LETTERS OF CREDIT

1. Definition
2. Applicable laws
3. Parties to a letter of credit
4. Transactions involved in a letter of credit (See: Independence Principle; ra!d
"#ception Principle and $!le of Strict %o&pliance'
(. T)pes of letters of credit
a. irrevocable letter of credit
b. confir&ed letter of credit
c. standb) letter of credit
d. ot*ers
CASES: +an, of t*e P*ilippine Islands vs. De $en) abric Ind!stries- Inc.- ..$. /o.
0124221- 13 4ctober 1567-; +an, of A&erica- /T vs. %o!rt of Appeals- ..$. /o.
17(35(-17 Dece&ber 1553; eati +an, 8 Tr!st %o&pan) vs. %o!rt of Appeals- ..$.
/o. 54275- 37 April 1551; Transfield P*ilippines- Inc. vs. 0!9on :)dro %orp.- ..$.
/o. 143616-22 /ove&ber 2774; ;<SS vs. :on. Dawa)- ..$. /o. 137632- 21 =!ne
2774
TRUST RECEIPTS
1. Tr!st receipt transaction (Sec. 4- T$0'
2. or& of tr!st receipt (Sec. (- T$0'
3. Parties to a tr!st receipt transaction
4. $i>*ts of t*e entr!ster (Sec. 6- 2- 8 12 T$0'
(. 4bli>ations?0iabilities of t*e entr!stee (Sec. 5 8 17- T$0'
3. $i>*ts of p!rc*aser (Sec. 11- T$0'
6. Penalties (Sec. 13'
CASES: People vs. /itafan- ..$. /os. 21((5137- 73 April 1552; $osario Te#tile ;ills
%orp.- et al. vs. :o&e +an,ers Savin>s 8 Tr!st %o.- ..$. /o. 136232- 25 =!ne 277(;
0andl %o&pan) vs. ;etroban,- ..$. /o. 1(5322- 37 =!l) 2774; @intola vs. Ins!lar
+an,- ..$. /o. 63261- 25 ;a) 1526; Pilipinas vs. 4n>- ..$. /o. 133163- 2 A!>!st
2772'
WAREHOUSE RECEIPTS LAW
1. %oncept of ware*o!sin> b!siness
2. D!ties of a ware*o!se&an
3. <are*o!se receipts
a. !nctions
b. or& of receipts (Sec. 2- <$0'
c. ,inds of ware*o!se receipts
1. ne>otiable
2. non1ne>otiable
4. /e>otiation of receipts
a. bearer and order receipts (Sec. 36 8 32- <$0'
b. effects of ne>otiation (Sec. 41- 45 and 2(- <$0'
c. inco&plete ne>otiation (Sec. 43- <$0'
d. ne>otiation b) fra!d- &ista,e or d!ress (Sec. 46- <$0 co&pare wit*
Art. 1(12- /%%'
(. Transfer of receipts and effects t*ereof (Sec. 35 and 42- <$0'
3. 0iabilities of indorser or transferor (Sec. 44 8 4(- <$0'
6. <are*o!se&anAs lien and its enforce&ent (Sec. 26- 25- 33- 34 and 3(- <$0'
2. Adverse clai&s (Sec. 16- 12 and 15- <$0'
G.R. No. L-24821 October 16, 1970
BANK OF THE PHLPPNE !LAN"!, plaintiff-appellee,
vs.
"E REN# FABR$ N"%!TRE!, N$., A%RORA T. T%#O &'( A%RORA $AR$EREN# &)*&+
A%RORA $. GON,ALE!, defendants-appellants.
Aviado and Aranda for plaintiff-appellee.
S. Emiliano Calma for defendants-appellants.

$A!TRO, J.:.
This is an appeal from the decision of the Court of First Instance of Manila ordering the defendants-
appellants to pay to the Bank of the Philippine Islands hereinafter referred to as the Bank!, "ointly and
severally, the value of the credit it e#tended to them in several letters of credit $hich the Bank opened at
the %ehest of the defendants appellants to finance their importation of dyestuffs from the &nited 'tates,
$hich ho$ever turned out to %e mere colored chalk upon arrival and inspection thereof at the port of
Manila.
The record sho$s that on four (! different occasions in )*+), the ,e -eny Fa%ric Industries, Inc., a
Philippine corporation through its co-defendants-appellants, .urora Carcereny alias .urora C. /on0ales,
and .urora T. Tuyo, president and secretary, respectively of the corporation, applied to the Bank for four
(! irrevoca%le commercial letters of credit to cover the purchase %y the corporation of goods descri%ed in
the covering 12C applications as 3dyestuffs of various colors3 from its .merican supplier, the 4.B.
,istri%uting Company. .ll the applications of the corporation $ere approved, and the corresponding
Commercial 12C .greements $ere e#ecuted pursuant to %anking procedures. &nder these agreements, the
aforementioned officers of the corporation %ound themselves personally as "oint and solidary de%tors $ith
the corporation. Pursuant to %anking regulations then in force, the corporation delivered to the Bank peso
marginal deposits as each letter of credit $as opened.
The dates and amounts of the 12Cs applied for and approved as $ell as the peso marginal deposits made
$ere, respectively, as follo$s5.
Date Application Amount Marginal
& L/C No. Deposit
Oct. 10, 1961 61/141 !"#,6"$.$ %4,40#.
Oct. &, 1961 61/14$ !&",$6#.4 19,4#.64
Oct. 0, 1961 61/149" !19,40$.9 14,610.$$
No'. 10, 1961 61/1"64 !&6,6$#.64 &0,090.90
(O(AL .... !1&9,6&1.#" %9#,"$&.#"
)* 'irtue o+ t,e +oregoing transactions, t,e )an- issue. irre'oca/le commercial letters o+ cre.it
a..resse. to its correspon.ent /an-s in t,e 0nite. 1tates, 2it, uni+orm instructions +or t,em to
noti+* t,e /ene+iciar* t,ereo+, t,e 3.). Distri/uting Compan*, t,at t,e* ,a'e /een aut,ori4e. to
negotiate t,e latter5s sig,t .ra+ts up to t,e amounts mentione. t,e respecti'el*, i+ accompanie.,
upon presentation, /* a +ull set o+ negotia/le clean 6on /oar.6 ocean /ills o+ la.ing co'ering t,e
merc,an.ise appearing in t,e LCs t,at is, .*estu++s o+ 'arious colors. Conse7uentl*, t,e 3.).
Distri/uting Compan* .re2 upon, presente. to an. negotiate. 2it, t,ese /an-s, its sig,t .ra+ts
co'ering t,e amounts o+ t,e merc,an.ise ostensi/l* /eing e8porte. /* it, toget,er 2it, clean /ills
o+ la.ing, an. collecte. t,e +ull 'alue o+ t,e .ra+ts up to t,e amounts appearing in t,e L/Cs as
a/o'e in.icate.. (,ese correspon.ent /an-s t,en .e/ite. t,e account o+ t,e )an- o+ t,e
%,ilippine 9slan.s 2it, t,em up to t,e +ull 'alue o+ t,e .ra+ts presente. /* t,e 3.). Distri/uting
Compan*, plus commission t,ereon, an., t,erea+ter, en.orse. an. +or2ar.e. all .ocuments to
t,e )an- o+ t,e %,ilippine 9slan.s.
9n t,e meantime, as eac, s,ipment :co'ere. /* t,e a/o'e;mentione. letters o+ cre.it< arri'e. in
t,e %,ilippines, t,e De =en* >a/ric 9n.ustries, 9nc. ma.e partial pa*ments to t,e )an-
amounting, in t,e aggregate, to %90,000. >urt,er pa*ments 2ere, ,o2e'er, su/se7uentl*
.iscontinue. /* t,e corporation 2,en it /ecame esta/lis,e., as a result o+ a c,emical test
con.ucte. /* t,e National 1cience De'elopment )oar., t,at t,e goo.s t,at arri'e. in Manila
2ere colore. c,al-s instea. o+ .*estu++s.
(,e corporation also re+use. to ta-e possession o+ t,ese goo.s, an. +or t,is reason, t,e )an-
cause. t,em to /e .eposite. 2it, a /on.e. 2are,ouse pa*ing t,ere+or t,e amount o+
%1&,609.64 up to t,e +iling o+ its complaint 2it, t,e court /elo2 on Decem/er 10, 196&.
On Octo/er &4, 196 t,e lo2er court ren.ere. its .ecision or.ering t,e corporation an. its co;
.e+en.ants :t,e ,erein appellants< to pa* to t,e plainti++;appellee t,e amount o+ %&91,$0#.46, 2it,
interest t,ereon, as pro'i.e. +or in t,e L/C Agreements, at t,e rate o+ #? per annum +rom
Octo/er 1, 196& until +ull* pai., plus costs.
9t is t,e su/mission o+ t,e .e+en.ants;appellants t,at it 2as t,e .ut* o+ t,e +oreign correspon.ent
/an-s o+ t,e )an- o+ t,e %,ilippine 9slan.s to ta-e t,e necessar* precaution to insure t,at t,e
goo.s s,ippe. un.er t,e co'ering L/Cs con+orme. 2it, t,e item appearing t,erein, an., t,at t,e
+oregoing /an-s ,a'ing +aile. to per+orm t,is .ut*, no claim +or recoupment against t,e
.e+en.ants;appellants, arising +rom t,e losses incurre. +or t,e non;.eli'er* or .e+ecti'e .eli'er*
o+ t,e articles or.ere., coul. accrue.
@e can appreciate t,e s2eep o+ t,e appellants5 argument, /ut 2e also +in. t,at it is nestle.
,opelessl* insi.e a salient 2,ere t,e 'ali. contract /et2een t,e parties an. t,e internationall*
accepte. customs o+ t,e /an-ing tra.e must pre'ail.
1
0n.er t,e terms o+ t,eir Commercial Letter o+ Cre.it Agreements 2it, t,e )an-, t,e appellants
agree. t,at t,e )an- s,all not /e responsi/le +or t,e 6e8istence, c,aracter, 7ualit*, 7uantit*,
con.itions, pac-ing, 'alue, or .eli'er* o+ t,e propert* purporting to /e represente. /* .ocumentsA
+or an* .i++erence in c,aracter, 7ualit*, 7uantit*, con.ition, or 'alue o+ t,e propert* +rom t,at
e8presse. in .ocuments,6 or +or 6partial or incomplete s,ipment, or +ailure or omission to s,ip an*
or all o+ t,e propert* re+erre. to in t,e Cre.it,6 as 2ell as 6+or an* .e'iation +rom instructions,
.ela*, .e+ault or +rau. /* t,e s,ipper or an*one else in connection 2it, t,e propert* t,e s,ippers
or 'en.ors an. oursel'es Bpurc,asersC or an* o+ us.6 Da'ing agree. to t,ese terms, t,e
appellants ,a'e, t,ere+ore, no recourse /ut to compl* 2it, t,eir co'enant. 2
)ut e'en 2it,out t,e stipulation recite. a/o'e, t,e appellants cannot s,i+t t,e /ur.en o+ loss to
t,e )an- on account o+ t,e 'iolation /* t,eir 'en.or o+ its prestation.
9t 2as uncontro'erti/l* pro'en /* t,e )an- .uring t,e trial /elo2 t,at /an-s, in pro'i.ing +inancing
in international /usiness transactions suc, as t,ose entere. into /* t,e appellants, .o not .eal
2it, t,e propert* to /e e8porte. or s,ippe. to t,e importer, /ut .eal onl* 2it, .ocuments. (,e
)an- intro.uce. in e'i.ence a pro'ision containe. in t,e 60ni+orm Customs an. %ractices +or
Commercial Documentar* Cre.its >i8e. +or t,e (,irteent, Congress o+ 9nternational C,am/er o+
Commerce,6 to 2,ic, t,e %,ilippines is a signator* nation. Article 10 t,ereo+ pro'i.esE .
In documentary credit operations, all parties concerned deal in documents and
not in goods. F %a*ment, negotiation or acceptance against .ocuments in
accor.ance 2it, t,e terms an. con.itions o+ a cre.it /* a )an- aut,ori4e. to .o
so /in.s t,e part* gi'ing t,e aut,ori4ation to ta-e up t,e .ocuments an.
reim/urse t,e )an- ma-ing t,e pa*ment, negotiation or acceptance.
(,e e8istence o+ a custom in international /an-ing an. +inancing circles negating an* .ut* on t,e
part o+ a /an- to 'eri+* 2,et,er 2,at ,as /een .escri/e. in letters o+ cre.its or .ra+ts or s,ipping
.ocuments actuall* tallies 2it, 2,at 2as loa.e. a/oar. s,ip, ,a'ing /een positi'el* pro'en as a
+act, t,e appellants are /oun. /* t,is esta/lis,e. usage. (,e* 2ere, a+ter all, t,e ones 2,o
tappe. t,e +acilities a++or.e. /* t,e )an- in or.er to engage in international /usiness.
ACCO=D9NGLH, t,e Iu.gment a quo is a++irme., at .e+en.ants;appellants5 cost. (,is is 2it,out
preIu.ice to t,e )an-, in proper procee.ings in t,e court /elo2 in t,is same case pro'ing an.
/eing reim/urse. a..itional e8penses, i+ an*, it ,as incurre. /* 'irtue o+ t,e continue. storage o+
t,e goo.s in 7uestion up to t,e time t,is .ecision /ecomes +inal an. e8ecutor*.
G.R. No. 105395 December 10, 1993
BANK OF AMERICA, NT & SA, petitioners,
's.
CORT OF A!!EA"S, INTER#RESIN INDSTRIA" COR!ORATION, FRANCISCO TRA$ANO,
$O%N DOE AND $ANE DOE, respon.ents.
Agcaoili & Associates for petitioner.
Valenzuela Law Center, Victor Fernandez and Ramon ue!arra for pri!ate respondents.

&ITG, J.:
A 6+iasco,6 in'ol'ing an irre'oca/le letter o+ cre.it, ,as +oun. t,e .istresse. parties coming to
court as a.'ersaries in see-ing a .e+inition o+ t,eir respecti'e rig,ts or lia/ilities t,ereun.er.
On 0" Marc, 19$1, petitioner )an- o+ America, N( & 1A, Manila, recei'e. /* registere. mail an
9rre'oca/le Letter o+ Cre.it No. &0&#&/$1 purporte.l* issue. /* )an- o+ A*u.,*a, 1am*ae-
)ranc,, +or t,e account o+ General C,emicals, Lt.., o+ (,ailan. in t,e amount o+
01!&,#$&,000.00 to co'er t,e sale o+ plastic ropes an. 6agricultural +iles,6 2it, t,e petitioner as
a.'ising /an- an. pri'ate respon.ent 9nter;=esin 9n.ustrial Corporation as /ene+iciar*.
On 11 Marc, 19$1, )an- o+ America 2rote 9nter;=esin in+orming t,e latter o+ t,e +oregoing an.
transmitting, along 2it, t,e /an-5s communication,
t,e latter o+ cre.it. 0pon receipt o+ t,e letter;a.'ice 2it, t,e letter o+ cre.it, 9nter;=esin sent Att*.
Jmiliano (ana* to )an- o+ America to ,a'e t,e letter o+ cre.it con+irme.. (,e /an- .i. not.
=e*nal.o DueKas, /an- emplo*ee in c,arge o+ letters o+ cre.it, ,o2e'er, e8plaine. to Att*.
(ana* t,at t,ere 2as no nee. +or con+irmation /ecause t,e letter o+ cre.it 2oul. not ,a'e /een
transmitte. i+ it 2ere not genuine.
)et2een &6 Marc, to 10 April 19$1, 9nter;=esin soug,t to ma-e a partial a'ailment un.er t,e
letter o+ cre.it /* su/mitting to )an- o+ America in'oices, co'ering t,e s,ipment o+ &4,000 /ales
o+ pol*et,*lene rope to General C,emicals 'alue. at 01!1,&0,600.00, t,e correspon.ing
pac-ing list, e8port .eclaration an. /ill o+ la.ing. >inall*, a+ter /eing satis+ie. t,at 9nter;=esin5s
.ocuments con+orme. 2it, t,e con.itions e8presse. in t,e letter o+ cre.it, )an- o+ America
issue. in +a'or o+ 9nter;=esin a Cas,ier5s C,ec- +or %10,&19,09.&0, 6t,e %eso e7ui'alent o+ t,e
.ra+t :+or< 01!1,&0,600.00 .ra2n /* 9nter;=esin, a+ter .e.ucting t,e costs +or .ocumentar*
stamps, postage an. mail issuance.6
1
(,e c,ec- 2as pic-e. up /* 9nter;=esin5s J8ecuti'e Lice;
%resi.ent )arcelina (io. On 10 April 19$1, )an- o+ America 2rote )an- o+ A*u.,*a a.'ising t,e
latter o+ t,e a'ailment un.er t,e letter o+ cre.it an. soug,t t,e correspon.ing reim/ursement
t,ere+or.
Mean2,ile, 9nter;=esin, t,roug, Ms. (io, presente. to )an- o+ America t,e .ocuments +or t,e
secon. a'ailment un.er t,e same letter o+ cre.it consisting o+ a pac-ing list, /ill o+ la.ing,
in'oices, e8port .eclaration an. /ills in set, e'i.encing t,e secon. s,ipment o+ goo.s.
9mme.iatel* upon receipt o+ a tele8 +rom t,e )an- o+ A*u.,*a .eclaring t,e letter o+ cre.it
+rau.ulent,
2
)an- o+ America stoppe. t,e processing o+ 9nter;=esin5s .ocuments an. sent a tele8
to its /ranc, o++ice in )ang-o-, (,ailan., re7uesting assistance in .etermining t,e aut,enticit* o+
t,e letter o+ cre.it.
3
)an- o+ America -ept 9nter;=esin in+orme. o+ t,e .e'elopments. 1ensing a
+rau., )an- o+ America soug,t t,e assistance o+ t,e National )ureau o+ 9n'estigation :N)9<. @it,
t,e ,elp o+ t,e sta++ o+ t,e %,ilippine Jm/ass* at )ang-o-, as 2ell as t,e police an. customs
personnel o+ (,ailan., t,e N)9 agents, 2,o 2ere sent to (,ailan., .isco'ere. t,at t,e 'ans
e8porte. /* 9nter;=esin .i. not contain ropes /ut plastic strips, 2rappers, rags an. 2aste
materials. Dere at ,ome, t,e N)9 also in'estigate. 9nter;=esin5s %resi.ent >rancisco (raIano an.
J8ecuti'e Lice %resi.ent )arcelina (io, 2,o, t,erea+ter, 2ere criminall* c,arge. +or esta+a
t,roug, +alsi+ication o+ commercial .ocuments. (,e case, ,o2e'er, 2as e'entuall* .ismisse. /*
t,e =i4al %ro'incial >iscal 2,o +oun. no prima facie e'i.ence to 2arrant prosecution.
)an- o+ America sue. 9nter;=esin +or t,e reco'er* o+ %10,&19,09.&0, t,e peso e7ui'alent o+ t,e
.ra+t +or 01!1,&0,600.00 on t,e partial a'ailment o+ t,e no2 .iso2ne. letter o+ cre.it. On t,e
ot,er ,an., 9nter;=esin claime. t,at not onl* 2as it entitle. to retain %10,&19,09.&0 on its +irst
s,ipment /ut also to t,e /alance 01!1,461,400.00 co'ering t,e secon. s,ipment.
On &$ 3une 19$9, t,e trial court rule. +or 9nter;=esin,
'
,ol.ing t,atE
:a< )an- o+ America ma.e assurances t,at entice. 9nter;=esin to sen. t,e merc,an.ise to
(,ailan.A :/< t,e tele8 .eclaring t,e letter o+ cre.it +rau.ulent 2as un'eri+ie. an. sel+;ser'ing,
,ence, ,earsa*, /ut e'en assuming t,at t,e letter o+ cre.it 2as +a-e, 6t,e +ault s,oul. /e /orne /*
t,e )A 2,ic, 2as careless an. negligent6
5
+or +ailing to utili4e its mo.ern means o+
communication to 'eri+* 2it, )an- o+ A*u.,*a in (,ailan. t,e aut,enticit* o+ t,e letter o+ cre.it
/e+ore sen.ing t,e same to 9nter;=esinA :c< t,e loa.ing o+ plastic pro.ucts into t,e 'ans 2ere
un.er strict super'ision, inspection an. 'eri+ication o+ go'ernment o++icers 2,o ,a'e in t,eir +a'or
t,e presumption o+ regularit* in t,e per+ormance o+ o++icial +unctionsA an. :.< )an- o+ America
+aile. to pro'e t,e participation o+ 9nter;=esin or its emplo*ees in t,e allege. +rau. as, in +act, t,e
complaint +or esta+a t,roug, +alsi+ication o+ .ocuments 2as .ismisse. /* t,e %ro'incial >iscal o+
=i4al.
(
On appeal, t,e Court o+ Appeals
)
sustaine. t,e trial courtA ,ence, t,is present recourse /*
petitioner )an- o+ America.
(,e +ollo2ing issues are raise. /* )an- o+ AmericaE :a< 2,et,er it ,as 2arrante. t,e
genuineness an. aut,enticit* o+ t,e letter o+ cre.it an., corollaril*, 2,et,er it ,as acte. merel* as
an a.'ising /an- or as a con+irming /an-A :/< 2,et,er 9nter;=esin ,as actuall* s,ippe. t,e ropes
speci+ie. /* t,e letter o+ cre.itA an. :c< +ollo2ing t,e .is,onor o+ t,e letter o+ cre.it /* )an- o+
A*u.,*a, 2,et,er )an- o+ America ma* reco'er against 9nter;=esin un.er t,e .ra+t e8ecute. in
its partial a'ailment o+ t,e letter o+ cre.it.
*
9n re/uttal, 9nter;=esin ,ol.s t,atE :a< )an- o+ America cannot, on appeal, /elate.l* raise t,e
issue o+ /eing onl* an a.'ising /an-A :/< t,e +in.ings o+ t,e trial court t,at t,e ropes ,a'e actuall*
/een s,ippe. is /in.ing on t,e CourtA an., :c< )an- o+ America cannot reco'er +rom 9nter;=esin
/ecause t,e .ra2er o+ t,e letter o+ cre.it is t,e )an- o+ A*u.,*a an. not 9nter;=esin.
9+ onl* to un.erstan. ,o2 t,e parties, in t,e +irst place, got t,emsel'es into t,e mess, it ma* /e
2ell to start /* recalling ,o2, in its mo.ern use, a letter o+ cre.it is emplo*e. in tra.e
transactions.
A letter o+ cre.it is a +inancial .e'ice .e'elope. /* merc,ants as a con'enient an. relati'el* sa+e
mo.e o+ .ealing 2it, sales o+ goo.s to satis+* t,e seemingl* irreconcila/le interests o+ a seller,
2,o re+uses to part 2it, ,is goo.s /e+ore ,e is pai., an. a /u*er, 2,o 2ants to ,a'e control o+
t,e goo.s /e+ore pa*ing.
9
(o /rea- t,e impasse, t,e /u*er ma* /e re7uire. to contract a /an- to
issue a letter o+ cre.it in +a'or o+ t,e seller so t,at, /* 'irtue o+ t,e latter o+ cre.it, t,e issuing /an-
can aut,ori4e t,e seller to .ra2 .ra+ts an. engage to pa* t,em upon t,eir presentment
simultaneousl* 2it, t,e ten.er o+ .ocuments re7uire. /* t,e letter o+ cre.it.
10
(,e /u*er an. t,e
seller agree on 2,at .ocuments are to /e presente. +or pa*ment, /ut or.inaril* t,e* are
.ocuments o+ title e'i.encing or attesting to t,e s,ipment o+ t,e goo.s to t,e /u*er.
Once t,e cre.it is esta/lis,e., t,e seller s,ips t,e goo.s to t,e /u*er an. in t,e process secures
t,e re7uire. s,ipping .ocuments or .ocuments o+ title. (o get pai., t,e seller e8ecutes a .ra+t
an. presents it toget,er 2it, t,e re7uire. .ocuments to t,e issuing /an-. (,e issuing /an-
re.eems t,e .ra+t an. pa*s cas, to t,e seller i+ it +in.s t,at t,e .ocuments su/mitte. /* t,e seller
con+orm 2it, 2,at t,e letter o+ cre.it re7uires. (,e /an- t,en o/tains possession o+ t,e
.ocuments upon pa*ing t,e seller. (,e transaction is complete. 2,en t,e /u*er reim/urses t,e
issuing /an- an. ac7uires t,e .ocuments entitling ,im to t,e goo.s. 0n.er t,is arrangement, t,e
seller gets pai. onl* i+ ,e .eli'ers t,e .ocuments o+ title o'er t,e goo.s, 2,ile t,e /u*er ac7uires
sai. .ocuments an. control o'er t,e goo.s onl* a+ter reim/ursing t,e /an-.
@,at c,aracteri4es letters o+ cre.it, as .istinguis,e. +rom ot,er accessor* contracts, is t,e
engagement o+ t,e issuing /an- to pa* t,e seller o+ t,e .ra+t an. t,e re7uire. s,ipping
.ocuments are presente. to it. 9n turn, t,is arrangement assures t,e seller o+ prompt pa*ment,
in.epen.ent o+ an* /reac, o+ t,e main sales contract. )* t,is so;calle. 6in.epen.ence principle,6
t,e /an- .etermines compliance 2it, t,e letter o+ cre.it onl* /* e8amining t,e s,ipping
.ocuments presente.A it is preclu.e. +rom .etermining 2,et,er t,e main contract is actuall*
accomplis,e. or not.
11
(,ere 2oul. at least /e t,ree :< partiesE :a< t,e "uyer,
12
2,o procures t,e letter o+ cre.it an.
o/liges ,imsel+ to reim/urse t,e issuing /an- upon receipts o+ t,e .ocuments o+ titleA :/< t,e "an#
issuing t,e letter o+ cre.it,
13
2,ic, un.erta-es to pa* t,e seller upon receipt o+ t,e .ra+t an.
proper .ocument o+ titles an. to surren.er t,e .ocuments to t,e /u*er upon reim/ursementA an.,
:c< t,e seller,
1'
2,o in compliance 2it, t,e contract o+ sale s,ips t,e goo.s to t,e /u*er an.
.eli'ers t,e .ocuments o+ title an. .ra+t to t,e issuing /an- to reco'er pa*ment.
(,e num/er o+ t,e parties, not in+re7uentl* an. almost in'aria/l* in international tra.e practice,
ma* /e increase.. (,us, t,e ser'ices o+ an ad!ising :noti+*ing< /an-
15
ma* /e utili4e. to con'e*
to t,e seller t,e e8istence o+ t,e cre.itA or, o+ a confirming /an-
1(
2,ic, 2ill len. cre.ence to t,e
letter o+ cre.it issue. /* a lesser -no2n issuing /an-A or, o+ a paying "an#,
1)
2,ic, un.erta-es to
encas, t,e .ra+ts .ra2n /* t,e e8porter. >urt,er, instea. o+ going to t,e place o+ t,e issuing /an-
to claim pa*ment, t,e /u*er ma* approac, anot,er /an-, terme. t,e negotiating "an#,
1*
to ,a'e
t,e .ra+t .iscounte..
)eing a pro.uct o+ international commerce, t,e impact o+ t,is commercial instrument transcen.s
national /oun.aries, an. it is t,us not uncommon to +in. a .eart, o+ national la2 t,at can
a.e7uatel* pro'i.e +or its go'ernance. (,is countr* is no e8ception. Our o2n Co.e o+ Commerce
/asicall* intro.uces onl* its concept un.er Articles "6#;"#&, inclusi'e, t,ereo+. 9t is no 2on.er
t,en 2,* great reliance ,as /een place. on commercial usage an. practice, 2,ic,, in an* case,
can /e Iusti+ie. /* t,e uni'ersal acceptance o+ t,e autonom* o+ contract rules. (,e rules 2ere
later .e'elope. into 2,at is no2 -no2n as t,e 0ni+orm Customs an. %ractice +or Documentar*
Cre.its :60.C.%.6< issue. /* t,e 9nternational C,am/er o+ Commerce. 9t is /* no means a
complete te8t /* itsel+, +or, to /e sure, t,ere are ot,er principles, 2,ic,, alt,oug, part o+ le$
mercatoria, are not .ealt 2it, t,e 0.C.%.
9n F%A&I 'an# and &rust Company !. Court of Appeals,
19
2e ,a'e accepte., to t,e e8tent o+
t,eir pertinenc*, t,e application in our Iuris.iction o+ t,is international commercial cre.it regulator*
set o+ rules.
20
9n 'an# of ()il. Islands !. *e +ery,
21
2e ,a'e sai. t,at t,e o/ser'ances o+ t,e
0.C.%. is Iusti+ie. /* Article & o+ t,e Co.e o+ Commerce 2,ic, e8presses t,at, in t,e a/sence o+
an* particular pro'ision in t,e Co.e o+ Commerce, commercial transactions s,all /e go'erne. /*
usages an. customs generall* o/ser'e.. @e ,a'e +urt,er o/ser'e. t,at t,ere /eing no speci+ic
pro'isions 2,ic, go'ern t,e legal comple8ities arising +rom transactions in'ol'ing letters o+ cre.it
not onl* /et2een or among /an-s t,emsel'es /ut also /et2een /an-s an. t,e seller or t,e
/u*er, as t,e case ma* /e, t,e applica/ilit* o+ t,e 0.C.%. is un.enia/le.
(,e +irst issue raise. 2it, t,e petitioner, i.e., t,at it ,as in t,is instance merel* /een a.'ising
/an-, is outrig,tl* reIecte. /* 9nter;=esin an. is t,us soug,t to /e .iscar.e. +or ,a'ing /een
raise. onl* on appeal. @e cannot agree. (,e crucial point o+ .ispute in t,is case is 2,et,er un.er
t,e 6letter o+ cre.it,6 )an- o+ America ,as incurre. an* lia/ilit* to t,e 6/ene+iciar*6 t,ereo+, an
issue t,at largel* is .epen.ent on t,e /an-5s participation in t,at transactionA as a mere a.'ising
or noti+*ing /an-, it 2oul. not /e lia/le, /ut as a con+irming /an-, ,a. t,is /een t,e case, it coul.
/e consi.ere. as ,a'ing incurre. t,at lia/ilit*.
22
9n Insular Life Assurance Co. Ltd. %mployees Association , +atu !s. Insular Life Assurance Co.,
Ltd.,
23
t,e Court sai.E @,ere t,e issues alrea.* raise. also rest on ot,er issues not speci+icall*
presente., as long as t,e latter issues /ear rele'ance an. close relation to t,e +ormer an. as
long as t,e* arise +rom t,e matters on recor., t,e court ,as t,e aut,orit* to inclu.e t,em in its
.iscussion o+ t,e contro'ers* an. to pass upon t,em Iust as 2ell. 9n /rie+, in t,ose cases 2,ere
7uestions not particularl* raise. /* t,e parties sur+ace as necessar* +or t,e complete a.Iu.ication
o+ t,e rig,ts an. o/ligations o+ t,e parties, t,e interests o+ Iustice .ictate t,at t,e court s,oul.
consi.er an. resol'e t,em. (,e rule t,at onl* issues or t,eories raise. in t,e initial procee.ings
ma* /e ta-en up /* a part* t,ereto on appeal s,oul. onl* re+er to in.epen.ent, not concomitant
matters, to support or oppose t,e cause o+ action or .e+ense. (,e e'il t,at is soug,t to /e
a'oi.e., i.e., surprise to t,e a.'erse part*, is in realit* not e8istent on matters t,at are properl*
litigate. in t,e lo2er court an. appear on recor..
9t cannot seriousl* /e .ispute., loo-ing at t,is case, t,at )an- o+ America ,as, in +act, onl* /een
an a.'ising, not con+irming, /an-, an. t,is muc, is clearl* e'i.ent, among ot,er t,ings, /* t,e
pro'isions o+ t,e letter o+ cre.it itsel+, t,e petitioner /an-5s letter o+ a.'ice, its re7uest +or pa*ment
o+ a.'ising +ee, an. t,e a.mission o+ 9nter;=esin t,at it ,as pai. t,e same. (,at )an- o+ America
,as as-e. 9nter;=esin to su/mit .ocuments re7uire. /* t,e letter o+ cre.it an. e'entuall* ,as
pai. t,e procee.s t,ereo+, .i. not o/'iousl* ma-e it a con+irming /an-. (,e +act, too, t,at t,e
.ra+t re7uire. /* t,e letter o+ cre.it is to /e .ra2n un.er t,e account o+ General C,emicals
:/u*er< onl* means t,e same ,a. to /e presente. to )an- o+ A*u.,*a :issuing /an-< +or
pa*ment. 9t ma* /e signi+icant to recall t,at t,e letter o+ cre.it is an engagement o+ t,e issuing
/an-, not t,e a.'ising /an-, to pa* t,e .ra+t.
No less important is t,at )an- o+ America5s letter o+ 11 Marc, 19$1 ,as e8pressl* state. t,at
6BtC,e enclosure is solely an ad!ise o+ cre.it opene. /* t,e a/o'ementione. correspon.ent an.
con!eys no engagement "y us.6
2'
(,is 2ritten reser'ation /* )an- o+ America in limiting its
o/ligation onl* to /eing an a.'ising /an- is in consonance 2it, t,e pro'isions o+ 0.C.%.
As an a.'ising or noti+*ing /an-, )an- o+ America .i. not incur an* o/ligation more t,an Iust
noti+*ing 9nter;=esin o+ t,e letter o+ cre.it issue. in its +a'or, let alone to con+irm t,e letter o+
cre.it.
25
(,e /are statement o+ t,e /an- emplo*ees, a+orementione., in respon.ing to t,e in7uir*
ma.e /* Att*. (ana*, 9nter;=esin5s representati'e, on t,e aut,enticit* o+ t,e letter o+ cre.it
certainl* .i. not ,a'e t,e e++ect o+ no'ating t,e letter o+ cre.it an. )an- o+ America5s letter o+
a.'ise,
2(
nor can it Iusti+* t,e conclusion t,at t,e /an- must no2 assume total lia/ilit* on t,e
letter o+ cre.it. 9n.ee., 9nter;=esin itsel+ cannot claim to ,a'e /een all t,at +ree +rom +ault. As t,e
seller, t,e issuance o+ t,e letter o+ cre.it s,oul. ,a'e o/'iousl* /een a great concern to it.
2)
9t
2oul. ,a'e, in +act, /een strange i+ it .i. not, prior to t,e letter o+ cre.it, enter into a contract, or
negotiate. at t,e e'er* least, 2it, General C,emicals.
2*
9n t,e or.inar* course o+ /usiness, t,e
per+ection o+ contract prece.es t,e issuance o+ a letter o+ cre.it.
)ringing t,e letter o+ cre.it to t,e attention o+ t,e seller is t,e primor.ial o/ligation o+ an a.'ising
/an-. (,e 'ie2 t,at )an- o+ America s,oul. ,a'e +irst c,ec-e. t,e aut,enticit* o+ t,e letter o+
cre.it 2it, /an- o+ A*u.,*a, /* using a.'ance. mo.e o+ /usiness communications, /e+ore
.ispatc,ing t,e same to 9nter;=esin +in.s no real support in 0.C.%. Article 1$ o+ t,e 0.C.%. states
t,atE 6)an-s assume no lia/ilit* or responsi/ilit* +or t,e conse7uences arising out o+ t,e .ela*
an./or loss in transit o+ an* messages, letters or .ocuments, or +or .ela*, mutilation or ot,er
errors arising in t,e transmission o+ an* telecommunication . . .6 As a.'ising /an-, )an- o+
America is /oun. onl* to c,ec- t,e 6apparent aut,enticit*6 o+ t,e letter o+ cre.it, 2,ic, it .i..
29
Clari+*ing its meaning, @e/ster5s Nint, Ne2 Collegiate Dictionar*
30
e8plains t,at t,e 2or.
6A%%A=JN( suggests appearance to unai.e. senses t,at is not or ma* not /e /orne out /*
more rigorous e8amination or greater -no2le.ge.6
Ma* )an- o+ America t,en reco'er 2,at it ,as pai. un.er t,e letter o+ cre.it 2,en t,e
correspon.ing .ra+t +or partial a'ailment t,ereun.er an. t,e re7uire. .ocuments 2ere later
negotiate. 2it, it /* 9nter;=esinM (,e ans2er is *es. (,is -in. o+ transaction is 2,at is commonl*
re+erre. to as a .iscounting arrangement. (,is time, )an- o+ America ,as acte. in.epen.entl* as
a negotiating /an-, t,us sa'ing 9nter;=esin +rom t,e ,ar.s,ip o+ presenting t,e .ocuments
.irectl* to )an- o+ A*u.,*a to reco'er pa*ment. :9nter;=esin, o+ course, coul. ,a'e c,osen ot,er
/an-s 2it, 2,ic, to negotiate t,e .ra+t an. t,e .ocuments.< As a negotiating /an-, )an- o+
America ,as a rig,t to recourse against t,e issuer /an- an. until reim/ursement is o/taine.,
9nter;=esin, as t,e .ra2er o+ t,e .ra+t, continues to assume a contingent lia/ilit* t,ereon.
31
@,ile /an- o+ America ,as in.ee. +aile. to allege material +acts in its complaint t,at mig,t ,a'e
li-e2ise 2arrante. t,e application o+ t,e Negotia/le 9nstruments La2 an. possi/le t,en allo2e. it
to e'en go a+ter t,e in.orsers o+ t,e .ra+t, t,is +ailure, &/ nonet,eless, .oes not preclu.e
petitioner /an-5s rig,t :as negotiating /an-< o+ reco'er* +rom 9nter;=esin itsel+. 9nter;=esin a.mits
,a'ing recei'e. %10,&19,09.&0 +rom /an- o+ America on t,e letter o+ cre.it an. in ,a'ing
e8ecute. t,e correspon.ing .ra+t. (,e pa*ment to 9nter;=esin ,as gi'en, as a+oresai., )an- o+
America t,e rig,t o+ reim/ursement +rom t,e issuing /an-, )an- o+ A*u.,*a 2,ic,, in turn, 2oul.
t,en see- in.emni+ication +rom t,e /u*er :t,e General C,emicals o+ (,ailan.<. 1ince )an- o+
A*u.,*a .iso2ne. t,e letter o+ cre.it, ,o2e'er, )an- o+ America ma* no2 turn to 9nter;=esin +or
restitution.
)et2een t,e seller an. t,e negotiating /an- t,ere is t,e usual relations,ip
e8isting /et2een a .ra2er an. purc,aser o+ .ra+ts. 0nless .ra+ts .ra2n in
pursuance o+ t,e cre.it are in.icate. to /e 2it,out recourse t,ere+ore, t,e
negotiating /an- ,as t,e or.inar* rig,t o+ recourse against t,e seller in t,e e'ent
o+ .is,onor /* t,e issuing /an- . . . (,e +act t,at t,e correspon.ent an. t,e
negotiating /an- ma* /e one an. t,e same .oes not a++ect its rig,ts an.
o/ligations in eit,er capacit*, alt,oug, a special agreement is al2a*s a
possi/ilit* . . .
33
(,e a..itional groun. raise. /* t,e petitioner, i.e., t,at 9nter;=esin sent 2aste instea. o+ its
pro.ucts, is reall* o+ no conse7uence. 9n t,e operation o+ a letter o+ cre.it, t,e in'ol'e. /an-s
.eal onl* 2it, .ocuments an. not on goo.s .escri/e. in t,ose .ocuments.
3'
(,e ot,er issues raise. in t,en instant petition, +or instance, 2,et,er or not )an- o+ A*u.,*a .i.
issue t,e letter o+ cre.it an. 2,et,er or not t,e main contract o+ sale t,at ,as gi'en rise to t,e
letter o+ cre.it ,as /een /reac,e., are not rele'ant to t,is contro'ers*. (,e* are matters, instea.,
t,at can onl* /e o+ concern to t,e ,erein parties in an appropriate recourse against t,ose, 2,o,
un+ortunatel*, are not implea.e. in t,ese procee.ings.
9n +ine, 2e ,ol. t,at F
>irst, gi'en t,e +actual +in.ings o+ t,e courts /elo2, 2e conclu.e t,at petitioner )an- o+ America
,as acte. merel* as a notifying "an# an. .i. not assume t,e responsi/ilit* o+ a confirming "an#A
an.
1econ., petitioner /an-, as a negotiating "an#, is entitle. to reco'er on 9nter;=esin5s partial
a'ailment as /ene+iciar* o+ t,e letter o+ cre.it 2,ic, ,as /een .iso2ne. /* t,e allege. issuer
/an-.
No Iu.gment o+ ci'il lia/ilit* against t,e ot,er .e+en.ants, >rancisco (raIano an. ot,er
uni.enti+ie. parties, can /e ma.e, in t,is instance, t,ere /eing no su++icient e'i.ence to 2arrant
an* suc, +in.ing.
@DJ=J>O=J, t,e assaile. .ecision is 1J( A19DJ, an. respon.ent 9nter;=esin 9n.ustrial
Corporation is or.ere. to re+un. to petitioner )an- o+ America N( & 1A t,e amount o+
%10,&19,09.&0 2it, legal interest +rom t,e +iling o+ t,e complaint until +ull* pai..
G.R. No. 9'209 A+r,- 30, 1991
FEATI BANK & TRST COM!AN. /0o1 CIT.TRST BANKING COR!ORATION2, petitioner,
's.
T%E CORT OF A!!EA"S, 304 BERNARDO E. &I""A"5, respon.ents.
(elaez, Adriano & regorio for petitioner.
%zequiel -. Consulta for pri!ate respondent.

GTIERRE5, $R., J.:p
(,is is a petition +or re'ie2 see-ing t,e re'ersal o+ t,e .ecision o+ t,e Court o+ Appeals .ate.
3une &9, 1990 2,ic, a++irme. t,e .ecision o+ t,e =egional (rial Court o+ =i4al .ate. Octo/er &0,
19$6 or.ering t,e .e+en.ants C,ristiansen an. t,e petitioner, to pa* 'arious sums to respon.ent
Lillalu4, Iointl* an. se'erall*.
(,e +acts o+ t,e case are as +ollo2sE
On 3une , 19#1, )ernar.o J. Lillalu4 agree. to sell to t,e t,en .e+en.ant A8el C,ristiansen
&,000 cu/ic meters o+ lauan logs at !&#.00 per cu/ic meter >O).
A+ter inspecting t,e logs, C,ristiansen issue. purc,ase or.er No. #61#1.
On t,e arrangements ma.e an. upon t,e instructions o+ t,e consignee, Danmi (ra.e
De'elopment, Lt.., .e 1anta Ana, Cali+ornia, t,e 1ecurit* %aci+ic National )an- o+ Los Angeles,
Cali+ornia issue. 9rre'oca/le Letter o+ Cre.it No. 9C;46&6$ a'aila/le at sig,t in +a'or o+ Lillalu4 +or
t,e sum o+ !"4,000.00, t,e total purc,ase price o+ t,e lauan logs.
(,e letter o+ cre.it 2as maile. to t,e >eati )an- an. (rust Compan* :no2 Cit*trust< 2it, t,e
instruction to t,e latter t,at it 6+or2ar. t,e enclose. letter o+ cre.it to t,e /ene+iciar*.6 :=ecor.s,
Lol. 9, p. 11<
(,e letter o+ cre.it +urt,er pro'i.e. t,at t,e .ra+t to /e .ra2n is on 1ecurit* %aci+ic National )an-
an. t,at it /e accompanie. /* t,e +ollo2ing .ocumentsE
1. 1igne. Commercial 9n'oice in +our copies s,o2ing t,e num/er o+ t,e purc,ase
or.er an. certi+*ing t,at F
a. All terms an. con.itions o+ t,e purc,ase or.er ,a'e /een
complie. 2it, an. t,at all logs are +res, cut an. 7ualit* e7ual to
or /etter t,an t,at .escri/e. in D.A. C,ristiansen5s tele8 N&01 o+
Ma* 1, 19#0, an. t,at all logs ,a'e /een mar-e. 6)JL;JO.6
/. One complete set o+ .ocuments, inclu.ing 1/ original /ills o+
la.ing 2as airmaile. to Consignee an. %arties to /e a.'ise. /*
Dans;A8el C,ristiansen, 1,ip an. Merc,an.ise )ro-er.
c. One set o+ non;negotia/le .ocuments 2as airmaile. to Dan Mi
(ra.e De'elopment Compan* an. one set to Consignee an.
%arties to /e a.'ise. /* Dans;A8el C,ristiansen, 1,ip an.
Merc,an.ise )ro-er.
&. (all* s,eets in 7ua.ruplicate.
. &/ Original Clean on )oar. Ocean )ills o+ La.ing 2it, Consignee an. %arties
to /e a.'ise. /* Dans A8el C,ristiansen, s,o2ing >reig,t %repai. an. mar-e.
Noti+*E
Dan Mi (ra.e De'elopment Compan*, Lt.., 1anta Ana, Cali+ornia.
Letter o+ Cre.it No. 46&6$ .ate. 3une #, 19#1
Dan Mi (ra.e De'elopment Compan*, Lt.., %.O. )o8 104$0, 1anta Ana,
Cali+ornia 9&#11 an. Dan Mi (ra.e De'elopment Compan*, Lt.., 1eoul, Porea.
4. Certi+ication +rom Dan;A8el C,ristiansen, 1,ip an. Merc,an.ise )ro-er,
stating t,at logs ,a'e /een appro'e. prior to s,ipment in accor.ance 2it, terms
an. con.itions o+ correspon.ing purc,ase Or.er. :=ecor., Lol. 1 pp. 11;1&<
Also incorporate. /* re+erence in t,e letter o+ cre.it is t,e 0ni+orm Customs an. %ractice +or
Documentar* Cre.its :196& =e'ision<.
(,e logs 2ere t,erea+ter loa.e. on t,e 'essel 6Qenlin Glor*6 2,ic, 2as c,artere. /*
C,ristiansen. )e+ore its loa.ing, t,e logs 2ere inspecte. /* custom inspectors Nelo Laurente,
AleIan.ro Ca/iao, Jstanislao J.era +rom t,e )ureau o+ Customs :=ecor.s, Lol. 9, p. 1&4< an.
representati'es =ogelio Cantu/a an. 3esus (a.ena o+ t,e )ureau o+ >orestr* :=ecor.s, Lol. 9,
pp. 16;1#< all o+ 2,om certi+ie. to t,e goo. con.ition an. e8porta/ilit* o+ t,e logs.
A+ter t,e loa.ing o+ t,e logs 2as complete., t,e C,ie+ Mate, 1,ao 1,u @ang issue. a mate
receipt o+ t,e cargo 2,ic, state. t,e same are in goo. con.ition :=ecor.s, Lol. 9, p. 6<.
Do2e'er, C,ristiansen re+use. to issue t,e certi+ication as re7uire. in paragrap, 4 o+ t,e letter o+
cre.it, .espite se'eral re7uests ma.e /* t,e pri'ate respon.ent.
)ecause o+ t,e a/sence o+ t,e certi+ication /* C,ristiansen, t,e >eati )an- an. (rust Compan*
re+use. to a.'ance t,e pa*ment on t,e letter o+ cre.it.
(,e letter o+ cre.it lapse. on 3une 0, 19#1, :e8ten.e., ,o2e'er up to 3ul* 1, 19#1< 2it,out t,e
pri'ate respon.ent recei'ing an* certi+ication +rom C,ristiansen.
(,e persistent re+usal o+ C,ristiansen to issue t,e certi+ication prompte. t,e pri'ate respon.ent to
/ring t,e matter /e+ore t,e Central )an-. 9n a memoran.um .ate. August 16, 19#1, t,e Central
)an- rule. t,atE
. . . pursuant to t,e Monetar* )oar. =esolution No. 1&0 .ate. August , 19#1,
in all log e8ports, t,e certi+ication o+ t,e lum/er inspectors o+ t,e )ureau o+
>orestr* . . . s,all /e consi.ere. +inal +or purposes o+ negotiating .ocuments. An*
pro'ision in an* letter o+ cre.it co'ering log e8ports re7uiring certi+ication o+
/u*er5s agent or representati'e t,at sai. logs ,a'e /een appro'e. +or s,ipment
as a con.ition prece.ent to negotiation o+ s,ipping .ocuments s,all not /e
allo2e.. :=ecor.s, Lol. 9, p. 6#<
Mean2,ile, t,e logs arri'e. at 9nc,on, Porea an. 2ere recei'e. /* t,e consignee, Danmi (ra.e
De'elopment Compan*, to 2,om C,ristiansen sol. t,e logs +or t,e amount o+ !#."0 per cu/ic
meter, +or a net pro+it o+ !10 per cu/ic meter. Danmi (ra.e De'elopment Compan*, on t,e ot,er
,an. sol. t,e logs to (aisung Lum/er Compan* at 9nc,on, Porea. :Rollo, p. 9<
1ince t,e .eman.s /* t,e pri'ate respon.ent +or C,ristiansen to e8ecute t,e certi+ication pro'e.
+utile, Lillalu4, on 1eptem/er 1, 19#1, institute. an action +or mandamus an. speci+ic
per+ormance against C,ristiansen an. t,e >eati )an- an. (rust Compan* :no2 Cit*trust< /e+ore
t,e t,en Court o+ >irst 9nstance o+ =i4al. (,e petitioner 2as implea.e. as .e+en.ant /e+ore t,e
lo2er court onl* to a++or. complete relie+ s,oul. t,e court a quo or.er C,ristiansen to e8ecute t,e
re7uire. certi+ication.
(,e complaint pra*e. +or t,e +ollo2ingE
1. C,ristiansen /e or.ere. to issue t,e certi+ication re7uire. o+ ,im un.er t,e
Letter o+ Cre.itA
&. 0pon issuance o+ suc, certi+ication, or, i+ t,e court s,oul. +in. it unnecessar*,
>JA(9 )ANP /e or.ere. to accept negotiation o+ t,e Letter o+ Cre.it an. ma-e
pa*ment t,ereon to Lillalu4A
. Or.er C,ristiansen to pa* .amages to t,e plainti++. :Rollo, p. 9<
On or a/out 19#9, 2,ile t,e case 2as still pen.ing trial, C,ristiansen le+t t,e %,ilippines 2it,out
in+orming t,e Court an. ,is counsel. Dence, Lillalu4, +ile. an amen.e. complaint to ma-e t,e
petitioner soli.aril* lia/le 2it, C,ristiansen.
(,e trial court, in its or.er .ate. August &9, 19#9, a.mitte. t,e amen.e. complaint.
A+ter trial, t,e lo2er court +oun.E
(,e lia/ilit* o+ t,e .e+en.ant CD=91(9AN1JN is /e*on. .ispute, an. t,e
plainti++s rig,t to .eman. pa*ment is a/solute. De+en.ant CD=91(9AN1JN
,a'ing accepte. .eli'er* o+ t,e logs /* ,a'ing t,em loa.e. in ,is c,artere.
'essel t,e 6Qenlin Glor*6 an. s,ipping t,em to t,e consignee, ,is /u*er Dan Mi
(ra.e in 9nc,on, 1out, Porea :Art. 1"$", Ci'il Co.e<, ,is o/ligation to pa* t,e
purc,ase or.er ,a. clearl* arisen an. t,e plainti++ ma* sue an. reco'er t,e price
o+ t,e goo.s :Art. 1"9", Id<.
(,e Court /elie'es t,at t,e .e+en.ant CD=91(9AN1JN acte. in /a. +ait, an.
.eceit an. 2it, intent to .e+rau. t,e plainti++, re+lecte. in an. aggra'ate. /*, not
onl* ,is re+usal to issue t,e certi+ication t,at 2oul. ,a'e ena/le. 2it,out
7uestion t,e plainti++ to negotiate t,e letter o+ cre.it, /ut ,is accusing t,e plainti++
in ,is ans2er o+ +rau., intimi.ation, 'iolence an. .eceit. (,ese accusations sai.
.e+en.ant .i. not attempt to pro'e, as in +act ,e le+t t,e countr* 2it,out e'en
noti+*ing ,is o2n la2*er. 9t 2as to t,e Court5s min. a pure s2in.le.
(,e .e+en.ant >eati )an- an. (rust Compan*, on t,e ot,er ,an., must /e ,el.
lia/le toget,er 2it, ,is :sic< co;.e+en.ant +or ,a'ing, /* its 2rong+ul act, i.e., its
re+usal to negotiate t,e letter o+ cre.it in t,e a/sence o+ CD=91(9AN1JN5s
certi+ication :in spite o+ t,e Central )an-5s ruling t,at t,e re7uirement 2as illegal<,
pre'ente. pa*ment to t,e plainti++. (,e sai. letter o+ cre.it, as ma* /e seen on its
+ace, is irre!oca"le an. t,e issuing /an-, t,e 1ecurit* %aci+ic National )an- in
Los Angeles, Cali+ornia, un.ertoo- /* its terms t,at t,e same s,all /e ,onore.
upon its presentment. On t,e ot,er ,an., t,e noti+*ing /an-, t,e .e+en.ant >eati
)an- an. (rust Compan*, /* accepting t,e instructions +rom t,e issuing /an-,
itsel+ assume. t,e 'er* same un.erta-ing as t,e issuing /an- un.er t,e terms o+
t,e letter o+ cre.it.
888 888 888
(,e Court li-e2ise agrees 2it, t,e plainti++ t,at t,e .e+en.ant )ANP ma* also /e
,el. lia/le un.er t,e principles an. la2s on /ot, trust an. estoppel. @,en t,e
.e+en.ant )ANP accepte. its role as t,e noti+*ing an. negotiating /an- +or an.
in /e,al+ o+ t,e issuing /an-, it in e++ect accepte. a trust repose. on it, an.
/ecame a trustee in relation to plainti++ as t,e /ene+iciar* o+ t,e letter o+ cre.it. As
trustee, it 2as t,en .ut* /oun. to protect t,e interests o+ t,e plainti++ un.er t,e
terms o+ t,e letter o+ cre.it, an. must /e ,el. lia/le +or .amages an. loss
resulting to t,e plainti++ +rom its +ailure to per+orm t,at o/ligation.
>urt,ermore, 2,en t,e .e+en.ant )ANP assume. t,e role o+ a noti+*ing an.
negotiating )ANP it in e++ect represente. to t,e plainti++ t,at, i+ t,e plainti++
complie. 2it, t,e terms an. con.itions o+ t,e letter o+ cre.it an. presents t,e
same to t,e )ANP toget,er 2it, t,e .ocuments mentione. t,erein t,e sai.
)ANP 2ill pa* t,e plainti++ t,e amount o+ t,e letter o+ cre.it. (,e Court is
con'ince. t,at it 2as upon t,e strengt, o+ t,is letter o+ cre.it an. t,is implie.
representation o+ t,e .e+en.ant )ANP t,at t,e plainti++ .eli'ere. t,e logs to
.e+en.ant CD=91(9AN1JN, consi.ering t,at t,e issuing /an- is a +oreign /an-
2it, 2,om plainti++ ,a. no /usiness connections an. CD=91(9AN1JN ,a. not
o++ere. an* ot,er 1ecurit* +or t,e pa*ment o+ t,e logs. De+en.ant )ANP cannot
no2 /e allo2e. to .en* its commitment an. lia/ilit* un.er t,e letter o+ cre.itE
A ,ol.er o+ a promissor* note gi'en /ecause o+ gam/ling 2,o
in.orses t,e same to an innocent ,ol.er +or 'alue an. 2,o
assures sai. part* t,at t,e note ,as no legal .e+ect, is in
estoppel +rom asserting t,at t,ere ,a. /een an illegal
consi.eration +or t,e note, an. so, ,e ,as to pa* its 'alue.
:=o.rigue4 '. Martine4, " %,il. 6#<.
(,e .e+en.ant )ANP, in insisting upon t,e certi+ication o+ .e+en.ant
CD=91(9AN1JN as a con.ition prece.ent to negotiating t,e letter o+ cre.it,
li-e2ise in t,e Court5s opinion acte. in /a. +ait,, not onl* /ecause o+ t,e clear
.eclaration o+ t,e Central )an- t,at suc, a re7uirement 2as illegal, /ut /ecause
t,e )ANP, 2it, all t,e legal counsel a'aila/le to it must ,a'e -no2n t,at t,e
con.ition 2as 'oi. since it .epen.e. on t,e sole 2ill o+ t,e .e/tor, t,e .e+en.ant
CD=91(9AN1JN. :Art. 11$&, Ci'il Co.e< :Rollo, pp. &9;1<
On t,e /asis o+ t,e +oregoing t,e trial court on Octo/er &0, 19$6, rule. in +a'or o+ t,e pri'ate
respon.ent. (,e .ispositi'e portion o+ its .ecision rea.sE
@DJ=J>O=J, Iu.gment is ,ere/* ren.ere. +or t,e plainti++, or.ering t,e
.e+en.ants to pa* t,e plainti++, Iointl* an. se'erall*, t,e +ollo2ing sumsE
a< !"4,000.00 :01<, or its peso e7ui'alent at t,e pre'ailing rate as o+ t,e time
pa*ment is actuall* ma.e, representing t,e purc,ase price o+ t,e logsA
/< %1#,40.00, representing go'ernment +ees an. c,arges pai. /* plainti++ in
connection 2it, t,e logs s,ipment in 7uestionA
c< %10,000.00 as temperate .amages :+or trips ma.e to )acolo. an. Porea<.
All t,ree +oregoing sums s,all /e 2it, interest t,ereon at 1&? per annum +rom
1eptem/er 1, 19#1, 2,en t,e complaint 2as +ile., until +ull* pai.E
.< %#0,000.00 as moral .amagesA
e< %0,000.00 as e8emplar* .amagesA an.
+< %0,000.00 as attorne*5s +ees an. litigation e8pense.
:Rollo, p. &$<
(,e petitioner recei'e. a cop* o+ t,e .ecision on No'em/er , 19$6. (2o .a*s t,erea+ter, or on
No'em/er ", 19$6, it +ile. a notice o+ appeal.
On No'em/er 10, 19$6, t,e pri'ate respon.ent +ile. a motion +or t,e imme.iate e8ecution o+ t,e
Iu.gment on t,e groun. t,at t,e appeal o+ t,e petitioner 2as +ri'olous an. .ilator*.
(,e trial court or.ere. t,e imme.iate e8ecution o+ its Iu.gment upon t,e pri'ate respon.ent5s
+iling o+ a /on..
(,e petitioner t,en +ile. a motion +or reconsi.eration an. a motion to suspen. t,e implementation
o+ t,e 2rit o+ e8ecution. )ot, motions 2ere, ,o2e'er, .enie.. (,us, petitioner +ile. /e+ore t,e
Court o+ Appeals a petition +or certiorari an. pro,i/ition 2it, preliminar* inIunction to enIoin t,e
imme.iate e8ecution o+ t,e Iu.gment.
(,e Court o+ Appeals in a .ecision .ate. April 9, 19$# grante. t,e petition an. nulli+ie. t,e or.er
o+ e8ecution, t,e .ispositi'e portion o+ t,e .ecision statesE
@DJ=J>O=J, t,e petition +or certiorari is grante.. =espon.ent 3u.ge5s or.er o+
e8ecution .ate. Decem/er &9, 19$6, as 2ell as ,is or.er .ate. 3anuar* 14,
19$# .en*ing t,e petitioner5s urgent motion to suspen. t,e 2rit o+ e8ecution
against its properties are ,ere/* annulle. an. set asi.e inso+ar as t,e* are
soug,t to /e en+orce. an. implemente. against t,e petitioner >eati )an- & (rust
Compan*, no2 Cit*trust )an-ing Corporation, .uring t,e pen.enc* o+ its appeal
+rom t,e a.'erse .ecision in Ci'il Case No. 1"1&1. Do2e'er, t,e e8ecution o+ t,e
same .ecision against .e+en.ant A8el C,ristiansen .i. not appeal sai. .ecision
ma* procee. unimpe.e.. (,e 1,eri++ s le'* on t,e petitioner5s properties, an.
t,e notice o+ sale .ate. 3anuar* 1, 19$# :Anne8 M<, are ,ere/* annulle. an.
set asi.e. Rollo p. 44<
A motion +or reconsi.eration 2as t,erea+ter +ile. /* t,e pri'ate respon.ent. (,e Court o+ Appeals,
in a resolution .ate. 3une &9, 19$# .enie. t,e motion +or reconsi.eration.
9n t,e meantime, t,e appeal +ile. /* t,e petitioner /e+ore t,e Court o+ Appeals 2as gi'en .ue
course. 9n its .ecision .ate. 3une &9, 1990, t,e Court o+ Appeals a++irme. t,e .ecision o+ t,e
lo2er court .ate. Octo/er &0, 19$6 an. rule. t,atE
1. >eati )an- a.mitte. in t,e 6special an. negati'e .e+enses6 section o+ its
ans2er t,at it 2as t,e /an- to negotiate t,e letter o+ cre.it issue. /* t,e 1ecurit*
%aci+ic National )an- o+ Los Angeles, Cali+ornia. :=ecor., pp. 1"6, 1"#<. >eati
)an- .i. noti+* Lillalu4 o+ suc, letter o+ cre.it. 9n +act, as suc, negotiating /an-,
e'en /e+ore t,e letter o+ cre.it 2as presente. +or pa*ment, >eati )an- ,a.
alrea.* ma.e an a.'ance pa*ment o+ %#",000.00 to Lillalu4 in anticipation o+
suc, presentment. As t,e negotiating /an-, >eati )an-, /* noti+*ing Lillalu4 o+
t,e letter o+ cre.it in /e,al+ o+ t,e issuing /an- :1ecurit* %aci+ic<, con+irme. suc,
letter o+ cre.it an. ma.e t,e same also its o2n o/ligation. (,is ruling +in.s
support in t,e aut,orit* cite. /* Lillalu4E
A con+irme. letter o+ cre.it is one in 2,ic, t,e noti+*ing /an- gi'es its assurance
also t,at t,e opening /an-5s o/ligation 2ill /e per+orme.. 9n suc, a case, t,e
noti+*ing /an- 2ill not simpl* transmit /ut 2ill con+irm t,e opening /an-5s
o/ligation /* ma-ing it also its o2n un.erta-ing, or commitment, or guarant* or
o/ligation. :@ar. & Dat+iel., &$;&9, cite. in Ag/a*ani, Commercial La2s, 19#$
e.ition, p. ##<.
>eati )an- argues +urt,er t,at it 2oul. /e consi.ere. as t,e negotiating /an-
onl* upon negotiation o+ t,e letter o+ cre.it. (,is stance is untena/le. Assurance,
commitments or guaranties suppose. to /e ma.e /* noti+*ing /an-s to t,e
/ene+iciar* o+ a letter o+ cre.it, as .e+ine. a/o'e, can /e rele'ant or meaning+ul
onl* 2it, respect to a +uture transaction, t,at is, negotiation. Dence, e'en /e+ore
actual negotiation, t,e noti+*ing /an-, /* t,e mere act o+ noti+*ing t,e /ene+iciar*
o+ t,e letter o+ cre.it, assumes as o+ t,at moment t,e o/ligation o+ t,e issuing
/an-.
&. 1ince >eati )an- acte. as guarantor o+ t,e issuing /an-, an. in e++ect also o+
t,e latter5s principal or client, i.e. Dans A8el;C,ristiansen. :sic< 1uc, /eing t,e
case, 2,en C,ristiansen re+use. to issue t,e certi+ication, it 2as as t,oug,
re+usal 2as ma.e /* >eati )an- itsel+. >eati )an- s,oul. ,a'e ta-en steps to
secure t,e certi+ication +rom C,ristiansenA an., i+ t,e latter s,oul. still re+use to
compl*, to ,ale ,im to court. 9n s,ort, >eati )an- s,oul. ,a'e ,onore. Lillalu45s
.eman. +or pa*ment o+ ,is logs /* 'irtue o+ t,e irre'oca/le letter o+ cre.it issue.
in Lillalu45s +a'or an. guarantee. /* >eati )an-.
. (,e .ecision promulgate. /* t,is Court in CA;G.=. 1p No. 110"1, 2,ic,
containe. t,e statement 61ince Lillalu46 .ra+t 2as not .ra2n strictl* in
compliance 2it, t,e terms o+ t,e letter o+ cre.it, >eati )an-5s re+usal to negotiate
it 2as Iusti+ie.,6 .i. not .ispose o+ t,is 7uestion on t,e merits. 9n t,at case, t,e
7uestion in'ol'e. 2as Iuris.iction or .iscretion, an. not Iu.gment. (,e 7uote.
pronouncement s,oul. not /e ta-en as a preempti'e Iu.gment on t,e merits o+
t,e present case on appeal.
4. (,e original action 2as +or 6.andamus an./or speci+ic per+ormance.6 >eati
)an- ma* not /e a part* to t,e transaction /et2een C,ristiansen an. 1ecurit*
%aci+ic National )an- on t,e one ,an., an. Lillalu4 on t,e ot,er ,an.A still, /eing
guarantor or agent o+ C,ristiansen an./or 1ecurit* %aci+ic National )an- 2,ic,
,a. .irectl* .ealt 2it, Lillalu4, >eati )an- ma* /e sue. properl* on speci+ic
per+ormance as a proce.ural means /* 2,ic, t,e relie+ soug,t /* Lillalu4 ma* /e
entertaine.. :Rollo, pp. &;<
(,e .ispositi'e portion o+ t,e .ecision o+ t,e Court o+ Appeals rea.sE
@DJ=J>O=J, t,e .ecision appeale. +rom is a++irme.A an. accor.ingl*, t,e
appeal is ,ere/* .ismisse.. Costs against t,e petitioner. :Rollo, p. <
Dence, t,is petition +or re'ie2.
(,e petitioner interposes t,e +ollo2ing reasons +or t,e allo2ance o+ t,e petition.
First Reason
(DJ =J1%ONDJN( CO0=( J==ONJO01LH CONCL0DJD >=OM (DJ
J1(A)L91DJD >AC(1 AND 9NDJJD, @JN( AGA9N1( (DJ JL9DJNCJ AND
DJC919ON O> (D91 DONO=A)LJ CO0=(, (DA( %J(9(9ONJ= )ANP 91
L9A)LJ ON (DJ LJ((J= O> C=JD9( DJ1%9(J %=9LA(J =J1%ONDJN(1
NON;COM%L9ANCJ @9(D (DJ (J=M1 (DJ=JO>,
-econd Reason
(DJ =J1%ONDJN( CO0=( COMM9((JD AN J==O= O> LA@ @DJN 9(
DJLD (DA( %J(9(9ONJ= )ANP, )H NO(9>H9NG %=9LA(J =J1%ONDJN( O>
(DJ LJ((J= O> C=JD9(, CON>9=MJD 10CD C=JD9( AND MADJ (DJ
1AMJ AL1O 9(1 O)L9GA(9ON A1 G0A=AN(O= O> (DJ 91109NG )ANP.
&)ird Reason
(DJ =J1%ONDJN( CO0=( L9PJ@91J COMM9((JD AN J==O= O> LA@
@DJN 9( A>>9=MJD (DJ (=9AL CO0=(51 DJC919ON. :Rollo, p. 1&<
(,e principal issue in t,is case is 2,et,er or not a correspon.ent /an- is to /e ,el. lia/le un.er
t,e letter o+ cre.it .espite non;compliance /* t,e /ene+iciar* 2it, t,e terms t,ereo+M
(,e petition is impresse. 2it, merit.
9t is a settle. rule in commercial transactions in'ol'ing letters o+ cre.it t,at t,e .ocuments
ten.ere. must strictl* con+orm to t,e terms o+ t,e letter o+ cre.it. (,e ten.er o+ .ocuments /* t,e
/ene+iciar* :seller< must inclu.e all .ocuments re7uire. /* t,e letter. A correspon.ent /an- 2,ic,
.eparts +rom 2,at ,as /een stipulate. un.er t,e letter o+ cre.it, as 2,en it accepts a +ault*
ten.er, acts on its o2n ris-s an. it ma* not t,erea+ter /e a/le to reco'er +rom t,e /u*er or t,e
issuing /an-, as t,e case ma* /e, t,e mone* t,us pai. to t,e /ene+iciar* (,us t,e rule o+ strict
compliance.
9n t,e 0nite. 1tates, commercial transactions in'ol'ing letters o+ cre.it are go'erne. /* t,e rule
o+ strict compliance. 9n t,e %,ilippines, t,e same ,ol.s true. (,e same rule must also /e +ollo2e..
(,e case o+ Anglo/-out) America &rust Co. !. 0)e et al. :1$4 N.J. #41 B19C< e8poun.e. clearl*
on t,e rule o+ strict compliance.
@e ,a'e ,ereto+ore ,el. t,at t,ese letters o+ cre.it are to /e strictl* complie.
2it, 2,ic, .ocuments, an. s,ipping .ocuments must /e +ollo2e. as state. in
t,e letter. (,ere is no .iscretion in t,e /an- or trust compan* to 2ai'e an*
re7uirements. (,e terms o+ t,e letter constitutes an agreement /et2een t,e
purc,aser an. t,e /an-. :p. #4<
Alt,oug, in some American .ecisions, /an-s are grante. a little .iscretion to accept a +ault*
ten.er as 2,en t,e ot,er .ocuments ma* /e consi.ere. immaterial or super+luous, t,is t,eor*
coul. lea. to .angerous prece.ents. 1ince a /an- .eals onl* 2it, .ocuments, it is not in a
position to .etermine 2,et,er or not t,e .ocuments re7uire. /* t,e letter o+ cre.it are material or
super+luous. (,e mere +act t,at t,e .ocument 2as speci+ie. t,erein rea.il* means t,at t,e
.ocument is o+ 'ital importance to t,e /u*er.
Moreo'er, t,e incorporation o+ t,e 0ni+orm Customs an. %ractice +or Documentar* Cre.it :0.C.%.
+or s,ort< in t,e letter o+ cre.it resulte. in t,e applica/ilit* o+ t,e sai. rules in t,e go'ernance o+
t,e relations /et2een t,e parties.
An. e'en i+ t,e 0.C.%. 2as not incorporate. in t,e letter o+ cre.it, 2e ,a'e alrea.* rule. in t,e
a++irmati'e as to t,e applica/ilit* o+ t,e 0.C.%. in cases /e+ore us.
9n 'an# of (.I. !. *e +ery :" 1C=A &"6 B19#0C<, 2e pronounce. t,at t,e o/ser'ance o+ t,e
0.C.%. in t,is Iuris.iction is Iusti+ie. /* Article & o+ t,e Co.e o+ Commerce. Article & o+ t,e Co.e o+
Commerce enunciates t,at in t,e a/sence o+ an* particular pro'ision in t,e Co.e o+ Commerce,
commercial transactions s,all /e go'erne. /* t,e usages an. customs generall* o/ser'e..
(,ere /eing no speci+ic pro'ision 2,ic, go'erns t,e legal comple8ities arising +rom transactions
in'ol'ing letters o+ cre.it not onl* /et2een t,e /an-s t,emsel'es /ut also /et2een /an-s an.
seller an./or /u*er, t,e applica/ilit* o+ t,e 0.C.%. is un.enia/le.
(,e pertinent pro'isions o+ t,e 0.C.%. :196& =e'ision< areE
Article .
An irre'oca/le cre.it is a .e+inite un.erta-ing on t,e part o+ t,e issuing /an- an.
constitutes t,e engagement o+ t,at /an- to t,e /ene+iciar* an. /ona +i.e ,ol.ers
o+ .ra+ts .ra2n an./or .ocuments presente. t,ereun.er, t,at t,e pro'isions +or
pa*ment, acceptance or negotiation containe. in t,e cre.it 2ill /e .ul* +ul+ille.,
pro!ided t)at all t)e terms and conditions of t)e credit are complied wit).
An irre!oca"le credit may "e ad!ised to a "eneficiary t)roug) anot)er "an# 1t)e
ad!ising "an#2 wit)out engagement on t)e part of t)at "an#, /ut 2,en an issuing
/an- aut,ori4es or re7uests anot,er /an- to con+irm its irre'oca/le cre.it an. t,e
latter .oes so, suc, con+irmation constitutes a .e+inite un.erta-ing o+ t,e
con+irming /an-. . . .
Article #.
)an-s must e8amine all .ocuments 2it, reasona/le care to ascertain t,at t,e*
appear on t,eir +ace to /e in accor.ance 2it, t,e terms an. con.itions o+ t,e
cre.it,6
Article $.
%a*ment, acceptance or negotiation against .ocuments 2,ic, appear on t)eir
face to "e in accordance wit) t)e terms and conditions of a credit /* a /an-
aut,ori4e. to .o so, /in.s t,e part* gi'ing t,e aut,ori4ation to ta-e up
.ocuments an. reim/urse t,e /an- 2,ic, ,as e++ecte. t,e pa*ment, acceptance
or negotiation. :Jmp,asis 1upplie.<
0n.er t,e +oregoing pro'isions o+ t,e 0.C.%., t,e /an- ma* onl* negotiate, accept or pa*, i+ t,e
.ocuments ten.ere. to it are on t,eir +ace in accor.ance 2it, t,e terms an. con.itions o+ t,e
.ocumentar* cre.it. An. since a correspon.ent /an-, li-e t,e petitioner, principall* .eals onl*
2it, .ocuments, t,e a/sence o+ an* .ocument re7uire. in t,e .ocumentar* cre.it Iusti+ies t,e
re+usal /* t,e correspon.ent /an- to negotiate, accept or pa* t,e /ene+iciar*, as it is not its
o/ligation to loo- /e*on. t,e .ocuments. 9t merel* ,as to rel* on t,e completeness o+ t,e
.ocuments ten.ere. /* t,e /ene+iciar*.
9n regar. to t,e ruling o+ t,e lo2er court an. a++irme. /* t,e Court o+ Appeals t,at t,e petitioner is
not a noti+*ing /an- /ut a con+irming /an-, 2e +in. t,e same erroneous.
(,e trial court 2rongl* mi8e. up t,e meaning o+ an irre'oca/le cre.it 2it, t,at o+ a con+irme.
cre.it. 9n its .ecision, t,e trial court rule. t,at t,e petitioner, in accepting t,e o/ligation to noti+*
t,e respon.ent t,at t,e irre!oca"le credit ,as /een transmitte. to t,e petitioner on /e,al+ o+ t,e
pri'ate respon.ent, ,as con+irme. t,e letter.
(,e trial court appears to ,a'e o'erloo-e. t,e +act t,at an irre'oca/le cre.it is not s*non*mous
2it, a con+irme. cre.it. (,ese t*pes o+ letters ,a'e .i++erent meanings an. t,e legal relations
arising +rom t,ere 'aries. A cre.it ma* /e an irre!oca"le credit an. at t,e same time a con+irme.
cre.it or 'ice;'ersa.
An irre'oca/le cre.it re+ers to t,e .uration o+ t,e letter o+ cre.it. @,at is simpl* means is t,at t,e
issuing /an- ma* not 2it,out t,e consent o+ t,e /ene+iciar* :seller< an. t,e applicant :/u*er<
re'o-e ,is un.erta-ing un.er t,e letter. (,e issuing /an- .oes not reser'e t,e rig,t to re'o-e t,e
cre.it. On t,e ot,er ,an., a con+irme. letter o+ cre.it pertains to t,e -in. o+ o/ligation assume.
/* t,e correspon.ent /an-. 9n t,is case, t,e correspon.ent /an- gi'es an a/solute assurance to
t,e /ene+iciar* t,at it 2ill un.erta-e t,e issuing /an-5s o/ligation as its o2n accor.ing to t,e
terms an. con.itions o+ t,e cre.it. :Ag/a*ani, Commercial La2s o+ t,e %,ilippines, Lol. 1, pp. $1;
$<
Dence, t,e mere +act t,at a letter o+ cre.it is irre'oca/le .oes not necessaril* impl* t,at t,e
correspon.ent /an- in accepting t,e instructions o+ t,e issuing /an- ,as also con+irme. t,e letter
o+ cre.it. Anot,er error 2,ic, t,e lo2er court an. t,e Court o+ Appeals ma.e 2as to con+use t,e
o/ligation assume. /* t,e petitioner.
9n commercial transactions in'ol'ing letters o+ cre.it, t,e +unctions assume. /* a correspon.ent
/an- are classi+ie. accor.ing to t,e o/ligations ta-en up /* it. (,e correspon.ent /an- ma* /e
calle. a noti+*ing /an-, a negotiating /an-, or a con+irming /an-.
9n case o+ a noti+*ing /an-, t,e correspon.ent /an- assumes no lia/ilit* e8cept to noti+* an./or
transmit to t,e /ene+iciar* t,e e8istence o+ t,e letter o+ cre.it. :Pronman an. Co., 9nc. '. %u/lic
National )an- o+ Ne2 Hor-, &1$ N.H.1. 616 B19&6CA 1,aterian, J8port;9mport )an-ing, p. &9&,
cite. in Ag/a*ani, Commercial La2s o+ t,e %,ilippines, Lol. 1, p. #6<. A negotiating /an-, on t,e
ot,er ,an., is a correspon.ent /an- 2,ic, /u*s or .iscounts a .ra+t un.er t,e letter o+ cre.it. 9ts
lia/ilit* is .epen.ent upon t,e stage o+ t,e negotiation. 9+ /e+ore negotiation, it ,as no lia/ilit* 2it,
respect to t,e seller /ut a+ter negotiation, a contractual relations,ip 2ill t,en pre'ail /et2een t,e
negotiating /an- an. t,e seller. :1canlon '. >irst National )an- o+ Me8ico, 16& N.J. "6# B19&$CA
1,aterian, J8port;9mport )an-ing, p. &9, cite. in Ag/a*ani, Commercial La2s o+ t,e %,ilippines,
Lol. 1, p. #6<
9n t,e case o+ a con+irming /an-, t,e correspon.ent /an- assumes a .irect o/ligation to t,e seller
an. its lia/ilit* is a primar* one as i+ t,e correspon.ent /an- itsel+ ,a. issue. t,e letter o+ cre.it.
:1,aterian, J8port;9mport )an-ing, p. &94, cite. in Ag/a*ani Commercial La2s o+ t,e %,ilippines,
Lol. 1, p. ##<
9n t,is case, t,e letter merel* pro'i.e. t,at t,e petitioner 6+or2ar. t,e enclose. original cre.it to
t,e /ene+iciar*.6 :=ecor.s, Lol. 9, p. 11< Consi.ering t,e a+oresai. instruction to t,e petitioner /*
t,e issuing /an-, t,e 1ecurit* %aci+ic National )an-, it is in.u/ita/le t,at t,e petitioner is onl* a
noti+*ing /an- an. not a con+irming /an- as rule. /* t,e courts /elo2.
9+ t,e petitioner 2as a con+irming /an-, t,en a categorical .eclaration s,oul. ,a'e /een state. in
t,e letter o+ cre.it t,at t,e petitioner is to ,onor all .ra+ts .ra2n in con+ormit* 2it, t,e letter o+
cre.it. @,at 2as simpl* state. t,erein 2as t,e instruction t,at t,e petitioner +or2ar. t,e original
letter o+ cre.it to t,e /ene+iciar*.
1ince t,e petitioner 2as onl* a noti+*ing /an-, its responsi/ilit* 2as solel* to noti+* an./or
transmit t,e .ocumentar* o+ cre.it to t,e pri'ate respon.ent an. its o/ligation en.s t,ere.
(,e noti+*ing /an- ma* suggest to t,e seller its 2illingness to negotiate, /ut t,is +act alone .oes
not impl* t,at t,e noti+*ing /an- promises to accept t,e .ra+t .ra2n un.er t,e .ocumentar*
cre.it.
A noti+*ing /an- is not a pri'* to t,e contract o+ sale /et2een t,e /u*er an. t,e seller, its
relations,ip is onl* 2it, t,at o+ t,e issuing /an- an. not 2it, t,e /ene+iciar* to 2,om ,e assumes
no lia/ilit*. 9t +ollo2s t,ere+ore t,at 2,en t,e petitioner re+use. to negotiate 2it, t,e pri'ate
respon.ent, t,e latter ,as no cause o+ action against t,e petitioner +or t,e en+orcement o+ ,is
rig,ts un.er t,e letter. :-ee Pronman an. Co., 9nc. '. %u/lic National )an- o+ Ne2 Hor-, supra<
9n or.er t,at t,e petitioner ma* /e ,el. lia/le un.er t,e letter, t,ere s,oul. /e proo+ t,at t,e
petitioner con+irme. t,e letter o+ cre.it.
(,e recor.s are, ,o2e'er, /ere+t o+ an* e'i.ence 2,ic, 2ill .isclose t,at t,e petitioner ,as
con+irme. t,e letter o+ cre.it. (,e onl* e'i.ence in t,is case, an. upon 2,ic, t,e pri'ate
respon.ent premise. ,is argument, is t,e %#",000.00 loan e8ten.e. /* t,e petitioner to ,im.
(,e pri'ate respon.ent relies on t,is loan to a.'ance ,is contention t,at t,e letter o+ cre.it 2as
con+irme. /* t,e petitioner. De claims t,at t,e loan 2as grante. /* t,e petitioner to ,im, 6in
anticipation o+ t,e presentment o+ t,e letter o+ cre.it.6
(,e proposition a.'ance. /* t,e pri'ate respon.ent ,as no /asis in +act or la2. (,at t,e loan
agreement /et2een t,em /e construe. as an act o+ con+irmation is rat,er +ar;+etc,e., +or it
.epen.s principall* on speculati'e reasoning.
As earlier state., t,ere must ,a'e /een an a/solute assurance on t,e part o+ t,e petitioner t,at it
2ill un.erta-e t,e issuing /an-5s o/ligation as its o2n. Leril*, t,e loan agreement it entere. into
cannot /e categori4e. as an emp,atic assurance t,at it 2ill carr* out t,e issuing /an-5s o/ligation
as its o2n.
(,e loan agreement is more reasona/l* classi+ie. as an isolate. transaction in.epen.ent o+ t,e
.ocumentar* cre.it.
O+ course, it ma* /e presume. t,at t,e petitioner loane. t,e mone* to t,e pri'ate respon.ent in
anticipation t,at it 2oul. later /e pai. /* t,e latter upon t,e receipt o+ t,e letter. Het, 2e 2oul.
,a'e no /asis to rule .e+initi'el* t,at suc, 6act6 s,oul. /e construe. as an act o+ con+irmation.
(,e pri'ate respon.ent no .ou/t 2as in nee. o+ mone* in loa.ing t,e logs on t,e s,ip 6Qenlin
Glor*6 an. t,e onl* 2a* to satis+* t,is nee. 2as to /orro2 mone* +rom t,e petitioner 2,ic, t,e
latter grante.. >rom t,ese circumstances, a logical conclusion t,at can /e gat,ere. is t,at t,e
letter o+ cre.it 2as merel* to ser'e as a collateral.
At t,e most, 2,en t,e petitioner e8ten.e. t,e loan to t,e pri'ate respon.ent, it assume. t,e
c,aracter o+ a negotiating /an-. J'en t,en, t,e petitioner 2ill still not /e lia/le, +or a negotiating
/an- /e+ore negotiation ,as no contractual relations,ip 2it, t,e seller.
(,e case o+ -canlon !. First +ational 'an# :supra< perspicuousl* e8plaine. t,e relations,ip
/et2een t,e seller an. t,e negotiating /an-, !izE
9t ma* /u* or re+use to /u* as it c,ooses. J7uall*, it must /e true t,at it o2es no
contractual .ut* to2ar. t,e person +or 2,ose /ene+it t,e letter is 2ritten to
.iscount or purc,ase an* .ra+t .ra2n against t,e cre.it. No relations,ip o+ agent
an. principal, or o+ trustee an. cestui, /et2een t,e recei'ing /an- an. t,e
/ene+iciar* o+ t,e letter is esta/lis,e.. :%."6$<
@,et,er t,ere+ore t,e petitioner is a noti+*ing /an- or a negotiating /an-, it cannot /e ,el. lia/le.
A/sent an* .e+initi'e proo+ t,at it ,as con+irme. t,e letter o+ cre.it or ,as actuall* negotiate. 2it,
t,e pri'ate respon.ent, t,e re+usal /* t,e petitioner to accept t,e ten.er o+ t,e pri'ate respon.ent
is Iusti+ie..
9n regar. to t,e +in.ing t,at t,e petitioner /ecame a 6trustee in relation to t,e plainti++ :pri'ate
respon.ent< as t,e /ene+iciar* o+ t,e letter o+ cre.it,6 t,e same ,as no legal /asis.
A trust ,as /een .e+ine. as t,e 6rig,t, en+orcea/le solel* in e7uit*, to t,e /ene+icial enIo*ment o+
propert* t,e legal title to 2,ic, is 'este. to anot,er.6 :$9 C.3.1. #1&<
(,e concept o+ a trust presupposes t,e e8istence o+ a speci+ic propert* 2,ic, ,as /een con+erre.
upon t,e person +or t,e /ene+it o+ anot,er. 9n or.er t,ere+ore +or t,e trust t,eor* o+ t,e pri'ate
respon.ent to /e sustaine., t,e petitioner s,oul. ,a'e ,a. in its possession a sum o+ mone* as
speci+ic +un. a.'ance. to it /* t,e issuing /an- an. to /e ,el. in trust /* it in +a'or o+ t,e pri'ate
respon.ent. (,is .oes not o/tain in t,is case.
(,e mere opening o+ a letter o+ cre.it, it is to /e note., .oes not in'ol'e a speci+ic appropriation o+
a sum o+ mone* in +a'or o+ t,e /ene+iciar*. 9t onl* signi+ies t,at t,e /ene+iciar* ma* /e a/le to
.ra2 +un.s upon t,e letter o+ cre.it up to t,e .esignate. amount speci+ie. in t,e letter. 9t .oes not
con'e* t,e notion t,at a particular sum o+ mone* ,as /een speci+icall* reser'e. or ,as /een ,el.
in trust.
@,at actuall* transpires in an irre'oca/le cre.it is t,at t,e correspon.ent /an- .oes not recei'e
in a.'ance t,e sum o+ mone* +rom t,e /u*er or t,e issuing /an-. On t,e contrar*, 2,en t,e
correspon.ent /an- accepts t,e ten.er an. pa*s t,e amount state. in t,e letter, t,e mone* t,at it
.oles out comes not +rom an* particular +un. t,at ,as /een a.'ance. /* t,e issuing /an-, rat,er
it gets t,e mone* +rom its o2n +un.s an. t,en later see-s reim/ursement +rom t,e issuing /an-.
Granting t,at a trust ,as /een create., still, t,e petitioner ma* not /e consi.ere. a trustee. As t,e
petitioner is onl* a noti+*ing /an-, its acceptance o+ t,e instructions o+ t,e issuing /an- 2ill not
create estoppel on its part resulting in t,e acceptance o+ t,e trust. %recisel*, as a noti+*ing /an-,
its onl* o/ligation is to noti+* t,e pri'ate respon.ent o+ t,e e8istence o+ t,e letter o+ cre.it. Do2
t,en can suc, create estoppel 2,en t,at is its onl* .ut* un.er t,e la2M
@e also +in. erroneous t,e statement o+ t,e Court o+ Appeals t,at t,e petitioner 6acte. as a
guarantor o+ t,e issuing /an- an. in e++ect also o+ t,e latter5s principal or client, i.e., Dans A8el
C,ristiansen.6
9t is a +un.amental rule t,at an irre'oca/le cre.it is in.epen.ent not onl* o+ t,e contract /et2een
t,e /u*er an. t,e seller /ut also o+ t,e cre.it agreement /et2een t,e issuing /an- an. t,e /u*er.
:-ee Ping.om o+ 12e.en '. Ne2 Hor- (rust Co., 96 N.H.1. &. ##9 B1949C<. (,e relations,ip
/et2een t,e /u*er :C,ristiansen< an. t,e issuing /an- :1ecurit* %aci+ic National )an-< is entirel*
in.epen.ent +rom t,e letter o+ cre.it issue. /* t,e latter.
(,e contract /et2een t,e t2o ,as no /earing as to t,e non;compliance /* t,e /u*er 2it, t,e
agreement /et2een t,e latter an. t,e seller. (,eir contract is similar to t,at o+ a contract o+
ser'ices :to open t,e letter o+ cre.it< an. not t,at o+ agenc* as 2as intimate. /* t,e Court o+
Appeals. (,e unIusti+ie. re+usal t,ere+ore /* C,ristiansen to issue t,e certi+ication un.er t,e letter
o+ cre.it s,oul. not li-e2ise /e c,arge. to t,e issuing /an-.
As a mere noti+*ing /an-, not onl* .oes t,e petitioner not ,a'e an* contractual relations,ip 2it,
t,e /u*er, it ,as also not,ing to .o 2it, t,e contract /et2een t,e issuing /an- an. t,e /u*er
regar.ing t,e issuance o+ t,e letter o+ cre.it.
(,e t,eor* o+ guarantee relie. upon /* t,e Court o+ Appeals ,as to necessaril* +ail. (,e concept
o+ guarantee !is/a/!is t,e concept o+ an irre'oca/le cre.it are inconsistent 2it, eac, ot,er.
9n t,e +irst place, t,e guarantee t,eor* .estro*s t,e in.epen.ence o+ t,e /an-5s responsi/ilit*
+rom t,e contract upon 2,ic, it 2as opene.. 9n t,e secon. place, t,e nature o+ /ot, contracts is
mutuall* in con+lict 2it, eac, ot,er. 9n contracts o+ guarantee, t,e guarantor5s o/ligation is merel*
collateral an. it arises onl* upon t,e .e+ault o+ t,e person primaril* lia/le. On t,e ot,er ,an., in
an irre'oca/le cre.it t,e /an- un.erta-es a primar* o/ligation. :-ee National )an- o+ Jagle
%ass, (e8 '. American National )an- o+ 1an >rancisco, &$& >. # B19&&C<
(,e relations,ip /et2een t,e issuing /an- an. t,e noti+*ing /an-, on t,e contrar*, is more similar
to t,at o+ an agenc* an. not t,at o+ a guarantee. 9t ma* /e o/ser'e. t,at t,e noti+*ing /an- is
merel* to +ollo2 t,e instructions o+ t,e issuing /an- 2,ic, is to noti+* or to transmit t,e letter o+
cre.it to t,e /ene+iciar*. :-ee Pronman '. %u/lic National )an- o+ Ne2 Hor-, supra<. 9ts
commitment is onl* to noti+* t,e /ene+iciar*. 9t .oes not un.erta-e an* assurance t,at t,e issuing
/an- 2ill per+orm 2,at ,as /een man.ate. to or e8pecte. o+ it. As an agent o+ t,e issuing /an-, it
,as onl* to +ollo2 t,e instructions o+ t,e issuing /an- an. to it alone is it o/ligate. an. not to
/u*er 2it, 2,om it ,as no contractual relations,ip.
9n +act t,e noti+*ing /an-, e'en i+ t,e seller ten.ers all t,e .ocuments re7uire. un.er t,e letter o+
cre.it, ma* re+use to negotiate or accept t,e .ra+ts .ra2n t,ereun.er an. it 2ill still not /e ,el.
lia/le +or its onl* engagement is to noti+* an./or transmit to t,e seller t,e letter o+ cre.it.
>inall*, e'en i+ 2e assume t,at t,e petitioner is a con+irming /an-, t,e petitioner cannot /e +orce.
to pa* t,e amount un.er t,e letter. As 2e ,a'e pre'iousl* e8plaine., t,ere 2as a +ailure on t,e
part o+ t,e pri'ate respon.ent to compl* 2it, t,e terms o+ t,e letter o+ cre.it.
(,e +ailure /* ,im to su/mit t,e certi+ication 2as +atal to ,is case. (,e 0.C.%. 2,ic, is
incorporate. in t,e letter o+ cre.it or.ains t,at t,e /an- ma* onl* pa* t,e amount speci+ie. un.er
t,e letter i+ all t,e .ocuments ten.ere. are on t,eir +ace in compliance 2it, t,e cre.it. 9t is not
tas-e. 2it, t,e .ut* o+ ascertaining t,e reason or reasons 2,* certain .ocuments ,a'e not /een
su/mitte., as it is onl* concerne. 2it, t,e .ocuments. (,us, 2,et,er or not t,e /u*er ,as
per+orme. ,is responsi/ilit* to2ar.s t,e seller is not t,e /an-5s pro/lem.
@e are a2are o+ t,e inIustice committe. /* C,ristiansen on t,e pri'ate respon.ent /ut 2e are
.eci.ing t,e contro'ers* on t,e /asis o+ 2,at t,e la2 is, +or t,e la2 is not meant to +a'or onl*
t,ose 2,o ,a'e /een oppresse., t,e la2 is to go'ern +uture relations among people as 2ell. 9ts
commitment is to all an. not to a single in.i'i.ual. (,e +ait, o+ t,e people in our Iustice s*stem
ma* /e ero.e. i+ 2e are to .eci.e not 2,at t,e la2 states /ut 2,at 2e /elie'e it s,oul. .eclare.
*ura le$ sed le$.
Consi.ering t,e +oregoing, t,e materialit* o+ ruling upon t,e 'ali.it* o+ t,e certi+icate o+ appro'al
re7uire. o+ t,e pri'ate respon.ent to su/mit un.er t,e letter o+ cre.it, ,as /ecome insigni+icant.
9n an* e'ent, 2e a++irm t,e earlier ruling o+ t,e Court o+ Appeals .ate. April 9, 19$# in regar. to
t,e petition /e+ore it +or certiorari an. pro,i/ition 2it, preliminar* inIunction, to 2itE
(,ere is no merit in t,e respon.ent5s contention t,at t,e certi+ication re7uire. in
con.ition No. 4 o+ t,e letter o+ cre.it 2as 6patentl* illegal.6 At t,e time t,e letter o+
cre.it 2as issue. t,ere 2as no Central )an- regulation pro,i/iting suc, a
con.ition in t,e letter o+ cre.it. (,e letter o+ cre.it :J8,. C< 2as issue. on 3une #,
19#1, more t,an t2o mont,s /e+ore t,e issuance o+ t,e Central )an-
Memoran.um on August 16, 19#1 .isallo2ing suc, a con.ition in a letter o+
cre.it. 9n +act t,e letter o+ cre.it ,a. alrea.* e8pire. on 3ul* 0, 19#1 2,en t,e
Central )an- memoran.um 2as issue.. 9n an* e'ent, it is .i++icult to see ,o2
suc, a con.ition coul. /e categori4e. as illegal or unreasona/le since all t,at
plainti++ Lillalu4, as seller o+ t,e logs, coul. an. s,oul. ,a'e .one 2as to re+use
to loa. t,e logs on t,e 'essel 6Qenlin Glor*6, unless C,ristiansen +irst issue. t,e
re7uire. certi+ication t,at t,e logs ,a. /een appro'e. /* ,im to /e in accor.ance
2it, t,e terms an. con.itions o+ ,is purc,ase or.er. Apparentl*, Lillalu4 2as in
too muc, ,aste to s,ip ,is logs 2it,out ta-ing all .ue precautions to assure t,at
all t,e terms an. con.itions o+ t,e letter o+ cre.it ,a. /een strictl* complie. 2it,,
so t,at t,ere 2oul. /e no ,itc, in its negotiation. :Rollo, p. $<
@DJ=J>O=J, t,e CO0=( =J1OLLJD to G=AN( t,e petition an. ,ere/* N0LL9>9J1 an.
1J(1 A19DJ t,e .ecision o+ t,e Court o+ Appeals .ate. 3une &9, 1990. (,e amen.e. complaint
in Ci'il Case No. 1"1&1 is D91M911JD.
G.R. No. 146717 No-e.ber 22, 2004
TRAN!FEL" PHLPPNE!, N$., petitioner,
vs.
L%,ON H#"RO $ORPORATON, A%!TRALA &'( NE/ ,EALAN"
BANKNG GRO%P L0TE" &'( !E$%RT# BANK $ORPORATON,
respondents.
, 6 C I ' I 7 8
TNGA, J.1
'u%"ect of this case is the letter of credit $hich has evolved as the u%i9uitous and most
important device in international trade. . creation of commerce and %usinessmen, the
letter of credit is also uni9ue in the num%er of parties involved and its supranational
character.
Petitioner has appealed from the ,ecision
)
of the Court of .ppeals in C.-/.-. 'P 8o.
+)*:) entitled 3Transfield Philippines, Inc. v. ;on. 7scar Pimentel, et al.,3 promulgated
on <) 4anuary =::).
=
7n =+ March )**>, petitioner and respondent 1u0on ;ydro Corporation hereinafter,
1;C! entered into a Turnkey Contract
<
$here%y petitioner, as Turnkey Contractor,
undertook to construct, on a turnkey %asis, a seventy >:!-Mega$att hydro-electric po$er
station at the Bakun -iver in the provinces of Benguet and Ilocos 'ur hereinafter, the
Pro"ect!. Petitioner $as given the sole responsi%ility for the design, construction,
commissioning, testing and completion of the Pro"ect.
(
The Turnkey Contract provides that5 )! the target completion date of the Pro"ect shall %e
on ) 4une =:::, or such later date as may %e agreed upon %et$een petitioner and
respondent 1;C or other$ise determined in accordance $ith the Turnkey Contract? and
=! petitioner is entitled to claim e#tensions of time 67T! for reasons enumerated in the
Turnkey Contract, among $hich are variations, force ma"eure, and delays caused %y 1;C
itself.
@
Further, in case of dispute, the parties are %ound to settle their differences through
mediation, conciliation and such other means enumerated under Clause =:.< of the
Turnkey Contract.
+
To secure performance of petitionerAs o%ligation on or %efore the target completion date,
or such time for completion as may %e determined %y the partiesA agreement, petitioner
opened in favor of 1;C t$o =! stand%y letters of credit %oth dated =: March =:::
hereinafter referred to as 3the 'ecurities3!, to $it5 'tand%y 1etter of Credit 8o.
6::))=+2B(:: $ith the local %ranch of respondent .ustralia and 8e$ Cealand Banking
/roup 1imited .8C Bank!
>
and 'tand%y 1etter of Credit 8o. IB,I,'B-::2( $ith
respondent 'ecurity Bank Corporation 'BC!
B
each in the amount of &'DB,*BB,*:>.::.
*
In the course of the construction of the pro"ect, petitioner sought various 67T to
complete the Pro"ect. The e#tensions $ere re9uested allegedly due to several factors
$hich prevented the completion of the Pro"ect on target date, such as force ma"eure
occasioned %y typhoon Ce%, %arricades and demonstrations. 1;C denied the re9uests,
ho$ever. This gave rise to a series of legal actions %et$een the parties $hich culminated
in the instant petition.
The first of the actions $as a -e9uest for .r%itration $hich 1;C filed %efore the
Construction Industry .r%itration Commission CI.C! on ) 4une )***.
):
This $as
follo$ed %y another -e9uest for .r%itration, this time filed %y petitioner %efore the
International Cham%er of Commerce ICC!
))
on < 8ovem%er =:::. In %oth ar%itration
proceedings, the common issues presented $ere5 E)! $hether typhoon Ce% and any of its
associated events constituted force ma"eure to "ustify the e#tension of time sought %y
petitioner? and E=! $hether 1;C had the right to terminate the Turnkey Contract for
failure of petitioner to complete the Pro"ect on target date.
Mean$hile, foreseeing that 1;C $ould call on the 'ecurities pursuant to the pertinent
provisions of the Turnkey Contract,
)=
petitionerFin t$o separate letters
)<
%oth dated ):
.ugust =:::Fadvised respondent %anks of the ar%itration proceedings already pending
%efore the CI.C and ICC in connection $ith its alleged default in the performance of its
o%ligations. .sserting that 1;C had no right to call on the 'ecurities until the resolution
of disputes %efore the ar%itral tri%unals, petitioner $arned respondent %anks that any
transfer, release, or disposition of the 'ecurities in favor of 1;C or any person claiming
under 1;C $ould constrain it to hold respondent %anks lia%le for li9uidated damages.
.s petitioner had anticipated, on => 4une =:::, 1;C sent notice to petitioner that
pursuant to Clause B.=
)(
of the Turnkey Contract, it failed to comply $ith its o%ligation to
complete the Pro"ect. ,espite the letters of petitioner, ho$ever, %oth %anks informed
petitioner that they $ould pay on the 'ecurities if and $hen 1;C calls on them.
)@
1;C asserted that additional e#tension of time $ould not %e $arranted? accordingly it
declared petitioner in default2delay in the performance of its o%ligations under the
Turnkey Contract and demanded from petitioner the payment of &'D>@,:::.:: for each
day of delay %eginning =B 4une =::: until actual completion of the Pro"ect pursuant to
Clause B.>.) of the Turnkey Contract. .t the same time, 1;C served notice that it $ould
call on the securities for the payment of li9uidated damages for the delay.
)+
7n @ 8ovem%er =:::, petitioner as plaintiff filed a Complaint for In"unction, $ith prayer
for temporary restraining order and $rit of preliminary in"unction, against herein
respondents as defendants %efore the -egional Trial Court -TC! of Makati.
)>
Petitioner
sought to restrain respondent 1;C from calling on the 'ecurities and respondent %anks
from transferring, paying on, or in any manner disposing of the 'ecurities or any
rene$als or su%stitutes thereof. The -TC issued a seventy-t$o >=!-hour temporary
restraining order on the same day. The case $as docketed as Civil Case 8o. ::-)<)= and
raffled to Branch )(B of the -TC of Makati.
.fter appropriate proceedings, the trial court issued an 7rder on * 8ovem%er =:::,
e#tending the temporary restraining order for a period of seventeen )>! days or until =+
8ovem%er =:::.
)B
The -TC, in its 7rder
)*
dated =( 8ovem%er =:::, denied petitionerAs application for a
$rit of preliminary in"unction. It ruled that petitioner had no legal right and suffered no
irrepara%le in"ury to "ustify the issuance of the $rit. 6mploying the principle of
3independent contract3 in letters of credit, the trial court ruled that 1;C should %e
allo$ed to dra$ on the 'ecurities for li9uidated damages. It de%unked petitionerAs
contention that the principle of 3independent contract3 could %e invoked only %y
respondent %anks since according to it respondent 1;C is the ultimate %eneficiary of the
'ecurities. The trial court further ruled that the %anks $ere mere custodians of the funds
and as such they $ere o%ligated to transfer the same to the %eneficiary for as long as the
latter could su%mit the re9uired certification of its claims.
,issatisfied $ith the trial courtAs denial of its application for a $rit of preliminary
in"unction, petitioner elevated the case to the Court of .ppeals via a Petition for
Certiorari under -ule +@, $ith prayer for the issuance of a temporary restraining order
and $rit of preliminary in"unction.
=:
Petitioner su%mitted to the appellate court that
1;CAs call on the 'ecurities $as premature considering that the issue of its default had
not yet %een resolved $ith finality %y the CI.C and2or the ICC. It asserted that until the
fact of delay could %e esta%lished, 1;C had no right to dra$ on the 'ecurities for
li9uidated damages.
-efuting petitionerAs contentions, 1;C claimed that petitioner had no right to restrain its
call on and use of the 'ecurities as payment for li9uidated damages. It averred that the
'ecurities are independent of the main contract %et$een them as sho$n on the face of the
t$o 'tand%y 1etters of Credit $hich %oth provide that the %anks have no responsi%ility to
investigate the authenticity or accuracy of the certificates or the declarantAs capacity or
entitlement to so certify.
In its -esolution dated =B 8ovem%er =:::, the Court of .ppeals issued a temporary
restraining order, en"oining 1;C from calling on the 'ecurities or any rene$als or
su%stitutes thereof and ordering respondent %anks to cease and desist from transferring,
paying or in any manner disposing of the 'ecurities.
;o$ever, the appellate court failed to act on the application for preliminary in"unction
until the temporary restraining order e#pired on => 4anuary =::). Immediately thereafter,
representatives of 1;C trooped to .8C Bank and $ithdre$ the total amount of
&'D(,*@:,:::.::, there%y reducing the %alance in .8C Bank to &'D),B@=,B)(.::.
7n = Fe%ruary =::), the appellate court dismissed the petition for certiorari. The
appellate court e#pressed conformity $ith the trial courtAs decision that 1;C could call
on the 'ecurities pursuant to the first principle in credit la$ that the credit itself is
independent of the underlying transaction and that as long as the %eneficiary complied
$ith the credit, it $as of no moment that he had not complied $ith the underlying
contract. Further, the appellate court held that even assuming that the trial courtAs denial
of petitionerAs application for a $rit of preliminary in"unction $as erroneous, it
constituted only an error of "udgment $hich is not correcti%le %y certiorari, unlike error
of "urisdiction.
&ndaunted, petitioner filed the instant Petition for -evie$ raising the follo$ing issues for
resolution5
G;6T;6- T;6 3I8,6P68,68C6 P-I8CIP163 78 16TT6-' 7F C-6,IT
M.H B6 I8I7J6, BH . B686FICI.-H T;6-67F G;6-6 T;6
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-616.'I8/ T;6 .M7&8T' ,&6 &8,6- T;6 '6C&-ITI6' ,6'PIT6
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.8, '6C&-ITH B.8J .-6 .117G6, T7 -616.'6, T;6
-6M.I8I8/ B.1.8C6 7F T;6 '6C&-ITI6' P-I7- T7 T;6
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1;C.
B. 1;C ,76' 87T -6T&-8 T;6 .M7&8T' IT ;.,
G-78/F&11H ,-.G8 F-7M T;6 '6C&-ITI6'.
=)
Petitioner contends that the courts %elo$ improperly relied on the 3independence
principle3 on letters of credit $hen this case falls s9uarely $ithin the 3fraud e#ception
rule.3 -espondent 1;C deli%erately misrepresented the supposed e#istence of delay
despite its kno$ledge that the issue $as still pending ar%itration, petitioner continues.
Petitioner asserts that 1;C should %e ordered to return the proceeds of the 'ecurities
pursuant to the principle against un"ust enrichment and that, under the premises,
in"unction $as the appropriate remedy o%taina%le from the competent local courts.
7n =@ .ugust =::<, petitioner filed a 'upplement to the Petition
==
and 'upplemental
Memorandum,
=<
alleging that in the course of the proceedings in the ICC .r%itration, a
num%er of documentary and testimonial evidence came out through the use of different
modes of discovery availa%le in the ICC .r%itration. It contends that after the filing of the
petition facts and admissions $ere discovered $hich demonstrate that 1;C kno$ingly
misrepresented that petitioner had incurred delaysF not$ithstanding its kno$ledge and
admission that delays $ere e#cused under the Turnkey ContractFto %e a%le to dra$
against the 'ecurities. -eiterating that fraud constitutes an e#ception to the independence
principle, petitioner urges that this $arrants a ruling from this Court that the call on the
'ecurities $as $rongful, as $ell as contrary to la$ and %asic principles of e9uity. It avers
that it $ould suffer grave irrepara%le damage if 1;C $ould %e allo$ed to use the
proceeds of the 'ecurities and not ordered to return the amounts it had $rongfully dra$n
thereon.
In its Manifestation dated B 'eptem%er =::<,
=(
1;C contends that the supplemental
pleadings filed %y petitioner present erroneous and misleading information $hich $ould
change petitionerAs theory on appeal.
In yet another Manifestation dated )= .pril =::(,
=@
petitioner alleges that on )B Fe%ruary
=::(, the ICC handed do$n its Third Partial .$ard, declaring that 1;C $rongfully dre$
upon the 'ecurities and that petitioner $as entitled to the return of the sums $rongfully
taken %y 1;C for li9uidated damages.
1;C filed a Counter-Manifestation dated =* 4une =::(,
=+
stating that petitionerAs
Manifestation dated )= .pril =::( enlarges the scope of its Petition for -evie$ of the <)
4anuary =::) ,ecision of the Court of .ppeals. 1;C notes that the Petition for -evie$
essentially dealt only $ith the issue of $hether in"unction could issue to restrain the
%eneficiary of an irrevoca%le letter of credit from dra$ing thereon. It adds that petitioner
has filed t$o other proceedings, to $it5 )! ICC Case 8o. ))=+(2T62MG, entitled
3Transfield Philippines Inc. v. 1u0on ;ydro Corporation,3 in $hich the parties made
claims and counterclaims arising from petitionerAs performance2misperformance of its
o%ligations as contractor for 1;C? and =! Civil Case 8o. :(-<<=, entitled 3Transfield
Philippines, Inc. v. 1u0on ;ydro Corporation3 %efore Branch @+ of the -TC of Makati,
$hich is an action to enforce and o%tain e#ecution of the ICCAs partial a$ard mentioned
in petitionerAs Manifestation of )= .pril =::(.
In its Comment to petitionerAs Motion for 1eave to File .ddendum to PetitionerAs
Memorandum, 1;C stresses that the 9uestion of $hether the funds it dre$ on the su%"ect
letters of credit should %e returned is outside the issue in this appeal. .t any rate, 1;C
adds that the action to enforce the ICCAs partial a$ard is no$ fully $ithin the Makati
-TCAs "urisdiction in Civil Case 8o. :(-<<=. 1;C asserts that petitioner is engaged in
forum-shopping %y keeping this appeal and at the same time seeking the suit for
enforcement of the ar%itral a$ard %efore the Makati court.
-espondent 'BC in its Memorandum, dated ): March =::<
=>
contends that the Court of
.ppeals correctly dismissed the petition for certiorari. Invoking the independence
principle, 'BC argues that it $as under no o%ligation to look into the validity or accuracy
of the certification su%mitted %y respondent 1;C or into the latterAs capacity or
entitlement to so certify. It adds that the act sought to %e en"oined %y petitioner $as
already fait accompli and the present petition $ould no longer serve any remedial
purpose.
In a similar fashion, respondent .8C Bank in its Memorandum dated )< March =::<
=B
posits that its actions could not %e regarded as un"ustified in vie$ of the prevailing
independence principle under $hich it had no o%ligation to ascertain the truth of 1;CAs
allegations that petitioner defaulted in its o%ligations. Moreover, it points out that since
the 'tand%y 1etter of Credit 8o. 6::))=+2B(:: had %een fully dra$n, petitionerAs prayer
for preliminary in"unction had %een rendered moot and academic.
.t the core of the present controversy is the applica%ility of the 3independence principle3
and 3fraud e#ception rule3 in letters of credit. Thus, a discussion of the nature and use of
letters of credit, also referred to simply as 3credits,3 $ould provide a %etter perspective of
the case.
The letter of credit evolved as a mercantile specialty, and the only $ay to understand all
its facets is to recogni0e that it is an entity unto itself. The relationship %et$een the
%eneficiary and the issuer of a letter of credit is not strictly contractual, %ecause %oth
privity and a meeting of the minds are lacking, yet strict compliance $ith its terms is an
enforcea%le right. 8or is it a third-party %eneficiary contract, %ecause the issuer must
honor drafts dra$n against a letter regardless of pro%lems su%se9uently arising in the
underlying contract. 'ince the %ankAs customer cannot dra$ on the letter, it does not
function as an assignment %y the customer to the %eneficiary. 8or, if properly used, is it a
contract of suretyship or guarantee, %ecause it entails a primary lia%ility follo$ing a
default. Finally, it is not in itself a negotia%le instrument, %ecause it is not paya%le to
order or %earer and is generally conditional, yet the draft presented under it is often
negotia%le.
=*
In commercial transactions, a letter of credit is a financial device developed %y merchants
as a convenient and relatively safe mode of dealing $ith sales of goods to satisfy the
seemingly irreconcila%le interests of a seller, $ho refuses to part $ith his goods %efore he
is paid, and a %uyer, $ho $ants to have control of the goods %efore paying.
<:
The use of
credits in commercial transactions serves to reduce the risk of nonpayment of the
purchase price under the contract for the sale of goods. ;o$ever, credits are also used in
non-sale settings $here they serve to reduce the risk of nonperformance. /enerally,
credits in the non-sale settings have come to %e kno$n as stand%y credits.
<)
There are three significant differences %et$een commercial and stand%y credits. First,
commercial credits involve the payment of money under a contract of sale. 'uch credits
%ecome paya%le upon the presentation %y the seller-%eneficiary of documents that sho$
he has taken affirmative steps to comply $ith the sales agreement. In the stand%y type,
the credit is paya%le upon certification of a partyAs nonperformance of the agreement. The
documents that accompany the %eneficiaryAs draft tend to sho$ that the applicant has not
performed. The %eneficiary of a commercial credit must demonstrate %y documents that
he has performed his contract. The %eneficiary of the stand%y credit must certify that his
o%ligor has not performed the contract.
<=
By definition, a letter of credit is a $ritten instrument $here%y the $riter re9uests or
authori0es the addressee to pay money or deliver goods to a third person and assumes
responsi%ility for payment of de%t therefor to the addressee.
<<
. letter of credit, ho$ever,
changes its nature as different transactions occur and if carried through to completion
ends up as a %inding contract %et$een the issuing and honoring %anks $ithout any regard
or relation to the underlying contract or disputes %et$een the parties thereto.
<(
'ince letters of credit have gained general accepta%ility in international trade transactions,
the ICC has pu%lished from time to time updates on the &niform Customs and Practice
&CP! for ,ocumentary Credits to standardi0e practices in the letter of credit area. The
vast ma"ority of letters of credit incorporate the &CP.
<@
First pu%lished in )*<<, the &CP
for ,ocumentary Credits has undergone several revisions, the latest of $hich $as in
)**<.
<+
In Bank of the Philippine Islands v. ,e -eny Fa%ric Industries, Inc.,
<>
this Court ruled
that the o%servance of the &CP is "ustified %y .rticle = of the Code of Commerce $hich
provides that in the a%sence of any particular provision in the Code of Commerce,
commercial transactions shall %e governed %y usages and customs generally o%served.
More recently, in Bank of .merica, 8T K '. v. Court of .ppeals,
<B
this Court ruled that
there %eing no specific provisions $hich govern the legal comple#ities arising from
transactions involving letters of credit, not only %et$een or among %anks themselves %ut
also %et$een %anks and the seller or the %uyer, as the case may %e, the applica%ility of the
&CP is undenia%le.
.rticle < of the &CP provides that credits, %y their nature, are separate transactions from
the sales or other contracts! on $hich they may %e %ased and %anks are in no $ay
concerned $ith or %ound %y such contracts!, even if any reference $hatsoever to such
contracts! is included in the credit. Conse9uently, the undertaking of a %ank to pay,
accept and pay drafts! or negotiate and2or fulfill any other o%ligation under the credit is
not su%"ect to claims or defenses %y the applicant resulting from his relationships $ith the
issuing %ank or the %eneficiary. . %eneficiary can in no case avail himself of the
contractual relationships e#isting %et$een the %anks or %et$een the applicant and the
issuing %ank.
Thus, the engagement of the issuing %ank is to pay the seller or %eneficiary of the credit
once the draft and the re9uired documents are presented to it. The so-called
3independence principle3 assures the seller or the %eneficiary of prompt payment
independent of any %reach of the main contract and precludes the issuing %ank from
determining $hether the main contract is actually accomplished or not. &nder this
principle, %anks assume no lia%ility or responsi%ility for the form, sufficiency, accuracy,
genuineness, falsification or legal effect of any documents, or for the general and2or
particular conditions stipulated in the documents or superimposed thereon, nor do they
assume any lia%ility or responsi%ility for the description, 9uantity, $eight, 9uality,
condition, packing, delivery, value or e#istence of the goods represented %y any
documents, or for the good faith or acts and2or omissions, solvency, performance or
standing of the consignor, the carriers, or the insurers of the goods, or any other person
$homsoever.
<*
The independent nature of the letter of credit may %e5 a! independence in toto $here the
credit is independent from the "ustification aspect and is a separate o%ligation from the
underlying agreement like for instance a typical stand%y? or %! independence may %e
only as to the "ustification aspect like in a commercial letter of credit or repayment
stand%y, $hich is identical $ith the same o%ligations under the underlying agreement. In
%oth cases the payment may %e en"oined if in the light of the purpose of the credit the
payment of the credit $ould constitute fraudulent a%use of the credit.
(:
Can the %eneficiary invoke the independence principleL
Petitioner insists that the independence principle does not apply to the instant case and
assuming it is so, it is a defense availa%le only to respondent %anks. 1;C, on the other
hand, contends that it $ould %e contrary to common sense to deny the %enefit of an
independent contract to the very party for $hom the %enefit is intended. .s %eneficiary of
the letter of credit, 1;C asserts it is entitled to invoke the principle.
.s discussed a%ove, in a letter of credit transaction, such as in this case, $here the credit
is stipulated as irrevoca%le, there is a definite undertaking %y the issuing %ank to pay the
%eneficiary provided that the stipulated documents are presented and the conditions of the
credit are complied $ith.
()
Precisely, the independence principle li%erates the issuing
%ank from the duty of ascertaining compliance %y the parties in the main contract. .s the
principleAs nomenclature clearly suggests, the o%ligation under the letter of credit is
independent of the related and originating contract. In %rief, the letter of credit is separate
and distinct from the underlying transaction.
/iven the nature of letters of credit, petitionerAs argumentFthat it is only the issuing %ank
that may invoke the independence principle on letters of creditFdoes not impress this
Court. To say that the independence principle may only %e invoked %y the issuing %anks
$ould render nugatory the purpose for $hich the letters of credit are used in commercial
transactions. .s it is, the independence doctrine $orks to the %enefit of %oth the issuing
%ank and the %eneficiary.
1etters of credit are employed %y the parties desiring to enter into commercial
transactions, not for the %enefit of the issuing %ank %ut mainly for the %enefit of the
parties to the original transactions. Gith the letter of credit from the issuing %ank, the
party $ho applied for and o%tained it may confidently present the letter of credit to the
%eneficiary as a security to convince the %eneficiary to enter into the %usiness transaction.
7n the other hand, the other party to the %usiness transaction, i.e., the %eneficiary of the
letter of credit, can %e rest assured of %eing empo$ered to call on the letter of credit as a
security in case the commercial transaction does not push through, or the applicant fails
to perform his part of the transaction. It is for this reason that the party $ho is entitled to
the proceeds of the letter of credit is appropriately called 3%eneficiary.3
PetitionerAs argument that any dispute must first %e resolved %y the parties, $hether
through negotiations or ar%itration, %efore the %eneficiary is entitled to call on the letter
of credit in essence $ould convert the letter of credit into a mere guarantee.
4urisprudence has laid do$n a clear distinction %et$een a letter of credit and a guarantee
in that the settlement of a dispute %et$een the parties is not a pre-re9uisite for the release
of funds under a letter of credit. In other $ords, the argument is incompati%le $ith the
very nature of the letter of credit. If a letter of credit is dra$a%le only after settlement of
the dispute on the contract entered into %y the applicant and the %eneficiary, there $ould
%e no practical and %eneficial use for letters of credit in commercial transactions.
Professor 4ohn F. ,olan, the noted authority on letters of credit, sheds more light on the
issue5
The stand%y credit is an attractive commercial device for many of the same
reasons that commercial credits are attractive. 6ssentially, these credits are
ine#pensive and efficient. 7ften they replace surety contracts, $hich tend to
generate higher costs than credits do and are usually triggered %y a factual
determination rather than %y the e#amination of documents.
Because parties and courts should not confuse the different functions of the surety
contract on the one hand and the stand%y credit on the other, the distinction
%et$een surety contracts and credits merits some reflection. The t$o commercial
devices share a common purpose. Both ensure against the o%ligorAs
nonperformance. They function, ho$ever, in distinctly different $ays.
Traditionally, upon the o%ligorAs default, the surety undertakes to complete the
o%ligorAs performance, usually %y hiring someone to complete that performance.
'urety contracts, then, often involve costs of determining $hether the o%ligor
defaulted a matter over $hich the surety and the %eneficiary often litigate! plus
the cost of performance. The %enefit of the surety contract to the %eneficiary is
o%vious. ;e kno$s that the surety, often an insurance company, is a strong
financial institution that $ill perform if the o%ligor does not. The %eneficiary also
should understand that such performance must a$ait the sometimes lengthy and
costly determination that the o%ligor has defaulted. In addition, the suretyAs
performance takes time.
The stand%y credit has different e#pectations. ;e reasona%ly e#pects that he $ill
receive cash in the event of nonperformance, that he $ill receive it promptly, and
that he $ill receive it %efore any litigation $ith the o%ligor the applicant! over the
nature of the applicantAs performance takes place. The stand%y credit has this
opposite effect of the surety contract5 it reverses the financial %urden of parties
during litigation.
In the surety contract setting, there is no duty to indemnify the %eneficiary until
the %eneficiary esta%lishes the fact of the o%ligorAs performance. The %eneficiary
may have to esta%lish that fact in litigation. ,uring the litigation, the surety holds
the money and the %eneficiary %ears most of the cost of delay in performance.
In the stand%y credit case, ho$ever, the %eneficiary avoids that litigation %urden
and receives his money promptly upon presentation of the re9uired documents. It
may %e that the applicant has, in fact, performed and that the %eneficiaryAs
presentation of those documents is not rightful. In that case, the applicant may sue
the %eneficiary in tort, in contract, or in %reach of $arranty? %ut, during the
litigation to determine $hether the applicant has in fact %reached the o%ligation to
perform, the %eneficiary, not the applicant, holds the money. Parties that use a
stand%y credit and courts construing such a credit should understand this
allocation of %urdens. There is a tendency in some 9uarters to overlook this
distinction %et$een surety contracts and stand%y credits and to reallocate %urdens
%y permitting the o%ligor or the issuer to litigate the performance 9uestion %efore
payment to the %eneficiary.
(=
Ghile it is the %ank $hich is %ound to honor the credit, it is the %eneficiary $ho has the
right to ask the %ank to honor the credit %y allo$ing him to dra$ thereon. The situation
itself emasculates petitionerAs posture that 1;C cannot invoke the independence principle
and highlights its puerility, more so in this case $here the %anks concerned $ere
impleaded as parties %y petitioner itself.
-espondent %anks had s9uarely raised the independence principle to "ustify their releases
of the amounts due under the 'ecurities. 7$ing to the nature and purpose of the stand%y
letters of credit, this Court rules that the respondent %anks $ere left $ith little or no
alternative %ut to honor the credit and %oth of them in fact su%mitted that it $as
3ministerial3 for them to honor the call for payment.
(<
Furthermore, 1;C has a right rooted in the Contract to call on the 'ecurities. The
relevant provisions of the Contract read, thus5
(.=.). In order to secure the performance of its o%ligations under this Contract, the
Contractor at its cost shall on the Commencement ,ate provide security to the
6mployer in the form of t$o irrevoca%le and confirmed stand%y letters of credit
the 3'ecurities3!, each in the amount of &'DB,*BB,*:>, issued and confirmed %y
%anks or financial institutions accepta%le to the 6mployer. 6ach of the 'ecurities
must %e in form and su%stance accepta%le to the 6mployer and may %e provided
on an annually rene$a%le %asis.
((
B.>.) If the Contractor fails to comply $ith Clause B.=, the Contractor shall pay to
the 6mployer %y $ay of li9uidated damages 31i9uidated ,amages for ,elay3!
the amount of &'D>@,::: for each and every day or part of a day that shall elapse
%et$een the Target Completion ,ate and the Completion ,ate, provided that
1i9uidated ,amages for ,elay paya%le %y the Contractor shall in the aggregate
not e#ceed =:M of the Contract Price. The Contractor shall pay 1i9uidated
,amages for ,elay for each day of the delay on the follo$ing day $ithout need
of demand from the 6mployer.
B.>.= The 6mployer may, $ithout pre"udice to any other method of recovery,
deduct the amount of such damages from any monies due, or to %ecome due to the
Contractor and2or %y dra$ing on the 'ecurity.3
(@
. contract once perfected, %inds the parties not only to the fulfillment of $hat has %een
e#pressly stipulated %ut also to all the conse9uences $hich according to their nature, may
%e in keeping $ith good faith, usage, and la$.
(+
. careful perusal of the Turnkey
Contract reveals the intention of the parties to make the 'ecurities ans$era%le for the
li9uidated damages occasioned %y any delay on the part of petitioner. The call upon the
'ecurities, $hile not an e#clusive remedy on the part of 1;C, is certainly an alternative
recourse availa%le to it upon the happening of the contingency for $hich the 'ecurities
have %een proffered. Thus, even $ithout the use of the 3independence principle,3 the
Turnkey Contract itself %esto$s upon 1;C the right to call on the 'ecurities in the event
of default.
8e#t, petitioner invokes the 3fraud e#ception3 principle. It avers that 1;CAs call on the
'ecurities is $rongful %ecause it fraudulently misrepresented to .8C Bank and 'BC that
there is already a %reach in the Turnkey Contract kno$ing fully $ell that this is yet to %e
determined %y the ar%itral tri%unals. It asserts that the 3fraud e#ception3 e#ists $hen the
%eneficiary, for the purpose of dra$ing on the credit, fraudulently presents to the
confirming %ank, documents that contain, e#pressly or %y implication, material
representations of fact that to his kno$ledge are untrue. In such a situation, petitioner
insists, in"unction is recogni0ed as a remedy availa%le to it.
Citing ,olanAs treatise on letters of credit, petitioner argues that the independence
principle is not $ithout limits and it is important to fashion those limits in light of the
principleAs purpose, $hich is to serve the commercial function of the credit. If it does not
serve those functions, application of the principle is not $arranted, and the commonla$
principles of contract should apply.
It is $orthy of note that the propriety of 1;CAs call on the 'ecurities is largely
intert$ined $ith the fact of default $hich is the self-same issue pending resolution %efore
the ar%itral tri%unals. To %e a%le to declare the call on the 'ecurities $rongful or
fraudulent, it is imperative to resolve, among others, $hether petitioner $as in fact guilty
of delay in the performance of its o%ligation. &nfortunately for petitioner, this Court is
not called upon to rule upon the issue of defaultFsuch issue having %een su%mitted %y
the parties to the "urisdiction of the ar%itral tri%unals pursuant to the terms em%odied in
their agreement.
(>
Gould in"unction then %e the proper remedy to restrain the alleged $rongful dra$s on the
'ecuritiesL
Most $riters agree that fraud is an e#ception to the independence principle. Professor
,olan opines that the untruthfulness of a certificate accompanying a demand for payment
under a stand%y credit may 9ualify as fraud sufficient to support an in"unction against
payment.
(B
The remedy for fraudulent a%use is an in"unction. ;o$ever, in"unction should
not %e granted unless5 a! there is clear proof of fraud? %! the fraud constitutes fraudulent
a%use of the independent purpose of the letter of credit and not only fraud under the main
agreement? and c! irrepara%le in"ury might follo$ if in"unction is not granted or the
recovery of damages $ould %e seriously damaged.
(*
In its complaint for in"unction %efore the trial court, petitioner alleged that it is entitled to
a total e#tension of t$o hundred fifty-three =@<! days $hich $ould move the target
completion date. It argued that if its claims for e#tension $ould %e found meritorious %y
the ICC, then 1;C $ould not %e entitled to any li9uidated damages.
@:
/enerally, in"unction is a preservative remedy for the protection of oneAs su%stantive right
or interest? it is not a cause of action in itself %ut merely a provisional remedy, an ad"unct
to a main suit. The issuance of the $rit of preliminary in"unction as an ancillary or
preventive remedy to secure the rights of a party in a pending case is entirely $ithin the
discretion of the court taking cogni0ance of the case, the only limitation %eing that this
discretion should %e e#ercised %ased upon the grounds and in the manner provided %y
la$.
@)
Before a $rit of preliminary in"unction may %e issued, there must %e a clear sho$ing %y
the complaint that there e#ists a right to %e protected and that the acts against $hich the
$rit is to %e directed are violative of the said right.
@=
It must %e sho$n that the invasion of
the right sought to %e protected is material and su%stantial, that the right of complainant is
clear and unmistaka%le and that there is an urgent and paramount necessity for the $rit to
prevent serious damage.
@<
Moreover, an in"unctive remedy may only %e resorted to $hen
there is a pressing necessity to avoid in"urious conse9uences $hich cannot %e remedied
under any standard compensation.
@(
In the instant case, petitioner failed to sho$ that it has a clear and unmistaka%le right to
restrain 1;CAs call on the 'ecurities $hich $ould "ustify the issuance of preliminary
in"unction. By petitionerAs o$n admission, the right of 1;C to call on the 'ecurities $as
contractually rooted and su%"ect to the e#press stipulations in the Turnkey Contract.
@@
Indeed, the Turnkey Contract is plain and une9uivocal in that it conferred upon 1;C the
right to dra$ upon the 'ecurities in case of default, as provided in Clause (.=.@, in
relation to Clause B.>.=, thus5
(.=.@ The 6mployer shall give the Contractor seven daysA notice of calling upon
any of the 'ecurities, stating the nature of the default for $hich the claim on any
of the 'ecurities is to %e made, provided that no notice $ill %e re9uired if the
6mployer calls upon any of the 'ecurities for the payment of 1i9uidated ,amages
for ,elay or for failure %y the Contractor to rene$ or e#tend the 'ecurities $ithin
)( days of their e#piration in accordance $ith Clause (.=.=.
@+
B.>.= The 6mployer may, $ithout pre"udice to any other method of recovery,
deduct the amount of such damages from any monies due, or to %ecome due, to
the Contractor and2or %y dra$ing on the 'ecurity.
@>
The pendency of the ar%itration proceedings $ould not per se make 1;CAs dra$s on the
'ecurities $rongful or fraudulent for there $as nothing in the Contract $hich $ould
indicate that the parties intended that all disputes regarding delay should first %e settled
through ar%itration %efore 1;C $ould %e allo$ed to call upon the 'ecurities. It is
therefore premature and a%surd to conclude that the dra$s on the 'ecurities $ere outright
fraudulent given the fact that the ICC and CI.C have not ruled $ith finality on the
e#istence of default.
8o$here in its complaint %efore the trial court or in its pleadings filed %efore the
appellate court, did petitioner invoke the fraud e#ception rule as a ground to "ustify the
issuance of an in"unction.
@B
Ghat petitioner did assert %efore the courts %elo$ $as the
fact that 1;CAs dra$s on the 'ecurities $ould %e premature and $ithout %asis in vie$ of
the pending disputes %et$een them. Petitioner should not %e allo$ed in this instance to
%ring into play the fraud e#ception rule to sustain its claim for the issuance of an
in"unctive relief. Matters, theories or arguments not %rought out in the proceedings %elo$
$ill ordinarily not %e considered %y a revie$ing court as they cannot %e raised for the
first time on appeal.
@*
The lo$er courts could thus not %e faulted for not applying the
fraud e#ception rule not only %ecause the e#istence of fraud $as fundamentally
inter$oven $ith the issue of default still pending %efore the ar%itral tri%unals, %ut more
so, %ecause petitioner never raised it as an issue in its pleadings filed in the courts %elo$.
.t any rate, petitioner utterly failed to sho$ that it had a clear and unmistaka%le right to
prevent 1;CAs call upon the 'ecurities.
7f course, prudence should have impelled 1;C to a$ait resolution of the pending issues
%efore the ar%itral tri%unals prior to taking action to enforce the 'ecurities. But, as earlier
stated, the Turnkey Contract did not re9uire 1;C to do so and, therefore, it $as merely
enforcing its rights in accordance $ith the tenor thereof. 7%ligations arising from
contracts have the force of la$ %et$een the contracting parties and should %e complied
$ith in good faith.
+:
More importantly, pursuant to the principle of autonomy of contracts
em%odied in .rticle )<:+ of the Civil Code,
+)
petitioner could have incorporated in its
Contract $ith 1;C, a proviso that only the final determination %y the ar%itral tri%unals
that default had occurred $ould "ustify the enforcement of the 'ecurities. ;o$ever, the
fact is petitioner did not do so? hence, it $ould have to live $ith its inaction.
Gith respect to the issue of $hether the respondent %anks $ere "ustified in releasing the
amounts due under the 'ecurities, this Court reiterates that pursuant to the independence
principle the %anks $ere under no o%ligation to determine the veracity of 1;CAs
certification that default has occurred. 8either $ere they %ound %y petitionerAs declaration
that 1;CAs call thereon $as $rongful. To repeat, respondent %anksA undertaking $as
simply to pay once the re9uired documents are presented %y the %eneficiary.
.t any rate, should petitioner finally prove in the pending ar%itration proceedings that
1;CAs dra$s upon the 'ecurities $ere $rongful due to the non-e#istence of the fact of
default, its right to seek indemnification for damages it suffered $ould not normally %e
foreclosed pursuant to general principles of la$.
Moreover, in a Manifestation,
+=
dated <: March =::), 1;C informed this Court that the
su%"ect letters of credit had %een fully dra$n. This fact alone $ould have %een sufficient
reason to dismiss the instant petition.
'ettled is the rule that in"unction $ould not lie $here the acts sought to %e en"oined have
already %ecome fait accompli or an accomplished or consummated act.
+<
In Tic0on v.
Iideo Post Manila, Inc.
+(
this Court ruled that $here the period $ithin $hich the former
employees $ere prohi%ited from engaging in or $orking for an enterprise that competed
$ith their former employerFthe very purpose of the preliminary in"unction Fhas
e#pired, any declaration upholding the propriety of the $rit $ould %e entirely useless as
there $ould %e no actual case or controversy %et$een the parties insofar as the
preliminary in"unction is concerned.
In the instant case, the consummation of the act sought to %e restrained had rendered the
instant petition mootFfor any declaration %y this Court as to propriety or impropriety of
the non-issuance of in"unctive relief could have no practical effect on the e#isting
controversy.
+@
The other issues raised %y petitioner particularly $ith respect to its right to
recover the amounts $rongfully dra$n on the 'ecurities, according to it, could properly
%e threshed out in a separate proceeding.
7ne final point. 1;C has charged petitioner of forum-shopping. It raised the charge on
t$o occasions. First, in its Counter-Manifestation dated =* 4une =::(
++
1;C alleges that
petitioner presented %efore this Court the same claim for money $hich it has filed in t$o
other proceedings, to $it5 ICC Case 8o. ))=+(2T62MG and Civil Case 8o. :(-<<=
%efore the -TC of Makati. 1;C argues that petitionerAs acts constitutes forum-shopping
$hich should %e punished %y the dismissal of the claim in %oth forums. 'econd, in its
Comment to PetitionerAs Motion for 1eave to File .ddendum to PetitionerAs
Memorandum dated B 7cto%er =::(, 1;C alleges that %y maintaining the present appeal
and at the same time pursuing Civil Case 8o. :(-<<=F$herein petitioner pressed for
"udgment on the issue of $hether the funds 1;C dre$ on the 'ecurities should %e
returnedFpetitioner resorted to forum-shopping. In %oth instances, ho$ever, petitioner
has apparently opted not to respond to the charge.
Forum-shopping is a very serious charge. It e#ists $hen a party repetitively avails of
several "udicial remedies in different courts, simultaneously or successively, all
su%stantially founded on the same transactions and the same essential facts and
circumstances, and all raising su%stantially the same issues either pending in, or already
resolved adversely, %y some other court.
+>
It may also consist in the act of a party against
$hom an adverse "udgment has %een rendered in one forum, of seeking another and
possi%ly favora%le opinion in another forum other than %y appeal or special civil action of
certiorari, or the institution of t$o or more actions or proceedings grounded on the same
cause on the supposition that one or the other court might look $ith favor upon the other
party.
+B
To determine $hether a party violated the rule against forum-shopping, the test
applied is $hether the elements of litis pendentia are present or $hether a final "udgment
in one case $ill amount to res "udicata in another.
+*
Forum-shopping constitutes improper
conduct and may %e punished $ith summary dismissal of the multiple petitions and direct
contempt of court.
>:
Considering the seriousness of the charge of forum-shopping and the severity of the
sanctions for its violation, the Court $ill refrain from making any definitive ruling on this
issue until after petitioner has %een given ample opportunity to respond to the charge.
G;6-6F7-6, the instant petition is ,68I6,, $ith costs against petitioner.
Petitioner is here%y re9uired to ans$er the charge of forum-shopping $ithin fifteen )@!
days from notice.
'7 7-,6-6,.
M6T-7P71IT.8 G.T6-G7-J' .8, '6G6-./6 'H'T6M, petitioner, vs.
;78. -6H8.1,7 B. ,.G.H, I8 ;I' C.P.CITH .' P-6'I,I8/ 4&,/6 7F
T;6 -6/I78.1 T-I.1 C7&-T 7F N&6C78 CITH, B-.8C; *: .8,
M.H8I1., G.T6- '6-IIC6', I8C., respondents.
, 6 C I ' I 7 8
.CC&8., J.5
7n 8ovem%er )>, =::<, the -egional Trial Court -TC! of Nue0on City, Branch *:,
made a determination that the Petition for -eha%ilitation $ith Prayer for 'uspension of
.ctions and Proceedings filed %y Maynilad Gater 'ervices, Inc. Maynilad! conformed
su%stantially to the provisions of 'ec. =, -ule ( of the Interim -ules of Procedure on
Corporate -eha%ilitation Interim -ules!. It forth$ith issued a 'tay 7rder
)
E)O $hich
states, in part, that the court $as there%y5
# # # # # # # # #
=. 'taying enforcement of all claims, $hether for money or other$ise and $hether such
enforcement is %y court action or other$ise, against the petitioner, its guarantors and
sureties not solidarily lia%le $ith the petitioner?
<. Prohi%iting the petitioner from selling, encum%ering, transferring, or disposing in any
manner any of its properties e#cept in the ordinary course of %usiness?
(. Prohi%iting the petitioner from making any payment of its lia%ilities, outstanding as at
the date of the filing of the petition?
# # # # # # # # #
'u%se9uently, on 8ovem%er =>, =::<, pu%lic respondent, acting on t$o &rgent Ex Parte
motions
=
E=O filed %y respondent Maynilad, issued the herein 9uestioned 7rder
<
E<O $hich
stated that it there%y5
P). ,6C1.-6' that the act of MG'' in commencing on 8ovem%er =(, =::< the
process for the payment %y the %anks of &'D*B million out of the &'D)=: million
stand%y letter of credit so the %anks have to make good such call2dra$ing of payment of
&'D*B million %y MG'' not later than 8ovem%er =>, =::< at ):5:: P. M. or any similar
act for that matter, is violative of the a%ove-9uoted su%-paragraph =.! of the dispositive
portion of this CourtQs 'tay 7rder dated 8ovem%er )>, =::<.
=. 7-,6-' MG'' through its officers2officials to $ithdra$ under pain of
contempt the $ritten certification2notice of dra$ to Citicorp International 1imited dated
8ovem%er =(, =::< and ,6C1.-6' void any payment %y the %anks to MG'' in the
event such $ritten certification2notice of dra$ is not $ithdra$n %y MG'' and2or MG''
receives payment %y virtue of the aforesaid stand%y letter of credit.R
.ggrieved %y this 7rder, petitioner Manila Gater$orks K 'e$erage 'ystem MG''!
filed this petition for revie$ %y $ay of certiorari under -ule +@ of the -ules of Court
)
=
<
9uestioning the legality of said order as having %een issued $ithout or in e#cess of the
lo$er courtQs "urisdiction or that the court a quo acted $ith grave a%use of discretion
amounting to lack or e#cess of "urisdiction.
(
E(O
.8T6C6,68T' 7F T;6 C.'6
7n Fe%ruary =), )**>, MG'' granted Maynilad under a Concession .greement a
t$enty-year period to manage, operate, repair, decommission and refur%ish the e#isting
MG'' $ater delivery and se$erage services in the Gest Cone 'ervice .rea, for $hich
Maynilad undertook to pay the corresponding concession fees on the dates agreed upon
in said agreement
@
E@O $hich, among other things, consisted of payments of petitionerQs
mostly foreign loans.
To secure the concessionaireQs performance of its o%ligations under the Concession
.greement, Maynilad $as re9uired under 'ection +.* of said contract to put up a %ond,
%ank guarantee or other security accepta%le to MG''.
In compliance $ith this re9uirement, Maynilad arranged on 4uly )(, =::: for a three-year
facility $ith a num%er of foreign %anks, led %y Citicorp International 1imited, for the
issuance of an Irrevoca%le 'tand%y 1etter of Credit
+
E+O in the amount of &'D)=:,:::,:::
in favor of MG'' for the full and prompt performance of MayniladQs o%ligations to
MG'' as aforestated.
'ometime in 'eptem%er =:::, respondent Maynilad re9uested MG'' for a mechanism
%y $hich it hoped to recover the losses it had allegedly incurred and $ould %e incurring
as a result of the depreciation of the Philippine Peso against the &' ,ollar. Failing to get
$hat it desired, Maynilad issued a Force Ma"eure 8otice on March B, =::) and
unilaterally suspended the payment of the concession fees. In an effort to salvage the
Concession .greement, the parties entered into a Memorandum of .greement M7.!
>
E>O
on 4une B, =::) $herein Maynilad $as allo$ed to recover foreign e#change losses under
a formula agreed upon %et$een them. 'ometime in .ugust =::) Maynilad again filed
another Force Ma"eure 8otice and, since MG'' could not agree $ith the terms of said
8otice, the matter $as referred on .ugust <:, =::) to the .ppeals Panel for ar%itration.
This resulted in the parties agreeing to resolve the issues through an amendment of the
Concession .greement on 7cto%er @, =::), kno$n as .mendment 8o. ),
B
EBO $hich $as
%ased on the terms set do$n in MG'' Board of Trustees -esolution 8o. (@>-=::), as
amended %y MG'' Board of Trustees -esolution 8o. (B>-=::),
*
E*O $hich provided inter
alia for a formula that $ould allo$ Maynilad to recover foreign e#change losses it had
incurred or $ould incur under the terms of the Concession .greement.
.s part of this agreement, Maynilad committed, among other things, to5
a! infuse the amount of &,DB:.: million as additional funding support from its
stockholders?
(
@
+
>
B
*
%! resume payment of the concession fees? and
c! mutually seek the dismissal of the cases pending %efore the Court of .ppeals and $ith
Minor ,ispute .ppeals Panel.
;o$ever, on 8ovem%er @, =::=, Maynilad served upon MG'' a 8otice of 6vent of
Termination, claiming that MG'' failed to comply $ith its o%ligations under the
Concession .greement and .mendment 8o. ) regarding the ad"ustment mechanism that
$ould cover MayniladQs foreign e#change losses. 7n ,ecem%er *, =::=, Maynilad filed
a 8otice of 6arly Termination of the concession, $hich $as challenged %y MG''. This
matter $as eventually %rought %efore the .ppeals Panel on 4anuary >, =::< %y MG''.
):
E):O 7n 8ovem%er >, =::<, the .ppeals Panel ruled that there $as no 6vent of
Termination as defined under .rt. ):.= ii! or ):.< iii! of the Concession .greement and
that, therefore, Maynilad should pay the concession fees that had fallen due.
The a$ard of the .ppeals Panel %ecame final on 8ovem%er ==, =::<. MG'', thereafter,
su%mitted a $ritten notice
))
E))O on 8ovem%er =(, =::<, to Citicorp International 1imited,
as agent for the participating %anks, that %y virtue of MayniladQs failure to perform its
o%ligations under the Concession .greement, it $as dra$ing on the Irrevoca%le 'tand%y
1etter of Credit and there%y demanded payment in the amount of &'D*B,*=<,+(:.)@.
Prior to this, ho$ever, Maynilad had filed on 8ovem%er )<, =::<, a petition for
reha%ilitation %efore the court a quo $hich resulted in the issuance of the 'tay 7rder of
8ovem%er )>, =::< and the disputed 7rder of 8ovem%er =>, =::<.
)=
E)=O
P6TITI786-Q' C.'6
Petitioner here%y raises the follo$ing issues5
). ,I, T;6 ;787-.B16 P-6'I,I8/ 4&,/6 /-.I61H 6-- .8,27- .CT
P.T68T1H GIT;7&T 4&-I',ICTI78 7- I8 6SC6'' 7F 4&-I',ICTI78 7-
GIT; /-.I6 .B&'6 7F ,I'C-6TI78 .M7&8TI8/ T7 1.CJ 7- 6SC6'' 7F
4&-I',ICTI78 I8 C78'I,6-I8/ T;6 P6-F7-M.8C6 B78, 7- .''6T' 7F
T;6 I''&I8/ B.8J' .' P.-T 7- P-7P6-TH 7F T;6 6'T.T6 7F T;6
P-II.T6 -6'P78,68T M.H8I1., '&B46CT T7 -6;.BI1IT.TI78.
=. ,I, T;6 ;787-.B16 P-6'I,I8/ 4&,/6 .CT GIT; 1.CJ 7- 6SC6'' 7F
4&-I',ICTI78 7- C7MMIT . /-.I6 6--7- 7F 1.G I8 ;71,I8/ T;.T
T;6 P6-F7-M.8C6 B78, 7B1I/.TI78' 7F T;6 B.8J' G6-6 87T
'71I,.-H I8 8.T&-6.
<. ,I, T;6 ;787-.B16 P-6'I,I8/ 4&,/6 /-.I61H 6-- I8 .117GI8/
M.H8I1., T7 I8 6FF6CT '66J . -6II6G 7- .PP6.1 7F T;6 FI8.1 .8,
BI8,I8/ ,6CI'I78 7F T;6 .PP6.1' P.861.
In support of the first issue, petitioner maintains that as a matter of la$, the &'D)=:
Million 'tand%y 1etter of Credit and Performance Bond are not property of the estate of
the de%tor Maynilad and, therefore, not su%"ect to the in rem reha%ilitation "urisdiction of
the trial court.
):
))
)=
Petitioner argues that a call made on the 'tand%y 1etter of Credit does not involve any
asset of Maynilad %ut only assets of the %anks. Furthermore, a call on the 'tand%y 1etter
of Credit cannot also %e considered a PclaimR falling under the purvie$ of the stay order
as alleged %y respondent as it is not directed against the assets of respondent Maynilad.
Petitioner concludes that the pu%lic respondent erred in declaring and holding that the
commencement of the process for the payment of &'D*B million is a violation of the
order issued on 8ovem%er )>, =::<.
-6'P78,68T M.H8I1.,Q' C.'6
-espondent Maynilad seeks to refute this argument %y alleging that5
a! the order o%"ected to $as strictly and precisely $orded and issued after carefully
considering2evaluating the import of the arguments and documents referred to %y
Maynilad, MG'' and2or creditors Chinatrust Commercial Bank and 'ue0 in relation to
admissions, pleadings and2or pertinent records
)<
E)<O and that pu%lic respondent had the
authority to issue the same?
%! pu%lic respondent never considered nor held that the Performance %ond or assets
of the issuing %anks are part or property of the estate of respondent Maynilad su%"ect to
reha%ilitation and $hich respondent Maynilad has not and has never claimed to %e?
)(
E)(O
c! $hat is relevant is not $hether the performance %ond or assets of the issuing
%anks are part of the estate of respondent Maynilad %ut $hether the act of petitioner in
commencing the process for the payment %y the %anks of &'D*B million out of the
&'D)=: million performance %ond is covered and2or prohi%ited under su%-paragraphs =.!
and (.! of the stay order dated 8ovem%er )>, =::<?
d! the "urisdiction of pu%lic respondent e#tends not only to the assets of respondent
Maynilad %ut also over persons and assets of Pall those affected %y the proceedings # # #
upon pu%lication of the notice of commencement?
)@
E)@OR and
e! the o%ligations under the 'tand%y 1etter of Credit are not solidary and are not
e#empt from the coverage of the stay order.
7&- -&1I8/
Ge $ill discuss the first t$o issues raised %y petitioner as these are interrelated and make
up the main issue of the petition %efore us $hich is, did the reha%ilitation court sitting as
such, act in e#cess of its authority or "urisdiction $hen it en"oined herein petitioner from
seeking the payment of the concession fees from the %anks that issued the Irrevoca%le
'tand%y 1etter of Credit in its favor and for the account of respondent MayniladL
The pu%lic respondent relied on 'ec. ), -ule < of the Interim -ules on Corporate
-eha%ilitation to support its "urisdiction over the Irrevoca%le 'tand%y 1etter of Credit and
the %anks that issued it. The section reads in part Pthat "urisdiction over those affected %y
the proceedings is considered ac9uired upon the pu%lication of the notice of
commencement of proceedings in a ne$spaper of general circulationR and goes further to
define reha%ilitation as an in rem proceeding. This provision is a logical conse9uence of
)<
)(
)@
the in rem nature of the proceedings, $here "urisdiction is ac9uired %y pu%lication and
$here it is necessary that the assets of the de%tor come $ithin the courtQs "urisdiction to
secure the same for the %enefit of creditors. The reference to Pall those affected %y the
proceedingsP covers creditors or such other persons or entities holding assets %elonging
to the de%tor under reha%ilitation $hich should %e reflected in its audited financial
statements. The %anks do not hold any assets of respondent Maynilad that $ould %e
material to the reha%ilitation proceedings nor is Maynilad lia%le to the %anks at this point.
-espondent MayniladQs Financial 'tatement as of ,ecem%er <), =::) and =::= do not
sho$ the Irrevoca%le 'tand%y 1etter of Credit as part of its assets or lia%ilities, and %y
respondent MayniladQs o$n admission it is not. In issuing the clarificatory order of
8ovem%er =>, =::<, en"oining petitioner from claiming from an asset that did not %elong
to the de%tor and over $hich it did not ac9uire "urisdiction, the reha%ilitation court acted
in e#cess of its "urisdiction.
-espondent Maynilad insists, ho$ever, that it is 'ec. + %!, -ule ( of the Interim -ules
that supports its claim that the commencement of the process to dra$ on the 'tand%y
1etter of Credit is an enforcement of claim prohi%ited %y and under the Interim -ules and
the order of pu%lic respondent.
-espondent Maynilad $ould persuade us that the a%ove provision "ustifies a leap to the
conclusion that such an enforcement is prohi%ited %y said section %ecause it is a Pclaim
against the de%tor, its guarantors and sureties not solidarily lia%le $ith the de%torR and
that there is nothing in the 'tand%y 1etter of Credit nor in la$ nor in the nature of the
o%ligation that $ould sho$ or re9uire the o%ligation of the %anks to %e solidary $ith the
respondent Maynilad.
Ge disagree.
First, the claim is not one against the de%tor %ut against an entity that respondent
Maynilad has procured to ans$er for its non-performance of certain terms and conditions
of the Concession .greement, particularly the payment of concession fees.
'econdly, 'ec. + %! of -ule ( of the Interim -ules does not en"oin the enforcement of all
claims against guarantors and sureties, b2t o')3 t4o+e c)&*.+ &5&*'+t 52&r&'tor+ &'(
+2ret*e+ 64o &re 'ot +o)*(&r*)3 )*&b)e 6*t4 t4e (ebtor. -espondent MayniladQs claim
that the %anks are not solidarily lia%le $ith the de%tor does not find support in
"urisprudence.
Ge held in Feati Bank !rust Compan" v. Court of Appeals
)+
E)+O that the concept of
guarantee vis-#-vis the concept of an irrevoca%le letter of credit are inconsistent $ith each
other. The guarantee theory destroys the independence of the %ankQs responsi%ility from
the contract upon $hich it $as opened and the nature of %oth contracts is mutually in
conflict $ith each other. In contracts of guarantee, the guarantorQs o%ligation is merely
collateral and it arises only upon the default of the person primarily lia%le. 7n the other
hand, in an irrevoca%le letter of credit, the %ank undertakes a primary o%ligation. Ge
have also defined a letter of credit as an engagement %y a %ank or other person made at
the re9uest of a customer that the issuer shall honor drafts or other demands of payment
upon compliance $ith the conditions specified in the credit.
)>
E)>O
)+
)>
1etters of credit $ere developed for the purpose of insuring to a seller payment of a
definite amount upon the presentation of documents
)B
E)BO and is thus a commitment %y the
issuer that the party in $hose favor it is issued and $ho can collect upon it $ill have his
credit against the applicant of the letter, duly paid in the amount specified in the letter.
)*
E)*O They are in effect a%solute undertakings to pay the money advanced or the amount for
$hich credit is given on the faith of the instrument. They are primary o%ligations and not
accessory contracts and $hile they are security arrangements, they are not converted
there%y into contracts of guaranty.
=:
E=:O Ghat distinguishes letters of credit from other
accessory contracts, is the engagement of the issuing %ank to pay the seller once the draft
and other re9uired shipping documents are presented to it.
=)
E=)O They are definite
undertakings to pay at sight once the documents stipulated therein are presented.
1etters of Credits have long %een and are still governed %y the provisions of the &niform
Customs and Practice for ,ocumentary Credits of the International Cham%er of
Commerce. In the )**< -evision it provides in .rt. = that Pthe e#pressions ,ocumentary
Credits! and 'tand%y 1etters! of Credit mean any arrangement, ho$ever made or
descri%ed, $here%y a %ank acting at the re9uest and on instructions of a customer or on
its o$n %ehalf is to make payment against stipulated documents!R and .rt. * thereof
defines the lia%ility of the issuing %anks on an irrevoca%le letter of credit as a Pdefinite
undertaking of the issuing %ank, provided that the stipulated documents are presented to
the nominated %ank or the issuing %ank and the terms and conditions of the Credit are
complied $ith, to pay at sight if the Credit provides for sight payment.R
==
E==O
Ge have accepted, in Feati Bank and !rust Compan" v. Court of Appeals
=<
E=<O and Bank
of America $! SA v. Court of Appeals,
=(
E=(O to the e#tent that they are pertinent, the
application in our "urisdiction of the international credit regulatory set of rules kno$n as
the &niform Customs and Practice for ,ocumentary Credits &.C.P! issued %y the
International Cham%er of Commerce, $hich $e said in Bank of t%e P%ilippine &slands v.
$er"
=@
E=@O $as "ustified under .rt. = of the Code of Commerce, $hich states5
P.cts of commerce, $hether those $ho e#ecute them %e merchants or not, and $hether
specified in this Code or not should %e governed %y the provisions contained in it? in their
a%sence, %y the usages of commerce generally o%served in each place? and in the a%sence
of %oth rules, %y those of the civil la$.R
The prohi%ition under 'ec + %! of -ule ( of the Interim -ules does not apply to herein
petitioner as the prohi%ition is on the enforcement of claims against guarantors or sureties
of the de%tors $hose o%ligations are not solidary $ith the de%tor. The participating
%anksQ o%ligation are solidary $ith respondent Maynilad in that it is a primary, direct,
)B
)*
=:
=)
==
=<
=(
=@
definite and an a%solute undertaking to pay and is not conditioned on the prior e#haustion
of the de%torQs assets. These are the same characteristics of a surety or solidary o%ligor.
Being solidary, the claims against them can %e pursued separately from and
independently of the reha%ilitation case, as held in !raders 'o"al Bank v. Court of
Appeals
=+
E=+O and reiterated in P%ilippine Bloomin( )ills, &nc. v. Court of Appeals,
=>
E=>O
$here $e said that property of the surety cannot %e taken into custody %y the
reha%ilitation receiver '6C! and said surety can %e sued separately to enforce his
lia%ility as surety for the de%ts or o%ligations of the de%tor. The de%ts or o%ligations for
$hich a surety may %e lia%le include future de%ts, an amount $hich may not %e kno$n at
the time the surety is given.
The terms of the Irrevoca%le 'tand%y 1etter of Credit do not sho$ that the o%ligations of
the %anks are not solidary $ith those of respondent Maynilad. 7n the contrary, it is
issued at the re9uest of and for the account of Maynilad Gater 'ervices, Inc., in favor of
the Metropolitan Gater$orks and 'e$erage 'ystem, as a %ond for the full and prompt
performance of the o%ligations %y the concessionaire under the Concession
.greement
=B
E=BO and herein petitioner is authori0ed %y the %anks to dra$ on it %y the
simple act of delivering to the agent a $ritten certification su%stantially in the form
.nne# PBR of the 1etter of Credit. It provides further in 'ec. +, that for as long as the
'tand%y 1etter of Credit is valid and su%sisting, the Banks shall honor any $ritten
Certification made %y MG'' in accordance $ith 'ec. =, of the 'tand%y 1etter of Credit
regardless of the date on $hich the event giving rise to such Gritten Certification arose.
=*
E=*O
Taking into consideration our o$n rulings on the nature of letters of credit and the
customs and usage developed over the years in the %anking and commercial practice of
letters of credit, $e hold that e#cept $hen a letter of credit specifically stipulates
other$ise, the o%ligation of the %anks issuing letters of credit are solidary $ith that of the
person or entity re9uesting for its issuance, the same %eing a direct, primary, a%solute and
definite undertaking to pay the %eneficiary upon the presentation of the set of documents
re9uired therein.
The pu%lic respondent, therefore, e#ceeded his "urisdiction, in holding that he $as
competent to act on the o%ligation of the %anks under the 1etter of Credit under the
argument that this $as not a solidary o%ligation $ith that of the de%tor. Being a solidary
o%ligation, the letter of credit is e#cluded from the "urisdiction of the reha%ilitation court
and therefore in en"oining petitioner from proceeding against the 'tand%y 1etters of
Credit to $hich it had a clear right under the la$ and the terms of said 'tand%y 1etter of
Credit, pu%lic respondent acted in e#cess of his "urisdiction.
.,,ITI78.1 I''&6'
Ge proceed to consider the other issues raised in the oral arguments and included in the
partiesQ memoranda5
). -espondent Maynilad argues that petitioner had a plain, speedy and ade9uate
remedy under the Interim -ules itself $hich provides in 'ec. )=, -ule ( that the court
may on motion or motu proprio, terminate, modify or set conditions for the continuance
=+
=>
=B
=*
of the stay order or relieve a claim from coverage thereof. Ge find, ho$ever, that the
pu%lic respondent had already accomplished this during the hearing set for the t$o
&rgent Ex Parte motions filed %y respondent Maynilad on 8ovem%er =) and =(, =::<,
<:
E<:O $here the parties including the creditors, 'ue0 and Chinatrust Commercial Ppresented
their respective arguments.R
<)
E<)O The pu%lic respondent then ruled, Pafter carefully
considering2evaluating the import of the arguments and documents referred to %y
Maynilad, MG'' and2or the creditors Chinatrust Commercial Bank and 'ue0 in relation
to the admissions, the pleadings, and2or pertinent portions of the records, this court is of
the considered and hum%le vie$ that the issue must perforce %e resolved in favor of
Maynilad.R
<=
E<=O ;ence to pursue their opposition %efore the same court $ould result in the
presentation of the same arguments and issues passed upon %y pu%lic respondent.
Furthermore, 'ec. @, -ule < of the Interim -ules $ould preclude any other effective
remedy 9uestioning the orders of the reha%ilitation court since they are immediately
e#ecutory and a petition for revie$ or an appeal therefrom shall not stay the e#ecution of
the order unless restrained or en"oined %y the appellate court.R In this situation, it had no
other remedy %ut to seek recourse to us through this petition for certiorari.
In Silvestre v. !orres and *+en,
<<
E<<O $e said that it is not enough that a remedy is
availa%le to prevent a party from making use of the e#traordinary remedy of certiorari
%ut that such remedy %e an ade9uate remedy $hich is e9ually %eneficial, speedy and
sufficient, not only a remedy $hich at some time in the future may offer relief %ut a
remedy $hich $ill promptly relieve the petitioner from the in"urious acts of the lo$er
tri%unal. It is the inade9uacy -- not the mere a%sence -- of all other legal remedies and the
danger of failure of "ustice $ithout the $rit, that must usually determine the propriety of
certiorari.
<(
E<(O
=. -espondent Maynilad argues that %y commencing the process for payment under
the 'tand%y 1etter of Credit, petitioner violated an immediately e#ecutory order of the
court and, therefore, comes to Court $ith unclean hands and should therefore %e denied
any relief.
It is true that the stay order is immediately e#ecutory. It is also true, ho$ever, that the
'tand%y 1etter of Credit and the %anks that issued it $ere not $ithin the "urisdiction of
the reha%ilitation court. The call on the 'tand%y 1etter of Credit, therefore, could not %e
considered a violation of the 'tay 7rder.
<. -espondentQs claim that the filing of the petition pre-empts the original
"urisdiction of the lo$er court is $ithout merit. The purpose of the initial hearing is to
determine $hether the petition for reha%ilitation has merit or not. The propriety of the
stay order as $ell as the clarificatory order had already %een passed upon in the hearing
previously had for that purpose. The determination of $hether the pu%lic respondent $as
correct in en"oining the petitioner from dra$ing on the 'tand%y 1etter of Credit $ill have
no %earing on the determination to %e made %y pu%lic respondent $hether the petition for
reha%ilitation has merit or not. 7ur decision on the instant petition does not pre-empt the
original "urisdiction of the reha%ilitation court.
<:
<)
<=
<<
<(
/HEREFORE, the petition for certiorari is /-.8T6,. The 7rder of 8ovem%er =>,
=::< of the -egional Trial Court of Nue0on City, Branch *:, is here%y declared 8&11
.8, I7I, and '6T .'I,6. The status quo 7rder herein previously issued is here%y
1IFT6,. In vie$ of the urgency attending this case, this decision is immediately
e#ecutory.
8o costs.
G.R. No. *1559#(0 A+r,- (, 1992
!EO!"E OF T%E !%I"I!!INES, :pu/lic petitioner< 304 A""IED BANKING
COR!ORATION :pri'ate petitioner<,
's.
%ON. $DGE DA&ID G. NITAFAN :pu/lic respon.ent< 304 BETT. SIA ANG
:pri'ate respon.ent<.

GTIERRE5, $R., J.:
(,is petition +or certiorari in'ol'es an issue t,at ,as /een raise. /e+ore t,is Court
se'eral times in t,e past. (,e petitioner, in e++ect, is as-ing +or a re;e8amination
o+ our .ecisions on t,e issue o+ 2,et,er or not an entrustee in a trust receipt
agreement 2,o +ails to .eli'er t,e procee.s o+ t,e sale or to return t,e goo.s i+
not sol. to t,e entruster;/an- is lia/le +or t,e crime o+ esta+a.
%etitioner Allie. )an-ing Corporation c,arge. )ett* 1ia Ang 2it, esta+a in
Criminal Case No. $#;""01 in an in+ormation 2,ic, allege.E
(,at on or a/out 3ul* 1$, 19$0, in t,e Cit* o+ Manila, %,ilippines, t,e sai.
accuse., /eing t,en t,e proprietress o+ Jc-art Jnterprises, a /usiness entit*
locate. at #"6 Nor/erto Amoranto A'enue, Rue4on Cit*, .i. t,en an. t,ere
2il+ull*, unla2+ull* an. +eloniousl* .e+rau. t,e Allie. )an-ing Corporation, a
/an-ing institution, represente. /* its Account O++icer, =a*mun. 1. Li, in t,e
+ollo2ing manner, to 2itE t,e sai. accuse. recei'e. in trust +rom t,e a+oresai.
/an- Gor.on %lastics, plastic s,eeting an. Doo- C,rome., in t,e total amount o+
%9$,000.00, speci+ie. in a trust receipt an. co'ere. /* Domestic Letter o+
Cre.it No. DLC;00&;$01&"4, un.er t,e e8press o/ligation on t,e part o+ sai.
accuse. to sell t,e same an. account +or t,e procee.s o+ t,e sale t,ereo+, i+ sol.,
or to return sai. merc,an.ise, i+ not sol., on or /e+ore Octo/er 16, 19$0, or upon
.eman., /ut t,e sai. accuse., once in possession o+ t,e sai. articles, +ar +rom
compl*ing 2it, t,e a+oresai. o/ligation, not2it,stan.ing repeate. .eman.s
ma.e upon ,er to t,at e++ect, pai. onl* t,e amount o+ %&$,11".#$, t,ere/*
lea'ing unaccounte. +or t,e amount o+ %114,$$4.&& 2,ic,, once in ,er
possession, 2it, intent to .e+rau., s,e misappropriate., misapplie. an.
con'erte. to ,er o2n personal use an. /ene+it, to t,e .amage an. preIu.ice o+
sai. Allie. )an-ing Corporation in t,e a+oresai. sum o+ %114,$$4.&&, %,ilippine
Currenc*. :Rollo, pp. 1;14<
(,e accuse. +ile. a motion to 7uas, t,e in+ormation on t,e groun. t,at t,e +acts
c,arge. .o not constitute an o++ense.
On 3anuar* #, 19$$, t,e respon.ent Iu.ge grante. t,e motion to 7uas,. (,e
or.er 2as anc,ore. on t,e premise t,at a trust receipt transaction is an e'i.ence
o+ a loan /eing secure. so t,at t,ere is, as /et2een t,e parties to it, a cre.itor;
.e/tor relations,ip. (,e court rule. t,at t,e penal clause o+ %resi.ential Decree
No. 1" on t,e (rust =eceipts La2 is inoperati'e /ecause it .oes not actuall*
punis, an o++ense mala pro)i"ita. (,e la2 onl* re+ers to t,e rele'ant esta+a
pro'ision in t,e =e'ise. %enal Co.e. (,e Court relie. on t,e Iu.icial
pronouncements in (eople !. Cue!o, 104 1C=A 1& B19$1C 2,ere, +or lac- o+ t,e
re7uire. num/er o+ 'otes, t,is Court up,el. t,e .ismissal o+ a c,arge +or esta+a
+or a 'iolation o+ a trust receipt agreementA an. in -ia !. (eople, 1&1 1C=A 6""
B19$C 2,ere 2e ,el. t,at t,e 'iolation merel* gi'es rise to a ci'il o/ligation. At
t,e time t,e or.er to 7uas, 2as issue. or on 3anuar* #, 19$$, t,ese t2o
.ecisions 2ere t,e onl* most recent ones. Dence, t,is petition.
(,e pri'ate respon.ent a.opte. practicall* t,e same stance o+ t,e lo2er court.
1,e li-e2ise asserts t,at %.D. 11" is unconstitutional as it 'iolates t,e
constitutional pro,i/ition against imprisonment +or non;pa*ment o+ a .e/t. 1,e
argues t,at 2,ere no malice e8ists in a /reac, o+ a purel* commercial
un.erta-ing, %.D. 11" imputes it.
(,is Court notes t,at t,e petitioner /an- /roug,t a similar case /e+ore t,is Court
in G.=. No. $&49", entitle. Allied 'an#ing Corporation !. 3on. -ecretary -edfrey
4rdo5ez and Alfredo C)ing 2,ic, 2e .eci.e. on Decem/er 10, 1990 :19&
1C=A &46<. 9n t,at case, t,e petitioner a..itionall* 7uestione., an. 2e
accor.ingl* re'erse., t,e pronouncement o+ t,e 1ecretar* o+ 3ustice limiting t,e
application o+ t,e penal pro'ision o+ %.D. 11" onl* to goo.s inten.e. to /e sol. to
t,e e8clusion o+ t,ose still to /e manu+acture..
As in G.=. No. $&49", 2e resol'e t,e instant petition in t,e lig,t o+ t,e Court5s
ruling in Lee !. Rodil, 1#" 1C=A 100 B19$9C an. -ia !. Court of Appeals, 166
1C=A &6 B19$$C. @e ,a'e ,el. in t,e latter cases t,at acts in'ol'ing t,e
'iolation o+ trust receipt agreements occurring a+ter &9 3anuar* 19# :.ate o+
enactment o+ %.D. 11"< 2oul. ma-e t,e accuse. criminall* lia/le +or esta+a un.er
paragrap, 1 :/<, Article 1" o+ t,e =e'ise. %enal Co.e :=%C< pursuant to t,e
e8plicit pro'ision in 1ection 1 o+ %.D. 11".
(,e rele'ant penal pro'ision o+ %.D. 11" pro'i.esE
1ec. 1 o+ %.D. No. 11" pro'i.esE
. . . (enalty clause. F (,e +ailure o+ an entrustee to turn o'er t,e procee.s o+ t,e
sale o+ t,e goo.s, .ocuments or instruments co'ere. /* a trust receipt to t,e
e8tent o+ t,e amount o2ing to t,e entruster or as appears in t,e trust receipt or to
return sai. goo.s, .ocuments or instruments i+ t,e* 2ere not sol. or .ispose. o+
in accor.ance 2it, t,e terms o+ t,e trust receipt s,all constitute t,e crime o+
esta+a, punis,a/le un.er t,e pro'isions o+ Article (,ree Dun.re. an. >i+teen,
paragrap, one :/< o+ Act Num/ere. (,ree (,ousan. Jig,t Dun.re. an. >i+teen,
as amen.e., ot,er2ise -no2n as t,e =e'ise. %enal Co.e. 9+ t,e 'iolation or
o++ense is committe. /* a corporation, partners,ip, association or ot,er Iuri.ical
entities, t,e penalt* pro!ided +or in t,is Decree s,all /e impose. upon t,e
.irectors, o++icers, emplo*ees or ot,er o++icials or persons t,erein responsi/le +or
t,e o++ense, 2it,out preIu.ice to t,e ci'il lia/ilities arising +rom t,e criminal
o++ense.
1ection 1 :/<, Article 1" o+ t,e =%C un.er 2,ic, t,e 'iolation is ma.e to +all,
statesE
. . . -windling :estafa<. F An* person 2,o s,all .e+rau. anot,er /* an* o+ t,e
means mentione. ,erein /elo2 . . . E
888 888 888
/. )* misappropriating or con'erting, to t,e preIu.ice o+ anot,er, mone*, goo.s,
or an* ot,er personal propert* recei'e. /* t,e o++en.er in trust or on
commission, or +or a.ministration, or un.er an* ot,er o/ligation in'ol'ing t,e .ut*
to ma-e .eli'er* o+ or to return t,e same, e'en t,oug, suc, o/ligation /e totall*
or partiall* guarantee. /* a /on.A or /* .en*ing ,a'ing recei'e. suc, mone*,
goo., or ot,er propert*.
(,e +actual circumstances in t,e present case s,o2 t,at t,e allege. 'iolation
2as committe. sometime in 19$0 or .uring t,e e++ecti'it* o+ %.D. 11". (,e
+ailure, t,ere+ore, to account +or t,e %114,$$4.&& /alance is 2,at ma-es t,e
accuse.;respon.ent criminall* lia/le +or esta+a. (,e Court reiterates its .e+initi'e
ruling t,at, in t,e Cue!o an. -ia :19$< cases relie. upon /* t,e accuse., %.D.
11" 2as not applie. /ecause t,e 7uestione. acts 2ere committe. /e+ore its
e++ecti'it*. :Lee '. =o.il, supra, p. 10$< At t,e time t,ose cases 2ere .eci.e., t,e
+ailure to compl* 2it, t,e o/ligations un.er t,e trust receipt 2as suscepti/le to
t2o interpretations. (,e Court in -ia a.opte. t,e 'ie2 t,at a 'iolation gi'es rise
onl* to a ci'il lia/ilit* as t,e more +easi/le 'ie2 6/e+ore t,e promulgation o+ %.D.
11",6 not2it,stan.ing prior .ecisions 2,ere 2e rule. t,at a /reac, also gi'es
rise to a lia/ilit* +or esta+a. :%eople '. Hu C,ai Do, " %,il. $#4 B19&9CA 1amo '.
%eople, 11" %,il. 46 B196&CA %,ilippine National )an- '. Arro4al, 10 %,il. &1
B19"$CA %,ilippine National )an- '. Liu.a e DiIos .e Angel 3ose, 6 %,il. $14
B196C<.
Contrar* to t,e reasoning o+ t,e respon.ent court an. t,e accuse., a trust
receipt arrangement .oes not in'ol'e a simple loan transaction /et2een a
cre.itor an. .e/tor;importer. Apart +rom a loan +eature, t,e trust receipt
arrangement ,as a securit* +eature t,at is co'ere. /* t,e trust receipt itsel+.
:Lintola '. 9nsular )an- o+ Asia an. America, 1"1 1C=A "#$ B19$#C< (,at secon.
+eature is 2,at pro'i.es t,e muc, nee.e. +inancial assistance to our tra.ers in
t,e importation or purc,ase o+ goo.s or merc,an.ise t,roug, t,e use o+ t,ose
goo.s or merc,an.ise as collateral +or t,e a.'ancements ma.e /* a /an-.
:1amo '. %eople, supra<. (,e title o+ t,e /an- to t,e securit* is t,e one soug,t to
/e protecte. an. not t,e loan 2,ic, is a separate an. .istinct agreement.
(,e (rust =eceipts La2 punis,es t,e .is,onest* an. a/use o+ con+i.ence in t,e
,an.ling o+ mone* or goo.s to t,e preIu.ice o+ anot,er regar.less o+ 2,et,er t,e
latter is t,e o2ner or not. (,e la2 .oes not see- to en+orce pa*ment o+ t,e loan.
(,us, t,ere can /e no 'iolation o+ a rig,t against imprisonment +or non;pa*ment
o+ a .e/t.
(rust receipts are in.ispensa/le contracts in international an. .omestic /usiness
transactions. (,e pre'alent use o+ trust receipts, t,e .anger o+ t,eir misuse
an./or misappropriation o+ t,e goo.s or procee.s reali4e. +rom t,e sale o+
goo.s, .ocuments or instruments ,el. in trust +or entruster;/an-s, an. t,e nee.
+or regulation o+ trust receipt transactions to sa+eguar. t,e rig,ts an. en+orce t,e
o/ligations o+ t,e parties in'ol'e. are t,e main t,rusts o+ %.D. 11". As correctl*
o/ser'e. /* t,e 1olicitor General, %.D. 11", li-e )atas %am/ansa )lg. &&,
punis,es t,e act 6not as an o++ense against propert*, /ut as an o++ense against
pu/lic or.er. . . .6 (,e misuse o+ trust receipts t,ere+ore s,oul. /e .eterre. to
pre'ent an* possi/le ,a'oc in tra.e circles an. t,e /an-ing communit* :citing
Lo4ano '. Martine4, 146 1C=A & B19$6CA Rollo, p. "#< 9t is in t,e conte8t o+
up,ol.ing pu/lic interest t,at t,e la2 no2 speci+icall* .esignates a /reac, o+ a
trust receipt agreement to /e an act t,at 6s,all6 ma-e one lia/le +or esta+a.
(,e o++ense is punis,e. as a malum pro)i"itum regar.less o+ t,e e8istence o+
intent or malice. A mere +ailure to .eli'er t,e procee.s o+ t,e sale or t,e goo.s i+
not sol., constitutes a criminal o++ense t,at causes preIu.ice not onl* to anot,er,
/ut more to t,e pu/lic interest.
@e are continuall* re;e'aluating t,e opposite 'ie2 2,ic, insists t,at t,e 'iolation
o+ a trust receipt agreement s,oul. result onl* in a ci'il action +or collection. (,e
respon.ent conten.s t,at t,ere is no malice in'ol'e.. 1,e cites t,e .issent o+ t,e
late C,ie+ 3ustice Clau.io (ee,an-ee in 4ng !. Court of Appeals, :1&4 1C=A
"#$ B19$C< to 2itE
(,e ol. capitalist orientation o+ putting importers in Iail +or suppose. esta+a or
s2in.ling +or non;pa*ment o+ t,e price o+ t,e importe. goo.s release. to t,em
un.er trust receipts :a purel* commercial transaction< un.er t,e +iction o+ t,e
trust receipt .e'ice, s,oul. no longer /e permitte. in t,is .a* an. age.
As earlier state., ,o2e'er, t,e la2 punis,es t,e .is,onest* an. a/use o+
con+i.ence in t,e ,an.ling o+ mone* or goo.s to t,e preIu.ice o+ t,e /an-.
(,e Court reiterates t,at t,e enactment o+ %.D. 11" is a 'ali. e8ercise o+ t,e
police po2er o+ t,e 1tate an. is, t,us, constitutional. :Lee '. =o.il, supra6 Lo4ano
'. Martine4, supra< (,e arguments o+ t,e respon.ent are appropriate +or a repeal
or mo.i+ication o+ t,e la2 an. s,oul. /e .irecte. to Congress. )ut until t,e la2 is
repeale., 2e are constraine. to appl* it.
@DJ=J>O=J, t,e petition is ,ere/* G=AN(JD. (,e Or.er o+ t,e respon.ent
=egional (rial Court o+ Manila, )ranc, "& .ate. 3anuar* #, 19$$ is 1J( A19DJ.
Let t,is case /e reman.e. to t,e sai. court +or .isposition in accor.ance 2it,
t,is .ecision.
1O O=DJ=JD.
E/.-. 8o. )<>=<=. 4une =*, =::@O
-7'.-I7 T6STI16 MI11' C7-P7-.TI78 and 6,I1B6-T7 H&4&IC7,
petitioners, vs. ;7M6 B.8J6-' '.II8/' .8, T-&'T C7MP.8H, respondent.
, 6 C I ' I 7 8
'.8,7I.1-/&TI6--6C, J.5
For our resolution is the petition for revie$ on certiorari assailing the ,ecisionE)O of the
Court of .ppeals dated March <), )**B in C.-/.-. CI 8o. (B>:B and its -esolution
dated 4anuary )=, )***.
The facts of the case as found %y the Court of .ppeals are5
P'ometime in )*B*, -osario Te#tile Mills Corporation -TMC! applied from ;ome
Bankers 'avings K Trust Co. for an 7mni%us Credit 1ine for P): million. The %ank
approved -TMCQs credit line %ut for only PB million. The %ank notified -TMC of the
grant of the said loan thru a letter dated March =, )*B* $hich contains terms and
conditions conformed %y -TMC thru 6dil%erto I. Hu"uico. 7n March <, )*B*, Hu"uico
signed a 'urety .greement in favor of the %ank, in $hich he %ound himself "ointly and
severally $ith -TMC for the payment of all -TMCQs inde%tedness to the %ank from )*B*
to )**:. -TMC availed of the credit line %y making numerous dra$do$ns, each
dra$do$n %eing covered %y a separate promissory note and trust receipt. -TMC,
represented %y Hu"uico, e#ecuted in favor of the %ank a total of eleven ))! promissory
notes.
,espite the lapse of the respective due dates under the promissory notes and
not$ithstanding the %ankQs demand letters, -TMC failed to pay its loans. ;ence, on
4anuary ==, )**<, the %ank filed a complaint for sum of money against -TMC and
Hu"uico %efore the -egional Trial Court, Br. )+, Manila.
In their ans$er 7-, pp. ((-(>!, -TMC and Hu"uico contend that they should %e
a%solved from lia%ility. They claimed that although the grant of the credit line and the
e#ecution of the suretyship agreement are admitted, the %ank gave assurance that the
suretyship agreement $as merely a formality under $hich Hu"uico $ill not %e personally
lia%le. They argue that the importation of ra$ materials under the credit line $as $ith a
grant of option to them to turn-over to the %ank the imported ra$ materials should these
fail to meet their manufacturing re9uirements. -TMC offered to make such turn-over
since the imported materials did not conform to the re9uired specifications. ;o$ever, the
%ank refused to accept the same, until the materials $ere destroyed %y a fire $hich gutted
do$n -TMCQs premises.
For failure of the parties to amica%ly settle the case, trial on the merits proceeded. .fter
the trial, the Court a 9uo rendered a decision in favor of the %ank, the decretal part of
$hich reads5
TG;6-6F7-6, P-6MI'6' C78'I,6-6,, "udgment is here%y rendered in favor of
plaintiff and against defendants $ho are ordered to pay "ointly and severally in favor of
plaintiff, inclusive of stipulated <:M per annum interest and penalty of <M per month
until fully paid, under the follo$ing promissory notes5
*:-)))+ +-=:-*: P><>,:BB.=@ *-)B-*:
maturity!
*:-)<=: >-)<-*: P+@:,:::.:: ):-))-*:
*:-)<<( >-)>-*: P(==,@::.:: ):-)@-*:
*:-)<<@ >-)>-*: P(==,@::.:: ):-)@-*:
*:-)<(> >-)B-*: P>*@,:::.:: ):-)+-*:
*:-)<>< >-=:-*: P>)@,*::.:: ):-)B-*:
*:-)<*> >-=>-*: P>><,@::.:: ):-=:-*:
*:-)(=* >-=+-*: P(=@,>@:.:: ):-=(-*:
*:-)@(: B->-*: P>=:,*B(.:: ))-@-*:
*:-)@+* B-*-*: P=:*,(<<.>@ ))-B-*:
*:-:*== @-=B-*: P>(>,>B:.:: B-=+-*:
The counterclaims of defendants are here%y ,I'MI''6,.
'7 7-,6-6,.R 7-, p. <=<? -ollo, p. ><!.RE=O
,issatisfied, -TMC and Hu"uico, herein petitioners, appealed to the Court of .ppeals,
contending that under the trust receipt contracts %et$een the parties, t4e3 .ere)3 4e)(
t4e 5oo(+ (e+cr*be( t4ere*' *' tr2+t 7or re+8o'(e't Ho.e B&'9er+ !&-*'5+ &'(
Tr2+t $o.8&'3 :t4e b&'9; 64*c4 o6'+ t4e +&.e. 'ince the o$nership of the goods
remains $ith the %ank, then it should %ear the loss. Gith the destruction of the goods %y
fire, petitioners should have %een relieved of any o%ligation to pay.
The Court of .ppeals, ho$ever, affirmed the trial courtQs "udgment, holding that the %ank
is merely the holder of the security for its advance payments to petitioners? and that the
goods they purchased, through the credit line e#tended %y the %ank, %elong to them and
hold said goods at their o$n risk.
Petitioners then filed a motion for reconsideration %ut this $as denied %y the .ppellate
Court in its -esolution dated 4anuary )=, )***.
;ence, this petition for revie$ on certiorari ascri%ing to the Court of .ppeals the
follo$ing errors5
PI
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P1.I8TIFF.
II
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/77,' -6M.I8' GIT; T;6 -6'P78,68T-P1.I8TIFF.
III
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CIII1 C7,6 .8, T;6 178/-'T.8,I8/ 4&-I'P-&,68C6 T;.T TI8T68TI78
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&8,6- T;6 '.M6 '&-6TH ./-66M68T.
II
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.8, 6FF6CTII6, T;6 ;787-.B16 C7&-T 7F .PP6.1' II71.T6, T;6
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,6BT7- I' ;IM'61F 1I.B16.
I
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-6C6IPT 1.G I8 ;71,I8/ T;6 P6TITI786-' 1I.B16 T7 T;6
-6'P78,68T.R
The a%ove assigned errors %oil do$n to the follo$ing issues5 )! $hether the Court of
.ppeals erred in holding that petitioners are not relieved of their o%ligation to pay their
loan after they tried to tender the goods to the %ank $hich refused to accept the same, and
$hich goods $ere su%se9uently lost in a fire? =! $hether the Court of .ppeals erred
$hen it ruled that petitioners are solidarily lia%le for the payment of their o%ligations to
the %ank? and <! $hether the Court of .ppeals violated the Trust -eceipts 1a$.
7n the first issue, petitioners theori0e that $hen petitioner -TMC imported the ra$
materials needed for its manufacture, using the credit line, it $as merely acting on %ehalf
of the %ank, the true o$ner of the goods %y virtue of the trust receipts. ;ence, under the
doctrine of res perit domino, the %ank took the risk of the loss of said ra$ materials.
-TMCQs role in the transaction $as that of end user of the ra$ materials and $hen it did
not accept those materials as they did not meet the manufacturing re9uirements, -TMC
made a valid and effective tender of the goods to the %ank. 'ince the %ank refused to
accept the ra$ materials, -TMC stored them in its $arehouse. Ghen the $arehouse and
its contents $ere gutted %y fire, petitionersQ o%ligation to the %ank $as accordingly
e#tinguished.
PetitionersQ stance, ho$ever, conveniently ignores the true nature of its transaction $ith
the %ank. Ge recall that -TMC filed $ith the %ank an application for a credit line in the
amount of P): million, %ut only PB million $as approved. -TMC then made
$ithdra$als from this credit line and issued several promissory notes in favor of the
%ank. In %anking and commerce, a credit line is Pthat amount of money or merchandise
$hich a %anker, merchant, or supplier agrees to supply to a person on credit and generally
agreed to in advance.RE<O It is the fi#ed limit of credit granted %y a %ank, retailer, or credit
card issuer to a customer, to the full e#tent of $hich the latter may avail himself of his
dealings $ith the former %ut $hich he must not e#ceed and is usually intended to cover a
series of transactions in $hich case, $hen the customerQs line of credit is nearly
e#hausted, he is e#pected to reduce his inde%tedness %y payments %efore making any
further dra$ings.E(O
It is thus clear that the principal transaction %et$een petitioner -TMC and the %ank is a
contract of loan. -TMC used the proceeds of this loan to purchase ra$ materials from a
supplier a%road. In order to secure the payment of the loan, -TMC delivered the ra$
materials to the %ank as collateral. Trust receipts $ere e#ecuted %y the parties to
evidence this security arrangement. 'imply stated, the trust receipts $ere mere securities.
In Samo vs. People,E@O $e descri%ed a trust receipt as Pa security transaction intended to
aid in financing importers and retail dealers $ho do not have sufficient funds or resources
to finance the importation or purchase of merchandise, and $ho may not %e a%le to
ac9uire credit e#cept through utili0ation, as collateral, of the merchandise imported or
purchased.RE+O
In /intola vs. &nsular Bank of Asia and America,E>O $e elucidated further that Pa trust
receipt, therefore, is a security agreement, pursuant to $hich a %ank ac9uires a Tsecurity
interestQ in the goods. It secures an inde%tedness and t4ere c&' be 'o +2c4 t4*'5 &+
+ec2r*t3 *'tere+t t4&t +ec2re+ 'o ob)*5&t*o'.<EBO 'ection < h! of the Trust -eceipts 1a$
P.,. 8o. ))@! defines a Psecurity interestR as follo$s5
Ph! 'ecurity Interest means a property interest in goods, documents, or instruments to
secure performance of some o%ligation of the entrustee or of some third persons to the
entruster and includes title, $hether or not e#pressed to %e a%solute, $henever such title
is in su%stance taken or retained for security only.R
PetitionersQ insistence that the o$nership of the ra$ materials remained $ith the %ank is
untena%le. In Sia vs. People,E*O A+ad vs. Court of Appeals,E):O and P$B vs. Pineda,E))O $e
held that5
PIf under the trust receipt, the %ank is made to appear as the o$ner, it $as %ut an artificial
e#pedient, more of legal fiction than fact, for if it $ere really so, it could dispose of the
goods in any manner it $ants, $hich it cannot do, "ust to give consistency $ith purpose
of the trust receipt of giving a stronger security for the loan o%tained %y the importer. To
co'+*(er t4e b&'9 &+ t4e tr2e o6'er 7ro. t4e *'ce8t*o' o7 t4e tr&'+&ct*o' 6o2)( be
to (*+re5&r( t4e )o&' 7e&t2re t4ereo7...<E)=O
Thus, petitioners cannot %e relieved of their o%ligation to pay their loan in favor of the
%ank.
.nent the second issue, petitioner Hu"uico contends that the suretyship agreement he
signed does not %ind him, the same %eing a mere formality.
Ge re"ect petitioner Hu"uicoQs contentions for t$o reasons.
First, there is no record to support his allegation that the surety agreement is a Pmere
formality?R and
'econd, as correctly held %y the Court of .ppeals, the 'uretyship .greement signed %y
petitioner Hu"uico %inds him. The terms clearly sho$ that he agreed to pay the %ank
"ointly and severally $ith -TMC. The parole evidence rule under 'ection *, -ule )<: of
the -evised -ules of Court is in point, thus5
P'6C. *. Evidence of 0ritten a(reements. U Ghen the terms of an agreement have %een
reduced in $riting, it is considered as containing all the terms agreed upon and there can
%e, %et$een the parties and their successors in interest, no evidence of such terms other
than the contents of the $ritten agreement.
;o$ever, a party may present evidence to modify, e#plain, or add to the terms of the
$ritten agreement if he puts in issue in his pleading5
a! .n intrinsic am%iguity, mistake, or imperfection in the $ritten agreement?
%! The failure of the $ritten agreement to e#press the true intent and
agreement of the parties thereto?
c! The validity of the $ritten agreement? or
d! The e#istence of other terms agreed to %y the parties or their successors in
interest after the e#ecution of the $ritten agreement.
# # #.R
&nder this -ule, the terms of a contract are rendered conclusive upon the parties and
evidence aliunde is not admissi%le to vary or contradict a complete and enforcea%le
agreement em%odied in a document.E)<O Ge have carefully e#amined the 'uretyship
.greement signed %y Hu"uico and found no am%iguity therein. ,ocuments must %e taken
as e#plaining all the terms of the agreement %et$een the parties $hen there appears to %e
no am%iguity in the language of said documents nor any failure to e#press the true intent
and agreement of the parties.E)(O
.s to the t%ird and final issue 1 .t the risk of %eing repetitious, $e stress that the contract
%et$een the parties is a loan. Ghat respondent %ank sought to collect as creditor $as the
loan it granted to petitioners. PetitionersQ recourse is to sue their supplier, if indeed the
materials $ere defective.
/HEREFORE, the petition is ,68I6,. The assailed ,ecision and -esolution of the
Court of .ppeals in C.-/.-. CI 8o. (B>:B are .FFI-M6, &$ !*!*. Costs against
petitioners.
'7 7-,6-6,.
Pangani%an, Chairman!, Corona, Carpio-Morales, and /arcia, 44., concur.
E/.-. 8o. )@*+==. 4uly <:, =::(O
1.8,1 K C7MP.8H P;I1.! I8C., P6-CII.1 /. 11.B.8 and M.8&61 P.
1&C68T6, petitioners, vs. M6T-7P71IT.8 B.8J K T-&'T C7MP.8H,
respondent.
, 6 C I ' I 7 8
H8.-6'-'.8TI./7, J.5
.t issue in this petition for revie$ on certiorari is $hether or not, in a trust receipt
transaction, an entruster $hich had taken actual and "uridical possession of the goods
covered %y the trust receipt may su%se9uently avail of the right to demand from the
entrustee the deficiency of the amount covered %y the trust receipt.
.s correctly appreciated %y the Court of .ppeals, the undisputed facts of this case are as
follo$s5
-espondent Metropolitan Bank and Trust Company Metro%ank! filed a complaint for
sum of money against 1andl and Company Phil.! Inc. 1andl! and its directors, Percival
/. 1la%an and Manuel P. 1ucente %efore the -egional Trial Court of Ce%u City, Branch
)*, docketed as Civil Case 8o. C6B-(B*@.
-espondent alleged that petitioner corporation is engaged in the %usiness of selling
imported $elding rods and alloys. 7n 4une )>, )*B<, it opened Commercial 1etter of
Credit 8o. (**B $ith respondent %ank, in the amount of &'D)*,+:+.>>, $hich $as
e9uivalent to P=)B,><<.*= in Philippine currency at the time the transaction $as
consummated. The letter of credit $as opened to purchase various $elding rods and
electrodes from Perma .lloys, Inc., 8e$ Hork, &.'..., as evidenced %y a Pro-Forma
Invoice dated March ):, )*B<. Petitioner corporation put up a marginal deposit of
P@:,()(.:: from the proceeds of a separate clean loan.
.s an additional security, and as a condition for the approval of petitioner corporationQs
application for the opening of the commercial letter of credit, respondent %ank re9uired
petitioners Percival /. 1la%an and Manuel P. 1ucente to e#ecute a Continuing 'uretyship
.greement to the e#tent of P(::,:::.::, e#cluding interest, in favor of respondent %ank.
Petitioner 1ucente also e#ecuted a ,eed of .ssignment in the amount of P<@,:::.:: in
favor of respondent %ank to cover the amount of petitioner corporationQs o%ligation to the
%ank. &pon compliance $ith these re9uisites, respondent %ank opened an irrevoca%le
letter of credit for the petitioner corporation.
To secure the inde%tedness of petitioner corporation, respondent %ank re9uired the
e#ecution of a Trust -eceipt in an amount e9uivalent to the letter of credit, on the
condition that petitioner corporation $ould hold the goods in trust for respondent %ank,
$ith the right to sell the goods and the o%ligation to turn over to respondent %ank the
proceeds of the sale, if any. If the goods remained unsold, petitioner corporation had the
further o%ligation to return them to respondent %ank on or %efore 8ovem%er =<, )*B<.
&pon arrival of the goods in the Philippines, petitioner corporation took possession and
custody thereof.
7n 8ovem%er =<, )*B<, the maturity date of the trust receipt, petitioner corporation
defaulted in the payment of its o%ligation to respondent %ank and failed to turn over the
goods to the latter. 7n 4uly =(, )*B(, respondent %ank demanded that petitioners, as
entrustees, turn over the goods su%"ect of the trust receipt. 7n 'eptem%er =(, )*B(,
petitioners turned over the su%"ect goods to the respondent %ank.
7n 4uly <), )*B@, in the presence of representatives of the petitioners and respondent
%ank, the goods $ere sold at pu%lic auction. The goods $ere sold for P<:,:::.:: to
respondent %ank as the highest %idder.
The proceeds of the auction sale $ere insufficient to completely satisfy petitionersQ
outstanding o%ligation to respondent %ank, not$ithstanding the application of the time
deposit account of petitioner 1ucente. .ccordingly, respondent %ank demanded that
petitioners pay the remaining %alance of their o%ligation. .fter petitioners failed to do so,
respondent %ank instituted the instant case to collect the said deficiency.
7n March <), )**>, after trial on the merits, the trial court rendered a decision, the
dispositive portion of $hich reads5
G;6-6F7-6, foregoing premises considered, 4udgment is here%y rendered in favor of
the plaintiff and against the defendant %y )! ordering the defendant to pay "ointly and
severally to the plaintiff the sum of P=*=,)>=.=< representing the defendantQs o%ligation,
as of .pril )>, )*B+? =! to pay the interest at the rate of )*M per annum to %e reckoned
from .pril )B, )*B+ until EtheO o%ligation is fully paid? <! to pay service charge at the
rate of =M per annum starting .pril )B, )*B+? (! to pay the sum e9uivalent to ):M per
annum of the total amount due collecti%le %y $ay of .ttorneyQs Fees? @! to pay
1itigation 6#penses of P<,:::.:: and to pay the cost of the suit? and +! to pay penalty
charge of )=M per annum.
'7 7-,6-6,.
<@
E)O
Petitioners appealed to the Court of .ppeals, raising the issues of5 )! $hether or not
respondent %ank has the right to recover any deficiency after it has retained possession of
and su%se9uently effected a pu%lic auction sale of the goods covered %y the trust receipt?
=! $hether or not respondent %ank is entitled to the amount of P<,:::.:: as and for
litigation e#penses and costs of the suit? and <! $hether or not respondent %ank is
entitled to the a$ard of attorneyQs fees.
7n Fe%ruary )<, =::<, the Court of .ppeals rendered a decision affirming in toto the
decision of the trial court.
<+
E=O
;ence, this petition for revie$ on the follo$ing assignment of errors5
I.
T;6 ;787-.B16 C7&-T 7F .PP6.1' /-7''1H 6--6, I8 .FFI-MI8/ T;6
T-I.1 C7&-TQ' -&1I8/ T;.T -6'P78,68T ;., T;6 -I/;T T7 C1.IM
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T7 -6'P78,68T.
II.
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P6TITI786-'.
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E<O
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The instant petition is partly meritorious.
The resolution of the first assigned error hinges on the proper interpretation of 'ection >
of Presidential ,ecree 8o. ))@, or the Trust -eceipts 1a$, $hich reads5
'ec. >. 'i(%ts of t%e entruster. - The entruster shall %e entitled to the proceeds from the
sale of the goods, documents or instruments released under a trust receipt to the entrustee
to the e#tent of the amount o$ing to the entruster or as appears in the trust receipt, or to
the return of the goods, documents or instruments in case of non-sale, and to the
enforcement of all other rights conferred on him in the trust receipt provided such are not
contrary to the provisions of this ,ecree.
The entruster may cancel the trust and take possession of the goods, documents or
instruments su%"ect of the trust or of the proceeds reali0ed therefrom at any time upon
default or failure of the entrustee to comply $ith any of the terms and conditions of the
trust receipt or any other agreement %et$een the entruster and the entrustee, and the
entruster in possession of the goods, documents or instruments may, on or after default,
give notice to the entrustee of the intention to sell, and may, not less than five days after
serving or sending of such notice, sell the goods, documents or instruments at pu%lic or
private sale, and the entruster may, at a pu%lic sale, %ecome a purchaser. The proceeds of
any such sale, $hether pu%lic or private, shall %e applied a! to the payment of the
e#penses thereof? %! to the payment of the e#penses of re-taking, keeping and storing the
goods, documents or instruments? c! to the satisfaction of the entrusteeQs inde%tedness to
the entruster. The entrustee shall receive any surplus %ut shall %e lia%le to the entruster
for any deficiency. 8otice of sale shall %e deemed sufficiently given if in $riting, and
either personally served on the entrustee or sent %y post-paid ordinary mail to the
entrusteeAs last kno$n %usiness address.
There is no 9uestion that petitioners failed to pay their outstanding o%ligation to
respondent %ank. They contend, ho$ever, that $hen the entrustee fails to settle his
principal loan, the entruster may choose %et$een t$o separate and alternative remedies5
)! the return of the goods covered %y the trust receipt, in $hich case, the entruster no$
ac9uires the o$nership of the goods $hich the entrustee failed to sell? or =! cancel the
trust and take possession of the goods, for the purpose of selling the same at a private sale
or at pu%lic auction. Petitioners assert that, under this second remedy, the entruster does
not ac9uire o$nership of the goods, in $hich case he is entitled to the deficiency.
Petitioners argue that these t$o remedies are so distinct that the availment of one
necessarily %ars the availment of the other. Thus, $hen respondent %ank availed of the
remedy of demanding the return of the goods, the actual return of all the unsold goods
completely e#tinguished petitionersQ lia%ility.
<B
E(O
PetitionersQ argument is %ereft of merit.
. trust receipt is ine#trica%ly linked $ith the primary agreement %et$een the parties.
Time and again, $e have emphasi0ed that a trust receipt agreement is merely a collateral
agreement, the purpose of $hich is to serve as security for a loan. Thus, in A+ad v. Court
of Appeals,
<*
E@O $e ruled5
. letter of credit-trust receipt arrangement is endo$ed $ith its o$n distinctive features
and characteristics. &nder that set-up, a %ank e#tends a loan covered %y the letter of
credit, $ith the trust receipt as security for the loan. In other $ords, the transaction
<B
<*
involves a loan feature represented %y the letter of credit, and a security feature $hich is
in the covering trust receipt. # # #.
. trust receipt, therefore, is a security agreement, pursuant to $hich a %ank ac9uires a
Psecurity interestR in the goods. It secures an inde%tedness and there can %e no such thing
as security interest that secures no o%ligation.
(:
E+O
The Trust -eceipts 1a$ $as enacted to safeguard commercial transactions and to offer
an additional layer of security to the lending %ank. Trust receipts are indispensa%le
contracts in international and domestic %usiness transactions. The prevalent use of trust
receipts, the danger of their misuse and2or misappropriation of the goods or proceeds
reali0ed from the sale of goods, documents or instruments held in trust for entruster
%anks, and the need for regulation of trust receipt transactions to safeguard the rights and
enforce the o%ligations of the parties involved are the main thrusts of the Trust -eceipts
1a$.
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E>O
The second paragraph of 'ection > provides a statutory remedy availa%le to an entruster
in the event of default or failure of the entrustee to comply $ith any of the terms and
conditions of the trust receipt or any other agreement %et$een the entruster and the
entrustee. More specifically, the entruster Pmay cancel the trust and take possession of
the goods, documents or instruments su%"ect of the trust or of the proceeds reali0ed
therefrom at any timeR. The la$ further provides that Pthe entruster in possession of the
goods, documents or instruments may, on or after default, give notice to the entrustee of
the intention to sell, and may, not less than five days after serving or sending of such
notice, sell the goods, documents or instruments at pu%lic or private sale, and the
entruster may, at a pu%lic sale, %ecome a purchaser. The proceeds of any such sale,
$hether pu%lic or private, shall %e applied a! to the payment of the e#penses thereof? %!
to the payment of the e#penses of re-taking, keeping and storing the goods, documents or
instruments? c! to the satisfaction of the entrusteeAs inde%tedness to the entruster. The
entrustee shall receive any surplus %ut shall %e lia%le to the entruster for any deficiency.R
The trust receipt %et$een respondent %ank and petitioner corporation contains the
follo$ing relevant clauses5
The B.8J268T-&'T6- may, at any time, and only at its option, cancel this trust and
take possession of the goods2documents2instruments su%"ect hereof or of the proceeds
reali0ed therefrom $herever they may then %e found, upon default or failure of the
68T-&'T66 to comply $ith any of the terms and conditions of this Trust -eceipt or of
any other agreement %et$een the B.8J268T-&'T6- and the 68T-&'T66? and the
B.8J268T-&'T6- having taken repossession of the goods2documents2instruments
o%"ect hereof may, on or after default, give at least five @! daysQ previous notice to the
68T-&'T66 of its intention to sell the goods2documents2instruments at pu%lic or private
sale, at $hich pu%lic sale, it may %ecome a purchaser? Provided, that the proceeds of any
such sale, $hether pu%lic or private, shall %e applied5 a! to the payment of the e#penses
thereof? %! to the payment of the e#penses of retaking, keeping and storing the
goods2documents2instruments? c! to the satisfaction of all of the 68T-&'T66Qs
inde%tedness to the B.8J268T-&'T6-? and Provided, further, that the 68T-&'T66
shall receive any surplus thereof %ut shall, in any case, %e lia%le to the
B.8J268T-&'T6- for any deficiency. # # #
8o act or omission on the part of the B.8J268T-&'T6- shall %e deemed and
considered a $aiver of any of its rights hereunder or under any related letters of credit,
(:
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drafts or other documents unless such $aiver is e#pressly made in $riting over the
signature of the B.8J268T-&'T6-.
(=
EBO
The afore-cited stipulations in the trust receipt are a near-e#act reproduction of the
second paragraph of 'ection > of the Trust -eceipts 1a$. The right of repossession and
su%se9uent sale at pu%lic auction $hich $ere availed of %y respondent %ank $ere rights
availa%le upon default, and $hich $ere conferred %y statute and reinforced %y the
contract %et$een the parties.
The initial repossession %y the %ank of the goods su%"ect of the trust receipt did not result
in the full satisfaction of the petitionersQ loan o%ligation. Petitioners are apparently
la%oring under the mistaken impression that the full turn-over of the goods suffices to
divest them of their o%ligation to repay the principal amount of their loan o%ligation.
This is definitely not the case. In P%ilippine $ational Bank v. 2on. -re(orio -. Pineda
and !a"a+as Cement Compan", &nc.,
(<
E*O $e had occasion to rule5
P8BQs possession of the su%"ect machinery and e9uipment %eing precisely as a form of
security for the advances given to TCC under the 1etter of Credit, said possession %y
itself cannot %e considered payment of the loan secured there%y. Payment $ould legally
result only after P8B had foreclosed on said securities, sold the same and applied the
proceeds thereof to TCCAs loan o%ligation. Mere possession does not amount to
foreclosure for foreclosure denotes the procedure adopted %y the mortgagee to terminate
the rights of the mortgagor on the property and includes the sale itself.
8either can said repossession amount to dacion en pa(o. ,ation in payment takes place
$hen property is alienated to the creditor in satisfaction of a de%t in money and the same
is governed %y sales. ,ation in payment is the delivery and transmission of o$nership of
a thing %y the de%tor to the creditor as an accepted e9uivalent of the performance of the
o%ligation. .s aforesaid, the repossession of the machinery and e9uipment in 9uestion
$as merely to secure the payment of TCCAs loan o%ligation and not for the purpose of
transferring o$nership thereof to P8B in satisfaction of said loan. Thus, no dacion en
pa(o $as ever accomplished. Citations omitted, underscoring supplied!
((
E):O
Indeed, in the )*B> case of /intola v. &nsular Bank of Asia and America,
(@
E))O $e struck
do$n the position of the petitioner-spouses that their o%ligation to the entruster %ank had
%een e#tinguished $hen they relin9uished possession of the goods in 9uestion. Thus5
. trust receiptV is a security agreement, pursuant to $hich a %ank ac9uires a Psecurity
interestR in the goods. It secures an inde%tedness and there can %e no such thing as
security interest that secures no o%ligation. .s defined in our la$s5
h! 'ecurity Interest means a property interest in goods, documents or instruments to
secure performance of some o%ligations of the entrustee or of some third persons to the
entruster and includes title, $hether or not e#pressed to %e a%solute, $henever such title
is in su%stance taken or retained for security only.
# # # # # # # # #
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Contrary to the allegations of the II8T71.', IB.. did not %ecome the real o$ner of
the goods. It $as merely the holder of a security title for the advances it had made to the
II8T71.'. The goods the II8T71.' had purchased through IB.. financing remain
their o$n property and they hold it at their o$n risk. The trust receipt arrangement did
not convert the IB.. into an investor? the latter remained a lender and creditor.
P# # # for the %ank has previously e#tended a loan $hich the 12C represents to the
importer, and %y that loan, the importer should %e the real o$ner of the goods. If under
the trust receipt, the %ank is made to appear as the o$ner, it $as %ut an artificial
e#pedient, more of a legal fiction than fact, for if it $ere so, it could dispose of the goods
in any manner it $ants, $hich it cannot do, "ust to give consistency $ith the purpose of
the trust receipt of giving a stronger security for the loan o%tained %y the importer. To
consider the %ank as the true o$ner from the inception of the transaction $ould %e to
disregard the loan feature thereof. # # #R
'ince the IB.. is not the factual o$ner of the goods, the II8T71.' cannot "ustifia%ly
claim that %ecause they have surrendered the goods to IB.. and su%se9uently deposited
them in the custody of the court, they are a%solutely relieved of their o%ligation to pay
their loan %ecause of their ina%ility to dispose of the goods. The fact that they $ere
una%le to sell the seashells in 9uestion does not affect IB..Qs right to recover the
advances it had made under the 1etter of Credit. Citations omitted.!
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E)=O
-espondent %ankQs repossession of the properties and su%se9uent sale of the goods $ere
completely in accordance $ith its statutory and contractual rights upon default of
petitioner corporation.
The second paragraph of 'ection > e#pressly provides that the entrustee shall %e lia%le to
the entruster for any deficiency after the proceeds of the sale have %een applied to the
payment of the e#penses of the sale, the payment of the e#penses of re-taking, keeping
and storing the goods, documents or instruments, and the satisfaction of the entrusteeQs
inde%tedness to the entruster.
In the case at %ar, the proceeds of the auction sale $ere insufficient to satisfy entirely
petitioner corporationQs inde%tedness to the respondent %ank. -espondent %ank $as thus
$ell $ithin its rights to institute the instant case to collect the deficiency.
Ge find, ho$ever, that there has %een an error in the computation of the total amount of
petitionersQ inde%tedness to respondent %ank.
.lthough respondent %ank contends that the error of computation is a 9uestion of fact
$hich is %eyond the po$er of this Court to revie$,
(>
E)<O the total amount of petitionersQ
inde%tedness in this case is not a 9uestion of fact. -ather, it is a 9uestion of la$, i.e., the
application of legal principles for the computation of the amount o$ed to respondent
%ank, and is thus a matter properly %rought for our determination.
The first issue involves the amount of inde%tedness prior to the imposition of interest and
penalty charges. The initial amount of the trust receipt of P=)B,><<.*=, $as reduced to
P)*=,=+@.*= as of 4une )(, )*B(, as per respondentQs 'tatement of Past ,ue Trust
-eceipt dated ,ecem%er ), )**<.
(B
E)(O This amount presuma%ly includes the application of
P<@,:::.::, the amount of petitioner 1ucenteQs ,eed of .ssignment, $hich amount $as
(+
(>
(B
applied %y respondent %ank to petitionersQ o%ligation. 8o sho$ing $as made, ho$ever,
that the P<:,:::.:: proceeds of the auction sale on 4uly <), )*B@ $as ever applied to the
loan. 8either $as the amount of P@:,()(.::, representing the marginal deposit made %y
petitioner corporation, deducted from the loan. .lthough respondent %ank contends that
the marginal deposit should not %e deducted from the principal o%ligation, this is
completely contrary to prevailing "urisprudence allo$ing the deduction of the marginal
deposit, thus5
The marginal deposit re9uirement is a Central Bank measure to cut off e#cess currency
li9uidity $hich $ould create inflationary pressure. It is a collateral security given %y the
de%tor, and is supposed to %e returned to him upon his compliance $ith his secured
o%ligation. Conse9uently, the %ank pays no interest on the marginal deposit, unlike an
ordinary %ank deposit $hich earns interest in the %ank. .s a matter of fact, the marginal
deposit re9uirement for letters of credit has %een discontinued, e#cept in those cases
$here the applicant for a letter of credit is not kno$n to the %ank or does not maintain a
good credit standing therein.
It is only fair then that the importerQs marginal deposit if one $as made, as in this case!,
should %e set off against his de%t, for $hile the importer earns no interest on his marginal
deposit, the %ank, apart from %eing a%le to use said deposit for its o$n purposes, also
earns interest on the money it loaned to the importer. It $ould %e onerous to compute
interest and other charges on the face value of the letter of credit $hich the %ank issued,
$ithout first crediting or setting off the marginal deposit $hich the importer paid to the
%ank. Compensation is proper and should take place %y operation of la$ %ecause the
re9uisites in .rticle )=>* of the Civil Code are present and should e#tinguish %oth de%ts
to the concurrent amount .rt. )=*:, Civil Code!. .lthough .%ad is only a surety, he
may set up compensation as regards $hat the creditor o$es the principal de%tor, T7MC7
.rt. )=B:, Civil Code!.
(*
E)@O
The net amount of the o%ligation, represented %y respondent %ank to %e P=*=,)>=.=< as
of .pril )>, )*B+, $ould thus %e P=)),>@B.=<.
To this principal amount must %e imposed the follo$ing charges5 )! )*M interest per
annum, in keeping $ith the terms of the trust receipt?
@:
E)+O and =! )=M penalty per annum,
collected %ased on the outstanding principal o%ligation plus unpaid interest, again in
keeping $ith the $ording of the trust receipt.
@)
E)>O It appearing that petitioners have paid
the interest and penalty charges until .pril )>, )*B+, the reckoning date for the
computation of the foregoing charges must %e .pril )B, )*B+.
. perusal of the records reveals that the trial court and the Court of .ppeals erred in
imposing service charges upon the petitioners. 8o such stipulation is found in the trust
receipt. Moreover, the trial court and the Court of .ppeals erred in computing attorneyQs
fees e9uivalent to ):M per annum, rather than ):M of the total amount due. There is no
%asis for compounding the interest annually, as the trial court and Court of .ppeals have
done. This amount $ould %e unconsciona%le.
Finally, 1ucente and 1la%anQs contention that they are not solidarily lia%le $ith petitioner
corporation is untena%le. .s co-signatories of the Continuing 'uretyship .greement,
they %ound themselves, inter alia, to pay the principal sum in the amount of not more
than P(::,:::.::? interest due on the principal o%ligation? attorneyQs fees? and e#penses
(*
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that may %e incurred in collecting the credit. The amount o$ed to respondent %ank is the
amount of the principal, interest, attorneyQs fees, and e#penses in collecting the principal
amount. The Continuing 'uretyship .greement e#pressly states the nature of the lia%ility
of 1ucente and 1la%an5
The lia%ility of the '&-6TH shall %e solidary, direct and immediate and not contingent
upon the %ankQs pursuit of $hatever remedies the B.8J have EsicO against the Borro$er
or the securities or liens the B.8J may possess and the '&-6TH $ill at any time,
$hether due or not due, pay to the B.8J $ith or $ithour demand upon the Borro$er,
any of the instruments of inde%tedness or other o%ligation here%y guaranteed %y the
'&-6TH.
@=
E)BO
'olidary lia%ility is one of the primary characteristics of a surety contract,
@<
E)*O and the
Continuing 'uretyship .greement e#pressly stipulates the solidary nature of 1ucente and
1la%anQs lia%ility. .ll three petitioners thus share the solidary o%ligation in favor of
respondent %ank, $hich is given the right, under the Civil Code, to proceed against any
one of the solidary de%tors or some or all of them simultaneously.
@(
E=:O
/HEREFORE, premises considered, the instant petition is P.-TI.11H /-.8T6,.
The decision of the Court of .ppeals in C.-/.-. CI 8o. @B)*< dated Fe%ruary )<, =::<
is .FFI-M6, $ith M7,IFIC.TI78'. .ccordingly, petitioners are ordered to pay
respondent %ank the follo$ing5 )! P=)),>@B.=< representing petitionersQ net o%ligation
as of .pril )>, )*B+? =! interest at the rate of )*M per annum and penalty at the rate of
)=M per annum reckoned from .pril )B, )*B+? <! attorneyQs fees e9uivalent to ):M of
the total amount due and collecti%le? and (! litigation e#penses in the amount of
P<,:::.::. The service charge at the rate of =M per annum %eginning .pril )B, )*B+ is
deleted. Costs against petitioners.
'7 7-,6-6,.
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@(
G.R. No. )32)1 M36 29, 19*)
S!OSES TIRSO I. &INTO"A 304 "ORETO D. &INTO"A, .e+en.ants;
appellants,
's.
INS"AR BANK OF ASIA AND AMERICA, plainti++;appellee.

ME"ENCIO#%ERRERA, J.:
(,is case 2as appeale. to t,e 9nterme.iate Appellate Court 2,ic,, ,o2e'er,
certi+ie. t,e same to t,is Court, t,e issue in'ol'e. /eing purel* legal.
(,e +acts are not .ispute..
On August &0, 19#" t,e spouses (irso an. Loreta Lintola :t,e L9N(OLA1, +or
s,ort<, .oing /usiness un.er t,e name an. st*le 6Da8 Pin 9nternational,6
engage. in t,e manu+acture o+ ra2 sea s,ells into +inis,e. pro.ucts, applie. +or
an. 2ere grante. a .omestic letter o+ cre.it /* t,e 9nsular )an- o+ Asia an.
America :9)AA<, Ce/u Cit*. 1 in t,e amount o+ %40,000.00. (,e Letter o+ Cre.it
aut,ori4e. t,e /an- to negotiate +or t,eir account .ra+ts .ra2n /* t,eir supplier,
one 1talin (an, on Da8 Pin 9nternational +or t,e purc,ase o+ pu-a an. oli'e
seas,ells. 9n consi.eration t,ereo+, t,e L9N(OLA1, Iointl* an. se'erall*, agree.
to pa* t,e /an- 6at maturit*, in %,ilippine currenc*, t,e e7ui'alent, o+ t,e
a+orementione. amount or suc, portion t,ereo+ as ma* /e .ra2n or pai., upon
t,e +ait, o+ t,e sai. cre.it toget,er 2it, t,e usual c,arges.6
On t,e same .a*, August &0, 19#", ,a'ing recei'e. +rom 1talin (an t,e pu-a
an. oli'e s,ells 2ort, %40,000.00, t,e L9N(OLA1 e8ecute. a (rust =eceipt
agreement 2it, 9)AA, Ce/u Cit*. 0n.er t,at Agreement, t,e L9N(OLA1 agree.
to ,ol. t,e goo.s in trust +or 9)AA as t,e 6latter5s propert* 2it, li/ert* to sell t,e
same +or its account, 6 an. 6in case o+ sale6 to turn o'er t,e procee.s as soon as
recei'e. to :9)AA< t,e .ue .ate in.icate. in t,e .ocument 2as Octo/er 19, 19#".
Da'ing .e+aulte. on t,eir o/ligation, 9)AA .eman.e. pa*ment +rom t,e
L9N(OLA1 in a letter .ate. 3anuar* 1, 19#6. (,e L9N(OLA1, 2,o 2ere una/le
to .ispose o+ t,e s,ells, respon.e. /* o++ering to return t,e goo.s. 9)AA re+use.
to accept t,e merc,an.ise, an. .ue to t,e continue. re+usal o+ t,e L9N(OLA1 to
ma-e goo. t,eir un.erta-ing, 9)AA c,arge. t,em 2it, Jsta+a +or ,a'ing
misappropriate., misapplie. an. con'erte. +or t,eir o2n personal use an.
/ene+it t,e a+oresai. goo.s. During t,e trial o+ t,e criminal case t,e L9N(OLA1
turne. o'er t,e seas,ells to t,e custo.* o+ t,e (rial Court.
On April 1&, 19$&, t,e t,en Court o+ >irst 9nstance o+ Ce/u, )ranc, L99, ac7uitte.
t,e L9N(OLA1 o+ t,e crime c,arge., a+ter +in.ing t,at t,e element o+
misappropriation or con'ersion 2as ine8istent. Conclu.e. t,e CourtE
>inall*, it s,oul. /e mentione. t,at un.er t,e trust receipt, in t,e e'ent o+ .e+ault
an./or non;+ul+illment on t,e part o+ t,e accuse. o+ t,eir un.erta-ing, t,e /an- is
entitle. to ta-e possession o+ t,e goo.s or to reco'er its e7ui'alent 'alue
toget,er 2it, t,e usual c,arges. 9n eit,er case, t,e reme.* o+ t,e )an- is ci'il
an. not criminal in nature. ...
2
1,ortl* t,erea+ter, 9)AA commence. t,e present ci'il action to reco'er t,e 'alue
o+ t,e goo.s /e+ore t,e =egional (rial Court o+ Ce/u, )ranc, OL9.
Dol.ing t,at t,e complaint 2as /arre. /* t,e Iu.gment o+ ac7uittal in t,e criminal
case, sai. Court .ismisse. t,e complaint. Do2e'er, on 9)AA5s motion, t,e Court
grante. reconsi.eration an.E
1. Or.er:e.<.e+en.ants Iointl* an. se'erall* to pa* t,e plainti++ t,e sum o+
1e'ent* (2o (,ousan. Nine Dun.re. Jig,t* (2o an. &#/100 :%#&,9$&.&#<,
%,ilippine Currenc*, plus interest o+ 14? per annum an. ser'ice c,arge o+ one
:1?< per cent per annum compute. +rom Iu.icial .eman. an. until t,e o/ligation
is +ull* pai.A
&. Or.ere. .e+en.ants Iointl* an. se'erall* to pa* attorne*5s +ees to t,e plainti++
in t,e sum o+ >our (,ousan. :%4,000.00< pesos, %,ilippine Currenc*, plus costs
o+ t,e suit.
3
(,e L9N(OLA1 rest t,eir present appeal on t,e principal allegation t,at t,eir
ac7uittal in t,e Jsta+a case /ars 9)AA5s +iling o+ t,e ci'il action /ecause 9)AA ,a.
not reser'e. in t,e criminal case its rig,t to en+orce separatel* t,eir ci'il lia/ilit*.
(,e* maintain t,at /* inter'ening acti'el* in t,e prosecution o+ t,e criminal case
t,roug, a pri'ate prosecutor, 9)AA ,a. c,osen to +ile t,e ci'il action implie.l*
2it, t,e criminal action, pursuant to 1ection 1, =ule 111 o+ t,e 19$" =ules on
Criminal %roce.ure, rea.ingE
1ection 1. Institution of criminal and ci!il action. , @,en a criminal action is
institute., t,e ci'il action +or t,e reco'er* o+ ci'il lia/ilit* arising +rom t,e o++ense
c,arge. is implie.l* institute. 2it, t,e criminal action, unless t,e o++en.e. part*
e8pressl* 2ai'es t,e ci'il action or reser'es ,is rig,t to institute it separatel*. ...
an. t,at since t,e Iu.gment in t,e criminal case ,a. ma.e a .eclaration t,at t,e
+acts +rom 2,ic, t,e ci'il action mig,t arise .i. not e8ist, t,e +iling o+ t,e ci'il
action arising +rom t,e o++ense is no2 /arre., as pro'i.e. /* 1ection ;/ o+ =ule
111 o+ t,e same =ules pro'i.ingE
:/< J8tinction o+ t,e penal action .oes not carr* 2it, it e8tinction o+ t,e ci'il,
unless t,e e8tinction procee.s +rom a .eclaration in a +inal Iu.gment t,at t,e +act
+rom 2,ic, t,e ci'il mig,t arise .i. not e8ist. 9n ot,er cases, t,e person entitle. to
t,e ci'il action ma* institute it in t,e Iuris.iction in t,e manner pro'i.e. /* la2
against t,e person 2,o ma* /e lia/le +or restitution o+ t,e t,ing an. reparation or
in.emnit* +or t,e .amage su++ere..
>urt,er, t,e L9N(OLA1 ta-e t,e position t,at t,eir o/ligation to 9)AA ,as /een
e8tinguis,e. inasmuc, as, t,roug, no +ault o+ t,eir o2n, t,e* 2ere una/le to
.ispose o+ t,e seas,ells, an. t,at t,e* ,a'e relinguis,e. possession t,ereo+ to
t,e 9)AA, as o2ner o+ t,e goo.s, /* .epositing t,em 2it, t,e Court.
(,e +oregoing su/mission o'erloo-s t,e nature an. mercantile usage o+ t,e
transaction in'ol'e.. A letter o+ cre.it;trust receipt arrangement is en.o2e. 2it,
its o2n .istincti'e +eatures an. c,aracteristics. 0n.er t,at set;up, a /an- e8ten.s
a loan co'ere. /* t,e Letter o+ Cre.it, 2it, t,e trust receipt as a securit* +or t,e
loan. 9n ot,er 2or.s, t,e transaction in'ol'es a loan +eature represente. /* t,e
letter o+ cre.it, an. a securit* +eature 2,ic, is in t,e co'ering trust receipt.
(,us, 1ection 4 o+ %.D. No. 11" .e+ines a trust receipt transaction asE
... an* transaction /* an. /et2een a person re+erre. to in t,is Decree as t,e
entruster, an. anot,er person re+erre. to in t,is Decree as t,e entrustee,
2,ere/* t,e entruster, 2,o o2ns or ,ol.s a/solute title or securit* interests o'er
certain speci+ie. goo.s, .ocuments or instruments, releases t,e same to t,e
possession o+ t,e entrustee upon t,e latter5s e8ecution an. .eli'er* to t,e
entruster o+ a signe. .ocument calle. a 6trust receipt6 2,erein t,e entrustee
/in.s ,imsel+ to ,ol. t,e .esignate. goo.s, .ocuments or instruments in trust +or
t,e entruster an. to sell or ot,er2ise .ispose o+ t,e goo.s, .ocuments or
instrument t,ereo+ to t,e e8tent o+ t,e amount o2ing to t,e entruster or as
appears in t,e trust receipt or t,e goo.s, .ocuments or instruments t,emsel'es i+
t,e* are unsol. or not ot,er2ise .ispose. o+, in accor.ance 2it, t,e terms an.
con.itions speci+ie. in t,e trust receipt, or +or ot,er purposes su/stantiall*
e7ui'alent to an* one o+ t,e +ollo2ingE
1. 9n t,e case o+ goo.s or .ocuments, :a< to sell t,e goo.s or procure t,eir
sale, ...
A trust receipt, t,ere+ore, is a securit* agreement, pursuant to 2,ic, a /an-
ac7uires a 6securit* interest6 in t,e goo.s. 69t secures an in.e/te.ness an. t,ere
can /e no suc, t,ing as securit* interest t,at secures no o/ligation.6
'
As .e+ine.
in our la2sE
:,< 61ecurit* 9nterest6means a propert* interest in goo.s, .ocuments or
instruments to secure per+ormance o+ some o/ligations o+ t,e entrustee or o+
some t,ir. persons to t,e entruster an. inclu.es title, 2,et,er or not e8presse.
to /e a/solute, 2,ene'er suc, title is in su/stance ta-en or retaine. +or securit*
onl*.
5

As eluci.ate. in -amo !s. (eople
(
6a trust receipt is consi.ere. as a securit*
transaction inten.e. to ai. in +inancing importers an. retail .ealers 2,o .o not
,a'e su++icient +un.s or resources to +inance t,e importation or purc,ase o+
merc,an.ise, an. 2,o ma* not /e a/le to ac7uire cre.it e8cept t,roug,
utili4ation, as collateral o+ t,e merc,an.ise importe. or purc,ase..6
Contrar* to t,e allegation o+ t,e L9N(OLA1, 9)AA .i. not /ecome t,e real o2ner
o+ t,e goo.s. 9t 2as merel* t,e ,ol.er o+ a securit* title +or t,e a.'ances it ,a.
ma.e to t,e L9N(OLA1 (,e goo.s t,e L9N(OLA1 ,a. purc,ase. t,roug, 9)AA
+inancing remain t,eir o2n propert* an. t,e* ,ol. it at t,eir o2n ris-. (,e trust
receipt arrangement .i. not con'ert t,e 9)AA into an in'estorA t,e latter remaine.
a len.er an. cre.itor.
... +or t,e /an- ,as pre'iousl* e8ten.e. a loan 2,ic, t,e L/C represents to t,e
importer, an. /* t,at loan, t,e importer s,oul. /e t,e real o2ner o+ t,e goo.s. 9+
un.er t,e trust receipt, t,e /an- is ma.e to appear as t,e o2ner, it 2as /ut an
arti+icial e8pe.ient, more o+ a legal +iction t,an +act, +or i+ it 2ere so, it coul.
.ispose o+ t,e goo.s in an* manner it 2ants, 2,ic, it cannot .o, Iust to gi'e
consistenc* 2it, t,e purpose o+ t,e trust receipt o+ gi'ing a stronger securit* +or
t,e loan o/taine. /* t,e importer. (o consi.er t,e /an- as t,e true o2ner +rom
t,e inception o+ t,e transaction 2oul. /e to .isregar. t,e loan +eature t,ereo+. ...
)

1ince t,e 9)AA is not t,e +actual o2ner o+ t,e goo.s, t,e L9N(OLA1 cannot
Iusti+ia/l* claim t,at /ecause t,e* ,a'e surren.ere. t,e goo.s to 9)AA an.
su/se7uentl* .eposite. t,em in t,e custo.* o+ t,e court, t,e* are a/solutel*
relie'e. o+ t,eir o/ligation to pa* t,eir loan /ecause o+ t,eir ina/ilit* to .ispose o+
t,e goo.s. (,e +act t,at t,e* 2ere una/le to sell t,e seas,ells in 7uestion .oes
not a++ect 9)AA5s rig,t to reco'er t,e a.'ances it ,a. ma.e un.er t,e Letter o+
Cre.it. 9n so arguing, t,e L9N(OLA1 con'enientl* close t,eir e*es to t,eir
application +or a Letter o+ Cre.it 2,erein t,e* e8pressl* o/ligate. t,emsel'es in
t,ese termsE
9N CON19DJ=A(9ON (DJ=JO>, 9/2e promise an. agree to pa* *ou at maturit*
in %,ilippine Currenc* t,e e7ui'alent o+ t,e a/o'e amount or suc, portion t,ereo+
as ma* /e .ra2n or pai. upon t,e +ait, o+ sai. cre.it toget,er 2it, t,e usual
c,arges. ... :J8,i/it 6A6<
(,e* +urt,er agree. t,at t,eir marginal .eposit o+ %$,000.00, later increase. to
%11,000.00
/e applie., 2it,out +urt,er procee.ings or +ormalities to pa* or re.uce our
o/ligation under t)is letter of credit or its corresponding &rust Receipt. :Jmp,asis
supplie.<
*

(,e +oregoing premises consi.ere., it +ollo2s t,at t,e ac7uittal o+ t,e L9N(OLA1
in t,e Jsta+a case is no /ar to t,e institution o+ a ci'il action +or collection. 9t is
inaccurate +or t,e L9N(OLA1 to claim t,at t,e Iu.gment in t,e esta+a case ,a.
.eclare. t,at t,e +acts +rom 2,ic, t,e ci'il action mig,t arise, .i. not e8ist, +or, it
2ill /e recalle. t,at t,e .ecision o+ ac7uittal e8pressl* .eclare. t,at 6t,e reme.*
o+ t,e )an- is ci'il an. not criminal in nature.6 (,is amounts to a reser'ation o+
t,e ci'il action in 9)AA5s +a'or, +or t,e Court 2oul. not ,a'e .2elt on a ci'il
lia/ilit* t,at it ,a. inten.e. to e8tinguis, /* t,e same .ecision.
9
(,e L9N(OLA1
are lia/le e$ contractu +or /reac, o+ t,e Letter o+ Cre.it F (rust =eceipt, 2,et,er
t,e* .i. or t,e* .i. not 6misappropriate, misappl* or con'ert6 t,e merc,an.ise as
c,arge. in t,e criminal case. 10 (,eir ci'il lia/ilit* .oes not arise e$ delicto, t,e
action +or t,e reco'er* o+ 2,ic, 2oul. ,a'e /een .eeme. institute. 2it, t,e
criminal;action :unless 2ai'e. or reser'e.< an. 2,ere ac7uittal /ase. on a
Iu.icial .eclaration t,at t,e criminal acts c,arge. .o not e8ist 2oul. ,a'e
e8tinguis,e. t,e ci'il action. 11 =at,er, t,e ci'il suit institute. /* 9)AA is /ase.
e$ contractu an. as suc, is .istinct an. in.epen.ent +rom an* criminal
procee.ings an. ma* procee. regar.less o+ t,e result o+ t,e latter. 0n.er t,e
situational circumstances o+ t,e parties, t,e* are go'erne. /* Article 1 o+ t,e
Ci'il Co.e, e8plicitl* pro'i.ingE
Art. 1. @,en t,e ci'il action is /ase. on an o/ligation not arising +rom t,e act or
omission complaine. o+ as a +elon*, suc, ci'il action ma* procee. in.epen.entl*
o+ t,e criminal procee.ings an. regar.less o+ t,e result o+ t,e latter.
@DJ=J>O=J, +in.ing no re'ersi/le error in t,e Iu.gment appeale. +rom, t,e
same is ,ere/* A>>9=MJD. No costs.
PI1IPI8.' B.8J, petitioner, vs. .1F-6,7 T. 78/ and 1678CI. 1IM,
respondents.
, 6 C I ' I 7 8
'.8,7I.1-/&TI6--6C, J.5
Petition for revie$ on certiorari
i
E)O of the -esolutions
ii
E=O dated 4anuary *, )**B and March
=@, )**B of the Court of .ppeals in C.-/.-. 'P 8o. (=::@, 3Pilipinas Bank vs. !%e
2onora+le Secretar" of Justice, t%e Cit" Prosecutor of )akati Cit", Alfredo !. *n( and
4eoncia 4im,3 reversing its ,ecision dated .ugust =*, )**>.
7n .pril )**), Bali$ag Mahogany Corporation BMC!, through its president,
respondent .lfredo T. 7ng, applied for a domestic commercial letter of credit $ith
petitioner Pilipinas Bank hereinafter referred to as the %ank! to finance the purchase of
a%out )::,::: %oard feet of 3.ir ,ried, ,ark -ed 1auan3 sa$n lum%er.
The %ank approved the application and issued 1etter of Credit 8o. *)2>=@-;7 in the
amount of P<,@::,:::.::. To secure payment of the amount, BMC, through respondent
7ng, e#ecuted t$o =! trust receipts
iii
E<O providing inter alia that it shall turn over the
proceeds of the goods to the %ank, if sold, or return the goods, if unsold, upon maturity on
4uly =B, )**) and .ugust (, )**).
7n due dates, BMC failed to comply $ith the trust receipt agreement. 7n 8ovem%er ==,
)**), it filed $ith the 'ecurities and 6#change Commission '6C! a Petition for
-eha%ilitation and for a ,eclaration in a 'tate of 'uspension of Payments under 'ection +
c! of P.,. 8o. *:=-.,
iv
E(O as amended, docketed as '6C Case 8o. ():*. .fter BMC
informed its creditors including the %ank! of the filing of the petition, a CreditorsA
Meeting $as held to5
a! inform all creditor %anks of the present status of BMC to avert any action $hich
$ould affect the companyAs operations, and %! reach an accord on a common course of
action to restore the company to sound financial footing.
7n 4anuary B, )**=, the '6C issued an order
v
E@O creating a Management Committee
$herein the %ank is represented. The Committee shall, among others, undertake the
management of BMC, take custody and control of all its e#isting assets and lia%ilities,
study, revie$ and evaluate its operation and2or the feasi%ility of its %eing restructured.
7n 7cto%er )<, )**=, BMC and a consortium of )( of its creditor %anks entered into a
Memorandum of .greement
vi
E+O M7.! rescheduling the payment of BMCQs e#isting
de%ts.
7n 8ovem%er =>, )**=, the '6C rendered a ,ecision
vii
E>O approving the -eha%ilitation
Plan of BMC as contained in the M7. and declaring it in a state of suspension of
payments.
;o$ever, BMC and respondent 7ng defaulted in the payment of their o%ligations under
the rescheduled payment scheme provided in the M7.. Thus, on .pril )**(, the %ank
filed $ith the Makati City ProsecutorQs 7ffice a complaint
viii
EBO charging respondents 7ng
and 1eoncia 1im as president and treasurer of BMC, respectively! $ith violation of the
Trust -eceipts 1a$ P, 8o. ))@!, docketed as I.'. 8o. *(-<<=(. The %ank alleged that
%oth respondents failed to pay their o%ligations under the trust receipts despite demand.
i#
E*O
7n 4uly >, )**(, <
rd
.ssistant Prosecutor 6dgardo 6. Bautista issued a -esolution
#
E):O
recommending the dismissal of the complaint. 7n 4uly )), )**(, the -esolution $as
approved %y Provincial Prosecutor of -i0al ;erminio T. &%ana, 'r.
#i
E))O The %ank filed a
motion for reconsideration %ut $as denied.
&pon appeal %y the %ank, the ,epartment of 4ustice ,74! rendered "udgment
#ii
E)=O
denying the same for lack of merit. Its motion for reconsideration $as like$ise denied.
#iii
E)<O
7n 4uly @, )**+, the %ank filed $ith this Court a petition for certiorari and mandamus
seeking to annul the resolution of the ,74. In a -esolution dated .ugust =), )**+, this
Court referred the petition to the Court of .ppeals for proper determination and
disposition.
#iv
E)(O
7n .ugust =*, )**>, the Court of .ppeals rendered "udgment, the dispositive portion of
$hich reads5
3G;6-6F7-6, in vie$ of all the foregoing, the assailed resolutions of the pu%lic
respondents are here%y '6T .'I,6 and in lieu thereof a ne$ one rendered directing the
pu%lic respondents to file the appropriate criminal charges for violation of P.,. 8o. ))@,
other$ise kno$n as The Trust -eceipts 1a$, against private respondents.R
#v
E)@O
;o$ever, upon respondentsQ motion for reconsideration, the Court of .ppeals reversed
itself, holding that the e#ecution of the M7. constitutes novation $hich 3places
petitioner Bank in estoppel to insist on the original trust relation and constitutes a %ar to
the filing of any criminal information for violation of the trust receipts la$.3
#vi
E)+O
The %ank filed a motion for reconsideration %ut $as denied.
#vii
E)>O ;ence this petition.
Petitioner %ank contends that the M7. did not novate, much less e#tinguish, the e#isting
o%ligations of BMC under the trust receipt agreement. The %ank, through the e#ecution
of the M7., merely assisted BMC to settle its o%ligations %y rescheduling the same.
;ence, $hen BMC defaulted in its payment, all its rights, including the right to charge
respondents for violation of the Trust -eceipts 1a$, $ere revived.
-espondents 7ng and 1im maintain that the M7., $hich has the effect of a compromise
agreement, novated BMCQs e#isting o%ligations under the trust receipt agreement. The
novation converted the partiesQ relationship into one of an ordinary creditor and de%tor.
Moreover, the e#ecution of the M7. precludes any criminal lia%ility on their part $hich
may arise in case they violate any provision thereof.
The only issue for our determination is $hether respondents can %e held lia%le for
violation of the Trust -eceipts 1a$.
'ection ( of P, 8o. ))@ The Trust -eceipts 1a$! defines a trust receipt as any
transaction %y and %et$een a person referred to as the entruster, and another person
referred to as the entrustee, $here%y the entruster $ho o$ns or holds a%solute title or
security interest over certain specified goods, documents or instruments, releases the
same to the possession of the entrustee upon the latterAs e#ecution and delivery to the
entruster of a signed document called a 3trust receipt3 $herein the entrustee %inds himself
to hold the designated goods, documents or instruments $ith the o%ligation to turn over
to the entruster the proceeds thereof to the e#tent of the amount o$ing to the entruster or
as appears in the trust receipt, or the goods, documents or instruments themselves if they
are unsold or not other$ise disposed of, in accordance $ith the terms and conditions
specified in the trust receipt.
#viii
E)BO
Failure of the entrustee to turn over the proceeds of the sale of the goods covered %y a
trust receipt to the entruster or to return the goods, if they $ere not disposed of, shall
constitute the crime of estafa under .rticle <)@, par. )%! of the -evised Penal Code.
#i#
E)*O
If the violation or offense is committed %y a corporation, the penalty shall %e imposed
upon the directors, officers, employees or other officials or persons therein responsi%le
for the offense, $ithout pre"udice to the civil lia%ilities arising from the criminal offense.
##
E=:O It is on this premise that petitioner %ank charged respondents $ith violation of the
Trust -eceipts 1a$.
Mere failure to deliver the proceeds of the sale or the goods, if not sold, constitutes
violation of P, 8o. ))@.
##i
E=)O ;o$ever, $hat is %eing punished %y the la$ is the
dishonesty and a%use of confidence in the handling of money or goods to the pre"udice of
another regardless of $hether the latter is the o$ner.

##ii
E==O
In this case, no dishonesty nor a%use of confidence can %e attri%uted to respondents.
-ecord sho$s that BMC failed to comply $ith its o%ligations upon maturity of the trust
receipts due to serious li9uidity pro%lems, prompting it to file a Petition for -eha%ilitation
and ,eclaration in a 'tate of 'uspension of Payments. It %ears emphasis that $hen
petitioner %ank made a demand upon BMC on Fe%ruary )), )**( to comply $ith its
o%ligations under the trust receipts, the latter $as already under the control of the
Management Committee created %y the '6C in its 7rder dated 4anuary B, )**=.
##iii
E=<O The
Management Committee took custody of all BMCQs assets and lia%ilities, including the
red lauan lum%er su%"ect of the trust receipts, and authori0ed their use in the ordinary
course of %usiness operations. Clearly, it $as the Management Committee $hich could
settle BMCQs o%ligations. Moreover, it has not escaped this CourtQs o%servation that
respondent 7ng paid P=),:::,:::.:: in compliance $ith the e9uity infusion re9uired %y
the M7.. The mala pro%i+ita nature of the offense not$ithstanding, respondentsQ intent
to misuse or misappropriate the goods or their proceeds has not %een esta%lished %y the
records.
##iv
E=(O
,id the M7. novate the trust agreement %et$een the partiesL
In 5uinto vs. People,
##v
E=@O this Court held that there are t$o $ays $hich could indicate the
presence of novation, there%y producing the effect of e#tinguishing an o%ligation %y
another $hich su%stitutes the same. The first is $hen novation has %een stated and
declared in une9uivocal terms. The second is $hen the old and the ne$ o%ligations are
incompati%le on every point. The test of incompati%ility is $hether or not the t$o
o%ligations can stand together. If they cannot, they are incompati%le and the latter
o%ligation novates the first. Corollarily, changes that %reed incompati%ility must %e
essential in nature and not merely accidental. The incompati%ility must take place in any
of the essential elements of the o%ligation, such as its o%"ect, cause or principal
conditions, other$ise, the change is merely modificatory in nature and insufficient to
e#tinguish the original o%ligation.
Contrary to petitionerAs contention, the M7. did not only reschedule BMCQs de%ts, %ut
more importantly, it provided principal conditions $hich are *'co.8&t*b)e $ith the trust
agreement. The undisputed points of incompati%ility %et$een the t$o agreements are5
Po*'t+ o7 *'co.8&t*b*)*t3 Tr2+t Rece*8t 0OA
)! 8ature of contract Trust -eceipt 1oan
##vi
E=+O
=! 4uridical relationship Trustor-Trustee 1ender-Borro$er
<! 'tatus of o%ligation Matured Paya%le $ithin > years
##vii
E=>O
(! /overning la$ Criminal Civil K Commercial
##viii
E=BO
@! 'ecurity offered Trust -eceipts -eal estate2chattel mortgages
##i#
E=*O
+! Interest rate per annum &nspecified! )(M
###
E<:O
>! ,efault charges =(M )(M
###i
E<)O
B! 8o. of parties < )+
;ence, applying the pronouncement in 5uinto, $e can safely conclude that the M7.
novated and effectively e#tinguished BMCAs o%ligations under the trust receipt
agreement.
Petitioner %ankAs argument that BMCAs non-compliance $ith the M7. revived
respondentsQ original lia%ilities under the trust receipt agreement is completely
misplaced. 'ection B.( of the M7. on termination reads5
3B.( Termination. .ny provision of this .greement to the contrary not$ithstanding, if
the conditions for rescheduling specified in 'ection > shall not %e complied $ith on such
later date as the Nualified Ma"ority 1enders in their sole and a%solute discretion may
agree in $riting, then
i! the o%ligation of the 1enders to reschedule the 6#isting Credits as contemplated
here%y shall automatically terminate on such date5
ii! the 6#isting .greements shall continue in full force and effect on the remaining loan
%alances as if this .greement had not %een entered into?
iii! all the rights of the lenders against the %orro$er and 'pouses 7ng prior to the
agreement shall revest to the lenders.3
Indeed, $hat is automatically terminated in case BMC failed to comply $ith the
conditions under the M7. is not the M7. itself %ut merely the o%ligation of the lender
the %ank! to reschedule the e#isting credits. Moreover, it is erroneous to assume that the
revesting of 3all the rights of lenders against the %orro$er3 means that petitioner can
charge respondents for violation of the Trust -eceipts 1a$ under the original trust receipt
agreement. .s e#plained earlier, the e#ecution of the M7. e#tinguished respondentsQ
o%ligation under the trust receipts. -espondentsQ lia%ility, if any, $ould only %e civil in
nature since the trust receipts $ere transformed into mere loan documents after the
e#ecution of the M7.. This is reinforced %y the fact that the mortgage contracts
e#ecuted %y the BMC survive despite its non-compliance $ith the conditions set forth in
the M7..
.ll told, $e find no reversi%le error committed %y the Court of .ppeals in rendering the
assailed -esolutions.
/HEREFORE, the petition is ,68I6,. The assailed -esolutions of the Court of
.ppeals dated 4anuary *, )**B and March =@, )**B in C.-/.-. 'P 8o. (=::@ are here%y
.FFI-M6,.
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