon Hydro Corporation, et al., 22 we held that 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. The socalled "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.

For, if the letter of credit is drawable only after the settlement of any dispute on the main contract entered into by the applicant of the said letter of credit and the beneficiary, then there would be no practical and beneficial use for letters of credit in commercial transactions. 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, it only deals in documents and it is not involved in the contract between the parties. The relationship between the beneficiary and the issuer of a letter of credit is not strictly contractual, because both privity and a meeting of the minds are lacking. Thus, upon receipt by Land Bank of the documents of title which conform with what the letter of credit requires, it is duty bound to pay the seller, as it did in this case.

Thus, no fault or acts of mismanagement can be attributed to Land Bank relative to Monet's import letter of credit. Its actions find solid footing on the legal principles and jurisprudence earlier discussed. Consequently, it was error for the trial court and for the Court of Appeals to grant opportunity losses to the respondents on this account. On the matter, however, of the Wishbone transaction where it is alleged by respondents that petitioner failed in its duty to protect its (Monet's) interest in collecting the amount due to it from its customers, we find that the trial court and the Court of Appeals committed no reversible error in holding Land Bank liable for opportunity losses. The trial court summarized the transaction in this manner:
The shipment to Wishbone Trading Company was for US16,119.00 on October 16, 1986. Documents were submitted without requesting for purchase of export bills. This was sent by plaintiff (Land Bank) via telex to Hongkong Bank requesting advice to pay as there were discrepancies. On advice of Hongkong Bank plaintiff paid the first shipment. At this point defendants (Monet and the Tagle spouses) were reluctant to release the two subsequent documents to the buyer until payment of the first shipment is made. When LANDBANK paid the defendants, believing that everything was in order, defendants released the documents for the two subsequent shipments, thinking that the LANDBANK's international department had taken the necessary measures for them to be paid. Wishbone then came up with new additional discrepancies not listed in the cable sent by LANDBANK. Defendants argue that if LANDBANK had acted prudently on this as it

used to do, Mantruste Hongkong could not have denied payment upon the first instructions of the buyer based on the cable of LANDBANK's international department. Defendants therefore asked LANDBANK to share with them the burden of compelling the shrewd buyers to effect the payment of the export bills. Furthermore, referring to the telex of Mantruste Hongkong the original documents to Wishbone were sent per requirement under the term of the Letter of Credit, but the goods were consigned to the order of Wells Fargo Bank. Defendants believed that Wells Fargo Bank should be responsible to the shipper. Thus the defendants requested for assistance to telex Wells Fargo Bank to inquire about the whereabouts of the merchandise shipped to them as consignee. As early as November 30, 1986, Mantruste Hongkong sent a telex addressed to the bank instructing it to pay MONET the sum of US$16,119.00 for the first shipment despite discrepancies which were minor and properly corrected. The evidence indicates that in the Wishbone case the foreign buyer was actually putting one over the defendants, which LANDBANK could have properly prevented had it been more aggressive as is expected of a bank.
STHAID

Exhibits "27" and "27-A" clearly show that the terms and conditions of the Letter of Credit were substantially complied with by MONET. And the evidence shows that Wells Fargo Bank was included to receive the bills of lading, notifying only Style Up of California, and yet LANDBANK did not consider this for purposes of collection. These were testified to by defendant Consuelo Tagle who explained what happened, including payments of account, which LANDBANK failed to rebut. LANDBANK did not pursue collection on this despite the fact that the goods were acceptable merchandise. 23

A careful review of the records reveal that the trial court correctly considered Land Bank as the attorney-in-fact of Monet with regard to its export transactions with Wishbone Trading Company. It was stipulated in the Deed of Assignment 24executed between Monet and Land Bank on June 26, 1981:
That the ASSIGNOR/s (Monet) by these presents, does/do hereby appoint/s the ASSIGNEE (Land Bank) their/his/her true and lawful attorney-in-fact and in their/his/her place and stead, to demand, collect and receivethe proceeds of the export letters of credit at a loan value of 80% to be applied to the payment of the credit accommodation herein secured. (Underscoring supplied)

Clearly, petitioner's refusal to own its responsibility in the handling of the Wishbone account fails against the aforequoted provision.

As the attorney-in-fact of Monet in transactions involving its export letters of credit, such as the Wishbone account, Land Bank should have exercised the requisite degree of diligence in collecting the amount due to the former. The records of this case are bereft of evidence showing that Land Bank exercised the prudence mandated by its contractual obligations to Monet. The failure of Land Bank to judiciously safeguard the interest of Monet is not without any repercussions vis--vis the viability of Monet as a business enterprise. As correctly observed by the Court of Appeals:
In fine, because of the non-collection . . . defendants-appellees suffered from a lack of financial resources sufficient to buy new materials. And since they also could no longer draw on their existing credit line with Landbank, they could not purchase materials to fill up the orders of their customers. Because of this the business reputation of Monet's suffered which hastened its decline. 25

The right of the respondents to be awarded opportunity losses having been established, we now go to the determination of the proper amount to be awarded to them under the circumstances obtaining in this case. The lower court awarded to herein respondents opportunity losses in the amount of US$30,000.00 based on its findings of two (2) acts of mismanagement committed by Land Bank. The Court of Appeals affirmed the amount of the award in the assailed decision. In view of our findings that Land Bank is not guilty of mismanagement in its handling of Monet's import letter of credit relative to the Beautilike transaction, we hold that a reduction of the amount of the grant is in order. It is not possible for us to totally do away with the award of opportunity losses having affirmed the findings of the trial court and the Court of Appeals that Land Bank, as the attorney-in-fact of Monet in its transaction with Wishbone Trading Company, committed acts of mismanagement. On account of the foregoing reasons, we reduce the amount of opportunity losses granted to Monet to US$15,000.00 payable in Philippine pesos at the official exchange rate when payment is to be made.
AcDaEH

Anent the second issue, we find that the trial court erred in limiting the obligation of the respondents to Land Bank to what was stated in the "Schedule of Amortization from the Loans and Discounts Department of LANDBANK", or Exhibit "39", 26for the respondents. Prefatorily, we restate the time honored principle that in a petition for review under Rule 45, only questions of law may be raised. It is not our function to analyze or weigh all over again evidence already considered in the proceedings

below, our jurisdiction is limited to reviewing only errors of law that may have been committed by the lower court. 27 The resolution of factual issues is the function of lower courts, whose findings on these matters are received with respect. A question of law which we may pass upon must not involve an examination of the probative value of the evidence presented by the litigants. 28 The above rule, however, admits of certain exceptions. The findings of fact of the Court of Appeals are generally conclusive but may be reviewed when: (1) the factual findings of the Court of Appeals and the trial court are contradictory; (2) the findings are grounded entirely on speculation, surmises or conjectures; (3) the inference made by the Court of Appeals from its findings of fact is manifestly mistaken, absurd or impossible; (4) there is grave abuse of discretion in the appreciation of facts; (5) the appellate court, in making its findings, goes beyond the issues of the case and such findings are contrary to the admissions of both appellant and appellee; (6) the judgment of the Court of Appeals is premised on a misapprehension of facts; (7) the Court of Appeals fails to notice certain relevant facts which, if properly considered, will justify a different conclusion; and (8) the findings of fact of the Court of Appeals are contrary to those of the trial court or are mere conclusions without citation of specific evidence, or where the facts set forth by the petitioner are not disputed by respondent, or where the findings of fact of the Court of Appeals are premised on the absence of evidence but are contradicted by the evidence on record. 29 Our review of the records of this case reveal that the reversible error committed by the lower court, and that of the Court of Appeals, partook of the form of over reliance and sole reliance on the figures contained in Exhibit "39", to the exclusion of other pieces of documentary evidence annexed by Land Bank to its complaint. There is no doubt that the respondents indeed owed Land Bank a sum of money. This much was clearly established by the series of letters 30 written by the officers of Monet to Land Bank acknowledging the corporation's indebtedness, albeit without specifying any amount, and asking for understanding and more time within which they can settle their obligations. We note, however, that the respondents have been consistent and persistent in their stand that they do not harbor any intention of evading the payment of the amount they actually owed to the petitioner, provided that there be a reconciliation of the payments made by the respondents on their loan obligations. 31 Indeed, Exhibit "39" or the Summary of Availment and Schedule of Amortization, which was made by the trial court as the basis in determining the amount of

indebtedness of the respondents to the petitioner, is a document issued by the Loans and Discounts Department of Land Bank itself. Nevertheless, we note that the amount covered by the said summary pertains only to the indebtedness of Monet to Land Bank amounting to P2,500,000.00, as covered by Promissory Note No. P-981. The amount reflected in Exhibit "39" is so small when compared to the P11,464,246.19 which Land Bank sought to collect from the respondents in its complaint before the trial court. The records of this case show that respondents, in the course of their credit transactions with Land Bank, executed not only one, but several promissory notes in varying amounts in favor of the bank.
cETDIA

On the other hand, Land Bank submitted a Consolidated Statement of Account dated August 31, 1992 32 in support of its claim as to the amount owed to it. The said document illustrated how, based on the computations made by Land Bank, the indebtedness of Monet ballooned to P11,464,246.19. Land Bank also submitted a Summary of Availments and Payments from 1981 to 1989 33 which detailed the series of availments and payments made by Monet. Notwithstanding the above facts, and considering that Monet's Exhibit "39" was prepared before its due date of April 29, 1991, while Land Bank's Consolidated Statement of Account was prepared much later on August 31, 1992, the trial court chose to overlook them and conveniently held that the correct basis of Monet's indebtedness to Land Bank are the figures contained in Exhibit "39". Nonetheless, no explanation was proffered why it used Exhibit "39" as basis in determining the actual indebtedness of Monet. We note that instead of dealing squarely with the issue of resolving the total amount of indebtedness due to Land Bank, the trial court and the Court of Appeals chose to expound on Land Bank's alleged acts of mismanagement. In "discussing" this issue, all the trial court said was:
LANDBANK claims that as of August 31, 1992, the defendants owe them the sum of P11,464,246.19 payable with interest at the rate of 10% per annum. But this is disputed by the defendants as shown in their Summary of Availment and Schedule of Amortization (Exh. "39"). 34

While both the petitioner and the respondents submitted their respective pieces of documentary evidence in support of their contentions as to the amount of indebtedness due to petitioner, the trial court failed to calibrate and harmonize them.

Unfortunately, despite the pieces of evidence submitted by the parties, our review of the same is inconclusive in determining the total amount due to the petitioner. The petitioner had failed to establish the effect of Monet's Exhibit "39" to its own Consolidated Statement of Account as of August 31, 1992, nor did the respondents categorically refute the said statement of account vis--vis its Exhibit "39". The interest of justice will best be served if this case be remanded to the court of origin for the purpose of determining the amount due to petitioner. The dearth in the records of sufficient evidence with which we can utilize in making a categorical ruling on the amount of indebtedness due to the petitioner constrains us to remand this case to the trial court with instructions to receive additional evidence as needed in order to fully thresh out the issue and establish the rights and obligations of the parties. From the amount ultimately determined by the trial court as the outstanding obligation of the respondents to the petitioner, will be deducted the award of opportunity losses granted to the respondents in the amount of US$15,000.00 payable in Philippine pesos at the official exchange rate when payment is to be made.
SCHIcT

WHEREFORE, the instant petition is GRANTED. The October 9, 2003 decision and the January 20, 2004 resolution of the Court of Appeals in CA-G.R. CV No. 57436, are MODIFIED insofar as the award of the counterclaim to the respondents is concerned. Accordingly, there being no basis to award opportunity costs to the respondents, Monet's Export and Manufacturing Corporation and the spouses, Vicente V. Tagle, Sr. and Ma. Consuelo G. Tagle, relative to the Beautilike account, but finding good cause to sustain the award of opportunity costs to the respondents on account of the failure of the petitioner to diligently perform its duties as the attorney-in-fact of the respondents in the Wishbone Trading Company account, the amount of opportunity costs granted to the respondents, is REDUCED to US$15,000.00 payable in Philippine pesos at the official exchange rate when payment is to be made. Insofar as the amount of indebtedness of the respondents to the petitioner is concerned, the October 9, 2003 decision and the January 20, 2004 resolution of the Court of Appeals in CA-G.R. CV No. 57436, are SET ASIDE. The case is hereby remanded to its court of origin, the Regional Trial Court of Manila, Branch 49, for the reception of additional evidence as may be needed to determine the actual amount of indebtedness of the respondents to the petitioner. The trial court is INSTRUCTED to deduct the award of opportunity losses granted to the respondents, in the amount of US$15,000.00 payable in Philippine pesos at the official exchange rate when payment is to be made, from the amount ultimately determined as the actual amount of indebtedness of the respondents to the petitioner. No pronouncement as to costs.

SO ORDERED.

Davide, Jr., C.J., Quisumbing, Carpio and Azcuna, JJ., concur.

Footnotes

1.Rollo, pp. 7-13. 2.Penned by Associate Justice Sergio L. Pestao, concurred in by Associate Justices Marina L. Buzon and Jose C. Mendoza. 3.Rollo, pp. 26-28. 4.Original Records, pp. 17-29. 5.Id. at 30-31. 6.Id. at 32-36. 7.Id. at 133-135. 8.The Export Packing Credit Line Agreement was amended a total of thirteen (13) times from January 27, 1982, the date of the second amendment up to September 23, 1987, the date of the thirteenth amendment. Original Records, pp. 43-96. 9.Original Records, p. 94. 10.As per allegations by Land Bank in paragraph 18 of its complaint, Original Records, p. 8. 11.Original Records, pp. 1-16. 12.The complaint was stamped as received by the Regional Trial Court of Manila on February 2, 1993. 13.Original Records, pp. 207-213. 14.CA Rollo, pp. 27-35. 15.Id. at 34-35. 16.Rollo, pp. 82-107. 17.Id. at 12.

18.Id. at 15-24. 19.Id. at 26-28. 20.Id. at 41-42. 21.G.R. No. 105395, 10 December 1993, 228 SCRA 357, 365-366. 22.G.R. No. 146717, 22 November 2004. 23.CA Rollo, pp. 32-33. 24.Original Records, p. 30. 25.Rollo, p. 12. 26.Original Records, p. 569. 27.Mea Builders, Inc., et al. v. Court of Appeals, et al., G.R. No. 121484, 31 January 2005. 28.Naguiat v. Court of Appeals, G.R. No. 118375, 3 October 2003, 412 SCRA 591, 595-596. 29.Supra, note 27. 30.Exhibit "EEE", March 5, 1992 letter of Monet, written by its president and chairman, Vic Tagle and addressed to Ms. Divina L. Ador Dionisio, Assistant Vice President of Land Bank of the Philippines, Original Records, p. 194; Exhibit "GGG", July 10, 1992 letter of Monet, written by its chairman, Vic Tagle and addressed to Ms. Divina L. Ador Dionisio, Assistant Vice President of Land Bank of the Philippines, Original Records, p. 197; Exhibit "III", October 2, 1992 letter of Monet, written by its acting president, Vicente Tagle, Jr., and addressed to Mr. Norberto Martinez, Assistant Vice President of Land Bank of the Philippines, Original Records, pp. 200-201. 31.See February 7, 1995 Comment on Plaintiff's Formal Offer of Exhibits filed by Monet, Original Records, p. 462. 32.Exhibit "MMM", Original Records, p. 437. 33.Exhibit "NNN", Original Records, pp. 438-457. 34.RTC Decision, p. 6, CA Rollo, p. 32.

SECOND DIVISION
[G.R. No. 146717. November 22, 2004.] TRANSFIELD PHILIPPINES, INC., petitioner, vs. LUZON HYDRO CORPORATION, AUSTRALIA and NEW ZEALAND BANKING GROUP LIMITED and SECURITY BANK CORPORATION, respondents. DECISION TINGA, J :
p

Subject of this case is the letter of credit which has evolved as the ubiquitous and most important device in international trade. A creation of commerce and businessmen, the letter of credit is also unique in the number of parties involved and its supranational character. Petitioner has appealed from the Decision 1 of the Court of Appeals in CA-G.R. SP No. 61901 entitled "Transfield Philippines, Inc. v. Hon. Oscar Pimentel, et al.," promulgated on 31 January 2001. 2 On 26 March 1997, petitioner and respondent Luzon Hydro Corporation (hereinafter, LHC) entered into a Turnkey Contract 3whereby petitioner, as Turnkey Contractor, undertook to construct, on a turnkey basis, a seventy (70)Megawatt hydro-electric power station at the Bakun River in the provinces of Benguet and Ilocos Sur (hereinafter, the Project). Petitioner was given the sole responsibility for the design, construction, commissioning, testing and completion of the Project. 4 The Turnkey Contract provides that: (1) the target completion date of the Project shall be on 1 June 2000, or such later date as may be agreed upon between petitioner and respondent LHC or otherwise determined in accordance with the Turnkey Contract; and (2) petitioner is entitled to claim extensions of time (EOT) for reasons enumerated in the Turnkey Contract, among which are variations, force majeure, and delays caused by LHC itself. 5 Further, in case of dispute, the parties are bound to settle their differences through mediation, conciliation and such other means enumerated under Clause 20.3 of the Turnkey Contract. 6

To secure performance of petitioner's obligation on or before the target completion date, or such time for completion as may be determined by the parties' agreement, petitioner opened in favor of LHC two (2) standby letters of credit both dated 20 March 2000 (hereinafter referred to as "the Securities"), to wit: Standby Letter of Credit No. E001126/8400 with the local branch of respondent Australia and New Zealand Banking Group Limited (ANZ Bank) 7 and Standby Letter of Credit No. IBDIDSB-00/4 with respondent Security Bank Corporation (SBC) 8 each in the amount of US$8,988,907.00. 9 In the course of the construction of the project, petitioner sought various EOT to complete the Project. The extensions were requested allegedly due to several factors which prevented the completion of the Project on target date, such asforce majeure occasioned by typhoon Zeb, barricades and demonstrations. LHC denied the requests, however. This gave rise to a series of legal actions between the parties which culminated in the instant petition. The first of the actions was a Request for Arbitration which LHC filed before the Construction Industry Arbitration Commission (CIAC) on 1 June 1999. 10 This was followed by another Request for Arbitration, this time filed by petitioner before the International Chamber of Commerce (ICC) 11 on 3 November 2000. In both arbitration proceedings, the common issues presented were: [1] whether typhoon Zeb and any of its associated events constituted force majeure to justify the extension of time sought by petitioner; and [2] whether LHC had the right to terminate the Turnkey Contract for failure of petitioner to complete the Project on target date.
CcHDSA

Meanwhile, foreseeing that LHC would call on the Securities pursuant to the pertinent provisions of the Turnkey Contract,12 petitioner in two separate letters 13 both dated 10 August 2000 advised respondent banks of the arbitration proceedings already pending before the CIAC and ICC in connection with its alleged default in the performance of its obligations. Asserting that LHC had no right to call on the Securities until the resolution of disputes before the arbitral tribunals, petitioner warned respondent banks that any transfer, release, or disposition of the Securities in favor of LHC or any person claiming under LHC would constrain it to hold respondent banks liable for liquidated damages. As petitioner had anticipated, on 27 June 2000, LHC sent notice to petitioner that pursuant to Clause 8.2 14 of the Turnkey Contract, it failed to comply with its obligation to complete the Project. Despite the letters of petitioner, however, both banks informed petitioner that they would pay on the Securities if and when LHC calls on them. 15

LHC asserted that additional extension of time would not be warranted; accordingly it declared petitioner in default/delay in the performance of its obligations under the Turnkey Contract and demanded from petitioner the payment of US$75,000.00 for each day of delay beginning 28 June 2000 until actual completion of the Project pursuant to Clause 8.7.1 of the Turnkey Contract. At the same time, LHC served notice that it would call on the securities for the payment of liquidated damages for the delay. 16 On 5 November 2000, petitioner as plaintiff filed a Complaint for Injunction, with prayer for temporary restraining order and writ of preliminary injunction, against herein respondents as defendants before the Regional Trial Court (RTC) of Makati. 17Petitioner sought to restrain respondent LHC from calling on the Securities and respondent banks from transferring, paying on, or in any manner disposing of the Securities or any renewals or substitutes thereof. The RTC issued a seventy-two (72)-hour temporary restraining order on the same day. The case was docketed as Civil Case No. 00-1312 and raffled to Branch 148 of the RTC of Makati. After appropriate proceedings, the trial court issued an Order on 9 November 2000, extending the temporary restraining order for a period of seventeen (17) days or until 26 November 2000. 18 The RTC, in its Order 19 dated 24 November 2000, denied petitioner's application for a writ of preliminary injunction. It ruled that petitioner had no legal right and suffered no irreparable injury to justify the issuance of the writ. Employing the principle of "independent contract" in letters of credit, the trial court ruled that LHC should be allowed to draw on the Securities for liquidated damages. It debunked petitioner's contention that the principle of "independent contract" could be invoked only by respondent banks since according to it respondent LHC is the ultimate beneficiary of the Securities. The trial court further ruled that the banks were mere custodians of the funds and as such they were obligated to transfer the same to the beneficiary for as long as the latter could submit the required certification of its claims. Dissatisfied with the trial court's denial of its application for a writ of preliminary injunction, petitioner elevated the case to the Court of Appeals via a Petition for Certiorari under Rule 65, with prayer for the issuance of a temporary restraining order and writ of preliminary injunction. 20 Petitioner submitted to the appellate court that LHC's call on the Securities was premature considering that the issue of its default had not yet been resolved with finality by the CIAC and/or the ICC.

It asserted that until the fact of delay could be established, LHC had no right to draw on the Securities for liquidated damages. Refuting petitioner's contentions, LHC claimed that petitioner had no right to restrain its call on and use of the Securities as payment for liquidated damages. It averred that the Securities are independent of the main contract between them as shown on the face of the two Standby Letters of Credit which both provide that the banks have no responsibility to investigate the authenticity or accuracy of the certificates or the declarant's capacity or entitlement to so certify. In its Resolution dated 28 November 2000, the Court of Appeals issued a temporary restraining order, enjoining LHC from calling on the Securities or any renewals or substitutes thereof and ordering respondent banks to cease and desist from transferring, paying or in any manner disposing of the Securities. However, the appellate court failed to act on the application for preliminary injunction until the temporary restraining order expired on 27 January 2001. Immediately thereafter, representatives of LHC trooped to ANZ Bank and withdrew the total amount of US$4,950,000.00, thereby reducing the balance in ANZ Bank to US$1,852,814.00. On 2 February 2001, the appellate court dismissed the petition for certiorari. The appellate court expressed conformity with the trial court's decision that LHC could call on the Securities pursuant to the first principle in credit law that the credit itself is independent of the underlying transaction and that as long as the beneficiary complied with the credit, it was of no moment that he had not complied with the underlying contract. Further, the appellate court held that even assuming that the trial court's denial of petitioner's application for a writ of preliminary injunction was erroneous, it constituted only an error of judgment which is not correctible by certiorari, unlike error of jurisdiction. Undaunted, petitioner filed the instant Petition for Review raising the following issues for resolution:
WHETHER THE "INDEPENDENCE PRINCIPLE" ON LETTERS OF CREDIT MAY BE INVOKED BY A BENEFICIARY THEREOF WHERE THE BENEFICIARY'S CALL THEREON IS WRONGFUL OR FRAUDULENT. WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE SECURITIES BEFORE THE RESOLUTION OF PETITIONER'S AND LHC'S DISPUTES BY THE APPROPRIATE TRIBUNAL.
HAaScT

WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN RELEASING THE AMOUNTS DUE UNDER THE SECURITIES DESPITE BEING NOTIFIED THAT LHC'S CALL THEREON IS WRONGFUL. WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND IRREPARABLE DAMAGE IN THE EVENT THAT:

A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ BANK AND SECURITY BANK ARE ALLOWED TO RELEASE, THE REMAINING BALANCE OF THE SECURITIES PRIOR TO THE RESOLUTION OF THE DISPUTES BETWEEN PETITIONER AND LHC. B. LHC DOES NOT RETURN THE AMOUNTS IT HAD WRONGFULLY DRAWN FROM THE SECURITIES. 21

Petitioner contends that the courts below improperly relied on the "independence principle" on letters of credit when this case falls squarely within the "fraud exception rule." Respondent LHC deliberately misrepresented the supposed existence of delay despite its knowledge that the issue was still pending arbitration, petitioner continues. Petitioner asserts that LHC should be ordered to return the proceeds of the Securities pursuant to the principle against unjust enrichment and that, under the premises, injunction was the appropriate remedy obtainable from the competent local courts. On 25 August 2003, petitioner filed a Supplement to the Petition 22 and Supplemental Memorandum, 23 alleging that in the course of the proceedings in the ICC Arbitration, a number of documentary and testimonial evidence came out through the use of different modes of discovery available in the ICC Arbitration. It contends that after the filing of the petition facts and admissions were discovered which demonstrate that LHC knowingly misrepresented that petitioner had incurred delays notwithstanding its knowledge and admission that delays were excused under the Turnkey Contract to be able to draw against the Securities. Reiterating that fraud constitutes an exception to the independence principle, petitioner urges that this warrants a ruling from this Court that the call on the Securities was wrongful, as well as contrary to law and basic principles of equity. It avers that it would suffer grave irreparable damage if LHC would be allowed to use the proceeds of the

Securities and not ordered to return the amounts it had wrongfully drawn thereon. In its Manifestationdated 8 September 2003, 24 LHC contends that the supplemental pleadings filed by petitioner present erroneous and misleading information which would change petitioner's theory on appeal. In yet another Manifestation dated 12 April 2004, 25 petitioner alleges that on 18 February 2004, the ICC handed down its Third Partial Award, declaring that LHC wrongfully drew upon the Securities and that petitioner was entitled to the return of the sums wrongfully taken by LHC for liquidated damages. LHC filed a Counter-Manifestation dated 29 June 2004, 26 stating that petitioner's Manifestation dated 12 April 2004 enlarges the scope of its Petition for Review of the 31 January 2001 Decision of the Court of Appeals. LHC notes that thePetition for Review essentially dealt only with the issue of whether injunction could issue to restrain the beneficiary of an irrevocable letter of credit from drawing thereon. It adds that petitioner has filed two other proceedings, to wit: (1) ICC Case No. 11264/TE/MW, entitled "Transfield Philippines Inc. v. Luzon Hydro Corporation," in which the parties made claims and counterclaims arising from petitioner's performance/misperformance of its obligations as contractor for LHC; and (2) Civil Case No. 04-332, entitled "Transfield Philippines, Inc. v. Luzon Hydro Corporation" before Branch 56 of the RTC of Makati, which is an action to enforce and obtain execution of the ICC's partial award mentioned in petitioner'sManifestation of 12 April 2004. In its Comment to petitioner's Motion for Leave to File Addendum to Petitioner's Memorandum, LHC stresses that the question of whether the funds it drew on the subject letters of credit should be returned is outside the issue in this appeal. At any rate, LHC adds that the action to enforce the ICC's partial award is now fully within the Makati RTC's jurisdiction in Civil Case No. 04-332. LHC asserts that petitioner is engaged in forum-shopping by keeping this appeal and at the same time seeking the suit for enforcement of the arbitral award before the Makati court. Respondent SBC in its Memorandum, dated 10 March 2003 27 contends that the Court of Appeals correctly dismissed the petition for certiorari. Invoking the independence principle, SBC argues that it was under no obligation to look into the validity or accuracy of the certification submitted by respondent LHC or into the latter's capacity or entitlement to so certify. It adds that the act sought to be

enjoined by petitioner was already fait accompli and the present petition would no longer serve any remedial purpose. In a similar fashion, respondent ANZ Bank in its Memorandum dated 13 March 2003 28 posits that its actions could not be regarded as unjustified in view of the prevailing independence principle under which it had no obligation to ascertain the truth of LHC's allegations that petitioner defaulted in its obligations. Moreover, it points out that since the Standby Letter of Credit No. E001126/8400 had been fully drawn, petitioner's prayer for preliminary injunction had been rendered moot and academic. At the core of the present controversy is the applicability of the "independence principle" and "fraud exception rule" in letters of credit. Thus, a discussion of the nature and use of letters of credit, also referred to simply as "credits," would provide a better perspective of the case. The letter of credit evolved as a mercantile specialty, and the only way to understand all its facets is to recognize that it is an entity unto itself. The relationship between the beneficiary and the issuer of a letter of credit is not strictly contractual, because both privity and a meeting of the minds are lacking, yet strict compliance with its terms is an enforceable right. Nor is it a third-party beneficiary contract, because the issuer must honor drafts drawn against a letter regardless of problems subsequently arising in the underlying contract. Since the bank's customer cannot draw on the letter, it does not function as an assignment by the customer to the beneficiary. Nor, if properly used, is it a contract of suretyship or guarantee, because it entails a primary liability following a default. Finally, it is not in itself a negotiable instrument, because it is not payable to order or bearer and is generally conditional, yet the draft presented under it is often negotiable. 29 In commercial transactions, 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. 30 The use of credits in commercial transactions serves to reduce the risk of nonpayment of the purchase price under the contract for the sale of goods. However, credits are also used in non-sale settings where they serve to reduce the risk of nonperformance. Generally, credits in the non-sale settings have come to be known as standby credits. 31

There are three significant differences between commercial and standby credits. First, commercial credits involve the payment of money under a contract of sale. 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. In the standby type, the credit is payable upon certification of a party's nonperformance of the agreement. The documents that accompany the beneficiary's draft tend to show that the applicant has not performed. The beneficiary of a commercial credit must demonstrate by documents that he has performed his contract. The beneficiary of the standby credit must certify that his obligor has not performed the contract. 32 By definition, a letter of credit is a written instrument 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. 33 A letter of credit, however, changes its nature as different transactions occur and if carried through to completion ends up as a binding contract between the issuing and honoring banks without any regard or relation to the underlying contract or disputes between the parties thereto. 34 Since letters of credit have gained general acceptability in international trade transactions, the ICC has published from time to time updates on the Uniform Customs and Practice (UCP) for Documentary Credits to standardize practices in the letter of credit area. The vast majority of letters of credit incorporate the UCP. 35 First published in 1933, the UCP for Documentary Credits has undergone several revisions, the latest of which was in 1993. 36 In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc., 37 this Court ruled that the observance of the UCP is justified by Article 2 of the Code of Commerce which provides that in the absence of any particular provision in the Code of Commerce, commercial transactions shall be governed by usages and customs generally observed. More recently, in Bank of America, NT & SA v. Court of Appeals, 38 this Court ruled that there being no specific provisions which govern the legal complexities arising from transactions involving letters of credit, not only between or among banks themselves but also between banks and the seller or the buyer, as the case may be, the applicability of the UCP is undeniable.
IaSAHC

Article 3 of the UCP provides that credits, by their nature, are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the credit. Consequently,

the undertaking of a bank to pay, accept and pay draft(s) or negotiate and/or fulfill any other obligation under the credit is not subject to claims or defenses by the applicant resulting from his relationships with the issuing bank or the beneficiary. A beneficiary can in no case avail himself of the contractual relationships existing between the banks or between the applicant and the issuing bank.

Thus, 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. The socalled "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. Under this principle, banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the general and/or particular conditions stipulated in the documents or superimposed thereon, nor do they assume any liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any documents, or for the good faith or acts and/or omissions, solvency, performance or standing of the consignor, the carriers, or the insurers of the goods, or any other person whomsoever. 39 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; or (b) independence may be only as to the justification aspect like in a commercial letter of credit or repayment standby, which is identical with the same obligations under the underlying agreement. 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. 40 Can the beneficiary invoke the independence principle? Petitioner insists that the independence principle does not apply to the instant case and assuming it is so, it is a defense available only to respondent banks. LHC, on the other hand, contends that it would be contrary to common sense to deny the benefit of an independent contract to the very party for whom the benefit is intended. As beneficiary of the letter of credit, LHC asserts it is entitled to invoke the principle.

As discussed above, in a letter of credit transaction, such as in this case, where the credit is stipulated as irrevocable, there is a definite undertaking by the issuing bank to pay the beneficiary provided that the stipulated documents are presented and the conditions of the credit are complied with. 41 Precisely, the independence principle liberates the issuing bank from the duty of ascertaining compliance by the parties in the main contract. As the principle's nomenclature clearly suggests, the obligation under the letter of credit is independent of the related and originating contract. In brief, the letter of credit is separate and distinct from the underlying transaction. Given the nature of letters of credit, petitioner's argument that it is only the issuing bank that may invoke the independence principle on letters of credit does not impress this Court. To say that the independence principle may only be invoked by the issuing banks would render nugatory the purpose for which the letters of credit are used in commercial transactions. As it is, the independence doctrine works to the benefit of both the issuing bank and the beneficiary. Letters of credit are employed by the parties desiring to enter into commercial transactions, not for the benefit of the issuing bank but mainly for the benefit of the parties to the original transactions. With the letter of credit from the issuing bank, the party who applied for and obtained it may confidently present the letter of credit to the beneficiary as a security to convince the beneficiary to enter into the business transaction. On the other hand, the other party to the business transaction, i.e., the beneficiary of the letter of credit, can be rest assured 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." Petitioner's argument that any dispute must first be resolved by the parties, whether through negotiations or arbitration, before the beneficiary is entitled to call on the letter of credit in essence would convert the letter of credit into a mere guarantee. Jurisprudence has laid down a clear distinction between a letter of credit and a guarantee in that the settlement of a dispute between the parties is not a pre-requisite for the release of funds under a letter of credit. In other words, the argument is incompatible with the very nature of the letter of credit. If a letter of credit is drawable only after settlement of the dispute on the contract entered into by the applicant and the beneficiary, there would be no practical and beneficial use for letters of credit in commercial transactions.

Professor John F. Dolan, the noted authority on letters of credit, sheds more light on the issue:
The standby credit is an attractive commercial device for many of the same reasons that commercial credits are attractive. Essentially, these credits are inexpensive and efficient. Often they replace surety contracts, which tend to generate higher costs than credits do and are usually triggered by a factual determination rather than by the examination of documents.
HTCISE

Because parties and courts should not confuse the different functions of the surety contract on the one hand and the standby credit on the other, the distinction between surety contracts and credits merits some reflection. The two commercial devices share a common purpose. Both ensure against the obligor's nonperformance. They function, however, in distinctly different ways. Traditionally, upon the obligor's default, the surety undertakes to complete the obligor's performance, usually by hiring someone to complete that performance. Surety contracts, then, often involve costs of determining whether the obligor defaulted (a matter over which the surety and the beneficiary often litigate) plus the cost of performance. The benefit of the surety contract to the beneficiary is obvious. He knows that the surety, often an insurance company, is a strong financial institution that will perform if the obligor does not. The beneficiary also should understand that such performance must await the sometimes lengthy and costly determination that the obligor has defaulted. In addition, the surety's performance takes time. The standby credit has different expectations. He reasonably expects that he will receive cash in the event of nonperformance, that he will receive it promptly, and that he will receive it before any litigation with the obligor (the applicant) over the nature of the applicant's performance takes place. The standby credit has this opposite effect of the surety contract: it reverses the financial burden of parties during litigation. In the surety contract setting, there is no duty to indemnify the beneficiary until the beneficiary establishes the fact of the obligor's performance. The beneficiary may have to establish that fact in litigation. During the litigation, the surety holds the money and the beneficiary bears most of the cost of delay in performance.

In the standby credit case, however, the beneficiary avoids that litigation burden and receives his money promptly upon presentation of the required documents. It may be that the applicant has, in fact, performed and that the beneficiary's presentation of those documents is not rightful. In that case, the applicant may sue the beneficiary in tort, in contract, or in breach of warranty; but, during the litigation to determine whether the applicant has in fact breached the obligation to perform, the beneficiary, not the applicant, holds the money. Parties that use a standby credit and courts construing such a credit should understand this allocation of burdens. There is a tendency in some quarters to overlook this distinction between surety contracts and standby credits and to reallocate burdens by permitting the obligor or the issuer to litigate the performance question before payment to the beneficiary. 42

While it is the bank which is bound to honor the credit, it is the beneficiary who has the right to ask the bank to honor the credit by allowing him to draw thereon. The situation itself emasculates petitioner's posture that LHC cannot invoke the independence principle and highlights its puerility, more so in this case where the banks concerned were impleaded as parties by petitioner itself. Respondent banks had squarely raised the independence principle to justify their releases of the amounts due under the Securities. Owing to the nature and purpose of the standby letters of credit, this Court rules that the respondent banks were left with little or no alternative but to honor the credit and both of them in fact submitted that it was "ministerial" for them to honor the call for payment. 43 Furthermore, LHC has a right rooted in the Contract to call on the Securities. The relevant provisions of the Contract read, thus:
4.2.1. In order to secure the performance of its obligations under this Contract, the Contractor at its cost shall on the Commencement Date provide security to the Employer in the form of two irrevocable and

confirmed standby letters of credit (the "Securities"), each in the amount of US$8,988,907, issued and confirmed by banks or financial institutions acceptable to the Employer. Each of the Securities must be in form and
substance acceptable to the Employer and may be provided on an annually renewable basis. 44

8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor

shall pay to the Employer by way of liquidated damages ("Liquidated Damages for Delay") the amount of US$75,000 for each and every day or part of a day that shall elapse between the Target Completion Date

and the Completion Date, provided that Liquidated Damages for Delay

payable by the Contractor shall in the aggregate not exceed 20% of the Contract Price. The Contractor shall pay Liquidated Damages for Delay for each day of the delay on the following day without need of demand from the Employer.

8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount of such damagesfrom any monies due, or to become due to the Contractor and/or by drawing on the Security." 45

A contract once perfected, binds the parties not only to the fulfillment of what has been expressly stipulated but also to all the consequences which according to their nature, may be in keeping with good faith, usage, and law. 46 A careful perusal of the Turnkey Contract reveals the intention of the parties to make the Securities answerable for the liquidated damages occasioned by any delay on the part of petitioner. The call upon the Securities, while not an exclusive remedy on the part of LHC, is certainly an alternative recourse available to it upon the happening of the contingency for which the Securities have been proffered. Thus, even without the use of the "independence principle," the Turnkey Contract itself bestows upon LHC the right to call on the Securities in the event of default. Next, petitioner invokes the "fraud exception" principle. It avers that LHC's call on the Securities is wrongful because it fraudulently misrepresented to ANZ Bank and SBC that there is already a breach in the Turnkey Contract knowing fully well that this is yet to be determined by the arbitral tribunals. It asserts that the "fraud exception" exists when the beneficiary, for the purpose of drawing on the credit, fraudulently presents to the confirming bank, documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue. In such a situation, petitioner insists, injunction is recognized as a remedy available to it.
ICTHDE

Citing Dolan's treatise on letters of credit, petitioner argues that the independence principle is not without limits and it is important to fashion those limits in light of the principle's purpose, which is to serve the commercial function of the credit. If it does not serve those functions, application of the principle is not warranted, and the commonlaw principles of contract should apply. It is worthy of note that the propriety of LHC's call on the Securities is largely intertwined with the fact of default which is the self-same issue pending

resolution before the arbitral tribunals. To be able to declare the call on the Securities wrongful or fraudulent, it is imperative to resolve, among others, whether petitioner was in fact guilty of delay in the performance of its obligation. Unfortunately for petitioner, this Court is not called upon to rule upon the issue of default such issue having been submitted by the parties to the jurisdiction of the arbitral tribunals pursuant to the terms embodied in their agreement. 47 Would injunction then be the proper remedy to restrain the alleged wrongful draws on the Securities? 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. 48 The remedy for fraudulent abuse is an injunction. However, injunction should not be granted unless: (a) there is clear proof of fraud; (b) the fraud constitutes fraudulent abuse of the independent purpose of the letter of credit and not only fraud under the main agreement; and (c) irreparable injury might follow if injunction is not granted or the recovery of damages would be seriously damaged. 49 In its complaint for injunction before the trial court, petitioner alleged that it is entitled to a total extension of two hundred fifty-three (253) days which would move the target completion date. It argued that if its claims for extension would be found meritorious by the ICC, then LHC would not be entitled to any liquidated damages. 50 Generally, injunction is a preservative remedy for the protection of one's substantive right or interest; it is not a cause of action in itself but merely a provisional remedy, an adjunct to a main suit. The issuance of the writ of preliminary injunction as an ancillary or preventive remedy to secure the rights of a party in a pending case is entirely within the discretion of the court taking cognizance of the case, the only limitation being that this discretion should be exercised based upon the grounds and in the manner provided by law. 51 Before a writ of preliminary injunction may be issued, there must be a clear showing by the complaint that there exists a right to be protected and that the acts against which the writ is to be directed are violative of the said right. 52 It must be shown that the invasion of the right sought to be protected is material and substantial, that the right of complainant is clear and unmistakable and that there is an urgent and paramount necessity for the writ to prevent serious damage. 53Moreover, an injunctive remedy may only be resorted to when there is

a pressing necessity to avoid injurious consequences which cannot be remedied under any standard compensation. 54 In the instant case, petitioner failed to show that it has a clear and unmistakable right to restrain LHC's call on the Securities which would justify the issuance of preliminary injunction. By petitioner's own admission, the right of LHC to call on the Securities was contractually rooted and subject to the express stipulations in the Turnkey Contract. 55 Indeed, the Turnkey Contract is plain and unequivocal in that it conferred upon LHC the right to draw upon the Securities in case of default, as provided in Clause 4.2.5, in relation to Clause 8.7.2, thus:
4.2.5 The Employer shall give the Contractor seven days' notice of calling upon any of the Securities, stating the nature of the default for which the claim on any of the Securities is to be made, provided that no

notice will be required if the Employer calls upon any of the Securities for the payment of Liquidated Damages for Delay or for failure by the
Contractor to renew or extend the Securities within 14 days of their expiration in accordance with Clause 4.2.2. 56

8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount of such damages from any monies due, or to become due, to the Contractor and/or by drawing on the Security. 57

The pendency of the arbitration proceedings would not per se make LHC's draws on the Securities wrongful or fraudulent for there was nothing in the Contract which would indicate that the parties intended that all disputes regarding delay should first be settled through arbitration before LHC would be allowed to call upon the Securities. It is therefore premature and absurd to conclude that the draws on the Securities were outright fraudulent given the fact that the ICC and CIAC have not ruled with finality on the existence of default. Nowhere in its complaint before the trial court or in its pleadings filed before the appellate court, did petitioner invoke the fraud exception rule as a ground to justify the issuance of an injunction. 58 What petitioner did assert before the courts below was the fact that LHC's draws on the Securities would be premature and without basis in view of the pending disputes between them. Petitioner should not be allowed in this instance to bring into play the fraud exception rule to sustain its claim for the issuance of an injunctive relief. Matters, theories or arguments not brought out in the proceedings below will ordinarily not be considered by a reviewing court as they cannot be raised for the first time on appeal. 59 The lower courts could thus not be faulted for not applying the fraud exception rule not only because the existence of fraud was fundamentally

interwoven with the issue of default still pending before the arbitral tribunals, but more so, because petitioner never raised it as an issue in its pleadings filed in the courts below. At any rate, petitioner utterly failed to show that it had a clear and unmistakable right to prevent LHC's call upon the Securities. Of course, prudence should have impelled LHC to await resolution of the pending issues before the arbitral tribunals prior to taking action to enforce the Securities. But, as earlier stated, the Turnkey Contract did not require LHC to do so and, therefore, it was merely enforcing its rights in accordance with the tenor thereof. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. 60 More importantly, pursuant to the principle of autonomy of contracts embodied in Article 1306 of the Civil Code, 61 petitioner could have incorporated in its Contract with LHC, a proviso that only the final determination by the arbitral tribunals that default had occurred would justify the enforcement of the Securities. However, the fact is petitioner did not do so; hence, it would have to live with its inaction. With respect to the issue of whether the respondent banks were justified in releasing the amounts due under the Securities, this Court reiterates that pursuant to the independence principle the banks were under no obligation to determine the veracity of LHC's certification that default has occurred. Neither were they bound by petitioner's declaration that LHC's call thereon was wrongful. To repeat, respondent banks' undertaking was simply to pay once the required documents are presented by the beneficiary. At any rate, should petitioner finally prove in the pending arbitration proceedings that LHC's draws upon the Securities were wrongful due to the non-existence of the fact of default, its right to seek indemnification for damages it suffered would not normally be foreclosed pursuant to general principles of law. Moreover, in a Manifestation, 62 dated 30 March 2001, LHC informed this Court that the subject letters of credit had been fully drawn. This fact alone would have been sufficient reason to dismiss the instant petition.
HAICTD

Settled is the rule that injunction would not lie where the acts sought to be enjoined have already become fait accompli or an accomplished or consummated act. 63 In Ticzon v. Video Post Manila, Inc. 64 this Court ruled that where the period within which the former employees were prohibited from engaging in or working for an enterprise that competed with their former employer the very purpose of the preliminary injunction has expired, any declaration upholding

the propriety of the writ would be entirely useless as there would be no actual case or controversy between the parties insofar as the preliminary injunction is concerned. In the instant case, the consummation of the act sought to be restrained had rendered the instant petition moot for any declaration by this Court as to propriety or impropriety of the non-issuance of injunctive relief could have no practical effect on the existing controversy. 65 The other issues raised by petitioner particularly with respect to its right to recover the amounts wrongfully drawn on the Securities, according to it, could properly be threshed out in a separate proceeding. One final point. LHC has charged petitioner of forum-shopping. It raised the charge on two occasions. First, in its Counter-Manifestation dated 29 June 2004 66 LHC alleges that petitioner presented before this Court the same claim for money which it has filed in two other proceedings, to wit: ICC Case No. 11264/TE/MW and Civil Case No. 04-332 before the RTC of Makati. LHC argues that petitioner's acts constitutes forum-shopping which should be punished by the dismissal of the claim in both forums. Second, in its Comment to Petitioner's Motion for Leave to File Addendum to Petitioner's Memorandum dated 8 October 2004, LHC alleges that by maintaining the present appeal and at the same time pursuing Civil Case No. 04-332 wherein petitioner pressed for judgment on the issue of whether the funds LHC drew on the Securities should be returned petitioner resorted to forum-shopping. In both instances, however, petitioner has apparently opted not to respond to the charge. Forum-shopping is a very serious charge. It exists when a party repetitively avails of several judicial remedies in different courts, simultaneously or successively, all substantially founded on the same transactions and the same essential facts and circumstances, and all raising substantially the same issues either pending in, or already resolved adversely, by some other court. 67 It may also consist in the act of a party against whom an adverse judgment has been rendered in one forum, of seeking another and possibly favorable opinion in another forum other than by appeal or special civil action of certiorari, or the institution of two or more actions or proceedings grounded on the same cause on the supposition that one or the other court might look with favor upon the other party. 68 To determine whether a party violated the rule against forumshopping, the test applied is whether the elements of litis pendentia are present or whether a final judgment in one case will amount to res judicata in another. 69 Forum-shopping constitutes improper conduct and may be punished with summary dismissal of the multiple petitions and direct contempt of court. 70

Considering the seriousness of the charge of forum-shopping and the severity of the sanctions for its violation, the Court will refrain from making any definitive ruling on this issue until after petitioner has been given ample opportunity to respond to the charge. WHEREFORE, the instant petition is DENIED, with costs against petitioner. Petitioner is hereby required to answer the charge of forum-shopping within fifteen (15) days from notice. SO ORDERED.

Puno, Austria-Martinez, Callejo, Sr. and Chico-Nazario, JJ ., concur.

Footnotes

1. Penned by Justice Candido V. Rivera, concurred in by Justices Conchita CarpioMorales and Rebecca de Guia-Salvador. 2. Rollo, pp. 5261. 3. Id. at 62252. 4. Id. at 7576. 5. Clause 1.1, Volume II of the Turnkey Contract, Rollo, p. 81. 6. 20.3 Dispute Resolution. If at anytime any dispute or difference shall arise between the Employer and the Contractor in connection with or arising out of this Contract or the carrying out of the Works, the parties together shall in good faith exert all efforts to resolve such dispute or difference by whatever means they deem appropriate, including conciliation, mediation and seeking the assistance of technical, accounting or other experts. At the request of any party, the chief executives of the Employer and the Contractor shall meet in a good-faith effort to reach an amicable settlement of the dispute or difference. Any dispute or difference that the parties are unable to resolve within a reasonable time may, at the option of either party, be referred to arbitration in accordance with Clause 20.4. (Id. at 179) 7. Annex "C," Rollo, pp. 254256. 8. Annex "D," Id. at 257259.

9. Clause 4.2.1, Volume II of the Turnkey Contract, Id. at 94. 10. Id. at 261265. 11. Id. at 359382. 12. Turnkey Contract, Clause 4.2.5, Rollo, p. 94, in relation to Clause 8.7.1., Rollo, p. 132. 13. Annex "H," Rollo, pp. 287289; Annex "H-1," Rollo, pp. 320322. 14. Clause 8.2. Time for Completion. The Contractor shall complete all the Works, including the Tests on Completion, in accordance with the Program on or before the Target Completion Date. (Rollo, p. 125) 15. Vol. 1, Rollo, pp. 355357. 16. 8.7.1. If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to the Employer by way of liquidated damages ("Liquidated Damages for Delay") the amount of US$75,000 for each and every day or part of a day that shall elapse between the Target Completion Date and the Completion Date, provided that Liquidated Damages for Delay payable by the Contractor shall in the aggregate not exceed 20% of the Contract Price. The Contractor shall pay Liquidated Damages for Delay for each day of the delay on the following day without need of demand from the Employer. 17. Annex "L," Rollo, pp. 383402. 18. Annex "N," Id. at 406409. 19. Annex "O," Id. at 412423. 20. Docketed as CA-G.R. SP No. 61901. 21. Rollo, pp. 2526. 22. Vol. II; Id. at 278. 23. Id. at 7992. 24. Id. at 9598. 25. Id. at 109113.

26. Id. at 666671. 27. Id. at 598607. 28. Id. at 619630. 29. Joseph, Letters of Credit: The Developing Concepts and Financing Functions, 94 BANKING LAW JOURNAL 850851 [1977]cited in M. KURKELA, LETTERS OF CREDIT UNDER INTERNATIONAL TRADE LAW, 321 (1985). 30. Bank of America v. Court of Appeals, G.R. No. 105395, 10 December 1993, 228 SCRA 357 citing William S. Shaterian, EXPORT-IMPORT BANKING: THE INSTRUMENTS AND OPERATIONS UTILIZED BY AMERICAN EXPORTERS AND IMPORTERS AND THEIR BANKS IN FINANCING FOREIGN TRADE, 284374 (1947). 31. E&H Partners v. Broadway Nat'l Bank, 39 F. Supp. 2d 275, (United States Circuit Court, S.D. New York) No. 96 Civ. 7098 (RLC), 19 October 1998 <http: //www.westlaw.com>. 32. J. DOLAN, THE LAW OF LETTERS OF CREDIT, REVISED Ed. (2000). 33. 24 A WORDS AND PHRASES 590, Permanent Edition. 34. Ibid. 35. JACKSON & DAVEY, INTERNATIONAL ECONOMIC RELATIONS, 53 (2nd ed.). 36. ICC Publication No. 500. 37. 146 Phil. 269 (1970). 38. G.R. No. 105395, 10 December 1993, 228 SCRA 357. 39. Article 15, UCP. 40. KURKELA, LETTERS OF CREDIT UNDER INTERNATIONAL TRADE LAW, 286287 (1985). 41. Art. 10, UCP. 42. Supra note 32 at 127. 43. Rollo, pp. 604 and 624.

44. Emphasis supplied; Id. at 94. 45. Emphasis supplied; Id. at 132. 46. Art. 1315, Civil Code. 47. Clause 20.4.1, Turnkey Contract, Rollo, p. 179. 48. Supra note 32 at 263. 49. M. KURKELA, LETTERS OF CREDIT UNDER INTERNATIONAL TRADE LAW, 309 (1985). 50. Rollo, p. 391. 51. Batangas Laguna Tayabas Bus Company, Inc. v. Bitanga, 415 Phil. 43. 52. Shin v. Court of Appeals, G.R. No. 113627, 6 February 2001, 351 SCRA 257. 53. Zabat v. Court of Appeals, G.R. No. 122089, 23 August 2000, 338 SCRA 551; Philippine Economic Zone Authority v.Vianzon, G.R. No. 131020, 20 July 2000, 336 SCRA 309; Valencia v. Court of Appeals, G.R. No. 119118, 19 February 2001, 352 SCRA 72; Crystal v. Cebu International School, G.R. No. 135433, 4 April 2001, 356 SCRA 296; Ong Ching Kian Chuan v. Court of Appeals, 415 Phil. 365 (2001). 54. Philippine National Bank v. Ritratto Group, Inc., 414 Phil. 494 (2001). 55. Rollo, p. 31. 56. Emphasis supplied; Id. at 9495. 57. Id. at 132. 58. Vide Annex "L," Rollo. pp. 392399; Petition for Certiorari, CA Rollo, pp. 743. 59. Salafranca v. Philamlife Village Homeowners Association, Inc., 360 Phil. 652; Ruby Industrial Corporation v. Court of Appeals, 348 Phil. 480; Victorias Milling Co., Inc. v. Court of Appeals, 389 Phil. 184. 60. Article 1159, Civil Code. 61. Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.

62. Rollo, p. 493. 63. Aznar Brothers Realty Company v. Court of Appeals, G.R. No. 128102, 7 March 2000, 327 SCRA 359; Soriano v. Court of Appeals, 416 Phil. 226 (2001); Rodil Enterprises v. Court of Appeals, G.R. No. 129609, 29 November 2001, 371 SCRA 79; Unionbank of the Philippines v. Court of Appeals, 370 Phil. 837 (1999). 64. 389 Phil. 20 (2000). 65. BLACK'S LAW DICTIONARY, p. 1008, citing Leonhart v. McCormick, D.C. Pa., 395 F. Supp. 1073. 66. Vol. II, Rollo, pp. 666669. 67. Tantoy, Sr. v. Court of Appeals, G.R. No. 141427, April 20, 2001, 357 SCRA 329. 68. Bangko Silangan Development Bank v. Court of Appeals, 412 Phil. 755 (2001). 69. Tirona v. Alejo, G.R. No. 129313, October 10, 2001, 367 SCRA 17; Manalo v. Court of Appeals, G.R. No. 141297, October 8, 2001, 366 SCRA 752. 70. Tantoy, Sr. v. Court of Appeals, supra note 67.; Caviles v. Seventeenth Division, Court of Appeals, G.R. No. 126857, September 18, 2002, 389 SCRA 306.