On July 2, 1981, MICO filed with PBCom an application for a domestic letter of credit in

the sum of Three Hundred Forty-Eight Thousand Pesos (P348,000.00).12 The

corresponding irrevocable letter of credit was approved and opened under LC No. L16060.13 Thereafter, the domestic letter of credit was negotiated and accepted by MICO
as evidenced by the corresponding bank draft issued for the purpose. 14 After the
supplier of the merchandise was paid, a trust receipt upon MICOs own initiative, was
executed in favor of PBCom.15
On September 14, 1981, MICO applied for another domestic letter of credit with PBCom
in the sum of Two Hundred Ninety Thousand Pesos (P290,000.00).16 The corresponding
irrevocable letter of credit was issued on September 22, 1981 under LC No. L16334.17 After the beneficiary of the said letter of credit was paid by PBCom for the price
of the merchandise, the goods were delivered to MICO which executed a corresponding
trust receipt18 in favor of PBCom.
On November 10, 1981, MICO applied for authority to open a foreign letter of credit in
favor of Ta Jih Enterprises Co., Ltd., 19 and thus, the corresponding letter of credit 20 was
then issued by PBCom with a cable sent to the beneficiary, Ta Jih Enterprises Co., Ltd.
advising that said beneficiary may draw funds from the account of PBCom in its
correspondent banks New York Office. 21 PBCom also informed its corresponding bank
in Taiwan, the Irving Trust Company, of the approved letter of credit. The correspondent
bank acknowledged PBComs advice through a confirmation letter 22 and by debiting
from PBComs account with the said correspondent bank the sum of Eleven Thousand
Nine Hundred Sixty US Dollars ($11 ,960.00). 23 As in past transactions, MICO executed
in favor of PBCom a corresponding trust receipt. 24
On January 4, 1982, MICO applied, for authority to open a foreign letter of credit in the
sum of One Thousand Nine Hundred US Dollars ($1,900.00), with PBCom. 25 Upon
approval, the corresponding letter of credit denominated as LC No. 62293 26 was issued
whereupon PBCom advised its correspondent bank and MICO 27 of the same.
Negotiation and proper acceptance of the letter of credit were then made by MICO.
Again, a corresponding trust receipt28 was executed by MICO in favor of PBCom.
In all the transactions involving foreign letters of credit, PBCom turned over to MICO the
necessary documents such as the bills of lading and commercial invoices to enable the
latter to withdraw the goods from the port of Manila.
On May 21, 1982 MICO obtained from PBCom another loan in the sum of Three
Hundred Seventy-Seven Thousand Pesos (P377,000.00) covered by Promissory Note
BA No. 7458.29
Upon maturity of all credit availments obtained by MICO from PBCom, the latter made a
demand for payment.30For failure of petitioner MICO to pay the obligations incurred
despite repeated demands, private respondent PBCom extrajudicially foreclosed
MICOs real estate mortgage and sold the said mortgaged properties in a public auction
sale held on November 23, 1982. Private respondent PBCom which emerged as the
highest bidder in the auction sale, applied the proceeds of the purchase price at public
auction of Three Million Pesos (P3,000,000.00) to the expenses of the foreclosure,
interest and charges and part of the principal of the loans, leaving an unpaid balance of
Five Million Four Hundred Forty-One Thousand Six Hundred Sixty-Three Pesos and
Ninety Centavos (P5,441,663.90) exclusive of penalty and interest charges. Aside from
the unpaid balance of Five Million Four Hundred Forty-One Thousand Six Hundred
Sixty-Three Pesos and Ninety Centavos (P5,441,663.90), MICO likewise had another
standing obligation in the sum of Four Hundred Sixty-One Thousand Six Hundred
Pesos and Six Centavos (P461,600.06) representing its trust receipts liabilities to
private respondent. PBCom then demanded the settlement of the aforesaid obligations
from herein petitioners-sureties who, however, refused to acknowledge their obligations

to PBCom under the surety agreements. Hence, PBCom filed a complaint with prayer
for writ of preliminary attachment before the Regional Trial Court of Manila, which was
raffled to Branch 55, alleging that MICO was no longer in operation and had no
properties to answer for its obligations. PBCom further alleged that petitioner Charles
Lee has disposed or concealed his properties with intent to defraud his creditors. Except
for MICO and Charles Lee, the sheriff of the RTC failed to serve the summons on herein
petitioners-sureties since they were all reportedly abroad at the time. An alias summons
was later issued but the sheriff was not able to serve the same to petitioners Alfonso Co
and Chua Siok Suy who was already sickly at the time and reportedly in Taiwan where
he later died.
Petitioners (MICO and herein petitioners-sureties) denied all the allegations of the
complaint filed by respondent PBCom, and alleged that: a) MICO was not granted the
alleged loans and neither did it receive the proceeds of the aforesaid loans; b) Chua
Siok Suy was never granted any valid Board Resolution to sign for and in behalf of
MICO; c) PBCom acted in bad faith in granting the alleged loans and in releasing the
proceeds thereof; d) petitioners were never advised of the alleged grant of loans and
the subsequent releases therefor, if any; e) since no loan was ever released to or
received by MICO, the corresponding real estate mortgage and the surety agreements
signed concededly by the petitioners-sureties are null and void.
The trial court gave credence to the testimonies of herein petitioners and dismissed the
complaint filed by PBCom. The trial court likewise declared the real estate mortgage
and its foreclosure null and void. In ruling for herein petitioners, the trial court said that
PBCom failed to adequately prove that the proceeds of the loans were ever delivered to
MICO. The trial court pointed out, among others, that while PBCom claimed that the
proceeds of the Four Million Pesos (P4,000,000.00) loan covered by promissory note
TA 094 were deposited to the current account of petitioner MICO, PBCom failed to
produce the ledger account showing such deposit. The trial court added that while
PBCom may have loaned to MICO the other sums of Three Hundred Forty-Eight
Thousand Pesos (P348,000.00) and Two Hundred Ninety Thousand Pesos
(P290,000.00), no proof has been adduced as to the existence of the goods covered
and paid by the said amounts. Hence, inasmuch as no consideration ever passed from
PBCom to MICO, all the documents involved therein, such as the promissory notes, real
estate mortgage including the surety agreements were all void or nonexistent for lack of
cause or consideration. The trial court said that the lack of proof as regards the
existence of the merchandise covered by the letters of credit bolstered the claim of
herein petitioners that no purchases of the goods were really made and that the letters
of credit transactions were simply resorted to by the PBCom and Chua Siok Suy to
accommodate the latter in his financial requirements.
The Court of Appeals reversed the ruling of the trial court, saying that the latter
committed an erroneous application and appreciation of the rules governing the burden
of proof. Citing Section 24 of the Negotiable Instruments Law which provides that
"Every negotiable instrument is deemed prima facie to have been issued for
valuable consideration and every person whose signature appears thereon to
have become a party thereto for value", the Court of Appeals said that while the
subject promissory notes and letters of credit issued by the PBCom made no mention of
delivery of cash, it is presumed that said negotiable instruments were issued for
valuable consideration. The Court of Appeals also cited the case of Gatmaitan vs. Court
of Appeals31which holds that "there is a presumption that an instrument sets out the
true agreement of the parties thereto and that it was executed for valuable
consideration". The appellate court noted and found that a notarized Certification was
issued by MICOs corporate secretary, P.B. Barrera, that Chua Siok Suy, was duly
authorized by the Board of Directors of MICO to borrow money and obtain credit
facilities from PBCom.

Petitioners filed a motion for reconsideration of the challenged decision of the Court of
Appeals but this was denied in a Resolution dated November 7, 1994 issued by its
Former Second Division. Petitioners-sureties then filed a petition for review on certiorari
with this Court, docketed as G.R. No. 117913, assailing the decision of the Court of
Appeals. MICO likewise filed a separate petition for review on certiorari, docketed as
G.R. No. 117914, with this Court assailing the same decision rendered by the Court of
Appeals. Upon motion filed by petitioners, the two (2) petitions were consolidated on
January 11, 1995.32
Petitioners contend that there was no proof that the proceeds of the loans or the goods
under the trust receipts were ever delivered to and received by MICO. But the record
shows otherwise. Petitioners-sureties further contend that assuming that there was
delivery by PBCom of the proceeds of the loans and the goods, the contracts were
executed by an unauthorized person, more specifically Chua Siok Suy who acted
fraudulently and in collusion with PBCom to defraud MICO.
The pertinent issues raised in the consolidated cases at bar are: a) whether or not the
proceeds of the loans and letters of credit transactions were ever delivered to MICO,
and b) whether or not the individual petitioners, as sureties, may be held liable under
the two (2) Surety Agreements executed on March 26, 1979 and July 28, 1980.
In civil cases, the party having the burden of proof must establish his case by
preponderance of evidence.33Preponderance of evidence means evidence which is
more convincing to the court as worthy of belief than that which is offered in opposition
thereto. Petitioners contend that the alleged promissory notes, trust receipts and surety
agreements attached to the complaint filed by PBCom did not ripen into valid and
binding contracts inasmuch as there is no evidence of the delivery of money or loan
proceeds to MICO or to any of the petitioners-sureties. Petitioners claim that under
normal banking practice, borrowers are required to accomplish promissory notes in
blank even before the grant of the loans applied for and such documents become valid
written contracts only when the loans are actually released to the borrower.
Petitioners allege that PBCom presented no evidence that it remitted payments to cover
the domestic and foreign letters of credit. Petitioners placed much reliance on the
erroneous decision of the trial court which stated that private respondent PBCom
allegedly failed to prove that it actually made payments under the letters of credit since
the bank drafts presented as evidence show that they were made in favor of the Bank of
Taiwan and First Commercial Bank.
RULING
Modern letters of credit are usually not made between natural persons. They involve
bank to bank transactions. Historically, the letter of credit was developed to facilitate the
sale of goods between, distant and unfamiliar buyers and sellers. It was an arrangement
under which a bank, whose credit was acceptable to the seller, would at the instance of
the buyer agree to pay drafts drawn on it by the seller, provided that certain documents
are presented such as bills of lading accompanied the corresponding drafts. Expansion
in the use of letters of credit was a natural development in commercial
banking.38 Parties to a commercial letter of credit include (a) the buyer or the importer,
(b) the seller, also referred to as beneficiary, (c) the opening bank which is usually the
buyers bank which actually issues the letter of credit, (d) the notifying bank which is the
correspondent bank of the opening bank through which it advises the beneficiary of the
letter of credit, (e) negotiating bank which is usually any bank in the city of the
beneficiary. The services of the notifying bank must always be utilized if the letter of
credit is to be advised to the beneficiary through cable, (f) the paying bank which buys
or discounts the drafts contemplated by the letter of credit, if such draft is to be drawn
on the opening bank or on another designated bank not in the city of the beneficiary. As

a rule, whenever the facilities of the opening bank are used, the beneficiary is supposed
to present his drafts to the notifying bank for negotiation and (g) the confirming bank
which, upon the request of the beneficiary, confirms the letter of credit issued by the
opening bank.
From the foregoing, it is clear that letters of credit, being usually bank to bank
transactions, involve more than just one bank. Consequently, there is nothing unusual in
the fact that the drafts presented in evidence by respondent bank were not made
payable to PBCom. As explained by respondent bank, a draft was drawn on the Bank of
Taiwan by Ta Jih Enterprises Co., Ltd. of Taiwan, supplier of the goods covered by the
foreign letter of credit. Having paid the supplier, the Bank of Taiwan then presented the
bank draft for reimbursement by PBComs correspondent bank in Taiwan, the Irving
Trust Company which explains the reason why on its face, the draft was made
payable to the Bank of Taiwan. Irving Trust Company accepted and endorsed the draft
to PBCom. The draft was later transmitted to PBCom to support the latters claim for
payment from MICO. MICO accepted the draft upon presentment and negotiated it to
PBCom.

G.R. No. 146717

November 22, 2004

TRANSFIELD
PHILIPPINES,
INC., petitioner,
vs.
LUZON HYDRO CORPORATION, AUSTRALIA and NEW ZEALAND BANKING
GROUP LIMITED and SECURITY BANK CORPORATION, respondents.
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
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)8each in the amount of US$8,988,907.00
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.
Meanwhile, foreseeing that LHC would call on the Securities pursuant to the pertinent
provisions of the Turnkey Contract, 12 petitionerin two separate letters 13 both dated 10
August 2000advised 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 8.214 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.
The RTC, in its Order19 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 claims.
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.
WHETHER THE "INDEPENDENCE PRINCIPLE" ON LETTERS OF CREDIT MAY BE
INVOKED BY A BENEFICIARY THEREOF WHERE THE BENEFICIARY'S CALL
THEREON IS WRONGFUL OR FRAUDULENT.
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
200328 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.
RULING
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 argumentthat it is only the issuing
bank that may invoke the independence principle on letters of creditdoes 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.
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.
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 defaultsuch 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 Securities?
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 Security.57
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 petition.
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 employerthe very purpose of the preliminary injunction
has expired, any declaration upholding the propriety of the writ would be entirely
useless as there would be no 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 mootfor 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.