(3) Metropolitan Waterworks vs. Reynaldo B. Daway (G.R. No.

160732, June 21,

2004)

Facts:
Maynilad obtained a 20-year concession to manage, repair, refurbish, and upgrade existing
Metropolitan Waterworks and Sewerage System (MWSS) water delivery and sewerage services
in Metro Manila’s west zone.  Maynilad, under the concession agreement undertook to pay
concession fees and its foreign loans.  To secure its obligations, Maynilad was required under
Section 9 of the concession contract to put up a bond, bank guarantee or other security
acceptable to MWSS.  Pursuant to this requirement, Maynilad arranged on for a three-year
facility with a number of foreign banks led by Citicorp Intl for the issuance of an irrevocable
standby letter of credit (SLC) in the amount of $ 120 million in favor of MWSS for the full and
prompt payment of Maynilad’s obligations to MWSS. Due to devaluation of the peso and other
business reversals of Maynilad, MWSS filed a notice of early termination of the concession
contract.  Upon certification of the non-performance of Maynilad obligation, the MWSS moved
to collect from Citicorp on the standby letters of credit issued. Maynilad filed for corporate
rehabilitation.  Judge Daway stayed the payment of the letter of credit by Citicorp pursuant
to Sec 6 (b) of Rule 4 of the Interim Rules on Corporate Rehabilitation.

Issue:
Whether or not the payment of the standby of letter of credit can be stayed by filing of a
petition for rehabilitation

Held:
No. The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to the standby
letter of credit issued by the bank as the former prohibition is on the enforcement of claims
against guarantors or sureties of the debtors whose obligations are not solidary with the
debtor.

The participating bank’s obligation under the letter of credit are solidary with respondent
Maynilad in that it is a primary, direct, definite and an absolute undertaking to pay and is not
conditioned on the prior exhaustion of the debtors assets. These are the same characteristics of
a surety or solidary obligor. And being solidary, the claims against them can be pursued
separately from and independently of the rehabilitation case.

Issuing banks under the letters of credit are not equivalent to guarantors. The concept of
guarantee vis-à-vis the concept of an irrevocable letter of credit are inconsistent with each
other.  The guarantee theory destroys the independence of the bank’s responsibility from the
contract upon which it was opened and the nature of both contracts is mutually in conflict with
each other. In contracts of guarantee, the guarantor’s obligation is merely collateral and it
arises only upon the default of the person primarily liable. On the other hand, in an irrevocable
letter of credit, the bank undertakes a primary obligation. We have also defined a letter of
credit as an engagement by a bank or other person made at the request of a customer that the
issuer shall honor drafts or other demands of payment upon compliance with the conditions
specified in the credit.

A Standby Letter of Credit is not a guaranty because under a Standby Letter of Credit, the bank
undertakes a primary obligation.  On the other hand, a guarantor undertakes a collateral
obligation which arises only upon the debtor’s default.  A Standby Letter of Credit is a primary
obligation and not an accessory contract.

(4) Reliance Commodities vs. Daewoo Industrial Co., LTD. (G.R. No. L-100831,
December 17, 1993)
Facts:
Reliance Commodities and Daewoo entered into a contract of sale under the terms of which the
latter undertook to ship and deliver to the former 2,000 metric tons of foundry pig iron for the
price of US$404,000.00. Daewoo shipped from Pohang, Republic of Korea, 2000 metric tons of
foundry pig iron to its consignee, Reliance in Manila. The Shipment was fully paid for. Upon
arrival, the subject cargo was found to be short of 135.655 metric tons as only 1,864.345 metric
tons were delivered to Reliance.
Another contract was entered into between the same parties for the purchase of another 2,000
metric tons of foundry pig iron. Daewoo acknowledged the short shipment of 135. 655 metric
tons under the 9 January 1980 contract and to compensate Reliance therefor, bound itself to
reduce the price by US$1 to US$2 per metric ton of pig iron for succeeding orders under the 2
May 1980 contract. However, that contract was not consummated and was later superseded by
still another contract dated 31 July 1980.
Reliance filed with the China Banking Corporation, an application for a Letter of Credit (L/C) in
favor of Daewoo covering the amount of US$380,000. The application was endorsed to the Iron
and Steel Authority (ISA) for approval but the application was denied. Reliance was instead
asked to submit purchase from end-users to support its application for a Letter of Credit.
However, Reliance was not able to raise purchase orders for 2,000 metric tons. Reliance alleges
that it was able to raise purchase orders for 1,900 metric tons. Daewoo, upon the other hand,
contends that Reliance was only able to raise purchase orders for 900 metric tons. Whatever
the exact amount of the purchase orders was, Daewoo rejected the proposed L/C for the
reason that the covered quantity fell short of the contracted tonnage. Thus, Reliance withdrew
the application for the L/C on 14 August 1980.
Daewoo learned that the failure of Reliance to open the L/C stipulated in the 31 July 1980
contract was due to the fact that as early as May 1980, Reliance had already exceeded its
foreign exchange allocation for 1980. Because of the failure of Reliance to comply with its
undertaking under the 31 July 1980 contract, Daewoo was compelled to sell the 2,000 metric
tons to another buyer at a lower price, to cut losses and expenses Daewoo had begun to incur
due to its inability to ship the 2000 metric tons to Reliance under their contract.
Reliance requested the payment of the amount of P226,370.48, representing the value of the
short delivery of 135.655 metric tons of foundry pig iron under the contract of 9 January 1980.
Daewoo refused. Reliance then filed an action for damages against Daewoo with the trial court.
Daewoo contended that Reliance was guilty of breach of contract when it failed to open an L/C
as required in the 31 July 1980 contract.

After trial, the trial court ruled that (1) the 31 July 1980 contract did not extinguish Daewoo's
obligation for short delivery pursuant to the 9 January 1980 contract and must therefore pay
Reliance P226,370.48 representing the value of the short delivered goods; and (2) Reliance is in
turn liable for breach of contract for its failure to open a letter of credit in favor of Daewoo
pursuant to the 31 July 1980 contract and must therefore pay the latter P331,920.97 as actual
damages. CA affirmed the same.

Reliance filed for petition for review to assail the award of damages in favor of Daewoo.
Reliance contends a) that its failure to open a Letter of Credit was due to the failure of Daewoo
to accept the purchase orders for 1,900 metric tons instead of 2,000 metric tons; b) that the
opening of the Letter of Credit was a condition precedent to the effectivity of the contract
between Reliance and Daewoo; and c) that since such condition had not occurred, the contract
never came into existence and, therefore, Reliance should not have been held liable for
damages.

ISSUE
Whether or not the failure of an importer (Reliance) to open a letter of credit on the date
agreed upon makes him liable to the exporter (Daewoo) for damages?

RULING
Yes. Failure of Reliance to open a letter of credit on the date agreed upon makes it liable to
Daewoo for damages.

A letter of credit is one of the modes of payment, set out in Sec. 8, Central Bank Circular No.
1389, "Consolidated Foreign Exchange Rules and Regulations," dated 13 April 1993, by which
commercial banks sell foreign exchange to service payments for, e.g., commodity imports.
The primary purpose of the letter of credit is to substitute for and therefore support the
agreement of the buyer/importer to pay money under a contract or other arrangement. It
creates in the seller/exporter a secure expectation of payment.

A letter of credit transaction may thus be seen to be a composite of at least three (3) distinct
but intertwined relationships being concretized in a contract:
(a) One contract relationship links the party applying for the L/C (the account party or buyer or
importer) and the party for whose benefit the L/C is issued (the beneficiary or seller or
exporter). In this contract, the account party, here Reliance, agrees, among other things and
subject to the terms and conditions of the contract, to pay money to the beneficiary, here
Daewoo.

(b) A second contract relationship is between the account party and the issuing bank. Under
this contract, (sometimes called the "Application and Agreement" or the "Reimbursement
Agreement"), the account party among other things, applies to the issuing bank for a specified
L/C and agrees to reimburse the bank for amounts paid by that bank pursuant to the L/C.

(5) Land Bank of the Philippines vs. Monets Export and Manufacturing
Corporation (G.R. 161865, March 10, 2005)
Facts:
Land Bank and Monets Export executed an Export Packing Credit Line Agreement under which
Monet was given a credit line in the amount of P250,000.00, secured by the proceeds of its
export letters of credit the continuing guaranty of the spouses Tagle, and the third party
mortgage executed by Pepita Mendigoria, which was amended to 5,000,000.00

Owing to the continued failure and refusal of Monet, notwithstanding repeated demands, to
pay its indebtedness to Land Bank, a complaint for collection of sum of money with prayer for
preliminary attachment was filed by Land Bank with the Regional Trial Court of Manila.

Monet and the Tagle spouses alleged that Land Bank failed and refused to collect the
receivables on their export letter of credit against Wishbone Trading Company of Hong Kong in
the sum of US$33,434.00, while it made unauthorized payments on their import letter of credit
to Beautilike (H.K.) Ltd. in the amount of US$38,768.40, which damaged the business of Monet.

The court rendered a decision holding Land Bank responsible for the mismanagement of the
Wishbone and Beautilike accounts of Monet. It held that because of the non-collection and
unauthorized payment made by Land Bank on behalf of Monet, and considering that the latter
could no longer draw from its credit line with Land Bank, it suffered from lack of financial
resources sufficient to buy the needed materials to fill up the standing orders from its
customers.

ISSUE
Whether or not Landbank is liable for making unauthorized payments in favor of Beautilike?

RULING:
No. The Land Bank is not liable for the payments made to Beautiflike. The lower courts erred in
holding that Land Bank failed to protect Monet’s interest when it paid the suppliers despite
discrepancies in the shipment vis—vis the order specifications of Monet.

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

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 o
responsibility for the description, weight, quality, condition, packing, delivery, value or
existence of the goods represented by any documents, or for the good faith or acts and/or
omissions, solvency, performance or standing of the consignor, the carriers, or the insurers of
the goods, or any other person whomsoever.

Land Bank, as the issuing bank in the Beautilike transaction involving an import letter of credit,
it only deals in documents and it is not involved in the contract between the parties. The
relationship between the beneficiary and the issuer of a letter of credit is not strictly
contractual, because both privity and a meeting of the minds are lacking. Thus, upon receipt by
Land Bank of the documents of title which conform to what the letter of credit requires, it is
duty bound to pay the seller, as it did in this case.

(10) Samsung Const. Co. Phil v. Far East Bank (G.R. No 129015 August 2004)
Facts:
A check drawn against petitioner was presented for payment to respondent Bank. Satisfied with
the authenticity of the signature appearing thereon, the check was encashed. The following
day, petitioner’s accountant who had custody of the company checks discovered that a check
was missing and reported the petitioner’s project manager who is also the sole signatory to its
checking account. Petitioner demanded that it be reimbursed for the proceeds of the check.
Issues:
Whether or not respondent bank is liable to reimburse for the payment of the forged check.
Held:
Yes. Banks are engaged in a business impressed with public interest, and it is their duty to
protect in return their many clients and depositors who transact business with them. They have
the obligation to treat their client’s account meticulously and with the highest degree of care,
considering the fiduciary nature of their relationship. The diligence required of banks,
therefore, is more than that of a good father of a family. Given the circumstances,
extraordinary dictates that FEBTC should have ascertained from Jong personally that the
signature in the questionable check was his. Since the drawer, Samsung Construction, is not
precluded by negligence from setting up the forgery, the general rule should apply.
Consequently, if a bank pays a forged check, it must be considered as paying out of its funds
and cannot charge the amount so paid to the account of the depositor. A bank is liable,
irrespective of its good faith, in paying a gorged check.