LETTERS OF CREDIT

Bank of America, NT & SA v. CA, 1993

Doctrine: There would at least be 3 parties: (a) the buyer, who procures the letter of credit and obliges himself to reimburse the issuing bank upon
receipts of the documents of title; (b) the bank issuing the letter of credit, which undertakes to pay the seller upon receipt of the draft and proper
document of titles and to surrender the documents to the buyer upon reimbursement; and, (c) the seller, who in compliance with the contract of sale
ships the goods to the buyer and delivers the documents of title and draft to the issuing bank to recover payment.
Facts:

Issuing Bank: Bank of Ayudhya; Advising & Negotiating Bank (itatanong sa bangko kung legit ung LC): Bank of America; Applicant/Buyer: General
Chemicals; Beneficiary: Inter Resin

Bank of America received an Irrevocable Letter of Credit issued by Bank of Ayudhya for the Account of General Chemicals Ltd., Inc. for the sale of
plastic ropes and agricultural files.

Under the letter of credit, Bank of America acted as an advising bank and Inter-Resin Industrial Corp. (IR) acted as the beneficiary. Upon receipt
of the letter advice, Inter- Resin told Bank of America to confirm the letter of credit.

Notwithstanding such instruction, Bank of America failed to confirm the letter of credit.

Inter-Resin made a partial availment of the Letter of Credit after presentment of the required documents to Bank of America. After confirmation of
all the documents, Bank of America issued a check in favor of IR.

BA advised Bank of Ayudhya of IRs availment under the letter of credit and asked for the corresponding reimbursement.

IR presented documents for the second availment under the same letter of credit.

However, BA stopped the processing of such after they received a telex from Bank of Ayudhya declaring that the LC fraudulent. BA sued
IR (beneficiary) for the recovery of the first LC payment.

The IR contended that Bank of America should have first checked the authenticity of the letter of credit with bank of Ayudhya.

Issues:
(a) Whether Bank of America warranted the genuineness and authenticity of the letter of credit and, corollarily, whether it has acted merely as an
advising bank or as a confirming bank? (NO, merely advising bank)
(b) Following the dishonor of the letter of credit by Bank of Ayudhya, whether Bank of America may recover against Inter-Resin under the letter of credit
when the corresponding draft for partial availment thereunder and the required documents were later negotiated with it by Inter-Resin? (YES)
Held:
1) Bank of America is a mere advising bank and not a confirming bank. Hence, as an advising or notifying bank, Bank of America did not incur any
obligation more than just notifying Inter-Resin of the letter of credit issued in its favor, let alone to confirm the letter of credit.

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.

CYCLE:
o

The buyer may be required to contract a bank to issue a letter of credit in favor of the seller

By virtue of the letter of credit, the issuing bank can authorize the seller to draw drafts and engage to pay them upon their presentment
simultaneously with the tender of documents required by the letter of credit.

The buyer and the seller agree on what documents are to be presented for payment, but ordinarily they are documents of title
evidencing or attesting to the shipment of the goods to the buyer.

Once the credit is established, the seller ships the goods to the buyer and in the process secures the required shipping documents or
documents of title.

To get paid, the seller executes a draft and presents it together with the required documents to the issuing bank.

The issuing bank redeems the draft and pays cash to the seller if it finds that the documents submitted by the seller conform with what
the letter of credit requires. The bank then obtains possession of the documents upon paying the seller.

The transaction is completed when the buyer reimburses the issuing bank and acquires the documents entitling him to the goods.

Under this arrangement, the seller gets paid only if he delivers the documents of title over the goods, while the buyer acquires said
documents and control over the goods only after reimbursing the bank.

There would at least be three (3) parties: (a) the buyer, who procures the letter of credit and obliges himself to reimburse the issuing bank upon
receipts of the documents of title; (b) the bank issuing the letter of credit, which undertakes to pay the seller upon receipt of the draft and proper
document of titles and to surrender the documents to the buyer upon reimbursement; and, (c) the seller, who in compliance with the contract of sale
ships the goods to the buyer and delivers the documents of title and draft to the issuing bank to recover payment.

CAB: Bringing the letter of credit to the attention of the seller is the primordial obligation of an advising bank. The view that Bank of America should
have first checked the authenticity of the letter of credit with bank of Ayudhya, by using advanced mode of business communications, before
dispatching the same to Inter-Resin finds no real support in U.C.P. Article 18 of the U.C.P. states that: "Banks assume no liability or responsibility for
the consequences arising out of the delay and/or loss in transit of any messages, letters or documents, or for delay, mutilation or other errors
arising in the transmission of any telecommunication . . ." As advising bank, Bank of America is bound only to check the "apparent
authenticity" of the letter of credit, which it did.

2) Bank of America may recover under the draft negotiated to it by Inter-Resin.

The services of an advising (notifying) bank may be utilized to convey to the seller the existence of the credit; or, of a confirming bank which will
lend credence to the letter of credit issued by a lesser known issuing bank; or, of a paying bank, which undertakes to encash the drafts drawn by
the exporter. Further, instead of going to the place of the issuing bank to claim payment, the buyer may approach another bank, termed the
negotiating bank, to have the draft discounted.

This kind of transaction is what is commonly referred to as a discounting arrangement. This time, Bank of America has acted independently as a
negotiating bank, thus saving Inter-Resin from the hardship of presenting the documents directly to Bank of Ayudhya to recover payment. (InterResin, of course, could have chosen other banks with which to negotiate the draft and the documents.) As a negotiating bank, Bank of America
has a right to recourse against the issuer bank and until reimbursement is obtained, Inter-Resin, as the drawer of the draft, continues to
assume a contingent liability thereon

The payment to Inter-Resin has given Bank of America the right of reimbursement from the issuing bank, Bank of Ayudhya which, in turn, would
then seek indemnification from the buyer (the General Chemicals of Thailand). Since Bank of Ayudhya disowned the letter of credit, however,
Bank of America may now turn to Inter-Resin for restitution.

Between the seller and the negotiating bank there is the usual relationship existing between a drawer and purchaser of drafts. Unless drafts drawn
in pursuance of the credit are indicated to be without recourse therefore, the negotiating bank has the ordinary right of recourse against the seller in
the event of dishonor by the issuing bank . . . The fact that the correspondent and the negotiating bank may be one and the same does not
affect its rights and obligations in either capacity, although a special agreement is always a possibility.

BPI v. De Reny Fabric Industries, Inc(1970)

Castro, J.
DOCTRINE:

The observance of the Uniform Customs and Practice in this jurisdiction is justified by Article 2 of the Code of Commerce which enunciates that in
the absence of any particular provision in the Code of Commerce, commercial transaction shall be governed by the usages and customs generally
observed.

The relationship of the buyer and the bank is separate and distinct from the relationship of the buyer and seller in the main contract; the bank is not
required to investigate if the contract underlying the LC has been fulfilled or not because in transactions involving LC, banks deal only with
documents and not goods
FACTS:

On four different occasions in 1961, De Reny Fabric Industries through its co-defendants Aurora Carcereny and Aurora Tuyo, applied to the
BPI four irrevocable commercial letters of credit to cover the purchase dyestuffs of various colors from its American supplier, the JB
Distributing Company.

All applications were approved, and Carcereny and Tuyo bound themselves as solidary debtors with the corporation.

JB collected the full value of the drafts and the corresponding banks then debited the account of the BPI with them.

De Reny made partial payments to BPI amounting, in aggregate, to P90,000. Further payments were, however, subsequently discontinued by
the corporation when it became established, as a result of a chemical test conducted by the National Science Development Board, that the
goods that arrived in Manila were colored chalks instead of dyestuffs.

The corporation also refused to take possession of these goods, and for this reason, the Bank caused them to be deposited with a bonded
warehouse paying therefor the amount of P12,609.64.

Lower Court: ordered De Reny and co-defendants to pay P291,807.46, with interest thereon.

Defendants argument:
o
it was the duty of the foreign correspondent banks of the Bank of the Philippine Islands to take the necessary precaution to
insure that the goods shipped under the covering L/Cs conformed with the item appearing therein , and, that the foregoing
banks having failed to perform this duty, no claim for recoupment against the defendants- appellants, arising from the losses
incurred for the non- delivery or defective delivery of the articles ordered, could accrue.
ISSUES + RULING:
WoN defendants are liable for the amount. YES.

Under the terms of their Commercial Letter of Credit Agreements with the Bank, the appellants agreed that the Bank shall not be
responsible for:
o
the existence, character, quality, quantity, conditions, packing, value, or delivery of the property purporting to be represented by
documents; for any difference in character, quality, quantity, condition, or value of the property from that expressed in documents
o
the partial or incomplete shipment, or failure or omission to ship any or all of the property referred to in the Credit
o
and for any deviation from instructions, delay, default or fraud by the shipper or anyone else in connection with the property the
shippers or vendors and ourselves [purchasers] or any of us.

Having agreed to these terms, the appellants have, therefore, no recourse but to comply with their covenant.
But even without the stipulation recited above, the appellants cannot shift the burden of loss to the Bank on account of the violation
by their vendor of its prestation.

Banks, in providing financing in international business transactions such as those entered into by the appellants, do not deal with the property
to be exported or shipped to the importer, but deal only with documents.

Under Article 10 of the Uniform Customs and Practices for Commercial Documentary Credits Fixed for the Thirteenth Congress of
International Chamber of Commerce to which the Philippines is a signatory nation:
o
In documentary credit operations, all parties concerned deal in documents and not in goods . Payment, negotiation or acceptance
against documents in accordance with the terms and conditions of a credit by a Bank authorized to do so binds the party giving the
authorization to take up the documents and reimburse the Bank making the payment, negotiation or acceptance.

The existence of a custom in international banking and financing circles negating any duty on the part of a bank to verify whether what has
been described in letters of credits or drafts or shipping documents actually tallies with what was loaded aboard ship, having been positively
proven as a fact, the appellants are bound by this established usage.
DISPOSITION: Affirmed.
Reliance Commodities, Inc. v. Daewoo Industrial Co. Ltd., G.R. No. 100831, Dec. 17, 1993
DOCTRINE: The LC is independent from the contract of sale. Failure of the buyer to open the Letter of Credit does not prevent the birth of the Sales
Contract. The failure of a buyer seasonably to furnish an agreed letter of credit is a breach of the contract between buyer and seller. Where the buyer
fails to open a letter of credit as stipulated, the seller or exporter is entitled to claim damages for such breach.
Facts:

Reliance Commodities, Inc. (Reliance) and Daewoo Industrial Co Ltd (Daewoo) entered into a contract of sale where Reliance undertook to ship
and deliver to Daewoo 2,000 tons of foundry pig iron.
o
First contract was consummated and completed but Daewoo fell short of 135.655 metric tons.
o
Second contract for 2,000 metric tons was also perfected.

However, Reliances application for a letter of credit was denied by the China Banking Corporation, and it was shown later that the reason
for this is that it has exceeded its foreign exchange allocation.

Because of the failure of Reliance to comply with its undertaking under the contract, Daewoo was forced to sell the foundry pig irons to another
buyer at a lower price.

Reliance filed an action for damages against Daewoo for the recovery of P226,370.48 representing the value of the short delivery of 135.655
metric tons of foundry pig iron under the first contract.

Daewoo filed a counterclaim, contending that Reliance was guilty of breach of contract when it failed to open a letter of credit as required in
the second contract.

TC: Daewoo's obligation for short delivery must be paid. Reliance is in turn liable for breach of contract for its failure to open a letter of credit in
favor of Daewoo and must therefore pay the latter actual damages.

Reliance appealed the second part of the trial court's judgment.

CA: Affirmed TC.

o
Reliance could not have opened the Letter of Credit in favor of Daewoo because it had already exhausted its foreign exchange allocation
at the time of its application, was amply supported by evidence; and
o
The opening of a letter of credit is not such a future and uncertain event as to make it a suspensive condition within the contemplation of
law; but, only mode of payment agreed upon by the parties.

Reliance assails the award of damages in favor of Daewoo contending that the opening of the Letter of Credit was a condition precedent to
the effectivity of the contract between Reliance and Daewoo and since such condition had not occurred, the contract never came into existence
and, therefore, Reliance should not have been held liable for damages.
Issue: Whether or not Reliance is liable for breach of contract by failing to obtain the letter of credit? (YES)
Held:

The opening of an L/C upon application of Reliance was not a condition precedent for the birth of the obligation of Reliance to purchase
foundry pig iron from Daewoo.

The parties, having reached "a meeting of minds" in respect of the subject matter of the contract, the price thereof, and other principal provisions, "
had a perfected contract."
As a rule, the failure of to open the appropriate letter of credit did not prevent the birth of the contract, and neither did such failure
extinguish the contract.
Opening of L/C in favour of Daewoo -> obligation of Reliance and its performance by Reliance was a condition for enforcement of the reciprocal
obligation of Daewoo to ship the subject matter of the contract the foundry pig iron to Reliance.
Contract bet. Reliance and Daewoo -> had already sprung into legal existence and was enforceable.
Thus the failure of a buyer seasonably to furnish an agreed letter of credit is a breach of the contract between buyer and seller . Where
the buyer fails to open a letter of credit as stipulated, the seller or exporter is entitled to claim damages for such breach . Damages for
failure to open a commercial credit may, in appropriate cases, include the loss of profit which the seller would reasonably have made had the
transaction been carried out.
Once the credit is established, the seller ships the goods to the buyer and in the process secures the required shipping documents or documents of
title. To get paid, the seller executes a draft and pays cash to the seller if it finds that the documents submitted by the seller conform with what the
letter of credit requires. The bank then obtains possession of the documents upon paying the seller.
The transaction is completed when the buyer reimburses the issuing bank and acquires the documents entitling him to the goods. Under this
arrangement, the seller gets paid only if he delivers the documents of title over the goods, while the goods only after reimbursing the bank.

Insular Bank of Asia & America v. IAC, Nov. 17, 1988

DOCTRINE: The partial payments made on the loan cannot be added in computing the issuing banks liability under its own standby letter of credit.
Although these payments could result in the reduction of the actual amount, which, could ultimately be collected from the issuing bank, the latters
separate undertaking under its letters of credit remain. The standby Letters of Credits are, in effect an absolute undertaking to pay the money advanced
or the amount for which credit is given on the faith of the instrument which is separate and distinct from the contract underlying it.
Facts:

Spouses Mendoza obtained a loan from PHILAM to finance the construction of their residential house.

PHILAM required that the amortization be guaranteed by an irrevocable Letter of Credit of a commercial bank.

The Mendozas contracted Insular Bank of Asia and America (IBAA) for the issuance of a standby Letter of Credit in favor of PHILAM.
o

The Letter of Credit issued by IBAA was secured by a real mortgage on the property of spouses in favor of IBAA.

The Mendozas executed promissory notes in favor of IBAA. Both Notes authorized IBAA to sell at public or private sale such securities
or things for the purpose of applying their proceeds to such payments of many particular obligation or obligations the Mendozas may
have to IBAA.

The Mendozas failed to pay Philam Life the amortization and Philam informed IBAA that it was declaring the entire balance outstanding on both
loans, including liquidated damages, immediately due and payable.

However, because IBAA contested the propriety of calling ill the entire loan, Philam Life desisted and resumed availing of the L/Cs by drawing
on them for 5 more amortizations.
o

Partial payments made by the principal obligors (Sps. Mendozas) would have the corresponding effect of reducing the liability of the IBAA
as guarantor

Philam Life then demanded the payment of P274,779.56 from IBAA but the latter took the position that, as a merely guarantor of the Mendozas
who are the principal debtors.

Issue: Whether or not the partial payments made by the principal obligors (respondent MENDOZAS) would have the corresponding effect of reducing
the liability of the IBAA as guarantor or surety under the terms of the standby LCs in question? (NO)
Held:

The subject standby Letters of Credit secure the payment of any obligation of the Mendozas to Philam Life including all interests, surcharges and
expenses thereon but not to exceed P600,000.00.

But while they are a security arrangement, they are not converted thereby into contracts of guaranty. That would make them ultra vires
rather than a letter of credit, which is within the powers of a bank.

The standby Letters of Credits are, in effect an absolute undertaking to pay the money advanced or the amount for which credit is given
on the faith of the instrument. They are primary obligations and not accessory contracts.

Being separate and independent agreements, the payments made by the Mendozas cannot be added in computing IBAAs liability under its own
standby letters of credit.

Payments made by the Mendozas directly to PHILAM Life are in compliance with their own prestation under the loan agreements. And although
these payments could result in the reduction of the actual amount which could ultimately be collected from IBAA, the latters separate undertaking
under its Letters of Credits remains.

Since there still remains a balance on the loan pursuant to its absolute undertaking under the L/Cs, therefore, IBAA cannot escape the obligation to
pay PHILAM Life for this unexpended balance.

Transfield Philippines, Inc. v. Luzon Hydro Corporation, G.R. No. 146717, Nov. 22, 2004
Doctrine: 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.
Facts:

Transfield Philippines (Transfield) entered into a turn-key contract with Luzon Hydro Corp. (LHC).

Under the contract, Transfield were to construct a hydro-electric plants in Benguet and Ilocos. Transfield was given the sole responsibility for the
design, construction, commissioning, testing and completion of the Project. The contract provides for a period for which the project is to be
completed and also allows for the extension of the period provided that the extension is based on justifiable grounds such as fortuitous
event.

In order to guarantee performance by Transfield, two stand-by letters of credit were required to be opened.

During the construction of the plant, Transfield requested for extension of time citing typhoon and various disputes delaying the construction. LHC
did not give due course to the extension of the period prayed for but referred the matter to arbitration committee.

Because of the delay in the construction of the plant, LHC called on the stand-by letters of credit because of default. However, the demand
was objected by Transfield on the ground that there is still pending arbitration on their request for extension of time.

Issue: Whether or not LHC can collect from the letters of credit despite the pending arbitration case?
Held:

Transfields 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.

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.
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.

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.

MWSS v. Hon. Daway, G.R. No. 160732, June 21, 2004

DOCTRINE: The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to the standby letter of credit issued by the bank as the former
prohibition is on the enforcement of claims against guarantors or sureties of the debtors whose obligations are not solidary with the debtor. The concept
of guarantee vis--vis the concept of an irrevocable letter of credit are inconsistent with each other. The guarantee theory destroys the independence of
the banks responsibility from the contract upon which it was opened and the nature of both contracts is mutually in conflict with each other. A Standby
Letter of Credit is not a guaranty because under a Standby Letter of Credit, the bank undertakes a primary obligation. On the other hand, a guarantor
undertakes a collateral obligation which arises only upon the debtors default. A Standby Letter of Credit is a primary obligation and not an accessory
contract.
FACTS:

Maynilad obtained a 20-year concession to manage, repair, refurbish, and upgrade existing MWSS water delivery and sewerage services in Metro
Manilas west zone. Maynilad, under the concession agreement undertook to pay concession fees and itsforeign loans.

To secure its obligations, Maynilad was required under Section 9 of the concession contract to put up a bond, bank guarantee or other security
acceptable to MWSS.

Pursuant to this requirement, Maynilad arranged on for a three-year facility with a number of foreign banks led by Citicorp Intl for the
issuance of an irrevocable standby letter of credit (SLC) in the amount of $ 120 million in favor of MWSS for the full and prompt payment of
Maynilads obligations to MWSS.

Due to devaluation of the peso and other business reversals of Maynilad, MWSS filed a notice of early termination of the concession contract.

Upon certification of the non performance of Maynilad obligation, the MWSS moved to collect from Citicorp on the standby letters of
credit issued. Maynilad filed for corporate rehabilitation.

Judge Daway stayed the payment of the letter of credit by Citicorp pursuant to Sec 6 (b) of Rule 4 of the Interim Rules on Corporate Rehabilitation.

Issue: Whether or not the payment of the standby of letter of credit can be stayed by filing of a petition for rehabilitation? (NO)
Held: The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to a standby letter of credit issued by the bank as the former
prohibition is on the enforcement of claims against guarantors or sureties of the debtors whose obligations are not solidary with the debtor.

The participating banks obligation under the letter of credit are solidary with respondent Maynilad in that it is a primary, direct, definite and an
absolute undertaking to pay and is not conditioned on the prior exhaustion of the debtors assets.

These are the same characteristics of a surety or solidary obligor. And being solidary, the claims against them can be pursued separately from and
independently of the rehabilitation case.

Issuing banks under the letters of credit are not equivalent to guarantors . The concept of guarantee vis--vis the concept of an irrevocable
letter of credit are inconsistent with each other. The guarantee theory destroys the independence of the banks responsibility from the contract
upon which it was opened and the nature of both contracts is mutually in conflict with each other. In contracts of guarantee, the guarantors
obligation is merely collateral and it arises only upon the default of the person primarily liable.

On the other hand, in an irrevocable letter of credit, the bank undertakes a primary obligation.

We have also defined a letter of credit as an engagement by a bank or other person made at the request of a customer that the issuer shall honor
drafts or other demands of payment upon compliance with the conditions specified in the credit.

A Standby Letter of Credit is not a guaranty because under a Standby Letter of Credit, the bank undertakes a primary obligation. On the
other hand, a guarantor undertakes a collateral obligation which arises only upon the debtors default. A Standby Letter of Credit is a primary
obligation and not an accessory contract.

Prudential Bank v. IAC, G.R. No. 74886, Dec. 8, 1992

Doctrine: Through a letter of credit, the bank merely substitutes its own promise to pay for one of its customers who in return promises to pay the bank
the amount of funds mentioned in the letter of credit plus credit or commitment fees mutually agreed upon.
Facts:

Philippine Rayon Mills, Inc.(PRMI) entered into a contract with Nissho Co., Ltd. of Japan for the importation of textile machineries under a 5-year
deferred payment plan.

To effect the payment, PRMI applied for a commercial letter of credit with the Prudential Bank and Trust Company in favor of Nissho.
Prudential Bank opened Letter of Credit No. DPP-63762 for $128,548.78

Against this letter of credit, drafts were drawn and issued by Nissho, which were all paid by the Prudential Bank through its correspondent in
Japan, the Bank of Tokyo, Ltd.

Two of the original drafts were accepted by PRMI through its president, Anacleto R. Chi, while the others were not.

Upon the arrival of the machineries, the Prudential Bank indorsed the shipping documents to the PRMI which accepted delivery of the same. To
enable PRMI to take delivery of the machineries, it executed, by prior arrangement with the Prudential Bank, a trust receipt which was
signed by Anacleto R. Chi in his capacity as President of PRMI company

At the back of the trust receipt was printed a form to be accomplished by 2 sureties who, by the very terms and conditions thereof, were to be jointly
and severally liable to the Prudential Bank should the PRMI fail to pay the total amount or any portion of the drafts issued by Nissho and paid for by
Prudential Bank. .

PRMI was able to take delivery of the textile machineries and installed the same at its factory site.

Sometime in 1967, PRMI ceased business operations. Its obligation arising from the letter of credit and the trust receipt remained unpaid and
unliquidated. Repeated formal demands for the payment of the said trust receipt yielded no result
Hence, the present action for the collection of the principal amount of P956,384.95 was filed on October 3, 1974 against PRMI and Anacleto R. Chi.

Chi argued that presentment for acceptance was necessary to make PRMI liable.

The trial court ruled that that presentment for acceptance was an indispensable requisite for Philippine Rayons liability on the drafts to attach.

Issue: Whether or not presentment for acceptance was needed in order for PRMI to be liable under the draft? (NO)
Held:

Presentment for acceptance is defined an the production of a bill of exchange to a drawee for acceptance. Acceptance, however, was not even
necessary in the first place because the drafts which were eventually issued were sight drafts. Even if these were not sight drafts, thereby
necessitating acceptance, it would be the Bank (Bank of America) and not Philippine Rayon which had to accept the same for the latter was
not the drawee.

The trial court and the public respondent, therefore, erred in ruling that presentment for acceptance was an indispensable requisite for Philippine
Rayons liability on the drafts to attach.

Contrary to both courts pronouncements, Philippine Rayon immediately became liable upon Bank of Americas payment on the letter of
credit. Such is the essence of the letter of credit issued by the petitioner.

Through a letter of credit, the bank merely substitutes its own promise to pay for one of its customers who in return promises to pay the bank the
amount of funds mentioned in the letter of credit plus credit or commitment fees mutually agreed upon.

A different conclusion would violate the principle upon which commercial letters of credit are founded because in such a case, both the beneficiary
and the issuer, Nissho Company Ltd. and the petitioner, respectively, would be placed at the mercy of Philippine Rayon even if the latter had
already received the imported machinery and the petitioner had fully paid for it.

In fact, there was no need for acceptance as the issued drafts are sight drafts. Presentment for acceptance is necessary only in the cases
expressly provided for in Section 143 of the Negotiable Instruments Law (NIL).

In the instant case then, the drawee was necessarily the herein the Bank of America. It was to the latter that the drafts were presented for payment.

Rodzssen Supply Co. v. Far East Bank and Trust Co, G.R. No. 109087, May 9, 2001

DOCTRINE: It is only fair then that the importers marginal deposit (if one was made, as in this case), should be set off against his debt, for while the
importer earns no interest on his marginal deposit, the bank, apart from being able to use said deposit for its own purposes, also earns interest on the
money it loaned to the importer.
Facts:

Southeast Timber Co. (TOMCO) applied for, and was granted by the Philippine Commercial and Industrial Bank (PCIB), a domestic letter of credit
for P 80,000 in favor of its supplier, Oregon Industries, Inc., to pay for one Skagit Yarder with accessories.

PCIB paid to Oregon Industries the cost of the machinery against a bill of exchange for P 80,000, with recourse, presentment and notice of
dishonor waived, and with date of maturity on January 4, 1964.

After making the required marginal deposit of P28,000, TOMCO, Inc. signed and delivered to the bank a trust receipt acknowledging
receipt of the merchandise in trust for the bank, with the obligation to hold the same in storage as property of PCIB, with a right to sell the
same for cash provided that the entire proceeds thereof are turned over to the bank, to be applied against acceptance(s) and any other
indebtedness of TOMCO, Inc.

In consideration of the release to TOMCO, Inc. by PCIB of the machinery covered by the trust receipt, petitioner Ramon Abad signed an
undertaking entitled, Deed of Continuing Guaranty appearing on the back of the trust receipt, whereby he promised to pay the obligation jointly
and severally with TOMCO, Inc. Except for TOMCOs P28,000 marginal deposit in the bank, no payment has been made to PCIB by either
TOMCO, Inc. or its surety, Abad, on the P80,000 letter of credit. Consequently, PCIB filed a collection suit against Abad and TOMCO. TOMCO did
not deny its liability to PCIB under the letter of credit but it alleged that inasmuch as it made a marginal deposit of P28,000, this amount should
have been deducted from its principal obligation, leaving a balance of P52,000 only, on which the bank should have computed the interest, bank
charges, and attorneys fees.

Issue: Whether or not the marginal deposit should be included in computing the liability of TOMCO and Abad? (NO)
Held:

It is only fair then that the importers marginal deposit (if one was made, as in this case), should be set off against his debt, for while the importer
earns no interest on his marginal deposit, the bank, apart from being able to use said deposit for its own purposes, also earns interest on the
money it loaned to the importer.

It would be onerous to compute interest and other charges on the face value of the letter of credit which the bank issued, without first
crediting or setting off the marginal deposit which the importer paid to the bank.

Compensation is proper and should take effect by operation of law because the requisites in Article 1279 of the Civil Code are present and should
extinguish both debts to the concurrent amount (Art. 1290, Civil Code).

The marginal deposit requirement is a Central Bank measure to cut off excess currency liquidity which would create inflationary pressure. It
is a collateral security given by the debtor, and is supposed to be returned to him upon his compliance with his secured obligation

Consequently, the bank pays no interest on the marginal deposit, unlike an ordinary bank deposit which earns interest in the bank. As a matter of
fact, the marginal deposit requirement for letters of credit has been discontinued, except in those cases where the applicant for a letter of credit is
not known to the bank or does not maintain a good credit standing therein.

Abad v. CA, G.R. 42735, Jan. 22, 1990

FACTS:

TOMCO, Inc.applied for, and was granted by the Philippine Commercial and Industrial Bank (hereafter called "PCIB"), a domestic letter of credit in
favor of its supplier, Oregon Industries, Inc., to pay for one Skagit Yarder with accessories. PCIB paid to Oregon Industries the cost of the
machinery against a bill of exchange .

After making the required marginal deposit, TOMCO, Inc. signed and delivered to the bank a trust receipt acknowledging receipt of the
merchandise in trust for the bank, with the obligation "to hold the same in storage" as property of PCIB, with a right to sell the same for cash
provided that the entire proceeds thereof are turned over to the bank, to be applied against acceptance(s) and any other indebtedness of TOMCO,
Inc.

In consideration of the release to TOMCO, Inc. by PCIB of the machinery covered by the trust receipt, Ramon Abad signed an undertaking entitled,
"Deed of Continuing Guaranty" appearing on the back of the trust receipt, whereby he Promised to pay the obligation jointly and severally with
TOMCO, Inc.

Except for TOMCOs P28,000 marginal deposit in the bank, no payment has been made to PCIB by either TOMCO, Inc. or its surety, Abad, on the
P80,000 letter of credit.

Consequently, the bank sued TOMCO, Inc. and Abad

TOMCO did not deny its liability to PCIB under the letter of credit but it alleged that inasmuch as it made a marginal deposit the same should have
been deducted from its principal obligation, on which the bank should have computed the interest, bank charges, and attorney's fees.

TC: in favor of PCIB ordering TOMCO and ABAD to pay jointly and severally to PCIB with the marginal deposit still included in the computation of
the obligation.

CA: Affirmed in toto decision of TC.

ISSUE: Whether or not the marginal deposit paid for should first be deducted from its principal before computing interests and other charges? (YES)
HELD:

The marginal deposit requirement is a Central Bank measure to cut off excess currency liquidity which would create inflationary pressure. It is a
collateral security given by the debtor, and is supposed to be returned to him upon his compliance with his secured obligation. Consequently, the
bank pays no interest on the marginal deposit, unlike an ordinary bank deposit which earns interest in the bank. As a matter of fact, the marginal
deposit requirement for letters of credit has been discontinued, except in those cases where the applicant for a letter of credit is not known to the
bank or does not maintain a good credit standing therein.

It is only fair then that the marginal deposit (if one was made, as in this case), should be set off against his debt, for while the importer earns no
interest on his marginal deposit, the bank, apart from being able to use said deposit for its own purposes, also earns interest on the money it loaned
to the importer. It would be onerous to compute interest and other charges on the face value of the letter of credit which the bank issued, without
first crediting or setting off the marginal deposit which the importer paid to the bank. To allow such would be a clear case of unjust enrichment.

Feati Bank and Trust Company v. CA, G.R. No. 940209, Apr. 30, 1991
Doctrine: In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or transmit to the beneficiary the existence of the
letter of credit. A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft under the letter of credit. Its liability is
dependent upon the stage of the negotiation. If before negotiation, it has no liability with respect to the seller. However, after negotiation, a contractual
relationship will then prevail between the negotiating bank and the seller. In the case of a confirming bank, the correspondent bank assumes a direct
obligation to the seller and its liability is a primary one as if the correspondent bank itself had issued the letter of credit.
Facts:

Bernardo Villaluz entered into a contract of sale with Axel Christiansen in which Villaluz agreed to deliver to Christiansen 2,000 cubic meters of
lauan logs at $27.00 per cubic meter FOB.

On the arrangements made and upon the instructions of consignee, Hanmi Trade Development, Ltd., the Security Pacific National Bank of Los
Angeles, California issued an irrevocable letter of credit available at sight in favor of Villaluz for the sum of $54,000.00, the total purchase
price of the lauan logs.

The letter of credit was mailed to the Feati Bank and Trust Company with the instruction to the latter that it forward the enclosed letter of
credit to the beneficiary.

The letter of credit also provided that the draft to be drawn is on Security Pacific National Bank and that it be accompanied by certain documents.

The logs were thereafter loaded on a vessel but Christiansen refused to issue the certification required in paragraph 4 of the letter of credit, despite
repeated requests by the private respondent. The logs however were still shipped and received by consignee, to whom Christiansen sold the logs.

Because of the absence of the certification by Christiansen, the Feati Bank and Trust company refused to advance the payment on the
letter of credit until such credit lapsed.

Since the demands by Villaluz for Christiansen to execute the certification proved futile, he filed an action for mandamus and specific performance
against Christiansen and Feati Bank and Trust Company before the Court of First Instance of Rizal.

Christiansen however left the Philippines and Villaluz filed an amended complaint making Feati Bank and Trust Company.

Issue: Whether or not Feati Bank is liable for Releasing the funds to Christiansen? NO
Held:

In commercial transactions involving letters of credit, the functions assumed by a correspondent bank are classified according to the obligations
taken up by it. The correspondent bank may be called a notifying bank, a negotiating bank, or a confirming bank.
o

In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or transmit to the beneficiary the existence
of the letter of credit.

A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft under the letter of credit. Its liability is
dependent upon the stage of the negotiation. If before negotiation, it has no liability with respect to the seller but after negotiation, a
contractual relationship will then prevail between the negotiating bank and the seller.

In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller and its liability is a primary one as if
the correspondent bank itself had issued the letter of credit.

CAB: The letter merely provided that the petitioner forward the enclosed original credit to the beneficiary. Considering the aforesaid
instruction to the petitioner by the issuing bank, the Security Pacific National Bank, it is indubitable that the FEATI is only a notifying bank and
not a confirming bank as ruled by the courts below.

A notifying bank is not a privy to the contract of sale between the buyer and the seller, its relationship is only with that of the issuing
bank and not with the beneficiary to whom he assumes no liability. It follows therefore that when the petitioner refused to negotiate with the
private respondent, the latter has no cause of action against the petitioner for the enforcement of his rights under the letter.

Since the Feati was only a notifying bank, its responsibility was solely to notify and/or transmit the documentary of credit to the private respondent
and its obligation ends there.

At the most, when the petitioner extended the loan to the private respondent, it assumed the character of a negotiating bank.

Even then, the petitioner will still not be liable, for a negotiating bank before negotiation has no contractual relationship with the seller. Whether
therefore the petitioner is a notifying bank or a negotiating bank, it cannot be held liable. Absent any definitive proof that it has confirmed the letter
of credit or has actually negotiated with Feati, the refusal by the petitioner to accept the tender of the private respondent is justified.

Philippine National Bank vs. San Miguel Corporation. GR No. 186063, January 15, 2014
Facts:

SMC entered into an Exclusive Dealership Agreement with Goroza wherein the latter was given by SMC the right to sell its various beer products.

Goroza applied for a credit line with SMC, but one of the requirements for the credit line was a letter of credit. Thus, Goroza applied for and was
granted a letter of credit by the PNB in the amount of P2M.
o
Under the credit agreement, the PNB has the obligation to release the proceeds of Goroza's credit line to SMC upon presentation of
the invoices and official receipts of Goroza's purchases of SMC beer products to the PNB, Butuan Branch.

Goroza availed of his credit line with PNB and started selling SMC's beer products. He thereafter applied for an additional credit line with the PNB.

PNB granted Goroza a 1 year revolving credit line in the amount not exceeding P2.4M. Thus, Goroza's total credit line reached P4,400,000

Sometime in January 1998, however, Goroza started to become delinquent with his accounts.

Demands to pay the amount of P3,722,440.88 were made by SMC against Goroza and PNB, but neither of them paid.

SMC filed a Complaint for collection of sum of money against PNB and Goroza.

RTC: Goroza is solely liable and must pay P3.7M.

ISSUE: Whether or not PNB is not liable under the credit as Goroza is solely liable? (PNB is liable)
HELD:

In a letter of credit transaction 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.

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.

CAB: PNB cannot evade responsibility on the sole ground that the RTC judgment found Goroza liable and ordered him to pay the amount sought
to be recovered by SMC. PNB's liability, if any, under the letter of credit is yet to be determined.
Metropolitan Bank And Trust Company vs. Ley Construction And Development Corporation, G.R. No. 185590 December 03, 2014
Facts:

Defendant LCDC, a general contracting firm, through the oral representations of Sps. Ley, applied with Metrobank for the opening of a Letter of
Credit.

Metrobank issued a Letter of Credit in favor of the supplier-beneficiary Global Enterprises Limited, in the amount of USD 802,500. The letter of
credit covered the importation by defendant LCDC of 15,000 metric tons of Iraqi cement from Iraq.
o
LCDC applied for and filed with Metrobank 2 Applications for Amendment of Letter of Credit.

Thereafter, the supplier-beneficiary Global Enterprises, Inc. negotiated its Letter of Credit with the negotiating bank Credit Suisse of Zurich,
Switzerland.

Credit Suisse then sent a reimbursement claim by telex to American Express Bank Ltd., New York for the amount of USD 766,708 with a
certification that all terms and conditions of the credit were complied with.

American Express Bank debited Metrobanks account USD 770,691.30 and credited Credit Suisse Zurich Account with American Express Bank,
Ltd., New York for the negotiation of Letter of Credit.

Metrobank subsequently received from Credit Suisse the necessary shipping documents pertaining to Letter of Credit DC 90-303-C that were in
turn delivered to the LCDC.

Upon receipt of the aforesaid documents, LCDC executed a trust receipt. However, the cement that was to be imported through the
opening of the subject Letter of Credit never arrived in the Philippines.

The prompt payment of the obligation of the defendant LCDC was guaranteed by Sps. Ley under the Continuing Surety Agreement executed by the
latter in favor of the LCDC.

The obligation covered by the subject Letter of Credit in the amount of USD 802,500.00 has long been overdue and unpaid,
notwithstanding repeated demands for payment thereof.

Hence, this action by Metrobank. A demurrer was filed and it was granted.

RTC: Documents presented were insufficient to show that LCDC and the spouses Ley were responsible for the improper negotiation of the letter of
credit.

CA: Affirmed. Bank failed to show that LCDC and the spouses Ley were directly responsible for the improper negotiation of the letter of credit.

The Bank now insists that it has been able to establish its cause of action not only through preponderance of evidence but even by the admissions
of LCDC and the spouses Ley. It maintains that its cause of action is not predicated on the improper negotiation of the letter of credit but
on the breach of the terms and conditions of the trust receipt.
ISSUE: Whether the demurrer was properly granted? (YES)
HELD:

The Banks reference to the Trust Receipt as its primary actionable document is mistaken and misleading. That the Banks cause of action was
hinged on the Letter of Credit is unmistakable. Taken as a whole, the Banks allegations make a cause of action based on the Letter of Credit.

The Bank seeks to hold liable (1) LCDC for its obligations under the Letter of Credit, and (2) the spouses Ley for their obligations under the
Continuing Surety Agreement which stands as security for the Letter of Credit and not for the Trust Receipt.

A look at the Letter of Credit, the actionable document on which the Bank relied in its case against LCDC and the spouses Ley, confirms the
identical findings of the Regional Trial Court and the Court of Appeals.

In a letter of credit, there are three distinct and independent contracts: (1) the contract of sale between the buyer and the seller, (2) the contract of
the buyer with the issuing bank, and (3) the letter of credit proper in which the bank promises to pay the seller pursuant to the terms and conditions
stated therein.

CAB: What is involved is the second contract the contract of LCDC, as the buyer of Iraqi cement, with the Bank, as the issuer of the Letter of
Credit. The Bank refers to that contract in the Petition for Review on Certiorari and the Memorandum filed by the Bank in this case when the Bank
argues that, as LCDC and the spouses Ley have admitted the issuance of the Letter of Credit in their favor, they are deemed to have likewise
admitted the terms and conditions thereof, as evidenced by the stipulation therein appearing above the signature of respondent Janet Ley

Even the legal rights of the Bank and the correlative legal duty of LCDC have not been sufficiently established by the Bank in view of the
failure of the Banks evidence to show the provisions and conditions that govern its legal relationship with LCDC, particularly the
absence of the provisions and conditions supposedly printed at the back of the Application and Agreement for Commercial Letter of
Credit.

Even assuming arguendo that there was no impropriety in the negotiation of the Letter of Credit and the Banks cause of action was simply for the
collection of what it paid under said Letter of Credit, the Bank did not discharge its burden to prove every element of its cause of action against
LCDC.
This failure of the Bank to present preponderant evidence that will establish the liability of LCDC under the Letter of Credit necessarily benefits the
spouses Ley whose liability is supposed to be based on a Continuing Surety Agreement guaranteeing the liability of LCDC under the Letter of
Credit.