Umale also challenged ASB Realty’s personality to recover the
G.R. No. 181126 June 15, 2011
LEONARDO S. UMALE, [deceased] represented by CLARISSA
VICTORIA, JOHN LEO, GEORGE LEONARD, KRISTINE,
MARGUERITA ISABEL, AND MICHELLE ANGELIQUE, ALL
SURNAMED UMALE,
vs.
ASB REALTY CORPORATION,
FACTS:
This case involves a parcel of land identified as Lot 7, Block 5,
Amethyst Street, Ortigas Center, Pasig City which was originally
owned by Amethyst Pearl Corporation (Amethyst Pearl), a company
that is, in turn, wholly-owned by respondent ASB Realty Corporation
(ASB Realty).
In 1996, Amethyst Pearl executed a Deed of Assignment in
Liquidation of the subject premises in favor of ASB Realty in
consideration of the full redemption of Amethyst Pearl’s outstanding
capital stock from ASB Realty.5 Thus, ASB Realty became the owner
of the subject premises and obtained in its name which was
registered under its name.
Sometime in 2003, ASB Realty commenced an action in the MTC for
unlawful detainer7 of the subject premises against petitioner Umale.
ASB Realty alleged that it entered into a lease contract 8 with Umale
for the period June 1, 1999-May 31, 2000. Their agreement was for
Umale to conduct a pay-parking business on the property and pay a
monthly rent of ₱60,720.00 to ASB Realty.
Upon the contract’s expiration on May 31, 2000, Umale continued
occupying the premises and paying rentals albeit at an increased
monthly rent of ₱100,000.00. The last rental payment made by Umale
to ASB Realty was for the June 2001 to May 2002 period, as
evidenced by the Official Receipt No. 565119 dated November 19,
2001.
On June 23, 2003, ASB Realty served on Umale a Notice of
Termination of Lease and Demand to Vacate and Pay.10 ASB Realty
stated that it was terminating the lease effective midnight of June 30,
2003; that Umale should vacate the premises, and pay to ASB Realty
the rental arrears amounting to ₱1.3 million by July 15, 2003. Umale
failed to comply with such demands.
Umale admitted occupying the property since 1999 by virtue of a
verbal lease contract but vehemently denied that ASB Realty was his
lessor. He was adamant that his lessor was the original owner,
Amethyst Pearl. Since there was no contract between himself and
ASB Realty, the latter had no cause of action to file the unlawful
detainer complaint against him.
In asserting his right to remain on the property based on the oral
lease contract with Amethyst Pearl, Umale interposed that the lease
period agreed upon was "for a long period of time." 11 He then
allegedly paid ₱1.2 million in 1999 as one year advance rentals to
Amethyst Pearl.12
Umale further claimed that when his oral lease contract with Amethyst
Pearl ended in May 2000, they both agreed on an oral contract to sell.
They agreed that Umale did not have to pay rentals until the sale over
the subject property had been perfected between them.13 Despite
such agreement with Amethyst Pearl regarding the waiver of rent
payments, Umale maintained that he continued paying the annual
rent of ₱1.2 million. He was thus surprised when he received the
Notice of Termination of Lease from ASB Realty.14
subject premises considering that ASB Realty had been placed under
receivership by the Securities and Exchange Commission (SEC) and
a rehabilitation receiver had been duly appointed. Under Section
14(s), Rule 4 of the Administrative Memorandum No. 00-8-10SC,
otherwise known as the Interim Rules of Procedure on Corporate
Rehabilitation (Interim Rules), it is the rehabilitation receiver that has
the power to "take possession, control and custody of the debtor’s
assets." Since ASB Realty claims that it owns the subject premises, it
is its duly-appointed receiver that should sue to recover possession of
the same.15
ASB Realty replied that it was impossible for Umale to have entered
into a Contract of Lease with Amethyst Pearl in 1999 because
Amethyst Pearl had been liquidated in 1996. ASB Realty insisted that,
as evidenced by the written lease contract, Umale contracted with
ASB Realty, not with Amethyst Pearl. As further proof thereof, ASB
Realty cited the official receipt evidencing the rent payments made by
Umale to ASB Realty.
Ruling of the Metropolitan Trial Court: dismissed ASB
Realty’s complaint against Umale without prejudice. It held that ASB
Realty had no cause to seek Umale’s ouster from the subject property
because it was not Umale’s lessor. The trial court noted an
inconsistency in the written lease contract that was presented by ASB
Realty as basis for its complaint. Its whereas clauses cited ASB
Realty, with Eden C. Lin as its representative, as Umale’s lessor; but
its signatory page contained Eden C. Lin’s name under the heading
Amethyst Pearl. The MTC then concluded from such inconsistency
that Amethyst Pearl was the real lessor, who can seek Umale’s
ejectment from the subject property.17
Likewise, the MTC agreed with Umale that only the rehabilitation
receiver could file suit to recover ASB Realty’s property.18 Having
been placed under receivership, ASB Realty had no more personality
to file the complaint for unlawful detainer.
Ruling of the Regional Trial Court: held that the MTC erred
in dismissing ASB Realty’s complaint for lack of cause of action. It
found sufficient evidence to support the conclusion that it was indeed
ASB Realty that entered into a lease contract with Umale, hence, the
proper party who can assert the corresponding right to seek Umale’s
ouster from the leased premises for violations of the lease terms. In
addition to the written lease contract, the official receipt evidencing
Umale’s rental payments for the period June 2001 to May 2002 to
ASB Realty adequately established that Umale was aware that his
lessor, the one entitled to receive his rent payments, was ASB Realty,
not Amethyst Pearl.
ASB Realty’s positive assertions, supported as they are by credible
evidence, are more compelling than Umale’s bare negative
assertions. The RTC found Umale’s version of the facts incredible. It
was implausible that a businessman such as Umale would enter into
several transactions with his alleged lessor – a lease contract,
payment of lease rentals, acceptance of an offer to sell from his
alleged lessor, and an agreement to waive rentals – sans a sliver of
evidence.
With the lease contract between Umale and ASB Realty duly
established and Umale’s failure to pay the monthly rentals since June
2002 despite due demands from ASB Realty, the latter had the right
to terminate the lease contract and seek his eviction from the leased
premises. Thus, when the contract expired on June 30, 2003 (as
stated in the Notice of Termination of Lease), Umale lost his right to
remain on the premises and his continued refusal to vacate the same
constituted sufficient cause of action for his ejectment. 21
With respect to ASB Realty’s personality to file the unlawful detainer
suit, the RTC ruled that ASB Realty retained all its corporate powers,
including the power to sue, despite the appointment of a rehabilitation
receiver. Citing the Interim Rules, the RTC noted that the by law to a corporation is the power to sue in its own name. This power is
rehabilitation receiver was not granted therein the power to file granted to a duly-organized corporation, unless specifically revoked by
complaints on behalf of the corporation.22 another law.

Moreover, the retention of its corporate powers by the corporation
under rehabilitation will advance the objective of corporate
rehabilitation, which is to conserve and administer the assets of the
corporation in the hope that it may eventually be able to go from
financial distress to solvency. The suit filed by ASB Realty to recover
its property and back rentals from Umale could only benefit ASB
Realty.23
Umale filed a Motion for Reconsideration25 while ASB Realty moved
for the issuance of a writ of execution pursuant to Section 21 of the
1991 Revised Rules on Summary Procedure.26
RTC denied reconsideration of its Decision and granted ASB Realty’s
Motion for Issuance of a Writ of Execution.27
On appeal to the CA: Umale then filed his
appeal28 with the CA insisting that the parties did not enter into a
lease contract.29 Assuming that there was a lease, it was at most an
implied lease. Hence its period depended on the rent payments.
Since Umale paid rent annually, ASB Realty had to respect his lease
for the entire year. It cannot terminate the lease at the end of the
month, as it did in its Notice of Termination of Lease. 30 Lastly, Umale
insisted that it was the rehabilitation receiver, not ASB Realty, that
was the real party-in-interest.31
Pending the resolution thereof, Umale died and was substituted by his
widow and legal heirs, per CA Resolution dated August 14, 2006. 32
The CA affirmed the RTC Decision in toto
Petitioners filed a Motion for Reconsideration, 39 which was denied in
the
Same; Corporate Rehabilitation; Corporate Rehabilitation is
defined as the restoration of the debtor to a position of successful
operation and solvency, if it is shown that its continuance of operation is
economically feasible and its creditors can recover by way of the present
value of payments projected in the plan more if the corporation continues
as a going concern than if it is immediately liquidated.—Corporate
rehabilitation is defined as “the restoration of the debtor to a position of
successful operation and solvency, if it is shown that its continuance of
operation is economically feasible and its creditors can recover by way of
the present value of payments projected in the plan more if the corporation
continues as a going concern than if it is immediately liquidated.” It was first
introduced in the Philippine legal system through PD 902-A, as amended.
The intention of the law is “to effect a feasible and viable rehabilitation by
preserving a floundering business as a going concern, because the assets of
a business are often more valuable when so maintained than they would be
when liquidated.”
Same; Same; There is nothing in the concept of corporate
rehabilitation that would ipso facto deprive the Board of Directors and
corporate officers of a debtor corporation of control such that it can no
longer enforce its right to recover its property from an errant lessee.—The
interim rehabilitation receiver of the debtor corporation “does not take
over the control and management of the debtor corporation.” Likewise, the
rehabilitation receiver that will replace the interim receiver is tasked only to
monitor the successful implementation of the rehabilitation plan. There is
nothing in the concept of corporate rehabilitation that would ipso facto
deprive the Board of Directors and corporate officers of a debtor
corporation, such as ASB Realty, of control such that it can no longer
enforce its right to recover its property from an errant lessee. Umale vs. ASB
Realty Corporation, 652 SCRA 215, G.R. No. 181126 June 15, 2011

assailed January 2, 2008 Resolution.40

ISSUES:

The petitioners raise the following issues for resolution: 41

1. Can a corporate officer of ASB Realty (duly authorized by

the Board of Directors) file suit to recover an unlawfully
detained corporate property despite the fact that the
corporation had already been placed under rehabilitation?

2. Whether a contract of lease exists between ASB Realty

and Umale; and

3. Whether Umale is entitled to avail of the lease periods

provided in Article 1687 of the Civil Code.

Ruling:

Real Party-in-Interest; Real party-in-interest is defined as the

party who stands to be benefited or injured by the judgment in the suit, or
the party entitled to the avails of the suit.—There is no denying that ASB
Realty, as the owner of the leased premises, is the real party-in-interest in
the unlawful detainer suit. Real party-in-interest is defined as “the party
who stands to be benefited or injured by the judgment in the suit, or the
party entitled to the avails of the suit.”

Corporation Law; As a creature of law, the powers and attributes

of a corporation are those set out, expressly or impliedly, in the law.—As a
creature of law, the powers and attributes of a corporation are those set
out, expressly or impliedly, in the law. Among the general powers granted
G.R. No. 146717 November 22, 2004
TRANSFIELD PHILIPPINES, INC., petitioner,
vs.
LUZON HYDRO CORPORATION, AUSTRALIA and NEW
ZEALAND BANKING GROUP LIMITED and SECURITY BANK
CORPORATION, respondents.
FACTS:
Subject of this case is the letter of credit which has evolved as the
ubiquitous and most important device in international trade. A creation
of commerce and businessmen, the letter of credit is also unique in
the number of parties involved and its supranational character.
On 26 March 1997, petitioner and respondent Luzon Hydro
Corporation (hereinafter, LHC) entered into a Turnkey
Contract3 whereby petitioner, as Turnkey Contractor, undertook to
construct, on a turnkey basis, a seventy (70)-Megawatt hydro-electric
power station at the Bakun River in the provinces of Benguet and
Ilocos Sur (hereinafter, the Project). Petitioner was given the sole
responsibility for the design, construction, commissioning, testing and
completion of the Project.4
The Turnkey Contract provides that: (1) the target completion date of
the Project shall be on 1 June 2000, or such later date as may be
agreed upon between petitioner and respondent LHC or otherwise
determined in accordance with the Turnkey Contract; and (2)
petitioner is entitled to claim extensions of time (EOT) for reasons
enumerated in the Turnkey Contract, among which are variations,
force majeure, and delays caused by LHC itself. 5 Further, in case of
dispute, the parties are bound to settle their differences through
mediation, conciliation and such other means enumerated under
Clause 20.3 of the Turnkey Contract.6
To secure performance of petitioner's obligation on or before the
target completion date, or such time for completion as may be
determined by the parties' agreement, petitioner opened in favor of
LHC two (2) standby letters of credit both dated 20 March 2000
(hereinafter referred to as "the Securities"), to wit: Standby Letter of
Credit No. E001126/8400 with the local branch of respondent
Australia and New Zealand Banking Group Limited (ANZ Bank) 7 and
Standby Letter of Credit No. IBDIDSB-00/4 with respondent Security
Bank Corporation (SBC)8 each in the amount of US$8,988,907.00.9
In the course of the construction of the project, petitioner sought
various EOT to complete the Project. The extensions were requested
allegedly due to several factors which prevented the completion of the
Project on target date, such as force majeure occasioned by typhoon
Zeb, barricades and demonstrations. LHC denied the requests,
however. This gave rise to a series of legal actions between the
parties which culminated in the instant petition.
The first of the actions was a Request for Arbitration which LHC filed
before the Construction Industry Arbitration Commission (CIAC) on 1
June 1999.10 This was followed by another Request for Arbitration,
this time filed by petitioner before the International Chamber of
Commerce (ICC)11 on 3 November 2000. In both arbitration
proceedings, the common issues presented were: [1) whether
typhoon Zeb and any of its associated events constituted force
majeure to justify the extension of time sought by petitioner; and [2)
whether LHC had the right to terminate the Turnkey Contract for
failure of petitioner to complete the Project on target date.
Meanwhile, foreseeing that LHC would call on the Securities pursuant
to the pertinent provisions of the Turnkey Contract, 12 petitioner—in
two separate letters13 both dated 10 August 2000—advised
respondent banks of the arbitration proceedings already pending
before the CIAC and ICC in connection with its alleged default in the
performance of its obligations. Asserting that LHC had no right to call
on the Securities until the resolution of disputes before the arbitral
tribunals, petitioner warned respondent banks that any transfer,
release, or disposition of the Securities in favor of LHC or any person
claiming under LHC would constrain it to hold respondent banks liable
for liquidated damages.
As petitioner had anticipated, on 27 June 2000, LHC sent notice to
petitioner that pursuant to Clause 8.2 14 of the Turnkey Contract, it
failed to comply with its obligation to complete the Project. Despite the
letters of petitioner, however, both banks informed petitioner that they
would pay on the Securities if and when LHC calls on them. 15
LHC asserted that additional extension of time would not be
warranted; accordingly it declared petitioner in default/delay in the
performance of its obligations under the Turnkey Contract and
demanded from petitioner the payment of US$75,000.00 for each day
of delay beginning 28 June 2000 until actual completion of the Project
pursuant to Clause 8.7.1 of the Turnkey Contract. At the same time,
LHC served notice that it would call on the securities for the payment
of liquidated damages for the delay.16
On 5 November 2000, petitioner as plaintiff filed a Complaint for
Injunction, with prayer for temporary restraining order and writ of
preliminary injunction, against herein respondents as defendants
before the RTC. Petitioner sought to restrain respondent LHC from
calling on the Securities and respondent banks from transferring,
paying on, or in any manner disposing of the Securities or any
renewals or substitutes thereof. The RTC issued a seventy-two (72)-
hour temporary restraining order on the same day. The case was
docketed as Civil Case No. 00-1312 and raffled to Branch 148 of the
RTC.
TRIAL COURT DECISION: After appropriate
proceedings, the trial court issued an Order on 9 November 2000,
extending the temporary restraining order for a period of seventeen
(17) days or until 26 November 2000.18
The RTC denied petitioner's application for a writ of preliminary
injunction. It ruled that petitioner had no legal right and suffered no
irreparable injury to justify the issuance of the writ. Employing the
principle of "independent contract" in letters of credit, the trial court
ruled that LHC should be allowed to draw on the Securities for
liquidated damages. It debunked petitioner's contention that the
principle of "independent contract" could be invoked only by
respondent banks since according to it respondent LHC is the
ultimate beneficiary of the Securities. The trial court further ruled that
the banks were mere custodians of the funds and as such they were
obligated to transfer the same to the beneficiary for as long as the
latter could submit the required certification of its claims.
Dissatisfied with the trial court's denial of its application for a writ of
preliminary injunction, petitioner elevated the case to the Court of
Appeals via a Petition for Certiorari under Rule 65, with prayer for the
issuance of a temporary restraining order and writ of preliminary
injunction.20 Petitioner submitted to the appellate court that LHC's call
on the Securities was premature considering that the issue of its
default had not yet been resolved with finality by the CIAC and/or the
ICC. It asserted that until the fact of delay could be established, LHC
had no right to draw on the Securities for liquidated damages.
Refuting petitioner's contentions, LHC claimed that petitioner had no
right to restrain its call on and use of the Securities as payment for
liquidated damages. It averred that the Securities are independent of
the main contract between them as shown on the face of the two
Standby Letters of Credit which both provide that the banks have no
responsibility to investigate the authenticity or accuracy of the
certificates or the declarant's capacity or entitlement to so certify.
ON APPEAL TO THE CA: CA issued a temporary
restraining order, enjoining LHC from calling on the Securities or any
renewals or substitutes thereof and ordering respondent banks to
cease and desist from transferring, paying or in any manner disposing
of the Securities.
However, the appellate court failed to act on the application for
preliminary injunction until the temporary restraining order expired on
27 January 2001. Immediately thereafter, representatives of LHC
trooped to ANZ Bank and withdrew the total amount of
US$4,950,000.00, thereby reducing the balance in ANZ Bank to
US$1,852,814.00.
On 2 February 2001, the appellate court dismissed the petition for
certiorari. The appellate court expressed conformity with the trial
court's decision that LHC could call on the Securities pursuant to the
first principle in credit law that the credit itself is independent of the
underlying transaction and that as long as the beneficiary complied
with the credit, it was of no moment that he had not complied with the
underlying contract. Further, the appellate court held that even
assuming that the trial court's denial of petitioner's application for a
writ of preliminary injunction was erroneous, it constituted only an
error of judgment which is not correctible by certiorari, unlike error of
jurisdiction.
Hence, this petition:
ISSUE:
WHETHER THE "INDEPENDENCE PRINCIPLE" ON LETTERS OF
CREDIT MAY BE INVOKED BY A BENEFICIARY THEREOF
WHERE THE BENEFICIARY'S CALL THEREON IS WRONGFUL OR
FRAUDULENT.
WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE
SECURITIES BEFORE THE RESOLUTION OF PETITIONER'S AND
LHC'S DISPUTES BY THE APPROPRIATE TRIBUNAL.
WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN
RELEASING THE AMOUNTS DUE UNDER THE SECURITIES
DESPITE BEING NOTIFIED THAT LHC'S CALL THEREON IS
WRONGFUL.
WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND
IRREPARABLE DAMAGE IN THE EVENT THAT:
A. LHC IS ALLOWED TO CALL AND DRAW ON,
AND ANZ BANK AND SECURITY BANK ARE
ALLOWED TO RELEASE, THE REMAINING
BALANCE OF THE SECURITIES PRIOR TO THE
RESOLUTION OF THE DISPUTES BETWEEN
PETITIONER AND LHC.
B. LHC DOES NOT RETURN THE AMOUNTS IT
HAD WRONGFULLY DRAWN FROM THE
SECURITIES.21
[Petitioner contends that the courts below improperly relied on the
"independence principle" on letters of credit when this case falls
squarely within the "fraud exception rule." Respondent LHC
deliberately misrepresented the supposed existence of delay despite
its knowledge that the issue was still pending arbitration, petitioner
continues.]
[At the core of the present controversy is the applicability of the
"independence principle" and "fraud exception rule" in letters of credit.
Thus, a discussion of the nature and use of letters of credit, also
referred to simply as "credits," would provide a better perspective of
the case.]
RULING:
Commercial Law; Banks and Banking; Letters of Credit; Standby
Credits; Words and Phrases; In commercial transactions, a letter of credit is
a financial device developed by merchants as a convenient and relatively
safe mode of dealing with sales of goods to satisfy the seemingly
irreconcilable interests of a seller, who refuses to part with his goods before
he is paid, and a buyer, who wants to have control of the goods before
paying; Generally, credits in non-sale settings have come to be known as
standby credits.—The letter of credit evolved as a mercantile specialty, and
the only way to understand all its facets is to recognize that it is an entity
unto itself. The relationship between the beneficiary and the issuer of a
letter of credit is not strictly contractual, because both privity and a meeting
of the minds are lacking, yet strict compliance with its terms is an
enforceable right. Nor is it a third-party beneficiary contract, because the
issuer must honor drafts drawn against a letter regardless of problems
subsequently arising in the underlying contract. Since the bank’s customer
cannot draw on the letter, it does not function as an assignment by the
customer to the beneficiary. Nor, if properly used, is it a contract of
suretyship or guarantee, because it entails a primary liability following a
default. Finally, it is not in itself a negotiable instrument, because it is not
payable to order or bearer and is generally conditional, yet the draft
presented under it is often negotiable. In commercial transactions, a letter
of credit is a financial device developed by merchants as a convenient and
relatively safe mode of dealing with sales of goods to satisfy the seemingly
irreconcilable interests of a seller, who refuses to part with his goods before
he is paid, and a buyer, who wants to have control of the goods before
paying. The use of credits in commercial transactions serves to reduce the
risk of nonpayment of the purchase price under the contract for the sale of
goods. However, credits are also used in non-sale settings where they serve
to reduce the risk of nonperformance. Generally, credits in the non-sale
settings have come to be known as standby credits.
Same; Same; Same; Same; Commercial Credits and Standby
Credits, Distinguished.—There are three significant differences between
commercial and standby credits. First, commercial credits involve the
payment of money under a contract of sale. Such credits become payable
upon the presentation by the seller-beneficiary of documents that show he
has taken affirmative steps to comply with the sales agreement. In the
standby type, the credit is payable upon certification of a party’s
nonperformance of the agreement. The documents that accompany the
beneficiary’s draft tend to show that the applicant has not performed. The
beneficiary of a commercial credit must demonstrate by documents that he
has performed his contract. The beneficiary of the standby credit must
certify that his obligor has not performed the contract.
Same; Same; Same; A letter of credit 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.—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.
Same; Same; Same; Uniform Customs and Practice (UCP) for
Documentary Credits; Since letters of credit have gained general
acceptability in international trade transactions, the International Chamber
of Commerce (ICC) has published from time to time updates on the Uniform
Customs and Practice for Documentary Credits to standardize practices in
the letter of credit area; The observance of the UCP is justified by Article 2
of the Code of Commerce which provides that in the absence of any
particular provision in the Code of Commerce, commercial transactions
shall be governed by usages and customs generally observed.—Since letters
of credit have gained general acceptability in international trade
transactions, the ICC has published from time to time updates on the
Uniform Customs and Practice (UCP) for Documentary Credits to
standardize practices in the letter of credit area. The vast majority of letters
of credit incorporate the UCP. First published in 1933, the UCP for
Documentary Credits has undergone several revisions, the latest of which
was in 1993. In Bank of the Philippine Islands v. De Reny Fabric Industries,
Inc., this Court ruled that the observance of the UCP is justified by Article 2
of the Code of Commerce which provides that in the absence of any
particular provision in the Code of Commerce, commercial transactions
shall be governed by usages and customs generally observed. More
recently, in Bank of America, NT & SA v. Court of Appeals, this Court ruled
that there being no specific provisions which govern the legal complexities
arising from transactions involving letters of credit, not only between or
among banks themselves but also between banks and the seller or the
buyer, as the case may be, the applicability of the UCP is undeniable.
Same; Same; Same; “Independence Principle”; Under the
“independence 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.—Article 3 of the UCP provides
that credits, by their nature, are separate transactions from the sales or
other contract(s) on which they may be based and banks are in no way
concerned with or bound by such contract(s), even if any reference
whatsoever to such contract(s) is included in the credit. Consequently, the
undertaking of a bank to pay, accept and pay draft(s) or negotiate and/or
fulfill any other obligation under the credit is not subject to claims or
defenses by the applicant resulting from his relationships with the issuing
bank or the beneficiary. A beneficiary can in no case avail himself of the
contractual relationships existing between the banks or between the
applicant and the issuing bank. Thus, the engagement of the issuing bank is
to pay the seller or beneficiary of the credit once the draft and the required
documents are presented to it. The so-called “independence principle”
assures the seller or the beneficiary of prompt payment independent of any
breach of the main contract and precludes the issuing bank from
determining whether the main contract is actually accomplished or not.
Under this principle, banks assume no liability or responsibility for the form,
sufficiency, accuracy, genuineness, falsification or legal effect of any
documents, or for the general and/or particular conditions stipulated in the
documents or superimposed thereon, nor do they assume any liability or
responsibility for the description, quantity, weight, quality, condition,
packing, delivery, value or existence of the goods represented by any
documents, or for the good faith or acts and/or omissions, solvency,
performance or standing of the consignor, the carriers, or the insurers of
the goods, or any other person whomsoever.
Same; Same; Same; Same; The independent nature of the letter of
credit may be: (a) independence in toto where the credit is independent
from the justification aspect and is a separate obligation from the
underlying agreement; or (b) independence may be only as to the
justification aspect, though in both cases the payment may be enjoined if in
the light of the purpose of the credit the payment of the credit would
constitute fraudulent abuse of the credit.—The independent nature of the
letter of credit may be: (a) independence in toto where the credit is
independent from the justification aspect and is a separate obligation from
the underlying agreement like for instance a typical standby; or (b)
independence may be only as to the justification aspect like in a commercial
letter of credit or repayment standby, which is identical with the same
obligations under the underlying agreement. In both cases the payment
may be enjoined if in the light of the purpose of the credit the payment of
the credit would constitute fraudulent abuse of the credit.
Same; Same; Same; Same; The independence principle liberates
the issuing bank from the duty of ascertaining compliance by the parties in
the main contract; As it is, the independence doctrine works to the benefit
of both the issuing bank and the beneficiary.—As discussed above, in a
letter of credit transaction, such as in this case, where the credit is
stipulated as irrevocable, there is a definite undertaking by the issuing bank
to pay the beneficiary provided that the stipulated documents are
presented and the conditions of the credit are complied 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.
Given the nature of letters of credit, petitioner’s argument—that it is only
the issuing bank that may invoke the independence principle on letters of
credit—does not impress this Court. To say that the independence principle
may only be invoked by the issuing banks would render nugatory the
purpose for which the letters of credit are used in commercial transactions.
As it is, the independence doctrine works to the benefit of both the issuing
bank and the beneficiary.
Same; Same; Same; Same; Guarantee; Jurisprudence has laid
down a clear distinction between a letter of credit and a guarantee in that
the settlement of a dispute between the parties is not a prerequisite for the
release of funds under a letter of credit.—Petitioner’s argument that any
dispute must first be resolved by the parties, whether through negotiations
or arbitration, before the beneficiary is entitled to call on the letter of credit
in essence would convert the letter of credit into a mere guarantee.
Jurisprudence has laid down a clear distinction between a letter of credit
and a guarantee in that the settlement of a dispute between the parties is
not a pre-requisite for the release of funds under a letter of credit. In other
words, the argument is incompatible with the very nature of the letter of
credit. If a letter of credit is drawable only after settlement of the dispute
on the contract entered into by the applicant and the beneficiary, there
would be no practical and beneficial use for letters of credit in commercial
transactions.
Same; Same; Same; Same; Owing to the nature and purpose of
standby letters of credit, banks are left with little or no alternative but to
honor the credit or the call for payment.—While it is the bank which is
bound to honor the credit, it is the beneficiary who has the right to ask the
bank to honor the credit by allowing him to draw thereon. The situation
itself emasculates petitioner’s posture that LHC cannot invoke the
independence principle and highlights its puerility, more so in this case
where the banks concerned were impleaded as parties by petitioner itself.
Respondent banks had squarely raised the independence principle to justify
their releases of the amounts due under the Securities. Owing to the nature
and purpose of the standby letters of credit, this Court rules that the
respondent banks were left with little or no alternative but to honor the
credit and both of them in fact submitted that it was “ministerial” for them
to honor the call for payment.
Same; Same; Same; Same; Contracts; A contract once perfected,
binds the parties not only to the fulfillment of what has been expressly
stipulated but also to all the consequences which according to their nature,
may be in keeping with good faith, usage, and law.— A contract once
perfected, binds the parties not only to the fulfillment of what has been
expressly stipulated but also to all the consequences which according to
their nature, may be in keeping with good faith, usage, and law. A careful
perusal of the Turnkey Contract reveals the intention of the parties to make
the Securities answerable for the liquidated damages occasioned by any
delay on the part of petitioner. The call upon the Securities, while not an
exclusive remedy on the part of LHC, is certainly an alternative recourse
available to it upon the happening of the contingency for which the
Securities have been proffered. Thus, even without the use of the
“independence principle,” the Turnkey Contract itself bestows upon LHC
the right to call on the Securities in the event of default.
 Same; Same; Same; Same; Injunction; Requisites; Most writers
agree that fraud is an exception to the independence principle; The remedy
for fraudulent abuse is an injunction.—Most writers agree that fraud is an
exception to the independence principle. Professor Dolan opines that the
untruthfulness of a certificate accompanying a demand for payment under
a standby credit may qualify as fraud sufficient to support an injunction
against payment. The remedy for fraudulent abuse is an injunction.
However, injunction should not be granted unless: (a) there is clear proof of
fraud; (b) the fraud constitutes fraudulent abuse of the independent
purpose of the letter of credit and not only fraud under the main
agreement; and (c) irreparable injury might follow if injunction is not
granted or the recovery of damages would be seriously damaged.
Same; Same; Same; Same; Same; The issuance of the writ of
preliminary injunction as an ancillary or preventive remedy to secure the
rights of a party in a pending case is entirely within the discretion of the
court taking cognizance of the case, the only limitation being that this
discretion should be exercised based upon the grounds and in the manner
provided by law.—Generally, injunction is a preservative remedy for the
protection of one’s substantive right or interest; it is not a cause of action in
itself but merely a provisional remedy, an adjunct to a main suit. The
issuance of the writ of preliminary injunction as an ancillary or preventive
remedy to secure the rights of a party in a pending case is entirely within
the discretion of the court taking cognizance of the case, the only limitation
being that this discretion should be exercised based upon the grounds and
in the manner provided by law. Before a writ of preliminary injunction may
be issued, there must be a clear showing by the complaint that there exists
a right to be protected and that the acts against which the writ is to be
directed are violative of the said right. It must be shown that the invasion of
the right sought to be protected is material and substantial, that the right of
complainant is clear and unmistakable and that there is an urgent and
paramount necessity for the writ to prevent serious damage. Moreover, an
injunctive remedy may only be resorted to when there is a pressing
necessity to avoid injurious consequences which cannot be remedied under
any standard compensation.
Same; Same; Same; Same; It is premature and absurd to conclude
that the draws on the Securities were outright fraudulent where the
International Chamber of Commerce and the Construction Industry
Authority Commission have not ruled with finality on the existence of
default.—The pendency of the arbitration proceedings would not per se
make LHC’s draws on the Securities wrongful or fraudulent for there was
nothing in the Contract which would indicate that the parties intended that
all disputes regarding delay should first be settled through arbitration
before LHC would be allowed to call upon the Securities. It is therefore
premature and absurd to conclude that the draws on the Securities were
outright fraudulent given the fact that the ICC and CIAC have not ruled with
finality on the existence of default.
Same; Same; Same; Same; Actions; Appeals; Pleadings and
Practice; Matters, theories or arguments not brought out in the proceedings
below will ordinarily not be considered by a reviewing court as they cannot
be raised for the first time on appeal.—Nowhere in its complaint before the
trial court or in its pleadings filed before the appellate court, did petitioner
invoke the fraud exception rule as a ground to justify the issuance of an
injunction. What petitioner did assert before the courts below was the fact
that LHC’s draws on the Securities would be premature and without basis in
view of the disputes between them. Petitioner should not be allowed in this
instance to bring into play the fraud exception rule to sustain its claim for
the issuance of an injunctive relief. Matters, theories or arguments not
brought out in the proceedings below will ordinarily not be considered by a
reviewing court as they cannot be raised for the first time on appeal. The
lower courts could thus not be faulted for not applying the fraud exception
rule not only because the existence of fraud was fundamentally interwoven
with the issue of default still pending before the arbitral tribunals, but more
so, because petitioner never raised it as an issue in its pleadings filed in the
courts below. At any rate, petitioner utterly failed to show that it had a
clear and unmistakable right to prevent LHC’s call upon the Securities.
Same; Same; Same; Same; Obligations and Contracts; Obligations
arising from contracts have the force of law between the contracting parties
and should be complied with in good faith.— Prudence should have
impelled LHC to await resolution of the pending issues before the arbitral
tribunals prior to taking action to enforce the Securities. But, as earlier
stated, the Turnkey Contract did not require LHC to do so and, therefore, it
was merely enforcing its rights in accordance with the tenor thereof.
Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith. More
importantly, pursuant to the principle of autonomy of contracts embodied
in Article 1306 of the Civil Code, petitioner could have incorporated in its
Contract with LHC, a proviso that only the final determination by the
arbitral tribunals that default had occurred would justify the enforcement
of the Securities. However, the fact is petitioner did not do so; hence, it
would have to live with its inaction.
Actions; Injunction; Settled is the rule that injunction would not lie
where the acts sought to be enjoined have already become fait accompli or
an accomplished or consummated act.—In a Manifestation, dated 30 March
2001, LHC informed this Court that the subject letters of credit had been
fully drawn. This fact alone would have been sufficient reason to dismiss the
instant petition. Settled is the rule that injunction would not lie where the
acts sought to be enjoined have already become fait accompli or an
accomplished or consummated act. In Ticzon v. Video Post Manila, Inc. this
Court ruled that where the period within which the former employees were
prohibited from engaging in or working for an enterprise that competed
with their former employer—the very purpose of the preliminary
injunction—has expired, any declaration upholding the propriety of the writ
would be entirely useless as there would be no actual case or controversy
between the parties insofar as the preliminary injunction is concerned. In
the instant case, the consummation of the act sought to be restrained had
rendered the instant petition moot—for any declaration by this Court as to
propriety or impropriety of the non-issuance of injunctive relief could have
no practical effect on the existing controversy. The other issues raised by
petitioner particularly with respect to its right to recover the amounts
wrongfully drawn on the Securities, according to it, could properly be
threshed out in a separate proceeding.
Same; Pleadings and Practice; Forum Shopping; Considering the
seriousness of the charge of forum shopping and the severity of the
sanctions for its violation, the Court will refrain from making any definitive
ruling on the issue until the party alleged to have committed forum
shopping has been given ample opportunity to respond to the charge.—
Forum Shopping is a very serious charge. It exists when a party repetitively
avails of several judicial remedies in different courts, simultaneously or
successively, all substantially founded on the same transactions and the
same essential facts and circumstances, and all raising substantially the
same issues either pending in, or already resolved adversely, by some other
court. It may also consist in the act of a party against whom an adverse
judgment has been rendered in one forum, of seeking another and possibly
favorable opinion in another forum other than by appeal or special civil
action of certiorari, or the institution of two or more actions or proceedings
grounded on the same cause on the supposition that one or the other court
might look with favor upon the other party. To determine whether a party
violated the rule against forum shopping, the test applied is whether the
elements of litis pendentia are present or whether a final judgment in one
case will amount to res judicata in another. Forum Shopping constitutes
improper conduct and may be punished with summary dismissal of the
multiple petitions and direct contempt of court. Considering the seriousness
of the charge of forum Shopping and the severity of the sanctions for its
violation, the Court will refrain from making any definitive ruling on this
issue until after petitioner has been given ample opportunity to respond to
the charge. Transfield Philippines, Inc. vs. Luzon Hydro Corporation, 443
SCRA 307, G.R. No. 146717 November 22, 2004
G.R. No. 183486 February 24, 2016
THE HONGKONG & SHANGHAI BANKING CORPORATION,
LIMITED,
vs.
NATIONAL STEEL CORPORATION and CITYTRUST BANKING
CORPORATION (NOW BANK OF THE PHILIPPINE ISLANDS),
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. 19 In 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.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. 40 HSBC 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 RTC. 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 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
DECISION OF RTC: 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.
APPEAL TO CA: the 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.
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 Certiorari.
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.
Ruling:
Mercantile Law; Letter of Credit; Words and Phrases; A letter of
credit is a commercial instrument developed to address the unique needs of
certain commercial transactions.—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 567 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, 228
SCRA 357 (1993), 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.” Through a
letter of credit, a buyer obtains the credit of a third party, usually a bank, to
provide assurance of payment. 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.
Same; Same; Owing to the complexity of these contracts, there
may be a correspondent bank which facilitates the ease of completing the
transactions.—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. 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. 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. 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. 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. A confirming bank essentially insures that the
credit will be paid in accordance with the terms of the letter of credit. It
therefore assumes a direct obligation to the seller-beneficiary.
Same; Same; 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 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.
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.
Mercantile Law; Letter of Credit; In transactions where the letter
of credit is payable on sight, the issuer must pay upon due presentment.—
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. 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.
Civil Law; Delay; Under Article 1170 of the Civil Code, a party in
delay is liable for damages.—Under Article 1170 of the Civil Code, a party in
delay is liable for damages. The extent of these damages pertains to the
pecuniary loss duly proven. 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.
An interest in the amount of six percent (6%) is also awarded from the time
of the finality of this decision until full payment. The Hongkong & Shanghai
Banking Corporation, Limited vs. National Steel Corporation, 784 SCRA 659,
G.R. No. 183486 February 24, 2016

Same; Same; In Metropolitan Waterworks and Sewerage System

v. Daway, 432 SCRA 559 (2004), the Supreme Court (SC) 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.”—In Bank of the Philippine Islands v.
De Reny Fabric Industries, Inc., 35 SCRA 256 (1970), 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, 196 SCRA 576 (1991), this Court ruled that the UCP should be
applied in cases where the letter of credit expressly states that it is the
governing rule. This Court also held in Feati that the UCP applies even if it is
not incorporated into the letter of the credit. The application of the UCP in
Bank of Philippine Islands and in Feati was further affirmed in Metropolitan
Waterworks and Sewerage System v. Daway, 432 SCRA 559 (2004), 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.” These precedents
highlight the binding nature of the UCP in our jurisdiction.

Civil Law; Obligations; 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.—The provisions in the Civil
Code and our jurisprudence apply suppletorily in this case. 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
G.R. No. 161865. March 10, 2005
LAND BANK OF THE PHILIPPINES,
vs.
MONET’S EXPORT AND MANUFACTURING CORPORATION,
SPOUSES VICENTE V. TAGLE, SR. and MA. CONSUELO G.
TAGLE,
FACTS:
Land Bank of the Philippines (Land Bank), and Monet’s Export and
Manufacturing Corporation (Monet) executed an Export Packing
Credit Line Agreement4 under which Monet was given a credit line in
the amount of P250,000.00, secured by the proceeds of its export
letters of credit,5 the continuing guaranty of the spouses Vicente V.
Tagle, Sr. and Ma. Consuelo G. Tagle,6 and the third party mortgage
executed by Pepita C. Mendigoria.7
The credit line agreement was renewed and amended several
times8 until it was increased to P5,000,000.00.9 Owing to the
continued failure and refusal of Monet, notwithstanding repeated
demands, to pay its indebtedness to Land Bank, which have
ballooned to P11,464,246.1910 by August 31, 1992, a complaint11 for
collection of sum of money with prayer for preliminary attachment was
filed by Land Bank with the RTC
In their joint Answer with Compulsory Counterclaim, 13 Monet and the
Tagle spouses alleged that Land Bank failed and refused to collect
the receivables on their export letter of credit against Wishbone
Trading Company of Hong Kong in the sum of US$33,434.00, while it
made unauthorized payments on their import letter of credit to
Beautilike (H.K.) Ltd. in the amount of US$38,768.40, which seriously
damaged the business interests of Monet.
DECISION OF RTC: On July 15, 1997, the trial court
rendered decision, that:
1. Recognizing the obligation of the defendants as stated in the
"Schedule of Amortization from the Loans and Discount Department
of LAND BANK" (Exh. "39"), as well as the interest mentioned therein,
but deleting the penalty thereof as no penalty should be charged and
sentencing defendants jointly and severally to pay the amounts stated
therein as verified;
2. Granting the counterclaim interposed by the defendants in the
amount of US$30,000.00 payable in Philippine Pesos at the official
exchange rate when payment is to be made, to compensate for the
defendants’ lost income opportunities occasioned by defendants’
transaction with Wishbone Trading Corporation and with Beautilike,
the same to be deducted from the confirmed and computed obligation
mentioned in No. 1 hereof; and
3. Denying the claim for attorney’s fees for lack of merit.15
ON APPEAL TO CA: the Court of Appeals
promulgated the decision subject of the present petition for review. In
affirming the trial court, the Court of Appeals found that, indeed, Land
Bank was responsible for the mismanagement of the Wishbone and
Beautilike accounts of Monet. It held that because of the non-
collection and unauthorized payment made by Land Bank on behalf of
Monet, and considering that the latter could no longer draw from its
credit line with Land Bank, it suffered from lack of financial resources
sufficient to buy the needed materials to fill up the standing orders
from its customers.
Land Bank’s Motion for Reconsideration18 was denied by the Court of
Appeals
HENCE, this petition.
ISSUES:
1. Whether or not the respondent Court seriously erred in upholding
the findings and conclusion of the trial court limiting the liability of
private respondents based on [the] Summary of Availment and
Schedule of Amortization and granting the latter opportunity losses
anchored on the theory that petitioner disrupted the cas[h] flow of
respondent MONET’s which led to its decline;
2. Whether or not the respondent Court palpably erred in not clearly
establishing petitioner’s right to collect payment from private
respondents’ loan validly obtained in the sum of P11,464,246.19
Million which has become long overdue and demandable.
Ruling
Commercial Law; Letters of Credit; The undertaking of a bank to
pay, accept and pay draft(s) or negotiate and/or fulfill any other obligation
under the credit is not subject to claims or defenses by the applicant
resulting from his relationships with the issuing bank or the beneficiary.—
Article 3 of the Uniform Customs and Practice (UCP) for Documentary
Credits provides that credits, by their nature, are separate transactions
from the sales or other contract(s) on which they may be based and banks
are in no way concerned with or bound by such contract(s), even if any
reference whatsoever to such contract(s) is included in the credit.
Consequently, the undertaking of a bank to pay, accept and pay draft(s) or
negotiate and/or fulfill any other obligation under the credit is not subject
to claims or defenses by the applicant resulting from his relationships with
the issuing bank or the beneficiary.
Same; Same; 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.—In Transfield Philippines, Inc. v. Luzon
Hydro Corporation, et al., we held that 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.
Same; Same; The relationship between the beneficiary and the
issuer of a letter of credit is not strictly contractual, because both privity
and a meeting of the minds are lacking.—We find merit in the contention of
Land Bank that, as the issuing bank in the Beautilike transaction involving an
import letter of credit, it only deals in documents and it is not involved in
the contract between the parties. The relationship between the beneficiary
and the issuer of a letter of credit is not strictly contractual, because both
privity and a meeting of the minds are lacking. Thus, upon receipt by Land
Bank of the documents of title which conform with what the letter of credit
requires, it is duty bound to pay the seller, as it did in this case.
Remedial Law; Appeals; In a petition for review under Rule 45,
only questions of law may be raised; Exceptions.—Prefatorily, we restate
the time honored principle that in a petition for review under Rule 45, only
questions of law may be raised. It is not our function to analyze or weigh all
over again evidence already considered in the proceedings below, our
jurisdiction is limited to reviewing only errors of law that may have been
committed by the lower court. The resolution of factual issues is the
function of lower courts, whose findings on these matters are received with
respect. A question of law which we may pass upon must not involve an
examination of the probative value of the evidence presented by the
litigants. The above rule, however, admits of certain exceptions. The
findings of fact of the Court of Appeals are generally conclusive but may be
reviewed when: (1) the factual findings of the Court of Appeals and the trial
court are contradictory; (2) the findings are grounded entirely on
speculation, surmises or conjectures; (3) the inference made by the Court of
Appeals from its findings of fact is manifestly mistaken, absurd or
impossible; (4) there is grave abuse of discretion in the appreciation of
facts; (5) the appellate court, in making its findings, goes beyond the issues
of the case and such findings are contrary to the admissions of both
appellant and appellee; (6) the judgment of the Court of Appeals is
premised on a misapprehension of facts; (7) the Court of Appeals fails to
notice certain relevant facts which, if properly considered, will justify a
different conclusion; and (8) the findings of fact of the Court of Appeals are
contrary to those of the trial court or are mere conclusions without citation
of specific evidence, or where the facts set forth by the petitioner are not
disputed by respondent, or where the findings of fact of the Court of
Appeals are premised on the absence of evidence but are contradicted by
the evidence on record. Land Bank of the Philippines vs. Monet’s Export and
Manufacturing Corporation, 453 SCRA 173, G.R. No. 161865 March 10, 2005
G.R. No. 74851 December 9, 1999
RIZAL COMMERCIAL BANKING CORPORATION,
vs.
INTERMEDIATE APPELLATE COURT AND BF HOMES, INC.,
FACTS:
On September 28, 1984, BF Homes filed a "Petition for Rehabilitation
and for Declaration of Suspension of Payments" (SEC Case No.
002693) with the Securities and Exchange Commission (SEC).
One of the creditors listed in its inventory of creditors and liabilities
was RCBC.
On October 26, 1984, RCBC requested the Provincial Sheriff of Rizal
to extra-judicially foreclose its real estate mortgage on some
properties of BF Homes. A notice of extra-judicial foreclosure sale
was issued by the Sheriff on October 29, 1984, scheduled on
November 29, 1984, copies furnished both BF Homes (mortgagor)
and RCBC (mortgagee).
On motion of BF Homes, the SEC issued a temporary restraining
order (TRO), effective for 20 days, enjoining RCBC and the sheriff
from proceeding with the public auction sale. The sale was
rescheduled to January 29, 1985.
On January 25, 1985, the SEC ordered the issuance of a writ of
preliminary injunction upon petitioner's filing of a bond. However,
petitioner did not file a bond until January 29, 1985, the very day of
the auction sale, so no writ of preliminary injunction was issued by the
SEC. Presumably, unaware of the filing of the bond, the sheriffs
proceeded with the public auction sale on January 29, 1985, in which
RCBC was the highest bidder for the properties auctioned.
On February 5, 1985, BF Homes filed in the SEC a consolidated
motion to annul the auction sale and to cite RCBC and the sheriff for
contempt. RCBC opposed the motion
Because of the proceedings in the SEC, the sheriff withheld the
delivery to RCBC of a certificate of sale covering the auctioned
properties.
On February 13, 1985, the SEC in Case No. 002693 belatedly issued
a writ of preliminary injunction stopping the auction sale which had
been conducted by the sheriff two weeks earlier.
On March 13, 1985, despite SEC Case No. 002693, RCBC filed with
the RTC, an action for mandamus against the provincial sheriff of
Rizal and his deputy to compel them to execute in its favor a
certificate of sale of the auctioned properties.
On June 4, 1985, B.F. Homes filed an original complaint with the IAC
pursuant to Section 9 of B.P. 129 praying for the annulment of the
judgment, premised on the following:
. . .: (1) even before RCBC asked the sheriff to
extra-judicially foreclose its mortgage on petitioner's
properties, the SEC had already assumed exclusive
jurisdiction over those assets, and (2) that there was
extrinsic fraud in procuring the judgment because the
petitioner was not impleaded as a party in
the mandamus case, respondent court did not acquire
jurisdiction over it, and it was deprived of its right to be
heard. (CA Decision, p. 88, Rollo).
DECISION OF THE IAC: setting aside the decision of the
trial court, dismissing the mandamus case and suspending issuance
to RCBC of new land titles, "until the resolution of case by SEC in
Case No. 002693,"
Hence, this petition.
ISSUES:
The issue of whether or not preferred creditors of distressed
corporations stand on equal footing with all other creditors gains
relevance and materiality only upon the appointment of a
management committee, rehabilitation receiver, board, or body.
Insofar as petitioner RCBC is concerned, the provisions of
Presidential Decree No. 902-A are not yet applicable and it may still
be allowed to assert its preferred status because it foreclosed on the
mortgage prior to the appointment of the management committee on
March 18, 1985.
The Court, therefore, grants the motion for reconsideration on this
score.
RULING:
Corporation Law; Creditors; Issue of whether or not preferred
creditors of distressed corporations stand on equal footing with all other
creditors gains relevance and materiality only upon the appointment of a
management committee, rehabilitation receiver, board, or body.—The issue
of whether or not preferred creditors of distressed corporations stand on
equal footing with all other creditors gains relevance and materiality only
upon the appointment of a management committee, rehabilitation
receiver, board, or body. Insofar as petitioner RCBC is concerned, the
provisions of Presidential Decree No. 902-A are not yet applicable and it
may still be allowed to assert its preferred status because it foreclosed on
the mortgage prior to the appointment of the management committee on
March 18, 1985. The Court, therefore, grants the motion for
reconsideration on this score.

In answer, the sheriffs alleged that they proceeded with the auction
sale on January 29, 1985 because no writ of preliminary injunction
had been issued by SEC as of that date, but they informed the SEC
that they would suspend the issuance of a certificate of sale to RCBC.
On March 18, 1985, the SEC appointed a Management Committee
for BF Homes.
DECISION OF RTC: On RCBC's motion
the mandamus case, the trial court issued a judgment on the
pleadings, ordering respondents to execute and deliver to petitioner
the Certificate of the Auction Sale of January 29, 1985, involving the
properties sold therein, more particularly those described in Annex
"C" of their Answer."
Same; Same; Suspension of claims against a corporation under
rehabilitation is counted or figured up only upon the appointment of a
management committee or a rehabilitation receiver.—It is thus adequately
clear that suspension of claims against a corporation under rehabilitation is
counted or figured up only upon the appointment of a management
committee or a rehabilitation receiver. The holding that suspension of
actions for claims against a corporation under rehabilitation takes effect as
soon as the application or a petition for rehabilitation is filed with the SEC—
in
may, to some, be more logical and wise but unfortunately, such is
incongruent with the clear language of the law. To insist on such ruling, no
matter how practical and noble, would be to encroach upon legislative
prerogative to define the wisdom of the law—plainly judicial legislation.
Same; Same; Statutory Construction; When the law is clear and
free from any doubt or ambiguity, there is no room for construction or
interpretation; Only when the law is ambiguous or of doubtful meaning may
the court interpret or construe its true intent.—It bears stressing that the
first and fundamental duty of the Court is to apply the law. When the law is
clear and free from any doubt or ambiguity, there is no room for
construction or interpretation. As has been our consistent ruling, where the
law speaks in clear and categorical language, there is no occasion for
interpretation; there is only room for application (Cebu Portland Cement
Co. vs. Municipality of Naga, 24 SCRA 708 [1968]). x x x Only when the law is
ambiguous or of doubtful meaning may the court interpret or construe its
true intent. Ambiguity is a condition of admitting two or more meanings, of
being understood in more than one way, or of referring to two or more
things at the same time. A statute is ambiguous if it is admissible of two or
more possible meanings, in which case, the Court is called upon to exercise
one of its judicial functions, which is to interpret the law according to its
true intent.

Same; Same; A petition for rehabilitation does not always result in

the appointment of a receiver or the creation of a management committee;
Instances before a management committee and receivers may be
appointed.—As relevantly pointed out in the dissenting opinion, a petition
for rehabilitation does not always result in the appointment of a receiver or
the creation of a management committee. The SEC has to initially
determine whether such appointment is appropriate and necessary under
the circumstances. Under Paragraph (d), Section 6 of Presidential Decree
No. 902-A, certain situations must be shown to exist before a management
committee may be created or appointed, such as: (1.) when there is
imminent danger of dissipation, loss, wastage or destruction of assets or
other properties; or (2.) when there is paralization of business operations of
such corporations or entities which may be prejudicial to the interest of
minority stockholders, parties-litigants or to the general public. On the
other hand, receivers may be appointed whenever: (1.) necessary in order
to preserve the rights of the parties-litigants; and/or (2.) protect the
interest of the investing public and creditors. (Section 6 [c], P.D. 902-A.)

Same; Same; Same; Once a management committee,

rehabilitation receiver, board or body is appointed pursuant to Presidential
Decree 902-A, all actions for claims against a distressed corporation pending
before any court, tribunal, board or body shall be suspended accordingly;
Suspension shall not prejudice or render ineffective the status of a secured
creditor as compared to a totally unsecured creditor; In the event that
rehabilitation is no longer feasible and claims against the distressed
corporation would eventually have to be settled, the secured creditors shall
enjoy preference over the unsecured creditors subject only to the
provisions of the Civil Code on Concurrence and Preferences of Credit.—In
other words, once a management committee, rehabilitation receiver, board
or body is appointed pursuant to P.D. 902-A, all actions for claims against a
distressed corporation pending before any court, tribunal, board or body
shall be suspended accordingly. This suspension shall not prejudice or
render ineffective the status of a secured creditor as compared to a totally
unsecured creditor. P.D. 902-A does not state anything to this effect. What
it merely provides is that all actions for claims against the corporation,
partnership or association shall be suspended. This should give the receiver
a chance to rehabilitate the corporation if there should still be a possibility
for doing so. (This will be in consonance with Alemar’s, BF Homes, Araneta,
and RCBC insofar as enforcing liens by preferred creditors are concerned.)
However, in the event that rehabilitation is no longer feasible and claims
against the distressed corporation would eventually have to be settled, the
secured creditors shall enjoy preference over the unsecured creditors (still
maintaining PCIB ruling), subject only to the provisions of the Civil Code on
Concurrence and Preferences of Credit (our ruling in State Investment
House, Inc. vs. Court of Appeals, 277 SCRA 209 [1997]). Rizal Commercial
Banking Corporation vs. Intermediate Appellate Court, 320 SCRA 279, G.R.
No. 74851 December 9, 1999