G.R. No.

160732

June 21, 2004

METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner,

vs.
HON. REYNALDO B. DAWAY, in his capacity as Presiding Judge of the Regional Trial Court of
Quezon City, Branch 90 and Maynilad Water Services, Inc., respondents
AZCUNA, J.:
On November 17, 2003, the Regional Trial Court (RTC) of Quezon City, Branch 90, made a determination that the
Petition for Rehabilitation with Prayer for Suspension of Actions and Proceedings filed by Maynilad Water Services,
Inc. (Maynilad) conformed substantially to the provisions of Sec. 2, Rule 4 of the Interim Rules of Procedure on
Corporate Rehabilitation (Interim Rules). It forthwith issued a Stay Order 1 which states, in part, that the court was
thereby:
xxx

xxx

xxx

2. Staying enforcement of all claims, whether for money or otherwise and whether such enforcement is by
court action or otherwise, against the petitioner, its guarantors and sureties not solidarily liable with the
petitioner;
3. Prohibiting the petitioner from selling, encumbering, transferring, or disposing in any manner any of its
properties except in the ordinary course of business;
4. Prohibiting the petitioner from making any payment of its liabilities, outstanding as at the date of the
filing of the petition;
xxx

xxx

xxx

Subsequently, on November 27, 2003, public respondent, acting on two Urgent Ex Parte motions2 filed by
respondent Maynilad, issued the herein questioned Order3 which stated that it thereby:
"1. DECLARES that the act of MWSS in commencing on November 24, 2003 the process for the payment by
the banks of US$98 million out of the US$120 million standby letter of credit so the banks have to make
good such call/drawing of payment of US$98 million by MWSS not later than November 27, 2003 at 10:00
P. M. or any similar act for that matter, is violative of the above-quoted sub-paragraph 2.) of the dispositive
portion of this Courts Stay Order dated November 17, 2003.
2. ORDERS MWSS through its officers/officials to withdraw under pain of contempt the written
certification/notice of draw to Citicorp International Limited dated November 24, 2003 and DECLARES
void any payment by the banks to MWSS in the event such written certification/notice of draw is not
withdrawn by MWSS and/or MWSS receives payment by virtue of the aforesaid standby letter of credit."
Aggrieved by this Order, petitioner Manila Waterworks & Sewerage System (MWSS) filed this petition for review by
way of certiorari under Rule 65 of the Rules of Court questioning the legality of said order as having been issued
without or in excess of the lower courts jurisdiction or that the court a quo acted with grave abuse of discretion
amounting to lack or excess of jurisdiction.4
ANTECEDENTS OF THE CASE
On February 21, 1997, MWSS granted Maynilad under a Concession Agreement a twenty-year period to manage,
operate, repair, decommission and refurbish the existing MWSS water delivery and sewerage services in the West
Zone Service Area, for which Maynilad undertook to pay the corresponding concession fees on the dates agreed upon
in said agreement5 which, among other things, consisted of payments of petitioners mostly foreign loans.
To secure the concessionaires performance of its obligations under the Concession Agreement, Maynilad was
required under Section 6.9 of said contract to put up a bond, bank guarantee or other security acceptable to MWSS.
In compliance with this requirement, Maynilad arranged on July 14, 2000 for a three-year facility with a number of
foreign banks, led by Citicorp International Limited, for the issuance of an Irrevocable Standby Letter of Credit 6 in
the amount of US$120,000,000 in favor of MWSS for the full and prompt performance of Maynilads obligations to
MWSS as aforestated.
Sometime in September 2000, respondent Maynilad requested MWSS for a mechanism by which it hoped to recover
the losses it had allegedly incurred and would be incurring as a result of the depreciation of the Philippine Peso
against the US Dollar. Failing to get what it desired, Maynilad issued a Force Majeure Notice on March 8, 2001 and
unilaterally suspended the payment of the concession fees. In an effort to salvage the Concession Agreement, the
parties entered into a Memorandum of Agreement (MOA) 7 on June 8, 2001 wherein Maynilad was allowed to
recover foreign exchange losses under a formula agreed upon between them. Sometime in August 2001 Maynilad
again filed another Force Majeure Notice and, since MWSS could not agree with the terms of said Notice, the matter
was referred on August 30, 2001 to the Appeals Panel for arbitration. This resulted in the parties agreeing to resolve
the issues through an amendment of the Concession Agreement on October 5, 2001, known as Amendment No.
1,8which was based on the terms set down in MWSS Board of Trustees Resolution No. 457-2001, as amended by
MWSS Board of Trustees Resolution No. 487-2001, 9 which provided inter alia for a formula that would allow

Maynilad to recover foreign exchange losses it had incurred or would incur under the terms of the Concession
Agreement.
As part of this agreement, Maynilad committed, among other things, to:
a) infuse the amount of UD$80.0 million as additional funding support from its stockholders;
b) resume payment of the concession fees; and
c) mutually seek the dismissal of the cases pending before the Court of Appeals and with Minor Dispute
Appeals Panel.
However, on November 5, 2002, Maynilad served upon MWSS a Notice of Event of Termination, claiming that
MWSS failed to comply with its obligations under the Concession Agreement and Amendment No. 1 regarding the
adjustment mechanism that would cover Maynilads foreign exchange losses. On December 9, 2002, Maynilad filed
a Notice of Early Termination of the concession, which was challenged by MWSS. This matter was eventually
brought before the Appeals Panel on January 7, 2003 by MWSS. 10 On November 7, 2003, the Appeals Panel ruled
that there was no Event of Termination as defined under Art. 10.2 (ii) or 10.3 (iii) of the Concession Agreement and
that, therefore, Maynilad should pay the concession fees that had fallen due.
The award of the Appeals Panel became final on November 22, 2003. MWSS, thereafter, submitted a written
notice11 on November 24, 2003, to Citicorp International Limited, as agent for the participating banks, that by virtue
of Maynilads failure to perform its obligations under the Concession Agreement, it was drawing on the Irrevocable
Standby Letter of Credit and thereby demanded payment in the amount of US$98,923,640.15.
Prior to this, however, Maynilad had filed on November 13, 2003, a petition for rehabilitation before the court a
quowhich resulted in the issuance of the Stay Order of November 17, 2003 and the disputed Order of November 27,
2003.12
PETITIONERS CASE
Petitioner hereby raises the following issues:
1. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR AND/OR ACT PATENTLY WITHOUT
JURISDICTION OR IN EXCESS OF JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN CONSIDERING THE PERFORMANCE BOND
OR ASSETS OF THE ISSUING BANKS AS PART OR PROPERTY OF THE ESTATE OF THE PRIVATE
RESPONDENT MAYNILAD SUBJECT TO REHABILITATION.
2. DID THE HONORABLE PRESIDING JUDGE ACT WITH LACK OR EXCESS OF JURISDICTION OR
COMMIT A GRAVE ERROR OF LAW IN HOLDING THAT THE PERFORMANCE BOND OBLIGATIONS
OF THE BANKS WERE NOT SOLIDARY IN NATURE.
3. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR IN ALLOWING MAYNILAD TO IN
EFFECT SEEK A REVIEW OR APPEAL OF THE FINAL AND BINDING DECISION OF THE APPEALS
PANEL.
In support of the first issue, petitioner maintains that as a matter of law, the US$120 Million Standby Letter of
Credit and Performance Bond are not property of the estate of the debtor Maynilad and, therefore, not subject to
the in remrehabilitation jurisdiction of the trial court.
Petitioner argues that a call made on the Standby Letter of Credit does not involve any asset of Maynilad but only
assets of the banks. Furthermore, a call on the Standby Letter of Credit cannot also be considered a "claim" falling
under the purview of the stay order as alleged by respondent as it is not directed against the assets of respondent
Maynilad.
Petitioner concludes that the public respondent erred in declaring and holding that the commencement of the
process for the payment of US$98 million is a violation of the order issued on November 17, 2003.
RESPONDENT MAYNILADS CASE
Respondent Maynilad seeks to refute this argument by alleging that:
a) the order objected to was strictly and precisely worded and issued after carefully considering/evaluating
the import of the arguments and documents referred to by Maynilad, MWSS and/or creditors Chinatrust
Commercial Bank and Suez in relation to admissions, pleadings and/or pertinent records 13 and that public
respondent had the authority to issue the same;
b) public respondent never considered nor held that the Performance bond or assets of the issuing banks are
part or property of the estate of respondent Maynilad subject to rehabilitation and which respondent
Maynilad has not and has never claimed to be;14
c) what is relevant is not whether the performance bond or assets of the issuing banks are part of the estate
of respondent Maynilad but whether the act of petitioner in commencing the process for the payment by the

banks of US$98 million out of the US$120 million performance bond is covered and/or prohibited under
sub-paragraphs 2.) and 4.) of the stay order dated November 17, 2003;
d) the jurisdiction of public respondent extends not only to the assets of respondent Maynilad but also over
persons and assets of "all those affected by the proceedings x x x upon publication of the notice of
commencement;15" and
e) the obligations under the Standby Letter of Credit are not solidary and are not exempt from the coverage
of the stay order.
OUR RULING
We will discuss the first two issues raised by petitioner as these are interrelated and make up the main issue of the
petition before us which is, did the rehabilitation court sitting as such, act in excess of its authority or jurisdiction
when it enjoined herein petitioner from seeking the payment of the concession fees from the banks that issued the
Irrevocable Standby Letter of Credit in its favor and for the account of respondent Maynilad?
The public respondent relied on Sec. 1, Rule 3 of the Interim Rules on Corporate Rehabilitation to support its
jurisdiction over the Irrevocable Standby Letter of Credit and the banks that issued it. The section reads in part "that
jurisdiction over those affected by the proceedings is considered acquired upon the publication of the notice of
commencement of proceedings in a newspaper of general circulation" and goes further to define rehabilitation as
anin rem proceeding. This provision is a logical consequence of the in rem nature of the proceedings, where
jurisdiction is acquired by publication and where it is necessary that the assets of the debtor come within the courts
jurisdiction to secure the same for the benefit of creditors. The reference to "all those affected by the proceedings"
covers creditors or such other persons or entities holding assets belonging to the debtor under rehabilitation which
should be reflected in its audited financial statements. The banks do not hold any assets of respondent Maynilad that
would be material to the rehabilitation proceedings nor is Maynilad liable to the banks at this point.
Respondent Maynilads Financial Statement as of December 31, 2001 and 2002 do not show the Irrevocable Standby
Letter of Credit as part of its assets or liabilities, and by respondent Maynilads own admission it is not. In issuing
the clarificatory order of November 27, 2003, enjoining petitioner from claiming from an asset that did not belong to
the debtor and over which it did not acquire jurisdiction, the rehabilitation court acted in excess of its jurisdiction.
Respondent Maynilad insists, however, that it is Sec. 6 (b), Rule 4 of the Interim Rules that supports its claim that
the commencement of the process to draw on the Standby Letter of Credit is an enforcement of claim prohibited by
and under the Interim Rules and the order of public respondent.
Respondent Maynilad would persuade us that the above provision justifies a leap to the conclusion that such an
enforcement is prohibited by said section because it is a "claim against the debtor, its guarantors and sureties not
solidarily liable with the debtor" and that there is nothing in the Standby Letter of Credit nor in law nor in the nature
of the obligation that would show or require the obligation of the banks to be solidary with the respondent Maynilad.
We disagree.
First, the claim is not one against the debtor but against an entity that respondent Maynilad has procured to answer
for its non-performance of certain terms and conditions of the Concession Agreement, particularly the payment of
concession fees.
Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the enforcement of all claims against guarantors
and sureties, but only those claims against guarantors and sureties who are not solidarily liable with
the debtor. Respondent Maynilads claim that the banks are not solidarily liable with the debtor does not find
support in jurisprudence.
We held in Feati Bank & Trust Company v. Court of Appeals 16 that 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.17
Letters of credit were developed for the purpose of insuring to a seller payment of a definite amount upon the
presentation of documents18 and is thus a commitment by the issuer that the party in whose favor it is issued and
who can collect upon it will have his credit against the applicant of the letter, duly paid in the amount specified in the
letter.19 They are in effect absolute undertakings 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 and while they are security
arrangements, they are not converted thereby into contracts of guaranty. 20 What distinguishes letters of credit from
other accessory contracts, is the engagement of the issuing bank to pay the seller once the draft and other required
shipping documents are presented to it. 21 They are definite undertakings to pay at sight once the documents
stipulated therein are presented.
Letters of Credits have long been and are still governed by the provisions of the Uniform Customs and Practice for
Documentary Credits of the International Chamber of Commerce. In the 1993 Revision it provides in Art. 2 that "the
expressions Documentary Credit(s) and Standby Letter(s) of Credit mean any arrangement, however made or

described, whereby a bank acting at the request and on instructions of a customer or on its own behalf is to make
payment against stipulated document(s)" and Art. 9 thereof defines the liability of the issuing banks on an
irrevocable letter of credit as a "definite undertaking of the issuing bank, provided that the stipulated documents are
presented to the nominated bank or the issuing bank and the terms and conditions of the Credit are complied with,
to pay at sight if the Credit provides for sight payment." 22
We have accepted, in Feati Bank and Trust Company v. Court of Appeals 23 and Bank of America NT & SA v. Court
of Appeals,24 to the extent that they are pertinent, the application in our jurisdiction of the international credit
regulatory set of rules known as the Uniform Customs and Practice for Documentary Credits (U.C.P) issued by the
International Chamber of Commerce, which we said in Bank of the Philippine Islands v. Nery 25 was justified under
Art. 2 of the Code of Commerce, which states:
"Acts of commerce, whether those who execute them be merchants or not, and whether specified in this
Code or not should be governed by the provisions contained in it; in their absence, by the usages of
commerce generally observed in each place; and in the absence of both rules, by those of the civil law."
The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to herein petitioner as the 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 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.
Being solidary, the claims against them can be pursued separately from and independently of the rehabilitation case,
as held in Traders Royal Bank v. Court of Appeals 26 and reiterated in Philippine Blooming Mills, Inc. v. Court of
Appeals,27 where we said that property of the surety cannot be taken into custody by the rehabilitation receiver (SEC)
and said surety can be sued separately to enforce his liability as surety for the debts or obligations of the debtor. The
debts or obligations for which a surety may be liable include future debts, an amount which may not be known at the
time the surety is given.
The terms of the Irrevocable Standby Letter of Credit do not show that the obligations of the banks are not solidary
with those of respondent Maynilad. On the contrary, it is issued at the request of and for the account of Maynilad
Water Services, Inc., in favor of the Metropolitan Waterworks and Sewerage System, as a bond for the full and
prompt performance of the obligations by the concessionaire under the Concession Agreement 28 and herein
petitioner is authorized by the banks to draw on it by the simple act of delivering to the agent a written certification
substantially in the form Annex "B" of the Letter of Credit. It provides further in Sec. 6, that for as long as the
Standby Letter of Credit is valid and subsisting, the Banks shall honor any written Certification made by MWSS in
accordance with Sec. 2, of the Standby Letter of Credit regardless of the date on which the event giving rise to such
Written Certification arose.29
Taking into consideration our own rulings on the nature of letters of credit and the customs and usage developed
over the years in the banking and commercial practice of letters of credit, we hold that except when a letter of credit
specifically stipulates otherwise, the obligation of the banks issuing letters of credit are solidary with that of the
person or entity requesting for its issuance, the same being a direct, primary, absolute and definite undertaking to
pay the beneficiary upon the presentation of the set of documents required therein.
The public respondent, therefore, exceeded his jurisdiction, in holding that he was competent to act on the
obligation of the banks under the Letter of Credit under the argument that this was not a solidary obligation with
that of the debtor. Being a solidary obligation, the letter of credit is excluded from the jurisdiction of the
rehabilitation court and therefore in enjoining petitioner from proceeding against the Standby Letters of Credit to
which it had a clear right under the law and the terms of said Standby Letter of Credit, public respondent acted in
excess of his jurisdiction.
ADDITIONAL ISSUES
We proceed to consider the other issues raised in the oral arguments and included in the parties memoranda:
1. Respondent Maynilad argues that petitioner had a plain, speedy and adequate remedy under the Interim
Rules itself which provides in Sec. 12, Rule 4 that the court may on motion or motu proprio, terminate,
modify or set conditions for the continuance of the stay order or relieve a claim from coverage thereof. We
find, however, that the public respondent had already accomplished this during the hearing set for the two
UrgentEx Parte motions filed by respondent Maynilad on November 21 and 24, 2003, 30 where the parties
including the creditors, Suez and Chinatrust Commercial "presented their respective arguments." 31 The
public respondent then ruled, "after carefully considering/evaluating the import of the arguments and
documents referred to by Maynilad, MWSS and/or the creditors Chinatrust Commercial Bank and Suez in
relation to the admissions, the pleadings, and/or pertinent portions of the records, this court is of the
considered and humble view that the issue must perforce be resolved in favor of Maynilad." 32 Hence to
pursue their opposition before the same court would result in the presentation of the same arguments and
issues passed upon by public respondent.
Furthermore, Sec. 5, Rule 3 of the Interim Rules would preclude any other effective remedy questioning the
orders of the rehabilitation court since they are immediately executory and a petition for review or an appeal
therefrom shall not stay the execution of the order unless restrained or enjoined by the appellate court." In
this situation, it had no other remedy but to seek recourse to us through this petition for certiorari.
In Silvestre v. Torres and Oben,33 we said that it is not enough that a remedy is available to prevent a party
from making use of the extraordinary remedy of certiorari but that such remedy be an adequate remedy

which is equally beneficial, speedy and sufficient, not only a remedy which at some time in the future may
offer relief but a remedy which will promptly relieve the petitioner from the injurious acts of the lower
tribunal. It is the inadequacy -- not the mere absence -- of all other legal remedies and the danger of failure
of justice without the writ, that must usually determine the propriety of certiorari.34
2. Respondent Maynilad argues that by commencing the process for payment under the Standby Letter of
Credit, petitioner violated an immediately executory order of the court and, therefore, comes to Court with
unclean hands and should therefore be denied any relief.
It is true that the stay order is immediately executory. It is also true, however, that the Standby Letter of
Credit and the banks that issued it were not within the jurisdiction of the rehabilitation court. The call on the
Standby Letter of Credit, therefore, could not be considered a violation of the Stay Order.
3. Respondents claim that the filing of the petition pre-empts the original jurisdiction of the lower court is
without merit. The purpose of the initial hearing is to determine whether the petition for rehabilitation has
merit or not. The propriety of the stay order as well as the clarificatory order had already been passed upon
in the hearing previously had for that purpose. The determination of whether the public respondent was
correct in enjoining the petitioner from drawing on the Standby Letter of Credit will have no bearing on the
determination to be made by public respondent whether the petition for rehabilitation has merit or not. Our
decision on the instant petition does not pre-empt the original jurisdiction of the rehabilitation court.
WHEREFORE, the petition for certiorari is granted. The Order of November 27, 2003 of the Regional Trial Court
of Quezon City, Branch 90, is hereby declared NULL AND VOID and SET ASIDE. The status quo Order herein
previously issued is hereby LIFTED. In view of the urgency attending this case, this decision is immediately
executory.

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.
TINGA, J.:
Subject of this case is the letter of credit which has evolved as the ubiquitous and most important device in
international trade. A creation of commerce and businessmen, the letter of credit is also unique in the number of
parties involved and its supranational character.
Petitioner has appealed from the Decision1 of the Court of Appeals in CA-G.R. SP No. 61901 entitled "Transfield
Philippines, Inc. v. Hon. Oscar Pimentel, et al.," promulgated on 31 January 2001. 2
On 26 March 1997, petitioner and respondent Luzon Hydro Corporation (hereinafter, LHC) entered into a Turnkey
Contract3 whereby petitioner, as Turnkey Contractor, undertook to construct, on a turnkey basis, a seventy (70)Megawatt hydro-electric power station at the Bakun River in the provinces of Benguet and Ilocos Sur (hereinafter,
the Project). Petitioner was given the sole responsibility for the design, construction, commissioning, testing and
completion of the Project.4
The Turnkey Contract provides that: (1) the target completion date of the Project shall be on 1 June 2000, or such
later date as may be agreed upon between petitioner and respondent LHC or otherwise determined in accordance
with the Turnkey Contract; and (2) petitioner is entitled to claim extensions of time (EOT) for reasons enumerated
in the Turnkey Contract, among which are variations, force majeure, and delays caused by LHC itself. 5 Further, in
case of dispute, the parties are bound to settle their differences through mediation, conciliation and such other
means enumerated under Clause 20.3 of the Turnkey Contract.6
To secure performance of petitioner's obligation on or before the target completion date, or such time for completion
as may be determined by the parties' agreement, petitioner opened in favor of LHC two (2) standby letters of credit
both dated 20 March 2000 (hereinafter referred to as "the Securities"), to wit: Standby Letter of Credit No.
E001126/8400 with the local branch of respondent Australia and New Zealand Banking Group Limited (ANZ
Bank)7and Standby Letter of Credit No. IBDIDSB-00/4 with respondent Security Bank Corporation (SBC) 8 each in
the amount of US$8,988,907.00.9
In the course of the construction of the project, petitioner sought various EOT to complete the Project. The
extensions were requested allegedly due to several factors which prevented the completion of the Project on target
date, such as force majeure occasioned by typhoon Zeb, barricades and demonstrations. LHC denied the requests,
however. This gave rise to a series of legal actions between the parties which culminated in the instant petition.
The first of the actions was a Request for Arbitration which LHC filed before the Construction Industry Arbitration
Commission (CIAC) on 1 June 1999.10 This was followed by another Request for Arbitration, this time filed by
petitioner before the International Chamber of Commerce (ICC) 11 on 3 November 2000. In both arbitration
proceedings, the common issues presented were: [1) whether typhoon Zeb and any of its associated events
constituted force majeure to justify the extension of time sought by petitioner; and [2) whether LHC had the right to
terminate the Turnkey Contract for failure of petitioner to complete the Project on target date.
Meanwhile, foreseeing that LHC would call on the Securities pursuant to the pertinent provisions of the Turnkey
Contract,12 petitionerin two separate letters13 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 8.2 14 of the
Turnkey Contract, it failed to comply with its obligation to complete the Project. Despite the letters of petitioner,
however, both banks informed petitioner that they would pay on the Securities if and when LHC calls on them. 15
LHC asserted that additional extension of time would not be warranted; accordingly it declared petitioner in
default/delay in the performance of its obligations under the Turnkey Contract and demanded from petitioner the
payment of US$75,000.00 for each day of delay beginning 28 June 2000 until actual completion of the Project
pursuant to Clause 8.7.1 of the Turnkey Contract. At the same time, LHC served notice that it would call on the
securities for the payment of liquidated damages for the delay.16
On 5 November 2000, petitioner as plaintiff filed a Complaint for Injunction, with prayer for temporary restraining
order and writ of preliminary injunction, against herein respondents as defendants before the Regional Trial Court
(RTC) of Makati.17 Petitioner sought to restrain respondent LHC from calling on the Securities and respondent banks
from transferring, paying on, or in any manner disposing of the Securities or any renewals or substitutes thereof.
The RTC issued a seventy-two (72)-hour temporary restraining order on the same day. The case was docketed as
Civil Case No. 00-1312 and raffled to Branch 148 of the RTC of Makati.
After appropriate proceedings, the trial court issued an Order on 9 November 2000, extending the temporary
restraining order for a period of seventeen (17) days or until 26 November 2000. 18

The RTC, in its 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.
Dissatisfied with the trial court's denial of its application for a writ of preliminary injunction, petitioner elevated the
case to the Court of Appeals via a Petition for Certiorari under Rule 65, with prayer for the issuance of a temporary
restraining order and writ of preliminary injunction. 20 Petitioner submitted to the appellate court that LHC's call on
the Securities was premature considering that the issue of its default had not yet been resolved with finality by the
CIAC and/or the ICC. It asserted that until the fact of delay could be established, LHC had no right to draw on the
Securities for liquidated damages.
Refuting petitioner's contentions, LHC claimed that petitioner had no right to restrain its call on and use of the
Securities as payment for liquidated damages. It averred that the Securities are independent of the main contract
between them as shown on the face of the two Standby Letters of Credit which both provide that the banks have no
responsibility to investigate the authenticity or accuracy of the certificates or the declarant's capacity or entitlement
to so certify.
In its Resolution dated 28 November 2000, the Court of Appeals issued a temporary restraining order, enjoining
LHC from calling on the Securities or any renewals or substitutes thereof and ordering respondent banks to cease
and desist from transferring, paying or in any manner disposing of the Securities.
However, the appellate court failed to act on the application for preliminary injunction until the temporary
restraining order expired on 27 January 2001. Immediately thereafter, representatives of LHC trooped to ANZ Bank
and withdrew the total amount of US$4,950,000.00, thereby reducing the balance in ANZ Bank to
US$1,852,814.00.
On 2 February 2001, the appellate court dismissed the petition for certiorari. The appellate court expressed
conformity with the trial court's decision that LHC could call on the Securities pursuant to the first principle in
credit law that the credit itself is independent of the underlying transaction and that as long as the beneficiary
complied with the credit, it was of no moment that he had not complied with the underlying contract. Further, the
appellate court held that even assuming that the trial court's denial of petitioner's application for a writ of
preliminary injunction was erroneous, it constituted only an error of judgment which is not correctible by certiorari,
unlike error of jurisdiction.
Undaunted, petitioner filed the instant Petition for Review raising the following issues for resolution:
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.
WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE SECURITIES BEFORE THE
RESOLUTION OF PETITIONER'S AND LHC'S DISPUTES BY THE APPROPRIATE TRIBUNAL.
WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN RELEASING THE AMOUNTS DUE
UNDER THE SECURITIES DESPITE BEING NOTIFIED THAT LHC'S CALL THEREON IS WRONGFUL.
WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND IRREPARABLE DAMAGE IN THE EVENT
THAT:
A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ BANK AND SECURITY BANK ARE
ALLOWED TO RELEASE, THE REMAINING BALANCE OF THE SECURITIES PRIOR TO THE
RESOLUTION OF THE DISPUTES BETWEEN PETITIONER AND LHC.
B. LHC DOES NOT RETURN THE AMOUNTS IT HAD WRONGFULLY DRAWN FROM THE
SECURITIES.21
Petitioner contends that the courts below improperly relied on the "independence principle" on letters of credit
when this case falls squarely within the "fraud exception rule." Respondent LHC deliberately misrepresented the
supposed existence of delay despite its knowledge that the issue was still pending arbitration, petitioner continues.
Petitioner asserts that LHC should be ordered to return the proceeds of the Securities pursuant to the principle
against unjust enrichment and that, under the premises, injunction was the appropriate remedy obtainable from the
competent local courts.
On 25 August 2003, petitioner filed a Supplement to the Petition 22 and Supplemental Memorandum,23 alleging that
in the course of the proceedings in the ICC Arbitration, a number of documentary and testimonial evidence came out
through the use of different modes of discovery available in the ICC Arbitration. It contends that after the filing of
the petition facts and admissions were discovered which demonstrate that LHC knowingly misrepresented that
petitioner had incurred delays notwithstanding its knowledge and admission that delays were excused under the
Turnkey Contractto be able to draw against the Securities. Reiterating that fraud constitutes an exception to the

independence principle, petitioner urges that this warrants a ruling from this Court that the call on the Securities
was wrongful, as well as contrary to law and basic principles of equity. It avers that it would suffer grave irreparable
damage if LHC would be allowed to use the proceeds of the Securities and not ordered to return the amounts it had
wrongfully drawn thereon.
In its Manifestation dated 8 September 2003, 24 LHC contends that the supplemental pleadings filed by petitioner
present erroneous and misleading information which would change petitioner's theory on appeal.
In yet another Manifestation dated 12 April 2004, 25 petitioner alleges that on 18 February 2004, the ICC handed
down its Third Partial Award, declaring that LHC wrongfully drew upon the Securities and that petitioner was
entitled to the return of the sums wrongfully taken by LHC for liquidated damages.
LHC filed a Counter-Manifestation dated 29 June 2004, 26 stating that petitioner's Manifestation dated 12 April 2004
enlarges the scope of its Petition for Review of the 31 January 2001 Decision of the Court of Appeals. LHC notes that
the Petition for Review essentially dealt only with the issue of whether injunction could issue to restrain the
beneficiary of an irrevocable letter of credit from drawing thereon. It adds that petitioner has filed two other
proceedings, to wit: (1) ICC Case No. 11264/TE/MW, entitled "Transfield Philippines Inc. v. Luzon Hydro
Corporation," in which the parties made claims and counterclaims arising from petitioner's
performance/misperformance of its obligations as contractor for LHC; and (2) Civil Case No. 04-332, entitled
"Transfield Philippines, Inc. v. Luzon Hydro Corporation" before Branch 56 of the RTC of Makati, which is an action
to enforce and obtain execution of the ICC's partial award mentioned in petitioner's Manifestation of 12 April 2004.
In its Comment to petitioner's Motion for Leave to File Addendum to Petitioner's Memorandum, LHC stresses that
the question of whether the funds it drew on the subject letters of credit should be returned is outside the issue in
this appeal. At any rate, LHC adds that the action to enforce the ICC's partial award is now fully within the Makati
RTC's jurisdiction in Civil Case No. 04-332. LHC asserts that petitioner is engaged in forum-shopping by keeping
this appeal and at the same time seeking the suit for enforcement of the arbitral award before the Makati court.
Respondent SBC in its Memorandum, dated 10 March 2003 27 contends that the Court of Appeals correctly dismissed
the petition for certiorari. Invoking the independence principle, SBC argues that it was under no obligation to look
into the validity or accuracy of the certification submitted by respondent LHC or into the latter's capacity or
entitlement to so certify. It adds that the act sought to be enjoined by petitioner was already fait accompli and the
present petition would no longer serve any remedial purpose.
In a similar fashion, respondent ANZ Bank in its Memorandum dated 13 March 2003 28 posits that its actions could
not be regarded as unjustified in view of the prevailing independence principle under which it had no obligation to
ascertain the truth of LHC's allegations that petitioner defaulted in its obligations. Moreover, it points out that since
the Standby Letter of Credit No. E001126/8400 had been fully drawn, petitioner's prayer for preliminary injunction
had been rendered moot and academic.
At the core of the present controversy is the applicability of the "independence principle" and "fraud exception rule"
in letters of credit. Thus, a discussion of the nature and use of letters of credit, also referred to simply as "credits,"
would provide a better perspective of the case.
The letter of credit evolved as a mercantile specialty, and the only way to understand all its facets is to recognize that
it is an entity unto itself. The relationship between the beneficiary and the issuer of a letter of credit is not strictly
contractual, because both privity and a meeting of the minds are lacking, yet strict compliance with its terms is an
enforceable right. Nor is it a third-party beneficiary contract, because the issuer must honor drafts drawn against a
letter regardless of problems subsequently arising in the underlying contract. Since the bank's customer cannot draw
on the letter, it does not function as an assignment by the customer to the beneficiary. Nor, if properly used, is it a
contract of suretyship or guarantee, because it entails a primary liability following a default. Finally, it is not in itself
a negotiable instrument, because it is not payable to order or bearer and is generally conditional, yet the draft
presented under it is often negotiable.29
In commercial transactions, a letter of credit is a financial device developed by merchants as a convenient and
relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who
refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before
paying.30 The use of credits in commercial transactions serves to reduce the risk of nonpayment of the purchase price
under the contract for the sale of goods. However, credits are also used in non-sale settings where they serve to
reduce the risk of nonperformance. Generally, credits in the non-sale settings have come to be known as standby
credits.31
There are three significant differences between commercial and standby credits. First, commercial credits involve
the payment of money under a contract of sale. Such credits become payable upon the presentation by the sellerbeneficiary 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.

Professor John F. Dolan, the noted authority on letters of credit, sheds more light on the issue:
The standby credit is an attractive commercial device for many of the same reasons that commercial credits
are attractive. Essentially, these credits are inexpensive and efficient. Often they replace surety contracts,
which tend to generate higher costs than credits do and are usually triggered by a factual determination
rather than by the examination of documents.
Because parties and courts should not confuse the different functions of the surety contract on the one hand
and the standby credit on the other, the distinction between surety contracts and credits merits some
reflection. The two commercial devices share a common purpose. Both ensure against the obligor's
nonperformance. They function, however, in distinctly different ways.
Traditionally, upon the obligor's default, the surety undertakes to complete the obligor's performance,
usually by hiring someone to complete that performance. Surety contracts, then, often involve costs of
determining whether the obligor defaulted (a matter over which the surety and the beneficiary often litigate)
plus the cost of performance. The benefit of the surety contract to the beneficiary is obvious. He knows that
the surety, often an insurance company, is a strong financial institution that will perform if the obligor does
not. The beneficiary also should understand that such performance must await the sometimes lengthy and
costly determination that the obligor has defaulted. In addition, the surety's performance takes time.
The standby credit has different expectations. He reasonably expects that he will receive cash in the event of
nonperformance, that he will receive it promptly, and that he will receive it before any litigation with the
obligor (the applicant) over the nature of the applicant's performance takes place. The standby credit has this
opposite effect of the surety contract: it reverses the financial burden of parties during litigation.
In the surety contract setting, there is no duty to indemnify the beneficiary until the beneficiary establishes
the fact of the obligor's performance. The beneficiary may have to establish that fact in litigation. During the
litigation, the surety holds the money and the beneficiary bears most of the cost of delay in performance.
In the standby credit case, however, the beneficiary avoids that litigation burden and receives his money
promptly upon presentation of the required documents. It may be that the applicant has, in fact, performed
and that the beneficiary's presentation of those documents is not rightful. In that case, the applicant may sue
the beneficiary in tort, in contract, or in breach of warranty; but, during the litigation to determine whether
the applicant has in fact breached the obligation to perform, the beneficiary, not the applicant, holds the
money. Parties that use a standby credit and courts construing such a credit should understand this
allocation of burdens. There is a tendency in some quarters to overlook this distinction between surety
contracts and standby credits and to reallocate burdens by permitting the obligor or the issuer to litigate the
performance question before payment to the beneficiary.42
While it is the bank which is bound to honor the credit, it is the beneficiary who has the right to ask the bank to
honor the credit by allowing him to draw thereon. The situation itself emasculates petitioner's posture that LHC
cannot invoke the independence principle and highlights its puerility, more so in this case where the banks
concerned were impleaded as parties by petitioner itself.
Respondent banks had squarely raised the independence principle to justify their releases of the amounts due under
the Securities. Owing to the nature and purpose of the standby letters of credit, this Court rules that the respondent
banks were left with little or no alternative but to honor the credit and both of them in fact submitted that it was
"ministerial" for them to honor the call for payment.43
Furthermore, LHC has a right rooted in the Contract to call on the Securities. The relevant provisions of the Contract
read, thus:
4.2.1. In order to secure the performance of its obligations under this Contract, the Contractor at its cost
shall on the Commencement Date provide security to the Employer in the form of two irrevocable and
confirmed standby letters of credit (the "Securities"), each in the amount of US$8,988,907, issued and
confirmed by banks or financial institutions acceptable to the Employer. Each of the Securities must be in
form and substance acceptable to the Employer and may be provided on an annually renewable basis. 44
8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to the Employer by way of
liquidated damages ("Liquidated Damages for Delay") the amount of US$75,000 for each and every day or
part of a day that shall elapse between the Target Completion Date and the Completion Date, provided that
Liquidated Damages for Delay payable by the Contractor shall in the aggregate not exceed 20% of the
Contract Price. The Contractor shall pay Liquidated Damages for Delay for each day of the delay on the
following day without need of demand from the Employer.
8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount of such
damages from any monies due, or to become due to the Contractor and/or by drawing on the Security." 45
A contract once perfected, binds the parties not only to the fulfillment of what has been expressly stipulated but also
to all the consequences which according to their nature, may be in keeping with good faith, usage, and law. 46 A
careful perusal of the Turnkey Contract reveals the intention of the parties to make the Securities answerable for the
liquidated damages occasioned by any delay on the part of petitioner. The call upon the Securities, while not an
exclusive remedy on the part of LHC, is certainly an alternative recourse available to it upon the happening of the
contingency for which the Securities have been proffered. Thus, even without the use of the "independence
principle," the Turnkey Contract itself bestows upon LHC the right to call on the Securities in the event of default.

Next, petitioner invokes the "fraud exception" principle. It avers that LHC's call on the Securities is wrongful
because it fraudulently misrepresented to ANZ Bank and SBC that there is already a breach in the Turnkey Contract
knowing fully well that this is yet to be determined by the arbitral tribunals. It asserts that the "fraud exception"
exists when the beneficiary, for the purpose of drawing on the credit, fraudulently presents to the confirming bank,
documents that contain, expressly or by implication, material representations of fact that to his knowledge are
untrue. In such a situation, petitioner insists, injunction is recognized as a remedy available to it.
Citing Dolan's treatise on letters of credit, petitioner argues that the independence principle is not without limits and
it is important to fashion those limits in light of the principle's purpose, which is to serve the commercial function of
the credit. If it does not serve those functions, application of the principle is not warranted, and the commonlaw
principles of contract should apply.
It is worthy of note that the propriety of LHC's call on the Securities is largely intertwined with the fact of default
which is the self-same issue pending resolution before the arbitral tribunals. To be able to declare the call on the
Securities wrongful or fraudulent, it is imperative to resolve, among others, whether petitioner was in fact guilty of
delay in the performance of its obligation. Unfortunately for petitioner, this Court is not called upon to rule upon the
issue of 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.52It 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.55Indeed, 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,61petitioner 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.
One final point. LHC has charged petitioner of forum-shopping. It raised the charge on two occasions. First, in its
Counter-Manifestation dated 29 June 200466 LHC alleges that petitioner presented before this Court the same claim
for money which it has filed in two other proceedings, to wit: ICC Case No. 11264/TE/MW and Civil Case No. 04-332
before the RTC of Makati. LHC argues that petitioner's acts constitutes forum-shopping which should be punished
by the dismissal of the claim in both forums. Second, in its Comment to Petitioner's Motion for Leave to File
Addendum to Petitioner's Memorandum dated 8 October 2004, LHC alleges that by maintaining the present appeal
and at the same time pursuing Civil Case No. 04-332wherein petitioner pressed for judgment on the issue of
whether the funds LHC drew on the Securities should be returnedpetitioner resorted to forum-shopping. In both
instances, however, petitioner has apparently opted not to respond to the charge.
Forum-shopping is a very serious charge. It exists when a party repetitively avails of several judicial remedies in
different courts, simultaneously or successively, all substantially founded on the same transactions and the same
essential facts and circumstances, and all raising substantially the same issues either pending in, or already resolved
adversely, by some other court.67 It may also consist in the act of a party against whom an adverse judgment has been
rendered in one forum, of seeking another and possibly favorable opinion in another forum other than by appeal or
special civil action of certiorari, or the institution of two or more actions or proceedings grounded on the same cause
on the supposition that one or the other court might look with favor upon the other party. 68 To determine whether a
party violated the rule against forum-shopping, the test applied is whether the elements of litis pendentia are
present or whether a final judgment in one case will amount to res judicata in another. 69 Forum-shopping constitutes
improper conduct and may be punished with summary dismissal of the multiple petitions and direct contempt of
court.70
Considering the seriousness of the charge of forum-shopping and the severity of the sanctions for its violation, the
Court will refrain from making any definitive ruling on this issue until after petitioner has been given ample
opportunity to respond to the charge.
WHEREFORE, the instant petition is DENIED, with costs against petitioner.

G.R. No. 94209

April 30, 1991

FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING CORPORATION), petitioner,
vs.
THE COURT OF APPEALS, and BERNARDO E. VILLALUZ, respondents.
GUTIERREZ, JR., J.:
This is a petition for review seeking the reversal of the decision of the Court of Appeals dated June 29, 1990 which
affirmed the decision of the Regional Trial Court of Rizal dated October 20, 1986 ordering the defendants
Christiansen and the petitioner, to pay various sums to respondent Villaluz, jointly and severally.
The facts of the case are as follows:
On June 3, 1971, Bernardo E. Villaluz agreed to sell to the then defendant Axel Christiansen 2,000 cubic meters of
lauan logs at $27.00 per cubic meter FOB.
After inspecting the logs, Christiansen issued purchase order No. 76171.
On the arrangements made and upon the instructions of the consignee, Hanmi Trade Development, Ltd., de Santa
Ana, California, the Security Pacific National Bank of Los Angeles, California issued Irrevocable Letter of Credit No.
IC-46268 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 (now Citytrust) with the instruction to the latter
that it "forward the enclosed letter of credit to the beneficiary." (Records, Vol. I, p. 11)
The letter of credit further provided that the draft to be drawn is on Security Pacific National Bank and that it be
accompanied by the following documents:
1. Signed Commercial Invoice in four copies showing the number of the purchase order and certifying that

a. All terms and conditions of the purchase order have been complied with and that all logs are fresh
cut and quality equal to or better than that described in H.A. Christiansen's telex #201 of May 1,
1970, and that all logs have been marked "BEV-EX."
b. One complete set of documents, including 1/3 original bills of lading was airmailed to Consignee
and Parties to be advised by Hans-Axel Christiansen, Ship and Merchandise Broker.
c. One set of non-negotiable documents was airmailed to Han Mi Trade Development Company and
one set to Consignee and Parties to be advised by Hans-Axel Christiansen, Ship and Merchandise
Broker.
2. Tally sheets in quadruplicate.
3. 2/3 Original Clean on Board Ocean Bills of Lading with Consignee and Parties to be advised by Hans Axel
Christiansen, showing Freight Prepaid and marked Notify:
Han Mi Trade Development Company, Ltd., Santa Ana, California.
Letter of Credit No. 46268 dated June 7, 1971
Han Mi Trade Development Company, Ltd., P.O. Box 10480, Santa Ana, California 92711 and Han Mi Trade
Development Company, Ltd., Seoul, Korea.
4. Certification from Han-Axel Christiansen, Ship and Merchandise Broker, stating that logs have been
approved prior to shipment in accordance with terms and conditions of corresponding purchase Order.
(Record, Vol. 1 pp. 11-12)
Also incorporated by reference in the letter of credit is the Uniform Customs and Practice for Documentary Credits
(1962 Revision).
The logs were thereafter loaded on the vessel "Zenlin Glory" which was chartered by Christiansen. Before its
loading, the logs were inspected by custom inspectors Nelo Laurente, Alejandro Cabiao, Estanislao Edera from the
Bureau of Customs (Records, Vol. I, p. 124) and representatives Rogelio Cantuba and Jesus Tadena of the Bureau
of Forestry (Records, Vol. I, pp. 16-17) all of whom certified to the good condition and exportability of the logs.
After the loading of the logs was completed, the Chief Mate, Shao Shu Wang issued a mate receipt of the cargo
which stated the same are in good condition (Records, Vol. I, p. 363). However, Christiansen refused to issue the

certification as required in paragraph 4 of the letter of credit, despite several requests made by the private
respondent.
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.
The letter of credit lapsed on June 30, 1971, (extended, however up to July 31, 1971) without the private respondent
receiving any certification from Christiansen.
The persistent refusal of Christiansen to issue the certification prompted the private respondent to bring the matter
before the Central Bank. In a memorandum dated August 16, 1971, the Central Bank ruled that:
. . . pursuant to the Monetary Board Resolution No. 1230 dated August 3, 1971, in all log exports, the
certification of the lumber inspectors of the Bureau of Forestry . . . shall be considered final for purposes of
negotiating documents. Any provision in any letter of credit covering log exports requiring certification of
buyer's agent or representative that said logs have been approved for shipment as a condition precedent to
negotiation of shipping documents shall not be allowed. (Records, Vol. I, p. 367)
Meanwhile, the logs arrived at Inchon, Korea and were received by the consignee, Hanmi Trade Development
Company, to whom Christiansen sold the logs for the amount of $37.50 per cubic meter, for a net profit of $10 per
cubic meter. Hanmi Trade Development Company, on the other hand sold the logs to Taisung Lumber Company at
Inchon, Korea. (Rollo, p. 39)
Since the demands by the private respondent for Christiansen to execute the certification proved futile, Villaluz, on
September 1, 1971, instituted an action for mandamus and specific performance against Christiansen and the Feati
Bank and Trust Company (now Citytrust) before the then Court of First Instance of Rizal. The petitioner was
impleaded as defendant before the lower court only to afford complete relief should the court a quo order
Christiansen to execute the required certification.
The complaint prayed for the following:
1. Christiansen be ordered to issue the certification required of him under the Letter of Credit;
2. Upon issuance of such certification, or, if the court should find it unnecessary, FEATI BANK be ordered to
accept negotiation of the Letter of Credit and make payment thereon to Villaluz;
3. Order Christiansen to pay damages to the plaintiff. (Rollo, p. 39)
On or about 1979, while the case was still pending trial, Christiansen left the Philippines without informing the Court
and his counsel. Hence, Villaluz, filed an amended complaint to make the petitioner solidarily liable with
Christiansen.
The trial court, in its order dated August 29, 1979, admitted the amended complaint.
After trial, the lower court found:
The liability of the defendant CHRISTIANSEN is beyond dispute, and the plaintiffs right to demand payment
is absolute. Defendant CHRISTIANSEN having accepted delivery of the logs by having them loaded in his
chartered vessel the "Zenlin Glory" and shipping them to the consignee, his buyer Han Mi Trade in Inchon,
South Korea (Art. 1585, Civil Code), his obligation to pay the purchase order had clearly arisen and the
plaintiff may sue and recover the price of the goods (Art. 1595, Id).
The Court believes that the defendant CHRISTIANSEN acted in bad faith and deceit and with intent to
defraud the plaintiff, reflected in and aggravated by, not only his refusal to issue the certification that would
have enabled without question the plaintiff to negotiate the letter of credit, but his accusing the plaintiff in his
answer of fraud, intimidation, violence and deceit. These accusations said defendant did not attempt to
prove, as in fact he left the country without even notifying his own lawyer. It was to the Court's mind a pure
swindle.
The defendant Feati Bank and Trust Company, on the other hand, must be held liable together with his (sic)
co-defendant for having, by its wrongful act, i.e., its refusal to negotiate the letter of credit in the absence of
CHRISTIANSEN's certification (in spite of the Central Bank's ruling that the requirement was illegal),
prevented payment to the plaintiff. The said letter of credit, as may be seen on its face, is irrevocable and
theissuing bank, the Security Pacific National Bank in Los Angeles, California, undertook by its terms that
the same shall be honored upon its presentment. On the other hand, the notifying bank, the defendant Feati
Bank and Trust Company, by accepting the instructions from the issuing bank, itself assumed the very same
undertaking as the issuing bank under the terms of the letter of credit.
xxx

xxx

xxx

The Court likewise agrees with the plaintiff that the defendant BANK may also be held liable under the
principles and laws on both trust and estoppel. When the defendant BANK accepted its role as the notifying
and negotiating bank for and in behalf of the issuing bank, it in effect accepted a trust reposed on it, and
became a trustee in relation to plaintiff as the beneficiary of the letter of credit. As trustee, it was then duty

bound to protect the interests of the plaintiff under the terms of the letter of credit, and must be held liable for
damages and loss resulting to the plaintiff from its failure to perform that obligation.
Furthermore, when the defendant BANK assumed the role of a notifying and negotiating BANK it in effect
represented to the plaintiff that, if the plaintiff complied with the terms and conditions of the letter of credit
and presents the same to the BANK together with the documents mentioned therein the said BANK will pay
the plaintiff the amount of the letter of credit. The Court is convinced that it was upon the strength of this
letter of credit and this implied representation of the defendant BANK that the plaintiff delivered the logs to
defendant CHRISTIANSEN, considering that the issuing bank is a foreign bank with whom plaintiff had no
business connections and CHRISTIANSEN had not offered any other Security for the payment of the logs.
Defendant BANK cannot now be allowed to deny its commitment and liability under the letter of credit:
A holder of a promissory note given because of gambling who indorses the same to an innocent
holder for value and who assures said party that the note has no legal defect, is in estoppel from
asserting that there had been an illegal consideration for the note, and so, he has to pay its value.
(Rodriguez v. Martinez, 5 Phil. 67).
The defendant BANK, in insisting upon the certification of defendant CHRISTIANSEN as a condition
precedent to negotiating the letter of credit, likewise in the Court's opinion acted in bad faith, not only
because of the clear declaration of the Central Bank that such a requirement was illegal, but because the
BANK, with all the legal counsel available to it must have known that the condition was void since it
depended on the sole will of the debtor, the defendant CHRISTIANSEN. (Art. 1182, Civil Code) (Rollo, pp.
29-31)
On the basis of the foregoing the trial court on October 20, 1986, ruled in favor of the private respondent. The
dispositive portion of its decision reads:
WHEREFORE, judgment is hereby rendered for the plaintiff, ordering the defendants to pay the plaintiff,
jointly and severally, the following sums:
a) $54,000.00 (US), or its peso equivalent at the prevailing rate as of the time payment is actually made,
representing the purchase price of the logs;
b) P17,340.00, representing government fees and charges paid by plaintiff in connection with the logs
shipment in question;
c) P10,000.00 as temperate damages (for trips made to Bacolod and Korea).
All three foregoing sums shall be with interest thereon at 12% per annum from September 1, 1971, when the
complaint was filed, until fully paid:
d) P70,000.00 as moral damages;
e) P30,000.00 as exemplary damages; and
f) P30,000.00 as attorney's fees and litigation expense.
(Rollo, p. 28)
The petitioner received a copy of the decision on November 3, 1986. Two days thereafter, or on November 5, 1986,
it filed a notice of appeal.
On November 10, 1986, the private respondent filed a motion for the immediate execution of the judgment on the
ground that the appeal of the petitioner was frivolous and dilatory.
The trial court ordered the immediate execution of its judgment upon the private respondent's filing of a bond.
The petitioner then filed a motion for reconsideration and a motion to suspend the implementation of the writ of
execution. Both motions were, however, denied. Thus, petitioner filed before the Court of Appeals a petition
forcertiorari and prohibition with preliminary injunction to enjoin the immediate execution of the judgment.
The Court of Appeals in a decision dated April 9, 1987 granted the petition and nullified the order of execution, the
dispositive portion of the decision states:
WHEREFORE, the petition for certiorari is granted. Respondent Judge's order of execution dated December
29, 1986, as well as his order dated January 14, 1987 denying the petitioner's urgent motion to suspend the
writ of execution against its properties are hereby annulled and set aside insofar as they are sought to be
enforced and implemented against the petitioner Feati Bank & Trust Company, now Citytrust Banking
Corporation, during the pendency of its appeal from the adverse decision in Civil Case No. 15121. However,
the execution of the same decision against defendant Axel Christiansen did not appeal said decision may
proceed unimpeded. The Sheriff s levy on the petitioner's properties, and the notice of sale dated January
13, 1987 (Annex M), are hereby annulled and set aside. Rollo p. 44)

A motion for reconsideration was thereafter filed by the private respondent. The Court of Appeals, in a resolution
dated June 29, 1987 denied the motion for reconsideration.
In the meantime, the appeal filed by the petitioner before the Court of Appeals was given due course. In its decision
dated June 29, 1990, the Court of Appeals affirmed the decision of the lower court dated October 20, 1986 and ruled
that:
1. Feati Bank admitted in the "special and negative defenses" section of its answer that it was the bank to
negotiate the letter of credit issued by the Security Pacific National Bank of Los Angeles, California. (Record,
pp. 156, 157). Feati Bank did notify Villaluz of such letter of credit. In fact, as such negotiating bank, even
before the letter of credit was presented for payment, Feati Bank had already made an advance payment of
P75,000.00 to Villaluz in anticipation of such presentment. As the negotiating bank, Feati Bank, by notifying
Villaluz of the letter of credit in behalf of the issuing bank (Security Pacific), confirmed such letter of credit
and made the same also its own obligation. This ruling finds support in the authority cited by Villaluz:
A confirmed letter of credit is one in which the notifying bank gives its assurance also that the opening
bank's obligation will be performed. In such a case, the notifying bank will not simply transmit but will confirm
the opening bank's obligation by making it also its own undertaking, or commitment, or guaranty or
obligation. (Ward & Hatfield, 28-29, cited in Agbayani, Commercial Laws, 1978 edition, p. 77).
Feati Bank argues further that it would be considered as the negotiating bank only upon negotiation of the
letter of credit. This stance is untenable. Assurance, commitments or guaranties supposed to be made by
notifying banks to the beneficiary of a letter of credit, as defined above, can be relevant or meaningful only
with respect to a future transaction, that is, negotiation. Hence, even before actual negotiation, the notifying
bank, by the mere act of notifying the beneficiary of the letter of credit, assumes as of that moment the
obligation of the issuing bank.
2. Since Feati Bank acted as guarantor of the issuing bank, and in effect also of the latter's principal or
client,i.e. Hans Axel-Christiansen. (sic) Such being the case, when Christiansen refused to issue the
certification, it was as though refusal was made by Feati Bank itself. Feati Bank should have taken steps to
secure the certification from Christiansen; and, if the latter should still refuse to comply, to hale him to court.
In short, Feati Bank should have honored Villaluz's demand for payment of his logs by virtue of the
irrevocable letter of credit issued in Villaluz's favor and guaranteed by Feati Bank.
3. The decision promulgated by this Court in CA-G.R. Sp No. 11051, which contained the statement "Since
Villaluz" draft was not drawn strictly in compliance with the terms of the letter of credit, Feati Bank's refusal
to negotiate it was justified," did not dispose of this question on the merits. In that case, the question
involved was jurisdiction or discretion, and not judgment. The quoted pronouncement should not be taken as
a preemptive judgment on the merits of the present case on appeal.
4. The original action was for "Mandamus and/or specific performance." Feati Bank may not be a party to
the transaction between Christiansen and Security Pacific National Bank on the one hand, and Villaluz on
the other hand; still, being guarantor or agent of Christiansen and/or Security Pacific National Bank which
had directly dealt with Villaluz, Feati Bank may be sued properly on specific performance as a procedural
means by which the relief sought by Villaluz may be entertained. (Rollo, pp. 32-33)
The dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, the decision appealed from is affirmed; and accordingly, the appeal is hereby dismissed.
Costs against the petitioner. (Rollo, p. 33)
Hence, this petition for review.
The petitioner interposes the following reasons for the allowance of the petition.
First Reason
THE RESPONDENT COURT ERRONEOUSLY CONCLUDED FROM THE ESTABLISHED FACTS AND
INDEED, WENT AGAINST THE EVIDENCE AND DECISION OF THIS HONORABLE COURT, THAT
PETITIONER BANK IS LIABLE ON THE LETTER OF CREDIT DESPITE PRIVATE RESPONDENTS NONCOMPLIANCE WITH THE TERMS THEREOF,
Second Reason
THE RESPONDENT COURT COMMITTED AN ERROR OF LAW WHEN IT HELD THAT PETITIONER
BANK, BY NOTIFYING PRIVATE RESPONDENT OF THE LETTER OF CREDIT, CONFIRMED SUCH
CREDIT AND MADE THE SAME ALSO ITS OBLIGATION AS GUARANTOR OF THE ISSUING BANK.
Third Reason
THE RESPONDENT COURT LIKEWISE COMMITTED AN ERROR OF LAW WHEN IT AFFIRMED THE
TRIAL COURT'S DECISION. (Rollo, p. 12)

The principal issue in this case is whether or not a correspondent bank is to be held liable under the letter of credit
despite non-compliance by the beneficiary with the terms thereof?
The petition is impressed with merit.
It is a settled rule in commercial transactions involving letters of credit that the documents tendered must strictly
conform to the terms of the letter of credit. The tender of documents by the beneficiary (seller) must include all
documents required by the letter. A correspondent bank which departs from what has been stipulated under the
letter of credit, as when it accepts a faulty tender, acts on its own risks and it may not thereafter be able to recover
from the buyer or the issuing bank, as the case may be, the money thus paid to the beneficiary Thus the rule of strict
compliance.
In the United States, commercial transactions involving letters of credit are governed by the rule of strict compliance.
In the Philippines, the same holds true. The same rule must also be followed.
The case of Anglo-South America Trust Co. v. Uhe et al. (184 N.E. 741 [1933]) expounded clearly on the rule of
strict compliance.
We have heretofore held that these letters of credit are to be strictly complied with which documents, and
shipping documents must be followed as stated in the letter. There is no discretion in the bank or trust
company to waive any requirements. The terms of the letter constitutes an agreement between the
purchaser and the bank. (p. 743)
Although in some American decisions, banks are granted a little discretion to accept a faulty tender as when the
other documents may be considered immaterial or superfluous, this theory could lead to dangerous precedents.
Since a bank deals only with documents, it is not in a position to determine whether or not the documents required
by the letter of credit are material or superfluous. The mere fact that the document was specified therein readily
means that the document is of vital importance to the buyer.
Moreover, the incorporation of the Uniform Customs and Practice for Documentary Credit (U.C.P. for short) in the
letter of credit resulted in the applicability of the said rules in the governance of the relations between the parties.
And even if the U.C.P. was not incorporated in the letter of credit, we have already ruled in the affirmative as to the
applicability of the U.C.P. in cases before us.
In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the observance of the U.C.P. in this jurisdiction
is justified by Article 2 of the Code of Commerce. Article 2 of the Code of Commerce enunciates that in the absence
of any particular provision in the Code of Commerce, commercial transactions shall be governed by the usages and
customs generally observed.
There being no specific provision which governs the legal complexities arising from transactions involving letters of
credit not only between the banks themselves but also between banks and seller and/or buyer, the applicability of
the U.C.P. is undeniable.
The pertinent provisions of the U.C.P. (1962 Revision) are:
Article 3.
An irrevocable credit is a definite undertaking on the part of the issuing bank and constitutes the
engagement of that bank to the beneficiary and bona fide holders of drafts drawn and/or documents
presented thereunder, that the provisions for payment, acceptance or negotiation contained in the credit will
be duly fulfilled,provided that all the terms and conditions of the credit are complied with.
An irrevocable credit may be advised to a beneficiary through another bank (the advising bank) without
engagement on the part of that bank, but when an issuing bank authorizes or requests another bank to
confirm its irrevocable credit and the latter does so, such confirmation constitutes a definite undertaking of
the confirming bank. . . .
Article 7.
Banks must examine all documents with reasonable care to ascertain that they appear on their face to be in
accordance with the terms and conditions of the credit,"
Article 8.
Payment, acceptance or negotiation against documents which appear on their face to be in accordance with
the terms and conditions of a credit by a bank authorized to do so, binds the party giving the authorization to
take up documents and reimburse the bank which has effected the payment, acceptance or negotiation.
(Emphasis Supplied)
Under the foregoing provisions of the U.C.P., the bank may only negotiate, accept or pay, if the documents tendered
to it are on their face in accordance with the terms and conditions of the documentary credit. And since a
correspondent bank, like the petitioner, principally deals only with documents, the absence of any document
required in the documentary credit justifies the refusal by the correspondent bank to negotiate, accept or pay the

beneficiary, as it is not its obligation to look beyond the documents. It merely has to rely on the completeness of the
documents tendered by the beneficiary.
In regard to the ruling of the lower court and affirmed by the Court of Appeals that the petitioner is not a notifying
bank but a confirming bank, we find the same erroneous.
The trial court wrongly mixed up the meaning of an irrevocable credit with that of a confirmed credit. In its decision,
the trial court ruled that the petitioner, in accepting the obligation to notify the respondent that the irrevocable
credithas been transmitted to the petitioner on behalf of the private respondent, has confirmed the letter.
The trial court appears to have overlooked the fact that an irrevocable credit is not synonymous with a confirmed
credit. These types of letters have different meanings and the legal relations arising from there varies. A credit may
be an irrevocable credit and at the same time a confirmed credit or vice-versa.
An irrevocable credit refers to the duration of the letter of credit. What is simply means is that the issuing bank may
not without the consent of the beneficiary (seller) and the applicant (buyer) revoke his undertaking under the letter.
The issuing bank does not reserve the right to revoke the credit. On the other hand, a confirmed letter of credit
pertains to the kind of obligation assumed by the correspondent bank. In this case, the correspondent bank gives an
absolute assurance to the beneficiary that it will undertake the issuing bank's obligation as its own according to the
terms and conditions of the credit. (Agbayani, Commercial Laws of the Philippines, Vol. 1, pp. 81-83)
Hence, the mere fact that a letter of credit is irrevocable does not necessarily imply that the correspondent bank in
accepting the instructions of the issuing bank has also confirmed the letter of credit. Another error which the lower
court and the Court of Appeals made was to confuse the obligation assumed by the petitioner.
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.
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. (Kronman and Co., Inc. v. Public National Bank of New York, 218
N.Y.S. 616 [1926]; Shaterian, Export-Import Banking, p. 292, cited in Agbayani, Commercial Laws of the Philippines,
Vol. 1, p. 76). 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. (Scanlon v. First National Bank of Mexico, 162 N.E. 567 [1928]; Shaterian, Export-Import
Banking, p. 293, cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76)
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. (Shaterian, Export-Import Banking,
p. 294, cited in Agbayani Commercial Laws of the Philippines, Vol. 1, p. 77)
In this case, the letter merely provided that the petitioner "forward the enclosed original credit to the beneficiary."
(Records, Vol. I, p. 11) Considering the aforesaid instruction to the petitioner by the issuing bank, the Security
Pacific National Bank, it is indubitable that the petitioner is only a notifying bank and not a confirming bank as ruled
by the courts below.
If the petitioner was a confirming bank, then a categorical declaration should have been stated in the letter of credit
that the petitioner is to honor all drafts drawn in conformity with the letter of credit. What was simply stated therein
was the instruction that the petitioner forward the original letter of credit to the beneficiary.
Since the petitioner 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.
The notifying bank may suggest to the seller its willingness to negotiate, but this fact alone does not imply that the
notifying bank promises to accept the draft drawn under the documentary credit.
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. (See Kronman and Co., Inc. v. Public National Bank of
New York, supra)
In order that the petitioner may be held liable under the letter, there should be proof that the petitioner confirmed the
letter of credit.
The records are, however, bereft of any evidence which will disclose that the petitioner has confirmed the letter of
credit. The only evidence in this case, and upon which the private respondent premised his argument, is the
P75,000.00 loan extended by the petitioner to him.
The private respondent relies on this loan to advance his contention that the letter of credit was confirmed by the
petitioner. He claims that the loan was granted by the petitioner to him, "in anticipation of the presentment of the
letter of credit."

The proposition advanced by the private respondent has no basis in fact or law. That the loan agreement between
them be construed as an act of confirmation is rather far-fetched, for it depends principally on speculative reasoning.
As earlier stated, there must have been an absolute assurance on the part of the petitioner that it will undertake the
issuing bank's obligation as its own. Verily, the loan agreement it entered into cannot be categorized as an emphatic
assurance that it will carry out the issuing bank's obligation as its own.
The loan agreement is more reasonably classified as an isolated transaction independent of the documentary credit.
Of course, it may be presumed that the petitioner loaned the money to the private respondent in anticipation that it
would later be paid by the latter upon the receipt of the letter. Yet, we would have no basis to rule definitively that
such "act" should be construed as an act of confirmation.
The private respondent no doubt was in need of money in loading the logs on the ship "Zenlin Glory" and the only
way to satisfy this need was to borrow money from the petitioner which the latter granted. From these
circumstances, a logical conclusion that can be gathered is that the letter of credit was merely to serve as a
collateral.
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.
The case of Scanlon v. First National Bank (supra) perspicuously explained the relationship between the seller and
the negotiating bank, viz:
It may buy or refuse to buy as it chooses. Equally, it must be true that it owes no contractual duty toward the
person for whose benefit the letter is written to discount or purchase any draft drawn against the credit. No
relationship of agent and principal, or of trustee and cestui, between the receiving bank and the beneficiary
of the letter is established. (P.568)
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 the private respondent, the
refusal by the petitioner to accept the tender of the private respondent is justified.
In regard to the finding that the petitioner became a "trustee in relation to the plaintiff (private respondent) as the
beneficiary of the letter of credit," the same has no legal basis.
A trust has been defined as the "right, enforceable solely in equity, to the beneficial enjoyment of property the legal
title to which is vested to another." (89 C.J.S. 712)
The concept of a trust presupposes the existence of a specific property which has been conferred upon the person
for the benefit of another. In order therefore for the trust theory of the private respondent to be sustained, the
petitioner should have had in its possession a sum of money as specific fund advanced to it by the issuing bank and
to be held in trust by it in favor of the private respondent. This does not obtain in this case.
The mere opening of a letter of credit, it is to be noted, does not involve a specific appropriation of a sum of money
in favor of the beneficiary. It only signifies that the beneficiary may be able to draw funds upon the letter of credit up
to the designated amount specified in the letter. It does not convey the notion that a particular sum of money has
been specifically reserved or has been held in trust.
What actually transpires in an irrevocable credit is that the correspondent bank does not receive in advance the sum
of money from the buyer or the issuing bank. On the contrary, when the correspondent bank accepts the tender and
pays the amount stated in the letter, the money that it doles out comes not from any particular fund that has been
advanced by the issuing bank, rather it gets the money from its own funds and then later seeks reimbursement from
the issuing bank.
Granting that a trust has been created, still, the petitioner may not be considered a trustee. As the petitioner is only
a notifying bank, its acceptance of the instructions of the issuing bank will not create estoppel on its part resulting in
the acceptance of the trust. Precisely, as a notifying bank, its only obligation is to notify the private respondent of the
existence of the letter of credit. How then can such create estoppel when that is its only duty under the law?
We also find erroneous the statement of the Court of Appeals that the petitioner "acted as a guarantor of the issuing
bank and in effect also of the latter's principal or client, i.e., Hans Axel Christiansen."
It is a fundamental rule that an irrevocable credit is independent not only of the contract between the buyer and the
seller but also of the credit agreement between the issuing bank and the buyer. (See Kingdom of Sweden v. New
York Trust Co., 96 N.Y.S. 2d 779 [1949]). The relationship between the buyer (Christiansen) and the issuing bank
(Security Pacific National Bank) is entirely independent from the letter of credit issued by the latter.
The contract between the two has no bearing as to the non-compliance by the buyer with the agreement between
the latter and the seller. Their contract is similar to that of a contract of services (to open the letter of credit) and not
that of agency as was intimated by the Court of Appeals. The unjustified refusal therefore by Christiansen to issue
the certification under the letter of credit should not likewise be charged to the issuing bank.

As a mere notifying bank, not only does the petitioner not have any contractual relationship with the buyer, it has
also nothing to do with the contract between the issuing bank and the buyer regarding the issuance of the letter of
credit.
The theory of guarantee relied upon by the Court of Appeals has to necessarily fail. The concept of guarantee vis-avis the concept of an irrevocable credit are inconsistent with each other.
In the first place, the guarantee theory destroys the independence of the bank's responsibility from the contract upon
which it was opened. In the second place, the nature of both contracts is mutually in conflict with each other. In
contracts of guarantee, the guarantor's obligation is merely collateral and it arises only upon the default of the
person primarily liable. On the other hand, in an irrevocable credit the bank undertakes a primary obligation.
(SeeNational Bank of Eagle Pass, Tex v. American National Bank of San Francisco, 282 F. 73 [1922])
The relationship between the issuing bank and the notifying bank, on the contrary, is more similar to that of an
agency and not that of a guarantee. It may be observed that the notifying bank is merely to follow the instructions of
the issuing bank which is to notify or to transmit the letter of credit to the beneficiary. ( See Kronman v. Public
National Bank of New York, supra). Its commitment is only to notify the beneficiary. It does not undertake any
assurance that the issuing bank will perform what has been mandated to or expected of it. As an agent of the
issuing bank, it has only to follow the instructions of the issuing bank and to it alone is it obligated and not to buyer
with whom it has no contractual relationship.
In fact the notifying bank, even if the seller tenders all the documents required under the letter of credit, may refuse
to negotiate or accept the drafts drawn thereunder and it will still not be held liable for its only engagement is to
notify and/or transmit to the seller the letter of credit.
Finally, even if we assume that the petitioner is a confirming bank, the petitioner cannot be forced to pay the amount
under the letter. As we have previously explained, there was a failure on the part of the private respondent to comply
with the terms of the letter of credit.
The failure by him to submit the certification was fatal to his case. The U.C.P. which is incorporated in the letter of
credit ordains that the bank may only pay the amount specified under the letter if all the documents tendered are on
their face in compliance with the credit. It is not tasked with the duty of ascertaining the reason or reasons why
certain documents have not been submitted, as it is only concerned with the documents. Thus, whether or not the
buyer has performed his responsibility towards the seller is not the bank's problem.
1wphi1

We are aware of the injustice committed by Christiansen on the private respondent but we are deciding the
controversy on the basis of what the law is, for the law is not meant to favor only those who have been oppressed,
the law is to govern future relations among people as well. Its commitment is to all and not to a single individual. The
faith of the people in our justice system may be eroded if we are to decide not what the law states but what we
believe it should declare. Dura lex sed lex.
Considering the foregoing, the materiality of ruling upon the validity of the certificate of approval required of the
private respondent to submit under the letter of credit, has become insignificant.
In any event, we affirm the earlier ruling of the Court of Appeals dated April 9, 1987 in regard to the petition before it
for certiorari and prohibition with preliminary injunction, to wit:
There is no merit in the respondent's contention that the certification required in condition No. 4 of the letter
of credit was "patently illegal." At the time the letter of credit was issued there was no Central Bank
regulation prohibiting such a condition in the letter of credit. The letter of credit (Exh. C) was issued on June
7, 1971, more than two months before the issuance of the Central Bank Memorandum on August 16, 1971
disallowing such a condition in a letter of credit. In fact the letter of credit had already expired on July 30,
1971 when the Central Bank memorandum was issued. In any event, it is difficult to see how such a
condition could be categorized as illegal or unreasonable since all that plaintiff Villaluz, as seller of the logs,
could and should have done was to refuse to load the logs on the vessel "Zenlin Glory", unless Christiansen
first issued the required certification that the logs had been approved by him to be in accordance with the
terms and conditions of his purchase order. Apparently, Villaluz was in too much haste to ship his logs
without taking all due precautions to assure that all the terms and conditions of the letter of credit had been
strictly complied with, so that there would be no hitch in its negotiation. (Rollo, p. 8)
WHEREFORE, the COURT RESOLVED to GRANT the petition and hereby NULLIFIES and SETS ASIDE the
decision of the Court of Appeals dated June 29, 1990. The amended complaint in Civil Case No. 15121 is
DISMISSED.