THE COSOLIDATED BANK AND TRUST CORPORATION reimbursement of alleged overpayment to petitioner of the amount of (SOLIDBANK), petitioner P490,228.90. vs. At the pre-trial conference, the parties agreed on the following issues: THE COURT OF APPEALS, CONTINENTAL CEMENT 1) Whether or not the transaction involved is a loan transaction or a CORPORATION, GREGORY T. LIM and SPOUSE, trust receipt transaction; respondents. 2) Whether or not the interest rates charged against the defendants by YNARES-SANTIAGO, J.: the plaintiff are proper under the letter of credit, trust receipt and under The instant petition for review seeks to partially set aside the July 26, existing rules or regulations of the Central Bank; 1993 Decision1 of respondent Court of Appeals in CA-GR. CV No. 3) Whether or not the plaintiff properly applied the previous payment 29950, insofar as it orders petitioner to reimburse respondent of P300,456.27 by the defendant corporation on July 13, 1982 as Continental Cement Corporation the amount of P490, 228.90 with payment for the latters account; and interest thereon at the legal rate from July 26, 1988 until fully paid. 4) Whether or not the defendants are personally liable under the The petition also seeks to set aside the March 8, 1994 Resolution2 of transaction sued for in this case.4 respondent Court of Appeals denying its Motion for Reconsideration. On September 17, 1990, the trial court rendered its Decision,5 The facts are as follows: dismissing the Complaint and ordering petitioner to pay respondents On July 13, 1982, respondents Continental Cement Corporation the following amounts under their counterclaim: P490,228.90 (hereinafter, respondent Corporation) and Gregory T. Lim representing overpayment of respondent Corporation, with interest (hereinafter, respondent Lim) obtained from petitioner Consolidated thereon at the legal rate from July 26, 1988 until fully paid; P10,000.00 Bank and Trust Corporation Letter of Credit No. DOM-23277 in the as attorney's fees; and costs. amount of P 1,068,150.00 On the same date, respondent Corporation Both parties appealed to the Court of Appeals, which partially paid a marginal deposit of P320,445.00 to petitioner. The letter of modified the Decision by deleting the award of attorney's fees in favor credit was used to purchase around five hundred thousand liters of of respondents and, instead, ordering respondent Corporation to pay bunker fuel oil from Petrophil Corporation, which the latter delivered petitioner P37,469.22 as and for attorney's fees and litigation directly to respondent Corporation in its Bulacan plant. In relation to expenses. the same transaction, a trust receipt for the amount of P 1,001,520.93 Hence, the instant petition raising the following issues: was executed by respondent Corporation, with respondent Lim as 1. WHETHER OR NOT THE RESPONDENT APPELLATE signatory. COURT ACTED INCORRECTLY OR COMMITTED Claiming that respondents failed to turn over the goods covered by the REVERSIBLE ERROR IN HOLDING THAT THERE WAS trust receipt or the proceeds thereof, petitioner filed a complaint for OVERPAYMENT BY PRIVATE RESPONDENTS TO THE sum of money with application for preliminary attachment3 before the PETITIONER IN THE AMOUNT OF P490,228.90 DESPITE THE Regional Trial Court of Manila. In answer to the complaint, ABSENCE OF ANY COMPUTATION MADE IN THE DECISION respondents averred that the transaction between them was a simple AND THE ERRONEOUS APPLICATION OF PAYMENTS loan and not a trust receipt transaction, and that the amount claimed WHICH IS IN VIOLATION OF THE NEW CIVIL CODE. by petitioner did not take into account payments already made by 2. WHETHER OR NOT THE MANNER OF COMPUTATION OF them. Respondent Lim also denied any personal liability in the subject THE MARGINAL DEPOSIT BY THE RESPONDENT APPELLATE COURT IS IN ACCORDANCE WITH BANKING marginal deposit should be considered only after computing the PRACTICE. principal plus accrued interest and other charges. However, to sustain 3. WHETHER OR NOT THE AGREEMENT AMONG THE petitioner on this score would be to countenance a clear case of unjust PARTIES AS TO THE FLOATING OF INTEREST RATE IS enrichment, for while a marginal deposit earns no interest in favour of VALID UNDER APPLICABLE JURISPRUDENCE AND THE the debtor-depositor, the bank is not only able to use the same for its RULES AND REGULATIONS OF THE CENTRAL BANK. own purposes, interest-free, but is also able to earn interest on the 4. WHETHER OR NO THE RESPONDENT APPELLATE COUR money loaned to respondent Corporation. Indeed, it would be onerous GRIEVOUSLY ERRED IN NOT CONSIDERING THE to compute interest and other charges on the face value of the letter of TRANSACTION AT BAR AS A TRUST RECEIPT credit which the petitioner issued, without first crediting or setting off TRANSACTION ON THE BASIS OF THE JUDICIAL the marginal deposit which the respondent Corporation paid to it. ADMISSIONS OF THE PRIVATE RESPONDENTS AND FOR Compensation is proper and should take effect by operation of law WHICH RESPONDENTS ARE LIABLE THEREFOR. because the requisites in Article 1279 of the Civil Code are present 5. WHETHER OR NOT THE RESPONDENT APPELLATE and should extinguish both debts to the concurrent amount.8 COURT GRIEVOUSLY ERRED IN NOT HOLDING PRIVATE Hence, the interests and other charges on the subject letter of credit RESPONDENT SPOUSES LIABLE UNDER THE TRUST should be computed only on the balance of P681,075.93, which was RECEIPT TRANSACTION.6 the portion actually loaned by the bank to respondent Corporation. The petition must be denied. Neither do we find error when the lower court and the Court of On the first issue respecting the fact of overpayment found by both the Appeals set aside as invalid the floating rate of interest exhorted by lower court and respondent Court of Appeals, we stress the time- petitioner to be applicable. The pertinent provision in the trust receipt honored rule that findings of fact by the Court of Appeals especially agreement of the parties fixing the interest rate states: if they affirm factual findings of the trial court will not be disturbed I, WE jointly and severally agree to any increase or decrease in the by this Court, unless these findings are not supported by evidence.7 interest rate which may occur after July 1, 1981, when the Central Petitioner decries the lack of computation by the lower court as basis Bank floated the interest rate, and to pay additionally the penalty of for its ruling that there was an overpayment made. While such a 1% per month until the amount/s or instalments/s due and unpaid computation may not have appeared in the Decision itself, we note that under the trust receipt on the reverse side hereof is/are fully paid.9 the trial court's finding of overpayment is supported by evidence We agree with respondent Court of Appeals that the foregoing presented before it. At any rate, we painstakingly reviewed and stipulation is invalid, there being no reference rate set either by it or computed the payments together with the interest and penalty charges by the Central Bank, leaving the determination thereof at the sole will due thereon and found that the amount of overpayment made by and control of petitioner. 1wphi1.nt respondent Bank to petitioner, i.e., P263,070.13, was more than what While it may be acceptable, for practical reasons given the fluctuating was ordered reimbursed by the lower court. However, since economic conditions, for banks to stipulate that interest rates on a loan respondents did not file an appeal in this case, the amount ordered not be fixed and instead be made dependent upon prevailing market reimbursed by the lower court should stand. conditions, there should always be a reference rate upon which to peg Moreover, petitioner's contention that the marginal deposit made by such variable interest rates. An example of such a valid variable respondent Corporation should not be deducted outright from the interest rate was found in Polotan, Sr. v. Court of Appeals. 10 In that amount of the letter of credit is untenable. Petitioner argues that the case, the contractual provision stating that "if there occurs any change in the prevailing market rates, the new interest rate shall be the receipt was only executed nearly two months after full delivery of the guiding rate in computing the interest due on the outstanding oil was made to respondent Corporation, or on September 2, 1982. obligation without need of serving notice to the Cardholder other than The danger in characterizing a simple loan as a trust receipt transaction the required posting on the monthly statement served to the was explained in Colinares, to wit: Cardholder"11 was considered valid. The aforequoted provision was The Trust Receipts Law does not seek to enforce payment of the loan, upheld notwithstanding that it may partake of the nature of an rather it punishes the dishonesty and abuse of confidence in the escalation clause, because at the same time it provides for the decrease handling of money or goods to the prejudice of another regardless of in the interest rate in case the prevailing market rates dictate its whether the latter is the owner. Here, it is crystal clear that on the part reduction. In other words, unlike the stipulation subject of the instant of Petitioners there was neither dishonesty nor abuse of confidence in case, the interest rate involved in the Polotan case is designed to be the handling of money to the prejudice of PBC. Petitioners continually based on the prevailing market rate. On the other hand, a stipulation endeavored to meet their obligations, as shown by several receipts ostensibly signifying an agreement to "any increase or decrease in the issued by PBC acknowledging payment of the loan. interest rate," without more, cannot be accepted by this Court as valid The Information charges Petitioners with intent to defraud and for it leaves solely to the creditor the determination of what interest misappropriating the money for their personal use. The mala prohibita rate to charge against an outstanding loan. nature of the alleged offense notwithstanding, intent as a state of mind Petitioner has also failed to convince us that its transaction with was not proved to be present in Petitioners' situation. Petitioners respondent Corporation is really a trust receipt transaction instead of employed no artifice in dealing with PBC and never did they evade merely a simple loan, as found by the lower court and the Court of payment of their obligation nor attempt to abscond. Instead, Appeals. Petitioners sought favorable terms precisely to meet their obligation. The recent case of Colinares v. Court of Appeals 12 appears to be Also noteworthy is the fact that Petitioners are not importers acquiring foursquare with the facts obtaining in the case at bar. There, we found the goods for re-sale, contrary to the express provision embodied in that inasmuch as the debtor received the goods subject of the trust the trust receipt. They are contractors who obtained the fungible goods receipt before the trust receipt itself was entered into, the transaction for their construction project. At no time did title over the construction in question was a simple loan and not a trust receipt agreement. Prior materials pass to the bank, but directly to the Petitioners from CM to the date of execution of the trust receipt, ownership over the goods Builders Centre. This impresses upon the trust receipt in question was already transferred to the debtor. This situation is inconsistent vagueness and ambiguity, which should not be the basis for criminal with what normally obtains in a pure trust receipt transaction, wherein prosecution in the event of violation of its provisions. the goods belong in ownership to the bank and are only released to the The practice of banks of making borrowers sign trust receipts to importer in trust after the loan is granted. facilitate collection of loans and place them under the threats of In the case at bar, as in Colinares, the delivery to respondent criminal prosecution should they be unable to pay it may be unjust and Corporation of the goods subject of the trust receipt occurred long inequitable if not reprehensible. Such agreements are contracts of before the trust receipt itself was executed. More specifically, delivery adhesion which borrowers have no option but to sign lest their loan be of the bunker fuel oil to respondent Corporation's Bulacan plant disapproved. The resort to this scheme leaves poor and hapless commenced on July 7, 1982 and was completed by July 19, 1982.13 borrowers at the mercy of banks, and is prone to misinterpretation, as Further, the oil was used up by respondent Corporation in its normal had happened in this case. Eventually, PBC showed its true colors and operations by August, 1982.14 On the other hand, the subject trust admitted that it was only after collection of the money, as manifested by its Affidavit of Desistance. He has testified that ownership was acknowledged in favor of Similarly, respondent Corporation cannot be said to have been Continental Cement Corp. so that question has already been answered. dishonest in its dealings with petitioner. Neither has it been shown that A TTY. BANAGA: it has evaded payment of its obligations. Indeed, it continually That is why I made a follow up question asking ownership of the endeavored to meet the same, as shown by the various receipts issued bunker fuel oil. by petitioner acknowledging payment on the loan. Certainly, the COURT: payment of the sum of P1,832,158.38 on a loan with a principal Proceed. amount of only P681,075.93 negates any badge of dishonesty , abuse A TTY .BANAGA: of confidence or mishandling of funds on the part of respondent Q - Who owns the bunker fuel oil after purchase from Petrophil Corp. Corporation, which are the gravamen of a trust receipt violation. ? Furthermore, Respondent Corporation is not an importer, which A - Gregory Lim.15 acquired the bunker fuel oil for re-sale; it needed the oil for its own By all indications, then, it is apparent that there was really no trust operations. More importantly, at no time did title over the oil pass to receipt transaction that took place. Evidently, respondent Corporation petitioner, but directly to respondent Corporation to which the oil was was required to sign the trust receipt simply to facilitate collection by directly delivered long before the trust receipt was executed. The fact petitioner of the loan it had extended to the former. that ownership of the oil belonged to respondent Corporation, through Finally, we are not convinced that respondent Gregory T. Lim and his its President, Gregory Lim, was acknowledged by petitioner's own spouse should be personally liable under the subject trust receipt. account officer on the witness stand, to wit: Petitioner's argument that respondent Corporation and respondent Lim Q -After the bank opened a letter of credit in favor of Petrophil Corp. and his spouse are one and the same cannot be sustained. The for the account of the defendants thereby paying the value of the transactions sued upon were clearly entered into by respondent Lim in bunker fuel oil what transpired next after that? his capacity as Executive Vice President of respondent Corporation. A -Upon purchase of the bunker fuel oil and upon the requests of the We stress the hornbook law that corporate personality is a shield defendant possession of the bunker fuel oil were transferred to them. against personal liability of its officers. Thus, we agree that Q -You mentioned them to whom are you referring to? respondents Gregory T. Lim and his spouse cannot be made personally A -To the Continental Cement Corp. upon the execution of the trust liable since respondent Lim entered into and signed the contract receipt acknowledging the ownership of the bunker fuel oil this should clearly in his official capacity as Executive Vice President. The be acceptable for whatever disposition he may make. personality of the corporation is separate and distinct from the persons Q - You mentioned about acknowledging ownership of the bunker fuel composing it.16 oil to whom by whom? WHEREFORE, in view of all the foregoing, the instant Petition for A - By the Continental Cement Corp. Review is DENIED. The Decision of the Court of Appeals dated July Q So by your statement who really owns the bunker fuel oil? 26, 1993 in CA-G.R. CY No.29950 is AFFIRMED. A TTY. RACHON: SO ORDERED. Objection already answered, COURT: Give time to the other counsel to object. A TTY. RACHON : G.R. No. 169617 April 4, 2007 rate."4 HEIRS OF ZOILO ESPIRITU AND PRIMITIVA ESPIRITU, After three months, when the debt became due and demandable, the Petitioners, Spouses Landrito were unable to pay the principal, and had not been vs. able to make any interest payments other than the amount initially SPOUSES MAXIMO LANDRITO AND PAZ LANDRITO, deducted from the proceeds of the loan. On 29 December 1986, the Represented by ZOILO LANDRITO, as their Attorney-in-Fact, loan agreement was extended to 4 January 1987 through an Respondents. Amendment of Real Estate Mortgage. The loan was restructured in DECISION such a way that the unpaid interest became part of the principal, thus CHICO-NAZARIO, J.: increasing the principal to 385,000. The new loan agreement adopted This is a petition for Review on Certiorari under Rule 45 of the Rules all other terms and conditions contained in first agreement.5 of Court assailing the Decision of the Court of Appeals,1 dated 31 Due to the continued inability of the Spouses Landritos to settle their August 2005, reversing the Decision rendered by the trial court on 13 obligations with the Spouses Espiritu, the loan agreement was December 1995. The Court of Appeals, in its assailed Decision, fixed renewed three more times. In all these subsequent renewals, the same the interest rate of the loan between the parties at 12% per annum, and terms and conditions found in the first agreement were retained. On ordered the Spouses Zoilo and Primitiva Espiritu (Spouses Espiritu) 29 July 1987, the principal was increased to 507,000.00 inclusive of to reconvey the subject property to the Spouses Landrito conditioned running interest. On 11 March 1988, it was increased to 647,000.00. upon the payment of the loan. And on 21 October 1988, the principal was increased to 874,125.00.6 Petitioners DULCE, BENLINDA, EDWIN, CYNTHIA, AND At the hearing before the trial court, Zoilo Espiritu testified that the MIRIAM ANDREA, all surnamed ESPIRITU, are the only children increase in the principal in each amendment of the loan agreement did and legal heirs of the Spouses Zoilo and Primitiva Espiritu, who both not correspond to the amount delivered to the Spouses Landrito. died during the pendency of the case before the Honorable Court of Rather, the increase in the principal had been due to unpaid interest Appeals.2 and other charges.7 Respondents Spouses Maximo and Paz Landrito (Spouses Landrito) The debt remained unpaid. As a consequence, the Spouses Espiritu are herein represented by their son and attorney-in-fact, Zoilo foreclosed the mortgaged property on 31 October 1990. During the Landrito.3 auction sale, the property was sold to the Spouses Espiritu as the lone On 5 September 1986, Spouses Landrito loaned from the Spouses bidder. On 9 January 1991, the Sheriffs Certificate of Sale was Espiritu the amount of 350,000.00 payable in three months. To annotated on the title of the mortgaged property, giving the Spouses secure the loan, the Spouses Landrito executed a real estate mortgage Landrito until 8 January 1992 to redeem the property. 8 over a five hundred forty (540) square meter lot located in Alabang, The Spouses Landrito failed to redeem the subject property although Muntinlupa, covered by Transfer Certificate of Title No. S-48948, in they alleged that they negotiated for the redemption of the property as favor of the Spouses Espiritu. From the 350,000.00 that the Landritos early as 30 October 1991. While the negotiated price for the land were supposed to receive, 17,500.00 was deducted as interest for the started at 1,595,392.79, it was allegedly increased by the Spouses first month which was equivalent to five percent of the principal debt, Espiritu from time to time. Spouses Landrito allegedly tendered two and 7,500.00 was further deducted as service fee. Thus, they actually managers checks and some cash, totaling 1,800,000.00 to the received a net amount of 325,000.00. The agreement, however, Spouses Espiritu on 13 January 1992, but the latter refused to accept provided that the principal indebtedness earns "interest at the legal the same. They also alleged that the Spouses Espiritu increased the amount demanded to 2.5 Million and gave them until July 1992 to one-year redemption period provided by law, the action for pay the said amount. However, upon inquiry, they found out that on reconveyance remained as a remedy available to a landowner whose 24 June 1992, the Spouses Espiritu had already executed an Affidavit property was wrongfully registered in anothers name since the subject of Consolidation of Ownership and registered the mortgaged property property has not yet passed to an innocent purchaser for value.13 in their name, and that the Register of Deeds of Makati had already In the decretal portion of its Decision, the Court of Appeals ruled14: issued Transfer Certificate of Title No. 179802 in the name of the WHEREFORE, the instant appeal is hereby GRANTED. The assailed Spouses Espiritu. On 9 October 1992, the Spouses Landrito, Decision dated December 13, 1995 of the Regional Trial Court of represented by their son Zoilo Landrito, filed an action for annulment Makati, Branch 146 in Civil Case No. 92-2920 is hereby REVERSED or reconveyance of title, with damages against the Spouses Espiritu and SET ASIDE, and a new one is hereby entered as follows: (1) The before Branch 146 of the Regional Trial Court of Makati.9 Among the legal rate of 12% per annum is hereby FIXED to be applied as the allegations in their Complaint, they stated that the Spouses Espiritu, interest of the loan; and (2) Conditioned upon the payment of the loan, as creditors and mortgagees, "imposed interest rates that are shocking defendants-appellees spouses Zoilo and Primitiva Espiritu are hereby to ones moral senses."10 ordered to reconvey Transfer Certificate of Title No. S-48948 to The trial court dismissed the complaint and upheld the validity of the appellant spouses Maximo and Paz Landrito. foreclosure sale. The trial court ordered in its Decision, dated 13 The case is REMANDED to the Trial Court for the above December 1995:11 determination. WHEREFORE, all the foregoing premises considered, the herein Hence, the present petition. The following issues were raised:15 complaint is hereby dismissed forthwith. I Without pronouncements to costs. THE HONORABLE COURT OF APPEALS ERRED IN The Spouses Landrito appealed to the Court of Appeals pursuant to REVERSING AND SETTING ASIDE THE DECISION OF THE Rule 41 of the 1997 Rules of Court. In its Decision dated 31 August TRIAL COURT AND ORDERING HEREIN PETITIONERS TO 2005, the Court of Appeals reversed the trial courts decision, RECONVEY TRANSFER CERTIFICATE OF TITLE NO. 18918 decreeing that the five percent (5%) interest imposed by the Spouses TO HEREIN RESPONDENTS, WITHOUT ANY FACTUAL OR Espiritu on the first month and the varying interest rates imposed for LEGAL BASIS THEREFOR. the succeeding months contravened the provisions of the Real Estate II Mortgage contract which provided that interest at the legal rate, i.e., THE HONORABLE COURT OF APPEALS ERRED IN FINDING 12% per annum, would be imposed. It also ruled that although the THAT HEREIN PETITIONERS UNILATERALLY IMPOSED ON Usury Law had been rendered ineffective by Central Bank Circular HEREIN RESPONDENTS THE ALLEGEDLY UNREASONABLE No. 905, which, in effect, removed the ceiling rates prescribed for INTERESTS ON THE MORTGAGE LOANS. interests, thus, allowing parties to freely stipulate thereon, the courts III may render void any stipulation of interest rates which are found THE HONORABLE COURT OF APPEALS ERRED IN NOT iniquitous or unconscionable. As a result, the Court of Appeals set the CONSIDERING THAT HEREIN RESPONDENTS ATTORNEY- interest rate of the loan at the legal rate, or 12% per annum.12 IN-FACT IS NOT ARMED WITH AUTHORITY TO FILE AND Furthermore, the Court of Appeals held that the action for PROSECUTE THIS CASE. reconveyance, filed by the Spouses Landrito, is still a proper remedy. The petition is without merit. Even if the Spouses Landrito failed to redeem the property within the The Real Estate Mortgage executed between the parties specified that "the principal indebtedness shall earn interest at the legal rate." The Act," the State seeks to protect its citizens from a lack of awareness of agreement contained no other provision on interest or any fees or the true cost of credit by assuring the full disclosure of such costs. charges incident to the debt. In at least three contracts, all designated Section 4, in connection with Section 3(3)16 of the said law, gives a as Amendment of Real Estate Mortgage, the interest rate imposed was, detailed enumeration of the specific information required to be likewise, unspecified. During his testimony, Zoilo Espiritu admitted disclosed, among which are the interest and other charges incident to that the increase in the principal in each of the Amendments of the the extension of credit. Section 617 of the same law imposes on anyone Real Estate Mortgage consists of interest and charges. The Spouses who willfully violates these provisions, sanctions which include civil Espiritu alleged that the parties had agreed on the interest and charges liability, and a fine and/or imprisonment. imposed in connection with the loan, hereunder enumerated: Although any action seeking to impose either civil or criminal liability 1. 17,500.00 was the interest charged for the first month and had already prescribed, this Court frowns upon the underhanded 7,500.00 was imposed as service fee. manner in which the Spouses Espiritu imposed interest and charges, 2. 35,000.00 interest and charges, or the difference between the in connection with the loan. This is aggravated by the fact that one of 350,000.00 principal in the Real Estate Mortgage dated 5 September the creditors, Zoilo Espiritu, a lawyer, is hardly in a position to plead 1986 and the 385,000.00 principal in the Amendment of the Real ignorance of the requirements of the law in connection with the Estate Mortgage dated 29 December 1986. transparency of credit transactions. In addition, the Civil Code clearly 3. 132,000.00 interest and charges, or the difference between the provides that: 385,000.00 principal in the Amendment of the Real Estate Mortgage Article 1956. No interest shall be due unless it has been stipulated in dated 29 December 1986 and the 507,000.00 principal in the writing. Amendment of the Real Estate Mortgage dated 29 July 1987. The omission of the Spouses Espiritu in specifying in the contract the 4. 140,000.00 interest and charges, or the difference between the interest rate which was actually imposed, in contravention of the law, 507,000.00 principal in the Amendment of the Real Estate Mortgage manifested bad faith. dated 29 July 1987 and the 647,000.00 principal in the Amendment In several cases, this Court has been known to declare null and void of the Real Estate Mortgage dated 11 March 1988. stipulations on interest and charges that were found excessive, 5. 227,125.00 interest and charges, or the difference between the iniquitous, and unconscionable. In the case of Medel v. Court of 647,000.00 principal in the Amendment of the Real Estate Mortgage Appeals,18 the Court declared an interest rate of 5.5% per month on a dated 11 March 1988 and the 874,125 principal in the Amendment 500,000.00 loan to be excessive, iniquitous, unconscionable and of the Real Estate Mortgage dated 21 October 1988. exorbitant. Even if the parties themselves agreed on the interest rate The total interest and charges amounting to 559,125.00 on the and stipulated the same in a written agreement, it nevertheless original principal of 350,000 was accumulated over only two years declared such stipulation as void and ordered the imposition of a 12% and one month. These charges are not found in any written agreement yearly interest rate. In Spouses Solangon v. Salazar,19 6% monthly between the parties. The records fail to show any computation on how interest on a 60,000.00 loan was likewise equitably reduced to a 1% much interest was charged and what other fees were imposed. Not monthly interest or 12% per annum. In Ruiz v. Court of Appeals,20 the only did lack of transparency characterize the aforementioned Court found a 3% monthly interest imposed on four separate loans agreements, the interest rates and the service charge imposed, at an with a total of 1,050,000.00 to be excessive and reduced the interest average of 6.39% per month, are excessive. to a 1% monthly interest or 12% per annum. In enacting Republic Act No. 3765, known as the "Truth in Lending In declaring void the stipulations authorizing excessive interest and charges, the Court declared that although the Usury Law was will have their land foreclosed for failure to pay an over-inflated loan suspended by Central Bank Circular No. 905, s. 1982, effective on 1 only a small part of which they were obligated to pay. January 1983, and consequently parties are given a wide latitude to Moreover, it is evident from the facts of the case that despite agree on any interest rate, nothing in the said Circular grants lenders considerable effort on their part, the Spouses Landrito failed to redeem carte blanche authority to raise interest rates to levels which will either the mortgaged property because they were unable to raise the total enslave their borrowers or lead to a hemorrhaging of their assets.21 amount, which was grossly inflated by the excessive interest imposed. Stipulation authorizing iniquitous or unconscionable interests are Their attempt to redeem the mortgaged property at the inflated amount contrary to morals, if not against the law. Under Article 1409 of the of 1,595,392.79, as early as 30 October 1991, is reflected in a letter, Civil Code, these contracts are inexistent and void from the beginning. which creditor-mortgagee Zoilo Landrito acknowledged to have They cannot be ratified nor the right to set up their illegality as a received by affixing his signature herein.28 They also attached in their defense be waived.22 The nullity of the stipulation on the usurious Complaint copies of two checks in the amounts of 770,000.00 and interest does not, however, affect the lenders right to recover the 995,087.00, both dated 13 January 1992, which were allegedly principal of the loan.23 Nor would it affect the terms of the real estate refused by the Spouses Espiritu.29 Lastly, the Spouses Espiritu even mortgage. The right to foreclose the mortgage remains with the attached in their exhibits a copy of a handwritten letter, dated 27 creditors, and said right can be exercised upon the failure of the January 1994, written by Paz Landrito, addressed to the Spouses debtors to pay the debt due. The debt due is to be considered without Espiritu, wherein the former offered to pay the latter the sum of the stipulation of the excessive interest. A legal interest of 12% per 2,000,000.00.30 In all these instances, the Spouses Landrito had tried, annum will be added in place of the excessive interest formerly but failed, to pay an amount way over the indebtedness they were imposed. supposed to pay i.e., 350,000.00 and 12% interest per annum. Thus, While the terms of the Real Estate Mortgage remain effective, the it is only proper that the Spouses Landrito be given the opportunity to foreclosure proceedings held on 31 Ocotber 1990 cannot be given repay the real amount of their indebtedness. effect. In the Notice of Sheriffs Sale24 dated 5 October 1990, and in Since the Spouses Landrito, the debtors in this case, were not given an the Certificate of Sale25 dated 31 October 1990, the amount designated opportunity to settle their debt, at the correct amount and without the as mortgage indebtedness amounted to 874,125.00. Likewise, in the iniquitous interest imposed, no foreclosure proceedings may be demand letter26 dated 12 December 1989, Zoilo Espiritu demanded instituted. A judgment ordering a foreclosure sale is conditioned upon from the Spouses Landrito the amount of 874,125.00 for the unpaid a finding on the correct amount of the unpaid obligation and the failure loan. Since the debt due is limited to the principal of 350,000.00 with of the debtor to pay the said amount.31 In this case, it has not yet been 12% per annum as legal interest, the previous demand for payment of shown that the Spouses Landrito had already failed to pay the correct the amount of 874,125.00 cannot be considered as a valid demand amount of the debt and, therefore, a foreclosure sale cannot be for payment. For an obligation to become due, there must be a valid conducted in order to answer for the unpaid debt. The foreclosure sale demand.27 Nor can the foreclosure proceedings be considered valid conducted upon their failure to pay 874,125 in 1990 should be since the total amount of the indebtedness during the foreclosure nullified since the amount demanded as the outstanding loan was proceedings was pegged at 874,125.00 which included interest and overstated; consequently it has not been shown that the mortgagors which this Court now nullifies for being excessive, iniquitous and the Spouses Landrito, have failed to pay their outstanding obligation. exorbitant. If the foreclosure proceedings were considered valid, this Moreover, if the proceeds of the sale together with its reasonable rates would result in an inequitable situation wherein the Spouses Landrito of interest were applied to the obligation, only a small part of its original loans would actually remain outstanding, but because of the present, there is nothing in this Decision which prevents the Spouses unconscionable interest rates, the larger part corresponded to said Espiritu from foreclosing the mortgaged property. excessive and iniquitous interest. The last issue raised by the petitioners is whether or not Zoilo Landrito As a result, the subsequent registration of the foreclosure sale cannot was authorized to file the action for reconveyance filed before the trial transfer any rights over the mortgaged property to the Spouses court or even to file the appeal from the judgment of the trial court, by Espiritu. The registration of the foreclosure sale, herein declared virtue of the Special Power of Attorney dated 30 September 1992. invalid, cannot vest title over the mortgaged property. The Torrens They further noted that the trial court and the Court of Appeals failed system does not create or vest title where one does not have a rightful to rule on this issue.36 claim over a real property. It only confirms and records title already The Special Power of Attorney37 dated 30 September 1992 was existing and vested. It does not permit one to enrich oneself at the executed by Maximo Landrito, Jr., with the conformity of Paz expense of another.32 Thus, the decree of registration, even after the Landrito, in connection with the mortgaged property. It authorized lapse of one (1) year, cannot attain the status of indefeasibility. Zoilo Landrito: Significantly, the records show that the property mortgaged was 2. To make, sign, execute and deliver corresponding pertinent purchased by the Spouses Espiritu and had not been transferred to an contracts, documents, agreements and other writings of whatever innocent purchaser for value. This means that an action for nature or kind and to sue or file legal action in any court of the reconveyance may still be availed of in this case.33 Philippines, to collect, ask demands, encash checks, and recover any Registration of property by one person in his or her name, whether by and all sum of monies, proceeds, interest and other due accruing, mistake or fraud, the real owner being another person, impresses upon owning, payable or belonging to me as such owner of the afore- the title so acquired the character of a constructive trust for the real mentioned property. (Emphasis provided.) owner, which would justify an action for reconveyance.34 This is based Zoilo Landritos authority to file the case is clearly set forth in the on Article 1465 of the Civil Code which states that: Special Power of Attorney. Furthermore, the records of the case Art. 1465. If property acquired through mistakes or fraud, the person unequivocally show that Zoilo Landrito filed the reconveyance case obtaining it is, by force of law, considered a trustee of an implied trust with the full authority of his mother, Paz Landrito, who attended the for benefit of the person from whom the property comes. hearings of the case, filed in her behalf, without making any protest.38 The action for reconveyance does not prescribe until after a period of She even testified in the same case on 30 August 1995. From the acts ten years from the date of the registration of the certificate of sale since of Paz Landrito, there is no doubt that she had authorized her son to the action would be based on implied trust.35 Thus, the action for file the action for reconveyance, in her behalf, before the trial court. reconveyance filed on 31 October 1992, more than one year after the IN VIEW OF THE FOREGOING, the instant Petition is DENIED. Sheriffs Certificate of Sale was registered on 9 January 1991, was This Court AFFIRMS the assailed Decision of the Court of Appeals, filed within the prescription period. promulgated on 31 August 2005, fixing the interest rate of the loan It should, however, be reiterated that the provisions of the Real Estate between the parties at 12% per annum, and ordering the Spouses Mortgage are not annulled and the principal obligation stands. In Espiritu to reconvey the subject property to the Spouses Landrito addition, the interest is not completely removed; rather, it is set by this conditioned upon the payment of the loan together with herein fixed Court at 12% per annum. Should the Spouses Landrito fail to pay the rate of interest. Costs against the petitioners. principal, with its recomputed interest which runs from the time the SO ORDERED. loan agreement was entered into on 5 September 1986 until the G.R. No. 170281 January 18, 2008 made of the motion for leave of court to serve summons by REPUBLIC OF THE PHILIPPINES, represented by the ANTI- publication. MONEY LAUNDERING COUNCIL, petitioner, In an order dated January 30, 2004, the trial court archived the case vs. allegedly for failure of the Republic to serve the alias summons. The GLASGOW CREDIT AND COLLECTION SERVICES, INC. Republic filed an ex parte omnibus motion to (a) reinstate the case and and CITYSTATE SAVINGS BANK, INC., respondents. (b) resolve its pending motion for leave of court to serve summons by DECISION publication. CORONA, J.: In an order dated May 31, 2004, the trial court ordered the This is a petition for review1 of the order2 dated October 27, 2005 of reinstatement of the case and directed the Republic to serve the alias the Regional Trial Court (RTC) of Manila, Branch 47, dismissing the summons on Glasgow and CSBI within 15 days. However, it did not complaint for forfeiture3 filed by the Republic of the Philippines, resolve the Republics motion for leave of court to serve summons by represented by the Anti-Money Laundering Council (AMLC) against publication declaring: respondents Glasgow Credit and Collection Services, Inc. (Glasgow) Until and unless a return is made on the alias summons, any action on and Citystate Savings Bank, Inc. (CSBI). [the Republics] motion for leave of court to serve summons by On July 18, 2003, the Republic filed a complaint in the RTC Manila publication would be untenable if not premature. for civil forfeiture of assets (with urgent plea for issuance of temporary On July 12, 2004, the Republic (through the Office of the Solicitor restraining order [TRO] and/or writ of preliminary injunction) against General [OSG]) received a copy of the sheriffs return dated June 30, the bank deposits in account number CA-005-10-000121-5 2004 stating that the alias summons was returned "unserved" as maintained by Glasgow in CSBI. The case, filed pursuant to RA 9160 Glasgow was no longer holding office at the given address since July (the Anti-Money Laundering Act of 2001), as amended, was docketed 2002 and left no forwarding address. as Civil Case No. 03-107319. Meanwhile, the Republics motion for leave of court to serve Acting on the Republics urgent plea for the issuance of a TRO, the summons by publication remained unresolved. Thus, on August 11, executive judge4 of RTC Manila issued a 72-hour TRO dated July 21, 2005, the Republic filed a manifestation and ex parte motion to resolve 2003. The case was thereafter raffled to Branch 47 and the hearing on its motion for leave of court to serve summons by publication. the application for issuance of a writ of preliminary injunction was set On August 12, 2005, the OSG received a copy of Glasgows "Motion on August 4, 2003. to Dismiss (By Way of Special Appearance)" dated August 11, 2005. After hearing, the trial court (through then Presiding Judge Marivic T. It alleged that (1) the court had no jurisdiction over its person as Balisi-Umali) issued an order granting the issuance of a writ of summons had not yet been served on it; (2) the complaint was preliminary injunction. The injunctive writ was issued on August 8, premature and stated no cause of action as there was still no conviction 2003. for estafa or other criminal violations implicating Glasgow and (3) Meanwhile, summons to Glasgow was returned "unserved" as it could there was failure to prosecute on the part of the Republic. no longer be found at its last known address. The Republic opposed Glasgows motion to dismiss. It contended that On October 8, 2003, the Republic filed a verified omnibus motion for its suit was an action quasi in rem where jurisdiction over the person (a) issuance of alias summons and (b) leave of court to serve summons of the defendant was not a prerequisite to confer jurisdiction on the by publication. In an order dated October 15, 2003, the trial court court. It asserted that prior conviction for unlawful activity was not a directed the issuance of alias summons. However, no mention was precondition to the filing of a civil forfeiture case and that its complaint alleged ultimate facts sufficient to establish a cause of court have dismissed the complaint for improper venue? In Dacoycoy action. It denied that it failed to prosecute the case. v. Intermediate Appellate Court6 (reiterated in Rudolf Lietz Holdings, On October 27, 2005, the trial court issued the assailed order. It Inc. v. Registry of Deeds of Paraaque City),7 this Court ruled: dismissed the case on the following grounds: (1) improper venue as it The motu proprio dismissal of petitioners complaint by [the] trial should have been filed in the RTC of Pasig where CSBI, the court on the ground of improper venue is plain error. (emphasis depository bank of the account sought to be forfeited, was located; (2) supplied) insufficiency of the complaint in form and substance and (3) failure to At any rate, the trial court was a proper venue. prosecute. It lifted the writ of preliminary injunction and directed On November 15, 2005, this Court issued A.M. No. 05-11-04-SC, the CSBI to release to Glasgow or its authorized representative the funds Rule of Procedure in Cases of Civil Forfeiture, Asset Preservation, and in CA-005-10-000121-5. Freezing of Monetary Instrument, Property, or Proceeds Representing, Raising questions of law, the Republic filed this petition. Involving, or Relating to an Unlawful Activity or Money Laundering On November 23, 2005, this Court issued a TRO restraining Glasgow Offense under RA 9160, as amended (Rule of Procedure in Cases of and CSBI, their agents, representatives and/or persons acting upon Civil Forfeiture). The order dismissing the Republics complaint for their orders from implementing the assailed October 27, 2005 order. civil forfeiture of Glasgows account in CSBI has not yet attained It restrained Glasgow from removing, dissipating or disposing of the finality on account of the pendency of this appeal. Thus, the Rule of funds in account no. CA-005-10-000121-5 and CSBI from allowing Procedure in Cases of Civil Forfeiture applies to the Republics any transaction on the said account. complaint.8 Moreover, Glasgow itself judicially admitted that the Rule The petition essentially presents the following issue: whether the of Procedure in Cases of Civil Forfeiture is "applicable to the instant complaint for civil forfeiture was correctly dismissed on grounds of case."9 improper venue, insufficiency in form and substance and failure to Section 3, Title II (Civil Forfeiture in the Regional Trial Court) of the prosecute. Rule of Procedure in Cases of Civil Forfeiture provides: The Court agrees with the Republic. Sec. 3. Venue of cases cognizable by the regional trial court. A The Complaint Was Filed In The Proper Venue petition for civil forfeiture shall be filed in any regional trial court In its assailed order, the trial court cited the grounds raised by Glasgow of the judicial region where the monetary instrument, property or in support of its motion to dismiss: proceeds representing, involving, or relating to an unlawful 1. That this [c]ourt has no jurisdiction over the person of Glasgow activity or to a money laundering offense are located; provided, considering that no [s]ummons has been served upon it, and it has not however, that where all or any portion of the monetary instrument, entered its appearance voluntarily; property or proceeds is located outside the Philippines, the petition 2. That the [c]omplaint for forfeiture is premature because of the may be filed in the regional trial court in Manila or of the judicial absence of a prior finding by any tribunal that Glasgow was engaged region where any portion of the monetary instrument, property, or in unlawful activity: [i]n connection therewith[,] Glasgow argues that proceeds is located, at the option of the petitioner. (emphasis supplied) the [c]omplaint states no cause of action; and Under Section 3, Title II of the Rule of Procedure in Cases of Civil 3. That there is failure to prosecute, in that, up to now, summons has Forfeiture, therefore, the venue of civil forfeiture cases is any RTC of yet to be served upon Glasgow.5 the judicial region where the monetary instrument, property or But inasmuch as Glasgow never questioned the venue of the proceeds representing, involving, or relating to an unlawful activity or Republics complaint for civil forfeiture against it, how could the trial to a money laundering offense are located. Pasig City, where the account sought to be forfeited in this case is situated, is within the Glasgows bank account and deposit are related to the unlawful National Capital Judicial Region (NCJR). Clearly, the complaint for activities of Estafa and violation of Securities Regulation Code, as civil forfeiture of the account may be filed in any RTC of the NCJR. well as to a money laundering offense [which] [has] been summarized Since the RTC Manila is one of the RTCs of the NCJR,10 it was a by the AMLC in its Resolution No. 094; and proper venue of the Republics complaint for civil forfeiture of (i) Because defendant Glasgows bank account and deposits are Glasgows account. related to the unlawful activities of Estafa and violation of Securities The Complaint Was Sufficient In Form And Substance Regulation Code, as well as [to] money laundering offense as In the assailed order, the trial court evaluated the Republics complaint aforestated, and being the subject of covered transaction reports and to determine its sufficiency in form and substance: eventual freeze orders, the same should properly be forfeited in favor At the outset, this [c]ourt, before it proceeds, takes the opportunity to of the government in accordance with Section 12, R.A. 9160, as examine the [c]omplaint and determine whether it is sufficient in form amended.11 and substance. In a motion to dismiss for failure to state a cause of action, the focus Before this [c]ourt is a [c]omplaint for Civil Forfeiture of Assets filed is on the sufficiency, not the veracity, of the material allegations.12 The by the [AMLC], represented by the Office of the Solicitor General[,] determination is confined to the four corners of the complaint and against Glasgow and [CSBI] as necessary party. The [c]omplaint nowhere else.13 principally alleges the following: In a motion to dismiss a complaint based on lack of cause of action, (a) Glasgow is a corporation existing under the laws of the Philippines, the question submitted to the court for determination is the sufficiency with principal office address at Unit 703, 7th Floor, Citystate Center of the allegations made in the complaint to constitute a cause of action [Building], No. 709 Shaw Boulevard[,] Pasig City; and not whether those allegations of fact are true, for said motion must (b) [CSBI] is a corporation existing under the laws of the Philippines, hypothetically admit the truth of the facts alleged in the complaint. with principal office at Citystate Center Building, No. 709 Shaw The test of the sufficiency of the facts alleged in the complaint is Boulevard, Pasig City; whether or not, admitting the facts alleged, the court could render (c) Glasgow has funds in the amount of P21,301,430.28 deposited a valid judgment upon the same in accordance with the prayer of with [CSBI], under CA 005-10-000121-5; the complaint.14 (emphasis ours) (d) As events have proved, aforestated bank account is related to the In this connection, Section 4, Title II of the Rule of Procedure in Cases unlawful activities of Estafa and violation of Securities Regulation of Civil Forfeiture provides: Code; Sec. 4. Contents of the petition for civil forfeiture. - The petition for (e) The deposit has been subject of Suspicious Transaction Reports; civil forfeiture shall be verified and contain the following allegations: (f) After appropriate investigation, the AMLC issued Resolutions No. (a) The name and address of the respondent; 094 (dated July 10, 2002), 096 (dated July 12, 2002), 101 (dated July (b) A description with reasonable particularity of the monetary 23, 2002), and 108 (dated August 2, 2002), directing the issuance of instrument, property, or proceeds, and their location; and freeze orders against the bank accounts of Glasgow; (c) The acts or omissions prohibited by and the specific provisions of (g) Pursuant to said AMLC Resolutions, Freeze Orders Nos. 008-010, the Anti-Money Laundering Act, as amended, which are alleged to be 011 and 013 were issued on different dates, addressed to the concerned the grounds relied upon for the forfeiture of the monetary instrument, banks; property, or proceeds; and (h) The facts and circumstances plainly showing that defendant [(d)] The reliefs prayed for. Here, the verified complaint of the Republic contained the following Rule 12.2. When Civil Forfeiture May be Applied. When there is a allegations: SUSPICIOUS TRANSACTION REPORT OR A COVERED (a) the name and address of the primary defendant therein, Glasgow;15 TRANSACTION REPORT DEEMED SUSPICIOUS AFTER (b) a description of the proceeds of Glasgows unlawful activities with INVESTIGATION BY THE AMLC, and the court has, in a petition particularity, as well as the location thereof, account no. CA-005-10- filed for the purpose, ordered the seizure of any monetary instrument 000121-5 in the amount of P21,301,430.28 maintained with CSBI; or property, in whole or in part, directly or indirectly, related to said (c) the acts prohibited by and the specific provisions of RA 9160, as report, the Revised Rules of Court on civil forfeiture shall apply. amended, constituting the grounds for the forfeiture of the said RA 9160, as amended, and its implementing rules and regulations lay proceeds. In particular, suspicious transaction reports showed that down two conditions when applying for civil forfeiture: Glasgow engaged in unlawful activities of estafa and violation of the (1) when there is a suspicious transaction report or a covered Securities Regulation Code (under Section 3(i)(9) and (13), RA 9160, transaction report deemed suspicious after investigation by the AMLC as amended); the proceeds of the unlawful activities were transacted and and deposited with CSBI in account no. CA-005-10-000121-5 thereby (2) the court has, in a petition filed for the purpose, ordered the seizure making them appear to have originated from legitimate sources; as of any monetary instrument or property, in whole or in part, directly such, Glasgow engaged in money laundering (under Section 4, RA or indirectly, related to said report. 9160, as amended); and the AMLC subjected the account to freeze It is the preliminary seizure of the property in question which brings order and it within the reach of the judicial process.16 It is actually within the (d) the reliefs prayed for, namely, the issuance of a TRO or writ of courts possession when it is submitted to the process of the court.17 preliminary injunction and the forfeiture of the account in favor of the The injunctive writ issued on August 8, 2003 removed account no. government as well as other reliefs just and equitable under the CA-005-10-000121-5 from the effective control of either Glasgow or premises. CSBI or their representatives or agents and subjected it to the process The form and substance of the Republics complaint substantially of the court. conformed with Section 4, Title II of the Rule of Procedure in Cases Since account no. CA-005-10-000121-5 of Glasgow in CSBI was (1) of Civil Forfeiture. covered by several suspicious transaction reports and (2) placed under Moreover, Section 12(a) of RA 9160, as amended, provides: the control of the trial court upon the issuance of the writ of SEC. 12. Forfeiture Provisions. preliminary injunction, the conditions provided in Section 12(a) of RA (a) Civil Forfeiture. When there is a covered transaction report 9160, as amended, were satisfied. Hence, the Republic, represented by made, and the court has, in a petition filed for the purpose ordered the AMLC, properly instituted the complaint for civil forfeiture. seizure of any monetary instrument or property, in whole or in part, Whether or not there is truth in the allegation that account no. CA- directly or indirectly, related to said report, the Revised Rules of Court 005-10-000121-5 contains the proceeds of unlawful activities is an on civil forfeiture shall apply. evidentiary matter that may be proven during trial. The complaint, In relation thereto, Rule 12.2 of the Revised Implementing Rules and however, did not even have to show or allege that Glasgow had been Regulations of RA 9160, as amended, states: implicated in a conviction for, or the commission of, the unlawful RULE 12 activities of estafa and violation of the Securities Regulation Code. Forfeiture Provisions A criminal conviction for an unlawful activity is not a prerequisite for xxx xxx xxx the institution of a civil forfeiture proceeding. Stated otherwise, a finding of guilt for an unlawful activity is not an essential element of the case. Nothing could be more erroneous. civil forfeiture. Immediately after the complaint was filed, the trial court ordered its Section 6 of RA 9160, as amended, provides: deputy sheriff/process server to serve summons and notice of the SEC. 6. Prosecution of Money Laundering. hearing on the application for issuance of TRO and/or writ of (a) Any person may be charged with and convicted of both the offense preliminary injunction. The subpoena to Glasgow was, however, of money laundering and the unlawful activity as herein defined. returned unserved as Glasgow "could no longer be found at its given (b) Any proceeding relating to the unlawful activity shall be given address" and had moved out of the building since August 1, 2002. precedence over the prosecution of any offense or violation under this Meanwhile, after due hearing, the trial court issued a writ of Act without prejudice to the freezing and other remedies provided. preliminary injunction enjoining Glasgow from removing, dissipating (emphasis supplied) or disposing of the subject bank deposits and CSBI from allowing any Rule 6.1 of the Revised Implementing Rules and Regulations of RA transaction on, withdrawal, transfer, removal, dissipation or 9160, as amended, states: disposition thereof. Rule 6.1. Prosecution of Money Laundering As the summons on Glasgow was returned "unserved," and (a) Any person may be charged with and convicted of both the offense considering that its whereabouts could not be ascertained despite of money laundering and the unlawful activity as defined under Rule diligent inquiry, the Republic filed a verified omnibus motion for (a) 3(i) of the AMLA. issuance of alias summons and (b) leave of court to serve summons (b) Any proceeding relating to the unlawful activity shall be given by publication on October 8, 2003. While the trial court issued an alias precedence over the prosecution of any offense or violation under the summons in its order dated October 15, 2003, it kept quiet on the AMLA without prejudice to the application ex-parte by the AMLC prayer for leave of court to serve summons by publication. to the Court of Appeals for a freeze order with respect to the monetary Subsequently, in an order dated January 30, 2004, the trial court instrument or property involved therein and resort to other remedies archived the case for failure of the Republic to cause the service of provided under the AMLA, the Rules of Court and other alias summons. The Republic filed an ex parte omnibus motion to (a) pertinent laws and rules. (emphasis supplied) reinstate the case and (b) resolve its pending motion for leave of court Finally, Section 27 of the Rule of Procedure in Cases of Civil to serve summons by publication. Forfeiture provides: In an order dated May 31, 2004, the trial court ordered the Sec. 27. No prior charge, pendency or conviction necessary. No reinstatement of the case and directed the Republic to cause the service prior criminal charge, pendency of or conviction for an unlawful of the alias summons on Glasgow and CSBI within 15 days. However, activity or money laundering offense is necessary for the it deferred its action on the Republics motion for leave of court to commencement or the resolution of a petition for civil forfeiture. serve summons by publication until a return was made on the alias (emphasis supplied) summons. Thus, regardless of the absence, pendency or outcome of a criminal Meanwhile, the Republic continued to exert efforts to obtain prosecution for the unlawful activity or for money laundering, an information from other government agencies on the whereabouts or action for civil forfeiture may be separately and independently current status of respondent Glasgow if only to save on expenses of prosecuted and resolved. publication of summons. Its efforts, however, proved futile. The There Was No FailureTo Prosecute records on file with the Securities and Exchange Commission The trial court faulted the Republic for its alleged failure to prosecute provided no information. Other inquiries yielded negative results. On July 12, 2004, the Republic received a copy of the sheriffs return wielded its power to dismiss the Republics complaint. dated June 30, 2004 stating that the alias summons had been returned Service Of Summons May Be By Publication "unserved" as Glasgow was no longer holding office at the given In Republic v. Sandiganbayan,19 this Court declared that the rule is address since July 2002 and left no forwarding address. Still, no action settled that forfeiture proceedings are actions in rem. While that case was taken by the trial court on the Republics motion for leave of court involved forfeiture proceedings under RA 1379, the same principle to serve summons by publication. Thus, on August 11, 2005, the applies in cases for civil forfeiture under RA 9160, as amended, since Republic filed a manifestation and ex parte motion to resolve its both cases do not terminate in the imposition of a penalty but merely motion for leave of court to serve summons by publication. in the forfeiture of the properties either acquired illegally or related to It was at that point that Glasgow filed a motion to dismiss by way of unlawful activities in favor of the State. special appearance which the Republic vigorously opposed. Strangely, As an action in rem, it is a proceeding against the thing itself instead to say the least, the trial court issued the assailed order granting of against the person.20 In actions in rem or quasi in rem, jurisdiction Glasgows motion. over the person of the defendant is not a prerequisite to conferring Given these circumstances, how could the Republic be faulted for jurisdiction on the court, provided that the court acquires jurisdiction failure to prosecute the complaint for civil forfeiture? While there was over the res.21 Nonetheless, summons must be served upon the admittedly a delay in the proceeding, it could not be entirely or defendant in order to satisfy the requirements of due process.22 For this primarily ascribed to the Republic. That Glasgows whereabouts could purpose, service may be made by publication as such mode of service not be ascertained was not only beyond the Republics control, it was is allowed in actions in rem and quasi in rem.23 also attributable to Glasgow which left its principal office address In this connection, Section 8, Title II of the Rule of Procedure in Cases without informing the Securities and Exchange Commission or any of Civil Forfeiture provides: official regulatory body (like the Bureau of Internal Revenue or the Sec. 8. Notice and manner of service. - (a) The respondent shall be Department of Trade and Industry) of its new address. Moreover, as given notice of the petition in the same manner as service of summons early as October 8, 2003, the Republic was already seeking leave of under Rule 14 of the Rules of Court and the following rules: court to serve summons by publication. 1. The notice shall be served on respondent personally, or by any other In Marahay v. Melicor,18 this Court ruled: means prescribed in Rule 14 of the Rules of Court; While a court can dismiss a case on the ground of non prosequitur, the 2. The notice shall contain: (i) the title of the case; (ii) the docket real test for the exercise of such power is whether, under the number; (iii) the cause of action; and (iv) the relief prayed for; and circumstances, plaintiff is chargeable with want of due diligence in 3. The notice shall likewise contain a proviso that, if no comment or failing to proceed with reasonable promptitude. In the absence of a opposition is filed within the reglementary period, the court shall hear pattern or scheme to delay the disposition of the case or a wanton the case ex parte and render such judgment as may be warranted by failure to observe the mandatory requirement of the rules on the the facts alleged in the petition and its supporting evidence. part of the plaintiff, as in the case at bar, courts should decide to (b) Where the respondent is designated as an unknown owner or dispense with rather than wield their authority to dismiss. whenever his whereabouts are unknown and cannot be (emphasis supplied) ascertained by diligent inquiry, service may, by leave of court, be We see no pattern or scheme on the part of the Republic to delay the effected upon him by publication of the notice of the petition in a disposition of the case or a wanton failure to observe the mandatory newspaper of general circulation in such places and for such time requirement of the rules. The trial court should not have so eagerly as the court may order. In the event that the cost of publication exceeds the value or amount of the property to be forfeited by ten Urgent Ex-Parte Application for the issuance of a freeze order with percent, publication shall not be required. (emphasis supplied) the CA against certain monetary instruments and properties of the WHEREFORE, the petition is hereby GRANTED. The October 27, petitioners, pursuant to Section 104 of Republic Act (RA) No. 9160, 2005 order of the Regional Trial Court of Manila, Branch 47, in Civil as amended (otherwise known as the Anti-Money Laundering Act of Case No. 03-107319 is SET ASIDE. The August 11, 2005 motion to 2001). This application was based on the February 1, 2005 letter of the dismiss of Glasgow Credit and Collection Services, Inc. is DENIED. Office of the Ombudsman to the AMLC, recommending that the latter And the complaint for forfeiture of the Republic of the Philippines, conduct an investigation on Lt. Gen. Ligot and his family for possible represented by the Anti-Money Laundering Council, is violation of RA No. 9160.5 REINSTATED. In support of this recommendation, the Ombudsman attached the The case is hereby REMANDED to the Regional Trial Court of Complaint6 it filed against the Ligots for perjury under Article 183 of Manila, Branch 47 which shall forthwith proceed with the case the Revised Penal Code, and for violations of Section 87 of RA No. pursuant to the provisions of A.M. No. 05-11-04-SC. Pending final 67138 and RA No. 3019 (Anti-Graft and Corrupt Practices Act). determination of the case, the November 23, 2005 temporary The Ombudsmans Complaint restraining order issued by this Court is hereby MAINTAINED. a. Lt. Gen. Ligot and immediate family SO ORDERED. The Ombudsmans complaint alleges that Lt. Gen. Ligot served in the Armed Forces of the Philippines (AFP) for 33 years and 2 months, G.R. No. 176944 March 6, 2013 from April 1, 1966 as a cadet until his retirement on August 17, 2004.9 RET. LT. GEN. JACINTO C. LIGOT, ERLINDA Y. LIGOT, He and Mrs. Ligot have four children, namely: Paulo Y. Ligot, Riza PAULO Y. LIGOT, RIZA Y. LIGOT, and MIGUEL Y. LIGOT, Y. Ligot, Petitioners, George Y. Ligot and Miguel Y. Ligot, who have all reached the age vs. of majority at the time of the filing of the complaint.10 REPUBLIC OF THE PHILIPPINES, represented by the ANTI- Lt. Gen. Ligot declared in his Statement of Assets, Liabilities, and Net MONEY LAUNDERING COUNCIL, Respondent. Worth (SALN) that as of December 31, 2003, he had assets in the total DECISION amount of Three Million Eight Hundred Forty-Eight Thousand and BRION, J.: Three Pesos (3,848,003.00).11 In contrast, his declared assets in his In this petition for certiorari,1 retired Lieutenant General (Lt. Gen.) 1982 SALN amounted to only One Hundred Five Thousand Pesos Jacinto C. Ligot, Erlinda Y. Ligot (Mrs. Ligot), Paulo Y. Ligot, Riza (105,000.00).12 Y. Ligot, and Miguel Y. Ligot (petitioners) claim that the Court of Aside from these declared assets, the Ombudsmans investigation Appeals (CA) acted with grave abuse of discretion amounting to lack revealed that Lt. Gen. Ligot and his family had other properties and or excess of jurisdiction when it issued its January 12, 2007 resolution2 bank accounts, not declared in his SALN, amounting to at least Fifty in CA G.R. SP No. 90238. This assailed resolution affirmed in toto the Four Million One Thousand Two Hundred Seventeen Pesos CAs earlier January 4, 2006 resolution3 extending the freeze order (54,001,217.00). These undeclared assets consisted of the following: issued against the Ligots properties for an indefinite period of time. BACKGROUND FACTS On June 27, 2005, the Republic of the Philippines (Republic), represented by the Anti-Money Laundering Council (AMLC), filed an Undeclared Assets Amount From these circumstances, the Ombudsman concluded that Yambao acted as a dummy and/or nominee of the Ligot spouses, and all the Jacinto Ligots undeclared assets P 41,185,583.5313 properties registered in Yambaos name actually belong to the Ligot Jacinto Ligots childrens assets 1,744,035.6014 family. Tuition fees and travel expenses P 2,308,047.8715 Urgent Ex-Parte Freeze Order Application Edgardo Yambaos assets P 8,763,550.0016 As a result of the Ombudsmans complaint, the Compliance and relative to the real properties Investigation staff (CIS) of the AMLC conducted a financial Total P 54,001,217.00 investigation, which revealed the existence of the Ligots various bank Bearing in mind that Lt. Gen. Ligots main source of income was his accounts with several financial institutions.20 On April 5, 2005, the salary as an officer of the AFP,17 and given his wife and childrens Ombudsman for the Military and Other Law Enforcement Officers lack of any other substantial sources of income,18 the Ombudsman issued a resolution holding that probable cause exists that Lt. Gen. declared the assets registered in Lt. Gen. Ligots name, as well as those Ligot violated Section 8, in relation to Section 11, of RA No. 6713, as in his wifes and childrens names, to be illegally obtained and well as Article 18321 of the Revised Penal Code. unexplained wealth, pursuant to the provisions of RA No. 1379 (An On May 25, 2005, the AMLC issued Resolution No. 52, Series of Act Declaring Forfeiture in Favor of the State Any Property Found to 2005, directing the Executive Director of the AMLC Secretariat to file Have Been Unlawfully Acquired by Any Public Officer or Employee an application for a freeze order against the properties of Lt. Gen. and Providing for the Proceedings Therefor). Ligot and the members of his family with the CA.22 Subsequently, on b. Edgardo Tecson Yambao June 27, 2005, the Republic filed an Urgent Ex-Parte Application with The Ombudsmans investigation also looked into Mrs. Ligots the appellate court for the issuance of a Freeze Order against the younger brother, Edgardo Tecson Yambao. The records of the Social properties of the Ligots and Yambao. Security System (SSS) revealed that Yambao had been employed in The appellate court granted the application in its July 5, 2005 the private sector from 1977 to 1994. Based on his contributions to the resolution, ruling that probable cause existed that an unlawful activity SSS, Yambao did not have a substantial salary during his employment. and/or money laundering offense had been committed by Lt. Gen. While Yambao had an investment with Mabelline Foods, Inc., the Ligot and his family, including Yambao, and that the properties sought Ombudsman noted that this company only had a net income of to be frozen are related to the unlawful activity or money laundering 5,062.96 in 2002 and 693.67 in 2003.19 Moreover, the certification offense. Accordingly, the CA issued a freeze order against the Ligots from the Bureau of Internal Revenue stated that Yambao had no record and Yambaos various bank accounts, web accounts and vehicles, of any annual Individual Income valid for a period of 20 days from the date of issuance. Tax Return filed for the calendar year 1999 up to the date of the On July 26, 2005, the Republic filed an Urgent Motion for Extension investigation. of Effectivity of Freeze Order, arguing that if the bank accounts, web Despite Yambaos lack of substantial income, the records show that accounts and vehicles were not continuously frozen, they could be he has real properties and vehicles registered in his name, amounting placed beyond the reach of law enforcement authorities and the to Eight Million Seven Hundred Sixty Three Thousand Five Hundred governments efforts to recover the proceeds of the Ligots unlawful Fifty Pesos (8,763,550.00), which he acquired from 1993 onwards. activities would be frustrated. In support of its motion, it informed the The Office of the Ombudsman further observed that in the documents CA that the Ombudsman was presently investigating the following it examined, Yambao declared three of the Ligots addresses as his cases involving the Ligots: own. Instrument, Property, or Proceeds Representing, Involving, or Relating to an Unlawful Activity or Money Laundering Offense under Republic Act No. 9160, as Amended"23 (Rule in Civil Forfeiture Case Number Complainant(s) Nature Cases) took effect. Under this rule, a freeze order could be extended OMB-P-C-05- Wilfredo Garrido Plunder for a maximum period of six months. 0523 On January 31, 2006, the Ligots filed a motion for reconsideration of OMB-P-C-05- AGIO Gina Villamor, et Perjury the CAs January 4, 2006 resolution, insisting that the freeze order 0003 al. should be lifted considering: (a) no predicate crime has been proven OMB-P-C-05- Field Investigation Violation of RA No. to support the freeze orders issuance; (b) the freeze order expired six 0184 Office 3019, Section 3(b); months after it was issued on July 5, 2005; and (c) the freeze order is Perjury under provisional in character and not intended to supplant a case for money Article 183, laundering. When the CA denied this motion in its resolution dated Revised Penal Code January 12, 2007, the Ligots filed the present petition. in relation to THE PETITIONERS ARGUMENTS Section 11 of RA Lt. Gen. Ligot argues that the appellate court committed grave abuse No. 6713; of discretion amounting to lack or excess of jurisdiction when it Forfeiture extended the freeze order issued against him and his family even Proceedings in though no predicate crime had been duly proven or established to Relation to RA No. support the allegation of money laundering. He also maintains that the 1379 freeze order issued against them ceased to be effective in view of the OMB-P-C-05-0352 David Odilao Malicious Mischief; 6-month extension limit of freeze orders provided under the Rule in Violation of Section Civil Forfeiture Cases. The CA, in extending the freeze order, not only 20, RA No. 7856 unduly deprived him and his family of their property, in violation of Finding merit in the Republics arguments, the CA granted the motion due process, but also penalized them before they had been convicted in its September 20, 2005 resolution, extending the freeze order until of the crimes they stand accused of. after all the appropriate proceedings and/or investigations have been THE REPUBLICS ARGUMENTS terminated. In opposition, the Republic claims that the CA can issue a freeze order On September 28, 2005, the Ligots filed a motion to lift the extended upon a determination that probable cause exists, showing that the freeze order, principally arguing that there was no evidence to support monetary instruments or properties subject of the freeze order are the extension of the freeze order. They further argued that the related to the unlawful activity enumerated in RA No. 9160. Contrary extension not only deprived them of their property without due to the petitioners claims, it is not necessary that a formal criminal process; it also punished them before their guilt could be proven. The charge must have been previously filed against them before the freeze appellate court subsequently denied this motion in its January 4, 2006 order can be issued. resolution. The Republic further claims that the CAs September 20, 2005 Meanwhile, on November 15, 2005, the "Rule of Procedure in Cases resolution, granting the Republics motion to extend the effectivity of of Civil Forfeiture, Asset Preservation, and Freezing of Monetary the freeze order, had already become final and executory, and could no longer be challenged. The Republic notes that the Ligots erred Rules of Court. Certiorari will issue only to correct errors of when they filed what is effectively a second motion for jurisdiction. It is not a remedy to correct errors of judgment. An error reconsideration in response to the CAs January 4, 2006 resolution, of judgment is one in which the court may commit in the exercise of instead of filing a petition for review on certiorari via Rule 45 with its jurisdiction, and which error is reversible only by an appeal. Error this Court. Under these circumstances, the assailed January 4, 2006 of jurisdiction is one where the act complained of was issued by the resolution granting the freeze order had already attained finality when court without or in excess of jurisdiction and which error is correctible the Ligots filed the present petition before this Court. only by the extraordinary writ of certiorari. Certiorari will not be THE COURTS RULING issued to cure errors by the trial court in its appreciation of the We find merit in the petition. evidence of the parties, and its conclusions anchored on the said I. Procedural aspect findings and its conclusions of law. As long as the court acts within its a. Certiorari not proper remedy to assail freeze order; exception jurisdiction, any alleged errors committed in the exercise of its Section 57 of the Rule in Civil Forfeiture Cases explicitly provides the discretion will amount to nothing more than mere errors of judgment, remedy available in cases involving freeze orders issued by the CA: correctible by an appeal or a petition for review under Rule 45 of the Section 57. Appeal. - Any party aggrieved by the decision or ruling of Rules of Court.25 (citations omitted; italics supplied) the court may appeal to the Supreme Court by petition for review on Clearly, the Ligots should have filed a petition for review on certiorari, certiorari under Rule 45 of the Rules of Court. The appeal shall not and not what is effectively a second motion for reconsideration (nor stay the enforcement of the subject decision or final order unless the an original action of certiorari after this second motion was denied), Supreme Court directs otherwise. [italics supplied] within fifteen days from receipt of the CAs January 4, 2006 From this provision, it is apparent that the petitioners should have filed resolution. To recall, this resolution denied the petitioners motion to a petition for review on certiorari, and not a petition for certiorari, to lift the extended freeze order which is effectively a motion for assail the CA resolution which extended the effectivity period of the reconsideration of the CA ruling extending the freeze order freeze order over their properties. indefinitely.26 Even assuming that a petition for certiorari is available to the However, considering the issue of due process squarely brought before petitioners, a review of their petition shows that the issues they raise us in the face of an apparent conflict between Section 10 of RA No. (i.e., existence of probable cause to support the freeze order; the 9160, as amended, and Section 53(b) of the Rule in Civil Forfeiture applicability of the 6-month limit to the extension of freeze orders Cases, this Court finds it imperative to relax the application of the embodied in the Rule of Procedure in Cases of Civil Forfeiture) rules of procedure and resolve this case on the merits in the interest of pertain to errors of judgment allegedly committed by the CA, which justice.27 fall outside the Courts limited jurisdiction when resolving certiorari b. Applicability of 6-month extension period under the Rule in Civil petitions. As held in People v. Court of Appeals:24 Forfeiture Cases In a petition for certiorari, the jurisdiction of the court is narrow in Without challenging the validity of the fixed 6-month extension scope. It is limited to resolving only errors of jurisdiction. It is not to period, the Republic nonetheless asserts that the Rule in Civil stray at will and resolve questions or issues beyond its competence Forfeiture Cases does not apply to the present case because the CA such as errors of judgment. Errors of judgment of the trial court are to had already resolved the issues regarding the extension of the freeze be resolved by the appellate court in the appeal by and of error or via order before the a petition for review on certiorari in this Court under Rule 45 of the Rule in Civil Forfeiture Cases came into effect. This reasoning fails to convince us. and academic. Notably, the Rule in Civil Forfeiture Cases came into effect on A case is considered moot and academic when it "ceases to present a December 15, 2005. Section 59 provides that it shall "apply to all justiciable controversy by virtue of supervening events, so that a pending civil forfeiture cases or petitions for freeze order" at the time declaration thereon would be of no practical use or value. Generally, of its effectivity. courts decline jurisdiction over such case or dismiss it on ground of A review of the record reveals that after the CA issued its September mootness."28 However, the moot and academic principle is not an iron- 20, 2005 resolution extending the freeze order, the Ligots filed a clad rule and is subject to four settled exceptions,29 two of which are motion to lift the extended freeze order on September 28, 2005. present in this case, namely: when the constitutional issue raised Significantly, the CA only acted upon this motion on January 4, 2006, requires the formulation of controlling principles to guide the bench, when it issued a resolution denying it. the bar, and the public, and when the case is capable of repetition, yet While denominated as a Motion to Lift Extended Freeze Order, this evading review. motion was actually a motion for reconsideration, as it sought the The apparent conflict presented by the limiting provision of the Rule reversal of the assailed CA resolution. Since the Ligots motion for in Civil Forfeiture Cases, on one hand, and the very broad judicial reconsideration was still pending resolution at the time the Rule in discretion under RA No. 9160, as amended, on the other hand, and the Civil Forfeiture Cases came into effect on December 15, 2005, the uncertainty it casts on an individuals guaranteed right to due process Rule unquestionably applies to the present case. indubitably call for the Courts exercise of its discretion to decide the c. Subsequent events case, otherwise moot and academic, under those two exceptions, for During the pendency of this case, the Republic manifested that on the future guidance of those affected and involved in the September 26, 2011, it filed a Petition for Civil Forfeiture with the implementation of RA No. 9160, as amended. Regional Trial Court (RTC) of Manila. On September 28, 2011, the Additionally, we would be giving premium to the governments RTC, Branch 22, Manila, issued a Provisional Asset Preservation failure to file an appropriate case until only after six years (despite the Order and on October 5, 2011, after due hearing, it issued an Asset clear provision of the Rule in Civil Forfeiture Cases) were we to Preservation Order. dismiss the petition because of the filing of the forfeiture case during On the other hand, the petitioners manifested that as of October 29, the pendency of the case before the Court. The sheer length of time 2012, the only case filed in connection with the frozen bank accounts and the constitutional violation involved, as will be discussed below, is Civil Case No. 0197, for forfeiture of unlawfully acquired properties strongly dissuade us from dismissing the petition on the basis of the under RA No. 1379 (entitled "Republic of the Philippines v. Lt. Gen. "moot and academic" principle. The Court should not allow the seeds Jacinto Ligot, et. al."), pending before the Sandiganbayan. of future violations to sprout by hiding under this principle even when These subsequent developments and their dates are significant in our directly confronted with the glaring issue of the respondents violation consideration of the present case, particularly the procedural aspect. of the petitioners due process right30 - an issue that the respondent Under Section 56 of the Rule in Civil Forfeiture Cases which provides itself chooses to ignore. that after the post-issuance hearing on whether to modify, lift or extend We shall discuss the substantive relevance of the subsequent the freeze order, the CA shall remand the case and transmit the records developments and their dates at length below. to the RTC for consolidation with the pending civil forfeiture II. Substantive aspect proceeding. This provision gives the impression that the filing of the a. Probable cause exists to support the issuance of a freeze order appropriate cases in courts in 2011 and 2012 rendered this case moot The legal basis for the issuance of a freeze order is Section 10 of RA No. 9160, as amended by RA No. 9194, which states: on whether the bank accounts, assets, or other monetary instruments Section 10. Freezing of Monetary Instrument or Property. The Court sought to be frozen are in any way related to any of the illegal activities of Appeals, upon application ex parte by the AMLC and after enumerated under RA No. 9160, as amended.35 Otherwise stated, determination that probable cause exists that any monetary instrument probable cause refers to the sufficiency of the relation between an or property is in any way related to an unlawful activity as defined in unlawful activity and the property or monetary instrument which is the Section focal point of Section 10 of RA No. 9160, as amended. To differentiate 3(i) hereof, may issue a freeze order which shall be effective this from any criminal case that may thereafter be instituted against immediately. The freeze order shall be for a period of twenty (20) days the same respondent, the Rule in Civil Forfeiture Cases expressly unless extended by the court. [italics supplied] provides The Ligots claim that the CA erred in extending the effectivity period SEC. 28. Precedence of proceedings. - Any criminal case relating to of the freeze order against them, given that they have not yet been an unlawful activity shall be given precedence over the prosecution of convicted of committing any of the offenses enumerated under RA any offense or violation under Republic Act No. 9160, as amended, No. 9160 that would support the AMLCs accusation of money- without prejudice to the filing of a separate petition for civil forfeiture laundering activity. or the issuance of an asset preservation order or a freeze order. Such We do not see any merit in this claim. The Ligots argument is founded civil action shall proceed independently of the criminal prosecution. on a flawed understanding of probable cause in the context of a civil [italics supplied; emphases ours] forfeiture proceeding31 or freeze order application.32 Section 10 of RA No. 9160 (allowing the extension of the freeze order) Based on Section 10 quoted above, there are only two requisites for and Section 28 (allowing a separate petition for the issuance of a freeze the issuance of a freeze order: (1) the application ex parte by the order to proceed independently) of the Rule in Civil Forfeiture Cases AMLC and (2) the determination of probable cause by the CA.33 The are only consistent with the very purpose of the freeze order, which probable cause required for the issuance of a freeze order differs from specifically is to give the government the necessary time to prepare its the probable cause required for the institution of a criminal action, and case and to file the appropriate charges without having to worry about the latter was not an issue before the CA nor is it an issue before us in the possible dissipation of the assets that are in any way related to the this case. suspected illegal activity. Thus, contrary to the Ligots claim, a freeze As defined in the law, the probable cause required for the issuance of order is not dependent on a separate criminal charge, much less does a freeze order refers to "such facts and circumstances which would it depend on a conviction. lead a reasonably discreet, prudent or cautious man to believe that an That a freeze order can be issued upon the AMLCs ex parte unlawful activity and/or a money laundering offense is about to be, is application further emphasizes the laws consideration of how critical being or has been committed and that the account or any monetary time is in these proceedings. As we previously noted in Republic v. instrument or property subject thereof sought to be frozen is in any Eugenio, Jr.,36 "to make such freeze order anteceded by a judicial way related to said unlawful activity and/or money laundering proceeding with notice to the account holder would allow for or lead offense."34 to the dissipation of such funds even before the order could be issued." In other words, in resolving the issue of whether probable cause exists, It should be noted that the existence of an unlawful activity that would the CAs statutorily-guided determinations focus is not on the justify the issuance and the extension of the freeze order has likewise probable commission of an unlawful activity (or money laundering) been established in this case. that the Office of the Ombudsman has already determined to exist, but From the ex parte application and the Ombudsmans complaint, we glean that Lt. Gen. Ligot himself admitted that his income came from property and thwarting the States effort in building its case and his salary as an officer of the AFP. Yet, the Ombudsmans eventually filing civil forfeiture proceedings and/or prosecuting the investigation revealed that the bank accounts, investments and owner. properties in the name of Lt. Gen. Ligot and his family amount to more Our examination of the Anti-Money Laundering Act of 2001, as than Fifty-Four Million Pesos (54,000,000.00). Since these assets are amended, from the point of view of the freeze order that it authorizes, grossly disproportionate to Lt. Gen. Ligots income, as well as the lack shows that the law is silent on the maximum period of time that the of any evidence that the Ligots have other sources of income, the CA freeze order can be extended by the CA. The final sentence of Section properly found that probable cause exists that these funds have been 10 of the Anti-Money Laundering Act of 2001 provides, "the freeze illegally acquired. On the other hand, the AMLCs verified allegations order shall be for a period of twenty (20) days unless extended by the in its ex parte application, based on the complaint filed by the court." In contrast, Section 55 of the Rule in Civil Forfeiture Cases Ombudsman against Ligot and his family for violations of the Anti- qualifies the grant of extension "for a period not exceeding six Graft and Corrupt Practices Act, clearly sustain the CAs finding that months" "for good cause" shown. probable cause exists that the monetary instruments subject of the We observe on this point that nothing in the law grants the owner of freeze order are related to, or are the product of, an unlawful activity. the "frozen" property any substantive right to demand that the freeze b. A freeze order, however, cannot be issued for an indefinite period order be lifted, except by implication, i.e., if he can show that no Assuming that the freeze order is substantively in legal order, the probable cause exists or if the 20-day period has already lapsed Ligots now assert that its effectiveness ceased after January 25, 2006 without any extension being requested from and granted by the CA. (or six months after July 25, 2005 when the original freeze order first Notably, the Senate deliberations on RA No. 9160 even suggest the expired), pursuant to Section 53(b) of the Rule in Civil Forfeiture intent on the part of our legislators to make the freeze order effective Cases (A.M. No. 05-11-04-SC). This section states: until the termination of the case, when necessary.40 Section 53. Freeze order. The silence of the law, however, does not in any way affect the Courts xxxx own power under the Constitution to "promulgate rules concerning the (b) Extension. On motion of the petitioner filed before the expiration protection and enforcement of constitutional rights xxx and procedure of twenty days from issuance of a freeze order, the court may for good in all courts."41 Pursuant to this power, the Court issued A.M. No. 05- cause extend its effectivity for a period not exceeding six months. 11-04-SC, limiting the effectivity of an extended freeze order to six [italics supplied; emphasis ours] months to otherwise leave the grant of the extension to the sole We find merit in this claim. discretion of the CA, which may extend a freeze order indefinitely or A freeze order is an extraordinary and interim relief37 issued by the to an unreasonable amount of time carries serious implications on CA to prevent the dissipation, removal, or disposal of properties that an individuals substantive right to due process.42 This right demands are suspected to be the proceeds of, or related to, unlawful activities that no person be denied his right to property or be subjected to any as defined in Section 3(i) of RA No. 9160, as amended.38 The primary governmental action that amounts to a denial.43 The right to due objective of a freeze order is to temporarily preserve monetary process, under these terms, requires a limitation or at least an inquiry instruments or property that are in any way related to an unlawful on whether sufficient justification for the governmental action.44 activity or money laundering, by preventing the owner from utilizing In this case, the law has left to the CA the authority to resolve the issue them during the duration of the freeze order.39 The relief is pre- of extending the freeze order it issued. Without doubt, the CA emptive in character, meant to prevent the owner from disposing his followed the law to the letter, but it did so by avoiding the fundamental laws command under its Section 1, Article III. This command, the the remedy is an adjunct of or an incident to the main action of asking Court under its constitutional rule-making power sought to for the issuance of an asset preservation order from the court where implement through Section 53(b) of the Rule in Civil Forfeiture Cases the petition is filed is precisely available. For emphasis, a freeze order which the CA erroneously assumed does not apply. is both a preservatory and preemptive remedy. The Ligots case perfectly illustrates the inequity that would result To stress, the evils caused by the laws silence on the freeze orders from giving the CA the power to extend freeze orders without period of effectivity46 compelled this Court to issue the Rule in Civil limitations. As narrated above, the CA, via its September 20, 2005 Forfeiture Cases. Specifically, the Court fixed the maximum resolution, extended the freeze order over the Ligots various bank allowable extension on the freeze orders effectivity at six months. In accounts and personal properties "until after all the appropriate doing so, the Court sought to balance the States interest in going after proceedings and/or investigations being conducted are terminated."45 suspected money launderers with an individuals constitutionally- By its very terms, the CA resolution effectively bars the Ligots from protected right not to be deprived of his property without due process using any of the property covered by the freeze order until after an of law, as well as to be presumed innocent until proven guilty. eventual civil forfeiture proceeding is concluded in their favor and To our mind, the six-month extension period is ordinarily sufficient after they shall have been adjudged not guilty of the crimes they are for the government to act against the suspected money launderer and suspected of committing. These periods of extension are way beyond to file the appropriate forfeiture case against him, and is a reasonable the intent and purposes of a freeze order which is intended solely as period as well that recognizes the property owners right to due an interim relief; the civil and criminal trial courts can very well process. In this case, the period of inaction of six years, under the handle the disposition of properties related to a forfeiture case or to a circumstances, already far exceeded what is reasonable. crime charged and need not rely on the interim relief that the appellate We are not unmindful that the State itself is entitled to due court issued as a guarantee against loss of property while the process.1wphi1 As a due process concern, we do not say that the six- government is preparing its full case. The term of the CAs extension, month period is an inflexible rule that would result in the automatic too, borders on inflicting a punishment to the Ligots, in violation of lifting of the freeze order upon its expiration in all instances. An their constitutionally protected right to be presumed innocent, because inflexible rule may lend itself to abuse - to the prejudice of the States the unreasonable denial of their property comes before final legitimate interests - where the property owner would simply file conviction. numerous suits, questioning the freeze order during the six-month In more concrete terms, the freeze order over the Ligots properties extension period, to prevent the timely filing of a money laundering has been in effect since 2005, while the civil forfeiture case per the or civil forfeiture case within this period. With the limited resources Republics manifestation was filed only in 2011 and the forfeiture that our government prosecutors and investigators have at their case under RA No. 1379 per the petitioners manifestation was disposal, the end-result of an inflexible rule is not difficult to see. filed only in 2012. This means that the Ligots have not been able to We observe, too, that the factual complexities and intricacies of the access the properties subject of the freeze order for six years or so case and other matters that may be beyond the governments simply on the basis of the existence of probable cause to issue a freeze prosecutory agencies control may contribute to their inability to file order, which was intended mainly as an interim preemptive remedy. the corresponding civil forfeiture case before the lapse of six months. As correctly noted by the petitioners, a freeze order is meant to have a Given these considerations, it is only proper to strike a balance temporary effect; it was never intended to supplant or replace the between the individuals right to due process and the governments actual forfeiture cases where the provisional remedy - which means, interest in curbing criminality, particularly money laundering and the predicate crimes underlying it. enshrined in our Constitution. So long as we continue to be guided by Thus, as a rule, the effectivity of a freeze order may be extended by the Constitution and the rule of law, the Court cannot allow the the CA for a period not exceeding six months. Before or upon the lapse justification of governmental action on the basis of the noblest of this period, ideally, the Republic should have already filed a case objectives alone. As so oft-repeated, the end does not justify the for civil forfeiture against the property owner with the proper courts means. Of primordial importance is that the means employed must be and accordingly secure an asset preservation order or it should have in keeping with the Constitution. Mere expediency will certainly not filed the necessary information.47 Otherwise, the property owner excuse constitutional shortcuts.48 should already be able to fully enjoy his property without any legal WHEREFORE, premises considered, we GRANT the petition and process affecting it. However, should it become completely necessary LIFT the freeze order issued by the Court of Appeals in CA G.R. SP for the Republic to further extend the duration of the freeze order, it No. 90238. This lifting is without prejudice to, and shall not affect, the should file the necessary motion before the expiration of the six-month preservation orders that the lower courts have ordered on the same period and explain the reason or reasons for its failure to file an properties in the cases pending before them. Pursuant to Section 56 of appropriate case and justify the period of extension sought. The freeze A.M. No. 05-11-04-SC, the Court of Appeals is hereby ordered to order should remain effective prior to the resolution by the CA, which remand the case and to transmit the records to the Regional Trial Court is hereby directed to resolve this kind of motion for extension with of Manila, Branch 22, where the civil forfeiture proceeding is pending, reasonable dispatch. for consolidation therewith as may be appropriate. In the present case, we note that the Republic has not offered any SO ORDERED. explanation why it took six years (from the time it secured a freeze order) before a civil forfeiture case was filed in court, despite the clear G.R. No. L-24821 October 16, 1970 tenor of the Rule in Civil Forfeiture Cases allowing the extension of a BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellee, freeze order for only a period of six months. All the Republic could vs. proffer is its temporal argument on the inapplicability of the Rule in DE RENY FABRIC INDUSTRIES, INC., AURORA T. TUYO Civil Forfeiture Cases; in effect, it glossed over the squarely-raised and AURORA CARCERENY alias AURORA C. GONZALES, issue of due process. Under these circumstances, we cannot but defendants-appellants. conclude that the continued extension of the freeze order beyond the Aviado and Aranda for plaintiff-appellee. six-month period violated the Ligots right to due process; thus, the S. Emiliano Calma for defendants-appellants. CA decision should be reversed. We clarify that our conclusion applies only to the CA ruling and does CASTRO, J.:. not affect the proceedings and whatever order or resolution the RTC This is an appeal from the decision of the Court of First Instance of may have issued in the presently pending civil cases for forfeiture. We Manila ordering the defendants-appellants to pay to the Bank of the make this clarification to ensure that we can now fully conclude and Philippine Islands (hereinafter referred to as the Bank), jointly and terminate this CA aspect of the case. severally, the value of the credit it extended to them in several letters As our last point, we commend the fervor of the CA in assisting the of credit which the Bank opened at the behest of the defendants States efforts to prosecute corrupt public officials. We remind the appellants to finance their importation of dyestuffs from the United appellate court though that the governments anti-corruption drive States, which however turned out to be mere colored chalk upon cannot be done at the expense of cherished fundamental rights arrival and inspection thereof at the port of Manila. The record shows that on four (4) different occasions in 1961, the De drafts up to the amounts appearing in the L/Cs as above indicated. Reny Fabric Industries, Inc., a Philippine corporation through its co- These correspondent banks then debited the account of the Bank of defendants-appellants, Aurora Carcereny alias Aurora C. Gonzales, the Philippine Islands with them up to the full value of the drafts and Aurora T. Tuyo, president and secretary, respectively of the presented by the J.B. Distributing Company, plus commission corporation, applied to the Bank for four (4) irrevocable commercial thereon, and, thereafter, endorsed and forwarded all documents to the letters of credit to cover the purchase by the corporation of goods Bank of the Philippine Islands. described in the covering L/C applications as "dyestuffs of various In the meantime, as each shipment (covered by the above-mentioned colors" from its American supplier, the J.B. Distributing Company. letters of credit) arrived in the Philippines, the De Reny Fabric All the applications of the corporation were approved, and the Industries, Inc. made partial payments to the Bank amounting, in the corresponding Commercial L/C Agreements were executed pursuant aggregate, to P90,000. Further payments were, however, subsequently to banking procedures. Under these agreements, the aforementioned discontinued by the corporation when it became established, as a result officers of the corporation bound themselves personally as joint and of a chemical test conducted by the National Science Development solidary debtors with the corporation. Pursuant to banking regulations Board, that the goods that arrived in Manila were colored chalks then in force, the corporation delivered to the Bank peso marginal instead of dyestuffs. deposits as each letter of credit was opened. The corporation also refused to take possession of these goods, and The dates and amounts of the L/Cs applied for and approved as well for this reason, the Bank caused them to be deposited with a bonded as the peso marginal deposits made were, respectively, as follows:. warehouse paying therefor the amount of P12,609.64 up to the filing Date Application Amount Marginal of its complaint with the court below on December 10, 1962. & L/C No. Deposit On October 24, 1963 the lower court rendered its decision ordering Oct. 10, 1961 61/1413 $57,658.38 P43,407.33 the corporation and its co-defendants (the herein appellants) to pay to Oct. 23, 1961 61/1483 $25,867.34 19,473.64 the plaintiff-appellee the amount of P291,807.46, with interest Oct. 30, 1961 61/1495 $19,408.39 14,610.88 thereon, as provided for in the L/C Agreements, at the rate of 7% per Nov. 10, 1961 61/1564 $26,687.64 20,090.90 annum from October 31, 1962 until fully paid, plus costs. TOTAL .... $129,621.75 P97,582.75 It is the submission of the defendants-appellants that it was the duty By virtue of the foregoing transactions, the Bank issued irrevocable of the foreign correspondent banks of the Bank of the Philippine commercial letters of credit addressed to its correspondent banks in Islands to take the necessary precaution to insure that the goods the United States, with uniform instructions for them to notify the shipped under the covering L/Cs conformed with the item appearing beneficiary thereof, the J.B. Distributing Company, that they have therein, and, that the foregoing banks having failed to perform this been authorized to negotiate the latter's sight drafts up to the amounts duty, no claim for recoupment against the defendants-appellants, mentioned the respectively, if accompanied, upon presentation, by a arising from the losses incurred for the non-delivery or defective full set of negotiable clean "on board" ocean bills of lading covering delivery of the articles ordered, could accrue. the merchandise appearing in the LCs that is, dyestuffs of various We can appreciate the sweep of the appellants' argument, but we also colors. Consequently, the J.B. Distributing Company drew upon, find that it is nestled hopelessly inside a salient where the valid presented to and negotiated with these banks, its sight drafts covering contract between the parties and the internationally accepted customs the amounts of the merchandise ostensibly being exported by it, of the banking trade must prevail.1 together with clean bills of lading, and collected the full value of the Under the terms of their Commercial Letter of Credit Agreements with the Bank, the appellants agreed that the Bank shall not be responsible by the Bank in order to engage in international business. for the "existence, character, quality, quantity, conditions, packing, ACCORDINGLY, the judgment a quo is affirmed, at defendants- value, or delivery of the property purporting to be represented by appellants' cost. This is without prejudice to the Bank, in proper documents; for any difference in character, quality, quantity, proceedings in the court below in this same case proving and being condition, or value of the property from that expressed in documents," reimbursed additional expenses, if any, it has incurred by virtue of the or for "partial or incomplete shipment, or failure or omission to ship continued storage of the goods in question up to the time this decision any or all of the property referred to in the Credit," as well as "for any becomes final and executory. deviation from instructions, delay, default or fraud by the shipper or anyone else in connection with the property the shippers or vendors G.R. No. 94209 April 30, 1991 and ourselves [purchasers] or any of us." Having agreed to these terms, FEATI BANK & TRUST COMPANY (now CITYTRUST the appellants have, therefore, no recourse but to comply with their BANKING CORPORATION), petitioner, covenant. 2 vs. But even without the stipulation recited above, the appellants cannot THE COURT OF APPEALS, and BERNARDO E. VILLALUZ, shift the burden of loss to the Bank on account of the violation by their respondents. vendor of its prestation. Pelaez, Adriano & Gregorio for petitioner.Ezequiel S. Consulta for It was uncontrovertibly proven by the Bank during the trial below that private respondent. banks, in providing financing in international business transactions such as those entered into by the appellants, do not deal with the GUTIERREZ, JR., J.: property to be exported or shipped to the importer, but deal only with This is a petition for review seeking the reversal of the decision of the documents. The Bank introduced in evidence a provision contained in Court of Appeals dated June 29, 1990 which affirmed the decision of the "Uniform Customs and Practices for Commercial Documentary the Regional Trial Court of Rizal dated October 20, 1986 ordering the Credits Fixed for the Thirteenth Congress of International Chamber of defendants Christiansen and the petitioner, to pay various sums to Commerce," to which the Philippines is a signatory nation. Article 10 respondent Villaluz, jointly and severally. thereof provides: . The facts of the case are as follows: In documentary credit operations, all parties concerned deal in On June 3, 1971, Bernardo E. Villaluz agreed to sell to the then documents and not in goods. Payment, negotiation or acceptance defendant Axel Christiansen 2,000 cubic meters of lauan logs at against documents in accordance with the terms and conditions of a $27.00 per cubic meter FOB. credit by a Bank authorized to do so binds the party giving the After inspecting the logs, Christiansen issued purchase order No. authorization to take up the documents and reimburse the Bank 76171. making the payment, negotiation or acceptance. On the arrangements made and upon the instructions of the consignee, The existence of a custom in international banking and financing Hanmi Trade Development, Ltd., de Santa Ana, California, the circles negating any duty on the part of a bank to verify whether what Security Pacific National Bank of Los Angeles, California issued has been described in letters of credits or drafts or shipping documents Irrevocable Letter of Credit No. IC-46268 available at sight in favor actually tallies with what was loaded aboard ship, having been of Villaluz for the sum of $54,000.00, the total purchase price of the positively proven as a fact, the appellants are bound by this established lauan logs. usage. They were, after all, the ones who tapped the facilities afforded 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 and representatives Rogelio Cantuba and Jesus Tadena of the Bureau enclosed letter of credit to the beneficiary." (Records, Vol. I, p. 11) of Forestry (Records, Vol. I, pp. 16-17) all of whom certified to the The letter of credit further provided that the draft to be drawn is on good condition and exportability of the logs. Security Pacific National Bank and that it be accompanied by the After the loading of the logs was completed, the Chief Mate, Shao Shu following documents: Wang issued a mate receipt of the cargo which stated the same are in 1. Signed Commercial Invoice in four copies showing the number of good condition (Records, Vol. I, p. 363). However, Christiansen the purchase order and certifying that refused to issue the certification as required in paragraph 4 of the letter a. All terms and conditions of the purchase order have been complied of credit, despite several requests made by the private respondent. with and that all logs are fresh cut and quality equal to or better than Because of the absence of the certification by Christiansen, the Feati that described in H.A. Christiansen's telex #201 of May 1, 1970, and Bank and Trust Company refused to advance the payment on the letter that all logs have been marked "BEV-EX." of credit. b. One complete set of documents, including 1/3 original bills of The letter of credit lapsed on June 30, 1971, (extended, however up to lading was airmailed to Consignee and Parties to be advised by Hans- July 31, 1971) without the private respondent receiving any Axel Christiansen, Ship and Merchandise Broker. certification from Christiansen. c. One set of non-negotiable documents was airmailed to Han Mi The persistent refusal of Christiansen to issue the certification Trade Development Company and one set to Consignee and Parties to prompted the private respondent to bring the matter before the Central be advised by Hans-Axel Christiansen, Ship and Merchandise Broker. Bank. In a memorandum dated August 16, 1971, the Central Bank 2. Tally sheets in quadruplicate. ruled that: 3. 2/3 Original Clean on Board Ocean Bills of Lading with Consignee . . . pursuant to the Monetary Board Resolution No. 1230 dated August and Parties to be advised by Hans Axel Christiansen, showing Freight 3, 1971, in all log exports, the certification of the lumber inspectors of Prepaid and marked Notify: the Bureau of Forestry . . . shall be considered final for purposes of Han Mi Trade Development Company, Ltd., Santa Ana, California. negotiating documents. Any provision in any letter of credit covering Letter of Credit No. 46268 dated June 7, 1971 log exports requiring certification of buyer's agent or representative Han Mi Trade Development Company, Ltd., P.O. Box 10480, Santa that said logs have been approved for shipment as a condition Ana, California 92711 and Han Mi Trade Development Company, precedent to negotiation of shipping documents shall not be allowed. Ltd., Seoul, Korea. (Records, Vol. I, p. 367) 4. Certification from Han-Axel Christiansen, Ship and Merchandise Meanwhile, the logs arrived at Inchon, Korea and were received by Broker, stating that logs have been approved prior to shipment in the consignee, Hanmi Trade Development Company, to whom accordance with terms and conditions of corresponding purchase Christiansen sold the logs for the amount of $37.50 per cubic meter, Order. (Record, Vol. 1 pp. 11-12) for a net profit of $10 per cubic meter. Hanmi Trade Development Also incorporated by reference in the letter of credit is the Uniform Company, on the other hand sold the logs to Taisung Lumber Customs and Practice for Documentary Credits (1962 Revision). Company at Inchon, Korea. (Rollo, p. 39) The logs were thereafter loaded on the vessel "Zenlin Glory" which Since the demands by the private respondent for Christiansen to was chartered by Christiansen. Before its loading, the logs were execute the certification proved futile, Villaluz, on September 1, 1971, inspected by custom inspectors Nelo Laurente, Alejandro Cabiao, instituted an action for mandamus and specific performance against Estanislao Edera from the Bureau of Customs (Records, Vol. I, p. 124) Christiansen and the Feati Bank and Trust Company (now Citytrust) before the then Court of First Instance of Rizal. The petitioner was wrongful act, i.e., its refusal to negotiate the letter of credit in the impleaded as defendant before the lower court only to afford complete absence of CHRISTIANSEN's certification (in spite of the Central relief should the court a quo order Christiansen to execute the required Bank's ruling that the requirement was illegal), prevented payment to certification. the plaintiff. The said letter of credit, as may be seen on its face, is The complaint prayed for the following: irrevocable and the issuing bank, the Security Pacific National Bank 1. Christiansen be ordered to issue the certification required of him in Los Angeles, California, undertook by its terms that the same shall under the Letter of Credit; be honored upon its presentment. On the other hand, the notifying 2. Upon issuance of such certification, or, if the court should find it bank, the defendant Feati Bank and Trust Company, by accepting the unnecessary, FEATI BANK be ordered to accept negotiation of the instructions from the issuing bank, itself assumed the very same Letter of Credit and make payment thereon to Villaluz; undertaking as the issuing bank under the terms of the letter of credit. 3. Order Christiansen to pay damages to the plaintiff. (Rollo, p. 39) xxx xxx xxx On or about 1979, while the case was still pending trial, Christiansen The Court likewise agrees with the plaintiff that the defendant BANK left the Philippines without informing the Court and his counsel. may also be held liable under the principles and laws on both trust and Hence, Villaluz, filed an amended complaint to make the petitioner estoppel. When the defendant BANK accepted its role as the notifying solidarily liable with Christiansen. and negotiating bank for and in behalf of the issuing bank, it in effect The trial court, in its order dated August 29, 1979, admitted the accepted a trust reposed on it, and became a trustee in relation to amended complaint. plaintiff as the beneficiary of the letter of credit. As trustee, it was then After trial, the lower court found: duty bound to protect the interests of the plaintiff under the terms of The liability of the defendant CHRISTIANSEN is beyond dispute, and the letter of credit, and must be held liable for damages and loss the plaintiffs right to demand payment is absolute. Defendant resulting to the plaintiff from its failure to perform that obligation. CHRISTIANSEN having accepted delivery of the logs by having Furthermore, when the defendant BANK assumed the role of a them loaded in his chartered vessel the "Zenlin Glory" and shipping notifying and negotiating BANK it in effect represented to the plaintiff them to the consignee, his buyer Han Mi Trade in Inchon, South Korea that, if the plaintiff complied with the terms and conditions of the letter (Art. 1585, Civil Code), his obligation to pay the purchase order had of credit and presents the same to the BANK together with the clearly arisen and the plaintiff may sue and recover the price of the documents mentioned therein the said BANK will pay the plaintiff the goods (Art. 1595, Id). amount of the letter of credit. The Court is convinced that it was upon The Court believes that the defendant CHRISTIANSEN acted in bad the strength of this letter of credit and this implied representation of faith and deceit and with intent to defraud the plaintiff, reflected in and the defendant BANK that the plaintiff delivered the logs to defendant aggravated by, not only his refusal to issue the certification that would CHRISTIANSEN, considering that the issuing bank is a foreign bank have enabled without question the plaintiff to negotiate the letter of with whom plaintiff had no business connections and credit, but his accusing the plaintiff in his answer of fraud, CHRISTIANSEN had not offered any other Security for the payment intimidation, violence and deceit. These accusations said defendant of the logs. Defendant BANK cannot now be allowed to deny its did not attempt to prove, as in fact he left the country without even commitment and liability under the letter of credit: notifying his own lawyer. It was to the Court's mind a pure swindle. A holder of a promissory note given because of gambling who The defendant Feati Bank and Trust Company, on the other hand, must indorses the same to an innocent holder for value and who assures said be held liable together with his (sic) co-defendant for having, by its 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 The trial court ordered the immediate execution of its judgment upon to pay its value. (Rodriguez v. Martinez, 5 Phil. 67). the private respondent's filing of a bond. The defendant BANK, in insisting upon the certification of defendant The petitioner then filed a motion for reconsideration and a motion to CHRISTIANSEN as a condition precedent to negotiating the letter of suspend the implementation of the writ of execution. Both motions credit, likewise in the Court's opinion acted in bad faith, not only were, however, denied. Thus, petitioner filed before the Court of because of the clear declaration of the Central Bank that such a Appeals a petition for certiorari and prohibition with preliminary requirement was illegal, but because the BANK, with all the legal injunction to enjoin the immediate execution of the judgment. counsel available to it must have known that the condition was void The Court of Appeals in a decision dated April 9, 1987 granted the since it depended on the sole will of the debtor, the defendant petition and nullified the order of execution, the dispositive portion of CHRISTIANSEN. (Art. 1182, Civil Code) (Rollo, pp. 29-31) the decision states: On the basis of the foregoing the trial court on October 20, 1986, ruled WHEREFORE, the petition for certiorari is granted. Respondent in favor of the private respondent. The dispositive portion of its Judge's order of execution dated December 29, 1986, as well as his decision reads: order dated January 14, 1987 denying the petitioner's urgent motion to WHEREFORE, judgment is hereby rendered for the plaintiff, ordering suspend the writ of execution against its properties are hereby annulled the defendants to pay the plaintiff, jointly and severally, the following and set aside insofar as they are sought to be enforced and sums: implemented against the petitioner Feati Bank & Trust Company, now a) $54,000.00 (US), or its peso equivalent at the prevailing rate as of Citytrust Banking Corporation, during the pendency of its appeal from the time payment is actually made, representing the purchase price of the adverse decision in Civil Case No. 15121. However, the execution the logs; of the same decision against defendant Axel Christiansen did not b) P17,340.00, representing government fees and charges paid by appeal said decision may proceed unimpeded. The Sheriff s levy on plaintiff in connection with the logs shipment in question; the petitioner's properties, and the notice of sale dated January 13, c) P10,000.00 as temperate damages (for trips made to Bacolod and 1987 (Annex M), are hereby annulled and set aside. Rollo p. 44) Korea). A motion for reconsideration was thereafter filed by the private All three foregoing sums shall be with interest thereon at 12% per respondent. The Court of Appeals, in a resolution dated June 29, 1987 annum from September 1, 1971, when the complaint was filed, until denied the motion for reconsideration. fully paid: In the meantime, the appeal filed by the petitioner before the Court of d) P70,000.00 as moral damages; Appeals was given due course. In its decision dated June 29, 1990, the e) P30,000.00 as exemplary damages; and Court of Appeals affirmed the decision of the lower court dated f) P30,000.00 as attorney's fees and litigation expense. October 20, 1986 and ruled that: (Rollo, p. 28) 1. Feati Bank admitted in the "special and negative defenses" section The petitioner received a copy of the decision on November 3, 1986. of its answer that it was the bank to negotiate the letter of credit issued Two days thereafter, or on November 5, 1986, it filed a notice of by the Security Pacific National Bank of Los Angeles, California. appeal. (Record, pp. 156, 157). Feati Bank did notify Villaluz of such letter of On November 10, 1986, the private respondent filed a motion for the credit. In fact, as such negotiating bank, even before the letter of credit immediate execution of the judgment on the ground that the appeal of was presented for payment, Feati Bank had already made an advance the petitioner was frivolous and dilatory. payment of P75,000.00 to Villaluz in anticipation of such presentment. As the negotiating bank, Feati Bank, by notifying be taken as a preemptive judgment on the merits of the present case Villaluz of the letter of credit in behalf of the issuing bank (Security on appeal. Pacific), confirmed such letter of credit and made the same also its 4. The original action was for "Mandamus and/or specific own obligation. This ruling finds support in the authority cited by performance." Feati Bank may not be a party to the transaction Villaluz: between Christiansen and Security Pacific National Bank on the one A confirmed letter of credit is one in which the notifying bank gives hand, and Villaluz on the other hand; still, being guarantor or agent of its assurance also that the opening bank's obligation will be performed. Christiansen and/or Security Pacific National Bank which had directly In such a case, the notifying bank will not simply transmit but will dealt with Villaluz, Feati Bank may be sued properly on specific confirm the opening bank's obligation by making it also its own performance as a procedural means by which the relief sought by undertaking, or commitment, or guaranty or obligation. (Ward & Villaluz may be entertained. (Rollo, pp. 32-33) Hatfield, 28-29, cited in Agbayani, Commercial Laws, 1978 edition, The dispositive portion of the decision of the Court of Appeals reads: p. 77). WHEREFORE, the decision appealed from is affirmed; and Feati Bank argues further that it would be considered as the accordingly, the appeal is hereby dismissed. Costs against the negotiating bank only upon negotiation of the letter of credit. This petitioner. (Rollo, p. 33) stance is untenable. Assurance, commitments or guaranties supposed Hence, this petition for review. to be made by notifying banks to the beneficiary of a letter of credit, The petitioner interposes the following reasons for the allowance of as defined above, can be relevant or meaningful only with respect to a the petition. future transaction, that is, negotiation. Hence, even before actual First Reason negotiation, the notifying bank, by the mere act of notifying the THE RESPONDENT COURT ERRONEOUSLY CONCLUDED beneficiary of the letter of credit, assumes as of that moment the FROM THE ESTABLISHED FACTS AND INDEED, WENT obligation of the issuing bank. AGAINST THE EVIDENCE AND DECISION OF THIS 2. Since Feati Bank acted as guarantor of the issuing bank, and in HONORABLE COURT, THAT PETITIONER BANK IS LIABLE effect also of the latter's principal or client, i.e. Hans Axel- ON THE LETTER OF CREDIT DESPITE PRIVATE Christiansen. (sic) Such being the case, when Christiansen refused to RESPONDENTS NON-COMPLIANCE WITH THE TERMS issue the certification, it was as though refusal was made by Feati THEREOF, Bank itself. Feati Bank should have taken steps to secure the Second Reason certification from Christiansen; and, if the latter should still refuse to THE RESPONDENT COURT COMMITTED AN ERROR OF LAW comply, to hale him to court. In short, Feati Bank should have honored WHEN IT HELD THAT PETITIONER BANK, BY NOTIFYING Villaluz's demand for payment of his logs by virtue of the irrevocable PRIVATE RESPONDENT OF THE LETTER OF CREDIT, letter of credit issued in Villaluz's favor and guaranteed by Feati Bank. CONFIRMED SUCH CREDIT AND MADE THE SAME ALSO ITS 3. The decision promulgated by this Court in CA-G.R. Sp No. 11051, OBLIGATION AS GUARANTOR OF THE ISSUING BANK. which contained the statement "Since Villaluz" draft was not drawn Third Reason strictly in compliance with the terms of the letter of credit, Feati Bank's THE RESPONDENT COURT LIKEWISE COMMITTED AN refusal to negotiate it was justified," did not dispose of this question ERROR OF LAW WHEN IT AFFIRMED THE TRIAL COURT'S on the merits. In that case, the question involved was jurisdiction or DECISION. (Rollo, p. 12) discretion, and not judgment. The quoted pronouncement should not 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 U.C.P. in cases before us. by the beneficiary with the terms thereof? In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that The petition is impressed with merit. the observance of the U.C.P. in this jurisdiction is justified by Article It is a settled rule in commercial transactions involving letters of credit 2 of the Code of Commerce. Article 2 of the Code of Commerce that the documents tendered must strictly conform to the terms of the enunciates that in the absence of any particular provision in the Code letter of credit. The tender of documents by the beneficiary (seller) of Commerce, commercial transactions shall be governed by the must include all documents required by the letter. A correspondent usages and customs generally observed. bank which departs from what has been stipulated under the letter of There being no specific provision which governs the legal credit, as when it accepts a faulty tender, acts on its own risks and it complexities arising from transactions involving letters of credit not may not thereafter be able to recover from the buyer or the issuing only between the banks themselves but also between banks and seller bank, as the case may be, the money thus paid to the beneficiary Thus and/or buyer, the applicability of the U.C.P. is undeniable. the rule of strict compliance. The pertinent provisions of the U.C.P. (1962 Revision) are: In the United States, commercial transactions involving letters of Article 3. credit are governed by the rule of strict compliance. In the Philippines, An irrevocable credit is a definite undertaking on the part of the the same holds true. The same rule must also be followed. issuing bank and constitutes the engagement of that bank to the The case of Anglo-South America Trust Co. v. Uhe et al. (184 N.E. beneficiary and bona fide holders of drafts drawn and/or documents 741 [1933]) expounded clearly on the rule of strict compliance. presented thereunder, that the provisions for payment, acceptance or We have heretofore held that these letters of credit are to be strictly negotiation contained in the credit will be duly fulfilled, provided that complied with which documents, and shipping documents must be all the terms and conditions of the credit are complied with. followed as stated in the letter. There is no discretion in the bank or An irrevocable credit may be advised to a beneficiary through another trust company to waive any requirements. The terms of the letter bank (the advising bank) without engagement on the part of that bank, constitutes an agreement between the purchaser and the bank. (p. 743) but when an issuing bank authorizes or requests another bank to Although in some American decisions, banks are granted a little confirm its irrevocable credit and the latter does so, such confirmation discretion to accept a faulty tender as when the other documents may constitutes a definite undertaking of the confirming bank. . . . be considered immaterial or superfluous, this theory could lead to Article 7. dangerous precedents. Since a bank deals only with documents, it is Banks must examine all documents with reasonable care to ascertain not in a position to determine whether or not the documents required that they appear on their face to be in accordance with the terms and by the letter of credit are material or superfluous. The mere fact that conditions of the credit," the document was specified therein readily means that the document Article 8. is of vital importance to the buyer. Payment, acceptance or negotiation against documents which appear Moreover, the incorporation of the Uniform Customs and Practice for on their face to be in accordance with the terms and conditions of a Documentary Credit (U.C.P. for short) in the letter of credit resulted credit by a bank authorized to do so, binds the party giving the in the applicability of the said rules in the governance of the relations authorization to take up documents and reimburse the bank which has between the parties. effected the payment, acceptance or negotiation. (Emphasis Supplied) And even if the U.C.P. was not incorporated in the letter of credit, we Under the foregoing provisions of the U.C.P., the bank may only have already ruled in the affirmative as to the applicability of the negotiate, accept or pay, if the documents tendered to it are on their face in accordance with the terms and conditions of the documentary assumed by a correspondent bank are classified according to the credit. And since a correspondent bank, like the petitioner, principally obligations taken up by it. The correspondent bank may be called a deals only with documents, the absence of any document required in notifying bank, a negotiating bank, or a confirming bank. the documentary credit justifies the refusal by the correspondent bank In case of a notifying bank, the correspondent bank assumes no to negotiate, accept or pay the beneficiary, as it is not its obligation to liability except to notify and/or transmit to the beneficiary the look beyond the documents. It merely has to rely on the completeness existence of the letter of credit. (Kronman and Co., Inc. v. Public of the documents tendered by the beneficiary. National Bank of New York, 218 N.Y.S. 616 [1926]; Shaterian, In regard to the ruling of the lower court and affirmed by the Court of Export-Import Banking, p. 292, cited in Agbayani, Commercial Laws Appeals that the petitioner is not a notifying bank but a confirming of the Philippines, Vol. 1, p. 76). A negotiating bank, on the other bank, we find the same erroneous. hand, is a correspondent bank which buys or discounts a draft under The trial court wrongly mixed up the meaning of an irrevocable credit the letter of credit. Its liability is dependent upon the stage of the with that of a confirmed credit. In its decision, the trial court ruled that negotiation. If before negotiation, it has no liability with respect to the the petitioner, in accepting the obligation to notify the respondent that seller but after negotiation, a contractual relationship will then prevail the irrevocable credit has been transmitted to the petitioner on behalf between the negotiating bank and the seller. (Scanlon v. First National of the private respondent, has confirmed the letter. Bank of Mexico, 162 N.E. 567 [1928]; Shaterian, Export-Import The trial court appears to have overlooked the fact that an irrevocable Banking, p. 293, cited in Agbayani, Commercial Laws of the credit is not synonymous with a confirmed credit. These types of Philippines, Vol. 1, p. 76) letters have different meanings and the legal relations arising from In the case of a confirming bank, the correspondent bank assumes a there varies. A credit may be an irrevocable credit and at the same direct obligation to the seller and its liability is a primary one as if the time a confirmed credit or vice-versa. correspondent bank itself had issued the letter of credit. (Shaterian, An irrevocable credit refers to the duration of the letter of credit. What Export-Import Banking, p. 294, cited in Agbayani Commercial Laws is simply means is that the issuing bank may not without the consent of the Philippines, Vol. 1, p. 77) of the beneficiary (seller) and the applicant (buyer) revoke his In this case, the letter merely provided that the petitioner "forward the undertaking under the letter. The issuing bank does not reserve the enclosed original credit to the beneficiary." (Records, Vol. I, p. 11) right to revoke the credit. On the other hand, a confirmed letter of Considering the aforesaid instruction to the petitioner by the issuing credit pertains to the kind of obligation assumed by the correspondent bank, the Security Pacific National Bank, it is indubitable that the bank. In this case, the correspondent bank gives an absolute assurance petitioner is only a notifying bank and not a confirming bank as ruled to the beneficiary that it will undertake the issuing bank's obligation by the courts below. as its own according to the terms and conditions of the credit. If the petitioner was a confirming bank, then a categorical declaration (Agbayani, Commercial Laws of the Philippines, Vol. 1, pp. 81-83) should have been stated in the letter of credit that the petitioner is to Hence, the mere fact that a letter of credit is irrevocable does not honor all drafts drawn in conformity with the letter of credit. What necessarily imply that the correspondent bank in accepting the was simply stated therein was the instruction that the petitioner instructions of the issuing bank has also confirmed the letter of credit. forward the original letter of credit to the beneficiary. Another error which the lower court and the Court of Appeals made Since the petitioner was only a notifying bank, its responsibility was was to confuse the obligation assumed by the petitioner. solely to notify and/or transmit the documentary of credit to the private In commercial transactions involving letters of credit, the functions respondent and its obligation ends there. The notifying bank may suggest to the seller its willingness to The private respondent no doubt was in need of money in loading the negotiate, but this fact alone does not imply that the notifying bank logs on the ship "Zenlin Glory" and the only way to satisfy this need promises to accept the draft drawn under the documentary credit. was to borrow money from the petitioner which the latter granted. A notifying bank is not a privy to the contract of sale between the From these circumstances, a logical conclusion that can be gathered is buyer and the seller, its relationship is only with that of the issuing that the letter of credit was merely to serve as a collateral. bank and not with the beneficiary to whom he assumes no liability. It At the most, when the petitioner extended the loan to the private follows therefore that when the petitioner refused to negotiate with the respondent, it assumed the character of a negotiating bank. Even then, private respondent, the latter has no cause of action against the the petitioner will still not be liable, for a negotiating bank before petitioner for the enforcement of his rights under the letter. (See negotiation has no contractual relationship with the seller. Kronman and Co., Inc. v. Public National Bank of New York, supra) The case of Scanlon v. First National Bank (supra) perspicuously In order that the petitioner may be held liable under the letter, there explained the relationship between the seller and the negotiating bank, should be proof that the petitioner confirmed the letter of credit. viz: The records are, however, bereft of any evidence which will disclose It may buy or refuse to buy as it chooses. Equally, it must be true that that the petitioner has confirmed the letter of credit. The only evidence it owes no contractual duty toward the person for whose benefit the in this case, and upon which the private respondent premised his letter is written to discount or purchase any draft drawn against the argument, is the P75,000.00 loan extended by the petitioner to him. credit. No relationship of agent and principal, or of trustee and cestui, The private respondent relies on this loan to advance his contention between the receiving bank and the beneficiary of the letter is that the letter of credit was confirmed by the petitioner. He claims that established. (P.568) the loan was granted by the petitioner to him, "in anticipation of the Whether therefore the petitioner is a notifying bank or a negotiating presentment of the letter of credit." bank, it cannot be held liable. Absent any definitive proof that it has The proposition advanced by the private respondent has no basis in confirmed the letter of credit or has actually negotiated with the fact or law. That the loan agreement between them be construed as an private respondent, the refusal by the petitioner to accept the tender of act of confirmation is rather far-fetched, for it depends principally on the private respondent is justified. speculative reasoning. In regard to the finding that the petitioner became a "trustee in relation As earlier stated, there must have been an absolute assurance on the to the plaintiff (private respondent) as the beneficiary of the letter of part of the petitioner that it will undertake the issuing bank's obligation credit," the same has no legal basis. as its own. Verily, the loan agreement it entered into cannot be A trust has been defined as the "right, enforceable solely in equity, to categorized as an emphatic assurance that it will carry out the issuing the beneficial enjoyment of property the legal title to which is vested bank's obligation as its own. to another." (89 C.J.S. 712) The loan agreement is more reasonably classified as an isolated The concept of a trust presupposes the existence of a specific property transaction independent of the documentary credit. which has been conferred upon the person for the benefit of another. Of course, it may be presumed that the petitioner loaned the money to In order therefore for the trust theory of the private respondent to be the private respondent in anticipation that it would later be paid by the sustained, the petitioner should have had in its possession a sum of latter upon the receipt of the letter. Yet, we would have no basis to rule money as specific fund advanced to it by the issuing bank and to be definitively that such "act" should be construed as an act of held in trust by it in favor of the private respondent. This does not confirmation. obtain in this case. The mere opening of a letter of credit, it is to be noted, does not involve certification under the letter of credit should not likewise be charged a specific appropriation of a sum of money in favor of the beneficiary. to the issuing bank. It only signifies that the beneficiary may be able to draw funds upon As a mere notifying bank, not only does the petitioner not have any the letter of credit up to the designated amount specified in the letter. contractual relationship with the buyer, it has also nothing to do with It does not convey the notion that a particular sum of money has been the contract between the issuing bank and the buyer regarding the specifically reserved or has been held in trust. issuance of the letter of credit. What actually transpires in an irrevocable credit is that the The theory of guarantee relied upon by the Court of Appeals has to correspondent bank does not receive in advance the sum of money necessarily fail. The concept of guarantee vis-a-vis the concept of an from the buyer or the issuing bank. On the contrary, when the irrevocable credit are inconsistent with each other. correspondent bank accepts the tender and pays the amount stated in In the first place, the guarantee theory destroys the independence of the letter, the money that it doles out comes not from any particular the bank's responsibility from the contract upon which it was opened. fund that has been advanced by the issuing bank, rather it gets the In the second place, the nature of both contracts is mutually in conflict money from its own funds and then later seeks reimbursement from with each other. In contracts of guarantee, the guarantor's obligation the issuing bank. is merely collateral and it arises only upon the default of the person Granting that a trust has been created, still, the petitioner may not be primarily liable. On the other hand, in an irrevocable credit the bank considered a trustee. As the petitioner is only a notifying bank, its undertakes a primary obligation. (See National Bank of Eagle Pass, acceptance of the instructions of the issuing bank will not create Tex v. American National Bank of San Francisco, 282 F. 73 [1922]) estoppel on its part resulting in the acceptance of the trust. Precisely, The relationship between the issuing bank and the notifying bank, on as a notifying bank, its only obligation is to notify the private the contrary, is more similar to that of an agency and not that of a respondent of the existence of the letter of credit. How then can such guarantee. It may be observed that the notifying bank is merely to create estoppel when that is its only duty under the law? follow the instructions of the issuing bank which is to notify or to We also find erroneous the statement of the Court of Appeals that the transmit the letter of credit to the beneficiary. (See Kronman v. Public petitioner "acted as a guarantor of the issuing bank and in effect also National Bank of New York, supra). Its commitment is only to notify of the latter's principal or client, i.e., Hans Axel Christiansen." the beneficiary. It does not undertake any assurance that the issuing It is a fundamental rule that an irrevocable credit is independent not bank will perform what has been mandated to or expected of it. As an only of the contract between the buyer and the seller but also of the agent of the issuing bank, it has only to follow the instructions of the credit agreement between the issuing bank and the buyer. (See issuing bank and to it alone is it obligated and not to buyer with whom Kingdom of Sweden v. New York Trust Co., 96 N.Y.S. 2d 779 it has no contractual relationship. [1949]). The relationship between the buyer (Christiansen) and the In fact the notifying bank, even if the seller tenders all the documents issuing bank (Security Pacific National Bank) is entirely independent required under the letter of credit, may refuse to negotiate or accept from the letter of credit issued by the latter. the drafts drawn thereunder and it will still not be held liable for its The contract between the two has no bearing as to the non-compliance only engagement is to notify and/or transmit to the seller the letter of by the buyer with the agreement between the latter and the seller. Their credit. contract is similar to that of a contract of services (to open the letter of Finally, even if we assume that the petitioner is a confirming bank, the credit) and not that of agency as was intimated by the Court of petitioner cannot be forced to pay the amount under the letter. As we Appeals. The unjustified refusal therefore by Christiansen to issue the have previously explained, there was a failure on the part of the private respondent to comply with the terms of the letter of credit. Christiansen first issued the required certification that the logs had The failure by him to submit the certification was fatal to his been approved by him to be in accordance with the terms and case.1wphi1 The U.C.P. which is incorporated in the letter of credit conditions of his purchase order. Apparently, Villaluz was in too much ordains that the bank may only pay the amount specified under the haste to ship his logs without taking all due precautions to assure that letter if all the documents tendered are on their face in compliance all the terms and conditions of the letter of credit had been strictly with the credit. It is not tasked with the duty of ascertaining the reason complied with, so that there would be no hitch in its negotiation. or reasons why certain documents have not been submitted, as it is (Rollo, p. 8) only concerned with the documents. Thus, whether or not the buyer WHEREFORE, the COURT RESOLVED to GRANT the petition and has performed his responsibility towards the seller is not the bank's hereby NULLIFIES and SETS ASIDE the decision of the Court of problem. Appeals dated June 29, 1990. The amended complaint in Civil Case We are aware of the injustice committed by Christiansen on the private No. 15121 is DISMISSED. respondent but we are deciding the controversy on the basis of what SO ORDERED. 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. G.R. No. 74834 November 17, 1988 Its commitment is to all and not to a single individual. The faith of the INSULAR BANK OF ASIA & AMERICA (NOW PHILIPPINE people in our justice system may be eroded if we are to decide not COMMERCIAL INTERNATIONAL BANK), petitioner, what the law states but what we believe it should declare. Dura lex sed vs. lex. HON. INTERMEDIATE APPELLATE COURT, THE Considering the foregoing, the materiality of ruling upon the validity PHILIPPINE AMERICAN LIFE INSURANCE CO., SPS. BEN of the certificate of approval required of the private respondent to MENDOZA & JUANITA M. MENDOZA, respondents. submit under the letter of credit, has become insignificant. Balili, Parado, Cavada & Maamo for petitioner. In any event, we affirm the earlier ruling of the Court of Appeals dated Romulo, Mabanta, Buenaventura, Sayoc & Delos Angeles for April 9, 1987 in regard to the petition before it for certiorari and respondent Spouses Mendozas. prohibition with preliminary injunction, to wit: Francisco, Zulueta & Associates for respondent Philam Life. 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." MELENCIO-HERRERA, J.: At the time the letter of credit was issued there was no Central Bank An appeal by certiorari under Rule 45 of the Rules of Court by regulation prohibiting such a condition in the letter of credit. The letter petitioner, the Insular Bank of Asia and America (IBAA) [now the of credit (Exh. C) was issued on June 7, 1971, more than two months Philippine Commercial International Bank], from the judgment of the before the issuance of the Central Bank Memorandum on August 16, public respondent, then the Intermediate Appellate Court, * in CA- 1971 disallowing such a condition in a letter of credit. In fact the letter G.R. CV No. 03224. of credit had already expired on July 30, 1971 when the Central Bank Briefly, the antecedent facts disclose that sometime in 1976 and 1977 memorandum was issued. In any event, it is difficult to see how such respondent spouses Ben S. Mendoza and Juanita M. Mendoza (the a condition could be categorized as illegal or unreasonable since all Mendozas, for brevity), obtained two (2) loans from respondent that plaintiff Villaluz, as seller of the logs, could and should have done Philippine American Life Insurance Co. (Philam Life) in the total was to refuse to load the logs on the vessel "Zenlin Glory", unless amount of P600,000.00 to finance the construction of their residential house at Mandaue City. The said loans, with a 14% nominal interest Mendozas who are the principal debtors, its remaining outstanding rate, were to be liquidated in equal amortizations over a period of five obligation under the two (2) standby L/Cs was only P30,100.60. Later, (5) years from March 1977 to March 1982. IBAA corrected the latter amount and showed instead an overpayment To secure payment, Philam Life required that amortizations be arrived at as follows: guaranteed by an irrevocable standby letter of credit of a commercial Limit of Liability P 600,000.00 bank. Thus, the Mendozas contracted with petitioner Insular Bank of Less: Asia and America (IBAA) for the issuance of two (2) irrevocable standby Letters of Credit in favor of Philam Life for the total amount a) Payment of Mendozas P 280, 293.11 of P600,000.00. The first L/C for P500,000.00 was to expire on 1 b) Payment of IBAA 372,227.65 652,520.76 October 1981 (Exhibit "7", IBAA) and the second for P100,000.00 on Overpayment by IBAA ( P 52,520.76) 1 January 1982 (Exhibit "8", IBAA) These two (2) irrevocable standby On 21 April 1980 the Real Estate Mortgage, which secured the two L/Cs were, in turn, secured by a real estate mortgage for the same (2) standby L/Cs. was extrajudicially foreclosed by, and sold at public amount on the property of Respondent Spouses in favor of IBAA. auction for P775,000.00, to petitioner IBAA as the lone and highest On 11 May 1977, the Mendozas executed a promissory note (No. L- bidder (Exhibit "17-Mendoza"). The bid price of P775,000.00 by 562/77) in favor of IBAA promising to pay the sum of P100,000.00 petitioner IBAA was arrived at as follows: plus 19% p.a. interest on 31 May 1979. Again, on 3 June 1977, Principal (unpaid advances under the 2 P 432,386.07 Respondent Spouses executed another Promissory Note (No. 564/77) standby LCs) plus interest & charges binding themselves to pay IBAA P100,000.00 plus 19% p.a. interest Add: on 23 June 1979. Both Notes authorized IBAA "to sell at public or private sale such securities or things for the purpose of applying their a) Stipulated Attorney's fees (20%) P 86,477.20 proceeds to such payments" of many particular obligation or b) Principals (clean loans) plus accrued obligations" the Mendozas may have to IBAA. (Exhibits "34" and interest under P/Ns Nos. 562/77 and "35"-IBAA, Annex "D" p. 131, Rollo) 564/77 P 255,346.95 The Mendozas failed to pay Philam Life the amortization that fell due c) Expenses of foreclosure P 72.20 on 1 June 1978 so that Philam Life informed IBAA that it was TOTAL P 775,000.42 declaring both loans as "entirely due and demandable" and demanded On a date that does not appear of record, Philam Life filed suit against payment of P492,996.30 (Exhibit "H"). However, because IBAA Respondent Spouses and IBAA before the Regional Trial Court of contested the propriety of calling ill the entire loan, Philam Life Manila, Branch XXXXI, for the recovery of the sum of P274,779.56, desisted and resumed availing of the L/Cs by drawing on them for five the amount allegedly still owing under the loan. After trial, said Court (5) more amortizations. rendered a Decision finding that IBAA had paid Philam Life only On 7 September 1979, because the Mendozas defaulted on their P342,127.05 and not P372,227.65, as claimed by IBAA, because of a amortization due on 1 September 1979, Philam Life again informed stale IBAA Manager's check in the amount of P30,100.60, which had IBAA that it was declaring the entire balance outstanding on both to be deducted. With this deduction, the Trial Court arrived at the loans, including liquidated damages, "immediately due and payable." following computation: Philam Life then demanded the payment of P274,779.56 from IBAA Limit of Liability of IBAA Less: P 600,000.00 but the latter took the position that, as a melee guarantor of the a) Payment by Mendozas P 280, 293.11 b) Payment by IBAA P342,127.05 P 622,420.16 defendant- spouses against the plaintiff and the defendant IBAA, as Overpayment by IBAA P 22,420.16 well as the counterclaim filed by defendant IBAA against the plaintiff. Thus, the Trial Court ruled: No special pronouncement as to costs in this instance. (p. 51, Rollo). ACCORDINGLY, judgment is hereby rendered ordering: Availing of the instant Petition, IBAA seeks a reversal of the aforesaid (1) Defendants-spouses Ben S. Mendoza and Juanita M. Mendoza to judgment and the affirmance instead of that of the Trial Court. We pay plaintiff Philippine American Life Insurance Company the sum of resolved to give due course. The issues addressed, as posited by IBAA, P322,000.00 plus 2% per month as penalty interest from September are: 12, 1979 until the whole amount is fully paid, P10,000 as attorney's 1. Whether or not the partial payments made by the principal obligors fees, and costs. (respondent MENDOZAS) would have the corresponding effect of (2) Plaintiff Philippine American Life Insurance Company to refund reducing the liability of the petitioner as guarantor or surety under the the sum of P22,420.16 to the defendant Insular Bank of Asia and terms of the standby LCs in question. America plus legal interest from March 31, 1980 until the whole 2. Whether or not respondent Intermediate Appellate Court is correct amount is fully paid; and in disregarding a documentary evidence (O.R. No. 74323, Exhibit 28- (3) Dismissal of the counterclaim and crossclaim filed by the IBAA) showing the amount paid by petitioner and which was admitted defendants- spouses against the plaintiff and the defendant IBAA, as as evidence without objection on the paint of the counsel for the well as the counterclaim filed by defendant IBAA against the plaintiff. respondent Philam. (pp. 28-29, Rollo) 3. Whether or not the Intermediate Appellate Court is correct in In so deciding, the Trial Court took the position that IBAA, "as surety" passing sub-silencio the following points raised by the petitioner in its was discharged of its liability to the extent of the payment made by Brief to sustain the decision of the Trial Court on some other grounds. the Mendozas, as the principal debtors, to the creditor, Philam Life. a. Effective rate of interest imposed by respondent Philam exceeded Both Philam Life and Respondent Spouses appealed to respondent the allowable ceiling; Appellate Court, which reversed the Trial Court and ruled instead that b. Respondent Philam has no right to call in at one time the two IBAA's liability was not reduced by virtue of the payments made by standby letters of credit; the Mendozas. Accordingly, the Appellate Court decreed: c. Respondent Philam failed to follow the condition in the two (2) WHEREFORE, premises considered, judgment is hereby rendered standby letters of credit: ordering: which could have otherwise altered the result of the decision. 1. Defendants-appellant spouses Ben S. Mendoza and Juanita M. 4. Whether or not the award of attorney's fees to respondent Philam is Mendoza and defendant-appellee IBAA to pay jointly and severally proper in so far as petitioner is affected. (p. 15, Rollo) plaintiff-appellant Philamlife, the sum of P222,000.00 plus 2% per The pivotal issue is the first one. IBAA stresses that it has no more month as penalty interest from September 12, 1979 until the whole liability to Philam Life under the two (2) standby Letters of Credit and, amount is fully paid; plus P25,000.00, as attorney's fees, and costs; instead, is entitled to a refund. Whereas Philam Life and the Mendoza however, defendant-appellee IBAA shall only be liable up to the spouses separately maintain that IBAA's obligation under said two (2) amount of P296,294.05; L/Cs is original and primary and is not reduced by the direct payments 2. Dismissal of the claim by the IBAA for a refund of P22,420.16 from made by the Mendozas to Philam Life. the Phil-American Life Insurance Co.; and 1. In construing the terms of a Letter of Credit, as in other contracts, it 3. Dismissal of the counterclaim and cross-claim filed by the is the intention of the parties that must govern. Letters of credit and contracts for the issuance of such letters are advanced or the amount for which credit is given on the faith of the subject to the same rules of construction as are ordinary commercial instrument." (Scribner v. Rutherford, 22 N.W. 670, 65 Iowa 551; contracts. They are to receive a reasonable and not a technical Duval v. Trask,, 12 Mass. 154, cited in 38 CJS, Sec. 7, p. 1142). They construction and although usage and custom cannot control express are primary obligations and not accessory contracts. Being separate terms in letters of credit, they are to be construed with reference to all and independent agreements, the payments made by the Mendozas the surrounding facts and circumstances, to the particular and often cannot be added in computing IBAA's liability under its own standby varying terms in which they may be expressed, the circumstances and letters of credit. Payments made by the Mendozas directly to Philam intention of the parties to them, and the usages of the particular trade Life are in compliance with their own prestation under the loan of business contemplated. (International Banking Corp. vs. Irving agreements. And although these payments could result in the National Bank, CCA N.Y. 283 F. 103, affirming DC 274 F. 122; Old reduction of the actual amount which could ultimately be collected Colony Trust Co. vs. Lawyers' Title and Trust Co., CAA NY, 297 F. from IBAA, the latter's separate undertaking under its L/Cs remains. 152, cited in Vol. 72, CJS sec. 178, pp. 387-388).<re||an1w> Both the Trial Court and the Appellate Court found, as a fact, that there The terms of the subject Irrevocable Standby Letters of Credit read, in still remains a balance on the loan, Pursuant to its absolute undertaking part, as follows: under the L/Cs, therefore, IBAA cannot escape the obligation to pay This credit secures the payment of any obligation of the accountee to Philam Life for this unexpended balance. The Appellate Court found you under that Loan Agreement hereto attached as Annex 'A' and it to be P222,000.00, arrived at by the Trial Court and adopted by the made a part hereof, including those pertaining to (a) surcharges on Appellate Court, as follows: defaulted account; stallments, (b) increased interest charges (in the ... In the summary of application of payments (Exhibit "KK") the event the law should authorize this increase), and (c) liabilities plaintiff applied Pl,918.00 as commitment fee, P4,397.66 as connected with taxes stipulated to be for Accountee's and provided surcharges, P199,683.40 as interests, and P320,000.00 on the however, that our maximum liabilities hereunder shall not exceed the principal. The P58,000.00 which is covered by OR No. 74396 was also amount of P500,000.00 (Pl00.000.00 for the other LC). applied "against the total loan." Since plaintiff applied P378,000.00 Each drawing under this credit shall be available at any time after one against the total indebtedness of P600,000.00 there still remains an (1) day from due date of the obligations therein secured. Each drawing outstanding balance on the principal P322,000.00 (should be under this credit shall be accomplished by your signed statement in P222,000.00) aside from the agreed penalty interest until the whole duplicate that the amount drawn represents payment due and unpaid amount is fully paid. ... (Decision, Trial Court, p. 50, Rollo) by the accountee. (pp. 11-12, Decision, pp. 38-39, Rollo). [Emphasis The amount of P222,000.00, therefore, considered as "any obligation our ]. of the accountee" under the L/Cs will still have to be paid by IBAA Unequivocally, the subject standby Letters of Credit secure the under the explicit terms thereof, which IBAA had itself supplied. payment of any obligation of the Mendozas to Philam Life including Letters of credit are strictly construed to the end that the rights of those all interests, surcharges and expenses thereon but not to exceed directly parties to them may be preserved and their interest P600,000.00. But while they are a security arrangement, they are not safeguarded (Moss vs. Old Colony Trust Co., 140 N.E. 803, 246 Mass. converted thereby into contracts of guaranty. That would make them 138, 152).<re||an1w> Like any other writing, it will be construed ultra vires rather than a letter of credit, which is within the powers of most strongly against the writer and so as to be reasonable and a bank (Section 74[e], RA 337, General Banking Act). 1 The standby consistent with honest intentions. On the whole, the construction will L/Cs are, "in effect an absolute undertaking to pay the money be generally a strict one (Lamborn vs. National Park Bank of New York, 208 N.Y.S. 428, 212 App. Div. 25, affirming Id , 204 N.Y.S. 248, Rollo) 557,123 Misc. 211, affirmed Id.. 148 N.E. 664, 240 N.Y. 520). As c) The omission by Philam Life to draw the required drafts on the found by the Appellate Court, however, the amount payable should standby L/Cs can be explained by the fact that all the drafts were pre- not exceed P296,294,05 (P600,000.00 less P303,705.95, the total prepared, pre-dated and amount found by the Appellate Court to have been paid by IBAA to pre-accepted by the Mendozas. Philam Life, therefore, could not have Philam Life). complied to the letter with the provision in the L/Cs that drawings 2. The second issue as to whether or not documentary evidence was therefrom were to be made by drafts for each due and unpaid disregarded by the Appellate Court regarding the amount actually paid amortization. Besides, the accelaration of the entire balance of the loan by IBAA to Philam Life, or P303,705.95 (not P342,127.05 as found was sufficient notice of dishonor of the pre-drawn and pre-accepted by the Trial Court), questions a finding of fact, which should be drafts. accorded not only respect but even finality. It is not the function of 4. Coming now to the award of attorney's fees of P25,000.00, the same this Court to analyze or weigh such evidence all over again, its appears reasonable under the circumstances of the case specially jurisdiction being limited to reviewing errors of law that might have considering that in the foreclosure of the mortgage in its favor IBAA been committed by lower Courts. charged the Mendozas attorney's fees in the amount of P86,477.20, 3. The third issue faults respondent Appellate Court with having supra. passed As to the liability of the Mendozas to IBAA, it bears recalling that the sub-silencio over certain points raised by petitioner IBAA in his Brief Mendozas, upon their application for the opening and issuance of the sustaining the Decision of the Trial Court. It is accepted judicial Irrevocable Standby Letters of Credit in favor of Philam Life, had practice, however, that Courts are not required to resolve all issues executed a Real Estate Mortgage as security to IBAA for any payment raised in pleadings unless necessary for the resolution of the case. that the latter may remit to Philam Life on the strength of said Letters Apparently, respondent Appellate Court deemed it unnecessary to of Credit; and that IBAA had recovered from the Mendozas the pass upon those points. Be that as it may, suffice it to state: amount of P432,386.07 when it foreclosed on the mortgaged property a) It is a matter of common knowledge in lending procedures that the of said spouses in the concept of "principal (unpaid advances under nominal interest is different from the effective rate of interest and that the 2 standby L/Cs plus interest and charges)." In addition, IBAA had the discounting interest scheme as well as the principal amortization recovered P255,364.95 representing its clean loans to the Mendozas scheme are practices commonly resorted to by lending institutions. If plus accrued interest besides the fact that it now has the foreclosed IBAA disagreed with the computation scheme adopted by Philam property. As between IBAA and the Mendozas, therefore, there has Life, which could have been detected in the early stages of the been full liquidation. The remaining obligation of P222,000.00 on the controversy, IBAA could have interposed its objections. loan of the Mendozas, therefore, is now IBAA's sole responsibility to b) The right to call in at one time the two standby L/Cs was specifically pay to Philam Life by virtue of its absolute and irrevocable provided for in the Loan Agreement, which was specifically made an undertaking under the standby L/Cs. Specially so, since the integral part of the L/Cs Section 8 thereof read: promissory notes executed by the Mendozas in favor of IBAA ... 8. The Lender shall have the light to declare the entire balance of authorized the sale of the mortgaged security "for the purpose of the loans and all obligations of the borrower to the lender as applying their proceeds to ... payments" of their obligations to IBAA. immediately due and payable in case the borrower fails for any reason WHEREFORE, the Decision of respondent Intermediate Appellate to comply with any payment or other obligations of the Lender. (p. Court, dated 20 December 1985, is hereby MODIFIED. Petitioner IBAA (now the Philippine Commercial International Bank) shall pay because the letter of credit would not have been transmitted if it were Philippine American Life Insurance Company the sum of P222,000.00 not genuine. plus 2% per month as penalty interest from 12 September 1979 until Between 26 March to 10 April 1981, Inter-Resin sought to make a the whole amount is fully paid, but in no case to exceed P296,294.05, partial availment under the letter of credit by submitting to Bank of plus P25,000.00 as attorney's fees. No costs. America invoices, covering the shipment of 24,000 bales of SO ORDERED. polyethylene rope to General Chemicals valued at US$1,320,600.00, the corresponding packing list, export declaration and bill of lading. G.R. No. 105395 December 10, 1993 Finally, after being satisfied that Inter-Resin's documents conformed BANK OF AMERICA, NT & SA, petitioners, with the conditions expressed in the letter of credit, Bank of America vs. issued in favor of Inter-Resin a Cashier's Check for P10,219,093.20, COURT OF APPEALS, INTER-RESIN INDUSTRIAL "the Peso equivalent of the draft (for) US$1,320,600.00 drawn by CORPORATION, FRANCISCO TRAJANO, JOHN DOE AND Inter-Resin, after deducting the costs for documentary stamps, postage JANE DOE, respondents. and mail issuance." 1 The check was picked up by Inter-Resin's Agcaoili & Associates for petitioner. Executive Vice-President Barcelina Tio. On 10 April 1981, Bank of Valenzuela Law Center, Victor Fernandez and Ramon Guevarra for America wrote Bank of Ayudhya advising the latter of the availment private respondents. under the letter of credit and sought the corresponding reimbursement therefor. VITUG, J.: Meanwhile, Inter-Resin, through Ms. Tio, presented to Bank of A "fiasco," involving an irrevocable letter of credit, has found the America the documents for the second availment under the same letter distressed parties coming to court as adversaries in seeking a definition of credit consisting of a packing list, bill of lading, invoices, export of their respective rights or liabilities thereunder. declaration and bills in set, evidencing the second shipment of goods. On 05 March 1981, petitioner Bank of America, NT & SA, Manila, Immediately upon receipt of a telex from the Bank of Ayudhya received by registered mail an Irrevocable Letter of Credit No. declaring the letter of credit fraudulent, 2 Bank of America stopped the 20272/81 purportedly issued by Bank of Ayudhya, Samyaek Branch, processing of Inter-Resin's documents and sent a telex to its branch for the account of General Chemicals, Ltd., of Thailand in the amount office in Bangkok, Thailand, requesting assistance in determining the of US$2,782,000.00 to cover the sale of plastic ropes and "agricultural authenticity of the letter of credit. 3 Bank of America kept Inter-Resin files," with the petitioner as advising bank and private respondent informed of the developments. Sensing a fraud, Bank of America Inter-Resin Industrial Corporation as beneficiary. sought the assistance of the National Bureau of Investigation (NBI). On 11 March 1981, Bank of America wrote Inter-Resin informing the With the help of the staff of the Philippine Embassy at Bangkok, as latter of the foregoing and transmitting, along with the bank's well as the police and customs personnel of Thailand, the NBI agents, communication, who were sent to Thailand, discovered that the vans exported by Inter- the latter of credit. Upon receipt of the letter-advice with the letter of Resin did not contain ropes but plastic strips, wrappers, rags and waste credit, Inter-Resin sent Atty. Emiliano Tanay to Bank of America to materials. Here at home, the NBI also investigated Inter-Resin's have the letter of credit confirmed. The bank did not. Reynaldo President Francisco Trajano and Executive Vice President Barcelina Dueas, bank employee in charge of letters of credit, however, Tio, who, thereafter, were criminally charged for estafa through explained to Atty. Tanay that there was no need for confirmation falsification of commercial documents. The case, however, was eventually dismissed by the Rizal Provincial Fiscal who found no the findings of the trial court that the ropes have actually been shipped prima facie evidence to warrant prosecution. is binding on the Court; and, (c) Bank of America cannot recover from Bank of America sued Inter-Resin for the recovery of P10,219,093.20, Inter-Resin because the drawer of the letter of credit is the Bank of the peso equivalent of the draft for US$1,320,600.00 on the partial Ayudhya and not Inter-Resin. availment of the now disowned letter of credit. On the other hand, If only to understand how the parties, in the first place, got themselves Inter-Resin claimed that not only was it entitled to retain into the mess, it may be well to start by recalling how, in its modern P10,219,093.20 on its first shipment but also to the balance use, a letter of credit is employed in trade transactions. US$1,461,400.00 covering the second shipment. A letter of credit is a financial device developed by merchants as a On 28 June 1989, the trial court ruled for Inter-Resin, 4 holding convenient and relatively safe mode of dealing with sales of goods to that:(a) Bank of America made assurances that enticed Inter-Resin to satisfy the seemingly irreconcilable interests of a seller, who refuses send the merchandise to Thailand; (b) the telex declaring the letter of to part with his goods before he is paid, and a buyer, who wants to credit fraudulent was unverified and self-serving, hence, hearsay, but have control of the goods before paying. 9 To break the impasse, the even assuming that the letter of credit was fake, "the fault should be buyer may be required to contract a bank to issue a letter of credit in borne by the BA which was careless and negligent" 5 for failing to favor of the seller so that, by virtue of the latter of credit, the issuing utilize its modern means of communication to verify with Bank of bank can authorize the seller to draw drafts and engage to pay them Ayudhya in Thailand the authenticity of the letter of credit before upon their presentment simultaneously with the tender of documents sending the same to Inter-Resin; (c) the loading of plastic products required by the letter of credit. 10 The buyer and the seller agree on into the vans were under strict supervision, inspection and verification what documents are to be presented for payment, but ordinarily they of government officers who have in their favor the presumption of are documents of title evidencing or attesting to the shipment of the regularity in the performance of official functions; and (d) Bank of goods to the buyer. America failed to prove the participation of Inter-Resin or its Once the credit is established, the seller ships the goods to the buyer employees in the alleged fraud as, in fact, the complaint for estafa and in the process secures the required shipping documents or through falsification of documents was dismissed by the Provincial documents of title. To get paid, the seller executes a draft and presents Fiscal of Rizal.6 it together with the required documents to the issuing bank. The On appeal, the Court of Appeals 7 sustained the trial court; hence, this issuing bank redeems the draft and pays cash to the seller if it finds present recourse by petitioner Bank of America. that the documents submitted by the seller conform with what the The following issues are raised by Bank of America: (a) whether it has letter of credit requires. The bank then obtains possession of the warranted the genuineness and authenticity of the letter of credit and, documents upon paying the seller. The transaction is completed when corollarily, whether it has acted merely as an advising bank or as a the buyer reimburses the issuing bank and acquires the documents confirming bank; (b) whether Inter-Resin has actually shipped the entitling him to the goods. Under this arrangement, the seller gets paid ropes specified by the letter of credit; and (c) following the dishonor only if he delivers the documents of title over the goods, while the of the letter of credit by Bank of Ayudhya, whether Bank of America buyer acquires said documents and control over the goods only after may recover against Inter-Resin under the draft executed in its partial reimbursing the bank. availment of the letter of credit.8 What characterizes letters of credit, as distinguished from other In rebuttal, Inter-Resin holds that: (a) Bank of America cannot, on accessory contracts, is the engagement of the issuing bank to pay the appeal, belatedly raise the issue of being only an advising bank; (b) seller of the draft and the required shipping documents are presented to it. In turn, this arrangement assures the seller of prompt payment, the U.C.P. independent of any breach of the main sales contract. By this so-called In FEATI Bank and Trust Company v. Court of Appeals, 19 we have "independence principle," the bank determines compliance with the accepted, to the extent of their pertinency, the application in our letter of credit only by examining the shipping documents presented; jurisdiction of this international commercial credit regulatory set of it is precluded from determining whether the main contract is actually rules. 20 In Bank of Phil. Islands v. De Nery, 21 we have said that the accomplished or not. 11 observances of the U.C.P. is justified by Article 2 of the Code of There would at least be three (3) parties: (a) the buyer, 12 who procures Commerce which expresses that, in the absence of any particular the letter of credit and obliges himself to reimburse the issuing bank provision in the Code of Commerce, commercial transactions shall be upon receipts of the documents of title; (b) the bank issuing the letter governed by usages and customs generally observed. We have further of credit, 13 which undertakes to pay the seller upon receipt of the draft observed that there being no specific provisions which govern the and proper document of titles and to surrender the documents to the legal complexities arising from transactions involving letters of credit buyer upon reimbursement; and, (c) the seller, 14 who in compliance not only between or among banks themselves but also between banks with the contract of sale ships the goods to the buyer and delivers the and the seller or the buyer, as the case may be, the applicability of the documents of title and draft to the issuing bank to recover payment. U.C.P. is undeniable. The number of the parties, not infrequently and almost invariably in The first issue raised with the petitioner, i.e., that it has in this instance international trade practice, may be increased. Thus, the services of an merely been advising bank, is outrightly rejected by Inter-Resin and is advising (notifying) bank 15 may be utilized to convey to the seller the thus sought to be discarded for having been raised only on appeal. We existence of the credit; or, of a confirming bank 16 which will lend cannot agree. The crucial point of dispute in this case is whether under credence to the letter of credit issued by a lesser known issuing bank; the "letter of credit," Bank of America has incurred any liability to the or, of a paying bank, 17 which undertakes to encash the drafts drawn "beneficiary" thereof, an issue that largely is dependent on the bank's by the exporter. Further, instead of going to the place of the issuing participation in that transaction; as a mere advising or notifying bank, bank to claim payment, the buyer may approach another bank, termed it would not be liable, but as a confirming bank, had this been the case, the negotiating bank, 18 to have the draft discounted. it could be considered as having incurred that liability. 22 Being a product of international commerce, the impact of this In Insular Life Assurance Co. Ltd. Employees Association Natu vs. commercial instrument transcends national boundaries, and it is thus Insular Life Assurance Co., Ltd., 23 the Court said: Where the issues not uncommon to find a dearth of national law that can adequately already raised also rest on other issues not specifically presented, as provide for its governance. This country is no exception. Our own long as the latter issues bear relevance and close relation to the former Code of Commerce basically introduces only its concept under and as long as they arise from the matters on record, the court has the Articles 567-572, inclusive, thereof. It is no wonder then why great authority to include them in its discussion of the controversy and to reliance has been placed on commercial usage and practice, which, in pass upon them just as well. In brief, in those cases where questions any case, can be justified by the universal acceptance of the autonomy not particularly raised by the parties surface as necessary for the of contract rules. The rules were later developed into what is now complete adjudication of the rights and obligations of the parties, the known as the Uniform Customs and Practice for Documentary Credits interests of justice dictate that the court should consider and resolve ("U.C.P.") issued by the International Chamber of Commerce. It is by them. The rule that only issues or theories raised in the initial no means a complete text by itself, for, to be sure, there are other proceedings may be taken up by a party thereto on appeal should only principles, which, although part of lex mercatoria, are not dealt with refer to independent, not concomitant matters, to support or oppose the cause of action or defense. The evil that is sought to be avoided, General Chemicals. 28 In the ordinary course of business, the i.e., surprise to the adverse party, is in reality not existent on matters perfection of contract precedes the issuance of a letter of credit. that are properly litigated in the lower court and appear on record. Bringing the letter of credit to the attention of the seller is the It cannot seriously be disputed, looking at this case, that Bank of primordial obligation of an advising bank. The view that Bank of America has, in fact, only been an advising, not confirming, bank, and America should have first checked the authenticity of the letter of this much is clearly evident, among other things, by the provisions of credit with bank of Ayudhya, by using advanced mode of business the letter of credit itself, the petitioner bank's letter of advice, its communications, before dispatching the same to Inter-Resin finds no request for payment of advising fee, and the admission of Inter-Resin real support in U.C.P. Article 18 of the U.C.P. states that: "Banks that it has paid the same. That Bank of America has asked Inter-Resin assume no liability or responsibility for the consequences arising out to submit documents required by the letter of credit and eventually has of the delay and/or loss in transit of any messages, letters or paid the proceeds thereof, did not obviously make it a confirming documents, or for delay, mutilation or other errors arising in the bank. The fact, too, that the draft required by the letter of credit is to transmission of any telecommunication . . ." As advising bank, Bank be drawn under the account of General Chemicals (buyer) only means of America is bound only to check the "apparent authenticity" of the the same had to be presented to Bank of Ayudhya (issuing bank) for letter of credit, which it did. 29 Clarifying its meaning, Webster's Ninth payment. It may be significant to recall that the letter of credit is an New Collegiate Dictionary 30 explains that the word "APPARENT engagement of the issuing bank, not the advising bank, to pay the suggests appearance to unaided senses that is not or may not be borne draft. out by more rigorous examination or greater knowledge." No less important is that Bank of America's letter of 11 March 1981 May Bank of America then recover what it has paid under the letter of has expressly stated that "[t]he enclosure is solely an advise of credit credit when the corresponding draft for partial availment thereunder opened by the abovementioned correspondent and conveys no and the required documents were later negotiated with it by Inter- engagement by us." 24 This written reservation by Bank of America in Resin? The answer is yes. This kind of transaction is what is limiting its obligation only to being an advising bank is in consonance commonly referred to as a discounting arrangement. This time, Bank with the provisions of U.C.P. of America has acted independently as a negotiating bank, thus saving As an advising or notifying bank, Bank of America did not incur any Inter-Resin from the hardship of presenting the documents directly to obligation more than just notifying Inter-Resin of the letter of credit Bank of Ayudhya to recover payment. (Inter-Resin, of course, could issued in its favor, let alone to confirm the letter of credit. 25 The bare have chosen other banks with which to negotiate the draft and the statement of the bank employees, aforementioned, in responding to documents.) As a negotiating bank, Bank of America has a right to the inquiry made by Atty. Tanay, Inter-Resin's representative, on the recourse against the issuer bank and until reimbursement is obtained, authenticity of the letter of credit certainly did not have the effect of Inter-Resin, as the drawer of the draft, continues to assume a novating the letter of credit and Bank of America's letter of advise, 26 contingent liability thereon. 31 nor can it justify the conclusion that the bank must now assume total While bank of America has indeed failed to allege material facts in its liability on the letter of credit. Indeed, Inter-Resin itself cannot claim complaint that might have likewise warranted the application of the to have been all that free from fault. As the seller, the issuance of the Negotiable Instruments Law and possible then allowed it to even go letter of credit should have obviously been a great concern to it. 27 It after the indorsers of the draft, this failure, 32/ nonetheless, does not would have, in fact, been strange if it did not, prior to the letter of preclude petitioner bank's right (as negotiating bank) of recovery from credit, enter into a contract, or negotiated at the every least, with 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 WHEREFORE, the assailed decision is SET ASIDE, and respondent the corresponding draft. The payment to Inter-Resin has given, as Inter-Resin Industrial Corporation is ordered to refund to petitioner aforesaid, Bank of America the right of reimbursement from the Bank of America NT & SA the amount of P10,219,093.20 with legal issuing bank, Bank of Ayudhya which, in turn, would then seek interest from the filing of the complaint until fully paid. indemnification from the buyer (the General Chemicals of Thailand). No costs. Since Bank of Ayudhya disowned the letter of credit, however, Bank SO ORDERED. of America may now turn to Inter-Resin for restitution. Between the seller and the negotiating bank there is the usual G.R. No. 146717 November 22, 2004 relationship existing between a drawer and purchaser of drafts. Unless TRANSFIELD PHILIPPINES, INC., petitioner, drafts drawn in pursuance of the credit are indicated to be without vs. recourse therefore, the negotiating bank has the ordinary right of LUZON HYDRO CORPORATION, AUSTRALIA and NEW recourse against the seller in the event of dishonor by the issuing bank ZEALAND BANKING GROUP LIMITED and SECURITY . . . The fact that the correspondent and the negotiating bank may be BANK CORPORATION, respondents. one and the same does not affect its rights and obligations in either capacity, although a special agreement is always a possibility . . . 33 DECISION 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 TINGA, J.: operation of a letter of credit, the involved banks deal only with Subject of this case is the letter of credit which has evolved as the documents and not on goods described in those documents. 34 ubiquitous and most important device in international trade. A The other issues raised in then instant petition, for instance, whether creation of commerce and businessmen, the letter of credit is also or not Bank of Ayudhya did issue the letter of credit and whether or unique in the number of parties involved and its supranational not the main contract of sale that has given rise to the letter of credit character. has been breached, are not relevant to this controversy. They are Petitioner has appealed from the Decision1 of the Court of Appeals in matters, instead, that can only be of concern to the herein parties in an CA-G.R. SP No. 61901 entitled "Transfield Philippines, Inc. v. Hon. appropriate recourse against those, who, unfortunately, are not Oscar Pimentel, et al.," promulgated on 31 January 2001.2 impleaded in these proceedings. On 26 March 1997, petitioner and respondent Luzon Hydro In fine, we hold that Corporation (hereinafter, LHC) entered into a Turnkey Contract3 First, given the factual findings of the courts below, we conclude that whereby petitioner, as Turnkey Contractor, undertook to construct, on petitioner Bank of America has acted merely as a notifying bank and a turnkey basis, a seventy (70)-Megawatt hydro-electric power station did not assume the responsibility of a confirming bank; and at the Bakun River in the provinces of Benguet and Ilocos Sur Second, petitioner bank, as a negotiating bank, is entitled to recover (hereinafter, the Project). Petitioner was given the sole responsibility on Inter-Resin's partial availment as beneficiary of the letter of credit for the design, construction, commissioning, testing and completion which has been disowned by the alleged issuer bank. of the Project.4 No judgment of civil liability against the other defendants, Francisco The Turnkey Contract provides that: (1) the target completion date of Trajano and other unidentified parties, can be made, in this instance, the Project shall be on 1 June 2000, or such later date as may be agreed there being no sufficient evidence to warrant any such finding. upon between petitioner and respondent LHC or otherwise determined in accordance with the Turnkey Contract; and (2) petitioner is entitled banks of the arbitration proceedings already pending before the CIAC to claim extensions of time (EOT) for reasons enumerated in the and ICC in connection with its alleged default in the performance of Turnkey Contract, among which are variations, force majeure, and its obligations. Asserting that LHC had no right to call on the delays caused by LHC itself.5 Further, in case of dispute, the parties Securities until the resolution of disputes before the arbitral tribunals, are bound to settle their differences through mediation, conciliation petitioner warned respondent banks that any transfer, release, or and such other means enumerated under Clause 20.3 of the Turnkey disposition of the Securities in favor of LHC or any person claiming Contract.6 under LHC would constrain it to hold respondent banks liable for To secure performance of petitioner's obligation on or before the target liquidated damages. completion date, or such time for completion as may be determined As petitioner had anticipated, on 27 June 2000, LHC sent notice to by the parties' agreement, petitioner opened in favor of LHC two (2) petitioner that pursuant to Clause 8.214 of the Turnkey Contract, it standby letters of credit both dated 20 March 2000 (hereinafter failed to comply with its obligation to complete the Project. Despite referred to as "the Securities"), to wit: Standby Letter of Credit No. the letters of petitioner, however, both banks informed petitioner that E001126/8400 with the local branch of respondent Australia and New they would pay on the Securities if and when LHC calls on them.15 Zealand Banking Group Limited (ANZ Bank)7 and Standby Letter of LHC asserted that additional extension of time would not be Credit No. IBDIDSB-00/4 with respondent Security Bank warranted; accordingly it declared petitioner in default/delay in the Corporation (SBC)8 each in the amount of US$8,988,907.00.9 performance of its obligations under the Turnkey Contract and In the course of the construction of the project, petitioner sought demanded from petitioner the payment of US$75,000.00 for each day various EOT to complete the Project. The extensions were requested of delay beginning 28 June 2000 until actual completion of the Project allegedly due to several factors which prevented the completion of the pursuant to Clause 8.7.1 of the Turnkey Contract. At the same time, Project on target date, such as force majeure occasioned by typhoon LHC served notice that it would call on the securities for the payment Zeb, barricades and demonstrations. LHC denied the requests, of liquidated damages for the delay.16 however. This gave rise to a series of legal actions between the parties On 5 November 2000, petitioner as plaintiff filed a Complaint for which culminated in the instant petition. Injunction, with prayer for temporary restraining order and writ of The first of the actions was a Request for Arbitration which LHC filed preliminary injunction, against herein respondents as defendants before the Construction Industry Arbitration Commission (CIAC) on before the Regional Trial Court (RTC) of Makati.17 Petitioner sought 1 June 1999.10 This was followed by another Request for Arbitration, to restrain respondent LHC from calling on the Securities and this time filed by petitioner before the International Chamber of respondent banks from transferring, paying on, or in any manner Commerce (ICC)11 on 3 November 2000. In both arbitration disposing of the Securities or any renewals or substitutes thereof. The proceedings, the common issues presented were: [1) whether typhoon RTC issued a seventy-two (72)-hour temporary restraining order on Zeb and any of its associated events constituted force majeure to the same day. The case was docketed as Civil Case No. 00-1312 and justify the extension of time sought by petitioner; and [2) whether raffled to Branch 148 of the RTC of Makati. LHC had the right to terminate the Turnkey Contract for failure of After appropriate proceedings, the trial court issued an Order on 9 petitioner to complete the Project on target date. November 2000, extending the temporary restraining order for a Meanwhile, foreseeing that LHC would call on the Securities pursuant period of seventeen (17) days or until 26 November 2000.18 to the pertinent provisions of the Turnkey Contract,12 petitionerin The RTC, in its Order19 dated 24 November 2000, denied petitioner's two separate letters13 both dated 10 August 2000advised respondent application for a writ of preliminary injunction. It ruled that petitioner had no legal right and suffered no irreparable injury to justify the US$4,950,000.00, thereby reducing the balance in ANZ Bank to issuance of the writ. Employing the principle of "independent US$1,852,814.00. contract" in letters of credit, the trial court ruled that LHC should be On 2 February 2001, the appellate court dismissed the petition for allowed to draw on the Securities for liquidated damages. It debunked certiorari. The appellate court expressed conformity with the trial petitioner's contention that the principle of "independent contract" court's decision that LHC could call on the Securities pursuant to the could be invoked only by respondent banks since according to it first principle in credit law that the credit itself is independent of the respondent LHC is the ultimate beneficiary of the Securities. The trial underlying transaction and that as long as the beneficiary complied court further ruled that the banks were mere custodians of the funds with the credit, it was of no moment that he had not complied with the and as such they were obligated to transfer the same to the beneficiary underlying contract. Further, the appellate court held that even for as long as the latter could submit the required certification of its assuming that the trial court's denial of petitioner's application for a claims. writ of preliminary injunction was erroneous, it constituted only an Dissatisfied with the trial court's denial of its application for a writ of error of judgment which is not correctible by certiorari, unlike error of preliminary injunction, petitioner elevated the case to the Court of jurisdiction. Appeals via a Petition for Certiorari under Rule 65, with prayer for the Undaunted, petitioner filed the instant Petition for Review raising the issuance of a temporary restraining order and writ of preliminary following issues for resolution: injunction.20 Petitioner submitted to the appellate court that LHC's call WHETHER THE "INDEPENDENCE PRINCIPLE" ON LETTERS on the Securities was premature considering that the issue of its default OF CREDIT MAY BE INVOKED BY A BENEFICIARY THEREOF had not yet been resolved with finality by the CIAC and/or the ICC. It WHERE THE BENEFICIARY'S CALL THEREON IS WRONGFUL asserted that until the fact of delay could be established, LHC had no OR FRAUDULENT. right to draw on the Securities for liquidated damages. WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON Refuting petitioner's contentions, LHC claimed that petitioner had no THE SECURITIES BEFORE THE RESOLUTION OF right to restrain its call on and use of the Securities as payment for PETITIONER'S AND LHC'S DISPUTES BY THE APPROPRIATE liquidated damages. It averred that the Securities are independent of TRIBUNAL. the main contract between them as shown on the face of the two WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED Standby Letters of Credit which both provide that the banks have no IN RELEASING THE AMOUNTS DUE UNDER THE responsibility to investigate the authenticity or accuracy of the SECURITIES DESPITE BEING NOTIFIED THAT LHC'S CALL certificates or the declarant's capacity or entitlement to so certify. THEREON IS WRONGFUL. In its Resolution dated 28 November 2000, the Court of Appeals WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND issued a temporary restraining order, enjoining LHC from calling on IRREPARABLE DAMAGE IN THE EVENT THAT: the Securities or any renewals or substitutes thereof and ordering A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ respondent banks to cease and desist from transferring, paying or in BANK AND SECURITY BANK ARE ALLOWED TO RELEASE, any manner disposing of the Securities. THE REMAINING BALANCE OF THE SECURITIES PRIOR TO However, the appellate court failed to act on the application for THE RESOLUTION OF THE DISPUTES BETWEEN PETITIONER preliminary injunction until the temporary restraining order expired on AND LHC. 27 January 2001. Immediately thereafter, representatives of LHC B. LHC DOES NOT RETURN THE AMOUNTS IT HAD trooped to ANZ Bank and withdrew the total amount of WRONGFULLY DRAWN FROM THE SECURITIES.21 Petitioner contends that the courts below improperly relied on the petitioner's Manifestation dated 12 April 2004 enlarges the scope of "independence principle" on letters of credit when this case falls its Petition for Review of the 31 January 2001 Decision of the Court squarely within the "fraud exception rule." Respondent LHC of Appeals. LHC notes that the Petition for Review essentially dealt deliberately misrepresented the supposed existence of delay despite its only with the issue of whether injunction could issue to restrain the knowledge that the issue was still pending arbitration, petitioner beneficiary of an irrevocable letter of credit from drawing thereon. It continues. adds that petitioner has filed two other proceedings, to wit: (1) ICC Petitioner asserts that LHC should be ordered to return the proceeds Case No. 11264/TE/MW, entitled "Transfield Philippines Inc. v. of the Securities pursuant to the principle against unjust enrichment Luzon Hydro Corporation," in which the parties made claims and and that, under the premises, injunction was the appropriate remedy counterclaims arising from petitioner's performance/misperformance obtainable from the competent local courts. of its obligations as contractor for LHC; and (2) Civil Case No. 04- On 25 August 2003, petitioner filed a Supplement to the Petition22 and 332, entitled "Transfield Philippines, Inc. v. Luzon Hydro Supplemental Memorandum,23 alleging that in the course of the Corporation" before Branch 56 of the RTC of Makati, which is an proceedings in the ICC Arbitration, a number of documentary and action to enforce and obtain execution of the ICC's partial award testimonial evidence came out through the use of different modes of mentioned in petitioner's Manifestation of 12 April 2004. discovery available in the ICC Arbitration. It contends that after the In its Comment to petitioner's Motion for Leave to File Addendum to filing of the petition facts and admissions were discovered which Petitioner's Memorandum, LHC stresses that the question of whether demonstrate that LHC knowingly misrepresented that petitioner had the funds it drew on the subject letters of credit should be returned is incurred delays notwithstanding its knowledge and admission that outside the issue in this appeal. At any rate, LHC adds that the action delays were excused under the Turnkey Contractto be able to draw to enforce the ICC's partial award is now fully within the Makati against the Securities. Reiterating that fraud constitutes an exception RTC's jurisdiction in Civil Case No. 04-332. LHC asserts that to the independence principle, petitioner urges that this warrants a petitioner is engaged in forum-shopping by keeping this appeal and at ruling from this Court that the call on the Securities was wrongful, as the same time seeking the suit for enforcement of the arbitral award well as contrary to law and basic principles of equity. It avers that it before the Makati court. would suffer grave irreparable damage if LHC would be allowed to Respondent SBC in its Memorandum, dated 10 March 200327 use the proceeds of the Securities and not ordered to return the contends that the Court of Appeals correctly dismissed the petition for amounts it had wrongfully drawn thereon. certiorari. Invoking the independence principle, SBC argues that it In its Manifestation dated 8 September 2003,24 LHC contends that the was under no obligation to look into the validity or accuracy of the supplemental pleadings filed by petitioner present erroneous and certification submitted by respondent LHC or into the latter's capacity misleading information which would change petitioner's theory on or entitlement to so certify. It adds that the act sought to be enjoined appeal. by petitioner was already fait accompli and the present petition would In yet another Manifestation dated 12 April 2004,25 petitioner alleges no longer serve any remedial purpose. that on 18 February 2004, the ICC handed down its Third Partial In a similar fashion, respondent ANZ Bank in its Memorandum dated Award, declaring that LHC wrongfully drew upon the Securities and 13 March 200328 posits that its actions could not be regarded as that petitioner was entitled to the return of the sums wrongfully taken unjustified in view of the prevailing independence principle under by LHC for liquidated damages. which it had no obligation to ascertain the truth of LHC's allegations LHC filed a Counter-Manifestation dated 29 June 2004,26 stating that that petitioner defaulted in its obligations. Moreover, it points out that since the Standby Letter of Credit No. E001126/8400 had been fully presentation by the seller-beneficiary of documents that show he has drawn, petitioner's prayer for preliminary injunction had been taken affirmative steps to comply with the sales agreement. In the rendered moot and academic. standby type, the credit is payable upon certification of a party's At the core of the present controversy is the applicability of the nonperformance of the agreement. The documents that accompany the "independence principle" and "fraud exception rule" in letters of beneficiary's draft tend to show that the applicant has not performed. credit. Thus, a discussion of the nature and use of letters of credit, also The beneficiary of a commercial credit must demonstrate by referred to simply as "credits," would provide a better perspective of documents that he has performed his contract. The beneficiary of the the case. standby credit must certify that his obligor has not performed the The letter of credit evolved as a mercantile specialty, and the only way contract.32 to understand all its facets is to recognize that it is an entity unto itself. By definition, a letter of credit is a written instrument whereby the The relationship between the beneficiary and the issuer of a letter of writer requests or authorizes the addressee to pay money or deliver credit is not strictly contractual, because both privity and a meeting of goods to a third person and assumes responsibility for payment of debt the minds are lacking, yet strict compliance with its terms is an therefor to the addressee.33 A letter of credit, however, changes its enforceable right. Nor is it a third-party beneficiary contract, because nature as different transactions occur and if carried through to the issuer must honor drafts drawn against a letter regardless of completion ends up as a binding contract between the issuing and problems subsequently arising in the underlying contract. Since the honoring banks without any regard or relation to the underlying bank's customer cannot draw on the letter, it does not function as an contract or disputes between the parties thereto.34 assignment by the customer to the beneficiary. Nor, if properly used, Since letters of credit have gained general acceptability in is it a contract of suretyship or guarantee, because it entails a primary international trade transactions, the ICC has published from time to liability following a default. Finally, it is not in itself a negotiable time updates on the Uniform Customs and Practice (UCP) for instrument, because it is not payable to order or bearer and is generally Documentary Credits to standardize practices in the letter of credit conditional, yet the draft presented under it is often negotiable.29 area. The vast majority of letters of credit incorporate the UCP.35 First In commercial transactions, a letter of credit is a financial device published in 1933, the UCP for Documentary Credits has undergone developed by merchants as a convenient and relatively safe mode of several revisions, the latest of which was in 1993.36 dealing with sales of goods to satisfy the seemingly irreconcilable In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,37 interests of a seller, who refuses to part with his goods before he is this Court ruled that the observance of the UCP is justified by Article paid, and a buyer, who wants to have control of the goods before 2 of the Code of Commerce which provides that in the absence of any paying.30 The use of credits in commercial transactions serves to particular provision in the Code of Commerce, commercial reduce the risk of nonpayment of the purchase price under the contract transactions shall be governed by usages and customs generally for the sale of goods. However, credits are also used in non-sale observed. More recently, in Bank of America, NT & SA v. Court of settings where they serve to reduce the risk of nonperformance. Appeals,38 this Court ruled that there being no specific provisions Generally, credits in the non-sale settings have come to be known as which govern the legal complexities arising from transactions standby credits.31 involving letters of credit, not only between or among banks There are three significant differences between commercial and themselves but also between banks and the seller or the buyer, as the standby credits. First, commercial credits involve the payment of case may be, the applicability of the UCP is undeniable. money under a contract of sale. Such credits become payable upon the Article 3 of the UCP provides that credits, by their nature, are separate transactions from the sales or other contract(s) on which they may be Petitioner insists that the independence principle does not apply to the based and banks are in no way concerned with or bound by such instant case and assuming it is so, it is a defense available only to contract(s), even if any reference whatsoever to such contract(s) is respondent banks. LHC, on the other hand, contends that it would be included in the credit. Consequently, the undertaking of a bank to pay, contrary to common sense to deny the benefit of an independent accept and pay draft(s) or negotiate and/or fulfill any other obligation contract to the very party for whom the benefit is intended. As under the credit is not subject to claims or defenses by the applicant beneficiary of the letter of credit, LHC asserts it is entitled to invoke resulting from his relationships with the issuing bank or the the principle. beneficiary. A beneficiary can in no case avail himself of the As discussed above, in a letter of credit transaction, such as in this contractual relationships existing between the banks or between the case, where the credit is stipulated as irrevocable, there is a definite applicant and the issuing bank. undertaking by the issuing bank to pay the beneficiary provided that Thus, the engagement of the issuing bank is to pay the seller or the stipulated documents are presented and the conditions of the credit beneficiary of the credit once the draft and the required documents are are complied with.41 Precisely, the independence principle liberates presented to it. The so-called "independence principle" assures the the issuing bank from the duty of ascertaining compliance by the seller or the beneficiary of prompt payment independent of any breach parties in the main contract. As the principle's nomenclature clearly of the main contract and precludes the issuing bank from determining suggests, the obligation under the letter of credit is independent of the whether the main contract is actually accomplished or not. Under this related and originating contract. In brief, the letter of credit is separate principle, banks assume no liability or responsibility for the form, and distinct from the underlying transaction. sufficiency, accuracy, genuineness, falsification or legal effect of any Given the nature of letters of credit, petitioner's argumentthat it is documents, or for the general and/or particular conditions stipulated only the issuing bank that may invoke the independence principle on in the documents or superimposed thereon, nor do they assume any letters of creditdoes not impress this Court. To say that the liability or responsibility for the description, quantity, weight, quality, independence principle may only be invoked by the issuing banks condition, packing, delivery, value or existence of the goods would render nugatory the purpose for which the letters of credit are represented by any documents, or for the good faith or acts and/or used in commercial transactions. As it is, the independence doctrine omissions, solvency, performance or standing of the consignor, the works to the benefit of both the issuing bank and the beneficiary. carriers, or the insurers of the goods, or any other person Letters of credit are employed by the parties desiring to enter into whomsoever.39 commercial transactions, not for the benefit of the issuing bank but The independent nature of the letter of credit may be: (a) independence mainly for the benefit of the parties to the original transactions. With in toto where the credit is independent from the justification aspect the letter of credit from the issuing bank, the party who applied for and and is a separate obligation from the underlying agreement like for obtained it may confidently present the letter of credit to the instance a typical standby; or (b) independence may be only as to the beneficiary as a security to convince the beneficiary to enter into the justification aspect like in a commercial letter of credit or repayment business transaction. On the other hand, the other party to the business standby, which is identical with the same obligations under the transaction, i.e., the beneficiary of the letter of credit, can be rest underlying agreement. In both cases the payment may be enjoined if assured of being empowered to call on the letter of credit as a security in the light of the purpose of the credit the payment of the credit would in case the commercial transaction does not push through, or the constitute fraudulent abuse of the credit.40 applicant fails to perform his part of the transaction. It is for this reason Can the beneficiary invoke the independence principle? that the party who is entitled to the proceeds of the letter of credit is appropriately called "beneficiary." the sometimes lengthy and costly determination that the obligor has Petitioner's argument that any dispute must first be resolved by the defaulted. In addition, the surety's performance takes time. parties, whether through negotiations or arbitration, before the The standby credit has different expectations. He reasonably expects beneficiary is entitled to call on the letter of credit in essence would that he will receive cash in the event of nonperformance, that he will convert the letter of credit into a mere guarantee. Jurisprudence has receive it promptly, and that he will receive it before any litigation laid down a clear distinction between a letter of credit and a guarantee with the obligor (the applicant) over the nature of the applicant's in that the settlement of a dispute between the parties is not a pre- performance takes place. The standby credit has this opposite effect of requisite for the release of funds under a letter of credit. In other words, the surety contract: it reverses the financial burden of parties during the argument is incompatible with the very nature of the letter of litigation. credit. If a letter of credit is drawable only after settlement of the In the surety contract setting, there is no duty to indemnify the dispute on the contract entered into by the applicant and the beneficiary until the beneficiary establishes the fact of the obligor's beneficiary, there would be no practical and beneficial use for letters performance. The beneficiary may have to establish that fact in of credit in commercial transactions. litigation. During the litigation, the surety holds the money and the Professor John F. Dolan, the noted authority on letters of credit, sheds beneficiary bears most of the cost of delay in performance. more light on the issue: In the standby credit case, however, the beneficiary avoids that The standby credit is an attractive commercial device for many of the litigation burden and receives his money promptly upon presentation same reasons that commercial credits are attractive. Essentially, these of the required documents. It may be that the applicant has, in fact, credits are inexpensive and efficient. Often they replace surety performed and that the beneficiary's presentation of those documents contracts, which tend to generate higher costs than credits do and are is not rightful. In that case, the applicant may sue the beneficiary in usually triggered by a factual determination rather than by the tort, in contract, or in breach of warranty; but, during the litigation to examination of documents. determine whether the applicant has in fact breached the obligation to Because parties and courts should not confuse the different functions perform, the beneficiary, not the applicant, holds the money. Parties of the surety contract on the one hand and the standby credit on the that use a standby credit and courts construing such a credit should other, the distinction between surety contracts and credits merits some understand this allocation of burdens. There is a tendency in some reflection. The two commercial devices share a common purpose. quarters to overlook this distinction between surety contracts and Both ensure against the obligor's nonperformance. They function, standby credits and to reallocate burdens by permitting the obligor or however, in distinctly different ways. the issuer to litigate the performance question before payment to the Traditionally, upon the obligor's default, the surety undertakes to beneficiary.42 complete the obligor's performance, usually by hiring someone to While it is the bank which is bound to honor the credit, it is the complete that performance. Surety contracts, then, often involve costs beneficiary who has the right to ask the bank to honor the credit by of determining whether the obligor defaulted (a matter over which the allowing him to draw thereon. The situation itself emasculates surety and the beneficiary often litigate) plus the cost of performance. petitioner's posture that LHC cannot invoke the independence The benefit of the surety contract to the beneficiary is obvious. He principle and highlights its puerility, more so in this case where the knows that the surety, often an insurance company, is a strong banks concerned were impleaded as parties by petitioner itself. financial institution that will perform if the obligor does not. The Respondent banks had squarely raised the independence principle to beneficiary also should understand that such performance must await justify their releases of the amounts due under the Securities. Owing to the nature and purpose of the standby letters of credit, this Court proffered. Thus, even without the use of the "independence principle," rules that the respondent banks were left with little or no alternative the Turnkey Contract itself bestows upon LHC the right to call on the but to honor the credit and both of them in fact submitted that it was Securities in the event of default. "ministerial" for them to honor the call for payment.43 Next, petitioner invokes the "fraud exception" principle. It avers that Furthermore, LHC has a right rooted in the Contract to call on the LHC's call on the Securities is wrongful because it fraudulently Securities. The relevant provisions of the Contract read, thus: misrepresented to ANZ Bank and SBC that there is already a breach 4.2.1. In order to secure the performance of its obligations under this in the Turnkey Contract knowing fully well that this is yet to be Contract, the Contractor at its cost shall on the Commencement Date determined by the arbitral tribunals. It asserts that the "fraud provide security to the Employer in the form of two irrevocable and exception" exists when the beneficiary, for the purpose of drawing on confirmed standby letters of credit (the "Securities"), each in the the credit, fraudulently presents to the confirming bank, documents amount of US$8,988,907, issued and confirmed by banks or financial that contain, expressly or by implication, material representations of institutions acceptable to the Employer. Each of the Securities must be fact that to his knowledge are untrue. In such a situation, petitioner in form and substance acceptable to the Employer and may be insists, injunction is recognized as a remedy available to it. provided on an annually renewable basis.44 Citing Dolan's treatise on letters of credit, petitioner argues that the 8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor independence principle is not without limits and it is important to shall pay to the Employer by way of liquidated damages ("Liquidated fashion those limits in light of the principle's purpose, which is to serve Damages for Delay") the amount of US$75,000 for each and every the commercial function of the credit. If it does not serve those day or part of a day that shall elapse between the Target Completion functions, application of the principle is not warranted, and the Date and the Completion Date, provided that Liquidated Damages for commonlaw principles of contract should apply. Delay payable by the Contractor shall in the aggregate not exceed 20% It is worthy of note that the propriety of LHC's call on the Securities of the Contract Price. The Contractor shall pay Liquidated Damages is largely intertwined with the fact of default which is the self-same for Delay for each day of the delay on the following day without need issue pending resolution before the arbitral tribunals. To be able to of demand from the Employer. declare the call on the Securities wrongful or fraudulent, it is 8.7.2 The Employer may, without prejudice to any other method of imperative to resolve, among others, whether petitioner was in fact recovery, deduct the amount of such damages from any monies due, guilty of delay in the performance of its obligation. Unfortunately for or to become due to the Contractor and/or by drawing on the petitioner, this Court is not called upon to rule upon the issue of Security."45 defaultsuch issue having been submitted by the parties to the A contract once perfected, binds the parties not only to the fulfillment jurisdiction of the arbitral tribunals pursuant to the terms embodied in of what has been expressly stipulated but also to all the consequences their agreement.47 which according to their nature, may be in keeping with good faith, Would injunction then be the proper remedy to restrain the alleged usage, and law.46 A careful perusal of the Turnkey Contract reveals the wrongful draws on the Securities? intention of the parties to make the Securities answerable for the Most writers agree that fraud is an exception to the independence liquidated damages occasioned by any delay on the part of petitioner. principle. Professor Dolan opines that the untruthfulness of a The call upon the Securities, while not an exclusive remedy on the part certificate accompanying a demand for payment under a standby of LHC, is certainly an alternative recourse available to it upon the credit may qualify as fraud sufficient to support an injunction against happening of the contingency for which the Securities have been payment.48 The remedy for fraudulent abuse is an injunction. However, injunction should not be granted unless: (a) there is clear Securities in case of default, as provided in Clause 4.2.5, in relation to proof of fraud; (b) the fraud constitutes fraudulent abuse of the Clause 8.7.2, thus: independent purpose of the letter of credit and not only fraud under 4.2.5 The Employer shall give the Contractor seven days' notice of the main agreement; and (c) irreparable injury might follow if calling upon any of the Securities, stating the nature of the default for injunction is not granted or the recovery of damages would be which the claim on any of the Securities is to be made, provided that seriously damaged.49 no notice will be required if the Employer calls upon any of the In its complaint for injunction before the trial court, petitioner alleged Securities for the payment of Liquidated Damages for Delay or for that it is entitled to a total extension of two hundred fifty-three (253) failure by the Contractor to renew or extend the Securities within 14 days which would move the target completion date. It argued that if days of their expiration in accordance with Clause 4.2.2.56 its claims for extension would be found meritorious by the ICC, then 8.7.2 The Employer may, without prejudice to any other method of LHC would not be entitled to any liquidated damages.50 recovery, deduct the amount of such damages from any monies due, Generally, injunction is a preservative remedy for the protection of or to become due, to the Contractor and/or by drawing on the one's substantive right or interest; it is not a cause of action in itself Security.57 but merely a provisional remedy, an adjunct to a main suit. The The pendency of the arbitration proceedings would not per se make issuance of the writ of preliminary injunction as an ancillary or LHC's draws on the Securities wrongful or fraudulent for there was preventive remedy to secure the rights of a party in a pending case is nothing in the Contract which would indicate that the parties intended entirely within the discretion of the court taking cognizance of the that all disputes regarding delay should first be settled through case, the only limitation being that this discretion should be exercised arbitration before LHC would be allowed to call upon the Securities. based upon the grounds and in the manner provided by law.51 It is therefore premature and absurd to conclude that the draws on the Before a writ of preliminary injunction may be issued, there must be Securities were outright fraudulent given the fact that the ICC and a clear showing by the complaint that there exists a right to be CIAC have not ruled with finality on the existence of default. protected and that the acts against which the writ is to be directed are Nowhere in its complaint before the trial court or in its pleadings filed violative of the said right.52 It must be shown that the invasion of the before the appellate court, did petitioner invoke the fraud exception right sought to be protected is material and substantial, that the right rule as a ground to justify the issuance of an injunction.58 What of complainant is clear and unmistakable and that there is an urgent petitioner did assert before the courts below was the fact that LHC's and paramount necessity for the writ to prevent serious damage.53 draws on the Securities would be premature and without basis in view Moreover, an injunctive remedy may only be resorted to when there of the pending disputes between them. Petitioner should not be is a pressing necessity to avoid injurious consequences which cannot allowed in this instance to bring into play the fraud exception rule to be remedied under any standard compensation.54 sustain its claim for the issuance of an injunctive relief. Matters, In the instant case, petitioner failed to show that it has a clear and theories or arguments not brought out in the proceedings below will unmistakable right to restrain LHC's call on the Securities which ordinarily not be considered by a reviewing court as they cannot be would justify the issuance of preliminary injunction. By petitioner's raised for the first time on appeal.59 The lower courts could thus not be own admission, the right of LHC to call on the Securities was faulted for not applying the fraud exception rule not only because the contractually rooted and subject to the express stipulations in the existence of fraud was fundamentally interwoven with the issue of Turnkey Contract.55 Indeed, the Turnkey Contract is plain and default still pending before the arbitral tribunals, but more so, because unequivocal in that it conferred upon LHC the right to draw upon the petitioner never raised it as an issue in its pleadings filed in the courts below. At any rate, petitioner utterly failed to show that it had a clear were prohibited from engaging in or working for an enterprise that and unmistakable right to prevent LHC's call upon the Securities. competed with their former employerthe very purpose of the Of course, prudence should have impelled LHC to await resolution of preliminary injunction has expired, any declaration upholding the the pending issues before the arbitral tribunals prior to taking action propriety of the writ would be entirely useless as there would be no to enforce the Securities. But, as earlier stated, the Turnkey Contract actual case or controversy between the parties insofar as the did not require LHC to do so and, therefore, it was merely enforcing preliminary injunction is concerned. its rights in accordance with the tenor thereof. Obligations arising In the instant case, the consummation of the act sought to be restrained from contracts have the force of law between the contracting parties had rendered the instant petition mootfor any declaration by this and should be complied with in good faith.60 More importantly, Court as to propriety or impropriety of the non-issuance of injunctive pursuant to the principle of autonomy of contracts embodied in Article relief could have no practical effect on the existing controversy.65 The 1306 of the Civil Code,61 petitioner could have incorporated in its other issues raised by petitioner particularly with respect to its right to Contract with LHC, a proviso that only the final determination by the recover the amounts wrongfully drawn on the Securities, according to arbitral tribunals that default had occurred would justify the it, could properly be threshed out in a separate proceeding. enforcement of the Securities. However, the fact is petitioner did not One final point. LHC has charged petitioner of forum-shopping. It do so; hence, it would have to live with its inaction. raised the charge on two occasions. First, in its Counter-Manifestation With respect to the issue of whether the respondent banks were dated 29 June 200466 LHC alleges that petitioner presented before this justified in releasing the amounts due under the Securities, this Court Court the same claim for money which it has filed in two other reiterates that pursuant to the independence principle the banks were proceedings, to wit: ICC Case No. 11264/TE/MW and Civil Case No. under no obligation to determine the veracity of LHC's certification 04-332 before the RTC of Makati. LHC argues that petitioner's acts that default has occurred. Neither were they bound by petitioner's constitutes forum-shopping which should be punished by the declaration that LHC's call thereon was wrongful. To repeat, dismissal of the claim in both forums. Second, in its Comment to respondent banks' undertaking was simply to pay once the required Petitioner's Motion for Leave to File Addendum to Petitioner's documents are presented by the beneficiary. Memorandum dated 8 October 2004, LHC alleges that by maintaining At any rate, should petitioner finally prove in the pending arbitration the present appeal and at the same time pursuing Civil Case No. 04- proceedings that LHC's draws upon the Securities were wrongful due 332wherein petitioner pressed for judgment on the issue of whether to the non-existence of the fact of default, its right to seek the funds LHC drew on the Securities should be returnedpetitioner indemnification for damages it suffered would not normally be resorted to forum-shopping. In both instances, however, petitioner has foreclosed pursuant to general principles of law. apparently opted not to respond to the charge. Moreover, in a Manifestation,62 dated 30 March 2001, LHC informed Forum-shopping is a very serious charge. It exists when a party this Court that the subject letters of credit had been fully drawn. This repetitively avails of several judicial remedies in different courts, fact alone would have been sufficient reason to dismiss the instant simultaneously or successively, all substantially founded on the same petition. transactions and the same essential facts and circumstances, and all Settled is the rule that injunction would not lie where the acts sought raising substantially the same issues either pending in, or already to be enjoined have already become fait accompli or an accomplished resolved adversely, by some other court.67 It may also consist in the or consummated act.63 In Ticzon v. Video Post Manila, Inc.64 this act of a party against whom an adverse judgment has been rendered in Court ruled that where the period within which the former employees one forum, of seeking another and possibly favorable opinion in another forum other than by appeal or special civil action of certiorari, or the institution of two or more actions or proceedings grounded on the same cause on the supposition that one or the other court might look with favor upon the other party.68 To determine whether a party violated the rule against forum-shopping, the test applied is whether the elements of litis pendentia are present or whether a final judgment in one case will amount to res judicata in another.69 Forum-shopping constitutes improper conduct and may be punished with summary dismissal of the multiple petitions and direct contempt of court.70 Considering the seriousness of the charge of forum-shopping and the severity of the sanctions for its violation, the Court will refrain from making any definitive ruling on this issue until after petitioner has been given ample opportunity to respond to the charge. WHEREFORE, the instant petition is DENIED, with costs against petitioner. Petitioner is hereby required to answer the charge of forum-shopping within fifteen (15) days from notice. SO ORDERED.