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, Petitioner, versus LUZON HYDRO

2004-11-22 | G.R. No. 146717
Tinga, J.:
Subject of this case is the letter of credit which has evolved as the ubiquitous and most important device
in international trade. A creation of commerce and businessmen, the letter of credit is also unique in the
number of parties involved and its supranational character.
Petitioner has appealed from the Decision[1] of the Court of Appeals in CA-G.R. SP No. 61901 entitled
"Transfield Philippines, Inc. v. Hon. Oscar Pimentel, et al.," promulgated on 31 January 2001.[2]
On 26 March 1997, petitioner and respondent Luzon Hydro Corporation (hereinafter, LHC) entered into a
Turnkey Contract[3] whereby petitioner, as Turnkey Contractor, undertook to construct, on a turnkey
basis, a seventy (70)-Megawatt hydro-electric power station at the Bakun River in the provinces of
Benguet and Ilocos Sur (hereinafter, the Project). Petitioner was given the sole responsibility for the
design, construction, commissioning, testing and completion of the Project.[4]
The Turnkey Contract provides that: (1) the target completion date of the Project shall be on 1 June 2000,
or such later date as may be agreed upon between petitioner and respondent LHC or otherwise
determined in accordance with the Turnkey Contract; and (2) petitioner is entitled to claim extensions of
time (EOT) for reasons enumerated in the Turnkey Contract, among which are variations, force majeure,
and delays caused by LHC itself.[5] Further, in case of dispute, the parties are bound to settle their
differences through mediation, conciliation and such other means enumerated under Clause 20.3 of the
Turnkey Contract.[6]
To secure performance of petitioner's obligation on or before the target completion date, or such time for
completion as may be determined by the parties' agreement, petitioner opened in favor of LHC two (2)
standby letters of credit both dated 20 March 2000 (hereinafter referred to as "the Securities"), to wit:
Standby Letter of Credit No. E001126/8400 with the local branch of respondent Australia and New
Zealand Banking Group Limited (ANZ Bank)[7] and Standby Letter of Credit No. IBDIDSB-00/4 with
respondent Security Bank Corporation (SBC)[8] each in the amount of US$8,988,907.00.[9]
In the course of the construction of the project, petitioner sought various EOT to complete the Project.
The extensions were requested allegedly due to several factors which prevented the completion of the
Project on target date, such as force majeure occasioned by typhoon Zeb, barricades and
demonstrations. LHC denied the requests, however. This gave rise to a series of legal actions between
the parties which culminated in the instant petition.
The first of the actions was a Request for Arbitration which LHC filed before the Construction Industry
Arbitration Commission (CIAC) on 1 June 1999.[10] This was followed by another Request for Arbitration,
this time filed by petitioner before the International Chamber of Commerce (ICC)[11] on 3 November
2000. In both arbitration proceedings, the common issues presented were: [1) whether typhoon Zeb and
any of its associated events constituted force majeure to justify the extension of time sought by petitioner;
and [2) whether LHC had the right to terminate the Turnkey Contract for failure of petitioner to complete
the Project on target date.

Meanwhile, foreseeing that LHC would call on the Securities pursuant to the pertinent provisions of the
Turnkey Contract,[12] petitioner-in two separate letters[13] both dated 10 August 2000-advised
respondent banks of the arbitration proceedings already pending before the CIAC and ICC in connection
with its alleged default in the performance of its obligations. Asserting that LHC had no right to call on the
Securities until the resolution of disputes before the arbitral tribunals, petitioner warned respondent
banks that any transfer, release, or disposition of the Securities in favor of LHC or any person claiming
under LHC would constrain it to hold respondent banks liable for liquidated damages.
As petitioner had anticipated, on 27 June 2000, LHC sent notice to petitioner that pursuant to Clause
8.2[14] of the Turnkey Contract, it failed to comply with its obligation to complete the Project. Despite the
letters of petitioner, however, both banks informed petitioner that they would pay on the Securities if and
when LHC calls on them.[15]
LHC asserted that additional extension of time would not be warranted; accordingly it declared petitioner
in default/delay in the performance of its obligations under the Turnkey Contract and demanded from
petitioner the payment of US$75,000.00 for each day of delay beginning 28 June 2000 until actual
completion of the Project pursuant to Clause 8.7.1 of the Turnkey Contract. At the same time, LHC
served notice that it would call on the securities for the payment of liquidated damages for the delay.[16]
On 5 November 2000, petitioner as plaintiff filed a Complaint for Injunction, with prayer for temporary
restraining order and writ of preliminary injunction, against herein respondents as defendants before the
Regional Trial Court (RTC) of Makati.[17] Petitioner sought to restrain respondent LHC from calling on
the Securities and respondent banks from transferring, paying on, or in any manner disposing of the
Securities or any renewals or substitutes thereof. The RTC issued a seventy-two (72)-hour temporary
restraining order on the same day. The case was docketed as Civil Case No. 00-1312 and raffled to
Branch 148 of the RTC of Makati.
After appropriate proceedings, the trial court issued an Order on 9 November 2000, extending the
temporary restraining order for a period of seventeen (17) days or until 26 November 2000.[18]
The RTC, in its Order[19] dated 24 November 2000, denied petitioner's application for a writ of
preliminary injunction. It ruled that petitioner had no legal right and suffered no irreparable injury to justify
the issuance of the writ. Employing the principle of "independent contract" in letters of credit, the trial
court ruled that LHC should be allowed to draw on the Securities for liquidated damages. It debunked
petitioner's contention that the principle of "independent contract" could be invoked only by respondent
banks since according to it respondent LHC is the ultimate beneficiary of the Securities. The trial court
further ruled that the banks were mere custodians of the funds and as such they were obligated to
transfer the same to the beneficiary for as long as the latter could submit the required certification of its
Dissatisfied with the trial court's denial of its application for a writ of preliminary injunction, petitioner
elevated the case to the Court of Appeals via a Petition for Certiorari under Rule 65, with prayer for the
issuance of a temporary restraining order and writ of preliminary injunction.[20] Petitioner submitted to
the appellate court that LHC's call on the Securities was premature considering that the issue of its
default had not yet been resolved with finality by the CIAC and/or the ICC. It asserted that until the fact of
delay could be established, LHC had no right to draw on the Securities for liquidated damages.
Refuting petitioner's contentions, LHC claimed that petitioner had no right to restrain its call on and use
of the Securities as payment for liquidated damages. It averred that the Securities are independent of the
main contract between them as shown on the face of the two Standby Letters of Credit which both
provide that the banks have no responsibility to investigate the authenticity or accuracy of the certificates

or the declarant's capacity or entitlement to so certify.

In its Resolution dated 28 November 2000, the Court of Appeals issued a temporary restraining order,
enjoining LHC from calling on the Securities or any renewals or substitutes thereof and ordering
respondent banks to cease and desist from transferring, paying or in any manner disposing of the
However, the appellate court failed to act on the application for preliminary injunction until the temporary
restraining order expired on 27 January 2001. Immediately thereafter, representatives of LHC trooped to
ANZ Bank and withdrew the total amount of US$4,950,000.00, thereby reducing the balance in ANZ
Bank to US$1,852,814.00.
On 2 February 2001, the appellate court dismissed the petition for certiorari. The appellate court
expressed conformity with the trial court's decision that LHC could call on the Securities pursuant to the
first principle in credit law that the credit itself is independent of the underlying transaction and that as
long as the beneficiary complied with the credit, it was of no moment that he had not complied with the
underlying contract. Further, the appellate court held that even assuming that the trial court's denial of
petitioner's application for a writ of preliminary injunction was erroneous, it constituted only an error of
judgment which is not correctible by certiorari, unlike error of jurisdiction.
Undaunted, petitioner filed the instant Petition for Review raising the following issues for resolution:
Petitioner contends that the courts below improperly relied on the "independence principle" on letters of
credit when this case falls squarely within the "fraud exception rule." Respondent LHC deliberately
misrepresented the supposed existence of delay despite its knowledge that the issue was still pending
arbitration, petitioner continues.
Petitioner asserts that LHC should be ordered to return the proceeds of the Securities pursuant to the
principle against unjust enrichment and that, under the premises, injunction was the appropriate remedy
obtainable from the competent local courts.

On 25 August 2003, petitioner filed a Supplement to the Petition[22] and Supplemental Memorandum,[23]
alleging that in the course of the proceedings in the ICC Arbitration, a number of documentary and
testimonial evidence came out through the use of different modes of discovery available in the ICC
Arbitration. It contends that after the filing of the petition facts and admissions were discovered which
demonstrate that LHC knowingly misrepresented that petitioner had incurred delays- notwithstanding its
knowledge and admission that delays were excused under the Turnkey Contract-to be able to draw
against the Securities. Reiterating that fraud constitutes an exception to the independence principle,
petitioner urges that this warrants a ruling from this Court that the call on the Securities was wrongful, as
well as contrary to law and basic principles of equity. It avers that it would suffer grave irreparable
damage if LHC would be allowed to use the proceeds of the Securities and not ordered to return the
amounts it had wrongfully drawn thereon.
In its Manifestation dated 8 September 2003,[24] LHC contends that the supplemental pleadings filed by
petitioner present erroneous and misleading information which would change petitioner's theory on
In yet another Manifestation dated 12 April 2004,[25] petitioner alleges that on 18 February 2004, the
ICC handed down its Third Partial Award, declaring that LHC wrongfully drew upon the Securities and
that petitioner was entitled to the return of the sums wrongfully taken by LHC for liquidated damages.
LHC filed a Counter-Manifestation dated 29 June 2004,[26] stating that petitioner's Manifestation dated
12 April 2004 enlarges the scope of its Petition for Review of the 31 January 2001 Decision of the Court
of Appeals. LHC notes that the Petition for Review essentially dealt only with the issue of whether
injunction could issue to restrain the beneficiary of an irrevocable letter of credit from drawing thereon. It
adds that petitioner has filed two other proceedings, to wit: (1) ICC Case No. 11264/TE/MW, entitled
"Transfield Philippines Inc. v. Luzon Hydro Corporation," in which the parties made claims and
counterclaims arising from petitioner's performance/misperformance of its obligations as contractor for
LHC; and (2) Civil Case No. 04-332, entitled "Transfield Philippines, Inc. v. Luzon Hydro Corporation"
before Branch 56 of the RTC of Makati, which is an action to enforce and obtain execution of the ICC's
partial award mentioned in petitioner's Manifestation of 12 April 2004.
In its Comment to petitioner's Motion for Leave to File Addendum to Petitioner's Memorandum, LHC
stresses that the question of whether the funds it drew on the subject letters of credit should be returned
is outside the issue in this appeal. At any rate, LHC adds that the action to enforce the ICC's partial
award is now fully within the Makati RTC's jurisdiction in Civil Case No. 04-332. LHC asserts that
petitioner is engaged in forum-shopping by keeping this appeal and at the same time seeking the suit for
enforcement of the arbitral award before the Makati court.
Respondent SBC in its Memorandum, dated 10 March 2003[27] contends that the Court of Appeals
correctly dismissed the petition for certiorari. Invoking the independence principle, SBC argues that it
was under no obligation to look into the validity or accuracy of the certification submitted by respondent
LHC or into the latter's capacity or entitlement to so certify. It adds that the act sought to be enjoined by
petitioner was already fait accompli and the present petition would no longer serve any remedial purpose.
In a similar fashion, respondent ANZ Bank in its Memorandum dated 13 March 2003[28] posits that its
actions could not be regarded as unjustified in view of the prevailing independence principle under which
it had no obligation to ascertain the truth of LHC's allegations that petitioner defaulted in its obligations.
Moreover, it points out that since the Standby Letter of Credit No. E001126/8400 had been fully drawn,
petitioner's prayer for preliminary injunction had been rendered moot and academic.
At the core of the present controversy is the applicability of the "independence principle" and "fraud

exception rule" in letters of credit. Thus, a discussion of the nature and use of letters of credit, also
referred to simply as "credits," would provide a better perspective of the case.
The letter of credit evolved as a mercantile specialty, and the only way to understand all its facets is to
recognize that it is an entity unto itself. The relationship between the beneficiary and the issuer of a letter
of credit is not strictly contractual, because both privity and a meeting of the minds are lacking, yet strict
compliance with its terms is an enforceable right. Nor is it a third-party beneficiary contract, because the
issuer must honor drafts drawn against a letter regardless of problems subsequently arising in the
underlying contract. Since the bank's customer cannot draw on the letter, it does not function as an
assignment by the customer to the beneficiary. Nor, if properly used, is it a contract of suretyship or
guarantee, because it entails a primary liability following a default. Finally, it is not in itself a negotiable
instrument, because it is not payable to order or bearer and is generally conditional, yet the draft
presented under it is often negotiable.[29]
In commercial transactions, a letter of credit is a financial device developed by merchants as a
convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable
interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to
have control of the goods before paying.[30] The use of credits in commercial transactions serves to
reduce the risk of nonpayment of the purchase price under the contract for the sale of goods. However,
credits are also used in non-sale settings where they serve to reduce the risk of nonperformance.
Generally, credits in the non-sale settings have come to be known as standby credits.[31]
There are three significant differences between commercial and standby credits. First, commercial
credits involve the payment of money under a contract of sale. Such credits become payable upon the
presentation by the seller-beneficiary of documents that show he has taken affirmative steps to comply
with the sales agreement. In the standby type, the credit is payable upon certification of a party's
nonperformance of the agreement. The documents that accompany the beneficiary's draft tend to show
that the applicant has not performed. The beneficiary of a commercial credit must demonstrate by
documents that he has performed his contract. The beneficiary of the standby credit must certify that his
obligor has not performed the contract.[32]
By definition, a letter of credit is a written instrument whereby the writer requests or authorizes the
addressee to pay money or deliver goods to a third person and assumes responsibility for payment of
debt therefor to the addressee.[33] A letter of credit, however, changes its nature as different
transactions occur and if carried through to completion ends up as a binding contract between the
issuing and honoring banks without any regard or relation to the underlying contract or disputes between
the parties thereto.[34]
Since letters of credit have gained general acceptability in international trade transactions, the ICC has
published from time to time updates on the Uniform Customs and Practice (UCP) for Documentary
Credits to standardize practices in the letter of credit area. The vast majority of letters of credit
incorporate the UCP.[35] First published in 1933, the UCP for Documentary Credits has undergone
several revisions, the latest of which was in 1993.[36]
In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,[37] this Court ruled that the
observance of the UCP is justified by Article 2 of the Code of Commerce which provides that in the
absence of any particular provision in the Code of Commerce, commercial transactions shall be
governed by usages and customs generally observed. More recently, in Bank of America, NT & SA v.
Court of Appeals,[38] this Court ruled that there being no specific provisions which govern the legal
complexities arising from transactions involving letters of credit, not only between or among banks
themselves but also between banks and the seller or the buyer, as the case may be, the applicability of

the UCP is undeniable.

Article 3 of the UCP provides that credits, by their nature, are separate transactions from the sales or
other contract(s) on which they may be based and banks are in no way concerned with or bound by such
contract(s), even if any reference whatsoever to such contract(s) is included in the credit. Consequently,
the undertaking of a bank to pay, accept and pay draft(s) or negotiate and/or fulfill any other obligation
under the credit is not subject to claims or defenses by the applicant resulting from his relationships with
the issuing bank or the beneficiary. A beneficiary can in no case avail himself of the contractual
relationships existing between the banks or between the applicant and the issuing bank.
Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once the draft
and the required documents are presented to it. The so-called "independence principle" assures the
seller or the beneficiary of prompt payment independent of any breach of the main contract and
precludes the issuing bank from determining whether the main contract is actually accomplished or not.
Under this principle, banks assume no liability or responsibility for the form, sufficiency, accuracy,
genuineness, falsification or legal effect of any documents, or for the general and/or particular conditions
stipulated in the documents or superimposed thereon, nor do they assume any liability or responsibility
for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods
represented by any documents, or for the good faith or acts and/or omissions, solvency, performance or
standing of the consignor, the carriers, or the insurers of the goods, or any other person whomsoever.[39]
The independent nature of the letter of credit may be: (a) independence in toto where the credit is
independent from the justification aspect and is a separate obligation from the underlying agreement like
for instance a typical standby; or (b) independence may be only as to the justification aspect like in a
commercial letter of credit or repayment standby, which is identical with the same obligations under the
underlying agreement. In both cases the payment may be enjoined if in the light of the purpose of the
credit the payment of the credit would constitute fraudulent abuse of the credit.[40]
Can the beneficiary invoke the independence principle?
Petitioner insists that the independence principle does not apply to the instant case and assuming it is so,
it is a defense available only to respondent banks. LHC, on the other hand, contends that it would be
contrary to common sense to deny the benefit of an independent contract to the very party for whom the
benefit is intended. As beneficiary of the letter of credit, LHC asserts it is entitled to invoke the principle.
As discussed above, in a letter of credit transaction, such as in this case, where the credit is stipulated
as irrevocable, there is a definite undertaking by the issuing bank to pay the beneficiary provided that the
stipulated documents are presented and the conditions of the credit are complied with.[41] Precisely, the
independence principle liberates the issuing bank from the duty of ascertaining compliance by the parties
in the main contract. As the principle's nomenclature clearly suggests, the obligation under the letter of
credit is independent of the related and originating contract. In brief, the letter of credit is separate and
distinct from the underlying transaction.
Given the nature of letters of credit, petitioner's argument-that it is only the issuing bank that may invoke
the independence principle on letters of credit-does not impress this Court. To say that the
independence principle may only be invoked by the issuing banks would render nugatory the purpose for
which the letters of credit are used in commercial transactions. As it is, the independence doctrine works
to the benefit of both the issuing bank and the beneficiary.
Letters of credit are employed by the parties desiring to enter into commercial transactions, not for the
benefit of the issuing bank but mainly for the benefit of the parties to the original transactions. With the

letter of credit from the issuing bank, the party who applied for and obtained it may confidently present
the letter of credit to the beneficiary as a security to convince the beneficiary to enter into the business
transaction. On the other hand, the other party to the business transaction, i.e., the beneficiary of the
letter of credit, can be rest assured of being empowered to call on the letter of credit as a security in case
the commercial transaction does not push through, or the applicant fails to perform his part of the
transaction. It is for this reason that the party who is entitled to the proceeds of the letter of credit is
appropriately called "beneficiary."
Petitioner's argument that any dispute must first be resolved by the parties, whether through negotiations
or arbitration, before the beneficiary is entitled to call on the letter of credit in essence would convert the
letter of credit into a mere guarantee. Jurisprudence has laid down a clear distinction between a letter of
credit and a guarantee in that the settlement of a dispute between the parties is not a pre-requisite for
the release of funds under a letter of credit. In other words, the argument is incompatible with the very
nature of the letter of credit. If a letter of credit is drawable only after settlement of the dispute on the
contract entered into by the applicant and the beneficiary, there would be no practical and beneficial use
for letters of credit in commercial transactions.
Professor John F. Dolan, the noted authority on letters of credit, sheds more light on the issue:
The standby credit is an attractive commercial device for many of the same reasons that commercial
credits are attractive. Essentially, these credits are inexpensive and efficient. Often they replace surety
contracts, which tend to generate higher costs than credits do and are usually triggered by a factual
determination rather than by the examination of documents.
Because parties and courts should not confuse the different functions of the surety contract on the one
hand and the standby credit on the other, the distinction between surety contracts and credits merits
some reflection. The two commercial devices share a common purpose. Both ensure against the
obligor's nonperformance. They function, however, in distinctly different ways.
Traditionally, upon the obligor's default, the surety undertakes to complete the obligor's performance,
usually by hiring someone to complete that performance. Surety contracts, then, often involve costs of
determining whether the obligor defaulted (a matter over which the surety and the beneficiary often
litigate) plus the cost of performance. The benefit of the surety contract to the beneficiary is obvious. He
knows that the surety, often an insurance company, is a strong financial institution that will perform if the
obligor does not. The beneficiary also should understand that such performance must await the
sometimes lengthy and costly determination that the obligor has defaulted. In addition, the surety's
performance takes time.
The standby credit has different expectations. He reasonably expects that he will receive cash in the
event of nonperformance, that he will receive it promptly, and that he will receive it before any litigation
with the obligor (the applicant) over the nature of the applicant's performance takes place. The standby
credit has this opposite effect of the surety contract: it reverses the financial burden of parties during
In the surety contract setting, there is no duty to indemnify the beneficiary until the beneficiary
establishes the fact of the obligor's performance. The beneficiary may have to establish that fact in
litigation. During the litigation, the surety holds the money and the beneficiary bears most of the cost of
delay in performance.
In the standby credit case, however, the beneficiary avoids that litigation burden and receives his money
promptly upon presentation of the required documents. It may be that the applicant has, in fact,

performed and that the beneficiary's presentation of those documents is not rightful. In that case, the
applicant may sue the beneficiary in tort, in contract, or in breach of warranty; but, during the litigation to
determine whether the applicant has in fact breached the obligation to perform, the beneficiary, not the
applicant, holds the money. Parties that use a standby credit and courts construing such a credit should
understand this allocation of burdens. There is a tendency in some quarters to overlook this distinction
between surety contracts and standby credits and to reallocate burdens by permitting the obligor or the
issuer to litigate the performance question before payment to the beneficiary.[42]

While it is the bank which is bound to honor the credit, it is the beneficiary who has the right to ask the
bank to honor the credit by allowing him to draw thereon. The situation itself emasculates petitioner's
posture that LHC cannot invoke the independence principle and highlights its puerility, more so in this
case where the banks concerned were impleaded as parties by petitioner itself.
Respondent banks had squarely raised the independence principle to justify their releases of the
amounts due under the Securities. Owing to the nature and purpose of the standby letters of credit, this
Court rules that the respondent banks were left with little or no alternative but to honor the credit and
both of them in fact submitted that it was "ministerial" for them to honor the call for payment.[43]
Furthermore, LHC has a right rooted in the Contract to call on the Securities. The relevant provisions of
the Contract read, thus:
4.2.1. In order to secure the performance of its obligations under this Contract, the Contractor at its cost
shall on the Commencement Date provide security to the Employer in the form of two irrevocable and
confirmed standby letters of credit (the "Securities"), each in the amount of US$8,988,907, issued and
confirmed by banks or financial institutions acceptable to the Employer. Each of the Securities must be in
form and substance acceptable to the Employer and may be provided on an annually renewable
8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to the Employer by way of
liquidated damages ("Liquidated Damages for Delay") the amount of US$75,000 for each and every day
or part of a day that shall elapse between the Target Completion Date and the Completion Date,
provided that Liquidated Damages for Delay payable by the Contractor shall in the aggregate not exceed
20% of the Contract Price. The Contractor shall pay Liquidated Damages for Delay for each day of the
delay on the following day without need of demand from the Employer.
8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount of such
damages from any monies due, or to become due to the Contractor and/or by drawing on the
A contract once perfected, binds the parties not only to the fulfillment of what has been expressly
stipulated but also to all the consequences which according to their nature, may be in keeping with good
faith, usage, and law.[46] A careful perusal of the Turnkey Contract reveals the intention of the parties to
make the Securities answerable for the liquidated damages occasioned by any delay on the part of
petitioner. The call upon the Securities, while not an exclusive remedy on the part of LHC, is certainly an
alternative recourse available to it upon the happening of the contingency for which the Securities have
been proffered. Thus, even without the use of the "independence principle," the Turnkey Contract itself
bestows upon LHC the right to call on the Securities in the event of default.
Next, petitioner invokes the "fraud exception" principle. It avers that LHC's call on the Securities is
wrongful because it fraudulently misrepresented to ANZ Bank and SBC that there is already a breach in

the Turnkey Contract knowing fully well that this is yet to be determined by the arbitral tribunals. It
asserts that the "fraud exception" exists when the beneficiary, for the purpose of drawing on the credit,
fraudulently presents to the confirming bank, documents that contain, expressly or by implication,
material representations of fact that to his knowledge are untrue. In such a situation, petitioner insists,
injunction is recognized as a remedy available to it.
Citing Dolan's treatise on letters of credit, petitioner argues that the independence principle is not without
limits and it is important to fashion those limits in light of the principle's purpose, which is to serve the
commercial function of the credit. If it does not serve those functions, application of the principle is not
warranted, and the commonlaw principles of contract should apply.
It is worthy of note that the propriety of LHC's call on the Securities is largely intertwined with the fact of
default which is the self-same issue pending resolution before the arbitral tribunals. To be able to declare
the call on the Securities wrongful or fraudulent, it is imperative to resolve, among others, whether
petitioner was in fact guilty of delay in the performance of its obligation. Unfortunately for petitioner, this
Court is not called upon to rule upon the issue of default-such issue having been submitted by the
parties to the jurisdiction of the arbitral tribunals pursuant to the terms embodied in their agreement.[47]
Would injunction then be the proper remedy to restrain the alleged wrongful draws on the
Most writers agree that fraud is an exception to the independence principle. Professor Dolan opines that
the untruthfulness of a certificate accompanying a demand for payment under a standby credit may
qualify as fraud sufficient to support an injunction against payment.[48] The remedy for fraudulent abuse
is an injunction. However, injunction should not be granted unless: (a) there is clear proof of fraud; (b)
the fraud constitutes fraudulent abuse of the independent purpose of the letter of credit and not only
fraud under the main agreement; and (c) irreparable injury might follow if injunction is not granted or the
recovery of damages would be seriously damaged.[49]
In its complaint for injunction before the trial court, petitioner alleged that it is entitled to a total extension
of two hundred fifty-three (253) days which would move the target completion date. It argued that if its
claims for extension would be found meritorious by the ICC, then LHC would not be entitled to any
liquidated damages.[50]
Generally, injunction is a preservative remedy for the protection of one's substantive right or interest; it is
not a cause of action in itself but merely a provisional remedy, an adjunct to a main suit. The issuance of
the writ of preliminary injunction as an ancillary or preventive remedy to secure the rights of a party in a
pending case is entirely within the discretion of the court taking cognizance of the case, the only
limitation being that this discretion should be exercised based upon the grounds and in the manner
provided by law.[51]
Before a writ of preliminary injunction may be issued, there must be a clear showing by the complaint
that there exists a right to be protected and that the acts against which the writ is to be directed are
violative of the said right.[52] It must be shown that the invasion of the right sought to be protected is
material and substantial, that the right of complainant is clear and unmistakable and that there is an
urgent and paramount necessity for the writ to prevent serious damage.[53] Moreover, an injunctive
remedy may only be resorted to when there is a pressing necessity to avoid injurious consequences
which cannot be remedied under any standard compensation.[54]
In the instant case, petitioner failed to show that it has a clear and unmistakable right to restrain LHC's
call on the Securities which would justify the issuance of preliminary injunction. By petitioner's own

admission, the right of LHC to call on the Securities was contractually rooted and subject to the express
stipulations in the Turnkey Contract.[55] Indeed, the Turnkey Contract is plain and unequivocal in that it
conferred upon LHC the right to draw upon the Securities in case of default, as provided in Clause 4.2.5,
in relation to Clause 8.7.2, thus:
4.2.5 The Employer shall give the Contractor seven days' notice of calling upon any of the Securities,
stating the nature of the default for which the claim on any of the Securities is to be made, provided that
no notice will be required if the Employer calls upon any of the Securities for the payment of Liquidated
Damages for Delay or for failure by the Contractor to renew or extend the Securities within 14 days of
their expiration in accordance with Clause 4.2.2.[56]
8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount of such
damages from any monies due, or to become due, to the Contractor and/or by drawing on the

The pendency of the arbitration proceedings would not per se make LHC's draws on the Securities
wrongful or fraudulent for there was nothing in the Contract which would indicate that the parties
intended that all disputes regarding delay should first be settled through arbitration before LHC would be
allowed to call upon the Securities. It is therefore premature and absurd to conclude that the draws on
the Securities were outright fraudulent given the fact that the ICC and CIAC have not ruled with finality
on the existence of default.
Nowhere in its complaint before the trial court or in its pleadings filed before the appellate court, did
petitioner invoke the fraud exception rule as a ground to justify the issuance of an injunction.[58] What
petitioner did assert before the courts below was the fact that LHC's draws on the Securities would be
premature and without basis in view of the pending disputes between them. Petitioner should not be
allowed in this instance to bring into play the fraud exception rule to sustain its claim for the issuance of
an injunctive relief. Matters, theories or arguments not brought out in the proceedings below will
ordinarily not be considered by a reviewing court as they cannot be raised for the first time on appeal.[59]
The lower courts could thus not be faulted for not applying the fraud exception rule not only because the
existence of fraud was fundamentally interwoven with the issue of default still pending before the arbitral
tribunals, but more so, because petitioner never raised it as an issue in its pleadings filed in the courts
below. At any rate, petitioner utterly failed to show that it had a clear and unmistakable right to prevent
LHC's call upon the Securities.
Of course, prudence should have impelled LHC to await resolution of the pending issues before the
arbitral tribunals prior to taking action to enforce the Securities. But, as earlier stated, the Turnkey
Contract did not require LHC to do so and, therefore, it was merely enforcing its rights in accordance
with the tenor thereof. Obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith.[60] More importantly, pursuant to the principle of
autonomy of contracts embodied in Article 1306 of the Civil Code,[61] petitioner could have incorporated
in its Contract with LHC, a proviso that only the final determination by the arbitral tribunals that default
had occurred would justify the enforcement of the Securities. However, the fact is petitioner did not do so;
hence, it would have to live with its inaction.
With respect to the issue of whether the respondent banks were justified in releasing the amounts due
under the Securities, this Court reiterates that pursuant to the independence principle the banks were
under no obligation to determine the veracity of LHC's certification that default has occurred. Neither
were they bound by petitioner's declaration that LHC's call thereon was wrongful. To repeat, respondent
banks' undertaking was simply to pay once the required documents are presented by the beneficiary.

At any rate, should petitioner finally prove in the pending arbitration proceedings that LHC's draws upon
the Securities were wrongful due to the non-existence of the fact of default, its right to seek
indemnification for damages it suffered would not normally be foreclosed pursuant to general principles
of law.
Moreover, in a Manifestation,[62] dated 30 March 2001, LHC informed this Court that the subject letters
of credit had been fully drawn. This fact alone would have been sufficient reason to dismiss the instant
Settled is the rule that injunction would not lie where the acts sought to be enjoined have already
become fait accompli or an accomplished or consummated act.[63] In Ticzon v. Video Post Manila,
Inc.[64] this Court ruled that where the period within which the former employees were prohibited from
engaging in or working for an enterprise that competed with their former employer-the very purpose of
the preliminary injunction -has expired, any declaration upholding the propriety of the writ would be
entirely useless as there would be no actual case or controversy between the parties insofar as the
preliminary injunction is concerned.
In the instant case, the consummation of the act sought to be restrained had rendered the instant petition
moot-for any declaration by this Court as to propriety or impropriety of the non-issuance of injunctive
relief could have no practical effect on the existing controversy.[65] The other issues raised by petitioner
particularly with respect to its right to recover the amounts wrongfully drawn on the Securities, according
to it, could properly be threshed out in a separate proceeding.
One final point. LHC has charged petitioner of forum-shopping. It raised the charge on two occasions.
First, in its Counter-Manifestation dated 29 June 2004[66] LHC alleges that petitioner presented before
this Court the same claim for money which it has filed in two other proceedings, to wit: ICC Case No.
11264/TE/MW and Civil Case No. 04-332 before the RTC of Makati. LHC argues that petitioner's acts
constitutes forum-shopping which should be punished by the dismissal of the claim in both forums.
Second, in its Comment to Petitioner's Motion for Leave to File Addendum to Petitioner's Memorandum
dated 8 October 2004, LHC alleges that by maintaining the present appeal and at the same time
pursuing Civil Case No. 04-332-wherein petitioner pressed for judgment on the issue of whether the
funds LHC drew on the Securities should be returned-petitioner resorted to forum-shopping. In both
instances, however, petitioner has apparently opted not to respond to the charge.
Forum-shopping is a very serious charge. It exists when a party repetitively avails of several judicial
remedies in different courts, simultaneously or successively, all substantially founded on the same
transactions and the same essential facts and circumstances, and all raising substantially the same
issues either pending in, or already resolved adversely, by some other court.[67] It may also consist in
the act of a party against whom an adverse judgment has been rendered in one forum, of seeking
another and possibly favorable opinion in another forum other than by appeal or special civil action of
certiorari, or the institution of two or more actions or proceedings grounded on the same cause on the
supposition that one or the other court might look with favor upon the other party.[68] To determine
whether a party violated the rule against forum-shopping, the test applied is whether the elements of litis
pendentia are present or whether a final judgment in one case will amount to res judicata in another.[69]
Forum-shopping constitutes improper conduct and may be punished with summary dismissal of the
multiple petitions and direct contempt of court.[70]
Considering the seriousness of the charge of forum-shopping and the severity of the sanctions for its
violation, the Court will refrain from making any definitive ruling on this issue until after petitioner has
been given ample opportunity to respond to the charge.

WHEREFORE, the instant petition is DENIED, with costs against petitioner.

Petitioner is hereby required to answer the charge of forum-shopping within fifteen (15) days from notice.
Associate Justice
Associate Justice
Associate Justice
Associate Justice
Associate Justice
Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the conclusions in the
above Decision were reached in consultation before the case was assigned to the writer of the opinion of
the Court's Division.
Acting Chief Justice
[1]Penned by Justice Candido V. Rivera, concurred in by Justices Conchita Carpio-Morales and
Rebecca de Guia-Salvador.
[2]Rollo, pp. 52-61.
[3]Id. at 62-252.
[4]Id. at 75-76.
[5]Clause 1.1, Volume II of the Turnkey Contract, Rollo, p. 81.
[6]20.3 Dispute Resolution.
If at anytime any dispute or difference shall arise between the Employer and the Contractor in
connection with or arising out of this Contract or the carrying out of the Works, the parties together shall
in good faith exert all efforts to resolve such dispute or difference by whatever means they deem
appropriate, including conciliation, mediation and seeking the assistance of technical, accounting or

other experts. At the request of any party, the chief executives of the Employer and the Contractor shall
meet in a good-faith effort to reach an amicable settlement of the dispute or difference. Any dispute or
difference that the parties are unable to resolve within a reasonable time may, at the option of either
party, be referred to arbitration in accordance with Clause 20.4. (Id. at 179)
[7]Annex "C," Rollo, pp. 254-256.
[8]Annex "D," Id. at 257-259.
[9]Clause 4.2.1, Volume II of the Turnkey Contract, Id. at 94.
[10]Id. at 261-265.
[11]Id. at 359-382.
[12]Turnkey Contract, Clause 4.2.5, Rollo, p. 94, in relation to Clause 8.7.1., Rollo, p. 132.
[13]Annex "H," Rollo, pp. 287-289; Annex "H-1," Rollo, pp. 320-322.
[14]Clause 8.2. Time for Completion.
The Contractor shall complete all the Works, including the Tests on Completion, in accordance with the
Program on or before the Target Completion Date. (Rollo, p. 125)
[15]Vol. 1, Rollo, pp. 355-357.
[16]8.7.1. If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to the Employer by
way of liquidated damages ("Liquidated Damages for Delay") the amount of US$75,000 for each and
every day or part of a day that shall elapse between the Target Completion Date and the Completion
Date, provided that Liquidated Damages for Delay payable by the Contractor shall in the aggregate not
exceed 20% of the Contract Price. The Contractor shall pay Liquidated Damages for Delay for each day
of the delay on the following day without need of demand from the Employer.
[17]Annex "L," Rollo, pp. 383-402.
[18]Annex "N," Id. at 406-409.
[19]Annex "O," Id. at 412-423.
[20]Docketed as CA-G.R. SP No. 61901.
[21]Rollo, pp. 25-26.
[22]Vol. II; Id. at 2-78.
[23]Id. at 79-92.
[24]Id. at 95-98
[25]Id. at 109-113.

[26]Id. at 666-671.
[27]Id. at 598-607.
[28]Id. at 619-630.
[29]Joseph, Letters of Credit: The Developing Concepts and Financing Functions, 94 Banking Law
Journal 850-851 [1977] cited in M. Kurkela, Letters of Credit under International Trade Law, 321 (1985).
[30]Bank of America v. Court of Appeals, G.R. No. 105395, 10 December 1993, 228 SCRA 357 citing
William S. Shaterian, Export-Import Banking: The Instruments and Operations Utilized by American
Exporters and Importers and Their Banks in Financing Foreign Trade, 284-374 (1947).
[31]E&H Partners v. Broadway Nat'l Bank, 39 F. Supp. 2d 275, (United States Circuit Court, S.D. New
York) No. 96 Civ. 7098 (RLC), 19 October 1998 .
[32]J. Dolan, The Law of Letters of Credit, Revised Ed. (2000).
[33]24 A Words and Phrases 590, Permanent Edition.
[35]Jackson & Davey, International Economic Relations, 53 (2nd ed.).
[36]ICC Publication No. 500.

[37]146 Phil. 269 (1970).

[38]G.R. No. 105395, 10 December 1993, 228 SCRA 357.
[39]Article 15, UCP.
[40]Kurkela, Letters of Credit Under International Trade Law, 286-287 (1985).
[41]Art. 10, UCP.
[42]Supra note 32 at 1-27.

[43]Rollo, pp. 604 and 624.

[44]Underscoring supplied; Id. at 94.
[45]Underscoring supplied; Id. at 132.
[46]Art. 1315, Civil Code.
[47]Clause 20.4.1, Turnkey Contract, Rollo, p. 179.
[48]Supra note 32 at 2-63.

[49]M. Kurkela, Letters of Credit Under International Trade Law, 309 (1985).
[50]Rollo, p. 391.
[51]Batangas Laguna Tayabas Bus Company, Inc. v. Bitanga, 415 Phil. 43.
[52]Shin v. Court of Appeals, G.R. No. 113627, 6 February 2001, 351 SCRA 257.
[53]Zabat v. Court of Appeals, G.R. No. 122089, 23 August 2000, 338 SCRA 551; Philippine Economic
Zone Authority v. Vianzon, G.R. No. 131020, 20 July 2000, 336 SCRA 309; Valencia v. Court of Appeals,
G.R. No. 119118, 19 February 2001, 352 SCRA 72; Crystal v. Cebu International School, G.R. No.
135433, 4 April 2001, 356 SCRA 296; Ong Ching Kian Chuan v. Court of Appeals, 415 Phil. 365 (2001).
[54]Philippine National Bank v. Ritratto Group, Inc., 414 Phil. 494 (2001).
[55]Rollo, p. 31.
[56]Underscoring supplied; Id. at 94-95.
[57]Id. at 132.
[58]Vide Annex "L," Rollo. pp. 392-399; Petition for Certiorari, CA Rollo, pp. 7-43.
[59] Salafranca v. Philamlife Village Homeowners Association, Inc., 360 Phil. 652; Ruby Industrial
Corporation v. Court of Appeals, 348 Phil. 480; Victorias Milling Co., Inc. v. Court of Appeals, 389 Phil.
[60]Article 1159, Civil Code.
[61]Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as
they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or
public policy.
[62]Rollo, p. 493.
[63]Aznar Brothers Realty Company v. Court of Appeals, G.R. No. 128102, 7 March 2000, 327 SCRA
359; Soriano v. Court of Appeals, 416 Phil. 226 (2001); Rodil Enterprises v. Court of Appeals, G.R. No.
G.R. No. 129609, 29 November 2001, 371 SCRA 79; Unionbank of the Philippines v. Court of Appeals,
370 Phil. 837 (1999).
[64]389 Phil. 20 (2000).
[65]Black's Law Dictionary, p. 1008, citing Leonhart v. McCormick, D.C. Pa., 395 F. Supp. 1073.
[66] Vol. II, Rollo, pp. 666-669.
[67]Tantoy, Sr. v. Court of Appeals, G.R. No. 141427, April 20, 2001, 357 SCRA 329.
[68]Bangko Silangan Development Bank v. Court of Appeals, 412 Phil. 755 (2001).
[69]Tirona v. Alejo, G.R. No. 129313, October 10, 2001, 367 SCRA 17; Manalo v. Court of Appeals, G.R.

No. 141297, October 8, 2001, 366 SCRA 752.

[70]Tantoy, Sr. v. Court of Appeals, supra note 67.; Caviles v. Seventeenth Division, Court of Appeals,
G.R. No. 126857, September 18, 2002, 389 SCRA 306.