Republic of the Philippines accepted by the defendant-appellant through its president, Anacleto R.

SUPREME COURT Chi, while the others were not (Exhibits X-2 to X-11, Ibid., pp. 66 to 76).
Manila
Upon the arrival of the machineries, the Prudential Bank indorsed the
THIRD DIVISION shipping documents to the defendant-appellant which accepted delivery
of the same. To enable the defendant-appellant to take delivery of the
G.R. No. 74886 December 8, 1992 machineries, it executed, by prior arrangement with the Prudential Bank,
a trust receipt which was signed by Anacleto R. Chi in his capacity as
President (sic) of defendant-appellant company (Exhibit C, Ibid., p. 13).
PRUDENTIAL BANK, petitioner,
vs.
INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON MILLS, At the back of the trust receipt is a printed form to be accomplished by
INC. and ANACLETO R. CHI, respondents. two sureties who, by the very terms and conditions thereof, were to be
jointly and severally liable to the Prudential Bank should the defendant-
appellant fail to pay the total amount or any portion of the drafts issued
DAVIDE, JR., J.:
by Nissho and paid for by Prudential Bank. The defendant-appellant was
able to take delivery of the textile machineries and installed the same at
Petitioner seeks to review and set aside the decision 1 of public its factory site at 69 Obudan Street, Quezon City.
respondent; Intermediate Appellate Court (now Court of Appeals), dated
10 March 1986, in AC-G.R. No. 66733 which affirmed in toto the 15 June
Sometime in 1967, the defendant-appellant ceased business operation
1978 decision of Branch 9 (Quezon City) of the then Court of First
(sic). On December 29, 1969, defendant-appellant's factory was leased
Instance (now Regional Trial Court) of Rizal in Civil Case No. Q-19312.
by Yupangco Cotton Mills for an annual rental of P200,000.00 (Exhibit
The latter involved an action instituted by the petitioner for the recovery
I, Ibid., p. 22). The lease was renewed on January 3, 1973 (Exhibit
of a sum of money representing the amount paid by it to the Nissho
J, Ibid., p. 26). On January 5, 1974, all the textile machineries in the
Company Ltd. of Japan for textile machinery imported by the defendant,
defendant-appellant's factory were sold to AIC Development Corporation
now private respondent, Philippine Rayon Mills, Inc. (hereinafter
for P300,000.00 (Exhibit K, Ibid., p. 29).
Philippine Rayon), represented by co-defendant Anacleto R. Chi.

The obligation of the defendant-appellant arising from the letter of credit

The facts which gave rise to the instant controversy are summarized by
the public respondent as follows:
On August 8, 1962, defendant-appellant Philippine Rayon Mills, Inc.
entered into a contract with Nissho Co., Ltd. of Japan for the importation
of textile machineries under a five-year deferred payment plan (Exhibit B,
Plaintiff's Folder of Exhibits, p 2). To effect payment for said machineries,
the defendant-appellant applied for a commercial letter of credit with the
Prudential Bank and Trust Company in favor of Nissho. By1virtue of said
application, the Prudential Bank opened Letter of Credit No. DPP-63762
for $128,548.78 (Exhibit A, Ibid., p. 1). Against this letter of credit, drafts
were drawn and issued by Nissho (Exhibits X, X-1 to X-11, Ibid., pp. 65,
66 to 76), which were all paid by the Prudential Bank through its
correspondent in Japan, the Bank of Tokyo, Ltd. As indicated on their
faces, two of these drafts (Exhibit X and X-1, Ibid., pp. 65-66) were
and the trust receipt remained unpaid and unliquidated. Repeated formal
demands (Exhibits U, V, and W, Ibid., pp. 62, 63, 64) for the payment of
the said trust receipt yielded no result Hence, the present action for the
collection of the principal amount of P956,384.95 was filed on October 3,
1974 against the defendant-appellant and Anacleto R. Chi. In their
respective answers, the defendants interposed identical special
defenses, viz., the complaint states no cause of action; if there is, the
same has prescribed; and the plaintiff is guilty of laches. 2
On 15 June 1978, the trial court rendered its decision the dispositive
portion of which reads:
WHEREFORE, judgment is hereby rendered sentencing the defendant
Philippine Rayon Mills, Inc. to pay plaintiff the sum of P153,645.22, the

BANKING No. 6
amounts due under Exhibits "X" & "X-1", with interest at 6% per annum
beginning September 15, 1974 until fully paid.
Insofar as the amounts involved in drafts Exhs. "X" (sic) to "X-11",
inclusive, the same not having been accepted by defendant Philippine
Rayon Mills, Inc., plaintiff's cause of action thereon has not accrued,
hence, the instant case is premature.
Insofar as defendant Anacleto R. Chi is concerned, the case is
dismissed. Plaintiff is ordered to pay defendant Anacleto R. Chi the sum
of P20,000.00 as attorney's fees.
With costs against defendant Philippine Rayon Mills, Inc.
SO ORDERED. 3
Petitioner appealed the decision to the then Intermediate Appellate
Court. In urging the said court to reverse or modify the decision,
petitioner alleged in its Brief that the trial court erred in (a) disregarding
its right to reimbursement from the private respondents for the entire
unpaid balance of the imported machines, the total amount of which was
paid to the Nissho Company Ltd., thereby violating the principle of the
third party payor's right to reimbursement provided for in the second
paragraph of Article 1236 of the Civil Code and under the rule against
unjust enrichment; (b) refusing to hold Anacleto R. Chi, as the
responsible officer of defendant corporation, liable under Section 13 of
P.D No 115 for the entire unpaid balance of the imported machines
covered by the bank's trust receipt (Exhibit "C"); (c) finding that the
solidary guaranty clause signed by Anacleto R. Chi is not a guaranty at
all; (d) controverting the judicial admissions of Anacleto R. Chi that he is
at least a simple guarantor of the said trust receipt obligation; (e)
contravening, based on the assumption that Chi is a simple guarantor,
Articles 2059, 2060 and 2062 of the Civil Code and the related evidence
and jurisprudence which provide that such liability had already attached;
(f) contravening the judicial admissions of Philippine Rayon2 with respect
to its liability to pay the petitioner the amounts involved in the drafts
(Exhibits "X", "X-l" to "X-11''); and (g) interpreting "sight" drafts as
requiring acceptance by Philippine Rayon before the latter could be held
liable thereon. 4
BANKING No. 6
In its decision, public respondent sustained the trial court in all respects.
As to the first and last assigned errors, it ruled that the provision on
unjust enrichment, Article 2142 of the Civil Code, applies only if there is
no express contract between the parties and there is a clear showing that
the payment is justified. In the instant case, the relationship existing
between the petitioner and Philippine Rayon is governed by specific
contracts, namely the application for letters of credit, the promissory
note, the drafts and the trust receipt. With respect to the last ten (10)
drafts (Exhibits "X-2" to "X-11") which had not been presented to and
were not accepted by Philippine Rayon, petitioner was not justified in
unilaterally paying the amounts stated therein. The public respondent did
not agree with the petitioner's claim that the drafts were sight drafts
which did not require presentment for acceptance to Philippine Rayon
because paragraph 8 of the trust receipt presupposes prior acceptance
of the drafts. Since the ten (10) drafts were not presented and accepted,
no valid demand for payment can be made.
Public respondent also disagreed with the petitioner's contention that
private respondent Chi is solidarily liable with Philippine Rayon pursuant
to Section 13 of P.D. No. 115 and based on his signature on the solidary
guaranty clause at the dorsal side of the trust receipt. As to the first
contention, the public respondent ruled that the civil liability provided for
in said Section 13 attaches only after conviction. As to the second, it
expressed misgivings as to whether Chi's signature on the trust receipt
made the latter automatically liable thereon because the so-called
solidary guaranty clause at the dorsal portion of the trust receipt is to be
signed not by one (1) person alone, but by two (2) persons; the last
sentence of the same is incomplete and unsigned by witnesses; and it is
not acknowledged before a notary public. Besides, even granting that it
was executed and acknowledged before a notary public, Chi cannot be
held liable therefor because the records fail to show that petitioner had
either exhausted the properties of Philippine Rayon or had resorted to all
legal remedies as required in Article 2058 of the Civil Code. As provided
for under Articles 2052 and 2054 of the Civil Code, the obligation of a
guarantor is merely accessory and subsidiary, respectively. Chi's liability
would therefore arise only when the principal debtor fails to comply with
his obligation. 5
Its motion to reconsider the decision having been denied by the public
respondent in its Resolution of 11 June 1986, 6 petitioner filed the instant
petition on 31 July 1986 submitting the following legal issues:
I. WHETHER OR NOT THE RESPONDENT APPELLATE COURT
GRIEVOUSLY ERRED IN DENYING PETITIONER'S CLAIM FOR FULL
REIMBURSEMENT AGAINST THE PRIVATE RESPONDENTS FOR
THE PAYMENT PETITIONER MADE TO NISSHO CO. LTD. FOR THE
BENEFIT OF PRIVATE RESPONDENT UNDER ART. 1283 OF THE
NEW CIVIL CODE OF THE PHILIPPINES AND UNDER THE GENERAL
PRINCIPLE AGAINST UNJUST ENRICHMENT;
II. WHETHER OR NOT RESPONDENT CHI IS SOLIDARILY LIABLE
UNDER THE TRUST RECEIPT (EXH. C);
III. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL
ADMISSIONS OF RESPONDENT CHI HE IS LIABLE THEREON AND
TO WHAT EXTENT;
IV. WHETHER OR NOT RESPONDENT CHI IS MERELY A SIMPLE
GUARANTOR; AND IF SO; HAS HIS LIABILITY AS SUCH ALREADY
ATTACHED;
V. WHETHER OR NOT AS THE SIGNATORY AND RESPONSIBLE
OFFICER OF RESPONDENT PHIL. RAYON RESPONDENT CHI IS
PERSONALLY LIABLE PURSUANT TO THE PROVISION OF SECTION
13, P.D. 115;
VI. WHETHER OR NOT RESPONDENT PHIL. RAYON IS LIABLE TO
THE PETITIONER UNDER THE TRUST RECEIPT (EXH. C);
VII. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL
ADMISSIONS RESPONDENT PHIL. RAYON IS LIABLE TO THE
PETITIONER UNDER THE DRAFTS (EXHS. X, X-1 TO X-11) AND TO
WHAT EXTENT;
VIII. WHETHER OR NOT SIGHT DRAFTS REQUIRE PRIOR
ACCEPTANCE FROM RESPONDENT PHIL. RAYON BEFORE THE
3 turn, defendant Philippine Rayon Mills, Inc., was obligated to pay plaintiff
LATTER BECOMES LIABLE TO PETITIONER. 7
In the Resolution of 12 March 1990, 8 this Court gave due course to the
petition after the filing of the Comment thereto by private respondent
Anacleto Chi and of the Reply to the latter by the petitioner; both parties
were also required to submit their respective memoranda which they
subsequently complied with.
BANKING No. 6
As We see it, the issues may be reduced as follows:
1. Whether presentment for acceptance of the drafts was indispensable
to make Philippine Rayon liable thereon;
2. Whether Philippine Rayon is liable on the basis of the trust receipt;
3. Whether private respondent Chi is jointly and severally liable with
Philippine Rayon for the obligation sought to be enforced and if not,
whether he may be considered a guarantor; in the latter situation,
whether the case should have been dismissed on the ground of lack of
cause of action as there was no prior exhaustion of Philippine Rayon's
properties.
Both the trial court and the public respondent ruled that Philippine Rayon
could be held liable for the two (2) drafts, Exhibits "X" and "X-1", because
only these appear to have been accepted by the latter after due
presentment. The liability for the remaining ten (10) drafts (Exhibits "X-2"
to "X-11" inclusive) did not arise because the same were not presented
for acceptance. In short, both courts concluded that acceptance of the
drafts by Philippine Rayon was indispensable to make the latter liable
thereon. We are unable to agree with this proposition. The transaction in
the case at bar stemmed from Philippine Rayon's application for a
commercial letter of credit with the petitioner in the amount of
$128,548.78 to cover the former's contract to purchase and import loom
and textile machinery from Nissho Company, Ltd. of Japan under a five-
year deferred payment plan. Petitioner approved the application. As
correctly ruled by the trial court in its Order of 6 March 1975: 9
. . . By virtue of said Application and Agreement for Commercial Letter of
Credit, plaintiff bank 10 was under obligation to pay through its
correspondent bank in Japan the drafts that Nisso (sic) Company, Ltd.,
periodically drew against said letter of credit from 1963 to 1968, pursuant
to plaintiff's contract with the defendant Philippine Rayon Mills, Inc. In
bank the amounts of the drafts drawn by Nisso (sic) Company, Ltd.
against said plaintiff bank together with any accruing commercial
charges, interest, etc. pursuant to the terms and conditions stipulated in
the Application and Agreement of Commercial Letter of Credit Annex "A".
A letter of credit is defined as an engagement by a bank or other person
made at the request of a customer that the issuer will honor drafts or
other demands for payment upon compliance with the conditions
specified in the credit. 11 Through a letter of credit, the bank merely
substitutes its own promise to pay for one of its customers who in return
promises to pay the bank the amount of funds mentioned in the letter of
credit plus credit or commitment fees mutually agreed upon. 12 In the
instant case then, the drawee was necessarily the herein petitioner. It
was to the latter that the drafts were presented for payment. In fact, there
was no need for acceptance as the issued drafts are sight drafts.
Presentment for acceptance is necessary only in the cases expressly
provided for in Section 143 of the Negotiable Instruments Law
(NIL). 13 The said section reads:
Sec. 143. When presentment for acceptance must be made.
Presentment for acceptance must be made:
(a) Where the bill is payable after sight, or in any other case, where
presentment for acceptance is necessary in order to fix the maturity of
the instrument; or
(b) Where the bill expressly stipulates that it shall be presented for
acceptance; or
(c) Where the bill is drawn payable elsewhere than at the residence or
place of business of the drawee.
In no other case is presentment for acceptance necessary in order to
render any party to the bill liable.
Obviously then, sight drafts do not require presentment for acceptance.
The acceptance of a bill is the signification by the drawee of his assent to
the order of the drawer; 14 this may be done in writing by the drawee in
the bill itself, or in a separate instrument. 15 4 production of a bill of exchange to a drawee for acceptance. 18 The trial
The parties herein agree, and the trial court explicitly ruled, that the
subject, drafts are sight drafts. Said the latter:
BANKING No. 6
. . . In the instant case the drafts being at sight, they are supposed to be
payable upon acceptance unless plaintiff bank has given the Philippine
Rayon Mills Inc. time within which to pay the same. The first two drafts
(Annexes C & D, Exh. X & X-1) were duly accepted as indicated on their
face (sic), and upon such acceptance should have been paid forthwith.
These two drafts were not paid and although Philippine Rayon Mills
ought to have paid the same, the fact remains that until now they are still
unpaid. 16
Corollarily, they are, pursuant to Section 7 of the NIL, payable on
demand. Section 7 provides:
Sec. 7. When payable on demand. An instrument is payable on
demand
(a) When so it is expressed to be payable on demand, or at sight, or on
presentation; or
(b) In which no time for payment in expressed.
Where an instrument is issued, accepted, or indorsed when overdue, it
is, as regards the person so issuing, accepting, or indorsing it, payable
on demand. (emphasis supplied)
Paragraph 8 of the Trust Receipt which reads: "My/our liability for
payment at maturity of any accepted draft, bill of exchange or
indebtedness shall not be extinguished or modified" 17 does not, contrary
to the holding of the public respondent, contemplate prior acceptance by
Philippine Rayon, but by the petitioner. Acceptance, however, was not
even necessary in the first place because the drafts which were
eventually issued were sight drafts And even if these were not sight
drafts, thereby necessitating acceptance, it would be the petitioner
and not Philippine Rayon which had to accept the same for the latter
was not the drawee. Presentment for acceptance is defined an the
court and the public respondent, therefore, erred in ruling that
presentment for acceptance was an indispensable requisite for Philippine
Rayon's liability on the drafts to attach. Contrary to both courts'
pronouncements, Philippine Rayon immediately became liable thereon
upon petitioner's payment thereof. Such is the essence of the letter of
credit issued by the petitioner. A different conclusion would violate the
principle upon which commercial letters of credit are founded because in
such a case, both the beneficiary and the issuer, Nissho Company Ltd.
and the petitioner, respectively, would be placed at the mercy of
Philippine Rayon even if the latter had already received the imported
machinery and the petitioner had fully paid for it. The typical setting and
purpose of a letter of credit are described in Hibernia Bank and Trust
Co. vs. J. Aron & Co., Inc., 19 thus:
Commercial letters of credit have come into general use in international
sales transactions where much time necessarily elapses between the
sale and the receipt by a purchaser of the merchandise, during which
interval great price changes may occur. Buyers and sellers struggle for
the advantage of position. The seller is desirous of being paid as surely
and as soon as possible, realizing that the vendee at a distant point has
it in his power to reject on trivial grounds merchandise on arrival, and
cause considerable hardship to the shipper. Letters of credit meet this
condition by affording celerity and certainty of payment. Their purpose is
to insure to a seller payment of a definite amount upon presentation of
documents. The bank deals only with documents. It has nothing to do
with the quality of the merchandise. Disputes as to the merchandise
shipped may arise and be litigated later between vendor and vendee, but
they may not impede acceptance of drafts and payment by the issuing
bank when the proper documents are presented.
The trial court and the public respondent likewise erred in disregarding
the trust receipt and in not holding that Philippine Rayon was liable
thereon. In People vs. Yu Chai Ho, 20 this Court explains the nature of a
trust receipt by quoting In re Dunlap Carpet Co., 21 thus:
By this arrangement a banker advances money to an intending importer,
and thereby lends the aid of capital, of credit, or of business facilities and
agencies abroad, to the enterprise of foreign commerce. Much of this
trade could hardly be carried on by any other means, and therefore it is
of the first importance that the fundamental factor in the transaction, the
banker's advance of money and credit, should receive the amplest
5 be repaid
protection. Accordingly, in order to secure that the banker shall
at the critical point that is, when the imported goods finally reach the
hands of the intended vendee the banker takes the full title to the
goods at the very beginning; he takes it as soon as the goods are bought
and settled for by his payments or acceptances in the foreign country,
and he continues to hold that title as his indispensable security until the
goods are sold in the United States and the vendee is called upon to pay
BANKING No. 6
for them. This security is not an ordinary pledge by the importer to the
banker, for the importer has never owned the goods, and moreover he is
not able to deliver the possession; but the security is the complete title
vested originally in the bankers, and this characteristic of the transaction
has again and again been recognized and protected by the courts. Of
course, the title is at bottom a security title, as it has sometimes been
called, and the banker is always under the obligation to reconvey; but
only after his advances have been fully repaid and after the importer has
fulfilled the other terms of the contract.
As further stated in National Bank vs. Viuda e Hijos de Angel
Jose, 22 trust receipts:
. . . [I]n a certain manner, . . . partake of the nature of a conditional sale
as provided by the Chattel Mortgage Law, that is, the importer becomes
absolute owner of the imported merchandise as soon an he has paid its
price. The ownership of the merchandise continues to be vested in the
owner thereof or in the person who has advanced payment, until he has
been paid in full, or if the merchandise has already been sold, the
proceeds of the sale should be turned over to him by the importer or by
his representative or successor in interest.
Under P.D. No. 115, otherwise known an the Trust Receipts Law, which
took effect on 29 January 1973, a trust receipt transaction is defined as
"any transaction by and between a person referred to in this Decree as
the entruster, and another person referred to in this Decree as the
entrustee, whereby the entruster, who owns or holds absolute title or
security interests' over certain specified goods, documents or
instruments, releases the same to the possession of the entrustee upon
the latter's execution and delivery to the entruster of a signed document
called the "trust receipt" wherein the entrustee binds himself to hold the
designated goods, documents or instruments in trust for the entruster
and to sell or otherwise dispose of the goods, documents or instruments
with the obligation to turn over to the entruster the proceeds thereof to
the extent of the amount owing to the entruster or as appears in the trust
receipt or the goods, instruments themselves if they are unsold or not
otherwise disposed of, in accordance with the terms and conditions
specified in the trusts receipt, or for other purposes substantially
equivalent to any one of the following: . . ."
It is alleged in the complaint that private respondents "not only have
presumably put said machinery to good use and have profited by its
operation and/or disposition but very recent information that (sic) reached
plaintiff bank that defendants already sold the machinery covered by the
trust receipt to Yupangco Cotton Mills," and that "as trustees of the
property covered by the trust receipt, . . . and therefore acting in fiduciary
(sic) capacity, defendants have willfully violated their duty to account for
the whereabouts of the machinery covered by the trust receipt or for the
proceeds of any lease, sale or other disposition of the same that they
may have made, notwithstanding demands therefor; defendants have
fraudulently misapplied or converted to their own use any money realized
from the lease, sale, and other disposition of said machinery." 23 While
there is no specific prayer for the delivery to the petitioner by Philippine
Rayon of the proceeds of the sale of the machinery covered by the trust
receipt, such relief is covered by the general prayer for "such further and
other relief as may be just and equitable on the premises." 24 And
although it is true that the petitioner commenced a criminal action for the
violation of the Trust Receipts Law, no legal obstacle prevented it from
enforcing the civil liability arising out of the trust, receipt in a separate
civil action. Under Section 13 of the Trust Receipts Law, the failure of an
entrustee to turn over the proceeds of the sale of goods, documents or
instruments covered by a trust receipt to the extent of the amount owing
to the entruster or as appear in the trust receipt or to return said goods,
documents or instruments if they were not sold or disposed of in
accordance with the terms of the trust receipt shall constitute the crime of
estafa, punishable under the provisions of Article 315, paragraph 1(b) of
the Revised Penal Code. 25 Under Article 33 of the Civil Code, a civil
action for damages, entirely separate and distinct from the criminal
action, may be brought by the injured party in cases of defamation, fraud
and physical injuries. Estafa falls under fraud.
We also conclude, for the reason hereinafter discussed, and not for that
adduced by the public respondent, that private respondent Chi's
signature in the dorsal portion of the trust receipt did not bind him
solidarily with Philippine Rayon. The statement at the dorsal portion of
the said trust receipt, which petitioner describes as a "solidary
6 guaranty
clause", reads:
In consideration of the PRUDENTIAL BANK AND TRUST COMPANY
complying with the foregoing, we jointly and severally agree and
undertake to pay on demand to the PRUDENTIAL BANK AND TRUST
COMPANY all sums of money which the said PRUDENTIAL BANK AND
BANKING No. 6
TRUST COMPANY may call upon us to pay arising out of or pertaining
to, and/or in any event connected with the default of and/or non-
fulfillment in any respect of the undertaking of the aforesaid:
PHILIPPINE RAYON MILLS, INC.
We further agree that the PRUDENTIAL BANK AND TRUST COMPANY
does not have to take any steps or exhaust its remedy against aforesaid:
before making demand on me/us.
(Sgd.) Anacleto R. Chi
ANACLETO R. CHI 26
Petitioner insists that by virtue of the clear wording of the statement,
specifically the clause ". . . we jointly and severally agree and undertake .
. .," and the concluding sentence on exhaustion, Chi's liability therein is
solidary.
In holding otherwise, the public respondent ratiocinates as follows:
With respect to the second argument, we have our misgivings as to
whether the mere signature of defendant-appellee Chi of (sic) the
guaranty agreement, Exhibit "C-1", will make it an actionable document.
It should be noted that Exhibit "C-1" was prepared and printed by the
plaintiff-appellant. A perusal of Exhibit "C-1" shows that it was to be
signed and executed by two persons. It was signed only by defendant-
appellee Chi. Exhibit "C-1" was to be witnessed by two persons, but no
one signed in that capacity. The last sentence of the guaranty clause is
incomplete. Furthermore, the plaintiff-appellant also failed to have the
purported guarantee clause acknowledged before a notary public. All
these show that the alleged guaranty provision was disregarded and,
therefore, not consummated.
But granting arguendo that the guaranty provision in Exhibit "C-1" was
fully executed and acknowledged still defendant-appellee Chi cannot be
held liable thereunder because the records show that the plaintiff-
appellant had neither exhausted the property of the defendant-appellant
nor had it resorted to all legal remedies against the said defendant-
appellant as provided in Article 2058 of the Civil Code. The obligation of
a guarantor is merely accessory under Article 2052 of the Civil Code and
subsidiary under Article 2054 of the Civil Code. Therefore, the liability of
the defendant-appellee arises only when the principal debtor fails to
comply with his obligation. 27
Our own reading of the questioned solidary guaranty clause yields no
other conclusion than that the obligation of Chi is only that of a guarantor.
This is further bolstered by the last sentence which speaks of waiver of
exhaustion, which, nevertheless, is ineffective in this case because the
space therein for the party whose property may not be exhausted was
not filled up. Under Article 2058 of the Civil Code, the defense of
exhaustion (excussion) may be raised by a guarantor before he may be
held liable for the obligation. Petitioner likewise admits that the
questioned provision is a solidary guaranty clause, thereby clearly
distinguishing it from a contract of surety. It, however, described the
guaranty as solidary between the guarantors; this would have been
correct if two (2) guarantors had signed it. The clause "we jointly and
severally agree and undertake" refers to the undertaking of the two (2)
parties who are to sign it or to the liability existing between themselves. It
does not refer to the undertaking between either one or both of them on
the one hand and the petitioner on the other with respect to the liability
described under the trust receipt. Elsewise stated, their liability is not
divisible as between them, i.e., it can be enforced to its full extent against
any one of them.
Furthermore, any doubt as to the import, or true intent of the solidary
guaranty clause should be resolved against the petitioner. The trust
receipt, together with the questioned solidary guaranty clause, is on a
form drafted and prepared solely by the petitioner; Chi's participation
therein is limited to the affixing of his signature thereon. It is, therefore, a
contract of adhesion; 28 as such, it must be strictly construed against the
party responsible for its preparation. 29
Neither can We agree with the reasoning of the public respondent that
this solidary guaranty clause was effectively disregarded simply because
it was not signed and witnessed by two (2) persons and acknowledged
before a notary public. While indeed, the clause ought to 7 have been
signed by two (2) guarantors, the fact that it was only Chi who signed the
same did not make his act an idle ceremony or render the clause totally
meaningless. By his signing, Chi became the sole guarantor. The
attestation by witnesses and the acknowledgement before a notary
public are not required by law to make a party liable on the instrument.
The rule is that contracts shall be obligatory in whatever form they may
BANKING No. 6
have been entered into, provided all the essential requisites for their
validity are present; however, when the law requires that a contract be in
some form in order that it may be valid or enforceable, or that it be
proved in a certain way, that requirement is absolute and
indispensable. 30 With respect to a guaranty, 31 which is a promise to
answer for the debt or default of another, the law merely requires that it,
or some note or memorandum thereof, be in writing. Otherwise, it would
be unenforceable unless ratified. 32 While the acknowledgement of a
surety before a notary public is required to make the same a public
document, under Article 1358 of the Civil Code, a contract of guaranty
does not have to appear in a public document.
And now to the other ground relied upon by the petitioner as basis for the
solidary liability of Chi, namely the criminal proceedings against the latter
for the violation of P.D. No. 115. Petitioner claims that because of the
said criminal proceedings, Chi would be answerable for the civil liability
arising therefrom pursuant to Section 13 of P.D. No. 115. Public
respondent rejected this claim because such civil liability presupposes
prior conviction as can be gleaned from the phrase "without prejudice to
the civil liability arising from the criminal offense." Both are wrong. The
said section reads:
Sec. 13. Penalty Clause. The failure of an entrustee to turn over the
proceeds of the sale of the goods, documents or instruments covered by
a trust receipt to the extent of the amount owing to the entruster or as
appears in the trust receipt or to return said goods, documents or
instruments if they were not sold or disposed of in accordance with the
terms of the trust receipt shall constitute the crime of estafa, punishable
under the provisions of Article Three hundred and fifteen, paragraph one
(b) of Act Numbered Three thousand eight hundred and fifteen, as
amended, otherwise known as the Revised Penal Code. If the violation
or offense is committed by a corporation, partnership, association or
other juridical entities, the penalty provided for in this Decree shall be
imposed upon the directors, officers, employees or other officials or
persons therein responsible for the offense, without prejudice to the civil
liabilities arising from the criminal offense.
A close examination of the quoted provision reveals that it is the last
sentence which provides for the correct solution. It is clear that if the
violation or offense is committed by a corporation, partnership,
association or other juridical entities, the penalty shall be imposed upon
the directors, officers, employees or other officials or persons therein
responsible for the offense. The penalty referred to is imprisonment, the
duration of which would depend on the amount of the fraud as provided
for in Article 315 of the Revised Penal Code. The reason for this is
obvious: corporations, partnerships, associations and other juridical
entities cannot be put in jail. However, it is these entities which are made
liable for the civil liability arising from the criminal offense. This is the
import of the clause "without prejudice to the civil liabilities arising from
the criminal offense." And, as We stated earlier, since that violation of a
trust receipt constitutes fraud under Article 33 of the Civil Code, petitioner
was acting well within its rights in filing an independent civil action to
enforce the civil liability arising therefrom against Philippine Rayon.
The remaining issue to be resolved concerns the propriety of the
dismissal of the case against private respondent Chi. The trial court
based the dismissal, and the respondent Court its affirmance thereof, on
the theory that Chi is not liable on the trust receipt in any capacity
either as surety or as guarantor because his signature at the dorsal
portion thereof was useless; and even if he could be bound by such
signature as a simple guarantor, he cannot, pursuant to Article 2058 of
the Civil Code, be compelled to pay until
after petitioner has exhausted and resorted to all legal remedies against
the principal debtor, Philippine Rayon. The records fail to show that
petitioner had done so 33 Reliance is thus placed on Article 2058 of the
Civil Code which provides:
Art. 2056. The guarantor cannot be compelled to pay the creditor unless
the latter has exhausted all the property of the debtor, and has resorted
to all the legal remedies against the debtor.
Simply stated, there is as yet no cause of action against Chi.
We are not persuaded. Excussion is not a condition sine qua non for the
institution of an action against a guarantor. In Southern Motors,
Inc. vs. Barbosa, 34 this Court stated:
8
4. Although an ordinary personal guarantor not a mortgagor or pledgor
may demand the aforementioned exhaustion, the creditor may, prior
thereto, secure a judgment against said guarantor, who shall be entitled,
however, to a deferment of the execution of said judgment against him
until after the properties of the principal debtor shall have been
exhausted to satisfy the obligation involved in the case.
BANKING No. 6
There was then nothing procedurally objectionable in impleading private
respondent Chi as a co-defendant in Civil Case No. Q-19312 before the
trial court. As a matter of fact, Section 6, Rule 3 of the Rules of Court on
permissive joinder of parties explicitly allows it. It reads:
Sec. 6. Permissive joinder of parties. All persons in whom or against
whom any right to relief in respect to or arising out of the same
transaction or series of transactions is alleged to exist, whether jointly,
severally, or in the alternative, may, except as otherwise provided in
these rules, join as plaintiffs or be joined as defendants in one complaint,
where any question of law or fact common to all such plaintiffs or to all
such defendants may arise in the action; but the court may make such
orders as may be just to prevent any plaintiff or defendant from being
embarrassed or put to expense in connection with any proceedings in
which he may have no interest.
This is the equity rule relating to multifariousness. It is based on trial
convenience and is designed to permit the joinder of plaintiffs or
defendants whenever there is a common question of law or fact. It will
save the parties unnecessary work, trouble and expense. 35
However, Chi's liability is limited to the principal obligation in the trust
receipt plus all the accessories thereof including judicial costs; with
respect to the latter, he shall only be liable for those costs incurred after
being judicially required to pay. 36 Interest and damages, being
accessories of the principal obligation, should also be paid; these,
however, shall run only from the date of the filing of the complaint.
Attorney's fees may even be allowed in appropriate cases. 37
In the instant case, the attorney's fees to be paid by Chi cannot be the
same as that to be paid by Philippine Rayon since it is only the trust
receipt that is covered by the guaranty and not the full extent of the
latter's liability. All things considered, he can be held liable for the sum of
P10,000.00 as attorney's fees in favor of the petitioner.
Thus, the trial court committed grave abuse of discretion in dismissing
the complaint as against private respondent Chi and condemning
petitioner to pay him P20,000.00 as attorney's fees.
In the light of the foregoing, it would no longer necessary to discuss the
other issues raised by the petitioner
WHEREFORE, the instant Petition is hereby GRANTED.
The appealed Decision of 10 March 1986 of the public respondent in AC-
G.R. CV No. 66733 and, necessarily, that of Branch 9 (Quezon City) of
the then Court of First Instance of Rizal in Civil Case No. Q-19312 are
hereby REVERSED and SET ASIDE and another is hereby entered:
1. Declaring private respondent Philippine Rayon Mills, Inc. liable on the
twelve drafts in question (Exhibits "X", "X-1" to "X-11", inclusive) and on
the trust receipt (Exhibit "C"), and ordering it to pay petitioner: (a) the
amounts due thereon in the total sum of P956,384.95 as of 15
September 1974, with interest thereon at six percent (6%) per annum
from 16 September 1974 until it is fully paid, less whatever may have
been applied thereto by virtue of foreclosure of mortgages, if any; (b) a
sum equal to ten percent (10%) of the aforesaid amount as attorney's
fees; and (c) the costs.
2. Declaring private respondent Anacleto R. Chi secondarily liable on the
trust receipt and ordering him to pay the face value thereof, with interest
at the legal rate, commencing from the date of the filing of the complaint
in Civil Case No. Q-19312 until the same is fully paid as well as the costs
and attorney's fees in the sum of P10,000.00 if the writ of execution for
the enforcement of the above awards against Philippine Rayon Mills, Inc.
is returned unsatisfied.
Costs against private respondents.
SO ORDERED.
Gutierrez, Jr., Bidin, Romero and Melo, JJ., concur.
PRUDENTIAL BANK vs. INTERMEDIATE APPELLATE COURT
G.R. No. 74886 December 8, 1992, 216 scra 257
--presentment for payment 9
FACTS:
BANKING No. 6
Philippine Rayon Mills, Inc. entered into a contract with Nissho Co., Ltd.
of Japan for the importation of textile machineries under a five-year
deferred payment plan. To effect payment for said machineries,
Philippine Rayon Mills opened a commercial letter of credit with the
Prudential Bank and Trust Company in favor of Nissho. Against this
letter of credit, drafts were drawn and issued by Nissho, which were all
paid by the Prudential Bank through its correspondent in Japan. Two of
these drafts were accepted by Philippine Rayon Mills while the others
were not. Petitioner instituted an action for the recovery of the sum of
money it paid to Nissho as Philippine Rayon Mills was not able to pay its
obligations arising from the letter of credit. Respondent court ruled that
with regard to the ten drafts which were not presented and accepted, no
valid demand for payment can be made. Petitioner however claims that
the drafts were sight drafts which did not require presentment for
acceptance to Philippine Rayon.
ISSUE:
Whether presentment for acceptance of the drafts was indispensable to
make Philippine Rayon liable thereon.
RULING:
In the case at bar, the drawee was necessarily the herein petitioner. It
was to the latter that the drafts were presented for payment. There was
in fact no need for acceptance as the issued drafts are sight
drafts. Presentment for acceptance is necessary only in the cases
expressly provided for in Section 143 of the Negotiable Instruments Law
(NIL). The said section provides that presentment for acceptance must
be made:
(a) Where the bill is payable after sight, or in any other case, where
presentment for acceptance is necessary in order to fix the maturity of
the instrument; or
(b) Where the bill expressly stipulates that it shall be presented for
acceptance; or
 (c) Where the bill is drawn payable elsewhere than at the residence
or place of business of the drawee.
In no other case is presentment for acceptance necessary in order to
render any party to the bill liable. Obviously then, sight drafts do not
require presentment for acceptance.
Prudential Bank v Intermediate Appellate Court and Anacleto Chi
G.R. No. 74886 December 8, 1992
Through a letter of credit, the bank merely substitutes its own
promise to pay for one of its customers who in return promises to
pay the bank the amount of funds mentioned in the letter of credit
plus credit or commitment fees mutually agreed upon.
Facts:
Philippine Rayon Mills, Inc.(PRMI) entered into a contract with Nissho
Co., Ltd. of Japan for the importation of textile machineries under a 5-
year deferred payment plan. To effect the payment, PRMI applied for a
commercial letter of credit with the Prudential Bank and Trust Company
in favor of Nissho. Prudential Bank opened Letter of Credit No. DPP-
63762 for $128,548.78 Against this letter of credit, drafts were drawn and
issued by Nissho, which were all paid by the Prudential Bank through its
correspondent in Japan, the Bank of Tokyo, Ltd. Two of the original drafts
were accepted by PRMI through its president, Anacleto R. Chi, while the
others were not. Upon the arrival of the machineries, the Prudential Bank
indorsed the shipping documents to the PRMI which accepted 10 delivery of
the same. To enable PRMI to take delivery of the machineries, it
executed, by prior arrangement with the Prudential Bank, a trust receipt
which was signed by Anacleto R. Chi in his capacity as President of
PRMI company
BANKING No. 6
At the back of the trust receipt was printed a form to be accomplished by
2 sureties who, by the very terms and conditions thereof, were to be
jointly and severally liable to the Prudential Bank should the PRMI fail to
pay the total amount or any portion of the drafts issued by Nissho and
paid for by Prudential Bank. . PRMI was able to take delivery of the
textile machineries and installed the same at its factory site. Chi argued
that presentment for acceptance was necessary to make PRMI liable.
The trial court ruled that that presentment for acceptance was an
indispensable requisite for Philippine Rayons liability on the drafts to
attach.
Issue :
Whether or not presentment for acceptance was needed in order for
PRMI to be liable under the draft.
HELD :
Presentment for acceptance is defined an the production of a bill of
exchange to a drawee for acceptance. Acceptance, however, was not
even necessary in the first place because the drafts which were
eventually issued were sight drafts. Even if these were not sight drafts,
thereby necessitating acceptance, it would be the Bank (Bank of
America) and not Philippine Rayon which had to accept the same
for the latter was not the drawee.
The trial court and the public respondent, therefore, erred in ruling that
presentment for acceptance was an indispensable requisite for Philippine
Rayons liability on the drafts to attach. Contrary to both courts
pronouncements, Philippine Rayon immediately became liable upon
Bank of Americas payment on the letter of credit. Such is the essence of
the letter of credit issued by the petitioner. A different conclusion would
violate the principle upon which commercial letters of credit are founded
because in such a case, both the beneficiary and the issuer, Nissho
Company Ltd. and the petitioner, respectively, would be placed at the
mercy of Philippine Rayon even if the latter had already received the
imported machinery and the petitioner had fully paid for it.
In fact, there was no need for acceptance as the issued drafts are sight
drafts. Presentment for acceptance is necessary only in the cases
expressly provided for in Section 143 of the Negotiable Instruments Law
(NIL).
In the instant case then, the drawee was necessarily the herein the Bank
of America. It was to the latter that the drafts were presented for
payment.
VITUG, J.:
A "fiasco," involving an irrevocable letter of credit, has found the
distressed parties coming to court as adversaries in seeking a definition
of their respective rights or liabilities thereunder.
On 05 March 1981, petitioner Bank of America, NT & SA, Manila,
received by registered mail an Irrevocable Letter of Credit No. 20272/81
purportedly issued by Bank of Ayudhya, Samyaek Branch, for the
account of General Chemicals, Ltd., of Thailand in the amount of
US$2,782,000.00 to cover the sale of plastic ropes and "agricultural
files," with the petitioner as advising bank and private respondent Inter-
Resin Industrial Corporation as beneficiary.

On 11 March 1981, Bank of America wrote Inter-Resin informing the

latter of the foregoing and transmitting, along with the bank's
communication,
the latter of credit. Upon receipt of the letter-advice with the letter of
credit, Inter-Resin sent Atty. Emiliano Tanay to Bank of America to have
the letter of credit confirmed. The bank did not. Reynaldo Dueas, bank
employee in charge of letters of credit, however, explained to Atty. Tanay
that there was no need for confirmation because the letter of credit would
not have been transmitted if it were not genuine.
Republic of the Philippines
SUPREME COURT
Manila Between 26 March to 10 April 1981, Inter-Resin sought to make a partial
availment under the letter of credit by submitting to Bank of America
invoices, covering the shipment of 24,000 bales of polyethylene rope to
THIRD DIVISION General Chemicals valued at US$1,320,600.00, the corresponding
packing list, export declaration and bill of lading. Finally, after being
G.R. No. 105395 December 10, 1993 satisfied that Inter-Resin's documents conformed with the conditions
expressed in the letter of credit, Bank of America issued in favor of Inter-
BANK OF AMERICA, NT & SA, petitioners, Resin a Cashier's Check for P10,219,093.20, "the Peso equivalent of the
vs. draft (for) US$1,320,600.00 drawn by Inter-Resin, after deducting the
COURT OF APPEALS, INTER-RESIN INDUSTRIAL CORPORATION, costs for documentary stamps, postage and mail issuance." 1 The check
FRANCISCO TRAJANO, JOHN DOE AND JANE DOE, respondents. was picked up by Inter-Resin's Executive Vice-President Barcelina Tio.
11
On 10 April 1981, Bank of America wrote Bank of Ayudhya advising the
Agcaoili & Associates for petitioner. latter of the availment under the letter of credit and sought the
corresponding reimbursement therefor.
Valenzuela Law Center, Victor Fernandez and Ramon Guevarra for
private respondents. Meanwhile, Inter-Resin, through Ms. Tio, presented to Bank of America
the documents for the second availment under the same letter of credit

BANKING No. 6
consisting of a packing list, bill of lading, invoices, export declaration and
bills in set, evidencing the second shipment of goods. Immediately upon
receipt of a telex from the Bank of Ayudhya declaring the letter of credit
fraudulent, 2 Bank of America stopped the processing of Inter-Resin's
documents and sent a telex to its branch office in Bangkok, Thailand,
requesting assistance in determining the authenticity of the letter of
credit. 3Bank of America kept Inter-Resin informed of the developments.
Sensing a fraud, Bank of America sought the assistance of the National
Bureau of Investigation (NBI). With the help of the staff of the Philippine
Embassy at Bangkok, as well as the police and customs personnel of
Thailand, the NBI agents, who were sent to Thailand, discovered that the
vans exported by Inter-Resin did not contain ropes but plastic strips,
wrappers, rags and waste materials. Here at home, the NBI also
investigated Inter-Resin's President Francisco Trajano and Executive
Vice President Barcelina Tio, who, thereafter, were criminally charged for
estafa through falsification of commercial documents. The case,
however, was eventually dismissed by the Rizal Provincial Fiscal who
found no prima facie evidence to warrant prosecution.
Bank of America sued Inter-Resin for the recovery of P10,219,093.20,
the peso equivalent of the draft for US$1,320,600.00 on the partial
availment of the now disowned letter of credit. On the other hand, Inter-
Resin claimed that not only was it entitled to retain P10,219,093.20 on its
first shipment but also to the balance US$1,461,400.00 covering the
second shipment.
On 28 June 1989, the trial court ruled for Inter-Resin, 4 holding that:
(a) Bank of America made assurances that enticed Inter-Resin to send
the merchandise to Thailand; (b) the telex declaring the letter of credit
fraudulent was unverified and self-serving, hence, hearsay, but even
assuming that the letter of credit was fake, "the fault should be borne by
the BA which was careless and negligent" 5 for failing to utilize its modern
means of communication to verify with Bank of Ayudhya in Thailand the
authenticity of the letter of credit before sending the same to Inter-Resin;
(c) the loading of plastic products into the vans were under strict
supervision, inspection and verification of government officers12 who have
in their favor the presumption of regularity in the performance of official
functions; and (d) Bank of America failed to prove the participation of
Inter-Resin or its employees in the alleged fraud as, in fact, the complaint
for estafa through falsification of documents was dismissed by the
Provincial Fiscal of Rizal. 6
BANKING No. 6
On appeal, the Court of Appeals 7 sustained the trial court; hence, this
present recourse by petitioner Bank of America.
The following issues are raised by Bank of America: (a) whether it has
warranted the genuineness and authenticity of the letter of credit and,
corollarily, whether it has acted merely as an advising bank or as a
confirming bank; (b) whether Inter-Resin has actually shipped the ropes
specified by the letter of credit; and (c) following the dishonor of the letter
of credit by Bank of Ayudhya, whether Bank of America may recover
against Inter-Resin under the draft executed in its partial availment of the
letter of credit. 8
In rebuttal, Inter-Resin holds that: (a) Bank of America cannot, on appeal,
belatedly raise the issue of being only an advising bank; (b) the findings
of the trial court that the ropes have actually been shipped is binding on
the Court; and, (c) Bank of America cannot recover from Inter-Resin
because the drawer of the letter of credit is the Bank of Ayudhya and not
Inter-Resin.
If only to understand how the parties, in the first place, got themselves
into the mess, it may be well to start by recalling how, in its modern use,
a letter of credit is employed in trade 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. 9 To break the impasse, the buyer
may be required to contract a bank to issue a letter of credit in favor of
the seller so that, by virtue of the latter of credit, the issuing bank can
authorize the seller to draw drafts and engage to pay them upon their
presentment simultaneously with the tender of documents required by
the letter of credit. 10 The buyer and the seller agree on what documents
are to be presented for payment, but ordinarily they are documents of
title evidencing or attesting to the shipment of the goods to the buyer.
Once the credit is established, the seller ships the goods to the buyer
and in the process secures the required shipping documents or
documents of title. To get paid, the seller executes a draft and presents it
together with the required documents to the issuing bank. The issuing
bank redeems the draft and pays cash to the seller if it finds that the
documents submitted by the seller conform with what the letter of credit
requires. The bank then obtains possession of the documents upon
paying the seller. The transaction is completed when the buyer
reimburses the issuing bank and acquires the documents entitling him to
the goods. Under this arrangement, the seller gets paid only if he delivers
the documents of title over the goods, while the buyer acquires said
documents and control over the goods only after reimbursing the bank.
What characterizes letters of credit, as distinguished from other
accessory contracts, is the engagement of the issuing bank to pay the
seller of the draft and the required shipping documents are presented to
it. In turn, this arrangement assures the seller of prompt payment,
independent of any breach of the main sales contract. By this so-called
"independence principle," the bank determines compliance with the letter
of credit only by examining the shipping documents presented; it is
precluded from determining whether the main contract is actually
accomplished or not. 11
There would at least be three (3) parties: (a) the buyer, 12 who procures
the letter of credit and obliges himself to reimburse the issuing bank upon
receipts of the documents of title; (b) the bank issuing the letter of
credit, 13 which undertakes to pay the seller upon receipt of the draft and
proper document of titles and to surrender the documents to the buyer
upon reimbursement; and, (c) the seller, 14 who in compliance with the
contract of sale ships the goods to the buyer and delivers the documents
of title and draft to the issuing bank to recover payment.
The number of the parties, not infrequently and almost invariably in
international trade practice, may be increased. Thus, the services of
an advising (notifying) bank 15 may be utilized to convey to the seller the
existence of the credit; or, of a confirming bank 16 which will lend
credence to the letter of credit issued by a lesser known issuing bank; or,
of a paying bank, 17 which undertakes to encash the drafts drawn by the
exporter. Further, instead of going to the place of the issuing bank to
claim payment, the buyer may approach another bank, termed
the negotiating bank, 18 to have the draft discounted. 13
Being a product of international commerce, the impact of this commercial
instrument transcends national boundaries, and it is thus not uncommon
to find a dearth of national law that can adequately provide for its
governance. This country is no exception. Our own Code of Commerce
BANKING No. 6
basically introduces only its concept under Articles 567-572, inclusive,
thereof. It is no wonder then why great reliance has been placed on
commercial usage and practice, which, in any case, can be justified by
the universal acceptance of the autonomy of contract rules. The rules
were later developed into what is now known as the Uniform Customs
and Practice for Documentary Credits ("U.C.P.") issued by the
International Chamber of Commerce. It is by no means a complete text
by itself, for, to be sure, there are other principles, which, although part
of lex mercatoria, are not dealt with the U.C.P.
In FEATI Bank and Trust Company v. Court of Appeals, 19 we have
accepted, to the extent of their pertinency, the application in our
jurisdiction of this international commercial credit regulatory set of
rules. 20 In Bank of Phil. Islands v. De Nery, 21 we have said that the
observances of the U.C.P. is justified by Article 2 of the Code of
Commerce which expresses that, in the absence of any particular
provision in the Code of Commerce, commercial transactions shall be
governed by usages and customs generally observed. We have further
observed 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 U.C.P. is
undeniable.
The first issue raised with the petitioner, i.e., that it has in this instance
merely been advising bank, is outrightly rejected by Inter-Resin and is
thus sought to be discarded for having been raised only on appeal. We
cannot agree. The crucial point of dispute in this case is whether under
the "letter of credit," Bank of America has incurred any liability to the
"beneficiary" thereof, an issue that largely is dependent on the bank's
participation in that transaction; as a mere advising or notifying bank, it
would not be liable, but as a confirming bank, had this been the case, it
could be considered as having incurred that liability. 22
In Insular Life Assurance Co. Ltd. Employees Association Natu
vs. Insular Life Assurance Co., Ltd., 23 the Court said: Where the issues
already raised also rest on other issues not specifically presented, as
long as the latter issues bear relevance and close relation to the former
and as long as they arise from the matters on record, the court has the
authority to include them in its discussion of the controversy and to pass
upon them just as well. In brief, in those cases where questions not
particularly raised by the parties surface as necessary for the complete
adjudication of the rights and obligations of the parties, the interests of
justice dictate that the court should consider and resolve them. The rule
that only issues or theories raised in the initial proceedings may be taken
up by a party thereto on appeal should only refer to independent, not
concomitant matters, to support or oppose the cause of action or
defense. The evil that is sought to be avoided, i.e., surprise to the
adverse party, is in reality not existent on matters that are properly
litigated in the lower court and appear on record.
It cannot seriously be disputed, looking at this case, that Bank of America
has, in fact, only been an advising, not confirming, bank, and this much is
clearly evident, among other things, by the provisions of the letter of
credit itself, the petitioner bank's letter of advice, its request for payment
of advising fee, and the admission of Inter-Resin that it has paid the
same. That Bank of America has asked Inter-Resin to submit documents
required by the letter of credit and eventually has paid the proceeds
thereof, did not obviously make it a confirming bank. The fact, too, that
the draft required by the letter of credit is to be drawn under the account
of General Chemicals (buyer) only means the same had to be presented
to Bank of Ayudhya (issuing bank) for payment. It may be significant to
recall that the letter of credit is an engagement of the issuing bank, not
the advising bank, to pay the draft.
No less important is that Bank of America's letter of 11 March 1981 has
expressly stated that "[t]he enclosure is solely an advise of credit opened
by the abovementioned correspondent and conveys no engagement by
us." 24This written reservation by Bank of America in limiting its obligation
only to being an advising bank is in consonance with the provisions of
U.C.P.
As an advising or notifying bank, Bank of America did not incur any
obligation more than just notifying Inter-Resin of the letter of credit issued
in its favor, let alone to confirm the letter of credit. 25 The bare statement
of the bank employees, aforementioned, in responding to the inquiry
made by Atty. Tanay, Inter-Resin's representative, on the authenticity of
14the letter of
the letter of credit certainly did not have the effect of novating
26
credit and Bank of America's letter of advise, nor can it justify the
conclusion that the bank must now assume total liability on the letter of
credit. Indeed, Inter-Resin itself cannot claim to have been all that free
from fault. As the seller, the issuance of the letter of credit should have
obviously been a great concern to it. 27 It would have, in fact, been
strange if it did not, prior to the letter of credit, enter into a contract, or
BANKING No. 6
negotiated at the every least, with General Chemicals. 28 In the ordinary
course of business, the perfection of contract precedes the issuance of a
letter of credit.
Bringing the letter of credit to the attention of the seller is the primordial
obligation of an advising bank. The view that Bank of America should
have first checked the authenticity of the letter of credit with bank of
Ayudhya, by using advanced mode of business communications, before
dispatching the same to Inter-Resin finds no real support in U.C.P. Article
18 of the U.C.P. states that: "Banks assume no liability or responsibility
for the consequences arising out of the delay and/or loss in transit of any
messages, letters or documents, or for delay, mutilation or other errors
arising in the transmission of any telecommunication . . ." As advising
bank, Bank of America is bound only to check the "apparent authenticity"
of the letter of credit, which it did. 29 Clarifying its meaning, Webster's
Ninth New Collegiate Dictionary 30 explains that the word "APPARENT
suggests appearance to unaided senses that is not or may not be borne
out by more rigorous examination or greater knowledge."
May Bank of America then recover what it has paid under the letter of
credit when the corresponding draft for partial availment thereunder and
the required documents were later negotiated with it by Inter-Resin? The
answer is yes. This kind of transaction is what is commonly referred to as
a discounting arrangement. This time, Bank of America has acted
independently as a negotiating bank, thus saving Inter-Resin from the
hardship of presenting the documents directly to Bank of Ayudhya to
recover payment. (Inter-Resin, of course, could have chosen other banks
with which to negotiate the draft and the documents.) As a negotiating
bank, Bank of America has a right to recourse against the issuer bank
and until reimbursement is obtained, Inter-Resin, as the drawer of the
draft, continues to assume a contingent liability thereon. 31
While bank of America has indeed failed to allege material facts in its
complaint that might have likewise warranted the application of the
Negotiable Instruments Law and possible then allowed it to even go after
the indorsers of the draft, this failure, 32/ nonetheless, does not preclude
petitioner bank's right (as negotiating bank) of recovery from Inter-Resin
itself. Inter-Resin admits having received P10,219,093.20 from bank of
America on the letter of credit and in having executed the corresponding
draft. The payment to Inter-Resin has given, as aforesaid, Bank of
America the right of reimbursement from the issuing bank, Bank of
Ayudhya which, in turn, would then seek indemnification from the buyer
(the General Chemicals of Thailand). Since Bank of Ayudhya disowned WHEREFORE, the assailed decision is SET ASIDE, and respondent
the letter of credit, however, Bank of America may now turn to Inter-Resin Inter-Resin Industrial Corporation is ordered to refund to petitioner Bank
for restitution. of America NT & SA the amount of P10,219,093.20 with legal interest
from the filing of the complaint until fully paid.
Between the seller and the negotiating bank there is the usual
relationship existing between a drawer and purchaser of drafts. Unless No costs.
drafts drawn in pursuance of the credit are indicated to be without
recourse therefore, the negotiating bank has the ordinary right of SO ORDERED.
recourse against the seller in the event of dishonor by the issuing bank . .
. The fact that the correspondent and the negotiating bank may be one Feliciano, Bidin, Romero and Melo, JJ., concur.
and the same does not affect its rights and obligations in either capacity,
although a special agreement is always a possibility . . . 33

The additional ground raised by the petitioner, i.e., that Inter-Resin sent
waste instead of its products, is really of no consequence. In the
operation of a letter of credit, the involved banks deal only with
documents and not on goods described in those documents. 34

The other issues raised in then instant petition, for instance, whether or
not Bank of Ayudhya did issue the letter of credit and whether or not the
main contract of sale that has given rise to the letter of credit has been
breached, are not relevant to this controversy. They are matters, instead,
that can only be of concern to the herein parties in an appropriate
recourse against those, who, unfortunately, are not impleaded in these
proceedings.

In fine, we hold that

First, given the factual findings of the courts below, we conclude that
petitioner Bank of America has acted merely as a notifying bank and did
not assume the responsibility of a confirming bank; and

Second, petitioner bank, as a negotiating bank, is entitled to recover on

Inter-Resin's partial availment as beneficiary of the letter of credit which
has been disowned by the alleged issuer bank. 15

No judgment of civil liability against the other defendants, Francisco

Trajano and other unidentified parties, can be made, in this instance,
there being no sufficient evidence to warrant any such finding.

BANKING No. 6

Bank of America NT & SA v Court of Appeals and Francisco et. al
G.R. No. 105395 December 10, 1993 16
There would at least be three (3) parties: (a) the buyer, who
procures the letter of credit and obliges himself to reimburse the
issuing bank upon receipts of the documents of title; (b) the bank
issuing the letter of credit, which undertakes to pay the seller upon
receipt of the draft and proper document of titles and to surrender
BANKING No. 6
the documents to the buyer upon reimbursement; and, (c) the
seller, who in compliance with the contract of sale ships the goods
to the buyer and delivers the documents of title and draft to the
issuing bank to recover payment.
Facts : Bank of America received an Irrevocable Letter of Credit issued
by Bank of Ayudhya for the Account of General Chemicals Ltd., Inc. for
the sale of plastic ropes and agricultural files. Under the letter of credit,
Bank of America acted as an advising bank and Inter-Resin Industrial
Corp. (IR) acted as the beneficiary. Upon receipt of the letter advice,
Inter- Resin told Bank of America to confirm the letter of credit.
Notwithstanding such instruction, Bank of America failed to confirm the
letter of credit. Inter-Resin made a partial availment of the Letter of Credit
after presentment of the required documents to Bank of America. After
confirmation of all the documents Bank of America issued a check in
favor of IR. BA advised Bank of Ayudhya of IRs availment under the
letter of credit and asked for the corresponding reimbursement. IR
presented documents for the second availment under the same letter of
credit. However, BA stopped the processing of such after they received a
telex from Bank of Ayudhya delaring that the LC fraudulent. BA sued IR
for the recovery of the first LC payment.
The IR contended that Bank of America should have first checked the
authenticity of the letter of credit with bank of Ayudhya
Issue: Whether or not Bank of America may recover what it has paid
under the letter of credit to Inter-Resin
Held : May Bank of America then recover what it has paid under the letter
of credit when the corresponding draft
There would at least be three (3) parties: (a) the buyer, who procures the
letter of credit and obliges himself to reimburse the issuing bank upon
receipts of the documents of title; (b) the bank issuing the letter of credit,
which undertakes to pay the seller upon receipt of the draft and proper
document of titles and to surrender the documents to the buyer upon
reimbursement; and, (c) the seller, who in compliance with the contract of
sale ships the goods to the buyer and delivers the documents of title and
draft to the issuing bank to recover payment.
The services of an advising (notifying) bank may be utilized to convey to
the seller the existence of the credit; or, of a confirming bank 16 which
will lend credence to the letter of credit issued by a lesser known issuing
bank; or, of a paying bank, which undertakes to encash the drafts drawn
by the exporter. Further, instead of going to the place of the issuing bank
to claim payment, the buyer may approach another bank, termed the
negotiating bank, 18 to have the draft discounted.
Bank of America has acted independently as a negotiating bank, thus
saving Inter-Resin from the hardship of presenting the documents
directly to Bank of Ayudhya to recover payment. As a negotiating bank,
Bank of America has a right to recourse against the issuer bank and until
reimbursement is obtained, Inter-Resin, as the drawer of the draft,
continues to assume a contingent liability thereon.
Furthermore, bringing the letter of credit to the attention of the seller is
the primordial obligation of an advising bank. The view that Bank of
America should have first checked the authenticity of the letter of credit
with bank of Ayudhya, by using advanced mode of business
communications, before dispatching the same to Inter-Resin finds no real
support.
17
Republic of the Philippines
SUPREME COURT
Manila
BANKING No. 6
EN BANC
G.R. No. L-24821 October 16, 1970
BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellee,
vs.
DE RENY FABRIC INDUSTRIES, INC., AURORA T. TUYO and
AURORA CARCERENY alias AURORA C. GONZALES, defendants-
appellants.
Aviado and Aranda for plaintiff-appellee.
S. Emiliano Calma for defendants-appellants.
CASTRO, J.:.
This is an appeal from the decision of the Court of First Instance of
Manila ordering the defendants-appellants to pay to the Bank of the
Philippine Islands (hereinafter referred to as the Bank), jointly and
severally, the value of the credit it extended to them in several letters of
credit which the Bank opened at the behest of the defendants appellants
to finance their importation of dyestuffs from the United States, which
however turned out to be mere colored chalk upon arrival and inspection
thereof at the port of Manila.
The record shows that on four (4) different occasions in 1961, the De
Reny Fabric Industries, Inc., a Philippine corporation through its co-
defendants-appellants, Aurora Carcereny alias Aurora C. Gonzales, and
Aurora T. Tuyo, president and secretary, respectively of the corporation,
applied to the Bank for four (4) irrevocable commercial letters of credit to
cover the purchase by the corporation of goods described in the covering
L/C applications as "dyestuffs of various colors" from its American
supplier, the J.B. Distributing Company. All the applications of the
corporation were approved, and the corresponding Commercial L/C
Agreements were executed pursuant to banking procedures. Under
these agreements, the aforementioned officers of the corporation bound
themselves personally as joint and solidary debtors with the corporation.
Pursuant to banking regulations then in force, the corporation delivered
to the Bank peso marginal deposits as each letter of credit was opened.
The dates and amounts of the L/Cs applied for and approved as well as
the peso marginal deposits made were, respectively, as follows:.
Date Application Amount Marginal
& L/C No. Deposit
Oct. 10, 1961 61/1413 $57,658.38 P43,407.33
Oct. 23, 1961 61/1483 $25,867.34 19,473.64
Oct. 30, 1961 61/1495 $19,408.39 14,610.88
Nov. 10, 1961 61/1564 $26,687.64 20,090.90
TOTAL .... $129,621.75 P97,582.75
By virtue of the foregoing transactions, the Bank issued irrevocable
commercial letters of credit addressed to its correspondent banks in the
United States, with uniform instructions for them to notify the beneficiary
thereof, the J.B. Distributing Company, that they have been authorized to
negotiate the latter's sight drafts up to the amounts mentioned the
respectively, if accompanied, upon presentation, by a full set of
negotiable clean "on board" ocean bills of lading covering the
merchandise appearing in the LCs that is, dyestuffs of various colors.
Consequently, the J.B. Distributing Company drew upon, presented to
and negotiated with these banks, its sight drafts covering the amounts of
the merchandise ostensibly being exported by it, together with clean bills
of lading, and collected the full value of the drafts up to the amounts
appearing in the L/Cs as above indicated. These correspondent banks
then debited the account of the Bank of the Philippine Islands with them
up to the full value of the drafts presented by the J.B. Distributing
Company, plus commission thereon, and, thereafter, endorsed and
forwarded all documents to the Bank of the Philippine Islands.
18
In the meantime, as each shipment (covered by the above-mentioned
letters of credit) arrived in the Philippines, the De Reny Fabric Industries,
Inc. made partial payments to the Bank amounting, in the aggregate, to
P90,000. Further payments were, however, subsequently discontinued
by the corporation when it became established, as a result of a chemical
test conducted by the National Science Development Board, that the
goods that arrived in Manila were colored chalks instead of dyestuffs.
BANKING No. 6
The corporation also refused to take possession of these goods, and for
this reason, the Bank caused them to be deposited with a bonded
warehouse paying therefor the amount of P12,609.64 up to the filing of
its complaint with the court below on December 10, 1962.
On October 24, 1963 the lower court rendered its decision ordering the
corporation and its co-defendants (the herein appellants) to pay to the
plaintiff-appellee the amount of P291,807.46, with interest thereon, as
provided for in the L/C Agreements, at the rate of 7% per annum from
October 31, 1962 until fully paid, plus costs.
It is the submission of the defendants-appellants that it was the duty of
the foreign correspondent banks of the Bank of the Philippine Islands to
take the necessary precaution to insure that the goods shipped under the
covering L/Cs conformed with the item appearing therein, and, that the
foregoing banks having failed to perform this duty, no claim for
recoupment against the defendants-appellants, arising from the losses
incurred for the non-delivery or defective delivery of the articles ordered,
could accrue.
We can appreciate the sweep of the appellants' argument, but we also
find that it is nestled hopelessly inside a salient where the valid contract
between the parties and the internationally accepted customs of the
banking trade must prevail.1
Under the terms of their Commercial Letter of Credit Agreements with the
Bank, the appellants agreed that the Bank shall not be responsible for
the "existence, character, quality, quantity, conditions, packing, value, or
delivery of the property purporting to be represented by documents; for
any difference in character, quality, quantity, condition, or value of the
property from that expressed in documents," or for "partial or incomplete
shipment, or failure or omission to ship any or all of the property referred
to in the Credit," as well as "for any deviation from instructions, delay,
default or fraud by the shipper or anyone else in connection with the
property the shippers or vendors and ourselves [purchasers] or any of
us." Having agreed to these terms, the appellants have, therefore, no
recourse but to comply with their covenant. 2
But even without the stipulation recited above, the appellants cannot shift
the burden of loss to the Bank on account of the violation by their vendor
of its prestation.
It was uncontrovertibly proven by the Bank during the trial below that
banks, in providing financing in international business transactions such
as those entered into by the appellants, do not deal with the property to
be exported or shipped to the importer, but deal only with documents.
The Bank introduced in evidence a provision contained in the "Uniform
Customs and Practices for Commercial Documentary Credits Fixed for
the Thirteenth Congress of International Chamber of Commerce," to
which the Philippines is a signatory nation. Article 10 thereof provides: .
In documentary credit operations, all parties concerned deal in
documents and not in goods. Payment, negotiation or acceptance
against documents in accordance with the terms and conditions of a
credit by a Bank authorized to do so binds the party giving the
authorization to take up the documents and reimburse the Bank making
the payment, negotiation or acceptance.
The existence of a custom in international banking and financing circles
negating any duty on the part of a bank to verify whether what has been
described in letters of credits or drafts or shipping documents actually
tallies with what was loaded aboard ship, having been positively proven
as a fact, the appellants are bound by this established usage. They were,
after all, the ones who tapped the facilities afforded by the Bank in order
to engage in international business.
ACCORDINGLY, the judgment a quo is affirmed, at defendants-
appellants' cost. This is without prejudice to the Bank, in proper
proceedings in the court below in this same case proving and being
reimbursed additional expenses, if any, it has incurred by virtue of the
continued storage of the goods in question up to the time this decision
becomes final and executory.
Reyes, J.B.L., Actg. C.J., Dizon, Makalintal, Zaldivar, Fernando,
Teehankee, Barredo, Villamor and Makasiar, JJ., concur.
Concepcion, C.J., is on leave. 19
# Footnotes.
1 The power of our courts to accept in evidence, international customas
evidence of general practice accepted as law, may be said to be derived
from both Constitutional as well as statutory sources. Section 3, Article II
BANKING No. 6
of the Constitution provides that "The Philippines renounces war as an
instrument of national policy and adopts the generally accepted
principles of international law of the Nation." Art. 9 of the New Civil Code
Provides that "No court or judge shall decline to render judgment by
reason of the silence, obscurity or insufficiency of the law," and Art. 12 of
the same Code provides that "A custom must be proved as fact,
according to the rules of evidence." The Code of Commerce, in its Article
2, likewise provides that "Acts of commerce, whether those who execute
them be merchants or not, should be governed by the provisions
contained init, 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." "Those acts contained in this Code and all others of analogous
character, shall be deemed acts of commerce." It must be noted that
certain principles governing the issuance, acceptance and payment of
letters of credit are specifically provided for in the Code of Commerce.
2 Article 12 of the Commercial Letter of Credit Agreement provides, inter
alia: "The users of the Credit shall be deemed our agents and we
assume all risks of their acts or omissions. Neither you nor your
correspondents shall be responsible: for the existence, character, quality,
quantity, condition, packing, value, or delivery of the property purporting
to be represented by documents; for any difference in character, quality,
quantity, condition, or value of the property from that expressed in
documents; ... for partial or incomplete shipment, or failure or omission to
ship any or all of the property referred to in the Credit; ... for any
deviation from instructions, delay, default or fraud by the shipper or
anyone else in connection with the property or the shipping thereof; ... for
any breach of contract between the shipper or vendors and ourselves or
any of
us; ... We are responsible to you for all obligations imposed upon you
with respect to the Credit or the relative drafts, documents or property. In
furtherance and extension and not in limitation of the specific provisions
hereinbefore set forth, we agree that any action taken by you or by any
correspondent of yours under or in connection with the Credit or the
relative drafts, documents or property, if taken in good faith, shall be
binding on us and shall not put you or your correspondent under any
resulting liability to us; and we make like agreement as to any inaction or
omission, unless in breach of good faith".
 Bank of Philippine Islands v De Reny Fabric Industries G.R. No. L-
24821 October 16, 1970

Doctrine: Under the terms of their Commercial Letter of Credit

Agreements with the Bank, the appellants agreed that the Bank
shall not be responsible for the existence, character, quality,
quantity, conditions, packing, value, or delivery of the property
purporting to be represented by documents; for any difference in
character, quality, quantity, condition, or value of the property from
that expressed in documents. Having been positively proven as a
fact, the appellants are bound by this established usage.

Facts:

De Reny Fabric Industries, Inc. (De Reny) applied for, and was granted,
four (4) irrevocable commercial letters of credit with the Bank of
Philippine Islands (BPI). The letter of credits was used to cover the
purchase of goods by De Reny from its American supplier, the J.B.
Distributing Company. As each shipment arrived in the Philippines, the
De Reny Fabric Industries, Inc. made partial payments to the Bank
amounting to 12,000. Further payments were, however, subsequently
discontinued by the corporation when it became established, as a result
of a chemical test conducted by the National Science Development
Board, that the goods that arrived in Manila were colored chalks instead
of dye stuffs. The corporation also refused to take possession of these
goods, and for this reason, the Bank caused them to be deposited with a
bonded warehouse paying therefor the amount of P12,609.64 up to the
filing of its complaint with the court.

Issue:

Whether or not De Reny fabrics is liable under the letter of Credit

20
Held:

Even without the stipulation recited above, the appellants cannot shift the
burden of loss to the Bank on account of the violation by their vendor of
its prestation. It was uncontrovertibly proven by the Bank during the trial
below that banks, in providing financing in international business

BANKING No. 6
transactions such as those entered into by the appellants, do not deal
with the property to be exported or shipped to the importer, but deal only
with documents. The existence of a custom in international banking and
financing circles negating any duty on the part of a bank to verify whether
what has been described in letters of credits or drafts or shipping
documents actually tallies with what was loaded aboard ship, having
been positively proven as a fact, the appellants are bound by this
established usage. They were, after all, the ones who tapped the Republic of the Philippines
facilities afforded by the Bank in order to engage in international SUPREME COURT
business. Manila

Under the terms of their Commercial Letter of Credit Agreements with the THIRD DIVISION
Bank, the appellants agreed that the Bank shall not be responsible for
the existence, character, quality, quantity, conditions, packing, value, or G.R. No. 94209 April 30, 1991
delivery of the property purporting to be represented by documents; for
any difference in character, quality, quantity, condition, or value of the FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING
property from that expressed in documents, or for partial or incomplete CORPORATION), petitioner,
shipment, or failure or omission to ship any or all of the property referred vs.
to in the Credit, as well as for any deviation from instructions, delay, THE COURT OF APPEALS, and BERNARDO E.
default or fraud by the shipper or anyone else in connection with the VILLALUZ, respondents.
property the shippers or vendors and ourselves [purchasers] or any of
us. Having agreed to these terms, the appellants have, therefore, no Pelaez, Adriano & Gregorio for petitioner.
recourse but to comply with their covenant. Ezequiel S. Consulta for private respondent.

What is the independence principle? GUTIERREZ, JR., J.:

The relationship of the buyer and the bank is separate and distinct from
the relationship of the buyer and seller in the main contract; the bank is
not required to investigate if the contract underlying the LC has been
fulfilled or not because in transactions involving LC, banks deal only with
documents and not goods (BPI v. De Reny Fabric Industries, Inc., L-
2481, Oct. 16, 1970). In effect, the buyer has no course of action against
the issuing bank.
21
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.

BANKING No. 6
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
22
Prepaid and marked Notify:
Han Mi Trade Development Company, Ltd., Santa Ana, California.
Letter of Credit No. 46268 dated June 7, 1971
BANKING No. 6
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 23 solidarily
liable with Christiansen.
The trial court, in its order dated August 29, 1979, admitted the amended
complaint.
BANKING No. 6
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
the issuing 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:
24
WHEREFORE, judgment is hereby rendered for the plaintiff, ordering the
defendants to pay the plaintiff, jointly and severally, the following sums:
BANKING No. 6
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 for certiorari 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
25
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
BANKING No. 6
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 NON-COMPLIANCE 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.
26 (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?
BANKING No. 6
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.
27
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.
BANKING No. 6
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 credit has 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 petitioner28
"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.
BANKING No. 6
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)
29
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.
BANKING No. 6
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-a-vis 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 30 undertakes a
primary obligation. (See National 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
BANKING No. 6
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.1wphi1 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.
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
Feati Bank and Trust Company v Court of Appeals
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 G.R. No. 94209 April 30, 1991
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 In case of a notifying bank, the correspondent bank assumes no
Appeals dated June 29, 1990. The amended complaint in Civil Case No. liability except to notify and/or transmit to the beneficiary the
15121 is DISMISSED. existence of the letter of credit.

SO ORDERED. A negotiating bank, on the other hand, is a correspondent bank

which buys or discounts a draft under the letter of credit. Its liability
Feliciano, Bidin and Davide, Jr., JJ., concur. is dependent upon the stage of the negotiation. If before
Fernan, C.J., took no part. 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.
31
In the case of a confirming bank, the correspondent bank assumes
a direct obligation to the seller and its liability is a primary one as if
the correspondent bank itself had issued the letter of credit.

Facts:

BANKING No. 6
Bernardo Villaluz entered into a contract of sale with Axel Christiansen in
which Villaluz agreed to deliver to Christiansen 2,000 cubic meters of
lauan logs at $27.00 per cubic meter FOB. On the arrangements made
and upon the instructions of consignee, Hanmi Trade Development, Ltd.,
the Security Pacific National Bank of Los Angeles, California issued an
irrevocable letter of credit available at sight in favor of Villaluz for the sum
of $54,000.00, the total purchase price of the lauan logs.
The letter of credit was mailed to the Feati Bank and Trust Company
with the instruction to the latter that it forward the enclosed letter of
credit to the beneficiary. The letter of credit also provided that the draft to
be drawn is on Security Pacific National Bank and that it be accompanied
by certain documents. The logs were thereafter loaded on a vessel but
Christiansen refused to issue the certification required in paragraph 4 of
the letter of credit, despite repeated requests by the private respondent.
The logs however were still shipped and received by consignee, to whom
Christiansen sold the logs. Because of the absence of the certification by
Christiansen, the Feati Bank and Trust company refused to advance the
payment on the letter of credit until such credit lapsed. Since the
demands by Villaluz for Christiansen to execute the certification proved
futile, he filed an action for mandamus and specific performance against
Christiansen and Feati Bank and Trust Company before the Court of First
Instance of Rizal. Christiansen however left the Philippines and Villaluz
filed an amended complaint making Feati Bank and Trust Company.
Issue:
Whether or not Feati Bank is liable for Releasing the funds to
Christiansen
Held:
In commercial transactions involving letters of credit, the functions
assumed by a correspondent bank are classified according to the
obligations taken up by it. The correspondent bank may32be 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.
BANKING No. 6
A negotiating bank, on the other hand, is a correspondent bank which
buys or discounts a draft under the letter of credit. Its liability is
dependent upon the stage of the negotiation. If before negotiation, it has
no liability with respect to the seller but after negotiation, a contractual
relationship will then prevail between the negotiating bank and the seller.
In the case of a confirming bank, the correspondent bank assumes a
direct obligation to the seller and its liability is a primary one as if the
correspondent bank itself had issued the letter of credit.
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.
A notifying bank is not a privy to the contract of sale between the buyer
and the seller, its relationship is only with that of the issuing bank and not
with the beneficiary to whom he assumes no liability. It follows therefore
that when the petitioner refused to negotiate with the private respondent,
the latter has no cause of action against the petitioner for the
enforcement of his rights under the letter.
Since the Feati was only a notifying bank, its responsibility was solely to
notify and/or transmit the documentary of credit to the private respondent
and its obligation ends there.
At the most, when the petitioner extended the loan to the private
respondent, it assumed the character of a negotiating bank. Even then,
the petitioner will still not be liable, for a negotiating bank before
negotiation has no contractual relationship with the seller. Whether
therefore the petitioner is a notifying bank or a negotiating bank, it cannot
be held liable. Absent any definitive proof that it has confirmed the letter
of credit or has actually negotiated with Feati, the refusal by the petitioner
to accept the tender of the private respondent is justified.
 FEATI Bank & Trust Company v. Court of Appeals
G.R. No. 94209. 30 April 1991
Gutierrez, Jr., J.

FACTS:

Bernardo Villaluz (BV) agreed to sell to Axel Christiansen (AC),

a ship and merchandise broker, 2,000 cubic meters of lauan
logs. After inspecting the logs, AC issued a purchase order for
the said logs.

On the arrangements made and upon the instructions of the

consignee, Hanmi Trade Development, Ltd. (HTDL), Santa Ana,
California, the Security Pacific National Bank (SPNB),
California issued an Irrevocable Letter of Credit (L/C) available
at sight in favor of BV for the total purchase price of the logs.
The L/C was mailed to FEATI Bank and Trust Company (FBTC)
with instruction that the draft to be drawn is on SPNB and that
it be accompanied by the following documents, among others:
a Certification from AC stating that the logs have been
approved prior to shipment in accordance with terms and
conditions of corresponding purchase order.
33
Consequently, the logs were thereafter loaded to the vessel
chartered by AC. After the loading of the logs was completed,
the Chief Mate of the vessel issued a mate receipt of the cargo
which stated the same are in good condition. However, AC
refused to issue the certification as required in the L/C
despite several requests made by BV. Because of the absence

BANKING No. 6
of the certification by AC, FBTC refused to advance the obligation to look beyond the documents. It merely has to rely
payment on the L/C. It eventually lapsed without BV receiving on the completeness of the documents tendered by the
any certification from AC. beneficiary.

Since BVs demands for AC to execute the certification proved
futile, he (BV) instituted an action for mandamus and specific
performance against AC and FBTC before the then Court of
First Instance (CFI) of Rizal. Unfortunately, while the case was
pending, AC left the Philippines without informing the CFI and
his counsel; hence, BV filed an amended complaint to make
FBTC solidarily liable with AC.
ISSUE:
Whether or not FBTC, as correspondent bank, is to be held
liable under the L/C despite non-compliance by the beneficiary,
BV, with the terms thereof?
An irrevocable credit refers to the duration of the L/C. What it
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 L/C 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. Hence, the mere fact
that a L/C is irrevocable does not necessarily imply that the
correspondent bank in accepting the instructions of the issuing
bank has also confirmed the L/C.

HELD:

No. It is a settled rule in commercial transactions involving

L/Cs that the documents tendered must strictly conform to its
terms. The tender of documents by the beneficiary (seller)
must include all documents required by the L/C. A
correspondent bank which departs from what has been
stipulated under the L/C, as when it accepts a faulty tender,
acts on its own risks and it may not thereafter be able to
Republic of the Philippines
recover from the buyer or the issuing bank, as the case may
SUPREME COURT
be, the money thus paid to the beneficiary.
Manila

Moreover, under the Uniform Customs and Practices for THIRD DIVISION
Documentary Credit, the bank may only negotiate, accept or
34
pay, if the documents tendered to it are on their face in G.R. No. L-100831 December 17, 1993
accordance with the terms and conditions of the documentary
credit. And since a correspondent bank principally deals only
RELIANCE COMMODITIES, INC., petitioner,
with documents, the absence of any document required in the
vs.
documentary credit justifies the refusal by the correspondent
DAEWOO INDUSTRIAL CO., LTD., respondent.
bank to negotiate, accept or pay the beneficiary, as it is not its

BANKING No. 6
Ongkiko & Dizon Law Offices for petitioner.
Lao, Veloso-Lao & Lao for private respondent.
FELICIANO, J.:
On 9 January 1980, petitioner Reliance Commodities, Inc. ("reliance")
and private respondent Daewoo Industrial Co., Ltd. ("Daewoo") entered
into a contract of sale under the terms of which the latter undertook to
ship and deliver to the former 2,000 metric tons of foundry pig iron for the
price of US$404,000.00. Pursuant to this contract, Daewoo shipped from
Pohang, Republic of Korea, 2,000 metric tons of foundry pig iron on
board the M/S Aurelio III under Bill of Lading No. PIP-1 for carriage to
and delivery in Manila to its consignee, Reliance. The shipment was fully
paid for. Upon arrival in Manila, the subject cargo was found to be short
of 135.655 metric tons as only 1,864.345 metric tons were discharged
and delivered to Reliance.
On 2 May 1980, another contract was entered into between the same
parties for the purchase of another 2,000 metric tons of foundry pig iron.
Daewoo acknowledged the short shipment of 135.655 metric tons under
the 9 January 1980 contract and, to compensate Reliance therefor,
bound itself to reduce the price by US$1 to US$2 per metric ton of pig
iron for succeeding orders. This undertaking was made part of the 2 May
1980 contract. However, that contract was not consummated and was
later superseded by still another contract dated 31 July 1980.
Quantity: 2,000MT
Price: US $190.30/MT C&F Manila
Amount: US $380,600.00
Packing: Bare Loose
Shipment: August
Destination: Manila
Payment: By an irrevocable of sight letter of credit in favor of Daewoo
Industrial Co., Ltd., 541 5th Street, namdaemunro, Jung-Gu, Seoul,
Korea.
Remarks: Other terms and conditions as per attached sheet.
We confirm our sales as specified herein. Subject to the terms and
conditions set forth herein, this confirmation of order ("the Contract")
constitutes a contract between Daewoo Industrial Co. Ltd. ("Seller") and
the addressee ("Buyer"). Other terms and conditions of the Contract are
on the back hereof. If you find anything herein not in order, please let us
know immediately, if necessary by telex, cable or telegram. Kindly sign
and return the duplicate after confirming the above.
Read and agreed to:
Name of addressee: Daewoo Industrial Co., Ltd.
By: (SGD) MR SAMUEL CHUASON By: (SGD) JA-HYUNG RYU
Date: July 31, 1980 Date: July 31, 1980 1

The 31 July 1980 contract read as follows: The attached sheet referred to above set out the following:

CONFIRMATION OF ORDER Reliance Commodities, Inc.

SALES NOTE No. HSB-SN/S001-R Our Reference No. HSB-PI/SO19-R

To Messrs: Reliance Commodities, Inc. 1. Invoicing: Actual Weight

161, 9th Street, 10th Avenue
Caloocan City 35
2. Chemical Composition (%):
Reference: HSB-PI/8019-R Carbon: 3.30 min. (aiming 3.80 min.)
Contracted through: Silicon: 2.21-2.60 (aiming 2.60)
Manganese: 0.30-1.00
Order No.: Phosphorous: 0.45 max. (aiming 0.25 max.)
Commodity: Foundry Pig Iron Sulfur: 0.05 max.
Spec.: JIS G 2202 Class 1-1C

BANKING No. 6
3. Quantity Tolerance: +10 percent of total quantity should be allowed.
4. Unit Weight: 5 kgs. + 1 kg. (one notch)
5. Broken pieces of twenty (20%) percent should be allowed.
6. All disputes, controversies, or differences which may arise between
the parties, out of or in relation to or in connection with this contract, or
for the breach thereof, shall be finally settled by arbitration in Korea in
accordance with the rules and regulations of Korea commercial
arbitration association or in the Philippines in accordance with the
Philippine arbitration rules.
7. Letter of credit should be opened on or before August 7, 1980.
8. Other terms and conditions, if necessary, are to be solved later by
mutual agreement.
9. Mill sheets and copies of non-negotiable documents to be sent to
buyer by airmail immediately after shipment.
10. This Sales Note No. HSB-SN/S001R cancels Sales Note No. HSB-
SN/8001 dated May 2, 1980. 2
On August 1, 1980, Reliance, through its Mrs. Samuel Chuason, filed
with the China Banking Corporation, an application for a Letter of Credit
(L/C) in favor of Daewoo covering the amount of US$380,600.00. The
application was endorsed to the Iron and Steel Authority (ISA) or
approval but the application was denied. Reliance was instead asked to
submit purchase orders from end-users to support its application for a
Letter of Credit. However, Reliance was not able to raise purchase
orders for 2,000 metric tons. Reliance alleges that it was able to raise
purchase orders for 1,900 metric tons. 3 Daewoo, upon the other hand,
contends that Reliance was only able to raise purchase orders for 900
36
metric tons. 4 An examination of the exhibits 5 presented by Reliance in
the trial court shows that only purchase orders for 900 metric tons were
stamped "Received" by the ISA. The other purchase orders for 1,000
metric tons allegedly sent by prospective end users to Reliance were not
shown to have been duly sent and exhibited to the ISA. Whatever the
exact amount of the purchase orders was, Daewoo rejected the
proposed L/C for the reason that the covered quantity fell short of the
BANKING No. 6
contracted tonnage. Thus, Reliance withdrew the application for the L/C
on 14 August 1980.
Subsequently, Daewoo leaned that the failure of Reliance to open the
L/C as stipulated in the 31 July 1980 contract was due to the fact that as
early as May 1980, Reliance has already exceeded its foreign exchange
allocation for 1980. Because of the failure of Reliance to comply with its
undertaking under the 31 July 1980 contract, Daewoo was compelled to
sell the 2,000 metric tons to another buyer at a lower price, to cut losses
and expenses Daewoo had begun to incur due to its inability to ship the
2000 metric tons to Reliance under their contract.
On 3 September 1980, Reliance, through its counsel, wrote Daewoo
requesting payment of the amount of P226,370.48, representing the
value of the short delivery of 135.655 metric tons of foundry pig iron
under the contract of 9 January 1980. Not being heeded, Reliance filed
an action for damages against Daewoo with the trial court. Daewoo
responded, inter alia, with a counterclaim for damages, contending that
Reliance was guilty of breach of contract when it failed to open an L/C as
required in the 31 July 1980 contract.
After trial, the trial court ruled that:
(1) the 31 July 1980 contract did not extinguish Daewoo's obligation for
short delivery pursuant to the 9 January 1980 contract and must
therefore pay Reliance P226,370.48 representing the value of the short
delivered goods plus interest and attorney's fees; and
(2) Reliance is in turn liable for breach of contract for its failure to open a
letter of credit in favor of Daewoo pursuant to the 31 July 1980 contract
and must therefore pay the latter P331,920.97 as actual damages with
legal interest plus attorney's fees.
Reliance appealed the second part of the trial court's judgment. Public
respondent Court of Appeals found no merit in the appeal and in
affirming the decision of the trial court ruled that:
1) the trial court's finding that Reliance could not have opened the Letter
of Credit in favor of Daewoo because it had already exhausted its foreign
exchange allocation at the time of its application, was amply supported
by evidence; and
2) the opening of a letter of credit is not such a future and uncertain
event as to make it a suspensive condition within the contemplation of
law; but, only mode of payment agreed upon by the parties, and a
standard mode at that when one of the parties to the transaction is a
foreigner and the consideration is payable in foreign exchange.
In the present Petition for Review, Reliance assails the award of
damages in favor of Daewoo. Reliance contends a) that its failure to
open a Letter of Credit was due to the failure of Daewoo to accept the
purchase orders for 1,900 metric tons instead of 2,000 metric tons; b)
that the opening of the Letter of Credit was a condition precedent to the
effectivity of the contract between Reliance and Daewoo; and c) that
since such condition had not occurred, the contract never came into
existence and, therefore, Reliance should not have been held liable for
damages.
The issue before us is whether or not the failure of an importer (Reliance)
to open a letter of credit on the date agreed upon makes him liable to the
exporter (Daewoo) for damages.
In addressing this issue, it is useful to recall the nature of a Letter of
Credit, and the mechanics involved in applying for a Letter of Credit.
The nature of a letter of credit was extensively discussed in Bank of
America, NT & SA v. Court of Appeals, et al. 6by Vitug, J. in the following
terms:
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. To break the impasse, the buyer may
be required to contract a bank to issue a letter of credit in favor of the
seller so that, by virtue of the letter of credit, the issuing bank can
authorize the seller to draw drafts and engage to pay them
37 upon their
presentment simultaneously with the tender of documents required by
the letter of credit. The buyer and seller agree on what documents are to
be presented for payment, but ordinarily they are documents of title
evidencing or attesting to the shipment of the goods to the buyer.
BANKING No. 6
Once the credit is established, the seller ships the goods to the buyer
and in the process secures the required shipping documents or
documents of title. To get paid, the seller executes a draft and pays cash
to the seller if it finds that the documents submitted by the seller conform
with what the letter of credit requires. The bank then obtains possession
of the documents upon paying the seller. The transaction is completed
when the buyer reimburses the issuing bank and acquires the documents
entitling him to the goods. Under this arrangement, the seller gets paid
only if he delivers the documents of title over the goods, while the goods
only after reimbursing the bank. 7 (footnotes omitted)
A letter of credit is one of the modes of payment, set out in Sec. 8,
Central Bank Circular No. 1389, "Consolidated Foreign Exchange Rules
and Regulations," dated 13 April 1993, by which commercial banks sell
foreign exchange to service payments for, e.g., commodity imports. The
primary purpose of the letter of credit is to substitute for and therefore
support, the agreement of the buyer/importer to pay money under a
contract or other arrangement. 8 It creates in the seller/exporter a secure
expectation of payment.
A letter of credit transaction may thus be seen to be a composite of at
least three (3) distinct but intertwined relationships being concretized in a
contract:
(a) One contract relationship links the party applying for the L/C (the
account party or buyer or importer) and the party for whose benefit the
L/C is issued (the beneficiary or seller or exporter). In this contract, the
account party, here Reliance, agrees, among other things and subject to
the terms and conditions of the contract, to pay money to the beneficiary,
here Daewoo.
(b) A second contract relationship is between the account party and the
issuing bank. Under this contract, (sometimes called the "Application and
Agreement" or the "Reimbursement Agreement"), the account party
among other things, applies to the issuing bank for a specified L/C and
agrees to reimburse the bank for amounts paid by that bank pursuant to
the L/C.
(c) The third contract relationship is established between the issuing
bank and the beneficiary, in order to support the contract, under
(a) above, of the account party and the beneficiary to, inter alia, pay
certain monies to the latter.
Certain other parties may be added to the foregoing, but the above three
are the indispensable ones.
The issue raised in the Petition at bar relates principally to the first
component contractual relation above: that between account party or
importer Reliance and beneficiary or exporter Daewoo.
Examining the actual terms of that relationship as set out in the 31 July
1980 contract quoted earlier (and not simply the summary inaccurately
rendered by the trial court), the Court considers that under that
instrument, the opening of an L/C upon application of Reliance was not a
condition precedent for the birth of the obligation of Reliance to purchase
foundry pig iron from Daewoo. We agree with the Court of Appeals that
Reliance and Daewoo, having reached "a meeting of minds" in respect of
the subject matter of the contract (2000 metric tons of foundry pig iron
with a specified chemical composition), the price thereof (US
$380,600.00), and other principal provisions, "they had a perfected
contract." 9 The failure of Reliance to open, the appropriate L/C did not
prevent the birth of that contract, and neither did such failure extinguish
that contract. The opening of the L/C in favor of Daewoo was an
obligation of Reliance and the performance of that obligation by Reliance
was a condition of enforcement of the reciprocal obligation of Daewoo to
ship the subject matter of the contract the foundry pig iron to
Reliance. But the contract itself between Reliance and Daewoo had
already sprung into legal existence and was enforceable.
The L/C provided for in that contract was the mode or mechanism by
which payment was to be effected by Reliance of the price of the pig iron.
In undertaking to accept or pay the drafts presented to it by the
beneficiary according to the tenor of an L/C, and only later on being
reimbursed by the account party, the issuing bank in effect extends a
loan to the account party. This loan feature, combined with the bank's
38
undertaking to accept the beneficiary's drafts drawn on the bank,
constitutes the L/C as a mode of payment. 10 Logically, before the issuing
bank open an L/C, it will take steps to ensure that it would indeed be
reimbursed when the time comes. Before an L/C can be opened, specific
legal requirements must be complied with.
BANKING No. 6
The Central Bank of the Philippines has established the following
requirements for opening a letter of credit:
All L/C's must be opened on or before the date of shipment with
maximum validity of one (1) year. Likewise, only one L/C should be
opened for each import transaction. for purposes of opening an L/C,
importers shall submit to the commercial bank the following documents:
a) the duly accomplished L/C application;
b) firm offer/proforma invoice which shall contain information on the
specific quantity of the importation, unit cost and total cost, complete
description/specification of the commodity and the Philippine Standard
Commodity Classification statistical code;
c) permits/clearances from the appropriate government agencies,
whenever applicable; and
d) duly accomplished Import Entry Declaration (IED) form which shall
serve as basis for payment of advance duties as required under PD
1853. 11 (Emphasis supplied)
The need for permits or clearances from appropriate government
agencies arises when regulated commodities are to be
imported. 12 Certain commodities are classified as "regulated
commodities" for purposes of their importation, "for reasons of public
health and safety, national security, international commitments, and
development/rationalization of local industry." 13 The petitioner in the
instant case entered into a transaction to import foundry pig iron, a
regulated commodity. In respect of the importation of this particular
commodity, the Iron and Steel Authority (ISA) is the government agency
designated to issue the permit or clearance. 14 Prior to the issuance of
such permit or clearance, ISA asks the buyer/importer to comply with
particular requirements, such as to show the availability of foreign
exchange allocations. The issuance of an L/C becomes, among other
things, an indication of compliance by the buyer/importer with his own
government's regulations relating to imports and to payment thereof. 15
The records shows that the opening of the L/C in the instant case
became very difficult because Reliance had exhausted its dollar
allocation. Reliance knew that it had already exceeded its dollar
allocation for the year 1980 when it entered into the 31 July 1980 WHEREFORE, in view of the foregoing, the Petition for Review is hereby
transaction with Daewoo. 16 As a rule, when the importer has exceeded DENIED for lack of merit and the decision of the Court of Appeals dated
its foreign exchange allocation, his application would be denied. 8 February 1991 is hereby AFFIRMED. Costs against petitioner.
However, ISA could reconsider such application on a case to case
basis. 17 Thus, in the instant case, ISA required Reliance to support its SO ORDERED.
application by submitting purchase orders from end-users for the same
quantity the latter wished to import. As earlier noted, Reliance was able Bidin, Romero, Melo and Vitug, JJ., concur.
to present purchase orders for only 900 metric tons of the subject pig
iron. 18 For having exceeded its foreign exchange allocation before it
entered into the 31 July 1980 contract with Daewoo, petitioner Reliance
can hold only itself responsible. for having failed to secure end-users
purchase orders equivalent to 2,000 metric tons, only Reliance should be
held responsible.

Daewoo rejected Reliance's proposed reduced tonnage. It had the right

to demand compliance with the terms of the basic contract and had no
duty to accept any unilateral modification of that contract. Compliance
with Philippine legal requirements was the duty of Reliance; it is not
disputed that ISA's requirements were legal and valid, and not arbitrary
or capricious. Compliance with such requirements, like keeping within
one's dollar allocation and complying with the requirements of ISA, were
within the control of Reliance and not of Daewoo. The Court is compelled
to agree with the Court of Appeals that the non-opening of the L/C was
due to the failure of Reliance to comply with its duty under the contract.

We believe and so hold that failure of a buyer seasonably to furnish an

agreed letter of credit is a breach of he contract between buyer and
seller. Where the buyer fails to open a letter of credit as stipulated, the
seller or exporter is entitled to claim damages for such breach. Damages
for failure to open a commercial credit may, in appropriate cases, include
the loss of profit which the seller would reasonably have made had the
transaction been carried out. 19

We hold, further, that the Court of Appeals committed no reversible error

when it ruled that the damages incurred by Daewoo were sufficiently
proved with the testimony of Mr. Ricardo Fernandez and39"the various
documentary evidence showing the loss suffered by the defendant when
it was compelled to sell the subject goods at a lower price." 20

Reliance Commodities, Inc. v. Daewoo Industrial Co., Ltd.

BANKING No. 6
G.R. No. L-100831 December 17, 1993 Daewoo is liable for damages because the contract to deliver the goods
were already perfected. The opening of an L/C upon application of
Reliance was not a condition precedent for the birth of the obligation of
Reliance to purchase foundry pig iron from Daewoo. As a rule, the failure
of to open the appropriate letter of credit did not prevent the birth of the
The failure of a buyer seasonably to furnish an agreed letter of
contract, and neither did such failure extinguish the contract.
credit is a breach of he contract between buyer and seller. Where
the buyer fails to open a letter of credit as stipulated, the seller or
exporter is entitled to claim damages for such breach. In the instant case, the opening of the letter of credit in favor of Daewoo
was an obligation of Reliance and the performance of that obligation by
Reliance was a condition for enforcement of the reciprocal obligation of
Facts:
Daewoo to ship the subject matter of the contract the foundry pig iron
to Reliance. But the contract itself between Reliance and Daewoo had
Reliance Commodities, Inc. (Reliance) and Daewoo Industrial Co Ltd already sprung into legal existence and was enforceable.
(Daewoo) entered into a contract of sale where Reliance undertook to
ship and deliver to Daewoo 2,000 tons of foundry pig iron. First contract
Thus the failure of a buyer seasonably to furnish an agreed letter of
was consummated and completed but Daewoo fell short of 135.655
credit is a breach of he contract between buyer and seller. Where the
metric tons. Second contract for 2,000 metric tons was also perfected.
buyer fails to open a letter of credit as stipulated, the seller or exporter is
However, Reliances application for a letter of credit was denied by the
entitled to claim damages for such breach. Damages for failure to open a
China Banking Corporation, and it was shown later that the reason for
commercial credit may, in appropriate cases, include the loss of profit
this is that it has exceeded its foreign exchange allocation.
which the seller would reasonably have made had the transaction been
carried out.
Because of the failure of Reliance to comply with its undertaking under
the contract, Daewoo was forced to sell the foundry pig irons to another
Once the credit is established, the seller ships the goods to the buyer
buyer at a lower price. Reliance filed an action for damages against
and in the process secures the required shipping documents or
Daewoo for the recovery of P226,370.48 representing the value of the
documents of title. To get paid, the seller executes a draft and pays cash
short delivery of 135.655 metric tons of foundry pig iron under the first
to the seller if it finds that the documents submitted by the seller conform
contract. Daewoo filed a counterclaim, contending that Reliance was
with what the letter of credit requires. The bank then obtains possession
guilty of breach of contract when it failed to open a letter of credit as
of the documents upon paying the seller. The transaction is completed
required in the second contract.
when the buyer reimburses the issuing bank and acquires the documents
entitling him to the goods. Under this arrangement, the seller gets paid
Issue: only if he delivers the documents of title over the goods, while the goods
only after reimbursing the bank.
Whether or not Reliance is liable for breach of contract by failing to
obtain the letter of credit
What is the effect of the buyers failure to procure a Letter of Credit
40 to the main contract?
Held:

The Letter of Credit is independent from the contract of sale. Failure of

the buyer to open the Letter of Credit does not prevent the birth of the
Sales Contract. (Reliance Commodities, Inc. v. Daewoo Industrial Co.
Ltd., G.R. No. 100831, Dec. 17, 1993) The opening of the Letter of Credit

BANKING No. 6
is only a mode of payment. The LC is not an essential requisite to the
contract of sale.

41

BANKING No. 6