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SECOND DIVISION

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.

DECISION

TINGA, J.:

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.

Petitioner has appealed from the Decision1 of the Court of Appeals in CA-G.R. SP No. 61901 entitled "Transfield
Philippines, Inc. v. Hon. Oscar Pimentel, et al.," promulgated on 31 January 2001.2

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

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 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 8.214 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 Regional Trial Court
(RTC) of Makati.17 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 of Makati.

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, in its Order19 dated 24 November 2000, 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.

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 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.

In its Resolution dated 28 November 2000, the Court of Appeals 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.

Undaunted, petitioner filed the instant Petition for Review raising the following issues for resolution:

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.

Petitioner asserts that LHC should be ordered to return the proceeds of the Securities pursuant to the principle
against unjust enrichment and that, under the premises, injunction was the appropriate remedy obtainable from the
competent local courts.

On 25 August 2003, petitioner filed a Supplement to the Petition22 and Supplemental Memorandum,23 alleging that in
the course of the proceedings in the ICC Arbitration, a number of documentary and testimonial evidence came out
through the use of different modes of discovery available in the ICC Arbitration. It contends that after the filing of the
petition facts and admissions were discovered which demonstrate that LHC knowingly misrepresented that
petitioner had incurred delays— notwithstanding its knowledge and admission that delays were excused under the
Turnkey Contract—to be able to draw against the Securities. Reiterating that fraud constitutes an exception to the
independence principle, petitioner urges that this warrants a ruling from this Court that the call on the Securities was

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 wrongful, as well as contrary to law and basic principles of equity. It avers that it would suffer grave irreparable
damage if LHC would be allowed to use the proceeds of the Securities and not ordered to return the amounts it had
wrongfully drawn thereon.

In its Manifestation dated 8 September 2003,24 LHC contends that the supplemental pleadings filed by petitioner
present erroneous and misleading information which would change petitioner's theory on appeal.

In yet another Manifestation dated 12 April 2004,25 petitioner alleges that on 18 February 2004, the ICC handed
down its Third Partial Award, declaring that LHC wrongfully drew upon the Securities and that petitioner was entitled
to the return of the sums wrongfully taken by LHC for liquidated damages.

LHC filed a Counter-Manifestation dated 29 June 2004,26 stating that petitioner's Manifestation dated 12 April 2004
enlarges the scope of its Petition for Review of the 31 January 2001 Decision of the Court of Appeals. LHC notes
that the Petition for Review essentially dealt only with the issue of whether injunction could issue to restrain the
beneficiary of an irrevocable letter of credit from drawing thereon. It adds that petitioner has filed two other
proceedings, to wit: (1) ICC Case No. 11264/TE/MW, entitled "Transfield Philippines Inc. v. Luzon Hydro
Corporation," in which the parties made claims and counterclaims arising from petitioner's
performance/misperformance of its obligations as contractor for LHC; and (2) Civil Case No. 04-332, entitled
"Transfield Philippines, Inc. v. Luzon Hydro Corporation" before Branch 56 of the RTC of Makati, which is an action
to enforce and obtain execution of the ICC's partial award mentioned in petitioner's Manifestation of 12 April 2004.

In its Comment to petitioner's Motion for Leave to File Addendum to Petitioner's Memorandum, LHC stresses that
the question of whether the funds it drew on the subject letters of credit should be returned is outside the issue in
this appeal. At any rate, LHC adds that the action to enforce the ICC's partial award is now fully within the Makati
RTC's jurisdiction in Civil Case No. 04-332. LHC asserts that petitioner is engaged in forum-shopping by keeping
this appeal and at the same time seeking the suit for enforcement of the arbitral award before the Makati court.

Respondent SBC in its Memorandum, dated 10 March 200327 contends that the Court of Appeals correctly
dismissed the petition for certiorari. Invoking the independence principle, SBC argues that it was under no obligation
to look into the validity or accuracy of the certification submitted by respondent LHC or into the latter's capacity or
entitlement to so certify. It adds that the act sought to be enjoined by petitioner was already fait accompli and the
present petition would no longer serve any remedial purpose.

In a similar fashion, respondent ANZ Bank in its Memorandum dated 13 March 200328 posits that its actions could
not be regarded as unjustified in view of the prevailing independence principle under which it had no obligation to
ascertain the truth of LHC's allegations that petitioner defaulted in its obligations. Moreover, it points out that since
the Standby Letter of Credit No. E001126/8400 had been fully drawn, petitioner's prayer for preliminary injunction
had been rendered moot and academic.

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.

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.29

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.30 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

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 to reduce the risk of nonperformance. Generally, credits in the non-sale settings have come to be known as standby
credits.31

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.32

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.33 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.34

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.35 First published in
1933, the UCP for Documentary Credits has undergone several revisions, the latest of which was in 1993.36

In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,37 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,38 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.

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.39

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.40

Can the beneficiary invoke the independence principle?

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 Petitioner insists that the independence principle does not apply to the instant case and assuming it is so, it is a
defense available only to respondent banks. LHC, on the other hand, contends that it would be contrary to common
sense to deny the benefit of an independent contract to the very party for whom the benefit is intended. As
beneficiary of the letter of credit, LHC asserts it is entitled to invoke the principle.

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.41 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.

Letters of credit are employed by the parties desiring to enter into commercial transactions, not for the benefit of the
issuing bank but mainly for the benefit of the parties to the original transactions. With the letter of credit from the
issuing bank, the party who applied for and obtained it may confidently present the letter of credit to the beneficiary
as a security to convince the beneficiary to enter into the business transaction. On the other hand, the other party to
the business transaction, i.e., the beneficiary of the letter of credit, can be rest assured of being empowered to call
on the letter of credit as a security in case the commercial transaction does not push through, or the applicant fails
to perform his part of the transaction. It is for this reason that the party who is entitled to the proceeds of the letter of
credit is appropriately called "beneficiary."

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.

Professor John F. Dolan, the noted authority on letters of credit, sheds more light on the issue:

The standby credit is an attractive commercial device for many of the same reasons that commercial credits
are attractive. Essentially, these credits are inexpensive and efficient. Often they replace surety contracts,
which tend to generate higher costs than credits do and are usually triggered by a factual determination rather
than by the examination of documents.

Because parties and courts should not confuse the different functions of the surety contract on the one hand
and the standby credit on the other, the distinction between surety contracts and credits merits some
reflection. The two commercial devices share a common purpose. Both ensure against the obligor's
nonperformance. They function, however, in distinctly different ways.

Traditionally, upon the obligor's default, the surety undertakes to complete the obligor's performance, usually
by hiring someone to complete that performance. Surety contracts, then, often involve costs of determining
whether the obligor defaulted (a matter over which the surety and the beneficiary often litigate) plus the cost
of performance. The benefit of the surety contract to the beneficiary is obvious. He knows that the surety,
often an insurance company, is a strong financial institution that will perform if the obligor does not. The
beneficiary also should understand that such performance must await the sometimes lengthy and costly
determination that the obligor has defaulted. In addition, the surety's performance takes time.

The standby credit has different expectations. He reasonably expects that he will receive cash in the event of
nonperformance, that he will receive it promptly, and that he will receive it before any litigation with the obligor
(the applicant) over the nature of the applicant's performance takes place. The standby credit has this

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 opposite effect of the surety contract: it reverses the financial burden of parties during litigation.

In the surety contract setting, there is no duty to indemnify the beneficiary until the beneficiary establishes the
fact of the obligor's performance. The beneficiary may have to establish that fact in litigation. During the
litigation, the surety holds the money and the beneficiary bears most of the cost of delay in performance.

In the standby credit case, however, the beneficiary avoids that litigation burden and receives his money
promptly upon presentation of the required documents. It may be that the applicant has, in fact, performed
and that the beneficiary's presentation of those documents is not rightful. In that case, the applicant may sue
the beneficiary in tort, in contract, or in breach of warranty; but, during the litigation to determine whether the
applicant has in fact breached the obligation to perform, the beneficiary, not the applicant, holds the money.
Parties that use a standby credit and courts construing such a credit should understand this allocation of
burdens. There is a tendency in some quarters to overlook this distinction between surety contracts and
standby credits and to reallocate burdens by permitting the obligor or the issuer to litigate the performance
question before payment to the beneficiary.42

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.43

Furthermore, LHC has a right rooted in the Contract to call on the Securities. The relevant provisions of the Contract
read, thus:

4.2.1. In order to secure the performance of its obligations under this Contract, the Contractor at its cost shall
on the Commencement Date provide security to the Employer in the form of two irrevocable and confirmed
standby letters of credit (the "Securities"), each in the amount of US$8,988,907, issued and confirmed by
banks or financial institutions acceptable to the Employer. Each of the Securities must be in form and
substance acceptable to the Employer and may be provided on an annually renewable basis.44

8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to the Employer by way of
liquidated damages ("Liquidated Damages for Delay") the amount of US$75,000 for each and every day or
part of a day that shall elapse between the Target Completion Date and the Completion Date, provided that
Liquidated Damages for Delay payable by the Contractor shall in the aggregate not exceed 20% of the
Contract Price. The Contractor shall pay Liquidated Damages for Delay for each day of the delay on the
following day without need of demand from the Employer.

8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount of such
damages from any monies due, or to become due to the Contractor and/or by drawing on the Security."45

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.46 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.

Next, petitioner invokes the "fraud exception" principle. It avers that LHC's call on the Securities is wrongful because
it fraudulently misrepresented to ANZ Bank and SBC that there is already a breach in the Turnkey Contract knowing
fully well that this is yet to be determined by the arbitral tribunals. It asserts that the "fraud exception" exists when
the beneficiary, for the purpose of drawing on the credit, fraudulently presents to the confirming bank, documents
that contain, expressly or by implication, material representations of fact that to his knowledge are untrue. In such a

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 situation, petitioner insists, injunction is recognized as a remedy available to it.

Citing Dolan's treatise on letters of credit, petitioner argues that the independence principle is not without limits and
it is important to fashion those limits in light of the principle's purpose, which is to serve the commercial function of
the credit. If it does not serve those functions, application of the principle is not warranted, and the commonlaw
principles of contract should apply.

It is worthy of note that the propriety of LHC's call on the Securities is largely intertwined with the fact of default
which is the self-same issue pending resolution before the arbitral tribunals. To be able to declare the call on the
Securities wrongful or fraudulent, it is imperative to resolve, among others, whether petitioner was in fact guilty of
delay in the performance of its obligation. Unfortunately for petitioner, this Court is not called upon to rule upon the
issue of default—such issue having been submitted by the parties to the jurisdiction of the arbitral tribunals pursuant
to the terms embodied in their agreement.47

Would injunction then be the proper remedy to restrain the alleged wrongful draws on the Securities?

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.48 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.49

In its complaint for injunction before the trial court, petitioner alleged that it is entitled to a total extension of two
hundred fifty-three (253) days which would move the target completion date. It argued that if its claims for extension
would be found meritorious by the ICC, then LHC would not be entitled to any liquidated damages.50

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.51

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.52
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.53 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.54

In the instant case, petitioner failed to show that it has a clear and unmistakable right to restrain LHC's call on the
Securities which would justify the issuance of preliminary injunction. By petitioner's own admission, the right of LHC
to call on the Securities was contractually rooted and subject to the express stipulations in the Turnkey Contract.55
Indeed, the Turnkey Contract is plain and unequivocal in that it conferred upon LHC the right to draw upon the
Securities in case of default, as provided in Clause 4.2.5, in relation to Clause 8.7.2, thus:

4.2.5 The Employer shall give the Contractor seven days' notice of calling upon any of the Securities, stating
the nature of the default for which the claim on any of the Securities is to be made, provided that no notice will
be required if the Employer calls upon any of the Securities for the payment of Liquidated Damages for Delay
or for failure by the Contractor to renew or extend the Securities within 14 days of their expiration in
accordance with Clause 4.2.2.56

8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount of such
damages from any monies due, or to become due, to the Contractor and/or by drawing on the Security.57

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

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 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.

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.58 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
pending 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.59 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.

Of course, 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.60 More
importantly, pursuant to the principle of autonomy of contracts embodied in Article 1306 of the Civil Code,61
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.

With respect to the issue of whether the respondent banks were justified in releasing the amounts due under the
Securities, this Court reiterates that pursuant to the independence principle the banks were under no obligation to
determine the veracity of LHC's certification that default has occurred. Neither were they bound by petitioner's
declaration that LHC's call thereon was wrongful. To repeat, respondent banks' undertaking was simply to pay once
the required documents are presented by the beneficiary.

At any rate, should petitioner finally prove in the pending arbitration proceedings that LHC's draws upon the
Securities were wrongful due to the non-existence of the fact of default, its right to seek indemnification for damages
it suffered would not normally be foreclosed pursuant to general principles of law.

Moreover, in a Manifestation,62 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.63 In Ticzon v. Video Post Manila, Inc.64 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.65 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.

One final point. LHC has charged petitioner of forum-shopping. It raised the charge on two occasions. First, in its
Counter-Manifestation dated 29 June 200466 LHC alleges that petitioner presented before this Court the same claim
for money which it has filed in two other proceedings, to wit: ICC Case No. 11264/TE/MW and Civil Case No. 04-332
before the RTC of Makati. LHC argues that petitioner's acts constitutes forum-shopping which should be punished
by the dismissal of the claim in both forums. Second, in its Comment to Petitioner's Motion for Leave to File
Addendum to Petitioner's Memorandum dated 8 October 2004, LHC alleges that by maintaining the present appeal
and at the same time pursuing Civil Case No. 04-332—wherein petitioner pressed for judgment on the issue of
whether the funds LHC drew on the Securities should be returned—petitioner resorted to forum-shopping. In both

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 instances, however, petitioner has apparently opted not 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.67 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.68 To
determine whether a party violated the rule against forum-shopping, the test applied is whether the elements of litis
pendentia are present or whether a final judgment in one case will amount to res judicata in another.69 Forum-
shopping constitutes improper conduct and may be punished with summary dismissal of the multiple petitions and
direct contempt of court.70

Considering the seriousness of the charge of forum-shopping and the severity of the sanctions for its violation, the
Court will refrain from making any definitive ruling on this issue until after petitioner has been given ample
opportunity to respond to the charge.

WHEREFORE, the instant petition is DENIED, with costs against petitioner.

Petitioner is hereby required to answer the charge of forum-shopping within fifteen (15) days from notice.

SO ORDERED.

Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur.

Footnotes
1
Penned by Justice Candido V. Rivera, concurred in by Justices Conchita Carpio-Morales and Rebecca de
Guia-Salvador.
2
Rollo, pp. 52-61.
3
Id. at 62-252.
4
Id. at 75-76.
5
Clause 1.1, Volume II of the Turnkey Contract, Rollo, p. 81.
6
20.3 Dispute Resolution.

If at anytime any dispute or difference shall arise between the Employer and the Contractor in connection with
or arising out of this Contract or the carrying out of the Works, the parties together shall in good faith exert all
efforts to resolve such dispute or difference by whatever means they deem appropriate, including conciliation,
mediation and seeking the assistance of technical, accounting or other experts. At the request of any party,
the chief executives of the Employer and the Contractor shall meet in a good-faith effort to reach an amicable
settlement of the dispute or difference. Any dispute or difference that the parties are unable to resolve within a
reasonable time may, at the option of either party, be referred to arbitration in accordance with Clause 20.4.
(Id. at 179)
7
Annex "C," Rollo, pp. 254-256.
8
Annex "D," Id. at 257-259.
9
Clause 4.2.1, Volume II of the Turnkey Contract, Id. at 94.
10
Id. at 261-265.

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 11
Id. at 359-382.
12
Turnkey Contract, Clause 4.2.5, Rollo, p. 94, in relation to Clause 8.7.1., Rollo, p. 132.
13
Annex "H," Rollo, pp. 287-289; Annex "H-1," Rollo, pp. 320-322.
14
Clause 8.2. Time for Completion.

The Contractor shall complete all the Works, including the Tests on Completion, in accordance with the
Program on or before the Target Completion Date. (Rollo, p. 125)
15
Vol. 1, Rollo, pp. 355-357.
16
8.7.1. If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to the Employer by way of
liquidated damages ("Liquidated Damages for Delay") the amount of US$75,000 for each and every day or
part of a day that shall elapse between the Target Completion Date and the Completion Date, provided that
Liquidated Damages for Delay payable by the Contractor shall in the aggregate not exceed 20% of the
Contract Price. The Contractor shall pay Liquidated Damages for Delay for each day of the delay on the
following day without need of demand from the Employer.
17
Annex "L," Rollo, pp. 383-402.
18
Annex "N," Id. at 406-409.
19
Annex "O," Id. at 412-423.
20
Docketed as CA-G.R. SP No. 61901.
21
Rollo, pp. 25-26.
22
Vol. II; Id. at 2-78.
23
Id. at 79-92.
24
Id. at 95-98
25
Id. at 109-113.
26
Id. at 666-671.
27
Id. at 598-607.
28
Id. at 619-630.
29
Joseph, Letters of Credit: The Developing Concepts and Financing Functions, 94 Banking Law Journal 850-
851 [1977] cited in M. Kurkela, Letters of Credit under International Trade Law, 321 (1985).
30
Bank of America v. Court of Appeals, G.R. No. 105395, 10 December 1993, 228 SCRA 357 citing William S.
Shaterian, Export-Import Banking: The Instruments and Operations Utilized by American Exporters and
Importers and Their Banks in Financing Foreign Trade, 284-374 (1947).
31
E&H Partners v. Broadway Nat'l Bank, 39 F. Supp. 2d 275, (United States Circuit Court, S.D. New York) No.
96 Civ. 7098 (RLC), 19 October 1998 <http://www.westlaw.com>.
32
J. Dolan, The Law of Letters of Credit, Revised Ed. (2000).
33
24 A Words and Phrases 590, Permanent Edition.
34
Ibid.

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 35
Jackson & Davey, International Economic Relations, 53 (2nd ed.).
36
ICC Publication No. 500.
37
146 Phil. 269 (1970).
38
G.R. No. 105395, 10 December 1993, 228 SCRA 357.
39
Article 15, UCP.
40
Kurkela, Letters of Credit Under International Trade Law, 286-287 (1985).
41
Art. 10, UCP.
42
Supra note 32 at 1-27.
43
Rollo, pp. 604 and 624.
44
Underscoring supplied; Id. at 94.
45
Underscoring supplied; Id. at 132.
46
Art. 1315, Civil Code.
47
Clause 20.4.1, Turnkey Contract, Rollo, p. 179.
48
Supra note 32 at 2-63.
49
M. Kurkela, Letters of Credit Under International Trade Law, 309 (1985).
50
Rollo, p. 391.
51
Batangas Laguna Tayabas Bus Company, Inc. v. Bitanga, 415 Phil. 43.
52
Shin v. Court of Appeals, G.R. No. 113627, 6 February 2001, 351 SCRA 257.
53
Zabat v. Court of Appeals, G.R. No. 122089, 23 August 2000, 338 SCRA 551; Philippine Economic Zone
Authority v. Vianzon, G.R. No. 131020, 20 July 2000, 336 SCRA 309; Valencia v. Court of Appeals, G.R. No.
119118, 19 February 2001, 352 SCRA 72; Crystal v. Cebu International School, G.R. No. 135433, 4 April
2001, 356 SCRA 296; Ong Ching Kian Chuan v. Court of Appeals, 415 Phil. 365 (2001).
54
Philippine National Bank v. Ritratto Group, Inc., 414 Phil. 494 (2001).
55
Rollo, p. 31.
56
Underscoring supplied; Id. at 94-95.
57
Id. at 132.
58
Vide Annex "L," Rollo. pp. 392-399; Petition for Certiorari, CA Rollo, pp. 7-43.
59
Salafranca v. Philamlife Village Homeowners Association, Inc., 360 Phil. 652; Ruby Industrial Corporation v.
Court of Appeals, 348 Phil. 480; Victorias Milling Co., Inc. v. Court of Appeals, 389 Phil. 184.
60
Article 1159, Civil Code.
61
Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they
may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public
policy.

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 62
Rollo, p. 493.
63
Aznar Brothers Realty Company v. Court of Appeals, G.R. No. 128102, 7 March 2000, 327 SCRA 359;
Soriano v. Court of Appeals, 416 Phil. 226 (2001); Rodil Enterprises v. Court of Appeals, G.R. No. G.R. No.
129609, 29 November 2001, 371 SCRA 79; Unionbank of the Philippines v. Court of Appeals, 370 Phil. 837
(1999).
64
389 Phil. 20 (2000).
65
Black's Law Dictionary, p. 1008, citing Leonhart v. McCormick, D.C. Pa., 395 F. Supp. 1073.
66
Vol. II, Rollo, pp. 666-669.
67
Tantoy, Sr. v. Court of Appeals, G.R. No. 141427, April 20, 2001, 357 SCRA 329.
68
Bangko Silangan Development Bank v. Court of Appeals, 412 Phil. 755 (2001).
69
Tirona v. Alejo, G.R. No. 129313, October 10, 2001, 367 SCRA 17; Manalo v. Court of Appeals, G.R. No.
141297, October 8, 2001, 366 SCRA 752.
70
Tantoy, Sr. v. Court of Appeals, supra note 67.; Caviles v. Seventeenth Division, Court of Appeals, G.R. No.
126857, September 18, 2002, 389 SCRA 306.

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