1

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.
2

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
3

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
made.
Public respondent also disagreed with the petitioner's contention
that private respondent Chi is solidarily liable with Philippine Rayon
pursuant to Section 13 of 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 second, it expressed misgivings as to whether
Chi's signature on the trust receipt made 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 witnesses; and it is not
acknowledged before a notary public. Besides, even granting that it
was executed and acknowledged before a notary public, Chi cannot
be held 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
Civil Code, the obligation of a guarantor is merely accessory and
subsidiary, respectively. Chi's liability would therefore arise only
when the principal debtor fails to comply with his obligation.
5

Its motion to reconsider the decision having been denied by the
public respondent in its Resolution of 11 June 1986,
6
petitioner
filed the instant petition on 31 July 1986 submitting the following
legal issues:
I. WHETHER OR NOT THE RESPONDENT APPELLATE
COURT 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 THE
PHILIPPINES AND UNDER THE GENERAL PRINCIPLE
AGAINST UNJUST ENRICHMENT;
II. WHETHER OR NOT RESPONDENT CHI IS
SOLIDARILY LIABLE UNDER THE TRUST RECEIPT
(EXH. C);
4

III. WHETHER OR NOT ON THE BASIS OF THE
JUDICIAL ADMISSIONS OF RESPONDENT CHI HE IS
LIABLE THEREON AND TO WHAT EXTENT;
IV. WHETHER OR NOT RESPONDENT CHI IS MERELY
A SIMPLE GUARANTOR; AND IF SO; HAS HIS
LIABILITY AS SUCH ALREADY ATTACHED;
V. WHETHER OR NOT AS THE SIGNATORY AND
RESPONSIBLE OFFICER OF RESPONDENT PHIL.
RAYON RESPONDENT CHI IS PERSONALLY LIABLE
PURSUANT TO THE PROVISION OF SECTION 13, P.D.
115;
VI. WHETHER OR NOT RESPONDENT PHIL. RAYON IS
LIABLE TO THE PETITIONER UNDER THE TRUST
RECEIPT (EXH. C);
VII. WHETHER OR NOT ON THE BASIS OF THE
JUDICIAL ADMISSIONS RESPONDENT PHIL. RAYON IS
LIABLE TO THE PETITIONER UNDER THE DRAFTS
(EXHS. X, X-1 TO X-11) AND TO WHAT EXTENT;
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
5

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.
6

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
7

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.
8

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: . . ."
It is alleged in the complaint that private respondents "not only
have presumably put said machinery to good use and have profited
by its operation and/or disposition but very recent information that
(sic) reached plaintiff bank that defendants already sold the
machinery covered by the trust receipt to Yupangco Cotton Mills,"
and that "as trustees of the property covered by the trust receipt, . .
. and therefore acting in fiduciary (sic) capacity, defendants have
willfully violated their duty to account for 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 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 covered by the trust receipt, such relief is covered by the
general prayer for "such 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 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 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 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 action, may be brought by
the injured party in cases of defamation, fraud and physical injuries.
Estafa falls under fraud.
9

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:
In consideration of the PRUDENTIAL BANK AND
TRUST COMPANY complying with the foregoing, we
jointly and severally agree and undertake to pay on
demand to the PRUDENTIAL BANK AND TRUST
COMPANY all sums of money which the said
PRUDENTIAL BANK AND TRUST COMPANY may call
upon us to pay arising out of or pertaining to,
and/or in any event connected with the default of
and/or non-fulfillment in any respect of the
undertaking of the aforesaid:
PHILIPPINE RAYON MILLS, INC.
We further agree that the PRUDENTIAL BANK AND
TRUST COMPANY does not have to take any steps
or exhaust its remedy against aforesaid:
before making demand on me/us.
(
S
g
d
.
)

A
n
a
c
l
e
t
o

R
.

C
h
i

A
N
A
C
L
E
T
O

R
.

C
H
I

2
6

10

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
11

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,
12

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
13

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 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 ten percent (10%) of
the aforesaid amount as attorney's
fees; and (c) the costs.
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 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.
14

Costs against private respondents.
SO ORDERED.
Gutierrez, Jr., Bidin, Romero and Melo, JJ., concur.
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
Dueas, 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
15

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
16

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.
Once the credit is established, the seller ships the goods to the
buyer and in the process secures the required shipping documents
or documents of title. To get paid, the seller executes a draft and
presents it together with the required documents to the issuing
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 is
completed when the buyer reimburses the issuing bank and
acquires the documents entitling him to the goods. Under this
arrangement, the seller gets paid only if he delivers the documents
of title over the goods, while the buyer acquires said documents
and control over the goods only after reimbursing the bank.
What characterizes letters of credit, as distinguished from other
accessory contracts, is the engagement of the issuing bank to pay
the seller of 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.
11

There would at least be three (3) parties: (a) the buyer,
12
who
procures the letter of credit and obliges himself to reimburse the
issuing bank upon receipts of the documents of title; (b) the bank
issuing the letter of credit,
13
which undertakes to pay the seller
upon receipt of the draft and proper document of titles and to
surrender the documents to the buyer upon reimbursement; and,
(c) the seller,
14
who in compliance with the contract of sale ships
the goods to the buyer and delivers the documents of title and draft
to the issuing bank to recover payment.
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
16
which will
lend credence to the letter of credit issued by a lesser known issuing
bank; or, of apaying bank,
17
which undertakes to encash the drafts
drawn by the exporter. Further, instead of going to the place of the
issuing bank to claim payment, the buyer may approach another
bank, termed the negotiating bank,
18
to have the draft discounted.
Being a product of international commerce, the impact of this
commercial instrument transcends national boundaries, and it is
thus not uncommon to find a dearth of national law that can
adequately provide for its governance. This country is no exception.
Our own Code of Commerce basically introduces only its concept
under 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 into
what is now known as the Uniform Customs and Practice for
Documentary Credits ("U.C.P.") issued by the International Chamber
of Commerce. It is by no means a complete text by itself, for, to be
sure, there are other principles, which, although part of lex
mercatoria, are not dealt with the U.C.P.
17

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
we have said that the
observances of the U.C.P. is justified by Article 2 of the Code of
Commerce which expresses that, in the absence of any particular
provision in the Code of Commerce, commercial transactions shall
be governed by usages and customs generally observed. We have
further observed 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 U.C.P. is undeniable.
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 issolely 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
18

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
19

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.
.R. NO. 117913. February 1, 2002]
CHARLES LEE, CHUA SIOK SUY, MARIANO SIO, ALFONSO YAP,
RICHARD VELASCO and ALFONSO CO, petitioners, vs.
COURT OF APPEALS and PHILIPPINE BANK OF
COMMUNICATIONS, respondents.
[G.R. NO. 117914. February 1, 2002]
MICO METALS CORPORATION, petitioner, vs. COURT OF APPEALS
and PHILIPPINE BANK OF
COMMUNICATIONS, respondents.
D E C I S I O N
DE LEON, JR., J:
20

Before us is the joint and consolidated petition for review of
the Decision
[1]
dated June 15, 1994 of the Court of Appeals in CA-
G.R. CV No. 27480 entitled, Philippine Bank of Communications
vs. Mico Metals Corporation, Charles Lee, Chua Siok Suy,
Mariano Sio, Alfonso Yap, Richard Velasco and Alfonso Co, which
reversed the decision of the Regional Trial Court (RTC) of Manila,
Branch 55 dismissing the complaint for a sum of money filed by
private respondent Philippine Bank of Communications against
herein petitioners, Mico Metals Corporation (MICO, for brevity),
Charles Lee, Chua Siok Suy,
[2]
Mariano Sio, Alfonso Yap, Richard
Velasco and Alfonso Co.
[3]
The dispositive portion of the said
Decision of the Court of Appeals, reads:
WHEREFORE, the decision of the Regional Trial Court is hereby
reversed and in lieu thereof, a new one is entered:
a) Ordering the defendants-appellees jointly and severally
to pay plaintiff PBCom the sum of Five million four
hundred fifty-one thousand six hundred sixty-three
pesos and ninety centavos (P5,451,663.90)
representing defendants-appellees unpaid obligations
arising from ordinary loans granted by the plaintiff plus
legal interest until fully paid.
b) Ordering defendants-appellees jointly and severally to
pay PBCom the sum of Four hundred sixty-one
thousand six hundred pesos and sixty-six centavos (P46
1,600.66) representing defendants-appellees unpaid
obligations arising from their letters of credit and trust
receipt transactions with plaintiff PBCom plus legal
interest until fully paid.
c) Ordering defendants-appellees jointly and severally to
pay PBCom the sum of P50,000.00 as attorneys fees.
No pronouncement as to costs.
The facts of the case are as follows:
On March 2, 1979, Charles Lee, as President of MICO wrote
private respondent Philippine Bank of Communications (PBCom)
requesting for a grant of a discounting loan/credit line in the sum of
Three Million Pesos (P3,000,000.00) for the purpose of carrying
out MICOs line of business as well as to maintain its volume of
business.
On the same day, Charles Lee requested for another
discounting loan/credit line of Three Million Pesos (P3,000,000.00)
from PBCom for the purpose of opening letters of credit and trust
receipts.
In connection with the requests for discounting loan/credit
lines, PBCom was furnished by MICO the following resolution which
was adopted unanimously by MICOs Board of Directors:
RESOLVED, that the President, Mr. Charles Lee, and the Vice-
President and General Manager, Mr. Mariano A. Sio, singly or
jointly, be and they are duly authorized and empowered for and in
behalf of this Corporation to apply for, negotiate and secure the
approval of commercial loans and other banking facilities and
accommodations, such as, but not limited to discount loans, letters
of credit, trust receipts, lines for marginal deposits on foreign and
domestic letters of credit, negotiate out-of-town checks, etc. from
the Philippine Bank of Communications, 216 Juan Luna, Manila in
such sums as they shall deem advantageous, the principal of all of
which shall not exceed the total amount of TEN MILLION PESOS
(P10,000,000.00), Philippine Currency, plus any interests that may
be agreed upon with said Bank in such loans and other credit lines of
the same kind and such further terms and conditions as may, upon
granting of said loans and other banking facilities, be imposed by
21

the Bank; and to make, execute, sign and deliver any contracts of
mortgage, pledge or sale of one, some or all of the properties of the
Company, or any other agreements or documents of whatever
nature or kind, including the signing, indorsing, cashing, negotiation
and execution of promissory notes, checks, money orders or other
negotiable instruments, which may be necessary and proper in
connection with said loans and other banking facilities, or with their
amendments, renewals and extensions of payment of the whole or
any part thereof.
[4]

On March 26, 1979, MICO availed of the first loan of One
Million Pesos (P1,000,000.00) from PBCom. Upon maturity of the
loan, MICO caused the same to be renewed, the last renewal of
which was made on May 21, 1982 under Promissory Note BNA No.
26218.
[5]

Another loan of One Million Pesos (P1,000,000.00) was availed
of by MICO from PBCom which was likewise later on renewed, the
last renewal of which was made on May 21, 1982 under Promissory
Note BNA No. 26219.
[6]
To complete MICOs availment of Three
Million Pesos (P3,000,000.00) discounting loan/credit line
with PBCom, MICO availed of another loan from PBComin the sum
of One Million Pesos (P1,000,000.00) on May 24, 1979. As in
previous loans, this was rolled over or renewed, the last renewal of
which was made on May 25, 1982 under Promissory Note BNA No.
26253.
[7]

As security for the loans, MICO through its Vice-President and
General Manager, Mariano Sio, executed on May 16, 1979 a Deed
of Real Estate Mortgage over its properties situated inPasig, Metro
Manila covered by Transfer Certificates of Title (TCT) Nos. 11248
and 11250.
On March 26, 1979 Charles Lee, Chua Siok Suy, Mariano Sio,
Alfonso Yap and Richard Velasco, in their personal capacities
executed a Surety Agreement
[8]
in favor of PBCom whereby the
petitioners jointly and severally, guaranteed the prompt payment
on due dates or at maturity of overdrafts, promissory notes,
discounts, drafts, letters of credit, bills of exchange, trust receipts,
and other obligations of every kind and nature, for which MICO may
be held accountable by PBCom. It was provided, however, that the
liability of the sureties shall not at any one time exceed the principal
amount of Three Million Pesos (P3,000,000.00) plus interest, costs,
losses, charges and expenses including attorneys fees incurred
by PBCom in connection therewith.
On July 14, 1980, petitioner Charles Lee, in his capacity as
president of MICO, wrote PBCom and applied for an additional loan
in the sum of Four Million Pesos (P4,000,000.00). The loan was
intended for the expansion and modernization of the companys
machineries. Upon approval of the said application for loan, MICO
availed of the additional loan of Four Million Pesos (P4,000,000.00)
as evidenced by Promissory Note TA No. 094.
[9]

As per agreement, the proceeds of all the loan availments were
credited to MICOs current checking account with PBCom. To induce
the PBCom to increase the credit line of MICO, Charles Lee,
Chua Siok Suy, Mariano Sio, Alfonso Yap, Richard Velasco and
Alfonso Co (hereinafter referred to as petitioners-sureties),
executed another surety agreement
[10]
in favor of PBCom on July 28,
1980, whereby they jointly and severally guaranteed the prompt
payment on due dates or at maturity of overdrafts, promissory
notes, discounts, drafts, letters of credit, bills of exchange, trust
receipts and all other obligations of any kind and nature for which
MICO may be held accountable by PBCom. It was provided,
however, that their liability shall not at any one time exceed the
sum of Seven Million Five Hundred Thousand Pesos (P7,500,000.00)
including interest, costs, charges, expenses and attorneys fees
incurred by MICO in connection therewith.
On July 29, 1980, MICO furnished PBCom with a notarized
certification issued by its corporate secretary, Atty. P.B. Barrera,
22

that Chua Siok Suy was duly authorized by the Board of Directors to
negotiate on behalf of MICO for loans and other
credit availments from PBCom. Indicated in the certification was the
following resolution unanimously approved by the Board
of Directors:
RESOLVED, AS IT IS HEREBY RESOLVED, That Mr. Chua Siok Suy be,
as he is hereby authorized and empowered, on behalf of MICO
METALS CORPORATION from time to time, to borrow money and
obtain other credit facilities, with or without security, from the
PHILIPPINE BANK OF COMMUNICATIONS in such amount(s) and
under such terms and conditions as he may determine, with full
power and authority to execute, sign and deliver such contracts,
instruments and papers in connection therewith, including real
estate and chattel mortgages, pledges and assignments over the
properties of the Corporation; and to renew and/or extend and/or
roll-over and/or reavail of the credit facilities granted thereunder,
either for lesser or for greater amount(s), the intention being that
such credit facilities and all securities of whatever kind given as
collaterals therefor shall be a continuing security.
RESOLVED FURTHER, That said bank is hereby authorized,
empowered and directed to rely on the authority given hereunder,
the same to continue in full force and effect until written notice of its
revocation shall be received by said Bank.
[11]

On July 2, 1981, MICO filed with PBCom an application for a
domestic letter of credit in the sum of Three Hundred Forty-Eight
Thousand Pesos (P348,000.00).
[12]
The corresponding irrevocable
letter of credit was approved and opened under LC No. L-
16060.
[13]
Thereafter, the domestic letter of credit was negotiated
and accepted by MICO as evidenced by the corresponding bank
draft issued for the purpose.
[14]
After the supplier of the
merchandise was paid, a trust receipt
upon MICOs own initiative, was executed in favor of PBCom.
[15]

On September 14, 1981, MICO applied for another domestic
letter of credit with PBCom in the sum of Two Hundred Ninety
Thousand Pesos (P290,000.00).
[16]
The corresponding irrevocable
letter of credit was issued on September 22, 1981 under LC No. L-
16334.
[17]
After the beneficiary of the said letter of credit was paid
by PBCom for the price of the merchandise, the goods were
delivered to MICO which executed a corresponding trust
receipt
[18]
in favor of PBCom.
On November 10, 1981, MICO applied for authority to open a
foreign letter of credit in favor of Ta Jih Enterprises Co., Ltd.,
[19]
and
thus, the corresponding letter of credit
[20]
was then issued
byPBCom with a cable sent to the beneficiary, Ta Jih Enterprises Co.,
Ltd. advising that said beneficiary may draw funds from the account
of PBCom in its correspondent banks New York
Office.
[21]
PBCom also informed its corresponding bank in Taiwan,
the Irving Trust Company, of the approved letter of credit. The
correspondent bank acknowledged PBComs advice through a
confirmation letter
[22]
and by debiting from PBComs account with
the said correspondent bank the sum of Eleven Thousand Nine
Hundred Sixty US Dollars ($11 ,960.00).
[23]
As in past transactions,
MICO executed in favor of PBCom a corresponding trust receipt.
[24]

On January 4, 1982, MICO applied, for authority to open a
foreign letter of credit in the sum of One Thousand Nine Hundred
US Dollars ($1,900.00), with PBCom.
[25]
Upon approval, the
corresponding letter of credit denominated as LC No. 62293
[26]
was
issued whereupon PBCom advised its correspondent bank and
MICO
[27]
of the same. Negotiation and proper acceptance of the
letter of credit were then made by MICO. Again, a corresponding
trust receipt
[28]
was executed by MICO in favor of PBCom.
23

In all the transactions involving foreign letters of
credit, PBCom turned over to MICO the necessary documents such
as the bills of lading and commercial invoices to enable the latter to
withdraw the goods from the port of Manila.
On May 21, 1982 MICO obtained from PBCom another loan in
the sum of Three Hundred Seventy-Seven Thousand Pesos
(P377,000.00) covered by Promissory Note BA No. 7458.
[29]

Upon maturity of all credit availments obtained by MICO
from PBCom, the latter made a demand for payment.
[30]
For failure
of petitioner MICO to pay the obligations incurred despite repeated
demands, private
respondent PBCom extrajudicially foreclosed MICOs real estate
mortgage and sold the said mortgaged properties in a public auction
sale held on November 23, 1982. Private respondent PBCom which
emerged as the highest bidder in the auction sale, applied the
proceeds of the purchase price at public auction of Three Million
Pesos (P3,000,000.00) to the expenses of the foreclosure, interest
and charges and part of the principal of the loans, leaving an unpaid
balance of Five Million Four Hundred Forty-One Thousand Six
Hundred Sixty-Three Pesos and Ninety Centavos (P5,441,663.90)
exclusive of penalty and interest charges. Aside from the unpaid
balance of Five Million Four Hundred Forty-One Thousand Six
Hundred Sixty-Three Pesos and Ninety Centavos (P5,441,663.90),
MICO likewise had another standing obligation in the sum of Four
Hundred Sixty-One Thousand Six Hundred Pesos and Six Centavos
(P461,600.06) representing its trust receipts liabilities to private
respondent. PBCom then demanded the settlement of the
aforesaid obligations from herein petitioners-sureties who,
however, refused to acknowledge their obligations to PBCom under
the surety agreements. Hence, PBCom filed a complaint with prayer
for writ of preliminary attachment before the Regional Trial Court of
Manila, which was raffled to Branch 55, alleging that MICO was no
longer in operation and had no properties to answer for its
obligations. PBCom further alleged that petitioner Charles Lee has
disposed or concealed his properties with intent to defraud his
creditors. Except for MICO and Charles Lee, the sheriff of the RTC
failed to serve the summons on herein petitioners-sureties since
they were all reportedly abroad at the time. An alias summons was
later issued but the sheriff was not able to serve the same to
petitioners Alfonso Co and Chua Siok Suy who was already sickly at
the time and reportedly in Taiwan where he later died.
Petitioners (MICO and herein petitioners-sureties) denied all
the allegations of the complaint filed by respondent PBCom, and
alleged that: a) MICO was not granted the alleged loans and neither
did it receive the proceeds of the aforesaid loans; b)
Chua Siok Suy was never granted any valid Board Resolution to sign
for and in behalf of MICO; c) PBCom acted in bad faith in granting
the alleged loans and in releasing the proceeds thereof; d)
petitioners were never advised of the alleged grant of loans and the
subsequent releases therefor, if any; e) since no loan was ever
released to or received by MICO, the corresponding real estate
mortgage and the surety agreements signed concededly by the
petitioners-sureties are null and void.
The trial court gave credence to the testimonies of herein
petitioners and dismissed the complaint filed by PBCom. The trial
court likewise declared the real estate mortgage and its foreclosure
null and void. In ruling for herein petitioners, the trial court said
that PBCom failed to adequately prove that the proceeds of the
loans were ever delivered to MICO. The trial court pointed out,
among others, that while PBCom claimed that the proceeds of the
Four Million Pesos (P4,000,000.00) loan covered by promissory note
TA 094 were deposited to the current account of petitioner
MICO, PBCom failed to produce the ledger account showing such
deposit. The trial court added that while PBCom may have loaned to
MICO the other sums of Three Hundred Forty-Eight Thousand Pesos
(P348,000.00) and Two Hundred Ninety Thousand Pesos
24

(P290,000.00), no proof has been adduced as to the existence of the
goods covered and paid by the said amounts. Hence, inasmuch as
no consideration ever passed from PBCom to MICO, all the
documents involved therein, such as the promissory notes, real
estate mortgage including the surety agreements were all void or
nonexistent for lack of cause or consideration. The trial court said
that the lack of proof as regards the existence of the merchandise
covered by the letters of credit bolstered the claim of herein
petitioners that no purchases of the goods were really made and
that the letters of credit transactions were simply resorted to by
the PBCom and Chua SiokSuy to accommodate the latter in his
financial requirements.
The Court of Appeals reversed the ruling of the trial court,
saying that the latter committed an erroneous application and
appreciation of the rules governing the burden of proof. Citing
Section 24 of the Negotiable Instruments Law which provides that
Every negotiable instrument is deemed prima facie to have been
issued for valuable consideration and every person whose
signature appears thereon to have become a party thereto for
value, the Court of Appeals said that while the subject promissory
notes and letters of credit issued by the PBCom made no mention of
delivery of cash, it is presumed that said negotiable instruments
were issued for valuable consideration. The Court of Appeals also
cited the case of Gatmaitan vs. Court of Appeals
[31]
which holds that
"there is a presumption that an instrument sets out the true
agreement of the parties thereto and that it was executed for
valuable consideration. The appellate court noted and found that
a notarized Certification was issued by MICOs corporate secretary,
P.B. Barrera, that Chua Siok Suy, was duly authorized by the Board
of Directors of MICO to borrow money and obtain credit facilities
from PBCom.
Petitioners filed a motion for reconsideration of the challenged
decision of the Court of Appeals but this was denied in a Resolution
dated November 7, 1994 issued by its Former Second Division.
Petitioners-sureties then filed a petition for review on certiorari
with this Court, docketed as G.R. No. 117913, assailing the decision
of the Court of Appeals. MICO likewise filed a separate petition for
review on certiorari, docketed as G.R. No. 117914, with this Court
assailing the same decision rendered by the Court of Appeals. Upon
motion filed by petitioners, the two (2) petitions were consolidated
on January 11, 1995.
[32]

Petitioners contend that there was no proof that the proceeds
of the loans or the goods under the trust receipts were ever
delivered to and received by MICO. But the record shows otherwise.
Petitioners-sureties further contend that assuming that there was
delivery by PBCom of the proceeds of the loans and the goods, the
contracts were executed by an unauthorized person, more
specifically Chua Siok Suy who acted fraudulently and in collusion
with PBCom to defraud MICO.
The pertinent issues raised in the consolidated cases at bar are:
a) whether or not the proceeds of the loans and letters of credit
transactions were ever delivered to MICO, and b) whether or not
the individual petitioners, as sureties, may be held liable under the
two (2) Surety Agreements executed on March 26, 1979 and July 28,
1980.
In civil cases, the party having the burden of proof must
establish his case by preponderance of evidence.
[33]
Preponderance
of evidence means evidence which is more convincing to the court
as worthy of belief than that which is offered in opposition thereto.
Petitioners contend that the alleged promissory notes, trust receipts
and surety agreements attached to the complaint filed
by PBCom did not ripen into valid and binding contracts inasmuch
as there is no evidence of the delivery of money or loan proceeds to
MICO or to any of the petitioners-sureties. Petitioners claim that
under normal banking practice, borrowers are required to
accomplish promissory notes in blank even before the grant of the
25

loans applied for and such documents become valid written
contracts only when the loans are actually released to the borrower.
We are not convinced.
During the trial of an action, the party who has the burden of
proof upon an issue may be aided in establishing his claim or
defense by the operation of a presumption, or, expressed
differently, by the probative value which the law attaches to a
specific state of facts. A presumption may operate against his
adversary who has not introduced proof to rebut the presumption.
The effect of a legal presumption upon a burden of proof is to
create the necessity of presenting evidence to meet the legal
presumption or the prima facie case created thereby, and which if
no proof to the contrary is presented and offered, will prevail. The
burden of proof remains where it is, but by the presumption the
one who has that burden is relieved for the time being from
introducing evidence in support of his averment, because the
presumption stands in the place of evidence unless rebutted.
Under Section 3, Rule 131 of the Rules of Court the following
presumptions, among others, are satisfactory if uncontradicted: a)
That there was a sufficient consideration for a contract and b) That
a negotiable instrument was given or indorsed for sufficient
consideration. As observed by the Court of Appeals, a similar
presumption is found in Section 24 of the Negotiable Instruments
Law which provides that every negotiable instrument is
deemed prima facie to have been issued for valuable consideration
and every person whose signature appears thereon to have become
a party for value. Negotiable instruments which are meant to be
substitutes for money, must conform to the following requisites to
be considered as such a) it must be in writing; b) it must be signed
by the maker or drawer; c) it must contain an unconditional promise
or order to pay a sum certain in money; d) it must be payable on
demand or at a fixed or determinable future time; e) it must be
payable to order or bearer; and f) where it is a bill of exchange,
the drawee must be named or otherwise indicated with reasonable
certainty. Negotiable instruments include promissory notes, bills of
exchange and checks. Letters of credit and trust receipts are,
however, not negotiable instruments. But drafts issued in
connection with letters of credit are negotiable instruments.
Private respondent PBCom presented the following
documentary evidence to prove petitioners credit availments and
liabilities:
1) Promissory Note No. BNA 26218 dated May 21, 1982
in the sum of P1,000,000.00 executed by MICO in favor
of PBCom.
2) Promissory Note No. BNA 26219 dated May 21, 1982
in the sum of P1,000,000.00 executed by MICO in favor
of PBCom.
3) Promissory Note No. BNA 26253 dated May 25, 1982
in the sum of P1,000,000.00 executed by MICO in favor
of PBCom.
4) Promissory Note No. BNA 7458 dated May 21, 1982
in the sum of P377,000.00 executed by MICO in favor
of PBCom.
5) Promissory Note No. TA 094 dated July 29, 1980 in
the sum of P4,000.000.00 executed by MICO in favor
of PBCom.
6) Irrevocable letter of credit No. L-16060 dated July
2,1981 issued in favor of Perez Battery Center for
account of Mico Metals Corp.
7) Draft dated July 2, 1981 in the sum of P348,000.00
issued by Perez Battery Center, beneficiary of
irrevocable Letter of Credit No. No. L-16060 and
accepted by MICO Metals corporation.
26

8) Letter dated July 2,
1981 from Perez Battery Center addressed to private
respondent PBCom showing that proceeds of the
irrevocable letter of credit No. L- 16060 was received by
Mr. MoisesRosete, representative
of Perez Battery Center.
9) Trust receipt dated July 2, 1981 executed by MICO in
favor of PBCom covering the merchandise purchased
under Letter of Credit No. 16060.
10) Irrevocable letter of credit No. L-16334 dated
September 22, 1981 issued in favor of Perez Battery
Center for account of MICO Metals Corp.
11) Draft dated September 22, 1981 in the sum
of P290,000.00 issued by Perez Battery Center and
accepted by MICO.
12) Letter dated September 17, 1981 from
Perez Battery addressed to PBCom showing that the
proceeds of credit no. L-16344 was received by
Mr. Moises Rosete, a representative
of PerezBattery Center.
13) Trust Receipt dated September 22,
1981 executed by MICO in favor of PBCom covering the
merchandise under Letter of Credit No. L-16334.
14) Irrevocable Letter of Credit no. 61873
dated November 10, 1981 for US$11,960.00 issued
by PBCom in favor of TA JIH Enterprises Co. Ltd.,
through its correspondent bank, Irving Trust Company
of Taipei, Taiwan.
15) Trust Receipt dated December 15, 9181 executed
by MICO in favor of PBCom showing that possession of
the merchandise covered by Irrevocable Letter of Credit
no. 61873 was released by PBCom to MICO.
16) Letters dated March 2, 1979 from MICO signed
by its president, Charles Lee, showing that MICO sought
credit line from PBCom in the form of loans, letters of
credit and trust receipt in the sum of P7,500,000.00.
17) Letter dated July 14, 1980 from MICO signed by
its president, Charles Lee, showing that MICO
requested for additional financial assistance in the sum
of P4,000,000.00.
18) Board resolution dated March 6, 1979 of MICO
authorizing Charles Lee and Mariano Sio singly or
jointly to act and sign for and in behalf of MICO relative
to the obtention of credit facilities from PBCom.
19) Duly notarized Deed of Mortgage dated May 16,
1979 executed by MICO in favor of PBCom over MICO
s real properties covered by TCT Nos. 11248 and 11250
located in Pasig.
20) Duly notarized Surety Agreement dated March
26, 1979 executed by herein petitioners Charles Lee,
Mariano Sio, Alfonso Yap, Richard Velasco and
Chua Siok Suy in favor of PBCom.
21) Duly notarized Surety Agreement dated July 28,
1980 executed by herein petitioners Charles Lee,
Mariano Sio, Alfonso Yap, Richard Velasco and
Chua Siok Suy in favor of PBCom.
22) Duly notarized certification dated July 28, 1980
issued by MICO s corporate secretary, Mr. P.B. Barrera,
attesting to the adoption of a board resolution
authorizing Chua Siok Suy to sign, for and in behalf of
MICO, all the necessary documents including contracts,
27

loan instruments and mortgages relative to
the obtention of various credit facilities from PBCom.
The above-cited documents presented have not merely created
a prima facie case but have actually proved the solidary obligation
of MICO and the petitioners, as sureties of MICO, in favor of
respondent PBCom. While the presumption found under the
Negotiable Instruments Law may not necessarily be applicable to
trust receipts and letters of credit, the presumption that the drafts
drawn in connection with the letters of credit have sufficient
consideration. Under Section 3(r), Rule 131 of the Rules of Court
there is also a presumption that sufficient consideration was given
in a contract. Hence, petitioners should have presented credible
evidence to rebut that presumption as well as the evidence
presented by private respondent PBCom. The letters of credit show
that the pertinent materials/merchandise have been received by
MICO. The drafts signed by the beneficiary/suppliers in connection
with the corresponding letters of credit proved that said suppliers
were paid by PBCom for the account of MICO. On the other hand,
aside from their bare denials petitioners did not present sufficient
and competent evidence to rebut the evidence of private
respondent PBCom. Petitioner MICO did not proffer a single piece
of evidence, apart from its bare denials, to support its allegation
that the loan transactions, real estate mortgage, letters of credit
and trust receipts were issued allegedly without any consideration.
Petitioners-sureties, for their part, presented the By-
Laws
[34]
of Mico Metals Corporation (MICO) to prove that only the
president of MICO is authorized to borrow money, arrange letters of
credit, execute trust receipts, and promissory notes and
consequently, that the loan transactions, letters of credit,
promissory notes and trust receipts, most of which were executed
by Chua SiokSuy in representation of MICO were not allegedly
authorized and hence, are not binding upon MICO. A perusal of the
By-Laws of MICO, however, shows that the power to borrow money
for the company and issue mortgages, bonds, deeds of trust and
negotiable instruments or securities, secured by mortgages or
pledges of property belonging to the company is not confined solely
to the president of the corporation. The Board of Directors of MICO
can also borrow money, arrange letters of credit, execute trust
receipts and promissory notes on behalf of the
corporation.
[35]
Significantly, this power of the Board of Directors
according to the by-laws of MICO, may be delegated to any of its
standing committee, officer or agent.
[36]
Hence, PBCom had every
right to rely on the Certification issued by MICO's corporate
secretary, P.B. Barrera, that Chua Siok Suy was duly authorized by
its Board of Directors to borrow money and obtain credit facilities in
behalf of MICO from PBCom.
Petitioners-sureties also presented a letter of their counsel
dated October 9, 1982, addressed to private
respondent PBCom purportedly to show that PBCom knew that
Chua Siok Suyallegedly used the credit and good names of the
petitioner-sureties for his benefit, and that petitioner-sureties were
made to sign blank documents and were furnished copies of the
same. The letter, however, is in fact merely a reply of petitioners-
sureties counsel to PBComs demand for payment
of MICOs obligations, and appears to be an inconsequential piece
of self-serving evidence.
In addition to the foregoing, MICO and petitioners-sureties
cited the decision of the trial court which stated that there was no
proof that the proceeds of the loans were ever delivered to MICO.
Although the private respondents witness, Mr. Gardiola, testified
that the proceeds of the loans were deposited in MICOs current
account with PBCom, his testimony was allegedly not supported by
any bank record, note or memorandum. A careful scrutiny of the
record including the transcript of stenographic notes reveals,
however, that although private respondent PBCom was willing to
produce the corresponding account ledger showing that the
28

proceeds of the loans were credited to MICOs current account
with PBCom, MICO in fact vigorously objected to the presentation
of said document. That point is shown in the testimony
of PBComs witness, Gardiola, thus:
Q: Now, all of these promissory note Exhibits I and J
which as you have said previously (sic) availed
originally by defendant Mico Metals Corp. sometime
in 1979, my question now is, do you know what
happened to the proceeds of the original availment?
A: Well, it was credited to the current account
of Mico Metals Corp.
Q: Why did it was credited to the proceeds to the
account of Mico Metals Corp? (sic)
A: Well, that is our understanding.
ATTY. DURAN:
Your honor, may we be given a chance to object, the
best evidence is the so-called current account...
COURT:
Can you produce the ledger account?
A: Yes, Your Honor, I will bring.
COURT:
The ledger or record of the current account
of Mico Metals Corp.
A: Yes, Your Honor.
ATTY. ACEJAS:
Your Honor, these are a confidential record, and they
might not be disclosed without the consent of the
person concerned. (sic)
ATTY. SANTOS:
Well, you are the one who is asking that.
ATTY. DURAN:
Your Honor, Im precisely want to show for the ... (sic)
COURT:
But the amount covered by the current account of
defendant Mico Metals Corp. is the subject matter of
this case.
xxx xxx
xxx
Q: Are those availments were release? (sic)
A: Yes, Your Honor, to the defendant corporation.
Q: By what means?
A: By the credit to their current account.
ATTY. ACEJAS:
We object to that, your Honor, because the
disclose is the secrecy of the bank deposit. (sic)
xxx xxx
xxx
Q: Before the recess Mr. Gardiola, you stated that the
proceeds of the three (3) promissory notes were
credited to the accounts of Mico Metals Corporation,
29

now do you know what kind of current account was
that which you are referring to?
ATTY. ACEJAS:
Objection your Honor, that is the disclose of the
deposit of defendant Mico Metals Corporation and it
cannot disclosed without the authority of the
depositor. (sic)
[37]

That proceeds of the loans which were originally availed of in
1979 were delivered to MICO is bolstered by the fact that more
than a year later, specifically on July 14, 1980, MICO through its
president, petitioner-surety Charles Lee, requested for an additional
loan of Four Million Pesos (P4,000,000.00) from PBCom. The fact
that MICO was requesting for an additional loan implied that it has
already availed of earlier loans from PBCom.
Petitioners allege that PBCom presented no evidence that it
remitted payments to cover the domestic and foreign letters of
credit. Petitioners placed much reliance on the erroneous decision
of the trial court which stated that private
respondent PBCom allegedly failed to prove that it actually made
payments under the letters of credit since the bank drafts presented
as evidence show that they were made in favor of the Bank of
Taiwan and First Commercial Bank.
Petitioners allegations are untenable.
Modern letters of credit are usually not made between natural
persons. They involve bank to bank transactions. Historically, the
letter of credit was developed to facilitate the sale of goods
between, distant and unfamiliar buyers and sellers. It was an
arrangement under which a bank, whose credit was acceptable to
the seller, would at the instance of the buyer agree to pay drafts
drawn on it by the seller, provided that certain documents are
presented such as bills of lading accompanied the corresponding
drafts. Expansion in the use of letters of credit was a natural
development in commercial banking.
[38]
Parties to a commercial
letter of credit include (a) the buyer or the importer, (b) the seller,
also referred to as beneficiary, (c) the opening bank which is usually
the buyers bank which actually issues the letter of credit, (d) the
notifying bank which is the correspondent bank of the opening bank
through which it advises the beneficiary of the letter of credit, (e)
negotiating bank which is usually any bank in the city of the
beneficiary. The services of the notifying bank must always be
utilized if the letter of credit is to be advised to the beneficiary
through cable, (f) the paying bank which buys or discounts the
drafts contemplated by the letter of credit, if such draft is to be
drawn on the opening bank or on another designated bank not in
the city of the beneficiary. As a rule, whenever the facilities of the
opening bank are used, the beneficiary is supposed to present his
drafts to the notifying bank for negotiation and (g) the confirming
bank which, upon the request of the beneficiary, confirms the letter
of credit issued by the opening bank.
From the foregoing, it is clear that letters of credit, being
usually bank to bank transactions, involve more than just one bank.
Consequently, there is nothing unusual in the fact that the drafts
presented in evidence by respondent bank were not made payable
to PBCom. As explained by respondent bank, a draft was drawn on
the Bank of Taiwan by Ta Jih Enterprises Co., Ltd. ofTaiwan, supplier
of the goods covered by the foreign letter of credit. Having paid the
supplier, the Bank of Taiwan then presented the bank draft for
reimbursement by PBComs correspondent bank in Taiwan, the
Irving Trust Company which explains the reason why on its face,
the draft was made payable to the Bank of Taiwan. Irving Trust
Company accepted and endorsed the draft to PBCom. The draft was
later transmitted to PBCom to support the latters claim for
payment from MICO. MICO accepted the draft upon presentment
and negotiated it to PBCom.
30

Petitioners further aver that MICO never requested that legal
possession of the merchandise be transferred to PBCom by way of
trust receipts. Petitioners insist that assuming that MICO
transferred possession of the merchandise to PBCom by way of
trust receipts, the same would be illegal since PBCom, being a
banking institution, is not authorized by law to engage in the
business of importing and selling goods.
A trust receipt is considered as a security transaction intended
to aid in financing importers and retail dealers who do not have
sufficient funds or resources to finance the importation or purchase
of merchandise, and who may not be able to acquire credit except
through utilization, as collateral of the merchandise imported or
purchased.
[39]
A trust receipt, therefor, is a document of security
pursuant to which a bank acquires a security interest in the goods
under trust receipt. Under a letter of credit-trust receipt
arrangement, a bank extends a loan covered by a letter of credit,
with the trust receipt as a security for the loan. The transaction
involves a loan feature represented by a letter of credit, and a
security feature which is in the covering trust receipt which
secures an indebtedness.
Petitioners averments with regard to the second issue are no
less incredulous. Petitioners contend that the letters of credit,
surety agreements and loan transactions did not ripen into valid and
binding contracts since no part of the proceeds of the loan
transactions were delivered to MICO or to any of the petitioners-
sureties. Petitioners-sureties allege that Chua Siok Suy was the
beneficiary of the proceeds of the loans and that the latter made
them sign the surety agreements in blank. Thus, they maintain that
they should not be held accountable for any liability that might
arise therefrom.
It has not escaped our notice that it was petitioner-surety
Charles Lee, as president of MICO Metals Corporation, who first
requested for a discounting loan of Three Million Pesos
(P3,000,000.00) from PBCom as evidenced by his letter dated March
2, 1979.
[40]
On the same day, Charles Lee, as President of MICO,
requested for a Letter of Credit and Trust Receipt line in the sum of
Three Million Pesos (P3,000,000.00).
[41]
Still, on the same day,
Charles Lee again as President of MICO, wrote another letter to
PBCOM requesting for a financing line in the sum of One Million
Five Hundred Thousand Pesos (P1,500,000.00) to be used
exclusively as marginal deposit for the opening of MICOs foreign
and local letters of credit with PBCom.
[42]
More than a year later, it
was also Charles Lee, again in his capacity as president of MICO,
who asked for an additional loan in the sum of Four Million Pesos
(P4,000,000.00). The claim therefore of petitioners that it was
Chua Siok Suy, in connivance with the respondent PBCom, who
applied for and obtained the loan transactions and letters of credit
strains credulity considering that even the Deed of the Real Estate
Mortgage in favor of PBCom was executed by petitioner-surety
Mariano Sio in his capacity as general manager of MICO
[43]
to secure
the loan accommodations obtained by MICO from PBCom.
Petitioners-sureties allege that they were made to sign the
surety agreements in blank by Chua Siok Suy. Petitioner Alfonso
Yap, the corporate treasurer, for his part testified that he signed
booklets of checks, surety agreements and promissory notes in
blank; that he signed the documents in blank despite his misgivings
since Chua Siok Suy assured him that the transaction can easily be
taken cared of since Chua Siok Suy personally knew the Chairman of
the Board of PBCom; that he was not receiving salary as treasurer
of Mico Metals and since Chua Siok Suy had a direct hand in the
management of Malayan Sales Corporation, of which Yap is an
employee, he (Yap) signed the documents in blank as consideration
for his continued employment in Malayan Sales Corporation.
Petitioner Antonio Co testified that he worked as office manager for
MICO from 1978-1982. As office manager, he was the one in charge
of transacting business like purchasing, selling and paying the salary
of the employees. He was also in charge of the handling of
31

documents pertaining to surety agreements, trust receipts and
promissory notes;
[44]
that when he first joined MICO Metals
Corporation, he was able to read the by-laws of the corporation and
he came to know that only the chairman and the president can
borrow money in behalf of the corporation; that Chua Siok Suy once
called him up and told him to secure an invoice so that a credit line
can be opened in the bank with a local letter of credit; that when
the invoice was secured, he (Co) brought it together with the
application for a credit line to Chua Siok Suy, and that he questioned
the authority of Chua Siok Suy pointing out that he (Co) is not
empowered to sign the document inasmuch as only the latter, as
president, was authorized to do so. However,
Chua Siok Suy allegedly just said that he had already talked with the
Chairman of the Board of PBCom; and that Chua Siok Suy reportedly
said that he needed the money to finance a project that he had with
the Taipei government. Co also testified that he knew of the
application for domestic letter of credit in the sum of Three
Hundred Forty-Eight Thousand Pesos (P348,000.00); and that a
certain Moises Rosete was authorized to claim the check covering
the Three Hundred Forty-Eight Thousand Pesos (P348,000.00)
from PBCom; and that after claiming the check Rosete brought it to
Perez Battery Center for indorsement after which the same was
deposited to the personal account of Chua Siok Suy.
[45]

We consider as incredible and unacceptable the claim of
petitioners-sureties that the Board of Directors of MICO was so
careless about the business affairs of MICO as well as about their
own personal reputation and money that they simply relied on the
say so of Chua Siok Suy on matters involving millions of pesos.
Under Section 3 (d), Rule 131 of the Rules of Court, it is presumed
that a person takes ordinary care of his concerns. Hence, the natural
presumption is that one does not sign a document without first
informing himself of its contents and consequences. Said
presumption acquires greater force in the case at bar where not
only one but several documents were executed at different times
and at different places by the petitioner sureties and
ChuaSiok Suy as president of MICO.
MICO and herein petitioners-sureties insist that
Chua Siok Suy was not duly authorized to negotiate for loans in
behalf of MICO from PBCom. Petitioners allegation, however, is
belied by the July 28, 1980 Certification issued by the corporate
secretary of PBCom, Atty. P.B. Barrera, that MICO's Board of
Directors gave Chua Siok Suy full authority to negotiate for loans in
behalf of MICO with PBCom. In fact, the Certification even provided
that Chua Siok Suys authority continues until and unless PBCom is
notified in writing of the withdrawal thereof by the said Board.
Notably, petitioners failed to contest the genuineness of the said
Certification which is notarized and to show any written proof of
any alleged withdrawal of the said authority given by the Board of
Directors to Chua Siok Suy to negotiate for loans in behalf of MICO.
There was no need for PBCom to personally inform the
petitioners-sureties individually about the terms of the loans, letters
of credit and other loan documents. The petitioners-sureties
themselves happen to comprise the Board of Directors of MICO,
which gave full authority to Chua Siok Suy to negotiate for loans in
behalf of MICO. Notice to MICOs authorized representative,
Chua Siok Suy, was notice to MICO. The Certification issued
by PBComs corporate secretary, Atty. P.B. Barrera, indicated that
Chua Siok Suy had full authority to negotiate and sign the necessary
documents, in behalf of MICO for loans from PBCom.
Respondent PBCom therefore had the right to rely on the said
notarized Certification of MICOs Corporate Secretary.
Anent petitioners-sureties contention that they obtained no
consideration whatsoever on the surety agreements, we need only
point out that the consideration for the sureties is the very
consideration for the principal obligor, MICO, in the contracts of
loan. In the case of Willex Plastic Industries Corporation vs. Court of
Appeals,
[46]
we ruled that the consideration necessary to support a
32

surety obligation need not pass directly to the surety, a
consideration moving to the principal alone being sufficient. For a
guarantor or surety is bound by the same consideration that makes
the contract effective between the parties thereto. It is not
necessary that a guarantor or surety should receive any part or
benefit, if such there be, accruing to his principal.
Petitioners placed too much reliance on the rule in evidence
that the burden of proof does not shift whereas the burden of going
forward with the evidence does pass from party to party. It is true
that said rule is not changed by the fact that the party having the
burden of proof has introduced evidence which established prima
facie his assertion because such evidence does not shift the burden
of proof; it merely puts the adversary to the necessity of producing
evidence to meet the prima facie case. Where the defendant merely
denies, either generally or otherwise, the allegations of the
plaintiffs pleadings, the burden of proof continues to rest on the
plaintiff throughout the trial and does not shift to the defendant
until the plaintiffs evidence has been presented and duly offered.
The defendant has then no burden except to produce evidence
sufficient to create a state of equipoise between his proof and that
of the plaintiff to defeat the latter, whereas the plaintiff has the
burden, as in the beginning, of establishing his case by a
preponderance of evidence.
[47]
But where the defendant has failed
to present and marshall evidence sufficient to create a state of
equipoise between his proof and that of plaintiff, the prima
facie case presented by the plaintiff will prevail.
In the case at bar, respondent PBCom, as plaintiff in the trial
court, has in fact presented sufficient documentary and testimonial
evidence that proved by preponderance of evidence its subject
collection case against the defendants who are the petitioners
herein. In view of all the foregoing, the Court of Appeals committed
no reversible error in its appealed Decision.
WHEREFORE, the assailed Decision of the Court of Appeals in
CA-G.R. CV No. 27480 entitled, Philippine Bank of Communications
vs. Mico Metals Corporation, Charles Lee, Chua SiokSuy,
Mariano Sio, Alfonso Yap, Richard Velasco and Alfonso Co, is
AFFIRMED in toto.
Costs against the petitioners.
SO ORDERED.
Bellosillo, (Chairman),
Mendoza, Quisumbing, and Buena, JJ., concur.
G.R. No. L-24821 October 16, 1970
BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellee,
vs.
DE RENY FABRIC INDUSTRIES, INC., AURORA T. TUYO and AURORA
CARCERENY alias AURORA C. GONZALES, defendants-appellants.
Aviado and Aranda for plaintiff-appellee.
S. Emiliano Calma for defendants-appellants.

CASTRO, J.:.
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 appellants to finance their importation of dyestuffs from
33

the United States, which however turned out to be mere colored
chalk upon arrival and inspection thereof at the port of 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.
34

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.
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 rate of 7%
per annum from October 31, 1962 until fully paid, plus costs.
It is the submission of the defendants-appellants that it was the
duty of the foreign correspondent banks of the Bank of the
Philippine Islands to take the necessary precaution to insure that
the goods shipped under the covering L/Cs conformed with 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 accrue.
We can appreciate the sweep of the appellants' argument, but we
also find that it is nestled hopelessly inside a salient where the valid
contract between the parties and the internationally accepted
customs of the banking trade must prevail.
1

Under the terms of their Commercial Letter of Credit Agreements
with the Bank, the appellants agreed that the Bank shall not be
responsible for the "existence, character, quality, quantity,
conditions, packing, value, or delivery of the property purporting to
be represented by documents; for any difference in character,
quality, quantity, condition, or value of the property from that
expressed in documents," or for "partial or incomplete shipment, or
failure or omission to ship any or all of the property referred to in
the Credit," as well as "for any deviation from instructions, delay,
default or fraud by the shipper or anyone else in connection with
the property the shippers or vendors and ourselves [purchasers] or
any of us." Having agreed to these terms, the appellants have,
therefore, no recourse but to comply with their covenant. 2
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.
It was uncontrovertibly proven by the Bank during the trial below
that banks, in providing financing in international business
transactions such as those entered into by the appellants, do not
deal with the property to be exported or shipped to the importer,
but deal only with documents. The Bank introduced in evidence a
provision contained in the "Uniform Customs and Practices for
Commercial Documentary Credits Fixed for the Thirteenth Congress
of International Chamber of Commerce," to which the Philippines is
a signatory nation. Article 10 thereof provides: .
In documentary credit operations, all parties
concerned deal in documents and not in 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
payment, negotiation or acceptance.
The existence of a custom in international banking and financing
circles negating any duty on the part of a bank to verify whether
what has been described in letters of credits or drafts or shipping
documents actually tallies with what was loaded aboard ship,
having been positively proven as a fact, the appellants are bound by
35

this established usage. They were, after all, the ones who tapped
the facilities afforded by the Bank in order to engage in
international business.
ACCORDINGLY, the judgment a quo is affirmed, at defendants-
appellants' cost. This is without prejudice to the Bank, in proper
proceedings in the court below in this same case proving and being
reimbursed additional expenses, if any, it has incurred by 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.
Concepcion, C.J., is on leave.
G.R. No. 94209 April 30, 1991
FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING
CORPORATION), petitioner,
vs.
THE COURT OF APPEALS, and BERNARDO E.
VILLALUZ, respondents.
Pelaez, Adriano & Gregorio for petitioner.
Ezequiel S. Consulta for private respondent.

GUTIERREZ, JR., J.:p
This is a petition for review seeking the reversal of the decision of
the Court of 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.
The facts of the case are as follows:
On June 3, 1971, Bernardo E. Villaluz agreed to sell to the then
defendant Axel Christiansen 2,000 cubic meters of lauan logs at
$27.00 per cubic meter FOB.
After inspecting the logs, Christiansen issued purchase order No.
76171.
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 sight in favor of Villaluz for the sum of $54,000.00, the total
purchase price of the lauan logs.
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)
The letter of credit further provided that the draft to be drawn is on
Security Pacific National Bank and that it be accompanied by the
following documents:
1. Signed Commercial Invoice in four copies showing
the number of the purchase order and certifying
that
a. All terms and conditions of the
purchase order have been complied
36

with and that all logs are fresh cut
and quality equal to or better than
that described in H.A. Christiansen's
telex #201 of May 1, 1970, and that
all logs have been marked "BEV-
EX."
b. One complete set of documents,
including 1/3 original bills of lading
was airmailed to Consignee and
Parties to be advised by Hans-Axel
Christiansen, Ship and Merchandise
Broker.
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.
2. Tally sheets in quadruplicate.
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:
Han Mi Trade Development Company, Ltd., Santa
Ana, California.
Letter of Credit No. 46268 dated June 7, 1971
Han Mi Trade Development Company, Ltd., P.O. Box
10480, Santa Ana, California 92711 and Han Mi
Trade Development Company, Ltd., Seoul, Korea.
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.
37

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
38

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 issuing bank is a foreign bank with whom
plaintiff had no business connections and
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:
39

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 defect, is
in estoppel from asserting that
there had been an illegal
consideration for the note, and so,
he has to pay its value. (Rodriguez
v. Martinez, 5 Phil. 67).
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
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, Civil Code) (Rollo, pp. 29-31)
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:
WHEREFORE, judgment is hereby rendered for the
plaintiff, ordering the defendants to pay the
plaintiff, jointly and severally, the following sums:
a) $54,000.00 (US), or its peso equivalent at the
prevailing rate as of the time payment is actually
made, representing the purchase price of the logs;
b) P17,340.00, representing government fees and
charges paid by plaintiff in connection with the logs
shipment in question;
c) P10,000.00 as temperate damages (for trips
made to Bacolod and Korea).
All three foregoing sums shall be with interest
thereon at 12% per annum from September 1,
1971, when the complaint was filed, until fully paid:
d) P70,000.00 as moral damages;
e) P30,000.00 as exemplary damages; and
f) P30,000.00 as attorney's fees and litigation
expense.
(Rollo, p. 28)
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.
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 and dilatory.
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
40

Court of Appeals a petition forcertiorari 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
41

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 Feati Bank.
3. The decision promulgated by this Court in CA-G.R.
Sp No. 11051, which contained the statement
"Since Villaluz" draft was not drawn strictly in
compliance with the terms of the letter of credit,
Feati Bank's refusal to negotiate it was justified,"
did not dispose of this question on the merits. In
that case, the question involved was 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)
The dispositive portion of the decision of the Court of Appeals
reads:
WHEREFORE, the decision appealed from is
affirmed; and accordingly, the appeal is hereby
dismissed. Costs against the petitioner. (Rollo, p. 33)
Hence, this petition for review.
The petitioner interposes the following reasons for the allowance of
the petition.
First Reason
THE RESPONDENT COURT ERRONEOUSLY
CONCLUDED FROM THE ESTABLISHED FACTS AND
INDEED, WENT AGAINST THE EVIDENCE AND
DECISION OF THIS HONORABLE COURT, THAT
PETITIONER BANK IS LIABLE ON THE LETTER OF
CREDIT DESPITE PRIVATE RESPONDENTS NON-
COMPLIANCE WITH THE TERMS THEREOF,
Second Reason
42

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 RESPONDENT COURT LIKEWISE COMMITTED
AN ERROR OF LAW WHEN IT AFFIRMED THE TRIAL
COURT'S DECISION. (Rollo, p. 12)
The principal issue in this case is whether or not a correspondent
bank is to be held liable under the letter of credit despite non-
compliance by the beneficiary with the terms thereof?
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
43

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
44

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.
45

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:
46

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.
47

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.
(SeeNational 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.
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
48

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, 1990. The amended complaint in Civil Case
No. 15121 is DISMISSED.
SO ORDERED.
Feliciano, Bidin and Davide, Jr., JJ., concur.
Fernan, C.J., took no part.
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.


D E C I S I O N


TINGA, J.:
49

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 Decision
1
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
Contract
3
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
petitionerin two separate letters
13
both dated 10
August 2000advised 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
50

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 8.2
14
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 Order
19
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 the Securities are
independent of the main contract between them as shown on the
face of the two Standby Letters of Credit which both provide that
51

the banks have no responsibility to investigate the authenticity or
accuracy of the certificates or the declarant's capacity or
entitlement to so certify.
In its Resolution dated 28 November 2000, the Court of Appeals
issued a temporary 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.
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
US$1,852,814.00.
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.
Undaunted, petitioner filed the instant Petition for Review raising
the following issues for resolution:
WHETHER THE "INDEPENDENCE PRINCIPLE" ON LETTERS OF
CREDIT MAY BE INVOKED BY A BENEFICIARY THEREOF
WHERE THE BENEFICIARY'S CALL THEREON IS WRONGFUL
OR FRAUDULENT.
WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE
SECURITIES BEFORE THE RESOLUTION OF PETITIONER'S AND
LHC'S DISPUTES BY THE APPROPRIATE TRIBUNAL.
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.
WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND
IRREPARABLE DAMAGE IN THE EVENT THAT:
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 principle" on letters of credit when this case falls
squarely within the "fraud exception 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
52

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
Petition
22
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 Contractto 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
2003
27
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.
53

In a similar fashion, respondent ANZ Bank in its Memorandum dated
13 March 2003
28
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
54

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.
55

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 argumentthat it
is only the issuing bank that may invoke the independence principle
on letters of creditdoes 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
56

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.
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 money and the beneficiary bears most of
the cost of delay in performance.
In the standby credit case, however, the beneficiary avoids
that litigation burden and receives his money promptly
upon presentation of the required documents. It may be
that the applicant has, in fact, performed and that the
beneficiary's presentation of 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, not the
applicant, holds the money. Parties that use a standby
credit and courts construing such a credit should
understand this allocation of burdens. There is a tendency
in some quarters to overlook this distinction between
surety contracts and standby credits and to reallocate
burdens by permitting the obligor or the issuer to litigate
the performance question before payment to the
beneficiary.
42

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 independence
principle and highlights its puerility, more so in this case where the
banks concerned were impleaded as parties by petitioner itself.
Respondent banks had squarely raised the independence principle
to justify their releases of the amounts due under the Securities.
Owing to the nature and purpose of the standby letters of credit,
this Court rules that the respondent banks were left with little or no
alternative but to honor the credit and both of them in fact
submitted that it was "ministerial" for them to honor the call for
payment.
43

Furthermore, LHC has a right rooted in the Contract to call on the
Securities. The relevant provisions of the Contract read, thus:
4.2.1. In order to secure the performance of its obligations
under this Contract, the Contractor at its cost shall on the
Commencement Date provide security to the Employer in
57

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 financial
institutions acceptable to the Employer. Each of the
Securities must be in form and substance acceptable to the
Employer and may be provided on an annually renewable
basis.
44

8.7.1 If the Contractor fails to comply with Clause 8.2, the
Contractor shall pay to the Employer by way of liquidated
damages ("Liquidated Damages for Delay") the amount of
US$75,000 for each and every day or part of a day that shall
elapse between the Target Completion Date and the
Completion Date, provided that Liquidated Damages for
Delay payable by the Contractor shall in the aggregate not
exceed 20% 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.
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."
45

A contract once perfected, binds the parties not only to the
fulfillment of what has been expressly stipulated but also to all the
consequences which according to their nature, may be in keeping
with good faith, usage, and law.
46
A careful perusal of the Turnkey
Contract reveals the intention of the parties to make the Securities
answerable 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
defaultsuch issue having been submitted by the parties to the
jurisdiction of the arbitral tribunals pursuant to the terms embodied
in their agreement.
47

58

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

59

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,
60

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 employerthe 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 mootfor 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 2004
66
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. 04-332wherein petitioner pressed for judgment on
the issue of whether the funds LHC drew on the Securities should be
returnedpetitioner 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.
WHEREFORE, the instant petition is DENIED, with costs against
petitioner.
Petitioner is hereby required to answer the charge of forum-
shopping within fifteen (15) days from notice.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario,
JJ., concur.
61

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
D E C I S I O N
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 Order
1
which states, in part, that
the court was thereby:
x x x x x x x x x
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;
x x x x x x x x x
Subsequently, on November 27, 2003, public respondent, acting on
two Urgent Ex Parte motions
2
filed by respondent Maynilad, issued
the herein questioned Order
3
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 Courts 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 courts jurisdiction or that the court a quo acted with
62

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 agreement
5
which, among other
things, consisted of payments of petitioners mostly foreign loans.
To secure the concessionaires 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 Credit
6
in the amount of US$120,000,000 in favor
of MWSS for the full and prompt performance of Maynilads
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 Maynilads 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
63

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 notice
11
on November
24, 2003, to Citicorp International Limited, 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 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 quowhich resulted in
the issuance of the Stay Order of November 17, 2003 and the
disputed Order of November 27, 2003.
12

PETITIONERS CASE
Petitioner hereby raises the following issues:
1. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR
AND/OR ACT 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 ASSETS OF THE ISSUING BANKS AS PART OR PROPERTY
OF THE ESTATE OF THE PRIVATE RESPONDENT MAYNILAD
SUBJECT TO REHABILITATION.
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.
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 order issued on
November 17, 2003.
RESPONDENT MAYNILADS CASE
Respondent Maynilad seeks to refute this argument by alleging
that:
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,
64

MWSS and/or creditors Chinatrust Commercial Bank and
Suez in relation to admissions, pleadings and/or pertinent
records
13
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
e) the obligations under the Standby Letter of Credit are not
solidary and are not exempt from the coverage of the stay
order.
OUR RULING
We will discuss the first two issues raised by petitioner as these are
interrelated and 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 the Irrevocable Standby Letter of Credit in its favor and for
the account of respondent Maynilad?
The public respondent relied on Sec. 1, Rule 3 of the Interim Rules
on Corporate 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 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 by
publication and where it is necessary that the assets of the debtor
come within the courts jurisdiction to secure the same for the
benefit of creditors. The reference to "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 Maynilad liable to the banks
at this point.
Respondent Maynilads 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 by respondent Maynilads own
admission it is not. In issuing the clarificatory order of November 27,
2003, enjoining petitioner from claiming from an asset that did not
belong to the debtor and over which it did not acquire jurisdiction,
the rehabilitation court acted in excess of its jurisdiction.
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
65

enforcement of claim prohibited by and under the Interim Rules and
the order of public respondent.
Respondent Maynilad would persuade us that the above provision
justifies a leap to the conclusion that such an enforcement is
prohibited by said section because it is a "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 solidary with the respondent
Maynilad.
We disagree.
First, the claim is not one against the debtor but against an entity
that respondent Maynilad has procured to answer for its non-
performance of certain terms and conditions of the Concession
Agreement, particularly the payment of concession fees.
Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin
the enforcement of all claims against guarantors and sureties, but
only those claims against guarantors and sureties who are not
solidarily liable with the debtor. Respondent Maynilads claim that
the banks are not solidarily liable with the debtor does not find
support in jurisprudence.
We held in Feati Bank & Trust Company v. Court of Appeals
16
that
the concept of guarantee vis--vis the concept of an irrevocable
letter of credit are inconsistent with 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 shall honor drafts or other demands of
payment upon compliance with the conditions specified in the
credit.
17

Letters of credit were developed for the purpose of insuring to a
seller payment of a definite amount upon the presentation of
documents
18
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)" 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 documents are presented to the nominated bank or the
66

issuing bank and the terms and conditions of the Credit are
complied with, to pay at sight if the Credit provides for sight
payment."
22

We have accepted, in Feati Bank and Trust Company v. Court of
Appeals
23
and Bank of America NT & SA v. Court of Appeals,
24
to the
extent that they are pertinent, the application in our jurisdiction of
the international credit regulatory set of rules known as the
Uniform Customs and Practice for Documentary Credits (U.C.P)
issued by the International Chamber of Commerce, which we said
in Bank of the Philippine Islands v. Nery
25
was justified under Art. 2
of the Code of Commerce, which states:
"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 debtors 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 Appeals
26
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 Agreement
28
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.
67

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 available to prevent a party from
making use of the extraordinary remedy of certiorari but
that such remedy be an adequate remedy which is equally
beneficial, speedy and 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

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.
It is true that the stay order is immediately executory. It is
also true, however, that the Standby Letter of Credit and
the banks that issued it were not within the jurisdiction of
68

the rehabilitation court. The call on the Standby Letter of
Credit, therefore, could not be considered a violation of the
Stay Order.
3. Respondents claim that the filing of the petition pre-
empts the original jurisdiction 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 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 will have no bearing
on the determination to be made by public respondent
whether 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.
WHEREFORE, the petition for certiorari is granted. The Order of
November 27, 2003 of the Regional Trial Court of Quezon City,
Branch 90, is hereby declared NULL AND VOID and SET ASIDE. The
status quo Order herein previously issued is hereby LIFTED. In view
of the urgency attending this case, this decision is immediately
executory.
No costs.
SO ORDERED.
Davide, Jr., Panganiban, Ynares-Santiago, and Carpio, JJ., concur.