Philippine National Bank vs.

San Miguel Corporation

G.R. No. 186063; January 15, 2014
J. Peralta

Where the trial court rendered a decision finding the applicant of a letter of credit solely liable to pay the
beneficiary and omitted by inadvertence to insert in its decision the phrase ‘without prejudice to the decision
that will be made against the issuing bank,’ the bank cannot evade responsibility base on this ground.The
Independence Principle assures the seller or the beneficiary of prompt payment independent of any breach of
the main contract and precludes the issuing bank from determining whether the main contract is actually
accomplished or not.

Facts:

San Miguel Corporation (SMC) entered into an Exclusive Dealership Agreement with Rodolfo Goroza, wherein
the latter was given by SMC the right to trade, deal, market or otherwise sell its various beer products. Goroza
applied for a credit line with SMC. To comply with the credit line application requirement, he applied for and
was granted a letter of credit by PNB. Subsequently, Goroza availed of his credit line with PNB and started selling
SMC’s beer products.

An additional credit line with PNB was applied for by Goroza and his total credit line reached P4,400,000.
Initially, Goroza was able to pay his credit purchases with SMC, but after sometime he started to become
delinquent with his accounts.

SMC demanded Goroza and PNB to pay the amount of P3,722,440.88, but neither of them paid. As a result, SMC
filed a Complaint for collection of sum of money against PNB and Goroza.

After summons, PNB filed its answer, while Goroza did not. Upon motion, Goroza was subsequently declared in
default. RTC later on rendered a decision in favor of SMC and against Goroza.

In the meantime, trial continued with respect to PNB. AN Urgent Motion to Terminate Proceedings was filed by
PNB on the ground that a decision was already rendered finding Goroza solely liable. The RTC denied this motion
and subsequently issued a Supplemental Judgment stating that: “the phrase ‘without prejudice to the decision
made against the other defendant PNB which was not declared in default’ shall be inserted in the dispositive
portion of the decision.” PNB then filed a motion for reconsideration, but the RTC denied the same. Aggrieved,
PNB filed a special civil action for certiorari with the CA, but was denied. A motion for reconsideration was filed,
but was again denied. Hence, the petition.

PNB argues that the RTC decision, finding Goroza solely liable to pay the entire amount sought to be recovered
by SMC, has settled the obligation of both Goroza and PNB.

Issue:

Whether or not the issuing bank is released from its liability to pay the beneficiary.

Ruling:

Petition Denied.

1
In the case of Transfield Philippines, Inc. v. Luzon Hydro Corporation:
By definition, a letter of credit is a written instrument whereby the writer requests or authorizes the addressee
to pay money or deliver goods to a third person and assumes responsibility for payment of debt therefor to the
addressee. A letter of credit, however, changes its nature as different transactions occur and if carried through
to completion ends up as a binding contract between the issuing and honoring banks without any regard or
relation to the underlying contract or disputes between the parties thereto.
Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once the draft and the
required documents are presented to it. The so-called "independence principle" assures the seller or the
beneficiary of prompt payment independent of any breach of the main contract and precludes the issuing bank
from determining whether the main contract is actually accomplished or not. Under this principle, banks assume
no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any
documents, or for the general and/or particular conditions stipulated in the documents or superimposed
thereon, nor do they assume any liability or responsibility for the description, quantity, weight, quality,
condition, packing, delivery, value or existence of the goods represented by any documents, or for the good
faith or acts and/or omissions, solvency, performance or standing of the consignor, the carriers, or the insurers
of the goods, or any other person whomsoever.

In a letter of credit transaction, such as in this case, where the credit is stipulated as irrevocable, there is a
definite undertaking by the issuing bank to pay the beneficiary provided that the stipulated documents are
presented and the conditions of the credit are complied with. Precisely, the independence principle liberates the
issuing bank from the duty of ascertaining compliance by the parties in the main contract. As the principle's
nomenclature clearly suggests, the obligation under the letter of credit is independent of the related and
originating contract. In brief, the letter of credit is separate and distinct from the underlying transaction.

In other words, PNB cannot evade responsibility on the sole ground that the RTC judgment found Goroza liable
and ordered him to pay the amount sought to be recovered by SMC. PNB's liability, if any, under the letter of
credit is yet to be determined.