PRUDENTIAL BANK vs.

INTERMEDIATE APPELLATE COURT the cases expressly provided for in Section 143 of the Negotiable Instruments Law
(NIL). The said section provides that presentment for acceptance must be made:
G.R. No. 74886 December 8, 1992, 216 scra 257
--presentment for payment
(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;
FACTS: or

Philippine Rayon Mills, Inc. entered into a contract with Nissho Co., Ltd. of Japan for (b) Where the bill expressly stipulates that it shall be presented for
the importation of textile machineries under a five-year deferred payment plan. To acceptance; or
effect payment for said machineries, Philippine Rayon Mills opened a commercial
(c) Where the bill is drawn payable elsewhere than at the residence or place
letter of credit with the Prudential Bank and Trust Company in favor of Nissho.
of business of the drawee.
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. Two of these drafts
were accepted by Philippine Rayon Mills while the others were not. Petitioner
In no other case is presentment for acceptance necessary in order to render any party
instituted an action for the recovery of the sum of money it paid to Nissho as
to the bill liable. Obviously then, sight drafts do not require presentment for
Philippine Rayon Mills was not able to pay its obligations arising from the letter of
acceptance.
credit. Respondent court ruled that with regard to the ten drafts which were not
presented and accepted, no valid demand for payment can be made. Petitioner
however claims that the drafts were sight drafts which did not require presentment for
acceptance to Philippine Rayon.

ISSUE:
Whether presentment for acceptance of the drafts was indispensable to make Republic of the Philippines
Philippine Rayon liable thereon. SUPREME COURT
Manila
RULING:
In the case at bar, the drawee was necessarily the herein petitioner. It was to the latter THIRD DIVISION
that the drafts were presented for payment. There was in fact no need for acceptance
as the issued drafts are sight drafts. Presentment for acceptance is necessary only in
G.R. No. 74886 December 8, 1992

PRUDENTIAL BANK, petitioner,
vs.
INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON MILLS, INC. and
ANACLETO R. CHI, respondents.
DAVIDE, JR., J.:
Petitioner seeks to review and set aside the decision 1 of public respondent;
Intermediate Appellate Court (now Court of Appeals), dated 10 March 1986, in AC-
G.R. No. 66733 which affirmed in toto the 15 June 1978 decision of Branch 9 (Quezon
City) of the then Court of First Instance (now Regional Trial Court) of Rizal in Civil
Case No. Q-19312. The latter involved an action instituted by the petitioner for the
recovery of a sum of money representing the amount paid by it to the Nissho Company
Ltd. of Japan for textile machinery imported by the defendant, now private
respondent, Philippine Rayon Mills, Inc. (hereinafter Philippine Rayon), represented
by co-defendant Anacleto R. Chi.
The facts which gave rise to the instant controversy are summarized by the public
respondent as follows:
On August 8, 1962, defendant-appellant Philippine Rayon Mills, Inc. entered into a
contract with Nissho Co., Ltd. of Japan for the importation of textile machineries
under a five-year deferred payment plan (Exhibit B, Plaintiff's Folder of Exhibits, p
2). To effect payment for said machineries, the defendant-appellant applied for a
commercial letter of credit with the Prudential Bank and Trust Company in favor of
Nissho. By virtue of said application, the Prudential Bank opened Letter of Credit No.
DPP-63762 for $128,548.78 (Exhibit A, Ibid., p. 1). Against this letter of credit, drafts
were drawn and issued by Nissho (Exhibits X, X-1 to X-11, Ibid., pp. 65, 66 to 76),
which were all paid by the Prudential Bank through its correspondent in Japan, the
Bank of Tokyo, Ltd. As indicated on their faces, two of these drafts (Exhibit X and
X-1, Ibid., pp. 65-66) were accepted by the defendant-appellant through its president,
Anacleto R. Chi, while the others were not (Exhibits X-2 to X-11, Ibid., pp. 66 to 76).
Upon the arrival of the machineries, the Prudential Bank indorsed the shipping
documents to the defendant-appellant which accepted delivery of the same. To enable
the defendant-appellant to take delivery of the machineries, it executed, by prior
arrangement with the Prudential Bank, a trust receipt which was signed by Anacleto
R. Chi in his capacity as President (sic) of defendant-appellant company (Exhibit C,
Ibid., p. 13).
At the back of the trust receipt is a printed form to be accomplished by two sureties
who, by the very terms and conditions thereof, were to be jointly and severally liable
to the Prudential Bank should the defendant-appellant fail to pay the total amount or
any portion of the drafts issued by Nissho and paid for by Prudential Bank. The
defendant-appellant was able to take delivery of the textile machineries and installed
the same at its factory site at 69 Obudan Street, Quezon City.
Sometime in 1967, the defendant-appellant ceased business operation (sic). On
December 29, 1969, defendant-appellant's factory was leased by Yupangco Cotton
Mills for an annual rental of P200,000.00 (Exhibit I, Ibid., p. 22). The lease was
renewed on January 3, 1973 (Exhibit J, Ibid., p. 26). On January 5, 1974, all the textile
machineries in the defendant-appellant's factory were sold to AIC Development
Corporation for P300,000.00 (Exhibit K, Ibid., p. 29).
The obligation of the defendant-appellant arising from the letter of credit and the trust
receipt remained unpaid and unliquidated. Repeated formal demands (Exhibits U, V,
and W, Ibid., pp. 62, 63, 64) for the payment of the said trust receipt yielded no result
Hence, the present action for the collection of the principal amount of P956,384.95
was filed on October 3, 1974 against the defendant-appellant and Anacleto R. Chi. In
their respective answers, the defendants interposed identical special defenses, viz., the
complaint states no cause of action; if there is, the same has prescribed; and the
plaintiff is guilty of laches. 2
On 15 June 1978, the trial court rendered its decision the dispositive portion of which
reads:
WHEREFORE, judgment is hereby rendered sentencing the defendant Philippine
Rayon Mills, Inc. to pay plaintiff the sum of P153,645.22, the amounts due under
Exhibits "X" & "X-1", with interest at 6% per annum beginning September 15, 1974
until fully paid.
Insofar as the amounts involved in drafts Exhs. "X" (sic) to "X-11", inclusive, the
same not having been accepted by defendant Philippine Rayon Mills, Inc., plaintiff's
cause of action thereon has not accrued, hence, the instant case is premature.
Insofar as defendant Anacleto R. Chi is concerned, the case is dismissed. Plaintiff is
ordered to pay defendant Anacleto R. Chi the sum of P20,000.00 as attorney's fees.
With costs against defendant Philippine Rayon Mills, Inc.
SO ORDERED. 3
Petitioner appealed the decision to the then Intermediate Appellate Court. In urging
the said court to reverse or modify the decision, petitioner alleged in its Brief that the
trial court erred in (a) disregarding its right to reimbursement from the private
respondents for the entire unpaid balance of the imported machines, the total amount
of which was paid to the Nissho Company Ltd., thereby violating the principle of the
third party payor's right to reimbursement provided for in the second paragraph of
Article 1236 of the Civil Code and under the rule against unjust enrichment; (b)
refusing to hold Anacleto R. Chi, as the responsible officer of defendant corporation,
liable under Section 13 of P.D No 115 for the entire unpaid balance of the imported
machines covered by the bank's trust receipt (Exhibit "C"); (c) finding that the solidary
guaranty clause signed by Anacleto R. Chi is not a guaranty at all; (d) controverting
the judicial admissions of Anacleto R. Chi that he is at least a simple guarantor of the
said trust receipt obligation; (e) contravening, based on the assumption that Chi is a
simple guarantor, Articles 2059, 2060 and 2062 of the Civil Code and the related
evidence and jurisprudence which provide that such liability had already attached; (f)
contravening the judicial admissions of Philippine Rayon with respect to its liability
to pay the petitioner the amounts involved in the drafts (Exhibits "X", "X-l" to "X-
11''); and (g) interpreting "sight" drafts as requiring acceptance by Philippine Rayon
before the latter could be held liable thereon. 4
In its decision, public respondent sustained the trial court in all respects. As to the first
and last assigned errors, it ruled that the provision on unjust enrichment, Article 2142
of the Civil Code, applies only if there is no express contract between the parties and
there is a clear showing that the payment is justified. In the instant case, the
relationship existing between the petitioner and Philippine Rayon is governed by
specific contracts, namely the application for letters of credit, the promissory note, the
drafts and the trust receipt. With respect to the last ten (10) drafts (Exhibits "X-2" to
"X-11") which had not been presented to and were not accepted by Philippine Rayon,
petitioner was not justified in unilaterally paying the amounts stated therein. The
public respondent did not agree with the petitioner's claim that the drafts were sight
drafts which did not require presentment for acceptance to Philippine Rayon because
paragraph 8 of the trust receipt presupposes prior acceptance of the drafts. Since the
ten (10) drafts were not presented and accepted, no valid demand for payment can be THE PHILIPPINES AND UNDER THE GENERAL PRINCIPLE AGAINST
made. UNJUST ENRICHMENT;

Public respondent also disagreed with the petitioner's contention that private II. WHETHER OR NOT RESPONDENT CHI IS SOLIDARILY LIABLE UNDER
respondent Chi is solidarily liable with Philippine Rayon pursuant to Section 13 of THE TRUST RECEIPT (EXH. C);
P.D. No. 115 and based on his signature on the solidary guaranty clause at the dorsal
side of the trust receipt. As to the first contention, the public respondent ruled that the
civil liability provided for in said Section 13 attaches only after conviction. As to the III. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS OF
second, it expressed misgivings as to whether Chi's signature on the trust receipt made RESPONDENT CHI HE IS LIABLE THEREON AND TO WHAT EXTENT;
the latter automatically liable thereon because the so-called solidary guaranty clause
at the dorsal portion of the trust receipt is to be signed not by one (1) person alone,
but by two (2) persons; the last sentence of the same is incomplete and unsigned by IV. WHETHER OR NOT RESPONDENT CHI IS MERELY A SIMPLE
witnesses; and it is not acknowledged before a notary public. Besides, even granting GUARANTOR; AND IF SO; HAS HIS LIABILITY AS SUCH ALREADY
that it was executed and acknowledged before a notary public, Chi cannot be held ATTACHED;
liable therefor because the records fail to show that petitioner had either exhausted the
properties of Philippine Rayon or had resorted to all legal remedies as required in
Article 2058 of the Civil Code. As provided for under Articles 2052 and 2054 of the
V. WHETHER OR NOT AS THE SIGNATORY AND RESPONSIBLE OFFICER
Civil Code, the obligation of a guarantor is merely accessory and subsidiary,
OF RESPONDENT PHIL. RAYON RESPONDENT CHI IS PERSONALLY
respectively. Chi's liability would therefore arise only when the principal debtor fails
LIABLE PURSUANT TO THE PROVISION OF SECTION 13, P.D. 115;
to comply with his obligation. 5

VI. WHETHER OR NOT RESPONDENT PHIL. RAYON IS LIABLE TO THE

Its motion to reconsider the decision having been denied by the public respondent in
PETITIONER UNDER THE TRUST RECEIPT (EXH. C);
its Resolution of 11 June 1986, 6 petitioner filed the instant petition on 31 July 1986
submitting the following legal issues:

VII. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS

RESPONDENT PHIL. RAYON IS LIABLE TO THE PETITIONER UNDER THE
I. WHETHER OR NOT THE RESPONDENT APPELLATE COURT
DRAFTS (EXHS. X, X-1 TO X-11) AND TO WHAT EXTENT;
GRIEVOUSLY ERRED IN DENYING PETITIONER'S CLAIM FOR FULL
REIMBURSEMENT AGAINST THE PRIVATE RESPONDENTS FOR THE
PAYMENT PETITIONER MADE TO NISSHO CO. LTD. FOR THE BENEFIT OF
PRIVATE RESPONDENT UNDER ART. 1283 OF THE NEW CIVIL CODE OF VIII. WHETHER OR NOT SIGHT DRAFTS REQUIRE PRIOR ACCEPTANCE
FROM RESPONDENT PHIL. RAYON BEFORE THE LATTER BECOMES
LIABLE TO PETITIONER. 7

In the Resolution of 12 March 1990, 8 this Court gave due course to the petition after
the filing of the Comment thereto by private respondent Anacleto Chi and of the Reply
to the latter by the petitioner; both parties were also required to submit their respective
memoranda which they subsequently complied with.
As We see it, the issues may be reduced as follows:
1. Whether presentment for acceptance of the drafts was indispensable to make
Philippine Rayon liable thereon;
2. Whether Philippine Rayon is liable on the basis of the trust receipt;
3. Whether private respondent Chi is jointly and severally liable with Philippine
Rayon for the obligation sought to be enforced and if not, whether he may be
considered a guarantor; in the latter situation, whether the case should have been
dismissed on the ground of lack of cause of action as there was no prior exhaustion of
Philippine Rayon's properties.
Both the trial court and the public respondent ruled that Philippine Rayon could be
held liable for the two (2) drafts, Exhibits "X" and "X-1", because only these appear
to have been accepted by the latter after due presentment. The liability for the
remaining ten (10) drafts (Exhibits "X-2" to "X-11" inclusive) did not arise because
the same were not presented for acceptance. In short, both courts concluded that
acceptance of the drafts by Philippine Rayon was indispensable to make the latter
liable thereon. We are unable to agree with this proposition. The transaction in the
case at bar stemmed from Philippine Rayon's application for a commercial letter of
credit with the petitioner in the amount of $128,548.78 to cover the former's contract
to purchase and import loom and textile machinery from Nissho Company, Ltd. of
Japan under a five-year deferred payment plan. Petitioner approved the application.
As correctly ruled by the trial court in its Order of 6 March 1975: 9
. . . By virtue of said Application and Agreement for Commercial Letter of Credit,
plaintiff bank 10 was under obligation to pay through its correspondent bank in Japan
the drafts that Nisso (sic) Company, Ltd., periodically drew against said letter of credit
from 1963 to 1968, pursuant to plaintiff's contract with the defendant Philippine
Rayon Mills, Inc. In turn, defendant Philippine Rayon Mills, Inc., was obligated to
pay plaintiff bank the amounts of the drafts drawn by Nisso (sic) Company, Ltd.
against said plaintiff bank together with any accruing commercial charges, interest,
etc. pursuant to the terms and conditions stipulated in the Application and Agreement
of Commercial Letter of Credit Annex "A".
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. 11 Through a letter of
credit, the bank merely substitutes its own promise to pay for 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. 12 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). 13
The said section reads:
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.
The acceptance of a bill is the signification by the drawee of his assent to the order of
the drawer; 14 this may be done in writing by the drawee in the bill itself, or in a
separate instrument. 15
The parties herein agree, and the trial court explicitly ruled, that the subject, drafts are
sight drafts. Said the latter:
. . . In the instant case the drafts being at sight, they are supposed to be payable upon
acceptance unless plaintiff bank has given the Philippine Rayon Mills Inc. time within
which to pay the same. The first two drafts (Annexes C & D, Exh. X & X-1) were
duly accepted as indicated on their face (sic), and upon such acceptance should have
been paid forthwith. These two drafts were not paid and although Philippine Rayon
Mills
ought to have paid the same, the fact remains that until now they are still unpaid. 16
Corollarily, they are, pursuant to Section 7 of the NIL, payable on demand. Section 7
provides:
Sec. 7. When payable on demand. — An instrument is payable on demand —
(a) When so it is expressed to be payable on demand, or at sight, or on presentation;
or
(b) In which no time for payment in expressed.
Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards
the person so issuing, accepting, or indorsing it, payable on demand. (emphasis
supplied)
Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment at
maturity of any accepted draft, bill of exchange or indebtedness shall not be
extinguished or modified" 17 does not, contrary to the holding of the public
respondent, contemplate prior acceptance by Philippine Rayon, but by the petitioner.
Acceptance, however, was not even necessary in the first place because the drafts
which were eventually issued were sight drafts And even if these were not sight drafts,
thereby necessitating acceptance, it would be the petitioner — and not Philippine
Rayon — which had to accept the same for the latter was not the drawee. Presentment
for acceptance is defined an the production of a bill of exchange to a drawee for
acceptance. 18 The trial court and the public respondent, therefore, erred in ruling that
presentment for acceptance was an indispensable requisite for Philippine Rayon's
liability on the drafts to attach. Contrary to both courts' pronouncements, Philippine
Rayon immediately became liable thereon upon petitioner's payment thereof. Such is
the essence of the letter of credit issued by the petitioner. A different conclusion would
violate the principle upon which commercial letters of credit are founded because in
such a case, both the beneficiary and the issuer, Nissho Company Ltd. and the
petitioner, respectively, would be placed at the mercy of Philippine Rayon even if the
latter had already received the imported machinery and the petitioner had fully paid
for it. The typical setting and purpose of a letter of credit are described in Hibernia
Bank and Trust Co. vs. J. Aron & Co., Inc., 19 thus:
Commercial letters of credit have come into general use in international sales
transactions where much time necessarily elapses between the sale and the receipt by
a purchaser of the merchandise, during which interval great price changes may occur.
Buyers and sellers struggle for the advantage of position. The seller is desirous of
being paid as surely and as soon as possible, realizing that the vendee at a distant point
has it in his power to reject on trivial grounds merchandise on arrival, and cause
considerable hardship to the shipper. Letters of credit meet this condition by affording
celerity and certainty of payment. Their purpose is to insure to a seller payment of a
definite amount upon presentation of documents. The bank deals only with
documents. It has nothing to do with the quality of the merchandise. Disputes as to
the merchandise shipped may arise and be litigated later between vendor and vendee,
but they may not impede acceptance of drafts and payment by the issuing bank when
the proper documents are presented.
The trial court and the public respondent likewise erred in disregarding the trust
receipt and in not holding that Philippine Rayon was liable thereon. In People vs. Yu
Chai Ho, 20 this Court explains the nature of a trust receipt by quoting In re Dunlap
Carpet Co., 21 thus:
By this arrangement a banker advances money to an intending importer, and thereby
lends the aid of capital, of credit, or of business facilities and agencies abroad, to the
enterprise of foreign commerce. Much of this trade could hardly be carried on by any
other means, and therefore it is of the first importance that the fundamental factor in
the transaction, the banker's advance of money and credit, should receive the amplest
protection. Accordingly, in order to secure that the banker shall be repaid at the critical
point — that is, when the imported goods finally reach the hands of the intended
vendee — the banker takes the full title to the goods at the very beginning; he takes it
as soon as the goods are bought and settled for by his payments or acceptances in the
foreign country, and he continues to hold that title as his indispensable security until
the goods are sold in the United States and the vendee is called upon to pay for them.
This security is not an ordinary pledge by the importer to the banker, for the importer
has never owned the goods, and moreover he is not able to deliver the possession; but
the security is the complete title vested originally in the bankers, and this characteristic
of the transaction has again and again been recognized and protected by the courts. Of
course, the title is at bottom a security title, as it has sometimes been called, and the
banker is always under the obligation to reconvey; but only after his advances have
been fully repaid and after the importer has fulfilled the other terms of the contract.
As further stated in National Bank vs. Viuda e Hijos de Angel Jose, 22 trust receipts:
. . . [I]n a certain manner, . . . partake of the nature of a conditional sale as provided
by the Chattel Mortgage Law, that is, the importer becomes absolute owner of the
imported merchandise as soon an he has paid its price. The ownership of the
merchandise continues to be vested in the owner thereof or in the person who has
advanced payment, until he has been paid in full, or if the merchandise has already
been sold, the proceeds of the sale should be turned over to him by the importer or by
his representative or successor in interest.
Under P.D. No. 115, otherwise known an the Trust Receipts Law, which took effect
on 29 January 1973, a trust receipt transaction is defined as "any transaction by and
between a person referred to in this Decree as the entruster, and another person
referred to in this Decree as the entrustee, whereby the entruster, who owns or holds
absolute title or security interests' over certain specified goods, documents or
instruments, releases the same to the possession of the entrustee upon the latter's
execution and delivery to the entruster of a signed document called the "trust receipt"
wherein the entrustee binds himself to hold the designated goods, documents or
instruments in trust for the entruster and to sell or otherwise dispose of the goods,
documents or 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 the goods, instruments themselves if they are unsold or not otherwise
disposed of, in accordance with the terms and conditions specified in the trusts receipt,
or for other purposes substantially equivalent to any one of the following: . . ."
action, may be brought by the injured party in cases of defamation, fraud and physical
injuries. Estafa falls under fraud.
We also conclude, for the reason hereinafter discussed, and not for that adduced by
the public respondent, that private respondent Chi's signature in the dorsal portion of
the trust receipt did not bind him solidarily with Philippine Rayon. The statement at
the dorsal portion of the said trust receipt, which petitioner describes as a "solidary
guaranty clause", reads:

It is alleged in the complaint that private respondents "not only have presumably put In consideration of the PRUDENTIAL BANK AND TRUST COMPANY complying
said machinery to good use and have profited by its operation and/or disposition but with the foregoing, we jointly and severally agree and undertake to pay on demand to
very recent information that (sic) reached plaintiff bank that defendants already sold the PRUDENTIAL BANK AND TRUST COMPANY all sums of money which the
the machinery covered by the trust receipt to Yupangco Cotton Mills," and that "as said PRUDENTIAL BANK AND TRUST COMPANY may call upon us to pay
trustees of the property covered by the trust receipt, . . . and therefore acting in arising out of or pertaining to, and/or in any event connected with the default of and/or
fiduciary (sic) capacity, defendants have willfully violated their duty to account for non-fulfillment in any respect of the undertaking of the aforesaid:
the whereabouts of the machinery covered by the trust receipt or for the proceeds of
any lease, sale or other disposition of the same that they may have made,
notwithstanding demands therefor; defendants have fraudulently misapplied or PHILIPPINE RAYON MILLS, INC.
converted to their own use any money realized from the lease, sale, and other
disposition of said machinery." 23 While there is no specific prayer for the delivery
to the petitioner by Philippine Rayon of the proceeds of the sale of the machinery
We further agree that the PRUDENTIAL BANK AND TRUST COMPANY does not
covered by the trust receipt, such relief is covered by the general prayer for "such
have to take any steps or exhaust its remedy against aforesaid:
further and other relief as may be just and equitable on the premises." 24 And although
it is true that the petitioner commenced a criminal action for the violation of the Trust
Receipts Law, no legal obstacle prevented it from enforcing the civil liability arising
out of the trust, receipt in a separate civil action. Under Section 13 of the Trust before making demand on me/us.
Receipts Law, the failure of an entrustee to turn over the proceeds of the sale of goods,
documents or instruments covered by a trust receipt to the extent of the amount owing
to the entruster or as appear in the trust receipt or to return said goods, documents or (Sgd.) Anacleto R. Chi
instruments if they were not sold or disposed of in accordance with the terms of the
ANACLETO R. CHI 26
trust receipt shall constitute the crime of estafa, punishable under the provisions of
Article 315, paragraph 1(b) of the Revised Penal Code. 25 Under Article 33 of the
Civil Code, a civil action for damages, entirely separate and distinct from the criminal
Petitioner insists that by virtue of the clear wording of the statement, specifically the
clause ". . . we jointly and severally agree and undertake . . .," and the concluding
sentence on exhaustion, Chi's liability therein is solidary.
In holding otherwise, the public respondent ratiocinates as follows:
With respect to the second argument, we have our misgivings as to whether the mere
signature of defendant-appellee Chi of (sic) the guaranty agreement, Exhibit "C-1",
will make it an actionable document. It should be noted that Exhibit "C-1" was
prepared and printed by the plaintiff-appellant. A perusal of Exhibit "C-1" shows that
it was to be signed and executed by two persons. It was signed only by defendant-
appellee Chi. Exhibit "C-1" was to be witnessed by two persons, but no one signed in
that capacity. The last sentence of the guaranty clause is incomplete. Furthermore, the
plaintiff-appellant also failed to have the purported guarantee clause acknowledged
before a notary public. All these show that the alleged guaranty provision was
disregarded and, therefore, not consummated.
But granting arguendo that the guaranty provision in Exhibit "C-1" was fully executed
and acknowledged still defendant-appellee Chi cannot be held liable thereunder
because the records show that the plaintiff-appellant had neither exhausted the
property of the defendant-appellant nor had it resorted to all legal remedies against
the said defendant-appellant as provided in Article 2058 of the Civil Code. The
obligation of a guarantor is merely accessory under Article 2052 of the Civil Code
and subsidiary under Article 2054 of the Civil Code. Therefore, the liability of the
defendant-appellee arises only when the principal debtor fails to comply with his
obligation. 27
Our own reading of the questioned solidary guaranty clause yields no other conclusion
than that the obligation of Chi is only that of a guarantor. This is further bolstered by
the last sentence which speaks of waiver of exhaustion, which, nevertheless, is
ineffective in this case because the space therein for the party whose property may not
be exhausted was not filled up. Under Article 2058 of the Civil Code, the defense of
exhaustion (excussion) may be raised by a guarantor before he may be held liable for
the obligation. Petitioner likewise admits that the questioned provision is a solidary
guaranty clause, thereby clearly distinguishing it from a contract of surety. It,
however, described the guaranty as solidary between the guarantors; this would have
been correct if two (2) guarantors had signed it. The clause "we jointly and severally
agree and undertake" refers to the undertaking of the two (2) parties who are to sign
it or to the liability existing between themselves. It does not refer to the undertaking
between either one or both of them on the one hand and the petitioner on the other
with respect to the liability described under the trust receipt. Elsewise stated, their
liability is not divisible as between them, i.e., it can be enforced to its full extent
against any one of them.
Furthermore, any doubt as to the import, or true intent of the solidary guaranty clause
should be resolved against the petitioner. The trust receipt, together with the
questioned solidary guaranty clause, is on a form drafted and prepared solely by the
petitioner; Chi's participation therein is limited to the affixing of his signature thereon.
It is, therefore, a contract of adhesion; 28 as such, it must be strictly construed against
the party responsible for its preparation. 29
Neither can We agree with the reasoning of the public respondent that this solidary
guaranty clause was effectively disregarded simply because it was not signed and
witnessed by two (2) persons and acknowledged before a notary public. While indeed,
the clause ought to have been signed by two (2) guarantors, the fact that it was only
Chi who signed the same did not make his act an idle ceremony or render the clause
totally meaningless. By his signing, Chi became the sole guarantor. The attestation by
witnesses and the acknowledgement before a notary public are not required by law to
make a party liable on the instrument. The rule is that contracts shall be obligatory in
whatever form they may have been entered into, provided all the essential requisites
for their validity are present; however, when the law requires that a contract be in
some form in order that it may be valid or enforceable, or that it be proved in a certain
way, that requirement is absolute and indispensable. 30 With respect to a guaranty, 31
which is a promise to answer for the debt or default of another, the law merely requires
that it, or some note or memorandum thereof, be in writing. Otherwise, it would be
unenforceable unless ratified. 32 While the acknowledgement of a surety before a
notary public is required to make the same a public document, under Article 1358 of
the Civil Code, a contract of guaranty does not have to appear in a public document.
And now to the other ground relied upon by the petitioner as basis for the solidary
liability of Chi, namely the criminal proceedings against the latter for the violation of
P.D. No. 115. Petitioner claims that because of the said criminal proceedings, Chi
would be answerable for the civil liability arising therefrom pursuant to Section 13 of
P.D. No. 115. Public respondent rejected this claim because such civil liability
presupposes prior conviction as can be gleaned from the phrase "without prejudice to
the civil liability arising from the criminal offense." Both are wrong. The said section
reads:
Sec. 13. Penalty Clause. — The failure of an entrustee to turn over the proceeds of the
sale of the goods, documents or instruments covered by a trust receipt to the extent of
the amount owing to the entruster or as appears in the trust receipt or to return said
goods, documents or instruments if they were not sold or disposed of in accordance
with the terms of the trust receipt shall constitute the crime of estafa, punishable under
the provisions of Article Three hundred and fifteen, paragraph one (b) of Act
Numbered Three thousand eight hundred and fifteen, as amended, otherwise known
as the Revised Penal Code. If the violation or offense is committed by a corporation,
partnership, association or other juridical entities, the penalty provided for in this
Decree shall be imposed upon the directors, officers, employees or other officials or
persons therein responsible for the offense, without prejudice to the civil liabilities
arising from the criminal offense.
A close examination of the quoted provision reveals that it is the last sentence which
provides for the correct solution. It is clear that if the violation or offense is committed
by a corporation, partnership, association or other juridical entities, the penalty shall
be imposed upon the directors, officers, employees or other officials or persons therein
responsible for the offense. The penalty referred to is imprisonment, the duration of
which would depend on the amount of the fraud as provided for in Article 315 of the
Revised Penal Code. The reason for this is obvious: corporations, partnerships,
associations and other juridical entities cannot be put in jail. However, it is these
entities which are made liable for the civil liability arising from the criminal offense.
This is the import of the clause "without prejudice to the civil liabilities arising from
the criminal offense." And, as We stated earlier, since that violation of a trust receipt
constitutes fraud under Article 33 of the Civil Code, petitioner was acting well within
its rights in filing an independent civil action to enforce the civil liability arising
therefrom against Philippine Rayon.
The remaining issue to be resolved concerns the propriety of the dismissal of the case
against private respondent Chi. The trial court based the dismissal, and the respondent
Court its affirmance thereof, on the theory that Chi is not liable on the trust receipt in
any capacity — either as surety or as guarantor — because his signature at the dorsal
portion thereof was useless; and even if he could be bound by such signature as a
simple guarantor, he cannot, pursuant to Article 2058 of the Civil Code, be compelled
to pay until
after petitioner has exhausted and resorted to all legal remedies against the principal
debtor, Philippine Rayon. The records fail to show that petitioner had done so 33
Reliance is thus placed on Article 2058 of the Civil Code which provides:
Art. 2056. The guarantor cannot be compelled to pay the creditor unless the latter has
exhausted all the property of the debtor, and has resorted to all the legal remedies
against the debtor.
Simply stated, there is as yet no cause of action against Chi.
We are not persuaded. Excussion is not a condition sine qua non for the institution of
an action against a guarantor. In Southern Motors, Inc. vs. Barbosa, 34 this Court
stated:
4. Although an ordinary personal guarantor — not a mortgagor or pledgor — may
demand the aforementioned exhaustion, the creditor may, prior thereto, secure a
judgment against said guarantor, who shall be entitled, however, to a deferment of the
execution of said judgment against him until after the properties of the principal debtor
shall have been exhausted to satisfy the obligation involved in the case.
There was then nothing procedurally objectionable in impleading private respondent
Chi as a co-defendant in Civil Case No. Q-19312 before the trial court. As a matter of
fact, Section 6, Rule 3 of the Rules of Court on permissive joinder of parties explicitly
allows it. It reads:
Sec. 6. Permissive joinder of parties. — All persons in whom or against whom any
right to relief in respect to or arising out of the same transaction or series of
transactions is alleged to exist, whether jointly, severally, or in the alternative, may,
except as otherwise provided in these rules, join as plaintiffs or be joined as defendants
in one complaint, where any question of law or fact common to all such plaintiffs or
to all such defendants may arise in the action; but the court may make such orders as
may be just to prevent any plaintiff or defendant from being embarrassed or put to
expense in connection with any proceedings in which he may have no interest.
This is the equity rule relating to multifariousness. It is based on trial convenience and
is designed to permit the joinder of plaintiffs or defendants whenever there is a
common question of law or fact. It will save the parties unnecessary work, trouble and
expense. 35
However, Chi's liability is limited to the principal obligation in the trust receipt plus
all the accessories thereof including judicial costs; with respect to the latter, he shall
only be liable for those costs incurred after being judicially required to pay. 36 Interest
and damages, being accessories of the principal obligation, should also be paid; these,
however, shall run only from the date of the filing of the complaint. Attorney's fees
may even be allowed in appropriate cases.37
In the instant case, the attorney's fees to be paid by Chi cannot be the same as that to
be paid by Philippine Rayon since it is only the trust receipt that is covered by the
guaranty and not the full extent of the latter's liability. All things considered, he can
be held liable for the sum of P10,000.00 as attorney's fees in favor of the petitioner.
Thus, the trial court committed grave abuse of discretion in dismissing the complaint
as against private respondent Chi and condemning petitioner to pay him P20,000.00
as attorney's fees.
In the light of the foregoing, it would no longer necessary to discuss the other issues
raised by the petitioner
WHEREFORE, the instant Petition is hereby GRANTED.
The appealed Decision of 10 March 1986 of the public respondent in AC-G.R. CV
No. 66733 and, necessarily, that of Branch 9 (Quezon City) of the then Court of First
Instance of Rizal in Civil Case No. Q-19312 are hereby REVERSED and SET ASIDE
and another is hereby entered:
1. Declaring private respondent Philippine Rayon Mills, Inc. liable on the twelve
drafts in question (Exhibits "X", "X-1" to "X-11", inclusive) and on the trust receipt
(Exhibit "C"), and ordering it to pay petitioner: (a) the amounts due thereon in the 2 Rollo, 39-41.
total sum of P956,384.95 as of 15 September 1974, with interest thereon at six percent
(6%) per annum from 16 September 1974 until it is fully paid, less whatever may have
been applied thereto by virtue of foreclosure of mortgages, if any; (b) a sum equal to 3 Rollo, 81-83.
ten percent (10%) of the aforesaid amount as attorney's fees; and (c) the costs.

4 Brief for Appellant, 1-4; Rollo, 85, et seq.

2. Declaring private respondent Anacleto R. Chi secondarily liable on the trust receipt
and ordering him to pay the face value thereof, with interest at the legal rate,
commencing from the date of the filing of the complaint in Civil Case No. Q-19312 5 Rollo, 45-46.
until the same is fully paid as well as the costs and attorney's fees in the sum of
P10,000.00 if the writ of execution for the enforcement of the above awards against
Philippine Rayon Mills, Inc. is returned unsatisfied.

Costs against private respondents.

Today is Monday, December 09, 2019home
Custom Search
SO ORDERED.

Gutierrez, Jr., Bidin, Romero and Melo, JJ., concur.

Republic of the Philippines
SUPREME COURT
Manila

Footnotes
THIRD DIVISION

1 Rollo, 39-47; per Associate Justice Crisolito Pascual, concurred in by Associate

Justices Jose C. Campos, Jr. and Serafin E. Camilon.
G.R. No. 105395 December 10, 1993
BANK OF AMERICA, NT & SA, petitioners,
vs.
COURT OF APPEALS, INTER-RESIN INDUSTRIAL CORPORATION,
FRANCISCO TRAJANO, JOHN DOE AND JANE DOE, respondents.
Agcaoili & Associates for petitioner.
Valenzuela Law Center, Victor Fernandez and Ramon Guevarra for private
respondents.
VITUG, J.:
A "fiasco," involving an irrevocable letter of credit, has found the distressed parties
coming to court as adversaries in seeking a definition of their respective rights or
liabilities thereunder.
On 05 March 1981, petitioner Bank of America, NT & SA, Manila, received by
registered mail an Irrevocable Letter of Credit No. 20272/81 purportedly issued by
Bank of Ayudhya, Samyaek Branch, for the account of General Chemicals, Ltd., of
Thailand in the amount of US$2,782,000.00 to cover the sale of plastic ropes and
"agricultural files," with the petitioner as advising bank and private respondent Inter-
Resin Industrial Corporation as beneficiary.
On 11 March 1981, Bank of America wrote Inter-Resin informing the latter of the
foregoing and transmitting, along with the bank's communication,
the latter of credit. Upon receipt of the letter-advice with the letter of credit, Inter-
Resin sent Atty. Emiliano Tanay to Bank of America to have the letter of credit
confirmed. The bank did not. Reynaldo Dueñas, bank employee in charge of letters of
credit, however, explained to Atty. Tanay that there was no need for confirmation
because the letter of credit would not have been transmitted if it were not genuine.
Between 26 March to 10 April 1981, Inter-Resin sought to make a partial availment
under the letter of credit by submitting to Bank of America invoices, covering the
shipment of 24,000 bales of polyethylene rope to General Chemicals valued at
US$1,320,600.00, the corresponding packing list, export declaration and bill of
lading. Finally, after being satisfied that Inter-Resin's documents conformed with the
conditions expressed in the letter of credit, Bank of America issued in favor of Inter-
Resin a Cashier's Check for P10,219,093.20, "the Peso equivalent of the draft (for)
US$1,320,600.00 drawn by Inter-Resin, after deducting the costs for documentary
stamps, postage and mail issuance." 1 The check was picked up by Inter-Resin's
Executive Vice-President Barcelina Tio. On 10 April 1981, Bank of America wrote
Bank of Ayudhya advising the latter of the availment under the letter of credit and
sought the corresponding reimbursement therefor.
Meanwhile, Inter-Resin, through Ms. Tio, presented to Bank of America the
documents for the second availment under the same letter of credit consisting of a
packing list, bill of lading, invoices, export declaration and bills in set, evidencing the
second shipment of goods. Immediately upon receipt of a telex from the Bank of
Ayudhya declaring the letter of credit fraudulent, 2 Bank of America stopped the
processing of Inter-Resin's documents and sent a telex to its branch office in Bangkok,
Thailand, requesting assistance in determining the authenticity of the letter of credit.
3 Bank of America kept Inter-Resin informed of the developments. Sensing a fraud,
Bank of America sought the assistance of the National Bureau of Investigation (NBI).
With the help of the staff of the Philippine Embassy at Bangkok, as well as the police
and customs personnel of Thailand, the NBI agents, who were sent to Thailand,
discovered that the vans exported by Inter-Resin did not contain ropes but plastic
strips, wrappers, rags and waste materials. Here at home, the NBI also investigated
Inter-Resin's President Francisco Trajano and Executive Vice President Barcelina Tio,
who, thereafter, were criminally charged for estafa through falsification of
commercial documents. The case, however, was eventually dismissed by the Rizal
Provincial Fiscal who found no prima facie evidence to warrant prosecution.
Bank of America sued Inter-Resin for the recovery of P10,219,093.20, the peso
equivalent of the draft for US$1,320,600.00 on the partial availment of the now
disowned letter of credit. On the other hand, Inter-Resin claimed that not only was it
entitled to retain P10,219,093.20 on its first shipment but also to the balance
US$1,461,400.00 covering the second shipment.
On 28 June 1989, the trial court ruled for Inter-Resin, 4 holding that:
(a) Bank of America made assurances that enticed Inter-Resin to send the merchandise
to Thailand; (b) the telex declaring the letter of credit fraudulent was unverified and
self-serving, hence, hearsay, but even assuming that the letter of credit was fake, "the
fault should be borne by the BA which was careless and negligent" 5 for failing to
utilize its modern means of communication to verify with Bank of Ayudhya in
Thailand the authenticity of the letter of credit before sending the same to Inter-Resin;
(c) the loading of plastic products into the vans were under strict supervision,
inspection and verification of government officers who have in their favor the
presumption of regularity in the performance of official functions; and (d) Bank of
America failed to prove the participation of Inter-Resin or its employees in the alleged
fraud as, in fact, the complaint for estafa through falsification of documents was
dismissed by the Provincial Fiscal of Rizal.6
On appeal, the Court of Appeals 7 sustained the trial court; hence, this present recourse
by petitioner Bank of America.
The following issues are raised by Bank of America: (a) whether it has warranted the
genuineness and authenticity of the letter of credit and, corollarily, whether it has
acted merely as an advising bank or as a confirming bank; (b) whether Inter-Resin has
actually shipped the ropes specified by the letter of credit; and (c) following the
dishonor of the letter of credit by Bank of Ayudhya, whether Bank of America may
recover against Inter-Resin under the draft executed in its partial availment of the
letter of credit.8
In rebuttal, Inter-Resin holds that: (a) Bank of America cannot, on appeal, belatedly
raise the issue of being only an advising bank; (b) the findings of the trial court that
the ropes have actually been shipped is binding on the Court; and, (c) Bank of America
cannot recover from Inter-Resin because the drawer of the letter of credit is the Bank
of Ayudhya and not Inter-Resin.
If only to understand how the parties, in the first place, got themselves into the mess,
it may be well to start by recalling how, in its modern use, a letter of credit is employed
in trade transactions.
A letter of credit is a financial device developed by merchants as a convenient and
relatively safe mode of dealing with sales of goods to satisfy the seemingly
irreconcilable interests of a seller, who refuses to part with his goods before he is paid,
and a buyer, who wants to have control of the goods before paying. 9 To break the
impasse, the buyer may be required to contract a bank to issue a letter of credit in
favor of the seller so that, by virtue of the latter of credit, the issuing bank can
authorize the seller to draw drafts and engage to pay them upon their presentment
simultaneously with the tender of documents required by the letter of credit. 10 The
buyer and the seller agree on what documents are to be presented for payment, but
ordinarily they are documents of title evidencing or attesting to the shipment of the
goods to the buyer.
 16 which will lend credence to the letter of credit issued by a lesser known issuing
bank; or, of a paying bank, 17 which undertakes to encash the drafts drawn by the
Once the credit is established, the seller ships the goods to the buyer and in the process
exporter. Further, instead of going to the place of the issuing bank to claim payment,
secures the required shipping documents or documents of title. To get paid, the seller
the buyer may approach another bank, termed the negotiating bank, 18 to have the
executes a draft and presents it together with the required documents to the issuing
draft discounted.
bank. The issuing bank redeems the draft and pays cash to the seller if it finds that the
documents submitted by the seller conform with what the letter of credit requires. The
bank then obtains possession of the documents upon paying the seller. The transaction
Being a product of international commerce, the impact of this commercial instrument
is completed when the buyer reimburses the issuing bank and acquires the documents
transcends national boundaries, and it is thus not uncommon to find a dearth of
entitling him to the goods. Under this arrangement, the seller gets paid only if he
national law that can adequately provide for its governance. This country is no
delivers the documents of title over the goods, while the buyer acquires said
exception. Our own Code of Commerce basically introduces only its concept under
documents and control over the goods only after reimbursing the bank.
Articles 567-572, inclusive, thereof. It is no wonder then why great reliance has been
placed on commercial usage and practice, which, in any case, can be justified by the
universal acceptance of the autonomy of contract rules. The rules were later developed
What characterizes letters of credit, as distinguished from other accessory contracts,
into what is now known as the Uniform Customs and Practice for Documentary
is the engagement of the issuing bank to pay the seller of the draft and the required
Credits ("U.C.P.") issued by the International Chamber of Commerce. It is by no
shipping documents are presented to it. In turn, this arrangement assures the seller of
means a complete text by itself, for, to be sure, there are other principles, which,
prompt payment, independent of any breach of the main sales contract. By this so-
although part of lex mercatoria, are not dealt with the U.C.P.
called "independence principle," the bank determines compliance with the letter of
credit only by examining the shipping documents presented; it is precluded from
determining whether the main contract is actually accomplished or not. 11
In FEATI Bank and Trust Company v. Court of Appeals, 19 we have accepted, to the
extent of their pertinency, the application in our jurisdiction of this international
commercial credit regulatory set of rules. 20 In Bank of Phil. Islands v. De Nery, 21
There would at least be three (3) parties: (a) the buyer, 12 who procures the letter of
we have said that the observances of the U.C.P. is justified by Article 2 of the Code
credit and obliges himself to reimburse the issuing bank upon receipts of the
of Commerce which expresses that, in the absence of any particular provision in the
documents of title; (b) the bank issuing the letter of credit, 13 which undertakes to pay
Code of Commerce, commercial transactions shall be governed by usages and
the seller upon receipt of the draft and proper document of titles and to surrender the
customs generally observed. We have further observed that there being no specific
documents to the buyer upon reimbursement; and, (c) the seller, 14 who in compliance
provisions which govern the legal complexities arising from transactions involving
with the contract of sale ships the goods to the buyer and delivers the documents of
letters of credit not only between or among banks themselves but also between banks
title and draft to the issuing bank to recover payment.
and the seller or the buyer, as the case may be, the applicability of the U.C.P. is
undeniable.

The number of the parties, not infrequently and almost invariably in international trade
practice, may be increased. Thus, the services of an advising (notifying) bank 15 may
be utilized to convey to the seller the existence of the credit; or, of a confirming bank
The first issue raised with the petitioner, i.e., that it has in this instance merely been
advising bank, is outrightly rejected by Inter-Resin and is thus sought to be discarded
for having been raised only on appeal. We cannot agree. The crucial point of dispute
in this case is whether under the "letter of credit," Bank of America has incurred any
liability to the "beneficiary" thereof, an issue that largely is dependent on the bank's
participation in that transaction; as a mere advising or notifying bank, it would not be
liable, but as a confirming bank, had this been the case, it could be considered as
having incurred that liability. 22
In Insular Life Assurance Co. Ltd. Employees Association — Natu vs. Insular Life
Assurance Co., Ltd., 23 the Court said: Where the issues already raised also rest on
other issues not specifically presented, as long as the latter issues bear relevance and
close relation to the former and as long as they arise from the matters on record, the
court has the authority to include them in its discussion of the controversy and to pass
upon them just as well. In brief, in those cases where questions not particularly raised
by the parties surface as necessary for the complete adjudication of the rights and
obligations of the parties, the interests of justice dictate that the court should consider
and resolve them. The rule that only issues or theories raised in the initial proceedings
may be taken up by a party thereto on appeal should only refer to independent, not
concomitant matters, to support or oppose the cause of action or defense. The evil that
is sought to be avoided, i.e., surprise to the adverse party, is in reality not existent on
matters that are properly litigated in the lower court and appear on record.
It cannot seriously be disputed, looking at this case, that Bank of America has, in fact,
only been an advising, not confirming, bank, and this much is clearly evident, among
other things, by the provisions of the letter of credit itself, the petitioner bank's letter
of advice, its request for payment of advising fee, and the admission of Inter-Resin
that it has paid the same. That Bank of America has asked Inter-Resin to submit
documents required by the letter of credit and eventually has paid the proceeds thereof,
did not obviously make it a confirming bank. The fact, too, that the draft required by
the letter of credit is to be drawn under the account of General Chemicals (buyer) only
means the same had to be presented to Bank of Ayudhya (issuing bank) for payment.
It may be significant to recall that the letter of credit is an engagement of the issuing
bank, not the advising bank, to pay the draft.
No less important is that Bank of America's letter of 11 March 1981 has expressly
stated that "[t]he enclosure is solely an advise of credit opened by the abovementioned
correspondent and conveys no engagement by us." 24 This written reservation by
Bank of America in limiting its obligation only to being an advising bank is in
consonance with the provisions of U.C.P.
As an advising or notifying bank, Bank of America did not incur any obligation more
than just notifying Inter-Resin of the letter of credit issued in its favor, let alone to
confirm the letter of credit. 25 The bare statement of the bank employees,
aforementioned, in responding to the inquiry made by Atty. Tanay, Inter-Resin's
representative, on the authenticity of the letter of credit certainly did not have the
effect of novating the letter of credit and Bank of America's letter of advise, 26 nor
can it justify the conclusion that the bank must now assume total liability on the letter
of credit. Indeed, Inter-Resin itself cannot claim to have been all that free from fault.
As the seller, the issuance of the letter of credit should have obviously been a great
concern to it. 27 It would have, in fact, been strange if it did not, prior to the letter of
credit, enter into a contract, or negotiated at the every least, with General Chemicals.
28 In the ordinary course of business, the perfection of contract precedes the issuance
of a letter of credit.
Bringing the letter of credit to the attention of the seller is the primordial obligation
of an advising bank. The view that Bank of America should have first checked the
authenticity of the letter of credit with bank of Ayudhya, by using advanced mode of
business communications, before dispatching the same to Inter-Resin finds no real
support in U.C.P. Article 18 of the U.C.P. states that: "Banks assume no liability or
responsibility for the consequences arising out of the delay and/or loss in transit of
any messages, letters or documents, or for delay, mutilation or other errors arising in
the transmission of any telecommunication . . ." As advising bank, Bank of America
is bound only to check the "apparent authenticity" of the letter of credit, which it did.
29 Clarifying its meaning, Webster's Ninth New Collegiate Dictionary 30 explains
that the word "APPARENT suggests appearance to unaided senses that is not or may
not be borne out by more rigorous examination or greater knowledge."
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
were later negotiated with it by Inter-Resin? The answer is yes. This kind of
transaction is what is commonly referred to as a discounting arrangement. This time,
Bank of America has acted independently as a negotiating bank, thus saving Inter-
Resin from the hardship of presenting the documents directly to Bank of Ayudhya to
recover payment. (Inter-Resin, of course, could have chosen other banks with which
to negotiate the draft and the documents.) As a negotiating bank, Bank of America
has a right to recourse against the issuer bank and until reimbursement is obtained,
Inter-Resin, as the drawer of the draft, continues to assume a contingent liability
thereon. 31
While bank of America has indeed failed to allege material facts in its complaint that
might have likewise warranted the application of the Negotiable Instruments Law and
possible then allowed it to even go after the indorsers of the draft, this failure, 32/
nonetheless, does not preclude petitioner bank's right (as negotiating bank) of
recovery from Inter-Resin itself. Inter-Resin admits having received P10,219,093.20
from bank of America on the letter of credit and in having executed the corresponding
draft. The payment to Inter-Resin has given, as aforesaid, Bank of America the right
of reimbursement from the issuing bank, Bank of Ayudhya which, in turn, would then
seek indemnification from the buyer (the General Chemicals of Thailand). Since Bank
of Ayudhya disowned the letter of credit, however, Bank of America may now turn to
Inter-Resin for restitution.
Between the seller and the negotiating bank there is the usual relationship existing
between a drawer and purchaser of drafts. Unless drafts drawn in pursuance of the
credit are indicated to be without recourse therefore, the negotiating bank has the
ordinary right of recourse against the seller in the event of dishonor by the issuing
bank . . . The fact that the correspondent and the negotiating bank may be one and the
same does not affect its rights and obligations in either capacity, although a special
agreement is always a possibility . . . 33
The additional ground raised by the petitioner, i.e., that Inter-Resin sent waste instead
of its products, is really of no consequence. In the operation of a letter of credit, the
involved banks deal only with documents and not on goods described in those
documents. 34
The other issues raised in then instant petition, for instance, whether or not Bank of
Ayudhya did issue the letter of credit and whether or not the main contract of sale that
has given rise to the letter of credit has been breached, are not relevant to this
controversy. They are matters, instead, that can only be of concern to the herein parties
in an appropriate recourse against those, who, unfortunately, are not impleaded in
these proceedings.
In fine, we hold that —
First, given the factual findings of the courts below, we conclude that petitioner Bank
of America has acted merely as a notifying bank and did not assume the responsibility
of a confirming bank; and
Second, petitioner bank, as a negotiating bank, is entitled to recover on Inter-Resin's
partial availment as beneficiary of the letter of credit which has been disowned by the
alleged issuer bank.
No judgment of civil liability against the other defendants, Francisco Trajano and
other unidentified parties, can be made, in this instance, there being no sufficient
evidence to warrant any such finding.
WHEREFORE, the assailed decision is SET ASIDE, and respondent Inter-Resin
Industrial Corporation is ordered to refund to petitioner Bank of America NT & SA
the amount of P10,219,093.20 with legal interest from the filing of the complaint until
fully paid.
No costs.
SO ORDERED.
Feliciano, Bidin, Romero and Melo, JJ., concur.
# Footnotes
1 Decision in Civil Case No. 41021 of Regional Trial Court, Branch 134, Makati,
p. 15.
2 The Bank of Ayudhya expressed impossibility of availment against the above-
mentioned letter of credit because the same had been issued, for the account of Siam
Union Metal L.P. (not General Chemicals of Thailand), for a different amount
covering "zinc highgrade," and in favor of Electrolytic Zinc Co. of Australasia Ltd.
(not Inter-Resin) (Exh. "Q", Record, p. 27).
3 The Bank of America, Bangkok, in an answer to the inquiry of the Bank of America,
Manila, stated that General Chemicals of Thailand received the bill of lading but
denied having ordered them. However, Bank of America, Bangkok, doubted that it
could hold the merchandise in favor of Bank of America, Manila, as it did not have
the documents (Exhs. "R" and "R-1," Record, pp. 28-29).
4 The dispositive portion reads : "WHEREFORE, in view of the foregoing, judgment
is hereby rendered as follows: 1. ordering the dismissal of the complaint for lack of
merit; 2. defendant's counterclaim with the Court found to be tenable and meritorious;
3. plaintiff BA is hereby ordered to pay the defendants the Peso equivalent of
US$1,461,400.00 with interests counted from April 21, 1981, until fully paid; 4.
plaintiff is hereby ordered to pay the defendants attorney's fees in the amount of
P30,000.00; 5. ordering the dissolution and lifting of the attachment issued by the
Court against defendants' properties' and 6. with costs against plaintiff" (Decision in
Civil case No. 41021, p. 209).
5 Decision in Civil Case No. 41021, p. 21.
6 Decision in Civil Case No. 41021, pp. 23-24.
7 CA-G.R. CV No. 24236, prom. 28 January 1992; Lapeña, Jr., ponente, Guingona
and Santiago, concurring.
8 Petition, pp. 13-14.
 omissions, solvency, performance or standing of the consignor, the carriers, or the
insurers of the goods, or any other person whomsoever."
9 See extensive discussions in William S. Shaterian Export-Import Banking: The
Instruments and Operations Utilized by American Exporters and Importers and their
Banks in Financing Foreign Trade (The Ronal Press Company: New York, 1947, pp.
According to White and Summers, op. cit.: ". . . Bankers . . . (describe) the transaction
284-374), James J. White and Robert S. Summers (eds) Uniform Commercial Code
between the bank and the beneficiary as a "paper transaction." By that they mean the
(West Publishing Co.: St. Paul, 1988) pp. 806-883, and John H. Jackson and William
bank issuer's agent should be able to sit with a necktie and a white shirt at a desk in a
J. Davey Legal Problems of International Economic Relations: Cases, Materials and
bank and by looking at papers that are presented to him determine whether the bank
Text on the National and International Economic Relations, 2nd Ed. (West Publishing
is obliged to make payment or not. He is not obligated and, indeed, is foreclosed from
Co., St. Paul, pp. 52-63).
donning his overalls and going into the field to determine whether the underlying
contract has been performed. This is the principal reason why careful courts and
lawyers state that the letter of credit is not a guarantee. In a typical guarantee the
10 Article 10 of the U.C.P. defines an irrevocable letter of credit as one that
guarantor will are to make payments if, and openly if, the customer has failed to fulfill
"constitutes a definite undertaking of the issuing bank, provided that the stipulated
his obligation on the underlying contract. If his obligation has been avoided because
documents are presented and that the terms and conditions of the credit are complied
of the acts of the beneficiary, typically there would be no obligation to guarantee and
with: i. if the credit provides for sight payment — to pay, or that payment will be
thus no duty on the guarantor to pay. Letters of credit are different, and they are
made; ii. if the credit provides for deferred payment — to pay, or that payment will
explicitly and consciously designed to be different in this respect. In effect, the
be made, on the date(s) determinable in accordance with the stipulations of the credit;
beneficiary under a letter of credit has bargained for the right to be paid and thus often
iii. if the credit provides for acceptance — to accept drafts drawn by the beneficiary
to be the defendant instead of the plaintiff in the ensuing litigation on the underlying
if he credit stipulates that they are to be drawn on the issuing bank, or to be responsible
contract, to be sued at home instead of being a plaintiff abroad . . . ."
for their acceptance and payment at maturity if the credit stipulates that they are to be
drawn on the applicant for the credit or any other drawee stipulated in the credit; iv.
if the credit provides for negotiation — to pay without recourse to drawers and/or
12 "The buyer of the merchandise, who is also the buyer of the credit instrument, is
bona fide holders, draft(s) drawn by the beneficiary, at sight or at a tenor, on the
the party who initiates the operation. His contract is with the bank which is to issue
applicant for the credit or on any other drawee stipulated in the credit other than the
the instrument and is represented by the Commercial Credit of Agreement form which
issuing bank itself, or to provide for negotiation by another bank and to pay, as above,
he signs, supported by a mutually made promises contained in the Agreement"
if such negotiation is not effected.
(Shaterian, op. cit. pp. 291-292).

11 Article 17 of the U.C.P. states: "Banks assume no liability or responsibility for the
13 "The Opening Bank, usually the buyer's bank, is the bank which actually issues the
form, sufficiency, accuracy, genuineness, falsification or legal effect of any
instrument. It is also known as the Issuing Bank. The selection of the opening bank is
documents, or for the general and/or particular conditions stipulated in the documents
important. It should be a strong bank, well known and well regarded in international
or superimposed thereon; nor do they assume any liability or responsibility for the
trading circles. This is the reason . . . smaller banks do not attempt to issue their own
description, quantity, weight, quality, condition, packing, delivery, value or existence
commercial credit instruments but take advantage of the facilities of . . . much larger,
of the goods represented by any documents, or for the good faith or acts and/or
stronger, and better known correspondent banks . . . The purpose of commercial credit
may not be readily accomplished unless the opening bank is well known and well
regarded" (Shaterian, op. cit., p. 292).
14 "The seller of the merchandise is called the Beneficiary of the credit instrument.
The instrument is addressed to him and in his favor. It is a written contract of the bank
which cannot compel the beneficiary to ship and avail himself of the benefits of the
instrument, the seller may recover from the bank the value of his shipment if made
within the terms of the instrument, even though he has not given the bank any direct
consideration for the bank's promises contained in the instrument. By a stretch of
imagination, as in order to support the instrument as a two-sided contract, supported
by mutually given considerations, the courts seem to hold that the commission paid
or to be paid by the buyer of the bank is also the consideration flowing from the seller
to the bank" (Shaterian, op. cit., p. 292).
15 "Whenever the instrument is not delivered to the buyer and by him mailed to the
beneficiary, the opening bank will advise the existence of the credit to the beneficiary
through its corresponding bank operating in the same locality as the seller. Such
correspondent bank becomes the Notifying Bank. The services of a notifying bank
must always be utilized if the credit is to be advised to the beneficiary by cable . . ."
(Shaterian, op. cit., p. 292).
16 "Whenever the beneficiary stipulates that the obligation of the opening bank shall
be also made the obligation of a bank himself, we have what is known as the a
confirmed commercial credit and the bank local to the beneficiary becomes the
Confirming Bank. In view of the fact that commercial credits issued by American
banks in favor of foreign sellers are invariably issued only by . . . larger well known
banks, no seller requests that they be confirmed by another bank. The standing of the
. . . opening bank is good enough. But many foreign banks are not particularly strong
or well known, compared with . . . banks issuing these credit instruments. Indeed,
many banks operating abroad are only known through the Banker's Almanac. They
serve a useful purpose in their own small communities and perhaps maintain dollars
account with the larger . . . banks. But their names are quite meaningless to the . . . .
exporter, and when the foreign buyer offers to his . . . seller a credit instrument issued
by such a bank, the seller may not receive the protection and other facilities which an
instrument issued by a large, strong, and well known bank will give him. To overcome
this, he requests that the credit as issued by the local bank of the foreign buyer be
confirmed by a well known . . . bank, which will turn out to be (a) . . . bank with which
the local bank of the buyer carries a dollar account. The liability of the confirming
bank is a primary one and is not contingent in any sense of the word. It is as if the
credit were issued by the opening and confirming banks jointly, thus giving the
beneficiary or a holder for value of drafts drawn under the credit, the right to proceed
against either or both banks, the moment the credit instrument has been breached. The
confirming bank receives a commission for its confirmation from the opening bank
which the opening bank, in turn, passes on to the buyer of the merchandise"
(Shaterian, op. cit., pp. 294-295).
17 "The Paying Bank is the bank on which the drafts are to be drawn. It may be the
opening bank, it may be a bank other than the opening bank and not inn the city of the
beneficiary, or it may be a bank in the city of the beneficiary, usually the advising
bank. If the beneficiary is to draw and receive payment in his own currency, the
notifying bank will be indicated as the paying bank also. When the draft is to be paid
in this manner, the paying bank assumes no responsibility but merely pays the
beneficiary and debits the payment immediately to the account which the opening
bank has with it. If the opening bank maintains no account with the paying bank, the
paying bank reimburses itself by drawing a bill of exchange on the opening bank, in
dollars, for the equivalent of the local currency paid to the beneficiary, at its buying
rate for dollar exchange. The beneficiary is entirely out of the transaction because his
draft is completely discharged by payment, and the credit arrangement between the
paying bank and the opening bank does not concern him" (Shaterian, op. cit., pp. 293-
294).
18 "If the draft contemplated by the credit instrument is to be drawn on the opening
bank or on another designated bank not in the city of the seller, any bank in the city
of the seller which buys or discounts the draft of the beneficiary becomes a
Negotiating Bank. As a rule, whenever the facilities of a notifying bank are used, the
beneficiary is apt to offer his drafts to the notifying bank for negotiation, thus giving
the notifying bank the character of a negotiating bank also. By negotiating the
beneficiary's drafts, the negotiating bank becomes "an endorser and bona fide holder"
of the drafts and within the protection of the credit instrument. It is also protected by
the drawer's a signature, as the drawer's contingent liability, as drawer, continues until
discharged by the actual payment of the bills of exchange" (Shaterian, op. cit., p. 293).
19 G.R. No. 94209, prom. 30 April 1991; 196 SCRA 576.
20 "The Uniform Customs and Practices for documentary credits were first published
in 1933. The current version was adopted by the International Chamber of Commerce
Council in 1983 and published as Publication No. 400 in July of that year. This current
version has the blessing of the United Nations Commission on International Trade
Law (UNCITRAL). The Uniform Customs and Practices are not 'law' because of the
act of any legislature or court, but because they have been explicitly and implicitly
made part of the contract of letters of credit. . . . [M]any of the letters of credit in the
United States are governed by the Uniform Custom and Practices and not by the UCC
(Uniform Commercial Code) . . .
"In general, the UCP is much more detailed than the UCC. It clearly shows the tracks
of many bankers and bank lawyers walking back and forth across its surface . . .
"Every lawyer who deals at any time with a letter of credit should have read the UVCP
at least once. The lawyer who deals routinely with such letters or who advises a bank
or beneficiary in a circumstance where litigation is threatened or commenced should
look more closely at the UCP." (White and Summers, op. cit., pp. 881-883).
21 No. L-24821, 16 October 1970; 35 SCRA 256.
22 See Feati Bank vs. Court of Appeals, 196 SCRA 576.
23 76 SCRA 61; see also Roman Catholic Archbishop vs. Court of Appeals, 198
SCRA 300; Macenas vs. Court of Appeals, 180 SCRA 83; Sociedad Europea de
Financiacion vs. Court of Appeals, 193 SCRA 105; Lianga Lumber Co. vs. Lianga
Timber Co., Inc. 76 SCRA 223.
24 Exh. "C," Records, p. 17.
25 "The banks involved charge a modest commission for their various services. The
higher the risk that the bank assumes, the higher the commission (e.g., to confirm an
L/C is riskier than merely transmitting an advise of credit) (Jackson and Davey, op.
cit., p. 53).
26 See Art. 1878 (9) and (11) of the Civil Code, respectively, provides that a special
power of attorney is required "[T]o bind the principal to render some service without
compensation" and "[T]o obligate the principal as a guarantor or surety." Art. 1887
states that "the agent shall act in accordance with the instructions of the principal".
Moreover, Art. 1888 enjoins the agent from carrying out "an agency if its execution
would manifestly result in loss or damage to the principal."
27 In fact, Inter-Resin's pro forma invoice (Exh. "A") sent to General Chemicals, on
the basis of which the letter of credit was apparently issued, demanded for a confirmed
and irrevocable letter of credit.

28 The suspicion that no contract of sale was perfected between Inter-Resin and
General Chemicals may find support in the absence of a written memorandum of the
sale or any other document showing that General Chemicals ordered the goods, and
the Comment of Inter-Resin detailing the material events of this case but, surprisingly,
failed to categorically state or show that such contract was consented to by the parties.
29 Article 8 of U.C.P. states : "A credit may be advised to a beneficiary through
another bank (the advising bank) without engagement on the part of the advising bank,
but that bank shall take reasonable care to check the apparent authenticity of the credit
which it advises. (Revised 1983, ICC No. 400; reproduced in Jackson and Davey, op.
cit., p. 54); TSN, 13 May 1982, Darley Wijiesekara on cross-examination.
30 1983 ed., p. 96.
31 See Shaterian, op. cit., p. 293.
32 In this respect, its belated theory before us and its motion for reconsideration of
the assailed decision should be rejected for being iniquitous under the circumstances.
In fact, Bank of America has failed to present the draft and, more substantially, Inter-
Resin has not been afforded full opportunity to refute by evidence this new argument
of Bank of America. In short, we find the records insufficient to arrive at a just
determination on this fact that can allow us to apply the Negotiable Instruments Law
thereon.
33 Philip W. Thayer, "Irrevocable Credits on International Commerce: Their Legal
Effects," Columbia Law Review (1937), vol. 37, pp. 1357-1358.
34 "Both in the application form for import credits and in the regulations governing
our export credits, it is definitely provided that the banks involved shall not be made
responsible for the genuineness of the documents submitted under commercial credits.
If the buyer of merchandise has sufficient confidence in the integrity of the seller
against shipping documents to be tendered to the bank by the seller, as provided by
the credit instrument, it follows that the same confidence should extend to the
tendering of genuine documents. If the seller is dishonest, he need not attempt to
defraud the buyer by the tender of forged documents. he can obtain the desired evil
end with less opportunity for prompt detection by shipping inferior goods or no goods
at all. The carrier does not pry into the cases and packages to make sure that the
merchandise is, in fact, as described in the bill of lading and invoices which are
prepared by the shipper. The tender of forged documents for the purpose of obtaining
money is a crime and the seller who commits such crime is prosecuted and jailed.
". . . Neither can the interested banks assume responsibility for the character or quality
of the goods shipped nor for the terms of the sale contract not incorporated and made
part of the credit instrument. How could they? While the parties to the sale contract
may be experts as to the involved merchandise the banks are not, generally speaking,
sufficiently versed in the fine points of each and every class of merchandise which
they finance. Even assuming the bank has men in its employ who can qualify as
experts in certain lines of merchandising, it would not wish to extend this sort of
service without adequate compensation but such service is not a banking function.
". . . Because of this credit should describe the goods in general terms only and the
buyer should trust that the seller will ship the exact merchandise ordered. If the buyer
is not satisfied with the moral standing of the seller, he should not open the credit but
buy on open account basis, or subject the draft terms with the additional requirement
that the
MWSS vs. DAWAY AND MAYNILAD
G.R. No. 160732.
June 21, 2004
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: the petition for certiorari is granted.The Order of November 27, 2003 of the
RTC of Quezon City 90, is hereby declared null and voidand set aside.
YES
 surety or solidary obligor. And being solidary, the claims against them can be pursued
separately from and independently of the rehabilitation case.
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.
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
Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the enforcement
bond for the full and prompt performance of the obligations by the concessionaire
of all claims against guarantors and sureties, but only those claims against guarantors
under the Concession Agreement and herein MWSS is authorized by the banks to
and sureties who are not solidarily liable with the debtor. Respondent Maynilads claim
draw on it by the simple act of delivering to the agent a written certification
that the banks are not solidarily liable with the debtor does not find support in
substantially in the form of the Letter of Credit.
jurisprudence.

Taking into consideration our own rulings on the nature of letters of credit and the
Letters of credit were developed for the purpose of insuring to a seller payment of a
customs and usage developed over the years in the banking and commercial practice
definite amount upon the presentation of documentsand is thus a commitment by the
of letters of credit, we hold that except when a letter of credit specifically stipulates
issuer that the party in whose favor it is issued and who can collect upon it will have
otherwise, the obligation of the banks issuing letters of credit are solidary with that of
his credit against the applicant of the letter, duly paid in the amount specified in the
the person or entity requesting for its issuance, the same being a direct, primary,
letter They are in effect absolute undertakings to pay the money advanced or the
absolute and definite undertaking to pay the beneficiary upon the presentation of the
amount for which credit is given on the faith of the instrument. They are primary
set of documents required therein.
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
The public respondent, therefore, exceeded his jurisdiction, in holding that he was
seller once the draft and other required shipping documents are presented to it. They
competent to act on the obligation of the banks under the Letter of Credit under the
are definite undertakings to pay at sight once the documents stipulated therein are
argument that this was not a solidary obligation with that of the debtor. Being a
presented.
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
The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to herein
said Standby Letter of Credit, public respondent acted in excess of his jurisdiction.
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
NOTES:
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
We held in Feati Bank & Trust Company v. Court of Appeals that the concept of Today is Monday, December 09, 2019home
guarantee vis–vis the concept of an irrevocable letter of credit are inconsistent with
Custom Search
each other.The guarantee theory destroys the independence of the banks 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 guarantors
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 FIRST DIVISION
shall honor drafts or other demands of payment upon compliance with the conditions
specified in the credit.
G.R. No. 160732 June 21, 2004

METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner,

vs.
HON. REYNALDO B. DAWAY, in his capacity as Presiding Judge of the Regional
Trial Court of Quezon City, Branch 90 and Maynilad Water Services, Inc.,
respondents

DECISION

AZCUNA, J.:

On November 17, 2003, the Regional Trial Court (RTC) of Quezon City, Branch 90,
made a determination that the Petition for Rehabilitation with Prayer for Suspension
of Actions and Proceedings filed by Maynilad Water Services, Inc. (Maynilad)
conformed substantially to the provisions of Sec. 2, Rule 4 of the Interim Rules of
Procedure on Corporate Rehabilitation (Interim Rules). It forthwith issued a Stay
Order1 which states, in part, that the court was thereby:

xxx xxx xxx
2. Staying enforcement of all claims, whether for money or otherwise and whether
such enforcement is by court action or otherwise, against the petitioner, its guarantors
and sureties not solidarily liable with the petitioner;
3. Prohibiting the petitioner from selling, encumbering, transferring, or disposing in
any manner any of its properties except in the ordinary course of business;
4. Prohibiting the petitioner from making any payment of its liabilities, outstanding as
at the date of the filing of the petition;
xxx xxx xxx
Subsequently, on November 27, 2003, public respondent, acting on two Urgent Ex
Parte motions2 filed by respondent Maynilad, issued the herein questioned Order3
which stated that it thereby:
"1. DECLARES that the act of MWSS in commencing on November 24, 2003 the
process for the payment by the banks of US$98 million out of the US$120 million
standby letter of credit so the banks have to make good such call/drawing of payment
of US$98 million by MWSS not later than November 27, 2003 at 10:00 P. M. or any
similar act for that matter, is violative of the above-quoted sub-paragraph 2.) of the
dispositive portion of this Court’s Stay Order dated November 17, 2003.
2. ORDERS MWSS through its officers/officials to withdraw under pain of contempt
the written certification/notice of draw to Citicorp International Limited dated
November 24, 2003 and DECLARES void any payment by the banks to MWSS in the
event such written certification/notice of draw is not withdrawn by MWSS and/or
MWSS receives payment by virtue of the aforesaid standby letter of credit."
Aggrieved by this Order, petitioner Manila Waterworks & Sewerage System (MWSS)
filed this petition for review by way of certiorari under Rule 65 of the Rules of Court
questioning the legality of said order as having been issued without or in excess of the
lower court’s jurisdiction or that the court a quo acted with grave abuse of discretion
amounting to lack or excess of jurisdiction.4
ANTECEDENTS OF THE CASE
On February 21, 1997, MWSS granted Maynilad under a Concession Agreement a
twenty-year period 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 on the dates
agreed upon in said agreement5 which, among other things, consisted of payments of
petitioner’s mostly foreign loans.
To secure the concessionaire’s performance of its obligations under the Concession
Agreement, 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 on July 14, 2000 for a three-
year facility with a number of foreign banks, led by Citicorp International Limited,
for the issuance of an Irrevocable Standby Letter of Credit6 in the amount of
US$120,000,000 in favor of MWSS for the full and prompt performance of
Maynilad’s obligations to MWSS as aforestated.
Sometime in September 2000, respondent Maynilad requested MWSS 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. Failing to get what it desired, Maynilad issued a Force Majeure Notice on
March 8, 2001 and unilaterally suspended the payment of the concession fees. In an
effort to salvage the Concession Agreement, the parties entered into a Memorandum
of Agreement (MOA)7 on June 8, 2001 wherein Maynilad was allowed to recover
foreign exchange losses under a formula agreed upon between them. Sometime in
August 2001 Maynilad again filed another Force Majeure Notice and, since MWSS
could not agree with the terms of said Notice, the matter was referred on August 30,
2001 to the Appeals Panel for arbitration. This resulted in the parties agreeing to
resolve the issues through an amendment of the Concession Agreement on October 5,
2001, known as Amendment No. 1,8 which was based on the terms set down in
MWSS Board of Trustees Resolution No. 457-2001, as amended by MWSS Board of
Trustees Resolution No. 487-2001,9 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.
As part of this agreement, Maynilad committed, among other things, to:
a) infuse the amount of UD$80.0 million as additional funding support from its
stockholders;
b) resume payment of the concession fees; and
c) mutually seek the dismissal of the cases pending before the Court of Appeals and
with Minor Dispute Appeals Panel.
However, on November 5, 2002, Maynilad served upon MWSS a Notice of Event of
Termination, claiming that MWSS failed to comply with its obligations under the
Concession Agreement and Amendment No. 1 regarding the adjustment mechanism
that would cover Maynilad’s foreign exchange losses. On December 9, 2002,
Maynilad filed a Notice of Early Termination of the concession, which was challenged
by MWSS. This matter was eventually brought before the Appeals Panel on January
7, 2003 by MWSS.10 On November 7, 2003, 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 on November 22, 2003. MWSS,
thereafter, submitted a written notice11 on November 24, 2003, to Citicorp
International Limited, as agent for the participating banks, that by virtue of Maynilad’s
failure to perform its obligations under the Concession Agreement, it was drawing on
the Irrevocable Standby Letter of Credit and thereby demanded payment in the amount
of US$98,923,640.15.
Prior to this, however, Maynilad had filed on November 13, 2003, a petition for
rehabilitation before the court a quo which resulted in the issuance of the Stay Order
of November 17, 2003 and the disputed Order of November 27, 2003.12
PETITIONER’S CASE
Petitioner hereby raises the following issues:
 Petitioner concludes that the public respondent erred in declaring and holding that the
commencement of the process for the payment of US$98 million is a violation of the
1. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR AND/OR ACT
order issued on November 17, 2003.
PATENTLY WITHOUT JURISDICTION OR IN EXCESS OF JURISDICTION OR
WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS
OF JURISDICTION IN CONSIDERING THE PERFORMANCE BOND OR
RESPONDENT MAYNILAD’S CASE
ASSETS OF THE ISSUING BANKS AS PART OR PROPERTY OF THE ESTATE
OF THE PRIVATE RESPONDENT MAYNILAD SUBJECT TO
REHABILITATION.
Respondent Maynilad seeks to refute this argument by alleging that:

2. DID THE HONORABLE PRESIDING JUDGE ACT WITH LACK OR EXCESS

OF JURISDICTION OR COMMIT A GRAVE ERROR OF LAW IN HOLDING
THAT THE PERFORMANCE BOND OBLIGATIONS OF THE BANKS WERE
NOT SOLIDARY IN NATURE.
3. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR IN ALLOWING
MAYNILAD TO IN EFFECT SEEK A REVIEW OR APPEAL OF THE FINAL
AND BINDING DECISION OF THE APPEALS PANEL.
In support of the first issue, petitioner maintains that as a matter of law, the US$120
Million Standby Letter of Credit and Performance Bond are not property of the estate
of the debtor Maynilad and, therefore, not subject to the in rem rehabilitation
jurisdiction of the trial court.
Petitioner argues that a call made on the Standby Letter of Credit does not involve any
asset of Maynilad but only assets of the banks. Furthermore, a call on the Standby
Letter of Credit cannot also be considered a "claim" falling under the purview of the
stay order as alleged by respondent as it is not directed against the assets of respondent
Maynilad.
a) the order objected to was strictly and precisely worded and issued after carefully
considering/evaluating the import of the arguments and documents referred to by
Maynilad, MWSS and/or creditors Chinatrust Commercial Bank and Suez in relation
to admissions, pleadings and/or pertinent records13 and that public respondent had
the authority to issue the same;
b) public respondent never considered nor held that the Performance bond or assets of
the issuing banks are part or property of the estate of respondent Maynilad subject to
rehabilitation and which respondent Maynilad has not and has never claimed to be;14
c) what is relevant is not whether the performance bond or assets of the issuing banks
are part of the estate of respondent Maynilad but whether the act of petitioner in
commencing the process for the payment by the banks of US$98 million out of the
US$120 million performance bond is covered and/or prohibited under sub-paragraphs
2.) and 4.) of the stay order dated November 17, 2003;
d) the jurisdiction of public respondent extends not only to the assets of respondent
Maynilad but also over persons and assets of "all those affected by the proceedings x
x x upon publication of the notice of commencement;15" and
 and by respondent Maynilad’s own admission it is not. In issuing the clarificatory
order of November 27, 2003, enjoining petitioner from claiming from an asset that
e) the obligations under the Standby Letter of Credit are not solidary and are not
did not belong to the debtor and over which it did not acquire jurisdiction, the
exempt from the coverage of the stay order.
rehabilitation court acted in excess of its jurisdiction.

OUR RULING
Respondent Maynilad insists, however, that it is Sec. 6 (b), Rule 4 of the Interim Rules
that supports its claim that the commencement of the process to draw on the Standby
Letter of Credit is an enforcement of claim prohibited by and under the Interim Rules
We will discuss the first two issues raised by petitioner as these are interrelated and and the order of public respondent.
make up the main issue of the petition before us which is, did 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
Respondent Maynilad would persuade us that the above provision justifies a leap to
the Irrevocable Standby Letter of Credit in its favor and for the account of respondent
the conclusion that such an enforcement is prohibited by said section because it is a
Maynilad?
"claim against the debtor, its guarantors and sureties not solidarily liable with the
debtor" and that there is nothing in the Standby Letter of Credit nor in law nor in the
nature of the obligation that would show or require the obligation of the banks to be
The public respondent relied on Sec. 1, Rule 3 of the Interim Rules on Corporate solidary with the respondent Maynilad.
Rehabilitation to support its jurisdiction over the Irrevocable Standby Letter of Credit
and the banks that issued it. The section reads in part "that jurisdiction over those
affected by the proceedings is considered acquired upon the publication of the notice
We disagree.
of commencement of proceedings in a newspaper of general circulation" and goes
further to define rehabilitation as an in rem proceeding. This provision is a logical
consequence of the in rem nature of the proceedings, where jurisdiction is acquired
First, the claim is not one against the debtor but against an entity that respondent
by publication and where it is necessary that the assets of the debtor come within the
Maynilad has procured to answer for its non-performance of certain terms and
court’s jurisdiction to secure the same for the benefit of creditors. The reference to
conditions of the Concession Agreement, particularly the payment of concession fees.
"all those affected by the proceedings" covers creditors or such other persons or
entities holding assets belonging to the debtor under rehabilitation which should be
reflected in its audited financial statements. The banks do not hold any assets of
respondent Maynilad that would be material to the rehabilitation proceedings nor is Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the enforcement
Maynilad liable to the banks at this point. of all claims against guarantors and sureties, but only those claims against guarantors
and sureties who are not solidarily liable with the debtor. Respondent Maynilad’s
claim that the banks are not solidarily liable with the debtor does not find
support in jurisprudence.
Respondent Maynilad’s Financial Statement as of December 31, 2001 and 2002 do
not show the Irrevocable Standby Letter of Credit as part of its assets or liabilities,
 and Art. 9 thereof defines the liability of the issuing banks on an irrevocable letter of
credit as a "definite undertaking of the issuing bank, provided that the stipulated
We held in Feati Bank & Trust Company v. Court of Appeals16 that the concept of
documents are presented to the nominated bank or the issuing bank and the terms and
guarantee vis-à-vis the concept of an irrevocable letter of credit are inconsistent with
conditions of the Credit are complied with, to pay at sight if the Credit provides for
each other. The guarantee theory destroys the independence of the bank’s
sight payment."22
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
We have accepted, in Feati Bank and Trust Company v. Court of Appeals23 and Bank
person primarily liable. On the other hand, in an irrevocable letter of credit, the
of America NT & SA v. Court of Appeals,24 to the extent that they are pertinent, the
bank undertakes a primary obligation. We have also defined a letter of credit as
application in our jurisdiction of the international credit regulatory set of rules known
an engagement by a bank or other person made at the request of a customer that
as the Uniform Customs and Practice for Documentary Credits (U.C.P) issued by the
the issuer shall honor drafts or other demands of payment upon compliance with
International Chamber of Commerce, which we said in Bank of the Philippine Islands
the conditions specified in the credit.17
v. Nery25 was justified under Art. 2 of the Code of Commerce, which states:

Letters of credit were developed for the purpose of insuring to a seller payment of a
definite amount upon the presentation of documents18 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.19 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.20 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.21 They
are definite undertakings to pay at sight once the documents stipulated therein are
presented.
Letters of Credits have long been and are still governed by the provisions of the
Uniform Customs and Practice for Documentary Credits of the International Chamber
of Commerce. In the 1993 Revision it provides in Art. 2 that "the expressions
Documentary Credit(s) and Standby Letter(s) of Credit mean any arrangement,
however made or described, whereby a bank acting at the request and on instructions
of a customer or on its own behalf is to make payment against stipulated document(s)"
"Acts of commerce, whether those who execute them be merchants or not, and
whether specified in this Code or not should be governed by the provisions contained
in it; in their absence, by the usages of commerce generally observed in each place;
and in the absence of both rules, by those of the civil law."
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 debtor’s assets. These are the same characteristics of a
surety or solidary obligor.
Being solidary, the claims against them can be pursued separately from and
independently of the rehabilitation case, as held in Traders Royal Bank v. Court of
Appeals26 and reiterated in Philippine Blooming Mills, Inc. v. Court of Appeals,27
where we said that property of the surety cannot be taken into custody by the
rehabilitation receiver (SEC) and said surety can be sued separately to enforce his
liability as surety for the debts or obligations of the debtor. The debts or obligations
for which a surety may be liable include future debts, an amount which may not be
known at the time the surety is given.
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 Water Services, Inc., in favor
of the Metropolitan Waterworks and Sewerage System, as a bond for the full and
prompt performance of the obligations by the concessionaire under the Concession
Agreement28 and herein petitioner 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
Annex "B" of the Letter of Credit. It provides further in Sec. 6, that for as long as the
Standby Letter of Credit is valid and subsisting, the Banks shall honor any written
Certification made by MWSS in accordance with Sec. 2, of the Standby Letter of
Credit regardless of the date on which the event giving rise to such Written
Certification arose.29
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.
ADDITIONAL ISSUES
We proceed to consider the other issues raised in the oral arguments and included in
the parties’ memoranda:
1. Respondent Maynilad argues that petitioner had a plain, speedy and adequate
remedy under the Interim Rules itself which provides in Sec. 12, Rule 4 that the court
may on motion or motu proprio, terminate, modify or set conditions for the
continuance of the stay order or relieve a claim from coverage thereof. We find,
however, that the public respondent had already accomplished this during the hearing
set for the two Urgent Ex Parte motions filed by respondent Maynilad on November
21 and 24, 2003,30 where the parties including the creditors, Suez and Chinatrust
Commercial "presented their respective arguments."31 The public respondent then
ruled, "after carefully considering/evaluating the import of the arguments and
documents referred to by Maynilad, MWSS and/or the creditors Chinatrust
Commercial Bank and Suez in relation to the admissions, the pleadings, and/or
pertinent portions of the records, this court is of the considered and humble view that
the issue must perforce be resolved in favor of Maynilad."32 Hence to pursue their
opposition before the same court would result in the presentation of the same
arguments and issues passed upon by public respondent.
Furthermore, Sec. 5, Rule 3 of the Interim Rules would preclude any other effective
remedy questioning the orders of the rehabilitation court since they are immediately
executory and a petition for review or an appeal therefrom shall not stay the execution
of the order unless restrained or enjoined by the appellate court." In this situation, it
had no other remedy but to seek recourse to us through this petition for certiorari.
In Silvestre v. Torres and Oben,33 we said that it is not enough that a remedy is WHEREFORE, the petition for certiorari is granted. The Order of November 27, 2003
available to prevent a party from making use of the extraordinary remedy of certiorari of the Regional Trial Court of Quezon City, Branch 90, is hereby declared NULL
but that such remedy be an adequate remedy which is equally beneficial, speedy and AND VOID and SET ASIDE. The status quo
sufficient, not only a remedy which at some time in the future may offer relief but a
remedy which will promptly relieve the petitioner from the injurious acts of the lower
tribunal. It is the inadequacy -- not the mere absence -- of all other legal remedies and
the danger of failure of justice without the writ, that must usually determine the
propriety of certiorari.34 Today is Monday, December 09, 2019home
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2. Respondent Maynilad argues that by commencing the process for payment under
the Standby Letter of Credit, petitioner violated an immediately executory order of
the court and, therefore, comes to Court with unclean hands and should therefore be
denied any relief. Republic of the Philippines
SUPREME COURT

It is true that the stay order is immediately executory. It is also true, however, that the Manila
Standby Letter of Credit and the banks that issued it were not within the jurisdiction
of the rehabilitation court. The call on the Standby Letter of Credit, therefore, could
not be considered a violation of the Stay Order. EN BANC

3. Respondent’s claim that the filing of the petition pre-empts the original jurisdiction G.R. No. L-15044 May 30, 1960
of the lower court is without merit. The purpose of the initial hearing is to determine
whether the petition for rehabilitation has merit or not. The propriety of the stay order
as well as the clarificatory order had already been passed upon in the hearing BELMAN COMPAÑIA INCORPORADA, plaintiff-appellee,
previously had for that purpose. The determination of whether the public respondent
was correct in enjoining the petitioner from drawing on the Standby Letter of Credit vs.
will have no bearing on the determination to be made by public respondent whether
CENTRAL BANK OF THE PHILIPPINES, defendant-appellant.
the petition for rehabilitation has merit or not. Our decision on the instant petition does
not pre-empt the original jurisdiction of the rehabilitation court.
Nat M. Balboa for appellant.
Bienvenido L. Garcia for appellee.
 Plaintiff, therefore, on December 20, 1957, filed with the above-mentioned court a
complaint praying, inter alia, that defendant's Monetary Board Resolution No. 286,
BARRERA, J.:
series of 1951, be declared null and void, and that defendant be ordered to refund to
plaintiff said amounts of P273.41 and P172.87 it paid as exchange tax.

From the decision of the Court of First Instance of Manila (in Civil Case No. 34566),
in which it was ordered to refund to plaintiff Belman Compañia Incorporada the
On January 3, 1958, defendant filed a motion to dismiss on the grounds that (1) the
amounts of P273.41 and P172.87, with legal interest from the date the complaint was
court has no jurisdiction over the subject matter of the action; (2) the complaint states
filed until fully paid, and the amount of P250.00 as attorney's fees, and to pay costs,
no cause of action; and (3) the cause of action, if any, is barred by the statute of
defendant Central Bank of the Philippines interposed this appeal.
limitations. On January 10, 1958, plaintiff filed an opposition to said motion, to which,
defendant filed a reply on January 17, 1958.

Two issues both legal, are presented in this appeal; (a) whether the action has already
prescribed, and (b) whether defendant Central Bank can be compelled to make the
On April 7, 1958, the court issued an order holding in abeyance its resolution on
refund after the amounts involved had already been turned over to the National
defendant's motion to dismiss, until after the parties shall have presented their
Treasury of the Government. We take up only the first question because it is decisive.
evidence.

On April 26, 1951 and May 4, 1951, plaintiff paid to the Philippine National Bank its
On April 11, 1958, defendant filed its answer reiterating as defenses, the grounds
obligations for foreign exchange obtained under Credits Nos. 43729 (PNB I/B 36747)
alleged in its motion to dismiss.
and 41347 (PNB I/B 37605), respectively. On the same dates, defendant Central Bank
collected from plaintiff, as exchange tax,1 the amounts of P273.41 (CBP O. R. No.
002801 dated April 26, (1951) and P172.87 (CBP O. R. No 002928 dated May 4,
After the issues have been joined and due hearing had, the lower court rendered a
1951) Plaintiff paid said amounts to defendant, under protest.
decision which, in pertinent part, reads:

On November 8, 1951, plaintiff requested defendant to refund to it both amounts, but

defendant refused to do so. Plaintiff reiterated said request for the refund of P273.41
on September 2, 1957, and of P172.87 on October 7, 1957; and for both amounts, on
December 2, 1957. Defendant, however, likewise refused to comply with plaintiff's
request2 .
xxx xxx xxx
Defendant's collection of the Exchange Tax on April 26, 1951 and May 4, 1951, when
plaintiff paid its obligations under Credits Nos. 43729 and No. 41347 is erroneous and
without any legal basis because the plaintiff on these dates did not purchase any
foreign exchange from the Bank but merely liquidated its existing accounts under the
Credits. The sale of foreign exchange in the present case took place at the moment
when the applications for Letters of Credit were approved and given due course that
is, on May 29, 1950 and January 2, 1951, at which time, Republic Act 601 imposing
Defendant-appellant urges in this appeal that the lower court erred in not dismissing
a tax on the sale of Foreign Exchange was not, as yet, in existence.
plaintiff-appellee's complaint on the ground that it has prescribed.

xxx xxx xxx

The contention is correct. It is to be noted that the excise tax law (Rep. Act No. 601,
contain no provision regarding the period within which a taxpayer must bring his
action to recover an excise tax erroneously or illegally collected. Accordingly,
Under these circumstances, and considering the fact that the amount of P273.41 under
Articles 18 and 1149 of the New Civil Code, should be applied in order to determine
Official Receipt No. 002801 was collected by the defendants seven (7) days (April
said period. The articles referred to, respectively, provide:
26, 1951) before Resolution No. 286 was approved on May 3, 1951, the conclusion is
inescapable that Central Bank Resolution No. 286 is null and void not only because it
has not been published as required by law in the Official Gazette, but as admitted by
ART. 18. In matters which are governed by the Code of Commerce and special laws,
the defendant itself under oath in par. XV of Exhibit "B", the same is erroneous
their deficiency shall be governed by the provisions of this Code. (Emphasis
interpretation of Section 1 of Republic Act 601.
supplied.).

The present suit is directed against the Central Bank, a corporation duly authorized by
ART. 1149. All other actions whose periods are not fixed in this Code or in other laws
its Charter to sue and be sued. Resolution No. 286 was issued by the Central Bank and
must be brought within five years from the time the right of action accrues. (Id.)
the defendant cannot now be permitted to claim exemption from the consequences of
an illegal resolution of its own making.

It is not disputed that under the doctrine laid down in the cases of Philippine National
Bank vs. Zulueta, 101 Phil., 1071; 55 Off. Gaz. (2) 222; Philippine National Bank vs.
There is nothing to the contention that plaintiff's action has prescribed, because no
Union Books, Incorporated, 101 Phil., 1084; and Philippine National Bank vs.
vested or acquired rights can arise from acts or ommissions which are against the law
Arrozal, 103 Phil., 213; 54 Off. Gaz. (21) 5698,3 said amounts of P273.41 and
or which infringe upon the rights of others. (Art. 2254, New Civil Code).
P172.87, were erroneously or illegally collected by the defendant from plaintiff
inasmuch as the latter had applied for the letters of credit (Nos. 41347 and 43729)
with the PNB, on May 29, 1950 and December 28, 1950, long before the enactment
IN VIEW OF THE FOREGOING CONSIDERATIONS, this Court hereby renders
of Republic Act No. 601 on March 28, 1951, imposing the excise tax on the purchase
judgments in favor of the plaintiff and against the defendant declaring Central Bank
on foreign exchange. Pursuant to Article 1149 of the New Civil Code above-quoted,
Resolution No. 286 illegal and void ab initio. Defendant is hereby ordered to return to
plaintiff's right of action to recover the aforementioned amounts should have
the plaintiff the sums of P273.41 and P172.87 with legal interests thereon from the
prescribed on April 26, 1956 (as to the P273.41) and May 4, 1956 (as to the P172.87).
date of the filing of the complaint until fully paid and the amount of P250.00 as
attorney's fees. Defendant shall pay the costs.
However, it appears that on November 8, 1951, plaintiff requested defendant, in In view of the conclusion at which we have arrived, we find no necessity in taking up
writing, to refund to it said amounts. Pursuant to Article 1155 of the New Civil Code,4 the other questions raised in this appeal.
the five-year period is interrupted and should start to be counted again from November
8, 1951. Thus computed, the right of action should expire on November 11, 1956.
Since the complaint was filed only on December 20, 1957, the action is clearly barred. Wherefore the decision appealed from is hereby reversed, with costs against the
It is true that other extrajudicial written requests or demands were made on September appellee. So ordered.
2, 1957 and October 7, 1957, and lastly on December 2, 1957, but all of these came
after the period had already prescribed, as stated, on November 11, 1956.
Paras, C.J., Bengzon, Montemayor, Bautista Angelo, Concepcion, and Gutierrez
David, JJ., concur.
Article 2254 of the new Civil Code which provides that "No vested or acquired right
can arise from acts or omissions which are against the law or which infringe upon the
rights of others", and which was cited by the lower court as authority for its conclusion
that plaintiff's action has not prescribed, is inapplicable. This article is among the
transitional provisions of the New Civil Code. It must be read in relation to, and within ___________
the context of Article 2252 which speaks of "Changes made and new provisions and
rules laid down by this Code which may prejudice or impair vested or acquired rights
in accordance with the old legislation" which changes shall have no retroactive effect. RESOLUTION
The second paragraph of Article 2252 reads:

July 14, 1960

For the determination of the applicable law in cases which are not specified elsewhere
in this Code, the following articles shall be observed:
BARRERA, J.:

And, one of these "following articles", is Article 2254 cited by the lower court.
Here in the instant case, all the pertinent facts occurred after the effectivity of the New
Civil Code. There is, therefore, no reason to apply Article 2254, especially so, when
no vested or acquired right is being here asserted by defendant Central Bank, the only
question being, whether the right of plaintiff to bring the action had already
prescribed.
In the decision of this Court promulgated May 30, 1960, we held that plaintiff-
appellee's action for the refund of payments made on April 26 and May 4, 1951 for
exchange tax, filed and instituted on December 20, 1957, had already prescribed and,
consequently, we reversed the lower court's decision directing the refund, with costs
against the appellee.
Plaintiff-appellee has filed a motion for reconsideration urging that his action was still
timely because, it is argued, the period of prescription applicable to the case is ten (10)
years from date of payment. To support this contention, Article 1144, paragraph (2)
is cited, which provides:
ARTICLE 1144. — The following actions must be brought within ten years from the
time the right of action accrues:
(1) ....;
(2) Upon an obligation created by law;
Since, it is claimed, the payment here was made by reason of a mistake in the
interpretation of Republic Act 601, the obligation to return arises by virtue of Article
2155, in relation to Article 2154 of the New Civil Code and is, therefore, one created
by law.
Movant-appellee is partly correct. However, Articles 2154 and 2155 relied upon,
specifically refer to obligations of the nature of solutio indebiti which are expressly
classified as quasi-contracts under Section 2, Chapter 1 of Title XVII of the New Civil
Code. Consequently, the law regarding prescription applicable to the action herein
involved is not. Article 1144-(2) cited by movant, but Article 1145(2) of the New
Civil Code providing:
Article 1145. — The following actions must be commenced within six years:
(1) ...;
(2) Upon a quasi-contract.
In this case, the first payment was made on April 26, 1951. Extrajudicial written
demand for refund was made on November 8, 1951 (after a lapse of 6 months and 12
days). The demand was denied November 14, 1951. The second demand was on
September 2, 1957, or after a lapse of 5 years, 9 months and 18 days from November
14, 1951. Granting the interruption provided in Article 1155,1 the period or
prescription that had elapse totals to 6 years and 4 months. Consequently, the
complaint filed on December 20, 1957 is clearly barred.
The second payment was made on May 4, 1951. From said date to November 8, 1951,
when the first demand was made, 6 months and 4 days had elapsed. From November
14, 1951 (date of denial of the demand) to October 7, 1957 when the second demand
on this payment was made, 5 years, 10 months and 23 days had elapsed. Adding up
the two periods will sum up to 6 years, 4 months and 27 days. Again, the complaint
based on the second payment is beyond the six (6) years provided for the prescription
of this kind of action.
The plea is made that inasmuch as the collection of the Exchange tax by the defendant
was clearly illegal or erroneous, movant should not be made to pay the costs for filing
the case for the refund of the payments made. This would be true if the action was
timely instituted before it was barred by the statute of limitations. But if, as in this
case, plaintiff files its claim after it has already been lost and; therefore, had no longer
any enforceable cause of action against the defendant, certainly the latter is entitled to
have his costs. For the reasons above set forth, the motion for reconsideration is
denied. So ordered.
Paras, C.J., Bengzon, Montemayor, Bautista Angelo, Labrador, Concepcion, and
Gutierrez David, JJ., concur.
 Republic of the Philippines
Footnotes SUPREME COURT
Manila
1 Pursuant to its Monetary Board Resolution No. 286, series of 1951.
THIRD DIVISION
2 All said requests for refund, were in writing.

3 See also Belman compania Incorporada vs. Central Bank 104 Phil., 877; 55 Off.
Gaz. (33) 6665.
G.R. No. 105387 November 11, 1993

4 "Art 1155. The prescription of actions is interrupted when they are filed before the
JOHANNES SCHUBACK & SONS PHILIPPINE TRADING CORPORATION,
court, when there is a written extrajudicial demand by the creditors, and when there is
petitioner,
any written acknowledgment of the debt by the debtor.
vs.
THE HON. COURT OF APPEALS, RAMON SAN JOSE, JR., doing business under
RESOLUTION
the name and style "PHILIPPINE SJ INDUSTRIAL TRADING," respondents.

1 "ART. 1155. The prescription of actions is interrupted when they are filed before
Hernandez, Velicaria, Vibar & Santiago for petitioner.
the Court, when there is a written extrajudicial demand by

Ernesto M. Tomaneng for private respondent.

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ROMERO, J.:
 and description. Defendant promised to submit the quantity per unit he wanted to order
on December 28 or 29 (Exh. F).
In this petition for review on certiorari, petitioner questions the reversal by the Court
of Appeals 1 of the trial court's ruling that a contract of sale had been perfected
between petitioner and private respondent over bus spare parts.
On December 29, 1981, defendant personally submitted the quantities he wanted to
Mr. Dieter Reichert, General Manager of plaintiff, at the latter's residence (t.s.n., 13
December, 1984, p. 36). The quantities were written in ink by defendant in the same
The facts as quoted from the decision of the Court of Appeals are as follows:
Purchase Order previously submitted. At the bottom of said Purchase Order,
defendant wrote in ink above his signature: "NOTE: Above P.O. will include a 3%
discount. The above will serve as our initial P.O." (Exhs. G to G-3-a).
Sometime in 1981, defendant 2 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 communicated with its trading
Plaintiff immediately ordered the items needed by defendant from Schuback Hamburg
partner. Johannes Schuback and Sohne Handelsgesellschaft m.b.n. & Co. (Schuback
to enable defendant to avail of the old prices. Schuback Hamburg in turn ordered
Hamburg) regarding the spare parts defendant wanted to order.
(Order No. 12204) the items from NDK, a supplier of MAN spare parts in West
Germany. On January 4, 1982, Schuback Hamburg sent plaintiff a proforma invoice
(Exhs. N-1 to N-3) to be used by defendant in applying for a letter of credit. Said
On October 16, 1981, defendant submitted to plaintiff a list of the parts (Exhibit B) invoice required that the letter of credit be opened in favor of Schuback Hamburg.
he wanted to purchase with specific part numbers and description. Plaintiff referred Defendant acknowledged receipt of the invoice (t.s.n., 19 December 1984, p. 40).
the list to Schuback Hamburg for quotations. Upon receipt of the quotations, plaintiff
sent to defendant a letter dated 25 November, 1981 (Exh. C) enclosing its offer on the
items listed by defendant.
An order confirmation (Exhs. I, I-1) was later sent by Schuback Hamburg to plaintiff
which was forwarded to and received by defendant on February 3, 1981 (t.s.n., 13
Dec. 1984, p. 42).
On December 4, 1981, defendant informed plaintiff that he preferred genuine to
replacement parts, and requested that he be given 15% on all items (Exh. D).
On February 16, 1982, plaintiff reminded defendant to open the letter of credit to avoid
delay in shipment and payment of interest (Exh. J). Defendant replied, mentioning,
On December 17, 1981, plaintiff submitted its formal offer (Exh. E) containing the among others, the difficulty he was encountering in securing: the required dollar
item number, quantity, part number, description, unit price and total to defendant. On allocations and applying for the letter of credit, procuring a loan and looking for a
December, 24, 1981, defendant informed plaintiff of his desire to avail of the prices partner-financier, and of finding ways 'to proceed with our orders" (Exh. K).
of the parts at that time and enclosed Purchase Order No. 0101 dated 14 December
1981 (Exh. F to F-4). Said Purchase Order contained the item number, part number
In the meantime, Schuback Hamburg received invoices from, NDK for partial
deliveries on Order No.12204 (Direct Interrogatories., 07 Oct, 1985, p. 3). Schuback
Hamburg paid NDK. The latter confirmed receipt of payments made on February 16,
1984 (Exh.C-Deposition).
On October 18, 1982, Plaintiff again reminded defendant of his order and advised that
the case may be endorsed to its lawyers (Exh. L). Defendant replied that he did not
make any valid Purchase Order and that there was no definite contract between him
and plaintiff (Exh. M). Plaintiff sent a rejoinder explaining that there is a valid
Purchase Order and suggesting that defendant either proceed with the order and open
a letter of credit or cancel the order and pay the cancellation fee of 30% of F.O.B.
value, or plaintiff will endorse the case to its lawyers (Exh. N).
Schuback Hamburg issued a Statement of Account (Exh. P) to plaintiff enclosing
therewith Debit Note (Exh. O) charging plaintiff 30% cancellation fee, storage and
interest charges in the total amount of DM 51,917.81. Said amount was deducted from
plaintiff's account with Schuback Hamburg (Direct Interrogatories, 07 October,
1985).
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.
In its decision dated June 13, 1988, the trial court4 ruled in favor of petitioner by
ordering private respondent to pay petitioner, among others, actual compensatory
damages in the amount of DM 51,917.81, unearned profits in the amount of DM
14,061.07, or their peso equivalent.
Thereafter, private respondent elevated his case before the Court of Appeals. On
February 18, 1992, the appellate court reversed the decision of the trial court and
dismissed the complaint of petitioner. It 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.
The issue posed for resolution is whether or not a contract of sale has been perfected
between the parties.
We reverse the decision of the Court of Appeals and reinstate the decision of the trial
court. It bears emphasizing that a "contract of sale is perfected at the moment there is
a meeting of minds upon the thing which is the object of the contract and upon the
price. . . . " 5
Article 1319 of the Civil Code states: "Consent is manifested by the meeting of the
offer and acceptance upon the thing and the cause which are to constitute the contract.
The offer must be certain and the acceptance absolute. A qualified acceptance
constitutes a counter offer." The facts presented to us indicate that consent on both
sides has been manifested.
The offer by petitioner was manifested on December 17, 1981 when petitioner
submitted its proposal containing the item number, quantity, part number, description,
the unit price and total to private respondent. On December 24, 1981, private
respondent informed petitioner of his desire to avail of the prices of the parts at that
time and simultaneously enclosed its Purchase Order No. 0l01 dated December 14,
1981. At this stage, a meeting of the minds between vendor and vendee has occurred,
the object of the contract: being the spare parts and the consideration, the price stated
in petitioner's offer dated December 17, 1981 and accepted by the respondent on
December 24,1981.
Although said purchase order did not contain the quantity he wanted to order, private
respondent made good, his promise to communicate the same on December 29, 1981.
At this juncture, it should be pointed out that private respondent was already in the
process of executing the agreement previously reached between the parties.
Below Exh. G-3, marked as Exhibit G-3-A, there appears this statement made by
private respondent: "Note. above P.O. will include a 3% discount. The above will
serve as our initial P.O." This notation on the purchase order was another indication
of acceptance on the part of the vendee, for by requesting a 3% discount, he implicitly
accepted the price as first offered by the vendor. The immediate acceptance by the
vendee of the offer was impelled by the fact that on January 1, 1982, prices would go
up, as in fact, the petitioner informed him that there would be a 7% increase, effective
January 1982. On the other hand, concurrence by the vendor with the said discount
requested by the vendee was manifested when petitioner immediately ordered the
items needed by private respondent from Schuback Hamburg which in turn ordered
from NDK, a supplier of MAN spare parts in West Germany.
When petitioner forwarded its purchase order to NDK, the price was still pegged at
the old one. Thus, the pronouncement of the Court Appeals that there as no confirmed
price on or about the last week of December 1981 and/or the first week of January
1982 was erroneous.
While we agree with the trial court's conclusion that indeed a perfection of contract
was reached between the parties, we differ as to the exact date when it occurred, for
perfection took place, not on December 29, 1981. Although the quantity to be ordered
was made determinate only on December 29, 1981, quantity is immaterial in the
perfection of a sales contract. What is of importance is the meeting of the minds as to
the object and cause, which from the facts disclosed, show that as of December 24,
1981, these essential elements had already occurred.
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." 6
WHEREFORE, the petition is GRANTED and the decision of the trial court dated
June 13, 1988 is REINSTATED with modification.
Today is Monday, December 09, 2019home
Custom Search
SO ORDERED.

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

Republic of the Philippines
SUPREME COURT
Manila

# Footnotes
FIRST DIVISION

1 Penned by Justice Artemon D. Luna and concurred in by Justices Serafin E. Camilon

and Celso L. Magsino.

G.R. No. 116863 February 12, 1998

2 Herein private respondent.

KENG HUA PAPER PRODUCTS CO. INC., petitioner,

3 Herein petitioner.
vs.
COURT OF APPEALS; REGIONAL TRIAL COURT OF MANILA, BR. 21; and
4 Regional Trial Court of Makati, Metro Manila, Branch 146. (Penned by Justice Jose
SEA-LAND SERVICE, INC., respondents.
L. Coscolluela, Jr.)

5 Civil Code, Article 1475, C & C Commercial Corp. v. PNB, G.R. No. 92499, July
5, 1989, 175 SCRA; NGA v. Intermediate Appellate Court, PANGANIBAN, J.:
What is the nature of a bill of lading? When does a bill of lading become binding on
a consignee? Will an alleged overshipment justify the consignee's refusal to receive
The Facts
the goods described in the bill of lading? When may interest be computed on unpaid
demurrage charges?

The factual antecedents of this case as found by the Court of Appeals are as follows:
Statement of the Case

Plaintiff (herein private respondent), a shipping company, is a foreign corporation

licensed to do business in the Philippines. On June 29, 1982, plaintiff received at its
These are the main questions raised in this petition assailing the Decision 1 of the
Hong Kong terminal a sealed container, Container No. SEAU 67523, containing
Court of Appeals 2 promulgated on May 20, 1994 in C.A.-G.R. CV No. 29953
seventy-six bales of "unsorted waste paper" for shipment to defendant (herein
affirming in toto the decision 3 dated September 28, 1990 in Civil Case No. 85-33269
petitioner), Keng Hua Paper Products, Co. in Manila. A bill of lading (Exh. A) to
of the Regional Trial Court of Manila, Branch 21. The dispositive portion of the said
cover the shipment was issued by the plaintiff.
RTC decision reads:

WHEREFORE, the Court finds by preponderance of evidence that Plaintiff has
proved its cause of action and right to relief. Accordingly, judgment is hereby
rendered in favor of the Plaintiff and against Defendant, ordering the Defendant to
pay plaintiff:
1. The sum of P67,340.00 as demurrage charges, with interest at the legal rate from
the date of the extrajudicial demand until fully paid;
2. A sum equivalent to ten (10%) percent of the total amount due as Attorney's fees
and litigation expenses.
On July 9, 1982, the shipment was discharged at the Manila International Container
Port. Notices of arrival were transmitted to the defendant but the latter failed to
discharge the shipment from the container during the "free time" period or grace
period. The said shipment remained inside the plaintiff's container from the moment
the free time period expired on July 29, 1982 until the time when the shipment was
unloaded from the container on November 22, 1983, or a total of four hundred eighty-
one (481) days. During the 481-day period, demurrage charges accrued. Within the
same period, letters demanding payment were sent by the plaintiff to the defendant
who, however, refused to settle its obligation which eventually amounted to
P67,340.00. Numerous demands were made on the defendant but the obligation
remained unpaid. Plaintiff thereafter commenced this civil action for collection and
damages.

In its answer, defendant, by way of special and affirmative defense, alleged that it
Send copy to respective counsel of the parties. purchased fifty (50) tons of waste paper from the shipper in Hong Kong, Ho Kee
Waste Paper, as manifested in Letter of Credit No. 824858 (Exh. 7. p. 110. Original
Record) issued by Equitable Banking Corporation, with partial shipment permitted;
SO ORDERED.4 that under the letter of credit, the remaining balance of the shipment was only ten (10)
metric tons as shown in Invoice No. H-15/82 (Exh. 8, p. 111, Original Record); that I. Whether or not petitioner had accepted the bill of lading;
the shipment plaintiff was asking defendant to accept was twenty (20) metric tons
which is ten (10) metric tons more than the remaining balance; that if defendant were
to accept the shipment, it would be violating Central Bank rules and regulations and II. Whether or not the award of the sum of P67,340.00 to private respondent was
custom and tariff laws; that plaintiff had no cause of action against the defendant proper;
because the latter did not hire the former to carry the merchandise; that the cause of
action should be against the shipper which contracted the plaintiff's services and not
against defendant; and that the defendant duly notified the plaintiff about the wrong III. Whether or not petitioner was correct in not accepting the overshipment;
shipment through a letter dated January 24, 1983 (Exh. D for plaintiff, Exh. 4 for
defendant, p. 5. Folder of Exhibits).
IV. Whether or not the award of legal interest from the date of private respondent's
extrajudicial demand was proper;8
As previously mentioned, the RTC found petitioner liable for demurrage; attorney's
fees and expenses of litigation. The petitioner appealed to the Court of Appeals,
arguing that the lower court erred in (1) awarding the sum of P67,340 in favor of the
In the main, the case revolves around the question of whether petitioner bound by the
private respondent, (2) rejecting petitioner's contention that there was overshipment,
bill of lading. We shall, thus, discuss the above four issues as they intertwine with this
(3) ruling that petitioner's recourse was against the shipper, and (4) computing legal
main question.
interest from date of extrajudicial demand.5

The Court's Ruling

Respondent Court of Appeals denied the appeal and affirmed the lower court's
decision in toto. In a subsequent resolution,6 it also denied the petitioner's motion for
reconsideration.
The petition is partly meritorious. We affirm petitioner's liability for demurrage, but
modify the interest rate thereon.
Hence, this petition for review.7

Main Issue: Liability Under the Bill of Lading

The Issues

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
In its memorandum, petitioner submits the following issues:
the consignee undertake specific responsibilities and assume stipulated obligations. 9
A "bill of lading delivered and accepted constitutes the contract of carriage even
though not signed," 10 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 In a
nutshell, the acceptance of a bill of lading by the shipper and the consignee, with full
knowledge of its contents, gives rise to the presumption that the same was a perfected
and binding contract. 12
In the case at bar, both lower courts held that the bill of lading was a valid and
perfected contract between the shipper (Ho Kee), the consignee (Petitioner Keng
Hua), and the carrier (Private Respondent Sea-Land). Section 17 of the bill of lading
provided that the shipper and the consignee were liable for the payment of demurrage
charges for the failure to discharge the containerized shipment beyond the grace
period allowed by tariff rules. Applying said stipulation, both lower courts found
petitioner liable. The aforementioned section of the bill of lading reads:
17. COOPERAGE FINES. The shipper and consignee shall be liable for, indemnify
the carrier and ship and hold them harmless against, and the carrier shall have a lien
on the goods for, all expenses and charges for mending cooperage, baling, repairing
or reconditioning the goods, or the van, trailers or containers, and all expenses
incurred in protecting, caring for or otherwise made for the benefit of the goods,
whether the goods be damaged or not, and for any payment, expense, penalty fine,
dues, duty, tax or impost, loss, damage, detention, demurrage, or liability of
whatsoever nature, sustained or incurred by or levied upon the carrier or the ship in
connection with the goods or by reason of the goods being or having been on board,
or because of shipper's failure to procure consular or other proper permits, certificates
or any papers that may be required at any port or place or shipper's failure to supply
information or otherwise to comply with all laws, regulations and requirements of law
in connection with the goods of from any other act or omission of the shipper or
consignee: (Emphasis supplied.)
Petitioner contends, however, that it should not be bound by the bill of lading because
it never gave its consent thereto. Although petitioner admits "physical acceptance" of
the bill of lading, it argues that its subsequent actions belie the finding that it accepted
the terms and conditions printed therein. 13 Petitioner cites as support the "Notice of
Refused or On Hand Freight" it received on November 2, 1982 from private
respondent, which acknowledged that petitioner declined to accept the shipment.
Petitioner adds that it sent a copy of the said notice to the shipper on December 23,
1982. Petitioner points to its January 24, 1983 letter to the private respondent,
stressing "that its acceptance of the bill of lading would be tantamount to an act of
smuggling as the amount it had imported (with full documentary support) was only
(at that time) for 10,000 kilograms and not for 20,313 kilograms as stated in the bill
of lading" and "could lay them vulnerable to legal sanctions for violation of customs
and tariff as well as Central Bank laws." 14 Petitioner further argues that the
demurrage "was a consequence of the shipper's mistake" of shipping more than what
was bought. The discrepancy in the amount of waste paper it actually purchased, as
reflected in the invoice vis-a-vis the excess amount in the bill of lading, allegedly
justifies its refusal to accept the shipment. 15
Petitioner Bound by
the Bill of Lading
We are not persuaded. Petitioner admits that it "received the bill of lading immediately
after the arrival of the shipment" 16 on July 8, 1982. 17 Having been afforded an
opportunity to examine the said document, petitioner did not immediately object to or
dissent from any term or stipulation therein. It was only six months later, on January
24, 1983, that petitioner sent a letter to private respondent saying that it could not
accept the shipment. Petitioner's inaction for such a long period conveys the clear
inference that it accepted the terms and conditions of the bill of lading. Moreover, said
letter spoke only of petitioner's inability to use the delivery permit, i.e. to pick up the
cargo, due to the shipper's failure to comply with the terms and conditions of the letter
of credit, for which reason the bill of lading and other shipping documents were
returned by the "banks" to the shipper. 18 The letter merely proved petitioner's refusal
to pick up the cargo, not its rejection of the bill of lading.
Petitioner's reliance on the Notice of Refused or On Hand Freight, as proof of its
nonacceptance of the bill of lading, is of no consequence. Said notice was not written
by petitioner; it was sent by private respondent to petitioner in November 1982, or
four months after petitioner received the bill of lading. If the notice has any legal
significance at all, it is to highlight petitioner's prolonged failure to object to the bill
of lading. Contrary to petitioner's contention, the notice and the letter support — not
belie — the findings of the two lower courts that the bill of lading was impliedly
accepted by petitioner.
As aptly stated by Respondent Court of Appeals:
In the instant case, (herein petitioner) cannot and did not allege non-receipt of its copy
of the bill of lading from the shipper. Hence, the terms and conditions as well as the
various entries contained therein were brought to its knowledge. (Herein petitioner)
accepted the bill of lading without interposing any objection as to its contents. This
raises the presumption that (herein petitioner) agreed to the entries and stipulations
imposed therein.
Moreover, it is puzzling that (herein petitioner) allowed months to pass, six (6) months
to be exact, before notifying (herein private respondent) of the "wrong shipment". It
was only on January 24, 1983 that (herein petitioner) sent (herein private respondent)
such a letter of notification (Exh D for plaintiff, Exh. 4 for defendant; p. 5, Folder of
Exhibits). Thus, for the duration of those six months (herein private respondent never
knew the reason for (herein petitioner's) refusal to discharge the shipment.
After accepting the bill of lading, receiving notices of arrival of the shipment, failing
to object thereto, (herein petitioner) cannot now deny that it is bound by the terms in
the bill of lading. If it did not intend to be bound, (herein petitioner) would not have
waited for six months to lapse before finally bringing the matter to (herein private
respondent's attention. The most logical reaction in such a case would be to
immediately verify the matter with the other parties involved. In this case, however,
(herein petitioner) unreasonably detained (herein private respondent's) vessel to the
latter's prejudice. 19
Petitioner's attempt to evade its obligation to receive the shipment on the pretext that
this may cause it to violate customs, tariff and central bank laws must likewise fail.
Mere apprehension of violating said laws, without a clear demonstration that taking
delivery of the shipment has become legally impossible, 20 cannot defeat the
petitioner's contractual obligation and liability under the bill of lading.
In any event, the issue of whether petitioner accepted the bill of lading was raised for
the first time only in petitioner's memorandum before this Court. Clearly, we cannot
now entertain an issue raised for the very first time on appeal, in deference to the well-
settled doctrine that "(a)n issue raised for the first time on appeal and not raised timely
in the proceedings in the lower court is barred by estoppel. Questions raised on appeal
must be within the issues framed by the parties and, consequently, issues not raised in
the trial court cannot be raised for the first time on appeal."21
In the case at bar, the prolonged failure of petitioner to receive and discharge the cargo
from the private respondent's vessel constitutes a violation of the terms of the bill of
lading. It should thus be liable for demurrage to the former.
In The Apollon, 22 Justice Story made the following relevant comment on the nature
of demurrage:
In truth, demurrage is merely an allowance or compensation for the delay or detention Q Now, after you sent this letter, do you know what happened?
of a vessel. It is often a matter of contract, but not necessarily so. The very
circumstance that in ordinary commercial voyages, a particular sum is deemed by the
parties a fair compensation for delays, is the very reason why it is, and ought to be, A Defendant continued to refuse to take delivery of the shipment and the shipment
adopted as a measure of compensation, in cases ex delicto. What fairer rule can be stayed at the port for a longer period.
adopted than that which founds itself upon mercantile usage as to indemnity, and fixes
a recompense upon the deliberate consideration of all the circumstances attending the
usual earnings and expenditures in common voyages? It appears to us that an Q So, what happened to the shipment?
allowance, by way of demurrage, is the true measure of damages in all cases of mere
detention, for that allowance has reference to the ship's expenses, wear and tear, and
common employment.23
A The shipment incurred additional demurrage charges which amounted to
P67,340.00 as of November 22, 1983 or more than a year after — almost a year after
the shipment arrived at the port.
Amount of Demurrage Charges

Q So, what did you do?

Petitioner argues that it is not obligated to pay any demurrage charges because, prior
to the filing of the complaint, private respondent made no demand for the sum of
P67,340. Moreover, private respondent's loss and prevention manager, Loi Gillera,
A We requested our collection agency to pursue the collection of this amount. 27
demanded P50,260; but its counsel, Sofronio Larcia, subsequently asked for a
different amount of P37,800.

Bill of Lading Separate from

Petitioner's position is puerile. The amount of demurrage charges in the sum of Other Letter of Credit Arrangements
P67,340 is a factual conclusion of the trial court that was affirmed by the Court of
Appeals and, thus, binding on this Court. 24 Besides, such factual finding is supported
by the extant evidence. 25 The apparent discrepancy was a result of the variance of In a letter of credit, there are three distinct and independent contracts:
the dates when the two demands were made. Necessarily, the longer the cargo
remained unclaimed, the higher the demurrage. Thus, while in his letter dated April
24, 1983, 26 private respondent's counsel demanded payment of only P37,800, the
(1) the contract of sale between the buyer and the seller, (2) the contract of the buyer
additional demurrage incurred petitioner due to its continued refusal to receive
with the issuing bank, and (3) the letter of credit proper in which the bank promises
delivery of the cargo ballooned to P67,340 by November 22, 1983. The testimony of
to pay the seller pursuant to the terms and conditions stated therein. "Few things are
Counsel Sofronio Larcia as regards said letter of April 24, 1983 elucidates, viz:
more clearly settled in law than that the three contracts which make up the letter of
credit arrangement are to be maintained in a state of perpetual separation." 28 A
transaction involving the purchase of goods may also require, apart from a letter of
credit, a contract of transportation specially when the seller and the buyer are not in
Jurisprudence teaches us:
the same locale or country, and the goods purchased have to be transported to the
latter.

2. When an obligation, not constituting a loan or forbearance of money, is breached,

an interest on the amount of damages awarded may be imposed at the discretion of
Hence, the contract of carriage, as stipulated in the bill of lading in the present case,
the court at the rate of 6% per annum. No interest, however, shall be adjudged on
must be treated independently of the contract of sale between the seller and the buyer,
unliquidated claims or damages except when or until the demand can be established
and the contract for the issuance of a letter of credit between the buyer and the issuing
with reasonable certainty. Accordingly, where the demand is established with
bank. Any discrepancy between the amount of the goods described in the commercial
reasonable certainty, the interest shall begin to run from the time the claim is made
invoice in the contract of sale and the amount allowed in the letter of credit will not
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be
affect the validity and enforceability of the contract of carriage as embodied in the bill
so reasonably established at the time the demand is made, the interest shall begin to
of lading. As the bank cannot be expected to look beyond the documents presented to
run only from the date the judgment of the court is made (at which time the
it by the seller pursuant to the letter of credit, 29 neither can the carrier be expected to
quantification of damages may be deemed to have been reasonably ascertained). The
go beyond the representations of the shipper in the bill of lading and to verify their
actual base for the computation of legal interest shall, in any case, be on the amount
accuracy vis-a-viz the commercial invoice and the letter of a credit. Thus, the
finally adjudged.
discrepancy between the amount of goods indicated in the invoice and the amount in
the bill of lading cannot negate petitioner's obligation to private respondent arising
from the contract of transportation. Furthermore, private respondent, as carrier, had
no knowledge of the contents of the container. The contract of carriage was under the 3. When the judgment of the court awarding a sum of money becomes final and
arrangement known as "Shipper's Load And Count," and shipper was solely executory, the rate of legal interest, whether the case falls under paragraph 1 or
responsible for the loading of the container while carrier was oblivious to the contents paragraph 2, above, shall be 12% per annum from such finality until its satisfaction,
of the shipment. Petitioner's remedy in case of overshipment lies against the this interim period being deemed to be by then an equivalent to a forbearance of
seller/shipper, not against the carrier. credit.31

Payment of Interest
Petitioner posits that it "first knew" of the demurrage claim of P67,340 only when it
received, by summons, private respondent's complaint. Hence, interest may not be
allowed to run from the date of private respondent's extrajudicial demands on March
8, 1983 for P50,260 or on April 24, 1983 for P37,800, considering that, in both cases,
"there was no demand for interest." 30 We agree.
The case before us involves an obligation not arising from a loan or forbearance of
money; thus, pursuant to Article 2209 of the Civil Code, the applicable interest rate is
six percent per annum. Since the bill of lading did not specify the amount of
demurrage, and the sum claimed by private respondent increased as the days went by,
the total amount demanded cannot be deemed to have been established with
reasonable certainty until the trial court rendered its judgment. Indeed, "(u)nliquidated
damages or claims, it is said, are those which are not or cannot be known until
definitely ascertained, assessed and determined by the courts after presentation of
proof. " 32 Consequently, the legal interest rate is six percent, to be computed from
September 28, 1990, the date of the trial court's decision. And in accordance with 2 Tenth Division, composed of J. Fermin A. Martin, Jr., ponente; and JJ. Emeterio C.
Philippine National Bank 33 and Eastern Shipping, 34 the rate of twelve percent per Cui (chairman) and Eugenio S. Labitoria, concurring.
annum shall be charged on the total then outstanding, from the time the judgment
becomes final and executory until its satisfaction.
3 Rollo, pp. 15-18. The RTC decision was penned by Judge Lourdes K. Tayao-
Jaguros, who was later appointed to the Court of Appeals, from where she has now
Finally, the Court notes that the matter of attorney's fees was taken up only in the retired.
dispositive portion of the trial court's decision. This falls short of the settled
requirement that the text of the decision should state the reason for the award of
attorney's fees, for without such justification, its award would be a "conclusion 4 Ibid., pp. 17-18.
without a premise, its basis being improperly left to speculation and conjecture."35

5 Petitioner's brief before the Court of Appeals, pp. 5-8; record of the Court of
WHEREFORE, the assailed Decision is hereby AFFIRMED with the Appeals, pp. 21-24.
MODIFICATION that the legal interest of six percent per annum shall be computed
from September 28, 1990 until its full payment before finality of judgment. The rate
of interest shall be adjusted to twelve percent per annum, computed from the time said
judgment became final and executory until full satisfaction. The award of attorney's
fees is DELETED.
Today is Monday, December 09, 2019home

SO ORDERED. Custom Search

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

Footnotes SECOND DIVISION

1 Rollo, pp. 20-32. G.R. No. 146717 November 22, 2004

TRANSFIELD PHILIPPINES, INC., petitioner,

vs.
LUZON HYDRO CORPORATION, AUSTRALIA and NEW ZEALAND
BANKING GROUP LIMITED and SECURITY BANK CORPORATION,
respondents.
DECISION
TINGA, J.:
Subject of this case is the letter of credit which has evolved as the ubiquitous and most
important device in international trade. A creation of commerce and businessmen, the
letter of credit is also unique in the number of parties involved and its supranational
character.
Petitioner has appealed from the Decision1 of the Court of Appeals in CA-G.R. SP
No. 61901 entitled "Transfield Philippines, Inc. v. Hon. Oscar Pimentel, et al.,"
promulgated on 31 January 2001.2
On 26 March 1997, petitioner and respondent Luzon Hydro Corporation (hereinafter,
LHC) entered into a Turnkey Contract3 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.4
The Turnkey Contract provides that: (1) the target completion date of the Project shall
be on 1 June 2000, or such later date as may be agreed upon between petitioner and
respondent LHC or otherwise determined in accordance with the Turnkey Contract;
and (2) petitioner is entitled to claim extensions of time (EOT) for reasons enumerated
in the Turnkey Contract, among which are variations, force majeure, and delays
caused by LHC itself.5 Further, in case of dispute, the parties are bound to settle their
differences through mediation, conciliation and such other means enumerated under
Clause 20.3 of the Turnkey Contract.6
To secure performance of petitioner's obligation on or before the target completion
date, or such time for completion as may be determined by the parties' agreement,
petitioner opened in favor of LHC two (2) standby letters of credit both dated 20
March 2000 (hereinafter referred to as "the Securities"), to wit: Standby Letter of
Credit No. E001126/8400 with the local branch of respondent Australia and New
Zealand Banking Group Limited (ANZ Bank)7 and Standby Letter of Credit No.
IBDIDSB-00/4 with respondent Security Bank Corporation (SBC)8 each in the
amount of US$8,988,907.00.9
In the course of the construction of the project, petitioner sought various EOT to
complete the Project. The extensions were requested allegedly due to several factors
which prevented the completion of the Project on target date, such 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.
The first of the actions was a Request for Arbitration which LHC filed before the
Construction Industry Arbitration Commission (CIAC) on 1 June 1999.10 This was
followed by another Request for Arbitration, this time filed by petitioner before the
International Chamber of Commerce (ICC)11 on 3 November 2000. In both
arbitration proceedings, the common issues presented were: [1) whether typhoon Zeb
and any of its associated events constituted force majeure to justify the extension of
time sought by petitioner; and [2) whether LHC had the right to terminate the Turnkey
Contract for failure of petitioner to complete the Project on target date.
Meanwhile, foreseeing that LHC would call on the Securities pursuant to the pertinent
provisions of the Turnkey Contract,12 petitioner—in two separate letters13 both dated
10 August 2000—advised respondent banks of the arbitration proceedings already
pending before the CIAC and ICC in connection with its alleged default in the
performance of its obligations. Asserting that LHC had no right to call on the
Securities until the resolution of disputes before the arbitral tribunals, petitioner
warned respondent banks that any transfer, release, or disposition of the Securities in
favor of LHC or any person claiming under LHC would constrain it to hold respondent
banks liable for liquidated damages.
As petitioner had anticipated, on 27 June 2000, LHC sent notice to petitioner that
pursuant to Clause 8.214 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.15
LHC asserted that additional extension of time would not be warranted; accordingly
it declared petitioner in default/delay in the performance of its obligations under the
Turnkey Contract and demanded from petitioner the payment of US$75,000.00 for
each day of delay beginning 28 June 2000 until actual completion of the Project
pursuant to Clause 8.7.1 of the Turnkey Contract. At the same time, LHC served
notice that it would call on the securities for the payment of liquidated damages for
the delay.16
On 5 November 2000, petitioner as plaintiff filed a Complaint for Injunction, with
prayer for temporary restraining order and writ of preliminary injunction, against
herein respondents as defendants before the Regional Trial Court (RTC) of Makati.17
Petitioner sought to restrain respondent LHC from calling on the Securities and
respondent banks from transferring, paying on, or in any manner disposing of the
Securities or any renewals or substitutes thereof. The RTC issued a seventy-two (72)-
hour temporary restraining order on the same day. The case was docketed as Civil
Case No. 00-1312 and raffled to Branch 148 of the RTC of Makati.
After appropriate proceedings, the trial court issued an Order on 9 November 2000,
extending the temporary restraining order for a period of seventeen (17) days or until
26 November 2000.18
The RTC, in its Order19 dated 24 November 2000, denied petitioner's application for
a writ of preliminary injunction. It ruled that petitioner had no legal right and suffered
no irreparable injury to justify the issuance of the writ. Employing the principle of
"independent contract" in letters of credit, the trial court ruled that LHC should be
allowed to draw on the Securities for liquidated damages. It debunked petitioner's
contention that the principle of "independent contract" could be invoked only by
respondent banks since according to it respondent LHC is the ultimate beneficiary of
the Securities. The trial court further ruled that the banks were mere custodians of the
funds and as such they were obligated to transfer the same to the beneficiary for as
long as the latter could submit the required certification of its claims.
Dissatisfied with the trial court's denial of its application for a writ of preliminary
injunction, petitioner elevated the case to the Court of Appeals via a Petition for
Certiorari under Rule 65, with prayer for the issuance of a temporary restraining order
and writ of preliminary injunction.20 Petitioner submitted to the appellate court that
LHC's call on the Securities was premature considering that the issue of its default
had not yet been resolved with finality by the CIAC and/or the ICC. It asserted that
until the fact of delay could be established, LHC had no right to draw on the Securities
for liquidated damages.
Refuting petitioner's contentions, LHC claimed that petitioner had no right to restrain
its call on and use of the Securities as payment for liquidated damages. It averred that
WHETHER THE "INDEPENDENCE PRINCIPLE" ON LETTERS OF CREDIT
the Securities are independent of the main contract between them as shown on the
MAY BE INVOKED BY A BENEFICIARY THEREOF WHERE THE
face of the two Standby Letters of Credit which both provide that the banks have no
BENEFICIARY'S CALL THEREON IS WRONGFUL OR FRAUDULENT.
responsibility to investigate the authenticity or accuracy of the certificates or the
declarant's capacity or entitlement to so certify.

WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE

SECURITIES BEFORE THE RESOLUTION OF PETITIONER'S AND LHC'S
In its Resolution dated 28 November 2000, the Court of Appeals issued a temporary
DISPUTES BY THE APPROPRIATE TRIBUNAL.
restraining order, enjoining LHC from calling on the Securities or any renewals or
substitutes thereof and ordering respondent banks to cease and desist from
transferring, paying or in any manner disposing of the Securities.
WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN
RELEASING THE AMOUNTS DUE UNDER THE SECURITIES DESPITE
BEING NOTIFIED THAT LHC'S CALL THEREON IS WRONGFUL.
However, the appellate court failed to act on the application for preliminary injunction
until the temporary restraining order expired on 27 January 2001. Immediately
thereafter, representatives of LHC trooped to ANZ Bank and withdrew the total
amount of US$4,950,000.00, thereby reducing the balance in ANZ Bank to WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND
US$1,852,814.00. IRREPARABLE DAMAGE IN THE EVENT THAT:

On 2 February 2001, the appellate court dismissed the petition for certiorari. The
appellate court expressed conformity with the trial court's decision that LHC could
call on the Securities pursuant to the first principle in credit law that the credit itself
is independent of the underlying transaction and that as long as the beneficiary
complied with the credit, it was of no moment that he had not complied with the
underlying contract. Further, the appellate court held that even assuming that the trial
court's denial of petitioner's application for a writ of preliminary injunction was
erroneous, it constituted only an error of judgment which is not correctible by
certiorari, unlike error of jurisdiction.
A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ BANK AND
SECURITY BANK ARE ALLOWED TO RELEASE, THE REMAINING
BALANCE OF THE SECURITIES PRIOR TO THE RESOLUTION OF THE
DISPUTES BETWEEN PETITIONER AND LHC.
B. LHC DOES NOT RETURN THE AMOUNTS IT HAD WRONGFULLY
DRAWN FROM THE SECURITIES.21

Petitioner contends that the courts below improperly relied on the "independence
Undaunted, petitioner filed the instant Petition for Review raising the following issues principle" on letters of credit when this case falls squarely within the "fraud exception
for resolution:
rule." Respondent LHC deliberately misrepresented the supposed existence of delay
despite its knowledge that the issue was still pending arbitration, petitioner continues.
Petitioner asserts that LHC should be ordered to return the proceeds of the Securities
pursuant to the principle against unjust enrichment and that, under the premises,
injunction was the appropriate remedy obtainable from the competent local courts.
On 25 August 2003, petitioner filed a Supplement to the Petition22 and Supplemental
Memorandum,23 alleging that in the course of the proceedings in the ICC Arbitration,
a number of documentary and testimonial evidence came out through the use of
different modes of discovery available in the ICC Arbitration. It contends that after
the filing of the petition facts and admissions were discovered which demonstrate that
LHC knowingly misrepresented that petitioner had incurred delays— notwithstanding
its knowledge and admission that delays were excused under the Turnkey Contract—
to be able to draw against the Securities. Reiterating that fraud constitutes an exception
to the independence principle, petitioner urges that this warrants a ruling from this
Court that the call on the Securities was wrongful, as well as contrary to law and basic
principles of equity. It avers that it would suffer grave irreparable damage if LHC
would be allowed to use the proceeds of the Securities and not ordered to return the
amounts it had wrongfully drawn thereon.
In its Manifestation dated 8 September 2003,24 LHC contends that the supplemental
pleadings filed by petitioner present erroneous and misleading information which
would change petitioner's theory on appeal.
In yet another Manifestation dated 12 April 2004,25 petitioner alleges that on 18
February 2004, the ICC handed down its Third Partial Award, declaring that LHC
wrongfully drew upon the Securities and that petitioner was entitled to the return of
the sums wrongfully taken by LHC for liquidated damages.
LHC filed a Counter-Manifestation dated 29 June 2004,26 stating that petitioner's
Manifestation dated 12 April 2004 enlarges the scope of its Petition for Review of the
31 January 2001 Decision of the Court of Appeals. LHC notes that the Petition for
Review essentially dealt only with the issue of whether injunction could issue to
restrain the beneficiary of an irrevocable letter of credit from drawing thereon. It adds
that petitioner has filed two other proceedings, to wit: (1) ICC Case No.
11264/TE/MW, entitled "Transfield Philippines Inc. v. Luzon Hydro Corporation," in
which the parties made claims and counterclaims arising from petitioner's
performance/misperformance of its obligations as contractor for LHC; and (2) Civil
Case No. 04-332, entitled "Transfield Philippines, Inc. v. Luzon Hydro Corporation"
before Branch 56 of the RTC of Makati, which is an action to enforce and obtain
execution of the ICC's partial award mentioned in petitioner's Manifestation of 12
April 2004.
In its Comment to petitioner's Motion for Leave to File Addendum to Petitioner's
Memorandum, LHC stresses that the question of whether the funds it drew on the
subject letters of credit should be returned is outside the issue in this appeal. At any
rate, LHC adds that the action to enforce the ICC's partial award is now fully within
the Makati RTC's jurisdiction in Civil Case No. 04-332. LHC asserts that petitioner is
engaged in forum-shopping by keeping this appeal and at the same time seeking the
suit for enforcement of the arbitral award before the Makati court.
Respondent SBC in its Memorandum, dated 10 March 200327 contends that the Court
of Appeals correctly dismissed the petition for certiorari. Invoking the independence
principle, SBC argues that it was under no obligation to look into the validity or
accuracy of the certification submitted by respondent LHC or into the latter's capacity
or entitlement to so certify. It adds that the act sought to be enjoined by petitioner was
already fait accompli and the present petition would no longer serve any remedial
purpose.
In a similar fashion, respondent ANZ Bank in its Memorandum dated 13 March
200328 posits that its actions could not be regarded as unjustified in view of the
prevailing independence principle under which it had no obligation to ascertain the
truth of LHC's allegations that petitioner defaulted in its obligations. Moreover, it
points out that since the Standby Letter of Credit No. E001126/8400 had been fully
drawn, petitioner's prayer for preliminary injunction had been rendered moot and
academic.
At the core of the present controversy is the applicability of the "independence
principle" and "fraud exception rule" in letters of credit. Thus, a discussion of the
nature and use of letters of credit, also referred to simply as "credits," would provide
a better perspective of the case.
The letter of credit evolved as a mercantile specialty, and the only way to understand
all its facets is to recognize that it is an entity unto itself. The relationship between the
beneficiary and the issuer of a letter of credit is not strictly contractual, because both
privity and a meeting of the minds are lacking, yet strict compliance with its terms is
an enforceable right. Nor is it a third-party beneficiary contract, because the issuer
must honor drafts drawn against a letter regardless of problems subsequently arising
in the underlying contract. Since the bank's customer cannot draw on the letter, it does
not function as an assignment by the customer to the beneficiary. Nor, if properly
used, is it a contract of suretyship or guarantee, because it entails a primary liability
following a default. Finally, it is not in itself a negotiable instrument, because it is not
payable to order or bearer and is generally conditional, yet the draft presented under
it is often negotiable.29
In commercial transactions, a letter of credit is a financial device developed by
merchants as a convenient and relatively safe mode of dealing with sales of goods to
satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his
goods before he is paid, and a buyer, who wants to have control of the goods before
paying.30 The use of credits in commercial transactions serves to reduce the risk of
nonpayment of the purchase price under the contract for the sale of goods. However,
credits are also used in non-sale settings where they serve to reduce the risk of
nonperformance. Generally, credits in the non-sale settings have come to be known
as standby credits.31
There are three significant differences between commercial and standby credits. First,
commercial credits involve the payment of money under a contract of sale. Such
credits become payable upon the presentation by the seller-beneficiary of documents
that show he has taken affirmative steps to comply with the sales agreement. In the
standby type, the credit is payable upon certification of a party's nonperformance of
the agreement. The documents that accompany the beneficiary's draft tend to show
that the applicant has not performed. The beneficiary of a commercial credit must
demonstrate by documents that he has performed his contract. The beneficiary of the
standby credit must certify that his obligor has not performed the contract.32
By definition, a letter of credit is a written instrument whereby the writer requests or
authorizes the addressee to pay money or deliver goods to a third person and assumes
responsibility for payment of debt therefor to the addressee.33 A letter of credit,
however, changes its nature as different transactions occur and if carried through to
completion ends up as a binding contract between the issuing and honoring banks
without any regard or relation to the underlying contract or disputes between the
parties thereto.34
Since letters of credit have gained general acceptability in international trade
transactions, the ICC has published from time to time updates on the Uniform
Customs and Practice (UCP) for Documentary Credits to standardize practices in the
letter of credit area. The vast majority of letters of credit incorporate the UCP.35 First
published in 1933, the UCP for Documentary Credits has undergone several revisions,
the latest of which was in 1993.36
In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,37 this Court ruled
that the observance of the UCP is justified by Article 2 of the Code of Commerce
which provides that in the absence of any particular provision in the Code of
Commerce, commercial transactions shall be governed by usages and customs
generally observed. More recently, in Bank of America, NT & SA v. Court of
Appeals,38 this Court ruled that there being no specific provisions which govern the
legal complexities arising from transactions involving letters of credit, not only
between or among banks themselves but also between banks and the seller or the
buyer, as the case may be, the applicability of the UCP is undeniable.
Article 3 of the UCP provides that credits, by their nature, are separate transactions
from the sales or other contract(s) on which they may be based and banks are in no
way concerned with or bound by such contract(s), even if any reference whatsoever
to such contract(s) is included in the credit. Consequently, the undertaking of a bank
to pay, accept and pay draft(s) or negotiate and/or fulfill any other obligation under
the credit is not subject to claims or defenses by the applicant resulting from his
relationships with the issuing bank or the beneficiary. A beneficiary can in no case
avail himself of the contractual relationships existing between the banks or between
the applicant and the issuing bank.
Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the
credit once the draft and the required documents are presented to it. The 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.39
The independent nature of the letter of credit may be: (a) independence in toto where
the credit is independent from the justification aspect and is a separate obligation from
the underlying agreement like for instance a typical standby; or (b) independence may
be only as to the justification aspect like in a commercial letter of credit or repayment
standby, which is identical with the same obligations under the underlying agreement.
In both cases the payment may be enjoined if in the light of the purpose of the credit
the payment of the credit would constitute fraudulent abuse of the credit.40
Can the beneficiary invoke the independence principle?
Petitioner insists that the independence principle does not apply to the instant case and
assuming it is so, it is a defense available only to respondent banks. LHC, on the other
hand, contends that it would be contrary to common sense to deny the benefit of an
independent contract to the very party for whom the benefit is intended. As beneficiary
of the letter of credit, LHC asserts it is entitled to invoke the principle.
As discussed above, in a letter of credit transaction, such as in this case, where the
credit is stipulated as irrevocable, there is a definite undertaking by the issuing bank
to pay the beneficiary provided that the stipulated documents are presented and the
conditions of the credit are complied with.41 Precisely, the independence principle
liberates the issuing bank from the duty of ascertaining compliance by the parties in
the main contract. As the principle's nomenclature clearly suggests, the obligation
under the letter of credit is independent of the related and originating contract. In brief,
the letter of credit is separate and distinct from the underlying transaction.
Given the nature of letters of credit, petitioner's argument—that it is only the issuing
bank that may invoke the independence principle on letters of credit—does not
impress this Court. To say that the independence principle may only be invoked by
the issuing banks would render nugatory the purpose for which the letters of credit are
used in commercial transactions. As it is, the independence doctrine works to the
benefit of both the issuing bank and the beneficiary.
Letters of credit are employed by the parties desiring to enter into commercial
transactions, not for the benefit of the issuing bank but mainly for the benefit of the
parties to the original transactions. With the letter of credit from the issuing bank, the
party who applied for and obtained it may confidently present the letter of credit to
the beneficiary as a security to convince the beneficiary to enter into the business
transaction. On the other hand, the other party to the business transaction, i.e., the
beneficiary of the letter of credit, can be rest assured of being empowered to call on
the letter of credit as a security in case the commercial transaction does not push
through, or the applicant fails to perform his part of the transaction. It is for this reason
that the party who is entitled to the proceeds of the letter of credit is appropriately
called "beneficiary."
Petitioner's argument that any dispute must first be resolved by the parties, whether
through negotiations or arbitration, before the beneficiary is entitled to call on the
letter of credit in essence would convert the letter of credit into a mere guarantee.
Jurisprudence has laid down a clear distinction between a letter of credit and a
guarantee in that the settlement of a dispute between the parties is not a pre-requisite
for the release of funds under a letter of credit. In other words, the argument is
incompatible with the very nature of the letter of credit. If a letter of credit is drawable
only after settlement of the dispute on the contract entered into by the applicant and
the beneficiary, there would be no practical and beneficial use for letters of credit in
commercial transactions.
Professor John F. Dolan, the noted authority on letters of credit, sheds more light on
the issue:
The standby credit is an attractive commercial device for many of the same reasons
that commercial credits are attractive. Essentially, these credits are inexpensive and
efficient. Often they replace surety contracts, which tend to generate higher costs than
credits do and are usually triggered by a factual determination rather than by the
examination of documents.
Because parties and courts should not confuse the different functions of the surety
contract on the one hand and the standby credit on the other, the distinction between
surety contracts and credits merits some reflection. The two commercial devices share
a common purpose. Both ensure against the obligor's nonperformance. They function,
however, in distinctly different ways.
Traditionally, upon the obligor's default, the surety undertakes to complete the
obligor's performance, usually by hiring someone to complete that performance.
Surety contracts, then, often involve costs of determining whether the obligor
defaulted (a matter over which the surety and the beneficiary often litigate) plus the
cost of performance. The benefit of the surety contract to the beneficiary is obvious.
He knows that the surety, often an insurance company, is a strong financial institution
that will perform if the obligor does not. The beneficiary also should understand that
such performance must await the sometimes lengthy and costly determination that the
obligor has defaulted. In addition, the surety's performance takes time.
The standby credit has different expectations. He reasonably expects that he will
receive cash in the event of nonperformance, that he will receive it promptly, and that
he will receive it before any litigation with the obligor (the applicant) over the nature
of the applicant's performance takes place. The standby credit has this opposite effect
of the surety contract: it reverses the financial burden of parties during litigation.
 Furthermore, LHC has a right rooted in the Contract to call on the Securities. The
relevant provisions of the Contract read, thus:
In the surety contract setting, there is no duty to indemnify the beneficiary until the
beneficiary establishes the fact of the obligor's performance. The beneficiary may
have to establish that fact in litigation. During the litigation, the surety holds the
4.2.1. In order to secure the performance of its obligations under this Contract, the
money and the beneficiary bears most of the cost of delay in performance.
Contractor at its cost shall on the Commencement Date provide security to the
Employer in the form of two irrevocable and confirmed standby letters of credit (the
"Securities"), each in the amount of US$8,988,907, issued and confirmed by banks or
In the standby credit case, however, the beneficiary avoids that litigation burden and
financial institutions acceptable to the Employer. Each of the Securities must be in
receives his money promptly upon presentation of the required documents. It may be
form and substance acceptable to the Employer and may be provided on an annually
that the applicant has, in fact, performed and that the beneficiary's presentation of
renewable basis.44
those documents is not rightful. In that case, the applicant may sue the beneficiary in
tort, in contract, or in breach of warranty; but, during the litigation to determine
whether the applicant has in fact breached the obligation to perform, the beneficiary,
8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to the
not the applicant, holds the money. Parties that use a standby credit and courts
Employer by way of liquidated damages ("Liquidated Damages for Delay") the
construing such a credit should understand this allocation of burdens. There is a
amount of US$75,000 for each and every day or part of a day that shall elapse between
tendency in some quarters to overlook this distinction between surety contracts and
the Target Completion Date and the Completion Date, provided that Liquidated
standby credits and to reallocate burdens by permitting the obligor or the issuer to
Damages for Delay payable by the Contractor shall in the aggregate not exceed 20%
litigate the performance question before payment to the beneficiary.42
of the Contract Price. The Contractor shall pay Liquidated Damages for Delay for
each day of the delay on the following day without need of demand from the
Employer.
While it is the bank which is bound to honor the credit, it is the beneficiary who has
the right to ask the bank to honor the credit by allowing him to draw thereon. The
situation itself emasculates petitioner's posture that LHC cannot invoke the
8.7.2 The Employer may, without prejudice to any other method of recovery, deduct
independence principle and highlights its puerility, more so in this case where the
the amount of such damages from any monies due, or to become due to the Contractor
banks concerned were impleaded as parties by petitioner itself.
and/or by drawing on the Security."45

Respondent banks had squarely raised the independence principle to justify their
A contract once perfected, binds the parties not only to the fulfillment of what has
releases of the amounts due under the Securities. Owing to the nature and purpose of
been expressly stipulated but also to all the consequences which according to their
the standby letters of credit, this Court rules that the respondent banks were left with
nature, may be in keeping with good faith, usage, and law.46 A careful perusal of the
little or no alternative but to honor the credit and both of them in fact submitted that
Turnkey Contract reveals the intention of the parties to make the Securities answerable
it was "ministerial" for them to honor the call for payment.43
for the liquidated damages occasioned by any delay on the part of petitioner. The call
upon the Securities, while not an exclusive remedy on the part of LHC, is certainly an
alternative recourse available to it upon the happening of the contingency for which
the Securities have been proffered. Thus, even without the use of the "independence
principle," the Turnkey Contract itself bestows upon LHC the right to call on the
Securities in the event of default.
Next, petitioner invokes the "fraud exception" principle. It avers that LHC's call on
the Securities is wrongful because it fraudulently misrepresented to ANZ Bank and
SBC that there is already a breach in the Turnkey Contract knowing fully well that
this is yet to be determined by the arbitral tribunals. It asserts that the "fraud
exception" exists when the beneficiary, for the purpose of drawing on the credit,
fraudulently presents to the confirming bank, documents that contain, expressly or by
implication, material representations of fact that to his knowledge are untrue. In such
a situation, petitioner insists, injunction is recognized as a remedy available to it.
Citing Dolan's treatise on letters of credit, petitioner argues that the independence
principle is not without limits and it is important to fashion those limits in light of the
principle's purpose, which is to serve the commercial function of the credit. If it does
not serve those functions, application of the principle is not warranted, and the
commonlaw principles of contract should apply.
It is worthy of note that the propriety of LHC's call on the Securities is largely
intertwined with the fact of default which is the self-same issue pending resolution
before the arbitral tribunals. To be able to declare the call on the Securities wrongful
or fraudulent, it is imperative to resolve, among others, whether petitioner was in fact
guilty of delay in the performance of its obligation. Unfortunately for petitioner, this
Court is not called upon to rule upon the issue of default—such issue having been
submitted by the parties to the jurisdiction of the arbitral tribunals pursuant to the
terms embodied in their agreement.47
Would injunction then be the proper remedy to restrain the alleged wrongful draws on
the Securities?
Most writers agree that fraud is an exception to the independence principle. Professor
Dolan opines that the untruthfulness of a certificate accompanying a demand for
payment under a standby credit may qualify as fraud sufficient to support an
injunction against payment.48 The remedy for fraudulent abuse is an injunction.
However, injunction should not be granted unless: (a) there is clear proof of fraud; (b)
the fraud constitutes fraudulent abuse of the independent purpose of the letter of credit
and not only fraud under the main agreement; and (c) irreparable injury might follow
if injunction is not granted or the recovery of damages would be seriously damaged.49
In its complaint for injunction before the trial court, petitioner alleged that it is entitled
to a total extension of two hundred fifty-three (253) days which would move the target
completion date. It argued that if its claims for extension would be found meritorious
by the ICC, then LHC would not be entitled to any liquidated damages.50
Generally, injunction is a preservative remedy for the protection of one's substantive
right or interest; it is not a cause of action in itself but merely a provisional remedy,
an adjunct to a main suit. The issuance of the writ of preliminary injunction as an
ancillary or preventive remedy to secure the rights of a party in a pending case is
entirely within the discretion of the court taking cognizance of the case, the only
limitation being that this discretion should be exercised based upon the grounds and
in the manner provided by law.51
Before a writ of preliminary injunction may be issued, there must be a clear showing
by the complaint that there exists a right to be protected and that the acts against which
the writ is to be directed are violative of the said right.52 It must be shown that the
invasion of the right sought to be protected is material and substantial, that the right
of complainant is clear and unmistakable and that there is an urgent and paramount
necessity for the writ to prevent serious damage.53 Moreover, an injunctive remedy
may only be resorted to when there is a pressing necessity to avoid injurious
consequences which cannot be remedied under any standard compensation.54
In the instant case, petitioner failed to show that it has a clear and unmistakable right
to restrain LHC's call on the Securities which would justify the issuance of preliminary
injunction. By petitioner's own admission, the right of LHC to call on the Securities
was contractually rooted and subject to the express stipulations in the Turnkey
Contract.55 Indeed, the Turnkey Contract is plain and unequivocal in that it conferred
upon LHC the right to draw upon the Securities in case of default, as provided in
Clause 4.2.5, in relation to Clause 8.7.2, thus:
4.2.5 The Employer shall give the Contractor seven days' notice of calling upon any
of the Securities, stating the nature of the default for which the claim on any of the
Securities is to be made, provided that no notice will be required if the Employer calls
upon any of the Securities for the payment of Liquidated Damages for Delay or for
failure by the Contractor to renew or extend the Securities within 14 days of their
expiration in accordance with Clause 4.2.2.56
8.7.2 The Employer may, without prejudice to any other method of recovery, deduct
the amount of such damages from any monies due, or to become due, to the Contractor
and/or by drawing on the Security.57
The pendency of the arbitration proceedings would not per se make LHC's draws on
the Securities wrongful or fraudulent for there was nothing in the Contract which
would indicate that the parties intended that all disputes regarding delay should first
be settled through arbitration before LHC would be allowed to call upon the
Securities. It is therefore premature and absurd to conclude that the draws on the
Securities were outright fraudulent given the fact that the ICC and CIAC have not
ruled with finality on the existence of default.
Nowhere in its complaint before the trial court or in its pleadings filed before the
appellate court, did petitioner invoke the fraud exception rule as a ground to justify
the issuance of an injunction.58 What petitioner did assert before the courts below
was the fact that LHC's draws on the Securities would be premature and without basis
in view of the pending disputes between them. Petitioner should not be allowed in this
instance to bring into play the fraud exception rule to sustain its claim for the issuance
of an injunctive relief. Matters, theories or arguments not brought out in the
proceedings below will ordinarily not be considered by a reviewing court as they
cannot be raised for the first time on appeal.59 The lower courts could thus not be
faulted for not applying the fraud exception rule not only because the existence of
fraud was fundamentally interwoven with the issue of default still pending before the
arbitral tribunals, but more so, because petitioner never raised it as an issue in its
pleadings filed in the courts below. At any rate, petitioner utterly failed to show that
it had a clear and unmistakable right to prevent LHC's call upon the Securities.
Of course, prudence should have impelled LHC to await resolution of the pending
issues before the arbitral tribunals prior to taking action to enforce the Securities. But,
as earlier stated, the Turnkey Contract did not require LHC to do so and, therefore, it
was merely enforcing its rights in accordance with the tenor thereof. Obligations
arising from contracts have the force of law between the contracting parties and should
be complied with in good faith.60 More importantly, pursuant to the principle of
autonomy of contracts embodied in Article 1306 of the Civil Code,61 petitioner could
have incorporated in its Contract with LHC, a proviso that only the final determination
by the arbitral tribunals that default had occurred would justify the enforcement of the
Securities. However, the fact is petitioner did not do so; hence, it would have to live
with its inaction.
With respect to the issue of whether the respondent banks were justified in releasing
the amounts due under the Securities, this Court reiterates that pursuant to the
independence principle the banks were under no obligation to determine the veracity
of LHC's certification that default has occurred. Neither were they bound by
petitioner's declaration that LHC's call thereon was wrongful. To repeat, respondent
banks' undertaking was simply to pay once the required documents are presented by
the beneficiary.
At any rate, should petitioner finally prove in the pending arbitration proceedings that
LHC's draws upon the Securities were wrongful due to the non-existence of the fact
of default, its right to seek indemnification for damages it suffered would not normally
be foreclosed pursuant to general principles of law.
Moreover, in a Manifestation,62 dated 30 March 2001, LHC informed this Court that
the subject letters of credit had been fully drawn. This fact alone would have been
sufficient reason to dismiss the instant petition.
Settled is the rule that injunction would not lie where the acts sought to be enjoined
have already become fait accompli or an accomplished or consummated act.63 In
Ticzon v. Video Post Manila, Inc.64 this Court ruled that where the period within
which the former employees were prohibited from engaging in or working for an
enterprise that competed with their former employer—the very purpose of the
preliminary injunction —has expired, any declaration upholding the propriety of the
writ would be entirely useless as there would be no actual case or controversy between
the parties insofar as the preliminary injunction is concerned.
In the instant case, the consummation of the act sought to be restrained had rendered
the instant petition moot—for any declaration by this Court as to propriety or
impropriety of the non-issuance of injunctive relief could have no practical effect on
the existing controversy.65 The other issues raised by petitioner particularly with
respect to its right to recover the amounts wrongfully drawn on the Securities,
according to it, could properly be threshed out in a separate proceeding.
One final point. LHC has charged petitioner of forum-shopping. It raised the charge
on two occasions. First, in its Counter-Manifestation dated 29 June 200466 LHC
alleges that petitioner presented before this Court the same claim for money which it
has filed in two other proceedings, to wit: ICC Case No. 11264/TE/MW and Civil
Case No. 04-332 before the RTC of Makati. LHC argues that petitioner's acts
constitutes forum-shopping which should be punished by the dismissal of the claim in
both forums. Second, in its Comment to Petitioner's Motion for Leave to File
Addendum to Petitioner's Memorandum dated 8 October 2004, LHC alleges that by
maintaining the present appeal and at the same time pursuing Civil Case No. 04-332—
wherein petitioner pressed for judgment on the issue of whether the funds LHC drew
on the Securities should be returned—petitioner resorted to forum-shopping. In both
instances, however, petitioner has apparently opted not to respond to the charge.
Forum-shopping is a very serious charge. It exists when a party repetitively avails of
several judicial remedies in different courts, simultaneously or successively, all
substantially founded on the same transactions and the same essential facts and
circumstances, and all raising substantially the same issues either pending in, or
already resolved adversely, by some other court.67 It may also consist in the act of a
party against whom an adverse judgment has been rendered in one forum, of seeking
another and possibly favorable opinion in another forum other than by appeal or
special civil action of certiorari, or the institution of two or more actions or
proceedings grounded on the same cause on the supposition that one or the other court
might look with favor upon the other party.68 To determine whether a party violated
the rule against forum-shopping, the test applied is whether the elements of litis
pendentia are present or whether a final judgment in one case will amount to res
judicata in another.69 Forum-shopping constitutes improper conduct and may be
punished with summary dismissal of the multiple petitions and direct contempt of
court.70
Considering the seriousness of the charge of forum-shopping and the severity of the
sanctions for its violation, the Court will refrain from making any definitive ruling on
this issue until after petitioner has been given ample opportunity to respond to the
charge.
Republic of the Philippines
SUPREME COURT
WHEREFORE, the instant petition is DENIED, with costs against petitioner.
Manila

Petitioner is hereby required to answer the charge of forum-shopping within fifteen

THIRD DIVISION
(15) days from notice.

G.R. No. 94209 April 30, 1991

SO ORDERED.

FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING

Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur.
CORPORATION), petitioner,
vs.
THE COURT OF APPEALS, and BERNARDO E. VILLALUZ, respondents.
Footnotes

Pelaez, Adriano & Gregorio for petitioner.

1 Penned by Justice Candido V. Rivera, concurred in by Justices Conchita Carpio-
Ezequiel S. Consulta for private respondent.
Morales and Rebecca de Guia-Salvador.

GUTIERREZ, JR., J.:

Today is Monday, December 09, 2019home

This is a petition for review seeking the reversal of the decision of the Court of
Custom Search
Appeals dated June 29, 1990 which affirmed the decision of the Regional Trial Court
of Rizal dated October 20, 1986 ordering the defendants Christiansen and the
petitioner, to pay various sums to respondent Villaluz, jointly and severally.
 Christiansen's telex #201 of May 1, 1970, and that all logs have been marked "BEV-
EX."
The facts of the case are as follows:

b. One complete set of documents, including 1/3 original bills of lading was airmailed
On June 3, 1971, Bernardo E. Villaluz agreed to sell to the then defendant Axel
to Consignee and Parties to be advised by Hans-Axel Christiansen, Ship and
Christiansen 2,000 cubic meters of lauan logs at $27.00 per cubic meter FOB.
Merchandise Broker.

After inspecting the logs, Christiansen issued purchase order No. 76171.
c. One set of non-negotiable documents was airmailed to Han Mi Trade Development
Company and one set to Consignee and Parties to be advised by Hans-Axel
Christiansen, Ship and Merchandise Broker.
On the arrangements made and upon the instructions of the consignee, Hanmi Trade
Development, Ltd., de Santa Ana, California, the Security Pacific National Bank of
Los Angeles, California issued Irrevocable Letter of Credit No. IC-46268 available at
2. Tally sheets in quadruplicate.
sight in favor of Villaluz for the sum of $54,000.00, the total purchase price of the
lauan logs.
3. 2/3 Original Clean on Board Ocean Bills of Lading with Consignee and Parties to
be advised by Hans Axel Christiansen, showing Freight Prepaid and marked Notify:
The letter of credit was mailed to the Feati Bank and Trust Company (now Citytrust)
with the instruction to the latter that it "forward the enclosed letter of credit to the
beneficiary." (Records, Vol. I, p. 11)
Han Mi Trade Development Company, Ltd., Santa Ana, California.

The letter of credit further provided that the draft to be drawn is on Security Pacific
Letter of Credit No. 46268 dated June 7, 1971
National Bank and that it be accompanied by the following documents:

Han Mi Trade Development Company, Ltd., P.O. Box 10480, Santa Ana, California
1. Signed Commercial Invoice in four copies showing the number of the purchase
92711 and Han Mi Trade Development Company, Ltd., Seoul, Korea.
order and certifying that —

a. All terms and conditions of the purchase order have been complied with and that
all logs are fresh cut and quality equal to or better than that described in H.A.
4. Certification from Han-Axel Christiansen, Ship and Merchandise Broker, stating
that logs have been approved prior to shipment in accordance with terms and
conditions of corresponding purchase Order. (Record, Vol. 1 pp. 11-12)
Also incorporated by reference in the letter of credit is the Uniform Customs and
Practice for Documentary Credits (1962 Revision).
The logs were thereafter loaded on the vessel "Zenlin Glory" which was chartered by
Christiansen. Before its loading, the logs were inspected by custom inspectors Nelo
Laurente, Alejandro Cabiao, Estanislao Edera from the Bureau of Customs (Records,
Vol. I, p. 124) and representatives Rogelio Cantuba and Jesus Tadena of the Bureau
of Forestry (Records, Vol. I, pp. 16-17) all of whom certified to the good condition
and exportability of the logs.
After the loading of the logs was completed, the Chief Mate, Shao Shu Wang issued
a mate receipt of the cargo which stated the same are in good condition (Records, Vol.
I, p. 363). However, Christiansen refused to issue the certification as required in
paragraph 4 of the letter of credit, despite several requests made by the private
respondent.
Because of the absence of the certification by Christiansen, the Feati Bank and Trust
Company refused to advance the payment on the letter of credit.
The letter of credit lapsed on June 30, 1971, (extended, however up to July 31, 1971)
without the private respondent receiving any certification from Christiansen.
The persistent refusal of Christiansen to issue the certification prompted the private
respondent to bring the matter before the Central Bank. In a memorandum dated
August 16, 1971, the Central Bank ruled that:
. . . pursuant to the Monetary Board Resolution No. 1230 dated August 3, 1971, in all
log exports, the certification of the lumber inspectors of the Bureau of Forestry . . .
shall be considered final for purposes of negotiating documents. Any provision in any
letter of credit covering log exports requiring certification of buyer's agent or
representative that said logs have been approved for shipment as a condition precedent
to negotiation of shipping documents shall not be allowed. (Records, Vol. I, p. 367)
Meanwhile, the logs arrived at Inchon, Korea and were received by the consignee,
Hanmi Trade Development Company, to whom Christiansen sold the logs for the
amount of $37.50 per cubic meter, for a net profit of $10 per cubic meter. Hanmi
Trade Development Company, on the other hand sold the logs to Taisung Lumber
Company at Inchon, Korea. (Rollo, p. 39)
Since the demands by the private respondent for Christiansen to execute the
certification proved futile, Villaluz, on September 1, 1971, instituted an action for
mandamus and specific performance against Christiansen and the Feati Bank and
Trust Company (now Citytrust) before the then Court of First Instance of Rizal. The
petitioner was impleaded as defendant before the lower court only to afford complete
relief should the court a quo order Christiansen to execute the required certification.
The complaint prayed for the following:
1. Christiansen be ordered to issue the certification required of him under the Letter
of Credit;

2. Upon issuance of such certification, or, if the court should find it unnecessary,
FEATI BANK be ordered to accept negotiation of the Letter of Credit and make
payment thereon to Villaluz;
3. Order Christiansen to pay damages to the plaintiff. (Rollo, p. 39)
On or about 1979, while the case was still pending trial, Christiansen left the
Philippines without informing the Court and his counsel. Hence, Villaluz, filed an
amended complaint to make the petitioner solidarily liable with Christiansen.
The trial court, in its order dated August 29, 1979, admitted the amended complaint.
After trial, the lower court found:
The liability of the defendant CHRISTIANSEN is beyond dispute, and the plaintiffs
right to demand payment is absolute. Defendant CHRISTIANSEN having accepted
delivery of the logs by having them loaded in his chartered vessel the "Zenlin Glory"
and shipping them to the consignee, his buyer Han Mi Trade in Inchon, South Korea
(Art. 1585, Civil Code), his obligation to pay the purchase order had clearly arisen
and the plaintiff may sue and recover the price of the goods (Art. 1595, Id).
The Court believes that the defendant CHRISTIANSEN acted in bad faith and deceit
and with intent to defraud the plaintiff, reflected in and aggravated by, not only his
refusal to issue the certification that would have enabled without question the plaintiff
to negotiate the letter of credit, but his accusing the plaintiff in his answer of fraud,
intimidation, violence and deceit. These accusations said defendant did not attempt to
prove, as in fact he left the country without even notifying his own lawyer. It was to
the Court's mind a pure swindle.
The defendant Feati Bank and Trust Company, on the other hand, must be held liable
together with his (sic) co-defendant for having, by its wrongful act, i.e., its refusal to
negotiate the letter of credit in the absence of CHRISTIANSEN's certification (in spite
of the Central Bank's ruling that the requirement was illegal), prevented payment to
the plaintiff. The said letter of credit, as may be seen on its face, is irrevocable and the
issuing bank, the Security Pacific National Bank in Los Angeles, California,
undertook by its terms that the same shall be honored upon its presentment. On the
other hand, the notifying bank, the defendant Feati Bank and Trust Company, by
accepting the instructions from the issuing bank, itself assumed the very same
undertaking as the issuing bank under the terms of the letter of credit.
xxx xxx xxx
The Court likewise agrees with the plaintiff that the defendant BANK may also be
held liable under the principles and laws on both trust and estoppel. When the
defendant BANK accepted its role as the notifying and negotiating bank for and in
behalf of the issuing bank, it in effect accepted a trust reposed on it, and became a
trustee in relation to plaintiff as the beneficiary of the letter of credit. As trustee, it was
then duty bound to protect the interests of the plaintiff under the terms of the letter of
credit, and must be held liable for damages and loss resulting to the plaintiff from its
failure to perform that obligation.
Furthermore, when the defendant BANK assumed the role of a notifying and
negotiating BANK it in effect represented to the plaintiff that, if the plaintiff complied
with the terms and conditions of the letter of credit and presents the same to the BANK
together with the documents mentioned therein the said BANK will pay the plaintiff
the amount of the letter of credit. The Court is convinced that it was upon the strength
of this letter of credit and this implied representation of the defendant BANK that the
plaintiff delivered the logs to defendant CHRISTIANSEN, considering that the
b) P17,340.00, representing government fees and charges paid by plaintiff in
issuing bank is a foreign bank with whom plaintiff had no business connections and
connection with the logs shipment in question;
CHRISTIANSEN had not offered any other Security for the payment of the logs.
Defendant BANK cannot now be allowed to deny its commitment and liability under
the letter of credit:
c) P10,000.00 as temperate damages (for trips made to Bacolod and Korea).

A holder of a promissory note given because of gambling who indorses the same to
an innocent holder for value and who assures said party that the note has no legal All three foregoing sums shall be with interest thereon at 12% per annum from
defect, is in estoppel from asserting that there had been an illegal consideration for the September 1, 1971, when the complaint was filed, until fully paid:
note, and so, he has to pay its value. (Rodriguez v. Martinez, 5 Phil. 67).

d) P70,000.00 as moral damages;

The defendant BANK, in insisting upon the certification of defendant
CHRISTIANSEN as a condition precedent to negotiating the letter of credit, likewise
in the Court's opinion acted in bad faith, not only because of the clear declaration of e) P30,000.00 as exemplary damages; and
the Central Bank that such a requirement was illegal, but because the BANK, with all
the legal counsel available to it must have known that the condition was void since it
depended on the sole will of the debtor, the defendant CHRISTIANSEN. (Art. 1182, f) P30,000.00 as attorney's fees and litigation expense.
Civil Code) (Rollo, pp. 29-31)

(Rollo, p. 28)
On the basis of the foregoing the trial court on October 20, 1986, ruled in favor of the
private respondent. The dispositive portion of its decision reads:
The petitioner received a copy of the decision on November 3, 1986. Two days
thereafter, or on November 5, 1986, it filed a notice of appeal.
WHEREFORE, judgment is hereby rendered for the plaintiff, ordering the defendants
to pay the plaintiff, jointly and severally, the following sums:
On November 10, 1986, the private respondent filed a motion for the immediate
execution of the judgment on the ground that the appeal of the petitioner was frivolous
a) $54,000.00 (US), or its peso equivalent at the prevailing rate as of the time payment and dilatory.
is actually made, representing the purchase price of the logs;
The trial court ordered the immediate execution of its judgment upon the private
respondent's filing of a bond.
The petitioner then filed a motion for reconsideration and a motion to suspend the
implementation of the writ of execution. Both motions were, however, denied. Thus,
petitioner filed before the Court of Appeals a petition for certiorari and prohibition
with preliminary injunction to enjoin the immediate execution of the judgment.
The Court of Appeals in a decision dated April 9, 1987 granted the petition and
nullified the order of execution, the dispositive portion of the decision states:
WHEREFORE, the petition for certiorari is granted. Respondent Judge's order of
execution dated December 29, 1986, as well as his order dated January 14, 1987
denying the petitioner's urgent motion to suspend the writ of execution against its
properties are hereby annulled and set aside insofar as they are sought to be enforced
and implemented against the petitioner Feati Bank & Trust Company, now Citytrust
Banking Corporation, during the pendency of its appeal from the adverse decision in
Civil Case No. 15121. However, the execution of the same decision against defendant
Axel Christiansen did not appeal said decision may proceed unimpeded. The Sheriff
s levy on the petitioner's properties, and the notice of sale dated January 13, 1987
(Annex M), are hereby annulled and set aside. Rollo p. 44)
A motion for reconsideration was thereafter filed by the private respondent. The Court
of Appeals, in a resolution dated June 29, 1987 denied the motion for reconsideration.
In the meantime, the appeal filed by the petitioner before the Court of Appeals was
given due course. In its decision dated June 29, 1990, the Court of Appeals affirmed
the decision of the lower court dated October 20, 1986 and ruled that:
1. Feati Bank admitted in the "special and negative defenses" section of its answer
that it was the bank to negotiate the letter of credit issued by the Security Pacific
National Bank of Los Angeles, California. (Record, pp. 156, 157). Feati Bank did
notify Villaluz of such letter of credit. In fact, as such negotiating bank, even before
the letter of credit was presented for payment, Feati Bank had already made an
advance payment of P75,000.00 to Villaluz in anticipation of such presentment. As
the negotiating bank, Feati Bank, by notifying Villaluz of the letter of credit in behalf
of the issuing bank (Security Pacific), confirmed such letter of credit and made the
same also its own obligation. This ruling finds support in the authority cited by
Villaluz:
A confirmed letter of credit is one in which the notifying bank gives its assurance also
that the opening bank's obligation will be performed. In such a case, the notifying
bank will not simply transmit but will confirm the opening bank's obligation by
making it also its own undertaking, or commitment, or guaranty or obligation. (Ward
& Hatfield, 28-29, cited in Agbayani, Commercial Laws, 1978 edition, p. 77).
Feati Bank argues further that it would be considered as the negotiating bank only
upon negotiation of the letter of credit. This stance is untenable. Assurance,
commitments or guaranties supposed to be made by notifying banks to the beneficiary
of a letter of credit, as defined above, can be relevant or meaningful only with respect
to a future transaction, that is, negotiation. Hence, even before actual negotiation, the
notifying bank, by the mere act of notifying the beneficiary of the letter of credit,
assumes as of that moment the obligation of the issuing bank.
2. Since Feati Bank acted as guarantor of the issuing bank, and in effect also of the
latter's principal or client, i.e. Hans Axel-Christiansen. (sic) Such being the case, when
Christiansen refused to issue the certification, it was as though refusal was made by
Feati Bank itself. Feati Bank should have taken steps to secure the certification from
Christiansen; and, if the latter should still refuse to comply, to hale him to court. In
short, Feati Bank should have honored Villaluz's demand for payment of his logs by
virtue of the irrevocable letter of credit issued in Villaluz's favor and guaranteed by
First Reason
Feati Bank.

THE RESPONDENT COURT ERRONEOUSLY CONCLUDED FROM THE

3. The decision promulgated by this Court in CA-G.R. Sp No. 11051, which contained
ESTABLISHED FACTS AND INDEED, WENT AGAINST THE EVIDENCE AND
the statement "Since Villaluz" draft was not drawn strictly in compliance with the
DECISION OF THIS HONORABLE COURT, THAT PETITIONER BANK IS
terms of the letter of credit, Feati Bank's refusal to negotiate it was justified," did not
LIABLE ON THE LETTER OF CREDIT DESPITE PRIVATE RESPONDENTS
dispose of this question on the merits. In that case, the question involved was
NON-COMPLIANCE WITH THE TERMS THEREOF,
jurisdiction or discretion, and not judgment. The quoted pronouncement should not
be taken as a preemptive judgment on the merits of the present case on appeal.

4. The original action was for "Mandamus and/or specific performance." Feati Bank
may not be a party to the transaction between Christiansen and Security Pacific
National Bank on the one hand, and Villaluz on the other hand; still, being guarantor
or agent of Christiansen and/or Security Pacific National Bank which had directly
dealt with Villaluz, Feati Bank may be sued properly on specific performance as a
procedural means by which the relief sought by Villaluz may be entertained. (Rollo,
pp. 32-33)
Second Reason
THE RESPONDENT COURT COMMITTED AN ERROR OF LAW WHEN IT
HELD THAT PETITIONER BANK, BY NOTIFYING PRIVATE RESPONDENT
OF THE LETTER OF CREDIT, CONFIRMED SUCH CREDIT AND MADE THE
SAME ALSO ITS OBLIGATION AS GUARANTOR OF THE ISSUING BANK.

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

THE RESPONDENT COURT LIKEWISE COMMITTED AN ERROR OF LAW

WHEREFORE, the decision appealed from is affirmed; and accordingly, the appeal WHEN IT AFFIRMED THE TRIAL COURT'S DECISION. (Rollo, p. 12)
is hereby dismissed. Costs against the petitioner. (Rollo, p. 33)

The principal issue in this case is whether or not a correspondent bank is to be held
Hence, this petition for review. liable under the letter of credit despite non-compliance by the beneficiary with the
terms thereof?

The petitioner interposes the following reasons for the allowance of the petition.
The petition is impressed with merit.
It is a settled rule in commercial transactions involving letters of credit that the
documents tendered must strictly conform to the terms of the letter of credit. The
tender of documents by the beneficiary (seller) must include all documents required
by the letter. A correspondent bank which departs from what has been stipulated under
the letter of credit, as when it accepts a faulty tender, acts on its own risks and it may
not thereafter be able to recover from the buyer or the issuing bank, as the case may
be, the money thus paid to the beneficiary Thus the rule of strict compliance.
In the United States, commercial transactions involving letters of credit are governed
by the rule of strict compliance. In the Philippines, the same holds true. The same rule
must also be followed.
The case of Anglo-South America Trust Co. v. Uhe et al. (184 N.E. 741 [1933])
expounded clearly on the rule of strict compliance.
We have heretofore held that these letters of credit are to be strictly complied with
which documents, and shipping documents must be followed as stated in the letter.
There is no discretion in the bank or trust company to waive any requirements. The
terms of the letter constitutes an agreement between the purchaser and the bank. (p.
743)
Although in some American decisions, banks are granted a little discretion to accept
a faulty tender as when the other documents may be considered immaterial or
superfluous, this theory could lead to dangerous precedents. Since a bank deals only
with documents, it is not in a position to determine whether or not the documents
required by the letter of credit are material or superfluous. The mere fact that the
document was specified therein readily means that the document is of vital importance
to the buyer.
Moreover, the incorporation of the Uniform Customs and Practice for Documentary
Credit (U.C.P. for short) in the letter of credit resulted in the applicability of the said
rules in the governance of the relations between the parties.
And even if the U.C.P. was not incorporated in the letter of credit, we have already
ruled in the affirmative as to the applicability of the U.C.P. in cases before us.
In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the observance
of the U.C.P. in this jurisdiction is justified by Article 2 of the Code of Commerce.
Article 2 of the Code of Commerce enunciates that in the absence of any particular
provision in the Code of Commerce, commercial transactions shall be governed by
the usages and customs generally observed.
There being no specific provision which governs the legal complexities arising from
transactions involving letters of credit not only between the banks themselves but also
between banks and seller and/or buyer, the applicability of the U.C.P. is undeniable.
The pertinent provisions of the U.C.P. (1962 Revision) are:
Article 3.
An irrevocable credit is a definite undertaking on the part of the issuing bank and
constitutes the engagement of that bank to the beneficiary and bona fide holders of
drafts drawn and/or documents presented thereunder, that the provisions for payment,
acceptance or negotiation contained in the credit will be duly fulfilled, provided that
all the terms and conditions of the credit are complied with.

An irrevocable credit may be advised to a beneficiary through another bank (the
advising bank) without engagement on the part of that bank, but when an issuing bank
authorizes or requests another bank to confirm its irrevocable credit and the latter does
so, such confirmation constitutes a definite undertaking of the confirming bank. . . .
Article 7.
Banks must examine all documents with reasonable care to ascertain that they appear
on their face to be in accordance with the terms and conditions of the credit,"
Article 8.
Payment, acceptance or negotiation against documents which appear on their face to
be in accordance with the terms and conditions of a credit by a bank authorized to do
so, binds the party giving the authorization to take up documents and reimburse the
bank which has effected the payment, acceptance or negotiation. (Emphasis Supplied)
Under the foregoing provisions of the U.C.P., the bank may only negotiate, accept or
pay, if the documents tendered to it are on their face in accordance with the terms and
conditions of the documentary credit. And since a correspondent bank, like the
petitioner, principally deals only with documents, the absence of any document
required in the documentary credit justifies the refusal by the correspondent bank to
negotiate, accept or pay the beneficiary, as it is not its obligation to look beyond the
documents. It merely has to rely on the completeness of the documents tendered by
the beneficiary.
In regard to the ruling of the lower court and affirmed by the Court of Appeals that
the petitioner is not a notifying bank but a confirming bank, we find the same
erroneous.
The trial court wrongly mixed up the meaning of an irrevocable credit with that of a
confirmed credit. In its decision, the trial court ruled that the petitioner, in accepting
the obligation to notify the respondent that the irrevocable credit has been transmitted
to the petitioner on behalf of the private respondent, has confirmed the letter.
The trial court appears to have overlooked the fact that an irrevocable credit is not
synonymous with a confirmed credit. These types of letters have different meanings
and the legal relations arising from there varies. A credit may be an irrevocable credit
and at the same time a confirmed credit or vice-versa.
An irrevocable credit refers to the duration of the letter of credit. What is simply means
is that the issuing bank may not without the consent of the beneficiary (seller) and the
applicant (buyer) revoke his undertaking under the letter. The issuing bank does not
reserve the right to revoke the credit. On the other hand, a confirmed letter of credit
pertains to the kind of obligation assumed by the correspondent bank. In this case, the
correspondent bank gives an absolute assurance to the beneficiary that it will
undertake the issuing bank's obligation as its own according to the terms and
conditions of the credit. (Agbayani, Commercial Laws of the Philippines, Vol. 1, pp.
81-83)
Hence, the mere fact that a letter of credit is irrevocable does not necessarily imply
that the correspondent bank in accepting the instructions of the issuing bank has also
confirmed the letter of credit. Another error which the lower court and the Court of
Appeals made was to confuse the obligation assumed by the petitioner.
In commercial transactions involving letters of credit, the functions assumed by a
correspondent bank are classified according to the obligations taken up by it. The
correspondent bank may be called a notifying bank, a negotiating bank, or a
confirming bank.
In case of a notifying bank, the correspondent bank assumes no liability except to
notify and/or transmit to the beneficiary the existence of the letter of credit. (Kronman
and Co., Inc. v. Public National Bank of New York, 218 N.Y.S. 616 [1926]; Shaterian,
Export-Import Banking, p. 292, cited in Agbayani, Commercial Laws of the
Philippines, Vol. 1, p. 76). A negotiating bank, on the other hand, is a correspondent
bank which buys or discounts a draft under the letter of credit. Its liability is dependent
upon the stage of the negotiation. If before negotiation, it has no liability with respect
to the seller but after negotiation, a contractual relationship will then prevail between
the negotiating bank and the seller. (Scanlon v. First National Bank of Mexico, 162
N.E. 567 [1928]; Shaterian, Export-Import Banking, p. 293, cited in Agbayani,
Commercial Laws of the Philippines, Vol. 1, p. 76)
In the case of a confirming bank, the correspondent bank assumes a direct obligation
to the seller and its liability is a primary one as if the correspondent bank itself had
issued the letter of credit. (Shaterian, Export-Import Banking, p. 294, cited in
Agbayani Commercial Laws of the Philippines, Vol. 1, p. 77)
In this case, the letter merely provided that the petitioner "forward the enclosed
original credit to the beneficiary." (Records, Vol. I, p. 11) Considering the aforesaid
instruction to the petitioner by the issuing bank, the Security Pacific National Bank, it
is indubitable that the petitioner is only a notifying bank and not a confirming bank as
ruled by the courts below.
If the petitioner was a confirming bank, then a categorical declaration should have
been stated in the letter of credit that the petitioner is to honor all drafts drawn in
conformity with the letter of credit. What was simply stated therein was the instruction
that the petitioner forward the original letter of credit to the beneficiary.
Since the petitioner was only a notifying bank, its responsibility was solely to notify
and/or transmit the documentary of credit to the private respondent and its obligation
ends there.
The notifying bank may suggest to the seller its willingness to negotiate, but this fact
alone does not imply that the notifying bank promises to accept the draft drawn under
the documentary credit.
A notifying bank is not a privy to the contract of sale between the buyer and the seller,
its relationship is only with that of the issuing bank and not with the beneficiary to
whom he assumes no liability. It follows therefore that when the petitioner refused to
negotiate with the private respondent, the latter has no cause of action against the
petitioner for the enforcement of his rights under the letter. (See Kronman and Co.,
Inc. v. Public National Bank of New York, supra)
In order that the petitioner may be held liable under the letter, there should be proof
that the petitioner confirmed the letter of credit.
The records are, however, bereft of any evidence which will disclose that the
petitioner has confirmed the letter of credit. The only evidence in this case, and upon
which the private respondent premised his argument, is the P75,000.00 loan extended
by the petitioner to him.
The private respondent relies on this loan to advance his contention that the letter of
credit was confirmed by the petitioner. He claims that the loan was granted by the
petitioner to him, "in anticipation of the presentment of the letter of credit."
The proposition advanced by the private respondent has no basis in fact or law. That
the loan agreement between them be construed as an act of confirmation is rather far-
fetched, for it depends principally on speculative reasoning.
As earlier stated, there must have been an absolute assurance on the part of the
petitioner that it will undertake the issuing bank's obligation as its own. Verily, the
loan agreement it entered into cannot be categorized as an emphatic assurance that it
will carry out the issuing bank's obligation as its own.
The loan agreement is more reasonably classified as an isolated transaction
independent of the documentary credit.
Of course, it may be presumed that the petitioner loaned the money to the private
respondent in anticipation that it would later be paid by the latter upon the receipt of
the letter. Yet, we would have no basis to rule definitively that such "act" should be
construed as an act of confirmation.
The private respondent no doubt was in need of money in loading the logs on the ship
"Zenlin Glory" and the only way to satisfy this need was to borrow money from the
petitioner which the latter granted. From these circumstances, a logical conclusion
that can be gathered is that the letter of credit was merely to serve as a collateral.
At the most, when the petitioner extended the loan to the private respondent, it
assumed the character of a negotiating bank. Even then, the petitioner will still not be
liable, for a negotiating bank before negotiation has no contractual relationship with
the seller.
The case of Scanlon v. First National Bank (supra) perspicuously explained the
relationship between the seller and the negotiating bank, viz:
It may buy or refuse to buy as it chooses. Equally, it must be true that it owes no
contractual duty toward the person for whose benefit the letter is written to discount
or purchase any draft drawn against the credit. No relationship of agent and principal,
or of trustee and cestui, between the receiving bank and the beneficiary of the letter is
established. (P.568)
Whether therefore the petitioner is a notifying bank or a negotiating bank, it cannot
be held liable. Absent any definitive proof that it has confirmed the letter of credit or
has actually negotiated with the private respondent, the refusal by the petitioner to
accept the tender of the private respondent is justified.
In regard to the finding that the petitioner became a "trustee in relation to the plaintiff
(private respondent) as the beneficiary of the letter of credit," the same has no legal
basis.
A trust has been defined as the "right, enforceable solely in equity, to the beneficial
enjoyment of property the legal title to which is vested to another." (89 C.J.S. 712)
The concept of a trust presupposes the existence of a specific property which has been
conferred upon the person for the benefit of another. In order therefore for the trust
theory of the private respondent to be sustained, the petitioner should have had in its
possession a sum of money as specific fund advanced to it by the issuing bank and to
be held in trust by it in favor of the private respondent. This does not obtain in this
case.
The mere opening of a letter of credit, it is to be noted, does not involve a specific
appropriation of a sum of money in favor of the beneficiary. It only signifies that the
beneficiary may be able to draw funds upon the letter of credit up to the designated
amount specified in the letter. It does not convey the notion that a particular sum of
money has been specifically reserved or has been held in trust.
What actually transpires in an irrevocable credit is that the correspondent bank does
not receive in advance the sum of money from the buyer or the issuing bank. On the
contrary, when the correspondent bank accepts the tender and pays the amount stated
in the letter, the money that it doles out comes not from any particular fund that has
been advanced by the issuing bank, rather it gets the money from its own funds and
then later seeks reimbursement from the issuing bank.
Granting that a trust has been created, still, the petitioner may not be considered a
trustee. As the petitioner is only a notifying bank, its acceptance of the instructions of
the issuing bank will not create estoppel on its part resulting in the acceptance of the
trust. Precisely, as a notifying bank, its only obligation is to notify the private
respondent of the existence of the letter of credit. How then can such create estoppel
when that is its only duty under the law?
We also find erroneous the statement of the Court of Appeals that the petitioner "acted
as a guarantor of the issuing bank and in effect also of the latter's principal or client,
i.e., Hans Axel Christiansen."
It is a fundamental rule that an irrevocable credit is independent not only of the
contract between the buyer and the seller but also of the credit agreement between the
issuing bank and the buyer. (See Kingdom of Sweden v. New York Trust Co., 96
N.Y.S. 2d 779 [1949]). The relationship between the buyer (Christiansen) and the
issuing bank (Security Pacific National Bank) is entirely independent from the letter
of credit issued by the latter.
The contract between the two has no bearing as to the non-compliance by the buyer
with the agreement between the latter and the seller. Their contract is similar to that
of a contract of services (to open the letter of credit) and not that of agency as was
intimated by the Court of Appeals. The unjustified refusal therefore by Christiansen
to issue the certification under the letter of credit should not likewise be charged to
the issuing bank.
As a mere notifying bank, not only does the petitioner not have any contractual
relationship with the buyer, it has also nothing to do with the contract between the
issuing bank and the buyer regarding the issuance of the letter of credit.
The theory of guarantee relied upon by the Court of Appeals has to necessarily fail.
The concept of guarantee vis-a-vis the concept of an irrevocable credit are inconsistent
with each other.
In the first place, the guarantee theory destroys the independence of the bank's
responsibility from the contract upon which it was opened. In the second place, the
nature of both contracts is mutually in conflict with each other. In contracts of
guarantee, the guarantor's obligation is merely collateral and it arises only upon the
default of the person primarily liable. On the other hand, in an irrevocable credit the
bank undertakes a primary obligation. (See National Bank of Eagle Pass, Tex v.
American National Bank of San Francisco, 282 F. 73 [1922])
The relationship between the issuing bank and the notifying bank, on the contrary, is
more similar to that of an agency and not that of a guarantee. It may be observed that
the notifying bank is merely to follow the instructions of the issuing bank which is to
notify or to transmit the letter of credit to the beneficiary. (See Kronman v. Public
National Bank of New York, supra). Its commitment is only to notify the beneficiary.
It does not undertake any assurance that the issuing bank will perform what has been
mandated to or expected of it. As an agent of the issuing bank, it has only to follow
the instructions of the issuing bank and to it alone is it obligated and not to buyer with
whom it has no contractual relationship.
In fact the notifying bank, even if the seller tenders all the documents required under
the letter of credit, may refuse to negotiate or accept the drafts drawn thereunder and
it will still not be held liable for its only engagement is to notify and/or transmit to the
seller the letter of credit.
Finally, even if we assume that the petitioner is a confirming bank, the petitioner
cannot be forced to pay the amount under the letter. As we have previously explained,
there was a failure on the part of the private respondent to comply with the terms of
the letter of credit.
The failure by him to submit the certification was fatal to his case.1âwphi1 The U.C.P.
which is incorporated in the letter of credit ordains that the bank may only pay the
amount specified under the letter if all the documents tendered are on their face in
compliance with the credit. It is not tasked with the duty of ascertaining the reason or
reasons why certain documents have not been submitted, as it is only concerned with
the documents. Thus, whether or not the buyer has performed his responsibility
towards the seller is not the bank's problem.
We are aware of the injustice committed by Christiansen on the private respondent
but we are deciding the controversy on the basis of what the law is, for the law is not
meant to favor only those who have been oppressed, the law is to govern future
relations among people as well. Its commitment is to all and not to a single individual.
The faith of the people in our justice system may be eroded if we are to decide not
what the law states but what we believe it should declare. Dura lex sed lex.
Considering the foregoing, the materiality of ruling upon the validity of the certificate
of approval required of the private respondent to submit under the letter of credit, has
become insignificant.
In any event, we affirm the earlier ruling of the Court of Appeals dated April 9, 1987
in regard to the petition before it for certiorari and prohibition with preliminary
injunction, to wit:
There is no merit in the respondent's contention that the certification required in
condition No. 4 of the letter of credit was "patently illegal." At the time the letter of
credit was issued there was no Central Bank regulation prohibiting such a condition
in the letter of credit. The letter of credit (Exh. C) was issued on June 7, 1971, more
than two months before the issuance of the Central Bank Memorandum on August 16,
1971 disallowing such a condition in a letter of credit. In fact the letter of credit had
already expired on July 30, 1971 when the Central Bank memorandum was issued. In
any event, it is difficult to see how such a condition could be categorized as illegal or
unreasonable since all that plaintiff Villaluz, as seller of the logs, could and should
have done was to refuse to load the logs on the vessel "Zenlin Glory", unless
Christiansen first issued the required certification that the logs had been approved by
him to be in accordance with the terms and conditions of his purchase order.
Apparently, Villaluz was in too much haste to ship his logs without taking all due
precautions to assure that all the terms and conditions of the letter of credit had been
strictly complied with, so that there would be no hitch in its negotiation. (Rollo, p. 8)
WHEREFORE, the COURT RESOLVED to GRANT the petition and hereby
NULLIFIES and SETS ASIDE the decision of the Court of Appeals dated June 29,
EN BANC
1990. The amended complaint in Civil Case No. 15121 is DISMISSED.

G.R. No. L-24821 October 16, 1970

SO ORDERED.

BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellee,

Feliciano, Bidin and Davide, Jr., JJ., concur.
vs.
Fernan, C.J., took no part.
DE RENY FABRIC INDUSTRIES, INC., AURORA T. TUYO and AURORA
CARCERENY alias AURORA C. GONZALES, defendants-appellants.

The Lawphil Project - Arellano Law Foundation

Aviado and Aranda for plaintiff-appellee.

S. Emiliano Calma for defendants-appellants.

CASTRO, J.:.
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This is an appeal from the decision of the Court of First Instance of Manila ordering
the defendants-appellants to pay to the Bank of the Philippine Islands (hereinafter
referred to as the Bank), jointly and severally, the value of the credit it extended to
them in several letters of credit which the Bank opened at the behest of the defendants
Republic of the Philippines appellants to finance their importation of dyestuffs from the United States, which
however turned out to be mere colored chalk upon arrival and inspection thereof at
SUPREME COURT the port of Manila.
Manila
The record shows that on four (4) different occasions in 1961, the De Reny Fabric
Industries, Inc., a Philippine corporation through its co-defendants-appellants, Aurora
Carcereny alias Aurora C. Gonzales, and Aurora T. Tuyo, president and secretary,
respectively of the corporation, applied to the Bank for four (4) irrevocable
commercial letters of credit to cover the purchase by the corporation of goods
described in the covering L/C applications as "dyestuffs of various colors" from its
American supplier, the J.B. Distributing Company. All the applications of the
corporation were approved, and the corresponding Commercial L/C Agreements were
executed pursuant to banking procedures. Under these agreements, the
aforementioned officers of the corporation bound themselves personally as joint and
solidary debtors with the corporation. Pursuant to banking regulations then in force,
the corporation delivered to the Bank peso marginal deposits as each letter of credit
was opened.
The dates and amounts of the L/Cs applied for and approved as well as the peso
marginal deposits made were, respectively, as follows:.
Date Application Amount Marginal
& L/C No. Deposit
Oct. 10, 1961 61/1413 $57,658.38 P43,407.33
Oct. 23, 1961 61/1483 $25,867.34 19,473.64
Oct. 30, 1961 61/1495 $19,408.39 14,610.88
Nov. 10, 1961 61/1564 $26,687.64 20,090.90
TOTAL .... $129,621.75 P97,582.75
By virtue of the foregoing transactions, the Bank issued irrevocable commercial letters
of credit addressed to its correspondent banks in the United States, with uniform
instructions for them to notify the beneficiary thereof, the J.B. Distributing Company,
that they have been authorized to negotiate the latter's sight drafts up to the amounts
mentioned the respectively, if accompanied, upon presentation, by a full set of
negotiable clean "on board" ocean bills of lading covering the merchandise appearing
in the LCs that is, dyestuffs of various colors. Consequently, the J.B. Distributing
Company drew upon, presented to and negotiated with these banks, its sight drafts
covering the amounts of the merchandise ostensibly being exported by it, together
with clean bills of lading, and collected the full value of the drafts up to the amounts
appearing in the L/Cs as above indicated. These correspondent banks then debited the
account of the Bank of the Philippine Islands with them up to the full value of the
drafts presented by the J.B. Distributing Company, plus commission thereon, and,
thereafter, endorsed and forwarded all documents to the Bank of the Philippine
Islands.
In the meantime, as each shipment (covered by the above-mentioned letters of credit)
arrived in the Philippines, the De Reny Fabric Industries, Inc. made partial payments
to the Bank amounting, in the aggregate, to P90,000. 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 below on
December 10, 1962.
 But 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.
On October 24, 1963 the lower court rendered its decision ordering the corporation
and its co-defendants (the herein appellants) to pay to the plaintiff-appellee the amount
of P291,807.46, with interest thereon, as provided for in the L/C Agreements, at the
It was uncontrovertibly proven by the Bank during the trial below that banks, in
rate of 7% per annum from October 31, 1962 until fully paid, plus costs.
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 Bank introduced in evidence a provision
It is the submission of the defendants-appellants that it was the duty of the foreign
contained in the "Uniform Customs and Practices for Commercial Documentary
correspondent banks of the Bank of the Philippine Islands to take the necessary
Credits Fixed for the Thirteenth Congress of International Chamber of Commerce,"
precaution to insure that the goods shipped under the covering L/Cs conformed with
to which the Philippines is a signatory nation. Article 10 thereof provides: .
the item appearing therein, and, that the foregoing banks having failed to perform this
duty, no claim for recoupment against the defendants-appellants, arising from the
losses incurred for the non-delivery or defective delivery of the articles ordered, could
In documentary credit operations, all parties concerned deal in documents and not in
accrue.
goods. — Payment, negotiation or acceptance against documents in accordance with
the terms and conditions of a credit by a Bank authorized to do so binds the party
giving the authorization to take up the documents and reimburse the Bank making the
We can appreciate the sweep of the appellants' argument, but we also find that it is
payment, negotiation or acceptance.
nestled hopelessly inside a salient where the valid contract between the parties and the
internationally accepted customs of the banking trade must prevail.1
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
Under the terms of their Commercial Letter of Credit Agreements with the Bank, the
credits or drafts or shipping documents actually tallies with what was loaded aboard
appellants agreed that the Bank shall not be responsible for the "existence, character,
ship, having been positively proven as a fact, the appellants are bound by this
quality, quantity, conditions, packing, value, or delivery of the property purporting to
established usage. They were, after all, the ones who tapped the facilities afforded by
be represented by documents; for any difference in character, quality, quantity,
the Bank in order to engage in international business.
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
ACCORDINGLY, the judgment a quo is affirmed, at defendants-appellants' cost. This
or fraud by the shipper or anyone else in connection with the property the shippers or
is without prejudice to the Bank, in proper proceedings in the court below in this same
vendors and ourselves [purchasers] or any of us." Having agreed to these terms, the
case proving and being reimbursed additional expenses, if any, it has incurred by
appellants have, therefore, no recourse but to comply with their covenant. 2
virtue of the continued storage of the goods in question up to the time this decision
becomes final and executory.
Reyes, J.B.L., Actg. C.J., Dizon, Makalintal, Zaldivar, Fernando, Teehankee,
Barredo, Villamor and Makasiar, JJ., concur.

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Concepcion, C.J., is on leave.
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Republic of the Philippines

# Footnotes.
SUPREME COURT
Manila
1 The power of our courts to accept in evidence, international customas evidence of
general practice accepted as law, may be said to be derived from both Constitutional
as well as statutory sources. Section 3, Article II of the Constitution provides that "The SECOND DIVISION
Philippines renounces war as an instrument of national policy and adopts the generally
accepted principles of international law of the Nation." Art. 9 of the New Civil Code
Provides that "No court or judge shall decline to render judgment by reason of the G.R. No. 74834 November 17, 1988
silence, obscurity or insufficiency of the law," and Art. 12 of the same Code provides
that "A custom must be proved as fact, according to the rules of evidence." The Code
of Commerce, in its Article 2, likewise provides that "Acts of commerce, whether
INSULAR BANK OF ASIA & AMERICA (NOW PHILIPPINE COMMERCIAL
those who execute them be merchants or not, should be governed by the provisions
INTERNATIONAL BANK), petitioner,
contained init, in their absence, by the usages of commerce generally observed in each
place; and in the absence of both rules, by those of the civil law." "Those acts vs.
contained in this Code and all others of analogous character, shall be deemed acts of
commerce." It must be noted that certain principles governing the issuance, HON. INTERMEDIATE APPELLATE COURT, THE PHILIPPINE AMERICAN
acceptance and payment of letters of credit are specifically provided for in the Code LIFE INSURANCE CO., SPS. BEN MENDOZA & JUANITA M. MENDOZA,
of Commerce. respondents.

2 Article 12 of the Commercial Letter of Credit Agreement provides, inter alia: "The Balili, Parado, Cavada & Maamo for petitioner.
users of the Credit shall be deemed our agents and we assume
Romulo, Mabanta, Buenaventura, Sayoc & Delos Angeles for respondent Spouses
Mendozas.
Francisco, Zulueta & Associates for respondent Philam Life.
MELENCIO-HERRERA, J.:
An appeal by certiorari under Rule 45 of the Rules of Court by petitioner, the Insular
Bank of Asia and America (IBAA) [now the Philippine Commercial International
Bank], from the judgment of the public respondent, then the Intermediate Appellate
Court, * in CA-G.R. CV No. 03224.
Briefly, the antecedent facts disclose that sometime in 1976 and 1977 respondent
spouses Ben S. Mendoza and Juanita M. Mendoza (the Mendozas, for brevity),
obtained two (2) loans from respondent Philippine American Life Insurance Co.
(Philam Life) in the total amount of P600,000.00 to finance the construction of their
residential house at Mandaue City. The said loans, with a 14% nominal interest rate,
were to be liquidated in equal amortizations over a period of five (5) years from March
1977 to March 1982.
To secure payment, Philam Life required that amortizations be guaranteed by an
irrevocable standby letter of credit of a commercial bank. Thus, the Mendozas
contracted with petitioner Insular Bank of Asia and America (IBAA) for the issuance
of two (2) irrevocable standby Letters of Credit in favor of Philam Life for the total
amount of P600,000.00. The first L/C for P500,000.00 was to expire on 1 October
1981 (Exhibit "7", IBAA) and the second for P100,000.00 on 1 January 1982 (Exhibit
"8", IBAA) These two (2) irrevocable standby L/Cs were, in turn, secured by a real
estate mortgage for the same amount on the property of Respondent Spouses in favor
of IBAA.
On 11 May 1977, the Mendozas executed a promissory note (No. L-562/77) in favor
of IBAA promising to pay the sum of P100,000.00 plus 19% p.a. interest on 31 May
1979. Again, on 3 June 1977, Respondent Spouses executed another Promissory Note
(No. 564/77) binding themselves to pay IBAA P100,000.00 plus 19% p.a. interest on
23 June 1979. Both Notes authorized IBAA "to sell at public or private sale such
securities or things for the purpose of applying their proceeds to such payments" of
many particular obligation or obligations" the Mendozas may have to IBAA. (Exhibits
"34" and "35"-IBAA, Annex "D" p. 131, Rollo)
The Mendozas failed to pay Philam Life the amortization that fell due on 1 June 1978
so that Philam Life informed IBAA that it was declaring both loans as "entirely due
and demandable" and demanded payment of P492,996.30 (Exhibit "H"). However,
because IBAA contested the propriety of calling ill the entire loan, Philam Life
desisted and resumed availing of the L/Cs by drawing on them for five (5) more
amortizations.
On 7 September 1979, because the Mendozas defaulted on their amortization due on
1 September 1979, Philam Life again informed IBAA that it was declaring the entire
balance outstanding on both loans, including liquidated damages, "immediately due
and payable." Philam Life then demanded the payment of P274,779.56 from IBAA
but the latter took the position that, as a melee guarantor of the Mendozas who are the
principal debtors, its remaining outstanding obligation under the two (2) standby L/Cs
was only P30,100.60. Later, IBAA corrected the latter amount and showed instead an
overpayment arrived at as follows:
Limit of Liability
P 600,000.00 On 21 April 1980 the Real Estate Mortgage, which secured the two (2) standby L/Cs.
was extrajudicially foreclosed by, and sold at public auction for P775,000.00, to
petitioner IBAA as the lone and highest bidder (Exhibit "17-Mendoza"). The bid price
Less: of P775,000.00 by petitioner IBAA was arrived at as follows:

Principal (unpaid advances under the 2

P 432,386.07

a) Payment of Mendozas standby LCs) plus interest & charges

P 280, 293.11 Add:

b) Payment of IBAA

372,227.65 652,520.76

Overpayment by IBAA a) Stipulated Attorney's fees (20%)

( P 52,520.76)
P 86,477.20
b) Principals (clean loans) plus accrued
On a date that does not appear of record, Philam Life filed suit against Respondent
Spouses and IBAA before the Regional Trial Court of Manila, Branch XXXXI, for
the recovery of the sum of P274,779.56, the amount allegedly still owing under the
loan. After trial, said Court rendered a Decision finding that IBAA had paid Philam
Life only P342,127.05 and not P372,227.65, as claimed by IBAA, because of a stale
IBAA Manager's check in the amount of P30,100.60, which had to be deducted. With
this deduction, the Trial Court arrived at the following computation:

interest under P/Ns Nos. 562/77 and Limit of Liability of IBAA Less:

P 600,000.00

564/77 a) Payment by Mendozas

P 255,346.95 P 280, 293.11

c) Expenses of foreclosure b) Payment by IBAA

P 72.20 P342,127.05 P 622,420.16

TOTAL Overpayment by IBAA

P 775,000.42 P 22,420.16
Thus, the Trial Court ruled:
ACCORDINGLY, judgment is hereby rendered ordering:
(1) Defendants-spouses Ben S. Mendoza and Juanita M. Mendoza to pay plaintiff
Philippine American Life Insurance Company the sum of P322,000.00 plus 2% per
month as penalty interest from September 12, 1979 until the whole amount is fully
paid, P10,000 as attorney's fees, and costs.
1. Defendants-appellant spouses Ben S. Mendoza and Juanita M. Mendoza and
defendant-appellee IBAA to pay jointly and severally plaintiff-appellant Philamlife,
the sum of P222,000.00 plus 2% per month as penalty interest from September 12,
1979 until the whole amount is fully paid; plus P25,000.00, as attorney's fees, and
costs; however, defendant-appellee IBAA shall only be liable up to the amount of
P296,294.05;
2. Dismissal of the claim by the IBAA for a refund of P22,420.16 from the Phil-
American Life Insurance Co.; and

(2) Plaintiff Philippine American Life Insurance Company to refund the sum of
P22,420.16 to the defendant Insular Bank of Asia and America plus legal interest from
3. Dismissal of the counterclaim and cross-claim filed by the defendant- spouses
March 31, 1980 until the whole amount is fully paid; and
against the plaintiff and the defendant IBAA, as well as the counterclaim filed by
defendant IBAA against the plaintiff.

(3) Dismissal of the counterclaim and crossclaim filed by the defendants- spouses
against the plaintiff and the defendant IBAA, as well as the counterclaim filed by
No special pronouncement as to costs in this instance. (p. 51, Rollo).
defendant IBAA against the plaintiff. (pp. 28-29, Rollo)

Availing of the instant Petition, IBAA seeks a reversal of the aforesaid judgment and
In so deciding, the Trial Court took the position that IBAA, "as surety" was discharged
the affirmance instead of that of the Trial Court. We resolved to give due course. The
of its liability to the extent of the payment made by the Mendozas, as the principal
issues addressed, as posited by IBAA, are:
debtors, to the creditor, Philam Life.

1. Whether or not the partial payments made by the principal obligors (respondent
Both Philam Life and Respondent Spouses appealed to respondent Appellate Court,
MENDOZAS) would have the corresponding effect of reducing the liability of the
which reversed the Trial Court and ruled instead that IBAA's liability was not reduced
petitioner as guarantor or surety under the terms of the standby LCs in question.
by virtue of the payments made by the Mendozas. Accordingly, the Appellate Court
decreed:
2. Whether or not respondent Intermediate Appellate Court is correct in disregarding
a documentary evidence (O.R. No. 74323, Exhibit 28-IBAA) showing the amount
WHEREFORE, premises considered, judgment is hereby rendered ordering:
paid by petitioner and which was admitted as evidence without objection on the paint
of the counsel for the respondent Philam.
3. Whether or not the Intermediate Appellate Court is correct in passing sub-silencio
the following points raised by the petitioner in its Brief to sustain the decision of the
Trial Court on some other grounds.
a. Effective rate of interest imposed by respondent Philam exceeded the allowable
ceiling;
b. Respondent Philam has no right to call in at one time the two standby letters of
credit;
c. Respondent Philam failed to follow the condition in the two (2) standby letters of
credit:
which could have otherwise altered the result of the decision.
4. Whether or not the award of attorney's fees to respondent Philam is proper in so far
as petitioner is affected. (p. 15, Rollo)
The pivotal issue is the first one. IBAA stresses that it has no more liability to Philam
Life under the two (2) standby Letters of Credit and, instead, is entitled to a refund.
Whereas Philam Life and the Mendoza spouses separately maintain that IBAA's
obligation under said two (2) L/Cs is original and primary and is not reduced by the
direct payments made by the Mendozas to Philam Life.
1. In construing the terms of a Letter of Credit, as in other contracts, it is the intention
of the parties that must govern.
Letters of credit and contracts for the issuance of such letters are subject to the same
rules of construction as are ordinary commercial contracts. They are to receive a
reasonable and not a technical construction and although usage and custom cannot
control express terms in letters of credit, they are to be construed with reference to all
the surrounding facts and circumstances, to the particular and often varying terms in
which they may be expressed, the circumstances and intention of the parties to them,
and the usages of the particular trade of business contemplated. (International Banking
Corp. vs. Irving National Bank, CCA N.Y. 283 F. 103, affirming DC 274 F. 122; Old
Colony Trust Co. vs. Lawyers' Title and Trust Co., CAA NY, 297 F. 152, cited in Vol.
72, CJS sec. 178, pp. 387-388).<äre||anº•1àw>
The terms of the subject Irrevocable Standby Letters of Credit read, in part, as follows:
This credit secures the payment of any obligation of the accountee to you under that
Loan Agreement hereto attached as Annex 'A' and made a part hereof, including those
pertaining to (a) surcharges on defaulted account; stallments, (b) increased interest
charges (in the event the law should authorize this increase), and (c) liabilities
connected with taxes stipulated to be for Accountee's and provided however, that our
maximum liabilities hereunder shall not exceed the amount of P500,000.00
(Pl00.000.00 for the other LC).
Each drawing under this credit shall be available at any time after one (1) day from
due date of the obligations therein secured. Each drawing under this credit shall be
accomplished by your signed statement in duplicate that the amount drawn represents
payment due and unpaid by the accountee. (pp. 11-12, Decision, pp. 38-39, Rollo).
[Emphasis our ].
Unequivocally, the subject standby Letters of Credit secure the payment of any
obligation of the Mendozas to Philam Life including all interests, surcharges and
expenses thereon but not to exceed P600,000.00. But while they are a security
arrangement, they are not converted thereby into contracts of guaranty. That would
make them ultra vires rather than a letter of credit, which is within the powers of a
bank (Section 74[e], RA 337, General Banking Act). 1 The standby L/Cs are, "in effect
an absolute undertaking to pay the money advanced or the amount for which credit is
given on the faith of the instrument." (Scribner v. Rutherford, 22 N.W. 670, 65 Iowa
551; Duval v. Trask,, 12 Mass. 154, cited in 38 CJS, Sec. 7, p. 1142). They are primary
obligations and not accessory contracts. Being separate and independent agreements,
the payments made by the Mendozas cannot be added in computing IBAA's liability
under its own standby letters of credit. Payments made by the Mendozas directly to
Philam Life are in compliance with their own prestation under the loan agreements.
And although these payments could result in the reduction of the actual amount which
could ultimately be collected from IBAA, the latter's separate undertaking under its
L/Cs remains.
Both the Trial Court and the Appellate Court found, as a fact, that there still remains
a balance on the loan, Pursuant to its absolute undertaking under the L/Cs, therefore,
IBAA cannot escape the obligation to pay Philam Life for this unexpended balance.
The Appellate Court found it to be P222,000.00, arrived at by the Trial Court and
adopted by the Appellate Court, as follows:
... In the summary of application of payments (Exhibit "KK") the plaintiff applied
Pl,918.00 as commitment fee, P4,397.66 as surcharges, P199,683.40 as interests, and
P320,000.00 on the principal. The P58,000.00 which is covered by OR No. 74396 was
also applied "against the total loan." Since plaintiff applied P378,000.00 against the
total indebtedness of P600,000.00 there still remains an outstanding balance on the
principal P322,000.00 (should be P222,000.00) aside from the agreed penalty interest
until the whole amount is fully paid. ... (Decision, Trial Court, p. 50, Rollo)
The amount of P222,000.00, therefore, considered as "any obligation of the
accountee" under the L/Cs will still have to be paid by IBAA under the explicit terms
thereof, which IBAA had itself supplied. Letters of credit are strictly construed to the
end that the rights of those directly parties to them may be preserved and their interest
safeguarded (Moss vs. Old Colony Trust Co., 140 N.E. 803, 246 Mass. 138,
152).<äre||anº•1àw> Like any other writing, it will be construed most strongly against
the writer and so as to be reasonable and consistent with honest intentions. On the
whole, the construction will be generally a strict one (Lamborn vs. National Park Bank
of New York, 208 N.Y.S. 428, 212 App. Div. 25, affirming Id , 204 N.Y.S. 557,123
Misc. 211, affirmed Id.. 148 N.E. 664, 240 N.Y. 520). As found by the Appellate
Court, however, the amount payable should not exceed P296,294,05 (P600,000.00
less P303,705.95, the total amount found by the Appellate Court to have been paid by
IBAA to Philam Life).
2. The second issue as to whether or not documentary evidence was disregarded by
the Appellate Court regarding the amount actually paid by IBAA to Philam Life, or
P303,705.95 (not P342,127.05 as found by the Trial Court), questions a finding of
fact, which should be accorded not only respect but even finality. It is not the function
of this Court to analyze or weigh such evidence all over again, its jurisdiction being
limited to reviewing errors of law that might have been committed by lower Courts.
3. The third issue faults respondent Appellate Court with having passed
sub-silencio over certain points raised by petitioner IBAA in his Brief sustaining the
Decision of the Trial Court. It is accepted judicial practice, however, that Courts are
not required to resolve all issues raised in pleadings unless necessary for the resolution
of the case. Apparently, respondent Appellate Court deemed it unnecessary to pass
upon those points. Be that as it may, suffice it to state:
a) It is a matter of common knowledge in lending procedures that the nominal interest
is different from the effective rate of interest and that the discounting interest scheme
as well as the principal amortization scheme are practices commonly resorted to by
lending institutions. If IBAA disagreed with the computation scheme adopted by
Philam Life, which could have been detected in the early stages of the controversy,
IBAA could have interposed its objections.
b) The right to call in at one time the two standby L/Cs was specifically provided for
in the Loan Agreement, which was specifically made an integral part of the L/Cs
Section 8 thereof read:
... 8. The Lender shall have the light to declare the entire balance of the loans and all
obligations of the borrower to the lender as immediately due and payable in case the
borrower fails for any reason to comply with any payment or other obligations of the
Lender. (p. 248, Rollo)
c) The omission by Philam Life to draw the required drafts on the standby L/Cs can
be explained by the fact that all the drafts were pre-prepared, pre-dated and
pre-accepted by the Mendozas. Philam Life, therefore, could not have complied to the
letter with the provision in the L/Cs that drawings therefrom were to be made by drafts
for each due and unpaid amortization. Besides, the accelaration of the entire balance
of the loan was sufficient notice of dishonor of the pre-drawn and pre-accepted drafts.
4. Coming now to the award of attorney's fees of P25,000.00, the same appears
reasonable under the circumstances of the case specially considering that in the
foreclosure of the mortgage in its favor IBAA charged the Mendozas attorney's fees
in the amount of P86,477.20, supra.
As to the liability of the Mendozas to IBAA, it bears recalling that the Mendozas,
upon their application for the opening and issuance of the Irrevocable Standby Letters
of Credit in favor of Philam Life, had executed a Real Estate Mortgage as security to
IBAA for any payment that the latter may remit to Philam Life on the strength of said
Letters of Credit; and that IBAA had recovered from the Mendozas the amount of
P432,386.07 when it foreclosed on the mortgaged property of said spouses in the
concept of "principal (unpaid advances under the 2 standby L/Cs plus interest and
charges)." In addition, IBAA had recovered P255,364.95 representing its clean loans
to the Mendozas plus accrued interest besides the fact that it now has the foreclosed
property. As between IBAA and the Mendozas, therefore, there has been full
liquidation. The remaining obligation of P222,000.00 on the loan of the Mendozas,
therefore, is now IBAA's sole responsibility to pay to Philam Life by virtue of its
absolute and irrevocable undertaking under the standby L/Cs. Specially so, since the
promissory notes executed by the Mendozas in favor of IBAA authorized the sale of
the mortgaged security "for the purpose of applying their proceeds to ... payments" of
their obligations to IBAA.
WHEREFORE, the Decision of respondent Intermediate Appellate Court, dated 20
December 1985, is hereby MODIFIED. Petitioner IBAA (now the Philippine
Commercial International Bank) shall pay Philippine American Life Insurance
Company the sum of P222,000.00 plus 2% per month as penalty interest from 12
September 1979 until the whole amount is fully paid, but in no case to exceed
P296,294.05, plus P25,000.00 as attorney's fees. No costs.
Today is Monday, December 09, 2019home
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Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-27829 August 19, 1988
PHILIPPINE VIRGINIA TOBACCO ADMINISTRATION, petitioner,
vs.
HON. WALFRIDO DE LOS ANGELES, Judge of the Court of First Instance of Rizal,
Branch IV (Quezon City) and TIMOTEO A. SEVILLA, doing business under the
name and style of PHILIPPINE ASSOCIATED RESOURCES and PRUDENTIAL
BANK AND TRUST COMPANY, respondents.
Lorenzo F. Miravite for respondent Timoteo Sevilla.
Ferrer & Ranada Law Office for respondent Prudential Bank & Trust Co.
PARAS, J.:
In these petition and supplemental petition for Certiorari, Prohibition and mandamus
with Preliminary Injunction, petitioner Philippine Virginia Tobacco Administration
seeks to annul and set aside the following Orders of respondent Judge of the Court of
First Instance of Rizal, Branch IV (Quezon City) in Civil Case No. Q-10351 and prays
that the Writ of Preliminary Injunction (that may be) issued by this Court enjoining
enforcement of the aforesaid Orders be made permanent. (Petition, Rollo, pp. 1-9)
They are:
The Order of July 17, 1967:
AS PRAYED FOR, the Prudential Bank & Trust Company is hereby directed to
release and deliver to the herein plaintiff, Timoteo A. Sevilla, the amount of
P800,000.00 in its custody representing the marginal deposit of the Letters of Credit
which said bank has issued in favor of the defendant, upon filing by the plaintiff of a
bond in the um of P800,000.00, to answer for whatever damage that the defendant
PVTA and the Prudential Bank & Trust Company may suffer by reason of this order.
(Annex "A," Rollo, p. 12)
The Order of November 3,1967:
IN VIEW OF THE FOREGOING, the petition under consideration is granted, as
follows: (a) the defendant PVTA is hereby ordered to issue the corresponding
certificate of Authority to the plaintiff, allowing him to export the remaining balance
of his tobacco quota at the current world market price and to make the corresponding
import of American high-grade tobacco; (b) the defendant PVTA is hereby restrained
from issuing any Certificate of Authority to export or import to any persons and/or
entities while the right of the plaintiff to the balance of his quota remains valid,
effective and in force; and (c) defendant PVTA is hereby enjoined from opening
public bidding to sell its Virginia leaf tobacco during the effectivity of its contract
with the plaintiff.

xxx xxx xxx
In order to protect the defendant from whatever damage it may sustain by virtue of
this order, the plaintiff is hereby directed to file a bond in the sum of P20,000.00.
(Annex "K," Rollo, pp. 4-5)
The Order of March 16, 1968:
WHEREFORE, the motion for reconsideration of the defendant against the order of
November 3, 1967 is hereby DENIED. (Annex "M," Rollo, P. 196)
The facts of the case are as follows:
Respondent Timoteo Sevilla, proprietor and General Manager of the Philippine
Associated Resources (PAR) together with two other entities, namely, the Nationwide
Agro-Industrial Development Corp. and the Consolidated Agro-Producers Inc. were
awarded in a public bidding the right to import Virginia leaf tobacco for blending
purposes and exportation by them of PVTA and farmer's low-grade tobacco at a rate
of one (1) kilo of imported tobacco for every nine (9) kilos of leaf tobacco actually
exported. Subsequently, the other two entities assigned their rights to PVTA and
respondent remained the only private entity accorded the privilege.
The contract entered into between the petitioner and respondent Sevilla was for the
importation of 85 million kilos of Virginia leaf tobacco and a counterpart exportation
of 2.53 million kilos of PVTA and 5.1 million kilos of farmer's and/or PVTA at P3.00
a kilo. (Annex "A," p. 55 and Annex "B," Rollo, p. 59) In accordance with their
contract respondent Sevilla purchased from petitioner and actually exported 2,101.470
kilos of tobacco, paying the PVTA the sum of P2,482,938.50 and leaving a balance
of P3,713,908.91. Before respondent Sevilla could import the counterpart blending
Virginia tobacco, amounting to 525,560 kilos, 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.
Thus, on September 14, 1965 subject contract which was already amended on
December 14, 1963 because of the prevailing export or world market price under
which respondent will be exporting at a loss, (Complaint, Rollo, p. 3) was further
amended to grant respondent the privileges under aforesaid law, subject to the
following conditions: (1) that on the 2,101.470 kilos already purchased, and exported,
the purchase price of about P3.00 a kilo was maintained; (2) that the unpaid balance
of P3,713,908.91 was to be liquidated by paying PVTA the sum of P4.00 for every
kilo of imported Virginia blending tobacco and; (3) that respondent Sevilla would
open an irrevocable letter of credit No. 6232 with the Prudential Bank and Trust Co.
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 respondent was trying to negotiate the reduction of the procurement cost of the
2,101.479 kilos of PVTA tobacco already exported which attempt was denied by
petitioner and also by the Office of the President, petitioner prepared two drafts to be
drawn against said letter of credit for amounts which have already become due and
demandable. Respondent then filed a complaint for damages with preliminary
injunction against the petitioner in the amount of P5,000,000.00. Petitioner filed an
answer with counterclaim, admitting the execution of the contract. It alleged however
that respondent, violated the terms thereof by causing the issuance of the preliminary
injunction to prevent the former from drawing from the letter of credit for amounts
due and payable and thus caused petitioner additional damage of 6% per annum.
A writ of preliminary injunction was issued by respondent judge enjoining petitioner
from drawing against the letter of credit. On motion of respondent, Sevilla, the lower
court dismissed the complaint on April 19, 1967 without prejudice and lifted the writ
of preliminary injunction but petitioner's motion for reconsideration was granted on
June 5,1967 and the Order of April 19,1967 was set aside. On July 1, 1967 Sevilla
filed an urgent motion for reconsideration of the Order of June 5, 1967 praying that
the Order of dismissal be reinstated. But pending the resolution of respondent's motion
and without notice to the petitioner, respondent judge issued the assailed Order of July
17, 1967 directing the Prudential Bank & Trust Co. to make the questioned release of
funds from the Letter of Credit. Before petitioner could file a motion for
reconsideration of said order, respondent Sevilla was able to secure the releaseof
P300,000.00 and the rest of the amount. Hence this petition, followed by the
supplemental petition when respondent filed with the lower court an urgent ex-parte
petition for the issuance of preliminary mandatory and preventive injunction which
was granted in the resolution of respondent Judge on November 3, 1967, above
quoted. On March 16, 1968, respondent Judge denied petitioner's motion for
reconsideration. (Supp. Petition, Rollo, pp. 128- 130)
Pursuant to the resolution of July 21, 1967, the Supreme Court required respondent to
file an answer to the petition within 10 days from notice thereof and upon petitioner's
posting a bond of fifty thousand pesos (P50,000.00), a writ of preliminary mandatory
injunction was issued enjoining respondent Judge from enforcing and implementing
his Order of July 17,1967 and private respondents Sevilla and Prudential Bank and
Trust Co. from complying with and implementing said order. The writ further
provides that in the event that the said order had already been complied with and
implemented, said respondents are ordered to return and make available the amounts
that might have been released and taken delivery of by respondent Sevilla. (Rollo, pp.
16-17)
In its answer, respondent bank explained that when it received the Order of the
Supreme Court to stop the release of P800,000.00 it had already released the same in
obedience to ailieged earlier Order of the lower Court which was reiterated with
ailieged admonition in a subsequent Order. (Annex "C," Rollo, pp. 37-38) A
Manifestation to that effect has already been filed c,irrency respondent bank (Rollo,
pp. 19-20) which was noted c,irrency this Court in the resolution of August 1, 1967,
a copy of which was sent to the Secretary of Justice. (Rollo, p. 30)
Before respondent Sevilla could file his answer, petitioner filed a motion to declare
him and respondent bank in contempt of court for having failed to comply with the
resolution to this court of July 21, 1967 to the effect that the assailed order has already
been implemented but respondents failed to return and make available the amounts
that had been released and taken delivery of by respondent Sevilla. (Rollo, pp. 100-
102)
In his answer to the petition, respondent Sevilla claims that petitioner demanded from
him a much higher price for Grades D and E tobacco than from the other awardees;
that petitioner violated its contract by granting indiscriminately to numerous buyers
the right to export and import tobacco while his agreement is being implemented,
thereby depriving respondent of his exclusive right to import the Virginia leaf tobacco
for blending purposes and that respondent Judge did not abuse his discretion in
ordering the release of the amount of P800,000.00 from the Letter of Credit, upon his
posting a bond for the same amount. He argued further that the granting of said
preliminary injunction is within the sound discretion of the court with or without
notice to the adverse party when the facts and the law are clear as in the instant case.
He insists that petitioner caretaker.2 claim from him a price higher than the other
awardees and that petitioner has no more right to the sum in controversy as the latter
has already been overpaid when computed not at the price of tobacco provided in the
contract which is inequitable and therefore null and void but at the price fixed for the
other awardees. (Answer of Sevilla, Rollo, pp. 105-111)
In its Answer to the Motion for Contempt, respondent bank reiterates its allegations
in the Manifestation and Answer which it filed in this case. (Rollo, pp. 113-114)
In his answer, (Rollo, pp. 118-119) to petitioner's motion to declare him in contempt,
respondent Sevilla explains that when he received a copy of the Order of this Court,
he had already disbursed the whole amount withdrawn, to settle his huge obligations.
Later he filed a supplemental answer in compliance with the resolution of this Court
of September 15, 1967 requiring him to state in detail the amounts allegedly disbursed
c,irrency him out of the withdrawn funds. (Rollo, pp. 121-123)
Pursuant to the resolution of the Supreme Court on April 25, 1968, a Writ of
Preliminary Injunction was issued upon posting of a surety bond in the amount of
twenty thousand pesos (P20,000.00) restraining respondent Judge from enforcing and
implementing his orders of November 3, 1967 and March 16, 1968 in Civil Case No.
Q-10351 of the Court of First Instance of Rizal (Quezon City).
Respondent Sevilla filed an answer to the supplemental petition (Rollo, pp. 216-221)
and so did respondent bank (Rollo, p. 225). Thereafter, all the parties filed their
respective memoranda (Memo for Petitioners, Rollo, pp. 230-244 for Resp. Bank, pp.
246-247; and for Respondents, Rollo, pp. 252-257). Petitioners filed a rejoinder (rollo,
pp. 259-262) and respondent Sevilla filed an Amended Reply Memorandum (Rollo,
pp. 266274). Thereafter the case was submitted for decision:' in September, 1968
(Rollo, p. 264).
Petitioner has raised the following issues:
1. Respondent Judge acted without or in excess of jurisdiction or with grave abuse of
discretion when he issued the Order of July 17, 1967, for the following reasons: (a)
the letter of credit issued by respondent bank is irrevocable; (b) said Order was issued
without notice and (c) said order disturbed the status quo of the parties and is
tantamount to prejudicing the case on the merits. (Rollo, pp. 7-9)
2. Respondent Judge likewise acted without or in excess of jurisdiction or with grave
abuse of discretion when he issued the Order of November 3, 1967 which has
exceeded the proper scope and function of a Writ of Preliminary Injunction which is
to preserve the status quo and caretaker.2 therefore assume without hearing on the
merits, that the award granted to respondent is exclusive; that the action is for specific
performance a d that the contract is still in force; that the conditions of the contract
have already been complied with to entitle the party to the issuance of the
corresponding Certificate of Authority to import American high grade tobacco; that
the contract is still existing; that the parties have already agreed that the balance of the
quota of respondent will be sold at current world market price and that petitioner has
been overpaid.
3. The alleged damages suffered and to be suffered by respondent Sevilla are not
irreparable, thus lacking in one essential prerequisite to be established before a Writ
of Preliminary Injunction may be issued. The alleged damages to be suffered are loss
of expected profits which can be measured and therefore reparable.
4. Petitioner will suffer greater damaaes than those alleged by respondent if the
injunction is not dissolved. Petitioner stands to lose warehousing storage and servicing
fees amounting to P4,704.236.00 yearly or P392,019.66 monthly, not to mention the
loss of opportunity to take advantage of any beneficial change in the price of tobacco.
5. The bond fixed by the lower court, in the amount of P20,000.00 is grossly
inadequate, (Rollo, pp. 128-151)
The petition is impressed with merit.
In issuing the Order of July 17, 1967, respondent Judge violated the irrevocability of
the letter of credit issued by respondent Bank in favor of petitioner. An irrevocable
letter of credit caretaker.2 during its lifetime be cancelled or modified Without the
express permission of the beneficiary (Miranda and Garrovilla, Principles of Money
Credit and Banking, Revised Edition, p. 291). Consequently, if the finding agricul-
the trial on the merits is that respondent Sevilla has ailieged unpaid balance due the
petitioner, such unpaid obligation would be unsecured.
In the issuance of the aforesaid Order, respondent Judge likewise violated: Section 4
of Rule 15 of the Relatiom, Rules of Court which requires that notice of a motion be
served by the applicant to all parties concerned at least three days before the hearing
thereof; Section 5 of the same Rule which provides that the notice shall be directed to
the parties concerned; and shall state the time and place for the hearing of the motion;
and Section 6 of the same Rule which requires proof of service of the notice thereof,
except when the Court is satisfied that the rights of the adverse party or parties are not
affected, (Sunga vs. Lacson, L-26055, April 29, 1968, 23 SCRA 393) A motion which
does not meet the requirements of Sections 4 and 5 of Rule 15 of the Relatiom, Rules
of Court is considered a worthless piece of paper which the Clerk has no right to
receiver and the respondent court a quo he has no authority to act thereon. (Vda. de
A. Zarias v. Maddela, 38 SCRA 35; Cledera v. Sarn-j-iento, 39 SCRA 552; and
Sacdalan v. Bautista, 56 SCRA 175). The three-day notice required by law in the filing
of a motion is intended not for the movant's benefit but to avoid surprises upon the
opposite party and to give the latter time to study and meet the arguments of the
motion. (J.M. Tuason and Co., Inc. v. Magdangal, L-1 5539. 4 SCRA 84).
More specifically, Section 5 of Rule 58 requires notice to the defendant before a
preliminary injunction is granted unless it shall appear from facts shown bv affidavits
or by the verified complaint that great or irreparable injury would result to the applyin-
before the matter can be heard on notice. Once the application is filed with the Judge,
the latter must cause ailieged Order to be served on the defendant, requiring him to
show cause at a given time and place why the injunction should not be granted. The
hearing is essential to the legality of the issuance of a preliminary injunction. It is
ailieged abuse of discretion on the part of the court to issue ailieged injunction without
hearing the parties and receiving evidence thereon (Associated Watchmen and
Security Union, et al. v. United States Lines, et al., 101 Phil. 896).
In the issuance of the Order of November 3, 1967, with notice and hearing
notwithstanding the discretionary power of the trial court to Issue a preliminary
mandatory injunction is not absolute as the issuance of the writ is the exception rather
than the rule. The party appropriate for it must show a clear legal right the violation
of which is so recent as to make its vindication an urgent one (Police Commission v.
Bello, 37 SCRA 230). It -is granted only on a showing that (a) the invasion of the right
is material and substantial; (b) the right of the complainant is clear and unmistakable;
and (c) there is ailieged urgent and permanent necessity for the writ to prevent serious
decision ( Pelejo v. Court of Appeals, 117 SCRA 665). In fact, it has always been said
that it is improper to issue a writ of preliminary mandatory injunction prior to the final
hearing except in cases of extreme urgency, where the right of petitioner to the writ is
very clear; where considerations of relative inconvenience bear strongly in
complainant's favor; where there is a willful and unlawful invasion of plaintiffs right
against his protest and remonstrance the injury being a contributing one, and there the
effect of the mandatory injunctions is rather to re-establish and maintain a pre-existing
continuing relation between the parties, recently and arbitrarily interrupted c,irrency
the defendant, than to establish a new relation (Alvaro v. Zapata, 11 8 SCRA 722;
Lemi v. Valencia, February 28, 1963, 7 SCRA 469; Com. of Customs v. Cloribel, L-
20266, January 31, 1967,19 SCRA 234.
In the case at bar there appears no urgency for the issuance of the writs of preliminary
mandatory injunctions in the Orders of July 17, 1967 and November 3, 1967; much
less was there a clear legal right of respondent Sevilla that has been violated by
petitioner. Indeed, it was ailieged abuse of discretion on the part of respondent Judge
to order the dissolution of the letter of credit on the basis of assumptions that cannot
be established except by a hearing on the merits nor was there a showing that R.A.
4155 applies retroactively to respondent in this case, modifying his importation /
exportation contract with petitioner. Furthermore, a writ of preliminary injunction's
enjoining any withdrawal from Letter of Credit 6232 would have been sufficient to
protect the rights of respondent Sevilla should the finding be that he has no more
unpaid obligations to petitioner.
Conversely, there is truth in petitioner's claim that it will suffer greater damage than
that suffered by respondent Sevilla if the Order of November 3, 1967 is not annulled.
Petitioner's stock if not made available to other parties will require warehouse storage
Similarly, there is merit in petitioner's contention that the question of exclusiveness
and servicing fees in the amount of P4,704,236.00 yearly or more than P9,000.000.00
of the award is ailieged issue raised by the pleadings and therefore a matter of
in two years time.
controversy, hence a preliminary mandatory injunction directing petitioner to issue
respondent Sevilla a certificate of authority to import Virginia leaf tobacco and at the
same time restraining petitioner from issuing a similar certificate of authority to others
Parenthetically, the alleged insufficiency of a bond fixed by the Court is not by itself
is premature and improper.
ailieged adequate reason for the annulment of the three assailed Orders. The filing of
ailieged insufficient or defective bond does not dissolve absolutely and
unconditionally ailieged injunction. The remedy in a proper case is to order party to
The sole object of a preliminary injunction is to preserve the status quo until the merit
file a sufficient bond (Municipality of La Trinidad v. CFI of Baguio - Benguet, Br. I,
can be heard. It is the last actual peaceable uncontested status which precedes the
123 SCRA 81). However, in the instant case this remedy is not sufficient to cure the
pending controversy (Rodulfo v. Alfonso, L-144, 76 Phil. 225), in the instant case,
defects already adverted to.
before the Case No. Q-10351 was filed in the Court of First Instance of Rizal.
Consequently, instead of operating to preserve the status quo until the parties' rights
can be fairly and fully investigated and determined (De los Reyes v. Elepano, et al.,
PREMISES CONSIDERED, the petition is given due course and the assailed Orders
93 Phil. 239), the Orders of July 17, 1966 and March 3, 1967 serve to disturb the status
of July 17, 1967 and November 3, 1967 and March 16, 1968 are ANNULLED and
quo.
SET ASIDE; and the preliminary injunctions issued c,irrency this Court should
continue until the termination of Case No. Q-10351 on the merits.
Injury is considered irreparable if it is of such constant and frequent recurrence that
no fair or reasonable redress can be had therefor in a court of law (Allundorff v.
SO ORDERED,
Abrahanson, 38 Phil. 585) or where there is no standard c,irrency which their amount
can be measured with reasonable accuracy, that is, it is not susceptible of
mathematical computation (SSC v. Bayona, et al., L-13555, May 30, 1962).
Melencio-Herrera (Chairperson) and Padilla, JJ., concur.

Any alleged damage suffered or might possibly be suffered by respondent Sevilla

refers to expected profits and claimed by him in this complaint as damages in the Sarmiento J., took no part.
amount of FIVE Million Pesos (P5,000,000.00), a damage that can be measured,
susceptible of mathematical computation, not irreparable, nor do they necessitate the
issuance of the Order of November 3, 1967.
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