FEATI BANK VS.

CA

behalf of the issuing bank, it in effect accepted a trust reposed on it

and became a trustee in relation to Villaluz.

FACTS:
Note: Feati as a notifying bank is only obliged to notify and transmit to the
seller the LC.
Bernardo Villaluz (seller) agreed to sell to Christiansen (buyer) 2,000 cubic
meters of lauan logs at a price of $27 per cubic meter FOB. Security Pacific
National Bank of LA (Security) issued an Irrevocable Letter of Credit. Said
letter of credit was mailed to FEATI bank and one of the documents required
to be submitted by the seller to the bank is the Certification from Han Axel
Christiansen that the logs have been approved prior to shipping in
accordance with terms and conditions of corresponding purchase order. Also
incorporated by reference in the letter of credit is the Uniform Customs and
Practice for Documentary Credits (UCP).
The logs were thereafter loaded on the vessel Zenlin Glory which was
chartered by Christiansen. It was certified to be in good condition and
exportable. The logs arrived at Korea and were received by the consignee
Hanmi Trade Devt Comp. and were subsequently sold to another party.
However Christiansen failed and refused to issue the certificate despite
repeated demands by Villaluz. Due to the absence of the said certificate,
Feati Bank refused to advance the payment on the letter of credit. because of
the situation of Villaluz, Central Bank issued a memorandum declaring that
the requirement of CERTIFICATION is not allowed. However such memo
only came out after the letter of credit has already lapsed.
RTC ruled in favor of Villaluz and held Feati Bank and Christiansen solildarily
liable, it held that:
1. Feati Bank is liable because it failed to negotiate the letter of credit in
the absence of the certification even if the Central Bank held such
requirement as void.
2. That because the LC is irrevocable, the issuing bank, Security, is
deemed to honor the LC upon presentment. And by accepting the
instructions from the issuing bank Feati assumed the same
undertaking.
3. Under the principles and laws on both trust and estoppels. When
Feati Bank accepted its role as the notifying and negotiating bank in

CA affirmed and further held:

1. The LC was a confirmed LC in which the notifying bank gives its
assurance also that the opening banks obligation will be performed.
The notifying bank in such a case will not simply transmit but will
confirm the opening banks obligation by making it also its own
understanding, commitment or guaranty or obligation.
ISSUE:
1. W/N Feati Bank can be held liable for the LC absence the
certification required by the LC.
RULING:
NO, Feati Bank is not liable. It is already a settled rule in Commercial
transaction involving letter of credit that the documents tendered must strictly
conform to the terms of the LC. In this case, the mere fact that the
certification was required by the LC means that the document is of vital
importance to the buyer and therefore must be submitted before the notifying
bank is compelled to honor the LC. Thus failure of Villaluz to surrender the
Certification is fatal.

Under the UCP1 the bank may 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 Feati Bank deals only with documents,
the absence of any document required in the LC 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.
SC also held that the decision of the TC was wrong in holding that
irrevocable and confirmed credit is synonymous. It held that an irrevocable
credit refers to the duration of the LC. On the other hand confirmed letter
pertains to the obligation assumed by the bank, in this case, the
correspondent bank gives an assurance to the beneficiary that it will
undertake the issuing banks obligation as its own according to the terms and
conditions of the credit. Hence it does not mean that the mere fact that a LC
is irrevocable imply that the Correspondent bank in accepting the instructions
of the issuing bank has also confirmed the LC.
1 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.

The SC also held that in this case Feati Bank was merely a notifying bank 2
and not a negotiating bank 3 nor a confirming bank 4. In this case the LC
merely provided Feati Bank forward the enclosed original credit to Villaluz. As
a notifying bank, its responsibility was solely to notify and/or transmit the
documentary of credit to Villaluz and its obligation ends there. There is
neither proof that Feati Bank confirmed the letter, the $75,000 loan granted
by Feati Bank to Villaluz was not in anticipation of the loan but was an
isolated transaction, the logical conclusion is that the LC was merely a
collateral. By extending the loan it assumed the character of a negotiating
bank but even then Feati bank was still not liable because there was no
contractual relationship between Feati and Villaluz.
Neither was there a trust5 between Feati Bank (trustee) and Villaluz
(beneficiary). the mere opening of a LC 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 LC. The correspondent bank does not
receive in advance the sum of money from the issuing bank. On the contrary,
when they accept the tender and pays the amount, it gets the money from its
own funds and then later seeks reimbursement from the issuing bank. Also
as notifying bank it cannot be held liable even if there is a trust created.

2 In case of a notifying bank, the correspondent bank assumes no liability except to notify
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. . . .

and/or transmit to the beneficiary the existence of the letter of credit. (no contractual relationship
with seller/benificiary)

3 A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a
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)

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. (no contractual
relationship with seller/benificiary)

4 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.

5 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." Therefore, In order therefore for the trust
theory to be sustained, Feati Bank 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 Viallaluz.
This does not obtain in this case.

Neither was there a guarantee. It is fundamental 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. Feati
Bank has no business with the relationship of Christiansen and Security it
merely being a notifying bank. Feati Bank was only following instruction of
the issuing bank.

But even if all of this argument existed (trust, guarantee, and confirming
bank, Feati Bank cannot be compelled to pay because there was a failure on
the part of Villaluz to comply with the terms of the LC which is the absence of
the certificate. It cannot be argued that such a requirement is illegal because
such pronouncement by the Central Bank was only done after the issuance
of the LC, when the LC was issued there was still no such prohibition.