LETTERS OF CREDIT
or any person claiming under LHC would constrain it
1. TRANSFIELD PHILIPPINES INC v LUZON HYDRO
CORP
FACTS: Petitioner and respondent Luzon Hydro
Corporation (hereinafter, LHC) entered into a Turnkey
Contract whereby 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.
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 Turn-key
Contract, among which are variations, force majeure,
and delays caused by LHC itself. 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.
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”).
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 as force 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.
Foreseeing that LHC would call on the Securities
pursuant to the pertinent provisions of the Turnkey
Contract, petitioner—in two separate letters 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
to hold respondent banks liable for liquidated
damages.
LHC sent notice to petitioner that pursuant to Clause
8.214 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.
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.
ISSUE: W/N the “independence principle” on letters of
credit may be invoked by a beneficiary thereof where
the beneficiary’s call thereon is wrongful or
fraudulent.
RULING: YES. 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. 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.
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. 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.
2. MWSS vs. DAWAY AND MAYNILAD
FACTS: MWSS granted Maynilad under a Concession
Agreement to manage, operate, repair, decommission
and refurbish the existing MWSS water delivery and
sewerage services in the West Zone Service Area, for
which Maynilad undertook to pay the corresponding
concession fees which, among other things, consisted
of payments of petitioners mostly foreign loans.
To secure the concessionaires performance of its
obligations, Maynilad was required under Section 6.9
of said contract to put up a bond, bank guarantee or
other security acceptable to MWSS.
In compliance with this requirement, Maynilad
arranged for a three-year facility with a number of
foreign banks, led by Citicorp Int’l Ltd., for the
issuance of an Irrevocable Standby Letter of Credit in
favor of MWSS for the full and prompt performance of
Maynilads obligations to MWSS as aforestated.
Later, the parties agreed to resolve the issues
between them [Maynilad is asking for a mechanism by
which it hoped to recover the losses it had allegedly
incurred and would be incurring as a result of the
depreciation of the Philippine Peso against the US
Dollar and in filing to get what it desired, Maynilad
unilaterally suspended the payment of the concession
fees] through an amendment of the Concession
Agreement which was based on the terms set down in
MWSS Board of Trustees Resolution which provided
inter alia for a formula that would allow Maynilad to
recover foreign exchange losses it had incurred or
would incur under the terms of the Concession
Agreement.
However Maynilad served upon MWSS a Notice of
Event of Termination, claiming that MWSS failed to
comply with its obligations under the Concession
Agreement and its Amendment regarding the
adjustment mechanism that would cover Maynilads
foreign exchange losses. Maynilad filed a Notice of
Early Termination of the concession, which was
challenged by MWSS. This matter was eventually
brought before the Appeals Panel by MWSS. the
Appeals Panel ruled that there was no Event of
Termination as defined under Art. 10.2 (ii) or 10.3 (iii)
of the Concession Agreement and that, therefore,
Maynilad should pay the concession fees that had
fallen due.
The award of the Appeals Panel became final. MWSS,
thereafter, submitted a written notice to Citicorp Int’l
Ltd, as agent for the participating banks, that by virtue
of Maynilads failure to perform its obligations under
the Concession Agreement, it was drawing on the
Irrevocable Standby Letter of Credit and thereby
demanded payment.
Prior to this, however, Maynilad had filed on a petition
for rehabilitation before the RTC of Quezon City which
resulted in the issuance of the Stay Order and the
disputed Order of November 27, 2003.
ISSUE: WON the rehabilitation court sitting as such,
act in excess of its authority or jurisdiction when it
enjoined herein petitioner from seeking the payment
of the concession fees from the banks that issued the
Irrevocable Standby Letter of Credit in its favor
HELD: YES
First, the claim is not one against the debtor but
against an entity that respondent Maynilad has
procured to answer for its non-performance of certain
terms and conditions of the Concession Agreement,
particularly the payment of concession fees.
Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does
not enjoin the enforcement of all claims against
guarantors and sureties, but only those claims against
guarantors and sureties who are not solidarily liable
with the debtor. Respondent Maynilads claim that the
banks are not solidarily liable with the debtor does not
find support in jurisprudence.
Letters of credit were developed for the purpose of
insuring to a seller payment of a definite amount upon
the presentation of documents and is thus a
commitment by the issuer that the party in whose
favor it is issued and who can collect upon it will have
his credit against the applicant of the letter, duly paid
in the amount specified in the letter They are in effect
absolute undertakings to pay the money advanced or
the amount for which credit is given on the faith of the
instrument. They are primary obligations and not
accessory contracts and while they are security
arrangements, they are not converted thereby into
contracts of guaranty. What distinguishes letters of
credit from other accessory contracts, is the
engagement of the issuing bank to pay the seller once
the draft and other required shipping documents are
presented to it. They are definite undertakings to pay
at sight once the documents stipulated therein are
presented.
The prohibition under Sec 6 (b) of Rule 4 of the Interim
Rules does not apply to herein petitioner as the
prohibition is on the enforcement of claims against
guarantors or sureties of the debtors whose
obligations are not solidary with the debtor. The
participating banks obligation are solidary with
respondent Maynilad in that it is a primary, direct,
definite and an absolute undertaking to pay and is not
conditioned on the prior exhaustion of the debtors
assets. These are the same characteristics of a surety
or solidary obligor. And being solidary, the claims
against them can be pursued separately from and
independently of the rehabilitation case.
The terms of the Irrevocable Standby Letter of Credit
do not show that the obligations of the banks are not
solidary with those of respondent Maynilad. On the
contrary, it is issued at the request of and for the
account of Maynilad in favor of the MWSS as a bond
for the full and prompt performance of the obligations
by the concessionaire under the Concession
Agreement and herein MWSS is authorized by the
banks to draw on it by the simple act of delivering to
the agent a written certification substantially in the
form of the Letter of Credit.
Taking into consideration our own rulings on the
nature of letters of credit and the customs and usage
developed over the years in the banking and
commercial practice of letters of credit, we hold that
except when a letter of credit specifically stipulates
otherwise, the obligation of the banks issuing letters
of credit are solidary with that of the person or entity
requesting for its issuance, the same being a direct,
primary, absolute and definite undertaking to pay the
beneficiary upon the presentation of the set of
documents required therein.
The public respondent, therefore, exceeded his
jurisdiction, in holding that he was competent to act
on the obligation of the banks under the Letter of
Credit under the argument that this was not a solidary
obligation with that of the debtor. Being a solidary
obligation, the letter of credit is excluded from the
jurisdiction of the rehabilitation court and therefore in
enjoining petitioner from proceeding against the
Standby Letters of Credit to which it had a clear right
under the law and the terms of said Standby Letter of
Credit, public respondent acted in excess of his
jurisdiction.
3. Prudential Bank v IAC
FACTS: Philippine Rayon Mills, Inc.(PRMI) entered into
a contract with Nissho Co., Ltd. of Japan for the
importation of textile machineries. To effect the
payment, PRMI applied for a commercial letter of
credit with the Prudential Bank and Trust Company in
favor of Nissho.
Prudential Bank opened a Letter of Credit. Against this
letter of credit, drafts were drawn and issued by
Nissho, which were all paid by the Prudential Bank
through its correspondent in Japan, the Bank of Tokyo.
Two of these drafts were accepted by PRMI, while the
others were not.
Later, PRMI ceased business operation. The PRMI's
obligation from the letter of credit remained unpaid
and unliquidated despite repeated demands.
An action for collection was filed against PRMI. The
lower court ruled that acceptance of the drafts by
Philippine Rayon was indispensable to make the latter
liable.
ISSUE: W/N presentment for acceptance of the drafts
was indispensable to make PRMI liable
RULING: NO. Presentment for acceptance is not
required for sight drafts.
A letter of credit is defined as an engagement by a
bank or other person made at the request of a
customer that the issuer will honor drafts or other
demands for payment upon compliance with the
conditions specified in the credit. Through a letter of
credit, the bank merely substitutes its own promise to
pay for the promise to pay of one of its customers
who in return promises to pay the bank the amount of
funds mentioned in the letter of credit plus credit or
commitment fees mutually agreed upon.
In the instant case then, the drawee was necessarily
the herein petitioner. It was to the latter that the
drafts were presented for payment. In fact, there was
no need for acceptance as the issued drafts are sight
drafts.
Presentment for acceptance is necessary only in the
cases expressly provided for in Section 143 of the
Negotiable Instruments Law (NIL).
“SEC. 143. When presentment for acceptance
must be made.
Presentment for acceptance must be made:
 (a) Where the bill is payable after sight, or in
any other case where presentment for
acceptance is necessary in order to fix the
maturity of the instrument; or
(b) Where the bill expressly stipulates that it
shall be presented for acceptance; or
(c) Where the bill is drawn payable elsewhere
than at the residence or place of business of
the drawee.
In no other case is presentment for acceptance
necessary in order to render any party to the bill
liable.” Obviously then, sight drafts do not require
presentment for acceptance.
4. Reliance Commodities vs Daewoo Industrial co.
Facts: Reliance Commodities, Inc. (Reliance) and
Daewoo Industrial Co Ltd (Daewoo) entered into a
contract of sale where Reliance undertook to ship and
deliver to Daewoo 2,000 tons of foundry pig iron. First
contract was consummated and completed but
Daewoo fell short of 135.655 metric tons. Second
contract for 2,000 metric tons was also perfected.
However, Reliance’s application for a letter of credit
was denied by the China Banking Corporation, and it
was shown later that the reason for this is that it has
exceeded its foreign exchange allocation.
Because of the failure of Reliance to comply with its
undertaking under the contract, Daewoo was forced
to sell the foundry pig irons to another buyer at a
lower price. Reliance filed an action for damages
against Daewoo for the recovery of P226,370.48
representing the value of the short delivery of 135.655
metric tons of foundry pig iron under the first
contract. Daewoo filed a counterclaim, contending
that Reliance was guilty of breach of contract when it
failed to open a letter of credit as required in the
second contract.
Issue: W/N Reliance is liable for breach of contract by
failing to obtain the letter of credit
Rulinng: Yes. Daewoo is liable for damages because
the contract to deliver the goods were already
perfected. The opening of an L/C upon application of
Reliance was not a condition precedent for the birth of
the obligation of Reliance to purchase foundry pig iron
from Daewoo. As a rule, the failure of to open the
appropriate letter of credit did not prevent the birth
of the contract, and neither did such failure extinguish
the contract.
In the instant case, the opening of the letter of credit
in favor of Daewoo was an obligation of Reliance and
the performance of that obligation by Reliance was a
condition for enforcement of the reciprocal obligation
of Daewoo to ship the subject matter of the contract –
the foundry pig iron – to Reliance. But the contract
itself between Reliance and Daewoo had already
sprung into legal existence and was enforceable.
Thus the failure of a buyer seasonably to furnish an
agreed letter of credit is a breach of he contract
between buyer and seller. Where the buyer fails to
open a letter of credit as stipulated, the seller or
exporter is entitled to claim damages for such breach.
Damages for failure to open a commercial credit may,
in appropriate cases, include the loss of profit which
the seller would reasonably have made had the
transaction been carried out.
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 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 goods only after reimbursing the
bank.
Doctrine: The failure of a buyer seasonably to furnish
an agreed letter of credit is a breach of the contract
between buyer and seller. Where the buyer fails to
open a letter of credit as stipulated, the seller or
exporter is entitled to claim damages for such breach.
5. Bank of America, NT and SA v. Court of Appeals
FACTS:
Bank of America received by registered mail
an irrevocable letter of credit purportedly issued by
Bank of Ayudhya Samyek Branch, for the account of
General Chemicals, Ltd., of Thailand in the amount of
$2,782,000.00 to cover the sale of plastic ropes and
agricultural files, with Bank of America as the advising
bank and Inter-Resin Industrial Corporation as
beneficiary.
Bank of America notified Inter-Resin of the
letter of credit. Upon request by Inter-Resin for Bank
of America to confirm the letter of credit by sending
its lawyer, the latter refused although one of its
employees explained to Inter-Resin that there was no
need for confirmation because the letter of credit is
genuine.
Inter-Resin therefore twice sought availment
under the letter of credit. Bank of America issued
P10,219,093 in the first availment upon being satisfied
of the documents submitted by Inter-Resin. The same
documents were to Bank of Ayudha for
reimbursement.
On the request of second availment, Bank of
America stopped the processing upon being informed
by Bank of Ayudhya that the letter of credit was
fraudulent. Further, upon conducting an examination
of the vans sent by Inter-Resin, it found out that they
contain not ropes but plastic strips, wrappers, rags
and waste materials.
Bank of America sued Inter-Resin for recovery
of the money it gave under the first availment,
considering the letter of credit has been disowned by
Bank of Ayudhya. However, the trial court ruled in
favor of Inter-Resin which was affirmed by the Court
of Appeals.
Issue:
Whether or not, Bank of America, under the
letter of credit, is an advising bank or a confirming
bank, and if it can recover thereof from Inter-Resin the
amount it has paid.
Held: Advising Bank and can recover!
It ruled that 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.
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.
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 the UCP.
As advising bank, Bank of America is bound only to
check the “apparent authenticity” of the letter of
credit, which it did.
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 therefore 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. 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.
6. ASIAN TERMINALS, INC. vs. PHILAM INSURANCE
CO., INC
FACTS:
On April 15, 1995, Nichimen Corporation shipped to
Universal Motors Corporation 219 packages
containing 120 units of brand new Nissan Pickup Truck
Double Cab 4×2 model, without engine, tires and
batteries, on board the vessel S/S Calayan Iris from
Japan to Manila. The shipment, which had a declared
value of US$81,368 or P29,400,000, was insured with
Philam against all risks under the marine Policy no.
708-8006717-4. The carrying vessel arrived at the port
of manila on April 20, 1995, and when the shipment
was unloaded by the staff of ATI, it was found that the
package marked as 03-245-42K/1 was in bad order.
The Turn Over Survey of bad order cargoes dated April
21, 1995 identified two packages, labelled 03-245-
42K/1 and 03/237/7CK/2, as being dented and broken.
Thereafter, the cargoes were stored for temporary
safekeeping inside CFS Warehouse in Pier No. 5. On
May 11, 1995, the shipment was withdrawn by R.F.
Revilla Customs Brokerage, Inc., the authorized broker
of Universal Motors, and delivered to the latter’s
warehouse in Mandaluyong City. Upon the request of
Universal Motors, a bad order survey was conducted
on the cargoes and it was found that one Frame Axle
Sub without LWR was deeply dented on the buffle
plate while six Frame Assembly with Bush were
deformed and misaligned. Owing to the extent of the
damage to said cargoes, Universal Motors declared
them a total loss. On August 4, 1995, Universal Motors
filed a formal claim for damages in the amount of
P643,963.84 against Westwind, ATI and R.F. Revilla
Customs Brokerage, Inc. When Universal Motors’
demands remained unheeded, it sought reparation
from and was compensated in the sum of P633,957.15
by Philam. Accordingly, Universal Motors issued a
Subrogation Receipt dated November 15, 1995 in
favor of Philam. On January 18, 1996, Philam, as
subrogee of Universal Motors, filed a Complaint for
damages against Westwind, ATI and R.F. Revilla
Customs Brokerage, Inc. before the Regional Trial
Court of Makati City. The trial court rendered
judgment in favour of Philam which ruling was
affirmed by the Court of Appeals modifying the
amount to be paid by Westwind and ATI.
ISSUE: Whether or not Philam may claim against
Westwind and ATI as a subrogee
HELD: YES.
The Court holds that petitioner Philam has adequately
established the basis of its claim against petitioners
ATI and Westwind. Philam, as insurer, was subrogated
to the rights of the consignee, Universal Motors
Corporation, pursuant to the Subrogation receipt
executed by the latter in favour of the former. The
right of subrogation accrues simply upon payment by
the insurance company of the insurance claim.
Petitioner Philam’s action finds support in Article
2207 of the Civil Code which provides that if the
plaintiff’s property has been insured, and he has
received indemnity from the insurance company for
the injury or loss arising out of the wrong or breach of
contract complained of, the insurance company shall
be subrogated to the rights of the insured against the
wrongdoer or the person who has violated the
contract.
In Malayan Insurance Co., Inc. vs. Alberto, the Court
explained the effect of payment by the insurer of the
insurance claim in this wise: We have held that
payment by the insurer to the insured operates as an
equitable assignment to the insurer of all the
remedies that the insured may have against the third
party whose negligence or wrongful act caused the
loss. The right of subrogation is not dependent upon,
nor does it grow out of, any privity of contract. It
accrues simply upon payment by the insurance
company of the insurance claim. The doctrine of
subrogation has its roots in equity. It is designed to
promote and accomplish justice; and is the mode that
equity adopts to compel the ultimate payment of a
debt by one who, in justice, equity, and good
conscience, ought to pay.
7. FEATI (now CITYTRUST BANKING CORPORATION)
vs CA G.R. No. 94209 April 30, 1991
FACTS:
Bernardo E. Villaluz agreed to sell to Axel
Christiansen 2,000 cubic meters of lauan logs. After
inspecting the logs, Christiansen issued a purchase
order for said logs. On the arrangements made and
upon the instructions of the consignee, Hanmi Trade
Development, the Security Pacific National Bank of Los
Angeles, California issued Irrevocable Letter of Credit
available at sight in favor of Villaluz. The letter of
credit was mailed to the Feati Bank with the
instruction to the latter that it "forward the enclosed
letter of credit to the beneficiary” and the draft to be
drawn is on Security Pacific National Bank and that it
be accompanied by the following documents, among
others: 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.
The logs were thereafter loaded on the vessel
of Christiansen 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. 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 without the
private respondent receiving any certification from
Christiansen. 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. 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.
ISSUE: WON FEATI Bank may be held solidarily liable in
the LoC arrangement for non-compliance by Axel?
HELD:
No. 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. 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.
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. 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. 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.
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 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. In order
that the petitioner may be held liable under the letter,
there should be proof that the petitioner confirmed
the letter of credit. 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. 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.
8. BELMAN COMPAÑIA INCORPORADA vs CENTRAL
BANK OF THE PHILIPPINES
G. R. L-10195; November 29, 1958
FACTS: The petitioner won a bid to supply the
Philippine Government 1000 reams of onion skin
paper. It applied to the Philippine National Bank for a
letter of credit in the sum of $4,300.00 to pay its
American supplier based in California. In September
21, 1950, PNB approved and granted the application of
the letter of credit, through its correspondent bank in
the US Crocker First National Bank, paid the payee the
sum of $4,300 on or before October 19, 1950. On April
26, 1951, the petitioner paid PNB and whose payment
was assessed with an excise tax of 17% due to the
passage of the RA 601 which imposes 17% special
excise tax on foreign currency exchange. RA 601 was
enacted on March 28, 1951. The petitioner paid under
protest and sought to claim a refund contending that
the contract of letter of credit was perfected and
consummated on its approval which is before the
enactment of RA 601. Hence, the assessed excise tax
was invalid. Respondent contends that the grant or
approval on an application for a letter of credit for an
amount payable in foreign currency is only an
executory contract, in the sense that until payment,
return, or settlement of the amount paid and delivered
by, or collected from the bank in foreign currency be
made by the debtor, the contract is not executed or
consummated.
ISSUE: Whther or not the special excise tax assessed
is valid.
RULING: NO. An irrevocable letter of credit
granted by a bank, which authorizes a creditor in a
foreign country to draw upon a debtor of another and
to negotiate the draft through the agent or
correspondent bank or any bank in the country of the
creditor, is a consummated contract, when the agent
or correspondent bank or any bank in the country of
the creditor pays or delivers to the latter the amount in
foreign currency, as authorized by the bank in the
country of the debtor in compliance with the letter of
credit granted by it. It is the date of the payment of the
amount in foreign currency to the creditor in his
country by the agent or correspondent bank of the
bank in the country of the debtor that turns from
executory to executed or consummated contract. It is
not the date of payment by the debtor to the bank in
his country of the amount of foreign exchange sold
that makes the contract executed or consummated,
because the bank may grant the debtor extension of
time to pay such debt. The contention of Belman that
as there was a meeting of the minds and of contracting
parties as to price and object of the contract upon the
approval or grant of an application for a letter of credit
for an amount payable in payable in foreign currency is
that the contract was a valid and executed contract of
sale of foreign exchange. True, there was such a
contract in the sense that one party who has
performed his part may compel the other to perform
his. Still until payment be made in foreign currency of
the amount applied for in the letter of credit and
approved and granted by the bank, the same is not an
executed or consummated contract. The payment of
the amount in foreign currency to the creditor by the
bank or its agent or correspondent is necessary to
consummate the contract. Hence the date of such
payment or delivery of the amount in foreign currency
to the creditor determines whether such amount of
foreign currency is subject to the tax imposed by the
Government of the country where such letter of credit
was granted.
The draft authorized by the letter of credit applied for
by Belman and granted by the CBP stated that it must
be drawn and presented or negotiated in San
Francisco, California, U.S.A., not later than October
19,1950. It may be presumed that payment was made
on or before such date. And since Republic Act No. 601
imposing such tax took effect only on March 28, 1951,
it was not subject to excise tax.
9. Johannes Schuback and Sons vs. Court of Appeals
Facts:
Sometime in 1981, PHILIPPINE SJ INDUSTRIAL
TRADING established contact with plaintiff 3 through
the Philippine Consulate General in Hamburg, West
Germany, because he wanted to purchase MAN bus
spare parts from Germany.
Plaintiff immediately ordered the items needed by
defendant from Schuback Hamburg to enable
defendant to avail of the old prices. Plaintiff reminded
defendant to open the letter of credit to avoid delay in
shipment and payment of interest . Defendant replied,
mentioning, among others, the difficulty he was
encountering in securing: the required dollar
allocations and applying for the letter of credit,
procuring a loan and looking for a partner-financier,
and of finding ways 'to proceed with our orders.
Defendant replied that he did not make any valid
Purchase Order and that there was no definite
contract between him and plaintiff . Demand letters
sent to defendant by plaintiff's counsel dated March
22, 1983 and June 9, 1983 were to no avail (Exhs R and
S).
Consequently, petitioner filed a complaint for
recovery of actual or compensatory damages,
unearned profits, interest, attorney's fees and costs
against private respondent. CA ruled that there was
no perfection of contract since there was no meeting
of the minds as to the price between the last week of
December 1981 and the first week of January 1982
and defendant failed to open an irrevocable letter of
credit.
Issue: Whether or not a contract of sale was
perfected despite of a failure to open a letter of
credit
Ruling:
Yes. On the part of the buyer, the situation reveals
that private respondent failed to open an irrevocable
letter of credit without recourse in favor of Johannes
Schuback of Hamburg, Germany. This omission,
however. does not prevent the perfection of the
contract between the parties, for the opening of the
letter of credit is not to be deemed a suspensive
condition. The facts herein do not show that
petitioner reserved title to the goods until private
respondent had opened a letter of credit. Petitioner,
in the course of its dealings with private respondent,
did not incorporate any provision declaring their
contract of sale without effect until after the
fulfillment of the act of opening a letter of credit.
The opening of a etter of credit in favor of a vendor is
only a mode of payment. It is not among the
essential requirements of a contract of sale
enumerated in Article 1305 and 1474 of the Civil
Code, the absence of any of which will prevent the
perfection of the contract from taking place.
To adopt the Court of Appeals' ruling that the
contract of sale was dependent on the opening of a
letter of credit would be untenable from a pragmatic
point of view because private respondent would not
be able to avail of the old prices which were open to
him only for a limited period of time. This explains
why private respondent immediately placed the
order with petitioner which, in turn promptly
contacted its trading partner in Germany. As
succinctly stated by petitioner, "it would have been
impossible for respondent to avail of the said old
prices since the perfection of the contract would
arise much later, or after the end of the year 1981, or
when he finally opens the letter of credit.
10. Keng Hua Paper Products vs. CA
Facts: Sea-Land Service, a shipping company, is a
foreign corporation licensed to do business in the
Philippines. Shipping Company received at its Hong
Kong terminal a sealed container of “unsorted waste
paper” for shipment to Keng Hua Paper Products, Co.
in Manila. A bill of lading to cover the shipment was
issued by Shipping Company. Notices of arrival were
transmitted to Keng Hua 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 Shipping Company’s container
from the moment the free time period expired until
the time when the shipment was unloaded from the
container. During the said period, demurrage charges
accrued.
Keng Hua alleged that it purchased waste paper from
the shipper in Hong Kong, Ho Kee Waste Paper, as
manifested in a Letter of Credit issued by Equitable
Banking Corporation. His contentions were: 1) Under
the letter of credit, the remaining balance of the
shipment was only ten (10) metric tons but the
shipment Shipping Company was asking defendant to
accept was twenty (20) metric tons. 2) That Shipping
company had no cause of action against Keng Hua
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 Shipping
Company’s services and not against defendant.
Issue: WON the contract of carriage in a bill of lading
should be treated independently.
Ruling: Yes. 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. These three are to be maintained in perpetual
separation. (From the book: The undertaking of the
bank to pay, accept, and pay drafts or negotiate
and/or fulfill any obligation under the credit is not
subject to claims or defenses by the applicant
resulting from his relationship with the issuing bank or
the beneficiary. In the same manner, the beneficiary
can, in no case, avail himself of the contractual
relationships existing between the banks or between
the applicant and the issuing bank.)
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. Remedy of alleged overshipment lies against
the shipper and not against the carrier. The carrier
cannot be expected to go beyond the representation
of the shipper in the bill of lading and to verify their
accuracy vis-à-vis the contract of sale and the letter of
credit. Carrier had no knowledge of the contents of
the container.
Nature of 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. 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.”
11. BANK OF AMERICA NT&SA VS CA
FACTS:
Petitioner received an Irrevocable Letter of
Credit issued by Bank of Ayudhya for the account of
General Chemicals, Ltd., of Thailand 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.
Petitioner, however, did not confirm the letter.
Reynaldo Dueñas, bank employee in charge of letters
of credit, explained that there was no need for
confirmation because the letter would not have been
transmitted if it were not genuine.
Inter-Resin sought 2 availments under the
letter of credit by submitting to Petitioner the
necessary documents asked and issued in favor of
Inter-Resin a Cashier's Check for the first availment.
Petitioner wrote Bank of Ayudhya advising the latter
of the availment and sought the corresponding
reimbursement.
Upon receipt of a telex from the Bank of
Ayudhya declaring the letter of credit fraudulent, Bank
of America stopped the processing of Inter-Resin's
documents and requested assistance in determining
the authenticity of the letter of credit. Bank of
America kept Inter-Resin informed of the
developments. It was discovered that the vans
exported by Inter-Resin did not contain ropes waste
materials. Bank of America sued Inter-Resin for the
recovery of the peso equivalent of the draft for partial
availment of the now disowned letter of credit. On the
other hand, Inter-Resin claimed that not only was it
entitled to retain the amount given on the first
shipment but also to the balance covering the second
shipment.
ISSUE: Whether or not Petitioner merely acted as an
advising bank and not a confirming bank.
RULING: YES
Bringing the letter of credit to the attention of the
seller is the primordial obligation of an advising bank.
As advising bank, Bank of America is bound only to
check the "apparent authenticity" of the letter of
credit.
Bank of America has only been an advising, bank by
the provisions of the letter of credit itself. Its 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 that the
draft required by the letter of credit is to be drawn
under the account of General Chemicals (buyer) only
means 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.
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. The bare statement of
the bank employees 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, 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. 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 every least, with
General Chemicals. In the ordinary course of business,
the perfection of contract precedes the issuance of a
letter of credit.
12. Bank of the Philippine Islands vs De Reny Fabrics
35 SCRA 256
Facts: De Reny Fabric Industries, Inc. (De Reny) applied
for, and was granted, four (4) irrevocable commercial
letters of credit with the Bank of Philippine Islands
(BPI). The letter of credits was used to cover the
purchase of goods by De Reny from its American
supplier, the J.B. Distributing Company. As each
shipment arrived in the Philippines, the De Reny Fabric
Industries, Inc. made partial payments to the Bank
amounting to 12,000. Further payments were,
however, subsequently discontinued by the
corporation when it became established, as a result of
a chemical test conducted by the National Science
Development Board, that the goods that arrived in
Manila were colored chalks instead of dyestuffs. The
corporation also refused to take possession of these
goods, and for this reason, the Bank caused them to
be deposited with a bonded warehouse paying
therefor the amount of P12,609.64 up to the filing of
its complaint with the court.
Issue: Whether or not De Reny fabrics is liable under
the letter of Credit
Ruling: NO. Even without the stipulation recited
above, the appellants cannot shift the burden of loss
to the Bank on account of the violation by their
vendor of its prestation. It was uncontrovertibly
proven by the Bank during the trial below that banks,
in providing financing in international business
transactions such as those entered into by the
appellants, do not deal with the property to be
exported or shipped to the importer, but deal only
with documents. The existence of a custom in
international banking and financing circles negating
any duty on the part of a bank to verify whether what
has been described in letters of credits or drafts or
shipping documents actually tallies with what was
loaded aboard ship, having been positively proven as a
fact, the appellants are bound by this established
usage. They were, after all, the ones who tapped the
facilities afforded by the Bank in order to engage in
international business.
Under the terms of their Commercial Letter of Credit
Agreements with the Bank, the appellants agreed that
the Bank shall not be responsible for the “existence,
character, quality, quantity, conditions, packing, value,
or delivery of the property purporting to be
represented by documents; for any difference in
character, quality, quantity, condition, or value of the
property from that expressed in documents,” or for
“partial or incomplete shipment, or failure or omission
to ship any or all of the property referred to in the
Credit,” as well as “for any deviation from instructions,
delay, default or fraud by the shipper or anyone else
in connection with the property the shippers or
vendors and ourselves [purchasers] or any of us.”
Having agreed to these terms, the appellants have,
therefore, no recourse but to comply with their
covenant.
13. INSULAR BANK OF ASIA & AMERICA vs. IAC
G.R. No. L-74834
November 17, 1988
FACTS: The Spouses Mendoza obtained two loans
from Philam Life totalling PhP 600,000. The loans
(together with a 14% nominal interest rate) were to be
liquidated in equal amortizations over a period of 5
years. To secure payment, Philam Life required that
the said amortizations be guaranteed by an
irrevocable standby letter of credit (L/C) of a
commercial bank. As such, the Spouses Mendoza
contracted with Insular Bank for the issuance of two
irrevocable standby L/C in favor of Philam Life for the
total amount of PhP 600,000. These L/Cs were, in turn,
secured by a real estate mortgage on the property of
the spouses in favor of Insular Bank.
The Mendozas failed to pay Philam Life the
amortizations that fell due on 11 June 1978, thus,
Philam Life informed Insular Bank that it was declaring
both loans "entirely due and demandable", and
demanded the payment of PhP492,996.30. Insular
Bank contested the propriety of calling in the entire
loan, and philam life desisted. However, the spouses
once again defaulted on their amortization, causing
Philam Life to declare the remaining PhP 274,779.56
entirely due and demandable again. By way of
defense, Insular Bank claimed that, as a mere
guarantor of the spouses, its remaining obligation
under the two standby L/Cs were only PhP30,100.60.
Later, the bank even claimed that it made an
overpayment to Philam Life, and demanded a refund
of the same.
Philam life filed a suit against the spouses and Insular
Bank for the recovery of the amount of the loan
allegedly still owed to them. The trial court ruled that
Insular Bank, "as surety", was discharged of its liability
to the extent of the payment made by the spouses, as
the principal debtors, to Philam Life.
Upon appeal of Philam Life and the spouses, the
appellate court reversed the lower court's decision,
and ruled that insular bank's liability was not reduced
by virtue of the payments made by Mendoza.
ISSUE:
Whether the partial payments made by the Spouses
Mendoza would have the effect of reducing the
liability of the Insular Bank as guarantor or surety
under the terms of the standby L/C in question.
RULING:
NO, the partial payments made will not reduce the
liability of Insular Bank.
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. They
are primary obligations and not accessory contracts.
Being separate and independent agreements, the
payments made by the Mendozas cannot be added in
computing IBBA'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.
The amount of P222,000.00 as found by the trial
court, therefore, considered as "any obligation of the
accountee" under the L/Cs will still have to be paid by
Insular Bank under the explicit terms thereof, which
the bank 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. Like any other writing, it will be
construed most strongly against the writer and so as
to be reasonable and consistent with honest
intentions
14. MWSS vs. Hon Daway, 432 SCRA 559 (2004)
Letters of credit
Facts: Maynilad obtained a 20-year concession to
manage, repair, refurbish, and upgrade existing
Metropolitan Waterworks and Sewerage System
(MWSS) water delivery and sewerage services in
Metro Manila’s west zone. Maynilad, under the
concession agreement undertook to pay concession
fees and its foreign loans. To secure its obligations,
Maynilad was required under Section 6.9 of the
concession contract to put up a bond, bank guarantee
or other security acceptable to MWSS. Pursuant to
this requirement, Maynilad arranged on for a three-
year facility with a number of foreign banks led by
Citicorp Intl for the issuance of an irrevocable standby
letter of credit (SLC) in the amount of $ 120 million in
favor of MWSS for the full and prompt payment of
Maynilad’s obligations to MWSS. Due to devaluation
of the peso and other business reversals of Maynilad,
MWSS filed a notice of early termination of the
concession contract. Upon certification of the non-
performance of Maynilad obligation, the MWSS
moved to collect from Citicorp on the standby letters
of credit issued. Maynilad filed for corporate
rehabilitation. Judge Daway stayed the payment of the
letter of credit by Citicorp pursuant to Sec 6 (b) of Rule
4 of the Interim Rules on Corporate Rehabilitation.
Issue: Whether or not the payment of the standby of
letter of credit can be stayed by filing of a petition for
rehabilitation
Held: No. The prohibition under Sec 6 (b) of Rule 4 of
the Interim Rules does not apply to the the standby
letter of credit issued by the bank as the former
prohibition is on the enforcement of claims against
guarantors or sureties of the debtors whose
obligations are not solidary with the debtor.
The participating bank’s obligation under the letter of
credit are solidary with respondent Maynilad in that it
is a primary, direct, definite and an absolute
undertaking to pay and is not conditioned on the prior
exhaustion of the debtors assets. These are the same
characteristics of a surety or solidary obligor. And
being solidary, the claims against them can be pursued
separately from and independently of the
rehabilitation case.
Issuing banks under the letters of credit are not
equivalent to guarantors. The concept of guarantee
vis-à-vis the concept of an irrevocable letter of credit
are inconsistent with each other. The guarantee
theory destroys the independence of the bank’s
responsibility from the contract upon which it was
opened and 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 letter of credit,
the bank undertakes a primary obligation. We have
also defined a letter of credit as an engagement by a
bank or other person made at the request of a
customer that the issuer shall honor drafts or other
demands of payment upon compliance with the
conditions specified in the credit.
A Standby Letter of Credit is not a guaranty because
under a Standby Letter of Credit, the bank undertakes
a primary obligation. On the other hand, a guarantor
undertakes a collateral obligation which arises only
upon the debtor’s default. A Standby Letter of Credit
is a primary obligation and not an accessory contract.
15. Philippine Virginia Tobacco Administration v Judge
Delos Santos G.R. No. L-27829 August 19, 1988
Doctrine: An irrevocable letter of credit cannot,
during its lifetime, be cancelled or modified without
the express permission of the beneficiary.
Facts: The Philippine Virginia Tobacco Administration
(PVTA) and Timoteo Sevilla, Gen. manager of
Philippine Associated Resources (PAR), entered into a
contract for the importation of Virginia leaf tobacco
and a counterpart exportation of tobacco and of
farmer’s and tobacco at P3.00 a kilo. In accordance
with their contract Sevilla purchased from PVZTA and
exported tobacco, paying the PVTA and leaving some
balance. Before respondent Sevilla could import the
counterpart blending Virginia tobacco, Republic Act
No. 4155 was passed and took effect on June 20, 1
964, authorizing the PVTA to grant import privileges at
the ratio of 4 to 1 instead of 9 to 1 and to dispose of
all its tobacco stock at the best price available.
Because of the prevailing export or world market price
under which Sevilla will be exporting at a loss, the
agreement was further amended to require Sevilla
would open an irrevocable letter of credit with the
Prudential Bank and Trust Co. (Prudential) in favor of
the PVTA to secure the payment of said balance,
drawable upon the release from the Bureau of
Customs of the imported Virginia blending tobacco.
While Sevilla was trying to negotiate the reduction of
the procurement cost of PVTA tobacco already
exported which attempt was denied by PVTA and also
by the Office of the President. PVTA attempted to
collect from the letter of Credit with
Prudential. Sevilla filed an injunction for the release of
funds with Prudential in the sala of Judge Delos
Santos. Judge Delos Santos issued the injunction
order and in a subsequent petition, ordered the funds
of the letter of credit released to Sevilla.
Issue: WON Respondent Judge acted with grave
abuse of discretion in releasing the funds to the
applicant of the letter of credit.
Held: Yes. Judge Delos Santos violated the
irrevocability of the letter of credit issued by
respondent Bank in favor of petitioner. An irrevocable
letter of credit cannot, during its lifetime, be
cancelled or modified Without the express
permission of the beneficiary. Consequently, if the
finding the trial on the merits is that respondent
Sevilla has ailieged unpaid balance due the petitioner,
such unpaid obligation would be unsecured.
16. LBP vs. Monet's Export and Manufacuring
Corporation
Facts: Land Bank of the Philippines (Land Bank), and
Monet’s Export and Manufacturing Corporation
(Monet) executed an Export Packing Credit Line
Agreement under which Monet was given a credit line
in the amount of P250,000.00, secured by the
proceeds of its export letters of credit, the continuing
guaranty of the spouses Vicente V. Tagle, Sr. and Ma.
Consuelo G. Tagle. The credit line agreement was
renewed and amended several times until it was
increased to P5,000,000.00. Subsequently, Monet
appointed Land Bank as an assignor to demand,
collect and receive the proceeds of the export letters
of credit of their clients at a oan value of 80%.
One of Monet’s, Wishbone Trading Company of
Hong Kong (Wishbone), drew the amount of
US$38,768.40 on the letter of credit. However,
Landbank was not able to collect from Wishbone.
Monet alleged as a consequence that they are not
liable for the letter of credit as Land Bank failed and
refused to collect the receivables on their export letter
of credit against Wishbone.
Issue: Whether or not the failure of Landbank to
collect from Wishbone Trading Company of Hong
Kong absolves Monet from liability.
Held: No. Monet is still liable notwithstanding
Landbank’s failure to collect. Land Bank that, as the
issuing bank in the transaction involving an import
letter of credit, is independent from its function as an
agent of the spouses. As the issuer of the 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.
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 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.
However, Monet’s liabilities are mitigated as the
bank failed to exercised the required diligence in its
collection. 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.
17. Abad vs. Court of AppealsG.R. No. 42735. January
22, 1990
On October 31, 1963, TOMCO, Inc., now known as
Southeast Timber Co. (Phils.), Inc., applied for, and
was granted by the Philippine Commercial and
Industrial Bank (PCIB) a domestic letter of credit for
P80,000 in favor of its supplier, Oregon Industries,
Inc., to pay for one Skagit Yarder. PCIB paid to Oregon
Industries the cost of the machinery against a bill of
exchange for P80,000 with date of maturity on
January 4, 1964. After making the required marginal
deposit of P28,000 on November 5, 1963, TOMCO, Inc.
signed and delivered to the bank a trust receipt
acknowledging receipt of the merchandise in trust for
the bank, with the obligation to hold the same in
storage as property of PCIB, with a right to sell the
same for cash provided that the entire proceeds
thereof are turned over to the bank, to be applied
against acceptance and any other indebtedness of
TOMCO. In consideration of the release to TOMCO,
Inc. by PCIB of the machinery covered by the trust
receipt, petitioner Ramon Abad signed an undertaking
whereby he promised to pay the obligation jointly and
severally with TOMCO, Inc. Except for TOMCO’s
marginal deposit in the bank, no payment has been
made to PCIB by either TOMCO, Inc. or Abad.
Consequently, the bank sued petitioners. PCIB
presented in evidence a “Statement of Draft Drawn”
showing that TOMCO was obligated to it in the total
sum of P125,766.13 as of August 26, 1970. TOMCO did
not deny its liability to PCIB under the letter of credit
but it alleged that inasmuch as it made a marginal
deposit of P28,000, this amount should have been
deducted from its principal obligation, leaving a
balance of P52,000 only, on which the bank should
have computed the interest, bank charges, and
attorney’s fees.
Issue: Whether or not the marginal deposit be
deducted against the LOC
Held: Yes. A trust receipt is considered as a security
transaction intended to aid in financing importers and
retail dealers who do not have sufficient funds or
resources to finance the importation or purchase of
merchandise, and who may not be able to acquire
credit except through utilization, as collateral of the
merchandise imported or purchased. The bank does
not become the real owner of the goods. It is merely
the holder of a security title for the advances it had
made to the importer. The goods the importer had
purchased through the bank financing, remain the
importer’s property and he holds it at his own risk.
The trust receipt arrangement does not convert the
bank into an investor; it remains a lender and creditor.
A trust receipt, is a security agreement, pursuant to
which a bank acquires a ‘security interest’ in the
goods. It secures an indebtedness and there can be
no such thing as security interest that secures no
obligation.” The marginal deposit requirement is a
Central Bank measure to cut off excess currency
liquidity which would create inflationary pressure. It is
a collateral security given by the debtor, and is
supposed to be returned to him upon his compliance
with his secured obligation. Consequently, the bank
pays no interest on the marginal deposit, unlike an
ordinary bank deposit which earns interest in the
bank. As a matter of fact, the marginal deposit
requirement for letters of credit has been
discontinued, except in those cases where the
applicant for a letter of credit is not known to the
bank or does not maintain a good credit standing
therein. It is not farfetched to assume that the bank
used TOMCO’s marginal deposit to partially fund the
P80,000 letter of credit it issued to TOMCO, hence, the
interests and other charges on said letter of credit
should be levied only on the balance of P52,000 which
was the portion that was actually funded or loaned by
the bank from its own funds. Requiring the importer
to pay interest on the entire letter of credit without
deducting first his marginal deposit, would be a clear
case of unjust enrichment by the bank.
18. RCBC V Alfa RTW Manufacturing Corp. 368 SCRA
611 (2001)
Facts: Alfa RTW Manufacturing Corporation
(Alfa RTW), on separate instances, was granted by the
plaintiff Rizal Commercial Banking Corporation (RCBC)
four Letters of Credit to facilitate its purchase of raw
materials for its garments business. Corresponding
bills of exchange of various amounts were drawn, and
charged to the account of Alfa RTW. Alfa, in turn,
had executed four Trust Receipts stipulating that it
had received in trust for the RCBC the goods and
merchandise described therein, and which were
purchased with the drawings upon the letters of
credit.
When the obligations upon the said
commercial documents became due, the plaintiff
demanded payment of the defendants’ undertakings,
citing two Comprehensive Surety Agreements which
were signed by Alfa Integrated Textile Mills and its
officers to guarantee jointly and severally, punctual
payment at maturity to RCBC, together with any and
all expenses of collection, etc.,
RCBC filed against Alfa RTW a complaint for
sum of money. It was awarded P18,961,372.43, with
legal interest until fully paid. The proceeds from the
sale of defendant Alfa’s ready to wear apparel, in the
sum of P73,133.70, should be deducted from the
principal obligation of P18,961,372.43. However, upon
appeal, the CA modified the RTC decision by
decreasing the award from P18,961.372.43 to
P3,060,406.25.
Issue: What is the agreement entered into
by the parties?
Ruling: The case now before us involves an
obligation arising from a letter of credit-trust receipt
transaction. Under this arrangement, a bank extends
to a borrower a loan covered by the letter of credit,
with the trust receipt as security of the loan. A trust
receipt is "a security transaction intended to aid in
financing importers and retail dealers who do not
have sufficient funds or resources to finance the
importation or purchase of merchandise, and who
may not be able to acquire credit except thru
utilization, as collateral, of the merchandise imported
or purchased."
In contracts contained in trust receipts, the
contracting parties may establish agreements, terms
and conditions they may deem advisable, provided
they are not contrary to law, morals or public order. In
the case at bar, there are specific amounts of interest,
service charges and penalties agreed upon by the
parties.
The Court of Appeals awarded only the sum of
P3,060,406.25 as it was the amount prayed for in the
complaint. However, sixteen years have already
lapsed from the filing of the complaint up to the time
the CA decided the case. The computed interest in
1982 would no longer be true in 1998. What the
Appellate Court should have done then was to
compute the total amount due in accordance with the
rules of thumb laid down by this Court in Eastern
Shipping Lines, Inc., the resulting formula of which is
as follows:
TOTAL AMOUNT DUE = principal + interest +
service charge + penalty + interest on interest
Attorney’s fees is 10% of the total amount
computed as of finality of judgment
Total amount due as of the date of finality of
judgment will earn an interest of 12% per
annum until fully paid.
Thus, the amount payable should be
computed by the trial court, upon finality of this
Decision, in accordance with the formula indicated
above.
19. Bank of Commerce (BOC) v. Teresita S. Serrano
[451 SCRA 484, Feb. 16, 2005]
FACTS: Serrano is the Gen. Mgr. and Treasurer of Via
Moda International, Inc., a domestic business entity
primarily engaged in the import and export of textile
materials and fabrics. Via Moda(VM), represented by
Serrano, obtained an export packing loan from
petitioner in the amount of $50k which was secured
by a Deed of Assignment over Irrevocable
Transferable Letter of Credit(LOC). Serrano executed
a promissory note in favor of BOC w/ a date of
maturity on July 14, 1994. VM then opened a deposit
account for the proceeds of the said loan. BOC issued
an Irrevocable LOC in the amount of $56.7k for the
purchase and importation of fabric and textile
products from Tiger Ear Fabric Co. Ltd. of Taiwan.
Serrano, in representation of VM secured the release
of the goods covered with a trust receipt. Under the
terms of the trust receipt, VM agreed to hold the
goods in trust for petitioner as the latter’s property
and to sell the same for the latter’s account. In case
of sale, the proceeds are to be remitted to the bank
as soon as it is received, but not later than the
maturity date. The goods covered by the trust receipt
were shipped by Via Moda to its consignee in New
Jersey, USA, who sent an Export LOC issued by the
Bank of New York, in favor of BOC. The Regional
Operations Officer of BOC signed the export
declarations to show consent to the shipment. The
total value of the entrusted goods which were shipped
per export declaration was $81.9k. The proceeds of
the entrusted goods sold were not credited to the
trust receipt but, were applied by the bank to the
principal, penalties and interest of the export packing
loan. The excess ₱472k was applied to the trust
receipt, leaving a balance of ₱1.4m as of Nov. 15,
1994.
On Nov. 16, 1994, petitioner sent a demand letter to
VM to pay the said amount plus interest and penalty
charges, or to return the goods covered by the Trust
Receipt w/in 5 days from receipt. The demand was not
heeded. As of Dec. 15, 1998, the outstanding balance
of VM was ₱4.7m. RTC charged Serrano with estafa
under Article 315 (b) of the RPC, CA reversed. Hence
this petition.
ISSUE: WON Serrano is jointly and severally liable w/
Via Moda under the guarantee clause of the letters of
credit, secured by a trust receipt.
HELD: No. A letter of credit is a separate document
from a trust receipt. While the trust receipt may have
been executed as a security on the letter of credit, still
the two documents involve different undertakings and
obligations. A letter of credit is an engagement by a
bank or other person made at the request of a
customer that the issuer will honor drafts or other
demands for payment upon compliance with the
conditions specified in the credit. Through a letter of
credit, the bank merely substitutes its own promise
to pay for the promise to pay of one of its customers
who in return promises to pay the bank the amount
of funds mentioned in the letter of credit plus credit
or commitment fees mutually agreed upon.
By contrast, a trust receipt transaction is one where
the entruster, who holds an absolute title or security
interests over certain goods, documents or
instruments, released the same to the entrustee, who
executes a trust receipt binding himself to hold the
goods, documents or instruments in trust for the
entruster and to sell or otherwise dispose of the
goods, documents and instruments with the obligation
to turn over to the entruster the proceeds thereof to
the extent of the amount owing to the entruster, or as
appears in the trust receipt, or return the goods,
documents or instruments themselves if they are
unsold, or not otherwise disposed of, in accordance
with the terms and conditions specified in the trust
receipt.
There was no misappropriation or conversion by the
respondent of the proceeds of the sale in the goods,
subject of the trust receipt since the proceeds were
actually received by petitioner but the latter applied
the same to Via Moda’s other obligations under the
export packing loan. It further stated that such
application of payment to another obligation was
done by petitioner on its own and should not create a
criminal liability on the part of respondent who did
not take part nor had any knowledge thereof. It is on
this premise that the respondent was acquitted of the
crime charged.
[Sorry kung mahaba, but yun important kasi sa case na
ito is the difference between an LOC and a trust
receipt.]