G.R. No.

146717 November 22,

2004
TRANSFIELD PHILIPPINES, INC., petitioner,
vs.
LUZN H!DR CRPRATIN, AUSTRALIA
"#$ NE% ZEALAND &AN'ING GRUP
LI(ITED "#$ SECURIT! &AN'
CRPRATIN, respondents.
D E C I S I O N
TINGA, J.)
Subject of this case is the letter of credit which
has evolved as the ubiquitous and most
important device in international trade.
creation of commerce and businessmen, the
letter of credit is also unique in the number of
parties involved and its supranational
character.
!etitioner has appealed from the Decision
"
of
the Court of ppeals in C#$.%. S! No. &"'("
entitled )*rans+eld !hilippines, Inc. v. ,on.
Oscar !imentel, et al.,) promul-ated on ."
/anuar0 1((".
1
On 1& 2arch "''3, petitioner and respondent
4u5on ,0dro Corporation 6hereinafter, 4,C7
entered into a *urn8e0 Contract
.
whereb0
petitioner, as *urn8e0 Contractor, undertoo8 to
construct, on a turn8e0 basis, a sevent0 63(7#
2e-awatt h0dro#electric power station at the
9a8un %iver in the provinces of 9en-uet and
Ilocos Sur 6hereinafter, the !roject7. !etitioner
was -iven the sole responsibilit0 for the desi-n,
construction, commissionin-, testin- and
completion of the !roject.
:
*he *urn8e0 Contract provides that; 6"7 the
tar-et completion date of the !roject shall be
on " /une 1(((, or such later date as ma0 be
a-reed upon between petitioner and
respondent 4,C or otherwise determined in
accordance with the *urn8e0 Contract< and 617
petitioner is entitled to claim e=tensions of
time 6EO*7 for reasons enumerated in the
*urn8e0 Contract, amon- which are variations,
force majeure, and dela0s caused b0 4,C
itself.
>
?urther, in case of dispute, the parties
are bound to settle their di@erences throu-h
mediation, conciliation and such other means
enumerated under Clause 1(.. of the *urn8e0
Contract.
&
*o secure performance of petitionerAs obli-ation
on or before the tar-et completion date, or
such time for completion as ma0 be
determined b0 the partiesA a-reement,
petitioner opened in favor of 4,C two 617
standb0 letters of credit both dated 1( 2arch
1((( 6hereinafter referred to as )the
Securities)7, to wit; Standb0 4etter of Credit No.
E((""1&BC:(( with the local branch of
respondent ustralia and New Dealand 9an8in-
$roup 4imited 6ND 9an87
3
and Standb0 4etter
of Credit No. I9DIDS9#((B: with respondent
Securit0 9an8 Corporation 6S9C7
C
each in the
amount of ESFC,'CC,'(3.((.
'
In the course of the construction of the project,
petitioner sou-ht various EO* to complete the
!roject. *he e=tensions were requested
alle-edl0 due to several factors which
prevented the completion of the !roject on
tar-et date, such as force majeure occasioned
b0 t0phoon Deb, barricades and
demonstrations. 4,C denied the requests,
however. *his -ave rise to a series of le-al
actions between the parties which culminated
in the instant petition.
*he +rst of the actions was a %equest for
rbitration which 4,C +led before the
Construction Industr0 rbitration Commission
6CIC7 on " /une "'''.
"(
*his was followed b0
another %equest for rbitration, this time +led
b0 petitioner before the International Chamber
of Commerce 6ICC7
""
on . November 1(((. In
both arbitration proceedin-s, the common
issues presented were; G"7 whether t0phoon
Deb and an0 of its associated events
constituted force majeure to justif0 the
e=tension of time sou-ht b0 petitioner< and G17
whether 4,C had the ri-ht to terminate the
*urn8e0 Contract for failure of petitioner to
complete the !roject on tar-et date.
2eanwhile, foreseein- that 4,C would call on
the Securities pursuant to the pertinent
provisions of the *urn8e0 Contract,
"1
petitioner
Hin two separate letters
".
both dated "(
u-ust 1(((Hadvised respondent ban8s of the
arbitration proceedin-s alread0 pendin- before
the CIC and ICC in connection with its alle-ed
default in the performance of its obli-ations.
ssertin- that 4,C had no ri-ht to call on the
Securities until the resolution of disputes
before the arbitral tribunals, petitioner warned
respondent ban8s that an0 transfer, release, or
disposition of the Securities in favor of 4,C or
an0 person claimin- under 4,C would constrain
"
it to hold respondent ban8s liable for liquidated
dama-es.
s petitioner had anticipated, on 13 /une 1(((,
4,C sent notice to petitioner that pursuant to
Clause C.1
":
of the *urn8e0 Contract, it failed to
compl0 with its obli-ation to complete the
!roject. Despite the letters of petitioner,
however, both ban8s informed petitioner that
the0 would pa0 on the Securities if and when
4,C calls on them.
">
4,C asserted that additional e=tension of time
would not be warranted< accordin-l0 it
declared petitioner in defaultBdela0 in the
performance of its obli-ations under the
*urn8e0 Contract and demanded from
petitioner the pa0ment of ESF3>,(((.(( for
each da0 of dela0 be-innin- 1C /une 1((( until
actual completion of the !roject pursuant to
Clause C.3." of the *urn8e0 Contract. t the
same time, 4,C served notice that it would call
on the securities for the pa0ment of liquidated
dama-es for the dela0.
"&
On > November 1(((, petitioner as plainti@
+led a Complaint for Injunction, with pra0er for
temporar0 restrainin- order and writ of
preliminar0 injunction, a-ainst herein
respondents as defendants before the %e-ional
*rial Court 6%*C7 of 2a8ati.
"3
!etitioner sou-ht
to restrain respondent 4,C from callin- on the
Securities and respondent ban8s from
transferrin-, pa0in- on, or in an0 manner
disposin- of the Securities or an0 renewals or
substitutes thereof. *he %*C issued a sevent0#
two 6317#hour temporar0 restrainin- order on
the same da0. *he case was doc8eted as Civil
Case No. ((#"."1 and raIed to 9ranch ":C of
the %*C of 2a8ati.
fter appropriate proceedin-s, the trial court
issued an Order on ' November 1(((,
e=tendin- the temporar0 restrainin- order for a
period of seventeen 6"37 da0s or until 1&
November 1(((.
"C
*he %*C, in its Order
"'
dated 1: November
1(((, denied petitionerAs application for a writ
of preliminar0 injunction. It ruled that petitioner
had no le-al ri-ht and su@ered no irreparable
injur0 to justif0 the issuance of the writ.
Emplo0in- the principle of )independent
contract) in letters of credit, the trial court
ruled that 4,C should be allowed to draw on
the Securities for liquidated dama-es. It
debun8ed petitionerAs contention that the
principle of )independent contract) could be
invo8ed onl0 b0 respondent ban8s since
accordin- to it respondent 4,C is the ultimate
bene+ciar0 of the Securities. *he trial court
further ruled that the ban8s were mere
custodians of the funds and as such the0 were
obli-ated to transfer the same to the
bene+ciar0 for as lon- as the latter could
submit the required certi+cation of its claims.
Dissatis+ed with the trial courtAs denial of its
application for a writ of preliminar0 injunction,
petitioner elevated the case to the Court of
ppeals via a !etition for Certiorari under %ule
&>, with pra0er for the issuance of a temporar0
restrainin- order and writ of preliminar0
injunction.
1(
!etitioner submitted to the
appellate court that 4,CAs call on the Securities
was premature considerin- that the issue of its
default had not 0et been resolved with +nalit0
b0 the CIC andBor the ICC. It asserted that
until the fact of dela0 could be established,
4,C had no ri-ht to draw on the Securities for
liquidated dama-es.
%efutin- petitionerAs contentions, 4,C claimed
that petitioner had no ri-ht to restrain its call
on and use of the Securities as pa0ment for
liquidated dama-es. It averred that the
Securities are independent of the main
contract between them as shown on the face of
the two Standb0 4etters of Credit which both
provide that the ban8s have no responsibilit0 to
investi-ate the authenticit0 or accurac0 of the
certi+cates or the declarantAs capacit0 or
entitlement to so certif0.
In its %esolution dated 1C November 1(((, the
Court of ppeals issued a temporar0
restrainin- order, enjoinin- 4,C from callin- on
the Securities or an0 renewals or substitutes
thereof and orderin- respondent ban8s to
cease and desist from transferrin-, pa0in- or in
an0 manner disposin- of the Securities.
,owever, the appellate court failed to act on
the application for preliminar0 injunction until
the temporar0 restrainin- order e=pired on 13
/anuar0 1((". Immediatel0 thereafter,
representatives of 4,C trooped to ND 9an8
and withdrew the total amount of
ESF:,'>(,(((.((, thereb0 reducin- the
balance in ND 9an8 to ESF",C>1,C":.((.
On 1 ?ebruar0 1((", the appellate court
dismissed the petition for certiorari. *he
appellate court e=pressed conformit0 with the
trial courtAs decision that 4,C could call on the
Securities pursuant to the +rst principle in
credit law that the credit itself is independent
of the underl0in- transaction and that as lon-
1
as the bene+ciar0 complied with the credit, it
was of no moment that he had not complied
with the underl0in- contract. ?urther, the
appellate court held that even assumin- that
the trial courtAs denial of petitionerAs
application for a writ of preliminar0 injunction
was erroneous, it constituted onl0 an error of
jud-ment which is not correctible b0 certiorari,
unli8e error of jurisdiction.
Endaunted, petitioner +led the instant !etition
for %eview raisin- the followin- issues for
resolution;
J,E*,E% *,E )INDE!ENDENCE
!%INCI!4E) ON 4E**E%S O? C%EDI*
2K 9E INLOMED 9K 9ENE?ICI%K
*,E%EO? J,E%E *,E 9ENE?ICI%KAS
C44 *,E%EON IS J%ON$?E4 O%
?%EDE4EN*.
J,E*,E% 4,C ,S *,E %I$,* *O
C44 ND D%J ON *,E SECE%I*IES
9E?O%E *,E %ESO4E*ION O?
!E*I*IONE%AS ND 4,CAS DIS!E*ES 9K
*,E !!%O!%I*E *%I9EN4.
J,E*,E% ND 9NM ND SECE%I*K
9NM %E /ES*I?IED IN %E4ESIN$ *,E
2OEN*S DEE ENDE% *,E SECE%I*IES
DES!I*E 9EIN$ NO*I?IED *,* 4,CAS
C44 *,E%EON IS J%ON$?E4.
J,E*,E% O% NO* !E*I*IONE% JI44
SE??E% $%LE ND I%%E!%94E
D2$E IN *,E ELEN* *,*;
. 4,C IS 44OJED *O C44
ND D%J ON, ND ND 9NM
ND SECE%I*K 9NM %E
44OJED *O %E4ESE, *,E
%E2ININ$ 94NCE O? *,E
SECE%I*IES !%IO% *O *,E
%ESO4E*ION O? *,E DIS!E*ES
9E*JEEN !E*I*IONE% ND
4,C.
9. 4,C DOES NO* %E*E%N *,E
2OEN*S I* ,D
J%ON$?E44K D%JN ?%O2
*,E SECE%I*IES.
1"
!etitioner contends that the courts below
improperl0 relied on the )independence
principle) on letters of credit when this case
falls squarel0 within the )fraud e=ception rule.)
%espondent 4,C deliberatel0 misrepresented
the supposed e=istence of dela0 despite its
8nowled-e that the issue was still pendin-
arbitration, petitioner continues.
!etitioner asserts that 4,C should be ordered
to return the proceeds of the Securities
pursuant to the principle a-ainst unjust
enrichment and that, under the premises,
injunction was the appropriate remed0
obtainable from the competent local courts.
On 1> u-ust 1((., petitioner +led a
Supplement to the !etition
11
and Supplemental
2emorandum,
1.
alle-in- that in the course of
the proceedin-s in the ICC rbitration, a
number of documentar0 and testimonial
evidence came out throu-h the use of di@erent
modes of discover0 available in the ICC
rbitration. It contends that after the +lin- of
the petition facts and admissions were
discovered which demonstrate that 4,C
8nowin-l0 misrepresented that petitioner had
incurred dela0sH notwithstandin- its
8nowled-e and admission that dela0s were
e=cused under the *urn8e0 ContractHto be
able to draw a-ainst the Securities. %eiteratin-
that fraud constitutes an e=ception to the
independence principle, petitioner ur-es that
this warrants a rulin- from this Court that the
call on the Securities was wron-ful, as well as
contrar0 to law and basic principles of equit0. It
avers that it would su@er -rave irreparable
dama-e if 4,C would be allowed to use the
proceeds of the Securities and not ordered to
return the amounts it had wron-full0 drawn
thereon.
In its 2anifestation dated C September 1((.,
1:

4,C contends that the supplemental pleadin-s
+led b0 petitioner present erroneous and
misleadin- information which would chan-e
petitionerAs theor0 on appeal.
In 0et another 2anifestation dated "1 pril
1((:,
1>
petitioner alle-es that on "C ?ebruar0
1((:, the ICC handed down its *hird !artial
ward, declarin- that 4,C wron-full0 drew
upon the Securities and that petitioner was
entitled to the return of the sums wron-full0
ta8en b0 4,C for liquidated dama-es.
4,C +led a Counter#2anifestation dated 1'
/une 1((:,
1&
statin- that petitionerAs
2anifestation dated "1 pril 1((: enlar-es the
scope of its !etition for %eview of the ."
/anuar0 1((" Decision of the Court of ppeals.
4,C notes that the !etition for %eview
essentiall0 dealt onl0 with the issue of whether
injunction could issue to restrain the
bene+ciar0 of an irrevocable letter of credit
.
from drawin- thereon. It adds that petitioner
has +led two other proceedin-s, to wit; 6"7 ICC
Case No. ""1&:B*EB2J, entitled )*rans+eld
!hilippines Inc. v. 4u5on ,0dro Corporation,) in
which the parties made claims and
counterclaims arisin- from petitionerAs
performanceBmisperformance of its obli-ations
as contractor for 4,C< and 617 Civil Case No.
(:#..1, entitled )*rans+eld !hilippines, Inc. v.
4u5on ,0dro Corporation) before 9ranch >& of
the %*C of 2a8ati, which is an action to enforce
and obtain e=ecution of the ICCAs partial award
mentioned in petitionerAs 2anifestation of "1
pril 1((:.
In its Comment to petitionerAs 2otion for 4eave
to ?ile ddendum to !etitionerAs 2emorandum,
4,C 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. t an0 rate, 4,C adds that the action to
enforce the ICCAs partial award is now full0
within the 2a8ati %*CAs jurisdiction in Civil Case
No. (:#..1. 4,C asserts that petitioner is
en-a-ed in forum#shoppin- b0 8eepin- this
appeal and at the same time see8in- the suit
for enforcement of the arbitral award before
the 2a8ati court.
%espondent S9C in its 2emorandum, dated "(
2arch 1((.
13
contends that the Court of
ppeals correctl0 dismissed the petition for
certiorari. Invo8in- the independence principle,
S9C ar-ues that it was under no obli-ation to
loo8 into the validit0 or accurac0 of the
certi+cation submitted b0 respondent 4,C or
into the latterAs capacit0 or entitlement to so
certif0. It adds that the act sou-ht to be
enjoined b0 petitioner was alread0 fait
accompli and the present petition would no
lon-er serve an0 remedial purpose.
In a similar fashion, respondent ND 9an8 in its
2emorandum dated ". 2arch 1((.
1C
posits
that its actions could not be re-arded as
unjusti+ed in view of the prevailin-
independence principle under which it had no
obli-ation to ascertain the truth of 4,CAs
alle-ations that petitioner defaulted in its
obli-ations. 2oreover, it points out that since
the Standb0 4etter of Credit No. E((""1&BC:((
had been full0 drawn, petitionerAs pra0er for
preliminar0 injunction had been rendered moot
and academic.
t the core of the present controvers0 is the
applicabilit0 of the )independence principle)
and )fraud e=ception rule) in letters of credit.
*hus, a discussion of the nature and use of
letters of credit, also referred to simpl0 as
)credits,) would provide a better perspective of
the case.
*he letter of credit evolved as a mercantile
specialt0, and the onl0 wa0 to understand all
its facets is to reco-ni5e that it is an entit0 unto
itself. *he relationship between the bene+ciar0
and the issuer of a letter of credit is not strictl0
contractual, because both privit0 and a
meetin- of the minds are lac8in-, 0et strict
compliance with its terms is an enforceable
ri-ht. Nor is it a third#part0 bene+ciar0
contract, because the issuer must honor drafts
drawn a-ainst a letter re-ardless of problems
subsequentl0 arisin- in the underl0in-
contract. Since the ban8As customer cannot
draw on the letter, it does not function as an
assi-nment b0 the customer to the bene+ciar0.
Nor, if properl0 used, is it a contract of
suret0ship or -uarantee, because it entails a
primar0 liabilit0 followin- a default. ?inall0, it is
not in itself a ne-otiable instrument, because it
is not pa0able to order or bearer and is
-enerall0 conditional, 0et the draft presented
under it is often ne-otiable.
1'
In commercial transactions, a letter of credit is
a +nancial device developed b0 merchants as a
convenient and relativel0 safe mode of dealin-
with sales of -oods to satisf0 the seemin-l0
irreconcilable interests of a seller, who refuses
to part with his -oods before he is paid, and a
bu0er, who wants to have control of the -oods
before pa0in-.
.(
*he use of credits in
commercial transactions serves to reduce the
ris8 of nonpa0ment of the purchase price under
the contract for the sale of -oods. ,owever,
credits are also used in non#sale settin-s where
the0 serve to reduce the ris8 of
nonperformance. $enerall0, credits in the non#
sale settin-s have come to be 8nown as
standb0 credits.
."
*here are three si-ni+cant di@erences between
commercial and standb0 credits. ?irst,
commercial credits involve the pa0ment of
mone0 under a contract of sale. Such credits
become pa0able upon the presentation b0 the
seller#bene+ciar0 of documents that show he
has ta8en aNrmative steps to compl0 with the
sales a-reement. In the standb0 t0pe, the
credit is pa0able upon certi+cation of a part0As
nonperformance of the a-reement. *he
documents that accompan0 the bene+ciar0As
draft tend to show that the applicant has not
performed. *he bene+ciar0 of a commercial
credit must demonstrate b0 documents that he
has performed his contract. *he bene+ciar0 of
the standb0 credit must certif0 that his obli-or
has not performed the contract.
.1
:
90 de+nition, a letter of credit is a written
instrument whereb0 the writer requests or
authori5es the addressee to pa0 mone0 or
deliver -oods to a third person and assumes
responsibilit0 for pa0ment of debt therefor to
the addressee.
..
letter of credit, however,
chan-es its nature as di@erent transactions
occur and if carried throu-h to completion ends
up as a bindin- contract between the issuin-
and honorin- ban8s without an0 re-ard or
relation to the underl0in- contract or disputes
between the parties thereto.
.:
Since letters of credit have -ained -eneral
acceptabilit0 in international trade
transactions, the ICC has published from time
to time updates on the Eniform Customs and
!ractice 6EC!7 for Documentar0 Credits to
standardi5e practices in the letter of credit
area. *he vast majorit0 of letters of credit
incorporate the EC!.
.>
?irst published in "'..,
the EC! for Documentar0 Credits has
under-one several revisions, the latest of
which was in "''..
.&
In 9an8 of the !hilippine Islands v. De %en0
?abric Industries, Inc.,
.3
this Court ruled that
the observance of the EC! is justi+ed b0 rticle
1 of the Code of Commerce which provides that
in the absence of an0 particular provision in the
Code of Commerce, commercial transactions
shall be -overned b0 usa-es and customs
-enerall0 observed. 2ore recentl0, in 9an8 of
merica, N* O S v. Court of ppeals,
.C
this
Court ruled that there bein- no speci+c
provisions which -overn the le-al comple=ities
arisin- from transactions involvin- letters of
credit, not onl0 between or amon- ban8s
themselves but also between ban8s and the
seller or the bu0er, as the case ma0 be, the
applicabilit0 of the EC! is undeniable.
rticle . of the EC! provides that credits, b0
their nature, are separate transactions from the
sales or other contract6s7 on which the0 ma0
be based and ban8s are in no wa0 concerned
with or bound b0 such contract6s7, even if an0
reference whatsoever to such contract6s7 is
included in the credit. Consequentl0, the
underta8in- of a ban8 to pa0, accept and pa0
draft6s7 or ne-otiate andBor ful+ll an0 other
obli-ation under the credit is not subject to
claims or defenses b0 the applicant resultin-
from his relationships with the issuin- ban8 or
the bene+ciar0. bene+ciar0 can in no case
avail himself of the contractual relationships
e=istin- between the ban8s or between the
applicant and the issuin- ban8.
*hus, the en-a-ement of the issuin- ban8 is to
pa0 the seller or bene+ciar0 of the credit once
the draft and the required documents are
presented to it. *he so#called )independence
principle) assures the seller or the bene+ciar0
of prompt pa0ment independent of an0 breach
of the main contract and precludes the issuin-
ban8 from determinin- whether the main
contract is actuall0 accomplished or not. Ender
this principle, ban8s assume no liabilit0 or
responsibilit0 for the form, suNcienc0,
accurac0, -enuineness, falsi+cation or le-al
e@ect of an0 documents, or for the -eneral
andBor particular conditions stipulated in the
documents or superimposed thereon, nor do
the0 assume an0 liabilit0 or responsibilit0 for
the description, quantit0, wei-ht, qualit0,
condition, pac8in-, deliver0, value or e=istence
of the -oods represented b0 an0 documents, or
for the -ood faith or acts andBor omissions,
solvenc0, performance or standin- of the
consi-nor, the carriers, or the insurers of the
-oods, or an0 other person whomsoever.
.'
*he independent nature of the letter of credit
ma0 be; 6a7 independence in toto where the
credit is independent from the justi+cation
aspect and is a separate obli-ation from the
underl0in- a-reement li8e for instance a
t0pical standb0< or 6b7 independence ma0 be
onl0 as to the justi+cation aspect li8e in a
commercial letter of credit or repa0ment
standb0, which is identical with the same
obli-ations under the underl0in- a-reement. In
both cases the pa0ment ma0 be enjoined if in
the li-ht of the purpose of the credit the
pa0ment of the credit would constitute
fraudulent abuse of the credit.
:(
Can the bene+ciar0 invo8e the independence
principleP
!etitioner insists that the independence
principle does not appl0 to the instant case and
assumin- it is so, it is a defense available onl0
to respondent ban8s. 4,C, on the other hand,
contends that it would be contrar0 to common
sense to den0 the bene+t of an independent
contract to the ver0 part0 for whom the bene+t
is intended. s bene+ciar0 of the letter of
credit, 4,C asserts it is entitled to invo8e the
principle.
s discussed above, in a letter of credit
transaction, such as in this case, where the
credit is stipulated as irrevocable, there is a
de+nite underta8in- b0 the issuin- ban8 to pa0
the bene+ciar0 provided that the stipulated
documents are presented and the conditions of
the credit are complied with.
:"
!recisel0, the
>
independence principle liberates the issuin-
ban8 from the dut0 of ascertainin- compliance
b0 the parties in the main contract. s the
principleAs nomenclature clearl0 su--ests, the
obli-ation under the letter of credit is
independent of the related and ori-inatin-
contract. In brief, the letter of credit is separate
and distinct from the underl0in- transaction.
$iven the nature of letters of credit,
petitionerAs ar-umentHthat it is onl0 the
issuin- ban8 that ma0 invo8e the
independence principle on letters of creditH
does not impress this Court. *o sa0 that the
independence principle ma0 onl0 be invo8ed b0
the issuin- ban8s would render nu-ator0 the
purpose for which the letters of credit are used
in commercial transactions. s it is, the
independence doctrine wor8s to the bene+t of
both the issuin- ban8 and the bene+ciar0.
4etters of credit are emplo0ed b0 the parties
desirin- to enter into commercial transactions,
not for the bene+t of the issuin- ban8 but
mainl0 for the bene+t of the parties to the
ori-inal transactions. Jith the letter of credit
from the issuin- ban8, the part0 who applied
for and obtained it ma0 con+dentl0 present the
letter of credit to the bene+ciar0 as a securit0
to convince the bene+ciar0 to enter into the
business transaction. On the other hand, the
other part0 to the business transaction, i.e., the
bene+ciar0 of the letter of credit, can be rest
assured of bein- empowered to call on the
letter of credit as a securit0 in case the
commercial transaction does not push throu-h,
or the applicant fails to perform his part of the
transaction. It is for this reason that the part0
who is entitled to the proceeds of the letter of
credit is appropriatel0 called )bene+ciar0.)
!etitionerAs ar-ument that an0 dispute must
+rst be resolved b0 the parties, whether
throu-h ne-otiations or arbitration, before the
bene+ciar0 is entitled to call on the letter of
credit in essence would convert the letter of
credit into a mere -uarantee. /urisprudence
has laid down a clear distinction between a
letter of credit and a -uarantee 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
ar-ument is incompatible with the ver0 nature
of the letter of credit. If a letter of credit is
drawable onl0 after settlement of the dispute
on the contract entered into b0 the applicant
and the bene+ciar0, there would be no
practical and bene+cial use for letters of credit
in commercial transactions.
!rofessor /ohn ?. Dolan, the noted authorit0 on
letters of credit, sheds more li-ht on the issue;
*he standb0 credit is an attractive
commercial device for man0 of the
same reasons that commercial credits
are attractive. Essentiall0, these credits
are ine=pensive and eNcient. Often
the0 replace suret0 contracts, which
tend to -enerate hi-her costs than
credits do and are usuall0 tri--ered b0
a factual determination rather than b0
the e=amination of documents.
9ecause parties and courts should not
confuse the di@erent functions of the
suret0 contract on the one hand and
the standb0 credit on the other, the
distinction between suret0 contracts
and credits merits some reQection. *he
two commercial devices share a
common purpose. 9oth ensure a-ainst
the obli-orAs nonperformance. *he0
function, however, in distinctl0 di@erent
wa0s.
*raditionall0, upon the obli-orAs default,
the suret0 underta8es to complete the
obli-orAs performance, usuall0 b0 hirin-
someone to complete that
performance. Suret0 contracts, then,
often involve costs of determinin-
whether the obli-or defaulted 6a matter
over which the suret0 and the
bene+ciar0 often liti-ate7 plus the cost
of performance. *he bene+t of the
suret0 contract to the bene+ciar0 is
obvious. ,e 8nows that the suret0,
often an insurance compan0, is a
stron- +nancial institution that will
perform if the obli-or does not. *he
bene+ciar0 also should understand that
such performance must await the
sometimes len-th0 and costl0
determination that the obli-or has
defaulted. In addition, the suret0As
performance ta8es time.
*he standb0 credit has di@erent
e=pectations. ,e reasonabl0 e=pects
that he will receive cash in the event of
nonperformance, that he will receive it
promptl0, and that he will receive it
before an0 liti-ation with the obli-or
6the applicant7 over the nature of the
applicantAs performance ta8es place.
*he standb0 credit has this opposite
e@ect of the suret0 contract; it reverses
the +nancial burden of parties durin-
liti-ation.
&
In the suret0 contract settin-, there is
no dut0 to indemnif0 the bene+ciar0
until the bene+ciar0 establishes the
fact of the obli-orAs performance. *he
bene+ciar0 ma0 have to establish that
fact in liti-ation. Durin- the liti-ation,
the suret0 holds the mone0 and the
bene+ciar0 bears most of the cost of
dela0 in performance.
In the standb0 credit case, however,
the bene+ciar0 avoids that liti-ation
burden and receives his mone0
promptl0 upon presentation of the
required documents. It ma0 be that the
applicant has, in fact, performed and
that the bene+ciar0As presentation of
those documents is not ri-htful. In that
case, the applicant ma0 sue the
bene+ciar0 in tort, in contract, or in
breach of warrant0< but, durin- the
liti-ation to determine whether the
applicant has in fact breached the
obli-ation to perform, the bene+ciar0,
not the applicant, holds the mone0.
!arties that use a standb0 credit and
courts construin- such a credit should
understand this allocation of burdens.
*here is a tendenc0 in some quarters
to overloo8 this distinction between
suret0 contracts and standb0 credits
and to reallocate burdens b0 permittin-
the obli-or or the issuer to liti-ate the
performance question before pa0ment
to the bene+ciar0.
:1
Jhile it is the ban8 which is bound to honor the
credit, it is the bene+ciar0 who has the ri-ht to
as8 the ban8 to honor the credit b0 allowin-
him to draw thereon. *he situation itself
emasculates petitionerAs posture that 4,C
cannot invo8e the independence principle and
hi-hli-hts its puerilit0, more so in this case
where the ban8s concerned were impleaded as
parties b0 petitioner itself.
%espondent ban8s had squarel0 raised the
independence principle to justif0 their releases
of the amounts due under the Securities.
Owin- to the nature and purpose of the
standb0 letters of credit, this Court rules that
the respondent ban8s 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 pa0ment.
:.
?urthermore, 4,C has a ri-ht rooted in the
Contract to call on the Securities. *he relevant
provisions of the Contract read, thus;
:.1.". In order to secure the
performance of its obli-ations under
this Contract, the Contractor at its cost
shall on the Commencement Date
provide securit0 to the Emplo0er in the
form of two irrevocable and con+rmed
standb0 letters of credit 6the
)Securities)7, each in the amount of
ESFC,'CC,'(3, issued and con+rmed
b0 ban8s or +nancial institutions
acceptable to the Emplo0er. Each of
the Securities must be in form and
substance acceptable to the Emplo0er
and ma0 be provided on an annuall0
renewable basis.
::
C.3." If the Contractor fails to compl0
with Clause C.1, the Contractor shall
pa0 to the Emplo0er b0 wa0 of
liquidated dama-es 6)4iquidated
Dama-es for Dela0)7 the amount of
ESF3>,((( for each and ever0 da0 or
part of a da0 that shall elapse between
the *ar-et Completion Date and the
Completion Date, provided that
4iquidated Dama-es for Dela0 pa0able
b0 the Contractor shall in the
a--re-ate not e=ceed 1(R of the
Contract !rice. *he Contractor shall pa0
4iquidated Dama-es for Dela0 for each
da0 of the dela0 on the followin- da0
without need of demand from the
Emplo0er.
C.3.1 *he Emplo0er ma0, without
prejudice to an0 other method of
recover0, deduct the amount of such
dama-es from an0 monies due, or to
become due to the Contractor andBor
b0 drawin- on the Securit0.)
:>
contract once perfected, binds the parties
not onl0 to the ful+llment of what has been
e=pressl0 stipulated but also to all the
consequences which accordin- to their nature,
ma0 be in 8eepin- with -ood faith, usa-e, and
law.
:&
careful perusal of the *urn8e0 Contract
reveals the intention of the parties to ma8e the
Securities answerable for the liquidated
dama-es occasioned b0 an0 dela0 on the part
of petitioner. *he call upon the Securities, while
not an e=clusive remed0 on the part of 4,C, is
certainl0 an alternative recourse available to it
upon the happenin- of the contin-enc0 for
which the Securities have been pro@ered. *hus,
even without the use of the )independence
principle,) the *urn8e0 Contract itself bestows
upon 4,C the ri-ht to call on the Securities in
the event of default.
3
Ne=t, petitioner invo8es the )fraud e=ception)
principle. It avers that 4,CAs call on the
Securities is wron-ful because it fraudulentl0
misrepresented to ND 9an8 and S9C that
there is alread0 a breach in the *urn8e0
Contract 8nowin- full0 well that this is 0et to be
determined b0 the arbitral tribunals. It asserts
that the )fraud e=ception) e=ists when the
bene+ciar0, for the purpose of drawin- on the
credit, fraudulentl0 presents to the con+rmin-
ban8, documents that contain, e=pressl0 or b0
implication, material representations of fact
that to his 8nowled-e are untrue. In such a
situation, petitioner insists, injunction is
reco-ni5ed as a remed0 available to it.
Citin- DolanAs treatise on letters of credit,
petitioner ar-ues that the independence
principle is not without limits and it is
important to fashion those limits in li-ht of the
principleAs 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 appl0.
It is worth0 of note that the propriet0 of 4,CAs
call on the Securities is lar-el0 intertwined with
the fact of default which is the self#same issue
pendin- resolution before the arbitral tribunals.
*o be able to declare the call on the Securities
wron-ful or fraudulent, it is imperative to
resolve, amon- others, whether petitioner was
in fact -uilt0 of dela0 in the performance of its
obli-ation. Enfortunatel0 for petitioner, this
Court is not called upon to rule upon the issue
of defaultHsuch issue havin- been submitted
b0 the parties to the jurisdiction of the arbitral
tribunals pursuant to the terms embodied in
their a-reement.
:3
Jould injunction then be the proper remed0 to
restrain the alle-ed wron-ful draws on the
SecuritiesP
2ost writers a-ree that fraud is an e=ception to
the independence principle. !rofessor Dolan
opines that the untruthfulness of a certi+cate
accompan0in- a demand for pa0ment under a
standb0 credit ma0 qualif0 as fraud suNcient
to support an injunction a-ainst pa0ment.
:C
*he
remed0 for fraudulent abuse is an injunction.
,owever, injunction should not be -ranted
unless; 6a7 there is clear proof of fraud< 6b7 the
fraud constitutes fraudulent abuse of the
independent purpose of the letter of credit and
not onl0 fraud under the main a-reement< and
6c7 irreparable injur0 mi-ht follow if injunction
is not -ranted or the recover0 of dama-es
would be seriousl0 dama-ed.
:'
In its complaint for injunction before the trial
court, petitioner alle-ed that it is entitled to a
total e=tension of two hundred +ft0#three 61>.7
da0s which would move the tar-et completion
date. It ar-ued that if its claims for e=tension
would be found meritorious b0 the ICC, then
4,C would not be entitled to an0 liquidated
dama-es.
>(
$enerall0, injunction is a preservative remed0
for the protection of oneAs substantive ri-ht or
interest< it is not a cause of action in itself but
merel0 a provisional remed0, an adjunct to a
main suit. *he issuance of the writ of
preliminar0 injunction as an ancillar0 or
preventive remed0 to secure the ri-hts of a
part0 in a pendin- case is entirel0 within the
discretion of the court ta8in- co-ni5ance of the
case, the onl0 limitation bein- that this
discretion should be e=ercised based upon the
-rounds and in the manner provided b0 law.
>"
9efore a writ of preliminar0 injunction ma0 be
issued, there must be a clear showin- b0 the
complaint that there e=ists a ri-ht to be
protected and that the acts a-ainst which the
writ is to be directed are violative of the said
ri-ht.
>1
It must be shown that the invasion of
the ri-ht sou-ht to be protected is material and
substantial, that the ri-ht of complainant is
clear and unmista8able and that there is an
ur-ent and paramount necessit0 for the writ to
prevent serious dama-e.
>.
2oreover, an
injunctive remed0 ma0 onl0 be resorted to
when there is a pressin- necessit0 to avoid
injurious consequences which cannot be
remedied under an0 standard compensation.
>:
In the instant case, petitioner failed to show
that it has a clear and unmista8able ri-ht to
restrain 4,CAs call on the Securities which
would justif0 the issuance of preliminar0
injunction. 90 petitionerAs own admission, the
ri-ht of 4,C to call on the Securities was
contractuall0 rooted and subject to the e=press
stipulations in the *urn8e0 Contract.
>>
Indeed,
the *urn8e0 Contract is plain and unequivocal
in that it conferred upon 4,C the ri-ht to draw
upon the Securities in case of default, as
provided in Clause :.1.>, in relation to Clause
C.3.1, thus;
:.1.> *he Emplo0er shall -ive the
Contractor seven da0sA notice of callin-
upon an0 of the Securities, statin- the
nature of the default for which the
claim on an0 of the Securities is to be
made, provided that no notice will be
required if the Emplo0er calls upon an0
of the Securities for the pa0ment of
C
4iquidated Dama-es for Dela0 or for
failure b0 the Contractor to renew or
e=tend the Securities within ": da0s of
their e=piration in accordance with
Clause :.1.1.
>&
C.3.1 *he Emplo0er ma0, without
prejudice to an0 other method of
recover0, deduct the amount of such
dama-es from an0 monies due, or to
become due, to the Contractor andBor
b0 drawin- on the Securit0.
>3
*he pendenc0 of the arbitration proceedin-s
would not per se ma8e 4,CAs draws on the
Securities wron-ful or fraudulent for there was
nothin- in the Contract which would indicate
that the parties intended that all disputes
re-ardin- dela0 should +rst be settled throu-h
arbitration before 4,C would be allowed to call
upon the Securities. It is therefore premature
and absurd to conclude that the draws on the
Securities were outri-ht fraudulent -iven the
fact that the ICC and CIC have not ruled with
+nalit0 on the e=istence of default.
Nowhere in its complaint before the trial court
or in its pleadin-s +led before the appellate
court, did petitioner invo8e the fraud e=ception
rule as a -round to justif0 the issuance of an
injunction.
>C
Jhat petitioner did assert before
the courts below was the fact that 4,CAs draws
on the Securities would be premature and
without basis in view of the pendin- disputes
between them. !etitioner should not be
allowed in this instance to brin- into pla0 the
fraud e=ception rule to sustain its claim for the
issuance of an injunctive relief. 2atters,
theories or ar-uments not brou-ht out in the
proceedin-s below will ordinaril0 not be
considered b0 a reviewin- court as the0 cannot
be raised for the +rst time on appeal.
>'
*he
lower courts could thus not be faulted for not
appl0in- the fraud e=ception rule not onl0
because the e=istence of fraud was
fundamentall0 interwoven with the issue of
default still pendin- before the arbitral
tribunals, but more so, because petitioner
never raised it as an issue in its pleadin-s +led
in the courts below. t an0 rate, petitioner
utterl0 failed to show that it had a clear and
unmista8able ri-ht to prevent 4,CAs call upon
the Securities.
Of course, prudence should have impelled 4,C
to await resolution of the pendin- issues before
the arbitral tribunals prior to ta8in- action to
enforce the Securities. 9ut, as earlier stated,
the *urn8e0 Contract did not require 4,C to do
so and, therefore, it was merel0 enforcin- its
ri-hts in accordance with the tenor thereof.
Obli-ations arisin- from contracts have the
force of law between the contractin- parties
and should be complied with in -ood faith.
&(

2ore importantl0, pursuant to the principle of
autonom0 of contracts embodied in rticle
".(& of the Civil Code,
&"
petitioner could have
incorporated in its Contract with 4,C, a proviso
that onl0 the +nal determination b0 the arbitral
tribunals that default had occurred would
justif0 the enforcement of the Securities.
,owever, the fact is petitioner did not do so<
hence, it would have to live with its inaction.
Jith respect to the issue of whether the
respondent ban8s were justi+ed in releasin-
the amounts due under the Securities, this
Court reiterates that pursuant to the
independence principle the ban8s were under
no obli-ation to determine the veracit0 of
4,CAs certi+cation that default has occurred.
Neither were the0 bound b0 petitionerAs
declaration that 4,CAs call thereon was
wron-ful. *o repeat, respondent ban8sA
underta8in- was simpl0 to pa0 once the
required documents are presented b0 the
bene+ciar0.
t an0 rate, should petitioner +nall0 prove in
the pendin- arbitration proceedin-s that 4,CAs
draws upon the Securities were wron-ful due to
the non#e=istence of the fact of default, its
ri-ht to see8 indemni+cation for dama-es it
su@ered would not normall0 be foreclosed
pursuant to -eneral principles of law.
2oreover, in a 2anifestation,
&1
dated .( 2arch
1((", 4,C informed this Court that the subject
letters of credit had been full0 drawn. *his fact
alone would have been suNcient reason to
dismiss the instant petition.
Settled is the rule that injunction would not lie
where the acts sou-ht to be enjoined have
alread0 become fait accompli or an
accomplished or consummated act.
&.
In *ic5on
v. Lideo !ost 2anila, Inc.
&:
this Court ruled that
where the period within which the former
emplo0ees were prohibited from en-a-in- in or
wor8in- for an enterprise that competed with
their former emplo0erHthe ver0 purpose of the
preliminar0 injunction Hhas e=pired, an0
declaration upholdin- the propriet0 of the writ
would be entirel0 useless as there would be no
actual case or controvers0 between the parties
insofar as the preliminar0 injunction is
concerned.
'
In the instant case, the consummation of the
act sou-ht to be restrained had rendered the
instant petition mootHfor an0 declaration b0
this Court as to propriet0 or impropriet0 of the
non#issuance of injunctive relief could have no
practical e@ect on the e=istin- controvers0.
&>

*he other issues raised b0 petitioner
particularl0 with respect to its ri-ht to recover
the amounts wron-full0 drawn on the
Securities, accordin- to it, could properl0 be
threshed out in a separate proceedin-.
One +nal point. 4,C has char-ed petitioner of
forum#shoppin-. It raised the char-e on two
occasions. ?irst, in its Counter#2anifestation
dated 1' /une 1((:
&&
4,C alle-es that
petitioner presented before this Court the same
claim for mone0 which it has +led in two other
proceedin-s, to wit; ICC Case No. ""1&:B*EB2J
and Civil Case No. (:#..1 before the %*C of
2a8ati. 4,C ar-ues that petitionerAs acts
constitutes forum#shoppin- which should be
punished b0 the dismissal of the claim in both
forums. Second, in its Comment to !etitionerAs
2otion for 4eave to ?ile ddendum to
!etitionerAs 2emorandum dated C October
1((:, 4,C alle-es that b0 maintainin- the
present appeal and at the same time pursuin-
Civil Case No. (:#..1Hwherein petitioner
pressed for jud-ment on the issue of whether
the funds 4,C drew on the Securities should be
returnedHpetitioner resorted to forum#
shoppin-. In both instances, however,
petitioner has apparentl0 opted not to respond
to the char-e.
?orum#shoppin- is a ver0 serious char-e. It
e=ists when a part0 repetitivel0 avails of
several judicial remedies in di@erent courts,
simultaneousl0 or successivel0, all
substantiall0 founded on the same transactions
and the same essential facts and
circumstances, and all raisin- substantiall0 the
same issues either pendin- in, or alread0
resolved adversel0, b0 some other court.
&3
It
ma0 also consist in the act of a part0 a-ainst
whom an adverse jud-ment has been rendered
in one forum, of see8in- another and possibl0
favorable opinion in another forum other than
b0 appeal or special civil action of certiorari, or
the institution of two or more actions or
proceedin-s -rounded on the same cause on
the supposition that one or the other court
mi-ht loo8 with favor upon the other part0.
&C
*o
determine whether a part0 violated the rule
a-ainst forum#shoppin-, the test applied is
whether the elements of litis pendentia are
present or whether a +nal jud-ment in one
case will amount to res judicata in another.
&'

?orum#shoppin- constitutes improper conduct
and ma0 be punished with summar0 dismissal
of the multiple petitions and direct contempt of
court.
3(
Considerin- the seriousness of the char-e of
forum#shoppin- and the severit0 of the
sanctions for its violation, the Court will refrain
from ma8in- an0 de+nitive rulin- on this issue
until after petitioner has been -iven ample
opportunit0 to respond to the char-e.
J,E%E?O%E, the instant petition is DENIED,
with costs a-ainst petitioner.
!etitioner is hereb0 required to answer the
char-e of forum#shoppin- within +fteen 6">7
da0s from notice.
SO O%DE%ED.
"(