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SECOND DIVISION

[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.
DECISION
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.
[1]
Petitioner has appealed from the Decision 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)
[3]
entered into a Turnkey Contract
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
[4]
Project.
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
[5]
variations, force majeure, and delays caused by LHC itself.
Further, in case of dispute, the
parties are bound to settle their differences through mediation, conciliation and such other means
[6]
enumerated under Clause 20.3 of the Turnkey Contract.
To secure performance of petitioners 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
[7]
Australia and New Zealand Banking Group Limited (ANZ Bank) and Standby Letter of Credit No.
[8]
IBDIDSB-00/4 with respondent Security Bank Corporation (SBC)
each in the amount of
[9]
US$8,988,907.00.

In the course of the construction of the project, petitioner sought various EOT to complete the
Project. The extensions were requested allegedly due to several factors which prevented the
completion of the Project on target date, such as force majeure occasioned by typhoon Zeb,
barricades and demonstrations. LHC denied the requests, however. This gave rise to a series of
legal actions between the parties which culminated in the instant petition.
The first of the actions was a Request for Arbitration which LHC filed before the Construction
[10]
Industry Arbitration Commission (CIAC) on 1 June 1999.
This was followed by another Request
[11]
for Arbitration, this time filed by petitioner before the International Chamber of Commerce (ICC)
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
[12]
[13]
provisions of the Turnkey Contract,
petitionerin two separate letters
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
[14]
Clause 8.2
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
[15]
pay on the Securities if and when LHC calls on them.
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
[16]
damages for the delay.
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
[17]
defendants before the Regional Trial Court (RTC) of Makati.
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
[18]
the temporary restraining order for a period of seventeen (17) days or until 26 November 2000.
[19]
The RTC, in its Order
dated 24 November 2000, denied petitioners 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 petitioners 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 courts 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
[20]
prayer for the issuance of a temporary restraining order and writ of preliminary injunction.
Petitioner submitted to the appellate court that LHCs 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 petitioners 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 declarants 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 courts 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 courts denial of petitioners 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 BENEFICIARYS CALL THEREON IS WRONGFUL OR
FRAUDULENT.
WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE SECURITIES BEFORE THE
RESOLUTION OF PETITIONERS AND LHCS 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 LHCS 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
[21]
THE SECURITIES.

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.
[22]
On 25 August 2003, petitioner filed a Supplement to the Petition
and Supplemental
[23]
Memorandum,
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.
[24]
In its Manifestation dated 8 September 2003,
LHC contends that the supplemental
pleadings filed by petitioner present erroneous and misleading information which would change
petitioners theory on appeal.
[25]
In yet another Manifestation dated 12 April 2004,
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.
[26]
LHC filed a Counter-Manifestation dated 29 June 2004,
stating that petitioners
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 petitioners 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 ICCs partial award mentioned in petitioners Manifestation of 12
April 2004.
In its Comment to petitioners Motion for Leave to File Addendum to Petitioners 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
ICCs partial award is now fully within the Makati RTCs 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.
[27]
Respondent SBC in its Memorandum, dated 10 March 2003
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 latters 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.
[28]
In a similar fashion, respondent ANZ Bank in its Memorandum dated 13 March 2003
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 LHCs 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, petitioners 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 banks 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
[29]
order or bearer and is generally conditional, yet the draft presented under it is often negotiable.
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,
[30]
who wants to have control of the goods before paying.
The use of credits in commercial
transactions serves to reduce the risk of nonpayment of the purchase price under the contract for
the sale of goods. 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
[31]
standby credits.

There are three significant differences between commercial and standby credits. First,
commercial credits involve the payment of money under a contract of sale. Such credits become
payable upon the presentation by the seller-beneficiary of documents that show he has taken
affirmative steps to comply with the sales agreement. In the standby type, the credit is payable
upon certification of a party's nonperformance of the agreement. The documents that accompany
the beneficiary's draft tend to show that the applicant has not performed. The beneficiary of a
commercial credit must demonstrate by documents that he has performed his contract. The
[32]
beneficiary of the standby credit must certify that his obligor has not performed the contract.
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
[33]
payment of debt therefor to the addressee.
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
[34]
disputes between the parties thereto.
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
[35]
of credit incorporate the UCP.
First published in 1933, the UCP for Documentary Credits has
[36]
undergone several revisions, the latest of which was in 1993.
[37]
In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,
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
[38]
v. Court of Appeals,
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
[39]
insurers of the goods, or any other person whomsoever.
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
[40]
of the credit.
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
[41]
with.
Precisely, the independence principle liberates the issuing bank from the duty of
ascertaining compliance by the parties in the main contract. As the principles 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, petitioners 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.
Petitioners 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 obligors
nonperformance. They function, however, in distinctly different ways.
Traditionally, upon the obligors default, the surety undertakes to complete the obligors 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 suretys 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 applicants 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 obligors 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 beneficiarys 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
petitioners 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
[43]
payment.
Furthermore, LHC has a right rooted in the Contract to call on the Securities. The relevant

provisions of the Contract read, thus:

Securities?

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
[46]
keeping with good faith, usage, and law.
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 LHCs 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 Dolans 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 principles 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 LHCs 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
[47]
terms embodied in their agreement.
Would injunction then be the proper remedy to restrain the alleged wrongful draws on the

Most writers agree that fraud is an exception to the independence principle. Professor Dolan
opines that the untruthfulness of a certificate accompanying a demand for payment under a
[48]
standby credit may qualify as fraud sufficient to support an injunction against payment.
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
[49]
follow if injunction is not granted or the recovery of damages would be seriously damaged.
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
[50]
be entitled to any liquidated damages.
Generally, injunction is a preservative remedy for the protection of ones 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
[51]
upon the grounds and in the manner provided by law.
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
[52]
directed are violative of the said right.
It must be shown that the invasion of the right sought to
be protected is material and substantial, that the right of complainant is clear and unmistakable and
[53]
that there is an urgent and paramount necessity for the writ to prevent serious damage.
Moreover, an injunctive remedy may only be resorted to when there is a pressing necessity to avoid
[54]
injurious consequences which cannot be remedied under any standard compensation.
In the instant case, petitioner failed to show that it has a clear and unmistakable right to restrain
LHCs call on the Securities which would justify the issuance of preliminary injunction. By petitioners
own admission, the right of LHC to call on the Securities was contractually rooted and subject to
[55]
the express stipulations in the Turnkey Contract.
Indeed, the Turnkey Contract is plain and
unequivocal in that it conferred upon LHC the right to draw upon the Securities in case of default,
as provided in Clause 4.2.5, in relation to Clause 8.7.2, thus:
4.2.5 The Employer shall give the Contractor seven days notice of calling upon any of the Securities, stating
the nature of the default for which the claim on any of the Securities is to be made, provided that no notice
will be required if the Employer calls upon any of the Securities for the payment of Liquidated Damages for
Delay or for failure by the Contractor to renew or extend the Securities within 14 days of their expiration in
accordance with Clause 4.2.2.

[56]

8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount of such
damages from any monies due, or to become due, to the Contractor and/or by drawing on the Security.

[57]

The pendency of the arbitration proceedings would not per se make LHCs 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,
[58]
did petitioner invoke the fraud exception rule as a ground to justify the issuance of an injunction.
What petitioner did assert before the courts below was the fact that LHCs 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
[59]
for the first time on appeal.
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 LHCs 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
[60]
the contracting parties and should be complied with in good faith.
More importantly, pursuant to
[61]
the principle of autonomy of contracts embodied in Article 1306 of the Civil Code,
petitioner
could have incorporated in its Contract with LHC, a proviso that only the final determination by the
arbitral tribunals that default had occurred would justify the enforcement of the Securities. However,
the fact is petitioner did not do so; hence, it would have to live with its inaction.
With respect to the issue of whether the respondent banks were justified in releasing the
amounts due under the Securities, this Court reiterates that pursuant to the independence principle
the banks were under no obligation to determine the veracity of LHCs certification that default has
occurred. Neither were they bound by petitioners declaration that LHCs call thereon was wrongful.
To repeat, respondent banks undertaking was simply to pay once the required documents are
presented by the beneficiary.

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[65]
issuance of injunctive relief could have no practical effect on the existing controversy.
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
[66]
occasions. First, in its Counter-Manifestation dated 29 June 2004
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 petitioners acts constitutes forum-shopping which should be punished by the dismissal
of the claim in both forums. Second, in its Comment to Petitioners Motion for Leave to File
Addendum to Petitioners 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
[67]
same issues either pending in, or already resolved adversely, by some other court.
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
[68]
party.
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
[69]
amount to res judicata in another.
Forum-shopping constitutes improper conduct and may be
[70]
punished with summary dismissal of the multiple petitions and direct contempt of court.

At any rate, should petitioner finally prove in the pending arbitration proceedings that LHCs
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.

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.

[62]
Moreover, in a Manifestation,
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.

Petitioner is hereby required to answer the charge of forum-shopping within fifteen (15) days
from notice.

Settled is the rule that injunction would not lie where the acts sought to be enjoined have
[63]
already become fait accompli or an accomplished or consummated act.
In Ticzon v. Video Post
[64]
Manila, Inc.
this Court ruled that where the period within which the former employees were

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

SO ORDERED.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur.

[1]

[2]
[3]
[4]
[5]
[6]

Penned by Justice Candido V. Rivera, concurred in by Justices Conchita Carpio-Morales and Rebecca de GuiaSalvador.
Rollo, pp. 52-61.
Id. at 62-252.
Id. at 75-76.
Clause 1.1, Volume II of the Turnkey Contract, Rollo, p. 81.
20.3 Dispute Resolution.
If at anytime any dispute or difference shall arise between the Employer and the Contractor in connection with or
arising out of this Contract or the carrying out of the Works, the parties together shall in good faith exert all efforts
to resolve such dispute or difference by whatever means they deem appropriate, including conciliation, mediation
and seeking the assistance of technical, accounting or other experts. At the request of any party, the chief
executives of the Employer and the Contractor shall meet in a good-faith effort to reach an amicable settlement of
the dispute or difference. Any dispute or difference that the parties are unable to resolve within a reasonable time
may, at the option of either party, be referred to arbitration in accordance with Clause 20.4. (Id. at 179)

[7]
[8]
[9]

Annex C, Rollo, pp. 254-256.

[20]
[21]
[22]
[23]
[24]
[25]
[26]
[27]
[28]
[29]

[30]

Annex D, Id. at 257-259.


Clause 4.2.1, Volume II of the Turnkey Contract, Id. at 94.

[10]
[11]
[12]
[13]
[14]

[31]

Id. at 261-265.
Id. at 359-382.
Turnkey Contract, Clause 4.2.5, Rollo, p. 94, in relation to Clause 8.7.1., Rollo, p. 132.
Annex H, Rollo, pp. 287-289; Annex H-1, Rollo, pp. 320-322.
Clause 8.2. Time for Completion.

[32]
[33]
[34]
[35]

The Contractor shall complete all the Works, including the Tests on Completion, in accordance with the Program on or
before the Target Completion Date. (Rollo, p. 125)

[36]

[15]

[37]

[16]

[17]
[18]
[19]

Vol. 1, Rollo, pp. 355-357.


[38]
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.
Annex L, Rollo, pp. 383-402.
Annex N, Id. at 406-409.
Annex O, Id. at 412-423.

[39]
[40]
[41]
[42]
[43]
[44]

Docketed as CA-G.R. SP No. 61901.


Rollo, pp. 25-26.
Vol. II; Id. at 2-78.
Id. at 79-92.
Id. at 95-98
Id. at 109-113.
Id. at 666-671.
Id. at 598-607.
Id. at 619-630.
Joseph, Letters of Credit: The Developing Concepts and Financing Functions, 94 BANKING LAW JOURNAL 850-851
[1977] cited in M. KURKELA, LETTERS OF CREDIT UNDER INTERNATIONAL TRADE LAW, 321 (1985).
Bank of America v. Court of Appeals, G.R. No. 105395, 10 December 1993, 228 SCRA 357 citing William S.
Shaterian, EXPORT-IMPORT BANKING: THE INSTRUMENTS AND OPERATIONS UTILIZED BY AMERICAN
EXPORTERS AND IMPORTERS AND THEIR BANKS IN FINANCING FOREIGN TRADE, 284-374 (1947).
E&H Partners v. Broadway Nat'l Bank, 39 F. Supp. 2d 275, (United States Circuit Court, S.D. New York) No. 96 Civ.
7098 (RLC), 19 October 1998 <http://www.westlaw.com>.
J. DOLAN, THE LAW OF LETTERS OF CREDIT, REVISED Ed. (2000).
24 A WORDS AND PHRASES 590, Permanent Edition.
Ibid.
JACKSON & DAVEY, INTERNATIONAL ECONOMIC RELATIONS, 53 (2nd ed.).
ICC Publication No. 500.
146 Phil. 269 (1970).
G.R. No. 105395, 10 December 1993, 228 SCRA 357.
Article 15, UCP.
KURKELA, LETTERS OF CREDIT UNDER INTERNATIONAL TRADE LAW, 286-287 (1985).
Art. 10, UCP.
Supra note 32 at 1-27.
Rollo, pp. 604 and 624.
Underscoring supplied; Id. at 94.

[45]
[46]
[47]
[48]
[49]
[50]
[51]
[52]
[53]

[54]
[55]
[56]
[57]
[58]
[59]

[60]
[61]

[62]
[63]

[64]
[65]
[66]
[67]

Underscoring supplied; Id. at 132.


Art. 1315, Civil Code.
Clause 20.4.1, Turnkey Contract, Rollo, p. 179.
Supra note 32 at 2-63.
M. KURKELA, LETTERS OF CREDIT UNDER INTERNATIONAL TRADE LAW, 309 (1985).
Rollo, p. 391.
Batangas Laguna Tayabas Bus Company, Inc. v. Bitanga, 415 Phil. 43.
Shin v. Court of Appeals, G.R. No. 113627, 6 February 2001, 351 SCRA 257.
Zabat v. Court of Appeals, G.R. No. 122089, 23 August 2000, 338 SCRA 551; Philippine Economic Zone Authority v.
Vianzon, G.R. No. 131020, 20 July 2000, 336 SCRA 309; Valencia v. Court of Appeals, G.R. No. 119118, 19
February 2001, 352 SCRA 72; Crystal v. Cebu International School, G.R. No. 135433, 4 April 2001, 356 SCRA
296; Ong Ching Kian Chuan v. Court of Appeals, 415 Phil. 365 (2001).
Philippine National Bank v. Ritratto Group, Inc., 414 Phil. 494 (2001).
Rollo, p. 31.
Underscoring supplied; Id. at 94-95.
Id. at 132.
Vide Annex L, Rollo. pp. 392-399; Petition for Certiorari, CA Rollo, pp. 7-43.
Salafranca v. Philamlife Village Homeowners Association, Inc., 360 Phil. 652; Ruby Industrial Corporation v. Court of
Appeals, 348 Phil. 480; Victorias Milling Co., Inc. v. Court of Appeals, 389 Phil. 184.
Article 1159, Civil Code.
Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.
Rollo, p. 493.
Aznar Brothers Realty Company v. Court of Appeals, G.R. No. 128102, 7 March 2000, 327 SCRA 359; Soriano v.
Court of Appeals, 416 Phil. 226 (2001); Rodil Enterprises v. Court of Appeals, G.R. No. G.R. No. 129609, 29
November 2001, 371 SCRA 79; Unionbank of the Philippines v. Court of Appeals, 370 Phil. 837 (1999).
389 Phil. 20 (2000).
BLACKS LAW DICTIONARY, p. 1008, citing Leonhart v. McCormick, D.C. Pa., 395 F. Supp. 1073.
Vol. II, Rollo, pp. 666-669.
Tantoy, Sr. v. Court of Appeals, G.R. No. 141427, April 20, 2001, 357 SCRA 329.

[68]
[69]

[70]

Bangko Silangan Development Bank v. Court of Appeals, 412 Phil. 755 (2001).
Tirona v. Alejo, G.R. No. 129313, October 10, 2001, 367 SCRA 17; Manalo v. Court of Appeals, G.R. No. 141297,
October 8, 2001, 366 SCRA 752.
Tantoy, Sr. v. Court of Appeals, supra note 67.; Caviles v. Seventeenth Division, Court of Appeals, G.R. No. 126857,
September 18, 2002, 389 SCRA 306.

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