Contents G.R. No.

105395 December 10, 1993

BANK OF AMERICA, NT & SA, PETITIONERS,
BANK OF AMERICA, NT & SA, petitioners, vs. COURT OF
VS.
APPEALS, INTER-RESIN INDUSTRIAL CORPORATION,
COURT OF APPEALS, INTER-RESIN INDUSTRIAL
FRANCISCO TRAJANO, JOHN DOE AND JANE
CORPORATION, FRANCISCO TRAJANO, JOHN DOE AND
DOE, respondents. .......................................................................................... 1
JANE DOE, RESPONDENTS.
BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellee, vs. DE Agcaoili & Associates for petitioner.
RENY FABRIC INDUSTRIES, INC., AURORA T. TUYO and
AURORA CARCERENY alias AURORA C. A "fiasco," involving an irrevocable letter of credit, has found the
GONZALES, defendants-appellants. CASTRO, J.:. ............................... 4 distressed parties coming to court as adversaries in seeking a definition
of their respective rights or liabilities thereunder.
FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING
CORPORATION), petitioner, vs. THE COURT OF APPEALS, and On 05 March 1981, petitioner Bank of America, NT & SA, Manila,
BERNARDO E. VILLALUZ, ........................................................................ 6 received by registered mail an Irrevocable Letter of Credit No. 20272/81
THE HONGKONG & SHANGHAI BANKING CORPORATION, purportedly issued by Bank of Ayudhya, Samyaek Branch, for the
LIMITED, Petitioner, v. NATIONAL STEEL CORPORATION AND account of General Chemicals, Ltd., of Thailand in the amount of
CITYTRUST BANKING CORPORATION (NOW BANK OF THE US$2,782,000.00 to cover the sale of plastic ropes and "agricultural
PHILIPPINE ISLANDS), Respondents. D E C I S I O N ...................... 12 files," with the petitioner as advising bank and private respondent Inter-
Resin Industrial Corporation as beneficiary.
KENG HUA PAPER PRODUCTS CO. INC., PETITIONER ,
VS. COURT OF APPEALS; REGIONAL TRIAL COURT OF On 11 March 1981, Bank of America wrote Inter-Resin informing the
MANILA, BR. 21; AND SEA-LAND SERVICE, INC., RESPONDENTS. latter of the foregoing and transmitting, along with the bank's
............................................................................................................................ 18 communication,
LAND BANK OF THE PHILIPPINES, PETITIONER , VS. MONETS the latter of credit. Upon receipt of the letter-advice with the letter of
EXPORT AND MANUFACTURING CORPORATION, SPOUSES credit, Inter-Resin sent Atty. Emiliano Tanay to Bank of America to have
VICENTE V. TAGLE, SR. AND MA. CONSUELO G. the letter of credit confirmed. The bank did not. Reynaldo Dueñas, bank
TAGLE, RESPONDENTS. ............................................................................... 21 employee in charge of letters of credit, however, explained to Atty.
Tanay that there was no need for confirmation because the letter of
CHARLES LEE, CHUA SIOK SUY, MARIANO SIO, ALFONSO credit would not have been transmitted if it were not genuine.
YAP, RICHARD VELASCO AND ALFONSO CO, PETITIONERS, VS.
COURT OF APPEALS AND PHILIPPINE BANK OF Between 26 March to 10 April 1981, Inter-Resin sought to make a partial
COMMUNICATIONS, RESPONDENTS. ................................................. 25 availment under the letter of credit by submitting to Bank of America
METROPOLITAN WATERWORKS AND SEWERAGE invoices, covering the shipment of 24,000 bales of polyethylene rope to
SYSTEM, PETITIONER , VS. ACT THEATER, INC., RESPONDENT. . 32 General Chemicals valued at US$1,320,600.00, the corresponding
packing list, export declaration and bill of lading. Finally, after being
METROPOLITAN WATERWORKS AND SEWERAGE satisfied that Inter-Resin's documents conformed with the conditions
SYSTEM, PETITIONER , VS. HON. REYNALDO B. DAWAY, IN HIS expressed in the letter of credit, Bank of America issued in favor of Inter-
CAPACITY AS PRESIDING JUDGE OF THE REGIONAL TRIAL Resin a Cashier's Check for P10,219,093.20, "the Peso equivalent of the
COURT OF QUEZON CITY, BRANCH 90 AND MAYNILAD draft (for) US$1,320,600.00 drawn by Inter-Resin, after deducting the
WATER SERVICES, INC., RESPONDENTS. .......................................... 33 costs for documentary stamps, postage and mail issuance." 1 The check
NATIONAL COMMERCIAL BANK OF SAUDI was picked up by Inter-Resin's Executive Vice-President Barcelina Tio.
ARABIA, PETITIONER , VS. COURT OF APPEALS AND On 10 April 1981, Bank of America wrote Bank of Ayudhya advising the
PHILIPPINE BANKING CORPORATION, RESPONDENTS. ........... 37 latter of the availment under the letter of credit and sought the
corresponding reimbursement therefor.
PHILIPPINE NATIONAL BANK, PETITIONER , VS. SAN MIGUEL
CORPORATION, RESPONDENT. ............................................................ 39 Meanwhile, Inter-Resin, through Ms. Tio, presented to Bank of America
PRUDENTIAL BANK, petitioner, vs. INTERMEDIATE the documents for the second availment under the same letter of credit
APPELLATE COURT, PHILIPPINE RAYON MILLS, INC. and consisting of a packing list, bill of lading, invoices, export declaration
ANACLETO R. CHI, respondents.............................................................41 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
TRANSFIELD PHILIPPINES, INC., petitioner, vs. LUZON HYDRO credit fraudulent, 2 Bank of America stopped the processing of Inter-
CORPORATION, AUSTRALIA and NEW ZEALAND BANKING Resin's documents and sent a telex to its branch office in Bangkok,
GROUP LIMITED and SECURITY BANK Thailand, requesting assistance in determining the authenticity of the
CORPORATION, respondents. ................................................................ 47 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 facieevidence to warrant prosecution.

pg. 1
Bank of America sued Inter-Resin for the recovery of P10,219,093.20, the reimburses the issuing bank and acquires the documents entitling him
peso equivalent of the draft for US$1,320,600.00 on the partial availment to the goods. Under this arrangement, the seller gets paid only if he
of the now disowned letter of credit. On the other hand, Inter-Resin delivers the documents of title over the goods, while the buyer acquires
claimed that not only was it entitled to retain P10,219,093.20 on its first said documents and control over the goods only after reimbursing the
shipment but also to the balance US$1,461,400.00 covering the second bank.
shipment.
What characterizes letters of credit, as distinguished from other
On 28 June 1989, the trial court ruled for Inter-Resin, 4 holding that: accessory contracts, is the engagement of the issuing bank to pay the
(a) Bank of America made assurances that enticed Inter-Resin to send seller of the draft and the required shipping documents are presented to
the merchandise to Thailand; (b) the telex declaring the letter of credit it. In turn, this arrangement assures the seller of prompt payment,
fraudulent was unverified and self-serving, hence, hearsay, but even independent of any breach of the main sales contract. By this so-called
assuming that the letter of credit was fake, "the fault should be borne by "independence principle," the bank determines compliance with the
the BA which was careless and negligent" 5 for failing to utilize its letter of credit only by examining the shipping documents presented; it
modern means of communication to verify with Bank of Ayudhya in is precluded from determining whether the main contract is actually
Thailand the authenticity of the letter of credit before sending the same accomplished or not. 11
to Inter-Resin; (c) the loading of plastic products into the vans were
under strict supervision, inspection and verification of government There would at least be three (3) parties: (a) the buyer, 12 who procures
officers who have in their favor the presumption of regularity in the the letter of credit and obliges himself to reimburse the issuing bank
performance of official functions; and (d) Bank of America failed to upon receipts of the documents of title; (b) the bank issuing the letter of
prove the participation of Inter-Resin or its employees in the alleged credit, 13 which undertakes to pay the seller upon receipt of the draft and
fraud as, in fact, the complaint for estafa through falsification of proper document of titles and to surrender the documents to the buyer
documents was dismissed by the Provincial Fiscal of Rizal. 6 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
On appeal, the Court of Appeals 7 sustained the trial court; hence, this of title and draft to the issuing bank to recover payment.
present recourse by petitioner Bank of America.
The number of the parties, not infrequently and almost invariably in
The following issues are raised by Bank of America: (a) whether it has international trade practice, may be increased. Thus, the services of
warranted the genuineness and authenticity of the letter of credit and, an advising (notifying) bank 15 may be utilized to convey to the seller the
corollarily, whether it has acted merely as an advising bank or as a existence of the credit; or, of a confirming bank 16 which will lend
confirming bank; (b) whether Inter-Resin has actually shipped the credence to the letter of credit issued by a lesser known issuing bank; or,
ropes specified by the letter of credit; and (c) following the dishonor of
of a paying bank, 17 which undertakes to encash the drafts drawn by the
the letter of credit by Bank of Ayudhya, whether Bank of America may
exporter. Further, instead of going to the place of the issuing bank to
recover against Inter-Resin under the draft executed in its partial
claim payment, the buyer may approach another bank, termed
availment of the letter of credit.8
the negotiating bank, 18 to have the draft discounted.
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 Being a product of international commerce, the impact of this
findings of the trial court that the ropes have actually been shipped is commercial instrument transcends national boundaries, and it is thus
binding on the Court; and, (c) Bank of America cannot recover from not uncommon to find a dearth of national law that can adequately
Inter-Resin because the drawer of the letter of credit is the Bank of provide for its governance. This country is no exception. Our own Code
Ayudhya and not Inter-Resin. of Commerce basically introduces only its concept under Articles 567-
572, inclusive, thereof. It is no wonder then why great reliance has been
If only to understand how the parties, in the first place, got themselves placed on commercial usage and practice, which, in any case, can be
into the mess, it may be well to start by recalling how, in its modern use, justified by the universal acceptance of the autonomy of contract rules.
a letter of credit is employed in trade transactions. 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
A letter of credit is a financial device developed by merchants as a International Chamber of Commerce. It is by no means a complete text
convenient and relatively safe mode of dealing with sales of goods to by itself, for, to be sure, there are other principles, which, although part
satisfy the seemingly irreconcilable interests of a seller, who refuses to of lex mercatoria, are not dealt with the U.C.P.
part with his goods before he is paid, and a buyer, who wants to have
control of the goods before paying. 9 To break the impasse, the buyer In FEATI Bank and Trust Company v. Court of Appeals, 19 we have accepted, to
may be required to contract a bank to issue a letter of credit in favor of the extent of their pertinency, the application in our jurisdiction of this
the seller so that, by virtue of the latter of credit, the issuing bank can international commercial credit regulatory set of rules. 20 In Bank of
authorize the seller to draw drafts and engage to pay them upon their Phil. Islands v. De Nery, 21 we have said that the observances of the U.C.P. is
presentment simultaneously with the tender of documents required by justified by Article 2 of the Code of Commerce which expresses that, in
the letter of credit. 10 The buyer and the seller agree on what documents the absence of any particular provision in the Code of Commerce,
are to be presented for payment, but ordinarily they are documents of commercial transactions shall be governed by usages and customs
title evidencing or attesting to the shipment of the goods to the buyer. generally observed. We have further observed that there being no
specific provisions which govern the legal complexities arising from
Once the credit is established, the seller ships the goods to the buyer transactions involving letters of credit not only between or among
and in the process secures the required shipping documents or banks themselves but also between banks and the seller or the buyer, as
documents of title. To get paid, the seller executes a draft and presents it the case may be, the applicability of the U.C.P. is undeniable.
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 The first issue raised with the petitioner, i.e., that it has in this instance
documents submitted by the seller conform with what the letter of merely been advising bank, is outrightly rejected by Inter-Resin and is
credit requires. The bank then obtains possession of the documents thus sought to be discarded for having been raised only on appeal. We
upon paying the seller. The transaction is completed when the buyer
pg. 2
cannot agree. The crucial point of dispute in this case is whether under real support in U.C.P. Article 18 of the U.C.P. states that: "Banks assume
the "letter of credit," Bank of America has incurred any liability to the no liability or responsibility for the consequences arising out of the
"beneficiary" thereof, an issue that largely is dependent on the bank's delay and/or loss in transit of any messages, letters or documents, or for
participation in that transaction; as a mere advising or notifying bank, it delay, mutilation or other errors arising in the transmission of any
would not be liable, but as a confirming bank, had this been the case, it telecommunication . . ." As advising bank, Bank of America is bound only
could be considered as having incurred that liability. 22 to check the "apparent authenticity" of the letter of credit, which it
did. 29 Clarifying its meaning, Webster's Ninth New Collegiate
In Insular Life Assurance Co. Ltd. Employees Association — Natu vs. Insular Life Dictionary 30 explains that the word "APPARENT suggests appearance
Assurance Co., Ltd., 23 the Court said: Where the issues already raised also to unaided senses that is not or may not be borne out by more rigorous
rest on other issues not specifically presented, as long as the latter issues examination or greater knowledge."
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 May Bank of America then recover what it has paid under the letter of
in its discussion of the controversy and to pass upon them just as well. credit when the corresponding draft for partial availment thereunder
In brief, in those cases where questions not particularly raised by the and the required documents were later negotiated with it by Inter-
parties surface as necessary for the complete adjudication of the rights Resin? The answer is yes. This kind of transaction is what is commonly
and obligations of the parties, the interests of justice dictate that the referred to as a discounting arrangement. This time, Bank of America
court should consider and resolve them. The rule that only issues or has acted independently as a negotiating bank, thus saving Inter-Resin
theories raised in the initial proceedings may be taken up by a party from the hardship of presenting the documents directly to Bank of
thereto on appeal should only refer to independent, not concomitant Ayudhya to recover payment. (Inter-Resin, of course, could have chosen
matters, to support or oppose the cause of action or defense. The evil other banks with which to negotiate the draft and the documents.) As a
that is sought to be avoided, i.e., surprise to the adverse party, is in negotiating bank, Bank of America has a right to recourse against the
reality not existent on matters that are properly litigated in the lower issuer bank and until reimbursement is obtained, Inter-Resin, as the
court and appear on record. drawer of the draft, continues to assume a contingent liability thereon. 31

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.
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.

No less important is that Bank of America's letter of 11 March 1981 has
expressly stated that "[t]he enclosure is solely an advise of credit opened
by the abovementioned correspondent and conveys no engagement by
us." 24This 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 although a special agreement is always a possibility . . .
Between the seller and the negotiating bank there is the usual
relationship existing between a drawer and purchaser of drafts. Unless
drafts drawn in pursuance of the credit are indicated to be without
recourse therefore, the negotiating bank has the ordinary right of
recourse against the seller in the event of dishonor by the issuing bank . .
. The fact that the correspondent and the negotiating bank may be one
and the same does not affect its rights and obligations in either capacity,
33

obligation more than just notifying Inter-Resin of the letter of credit

The additional ground raised by the petitioner, i.e., that Inter-Resin sent
issued in its favor, let alone to confirm the letter of credit. 25 The bare
statement of the bank employees, aforementioned, in responding to the waste instead of its products, is really of no consequence. In the
inquiry made by Atty. Tanay, Inter-Resin's representative, on the operation of a letter of credit, the involved banks deal34 only with
documents and not on goods described in those documents.
authenticity of the letter of credit certainly did not have the effect of
novating the letter of credit and Bank of America's letter of advise, nor 26
The other issues raised in then instant petition, for instance, whether or
can it justify the conclusion that the bank must now assume total
not Bank of Ayudhya did issue the letter of credit and whether or not
liability on the letter of credit. Indeed, Inter-Resin itself cannot claim to
the main contract of sale that has given rise to the letter of credit has
have been all that free from fault. As the seller, the issuance of the letter
been breached, are not relevant to this controversy. They are matters,
of credit should have obviously been a great concern to it. It would
27
instead, that can only be of concern to the herein parties in an
have, in fact, been strange if it did not, prior to the letter of credit, enter
appropriate recourse against those, who, unfortunately, are not
into a contract, or negotiated at the every least, with General
impleaded in these proceedings.
Chemicals. 28 In the ordinary course of business, the perfection of
contract precedes the issuance of a letter of credit. In fine, we hold that —
Bringing the letter of credit to the attention of the seller is the First, given the factual findings of the courts below, we conclude that
primordial obligation of an advising bank. The view that Bank of petitioner Bank of America has acted merely as a notifying bank and did
America should have first checked the authenticity of the letter of credit
not assume the responsibility of a confirming bank; and
with bank of Ayudhya, by using advanced mode of business
communications, before dispatching the same to Inter-Resin finds no
pg. 3
Second, petitioner bank, as a negotiating bank, is entitled to recover on G.R. No. L-24821 October 16, 1970
Inter-Resin's partial availment as beneficiary of the letter of credit BANK OF THE PHILIPPINE ISLANDS, PLAINTIFF -APPELLEE ,
which has been disowned by the alleged issuer bank. VS.
DE RENY FABRIC INDUSTRIES, INC., AURORA T. TUYO AND
No judgment of civil liability against the other defendants, Francisco AURORA CARCERENY ALIAS AURORA C.
Trajano and other unidentified parties, can be made, in this instance, GONZALES, DEFENDANTS- APPELLANTS.
there being no sufficient evidence to warrant any such finding. CASTRO, J.:.

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 This is an appeal from the decision of the Court of First Instance of
interest from the filing of the complaint until fully paid. Manila ordering the defendants-appellants to pay to the Bank of the
Philippine Islands (hereinafter referred to as the Bank), jointly and
No costs. 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
SO ORDERED. to finance their importation of dyestuffs from the United States, which
however turned out to be mere colored chalk upon arrival and
inspection thereof at 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.

pg. 4
These correspondent banks then debited the account of the Bank of the In documentary credit operations, all parties concerned deal in
Philippine Islands with them up to the full value of the drafts presented documents and not in goods. — Payment, negotiation or
by the J.B. Distributing Company, plus commission thereon, and, acceptance against documents in accordance with the
thereafter, endorsed and forwarded all documents to the Bank of the terms and conditions of a credit by a Bank authorized
Philippine Islands. to do so binds the party giving the authorization to
take up the documents and reimburse the Bank
In the meantime, as each shipment (covered by the above-mentioned making the payment, negotiation or acceptance.
letters of credit) arrived in the Philippines, the De Reny Fabric
Industries, Inc. made partial payments to the Bank amounting, in the The existence of a custom in international banking and financing circles
aggregate, to P90,000. Further payments were, however, subsequently negating any duty on the part of a bank to verify whether what has been
discontinued by the corporation when it became established, as a result described in letters of credits or drafts or shipping documents actually
of a chemical test conducted by the National Science Development tallies with what was loaded aboard ship, having been positively proven
Board, that the goods that arrived in Manila were colored chalks instead as a fact, the appellants are bound by this established usage. They were,
of dyestuffs. after all, the ones who tapped the facilities afforded by the Bank in order
to engage in international business.
The corporation also refused to take possession of these goods, and for
this reason, the Bank caused them to be deposited with a bonded ACCORDINGLY, the judgment a quo is affirmed, at defendants-
warehouse paying therefor the amount of P12,609.64 up to the filing of appellants' cost. This is without prejudice to the Bank, in proper
its complaint with the court below on December 10, 1962. proceedings in the court below in this same case proving and being
reimbursed additional expenses, if any, it has incurred by virtue of the
On October 24, 1963 the lower court rendered its decision ordering the continued storage of the goods in question up to the time this decision
corporation and its co-defendants (the herein appellants) to pay to the becomes final and executory.
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: .

pg. 5
 G.R. No. 94209 April 30, 1991 Han Mi Trade Development Company, Ltd., P.O. Box 10480,
Santa Ana, California 92711 and Han Mi Trade Development
FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING Company, Ltd., Seoul, Korea.
CORPORATION), petitioner,
vs. 4. Certification from Han-Axel Christiansen, Ship and
THE COURT OF APPEALS, and BERNARDO E. Merchandise Broker, stating that logs have been approved prior
VILLALUZ, respondents. to shipment in accordance with terms and conditions of
corresponding purchase Order. (Record, Vol. 1 pp. 11-12)
GUTIERREZ, JR., J.:
Also incorporated by reference in the letter of credit is the Uniform
This is a petition for review seeking the reversal of the decision of the Customs and Practice for Documentary Credits (1962 Revision).
Court of Appeals dated June 29, 1990 which affirmed the decision of the
Regional Trial Court of Rizal dated October 20, 1986 ordering the The logs were thereafter loaded on the vessel "Zenlin Glory" which was
defendants Christiansen and the petitioner, to pay various sums to chartered by Christiansen. Before its loading, the logs were inspected by
respondent Villaluz, jointly and severally. custom inspectors Nelo Laurente, Alejandro Cabiao, Estanislao Edera
from the Bureau of Customs (Records, Vol. I, p. 124) and representatives
The facts of the case are as follows: 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
On June 3, 1971, Bernardo E. Villaluz agreed to sell to the then defendant exportability of the logs.
Axel Christiansen 2,000 cubic meters of lauan logs at $27.00 per cubic
meter FOB. 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
After inspecting the logs, Christiansen issued purchase order No. 76171. good condition (Records, Vol. I, p. 363). However, Christiansen refused
to issue the certification as required in paragraph 4 of the letter of
On the arrangements made and upon the instructions of the consignee, credit, despite several requests made by the private respondent.
Hanmi Trade Development, Ltd., de Santa Ana, California, the Security
Pacific National Bank of Los Angeles, California issued Irrevocable Because of the absence of the certification by Christiansen, the Feati
Letter of Credit No. IC-46268 available at sight in favor of Villaluz for Bank and Trust Company refused to advance the payment on the letter
the sum of $54,000.00, the total purchase price of the lauan logs. of credit.
The letter of credit was mailed to the Feati Bank and Trust Company The letter of credit lapsed on June 30, 1971, (extended, however up to
(now Citytrust) with the instruction to the latter that it "forward the July 31, 1971) without the private respondent receiving any certification
enclosed letter of credit to the beneficiary." (Records, Vol. I, p. 11) from Christiansen.
The letter of credit further provided that the draft to be drawn is on The persistent refusal of Christiansen to issue the certification
Security Pacific National Bank and that it be accompanied by the prompted the private respondent to bring the matter before the Central
following documents: Bank. In a memorandum dated August 16, 1971, the Central Bank ruled
that:
1. Signed Commercial Invoice in four copies showing the
number of the purchase order and certifying that — . . . pursuant to the Monetary Board Resolution No. 1230 dated
August 3, 1971, in all log exports, the certification of the lumber
a. All terms and conditions of the purchase order have inspectors of the Bureau of Forestry . . . shall be considered final
been complied with and that all logs are fresh cut and for purposes of negotiating documents. Any provision in any
quality equal to or better than that described in H.A. letter of credit covering log exports requiring certification of
Christiansen's telex #201 of May 1, 1970, and that all buyer's agent or representative that said logs have been
logs have been marked "BEV-EX." approved for shipment as a condition precedent to negotiation
of shipping documents shall not be allowed. (Records, Vol. I, p.
b. One complete set of documents, including 1/3 367)
original bills of lading was airmailed to Consignee and
Parties to be advised by Hans-Axel Christiansen, Ship Meanwhile, the logs arrived at Inchon, Korea and were received by the
and Merchandise Broker. 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
c. One set of non-negotiable documents was airmailed $10 per cubic meter. Hanmi Trade Development Company, on the other
to Han Mi Trade Development Company and one set
hand sold the logs to Taisung Lumber Company at Inchon, Korea. (Rollo,
to Consignee and Parties to be advised by Hans-Axel
p. 39)
Christiansen, Ship and Merchandise Broker.
Since the demands by the private respondent for Christiansen to
2. Tally sheets in quadruplicate.
execute the certification proved futile, Villaluz, on September 1, 1971,
3. 2/3 Original Clean on Board Ocean Bills of Lading with instituted an action for mandamus and specific performance against
Consignee and Parties to be advised by Hans Axel Christiansen and the Feati Bank and Trust Company (now Citytrust)
Christiansen, showing Freight Prepaid and marked Notify: before the then Court of First Instance of Rizal. The petitioner was
impleaded as defendant before the lower court only to afford complete
Han Mi Trade Development Company, Ltd., Santa Ana, relief should the court a quo order Christiansen to execute the required
California. certification.

Letter of Credit No. 46268 dated June 7, 1971

pg. 6
The complaint prayed for the following:
1. Christiansen be ordered to issue the certification required of
him under the Letter of Credit;
2. Upon issuance of such certification, or, if the court should
find it unnecessary, FEATI BANK be ordered to accept
negotiation of the Letter of Credit and make payment thereon
to Villaluz;
3. Order Christiansen to pay damages to the plaintiff. (Rollo, p.
39)
On or about 1979, while the case was still pending trial, Christiansen left
the Philippines without informing the Court and his counsel. Hence,
Villaluz, filed an amended complaint to make the petitioner solidarily
liable with Christiansen.
The trial court, in its order dated August 29, 1979, admitted the
amended complaint.
After trial, the lower court found:
The liability of the defendant CHRISTIANSEN is beyond
dispute, and the plaintiffs right to demand payment is absolute.
Defendant CHRISTIANSEN having accepted delivery of the
logs by having them loaded in his chartered vessel the "Zenlin
Glory" and shipping them to the consignee, his buyer Han Mi
Trade in Inchon, South Korea (Art. 1585, Civil Code), his
obligation to pay the purchase order had clearly arisen and the
plaintiff may sue and recover the price of the goods (Art.
1595, Id).
The Court believes that the defendant CHRISTIANSEN acted
in bad faith and deceit and with intent to defraud the plaintiff,
reflected in and aggravated by, not only his refusal to issue the
certification that would have enabled without question the
plaintiff to negotiate the letter of credit, but his accusing the
plaintiff in his answer of fraud, intimidation, violence and
deceit. These accusations said defendant did not attempt to On the basis of the foregoing the trial court on October 20, 1986, ruled in
prove, as in fact he left the country without even notifying his favor of the private respondent. The dispositive portion of its decision
own lawyer. It was to the Court's mind a pure swindle. reads:
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
pg. 7
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:
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)
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.
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 Court of
Appeals a petition for certiorari and prohibition with preliminary
injunction to enjoin the immediate execution of the judgment.
The Court of Appeals in a decision dated April 9, 1987 granted the
petition and nullified the order of execution, the dispositive portion of
the decision states:
WHEREFORE, the petition for certiorari is granted.
Respondent Judge's order of execution dated December 29,
1986, as well as his order dated January 14, 1987 denying the
petitioner's urgent motion to suspend the writ of execution
against its properties are hereby annulled and set aside insofar
as they are sought to be enforced and implemented against the
petitioner Feati Bank & Trust Company, now Citytrust
Banking Corporation, during the pendency of its appeal from
the adverse decision in Civil Case No. 15121. However, the
execution of the same decision against defendant Axel
Christiansen did not appeal said decision may proceed
unimpeded. The Sheriff s levy on the petitioner's properties,
and the notice of sale dated January 13, 1987 (Annex M), are
hereby annulled and set aside. Rollo p. 44)
A motion for reconsideration was thereafter filed by the private
respondent. The Court of Appeals, in a resolution dated June 29, 1987
denied the motion for reconsideration.
In the meantime, the appeal filed by the petitioner before the Court of
Appeals was given due course. In its decision dated June 29, 1990, the
Court of Appeals affirmed the decision of the lower court dated October
20, 1986 and ruled that:
The dispositive portion of the decision of the Court of Appeals reads:
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 Hence, this petition for review.
negotiating bank, even before the letter of credit was presented
for payment, Feati Bank had already made an advance payment The petitioner interposes the following reasons for the allowance of the
of P75,000.00 to Villaluz in anticipation of such presentment. petition.
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).
pg. 8
Feati Bank argues further that it would be considered as the
negotiating bank only upon negotiation of the letter of credit.
This stance is untenable. Assurance, commitments or
guaranties supposed to be made by notifying banks to the
beneficiary of a letter of credit, as defined above, can be
relevant or meaningful only with respect to a future
transaction, that is, negotiation. Hence, even before actual
negotiation, the notifying bank, by the mere act of notifying the
beneficiary of the letter of credit, assumes as of that moment
the obligation of the issuing bank.
2. Since Feati Bank acted as guarantor of the issuing bank, and
in effect also of the latter's principal or client, i.e. Hans Axel-
Christiansen. (sic) Such being the case, when Christiansen
refused to issue the certification, it was as though refusal was
made by Feati Bank itself. Feati Bank should have taken steps
to secure the certification from Christiansen; and, if the latter
should still refuse to comply, to hale him to court. In short,
Feati Bank should have honored Villaluz's demand for payment
of his logs by virtue of the irrevocable letter of credit issued in
Villaluz's favor and guaranteed by 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)
WHEREFORE, the decision appealed from is affirmed; and
accordingly, the appeal is hereby dismissed. Costs against the
petitioner. (Rollo, p. 33)
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
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.
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.

The case of Anglo-South America Trust Co. v. Uhe et al. (184 N.E. 741 [1933]) Payment, acceptance or negotiation against documents which
expounded clearly on the rule of strict compliance. 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
We have heretofore held that these letters of credit are to be authorization to take up documents and reimburse the bank
strictly complied with which documents, and shipping which has effected the payment, acceptance or negotiation.
documents must be followed as stated in the letter. There is no (Emphasis Supplied)
discretion in the bank or trust company to waive any
requirements. The terms of the letter constitutes an agreement Under the foregoing provisions of the U.C.P., the bank may only
between the purchaser and the bank. (p. 743) 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.
Although in some American decisions, banks are granted a little And since a correspondent bank, like the petitioner, principally deals
discretion to accept a faulty tender as when the other documents may be only with documents, the absence of any document required in the
considered immaterial or superfluous, this theory could lead to documentary credit justifies the refusal by the correspondent bank to
dangerous precedents. Since a bank deals only with documents, it is not negotiate, accept or pay the beneficiary, as it is not its obligation to look
in a position to determine whether or not the documents required by beyond the documents. It merely has to rely on the completeness of the
the letter of credit are material or superfluous. The mere fact that the documents tendered by the beneficiary.
document was specified therein readily means that the document is of
vital importance to the buyer. 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
Moreover, the incorporation of the Uniform Customs and Practice for bank, we find the same erroneous.
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 The trial court wrongly mixed up the meaning of an irrevocable credit
between the parties. 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
And even if the U.C.P. was not incorporated in the letter of credit, we the irrevocable credithas been transmitted to the petitioner on behalf of
have already ruled in the affirmative as to the applicability of the U.C.P. the private respondent, has confirmed the letter.
in cases before us.
The trial court appears to have overlooked the fact that an irrevocable
In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the credit is not synonymous with a confirmed credit. These types of letters
observance of the U.C.P. in this jurisdiction is justified by Article 2 of have different meanings and the legal relations arising from there varies.
the Code of Commerce. Article 2 of the Code of Commerce enunciates A credit may be an irrevocable credit and at the same time a confirmed
that in the absence of any particular provision in the Code of Commerce, credit or vice-versa.
pg. 9
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.
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."

In commercial transactions involving letters of credit, the functions The proposition advanced by the private respondent has no basis in fact
assumed by a correspondent bank are classified according to the or law. That the loan agreement between them be construed as an act of
obligations taken up by it. The correspondent bank may be called a confirmation is rather far-fetched, for it depends principally on
notifying bank, a negotiating bank, or a confirming bank. speculative reasoning.

In case of a notifying bank, the correspondent bank assumes no liability As earlier stated, there must have been an absolute assurance on the part
except to notify and/or transmit to the beneficiary the existence of the of the petitioner that it will undertake the issuing bank's obligation as
letter of credit. (Kronman and Co., Inc. v. Public National Bank of New its own. Verily, the loan agreement it entered into cannot be categorized
York, 218 N.Y.S. 616 [1926]; Shaterian, Export-Import Banking, p. 292, as an emphatic assurance that it will carry out the issuing bank's
cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76). A obligation as its own.
negotiating bank, on the other hand, is a correspondent bank which
buys or discounts a draft under the letter of credit. Its liability is The loan agreement is more reasonably classified as an isolated
dependent upon the stage of the negotiation. If before negotiation, it has transaction independent of the documentary credit.
no liability with respect to the seller but after negotiation, a contractual
relationship will then prevail between the negotiating bank and the Of course, it may be presumed that the petitioner loaned the money to
seller. (Scanlon v. First National Bank of Mexico, 162 N.E. 567 [1928]; the private respondent in anticipation that it would later be paid by the
Shaterian, Export-Import Banking, p. 293, cited in Agbayani, latter upon the receipt of the letter. Yet, we would have no basis to rule
Commercial Laws of the Philippines, Vol. 1, p. 76) definitively that such "act" should be construed as an act of
confirmation.
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 The private respondent no doubt was in need of money in loading the
correspondent bank itself had issued the letter of credit. (Shaterian, logs on the ship "Zenlin Glory" and the only way to satisfy this need was
Export-Import Banking, p. 294, cited in Agbayani Commercial Laws of to borrow money from the petitioner which the latter granted. From
the Philippines, Vol. 1, p. 77) these circumstances, a logical conclusion that can be gathered is that the
letter of credit was merely to serve as a collateral.
In this case, the letter merely provided that the petitioner "forward the
enclosed original credit to the beneficiary." (Records, Vol. I, p. 11) At the most, when the petitioner extended the loan to the private
Considering the aforesaid instruction to the petitioner by the issuing respondent, it assumed the character of a negotiating bank. Even then,
bank, the Security Pacific National Bank, it is indubitable that the the petitioner will still not be liable, for a negotiating bank before
petitioner is only a notifying bank and not a confirming bank as ruled by negotiation has no contractual relationship with the seller.
the courts below.
The case of Scanlon v. First National Bank (supra) perspicuously explained
If the petitioner was a confirming bank, then a categorical declaration the relationship between the seller and the negotiating bank, viz:
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 It may buy or refuse to buy as it chooses. Equally, it must be
simply stated therein was the instruction that the petitioner forward true that it owes no contractual duty toward the person for
the original letter of credit to the beneficiary. whose benefit the letter is written to discount or purchase any
draft drawn against the credit. No relationship of agent and
Since the petitioner was only a notifying bank, its responsibility was principal, or of trustee and cestui, between the receiving bank
solely to notify and/or transmit the documentary of credit to the private and the beneficiary of the letter is established. (P.568)
respondent and its obligation ends there.
Whether therefore the petitioner is a notifying bank or a negotiating
The notifying bank may suggest to the seller its willingness to negotiate, bank, it cannot be held liable. Absent any definitive proof that it has
but this fact alone does not imply that the notifying bank promises to confirmed the letter of credit or has actually negotiated with the private
accept the draft drawn under the documentary credit. respondent, the refusal by the petitioner to accept the tender of the
private respondent is justified.
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 In regard to the finding that the petitioner became a "trustee in relation
not with the beneficiary to whom he assumes no liability. It follows to the plaintiff (private respondent) as the beneficiary of the letter of
therefore that when the petitioner refused to negotiate with the private credit," the same has no legal basis.
pg. 10
A trust has been defined as the "right, enforceable solely in equity, to the with each other. In contracts of guarantee, the guarantor's obligation is
beneficial enjoyment of property the legal title to which is vested to merely collateral and it arises only upon the default of the person
another." (89 C.J.S. 712) primarily liable. On the other hand, in an irrevocable credit the bank
undertakes a primary obligation. (SeeNational Bank of Eagle Pass, Tex v.
The concept of a trust presupposes the existence of a specific property American National Bank of San Francisco, 282 F. 73 [1922])
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 The relationship between the issuing bank and the notifying bank, on
sustained, the petitioner should have had in its possession a sum of the contrary, is more similar to that of an agency and not that of a
money as specific fund advanced to it by the issuing bank and to be held guarantee. It may be observed that the notifying bank is merely to follow
in trust by it in favor of the private respondent. This does not obtain in the instructions of the issuing bank which is to notify or to transmit the
this case. 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
The mere opening of a letter of credit, it is to be noted, does not involve does not undertake any assurance that the issuing bank will perform
a specific appropriation of a sum of money in favor of the beneficiary. It what has been mandated to or expected of it. As an agent of the issuing
only signifies that the beneficiary may be able to draw funds upon the bank, it has only to follow the instructions of the issuing bank and to it
letter of credit up to the designated amount specified in the letter. It alone is it obligated and not to buyer with whom it has no contractual
does not convey the notion that a particular sum of money has been relationship.
specifically reserved or has been held in trust.
In fact the notifying bank, even if the seller tenders all the documents
What actually transpires in an irrevocable credit is that the required under the letter of credit, may refuse to negotiate or accept the
correspondent bank does not receive in advance the sum of money from drafts drawn thereunder and it will still not be held liable for its only
the buyer or the issuing bank. On the contrary, when the correspondent engagement is to notify and/or transmit to the seller the letter of credit.
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 Finally, even if we assume that the petitioner is a confirming bank, the
been advanced by the issuing bank, rather it gets the money from its petitioner cannot be forced to pay the amount under the letter. As we
own funds and then later seeks reimbursement from the issuing bank. have previously explained, there was a failure on the part of the private
respondent to comply with the terms of the letter of credit.
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 The failure by him to submit the certification was fatal to his
acceptance of the instructions of the issuing bank will not create case.1âwphi1 The U.C.P. which is incorporated in the letter of credit
estoppel on its part resulting in the acceptance of the trust. Precisely, as ordains that the bank may only pay the amount specified under the
a notifying bank, its only obligation is to notify the private respondent letter if all the documents tendered are on their face in compliance with
of the existence of the letter of credit. How then can such create the credit. It is not tasked with the duty of ascertaining the reason or
estoppel when that is its only duty under the law? reasons why certain documents have not been submitted, as it is only
concerned with the documents. Thus, whether or not the buyer has
We also find erroneous the statement of the Court of Appeals that the
performed his responsibility towards the seller is not the bank's
petitioner "acted as a guarantor of the issuing bank and in effect also of
problem.
the latter's principal or client, i.e., Hans Axel Christiansen."
We are aware of the injustice committed by Christiansen on the private
It is a fundamental rule that an irrevocable credit is independent not respondent but we are deciding the controversy on the basis of what the
only of the contract between the buyer and the seller but also of the law is, for the law is not meant to favor only those who have been
credit agreement between the issuing bank and the buyer. (See Kingdom oppressed, the law is to govern future relations among people as well.
of Sweden v. New York Trust Co., 96 N.Y.S. 2d 779 [1949]). The Its commitment is to all and not to a single individual. The faith of the
relationship between the buyer (Christiansen) and the issuing bank people in our justice system may be eroded if we are to decide not what
(Security Pacific National Bank) is entirely independent from the letter the law states but what we believe it should declare. Dura lex sed lex.
of credit issued by the latter.
Considering the foregoing, the materiality of ruling upon the validity of
The contract between the two has no bearing as to the non-compliance the certificate of approval required of the private respondent to submit
by the buyer with the agreement between the latter and the seller. Their under the letter of credit, has become insignificant.
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. In any event, we affirm the earlier ruling of the Court of Appeals dated
The unjustified refusal therefore by Christiansen to issue the April 9, 1987 in regard to the petition before it for certiorari and
certification under the letter of credit should not likewise be charged to prohibition with preliminary injunction, to wit:
the issuing bank.
There is no merit in the respondent's contention that the
As a mere notifying bank, not only does the petitioner not have any certification required in condition No. 4 of the letter of credit
contractual relationship with the buyer, it has also nothing to do with was "patently illegal." At the time the letter of credit was issued
the contract between the issuing bank and the buyer regarding the there was no Central Bank regulation prohibiting such a
issuance of the letter of credit. condition in the letter of credit. The letter of credit (Exh. C)
was issued on June 7, 1971, more than two months before the
The theory of guarantee relied upon by the Court of Appeals has to
issuance of the Central Bank Memorandum on August 16, 1971
necessarily fail. The concept of guarantee vis-a-vis the concept of an disallowing such a condition in a letter of credit. In fact the
irrevocable credit are inconsistent with each other. letter of credit had already expired on July 30, 1971 when the
Central Bank memorandum was issued. In any event, it is
In the first place, the guarantee theory destroys the independence of the
difficult to see how such a condition could be categorized as
bank's responsibility from the contract upon which it was opened. In
illegal or unreasonable since all that plaintiff Villaluz, as seller
the second place, the nature of both contracts is mutually in conflict
pg. 11
 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.
pg. 12
G.R. No. 183486, February 24, 2016
THE HONGKONG & SHANGHAI BANKING CORPORATION,
LIMITED, Petitioner, v. NATIONAL STEEL CORPORATION AND
CITYTRUST BANKING CORPORATION (NOW BANK OF THE
PHILIPPINE ISLANDS), Respondents. D E C I S I O N
JARDELEZA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of
Court. Petitioner The Hongkong & Shanghai Banking Corporation,
Limited (HSBC) filed this petition to assail the Decision of the Court of
Appeals (CA) dated November 19, 2007 (Assailed Decision) which
reversed the ruling of the Regional Trial Court, Branch 62 of Makati
City (RTC Makati) and its Resolution denying HSBC's Motion for
Reconsideration dated June 23, 2008 (Assailed Resolution).
The Facts
Respondent National Steel Corporation (NSC) entered into an Export
Sales Contract (the Contract) with Klockner East Asia Limited
(Klockner) on October 12, 1993.1 NSC sold 1,200 metric tons of prime
cold rolled coils to Klockner under FOB ST Iligan terms. In accordance
with the requirements in the Contract, Klockner applied for an
irrevocable letter of credit with HSBC in favor of NSC as the beneficiary
in the amount of US$468,000. On October 22, 1993, HSBC issued an
irrevocable and onsight letter of credit no. HKH 239409 (the Letter of
Credit) in favor of NSC.2 The Letter of Credit stated that it is governed
by the International Chamber of Commerce Uniform Customs and
Practice for Documentary Credits, Publication No. 400 (UCP 400).
Under UCP 400, HSBC as the issuing bank, has the obligation to
immediately pay NSC upon presentment of the documents listed in the
Letter of Credit.3 These documents are: (1) one original commercial
invoice; (2) one packing list; (3) one non-negotiable copy of clean on
board ocean bill of lading made out to order, blank endorsed marked
'freight collect and notify applicant;' (4) copy of Mill Test Certificate
made out 'to whom it may concern;' (5) copy of beneficiary's telex to
applicant (Telex No. 86660 Klock HX) advising shipment details
including D/C No., shipping marks, name of vessel, port of shipment,
port of destination, bill of lading date, sailing and ETA dates,
description of goods, size, weight, number of packages and value of
goods latest two days after shipment date; and (6) beneficiary's
certificate certifying that (a) one set of non-negotiable copies of
documents (being those listed above) have been faxed to applicant
(FAX No. 5294987) latest two days after shipment date; and (b) one set
of documents including one copy each of invoice and packing list, 3/3
original bills of lading plus one non-negotiable copy and three original
Mill Test Certificates have been sent to applicant by air courier service
latest two days after shipment date.4
The Letter of Credit was amended twice to reflect changes in the terms
of delivery. On November 2, 1993, the Letter of Credit was first amended
to change the delivery terms from FOB ST Iligan to FOB ST Manila and
to increase the amount to US$488,400.5 It was subsequently amended
on November 18, 1993 to extend the expiry and shipment date to
December 8, 1993.6 On November 21, 1993, NSC, through Emerald
Forwarding Corporation, loaded and shipped the cargo of prime cold
rolled coils on board MV Sea Dragon under China Ocean Shipping
Company Bill of Lading No. HKG 266001. The cargo arrived in
Hongkong on November 25, 1993.7
NSC coursed the collection of its payment from Klockner through City
Trust Banking Corporation (City Trust). NSC had earlier obtained a
loan from City Trust secured by the proceeds of the Letter of Credit sending the export documents on collection basis has been its usual
issued by HSBC.8 practice in response to NSC's instructions in its transactions.26

On November 29, 1993, City Trust sent a collection order (Collection
Order) to HSBC respecting the collection of payment from Klockner.
The Collection Order instructed as follows: (1) deliver documents
against payment; (2) cable advice of non-payment with reason; (3) cable
advice payment; and (4) remit proceeds via TELEX.9 The Collection
Order also contained the following statement: "Subject to Uniform
Rules for the Collection of Commercial Paper Publication No. 322."10
Further, the Collection Order stated that proceeds should be remitted
to Standard Chartered Bank of Australia, Ltd., Offshore Branch Manila
(SCB-M) which was, in turn, in charge of remitting the amount to City
Trust.11 On the same date, City Trust also presented to HSBC the
following documents: (1) Letter of Credit; (2) Bill of Lading; (3)
Commercial Invoice; (4) Packing List; (5) Mill Test Certificate; (6)
NSC's TELEX to Klockner on shipping details; (7) Beneficiary's
Certificate of facsimile transmittal of documents; (8) Beneficiary's
Certificate of air courier transmittal of documents; and (9) DHL Receipt
No. 669988911 and Certificate of Origin.12
NSC responded to this in a letter dated January 18, 1994.27 NSC
expressed its disagreement with CityTrust's contention that it sent the
export documents to HSBC on collection basis. It highlighted that it
"negotiated with City Trust the export documents pertaining to LC No.
HKH 239409 of HSBC and it was City Trust, which wrongfully treated
the negotiation, as 'on collection basis.'"28 NSC further claimed that
City Trust used its own mistake as an excuse against payment under the
Letter of Credit. Thus, NSC argued that City Trust remains liable under
the Letter of Credit. It also stated that it presumes that City Trust has
preserved whatever right of reimbursement it may have against
HSBC.29
On January 13, 1994, CityTrust notified HSBC that it should continue to
press for payment and to hold on to the document until further
notice.30

On December 2, 1993, LISBC sent a cablegram to City Trust However, Klockner persisted in its refusal to pay. Thus, on February 17,
acknowledging receipt of the Collection Order. It also stated that the 1994, HSBC returned the documents to CityTrust.31 In a letter
documents will be presented to "the drawee against payment subject to accompanying the returned documents, HSBC stated that it considered
UCP 322 [Uniform Rules for Collection (URC) 322] as instructed..."13 itself discharged of its duty under the transaction. It also asked for
SCB-M then sent a cablegram to ITSBC requesting the latter to urgently payment of handling charges.32 In response, CityTrust sent a cablegram
remit the proceeds to its account. It further asked that LISBC inform it to HSBC dated February 21, 1994 stating that it is "no longer possible for
"if unable to pay"14 and of the "reasons thereof."15 Neither CityTrust nor beneficiary to wait for you to get paid by applicant."33 It explained that
SCB-M objected to LISBC's statement that the collection will be since the documents required under the Letter of Credit have been
handled under the Uniform Rules for Collection (URC 322). properly sent to HSBC, Citytrust demanded payment from it. CityTrust
also stated, for the first time in all of its correspondence with HSBC,
On December 7, 1993, HSBC responded to SCB-M and sent a cablegram that "re your previous telexes, ICC Publication No. 322 is not
where it repeated that "this bill is being handled subject to [URC] 322 applicable."34 FISBC responded in cablegram dated February 28,
as instructed by [the] collecting bank."16 It also informed SCB-M that it 1994.35 It insisted that CityTrust sent documents which clearly stated
has referred the matter to Klockner for payment and that it will revert that the collection was being made under URC 322. Thus, in accordance
upon the receipt of the amount.17 On December 8, 1993, the Letter of with its instructions, HSBC, in the next three months, demanded
Credit expired.18 payment from Klockner which the latter eventually refused. Flence,
FISBC stated that it opted to return the documents. It then informed
On December 10, 1993, HSBC sent another cablegram to SCB-M CityTrust that it considered the transaction closed save for the latter's
advising it that Klockner had refused payment. It then informed SCB-M obligation to pay the handling charges.36
that it intends to return the documents to NSC with all the banking
charges for its account.19 In a cablegram dated December 14, 1993, Disagreeing with HSBC's position, CityTrust sent a cablegram dated
CityTrust requested HSBC to inform it of Klockner's reason for refusing March 9, 1994.37 It insisted that HSBC should pay it in accordance with
payment so that it may refer the matter to NSC.20 HSBC did not the terms of the Letter of Credit which it issued on October 22, 1993.
respond and City Trust thus sent a follow-up cablegram to HSBC on Under the Letter of Credit, FISBC undertook to reimburse the
December 17, 1993. In this cablegram, City Trust insisted that a demand presenting bank under "ICC 400 upon the presentment of all necessary
for payment must be made from Kloclaier since the documents "were documents."38 CityTrust also stated that the reference to URC 322 in
found in compliance with LC terms and conditions."21 HSBC replied on its Collection Order was merely in fine print. The Collection Order itself
the same day stating that in accordance with CityTrust's instruction in was only pro-forma. CityTrust emphasized that the reference to URC
its Collection Order, HSBC treated the transaction as a matter under 322 has been "obviously superseded by our specific instructions to
URC 322. Thus, it demanded payment from Klockner which 'deliver documents against payment/cable advice non-payment with
unfortunately refused payment for unspecified reasons. It then noted reason/cable advice payment/remit proceeds via telex' which was typed
that under URC 322, Kloclaier has no duty to provide a reason for the in on said form."39 CityTrust also claimed that the controlling
refusal. Hence, HSBC requested for further instructions as to whether it document is the Letter of Credit and not the mere fine print on the
should continue to press for payment or return the documents.22 City Collection Order.40 FISBC replied on March 10, 1994.41 It argued that
Trust responded that as advised by its client, HSBC should continue to CityTrust clearly instructed it to collect payment under URC 322, thus,
press for payment.23 CityTrust can no longer claim a contrary position three months after it
made its request. FISBC repeated that the transaction is closed except
Klockner continued to refuse payment and HSBC notified City Trust in for City Trust's obligation to pay for the expenses which HSBC
a cablegram dated January 7, 1994, that should Kloclaier still refuse to incurred.42
accept the bill by January 12, 1994, it will return the full set of
documents to City Trust with all the charges for the account of the Meanwhile, on March 3, 1994, NSC sent a letter to HSBC where it, for
drawer.24 the first time, demanded payment under the Letter of Credit.43 On
March 11, 1994, the NSC sent another letter to LISBC through the Office
Meanwhile, on January 12, 1994, City Trust sent a letter to NSC stating of the Corporate Counsel which served as its final demand. These
that it executed NSC's instructions "to send, ON COLLECTION BASIS, demands were made after approximately four months from the
the export documents..."25 City Trust also explained that its act of expiration of the Letter of Credit.
pg. 13
Unable to collect from HSBC, NSC filed a complaint against it for compliance of the parties in the main contract. The dispositive portion
collection of sum of money (Complaint)44 docketed as Civil Case No. held -
94-2122 (Collection Case) of the RTC Makati. In its Complaint, NSC
alleged that it coursed the collection of the Letter of Credit through WHEREFORE, in view of the foregoing, the assailed decision is hereby
CityTrust. However, notwithstanding CityTrust's complete REVERSED and SET ASIDE. HSBC is ordered to pay its obligation
presentation of the documents in accordance with the requirements in under the irrevocable letter of credit in the amount of US$485,767.93 to
the Letter of Credit, HSBC unreasonably refused to pay its obligation in NSC with legal interest of six percent (6%) per annum from the filing of
the amount of US$485, 767.93.45 the complaint until the amount is fully paid, plus attorney's fees
equivalent to 10% of the principal. Costs against appellee HSBC.
HSBC filed its Answer46 on January 6, 1995. HSBC denied any liability
under the Letter of Credit. It argued in its Answer that CityTrust SO ORDERED.59
modified the obligation when it stated in its Collection Order that the
transaction is subject to URC 322 and not under UCP 400.47 It also HSBC filed a Motion for Reconsideration of the Assailed Decision which
filed a Motion to Admit Attached Third-Party Complaint48 against the CA denied in its Assailed Resolution dated June 23, 2008.60
CityTrust on November 21, 1995.49 It claimed that CityTrust instructed
it to collect payment under URC 322 and never raised that it intended Hence, HSBC filed this Petition for Review on Certiorari61 before this
to collect under the Letter of Credit.50 HSBC prayed that in the event Court, seeking a reversal of the CA's Assailed Decision and Resolution.
that the court finds it liable to NSC, CityTrust should be subrogated in In its petition, HSBC contends that CityTrust's order to collect under
its place and be made directly liable to NSC.51 The RTC Makati granted URC 322 did not modify nor contradict the Letter of Credit. In fact, it is
the motion and admitted the third party complaint. CityTrust filed its customary practice in commercial transactions for entities to collect
Answer52 on January 8, 1996. CityTrust denied that it modified the under URC 322 even if there is an underlying letter of credit. Further,
obligation. It argued that as a mere agent, it cannot modify the terms of City Trust acted as an agent of NSC in collecting payment and as such,
the Letter of Credit without the consent of all the parties.53 Further, itit had the authority to instruct HSBC to proceed under URC 322 and
explained that the supposed instruction that the transaction is subject not under UCP 400. Having clearly and expressly instructed HSBC to
to URC 322 was merely in fine print in a pro forma document and was collect under URC 322 and having fully intended the transaction to
superimposed and pasted over by a large pink sticker with different proceed under such rule as shown by the series of correspondence
remittance instructions.54 between City Trust and HSBC, City Trust is estopped from now
claiming that the collection was made under UCP 400 in accordance
After a full-blown trial,55 the RTC Makati rendered a decision (RTC with the Letter of Credit.
Decision) dated February 23, 2000.56 It found that IiSBC is not liable to
pay NSC the amount stated in the Letter of Credit. It ruled that the NSC, on the other hand, claims that ITSBC's obligation to pay is clear
applicable law is URC 322 as it was the law which CityTrust intended from the terms of the Letter of Credit and under UCP 400. It asserts
to apply to the transaction. Under URC 322, HSBC has no liability to that the applicable rule is UCP 400 and HSBC has no basis to argue that
pay when Klockner refused payment. The dispositive portion states - CityTrust's presentment of the documents allowed LISBC to vary the
terms of their agreement.62

The Issues
WHEREFORE, premises considered, judgment is hereby rendered as
follows: The central question in this case is who among the parties bears the
liability to pay the amount stated in the Letter of Credit. This requires a
1. Plaintiffs Complaint against HSBC is DISMISSED; and, HSBC's determination of which between UCP 400 and URC 322 governs the
Counterclaims against NSC are DENIED. transaction. The obligations of the parties under the proper applicable
rule will, in turn, determine their liability.
2. Ordering Third-Party Defendant CityTrust to pay Third-Party
Plaintiff HSBC the following: The Ruling of the Court

2.1 US$771.21 as actual and consequential damages; and We uphold the CA.

2.2 P100,000 as attorney's fees. The nature of a letter of credit

3. No pronouncement as to costs. A letter of credit is a commercial instrument developed to address the

unique needs of certain commercial transactions. It is recognized in our
SO ORDERED.57 jurisdiction and is sanctioned under Article 56763 of the Code of
Commerce and in numerous jurisprudence defining a letter of credit, the
NSC and CityTrust appealed the RTC Decision before the CA. In its principles relating to it, and the obligations of parties arising from it.
Assailed Decision dated November 19, 2007,58 the CA reversed the RTC
Makati. The CA found that it is UCP 400 and not URC 322 which In Bank of America, NT & SA v. Court of Appeals,64 this Court defined
governs the transaction. According to the CA, the terms of the Letter of a letter of credit as "...a financial device developed by merchants as a
Credit clearly stated that UCP 400 shall apply. Further, the CA convenient and relatively safe mode of dealing with sales of goods to
explained that even if the Letter of Credit did not state that UCP 400 satisfy the seemingly irreconcilable interests of a seller, who refuses to
governs, it nevertheless finds application as this Court has consistently part with his goods before he is paid, and a buyer, who wants to have
recognized it under Philippine jurisdiction. Thus, applying UCP 400 control of the goods before paying."65 Through a letter of credit, a buyer
and principles concerning letters of credit, the CA explained that the obtains the credit of a third party, usually a bank, to provide assurance
obligation of the issuing bank is to pay the seller or beneficiary of the of payment.66
credit once the draft and the required documents are properly
presented. Under the independence principle, the issuing bank's
obligation to pay under the letter of credit is separate from the
pg. 14
This, in turn, convinces a seller to part with his or her goods even before The buyer is then able to present these documents in order to claim the
he or she is paid, as he or she is insured by the third party that he or she goods. At this point, all the transactions are completed. The seller
will be paid as soon as he or she presents the documents agreed upon.67 received payment for his or her performance of his obligation to deliver
the goods. The issuing bank is reimbursed for the payment it made to
A letter of credit generally arises out of a separate contract requiring the the seller. The buyer received the goods purchased.
assurance of payment of a third party. In a transaction involving a letter
of credit, there are usually three transactions and three parties. The first Owing to the complexity of these contracts, there may be a
transaction, which constitutes the underlying transaction in a letter of correspondent bank which facilitates the ease of completing the
credit, is a contract of sale between the buyer and the seller. The transactions. A correspondent bank may be a notifying bank, a
contract may require that the buyer obtain a letter of credit from a third negotiating bank or a confirming bank depending on the nature of the
party acceptable to the seller. The obligations of the parties under this obligations assumed.77 A notifying bank undertakes to inform the
contract are governed by our law on sales. seller-beneficiary that a letter of credit exists. It may also have the duty
of transmitting the letter of credit. As its obligation is limited to this
The second transaction is the issuance of a letter of credit between the duty, it assumes no liability to pay under the letter of credit.78 A
buyer and the issuing bank. The buyer requests the issuing bank to issue negotiating bank, on the other hand, purchases drafts at a discount from
a letter of credit naming the seller as the beneficiary. In this transaction, the seller-beneficiary and presents them to the issuing bank for
the issuing bank undertakes to pay the seller upon presentation of the payment.79 Prior to negotiation, a negotiating bank has no obligation. A
documents identified in the letter of credit. The buyer, on the other contractual relationship between the negotiating bank and the seller-
hand, obliges himself or herself to reimburse the issuing bank for the beneficiary arises only after the negotiating bank purchases or discounts
payment made. In addition, this transaction may also include a fee for the drafts.80 Meanwhile, a confirming bank may honor the letter of
the issuing bank's services.68 This transaction constitutes an obligation credit issued by another bank or confirms that the letter of credit will be
on the part of the issuing bank to perform a service in consideration of honored by the issuing bank.81 A confirming bank essentially insures
the buyer's payment. The obligations of the parties and their remedies in that the credit will be paid in accordance with the terms of the letter of
cases of breach are governed by the letter of credit itself and by our credit.82 It therefore assumes a direct obligation to the seller-
general law on obligations, as our civil law finds suppletory application beneficiary.83
in commercial documents.69
Parenthetically, when banks are involved in letters of credit
The third transaction takes place between the seller and the issuing transactions, the standard of care imposed on banks engaged in business
bank. The issuing bank issues the letter of credit for the benefit of the imbued with public interest applies to them. Banks have the duty to act
seller. The seller may agree to ship the goods to the buyer even before with the highest degree of diligence in dealing with clients.84 Thus, in
actual payment provided that the issuing bank informs him or her that a dealing with the parties in a letter of credit, banks must also observe
letter of credit has been issued for his or her benefit. This means that the this degree of care.
seller can draw drafts from the issuing bank upon presentation of
certain documents identified in the letter of credit. The relationship The value of letters of credit in commerce hinges on an important aspect
between the issuing bank and the seller is not strictly contractual since of such a commercial transaction. Through a letter of credit, a seller-
there is no privity of contract nor meeting of the minds between them.70 beneficiary is assured of payment regardless of the status of the
It also does not constitute a stipulation pour autrui in favor of the seller underlying transaction. International contracts of sales are perfected
since the issuing bank must honor the drafts drawn against the letter of and consummated because of the certainty that the seller will be paid
credit regardless of any defect in the underlying contract.71 Neither can thus making him or her willing to part with the goods even prior to
it be considered as an assignment by the buyer to the seller-beneficiary actual receipt of the amount agreed upon. The legally demandable
as the buyer himself cannot draw on the letter.72 From its inception, obligation of an issuing bank to pay under the letter of credit, and the
only the seller can demand payment under the letter of credit. It is also enforceable right of the seller-beneficiary to demand payment, are
not a contract of suretyship or guaranty since it involves primary indispensable essentials for the system of letters of credit, if it is to serve
liability in the event of default.73 Nevertheless, while the relationship its purpose of facilitating commerce. Thus, a touchstone of any law or
between the seller-beneficiary and the issuing bank is not strictly custom governing letters of credit is an emphasis on the imperative that
contractual, strict payment under the terms of a letter of credit is an issuing banks respect their obligation to pay, and that seller-
enforceable right.74 This enforceable right finds two legal beneficiaries may reasonably expect payment, in accordance with the
underpinnings. First, letters of credit, as will be further explained, are terms of a letter of credit.
governed by recognized international norms which dictate strict
compliance with its terms. Second, the issuing bank has an existing Rules applicable to letters of credit
agreement with the buyer to pay the seller upon proper presentation of
documents. Thus, as the law on obligations applies even in commercial Letters of credit are defined and their incidences regulated by Articles
documents,75 the issuing bank has a duty to the buyer to honor in good 567 to 57285 of the Code of Commerce. These provisions must be read
faith its obligation under their agreement. As will be seen in the with Article 286 of the same code which states that acts of commerce
succeeding discussion, this transaction is also governed by international are governed by their provisions, by the usages and customs generally
customs which this Court has recognized in this jurisdiction.76 observed in the particular place and, in the absence of both rules, by
civil law. In addition, Article 5087 also states that commercial contracts
In simpler terms, the various transactions that give rise to a letter of shall be governed by the Code of Commerce and special laws and in
credit proceed as follows: Once the seller ships the goods, he or she their absence, by general civil law.
obtains the documents required under the letter of credit. He or she
shall then present these documents to the issuing bank which must then The International Chamber of Commerce (ICC)88 drafted a set of rules
pay the amount identified under the letter of credit after it ascertains to govern transactions involving letters of credit. This set of rules is
that the documents are complete. The issuing bank then holds on to known as the Uniform Customs and Practice for Documentary Credits
these documents which the buyer needs in order to claim the goods (UCP). Since its first issuance in 1933, the UCP has seen several
shipped. The buyer reimburses the issuing bank for its payment at revisions, the latest of which was in 2007, known as the UCP 600.
which point the issuing bank releases the documents to the buyer.
pg. 15
However, for the period relevant to this case, the prevailing version is Thus, when City Trust forwarded the Letter of Credit with the attached
the 1993 revision called the UCP 400. Throughout the years, the UCP documents to LISBC, it had the duty to make a determination of
has grown to become the worldwide standard in transactions involving whether its obligation to pay arose by properly examining the
letters of credit.89 It has enjoyed near universal application with an documents.
estimated 95% of worldwide letters of credit issued subject to the
UCP.90 In its petition, HSBC argues that it is not UCP 400 but URC 322 that
should govern the transaction.106 URC 322 is a set of norms compiled
In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,91 by the ICC.107 It was drafted by international experts and has been
this Court applied a provision from the UCP in resolving a case adopted by the ICC members. Owing to the status of the ICC and the
pertaining to a letter of credit transaction. This Court explained that the international representation of its membership, these rules have been
use of international custom in our jurisdiction is justified by Article 2 of widely observed by businesses throughout the world. It prescribes the
the Code of Commerce which provides that acts of commerce are collection procedures, technology, and standards for handling collection
governed by, among others, usages and customs generally observed. transactions for banks.108 Under the facts of this case, a bank acting in
Further, in Feati Bank & Trust Company v. Court of Appeals,92 this accordance with the terms of URC 322 merely facilitates collection. Its
Court ruled that the UCP should be applied in cases where the letter of duty is to forward the letter of credit and the required documents from
credit expressly states that it is the governing rule.93 This Court also the entity seeking payment to another entity which has the duty to pay.
held in Feati that the UCP applies even if it is not incorporated into the The bank incurs no obligation other than as a collecting agent. This is
letter of the credit.94 The application of the UCP in Bank of Philippine different in the case of an issuing bank acting in accordance with UCP
Islands and in Feati was further affirmed in Metropolitan Waterworks 400. In this case, the issuing bank has the duty to pay the amount stated
and Sewerage System v. Daway95 where this Court held that "[l]etters in the letter of credit upon due presentment. HSBC claims that while
of credit have long been and are still governed by the provisions of the UCP 400 applies to letters of credit, it is also common for beneficiaries
Uniform Customs and Practice for Documentary Credit[s] of the of such letters to seek collection under URC 322. HSBC further claims
International Chamber of Commerce."96 These precedents highlight the that URC 322 is an accepted custom in commerce.109
binding nature of the UCP in our jurisdiction.
HSBC's argument is without merit. We note that HSBC failed to
Thus, for the purpose of clarity, letters of credit are governed primarily present evidence to prove that URC 322 constitutes custom and usage
by their own provisions,97 by laws specifically applicable to them,98 recognized in commerce. Neither was there sufficient evidence to prove
and by usage and custom.99 Consistent with our rulings in several that beneficiaries under a letter of credit commonly resort to collection
cases,100 usage and custom refers to UCP 400. When the particular under URC 322 as a matter of industry practice. HSBC claims that the
issues are not covered by the provisions of the letter of credit, by laws testimony of its witness Mr. Lincoln MacMahon (Mr. MacMahon)
specifically applicable to them and by UCP 400, our general civil law suffices for this purpose.110 However, Mr. MacMahon was not
finds suppletory application.101 presented as an expert witness capable of establishing the existing
banking and commercial practice relating to URC 322 and letters of
Applying this set of laws and rules, this Court rules that HSBC is liable credit. Thus, this Court cannot hold that URC 322 and resort to it by
under the provisions of the Letter of Credit, in accordance with usage beneficiaries of letters of credit are customs that demand application in
and custom as embodied in UCP 400, and under the provisions of this case.
general civil law.
HSBC's position that URC 322 applies, thus allowing it, the issuing
HSBC's Liability bank, to disregard the Letter of Credit, and merely demand collection
from Klockner cannot be countenanced. Such an argument effectively
The Letter of Credit categorically stated that it is subject to UCP 400, to asks this Court to give imprimatur to a practice that undermines the
wit: value and reliability of letters of credit in trade and commerce. The
entire system of letters of credit rely on the assurance that upon
Except so far as otherwise expressly stated, this documentary credit is presentment of the proper documents, the beneficiary has an
subject to uniform Customs and Practice for Documentary Credits (1983 enforceable right and the issuing bank a demandable obligation, to pay
Revision), International Chamber of Commerce Publication No. 400.102 the amount agreed upon. Were a party to the transaction allowed to
simply set this aside by the mere invocation of another set of norms
From the moment that HSBC agreed to the terms of the Letter of Credit
related to commerce - one that is not established as a custom that is
- which states that UCP 400 applies - its actions in connection with the
entitled to recognition by this Court - the sanctity of letters of credit
transaction automatically became bound by the rules set in UCP 400.
will be jeopardized. To repeat, any law or custom governing letters of
Even assuming that URC 322 is an international custom that has been
credit should have, at its core, an emphasis on the imperative that
recognized in commerce, this does not change the fact that HSBC, as the
issuing banks respect their obligation to pay and that seller-
issuing bank of a letter of credit, undertook certain obligations dictated
beneficiaries may reasonably expect payment in accordance with the
by the terms of the Letter of Credit itself and by UCP 400. In Feati, this
terms of a letter of credit. Thus, the CA correctly ruled, to wit:
Court applied UCP 400 even when there is no express stipulation in the
letter of credit that it governs the transaction.103 On the strength of our At this juncture, it is significant to stress that an irrevocable letter of
ruling in Feati, we have the legal duty to apply UCP 400 in this case credit cannot, during its lifetime, be cancelled or modified without the
independent of the parties' agreement to be bound by it. express permission of the beneficiary. Not even partial payment of the
obligation by the applicant-buyer would amend or modify the
UCP 400 states that an irrevocable credit payable on sight, such as the
obligation of the issuing bank. The subsequent correspondences of
Letter of Credit in this case, constitutes a definite undertaking of the
[CityTrust] to HSBC, thus, could not in any way affect or amend the
issuing bank to pay, provided that the stipulated documents are
letter of credit, as it was not a party thereto. As a notifying bank, it has
presented and that the terms and conditions of the credit are complied
nothing to do with the contract between the issuing bank and the buyer
with.104 Further, UCP 400 provides that an issuing bank has the
regarding the issuance of the letter of credit.112 (Citations omitted)
obligation to examine the documents with reasonable care.105

pg. 16
The provisions in the Civil Code and our jurisprudence apply
suppletorily in this case.113 When a party knowingly and freely binds
himself or herself to perform an act, a juridical tie is created and he or
she becomes bound to fulfill his or her obligation. In this case, HSBC's
obligation arose from two sources. First, it has a contractual duty to
Klockner whereby it agreed to pay NSC upon due presentment of the
Letter of Credit and the attached documents. Second, it has an
obligation to NSC to honor the Letter of Credit. In complying with its
obligation, HSBC had the duty to perform all acts necessary. This
includes a proper examination of the documents presented to it and
making a judicious inquiry of whether City Trust, in behalf of NSC,
made a due presentment of the Letter of Credit.
Further, as a bank, HSBC has the duty to observe the highest degree of
diligence. In all of its transactions, it must exercise the highest standard
of care and must fulfill its obligations with utmost fidelity to its clients.
Thus, upon receipt of City Trust's Collection Order with the Letter of
Credit, HSBC had the obligation to carefully examine the documents it
received. Had it observed the standard of care expected of it, HSBC
would have discovered that the Letter of Credit is the very same
document which it issued upon the request of Klockner, its client. Had
LISBC taken the time to perform its duty with the highest degree of
diligence, it would have been alerted by the fact that the documents
presented to it corresponded with the documents stated in the Letter of
Credit, to which HSBC freely and knowingly agreed. HSBC ought to
have noticed the discrepancy between City Trust's request for collection
under URC 322 and the terms of the Letter of Credit. Notwithstanding
any statements by City Trust in the Collection Order as to the
applicable rules, FISBC had the independent duty of ascertaining
whether the presentment of the Letter of Credit and the attached
documents gave rise to an obligation which it had to Klockner (its
client) and NSC (the beneficiary). Regardless of any error that City
Trust may have committed, the standard of care expected of LISBC
dictates that it should have made a separate determination of the
significance of the presentment of the Letter of Credit and the attached
documents. A bank exercising the appropriate degree of diligence would
have, at the very least, inquired if NSC was seeking payment under the
Letter of Credit or merely seeking collection under URC 322. In failing
to do so, HSBC fell below the standard of care imposed upon it.
This Court therefore rules that CityTrust's presentment of the Letter of
Credit with the attached documents in behalf of NSC, constitutes due
presentment. Under the terms of the Letter of Credit, LISBC undertook
to pay the amount of US$485,767.93 upon presentment of the Letter of
Credit and the required documents.114 In accordance with this
agreement, NSC, through CityTrust, presented the Letter of Credit and
the following documents: (1) Letter of Credit; (2) Bill of Lading; (3)
Commercial Invoice; (4) Packing List; (5) Mill Test Certificate; (6)
NSC's TELEX to Klockner on shipping details; (7) Beneficiary's
Certificate of facsimile transmittal of documents; (8) Beneficiary's
Certificate of air courier transmittal of documents; and (9) DHL Receipt
No. 669988911 and Certificate of Origin.115
In transactions where the letter of credit is payable on sight, as in this
case, the issuer must pay upon due presentment. This obligation is
imbued with the character of definiteness in that not even the defect or
breach in the underlying transaction will affect the issuing bank's
liability.116 This is the Independence Principle in the law on letters of
credit. Article 17 of UCP 400 explains that under this principle, an
issuing bank assumes 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..." Thus, as long as the proper
documents are presented, the issuing bank has an obligation to pay even
if the buyer should later on refuse payment. Hence, Klockner's refusal to
pay carries no effect whatsoever on HSBC's obligation to pay under the
pg. 17
Letter of Credit. To allow HSBC to refuse to honor the Letter of Credit
simply because it could not collect first from Klockner is to countenance
a breach of the Independence Principle.
HSBC's persistent refusal to comply with its obligation
notwithstanding due presentment constitutes delay contemplated in
Article 1169 of the Civil Code.117 This provision states that a party to an
obligation incurs in delay from the time the other party makes a judicial
or extrajudicial demand for the fulfillment of the obligation. We rule
that the due presentment of the Letter of Credit and the attached
documents is tantamount to a demand. IISBC incurred in delay when it
failed to fulfill its obligation despite such a demand.
Under Article 1170 of the Civil Code,118 a party in delay is liable for
damages. The extent of these damages pertains to the pecuniary loss
duly proven.119 In this case, such damage refers to the losses which NSC
incurred in the amount of US$485,767.93 as stated in the Letter of
Credit. We also award interest as indemnity for the damages incurred in
the amount of six percent (6%) from the date of NSC's extrajudicial
demand.120 An interest in the amount of six percent (6%) is also
awarded from the time of the finality of this decision until full
payment.121
Having been remiss in its obligations under the applicable law, rules and
jurisprudence, HSBC only has itself to blame for its consequent liability
to NSC.
However, this Court finds that there is no basis for the CA's grant of
attorney's fees in favor of NSC. Article 2208 of the Civil Code122
enumerates the grounds for the award of attorney's fees. This Court has
explained that the award of attorney's fees is an exception rather than
the rule.123 The winning party is not automatically entitled to
attorney's fees as there should be no premium on the right to litigate.124
While courts may exercise discretion in granting attorney's fees, this
Court has stressed that the grounds used as basis for its award must
approximate as closely as possible the enumeration in Article 2208.125
Its award must have sufficient factual and legal justifications.126 This
Court rules that none of the grounds stated in Article 2208 are present
in this case. NSC has not cited any specific ground nor presented any
particular fact to warrant the award of attorney's fees.
CityTrust's Liability
When NSC obtained the services of CityTrust in collecting under the
Letter of Credit, it constituted CityTrust as its agent. Article 1868 of the
Civil Code states that a contract of agency exists when a person binds
himself or herself "to render some service or to do something in
representation or on behalf of another, with the consent or authority of
the latter." In this case, CityTrust bound itself to collect under the
Letter of Credit in behalf of NSC.
One of the obligations of an agent is to carry out the agency in
accordance with the instructions of the principal. In ascertaining NSC's
instructions to CityTrust, its letter dated January 18, 1994 is
determinative. In this letter, NSC clearly stated that it "negotiated with
CityTrust the export documents pertaining to LC No. HKH 239409 of
HSBC and it was CityTrust which wrongfully treated the negotiation as
'on collection basis.'"128 HSBC persistently communicated with
CityTrust and consistently repeated that it will proceed with collection
under URC 322. At no point did CityTrust correct HSBC or seek
clarification from NSC. In insisting upon its course of action, CityTrust
failed to act in accordance with the instructions given by NSC, its
principal. Nevertheless while this Court recognizes that CityTrust
committed a breach of its obligation to NSC, this carries no implications
on the clear liability of HSBC. As this Court already mentioned,
HSBC had a separate obligation that it failed to perform by reason of
acts independent of CityTrust's breach of its obligation under its
contract of agency. If CityTrust has incurred any liability, it is to its
principal NSC. However, NSC has not raised any claim against
CityTrust at any point in these proceedings. Thus, this Court cannot
make any finding of liability against City Trust in favor of NSC.
WHEREFORE, in view of the foregoing, the Assailed Decision dated
November 19, 2007 is AFFIRMED to the extent that it orders HSBC to
pay NSC the amount of US$485,767.93. HSBC is also liable to pay legal
interest of six percent (6%) per annum from the time of extrajudicial
demand. An interest of six percent (6%) is also awarded from the time
of the finality of this decision until the amount is fully paid. We delete
the award of attorney's fees. No pronouncement as to cost.
SO ORDERED.
pg. 18
KENG HUA PAPER PRODUCTS CO. INC., PETITIONER ,
VS. COURT OF APPEALS; REGIONAL TRIAL COURT OF
MANILA, BR. 21; AND SEA-LAND SERVICE, INC., RESPONDENTS.
DECISION
PANGANIBAN, J.:
What is the nature of a bill of lading? When does a bill of
lading become binding on a consignee? Will an alleged overshipment
justify the consignees refusal to receive the goods described in the bill of
lading? When may interest be computed on unpaid demurrage charges?
Statement of the Case
These are the main questions raised in this petition assailing the
Decision[1] of the Court of Appeals[2] promulgated on May 20, 1994 in
C.A.-G.R. CV No. 29953 affirming in toto the decision[3] dated September
28, 1990 in Civil Case No. 85-33269 of the Regional Trial Court of
Manila, Branch 21. The dispositive portion of the said RTC decision
reads:
WHEREFORE, the Court finds by preponderance of
evidence that Plaintiff has proved its cause of action and
right to relief. Accordingly, judgment is hereby rendered in
favor of the Plaintiff and against Defendant, ordering the
Defendant to pay plaintiff:
1. The sum of P67,340.00 as demurrage charges, with interest at the legal
rate from the date of the extrajudicial demand until fully paid;
2. A sum equivalent to ten (10%) percent of the total amount due as
Attorneys fees and litigation expenses.
Send copy to respective counsel of the parties. SO ORDERED.[4]
The Facts
The factual antecedents of this case as found by the Court of Appeals are
as follows:
Plaintiff (herein private respondent), a shipping company, is
a foreign corporation licensed to do business in the
Philippines. On June 29, 1982, plaintiff received at its Hong
Kong terminal a sealed container, Container No. SEAU
67523, containing seventy-six bales of unsorted waste paper
for shipment to defendant (herein petitioner), Keng Hua
Paper Products, Co. in Manila. A bill of lading (Exh. A) to
cover the shipment was issued by the plaintiff.
On July 9, 1982, the shipment was discharged at the Manila
International Container Port. Notices of arrival were
transmitted to the defendant but the latter failed to
discharge the shipment from the container during the free
time period or grace period. The said shipment remained
inside the plaintiffs container from the moment the free time
period expired on July 29, 1982 until the time when the
shipment was unloaded from the container on November 22,
1983, or a total of four hundred eighty-one (481) days. During
the 481-day period, demurrage charges accrued. Within the
same period, letters demanding payment were sent by the
plaintiff to the defendant who, however, refused to settle its
obligation which eventually amounted to P67,340.00.
 Numerous demands were made on the defendant but the
obligation remained unpaid. Plaintiff thereafter commenced
this civil action for collection and damages.
In its answer, defendant, by way of special and affirmative
defense, alleged that it purchased fifty (50) tons of waste
paper from the shipper in Hong Kong, Ho Kee Waste Paper,
as manifested in Letter of Credit No. 824858 (Exh. 7. p.
110.Original Record) issued by Equitable Banking
Corporation, with partial shipment permitted; that under
the letter of credit, the remaining balance of the shipment
was only ten (10) metric tons as shown in Invoice No. H-
15/82 (Exh. 8, p. 111, Original Record); that the shipment
plaintiff was asking defendant to accept was twenty (20)
metric tons which is ten (10) metric tons more than the
remaining balance; that if defendant were to accept the
shipment, it would be violating Central Bank rules and
regulations and custom and tariff laws; that plaintiff had no
cause of action against the defendant because the latter did
not hire the former to carry the merchandise; that the cause
of action should be against the shipper which contracted the
plaintiffs services and not against defendant; and that the
defendant duly notified the plaintiff about the wrong
shipment through a letter dated January 24, 1983 (Exh. D for
plaintiff, Exh. 4 for defendant, p. 5. Folder of Exhibits).
As previously mentioned, the RTC found petitioner liable for
demurrage, attorneys fees and expenses of litigation. The petitioner
appealed to the Court of Appeals, arguing that the lower court erred
in (1) awarding the sum of P67,340 in favor of theprivate respondent, (2)
rejecting petitioners contention that there was overshipment, (3) ruling
that petitioners recourse was against the shipper, and (4) computing
legal interest from date of extrajudicial demand.[5]
Respondent Court of Appeals denied the appeal and affirmed the
lower courts decision in toto. In a subsequent resolution,[6] it also denied
the petitioners motion for reconsideration.
Hence, this petition for review.[7]
The Issues
In its memorandum, petitioner submits the following issues:
I. Whether or not petitioner had accepted the bill of lading;
II. Whether or not the award of the sum of P67,340.00 to private
respondent was proper;
III. Whether or not petitioner was correct in not accepting the
overshipment;
IV. Whether or not the award of legal interest from the date of private
respondents extrajudicial demand was proper;[8]
In the main, the case revolves around the question of whether
petitioner was bound by the bill of lading. We shall, thus, discuss the
above four issues as they intertwine with this main question.
The Courts Ruling
The petition is partly meritorious. We affirm petitioners liability
for demurrage, but modify the interest rate thereon.
Main Issue: Liability Under the Bill of Lading
pg. 19
A bill of lading serves two functions. First, it is a receipt for the
goods shipped. Second, it is a contract by which three parties, namely,
the shipper, the carrier, and the consignee undertake specific
responsibilities and assume stipulated obligations.[9]A bill of lading
delivered and accepted constitutes the contract of carriage even though
not signed,[10] because the (a)cceptance of a
paper containing the terms of a proposed contract generally constitutes
an acceptance of the contract and of all of its terms and conditions of
which the acceptor has actual or constructive notice. [11] In a nutshell, the
acceptance of a bill of lading by the shipper and the consignee, with full
knowledge of its contents, gives rise to the presumption that the same
was a perfected and binding contract.[12]
In the case at bar, both lower courts held that the bill of lading was
a valid and perfected contract between the shipper (Ho Kee), the
consignee (Petitioner Keng Hua), and the carrier (Private Respondent
Sea-Land). Section 17 of the bill of lading provided that the shipper and
the consignee were liable for the payment of demurrage charges for the
failure to discharge the containerized shipment beyond the grace period
allowed by tariff rules. Applying said stipulation, both lower courts
found petitioner liable. The aforementioned section of the bill of lading
reads:
17. COOPERAGE FINES. The shipper and consignee shall be
liable for, indemnify the carrier and ship and hold them
harmless against, and the carrier shall have a lien on the
goods for, all expenses and charges for mending cooperage,
baling, repairing or reconditioning the goods, or the van,
trailers or containers, and all expenses incurred in
protecting, caring for or otherwise made for the benefit of the
goods, whether the goods be damaged or not, and for any
payment, expense, penalty fine, dues, duty, tax or impost,
loss, damage, detention, demurrage, or liability of whatsoever
nature, sustained or incurred by or levied upon the carrier or
the ship in connection with the goods or by reason of the
goods being or having been on board, or because of shippers
failure to procure consular or other proper permits,
certificates or any papers that may be required at any port or
place or shippers failure to supply information or otherwise
to comply with all laws, regulations and requirements of law
in connection with the goods of from any other act or
omission of the shipper or consignee: (Underscoring
supplied.)
Petitioner contends, however, that it should not be bound by the
bill of lading because it never gave its consent thereto. Although
petitioner admits physical acceptance of the bill of lading, it argues that
its subsequent actions belie the finding that it accepted the terms and
conditions printed therein.[13] Petitioner cites as support the Notice of
Refused or On Hand Freight it received on November 2, 1982 from
private respondent, which acknowledged that petitioner declined to
accept the shipment.Petitioner adds that it sent a copy of the said notice
to the shipper on December 29, 1982. Petitioner points to its January 24,
1983 letter to the private respondent, stressing that its acceptance of the
bill of lading would be tantamount to an act of smuggling as the amount
it had imported (with full documentary support) was only (at that
time) for 10,000 kilograms and not for 20,313 kilograms as stated in the
bill of lading and could lay them vulnerable to legal sanctions for
violation of customs and tariff as well as Central Bank
laws.[14] Petitioner further argues that the demurrage was a consequence
of the shippers mistake of shipping more than what was bought. The
discrepancy in the amount of waste paper it actually purchased, as
reflected in the invoice vis--vis the excess amount in the bill of lading,
allegedly justifies its refusal to accept the shipment.[15]
Petitioner Bound by the Bill of Lading
We are not persuaded. Petitioner admits that it received the bill of
lading immediately after the arrival of the shipment [16] on July 8,
1982.[17] Having been afforded an opportunity to examine the said
document, petitioner did not immediately object to or dissent from any
term or stipulation therein. It was only six months later, on January 24,
1983, that petitioner sent a letter to private respondent saying that it
could not accept the shipment. Petitioners inaction for such a long
period conveys the clear inference that it accepted the terms and
conditions of the bill of lading. Moreover, said letter spoke only of
petitioners inability to use the delivery permit, i.e. to pick up the cargo,
due to the shippers failure to comply with the terms and conditions of
the letter of credit, for which reason the bill of lading and other shipping
documents were returned by the banks to the shipper.[18] The letter
merely proved petitioners refusal to pick up the cargo, not its rejection
of the bill of lading.
Petitioners reliance on the Notice of Refused or On Hand Freight,
as proof of its nonacceptance of the bill of lading, is of no
consequence. Said notice was not written by petitioner; it was sent by
private respondent to petitioner in November 1982, or four months after
petitioner received the bill of
lading. If the notice has any legal significance at all, it is to highlight
petitioners prolonged failure to object to the bill of lading. Contrary to
petitioners contention, the notice and the letter support not belie the
findings of the two lower courts that the bill of lading was impliedly
accepted by petitioner.
As aptly stated by Respondent Court of Appeals:
In the instant case, (herein petitioner) cannot and did not
allege non-receipt of its copy of the bill of lading from the
shipper. Hence, the terms and conditions as well as the
various entries contained therein were brought to its
knowledge. (Herein petitioner) accepted the bill of lading
without interposing any objection as to its contents. This
raises the presumption that (herein petitioner) agreed to the
entries and stipulations imposed therein.
Moreover, it is puzzling that (herein petitioner) allowed
months to pass, six (6) months to be exact, before notifying
(herein private respondent) of the wrong shipment. It was
only on January 24, 1983 that (herein petitioner) sent (herein
private respondent) such a letter of notification (Exh D for
plaintiff, Exh. 4 for defendant; p. 5, Folder of Exhibits). Thus,
for the duration of those six months (herein private
respondent never knew the reason for (herein petitioners)
refusal to discharge the shipment.
After accepting the bill of lading, receiving notices of arrival
of the shipment, failing to object thereto, (herein petitioner)
cannot now deny that it is bound by the terms in the bill of
lading. If it did not intend to be bound, (herein petitioner)
would not have waited for six months to lapse before finally
bringing the matter to (herein private respondents
attention. The most logical reaction in such a case would be
to immediately verify the matter with the other parties
involved. In this case, however, (herein petitioner)
unreasonably detained (herein private respondents) vessel to
the latters prejudice.[19]
Petitioners attempt to evade its obligation to receive the shipment on
the pretext that this may cause it to violate customs, tariff and central
bank laws must likewise fail. Mere apprehension of violating said laws,
without a clear demonstration that taking delivery of the shipment has
pg. 20
become legally impossible,[20] cannot defeat the petitioners contractual
obligation and liability under the bill of lading.
In any event, the issue of whether petitioner accepted the bill of
lading was raised for the first time only in petitioners memorandum
before this Court. Clearly, we cannot now entertain an issue raised for
the very first time on appeal, in deference to the well-settled doctrine
that (a)n issue raised for the first time on appeal and not raised timely in
the proceedings in the lower court is barred by estoppel. Questions
raised on appeal must be within the issues framed by the parties and,
consequently, issues not raised in the trial court cannot be raised for the
first time on appeal.[21]
In the case at bar, the prolonged failure of petitioner to receive and
discharge the cargo from the private respondents vessel constitutes a
violation of the terms of the bill of lading. It should thus be liable for
demurrage to the former.
In The Apollon,[22] Justice Story made the following relevant
comment on the nature of demurrage:
In truth, demurrage is merely an allowance or compensation
for the delay or detention of a vessel. It is often a matter of
contract, but not necessarily so. The very circumstance that
in ordinary commercial voyages, a particular sum is deemed
by the parties a fair compensation for delays, is the very
reason why it is, and ought to be, adopted as a measure of
compensation, in cases ex delicto. What fairer rule can be
adopted than that which founds itself upon mercantile usage
as to indemnity, and fixes a recompense upon the deliberate
consideration of all the circumstances attending the usual
earnings and expenditures in common voyages? It appears to
us that an allowance, by way of demurrage, is the true
measure of damages in all cases of mere detention, for that
allowance has reference to the ships expenses, wear and tear,
and common employment.[23]
Amount of Demurrage Charges
Petitioner argues that it is not obligated to pay any demurrage
charges because, prior to the filing of the complaint, private respondent
made no demand for the sum of P67,340. Moreover, private respondents
loss and prevention manager, Loi Gillera, demanded P50,260, but its
counsel, Sofronio Larcia, subsequently asked for a different amount
of P37,800.
Petitioners position is puerile. The amount of demurrage charges in
the sum of P67,340 is a factual conclusion of the trial court that was
affirmed by the Court of Appeals and, thus, binding on this
Court.[24] Besides such factual finding is supported by the extant
evidence.[25] The apparent discrepancy was a result of the variance of the
dates when the two demands were made. Necessarily, the longer the
cargo remained unclaimed, the higher the demurrage. Thus, while in his
letter dated April 24, 1983,[26] private respondents counsel demanded
payment of only P37,800, the additional demurrage incurred by
petitioner due to its continued refusal to receive delivery of the cargo
ballooned to P67,340 by November 22, 1983. The testimony of Counsel
Sofronio Larcia as regards said letter of April 24, 1983 elucidates, viz:
Q Now, after you sent this letter, do you know what happened?
A Defendant continued to refuse to take delivery of the shipment
and the shipment stayed at the port for a longer period.
Q So, what happened to the shipment?
 A The shipment incurred additional demurrage charges which so reasonably established at the time the demand is made, the interest
amounted to P67,340.00 as of November 22, 1983 or more than shall begin to run only from the date the judgment of the court is made
a year after - almost a year after the shipment arrived at the (at which time the quantification of damages may be deemed to have
port. been reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged.
Q So, what did you do?
A We requested our collection agency to pursue the collection of 3. When the judgment of the court awarding a sum of money becomes
this amount.[27] final and executory, the rate of legal interest, whether the case falls
under paragraph 1 or paragraph 2, above, shall be 12% per annum from
Bill of Lading Separate from
such finality until its satisfaction, this interim period being deemed to
Other Letter of Credit Arrangements
be by then an equivalent to a forbearance of credit.[31]
In a letter of credit, there are three distinct and independent
contracts: (1) the contract of sale between the buyer and the
seller, (2) the contract of the buyer with the issuing bank, and (3) the The case before us involves an obligation not arising from a loan or
letter of credit proper in which the bank promises to pay the seller forbearance of money; thus, pursuant to Article 2209 of the Civil Code,
pursuant to the terms and conditions stated therein. Few things are the applicable interest rate is six percent per annum. Since the bill of
more clearly settled in law than that the three contracts which make up lading did not specify the amount of demurrage, and the sum claimed by
the letter of credit arrangement are to be maintained in a state of private respondent increased as the days went by, the total amount
perpetual separation.[28] A transaction involving the purchase of goods demanded cannot be deemed to have been established with reasonable
may also require, apart from a letter of credit, a contract of certainty until the trial court rendered its judgment. Indeed,
transportation specially when the seller and the buyer are not in the (u)nliquidated damages or claims, it is said, are those which are not or
same locale or country, and the goods purchased have to be transported cannot be known until definitely ascertained, assessed and determined
to the latter. by the courts after presentation of proof.[32] Consequently, the legal
interest rate is six percent, to be computed from September 28, 1990, the
Hence, the contract of carriage, as stipulated in the bill of lading in date of the trial courts decision. And in accordance with Philippine
the present case, must be treated independently of the contract of sale Natonal Bank[33] and Eastern Shipping,[34] the rate of twelve percent per
between the seller and the buyer, and the contract for the issuance of a annum shall be charged on the total then outstanding, from the time the
letter of credit between the buyer and the issuing bank. Any judgment becomes final and executory until its satisfaction.
discrepancy between the amount of the goods described in the
commercial invoice in the contract of sale and the amount allowed in the Finally, the Court notes that the matter of attorneys fees was taken
letter of credit will not affect the validity and enforceability of the up only in the dispositive portion of the trial courts decision. This falls
contract of carriage as embodied in the bill of lading. As the bank cannot short of the settled requirement that the text of the decision should
be expected to look beyond the documents presented to it by the seller state the reason for the award of attorneys fees, for without such
pursuant to the letter of credit,[29] neither can the carrier be expected to justification, its award would be a conclusion without a premise, its
go beyond the representations of the shipper in the bill of lading and to basis being improperly left to speculation and conjecture.[35]
verify their accuracy vis--vis the commercial invoice and the letter of
WHEREFORE, the assailed Decision is hereby AFFIRMED with
credit. Thus, the discrepancy between the amount of goods indicated in
the invoice and the amount in the bill of lading cannot negate the MODIFICATION that the legal interest of six percent per annum shall
petitioners obligation to private respondent arising from the contract of be computed from September 28, 1990 until its full payment before
transportation. Furthermore, private respondent, as carrier, had no finality of judgment. The rate of interest shall be adjusted to twelve
knowledge of the contents of the container. The contract of carriage was percent per annum, computed from the time said judgment became final
under the arrangement known as Shippers Load And Count, and the and executory until full satisfaction. The award of attorneys fees
shipper was solely responsible for the loading of the container while the is DELETED.
carrier was oblivious to the contents of the shipment. Petitioners SO ORDERED.
remedy in case of overshipment lies against the seller/shipper, not
against the carrier.
Payment of Interest

Petitioner posits that it first knew of the demurrage claim

of P67,340 only when it received, by summons, private respondents
complaint. Hence, interest may not be allowed to run from the date of
private respondents extrajudicial demands on March 8, 1983 for P50,260
or on April 24, 1983 for P37,800, considering that, in both cases, there
was no demand for interest.[30] We agree.
Jurisprudence teaches us:
2. When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be
imposed at the discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be
pg. 21
 LAND BANK OF THE PHILIPPINES, PETITIONER , VS. On October 9, 2003, the Court of Appeals promulgated the
MONETS EXPORT AND MANUFACTURING CORPORATION, decision subject of the present petition for review. In affirming the trial
SPOUSES VICENTE V. TAGLE, SR. AND MA. CONSUELO G. court, the Court of Appeals found that, indeed, Land Bank was
TAGLE, RESPONDENTS. responsible for the mismanagement of the Wishbone and Beautilike
accounts of Monet. It held that because of the non-collection and
DECISION unauthorized payment made by Land Bank on behalf of Monet, and
YNARES-SANTIAGO, J.: considering that the latter could no longer draw from its credit line with
Land Bank, it suffered from lack of financial resources sufficient to buy
the needed materials to fill up the standing orders from its customers.
This is a petition for review on certiorari under Rule 45 of the
Rules of Court assailing the October 9, 2003 Decision of the Court of
[1]
The Court of Appeals disposed of Land Banks appeal in this wise:
Appeals[2] in CA-G.R. CV No. 57436, and its January 20, 2004
Resolution[3] denying petitioners motion for reconsideration. WHEREFORE, premises considered, and finding no reversible error in
the assailed Decision of the Regional Trial Court of Manila, Branch 49,
The factual antecedents are as follows: in Civil Case No. 93-64350 dated July 15, 1997, said Decision is hereby
AFFIRMED and UPHELD and the appeal is DISMISSED for lack of
On June 25, 1981, petitioner, Land Bank of the Philippines (Land merit. SO ORDERED.[17]
Bank), and Monets Export and Manufacturing Corporation (Monet)
executed an Export Packing Credit Line Agreement[4] under which
Monet was given a credit line in the amount of P250,000.00, secured by Land Banks Motion for Reconsideration [18] was denied by the
the proceeds of its export letters of credit,[5] the continuing guaranty of Court of Appeals on January 20, 2004,[19] hence, this petition raising the
the spouses Vicente V. Tagle, Sr. and Ma. Consuelo G. Tagle, [6] and the following issues:
third party mortgage executed by Pepita C. Mendigoria. [7]
1. Whether or not the respondent Court seriously erred in
The credit line agreement was renewed and amended several upholding the findings and conclusion of the trial court
times until it was increased to P5,000,000.00. Owing to the
[8] [9] limiting the liability of private respondents based on [the]
continued failure and refusal of Monet, notwithstanding repeated Summary of Availment and Schedule of Amortization and
demands, to pay its indebtedness to Land Bank, which have ballooned granting the latter opportunity losses anchored on the
to P11,464,246.19 by August 31, 1992, a complaint for collection of
[10] [11] theory that petitioner disrupted the cas[h] flow of
sum of money with prayer for preliminary attachment was filed by Land respondent MONETs which led to its decline;
Bank with the Regional Trial Court of Manila, docketed as Civil Case 2. Whether or not the respondent Court palpably erred in not
No. 93-64350.[12] clearly establishing petitioners right to collect payment
In their joint Answer with Compulsory Counterclaim, [13] Monet from private respondents loan validly obtained in the sum
and the Tagle spouses alleged that Land Bank failed and refused to of P11,464,246.19 Million which has become long overdue
collect the receivables on their export letter of credit against Wishbone and demandable.[20]
Trading Company of Hong Kong in the sum of US$33,434.00, while it The petition is partly impressed with merit.
made unauthorized payments on their import letter of credit to
Beautilike (H.K.) Ltd. in the amount of US$38,768.40, which seriously As regards the Beautilike account, the trial court and the Court of
damaged the business interests of Monet. Appeals erred in holding that Land Bank failed to protect Monets
interest when it paid the suppliers despite discrepancies in the
On July 15, 1997, the trial court rendered decision,[14] the shipment vis--vis the order specifications of Monet.
dispositive portion of which reads:
Our ruling in Bank of America, NT & SA v. Court of Appeals,[21] is
WHEREFORE, in view of the foregoing, judgment is hereby rendered as pertinent:
follows:
A letter of credit is a financial device developed by merchants as a
1. Recognizing the obligation of the defendants as stated in the Schedule convenient and relatively safe mode of dealing with sales of goods to
of Amortization from the Loans and Discount Department of LAND satisfy the seemingly irreconcilable interests of a seller, who refuses to
BANK (Exh. 39), as well as the interest mentioned therein, but deleting part with his goods before he is paid, and a buyer, who wants to have
the penalty thereof as no penalty should be charged and sentencing control of the goods before paying. To break the impasse, the buyer may
defendants jointly and severally to pay the amounts stated therein as be required to contract a bank to issue a letter of credit in favor of the
verified; seller so that, by virtue of the letter 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
2. Granting the counterclaim interposed by the defendants in the
the letter of credit. The buyer and the seller agree on what documents
amount of US$30,000.00 payable in Philippine Pesos at the official
are to be presented for payment, but ordinarily they are documents of
exchange rate when payment is to be made, to compensate for the
title evidencing or attesting to the shipment of the goods to the buyer.
defendants lost income opportunities occasioned by defendants
transaction with Wishbone Trading Corporation and with Beautilike,
the same to be deducted from the confirmed and computed obligation Once the credit is established, the seller ships the goods to the buyer
mentioned in No. 1 hereof; and 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
3. Denying the claim for attorneys fees for lack of merit.[15]
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
From the foregoing decision, Land Bank filed an appeal[16] with the credit requires.
Court of Appeals.

pg. 22
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 the 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 once the draft and the required shipping documents are
presented to it. In turn, this arrangement assures the seller of
prompt payment, independent of any breach of the main sales
contract. By this so-called independence principle, the bank
determines compliance with the letter of credit only by examining
the shipping documents presented; it is precluded from determining
whether the main contract is actually accomplished or
not. (Emphasis supplied)
Moreover, Article 3 of the Uniform Customs and Practice (UCP)
for Documentary Credits 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 thecredit is not subject to claims or defenses by the applicant
resulting from his relationships with the issuing bank or the beneficiary.
In particular, Article 15 of the UCP states:
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, 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. (Emphasis supplied)
On the matter, however, of the Wishbone transaction where it is
alleged by respondents that petitioner failed in its duty to protect its
(Monets) interest in collecting the amount due to it from its customers,
we find that the trial court and the Court of Appeals committed no
reversible error in holding Land Bank liable for opportunity losses. The
trial court summarized the transaction in this manner:
The shipment to Wishbone Trading Company was for US16,119.00 on
October 16, 1986. Documents were submitted without requesting for
purchase of export bills. This was sent by plaintiff (Land Bank) via telex
to Hongkong Bank requesting advice to pay as there were discrepancies.
On advice of Hongkong Bank plaintiff paid the first shipment. At this
point defendants (Monet and the Tagle spouses) were reluctant to
release the two subsequent documents to the buyer until payment of the
first shipment is made. When LANDBANK paid the defendants,
believing that everything was in order, defendants released the
documents for the two subsequent shipments, thinking that the
LANDBANKs international department had taken the necessary
measures for them to be paid. Wishbone then came up with new
additional discrepancies not listed in the cable sent by LANDBANK.
Defendants argue that if LANDBANK had acted prudently on this as it
used to do, Mantruste Hongkong could not have denied payment upon
the first instructions of the buyer based on the cable of LANDBANKs
international department. Defendants therefore asked LANDBANK to
share with them the burden of compelling the shrewd buyers to effect
the payment of the export bills. Furthermore, referring to the telex of
Mantruste Hongkong the original documents to Wishbone were sent
per requirement under the term of the Letter of Credit, but the goods
were consigned to the order of Wells Fargo Bank. Defendants believed
that Wells Fargo Bank should be responsible to the shipper. Thus the
defendants requested for assistance to telex Wells Fargo Bank to
inquire about the whereabouts of the merchandise shipped to them as
consignee. As early as November 30, 1986, Mantruste Hongkong sent a
telex addressed to the bank instructing it to pay MONET the sum of
US$16,119.00 for the first shipment despite discrepancies which were
minor and properly corrected. The evidence indicates that in the
Wishbone case the foreign buyer was actually putting one over the
defendants, which LANDBANK could have properly prevented had it
been more aggressive as is expected of a bank.

Exhibits 27 and 27-A clearly show that the terms and conditions of the
In Transfield Philippines, Inc. v. Luzon Hydro Corporation, et al.,[22] we held
that the engagement of the issuing bank is to pay the seller or Letter of Credit were substantially complied with by MONET. And the
beneficiary of the credit once the draft and the required documents are evidence shows that Wells Fargo Bank was included to receive the bills
presented to it. The so-called independence principle assures the seller of lading, notifying only Style Up of California, and yet LANDBANK did
or the beneficiary of prompt payment independent of any breach of not consider this for purposes of collection. These were testified to by
the main contract and precludes the issuing bank from determining defendant Consuelo Tagle who explained what happened, including
whether the main contract is actually accomplished or not. payments of account, which LANDBANK failed to rebut. LANDBANK
did not pursue collection on this despite the fact that the goods were
For, if the letter of credit is drawable only after the settlement of acceptable merchandise.[23]
any dispute on the main contract entered into by the applicant of the
said letter of credit and the beneficiary, then there would be no practical A careful review of the records reveal that the trial court correctly
and beneficial use for letters of credit in commercial transactions. considered Land Bank as the attorney-in-fact of Monet with regard to
Accordingly, we find merit in the contention of Land Bank that, as its export transactions with Wishbone Trading Company. It was
the issuing bank in the Beautilike transaction involving an import letter stipulated in the Deed of Assignment [24]executed between Monet and

of credit, it only deals in documents and it is not involved in the contract Land Bank on June 26, 1981:
between the parties. The relationship between the beneficiary and the That the ASSIGNOR/s (Monet) by these presents, does/do hereby
issuer of a letter of credit is not strictly contractual, because both privity
appoint/s the ASSIGNEE (Land Bank) their/his/her true and lawful
and a meeting of the minds are lacking. Thus, upon receipt by Land attorney-in-fact and in their/his/her place and stead, to demand, collect
Bank of the documents of title which conform with what the letter of and receive the proceeds of the export letters of credit at a loan value of
credit requires, it is duty bound to pay the seller, as it did in this case.
80% to be applied to the payment of the credit accommodation herein
Thus, no fault or acts of mismanagement can be attributed to Land secured. (Underscoring supplied)
Bank relative to Monets import letter of credit. Its actions find solid
footing on the legal principles and jurisprudence earlier discussed. Clearly, petitioners refusal to own its responsibility in the
Consequently, it was error for the trial court and for the Court of handling of the Wishbone account fails against the aforequoted
Appeals to grant opportunity losses to the respondents on this account. provision.
pg. 23
 As the attorney-in-fact of Monet in transactions involving its respondent, or where the findings of fact of the Court of Appeals are
export letters of credit, such as the Wishbone account, Land Bank premised on the absence of evidence but are contradicted by the
should have exercised the requisite degree of diligence in collecting the evidence on record.[29]
amount due to the former. The records of this case are bereft of evidence
showing that Land Bank exercised the prudence mandated by its Our review of the records of this case reveal that the reversible
contractual obligations to Monet. error committed by the lower court, and that of the Court of Appeals,
partook of the form of over reliance and sole reliance on the figures
The failure of Land Bank to judiciously safeguard the interest of contained in Exhibit 39, to the exclusion of other pieces of documentary
Monet is not without any repercussions vis--vis the viability of Monet evidence annexed by Land Bank to its complaint.
as a business enterprise. As correctly observed by the Court of Appeals:
There is no doubt that the respondents indeed owed Land Bank a
In fine, because of the non-collection defendants-appellees suffered from sum of money. This much was clearly established by the series of
a lack of financial resources sufficient to buy new materials. And since letters[30] written by the officers of Monet to Land Bank acknowledging
they also could no longer draw on their existing credit line with the corporations indebtedness, albeit without specifying any amount,
Landbank, they could not purchase materials to fill up the orders of and asking for understanding and more time within which they can
their customers. Because of this the business reputation of Monets settle their obligations. We note, however, that the respondents have
suffered which hastened its decline.[25] been consistent and persistent in their stand that they do not harbor
any intention of evading the payment of the amount they actually owed
The right of the respondents to be awarded opportunity losses to the petitioner, provided that there be a reconciliation of the payments
having been established, we now go to the determination of the proper made by the respondents on their loan obligations.
[31]

amount to be awarded to them under the circumstances obtaining in Indeed, Exhibit 39 or the Summary of Availment and Schedule of
this case. The lower court awarded to herein respondents opportunity Amortization, which was made by the trial court as the basis in
losses in the amount of US$30,000.00 based on its findings of two (2) determining the amount of indebtedness of the respondents to the
acts of mismanagement committed by Land Bank. The Court of Appeals petitioner, is a document issued by the Loans and Discounts
affirmed the amount of the award in the assailed decision. In view of our Department of Land Bank itself. Nevertheless, we note that the amount
findings that Land Bank is not guilty of mismanagement in its handling covered by the said summary pertains only to the indebtedness of
of Monets import letter of credit relative to the Beautilike transaction, Monet to Land Bank amounting to P2,500,000.00, as covered by
we hold that a reduction of the amount of the grant is in order. It is not Promissory Note No. P-981. The amount reflected in Exhibit 39 is so
possible for us to totally do away with the award of opportunity losses small when compared to the P11,464,246.19 which Land Bank sought to
having affirmed the findings of the trial court and the Court of Appeals collect from the respondents in its complaint before the trial court. The
that Land Bank, as the attorney-in-fact of Monet in its transaction with records of this case show that respondents, in the course of their credit
Wishbone Trading Company, committed acts of mismanagement. On transactions with Land Bank, executed not only one, but several
account of the foregoing reasons, we reduce the amount of opportunity promissory notes in varying amounts in favor of the bank.
losses granted to Monet to US$15,000.00 payable in Philippine pesos at
the official exchange rate when payment is to be made. On the other hand, Land Bank submitted a Consolidated
Statement of Account dated August 31, 1992[32] in support of its claim as
Anent the second issue, we find that the trial court erred in to the amount owed to it. The said document illustrated how, based on
limiting the obligation of the respondents to Land Bank to what was the computations made by Land Bank, the indebtedness of Monet
stated in the Schedule of Amortization from the Loans and Discounts ballooned to P11,464,246.19. Land Bank also submitted a Summary of
Department of LANDBANK, or Exhibit 39,[26] for the respondents. Availments and Payments from 1981 to 1989[33] which detailed the series
Prefatorily, we restate the time honored principle that in a petition of availments and payments made by Monet.
for review under Rule 45, only questions of law may be raised. It is not Notwithstanding the above facts, and considering that Monets
our function to analyze or weigh all over again evidence already Exhibit 39 was prepared before its due date of April 29, 1991, while Land
considered in the proceedings below, our jurisdiction is limited to Banks Consolidated Statement of Account was prepared much later on
reviewing only errors of law that may have been committed by the lower August 31, 1992, the trial court chose to overlook them and conveniently
court.[27] The resolution of factual issues is the function of lower courts, held that the correct basis of Monets indebtedness to Land Bank are the
whose findings on these matters are received with respect. A question of figures contained in Exhibit 39. Nonetheless, no explanation was
law which we may pass upon must not involve an examination of the proferred why it used Exhibit 39 as basis in determining the actual
probative value of the evidence presented by the litigants. [28] indebtedness of Monet. We note that instead of dealing squarely with
The above rule, however, admits of certain exceptions. The the issue of resolving the total amount of indebtedness due to Land
findings of fact of the Court of Appeals are generally conclusive Bank, the trial court and the Court of Appeals chose to expound on
but may be reviewed when: (1) the factual findings of the Court of Land Banks alleged acts of mismanagement.
Appeals and the trial court are contradictory; (2) the findings are In discussing this issue, all the trial court said was:
grounded entirely on speculation, surmises or conjectures; (3) the
inference made by the Court of Appeals from its findings of fact is LANDBANK claims that as of August 31, 1992, the defendants owe them
manifestly mistaken, absurd or impossible; (4) there is grave abuse of the sum of P11,464,246.19 payable with interest at the rate of 10% per
discretion in the appreciation of facts; (5) the appellate court, in making annum. But this is disputed by the defendants as shown in their
its findings, goes beyond the issues of the case and such findings are Summary of Availment and Schedule of Amortization (Exh. 39).[34]
contrary to the admissions of both appellant and appellee; (6) the
judgment of the Court of Appeals is premised on a misapprehension of While both the petitioner and the respondents submitted their
facts; (7) the Court of Appeals fails to notice certain relevant facts respective pieces of documentary evidence in support of their
which, if properly considered, will justify a different conclusion; and (8) contentions as to the amount of indebtedness due to petitioner, the trial
the findings of fact of the Court of Appeals are contrary to those of the court failed to calibrate and harmonize them.
trial court or are mere conclusions without citation of specific evidence,
or where the facts set forth by the petitioner are not disputed by

pg. 24
 Unfortunately, despite the pieces of evidence submitted by the
parties, our review of the same is inconclusive in determining the total
amount due to the petitioner. The petitioner had failed to establish the
effect of Monets Exhibit 39 to its own Consolidated Statement of
Account as of August 31, 1992, nor did the respondents categorically
refute the said statement of account vis--vis its Exhibit 39. The interest
of justice will best be served if this case be remanded to the court of
origin for the purpose of determining the amount due to petitioner. The
dearth in the records of sufficient evidence with which we can utilize in
making a categorical ruling on the amount of indebtedness due to the
petitioner constrains us to remand this case to the trial court with
instructions to receive additional evidence as needed in order to fully
thresh out the issue and establish the rights and obligations of the
parties. From the amount ultimately determined by the trial court as the
outstanding obligation of the respondents to the petitioner, will be
deducted the award of opportunity losses granted to the respondents in
the amount of US$ 15,000.00 payable in Philippine pesos at the official
exchange rate when payment is to be made.
WHEREFORE, the instant petition is GRANTED. The October 9,
2003 decision and the January 20, 2004 resolution of the Court of
Appeals in CA-G.R. CV No. 57436, are MODIFIED insofar as the award
of the counterclaim to the respondents is concerned. Accordingly, there
being no basis to award opportunity costs to the respondents, Monets
Export and Manufacturing Corporation and the spouses, Vicente V.
Tagle, Sr. and Ma. Consuelo G. Tagle, relative to the Beautilike account,
but finding good cause to sustain the award of opportunity costs to the
respondents on account of the failure of the petitioner to diligently
perform its duties as the attorney-in-fact of the respondents in the
Wishbone Trading Company account, the amount of opportunity costs WHEREFORE, the decision of the Regional Trial Court is hereby
granted to the respondents, is REDUCED to US$15,000.00 payable in reversed and in lieu thereof, a new one is entered:
Philippine pesos at the official exchange rate when payment is to be
made.
Insofar as the amount of indebtedness of the respondents to the
petitioner is concerned, the October 9, 2003 decision and the January
20, 2004 resolution of the Court of Appeals in CA-G.R. CV No. 57436,
are SET ASIDE. The case is hereby remanded to its court of origin, the
Regional Trial Court of Manila, Branch 49, for the reception of
additional evidence as may be needed to determine the actual amount of
indebtedness of the respondents to the petitioner. The trial court is
INSTRUCTED to deduct the award of opportunity losses granted to the
respondents, in the amount of US$15,000.00 payable in Philippine pesos
at the official exchange rate when payment is to be made, from the
amount ultimately determined as the actual amount of indebtedness of
the respondents to the petitioner. No pronouncement as to costs.
pg. 25
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.
DECISION
DE LEON, JR., J:
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 SiokSuy, 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:
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 jointly and severally guaranteed the prompt payment on due dates or at
General Manager, Mr. Mariano A. Sio, singly or jointly, be and they are duly maturity of overdrafts, promissory notes, discounts, drafts, letters of
authorized and empowered for and in behalf of this Corporation to apply for, credit, bills of exchange, trust receipts and all other obligations of any
negotiate and secure the approval of commercial loans and other banking facilities kind and nature for which MICO may be held accountable by PBCom. It
and accommodations, such as, but not limited to discount loans, letters of credit, trust was provided, however, that their liability shall not at any one time
exceed the sum of Seven Million Five Hundred Thousand Pesos
receipts, lines for marginal deposits on foreign and domestic letters of credit, negotiate
(P7,500,000.00) including interest, costs, charges, expenses and
out-of-town checks, etc. from the Philippine Bank of Communications, 216 Juan Luna, attorneys fees incurred by MICO in connection therewith.
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), On July 29, 1980, MICO furnished PBCom with a notarized
Philippine Currency, plus any interests that may be agreed upon with said Bank in certification issued by its corporate secretary, Atty. P.B. Barrera, that
such loans and other credit lines of the same kind and such further terms and Chua Siok Suy was duly authorized by the Board of Directors to
conditions as may, upon granting of said loans and other banking facilities, be negotiate on behalf of MICO for loans and other
credit availments from PBCom. Indicated in the certification was the
imposed by the Bank; and to make, execute, sign and deliver any contracts of
following resolution unanimously approved by the Board of Directors:
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, RESOLVED, AS IT IS HEREBY RESOLVED, That Mr. Chua Siok Suy be, as he is
indorsing, cashing, negotiation and execution of promissory notes, checks, money hereby authorized and empowered, on behalf of MICO METALS CORPORATION
orders or other negotiable instruments, which may be necessary and proper in from time to time, to borrow money and obtain other credit facilities, with or without
connection with said loans and other banking facilities, or with their amendments, security, from the PHILIPPINE BANK OF COMMUNICATIONS in such
renewals and extensions of payment of the whole or any part thereof.[4] 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
On March 26, 1979, MICO availed of the first loan of One Million connection therewith, including real estate and chattel mortgages, pledges and
Pesos (P1,000,000.00) from PBCom. Upon maturity of the loan, MICO assignments over the properties of the Corporation; and to renew and/or extend
caused the same to be renewed, the last renewal of which was made and/or roll-over and/or reavail of the credit facilities granted thereunder, either for
on May 21, 1982 under Promissory Note BNA No. 26218.[5] lesser or for greater amount(s), the intention being that such credit facilities and all
Another loan of One Million Pesos (P1,000,000.00) was availed of securities of whatever kind given as collaterals therefor shall be a continuing security.
by MICO from PBCom which was likewise later on renewed, the last
renewal of which was made on May 21, 1982 under Promissory Note RESOLVED FURTHER, That said bank is hereby authorized, empowered and
BNA No. 26219.[6] To complete MICOsavailment of Three Million Pesos directed to rely on the authority given hereunder, the same to continue in full force
(P3,000,000.00) discounting loan/credit line with PBCom, MICO and effect until written notice of its revocation shall be received by said Bank. [11]
availed of another loan from PBCom in the sum of One Million Pesos
(P1,000,000.00) on May 24, 1979. As in previous loans, this was rolled On July 2, 1981, MICO filed with PBCom an application for a
over or renewed, the last renewal of which was made on May 25, domestic letter of credit in the sum of Three Hundred Forty-Eight
1982 under Promissory Note BNA No. 26253.[7] Thousand Pesos (P348,000.00).[12] The corresponding irrevocable letter
As security for the loans, MICO through its Vice-President and of credit was approved and opened under LC No. L-16060. Thereafter,
[13]

General Manager, Mariano Sio, executed on May 16, 1979 a Deed of Real the domestic letter of credit was negotiated and accepted by MICO as
Estate Mortgage over its properties situated in Pasig, Metro Manila evidenced by the corresponding bank draft issued for the
covered by Transfer Certificates of Title (TCT) Nos. 11248 and 11250. 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 March 26, 1979 Charles Lee, Chua Siok Suy, Mariano Sio,
Alfonso Yap and Richard Velasco, in their personal capacities executed On September 14, 1981, MICO applied for another domestic letter
a Surety Agreement[8] in favor of PBCom whereby the petitioners jointly of credit with PBCom in the sum of Two Hundred Ninety Thousand
and severally, guaranteed the prompt payment on due dates or at Pesos (P290,000.00). The corresponding irrevocable letter of credit
[16]

maturity of overdrafts, promissory notes, discounts, drafts, letters of was issued on September 22, 1981 under LC No. L-16334.[17] After the
credit, bills of exchange, trust receipts, and other obligations of every beneficiary of the said letter of credit was paid by PBCom for the price
kind and nature, for which MICO may be held accountable by PBCom. of the merchandise, the goods were delivered to MICO which executed
It was provided, however, that the liability of the sureties shall not at a corresponding trust receipt [18] in favor of PBCom.

any one time exceed the principal amount of Three Million Pesos On November 10, 1981, MICO applied for authority to open a
(P3,000,000.00) plus interest, costs, losses, charges and expenses foreign letter of credit in favor of Ta Jih Enterprises Co., Ltd.,[19] and
including attorneys fees incurred by PBCom in connection therewith. thus, the corresponding letter of credit[20] was then issued
On July 14, 1980, petitioner Charles Lee, in his capacity as by PBCom with a cable sent to the beneficiary, Ta JihEnterprises Co.,
president of MICO, wrote PBCom and applied for an additional loan in Ltd. advising that said beneficiary may draw funds from the account
the sum of Four Million Pesos (P4,000,000.00). The loan was intended of PBCom in its correspondent banks New York Office.[21] PBCom also
for the expansion and modernization of the companys machineries. informed its corresponding bank in Taiwan, the Irving Trust Company,
Upon approval of the said application for loan, MICO availed of the of the approved letter of credit. The correspondent bank
additional loan of Four Million Pesos (P4,000,000.00) as evidenced by acknowledged PBComs advice through a confirmation letter[22] and by
Promissory Note TA No. 094.[9] debiting from PBComs account with the said correspondent bank the
sum of Eleven Thousand Nine Hundred Sixty US Dollars ($11
As per agreement, the proceeds of all the loan availments were ,960.00).[23] As in past transactions, MICO executed in favor of PBCom a
credited to MICOs current checking account with PBCom. To induce corresponding trust receipt.[24]
the PBCom to increase the credit line of MICO, Charles Lee,
Chua Siok Suy, Mariano Sio, Alfonso Yap, Richard Velasco and Alfonso On January 4, 1982, MICO applied, for authority to open a foreign
Co (hereinafter referred to as petitioners-sureties), executed another letter of credit in the sum of One Thousand Nine Hundred US Dollars
surety agreement in favor of PBCom on July 28, 1980, whereby they
[10] ($1,900.00), with PBCom.[25]
pg. 26
 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.
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 extrajudiciallyforeclosed 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 whether or not the proceeds of the loans and letters of credit
corresponding real estate mortgage and the surety agreements signed transactions were ever delivered to MICO, and b) whether or not the
concededly by the petitioners-sureties are null and void.
The trial court gave credence to the testimonies of herein Surety Agreements executed on March 26, 1979 and July 28, 1980.
petitioners and dismissed the complaint filed by PBCom. The trial court
likewise declared the real estate mortgage and its foreclosure null and his case by preponderance of evidence.[33] Preponderance of evidence
void. In ruling for herein petitioners, the trial court said means evidence which is more convincing to the court as worthy of
that PBCom failed to adequately prove that the proceeds of the loans belief than that which is offered in opposition thereto. Petitioners
were ever delivered to MICO. The trial court pointed out, among others,
pg. 27
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 (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 Siok Suy 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)
individual petitioners, as sureties, may be held liable under the two (2)
In civil cases, the party having the burden of proof must establish
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 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.
pg. 28
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.
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. Moises Rosete,
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 Perez Battery 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,
loan instruments and mortgages relative to the obtention of various ledger showing that the proceeds of the loans were credited
credit facilities from PBCom.
The above-cited documents presented have not merely created the testimony of PBComs witness, Gardiola, thus:
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 Siok Suy 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 Suy allegedly 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 MICOsobligations, 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
pg. 29
of stenographic notes reveals, however, that although private
respondent PBCom was willing to produce the corresponding account
to MICOs current account with PBCom, MICO in fact vigorously
objected to the presentation of said document. That point is shown in
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)
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, Petitioners further aver that MICO never requested that legal
now do you know what kind of current account was possession of the merchandise be transferred to PBCom by way of trust
that which you are referring to? receipts. Petitioners insist that assuming that MICO transferred
possession of the merchandise to PBCom by way of trust receipts, the
ATTY. ACEJAS: same would be illegal since PBCom, being a banking institution, is not
Objection your Honor, that is the disclose of the deposit authorized by law to engage in the business of importing and selling
of defendant Mico Metals Corporation and it cannot goods.
disclosed without the authority of the depositor. (sic)[37] A trust receipt is considered as a security transaction intended to
That proceeds of the loans which were originally availed of in 1979 aid in financing importers and retail dealers who do not have sufficient
were delivered to MICO is bolstered by the fact that more than a year funds or resources to finance the importation or purchase of
later, specifically on July 14, 1980, MICO through its president, merchandise, and who may not be able to acquire credit except through
petitioner-surety Charles Lee, requested for an additional loan of Four utilization, as collateral of the merchandise imported or purchased.[39] A
Million Pesos (P4,000,000.00) from PBCom. The fact that MICO was trust receipt, therefor, is a document of security pursuant to which a
requesting for an additional loan implied that it has already availed of bank acquires a security interest in the goods under trust receipt. Under
earlier loans from PBCom. 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
Petitioners allege that PBCom presented no evidence that it loan. The transaction involves a loan feature represented by a letter of
remitted payments to cover the domestic and foreign letters of credit. credit, and a security feature which is in the covering trust receipt
Petitioners placed much reliance on the erroneous decision of the trial which secures an indebtedness.
court which stated that private respondent PBCom allegedly failed to
prove that it actually made payments under the letters of credit since Petitioners averments with regard to the second issue are no less
the bank drafts presented as evidence show that they were made in incredulous. Petitioners contend that the letters of credit, surety
favor of the Bank of Taiwan and First Commercial Bank. agreements and loan transactions did not ripen into valid and binding
contracts since no part of the proceeds of the loan transactions were
Petitioners allegations are untenable. delivered to MICO or to any of the petitioners-sureties. Petitioners-
sureties allege that Chua Siok Suy was the beneficiary of the proceeds of
Modern letters of credit are usually not made between natural
the loans and that the latter made them sign the surety agreements in
persons. They involve bank to bank transactions. Historically, the letter
blank. Thus, they maintain that they should not be held accountable for
of credit was developed to facilitate the sale of goods between, distant
any liability that might arise therefrom.
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 It has not escaped our notice that it was petitioner-surety Charles
the buyer agree to pay drafts drawn on it by the seller, provided that Lee, as president of MICO Metals Corporation, who first requested for a
certain documents are presented such as bills of lading accompanied the discounting loan of Three Million Pesos (P3,000,000.00) from PBCom as
corresponding drafts. Expansion in the use of letters of credit was a evidenced by his letter dated March 2, 1979.[40] On the same day, Charles
natural development in commercial banking.[38] Parties to a commercial Lee, as President of MICO, requested for a Letter of Credit and Trust
letter of credit include (a) the buyer or the importer, (b) the seller, also Receipt line in the sum of Three Million Pesos (P3,000,000.00).[41] Still,
referred to as beneficiary, (c) the opening bank which is usually the on the same day, Charles Lee again as President of MICO, wrote another
buyers bank which actually issues the letter of credit, (d) the notifying letter to PBCOM requesting for a financing line in the sum of One
bank which is the correspondent bank of the opening bank through Million Five Hundred Thousand Pesos (P1,500,000.00) to be used
which it advises the beneficiary of the letter of credit, (e) negotiating exclusively as marginal deposit for the opening of MICOs foreign and
bank which is usually any bank in the city of the beneficiary. The local letters of credit with PBCom.[42]More than a year later, it was also
services of the notifying bank must always be utilized if the letter of Charles Lee, again in his capacity as president of MICO, who asked for
credit is to be advised to the beneficiary through cable, (f) the paying an additional loan in the sum of Four Million Pesos (P4,000,000.00).
bank which buys or discounts the drafts contemplated by the letter of The claim therefore of petitioners that it was Chua Siok Suy, in
credit, if such draft is to be drawn on the opening bank or on another connivance with the respondent PBCom, who applied for and obtained
designated bank not in the city of the beneficiary. As a rule, whenever the loan transactions and letters of credit strains credulity considering
the facilities of the opening bank are used, the beneficiary is supposed to that even the Deed of the Real Estate Mortgage in favor of PBCom was
present his drafts to the notifying bank for negotiation and (g) the executed by petitioner-surety Mariano Sio in his capacity as general
confirming bank which, upon the request of the beneficiary, confirms manager of MICO[43] to secure the loan accommodations obtained by
the letter of credit issued by the opening bank. MICO from PBCom.
From the foregoing, it is clear that letters of credit, being usually Petitioners-sureties allege that they were made to sign the surety
bank to bank transactions, involve more than just one bank. agreements in blank by Chua Siok Suy. Petitioner Alfonso Yap, the
Consequently, there is nothing unusual in the fact that the drafts corporate treasurer, for his part testified that he signed booklets of
presented in evidence by respondent bank were not made payable checks, surety agreements and promissory notes in blank; that he signed
to PBCom. As explained by respondent bank, a draft was drawn on the the documents in blank despite his misgivings since
Bank of Taiwan by Ta Jih Enterprises Co., Ltd. of Taiwan, supplier of Chua Siok Suy assured him that the transaction can easily be taken
the goods covered by the foreign letter of credit. Having paid the cared of since Chua Siok Suy personally knew the Chairman of the
supplier, the Bank of Taiwan then presented the bank draft for Board of PBCom; that he was not receiving salary as treasurer
reimbursement by PBComs correspondent bank in Taiwan, the Irving of Mico Metals and since Chua Siok Suy had a direct hand in the
Trust Company which explains the reason why on its face, the draft was management of Malayan Sales Corporation, of which Yap is an
made payable to the Bank of Taiwan. Irving Trust Company accepted employee, he (Yap) signed the documents in blank as consideration for
and endorsed the draft to PBCom. The draft was later transmitted his continued employment in Malayan Sales Corporation. Petitioner
to PBCom to support the latters claim for payment from MICO. MICO Antonio Co testified that he worked as office manager for MICO from
accepted the draft upon presentment and negotiated it to PBCom. 1978-1982. As office manager, he was the one in charge of transacting
business like purchasing, selling and paying the salary of the employees.
pg. 30
He was also in charge of the handling of documents pertaining to surety of Willex Plastic Industries Corporation vs. Court of Appeals, [46] we ruled that
agreements, trust receipts and promissory notes; [44] that when he first the consideration necessary to support a surety obligation need not pass
joined MICO Metals Corporation, he was able to read the by-laws of the directly to the surety, a consideration moving to the principal alone
corporation and he came to know that only the chairman and the being sufficient. For a guarantor or surety is bound by the same
president can borrow money in behalf of the corporation; that consideration that makes the contract effective between the parties
Chua Siok Suy once called him up and told him to secure an invoice so thereto. It is not necessary that a guarantor or surety should receive any
that a credit line can be opened in the bank with a local letter of credit; part or benefit, if such there be, accruing to his principal.
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 Petitioners placed too much reliance on the rule in evidence that
the authority of Chua Siok Suy pointing out that he (Co) is not the burden of proof does not shift whereas the burden of going forward
empowered to sign the document inasmuch as only the latter, as with the evidence does pass from party to party. It is true that said rule
president, was authorized to do so. However, Chua Siok Suy allegedly is not changed by the fact that the party having the burden of proof has
just said that he had already talked with the Chairman of the Board introduced evidence which established prima facie his assertion because
of PBCom; and that Chua Siok Suy reportedly said that he needed the such evidence does not shift the burden of proof; it merely puts the
money to finance a project that he had with the Taipei government. Co adversary to the necessity of producing evidence to meet the prima
also testified that he knew of the application for domestic letter of facie case. Where the defendant merely denies, either generally or
credit in the sum of Three Hundred Forty-Eight Thousand Pesos otherwise, the allegations of the plaintiffs pleadings, the burden of proof
(P348,000.00); and that a certain Moises Rosete was authorized to continues to rest on the plaintiff throughout the trial and does not shift
claim the check covering the Three Hundred Forty-Eight Thousand to the defendant until the plaintiffs evidence has been presented and
Pesos (P348,000.00) from PBCom; and that after claiming the duly offered. The defendant has then no burden except to produce
check Rosete brought it to Perez Battery Center for indorsement after evidence sufficient to create a state of equipoise between his proof and
which the same was deposited to the personal account of that of the plaintiff to defeat the latter, whereas the plaintiff has the
Chua Siok Suy.[45] burden, as in the beginning, of establishing his case by a preponderance
of evidence.[47] But where the defendant has failed to present
We consider as incredible and unacceptable the claim of and marshall evidence sufficient to create a state of equipoise between
petitioners-sureties that the Board of Directors of MICO was so careless his proof and that of plaintiff, the prima facie case presented by the
about the business affairs of MICO as well as about their own personal
plaintiff will prevail.
reputation and money that they simply relied on the say so of
Chua Siok Suy on matters involving millions of pesos. Under Section 3 In the case at bar, respondent PBCom, as plaintiff in the trial court,
(d), Rule 131 of the Rules of Court, it is presumed that a person takes has in fact presented sufficient documentary and testimonial evidence
ordinary care of his concerns. Hence, the natural presumption is that that proved by preponderance of evidence its subject collection case
one does not sign a document without first informing himself of its against the defendants who are the petitioners herein. In view of all the
contents and consequences. Said presumption acquires greater force in foregoing, the Court of Appeals committed no reversible error in its
the case at bar where not only one but several documents were executed appealed Decision.
at different times and at different places by the petitioner sureties and
Chua Siok Suy as president of MICO. WHEREFORE, the assailed Decision of the Court of Appeals in
CA-G.R. CV No. 27480 entitled, Philippine Bank of Communications
MICO and herein petitioners-sureties insist that vs. Mico Metals Corporation, Charles Lee, Chua Siok Suy, Mariano Sio,
Chua Siok Suy was not duly authorized to negotiate for loans in behalf Alfonso Yap, Richard Velasco and Alfonso Co, is AFFIRMED in toto.
of MICO from PBCom. Petitioners allegation, however, is belied by the
July 28, 1980 Certification issued by the corporate secretary of PBCom, Costs against the petitioners.
Atty. P.B. Barrera, that MICO's Board of Directors gave
SO ORDERED.
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
pg. 31
 METROPOLITAN WATERWORKS AND SEWERAGE
SYSTEM, PETITIONER , VS. ACT THEATER, INC., RESPONDENT.
DECISION
CALLEJO, SR., J.:
Before the Court is a petition for review on certiorari filed by the
Metropolitan Waterworks and Sewerage System (MWSS), seeking to
reverse and set aside the Decision[1] dated January 31, 2001 of the Court
of Appeals in CA-G.R. CV No. 58581, which affirmed the civil aspect of
the Decision[2] dated May 5, 1997 of the Regional Trial Court of Quezon
City, Branch 77, directing the petitioner MWSS to pay the respondent
Act Theater, Inc. damages and attorneys fees.
The present case stemmed from the consolidated cases of Criminal
Case No. Q-89-2412 entitled People of the Philippines v. Rodolfo Tabian, et
al., for violation of Presidential Decree (P.D.) No. 401, as amended by
Batas Pambansa Blg. 876, and Civil Case No. Q-88-768 entitled Act
Theater, Inc. v. Metropolitan Waterworks and Sewerage System. The two cases
were jointly tried in the court a quo as they arose from the same factual
circumstances, to wit:
On September 22, 1988, four employees of the respondent Act
Theater, Inc., namely, Rodolfo Tabian, Armando Aguilar, Arnel Concha
and Modesto Ruales, were apprehended by members of the Quezon
City police force for allegedly tampering a water meter in violation of
P.D. No. 401, as amended by B.P. Blg. 876. The respondents employees
were subsequently criminally charged (Criminal Case No. Q-89-2412)
before the court a quo. On account of the incident, the respondents
water service connection was cut off. Consequently, the respondent
filed a complaint for injunction with damages (Civil Case No. Q-88-768)
against the petitioner MWSS.
In the civil case, the respondent alleged in its complaint filed with PROVISION OF ARTICLE 429 OF THE SAME CODE.[5]
the court a quo that the petitioner acted arbitrarily, whimsically and
capriciously, in cutting off the respondents water service connection
without prior notice. Due to lack of water, the health and sanitation, not
only of the respondents patrons but in the surrounding premises as well,
were adversely affected. The respondent prayed that the petitioner be
directed to pay damages.
After due trial, the court a quo rendered its decision, the dispositive attorneys fees is improper considering that there was no discussion or
portion of which reads:
In Criminal Case No. Q-89-2412
WHEREFORE, for failure of the prosecution to prove the guilt of the
accused beyond reasonable doubt, the four (4) above-named Accused
are hereby ACQUITTED of the crime charged.[3]
In Civil Case No. Q-88-768
...
1. Ordering defendant MWSS to pay plaintiff actual or an actual or threatened unlawful physical invasion or usurpation of his
compensatory damages in the amount of P25,000.00; property.
and to return the sum of P200,000.00 deposited by the
plaintiff for the restoration of its water services after its
disconnection on September 23, 1988;
2. Defendants counterclaim for undercollection the other.[7]
of P530,759.96 is dismissed for lack of merit;
3. Ordering defendant MWSS to pay costs of suit;
pg. 32
4. Ordering defendant MWSS to pay plaintiff the amount
of P5,000.00 as attorneys fees;
5. Making the mandatory injunction earlier issued to plaintiff
Act Theater, Inc. permanent.
SO ORDERED.[4]
Aggrieved, the petitioner appealed the civil aspect of the aforesaid
decision to the CA. The appellate court, however, dismissed the appeal.
According to the CA, the court a quo correctly found that the petitioners
act of cutting off the respondents water service connection without
prior notice was arbitrary, injurious and prejudicial to the latter
justifying the award of damages under Article 19 of the Civil Code.
Undaunted, the petitioner now comes to this Court alleging as
follows:
I
WHETHER OR NOT THE HONORABLE COURT OF APPEAL[S]
VALIDLY AFFIRMED THE DECISION OF THE REGIONAL TRIAL
COURT IN RESOLVING THE PETITIONERS APPEAL;
II
WHETHER OR NOT THE HONORABLE COURT OF APPEALS
VALIDLY UPHELD THE AWARD OF ATTORNEYS FEES;
III
WHETHER OR NOT THE HONORABLE COURT OF APPEAL[S]
CORRECTLY APPLIED THE PROVISION OF ARTICLE 19 OF THE
NEW CIVIL CODE WITHOUT CONSIDERING THE APPLICABLE
Preliminarily, the petitioner harps on the fact that, in quoting the
decretal portion of the court a quos decision, the CA erroneously
typed P500,000 as the attorneys fees awarded in favor of the respondent
when the same should only be P5,000. In any case, according to the
petitioner, whether the amount is P500,000 or P5,000, the award of
statement in the body of the assailed decision justifying such award. The
petitioner insists that in cutting off the respondents water service
connection, the petitioner merely exercised its proprietary right under
Article 429 of the Civil Code.
The petition is devoid of merit.
Article 429 of the Civil Code, relied upon by the petitioner in
justifying its act of disconnecting the water supply of the respondent
without prior notice, reads:
Art. 429. The owner or lawful possessor of a thing has the right to
exclude any person from the enjoyment and disposal thereof. For this
purpose, he may use such force as may be reasonable to repel or prevent
A right is a power, privilege, or immunity guaranteed under a
constitution, statute or decisional law, or recognized as a result of long
usage,[6] constitutive of a legally enforceable claim of one person against
Concededly, the petitioner, as the owner of the utility providing
water supply to certain consumers including the respondent, had the
right to exclude any person from the enjoyment and disposal
thereof. However, the exercise of rights is not without METROPOLITAN WATERWORKS AND SEWERAGE
limitations. Having the right should not be confused with the manner by SYSTEM, PETITIONER , VS. HON. REYNALDO B. DAWAY, IN HIS
which such right is to be exercised.[8] CAPACITY AS PRESIDING JUDGE OF THE REGIONAL TRIAL
COURT OF QUEZON CITY, BRANCH 90 AND MAYNILAD
Article 19 of the Civil Code precisely sets the norms for the WATER SERVICES, INC., RESPONDENTS.
exercise of ones rights:
DECISION
Art. 19. Every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due, and AZCUNA, J.:
observe honesty and good faith.
On November 17, 2003, the Regional Trial Court (RTC) of Quezon
When a right is exercised in a manner which discards these norms City, Branch 90, made a determination that the Petition for
resulting in damage to another, a legal wrong is committed for which Rehabilitation with Prayer for Suspension of Actions and Proceedings
actor can be held accountable.[9] In this case, the petitioner failed to act filed by Maynilad Water Services, Inc. (Maynilad) conformed
with justice and give the respondent what is due to it when the substantially to the provisions of Sec. 2, Rule 4 of the Interim Rules of
petitioner unceremoniously cut off the respondents water service Procedure on Corporate Rehabilitation (Interim Rules). It forthwith
connection. As correctly found by the appellate court: issued a Stay Order[1] which states, in part, that the court was thereby:
While it is true that MWSS had sent a notice of investigation to xxxxxxxxx
plaintiff-appellee prior to the disconnection of the latters water services,
this was done only a few hours before the actual disconnection. Upon 2. Staying enforcement of all claims, whether for money or
receipt of the notice and in order to ascertain the matter, Act sent its otherwise and whether such enforcement is by court
assistant manager Teodulo Gumalid, Jr. to the MWSS office but he was action or otherwise, against the petitioner, its guarantors
treated badly on the flimsy excuse that he had no authority to represent and sureties not solidarily liable with the petitioner;
Act. Acts water services were cut at midnight of the day following the 3. Prohibiting the petitioner from selling, encumbering,
apprehension of the employees. Clearly, the plaintiff-appellee was transferring, or disposing in any manner any of its
denied due process when it was deprived of the water services. As a properties except in the ordinary course of business;
consequence thereof, Act had to contract another source to provide
water for a number of days. Plaintiff-appellee was also compelled to 4. Prohibiting the petitioner from making any payment of its
deposit with MWSS the sum of P200,000.00 for the restoration of their liabilities, outstanding as at the date of the filing of the
water services.[10] petition;
Subsequently, on November 27, 2003, public respondent, acting on
There is, thus, no reason to deviate from the uniform findings and
two Urgent Ex Parte motions[2] filed by respondent Maynilad, issued the
conclusion of the court a quo and the appellate court that the petitioners herein questioned Order[3] which stated that it thereby:
act was arbitrary, injurious and prejudicial to the respondent, justifying
the award of damages under Article 19 of the Civil Code. 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
Finally, the amount of P500,000 as attorneys fees in that portion of the US$120 million standby letter of credit so the banks have to make
the assailed decision which quoted the fallo of the court a quos decision good such call/drawing of payment of US$98 million by MWSS not
was obviously a typographical error. As attorneys fees, the court a later than November 27, 2003 at 10:00 P. M. or any similar act for that
quo awarded the amount of P5,000 only.It was this amount, as well as matter, is violative of the above-quoted sub-paragraph 2.) of the
actual and compensatory damages of P25,000 and the reimbursement dispositive portion of this Courts Stay Order dated November 17, 2003.
of P200,000 deposited by the respondent for the restoration of its water
supply, that the CA affirmed, as it expressly stated in its dispositive 2. ORDERS MWSS through its officers/officials to withdraw under pain
portion that finding no cogent reason to reverse the appealed Decision of contempt the written certification/notice of draw to Citicorp
which is in conformity with the law and evidence, the same is hereby International Limited dated November 24, 2003 and DECLARES void
AFFIRMED.[11] any payment by the banks to MWSS in the event such written
The award of P5,000 as attorneys fees is reasonable and certification/notice of draw is not withdrawn by MWSS and/or MWSS
warranted. Attorneys fees may be awarded when a party is compelled to receives payment by virtue of the aforesaid standby letter of credit.
litigate or incur expenses to protect his interest by reason of an
unjustified act of the other party.[12] Aggrieved by this Order, petitioner Manila Waterworks &
Sewerage System (MWSS) filed this petition for review by way
WHEREFORE, the petition is DENIED. The Decision of the of certiorari under Rule 65 of the Rules of Court questioning the legality
Court of Appeals dated January 31, 2001 in CA-G.R. CV No. 58581 is of said order as having been issued without or in excess of the lower
AFFIRMED in toto. courts jurisdiction or that the court a quo acted with grave abuse of
SO ORDERED. 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.

pg. 33
 To secure the concessionaires performance of its obligations under PETITIONERS CASE
the Concession Agreement, Maynilad was required under Section 6.9 of Petitioner hereby raises the following issues:
said contract to put up a bond, bank guarantee or other security
acceptable to MWSS. 1. DID THE HONORABLE PRESIDING JUDGE GRAVELY
ERR AND/OR ACT PATENTLY WITHOUT
In compliance with this requirement, Maynilad arranged on July JURISDICTION OR IN EXCESS OF JURISDICTION OR
14, 2000 for a three-year facility with a number of foreign banks, led by WITH GRAVE ABUSE OF DISCRETION AMOUNTING
Citicorp International Limited, for the issuance of an Irrevocable TO LACK OR EXCESS OF JURISDICTION IN
Standby Letter of Credit[6] in the amount of US$120,000,000 in favor of CONSIDERING THE PERFORMANCE BOND OR
MWSS for the full and prompt performance of Maynilads obligations to ASSETS OF THE ISSUING BANKS AS PART OR
MWSS as aforestated. PROPERTY OF THE ESTATE OF THE PRIVATE
RESPONDENT MAYNILAD SUBJECT TO
Sometime in September 2000, respondent Maynilad requested REHABILITATION.
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 2. DID THE HONORABLE PRESIDING JUDGE ACT WITH
of the Philippine Peso against the US Dollar. Failing to get what it LACK OR EXCESS OF JURISDICTION OR COMMIT A
desired, Maynilad issued a Force Majeure Notice on March 8, 2001 and GRAVE ERROR OF LAW IN HOLDING THAT THE
unilaterally suspended the payment of the concession fees. In an effort PERFORMANCE BOND OBLIGATIONS OF THE
to salvage the Concession Agreement, the parties entered into a BANKS WERE NOT SOLIDARY IN NATURE.
Memorandum of Agreement (MOA)[7] on June 8, 2001 wherein
Maynilad was allowed to recover foreign exchange losses under a 3. DID THE HONORABLE PRESIDING JUDGE GRAVELY
formula agreed upon between them. Sometime in August 2001 Maynilad ERR IN ALLOWING MAYNILAD TO IN EFFECT SEEK
again filed another Force Majeure Notice and, since MWSS could not A REVIEW OR APPEAL OF THE FINAL AND BINDING
agree with the terms of said Notice, the matter was referred on August DECISION OF THE APPEALS PANEL.
30, 2001 to the Appeals Panel for arbitration. This resulted in the parties In support of the first issue, petitioner maintains that as a matter
agreeing to resolve the issues through an amendment of the Concession of law, the US$120 Million Standby Letter of Credit and Performance
Agreement on October 5, 2001, known as Amendment No. 1,[8] which Bond are not property of the estate of the debtor Maynilad and,
was based on the terms set down in MWSS Board of Trustees therefore, not subject to the in rem rehabilitationjurisdiction of the trial
Resolution No. 457-2001, as amended by MWSS Board of Trustees court.
Resolution No. 487-2001,[9] which provided inter alia for a formula that
would allow Maynilad to recover foreign exchange losses it had Petitioner argues that a call made on the Standby Letter of Credit
incurred or would incur under the terms of the Concession Agreement. does not involve any asset of Maynilad but only assets of the
banks. Furthermore, a call on the Standby Letter of Credit cannot also
As part of this agreement, Maynilad committed, among other be considered a claim falling under the purview of the stay order as
things, to: alleged by respondent as it is not directed against the assets of
a) infuse the amount of UD$80.0 million as additional respondent Maynilad.
funding support from its stockholders; Petitioner concludes that the public respondent erred in declaring
b) resume payment of the concession fees; and 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.
c) mutually seek the dismissal of the cases pending before the
Court of Appeals and with Minor Dispute Appeals Panel. RESPONDENT MAYNILADS CASE

However, on November 5, 2002, Maynilad served upon MWSS a

Notice of Event of Termination, claiming that MWSS failed to comply Respondent Maynilad seeks to refute this argument by alleging
with its obligations under the Concession Agreement and Amendment that:
No. 1 regarding the adjustment mechanism that would cover Maynilads
a) the order objected to was strictly and precisely worded and issued
foreign exchange losses. On December 9, 2002, Maynilad filed a Notice
after carefully considering/evaluating the import of the arguments and
of Early Termination of the concession, which was challenged by
documents referred to by Maynilad, MWSS and/or creditors Chinatrust
MWSS. This matter was eventually brought before the Appeals Panel
Commercial Bank and Suez in relation to admissions, pleadings and/or
on January 7, 2003 by MWSS.[10] On November 7, 2003, the Appeals
pertinent records[13] and that public respondent had the authority to
Panel ruled that there was no Event of Termination as defined under
issue the same;
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.
b) public respondent never considered nor held that the Performance
The award of the Appeals Panel became final on November 22, bond or assets of the issuing banks are part or property of the estate of
2003. MWSS, thereafter, submitted a written notice [11] on November 24, respondent Maynilad subject to rehabilitation and which respondent
2003, to Citicorp International Limited, as agent for the participating Maynilad has not and has never claimed to be;[14]
banks, that by virtue of Maynilads failure to perform its obligations
under the Concession Agreement, it was drawing on the Irrevocable c) what is relevant is not whether the performance bond or assets of the
Standby Letter of Credit and thereby demanded payment in the amount issuing banks are part of the estate of respondent Maynilad but whether
of US$98,923,640.15. the act of petitioner in commencing the process for the payment by the
Prior to this, however, Maynilad had filed on November 13, 2003, a banks of US$98 million out of the US$120 million performance bond is
petition for rehabilitation before the court a quo which resulted in the covered and/or prohibited under sub-paragraphs 2.) and 4.) of the stay
issuance of the Stay Order of November 17, 2003 and the disputed Order order dated November 17, 2003;
of November 27, 2003.[12]

pg. 34
d) the jurisdiction of public respondent extends not only to the assets of those claims against guarantors and sureties who are not solidarily
respondent Maynilad but also over persons and assets of all those liable with the debtor. Respondent Maynilads claim that the banks are
affected by the proceedings x x x upon publication of the notice of not solidarily liable with the debtor does not find support in
commencement;[15] and jurisprudence.
We held in Feati Bank & Trust Company v. Court of Appeals[16] that the
e) the obligations under the Standby Letter of Credit are not solidary
and are not exempt from the coverage of the stay order. 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
OUR RULING 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
We will discuss the first two issues raised by petitioner as these
primarily liable. On the other hand, in an irrevocable letter of credit, the
are interrelated and make up the main issue of the petition before us
bank undertakes a primary obligation. We have also defined a letter of
which is, did the rehabilitation court sitting as such, act in excess of its
credit as an engagement by a bank or other person made at the request
authority or jurisdiction when it enjoined herein petitioner from seeking
of a customer that the issuer shall honor drafts or other demands of
the payment of the concession fees from the banks that issued the
payment upon compliance with the conditions specified in the credit. [17]
Irrevocable Standby Letter of Credit in its favor and for the account of
respondent Maynilad? Letters of credit were developed for the purpose of insuring to a
seller payment of a definite amount upon the presentation of
The public respondent relied on Sec. 1, Rule 3 of the Interim Rules
documents[18] and is thus a commitment by the issuer that the party in
on Corporate Rehabilitation to support its jurisdiction over the
whose favor it is issued and who can collect upon it will have his credit
Irrevocable Standby Letter of Credit and the banks that issued it. The
against the applicant of the letter, duly paid in the amount specified in
section reads in part that jurisdiction over those affected by the
the letter.[19] They are in effect absolute undertakings to pay the money
proceedings is considered acquired upon the publication of the notice of
advanced or the amount for which credit is given on the faith of the
commencement of proceedings in a newspaper of general circulation
instrument. They are primary obligations and not accessory contracts
and goes further to define rehabilitation as an in rem proceeding. This and while they are security arrangements, they are not converted
provision is a logical consequence of the in rem nature of the proceedings, thereby into contracts of guaranty.[20] What distinguishes letters of
where jurisdiction is acquired by publication and where it is necessary credit from other accessory contracts, is the engagement of the issuing
that the assets of the debtor come within the courts jurisdiction to bank to pay the seller once the draft and other required shipping
secure the same for the benefit of creditors. The reference to all those documents are presented to it.[21] They are definite undertakings to pay
affected by the proceedings covers creditors or such other persons or at sight once the documents stipulated therein are presented.
entities holding assets belonging to the debtor under rehabilitation
which should be reflected in its audited financial statements. The banks Letters of Credits have long been and are still governed by the
do not hold any assets of respondent Maynilad that would be material provisions of the Uniform Customs and Practice for Documentary
to the rehabilitation proceedings nor is Maynilad liable to the banks at Credits of the International Chamber of Commerce. In the 1993 Revision
this point. it provides in Art. 2 that the expressions Documentary Credit(s) and
Standby Letter(s) of Credit mean any arrangement, however made or
Respondent Maynilads Financial Statement as of December 31, described, whereby a bank acting at the request and on instructions of a
2001 and 2002 do not show the Irrevocable Standby Letter of Credit as customer or on its own behalf is to make payment against stipulated
part of its assets or liabilities, and by respondent Maynilads own document(s) and Art. 9 thereof defines the liability of the issuing banks
admission it is not. In issuing the clarificatory order of November 27, on an irrevocable letter of credit as a definite undertaking of the issuing
2003, enjoining petitioner from claiming from an asset that did not bank, provided that the stipulated documents are presented to the
belong to the debtor and over which it did not acquire jurisdiction, the nominated bank or the issuing bank and the terms and conditions of the
rehabilitation court acted in excess of its jurisdiction. Credit are complied with, to pay at sight if the Credit provides for sight
Respondent Maynilad insists, however, that it is Sec. 6 (b), Rule 4 payment.
[22]

of the Interim Rules that supports its claim that the commencement of We have accepted, in Feati Bank and Trust Company v. Court of
the process to draw on the Standby Letter of Credit is an enforcement of Appeals[23] and Bank of America NT & SA v. Court of Appeals,[24] to the extent
claim prohibited by and under the Interim Rules and the order of public
that they are pertinent, the application in our jurisdiction of the
respondent.
international credit regulatory set of rules known as the Uniform
Respondent Maynilad would persuade us that the above provision Customs and Practice for Documentary Credits (U.C.P) issued by the
justifies a leap to the conclusion that such an enforcement is prohibited International Chamber of Commerce, which we said in Bank of the
by said section because it is a claim against the debtor, its guarantors Philippine Islands v. Nery[25] was justified under Art. 2 of the Code of
and sureties not solidarily liable with the debtor and that there is Commerce, which states:
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 Acts of commerce, whether those who execute them be merchants or
be solidary with the respondent Maynilad. 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
We disagree. commerce generally observed in each place; and in the absence of both
rules, by those of the civil law.
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 The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does
Agreement, particularly the payment of concession fees. not apply to herein petitioner as the prohibition is on the enforcement of
claims against guarantors or sureties of the debtors whose obligations
Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin are not solidary with the debtor.
the enforcement of all claims against guarantors and sureties, but only
pg. 35
 The participating banks obligation are solidary with respondent and humble view that the issue must perforce be resolved in favor of
Maynilad in that it is a primary, direct, definite and an absolute Maynilad.[32] Hence to pursue their opposition before the same court
undertaking to pay and is not conditioned on the prior exhaustion of the would result in the presentation of the same arguments and issues
debtors assets. These are the same characteristics of a surety or solidary passed upon by public respondent.
obligor.
Furthermore, Sec. 5, Rule 3 of the Interim Rules would preclude
Being solidary, the claims against them can be pursued separately any other effective remedy questioning the orders of the rehabilitation
from and independently of the rehabilitation case, as held in Traders court since they are immediately executory and a petition for review or
Royal Bank v. Court of Appeals[26] and reiterated in Philippine Blooming Mills, an appeal therefrom shall not stay the execution of the order unless
Inc. v. Court of Appeals,[27] where we said that property of the surety cannot restrained or enjoined by the appellate court. In this situation, it had no
be taken into custody by the rehabilitation receiver (SEC) and said other remedy but to seek recourse to us through this petition
surety can be sued separately to enforce his liability as surety for the for certiorari.
debts or obligations of the debtor. The debts or obligations for which a
In Silvestre v. Torres and Oben,[33] we said that it is not enough that a
surety may be liable include future debts, an amount which may not be
remedy is available to prevent a party from making use of the
known at the time the surety is given.
extraordinary remedy of certiorari but that such remedy be an adequate
The terms of the Irrevocable Standby Letter of Credit do not show remedy which is equally beneficial, speedy and sufficient, not only a
that the obligations of the banks are not solidary with those of remedy which at some time in the future may offer relief but a remedy
respondent Maynilad. On the contrary, it is issued at the request of and which will promptly relieve the petitioner from the injurious acts of the
for the account of Maynilad Water Services, Inc., in favor of the lower tribunal. It is the inadequacy -- not the mere absence -- of all other
Metropolitan Waterworks and Sewerage System, as a bond for the full legal remedies and the danger of failure of justice without the writ, that
and prompt performance of the obligations by the concessionaire under must usually determine the propriety of certiorari.[34]
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 2. Respondent Maynilad argues that by commencing the process
certification substantially in the form Annex B of the Letter of Credit. It for payment under the Standby Letter of Credit, petitioner violated an
provides further in Sec. 6, that for as long as the Standby Letter of Credit immediately executory order of the court and, therefore, comes to Court
is valid and subsisting, the Banks shall honor any written Certification with unclean hands and should therefore be denied any relief.
made by MWSS in accordance with Sec. 2, of the Standby Letter of It is true that the stay order is immediately executory. It is also
Credit regardless of the date on which the event giving rise to such true, however, that the Standby Letter of Credit and the banks that
Written Certification arose.[29] issued it were not within the jurisdiction of the rehabilitation court. The
Taking into consideration our own rulings on the nature of letters call on the Standby Letter of Credit, therefore, could not be considered a
of credit and the customs and usage developed over the years in the violation of the Stay Order.
banking and commercial practice of letters of credit, we hold that 3. Respondents claim that the filing of the petition pre-empts the
except when a letter of credit specifically stipulates otherwise, the original jurisdiction of the lower court is without merit. The purpose of
obligation of the banks issuing letters of credit are solidary with that of the initial hearing is to determine whether the petition for rehabilitation
the person or entity requesting for its issuance, the same being a direct, has merit or not. The propriety of the stay order as well as the
primary, absolute and definite undertaking to pay the beneficiary upon clarificatory order had already been passed upon in the hearing
the presentation of the set of documents required therein. previously had for that purpose. The determination of whether the
The public respondent, therefore, exceeded his jurisdiction, in public respondent was correct in enjoining the petitioner from drawing
holding that he was competent to act on the obligation of the banks on the Standby Letter of Credit will have no bearing on the
under the Letter of Credit under the argument that this was not a determination to be made by public respondent whether the petition for
solidary obligation with that of the debtor. Being a solidary obligation, rehabilitation has merit or not. Our decision on the instant petition does
the letter of credit is excluded from the jurisdiction of the rehabilitation not pre-empt the original jurisdiction of the rehabilitation court.
court and therefore in enjoining petitioner from proceeding against the WHEREFORE, the petition for certiorari is GRANTED. The Order
Standby Letters of Credit to which it had a clear right under the law and
of November 27, 2003 of the Regional Trial Court of Quezon City,
the terms of said Standby Letter of Credit, public respondent acted in Branch 90, is hereby declared NULL AND VOID and SET ASIDE. The
excess of his jurisdiction.
status quo Order herein previously issued is hereby LIFTED. In view of
ADDITIONAL ISSUES the urgency attending this case, this decision is immediately executory.
We proceed to consider the other issues raised in the oral
No costs.
arguments and included in the parties memoranda:
SO ORDERED.
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
pg. 36
G.R. No. 124267 January 31, 2003 By Decision of February 27, 1995, the Court of Appeals dismissed PBC's
Petition for Certiorari.17 On PBC's Motion for Reconsideration, however,
NATIONAL COMMERCIAL BANK OF SAUDI the Court of Appeals, by Amended Decision of March 8, 1996, set aside
ARABIA, PETITIONER, its February 27, 1995 Decision and granted PBC's Petition for Certiorari
VS. and directed the trial court to resolve PBC's Motion for Reconsideration
COURT OF APPEALS AND PHILIPPINE BANKING (of the trial court's August 24, 1993 Decision).18
CORPORATION, RESPONDENTS.
Justifying its setting aside of its February 27, 1995 Decision, the Court of
CARPIO MORALES, J.: Appeals held in its Amended Decision:

May the unrippled doctrine that a motion filed without the requisite . . . [T]o deny petitioner's motion for reconsideration on the
notice of hearing is a useless piece of paper with no legal effect1 be, ground of failure to contain a notice of hearing is too harsh an
under the facts of the case, relaxed? application of procedural rules especially so when petitioner
has filed a motion to set the motion for reconsideration for
hearing and had furnished private respondent a copy of the
Petitioner National Commercial Bank of Saudi Arabia (NCBSA) filed a
motion, a fact which is not denied by the latter.19
case against respondent Philippine Banking Corporation (PBC) in the
Regional Trial Court (RTC) of Makati on December 4, 1985 to recover
"the duplication in the payment of the proceeds of a letter of credit NCBSA thus comes to this Court assailing the Court of Appeals'
[NCBSA] has issued . . . brought about by the fact that both the head Amended Decision.
office and the Makati branch of [PBC, the negotiating bank,] collected
the proceeds of the letter of credit."2 The petition is impressed with merit.

On August 24, 1993, the RTC of Makati rendered a decision in favor of The requirement of notice under Sections 4 and 5, Rule 15 in connection
NCBSA.3 PBC received a copy of the decision on September 3, 1993 4 and with Section 2, Rule 37 of the Revised Rules of Court 20 is mandatory.
The absence of a notice of hearing is fatal and, in cases of motions to
on the 12th day of the period of appeal or on September 15, 1993, it filed a
Motion for Reconsideration.5 The motion, however, did not contain a reconsider a decision, the running of the period to appeal is not tolled by
notice of hearing.6 their filing or pendency.21 In the case at bar, it is not disputed that PBC's
Motion for Reconsideration of the August 24, 1993 decision of the trial
On September 21, 1993, NCBSA filed a Manifestation pointing out that court did not contain the requisite notice of hearing.
PBC's Motion for Reconsideration did not contain any notice of
hearing.7 In an attempt to cure the defect, PBC filed on Motion to Set the "Motion
for Reconsideration" for Hearing on September 27, 1993, or 9 days after
On September 27, 1993, NCBSA filed a Motion for Writ of Execution of the period for filing the Notice of Appeal had expired.
the decision of the trial court. 8 On even date, PBC filed a Motion to Set
"Motion for Reconsideration" for Hearing9 alleging as follows: The motion for reconsideration, however, being fatally defective for lack
of notice of hearing, cannot be cured by a belated filing of a notice of
2. The Motion for Reconsideration raised both questions of hearing. More so in the case at bar where the Motion to Set the
22

facts and law arising from the erroneous findings made by the "Motion for Reconsideration" was filed after the expiration of the period
Honorable Court in the said Decision; for filing an appeal.

3. In order that defendant can fully amplify and expound on the NCBSA thus calls for the strict application of our rules of procedure to
issues raised on the said motions, there is a need to set the avoid further delays in the disposition of the case, which has remained
23

Motion for Hearing. pending for more than 17 years.

NCBSA opposed this motion vigorously, it praying that it be stricken off PBC, on the other hand, invokes a just and fair determination of the
the records.11 case.24

By Order of February 1, 1994, the trial court struck from the records of PBC's appeal for justice and fairness does not lie, however, there being
the case PBC's Motion for Reconsideration of its decision and granted nothing on record to show that it has been a victim of injustice or
NCBSA's Motion for Writ of Execution.12 unfairness. On the contrary, as found by the Court of Appeals in its
original decision, PBC had the opportunity to participate in the trial and
present its defense and had actually made full use of the remedies under
PBC filed a Motion for Reconsideration of said Order of February 1,
our rules of procedure.25 More importantly, there was no oppressive
1994, this time alleging that PBC's failure to comply with the 3-day
exercise of judicial authority that would call for the annulment of the
notice rule "was essentially an honest mistake or oversight of
trial court's resolutions.26
counsel." This motion was just as vigorously opposed by NCBSA.
13 14

The finality of the decision of the trial court cannot be set aside purely
By Order of March 2, 1994, the trial court denied PBC's Motion for
on the basis of liberality for while it is true that a litigation is not a game
Reconsideration of its Order of February 1, 1994, finding that "[t]here are
of technicalities, this does not mean that the Rules of Court may be
no compelling reasons to warrant a liberal construction of the rules on
ignored at will and at random. Only for the most persuasive of reasons
Motions."15
should the court allow a relaxation of its procedural rules. 27
PBC assailed before the Court of Appeals via Petition for Certiorari the
trial court's March 2, 1994 Order.16
pg. 37
PBC, however, has not advanced any persuasive or exceptional reason in
failing to set its Motion for Reconsideration of the trial court's decision
for hearing. In fact, in its Motion to Set "Motion for Reconsideration" for
Hearing, PBC was completely silent on why it did not set the Motion for
Reconsideration for hearing. It just alleged that, as earlier quoted, "[i]n
order that defendant can fully amplify and expound on the issues raised
on said motion, there is a need to set the Motion [for Reconsideration]
for Hearing."28 This allegation conveys that, if there was no need for PBC
to "fully amplify and expound on the issues raised" in the Motion for
Reconsideration, no setting for hearing of said motion was needed. But
as earlier stated, the requirement of notice in this kind of motion is
mandatory. The Motion for Reconsideration thus remained a mere scrap
of paper which deserved no consideration.
The second set for the same amount, although it was received and
credited to [PBC's] account with Chemical Bank New York, were to be
and subsequently transmitted to the account of Labroco (International,
Philippines) . . .37(Emphasis supplied.)
WHEREFORE, the instant petition for review on certiorari is
GRANTED. The Amended Decision of the Court of Appeals dated
March 8, 1996 is SET ASIDE and the Resolutions of the Regional Trial
Court declaring the Motion for Reconsideration filed by the Philippine
Banking Corporation as pro forma is REINSTATED.
SO ORDERED.

But assuming that PBC had presented exceptional reason or excuse for
its failure to comply with the notice requirement, the Motion for
Reconsideration would be denied on the ground that it is pro forma.

In its Rejoinder29 to NCBSA's Reply to Comment to the petition at bar,

PBC alleged that it was, in its Motion for Reconsideration of the trial
court's decision, raising "serious questions involving findings of fact and
conclusions of law by the trial court," thus "questioning the decision as
being contrary to law and the evidence on record."30 A reading of the
records will show, however, that the same three issues raised by PBC
during the trial — prescription, laches and lack of double payment —
are what are being raised in its Motion for Reconsideration of the
decision of the trial court.

PBC's Motion for Reconsideration of the trial court's decision was thus
"in substance . . . a reiteration of reasons and arguments" 31 raised before
the trial court for the dismissal of NCBSA's complaint, which reasons
and arguments had already been considered and resolved against it on
the merits by the trial court. The Motion for Reconsideration was thus
merely pro forma.

Technicality aside, en passant, on the merits of PBC's Motion for

Reconsideration of the trial court's decision, the trial court did not err in
brushing aside its main defense of prescription — that NCBSA's
complaint is "based on the quasi-contract of solutio indebiti,"32 hence, it
prescribes in six years and, therefore, when NCBSA filed its complaint
nine years after the cause of action arose, it had prescribed.

Solutio indebiti applies where: (1) a payment is made when there exists
no binding relation between the payor, who has no duty to pay, and the
person who received the payment, and (2) the payment is made through
mistake, and not through liberality or some other cause 33 In the case at
bar, PBC and NCBSA were bound by their contract, the letter of credit,
under which NCBSA obliged itself to pay PBC, subject to compliance by
the latter with certain conditions provided therein. As such, the cause of
action was based on a contract, and the prescriptive period is ten, 34 not
six years.

Even PBC's defense of laches is bereft of merit, the cause of action not
having yet prescribed at the time NCBSA's complaint was filed.

Courts should never apply the doctrine of laches earlier than the
expiration of time limited for the commencement of actions at law. 35

And as to PBC's allegation that the trial court erred in finding the
existence of double payment, suffice it to state that PBC, while denying
that there was double payment, itself admitted having received a second
set of payment for the same amount covered by the letter of credit. Thus,
in its petition for certiorari36 filed with the Court of Appeals, it alleged,
quoted verbatim:
pg. 38
G.R. No. 186063 January 15, 2014 WHEREFORE, the Court hereby renders judgment in favor of plaintiff
[SMC] ordering defendant Rodolfo Goroza to pay plaintiff the
following:
PHILIPPINE NATIONAL BANK, PETITIONER ,
VS. 1. The principal amount of ₱3,722,440.00;
SAN MIGUEL CORPORATION, RESPONDENT. 2. The interest of 12% per annum on the principal amount
reckoned from January 27, 1998 up to the time of execution of
DECISION the Judgment of this case;
3. Attorney's fees of ₱30,000.00;
PERALTA, J.: 4. Litigation expenses of ₱20,000.00.
SO ORDERED.8
This treats of the petition for review on certiorari of the Decision 1 and
Resolution2 of the Court of Appeals (CA), dated June 7 2008 and Goroza filed a Notice of Appeal,9 while SMC filed a Motion for
December 15, 2008, respectively, in CA-G.R. SP No. 01249-MIN. Reconsideration.10

The facts, as summarized by the CA, are as follows: On July 14, 2005, the RTC granted SMC's motion for reconsideration.
The trial court amended its Decision by increasing the award of
On July 1, 1996, respondent San Miguel Corporation (SMC, for brevity) litigation expenses to ₱90,652.50.
11

entered into an Exclusive Dealership Agreement with a certain Rodolfo

R. Goroza (Goroza, hereafter), wherein the latter was given by SMC the Thereafter, on July 25, 2005, the RTC issued an Order,12 pertinent
right to trade, deal, market or otherwise sell its various beer products. portions of which read as follows: Finding the Notice of Appeal filed
within the reglementary period and the corresponding appeal fee paid, x
Goroza applied for a credit line with SMC, but one of the requirements x x. The same is hereby given due course.
for the credit line was a letter of credit. Thus, Goroza applied for and
was granted a letter of credit by the PNB in the amount of two million Considering that the case as against defendant PNB is still on-going, let
pesos (₱2,000,000.00). Under the credit agreement, the PNB has the the Record in this case insofar as defendant Rodolfo R. Goroza is
obligation to release the proceeds of Goroza's credit line to SMC upon concerned, be reproduced at the expense of defendant-appellant so that
presentation of the invoices and official receipts of Goroza's purchases the same can be forwarded to the Court of Appeals, together with the
of SMC beer products to the PNB, Butuan Branch. exhibits and transcript of stenographic notes in the required number of
copies. SO ORDERED.13
On August 1, 1996, Goroza availed of his credit line with PNB and
started selling SMC's beer products x x x. In the meantime, trial continued with respect to PNB.

On February 11, 1997, Goroza applied for an additional credit line with
the PNB. The latter granted Goroza a one (1) year revolving credit line in
the amount not exceeding two million four hundred thousand pesos
(₱2,400,000.00). Thus, Goroza's total credit line reached four million
four hundred thousand pesos (₱4,400,000.00) x x x. Initially, Goroza
was able to pay his credit purchases with SMC x x x. Sometime in
January 1998, however, Goroza started to become delinquent with his
accounts.
On September 27, 2005, PNB filed an Urgent Motion to Terminate
Proceedings14 on the ground that a decision was already rendered on
May 10, 2005 finding Goroza solely liable.
The RTC denied PNB's motion in its Resolution15 dated October 11,
2005.
On October 14, 2005, the RTC issued a Supplemental Judgment,16 thus:

Demands to pay the amount of three million seven hundred twenty-two The Court omitted by inadvertence to insert in its decision dated May
thousand four hundred forty pesos and 88/100 (₱3,722,440.88) were 10, 2005 the phrase "without prejudice to the decision that will be made
made by SMC against Goroza and PNB, but neither of them paid. Thus, against the other co-defendant, PNB, which was not declared in default."
on April 23, 2003, SMC filed a Complaint for collection of sum of money
against PNB and Goroza with the respondent Regional Trial Court
WHEREFORE, the phrase "without prejudice to the decision made
Branch 3, Butuan City.3
against the other defendant PNB which was not declared in default"
shall be inserted in the dispositive portion of said decision.
After summons, herein petitioner filed its Answer,4 while Goroza did
not. Upon respondent's Motion to Declare Defendant in
SO ORDERED.17
Default,5 Goroza was declared in default.

On even date, the RTC also issued an Amended Order,18 to wit:

Trial ensued insofar as Goroza was concerned and respondent presented
its evidence ex parte against the former. Respondent made a formal offer
of its exhibits on April 6, 2004 and the trial court admitted them on The Court's Order dated July 25, 2005 is hereby amended to include the
June 16, 2004. phrase "this appeal applies only to defendant Rolando Goroza and
without prejudice to the continuance of the hearing on the other
defendant Philippine National Bank".
Thereafter, on January 21, 2005, pre-trial between PNB and SMC was
held. 6
SO ORDERED.19
On May 10, 2005, the RTC rendered a Decision,7 disposing as follows:

pg. 39
PNB then filed a Motion for Reconsideration 20 of the above-quoted insofar as PNB is concerned, because the appeal made by Goroza was
Supplemental Judgment and Amended Order, but the RTC denied the only with respect to his own liability. In fact, PNB itself, in its Reply to
said motion via its Resolution21 dated July 6, 2006. respondent's Comment, admitted that the May 10, 2005 judgment of the
RTC was "decided solely against defendant Rodolfo Goroza."25
Aggrieved, PNB filed a special civil action for certiorari with the CA
imputing grave abuse of discretion on the part of the RTC for having The propriety of a several judgment is borne by the fact that SMC's
issued its July 6, 2006 Resolution.22 cause of action against PNB stems from the latter's alleged liability
under the letters of credit which it issued. On the other hand, SMC's
On June 17, 2008, the CA rendered its questioned Decision denying the cause of action against Goroza is the latter's failure to pay his obligation
petition and affirming the assailed Resolution of the RTC. to the former.1âwphi1 As to the separate judgment, PNB has a
counterclaim against SMC which is yet to be resolved by the RTC.
PNB filed a Motion for Reconsideration,23 but the CA denied it in its
assailed Resolution. Hence, the instant petition with the following Indeed, the issues between SMC and PNB which are to be resolved by
Assignment of Errors: the RTC, as contained in the trial court's Pre-Trial Order dated January
21, 2005, were not addressed by the RTC in its Decision rendered
THE COURT OF APPEALS ERRED IN HOLDING THAT THE TRIAL against Goroza. In particular, the RTC judgment against Goroza did not
COURT WAS CORRECT IN RENDERING A SUPPLEMENTAL make any determination as to whether or not PNB is liable under the
JUDGMENT AND AMENDED ORDER AGAINST THE BANK letter of credit it issued and, if so, up to what extent is its liability. In
DESPITE THE PERFECTION OF APPEAL OF ONE OF THE fact, contrary to PNB's claim, there is nothing in the RTC judgment
DEFENDANTS. which ruled that Goroza is "solely liable" to pay the amount which SMC
seeks to recover.
THE COURT OF APPEALS ERRED IN HOLDING THAT
PROCEEDINGS MAY CONTINUE AGAINST PNB DESPITE THE In this regard, this Court's disquisition on the import of a letter26 of
COMPLETE ADJUDICATION OF RELIEF IN FAVOR OF SMC. 24 credit, in the case ofTransfield Philippines, Inc. v. Luzon Hydro Corporation, as
correctly cited by the CA, is instructive, to wit:
PNB contends that the CA erred in holding that the RTC was correct in
rendering its Supplemental Judgment and Amended Order despite the By definition, a letter of credit is a written instrument whereby the
perfection of Goroza's appeal. PNB claims that when Goroza's appeal writer requests or authorizes the addressee to pay money or deliver
was perfected, the RTC lost jurisdiction over the entire case making the goods to a third person and assumes responsibility for payment of debt
assailed Supplemental Judgment and Amended Order void for having therefor to the addressee. A letter of credit, however, changes its nature
been issued without or in excess of jurisdiction. 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
PNB also argues that the CA erred in ruling that proceedings against it
between the parties thereto.
may continue in the RTC, despite the trial court's complete adjudication
of relief in favor of SMC. PNB avers that the May 10, 2005 Decision of
the RTC, finding Goroza solely liable to pay the entire amount sought to Thus, the engagement of the issuing bank is to pay the seller or
be recovered by SMC, has settled the obligation of both Goroza and beneficiary of the credit once the draft and the required documents are
PNB, and that there is no longer any ground to hold PNB for trial and presented to it. The so-called "independence principle" assures the seller
make a separate judgment against it; otherwise, SMC will recover twice or the beneficiary of prompt payment independent of any breach of the
for the same cause of action. 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,
The petition lacks merit.
sufficiency, accuracy, genuineness, falsification or legal effect of any
documents, or for the general and/or particular conditions stipulated in
It is clear from the proceedings held before and the orders issued by the the documents or superimposed thereon, nor do they assume any
RTC that the intention of the trial court is to conduct separate liability or responsibility for the description, quantity, weight, quality,
proceedings to determine the respective liabilities of Goroza and PNB, condition, packing, delivery, value or existence of the goods represented
and thereafter, to render several and separate judgments for or against by any documents, or for the good faith or acts and/or omissions,
them. While ideally, it would have been more prudent for the trial court solvency, performance or standing of the consignor, the carriers, or the
to render a single decision with respect to Goroza and PNB, the insurers of the goods, or any other person whomsoever.
procedure adopted the RTC is, nonetheless, allowed under Section 4,
Rule 36 of the Rules of Court, which provides that "in an action against
several defendants, the court may, when a several judgment is proper,
As discussed above, in a letter of credit transaction, such as in this case,
render judgment against one or more of them, leaving the action to
where the credit is stipulated as irrevocable, there is a definite
proceed against the others." In addition, Section 5 of the same Rule
undertaking by the issuing bank to pay the beneficiary provided that the
states that "when more than one claim for relief is presented in an
stipulated documents are presented and the conditions of the credit are
action, the court at any stage, upon a determination of the issues
complied with. Precisely, the independence principle liberates the
material to a particular claim and all counterclaims arising out of the
issuing bank from the duty of ascertaining compliance by the parties in
transaction or occurrence which is the subject matter of the claim may
the main contract. As the principle's nomenclature clearly suggests, the
render a separate judgment disposing of such claim." Further, the same
obligation under the letter of credit is independent of the related and
provision provides that "the judgment shall terminate the action with
originating contract. In brief, the letter of credit is separate and distinct
respect to the claim so disposed of and the action shall proceed as to the
from the underlying transaction.27
remaining claims." Thus, the appeal of Goroza, assailing the judgment of
the RTC finding him liable, will not prevent the continuation of the
ongoing trial between SMC and PNB. The RTC retains jurisdiction
pg. 40
In other words, PNB cannot evade responsibility on the sole ground that PRUDENTIAL BANK, petitioner,
the RTC judgment found Goroza liable and ordered him to pay the vs.
amount sought to be recovered by SMC. PNB's liability, if any, under the INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON
letter of credit is yet to be determined. MILLS, INC. and ANACLETO R. CHI, respondents.

WHEREFORE, the instant petition is DENIED. The Decision of the DAVIDE, JR., J.:
Court of Appeals, dated June 17, 2008, and its Resolution dated
December 15, 2008, both in CA-G.R. SP No. 01249-MIN, are Petitioner seeks to review and set aside the decision 1 of public
AFFIRMED. respondent; Intermediate Appellate Court (now Court of Appeals),
dated 10 March 1986, in AC-G.R. No. 66733 which affirmed in toto the 15
SO ORDERED. June 1978 decision of Branch 9 (Quezon City) of the then Court of First
Instance (now Regional Trial Court) of Rizal in Civil Case No. Q-19312.
The latter involved an action instituted by the petitioner for the
recovery of a sum of money representing the amount paid by it to the
Nissho Company Ltd. of Japan for textile machinery imported by the
defendant, now private respondent, Philippine Rayon Mills, Inc.
(hereinafter Philippine Rayon), represented by co-defendant Anacleto
R. Chi.

The facts which gave rise to the instant controversy are summarized by
the public respondent as follows:

On August 8, 1962, defendant-appellant Philippine Rayon

Mills, Inc. entered into a contract with Nissho Co., Ltd. of
Japan for the importation of textile machineries under a five-
year deferred payment plan (Exhibit B, Plaintiff's Folder of
Exhibits, p 2). To effect payment for said machineries, the
defendant-appellant applied for a commercial letter of credit
with the Prudential Bank and Trust Company in favor of
Nissho. By virtue of said application, the Prudential Bank
opened Letter of Credit No. DPP-63762 for $128,548.78
(Exhibit A, Ibid., p. 1). Against this letter of credit, drafts were
drawn and issued by Nissho (Exhibits X, X-1 to X-11, Ibid., pp.
65, 66 to 76), which were all paid by the Prudential Bank
through its correspondent in Japan, the Bank of Tokyo, Ltd. As
indicated on their faces, two of these drafts (Exhibit X and X-
1, Ibid., pp. 65-66) were accepted by the defendant-appellant
through its president, Anacleto R. Chi, while the others were
not (Exhibits X-2 to X-11, Ibid., pp. 66 to 76).

Upon the arrival of the machineries, the Prudential Bank

indorsed the shipping documents to the defendant-appellant
which accepted delivery of the same. To enable the defendant-
appellant to take delivery of the machineries, it executed, by
prior arrangement with the Prudential Bank, a trust receipt
which was signed by Anacleto R. Chi in his capacity as
President (sic) of defendant-appellant company (Exhibit
C, Ibid., p. 13).

At the back of the trust receipt is a printed form to be

accomplished by two sureties who, by the very terms and
conditions thereof, were to be jointly and severally liable to the
Prudential Bank should the defendant-appellant fail to pay the
total amount or any portion of the drafts issued by Nissho and
paid for by Prudential Bank. The defendant-appellant was able
to take delivery of the textile machineries and installed the
same at its factory site at 69 Obudan Street, Quezon City.

Sometime in 1967, the defendant-appellant ceased business

operation (sic). On December 29, 1969, defendant-appellant's
factory was leased by Yupangco Cotton Mills for an annual
rental of P200,000.00 (Exhibit I, Ibid., p. 22). The lease was
renewed on January 3, 1973 (Exhibit J, Ibid., p. 26). On January
pg. 41
 5, 1974, all the textile machineries in the defendant-appellant's In its decision, public respondent sustained the trial court in all
factory were sold to AIC Development Corporation for respects. As to the first and last assigned errors, it ruled that the
P300,000.00 (Exhibit K, Ibid., p. 29). 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
The obligation of the defendant-appellant arising from the clear showing that the payment is justified. In the instant case, the
letter of credit and the trust receipt remained unpaid and relationship existing between the petitioner and Philippine Rayon is
unliquidated. Repeated formal demands (Exhibits U, V, and governed by specific contracts, namely the application for letters of
W, Ibid., pp. 62, 63, 64) for the payment of the said trust credit, the promissory note, the drafts and the trust receipt. With
receipt yielded no result Hence, the present action for the respect to the last ten (10) drafts (Exhibits "X-2" to "X-11") which had
collection of the principal amount of P956,384.95 was filed on not been presented to and were not accepted by Philippine Rayon,
October 3, 1974 against the defendant-appellant and Anacleto petitioner was not justified in unilaterally paying the amounts stated
R. Chi. In their respective answers, the defendants interposed therein. The public respondent did not agree with the petitioner's claim
identical special defenses, viz., the complaint states no cause of that the drafts were sight drafts which did not require presentment for
action; if there is, the same has prescribed; and the plaintiff is acceptance to Philippine Rayon because paragraph 8 of the trust receipt
guilty of laches. 2 presupposes prior acceptance of the drafts. Since the ten (10) drafts
were not presented and accepted, no valid demand for payment can be
made.
On 15 June 1978, the trial court rendered its decision the dispositive
portion of which reads:
Public respondent also disagreed with the petitioner's contention that
private respondent Chi is solidarily liable with Philippine Rayon
WHEREFORE, judgment is hereby rendered sentencing the pursuant to Section 13 of P.D. No. 115 and based on his signature on the
defendant Philippine Rayon Mills, Inc. to pay plaintiff the sum solidary guaranty clause at the dorsal side of the trust receipt. As to the
of P153,645.22, the amounts due under Exhibits "X" & "X-1", first contention, the public respondent ruled that the civil liability
with interest at 6% per annum beginning September 15, 1974 provided for in said Section 13 attaches only after conviction. As to the
until fully paid. second, it expressed misgivings as to whether Chi's signature on the
trust receipt made the latter automatically liable thereon because the so-
Insofar as the amounts involved in drafts Exhs. "X" (sic) to "X- called solidary guaranty clause at the dorsal portion of the trust receipt
11", inclusive, the same not having been accepted by defendant is to be signed not by one (1) person alone, but by two (2) persons; the
Philippine Rayon Mills, Inc., plaintiff's cause of action thereon last sentence of the same is incomplete and unsigned by witnesses; and
has not accrued, hence, the instant case is premature. it is not acknowledged before a notary public. Besides, even granting
that it was executed and acknowledged before a notary public, Chi
Insofar as defendant Anacleto R. Chi is concerned, the case is cannot be held liable therefor because the records fail to show that
dismissed. Plaintiff is ordered to pay defendant Anacleto R. Chi petitioner had either exhausted the properties of Philippine Rayon or
the sum of P20,000.00 as attorney's fees. 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,
With costs against defendant Philippine Rayon Mills, Inc. 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
SO ORDERED. 3
Its motion to reconsider the decision having been denied by the public
Petitioner appealed the decision to the then Intermediate Appellate respondent in its Resolution of 11 June 1986, 6 petitioner filed the instant
Court. In urging the said court to reverse or modify the decision, petition on 31 July 1986 submitting the following legal issues:
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 I. WHETHER OR NOT THE RESPONDENT APPELLATE
was paid to the Nissho Company Ltd., thereby violating the principle of COURT GRIEVOUSLY ERRED IN DENYING
the third party payor's right to reimbursement provided for in the PETITIONER'S CLAIM FOR FULL REIMBURSEMENT
second paragraph of Article 1236 of the Civil Code and under the rule AGAINST THE PRIVATE RESPONDENTS FOR THE
against unjust enrichment; (b) refusing to hold Anacleto R. Chi, as the PAYMENT PETITIONER MADE TO NISSHO CO. LTD. FOR
responsible officer of defendant corporation, liable under Section 13 of THE BENEFIT OF PRIVATE RESPONDENT UNDER ART.
P.D No 115 for the entire unpaid balance of the imported machines 1283 OF THE NEW CIVIL CODE OF THE PHILIPPINES AND
covered by the bank's trust receipt (Exhibit "C"); (c) finding that the UNDER THE GENERAL PRINCIPLE AGAINST UNJUST
solidary guaranty clause signed by Anacleto R. Chi is not a guaranty at ENRICHMENT;
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) II. WHETHER OR NOT RESPONDENT CHI IS SOLIDARILY
contravening, based on the assumption that Chi is a simple guarantor, LIABLE UNDER THE TRUST RECEIPT (EXH. C);
Articles 2059, 2060 and 2062 of the Civil Code and the related evidence
and jurisprudence which provide that such liability had already III. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL
attached; (f) contravening the judicial admissions of Philippine Rayon ADMISSIONS OF RESPONDENT CHI HE IS LIABLE
with respect to its liability to pay the petitioner the amounts involved in THEREON AND TO WHAT EXTENT;
the drafts (Exhibits "X", "X-l" to "X-11''); and (g) interpreting "sight"
drafts as requiring acceptance by Philippine Rayon before the latter IV. WHETHER OR NOT RESPONDENT CHI IS MERELY A
could be held liable thereon. 4 SIMPLE GUARANTOR; AND IF SO; HAS HIS LIABILITY AS
SUCH ALREADY ATTACHED;

pg. 42
 V. WHETHER OR NOT AS THE SIGNATORY AND stipulated in the Application and Agreement of
RESPONSIBLE OFFICER OF RESPONDENT PHIL. RAYON Commercial Letter of Credit Annex "A".
RESPONDENT CHI IS PERSONALLY LIABLE PURSUANT
TO THE PROVISION OF SECTION 13, P.D. 115; 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
VI. WHETHER OR NOT RESPONDENT PHIL. RAYON IS other demands for payment upon compliance with the conditions
LIABLE TO THE PETITIONER UNDER THE TRUST specified in the credit. 11Through a letter of credit, the bank merely
RECEIPT (EXH. C); 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
VII. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL letter of credit plus credit or commitment fees mutually agreed
ADMISSIONS RESPONDENT PHIL. RAYON IS LIABLE TO upon. In the instant case then, the drawee was necessarily the herein
12

THE PETITIONER UNDER THE DRAFTS (EXHS. X, X-1 TO petitioner. It was to the latter that the drafts were presented for
X-11) AND TO WHAT EXTENT; 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
VIII. WHETHER OR NOT SIGHT DRAFTS REQUIRE
Instruments Law (NIL). 13 The said section reads:
PRIOR ACCEPTANCE FROM RESPONDENT PHIL. RAYON
BEFORE THE LATTER BECOMES LIABLE TO
PETITIONER. 7 Sec. 143. When presentment for acceptance must be made. —
Presentment for acceptance must be made:
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 (a) Where the bill is payable after sight, or in any
Anacleto Chi and of the Reply to the latter by the petitioner; both other case, where presentment for acceptance is
parties were also required to submit their respective memoranda which necessary in order to fix the maturity of the
they subsequently complied with. instrument; or

As We see it, the issues may be reduced as follows:
1. Whether presentment for acceptance of the drafts was
indispensable to make Philippine Rayon liable thereon;
2. Whether Philippine Rayon is liable on the basis of the trust
receipt;
3. Whether private respondent Chi is jointly and severally
liable with Philippine Rayon for the obligation sought to be
enforced and if not, whether he may be considered a guarantor;
in the latter situation, whether the case should have been
dismissed on the ground of lack of cause of action as there was
no prior exhaustion of Philippine Rayon's properties.
Both the trial court and the public respondent ruled that Philippine
Rayon could be held liable for the two (2) drafts, Exhibits "X" and "X-1",
because only these appear to have been accepted by the latter after due
presentment. The liability for the remaining ten (10) drafts (Exhibits "X-
2" to "X-11" inclusive) did not arise because the same were not presented
for acceptance. In short, both courts concluded that acceptance of the
drafts by Philippine Rayon was indispensable to make the latter liable
thereon. We are unable to agree with this proposition. The transaction
in the case at bar stemmed from Philippine Rayon's application for a
commercial letter of credit with the petitioner in the amount of
$128,548.78 to cover the former's contract to purchase and import loom
and textile machinery from Nissho Company, Ltd. of Japan under a five-
year deferred payment plan. Petitioner approved the application. As
correctly ruled by the trial court in its Order of 6 March 1975: 9
. . . By virtue of said Application and Agreement for
Commercial Letter of Credit, plaintiff bank 10 was
under obligation to pay through its correspondent
bank in Japan the drafts that Nisso (sic) Company,
Ltd., periodically drew against said letter of credit Corollarily, they are, pursuant to Section 7 of the NIL, payable on
from 1963 to 1968, pursuant to plaintiff's contract with demand. Section 7 provides:
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
pg. 43
(b) Where the bill expressly stipulates that it shall be
presented for acceptance; or
(c) Where the bill is drawn payable elsewhere than at
the residence or place of business of the drawee.
In no other case is presentment for acceptance necessary in
order to render any party to the bill liable.
Obviously then, sight drafts do not require presentment for acceptance.
The acceptance of a bill is the signification by the drawee of his assent to
the order of the drawer; 14 this may be done in writing by the drawee in
the bill itself, or in a separate instrument. 15
The parties herein agree, and the trial court explicitly ruled, that the
subject, drafts are sight drafts. Said the latter:
. . . In the instant case the drafts being at sight, they
are supposed to be payable upon acceptance unless
plaintiff bank has given the Philippine Rayon Mills
Inc. time within which to pay the same. The first two
drafts (Annexes C & D, Exh. X & X-1) were duly
accepted as indicated on their face (sic), and upon
such acceptance should have been paid forthwith.
These two drafts were not paid and although
Philippine Rayon Mills
ought to have paid the same, the fact remains that
until now they are still unpaid. 16
Sec. 7. When payable on demand. — An instrument is payable on
demand —
 (a) When so it is expressed to be payable on demand, abroad, to the enterprise of foreign commerce. Much
or at sight, or on presentation; or of this trade could hardly be carried on by any other
(b) In which no time for payment in expressed. means, and therefore it is of the first importance that
Where an instrument is issued, accepted, or indorsed when the fundamental factor in the transaction, the banker's
overdue, it is, as regards the person so issuing, accepting, or advance of money and credit, should receive the
indorsing it, payable on demand. (emphasis supplied) amplest protection. Accordingly, in order to secure
that the banker shall be repaid at the critical point —
Paragraph 8 of the Trust Receipt which reads: "My/our liability that is, when the imported goods finally reach the
for payment at maturity of any accepted draft, bill of exchange hands of the intended vendee — the banker takes the
or indebtedness shall not be extinguished or modified" 17 does full title to the goods at the very beginning; he takes it
not, contrary to the holding of the public respondent, as soon as the goods are bought and settled for by his
contemplate prior acceptance by Philippine Rayon, but by the payments or acceptances in the foreign country, and
petitioner. Acceptance, however, was not even necessary in the he continues to hold that title as his indispensable
first place because the drafts which were eventually issued security until the goods are sold in the United States
were sight drafts And even if these were not sight drafts, and the vendee is called upon to pay for them. This
thereby necessitating acceptance, it would be the petitioner — security is not an ordinary pledge by the importer to
and not Philippine Rayon — which had to accept the same for the banker, for the importer has never owned the
the latter was not the drawee. Presentment for acceptance is goods, and moreover he is not able to deliver the
defined an the production of a bill of exchange to a drawee for possession; but the security is the complete title
acceptance. 18The trial court and the public respondent, vested originally in the bankers, and this
therefore, erred in ruling that presentment for acceptance was characteristic of the transaction has again and again
an indispensable requisite for Philippine Rayon's liability on been recognized and protected by the courts. Of
the drafts to attach. Contrary to both courts' pronouncements, course, the title is at bottom a security title, as it has
Philippine Rayon immediately became liable thereon upon sometimes been called, and the banker is always under
petitioner's payment thereof. Such is the essence of the letter of the obligation to reconvey; but only after his advances
credit issued by the petitioner. A different conclusion would have been fully repaid and after the importer has
violate the principle upon which commercial letters of credit fulfilled the other terms of the contract.
are founded because in such a case, both the beneficiary and the
issuer, Nissho Company Ltd. and the petitioner, respectively, As further stated in National Bank vs. Viuda e Hijos de Angel Jose, 22 trust
would be placed at the mercy of Philippine Rayon even if the receipts:
latter had already received the imported machinery and the
petitioner had fully paid for it. The typical setting and purpose . . . [I]n a certain manner, . . . partake of the nature of a
of a letter of credit are described in Hibernia Bank and Trust conditional sale as provided by the Chattel Mortgage
Co.vs. J. Aron & Co., Inc., 19 thus: Law, that is, the importer becomes absolute owner of
the imported merchandise as soon an he has paid its
Commercial letters of credit have come into general price. The ownership of the merchandise continues to
use in international sales transactions where much be vested in the owner thereof or in the person who
time necessarily elapses between the sale and the has advanced payment, until he has been paid in full,
receipt by a purchaser of the merchandise, during or if the merchandise has already been sold, the
which interval great price changes may occur. Buyers proceeds of the sale should be turned over to him by
and sellers struggle for the advantage of position. The the importer or by his representative or successor in
seller is desirous of being paid as surely and as soon as interest.
possible, realizing that the vendee at a distant point
has it in his power to reject on trivial grounds Under P.D. No. 115, otherwise known an the Trust Receipts Law, which
merchandise on arrival, and cause considerable took effect on 29 January 1973, a trust receipt transaction is defined as
hardship to the shipper. Letters of credit meet this "any transaction by and between a person referred to in this Decree as
condition by affording celerity and certainty of the entruster, and another person referred to in this Decree as the
payment. Their purpose is to insure to a seller entrustee, whereby the entruster, who owns or holds absolute title or
payment of a definite amount upon presentation of security interests' over certain specified goods, documents or
documents. The bank deals only with documents. It instruments, releases the same to the possession of the entrustee upon
has nothing to do with the quality of the merchandise. the latter's execution and delivery to the entruster of a signed document
Disputes as to the merchandise shipped may arise and called the "trust receipt" wherein the entrustee binds himself to hold the
be litigated later between vendor and vendee, but they designated goods, documents or instruments in trust for the entruster
may not impede acceptance of drafts and payment by and to sell or otherwise dispose of the goods, documents or instruments
the issuing bank when the proper documents are with the obligation to turn over to the entruster the proceeds thereof to
presented. 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
The trial court and the public respondent likewise erred in disregarding not otherwise disposed of, in accordance with the terms and conditions
the trust receipt and in not holding that Philippine Rayon was liable specified in the trusts receipt, or for other purposes substantially
thereon. In People vs. Yu Chai Ho, 20 this Court explains the nature of a equivalent to any one of the following: . . ."
trust receipt by quoting In re Dunlap Carpet Co., 21 thus:
It is alleged in the complaint that private respondents "not only have
By this arrangement a banker advances money to an presumably put said machinery to good use and have profited by its
intending importer, and thereby lends the aid of operation and/or disposition but very recent information that (sic)
capital, of credit, or of business facilities and agencies reached plaintiff bank that defendants already sold the machinery
pg. 44
covered by the trust receipt to Yupangco Cotton Mills," and that "as prepared and printed by the plaintiff-appellant. A perusal of
trustees of the property covered by the trust receipt, . . . and therefore Exhibit "C-1" shows that it was to be signed and executed by
acting in fiduciary (sic) capacity, defendants have willfully violated their two persons. It was signed only by defendant-appellee Chi.
duty to account for the whereabouts of the machinery covered by the Exhibit "C-1" was to be witnessed by two persons, but no one
trust receipt or for the proceeds of any lease, sale or other disposition of signed in that capacity. The last sentence of the guaranty clause
the same that they may have made, notwithstanding demands therefor; is incomplete. Furthermore, the plaintiff-appellant also failed
defendants have fraudulently misapplied or converted to their own use to have the purported guarantee clause acknowledged before a
any money realized from the lease, sale, and other disposition of said notary public. All these show that the alleged guaranty
machinery." 23 While there is no specific prayer for the delivery to the provision was disregarded and, therefore, not consummated.
petitioner by Philippine Rayon of the proceeds of the sale of the
machinery covered by the trust receipt, such relief is covered by the But granting arguendo that the guaranty provision in Exhibit "C-
general prayer for "such further and other relief as may be just and 1" was fully executed and acknowledged still defendant-
equitable on the premises." 24 And although it is true that the petitioner appellee Chi cannot be held liable thereunder because the
commenced a criminal action for the violation of the Trust Receipts records show that the plaintiff-appellant had neither
Law, no legal obstacle prevented it from enforcing the civil liability exhausted the property of the defendant-appellant nor had it
arising out of the trust, receipt in a separate civil action. Under Section resorted to all legal remedies against the said defendant-
13 of the Trust Receipts Law, the failure of an entrustee to turn over the appellant as provided in Article 2058 of the Civil Code. The
proceeds of the sale of goods, documents or instruments covered by a obligation of a guarantor is merely accessory under Article
trust receipt to the extent of the amount owing to the entruster or as 2052 of the Civil Code and subsidiary under Article 2054 of the
appear in the trust receipt or to return said goods, documents or Civil Code. Therefore, the liability of the defendant-appellee
instruments if they were not sold or disposed of in accordance with the arises only when the principal debtor fails to comply with his
terms of the trust receipt shall constitute the crime of estafa, punishable obligation. 27
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,
Our own reading of the questioned solidary guaranty clause yields no
entirely separate and distinct from the criminal action, may be brought
other conclusion than that the obligation of Chi is only that of
by the injured party in cases of defamation, fraud and physical injuries.
a guarantor. This is further bolstered by the last sentence which speaks of
Estafa falls under fraud.
waiver of exhaustion, which, nevertheless, is ineffective in this case
because the space therein for the party whose property may not be
We also conclude, for the reason hereinafter discussed, and not for that exhausted was not filled up. Under Article 2058 of the Civil Code, the
adduced by the public respondent, that private respondent Chi's defense of exhaustion (excussion) may be raised by a guarantor before
signature in the dorsal portion of the trust receipt did not bind him he may be held liable for the obligation. Petitioner likewise admits that
solidarily with Philippine Rayon. The statement at the dorsal portion of the questioned provision is a solidary guaranty clause, thereby clearly
the said trust receipt, which petitioner describes as a "solidary guaranty distinguishing it from a contract of surety. It, however, described the
clause", reads: guaranty as solidary between the guarantors; this would have been
correct if two (2) guarantors had signed it. The clause "we jointly and
In consideration of the PRUDENTIAL BANK AND TRUST severally agree and undertake" refers to the undertaking of the two (2)
COMPANY complying with the foregoing, we jointly and parties who are to sign it or to the liability existing between themselves.
severally agree and undertake to pay on demand to the It does not refer to the undertaking between either one or both of them
PRUDENTIAL BANK AND TRUST COMPANY all sums of on the one hand and the petitioner on the other with respect to the
money which the said PRUDENTIAL BANK AND TRUST liability described under the trust receipt. Elsewise stated, their liability
COMPANY may call upon us to pay arising out of or pertaining is not divisible as between them, i.e., it can be enforced to its full extent
to, and/or in any event connected with the default of and/or against any one of them.
non-fulfillment in any respect of the undertaking of the
aforesaid: Furthermore, any doubt as to the import, or true intent of the solidary
guaranty clause should be resolved against the petitioner. The trust
PHILIPPINE RAYON MILLS, INC. receipt, together with the questioned solidary guaranty clause, is on a
form drafted and prepared solely by the petitioner; Chi's participation
We further agree that the PRUDENTIAL BANK AND TRUST therein is limited to the affixing of his signature thereon. It is, therefore,
COMPANY does not have to take any steps or exhaust its a contract of adhesion; 28 as such, it must be strictly construed against
remedy against aforesaid: the party responsible for its preparation. 29

before making demand on me/us
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
pg. 45
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 Art. 2056. The guarantor cannot be compelled to pay
answer for the debt or default of another, the law merely requires that it, the creditor unless the latter has exhausted all the
or some note or memorandum thereof, be in writing. Otherwise, it property of the debtor, and has resorted to all the legal
would be unenforceable unless ratified. 32 While the acknowledgement remedies against the debtor.
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 Simply stated, there is as yet no cause of action against Chi.
does not have to appear in a public document.
We are not persuaded. Excussion is not a condition sine qua non for the
And now to the other ground relied upon by the petitioner as basis for institution of an action against a guarantor. In Southern Motors,
the solidary liability of Chi, namely the criminal proceedings against the Inc. vs. Barbosa, 34 this Court stated:
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
4. Although an ordinary personal guarantor — not a mortgagor
liability arising therefrom pursuant to Section 13 of P.D. No. 115. Public
or pledgor — may demand the aforementioned exhaustion, the
respondent rejected this claim because such civil liability presupposes
creditor may, prior thereto, secure a judgment against said
prior conviction as can be gleaned from the phrase "without prejudice to
guarantor, who shall be entitled, however, to a deferment of the
the civil liability arising from the criminal offense." Both are wrong. The
execution of said judgment against him until after the
said section reads:
properties of the principal debtor shall have been exhausted to
satisfy the obligation involved in the case.
Sec. 13. Penalty Clause. — The failure of an entrustee to turn over
the proceeds of the sale of the goods, documents or instruments
There was then nothing procedurally objectionable in impleading
covered by a trust receipt to the extent of the amount owing to
private respondent Chi as a co-defendant in Civil Case No. Q-19312
the entruster or as appears in the trust receipt or to return said
before the trial court. As a matter of fact, Section 6, Rule 3 of the Rules
goods, documents or instruments if they were not sold or
of Court on permissive joinder of parties explicitly allows it. It reads:
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 Sec. 6. Permissive joinder of parties. — All persons in whom or
(b) of Act Numbered Three thousand eight hundred and against whom any right to relief in respect to or arising out of
fifteen, as amended, otherwise known as the Revised Penal the same transaction or series of transactions is alleged to exist,
Code. If the violation or offense is committed by a corporation, whether jointly, severally, or in the alternative, may, except as
partnership, association or other juridical entities, the penalty otherwise provided in these rules, join as plaintiffs or be joined
provided for in this Decree shall be imposed upon the directors, as defendants in one complaint, where any question of law or
officers, employees or other officials or persons therein fact common to all such plaintiffs or to all such defendants may
responsible for the offense, without prejudice to the civil arise in the action; but the court may make such orders as may
liabilities arising from the criminal offense. 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.
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, This is the equity rule relating to multifariousness. It is based on trial
association or other juridical entities, the penalty shall be imposed upon convenience and is designed to permit the joinder of plaintiffs or
the directors, officers, employees or other officials or persons therein defendants whenever there is a common question of law or fact. It will
responsible for the offense. The penalty referred to is imprisonment, the save the parties unnecessary work, trouble and expense.
35

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 However, Chi's liability is limited to the principal obligation in the trust
obvious: corporations, partnerships, associations and other juridical receipt plus all the accessories thereof including judicial costs; with
entities cannot be put in jail. However, it is these entities which are respect to the latter, he shall only be liable for those costs incurred after
made liable for the civil liability arising from the criminal offense. This is being judicially required to pay. 36 Interest and damages, being
the import of the clause "without prejudice to the civil liabilities arising accessories of the principal obligation, should also be paid; these,
from the criminal offense." And, as We stated earlier, since that violation however, shall run only from the date of the filing of the complaint.
of a trust receipt constitutes fraud under Article 33 of the Civil Code, Attorney's fees may even be allowed in appropriate cases.37
petitioner was acting well within its rights in filing an independent civil
action to enforce the civil liability arising therefrom against Philippine In the instant case, the attorney's fees to be paid by Chi cannot be the
Rayon. 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
The remaining issue to be resolved concerns the propriety of the latter's liability. All things considered, he can be held liable for the sum
dismissal of the case against private respondent Chi. The trial court of P10,000.00 as attorney's fees in favor of the petitioner.
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 — Thus, the trial court committed grave abuse of discretion in dismissing
either as surety or as guarantor — because his signature at the dorsal the complaint as against private respondent Chi and condemning
portion thereof was useless; and even if he could be bound by such petitioner to pay him P20,000.00 as attorney's fees.
signature as a simple guarantor, he cannot, pursuant to Article 2058 of
the Civil Code, be compelled to pay until
In the light of the foregoing, it would no longer necessary to discuss the
after petitioner has exhausted and resorted to all legal remedies against
other issues raised by the petitioner
the principal debtor, Philippine Rayon. The records fail to show that
petitioner had done so Reliance is thus placed on Article 2058 of the
33

Civil Code which provides: WHEREFORE, the instant Petition is hereby GRANTED.
pg. 46
 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.
Costs against private respondents.
SO ORDERED.
pg. 47
TRANSFIELD PHILIPPINES, INC., PETITIONER , VS. LUZON
HYDRO CORPORATION, AUSTRALIA AND NEW ZEALAND
BANKING GROUP LIMITED AND SECURITY BANK
CORPORATION, RESPONDENTS.
DECISION
TINGA, J.:
Subject of this case is the letter of credit which has evolved as the
ubiquitous and most important device in international trade. A creation
of commerce and businessmen, the letter of credit is also unique in the
number of parties involved and its supranational character.
Petitioner has appealed from the 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 petitioners 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 main contract between them as shown on the face of the two Standby
pursuant to the pertinent provisions of the Turnkey Letters of Credit which both provide that the banks have no
Contract,[12] petitionerin two separate letters[13] both dated 10 August responsibility to investigate the authenticity or accuracy of the
2000advised respondent banks of the arbitration proceedings already certificates or the declarants capacity or entitlement to so certify.
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 In its Resolution dated 28 November 2000, the Court of Appeals
call on the Securities until the resolution of disputes before the arbitral issued a temporary restraining order, enjoining LHC from calling on the
tribunals, petitioner warned respondent banks that any transfer, release, Securities or any renewals or substitutes thereof and ordering
or disposition of the Securities in favor of LHC or any person claiming respondent banks to cease and desist from transferring, paying or in any
under LHC would constrain it to hold respondent banks liable for manner disposing of the Securities.
liquidated damages. However, the appellate court failed to act on the application for
As petitioner had anticipated, on 27 June 2000, LHC sent notice to preliminary injunction until the temporary restraining order expired on
petitioner that pursuant to Clause 8.2[14] of the Turnkey Contract, it 27 January 2001. Immediately thereafter, representatives of LHC trooped
failed to comply with its obligation to complete the Project. Despite the to ANZ Bank and withdrew the total amount of US$4,950,000.00,
letters of petitioner, however, both banks informed petitioner that they thereby reducing the balance in ANZ Bank to US$1,852,814.00.
would pay on the Securities if and when LHC calls on them.[15] On 2 February 2001, the appellate court dismissed the petition for
LHC asserted that additional extension of time would not be certiorari. The appellate court expressed conformity with the trial
warranted; accordingly it declared petitioner in default/delay in the courts decision that LHC could call on the Securities pursuant to the
performance of its obligations under the Turnkey Contract and first principle in credit law that the credit itself is independent of the
demanded from petitioner the payment of US$75,000.00 for each day of underlying transaction and that as long as the beneficiary complied with
delay beginning 28 June 2000 until actual completion of the Project the credit, it was of no moment that he had not complied with the
pursuant to Clause 8.7.1 of the Turnkey Contract. At the same time, underlying contract. Further, the appellate court held that even
LHC served notice that it would call on the securities for the payment of assuming that the trial courts denial of petitioners application for a writ
liquidated damages for the delay.[16] of preliminary injunction was erroneous, it constituted only an error of
judgment which is not correctible by certiorari, unlike error of
On 5 November 2000, petitioner as plaintiff filed a Complaint for jurisdiction.
Injunction, with prayer for temporary restraining order and writ of
preliminary injunction, against herein respondents as defendants before Undaunted, petitioner filed the instant Petition for Review raising the
the Regional Trial Court (RTC) of Makati.[17]Petitioner sought to following issues for resolution:
restrain respondent LHC from calling on the Securities and respondent WHETHER THE INDEPENDENCE PRINCIPLE ON LETTERS OF
banks from transferring, paying on, or in any manner disposing of the CREDIT MAY BE INVOKED BY A BENEFICIARY THEREOF WHERE
Securities or any renewals or substitutes thereof. The RTC issued a THE BENEFICIARYS CALL THEREON IS WRONGFUL OR
seventy-two (72)-hour temporary restraining order on the same day. FRAUDULENT.
The case was docketed as Civil Case No. 00-1312 and raffled to Branch
148 of the RTC of Makati.
WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE
After appropriate proceedings, the trial court issued an Order on 9 SECURITIES BEFORE THE RESOLUTION OF PETITIONERS AND
November 2000, extending the temporary restraining order for a period LHCS DISPUTES BY THE APPROPRIATE TRIBUNAL.
of seventeen (17) days or until 26 November 2000. [18]
WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN
The RTC, in its Order[19] dated 24 November 2000, denied RELEASING THE AMOUNTS DUE UNDER THE SECURITIES
petitioners application for a writ of preliminary injunction. It ruled that DESPITE BEING NOTIFIED THAT LHCS CALL THEREON IS
petitioner had no legal right and suffered no irreparable injury to justify WRONGFUL.
the issuance of the writ. Employing the principle of independent
contract in letters of credit, the trial court ruled that LHC should be
WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND
allowed to draw on the Securities for liquidated damages. It debunked
IRREPARABLE DAMAGE IN THE EVENT THAT:
petitioners 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 A. LHC IS ALLOWED TO CALL AND DRAW ON,
ruled that the banks were mere custodians of the funds and as such they AND ANZ BANK AND SECURITY BANK ARE
were obligated to transfer the same to the beneficiary for as long as the ALLOWED TO RELEASE, THE REMAINING
latter could submit the required certification of its claims. BALANCE OF THE SECURITIES PRIOR TO
THE RESOLUTION OF THE DISPUTES
Dissatisfied with the trial courts denial of its application for a writ BETWEEN PETITIONER AND LHC.
of preliminary injunction, petitioner elevated the case to the Court of
Appeals via a Petition for Certiorari under Rule 65, with prayer for the B. LHC DOES NOT RETURN THE AMOUNTS IT
issuance of a temporary restraining order and writ of preliminary HAD WRONGFULLY DRAWN FROM THE
injunction.[20] Petitioner submitted to the appellate court that LHCs call SECURITIES.[21]
on the Securities was premature considering that the issue of its default Petitioner contends that the courts below improperly relied on the
had not yet been resolved with finality by the CIAC and/or the ICC. It independence principle on letters of credit when this case falls squarely
asserted that until the fact of delay could be established, LHC had no within the fraud exception rule. Respondent LHC deliberately
right to draw on the Securities for liquidated damages. misrepresented the supposed existence of delay despite its knowledge
Refuting petitioners contentions, LHC claimed that petitioner had that the issue was still pending arbitration, petitioner continues.
no right to restrain its call on and use of the Securities as payment for Petitioner asserts that LHC should be ordered to return the
liquidated damages. It averred that the Securities are independent of the proceeds of the Securities pursuant to the principle against unjust
pg. 48
enrichment and that, under the premises, injunction was the be regarded as unjustified in view of the prevailing independence
appropriate remedy obtainable from the competent local courts. principle under which it had no obligation to ascertain the truth of
LHCs allegations that petitioner defaulted in its obligations. Moreover,
On 25 August 2003, petitioner filed a Supplement to the it points out that since the Standby Letter of Credit No. E001126/8400
Petition[22] and Supplemental Memorandum,[23] alleging that in the course of had been fully drawn, petitioners prayer for preliminary injunction had
the proceedings in the ICC Arbitration, a number of documentary and been rendered moot and academic.
testimonial evidence came out through the use of different modes of
discovery available in the ICC Arbitration. It contends that after the At the core of the present controversy is the applicability of the
filing of the petition facts and admissions were discovered which independence principle and fraud exception rule in letters of credit.
demonstrate that LHC knowingly misrepresented that petitioner had Thus, a discussion of the nature and use of letters of credit, also referred
incurred delays notwithstanding its knowledge and admission that to simply as credits, would provide a better perspective of the case.
delays were excused under the Turnkey Contractto be able to draw
The letter of credit evolved as a mercantile specialty, and the only
against the Securities. Reiterating that fraud constitutes an exception to
way to understand all its facets is to recognize that it is an entity unto
the independence principle, petitioner urges that this warrants a ruling
itself. The relationship between the beneficiary and the issuer of a letter
from this Court that the call on the Securities was wrongful, as well as
of credit is not strictly contractual, because both privity and a meeting
contrary to law and basic principles of equity. It avers that it would
of the minds are lacking, yet strict compliance with its terms is an
suffer grave irreparable damage if LHC would be allowed to use the
enforceable right. Nor is it a third-party beneficiary contract, because
proceeds of the Securities and not ordered to return the amounts it had
the issuer must honor drafts drawn against a letter regardless of
wrongfully drawn thereon.
problems subsequently arising in the underlying contract. Since the
In its Manifestation dated 8 September 2003,[24] LHC contends that banks customer cannot draw on the letter, it does not function as an
the supplemental pleadings filed by petitioner present erroneous and assignment by the customer to the beneficiary. Nor, if properly used, is
misleading information which would change petitioners theory on it a contract of suretyship or guarantee, because it entails a primary
appeal. 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
In yet another Manifestation dated 12 April 2004,[25] petitioner conditional, yet the draft presented under it is often negotiable. [29]
alleges that on 18 February 2004, the ICC handed down its Third Partial
Award, declaring that LHC wrongfully drew upon the Securities and In commercial transactions, a letter of credit is a financial device
that petitioner was entitled to the return of the sums wrongfully taken developed by merchants as a convenient and relatively safe mode of
by LHC for liquidated damages. 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,
LHC filed a Counter-Manifestation dated 29 June 2004,[26] stating and a buyer, who wants to have control of the goods before
that petitioners Manifestation dated 12 April 2004 enlarges the scope of paying.[30] The use of credits in commercial transactions serves to reduce
its Petition for Review of the 31 January 2001 Decision of the Court of the risk of nonpayment of the purchase price under the contract for the
Appeals. LHC notes that the Petition for Review essentially dealt only with sale of goods. However, credits are also used in non-sale settings where
the issue of whether injunction could issue to restrain the beneficiary of they serve to reduce the risk of nonperformance. Generally, credits in
an irrevocable letter of credit from drawing thereon. It adds that the non-sale settings have come to be known as standby credits. [31]

petitioner has filed two other proceedings, to wit: (1) ICC Case No. There are three significant differences between commercial and
11264/TE/MW, entitled Transfield Philippines Inc. v. Luzon Hydro Corporation, standby credits. First, commercial credits involve the payment of money
in which the parties made claims and counterclaims arising from under a contract of sale. Such credits become payable upon the
petitioners performance/misperformance of its obligations as contractor presentation by the seller-beneficiary of documents that show he has
for LHC; and (2) Civil Case No. 04-332, entitled Transfield Philippines, Inc. taken affirmative steps to comply with the sales agreement. In the
v. Luzon Hydro Corporation before Branch 56 of the RTC of Makati, which standby type, the credit is payable upon certification of a party's
is an action to enforce and obtain execution of the ICCs partial award nonperformance of the agreement. The documents that accompany the
mentioned in petitioners Manifestation of 12 April 2004. beneficiary's draft tend to show that the applicant has not performed.
The beneficiary of a commercial credit must demonstrate by documents
In its Comment to petitioners Motion for Leave to File Addendum to that he has performed his contract. The beneficiary of the standby credit
Petitioners Memorandum, LHC stresses that the question of whether the must certify that his obligor has not performed the contract.[32]
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 By definition, a letter of credit is a written instrument whereby the
enforce the ICCs partial award is now fully within the Makati RTCs writer requests or authorizes the addressee to pay money or deliver
jurisdiction in Civil Case No. 04-332. LHC asserts that petitioner is goods to a third person and assumes responsibility for payment of debt
engaged in forum-shopping by keeping this appeal and at the same time therefor to the addressee. A letter of credit, however, changes its
[33]

seeking the suit for enforcement of the arbitral award before the Makati nature as different transactions occur and if carried through to
court. completion ends up as a binding contract between the issuing and
honoring banks without any regard or relation to the underlying
Respondent SBC in its Memorandum, dated 10 March contract or disputes between the parties thereto. [34]
2003[27] contends that the Court of Appeals correctly dismissed the
petition for certiorari. Invoking the independence principle, SBC argues Since letters of credit have gained general acceptability in
that it was under no obligation to look into the validity or accuracy of international trade transactions, the ICC has published from time to
the certification submitted by respondent LHC or into the latters time updates on the Uniform Customs and Practice (UCP) for
capacity or entitlement to so certify. It adds that the act sought to be Documentary Credits to standardize practices in the letter of credit
enjoined by petitioner was already fait accompli and the present petition area. The vast majority of letters of credit incorporate the UCP. [35] First
would no longer serve any remedial purpose. published in 1933, the UCP for Documentary Credits has undergone
several revisions, the latest of which was in 1993.[36]
In a similar fashion, respondent ANZ Bank in
its Memorandum dated 13 March 2003[28] posits that its actions could not
pg. 49
 In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,[37] this originating contract. In brief, the letter of credit is separate and distinct
Court ruled that the observance of the UCP is justified by Article 2 of from the underlying transaction.
the Code of Commerce which provides that in the absence of any
Given the nature of letters of credit, petitioners argumentthat it is
particular provision in the Code of Commerce, commercial transactions
only the issuing bank that may invoke the independence principle on
shall be governed by usages and customs generally observed. More
letters of creditdoes not impress this Court. To say that the
recently, in Bank of America, NT & SA v. Court of Appeals,[38] this Court ruled
independence principle may only be invoked by the issuing banks
that there being no specific provisions which govern the legal
would render nugatory the purpose for which the letters of credit are
complexities arising from transactions involving letters of credit, not
used in commercial transactions. As it is, the independence doctrine
only between or among banks themselves but also between banks and
works to the benefit of both the issuing bank and the beneficiary.
the seller or the buyer, as the case may be, the applicability of the UCP is
undeniable. Letters of credit are employed by the parties desiring to enter into
commercial transactions, not for the benefit of the issuing bank but
Article 3 of the UCP provides that credits, by their nature, are
mainly for the benefit of the parties to the original transactions. With
separate transactions from the sales or other contract(s) on which they
the letter of credit from the issuing bank, the party who applied for and
may be based and banks are in no way concerned with or bound by such
obtained it may confidently present the letter of credit to the beneficiary
contract(s), even if any reference whatsoever to such contract(s) is
as a security to convince the beneficiary to enter into the business
included in the credit. Consequently, the undertaking of a bank to pay,
transaction. On the other hand, the other party to the business
accept and pay draft(s) or negotiate and/or fulfill any other obligation
transaction, i.e., the beneficiary of the letter of credit, can be rest assured
under the credit is not subject to claims or defenses by the applicant
of being empowered to call on the letter of credit as a security in case
resulting from his relationships with the issuing bank or the beneficiary.
the commercial transaction does not push through, or the applicant fails
A beneficiary can in no case avail himself of the contractual
to perform his part of the transaction. It is for this reason that the party
relationships existing between the banks or between the applicant and
who is entitled to the proceeds of the letter of credit is appropriately
the issuing bank.
called beneficiary.
Thus, the engagement of the issuing bank is to pay the seller or
Petitioners argument that any dispute must first be resolved by the
beneficiary of the credit once the draft and the required documents are
parties, whether through negotiations or arbitration, before the
presented to it. The so-called independence principle assures the seller
beneficiary is entitled to call on the letter of credit in essence would
or the beneficiary of prompt payment independent of any breach of the
convert the letter of credit into a mere guarantee. Jurisprudence has laid
main contract and precludes the issuing bank from determining
down a clear distinction between a letter of credit and a guarantee in
whether the main contract is actually accomplished or not. Under this
that the settlement of a dispute between the parties is not a pre-
principle, banks assume no liability or responsibility for the form,
requisite for the release of funds under a letter of credit. In other words,
sufficiency, accuracy, genuineness, falsification or legal effect of any
the argument is incompatible with the very nature of the letter of credit.
documents, or for the general and/or particular conditions stipulated in
If a letter of credit is drawable only after settlement of the dispute on
the documents or superimposed thereon, nor do they assume any
the contract entered into by the applicant and the beneficiary, there
liability or responsibility for the description, quantity, weight, quality,
would be no practical and beneficial use for letters of credit in
condition, packing, delivery, value or existence of the goods represented
commercial transactions.
by any documents, or for the good faith or acts and/or omissions,
solvency, performance or standing of the consignor, the carriers, or the Professor John F. Dolan, the noted authority on letters of credit,
insurers of the goods, or any other person whomsoever.[39] sheds more light on the issue:
The independent nature of the letter of credit may be: (a) The standby credit is an attractive commercial device for many of the
independence in toto where the credit is independent from the same reasons that commercial credits are attractive. Essentially, these
justification aspect and is a separate obligation from the underlying credits are inexpensive and efficient. Often they replace surety
agreement like for instance a typical standby; or (b) independence may contracts, which tend to generate higher costs than credits do and are
be only as to the justification aspect like in a commercial letter of credit usually triggered by a factual determination rather than by the
or repayment standby, which is identical with the same obligations examination of documents.
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 Because parties and courts should not confuse the different functions of
credit would constitute fraudulent abuse of the credit. [40] the surety contract on the one hand and the standby credit on the other,
Can the beneficiary invoke the independence principle? the distinction between surety contracts and credits merits some
reflection. The two commercial devices share a common purpose. Both
Petitioner insists that the independence principle does not apply ensure against the obligors nonperformance. They function, however, in
to the instant case and assuming it is so, it is a defense available only to distinctly different ways.
respondent banks. LHC, on the other hand, contends that it would be
contrary to common sense to deny the benefit of an independent Traditionally, upon the obligors default, the surety undertakes to
contract to the very party for whom the benefit is intended. As complete the obligors performance, usually by hiring someone to
beneficiary of the letter of credit, LHC asserts it is entitled to invoke the complete that performance. Surety contracts, then, often involve costs of
principle. determining whether the obligor defaulted (a matter over which the
As discussed above, in a letter of credit transaction, such as in this surety and the beneficiary often litigate) plus the cost of performance.
case, where the credit is stipulated as irrevocable, there is a definite The benefit of the surety contract to the beneficiary is obvious. He
undertaking by the issuing bank to pay the beneficiary provided that the knows that the surety, often an insurance company, is a strong financial
stipulated documents are presented and the conditions of the credit are institution that will perform if the obligor does not. The beneficiary also
complied with.[41] Precisely, the independence principle liberates the should understand that such performance must await the sometimes
issuing bank from the duty of ascertaining compliance by the parties in lengthy and costly determination that the obligor has defaulted. In
the main contract. As the principles nomenclature clearly suggests, the addition, the suretys performance takes time.
obligation under the letter of credit is independent of the related and
pg. 50
The standby credit has different expectations. He reasonably expects 8.7.2 The Employer may, without prejudice to any other method of
that he will receive cash in the event of nonperformance, that he will recovery, deduct the amount of such damages from any monies due, or
receive it promptly, and that he will receive it before any litigation with to become due to the Contractor and/or by drawing on the Security.[45]
the obligor (the applicant) over the nature of the applicants
performance takes place. The standby credit has this opposite effect of A contract once perfected, binds the parties not only to the
the surety contract: it reverses the financial burden of parties during fulfillment of what has been expressly stipulated but also to all the
litigation. consequences which according to their nature, may be in keeping with
good faith, usage, and law.[46] A careful perusal of the Turnkey Contract
In the surety contract setting, there is no duty to indemnify the reveals the intention of the parties to make the Securities answerable for
beneficiary until the beneficiary establishes the fact of the obligors the liquidated damages occasioned by any delay on the part of
performance. The beneficiary may have to establish that fact in petitioner. The call upon the Securities, while not an exclusive remedy
litigation. During the litigation, the surety holds the money and the on the part of LHC, is certainly an alternative recourse available to it
beneficiary bears most of the cost of delay in performance. upon the happening of the contingency for which the Securities have
been proffered. Thus, even without the use of the independence
In the standby credit case, however, the beneficiary avoids that principle, the Turnkey Contract itself bestows upon LHC the right to
litigation burden and receives his money promptly upon presentation of call on the Securities in the event of default.
the required documents. It may be that the applicant has, in fact, Next, petitioner invokes the fraud exception principle. It avers
performed and that the beneficiarys presentation of those documents is that LHCs call on the Securities is wrongful because it fraudulently
not rightful. In that case, the applicant may sue the beneficiary in tort, in misrepresented to ANZ Bank and SBC that there is already a breach in
contract, or in breach of warranty; but, during the litigation to the Turnkey Contract knowing fully well that this is yet to be
determine whether the applicant has in fact breached the obligation to determined by the arbitral tribunals. It asserts that the fraud exception
perform, the beneficiary, not the applicant, holds the money. Parties that exists when the beneficiary, for the purpose of drawing on the credit,
use a standby credit and courts construing such a credit should fraudulently presents to the confirming bank, documents that contain,
understand this allocation of burdens. There is a tendency in some expressly or by implication, material representations of fact that to his
quarters to overlook this distinction between surety contracts and knowledge are untrue. In such a situation, petitioner insists, injunction
standby credits and to reallocate burdens by permitting the obligor or is recognized as a remedy available to it.
the issuer to litigate the performance question before payment to the
beneficiary.[42] Citing Dolans treatise on letters of credit, petitioner argues that
the independence principle is not without limits and it is important to
While it is the bank which is bound to honor the credit, it is the fashion those limits in light of the principles purpose, which is to serve
beneficiary who has the right to ask the bank to honor the credit by the commercial function of the credit. If it does not serve those
allowing him to draw thereon. The situation itself emasculates functions, application of the principle is not warranted, and the
petitioners posture that LHC cannot invoke the independence principle commonlaw principles of contract should apply.
and highlights its puerility, more so in this case where the banks
It is worthy of note that the propriety of LHCs call on the
concerned were impleaded as parties by petitioner itself. Securities is largely intertwined with the fact of default which is the
Respondent banks had squarely raised the independence principle self-same issue pending resolution before the arbitral tribunals. To be
to justify their releases of the amounts due under the Securities. Owing able to declare the call on the Securities wrongful or fraudulent, it is
to the nature and purpose of the standby letters of credit, this Court imperative to resolve, among others, whether petitioner was in fact
rules that the respondent banks were left with little or no alternative guilty of delay in the performance of its obligation. Unfortunately for
but to honor the credit and both of them in fact submitted that it was petitioner, this Court is not called upon to rule upon the issue of
ministerial for them to honor the call for payment.[43] defaultsuch issue having been submitted by the parties to the
jurisdiction of the arbitral tribunals pursuant to the terms embodied in
Furthermore, LHC has a right rooted in the Contract to call on the their agreement.[47]
Securities. The relevant provisions of the Contract read, thus:
Would injunction then be the proper remedy to restrain the
4.2.1. In order to secure the performance of its obligations under this alleged wrongful draws on the Securities?
Contract, the Contractor at its cost shall on the Commencement
Date provide security to the Employer in the form of two irrevocable Most writers agree that fraud is an exception to the independence
and confirmed standby letters of credit (the Securities), each in the principle. Professor Dolan opines that the untruthfulness of a certificate
amount of US$8,988,907, issued and confirmed by banks or financial accompanying a demand for payment under a standby credit may
institutions acceptable to the Employer. Each of the Securities must be qualify as fraud sufficient to support an injunction against
in form and substance acceptable to the Employer and may be provided payment. The remedy for fraudulent abuse is an injunction. However,
[48]

on an annually renewable basis.[44] injunction should not be granted unless: (a) there is clear proof of fraud;
(b) the fraud constitutes fraudulent abuse of the independent purpose
8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor of the letter of credit and not only fraud under the main agreement; and
shall pay to the Employer by way of liquidated damages (Liquidated (c) irreparable injury might follow if injunction[49] is not granted or the
Damages for Delay) the amount of US$75,000 for each and every day or recovery of damages would be seriously damaged.
part of a day that shall elapse between the Target Completion Date and In its complaint for injunction before the trial court, petitioner
the Completion Date, provided that Liquidated Damages for Delay alleged that it is entitled to a total extension of two hundred fifty-three
payable by the Contractor shall in the aggregate not exceed 20% of the (253) days which would move the target completion date. It argued that
Contract Price. The Contractor shall pay Liquidated Damages for Delay if its claims for extension would be found meritorious by the ICC, then
for each day of the delay on the following day without need of demand LHC would not be entitled to any liquidated damages.[50]
from the Employer.

pg. 51
 Generally, injunction is a preservative remedy for the protection of Of course, prudence should have impelled LHC to await resolution
ones substantive right or interest; it is not a cause of action in itself but of the pending issues before the arbitral tribunals prior to taking action
merely a provisional remedy, an adjunct to a main suit. The issuance of to enforce the Securities. But, as earlier stated, the Turnkey Contract did
the writ of preliminary injunction as an ancillary or preventive remedy not require LHC to do so and, therefore, it was merely enforcing its
to secure the rights of a party in a pending case is entirely within the rights in accordance with the tenor thereof. Obligations arising from
discretion of the court taking cognizance of the case, the only limitation contracts have the force of law between the contracting parties and
being that this discretion should be exercised based upon the grounds should be complied with in good faith.[60] More importantly, pursuant
and in the manner provided by law.[51] to the principle of autonomy of contracts embodied in Article 1306 of
the Civil Code,[61] petitioner could have incorporated in its Contract
Before a writ of preliminary injunction may be issued, there must with LHC, a proviso that only the final determination by the arbitral
be a clear showing by the complaint that there exists a right to be tribunals that default had occurred would justify the enforcement of the
protected and that the acts against which the writ is to be directed are Securities. However, the fact is petitioner did not do so; hence, it would
violative of the said right.[52] It must be shown that the invasion of the have to live with its inaction.
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 With respect to the issue of whether the respondent banks were
paramount necessity for the writ to prevent serious justified in releasing the amounts due under the Securities, this Court
damage.[53] Moreover, an injunctive remedy may only be resorted to reiterates that pursuant to the independence principle the banks were
when there is a pressing necessity to avoid injurious consequences under no obligation to determine the veracity of LHCs certification that
which cannot be remedied under any standard compensation.[54] default has occurred. Neither were they bound by petitioners
declaration that LHCs call thereon was wrongful. To repeat, respondent
In the instant case, petitioner failed to show that it has a clear and banks undertaking was simply to pay once the required documents are
unmistakable right to restrain LHCs call on the Securities which would presented by the beneficiary.
justify the issuance of preliminary injunction. By petitioners own
admission, the right of LHC to call on the Securities was contractually At any rate, should petitioner finally prove in the pending
rooted and subject to the express stipulations in the Turnkey arbitration proceedings that LHCs draws upon the Securities were
Contract.[55] Indeed, the Turnkey Contract is plain and unequivocal in wrongful due to the non-existence of the fact of default, its right to seek
that it conferred upon LHC the right to draw upon the Securities in case indemnification for damages it suffered would not normally be
of default, as provided in Clause 4.2.5, in relation to Clause 8.7.2, thus: foreclosed pursuant to general principles of law.
4.2.5 The Employer shall give the Contractor seven days notice of calling Moreover, in a Manifestation,[62] dated 30 March 2001, LHC
upon any of the Securities, stating the nature of the default for which informed this Court that the subject letters of credit had been fully
the claim on any of the Securities is to be made, provided that no notice drawn. This fact alone would have been sufficient reason to dismiss the
will be required if the Employer calls upon any of the Securities for the instant petition.
payment of Liquidated Damages for Delay or for failure by the
Contractor to renew or extend the Securities within 14 days of their Settled is the rule that injunction would not lie where the acts
expiration in accordance with Clause 4.2.2.[56] sought to be enjoined have already become fait accompli or an
accomplished or consummated act.[63] In Ticzon v. Video Post Manila,
8.7.2 The Employer may, without prejudice to any other method of Inc.[64] this Court ruled that where the period within which the former
recovery, deduct the amount of such damages from any monies due, or employees were prohibited from engaging in or working for an
to become due, to the Contractor and/or by drawing on the Security. [57] 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
The pendency of the arbitration proceedings would not per se make
actual case or controversy between the parties insofar as the preliminary
LHCs draws on the Securities wrongful or fraudulent for there was injunction is concerned.
nothing in the Contract which would indicate that the parties intended
that all disputes regarding delay should first be settled through In the instant case, the consummation of the act sought to be
arbitration before LHC would be allowed to call upon the Securities. It restrained had rendered the instant petition mootfor any declaration by
is therefore premature and absurd to conclude that the draws on the this Court as to propriety or impropriety of the non-issuance of
Securities were outright fraudulent given the fact that the ICC and injunctive relief could have no practical effect on the existing
CIAC have not ruled with finality on the existence of default. controversy.[65] The other issues raised by petitioner particularly with
respect to its right to recover the amounts wrongfully drawn on the
Nowhere in its complaint before the trial court or in its pleadings Securities, according to it, could properly be threshed out in a separate
filed before the appellate court, did petitioner invoke the fraud proceeding.
exception rule as a ground to justify the issuance of an
injunction.[58] What petitioner did assert before the courts below was One final point. LHC has charged petitioner of forum-shopping. It
the fact that LHCs draws on the Securities would be premature and raised the charge on two occasions. First, in its Counter-
without basis in view of the pending disputes between them. Petitioner Manifestation dated 29 June 2004[66] LHC alleges that petitioner
should not be allowed in this instance to bring into play the fraud presented before this Court the same claim for money which it has filed
exception rule to sustain its claim for the issuance of an injunctive relief. in two other proceedings, to wit: ICC Case No. 11264/TE/MW and Civil
Matters, theories or arguments not brought out in the proceedings Case No. 04-332 before the RTC of Makati. LHC argues that petitioners
below will ordinarily not be considered by a reviewing court as they acts constitutes forum-shopping which should be punished by the
cannot be raised for the first time on appeal. [59] The lower courts could dismissal of the claim in both forums. Second, in its Comment to Petitioners
thus not be faulted for not applying the fraud exception rule not only Motion for Leave to File Addendum to Petitioners Memorandum dated 8 October
because the existence of fraud was fundamentally interwoven with the 2004, LHC alleges that by maintaining the present appeal and at the
issue of default still pending before the arbitral tribunals, but more so, same time pursuing Civil Case No. 04-332wherein petitioner pressed for
because petitioner never raised it as an issue in its pleadings filed in the judgment on the issue of whether the funds LHC drew on the Securities
courts below. At any rate, petitioner utterly failed to show that it had a should be returnedpetitioner resorted to forum-shopping.
clear and unmistakable right to prevent LHCs call upon the Securities.
pg. 52
 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.

pg. 53