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10 March 2005
Ponente: Ynares-Santiago,, J.
SUMMARY:
Land Bank and Monet executed an Export Packing Line
Agreement. Despite several demands, Monet failed to pay
its indebtedness and the amount it owed to Land Bank grew
to P11M. Because of this, Land Bank filed a Complaint for
Collection of Sum of Money. In Monets Answer with
Compulsory Counterclaim, one of its allegations was that
Land Bank should be made liable for making unauthorized
payments on Monets import letter of credit to Beautilike in
the amount of $38K, which seriously damaged Monets
business.
RTC and the CA held that Land Bank failed to protect
Monets interest when it paid the suppliers despite
discrepancies in the shipment vis--vis the order
specifications of Monet. SC held otherwise and ruled that
Land Bank was correct when it paid Beautilike despite the
fact that there was a breach of the underlying contract.
DOCTRINE:
Under the independence principle, the obligation of the
issuing bank to pay the beneficiary arises once the latter is
able to submit the stipulated documents under the letter of
credit. Hence, the bank is not liable for damages even if
the shipment did not conform to the specifications of the
applicant.
FACTS:
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interest when it paid the suppliers despite discrepancies in
the shipment vis--vis the order specifications of Monet.
ISSUES/HELD:
1. *relevant* WON Land Bank could be made liable for
paying the supplier, Beautilike, despite discrepancies in
the shipment vis--vis the order specifications of Monet.
(Land Bank is NOT liable)
2. WON Land Bank liable to Monet with respect to the
Wishbone transaction for non-collection. (Land Bank is
liable)
RATIO:
1. Land Bank cannot be faulted for paying Beautilike.
a. [Bank of America v CA, on the nature of the letter of
credit and the letter of credit transaction process] 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.
i. 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.
ii. 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
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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.
c. The so-called independence principle assures the seller
or the beneficiary of prompt payment independent of
any breach of the main contract and precludes
the issuing bank from determining whether the
main contract is actually accomplished or not.
(Transfield Philippines v Luzon Hydro)
d. 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.