G.R. No. 94209 April 30, 1991
One set of non-negotiable documents was
FEATI BANK & TRUST COMPANY (now CITYTRUST
BANKING CORPORATION), petitioner,
vs.
THE COURT OF APPEALS, and BERNARDO E.
VILLALUZ, respondents.
Pelaez, Adriano & Gregorio for petitioner.
Ezequiel S. Consulta for private respondent.
GUTIERREZ, JR., J.:
This is a petition for review seeking the reversal of the decision
of the Court of Appeals dated June 29, 1990 which affirmed the
decision of the Regional Trial Court of Rizal dated October 20,
1986 ordering the defendants Christiansen and the petitioner, to
pay various sums to respondent Villaluz, jointly and severally.
The facts of the case are as follows:
On June 3, 1971, Bernardo E. Villaluz agreed to sell to the then
defendant Axel Christiansen 2,000 cubic meters of lauan logs at
$27.00 per cubic meter FOB.
After inspecting the logs, Christiansen issued purchase order
No. 76171.
On the arrangements made and upon the instructions of the
consignee, Hanmi Trade Development, Ltd., de Santa Ana,
California, the Security Pacific National Bank of Los Angeles,
California issued Irrevocable Letter of Credit No. IC-46268
available at sight in favor of Villaluz for the sum of $54,000.00,
the total purchase price of the lauan logs.
The letter of credit was mailed to the Feati Bank and Trust
Company (now Citytrust) with the instruction to the latter that it
"forward the enclosed letter of credit to the beneficiary."
(Records, Vol. I, p. 11)
The letter of credit further provided that the draft to be drawn is
on Security Pacific National Bank and that it be accompanied by
the following documents:
1. Signed Commercial Invoice in four copies showing
the number of the purchase order and certifying that —
a. All terms and conditions of the purchase
order have been complied with and that all
logs are fresh cut and quality equal to or
better than that described in H.A.
Christiansen's telex #201 of May 1, 1970, and
that all logs have been marked "BEV-EX."
b. One complete set of documents, including
1/3 original bills of lading was airmailed to
Consignee and Parties to be advised by
Hans-Axel Christiansen, Ship and
Merchandise Broker.
c.
airmailed to Han Mi Trade Development
Company and one set to Consignee and
Parties to be advised by Hans-Axel
Christiansen, Ship and Merchandise Broker.
2. Tally sheets in quadruplicate.
3. 2/3 Original Clean on Board Ocean Bills of Lading
with Consignee and Parties to be advised by Hans
Axel Christiansen, showing Freight Prepaid and
marked Notify:
Han Mi Trade Development Company, Ltd., Santa
Ana, California.
Letter of Credit No. 46268 dated June 7, 1971
Han Mi Trade Development Company, Ltd., P.O. Box
10480, Santa Ana, California 92711 and Han Mi Trade
Development Company, Ltd., Seoul, Korea.
4. Certification from Han-Axel Christiansen, Ship and
Merchandise Broker, stating that logs have been
approved prior to shipment in accordance with terms
and conditions of corresponding purchase Order.
(Record, Vol. 1 pp. 11-12)
Also incorporated by reference in the letter of credit is the
Uniform Customs and Practice for Documentary Credits (1962
Revision).
The logs were thereafter loaded on the vessel "Zenlin Glory"
which was chartered by Christiansen. Before its loading, the
logs were inspected by custom inspectors Nelo Laurente,
Alejandro Cabiao, Estanislao Edera from the Bureau of
Customs (Records, Vol. I, p. 124) and representatives Rogelio
Cantuba and Jesus Tadena of the Bureau of Forestry (Records,
Vol. I, pp. 16-17) all of whom certified to the good condition and
exportability of the logs.
After the loading of the logs was completed, the Chief Mate,
Shao Shu Wang issued a mate receipt of the cargo which stated
the same are in good condition (Records, Vol. I, p. 363).
However, Christiansen refused to issue the certification as
required in paragraph 4 of the letter of credit, despite several
requests made by the private respondent.
Because of the absence of the certification by Christiansen, the
Feati Bank and Trust Company refused to advance the payment
on the letter of credit.
The letter of credit lapsed on June 30, 1971, (extended,
however up to July 31, 1971) without the private respondent
receiving any certification from Christiansen.
The persistent refusal of Christiansen to issue the certification
prompted the private respondent to bring the matter before the
Central Bank. In a memorandum dated August 16, 1971, the
Central Bank ruled that:
. . . pursuant to the Monetary Board Resolution No.
1230 dated August 3, 1971, in all log exports, the
certification of the lumber inspectors of the Bureau of
 Forestry . . . shall be considered final for purposes of
negotiating documents. Any provision in any letter of
credit covering log exports requiring certification of
buyer's agent or representative that said logs have
been approved for shipment as a condition precedent
to negotiation of shipping documents shall not be
allowed. (Records, Vol. I, p. 367)
Meanwhile, the logs arrived at Inchon, Korea and were received
by the consignee, Hanmi Trade Development Company, to
whom Christiansen sold the logs for the amount of $37.50 per
cubic meter, for a net profit of $10 per cubic meter. Hanmi Trade
Development Company, on the other hand sold the logs to
Taisung Lumber Company at Inchon, Korea. (Rollo, p. 39)
Since the demands by the private respondent for Christiansen
to execute the certification proved futile, Villaluz, on September
1, 1971, instituted an action for mandamus and specific
performance against Christiansen and the Feati Bank and Trust
Company (now Citytrust) before the then Court of First Instance
of Rizal. The petitioner was impleaded as defendant before the
lower court only to afford complete relief should the court a
quo order Christiansen to execute the required certification.
The complaint prayed for the following:
1. Christiansen be ordered to issue the certification
required of him under the Letter of Credit;
2. Upon issuance of such certification, or, if the court
should find it unnecessary, FEATI BANK be ordered to
accept negotiation of the Letter of Credit and make
payment thereon to Villaluz;
3. Order Christiansen to pay damages to the plaintiff.
(Rollo, p. 39)
On or about 1979, while the case was still pending trial,
Christiansen left the Philippines without informing the Court and
his counsel. Hence, Villaluz, filed an amended complaint to
make the petitioner solidarily liable with Christiansen.
The trial court, in its order dated August 29, 1979, admitted the
amended complaint.
After trial, the lower court found:
The liability of the defendant CHRISTIANSEN is
beyond dispute, and the plaintiffs right to demand
payment is absolute. Defendant CHRISTIANSEN
having accepted delivery of the logs by having them
loaded in his chartered vessel the "Zenlin Glory" and
shipping them to the consignee, his buyer Han Mi
Trade in Inchon, South Korea (Art. 1585, Civil Code),
his obligation to pay the purchase order had clearly
arisen and the plaintiff may sue and recover the price
of the goods (Art. 1595, Id).
The Court believes that the defendant CHRISTIANSEN
acted in bad faith and deceit and with intent to defraud
the plaintiff, reflected in and aggravated by, not only his
refusal to issue the certification that would have
enabled without question the plaintiff to negotiate the
letter of credit, but his accusing the plaintiff in his
answer of fraud, intimidation, violence and deceit.
These accusations said defendant did not attempt to
prove, as in fact he left the country without even
notifying his own lawyer. It was to the Court's mind a
pure swindle.
The defendant Feati Bank and Trust Company, on the
other hand, must be held liable together with his (sic)
co-defendant for having, by its wrongful act, i.e., its
refusal to negotiate the letter of credit in the absence of
CHRISTIANSEN's certification (in spite of the Central
Bank's ruling that the requirement was illegal),
prevented payment to the plaintiff. The said letter of
credit, as may be seen on its face, is irrevocable and
the issuing bank, the Security Pacific National Bank in
Los Angeles, California, undertook by its terms that the
same shall be honored upon its presentment. On the
other hand, the notifying bank, the defendant Feati
Bank and Trust Company, by accepting the
instructions from the issuing bank, itself assumed the
very same undertaking as the issuing bank under the
terms of the letter of credit.
xxx xxx xxx
The Court likewise agrees with the plaintiff that the
defendant BANK may also be held liable under the
principles and laws on both trust and estoppel. When
the defendant BANK accepted its role as the notifying
and negotiating bank for and in behalf of the issuing
bank, it in effect accepted a trust reposed on it, and
became a trustee in relation to plaintiff as the
beneficiary of the letter of credit. As trustee, it was then
duty bound to protect the interests of the plaintiff under
the terms of the letter of credit, and must be held liable
for damages and loss resulting to the plaintiff from its
failure to perform that obligation.
Furthermore, when the defendant BANK assumed the
role of a notifying and negotiating BANK it in effect
represented to the plaintiff that, if the plaintiff complied
with the terms and conditions of the letter of credit and
presents the same to the BANK together with the
documents mentioned therein the said BANK will pay
the plaintiff the amount of the letter of credit. The Court
is convinced that it was upon the strength of this letter
of credit and this implied representation of the
defendant BANK that the plaintiff delivered the logs to
defendant CHRISTIANSEN, considering that the
issuing bank is a foreign bank with whom plaintiff had
no business connections and CHRISTIANSEN had not
offered any other Security for the payment of the logs.
Defendant BANK cannot now be allowed to deny its
commitment and liability under the letter of credit:
A holder of a promissory note given because
of gambling who indorses the same to an
innocent holder for value and who assures
said party that the note has no legal defect, is
in estoppel from asserting that there had been
an illegal consideration for the note, and so,
he has to pay its value. (Rodriguez v.
Martinez, 5 Phil. 67).
The defendant BANK, in insisting upon the certification
of defendant CHRISTIANSEN as a condition precedent
to negotiating the letter of credit, likewise in the Court's
opinion acted in bad faith, not only because of the clear
 declaration of the Central Bank that such a
requirement was illegal, but because the BANK, with
all the legal counsel available to it must have known
that the condition was void since it depended on the
sole will of the debtor, the defendant CHRISTIANSEN.
(Art. 1182, Civil Code) (Rollo, pp. 29-31)
On the basis of the foregoing the trial court on October 20,
1986, ruled in favor of the private respondent. The dispositive
portion of its decision reads:
WHEREFORE, judgment is hereby rendered for the
plaintiff, ordering the defendants to pay the plaintiff,
jointly and severally, the following sums:
a) $54,000.00 (US), or its peso equivalent at the
prevailing rate as of the time payment is actually made,
representing the purchase price of the logs;
b) P17,340.00, representing government fees and
charges paid by plaintiff in connection with the logs
shipment in question;
c) P10,000.00 as temperate damages (for trips made
to Bacolod and Korea).
All three foregoing sums shall be with interest thereon
at 12% per annum from September 1, 1971, when the
complaint was filed, until fully paid:
d) P70,000.00 as moral damages;
e) P30,000.00 as exemplary damages; and
f) P30,000.00 as attorney's fees and litigation expense.
(Rollo, p. 28)
The petitioner received a copy of the decision on November 3,
1986. Two days thereafter, or on November 5, 1986, it filed a
notice of appeal.
On November 10, 1986, the private respondent filed a motion
for the immediate execution of the judgment on the ground that
the appeal of the petitioner was frivolous and dilatory.
The trial court ordered the immediate execution of its judgment
upon the private respondent's filing of a bond.
The petitioner then filed a motion for reconsideration and a
motion to suspend the implementation of the writ of execution.
Both motions were, however, denied. Thus, petitioner filed
before the Court of Appeals a petition for certiorari and
prohibition with preliminary injunction to enjoin the immediate
execution of the judgment.
The Court of Appeals in a decision dated April 9, 1987 granted
the petition and nullified the order of execution, the dispositive
portion of the decision states:
WHEREFORE, the petition for certiorari is granted.
Respondent Judge's order of execution dated
December 29, 1986, as well as his order dated
January 14, 1987 denying the petitioner's urgent
motion to suspend the writ of execution against its
properties are hereby annulled and set aside insofar as
they are sought to be enforced and implemented
against the petitioner Feati Bank & Trust Company,
now Citytrust Banking Corporation, during the
pendency of its appeal from the adverse decision in
Civil Case No. 15121. However, the execution of the
same decision against defendant Axel Christiansen did
not appeal said decision may proceed unimpeded. The
Sheriff s levy on the petitioner's properties, and the
notice of sale dated January 13, 1987 (Annex M), are
hereby annulled and set aside. Rollo p. 44)
A motion for reconsideration was thereafter filed by the private
respondent. The Court of Appeals, in a resolution dated June
29, 1987 denied the motion for reconsideration.
In the meantime, the appeal filed by the petitioner before the
Court of Appeals was given due course. In its decision dated
June 29, 1990, the Court of Appeals affirmed the decision of the
lower court dated October 20, 1986 and ruled that:
1. Feati Bank admitted in the "special and negative
defenses" section of its answer that it was the bank to
negotiate the letter of credit issued by the Security
Pacific National Bank of Los Angeles, California.
(Record, pp. 156, 157). Feati Bank did notify Villaluz of
such letter of credit. In fact, as such negotiating bank,
even before the letter of credit was presented for
payment, Feati Bank had already made an advance
payment of P75,000.00 to Villaluz in anticipation of
such presentment. As the negotiating bank, Feati
Bank, by notifying Villaluz of the letter of credit in
behalf of the issuing bank (Security Pacific), confirmed
such letter of credit and made the same also its own
obligation. This ruling finds support in the authority
cited by Villaluz:
A confirmed letter of credit is one in which the notifying
bank gives its assurance also that the opening bank's
obligation will be performed. In such a case, the
notifying bank will not simply transmit but will confirm
the opening bank's obligation by making it also its own
undertaking, or commitment, or guaranty or obligation.
(Ward & Hatfield, 28-29, cited in Agbayani,
Commercial Laws, 1978 edition, p. 77).
Feati Bank argues further that it would be considered
as the negotiating bank only upon negotiation of the
letter of credit. This stance is untenable. Assurance,
commitments or guaranties supposed to be made by
notifying banks to the beneficiary of a letter of credit, as
defined above, can be relevant or meaningful only with
respect to a future transaction, that is, negotiation.
Hence, even before actual negotiation, the notifying
bank, by the mere act of notifying the beneficiary of the
letter of credit, assumes as of that moment the
obligation of the issuing bank.
2. Since Feati Bank acted as guarantor of the issuing
bank, and in effect also of the latter's principal or
client, i.e. Hans Axel-Christiansen. (sic) Such being the
case, when Christiansen refused to issue the
certification, it was as though refusal was made by
Feati Bank itself. Feati Bank should have taken steps
to secure the certification from Christiansen; and, if the
 latter should still refuse to comply, to hale him to court.
In short, Feati Bank should have honored Villaluz's
demand for payment of his logs by virtue of the
irrevocable letter of credit issued in Villaluz's favor and
guaranteed by Feati Bank.
3. The decision promulgated by this Court in CA-G.R.
Sp No. 11051, which contained the statement "Since
Villaluz" draft was not drawn strictly in compliance with
the terms of the letter of credit, Feati Bank's refusal to
negotiate it was justified," did not dispose of this
question on the merits. In that case, the question
involved was jurisdiction or discretion, and not
judgment. The quoted pronouncement should not be
taken as a preemptive judgment on the merits of the
present case on appeal.
4. The original action was for "Mandamus and/or
specific performance." Feati Bank may not be a party
to the transaction between Christiansen and Security
Pacific National Bank on the one hand, and Villaluz on
the other hand; still, being guarantor or agent of
Christiansen and/or Security Pacific National Bank
which had directly dealt with Villaluz, Feati Bank may
be sued properly on specific performance as a
procedural means by which the relief sought by Villaluz
may be entertained. (Rollo, pp. 32-33)
The dispositive portion of the decision of the Court of Appeals
reads:
WHEREFORE, the decision appealed from is affirmed;
and accordingly, the appeal is hereby dismissed. Costs
against the petitioner. (Rollo, p. 33)
Hence, this petition for review.
The petitioner interposes the following reasons for the
allowance of the petition.
First Reason
THE RESPONDENT COURT ERRONEOUSLY
CONCLUDED FROM THE ESTABLISHED FACTS
AND INDEED, WENT AGAINST THE EVIDENCE AND
DECISION OF THIS HONORABLE COURT, THAT
PETITIONER BANK IS LIABLE ON THE LETTER OF
CREDIT DESPITE PRIVATE RESPONDENTS NON-
COMPLIANCE WITH THE TERMS THEREOF,
Second Reason
THE RESPONDENT COURT COMMITTED AN
ERROR OF LAW WHEN IT HELD THAT PETITIONER
BANK, BY NOTIFYING PRIVATE RESPONDENT OF
THE LETTER OF CREDIT, CONFIRMED SUCH
CREDIT AND MADE THE SAME ALSO ITS
OBLIGATION AS GUARANTOR OF THE ISSUING
BANK.
Third Reason
THE RESPONDENT COURT LIKEWISE COMMITTED
AN ERROR OF LAW WHEN IT AFFIRMED THE
TRIAL COURT'S DECISION. (Rollo, p. 12)
The principal issue in this case is whether or not a
correspondent bank is to be held liable under the letter of credit
despite non-compliance by the beneficiary with the terms
thereof?
The petition is impressed with merit.
It is a settled rule in commercial transactions involving letters of
credit that the documents tendered must strictly conform to the
terms of the letter of credit. The tender of documents by the
beneficiary (seller) must include all documents required by the
letter. A correspondent bank which departs from what has been
stipulated under the letter of credit, as when it accepts a faulty
tender, acts on its own risks and it may not thereafter be able to
recover from the buyer or the issuing bank, as the case may be,
the money thus paid to the beneficiary Thus the rule of strict
compliance.
In the United States, commercial transactions involving letters of
credit are governed by the rule of strict compliance. In the
Philippines, the same holds true. The same rule must also be
followed.
The case of Anglo-South America Trust Co. v. Uhe et al. (184
N.E. 741 [1933]) expounded clearly on the rule of strict
compliance.
We have heretofore held that these letters of credit are
to be strictly complied with which documents, and
shipping documents must be followed as stated in the
letter. There is no discretion in the bank or trust
company to waive any requirements. The terms of the
letter constitutes an agreement between the purchaser
and the bank. (p. 743)
Although in some American decisions, banks are granted a little
discretion to accept a faulty tender as when the other
documents may be considered immaterial or superfluous, this
theory could lead to dangerous precedents. Since a bank deals
only with documents, it is not in a position to determine whether
or not the documents required by the letter of credit are material
or superfluous. The mere fact that the document was specified
therein readily means that the document is of vital importance to
the buyer.
Moreover, the incorporation of the Uniform Customs and
Practice for Documentary Credit (U.C.P. for short) in the letter of
credit resulted in the applicability of the said rules in the
governance of the relations between the parties.
And even if the U.C.P. was not incorporated in the letter of
credit, we have already ruled in the affirmative as to the
applicability of the U.C.P. in cases before us.
In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we
pronounced that the observance of the U.C.P. in this jurisdiction
is justified by Article 2 of the Code of Commerce. Article 2 of the
Code of Commerce enunciates that in the absence of any
particular provision in the Code of Commerce, commercial
transactions shall be governed by the usages and customs
generally observed.
There being no specific provision which governs the legal
complexities arising from transactions involving letters of credit
not only between the banks themselves but also between banks
and seller and/or buyer, the applicability of the U.C.P. is
undeniable.
The pertinent provisions of the U.C.P. (1962 Revision) are:
Article 3.
An irrevocable credit is a definite undertaking on the
part of the issuing bank and constitutes the
engagement of that bank to the beneficiary and bona
fide holders of drafts drawn and/or documents
presented thereunder, that the provisions for payment,
acceptance or negotiation contained in the credit will
be duly fulfilled,provided that all the terms and
conditions of the credit are complied with.
An irrevocable credit may be advised to a beneficiary
through another bank (the advising bank) without
engagement on the part of that bank, but when an
issuing bank authorizes or requests another bank to
confirm its irrevocable credit and the latter does so,
such confirmation constitutes a definite undertaking of
the confirming bank. . . .
Article 7.
Banks must examine all documents with reasonable
care to ascertain that they appear on their face to be in
accordance with the terms and conditions of the
credit,"
Article 8.
Payment, acceptance or negotiation against
documents which appear on their face to be in
accordance with the terms and conditions of a credit by
a bank authorized to do so, binds the party giving the
authorization to take up documents and reimburse the
bank which has effected the payment, acceptance or
negotiation. (Emphasis Supplied)
Under the foregoing provisions of the U.C.P., the bank may only
negotiate, accept or pay, if the documents tendered to it are on
their face in accordance with the terms and conditions of the
documentary credit. And since a correspondent bank, like the
petitioner, principally deals only with documents, the absence of
any document required in the documentary credit justifies the
refusal by the correspondent bank to negotiate, accept or pay
the beneficiary, as it is not its obligation to look beyond the
documents. It merely has to rely on the completeness of the
documents tendered by the beneficiary.
In regard to the ruling of the lower court and affirmed by the
Court of Appeals that the petitioner is not a notifying bank but a
confirming bank, we find the same erroneous.
The trial court wrongly mixed up the meaning of an irrevocable
credit with that of a confirmed credit. In its decision, the trial
court ruled that the petitioner, in accepting the obligation to
notify the respondent that the irrevocable credithas been
transmitted to the petitioner on behalf of the private respondent,
has confirmed the letter.
The trial court appears to have overlooked the fact that an
irrevocable credit is not synonymous with a confirmed credit.
These types of letters have different meanings and the legal
relations arising from there varies. A credit may be
an irrevocable credit and at the same time a confirmed credit or
vice-versa.
An irrevocable credit refers to the duration of the letter of credit.
What is simply means is that the issuing bank may not without
the consent of the beneficiary (seller) and the applicant (buyer)
revoke his undertaking under the letter. The issuing bank does
not reserve the right to revoke the credit. On the other hand, a
confirmed letter of credit pertains to the kind of obligation
assumed by the correspondent bank. In this case, the
correspondent bank gives an absolute assurance to the
beneficiary that it will undertake the issuing bank's obligation as
its own according to the terms and conditions of the credit.
(Agbayani, Commercial Laws of the Philippines, Vol. 1, pp. 81-
83)
Hence, the mere fact that a letter of credit is irrevocable does
not necessarily imply that the correspondent bank in accepting
the instructions of the issuing bank has also confirmed the letter
of credit. Another error which the lower court and the Court of
Appeals made was to confuse the obligation assumed by the
petitioner.
In commercial transactions involving letters of credit, the
functions assumed by a correspondent bank are classified
according to the obligations taken up by it. The correspondent
bank may be called a notifying bank, a negotiating bank, or a
confirming bank.
In case of a notifying bank, the correspondent bank assumes no
liability except to notify and/or transmit to the beneficiary the
existence of the letter of credit. (Kronman and Co., Inc. v. Public
National Bank of New York, 218 N.Y.S. 616 [1926]; Shaterian,
Export-Import Banking, p. 292, cited in Agbayani, Commercial
Laws of the Philippines, Vol. 1, p. 76). A negotiating bank, on
the other hand, is a correspondent bank which buys or
discounts a draft under the letter of credit. Its liability is
dependent upon the stage of the negotiation. If before
negotiation, it has no liability with respect to the seller but after
negotiation, a contractual relationship will then prevail between
the negotiating bank and the seller. (Scanlon v. First National
Bank of Mexico, 162 N.E. 567 [1928]; Shaterian, Export-Import
Banking, p. 293, cited in Agbayani, Commercial Laws of the
Philippines, Vol. 1, p. 76)
In the case of a confirming bank, the correspondent bank
assumes a direct obligation to the seller and its liability is a
primary one as if the correspondent bank itself had issued the
letter of credit. (Shaterian, Export-Import Banking, p. 294, cited
in Agbayani Commercial Laws of the Philippines, Vol. 1, p. 77)
In this case, the letter merely provided that the petitioner
"forward the enclosed original credit to the beneficiary."
(Records, Vol. I, p. 11) Considering the aforesaid instruction to
the petitioner by the issuing bank, the Security Pacific National
Bank, it is indubitable that the petitioner is only a notifying bank
and not a confirming bank as ruled by the courts below.
If the petitioner was a confirming bank, then a categorical
declaration should have been stated in the letter of credit that
the petitioner is to honor all drafts drawn in conformity with the
letter of credit. What was simply stated therein was the
instruction that the petitioner forward the original letter of credit
to the beneficiary.
Since the petitioner was only a notifying bank, its responsibility
was solely to notify and/or transmit the documentary of credit to
the private respondent and its obligation ends there.
The notifying bank may suggest to the seller its willingness to
negotiate, but this fact alone does not imply that the notifying
bank promises to accept the draft drawn under the documentary
credit.
A notifying bank is not a privy to the contract of sale between
the buyer and the seller, its relationship is only with that of the
issuing bank and not with the beneficiary to whom he assumes
no liability. It follows therefore that when the petitioner refused
to negotiate with the private respondent, the latter has no cause
of action against the petitioner for the enforcement of his rights
under the letter. (See Kronman and Co., Inc. v. Public National
Bank of New York, supra)
In order that the petitioner may be held liable under the letter,
there should be proof that the petitioner confirmed the letter of
credit.
The records are, however, bereft of any evidence which will
disclose that the petitioner has confirmed the letter of credit. The
only evidence in this case, and upon which the private
respondent premised his argument, is the P75,000.00 loan
extended by the petitioner to him.
The private respondent relies on this loan to advance his
contention that the letter of credit was confirmed by the
petitioner. He claims that the loan was granted by the petitioner
to him, "in anticipation of the presentment of the letter of credit."
The proposition advanced by the private respondent has no
basis in fact or law. That the loan agreement between them be
construed as an act of confirmation is rather far-fetched, for it
depends principally on speculative reasoning.
As earlier stated, there must have been an absolute assurance
on the part of the petitioner that it will undertake the issuing
bank's obligation as its own. Verily, the loan agreement it
entered into cannot be categorized as an emphatic assurance
that it will carry out the issuing bank's obligation as its own.
The loan agreement is more reasonably classified as an
isolated transaction independent of the documentary credit.
Of course, it may be presumed that the petitioner loaned the
money to the private respondent in anticipation that it would
later be paid by the latter upon the receipt of the letter. Yet, we
would have no basis to rule definitively that such "act" should be
construed as an act of confirmation.
The private respondent no doubt was in need of money in
loading the logs on the ship "Zenlin Glory" and the only way to
satisfy this need was to borrow money from the petitioner which
the latter granted. From these circumstances, a logical
conclusion that can be gathered is that the letter of credit was
merely to serve as a collateral.
At the most, when the petitioner extended the loan to the private
respondent, it assumed the character of a negotiating bank.
Even then, the petitioner will still not be liable, for a negotiating
bank before negotiation has no contractual relationship with the
seller.
The case of Scanlon v. First National Bank (supra)
perspicuously explained the relationship between the seller and
the negotiating bank, viz:
It may buy or refuse to buy as it chooses. Equally, it
must be true that it owes no contractual duty toward
the person for whose benefit the letter is written to
discount or purchase any draft drawn against the
credit. No relationship of agent and principal, or of
trustee and cestui, between the receiving bank and the
beneficiary of the letter is established. (P.568)
Whether therefore the petitioner is a notifying bank or a
negotiating bank, it cannot be held liable. Absent any definitive
proof that it has confirmed the letter of credit or has actually
negotiated with the private respondent, the refusal by the
petitioner to accept the tender of the private respondent is
justified.
In regard to the finding that the petitioner became a "trustee in
relation to the plaintiff (private respondent) as the beneficiary of
the letter of credit," the same has no legal basis.
A trust has been defined as the "right, enforceable solely in
equity, to the beneficial enjoyment of property the legal title to
which is vested to another." (89 C.J.S. 712)
The concept of a trust presupposes the existence of a specific
property which has been conferred upon the person for the
benefit of another. In order therefore for the trust theory of the
private respondent to be sustained, the petitioner should have
had in its possession a sum of money as specific fund advanced
to it by the issuing bank and to be held in trust by it in favor of
the private respondent. This does not obtain in this case.
The mere opening of a letter of credit, it is to be noted, does not
involve a specific appropriation of a sum of money in favor of
the beneficiary. It only signifies that the beneficiary may be able
to draw funds upon the letter of credit up to the designated
amount specified in the letter. It does not convey the notion that
a particular sum of money has been specifically reserved or has
been held in trust.
What actually transpires in an irrevocable credit is that the
correspondent bank does not receive in advance the sum of
money from the buyer or the issuing bank. On the contrary,
when the correspondent bank accepts the tender and pays the
amount stated in the letter, the money that it doles out comes
not from any particular fund that has been advanced by the
issuing bank, rather it gets the money from its own funds and
then later seeks reimbursement from the issuing bank.
Granting that a trust has been created, still, the petitioner may
not be considered a trustee. As the petitioner is only a notifying
bank, its acceptance of the instructions of the issuing bank will
not create estoppel on its part resulting in the acceptance of the
trust. Precisely, as a notifying bank, its only obligation is to notify
the private respondent of the existence of the letter of credit.
How then can such create estoppel when that is its only duty
under the law?
We also find erroneous the statement of the Court of Appeals
that the petitioner "acted as a guarantor of the issuing bank and
in effect also of the latter's principal or client, i.e., Hans Axel
Christiansen."
It is a fundamental rule that an irrevocable credit is independent
not only of the contract between the buyer and the seller but
also of the credit agreement between the issuing bank and the
buyer. (See Kingdom of Sweden v. New York Trust Co., 96
N.Y.S. 2d 779 [1949]). The relationship between the buyer
(Christiansen) and the issuing bank (Security Pacific National
Bank) is entirely independent from the letter of credit issued by
the latter.
The contract between the two has no bearing as to the non-
compliance by the buyer with the agreement between the latter
and the seller. Their contract is similar to that of a contract of
services (to open the letter of credit) and not that of agency as
was intimated by the Court of Appeals. The unjustified refusal
therefore by Christiansen to issue the certification under the
letter of credit should not likewise be charged to the issuing
bank.
As a mere notifying bank, not only does the petitioner not have
any contractual relationship with the buyer, it has also nothing to
do with the contract between the issuing bank and the buyer
regarding the issuance of the letter of credit.
The theory of guarantee relied upon by the Court of Appeals
has to necessarily fail. The concept of guarantee vis-a-vis the
concept of an irrevocable credit are inconsistent with each
other.
In the first place, the guarantee theory destroys the
independence of the bank's responsibility from the contract
upon which it was opened. In the second place, the nature of
both contracts is mutually in conflict with each other. In
contracts of guarantee, the guarantor's obligation is merely
collateral and it arises only upon the default of the person
primarily liable. On the other hand, in an irrevocable credit the
bank undertakes a primary obligation. (SeeNational Bank of
Eagle Pass, Tex v. American National Bank of San Francisco,
282 F. 73 [1922])
The relationship between the issuing bank and the notifying
bank, on the contrary, is more similar to that of an agency and
not that of a guarantee. It may be observed that the notifying
bank is merely to follow the instructions of the issuing bank
which is to notify or to transmit the letter of credit to the
beneficiary. (See Kronman v. Public National Bank of New
York, supra). Its commitment is only to notify the beneficiary. It
does not undertake any assurance that the issuing bank will
perform what has been mandated to or expected of it. As an
agent of the issuing bank, it has only to follow the instructions of
the issuing bank and to it alone is it obligated and not to buyer
with whom it has no contractual relationship.
In fact the notifying bank, even if the seller tenders all the
documents required under the letter of credit, may refuse to
negotiate or accept the drafts drawn thereunder and it will still
not be held liable for its only engagement is to notify and/or
transmit to the seller the letter of credit.
Finally, even if we assume that the petitioner is a confirming
bank, the petitioner cannot be forced to pay the amount under
the letter. As we have previously explained, there was a failure
on the part of the private respondent to comply with the terms of
the letter of credit.
The failure by him to submit the certification was fatal to his
case.1âwphi1 The U.C.P. which is incorporated in the letter of
credit ordains that the bank may only pay the amount specified
under the letter if all the documents tendered are on their face in
compliance with the credit. It is not tasked with the duty of
ascertaining the reason or reasons why certain documents have
not been submitted, as it is only concerned with the documents.
Thus, whether or not the buyer has performed his responsibility
towards the seller is not the bank's problem.
We are aware of the injustice committed by Christiansen on the
private respondent but we are deciding the controversy on the
basis of what the law is, for the law is not meant to favor only
those who have been oppressed, the law is to govern future
relations among people as well. Its commitment is to all and not
to a single individual. The faith of the people in our justice
system may be eroded if we are to decide not what the law
states but what we believe it should declare. Dura lex sed lex.
Considering the foregoing, the materiality of ruling upon the
validity of the certificate of approval required of the private
respondent to submit under the letter of credit, has become
insignificant.
In any event, we affirm the earlier ruling of the Court of Appeals
dated April 9, 1987 in regard to the petition before it
for certiorari and prohibition with preliminary injunction, to wit:
There is no merit in the respondent's contention that
the certification required in condition No. 4 of the letter
of credit was "patently illegal." At the time the letter of
credit was issued there was no Central Bank regulation
prohibiting such a condition in the letter of credit. The
letter of credit (Exh. C) was issued on June 7, 1971,
more than two months before the issuance of the
Central Bank Memorandum on August 16, 1971
disallowing such a condition in a letter of credit. In fact
the letter of credit had already expired on July 30, 1971
when the Central Bank memorandum was issued. In
any event, it is difficult to see how such a condition
could be categorized as illegal or unreasonable since
all that plaintiff Villaluz, as seller of the logs, could and
should have done was to refuse to load the logs on the
vessel "Zenlin Glory", unless Christiansen first issued
the required certification that the logs had been
approved by him to be in accordance with the terms
and conditions of his purchase order. Apparently,
Villaluz was in too much haste to ship his logs without
taking all due precautions to assure that all the terms
and conditions of the letter of credit had been strictly
complied with, so that there would be no hitch in its
negotiation. (Rollo, p. 8)
WHEREFORE, the COURT RESOLVED to GRANT the petition
and hereby NULLIFIES and SETS ASIDE the decision of the
Court of Appeals dated June 29, 1990. The amended complaint
in Civil Case No. 15121 is DISMISSED.
SO ORDERED.
G.R. No. 105395 December 10, 1993
BANK OF AMERICA, NT & SA, petitioners,
vs.
COURT OF APPEALS, INTER-RESIN INDUSTRIAL
CORPORATION, FRANCISCO TRAJANO, JOHN DOE AND
JANE DOE, respondents.
Agcaoili & Associates for petitioner.
Valenzuela Law Center, Victor Fernandez and Ramon Guevarra
for private respondents.
VITUG, J.:
A "fiasco," involving an irrevocable letter of credit, has found the
distressed parties coming to court as adversaries in seeking a
definition of their respective rights or liabilities thereunder.
On 05 March 1981, petitioner Bank of America, NT & SA,
Manila, received by registered mail an Irrevocable Letter of
Credit No. 20272/81 purportedly issued by Bank of Ayudhya,
Samyaek Branch, for the account of General Chemicals, Ltd., of
Thailand in the amount of US$2,782,000.00 to cover the sale of
plastic ropes and "agricultural files," with the petitioner as
advising bank and private respondent Inter-Resin Industrial
Corporation as beneficiary.
On 11 March 1981, Bank of America wrote Inter-Resin informing
the latter of the foregoing and transmitting, along with the bank's
communication, the latter of credit. Upon receipt of the letter-
advice with the letter of credit, Inter-Resin sent Atty. Emiliano
Tanay to Bank of America to have the letter of credit confirmed.
The bank did not. Reynaldo Dueñas, bank employee in charge
of letters of credit, however, explained to Atty. Tanay that there
was no need for confirmation because the letter of credit would
not have been transmitted if it were not genuine.
Between 26 March to 10 April 1981, Inter-Resin sought to make
a partial availment under the letter of credit by submitting to
Bank of America invoices, covering the shipment of 24,000
bales of polyethylene rope to General Chemicals valued at
US$1,320,600.00, the corresponding packing list, export
declaration and bill of lading. Finally, after being satisfied that
Inter-Resin's documents conformed with the conditions
expressed in the letter of credit, Bank of America issued in favor
of Inter-Resin a Cashier's Check for P10,219,093.20, "the Peso
equivalent of the draft (for) US$1,320,600.00 drawn by Inter-
Resin, after deducting the costs for documentary stamps,
postage and mail issuance." 1 The check was picked up by
Inter-Resin's Executive Vice-President Barcelina Tio. On 10
April 1981, Bank of America wrote Bank of Ayudhya advising
the latter of the availment under the letter of credit and sought
the corresponding reimbursement therefor.
Meanwhile, Inter-Resin, through Ms. Tio, presented to Bank of
America the documents for the second availment under the
same letter of credit consisting of a packing list, bill of lading,
invoices, export declaration and bills in set, evidencing the
second shipment of goods. Immediately upon receipt of a telex
from the Bank of Ayudhya declaring the letter of credit
fraudulent, 2 Bank of America stopped the processing of Inter-
Resin's documents and sent a telex to its branch office in
Bangkok, Thailand, requesting assistance in determining the
authenticity of the letter of credit. 3 Bank of America kept Inter-
Resin informed of the developments. Sensing a fraud, Bank of
America sought the assistance of the National Bureau of
Investigation (NBI). With the help of the staff of the Philippine
Embassy at Bangkok, as well as the police and customs
personnel of Thailand, the NBI agents, who were sent to
Thailand, discovered that the vans exported by Inter-Resin did
not contain ropes but plastic strips, wrappers, rags and waste
materials. Here at home, the NBI also investigated Inter-Resin's
President Francisco Trajano and Executive Vice President
Barcelina Tio, who, thereafter, were criminally charged for
estafa through falsification of commercial documents. The case,
however, was eventually dismissed by the Rizal Provincial
Fiscal who found no prima facieevidence to warrant
prosecution.
Bank of America sued Inter-Resin for the recovery of
P10,219,093.20, the peso equivalent of the draft for
US$1,320,600.00 on the partial availment of the now disowned
letter of credit. On the other hand, Inter-Resin claimed that not
only was it entitled to retain P10,219,093.20 on its first shipment
but also to the balance US$1,461,400.00 covering the second
shipment.
On 28 June 1989, the trial court ruled for Inter-Resin, 4 holding
that:
(a) Bank of America made assurances that enticed Inter-Resin
to send the merchandise to Thailand; (b) the telex declaring the
letter of credit fraudulent was unverified and self-serving, hence,
hearsay, but even assuming that the letter of credit was fake,
"the fault should be borne by the BA which was careless and
negligent" 5 for failing to utilize its modern means of
communication to verify with Bank of Ayudhya in Thailand the
authenticity of the letter of credit before sending the same to
Inter-Resin; (c) the loading of plastic products into the vans
were under strict supervision, inspection and verification of
government officers who have in their favor the presumption of
regularity in the performance of official functions; and (d) Bank
of America failed to prove the participation of Inter-Resin or its
employees in the alleged fraud as, in fact, the complaint for
estafa through falsification of documents was dismissed by the
Provincial Fiscal of Rizal.6
On appeal, the Court of Appeals 7 sustained the trial court;
hence, this present recourse by petitioner Bank of America.
The following issues are raised by Bank of America: (a) whether
it has warranted the genuineness and authenticity of the letter of
credit and, corollarily, whether it has acted merely as an
advising bank or as a confirming bank; (b) whether Inter-Resin
has actually shipped the ropes specified by the letter of credit;
and (c) following the dishonor of the letter of credit by Bank of
Ayudhya, whether Bank of America may recover against Inter-
Resin under the draft executed in its partial availment of the
letter of credit.8
In rebuttal, Inter-Resin holds that: (a) Bank of America cannot,
on appeal, belatedly raise the issue of being only an advising
bank; (b) the findings of the trial court that the ropes have
actually been shipped is binding on the Court; and, (c) Bank of
America cannot recover from Inter-Resin because the drawer of
the letter of credit is the Bank of Ayudhya and not Inter-Resin.
If only to understand how the parties, in the first place, got
themselves into the mess, it may be well to start by recalling
how, in its modern use, a letter of credit is employed in trade
transactions.
A letter of credit is a financial device developed by merchants as
a convenient and relatively safe mode of dealing with sales of
goods to satisfy the seemingly irreconcilable interests of a
seller, who refuses to part with his goods before he is paid, and
a buyer, who wants to have control of the goods before
paying. 9 To break the impasse, the buyer may be required to
contract a bank to issue a letter of credit in favor of the seller so
that, by virtue of the latter of credit, the issuing bank can
authorize the seller to draw drafts and engage to pay them upon
their presentment simultaneously with the tender of documents
required by the letter of credit. 10 The buyer and the seller agree
on what documents are to be presented for payment, but
ordinarily they are documents of title evidencing or attesting to
the shipment of the goods to the buyer.
Once the credit is established, the seller ships the goods to the
buyer and in the process secures the required shipping
documents or documents of title. To get paid, the seller
executes a draft and presents it together with the required
documents to the issuing bank. The issuing bank redeems the
draft and pays cash to the seller if it finds that the documents
submitted by the seller conform with what the letter of credit
requires. The bank then obtains possession of the documents
upon paying the seller. The transaction is completed when the
buyer reimburses the issuing bank and acquires the documents
entitling him to the goods. Under this arrangement, the seller
gets paid only if he delivers the documents of title over the
goods, while the buyer acquires said documents and control
over the goods only after reimbursing the bank.
What characterizes letters of credit, as distinguished from other
accessory contracts, is the engagement of the issuing bank to
pay the seller of the draft and the required shipping documents
are presented to it. In turn, this arrangement assures the seller
of prompt payment, independent of any breach of the main
sales contract. By this so-called "independence principle," the
bank determines compliance with the letter of credit only by
examining the shipping documents presented; it is precluded
from determining whether the main contract is actually
accomplished or not. 11
There would at least be three (3) parties: (a) the buyer, 12 who
procures the letter of credit and obliges himself to reimburse the
issuing bank upon receipts of the documents of title; (b)
the bank issuing the letter of credit, 13 which undertakes to pay
the seller upon receipt of the draft and proper document of titles
and to surrender the documents to the buyer upon
reimbursement; and, (c) the seller, 14 who in compliance with the
contract of sale ships the goods to the buyer and delivers the
documents of title and draft to the issuing bank to recover
payment.
The number of the parties, not infrequently and almost
invariably in international trade practice, may be increased.
Thus, the services of an advising (notifying) bank 15 may be
utilized to convey to the seller the existence of the credit; or, of
a confirming bank 16 which will lend credence to the letter of
credit issued by a lesser known issuing bank; or, of a paying
bank, 17 which undertakes to encash the drafts drawn by the
exporter. Further, instead of going to the place of the issuing
bank to claim payment, the buyer may approach another bank,
termed the negotiating bank, 18 to have the draft discounted.
Being a product of international commerce, the impact of this
commercial instrument transcends national boundaries, and it is
thus not uncommon to find a dearth of national law that can
adequately provide for its governance. This country is no
exception. Our own Code of Commerce basically introduces
only its concept under Articles 567-572, inclusive, thereof. It is
no wonder then why great reliance has been placed on
commercial usage and practice, which, in any case, can be
justified by the universal acceptance of the autonomy of contract
rules. The rules were later developed into what is now known as
the Uniform Customs and Practice for Documentary Credits
("U.C.P.") issued by the International Chamber of Commerce. It
is by no means a complete text by itself, for, to be sure, there
are other principles, which, although part of lex mercatoria, are
not dealt with the U.C.P.
In FEATI Bank and Trust Company v. Court of Appeals, 19 we
have accepted, to the extent of their pertinency, the application
in our jurisdiction of this international commercial credit
regulatory set of rules. 20 In Bank of Phil. Islands v. De
Nery, 21 we have said that the observances of the U.C.P. is
justified by Article 2 of the Code of Commerce which expresses
that, in the absence of any particular provision in the Code of
Commerce, commercial transactions shall be governed by
usages and customs generally observed. We have further
observed that there being no specific provisions which govern
the legal complexities arising from transactions involving letters
of credit not only between or among banks themselves but also
between banks and the seller or the buyer, as the case may be,
the applicability of the U.C.P. is undeniable.
The first issue raised with the petitioner, i.e., that it has in this
instance merely been advising bank, is outrightly rejected by
Inter-Resin and is thus sought to be discarded for having been
raised only on appeal. We cannot agree. The crucial point of
dispute in this case is whether under the "letter of credit," Bank
of America has incurred any liability to the "beneficiary" thereof,
an issue that largely is dependent on the bank's participation in
that transaction; as a mere advising or notifying bank, it would
not be liable, but as a confirming bank, had this been the case,
it could be considered as having incurred that liability. 22
In Insular Life Assurance Co. Ltd. Employees Association —
Natu vs. Insular Life Assurance Co., Ltd., 23 the Court said:
Where the issues already raised also rest on other issues not
specifically presented, as long as the latter issues bear
relevance and close relation to the former and as long as they
arise from the matters on record, the court has the authority to
include them in its discussion of the controversy and to pass
upon them just as well. In brief, in those cases where questions
not particularly raised by the parties surface as necessary for
the complete adjudication of the rights and obligations of the
parties, the interests of justice dictate that the court should
consider and resolve them. The rule that only issues or theories
raised in the initial proceedings may be taken up by a party
thereto on appeal should only refer to independent, not
concomitant matters, to support or oppose the cause of action
or defense. The evil that is sought to be avoided, i.e., surprise to
the adverse party, is in reality not existent on matters that are
properly litigated in the lower court and appear on record.
It cannot seriously be disputed, looking at this case, that Bank of
America has, in fact, only been an advising, not confirming,
bank, and this much is clearly evident, among other things, by
the provisions of the letter of credit itself, the petitioner bank's
letter of advice, its request for payment of advising fee, and the
admission of Inter-Resin that it has paid the same. That Bank of
America has asked Inter-Resin to submit documents required by
the letter of credit and eventually has paid the proceeds thereof,
did not obviously make it a confirming bank. The fact, too, that
the draft required by the letter of credit is to be drawn under the
account of General Chemicals (buyer) only means the same
had to be presented to Bank of Ayudhya (issuing bank) for
payment. It may be significant to recall that the letter of credit is
an engagement of the issuing bank, not the advising bank, to
pay the draft.
No less important is that Bank of America's letter of 11 March
1981 has expressly stated that "[t]he enclosure is solely an
advise of credit opened by the abovementioned correspondent
and conveys no engagement by us." 24This written reservation
by Bank of America in limiting its obligation only to being an
advising bank is in consonance with the provisions of U.C.P.
As an advising or notifying bank, Bank of America did not incur
any obligation more than just notifying Inter-Resin of the letter of
credit issued in its favor, let alone to confirm the letter of
credit. 25 The bare statement of the bank employees,
aforementioned, in responding to the inquiry made by Atty.
Tanay, Inter-Resin's representative, on the authenticity of the
letter of credit certainly did not have the effect of novating the
letter of credit and Bank of America's letter of advise, 26 nor can
it justify the conclusion that the bank must now assume total
liability on the letter of credit. Indeed, Inter-Resin itself cannot
claim to have been all that free from fault. As the seller, the
issuance of the letter of credit should have obviously been a
great concern to it. 27 It would have, in fact, been strange if it did
not, prior to the letter of credit, enter into a contract, or
negotiated at the every least, with General Chemicals. 28 In the
ordinary course of business, the perfection of contract precedes
the issuance of a letter of credit.
Bringing the letter of credit to the attention of the seller is the
primordial obligation of an advising bank. The view that Bank of
America should have first checked the authenticity of the letter
of credit with bank of Ayudhya, by using advanced mode of
business communications, before dispatching the same to Inter-
Resin finds no real support in U.C.P. Article 18 of the U.C.P.
states that: "Banks assume no liability or responsibility for the
consequences arising out of the delay and/or loss in transit of
any messages, letters or documents, or for delay, mutilation or
other errors arising in the transmission of any
telecommunication . . ." As advising bank, Bank of America is
bound only to check the "apparent authenticity" of the letter of
credit, which it did. 29 Clarifying its meaning, Webster's Ninth
New Collegiate Dictionary 30 explains that the word "APPARENT
suggests appearance to unaided senses that is not or may not
be borne out by more rigorous examination or greater
knowledge."
May Bank of America then recover what it has paid under the
letter of credit when the corresponding draft for partial availment
thereunder and the required documents were later negotiated
with it by Inter-Resin? The answer is yes. This kind of
transaction is what is commonly referred to as a discounting
arrangement. This time, Bank of America has acted
independently as a negotiating bank, thus saving Inter-Resin
from the hardship of presenting the documents directly to Bank
of Ayudhya to recover payment. (Inter-Resin, of course, could
have chosen other banks with which to negotiate the draft and
the documents.) As a negotiating bank, Bank of America has a
right to recourse against the issuer bank and until
reimbursement is obtained, Inter-Resin, as the drawer of the
draft, continues to assume a contingent liability thereon. 31
While bank of America has indeed failed to allege material facts
in its complaint that might have likewise warranted the
application of the Negotiable Instruments Law and possible then
allowed it to even go after the indorsers of the draft, this failure,
32/ nonetheless, does not preclude petitioner bank's right (as
negotiating bank) of recovery from Inter-Resin itself. Inter-Resin
admits having received P10,219,093.20 from bank of America
on the letter of credit and in having executed the corresponding
draft. The payment to Inter-Resin has given, as aforesaid, Bank
of America the right of reimbursement from the issuing bank,
Bank of Ayudhya which, in turn, would then seek indemnification
from the buyer (the General Chemicals of Thailand). Since Bank
of Ayudhya disowned the letter of credit, however, Bank of
America may now turn to Inter-Resin for restitution.
Between the seller and the negotiating bank
there is the usual relationship existing
between a drawer and purchaser of drafts.
Unless drafts drawn in pursuance of the credit
are indicated to be without recourse therefore,
the negotiating bank has the ordinary right of
recourse against the seller in the event of
dishonor by the issuing bank . . . The fact that
the correspondent and the negotiating bank
may be one and the same does not affect its
rights and obligations in either capacity,
although a special agreement is always a
possibility . . . 33
The additional ground raised by the petitioner, i.e., that Inter-
Resin sent waste instead of its products, is really of no
consequence. In the operation of a letter of credit, the involved
banks deal only with documents and not on goods described in
those documents. 34
The other issues raised in then instant petition, for instance,
whether or not Bank of Ayudhya did issue the letter of credit and
whether or not the main contract of sale that has given rise to
the letter of credit has been breached, are not relevant to this
controversy. They are matters, instead, that can only be of
concern to the herein parties in an appropriate recourse against
those, who, unfortunately, are not impleaded in these
proceedings.
In fine, we hold that —
First, given the factual findings of the courts below, we conclude
that petitioner Bank of America has acted merely as a notifying
bank and did not assume the responsibility of a confirming bank;
and
Second, petitioner bank, as a negotiating bank, is entitled to
recover on Inter-Resin's partial availment as beneficiary of the
letter of credit which has been disowned by the alleged issuer
bank.
No judgment of civil liability against the other defendants,
Francisco Trajano and other unidentified parties, can be made,
in this instance, there being no sufficient evidence to warrant
any such finding.
WHEREFORE, the assailed decision is SET ASIDE, and
respondent Inter-Resin Industrial Corporation is ordered to
refund to petitioner Bank of America NT & SA the amount of
P10,219,093.20 with legal interest from the filing of the
complaint until fully paid.
No costs.
SO ORDERED.
G.R. No. 183486
THE HONGKONG & SHANGHAI BANKING CORPORATION,
LIMITED, Petitioner,
vs.
NATIONAL STEEL CORPORATION and CITYTRUST
BANKING CORPORATION (NOW BANK OF THE PHILIPPINE
ISLANDS), Respondents.
DECISION
JARDELEZA, J.:
This is a petition for review on certiorari under Rule 45 of the
Rules of Court. Petitioner The Hongkong & Shanghai Banking
Corporation, Limited (HSBC) filed this petition to assail the
Decision of the Court of Appeals (CA) dated November 19,
2007 (Assailed Decision) which reversed the ruling of the
Regional Trial Court, Branch 62 of Makati City (RTC Makati)
and its Resolution denying HSBC's Motion for Reconsideration
dated June 23, 2008 (Assailed Resolution).
The Facts
Respondent National Steel Corporation (NSC) entered into an
Export Sales Contract (the Contract) with Klockner East Asia
Limited (Klockner) on October 12, 1993. 1 NSC sold 1,200
metric tons of prime cold rolled coils to Klockner under FOB ST
Iligan terms. In accordance with the requirements in the
Contract, Klockner applied for an irrevocable letter of credit with
HSBC in favor of NSC as the beneficiary in the amount of
US$468,000. On October 22, 1993, HSBC issued an
irrevocable and onsight letter of credit no. HKH 239409 (the
Letter of Credit) in favor of NSC.2 The Letter of Credit stated that
it is governed by the International Chamber of Commerce
Uniform Customs and Practice for Documentary Credits,
Publication No. 400 (UCP 400). Under UCP 400, HSBC as the
issuing bank, has the obligation to immediately pay NSC upon
presentment of the documents listed in the Letter of Credit.3
These documents are: (1) one original commercial invoice; (2)
one packing list; (3) one non-negotiable copy of clean on board
ocean bill of lading made out to order, blank endorsed marked
'freight collect and notify applicant;' (4) copy of Mill Test
Certificate made out 'to whom it may concern;' (5) copy of
beneficiary's telex to applicant (Telex No. 86660 Klock HX)
advising shipment details including DIC No., shipping marks,
name of vessel, port of shipment, port of destination, bill of
lading date, sailing and ETA dates, description of goods, size,
weight, number of packages and value of goods latest two days
after shipment date; and (6) beneficiary's certificate certifying
that (a) one set of non-negotiable copies of documents (being
those listed above) have been faxed to applicant (FAX No.
5294987) latest two days after shipment date; and (b) one set of
documents including one copy each of invoice and packing list,
3/3 original bills of lading plus one non-negotiable copy and
three original Mill Test Certificates have been sent to applicant
by air courier service latest two days after shipment date. 4
The Letter of Credit was amended twice to reflect changes in
the terms of delivery. On November 2, 1993, the Letter of Credit
was first amended to change the delivery terms from FOB ST
Iligan to FOB ST Manila and to increase the amount to
US$488,400.5 It was subsequently amended on November 18,
1993 to extend the expiry and shipment date to December 8,
1993.6 On November 21, 1993, NSC, through Emerald
Forwarding Corporation, loaded and shipped the cargo of prime
cold rolled coils on board MV Sea Dragon under China Ocean
Shipping Company Bill of Lading No. HKG 266001. The cargo
arrived in Hongkong on November 25, 1993.7
NSC coursed the collection of its payment from Klockner
through CityTrust Banking Corporation (CityTrust). NSC had
earlier obtained a loan from CityTrust secured by the proceeds
of the Letter of Credit issued by HSBC.8
On November 29, 1993, CityTrust sent a collection order
(Collection Order) to HSBC respecting the collection of payment
from Klockner. The Collection Order instructed as follows: (1)
deliver documents against payment; (2) cable advice of non-
payment with reason; (3) cable advice payment; and (4) remit
proceeds via TELEX. 9 The Collection Order also contained the
following statement: "Subject to Uniform Rules for the Collection
of Commercial Paper Publication No. 322." 10 Further, the
Collection Order stated that proceeds should be remitted to
Standard Chartered Bank of Australia, Ltd., Offshore Branch
Manila (SCB-M) which was, in turn, in charge of remitting the
amount to CityTrust. 11 On the same date, CityTrust also
presented to HSBC the following documents: (1) Letter of
Credit; (2) Bill of Lading; (3) Commercial Invoice; ( 4) Packing
List; (5) Mill Test Certificate; (6) NSC's TELEX to Klockner on
shipping details; (7) Beneficiary's Certificate of facsimile
transmittal of documents; (8) Beneficiary's Certificate of air
courier transmittal of documents; and (9) DHL Receipt No.
669988911 and Certificate of Origin. 12
On December 2, 1993, HSBC sent a cablegram to CityTrust
acknowledging receipt of the Collection Order. It also stated that
the documents will be presented to "the drawee against
payment subject to UCP 322 [Uniform Rules for Collection
(URC) 322] as instructed ... " 13 SCB-M then sent a cablegram
to HSBC requesting the latter to urgently remit the proceeds to
its account. It further asked that HSBC inform it "if unable to
pay" 14 and of the "reasons thereof." 15 Neither CityTrust nor
SCB-M objected to HSBC's statement that the collection will be
handled under the Uniform Rules for Collection (URC 322).
On December 7, 1993, HSBC responded to SCB-M and sent a
cablegram where it repeated that "this bill is being handled
subject to [URC] 322 as instructed by [the] collecting bank." 16 It
also informed SCB-M that it has referred the matter to Klockner
for payment and that it will revert upon the receipt of the
amount. 17 On December 8, 1993, the Letter of Credit expired.18
On December 10, 1993, HSBC sent another cablegram to SCB-
M advising it that Klockner had refused payment. It then
informed SCB-M that it intends to return the documents to NSC
with all the banking charges for its account. 19In a cablegram
dated December 14, 1993, CityTrust requested HSBC to inform
it of Klockner's reason for refusing payment so that it may refer
the matter to NSC.20 HSBC did not respond and CityTrust thus
sent a follow-up cablegram to HSBC on December 17, 1993. In
this cablegram, CityTrust insisted that a demand for payment
must be made from Klockner since the documents "were found
in compliance with LC terms and conditions."21 HSBC replied on
the same day stating that in accordance with CityTrust's
instruction in its Collection Order, HSBC treated the transaction
as a matter under URC 322. Thus, it demanded payment from
Klockner which unfortunately refused payment for unspecified
reasons. It then noted that under URC 322, Klockner has no
duty to provide a reason for the refusal. Hence, HSBC
requested for further instructions as to whether it should
continue to press for payment or return the
documents.22 CityTrust responded that as advised by its client,
HSBC should continue to press for payment. 23
Klockner continued to refuse payment and HSBC notified
CityTrust in a cablegram dated January 7, 1994, that should
Klockner still refuse to accept the bill by January 12, 1994, it will
return the full set of documents to CityTrust with all the charges
for the account of the drawer. 24
Meanwhile, on January 12, 1994, CityTrust sent a letter to NSC
stating that it executed NSC's instructions "to send, ON
COLLECTION BASIS, the export documents ... "25 CityTrust
also explained that its act of sending the export documents on
collection basis has been its usual practice in response to
NSC's instructions in its transactions.26
NSC responded to this in a letter dated January 18,
1994.27 NSC expressed its disagreement with CityTrust's
contention that it sent the export documents to HSBC on
collection basis. It highlighted that it "negotiated with CityTrust
the export documents pertaining to LC No. HKH 239409 of
HSBC and it was CityTrust, which wrongfully treated the
negotiation, as 'on collection basis."' 28 NSC further claimed that
CityTrust used its own mistake as an excuse against payment
under the Letter of Credit. Thus, NSC argued that CityTrust
remains liable under the Letter of Credit. It also stated that it
presumes that CityTrust has preserved whatever right of
reimbursement it may have against HSBC. 29
On January 13, 1994, CityTrust notified HSBC that it should
continue to press for payment and to hold on to the document
until further notice. 30
However, Klockner persisted in its refusal to pay. Thus, on
February 17, 1994, HSBC returned the documents to
CityTrust. 31 In a letter accompanying the returned documents,
HSBC stated that it considered itself discharged of its duty
under the transaction. It also asked for payment of handling
charges.32 In response, CityTrust sent a cablegram to HSBC
dated February 21, 1994 stating that it is "no longer possible for
beneficiary to wait for you to get paid by applicant." 33 It
explained that since the documents required under the Letter of
Credit have been properly sent to HSBC, Citytrust demanded
payment from it. CityTrust also stated, for the first time in all of
its correspondence with HSBC, that "re your previous telexes,
ICC Publication No. 322 is not applicable."34 HSBC responded
in cablegram dated February 28, 1994.35 It insisted that
CityTrust sent documents which clearly stated that the collection
was being made under URC 322. Thus, in accordance with its
instructions, HSBC, in the next three months, demanded
payment from Klockner which the latter eventually refused.
Hence, HSBC stated that it opted to return the documents. It
then informed CityTrust that it considered the transaction closed
save for the latter's obligation to pay the handling charges.36
Disagreeing with HSBC' s position, CityTrust sent a cablegram
dated March 9, 1994.37 It insisted that HSBC should pay it in
accordance with the terms of the Letter of Credit which it issued
on October 22, 1993. Under the Letter of Credit, HSBC
undertook to reimburse the presenting bank under "ICC 400
upon the presentment of all necessary documents."38 CityTrust
also stated that the reference to URC 322 in its Collection Order
was merely in fine print. The Collection Order itself was only
pro-forma. CityTrust emphasized that the reference to URC 322
has been "obviously superseded by our specific instructions to
'deliver documents against payment/cable advice non-payment
with reason/cable advice payment/remit proceeds via telex'
which was typed in on said form."39 CityTrust also claimed that
the controlling document is the Letter of Credit and not the mere
fine print on the Collection Order.40HSBC replied on March 10,
1994.41 It argued that CityTrust clearly instructed it to collect
payment under URC 322, thus, CityTrust can no longer claim a
contrary position three months after it made its request. HSBC
repeated that the transaction is closed except for CityTrust's
obligation to pay for the expenses which HSBC incurred. 42
Meanwhile, on March 3, 1994, NSC sent a letter to HSBC where
it, for the first time, demanded payment under the Letter of
Credit. 43 On March 11, 1994, the NSC sent another letter to
HSBC through the Office of the Corporate Counsel which
served as its final demand. These demands were made after
approximately four months from the expiration of the Letter of
Credit.
Unable to collect from HSBC, NSC filed a complaint against it
for collection of sum of money (Complaint)44 docketed as Civil
Case No. 94-2122 (Collection Case) of the RTC Makati. In its
Complaint, NSC alleged that it coursed the collection of the
Letter of Credit through CityTrust. However, notwithstanding
CityTrust's complete presentation of the documents in
accordance with the requirements in the Letter of Credit, HSBC
unreasonably refused to pay its obligation in the amount of
US$485,767.93.45
HSBC filed its Answer46 on January 6, 1995. HSBC denied any
liability under the Letter of Credit. It argued in its Answer that
CityTrust modified the obligation when it stated in its Collection
Order that the transaction is subject to URC 322 and not under
UCP 400.47 It also filed a Motion to Admit Attached Third-Party
Complaint48 against CityTrust on November 21, 1995.49 It
claimed that CityTrust instructed it to collect payment under
URC 322 and never raised that it intended to collect under the
Letter of Credit.50 HSBC prayed that in the event that the court
finds it liable to NSC, CityTrust should be subrogated in its place
and be made directly liable to NSC.51 The RTC Makati granted
the motion and admitted the third party complaint. CityTrust filed
its Answer52 on January 8, 1996. CityTrust denied that it
modified the obligation. It argued that as a mere agent, it cannot
modify the terms of the Letter of Credit without the consent of all
the parties. 53 Further, it explained that the supposed instruction
that the transaction is subject to URC 322 was merely in fine
print in a pro forma document and was superimposed and
pasted over by a large pink sticker with different remittance
instructions.54
After a full-blown trial,55 the RTC Makati rendered a decision
(RTC Decision) dated February 23, 2000.56 It found that HSBC
is not liable to pay NSC the amount stated in the Letter of
Credit. It ruled that the applicable law is URC 322 as it was the
law which CityTrust intended to apply to the transaction. Under
URC 322, HSBC has no liability to pay when Klockner refused
payment. The dispositive portion states -
WHEREFORE, premises considered, judgment is hereby
rendered as follows:
1. Plaintiffs Complaint against HSBC is DISMISSED; and,
HSBC's Counterclaims against NSC are DENIED.
2. Ordering Third-Party Defendant CityTrust to pay Third-Party
Plaintiff HSBC the following:
2.1 US$771.21 as actual and consequential damages;
and
2.2 Pl00,000 as attorney's fees.
3. No pronouncement as to costs.
SO ORDERED.57
NSC and CityTrust appealed the RTC Decision before the CA.
In its Assailed Decision dated November 19, 2007,58the CA
reversed the RTC Makati. The CA found that it is UCP 400 and
not URC 322 which governs the transaction. According to the
CA, the terms of the Letter of Credit clearly stated that UCP 400
shall apply. Further, the CA explained that even if the Letter of
Credit did not state that UCP 400 governs, it nevertheless finds
application as this Court has consistently recognized it under
Philippine jurisdiction. Thus, applying UCP 400 and principles
concerning letters of credit, the CA explained that the obligation
of the issuing bank is to pay the seller or beneficiary of the credit
once the draft and the required documents are properly
presented. Under the independence principle, the issuing bank's
obligation to pay under the letter of credit is separate from the
compliance of the parties in the main contract. The dispositive
portion held -
WHEREFORE, in view of the foregoing, the assailed decision is
hereby REVERSED and SET ASIDE. HSBC is ordered to pay
its obligation under the irrevocable letter of credit in the amount
of US$485,767.93 to NSC with legal interest of six percent (6%)
per annum from the filing of the complaint until the amount is
fully paid, plus attorney's fees equivalent to 10% of the principal.
Costs against appellee HSBC.
SO ORDERED.59
HSBC filed a Motion for Reconsideration of the Assailed
Decision which the CA denied in its Assailed Resolution dated
June 23, 2008.60
Hence, HSBC filed this Petition for Review on Certiorari61 before
this Court, seeking a reversal of the CA' s Assailed Decision and
Resolution. In its petition, HSBC contends that CityTrust's order
to collect under URC 322 did not modify nor contradict the
Letter of Credit. In fact, it is customary practice in commercial
transactions for entities to collect under URC 322 even if there
is an underlying letter of credit. Further, CityTrust acted as an
agent of NSC in collecting payment and as such, it had the
authority to instruct HSBC to proceed under URC 322 and not
under UCP 400. Having clearly and expressly instructed HSBC
to collect under URC 322 and having fully intended the
transaction to proceed under such rule as shown by the series
of correspondence between CityTrust and HSBC, CityTrust is
estopped from now claiming that the collection was made under
UCP 400 in accordance with the Letter of Credit.
NSC, on the other hand, claims that HSBC's obligation to pay is
clear from the terms of the Letter of Credit and under UCP 400.
It asserts that the applicable rule is UCP 400 and HSBC has no
basis to argue that CityTrust's presentment of the documents
allowed HSBC to vary the terms of their agreement. 62
The Issues
The central question in this case is who among the parties
bears the liability to pay the amount stated in the Letter of
Credit. This requires a determination of which between UCP
400 and URC 322 governs the transaction. The obligations of
the parties under the proper applicable rule will, in turn,
determine their liability.
The Ruling of the Court
We uphold the CA.
The nature of a letter of credit
A letter of credit is a commercial instrument developed to
address the unique needs of certain commercial transactions. It
is recognized in our jurisdiction and is sanctioned under Article
56763 of the Code of Commerce and in numerous jurisprudence
defining a letter of credit, the principles relating to it, and the
obligations of parties arising from it.
In Bank of America, NT & SA v. Court of Appeals,64 this Court
defined a letter of credit as " ... a financial device developed by
merchants as a convenient and relatively safe mode of dealing
with sales of goods to satisfy the seemingly irreconcilable
interests of a seller, who refuses to part with his goods before
he is paid, and a buyer, who wants to have control of the goods
before paying."65 Through a letter of credit, a buyer obtains the
credit of a third party, usually a bank, to provide assurance of
payment.66
This, in turn, convinces a seller to part with his or her goods
even before he or she is paid, as he or she is insured by the
third party that he or she will be paid as soon as he or she
presents the documents agreed upon. 67
A letter of credit generally arises out of a separate contract
requiring the assurance of payment of a third party. In a
transaction involving a letter of credit, there are usually three
transactions and three parties. The first transaction, which
constitutes the underlying transaction in a letter of credit, is a
contract of sale between the buyer and the seller. The contract
may require that the buyer obtain a letter of credit from a third
party acceptable to the seller. The obligations of the parties
under this contract are governed by our law on sales.
The second transaction is the issuance of a letter of credit
between the buyer and the issuing bank. The buyer requests
the issuing bank to issue a letter of credit naming the seller as
the beneficiary. In this transaction, the issuing bank undertakes
to pay the seller upon presentation of the documents identified
in the letter of credit. The buyer, on the other hand, obliges
himself or herself to reimburse the issuing bank for the payment
made. In addition, this transaction may also include a fee for the
issuing bank's services. 68 This transaction constitutes an
obligation on the part of the issuing bank to perform a service in
consideration of the buyer's payment. The obligations of the
parties and their remedies in cases of breach are governed by
the letter of credit itself and by our general law on obligations,
as our civil law finds suppletory application in commercial
documents. 69
The third transaction takes place between the seller and the
issuing bank. The issuing bank issues the letter of credit for the
benefit of the seller. The seller may agree to ship the goods to
the buyer even before actual payment provided that the issuing
bank informs him or her that a letter of credit has been issued
for his or her benefit. This means that the seller can draw drafts
from the issuing bank upon presentation of certain documents
identified in the letter of credit. The relationship between the
issuing bank and the seller is not strictly contractual since there
is no privity of contract nor meeting of the minds between
them. 70 It also does not constitute a stipulation pour autrui in
favor of the seller since the issuing bank must honor the drafts
drawn against the letter of credit regardless of any defect in the
underlying contract.71 Neither can it be considered as an
assignment by the buyer to the seller-beneficiary as the buyer
himself cannot draw on the letter. 72 From its inception, only the
seller can demand payment under the letter of credit. It is also
not a contract of suretyship or guaranty since it involves primary
liability in the event of default. 73 Nevertheless, while the
relationship between the seller-beneficiary and the issuing bank
is not strictly contractual, strict payment under the terms of a
letter of credit is an enforceable right. 74 This enforceable right
finds two legal underpinnings. First, letters of credit, as will be
further explained, are governed by recognized international
norms which dictate strict compliance with its terms. Second,
the issuing bank has an existing agreement with the buyer to
pay the seller upon proper presentation of documents. Thus, as
the law on obligations applies even in commercial
documents, 75 the issuing bank has a duty to the buyer to honor
in good faith its obligation under their agreement. As will be
seen in the succeeding discussion, this transaction is also
governed by international customs which this Court has
recognized in this jurisdiction. 76
In simpler terms, the various transactions that give rise to a
letter of credit proceed as follows: Once the seller ships the
goods, he or she obtains the documents required under the
letter of credit. He or she shall then present these documents to
the issuing bank which must then pay the amount identified
under the letter of credit after it ascertains that the documents
are complete. The issuing bank then holds on to these
documents which the buyer needs in order to claim the goods
shipped. The buyer reimburses the issuing bank for its payment
at which point the issuing bank releases the documents to the
buyer. The buyer is then able to present these documents in
order to claim the goods. At this point, all the transactions are
completed. The seller received payment for his or her
performance of his obligation to deliver the goods. The issuing
bank is reimbursed for the payment it made to the seller. The
buyer received the goods purchased.
Owing to the complexity of these contracts, there may be a
correspondent bank which facilitates the ease of completing the
transactions. A correspondent bank may be a notifying bank, a
negotiating bank or a confirming bank depending on the nature
of the obligations assumed. 77 A notifying bank undertakes to
inform the seller-beneficiary that a letter of credit exists. It may
also have the duty of transmitting the letter of credit. As its
obligation is limited to this duty, it assumes no liability to pay
under the letter of credit. 78 A negotiating bank, on the other
hand, purchases drafts at a discount from the seller-beneficiary
and presents them to the issuing bank for payment. 79 Prior to
negotiation, a negotiating bank has no obligation. A contractual
relationship between the negotiating bank and the seller-
beneficiary arises only after the negotiating bank purchases or
discounts the drafts. 80 Meanwhile, a confirming bank may honor
the letter of credit issued by another bank or confirms that the
letter of credit will be honored by the issuing bank. 81 A
confirming bank essentially insures that the credit will be paid in
accordance with the terms of the letter of credit.82 It therefore
assumes a direct obligation to the seller-beneficiary. 83
Parenthetically, when banks are involved in letters of credit
transactions, the standard of care imposed on banks engaged in
business imbued with public interest applies to them. Banks
have the duty to act with the highest degree of diligence in
dealing with clients. 84 Thus, in dealing with the parties in a letter
of credit, banks must also observe this degree of care.
The value of letters of credit in commerce hinges on an
important aspect of such a commercial transaction. Through a
letter of credit, a seller-beneficiary is assured of payment
regardless of the status of the underlying transaction.
International contracts of sales are perfected and consummated
because of the certainty that the seller will be paid thus making
him or her willing to part with the goods even prior to actual
receipt of the amount agreed upon. The legally demandable
obligation of an issuing bank to pay under the letter of credit,
and the enforceable right of the seller-beneficiary to demand
payment, are indispensable essentials for the system of letters
of credit, if it is to serve its purpose of facilitating commerce.
Thus, a touchstone of any law or custom governing letters of
credit is an emphasis on the imperative that issuing banks
respect their obligation to pay, and that seller-beneficiaries may
reasonably expect payment, in accordance with the terms of a
letter of credit.
Rules applicable to letters of credit
Letters of credit are defined and their incidences regulated by
Articles 567 to 57285 of the Code of Commerce. These
provisions must be read with Article 286 of the same code which
states that acts of commerce are governed by their provisions,
by the usages and customs generally observed in the particular
place and, in the absence of both rules, by civil law. In addition,
Article 5087 also states that commercial contracts shall be
governed by the Code of Commerce and special laws and in
their absence, by general civil law.
The International Chamber of Commerce (ICC)88 drafted a set
of rules to govern transactions involving letters of credit. This set
of rules is known as the Uniform Customs and Practice for
Documentary Credits (UCP). Since its first issuance in 1933, the
UCP has seen several revisions, the latest of which was in
2007, known as the UCP 600. However, for the period relevant
to this case, the prevailing version is the 1993 revision called
the UCP 400. Throughout the years, the UCP has grown to
become the worldwide standard in transactions involving letters
of credit.89 It has enjoyed near universal application with an
estimated 95% of worldwide letters of credit issued subject to
the UCP.90
In Bank of the Philippine Islands v. De Reny Fabric Industries,
Inc.,91 this Court applied a provision from the UCP in resolving a
case pertaining to a letter of credit transaction. This Court
explained that the use of international custom in our jurisdiction
is justified by Article 2 of the Code of Commerce which provides
that acts of commerce are governed by, among others, usages
and customs generally observed. Further, in Feati Bank & Trust
Company v. Court of Appeals,92 this Court ruled that the UCP
should be applied in cases where the letter of credit expressly
states that it is the governing rule.93 This Court also held
in Feati that the UCP applies even if it is not incorporated into
the letter of the credit.94 The application of the UCP in Bank of
Philippine Islands and in Feati was further affirmed
in Metropolitan Waterworks and Sewerage System v.
Daway95 where this Court held that "[l]etters of credit have long
been and are still governed by the provisions of the Uniform
Customs and Practice for Documentary Credit[s] of the
International Chamber of Commerce."96 These precedents
highlight the binding nature of the UCP in our jurisdiction.
Thus, for the purpose of clarity, letters of credit are governed
primarily by their own provisions, 97 by laws specifically
applicable to them, 98 and by usage and custom. 99 Consistent
with our rulings in several cases, 100 usage and custom refers
to UCP 400. When the particular issues are not covered by the
provisions of the letter of credit, by laws specifically applicable
to them and by UCP 400, our general civil law finds suppletory
app1ication.101
Applying this set of laws and rules, this Court rules that HSBC is
liable under the provisions of the Letter of Credit, in accordance
with usage and custom as embodied in UCP 400, and under the
provisions of general civil law.
HSBC 's Liability
The Letter of Credit categorically stated that it is subject to UCP
400, to wit:
Except so far as otherwise expressly stated, this documentary
credit is subject to uniform Customs and Practice for
Documentary Credits (1983 Revision), International Chamber of
Commerce Publication No. 400.102
From the moment that HSBC agreed to the terms of the Letter
of Credit - which states that UCP 400 applies - its actions in
connection with the transaction automatically became bound by
the rules set in UCP 400. Even assuming that URC 322 is an
international custom that has been recognized in commerce,
this does not change the fact that HSBC, as the issuing bank of
a letter of credit, undertook certain obligations dictated by the
terms of the Letter of Credit itself and by UCP 400. In Feati, this
Court applied UCP 400 even when there is no express
stipulation in the letter of credit that it governs the
transaction. 103 On the strength of our ruling in Feati, we have
the legal duty to apply UCP 400 in this case independent of the
parties' agreement to be bound by it.
UCP 400 states that an irrevocable credit payable on sight, such
as the Letter of Credit in this case, constitutes a definite
undertaking of the issuing bank to pay, provided that the
stipulated documents are presented and that the terms and
conditions of the credit are complied with. 104 Further, UCP 400
provides that an issuing bank has the obligation to examine the
documents with reasonable care. 105 Thus, when CityTrust
forwarded the Letter of Credit with the attached documents to
HSBC, it had the duty to make a determination of whether its
obligation to pay arose by properly examining the documents.
In its petition, HSBC argues that it is not UCP 400 but URC 322
that should govern the transaction. 106 URC 322 is a set of
norms compiled by the ICC. 107 It was drafted by international
experts and has been adopted by the ICC members. Owing to
the status of the ICC and the international representation of its
membership, these rules have been widely observed by
businesses throughout the world. It prescribes the collection
procedures, technology, and standards for handling collection
transactions for banks. 108 Under the facts of this case, a bank
acting in accordance with the terms of URC 322 merely
facilitates collection. Its duty is to forward the letter of credit and
the required documents from the entity seeking payment to
another entity which has the duty to pay. The bank incurs no
obligation other than as a collecting agent. This is different in
the case of an issuing bank acting in accordance with UCP 400.
In this case, the issuing bank has the duty to pay the amount
stated in the letter of credit upon due presentment. HSBC
claims that while UCP 400 applies to letters of credit, it is also
common for beneficiaries of such letters to seek collection under
URC 322. HSBC further claims that URC 322 is an accepted
custom in commerce. 109 HSBC's argument is without merit. We
note that HSBC failed to present evidence to prove that URC
322 constitutes custom and usage recognized in commerce.
Neither was there sufficient evidence to prove that beneficiaries
under a letter of credit commonly resort to collection under URC
322 as a matter of industry practice. HSBC claims that the
testimony of its witness Mr. Lincoln MacMahon (Mr. MacMahon)
suffices for this purpose. 110However, Mr. MacMahon was not
presented as an expert witness capable of establishing the
existing banking and commercial practice relating to URC 322
and letters of credit. Thus, this Court cannot hold that URC 322
and resort to it by beneficiaries of letters of credit are customs
that
demand application in this case.111
HSBC's position that URC 322 applies, thus allowing it, the
issuing bank, to disregard the Letter of Credit, and merely
demand collection from Klockner cannot be countenanced.
Such an argument effectively asks this Court to give imprimatur
to a practice that undermines the value and reliability of letters
of credit in trade and commerce. The entire system of letters of
credit rely on the assurance that upon presentment of the
proper documents, the beneficiary has an enforceable right and
the issuing bank a demandable obligation, to pay the amount
agreed upon. Were a party to the transaction allowed to simply
set this aside by the mere invocation of another set of norms
related to commerce - one that is not established as a custom
that is entitled to recognition by this Court - the sanctity of letters
of credit will be jeopardized. To repeat, any law or custom
governing letters of credit should have, at its core, an emphasis
on the imperative that issuing banks respect their obligation to
pay and that seller-beneficiaries may reasonably expect
payment in accordance with the terms of a letter of credit. Thus,
the CA correctly ruled, to wit:
At this juncture, it is significant to stress that an irrevocable letter
of credit cannot, during its lifetime, be cancelled or modified
without the express permission of the beneficiary. Not even
partial payment of the obligation by the applicant-buyer would
amend or modify the obligation of the issuing bank. The
subsequent correspondences of [CityTrust] to HSBC, thus,
could not in any way affect or amend the letter of credit, as it
was not a party thereto. As a notifying bank, it has nothing to do
with the contract between the issuing bank and the buyer
regarding the issuance of the letter of credit. 112 (Citations
omitted)
The provisions in the Civil Code and our jurisprudence apply
suppletorily in this case. 113 When a party knowingly and freely
binds himself or herself to perform an act, a juridical tie is
created and he or she becomes bound to fulfill his or her
obligation. In this case, HSBC's obligation arose from two
sources. First, it has a contractual duty to Klockner whereby it
agreed to pay NSC upon due presentment of the Letter of Credit
and the attached documents. Second, it has an obligation to
NSC to honor the Letter of Credit. In complying with its
obligation, HSBC had the duty to perform all acts necessary.
This includes a proper examination of the documents presented
to it and making a judicious inquiry of whether CityTrust, in
behalf of NSC, made a due presentment of the Letter of Credit.
Further, as a bank, HSBC has the duty to observe the highest
degree of diligence. In all of its transactions, it must exercise the
highest standard of care and must fulfill its obligations with
utmost fidelity to its clients. Thus, upon receipt of CityTrust's
Collection Order with the Letter of Credit, HSBC had the
obligation to carefully examine the documents it received. Had it
observed the standard of care expected of it, HSBC would have
discovered that the Letter of Credit is the very same document
which it issued upon the request of Klockner, its client. Had
HSBC taken the time to perform its duty with the highest degree
of diligence, it would have been alerted by the fact that the
documents presented to it corresponded with the documents
stated in the Letter of Credit, to which HSBC freely and
knowingly agreed. HSBC ought to have noticed the discrepancy
between CityTrust's request for collection under URC 322 and
the terms of the Letter of Credit. Notwithstanding any
statements by CityTrust in the Collection Order as to the
applicable rules, HSBC had the independent duty of
ascertaining whether the presentment of the Letter of Credit and
the attached documents gave rise to an obligation which it had
to Klockner (its client) and NSC (the beneficiary). Regardless of
any error that CityTrust may have committed, the standard of
care expected of HSBC dictates that it should have made a
separate detennination of the significance of the presentment of
the Letter of Credit and the attached documents. A bank
exercising the appropriate degree of diligence would have, at
the very least, inquired if NSC was seeking payment under the
Letter of Credit or merely seeking collection under URC 322. In
failing to do so, HSBC fell below the standard of care imposed
upon it.
This Court therefore rules that CityTrust's presentment of the
Letter of Credit with the attached documents in behalf of NSC,
constitutes due presentment.1avvphi1 Under the terms of the
Letter of Credit, HSBC undertook to pay the amount of
US$485,767.93 upon presentment of the Letter of Credit and
the required documents.114 In accordance with this agreement,
NSC, through CityTrust, presented the Letter of Credit and the
following documents: (1) Letter of Credit; (2) Bill of Lading; (3)
Commercial Invoice; (4) Packing List; (5) Mill Test Certificate;
(6) NSC's TELEX to Klockner on shipping details; (7)
Beneficiary's Certificate of facsimile transmittal of documents;
(8) Beneficiary's Certificate of air courier transmittal of
documents; and (9) DHL Receipt No. 669988911 and Certificate
of Origin.115
In transactions where the letter of credit is payable on sight, as
in this case, the issuer must pay upon due presentment. This
obligation is imbued with the character of definiteness in that not
even the defect or breach in the underlying transaction will
affect the issuing bank's liability. 116 This is the Independence
Principle in the law on letters of credit. Article 17 of UCP 400
explains that under this principle, an issuing bank assumes no
liability or responsibility "for the form, sufficiency, accuracy,
genuineness, falsification or legal effect of any documents, or
for the general and/or particular conditions stipulated in the
documents or superimposed thereon ... " Thus, as long as the
proper documents are presented, the issuing bank has an
obligation to pay even if the buyer should later on refuse
payment. Hence, Klockner's refusal to pay carries no effect
whatsoever on HSBC's obligation to pay under the Letter of
Credit. To allow HSBC to refuse to honor the Letter of Credit
simply because it could not collect first from Klockner is to
countenance a breach of the Independence Principle.
HSBC's persistent refusal to comply with its obligation
notwithstanding due presentment constitutes delay
contemplated in Article 1169 of the Civil Code. 117 This provision
states that a party to an obligation incurs in delay from the time
the other party makes a judicial or extrajudicial demand for the
fulfillment of the obligation. We rule that the due presentment of
the Letter of Credit and the attached documents is tantamount
to a demand. HSBC incurred in delay when it failed to fulfill its
obligation despite such a demand.
Under Article 1170 of the Civil Code, 118 a party in delay is liable
for damages. The extent of these damages pertains to the
pecuniary loss duly proven. 119 In this case, such damage refers
to the losses which NSC incurred in the amount of
US$485,767.93 as stated in the Letter of Credit. We also award
interest as indemnity for the damages incurred in the amount of
six percent (6%) from the date of NSC's extrajudicial
demand. 120 An interest in the amount of six percent (6%) is also
awarded from the time of the finality of this decision until full
payment. 121
Having been remiss in its obligations under the applicable law,
rules and jurisprudence, HSBC only has itself to blame for its
consequent liability to NSC.
However, this Court finds that there is no basis for the CA's
grant of attorney's fees in favor of NSC. Article 2208 of the Civil
Code122 enumerates the grounds for the award of attorney's
fees. This Court has explained that the award of attorney's fees
is an exception rather than the rule. 123 The winning party is not
automatically entitled to attorney's fees as there should be no
premium on the right to litigate. 124 While courts may exercise
discretion in granting attorney's fees, this Court has stressed
that the grounds used as basis for its award must approximate
as closely as possible the enumeration in Article 2208. 125 Its
award must have sufficient factual and legal
justifications. 126 This Court rules that none of the grounds
stated in Article 2208 are present in this case. NSC has not
cited any specific ground nor presented any particular fact to
warrant the award of attorney's fees.
CityTrust's Liability
When NSC obtained the services of CityTrust in collecting under
the Letter of Credit, it constituted CityTrust as its agent. Article
1868 of the Civil Code states that a contract of agency exists
when a person binds himself or herself "to render some service
or to do something in representation or on behalf of another,
with the consent or authority of the latter." In this case, CityTrust
bound itself to collect under the Letter of Credit in behalf of
NSC.
One of the obligations of an agent is to carry out the agency in
accordance with the instructions of the principal. 127In
ascertaining NSC's instructions to CityTrust, its letter dated
January 18, 1994 is determinative. In this letter, NSC clearly
stated that it "negotiated with CityTrust the export documents
pertaining to LC No. HKH 239409 of HSBC and it was CityTrust
which wrongfully treated the negotiation as 'on collection
basis."' 128 HSBC persistently communicated with CityTrust and
consistently repeated that it will proceed with collection under
URC 322. At no point did CityTrust correct HSBC or seek
clarification from NSC. In insisting upon its course of action,
CityTrust failed to act in accordance with the instructions given
by NSC, its principal. Nevertheless while this Court recognizes
that CityTrust committed a breach of its obligation to NSC, this
carries no implications on the clear liability of HSBC. As this
Court already mentioned, HSBC had a separate obligation that
it failed to perform by reason of acts independent of CityTrust's
breach of its obligation under its contract of agency. If CityTrust
has incurred any liability, it is to its principal NSC. However,
NSC has not raised any claim against CityTrust at any point in
these proceedings. Thus, this Court cannot make any finding of
liability against CityTrust in favor of NSC.
WHEREFORE, in view of the foregoing, the Assailed Decision
dated November 19, 2007 is AFFIRMED to the extent that it
orders HSBC to pay NSC the amount of US$485,767.93. HSBC
is also liable to pay legal interest of six percent (6%) per annum
from the time of extrajudicial demand. An interest of six percent
(6%) is also awarded from the time of the finality of this decision
until the amount is fully paid. We delete the award of attorney's
fees. No pronouncement as to cost.

SO ORDERED.