Cred Trans | 1

G.R. No. 90828 September 5, 2000

MELVIN COLINARES and LORDINO VELOSO, petitioners,

vs.
HONORABLE COURT OF APPEALS, and THE PEOPLE OF THE PHILIPPINES, respondents.

DECISION

DAVIDE, JR., C.J.:

In 1979 Melvin Colinares and Lordino Veloso (hereafter Petitioners) were contracted for a
consideration of ₱40,000 by the Carmelite Sisters of Cagayan de Oro City to renovate the latter’s
convent at Camaman-an, Cagayan de Oro City.

On 30 October 1979, Petitioners obtained 5,376 SF Solatone acoustical board 2’x4’x½", 300 SF
tanguile wood tiles 12"x12", 260 SF Marcelo economy tiles and 2 gallons UMYLIN cement adhesive
from CM Builders Centre for the construction project.1 The following day, 31 October 1979,
Petitioners applied for a commercial letter of credit2 with the Philippine Banking Corporation,
Cagayan de Oro City branch (hereafter PBC) in favor of CM Builders Centre. PBC approved the letter
of credit3 for ₱22,389.80 to cover the full invoice value of the goods. Petitioners signed a pro-forma
trust receipt4 as security. The loan was due on 29 January 1980.

On 31 October 1979, PBC debited ₱6,720 from Petitioners’ marginal deposit as partial payment of
the loan.5

On 7 May 1980, PBC wrote6 to Petitioners demanding that the amount be paid within seven days
from notice. Instead of complying with PBC’s demand, Veloso confessed that they lost ₱19,195.83
in the Carmelite Monastery Project and requested for a grace period of until 15 June 1980 to settle
the account.7

PBC sent a new demand letter8 to Petitioners on 16 October 1980 and informed them that their
outstanding balance as of 17 November 1979 was ₱20,824.40 exclusive of attorney’s fees of 25%. 9

On 2 December 1980, Petitioners proposed10 that the terms of payment of the loan be modified as
follows: ₱2,000 on or before 3 December 1980, and ₱1,000 per month starting 31 January 1980
until the account is fully paid. Pending approval of the proposal, Petitioners paid ₱1,000 to PBC on 4
December 1980,11 and thereafter ₱500 on 11 February 1981,12 16 March 1981,13 and 20 April
1981.14 Concurrently with the separate demand for attorney’s fees by PBC’s legal counsel, PBC
continued to demand payment of the balance.15

On 14 January 1983, Petitioners were charged with the violation of P.D. No. 115 (Trust Receipts
Law) in relation to Article 315 of the Revised Penal Code in an Information which was filed with
Branch 18, Regional Trial Court of Cagayan de Oro City. The accusatory portion of the Information
reads:

That on or about October 31, 1979, in the City of Cagayan de Oro, Philippines, and within the
jurisdiction of this Honorable Court, the above-named accused entered into a trust receipt
 Cred Trans | 2

agreement with the Philippine Banking Corporation at Cagayan de Oro City wherein the accused, as
entrustee, received from the entruster the following goods to wit:

Solatone Acoustical board

Tanguile Wood Tiles
Marcelo Cement Tiles
Umylin Cement Adhesive

with a total value of P22,389.80, with the obligation on the part of the accused-entrustee to hold
the aforesaid items in trust for the entruster and/or to sell on cash basis or otherwise dispose of
the said items and to turn over to the entruster the proceeds of the sale of said goods or if there be
no sale to return said items to the entruster on or before January 29, 1980 but that the said
accused after receipt of the goods, with intent to defraud and cause damage to the entruster,
conspiring, confederating together and mutually helping one another, did then and there wilfully,
unlawfully and feloniously fail and refuse to remit the proceeds of the sale of the goods to the
entruster despite repeated demands but instead converted, misappropriated and misapplied the
proceeds to their own personal use, benefit and gain, to the damage and prejudice of the Philippine
Banking Corporation, in the aforesaid sum of P22,389.80, Philippine Currency.

Contrary to PD 115 in relation to Article 315 of the Revised Penal Code.16

The case was docketed as Criminal Case No. 1390.

During trial, petitioner Veloso insisted that the transaction was a "clean loan" as per verbal
guarantee of Cayo Garcia Tuiza, PBC’s former manager. He and petitioner Colinares signed the
documents without reading the fine print, only learning of the trust receipt implication much later.
When he brought this to the attention of PBC, Mr. Tuiza assured him that the trust receipt was a
mere formality.17

On 7 July 1986, the trial court promulgated its decision18 convicting Petitioners of estafa for
violating P.D. No. 115 in relation to Article 315 of the Revised Penal Code and sentencing each of
them to suffer imprisonment of two years and one day of prision correccional as minimum to six
years and one day of prision mayor as maximum, and to solidarily indemnify PBC the amount of
₱20,824.44, with legal interest from 29 January 1980, 12 % penalty charge per annum, 25% of the
sums due as attorney’s fees, and costs.

The trial court considered the transaction between PBC and Petitioners as a trust receipt
transaction under Section 4, P.D. No. 115. It considered Petitioners’ use of the goods in their
Carmelite monastery project an act of "disposing" as contemplated under Section 13, P.D. No. 115,
and treated the charge invoice19 for goods issued by CM Builders Centre as a "document" within the
meaning of Section 3 thereof. It concluded that the failure of Petitioners to turn over the amount
they owed to PBC constituted estafa.

Petitioners appealed from the judgment to the Court of Appeals which was docketed as CA-G.R. CR
No. 05408. Petitioners asserted therein that the trial court erred in ruling that they violated the
Trust Receipt Law, and in holding them criminally liable therefor. In the alternative, they contend
that at most they can only be made civilly liable for payment of the loan.
 Cred Trans | 3

In its decision20 6 March 1989, the Court of Appeals modified the judgment of the trial court by
increasing the penalty to six years and one day of prision mayor as minimum to fourteen years eight
months and one day of reclusion temporal as maximum. It held that the documentary evidence of
the prosecution prevails over Veloso’s testimony, discredited Petitioners’ claim that the documents
they signed were in blank, and disbelieved that they were coerced into signing them.

On 25 March 1989, Petitioners filed a Motion for New Trial/Reconsideration21 alleging that the
"Disclosure Statement on Loan/Credit Transaction"22 (hereafter Disclosure Statement) signed by
them and Tuiza was suppressed by PBC during the trial. That document would have proved that the
transaction was indeed a loan as it bears a 14% interest as opposed to the trust receipt which does
not at all bear any interest. Petitioners further maintained that when PBC allowed them to pay in
installment, the agreement was novated and a creditor-debtor relationship was created.

In its resolution23 of 16 October 1989 the Court of Appeals denied the Motion for New
Trial/Reconsideration because the alleged newly discovered evidence was actually forgotten
evidence already in existence during the trial, and would not alter the result of the case.

Hence, Petitioners filed with us the petition in this case on 16 November 1989. They raised the
following issues:

1. WHETHER OR NOT THE DENIAL OF THE MOTION FOR NEW TRIAL ON THE GROUND OF
NEWLY DISCOVERED EVIDENCE, NAMELY, "DISCLOSURE ON LOAN/CREDIT TRANSACTION,"
WHICH IF INTRODUCED AND ADMITTED, WOULD CHANGE THE JUDGMENT, DOES NOT
CONSTITUTE A DENIAL OF DUE PROCESS.

2. ASSUMING THERE WAS A VALID TRUST RECEIPT, WHETHER OR NOT THE ACCUSED WERE
PROPERLY CHARGED, TRIED AND CONVICTED FOR VIOLATION OF SEC. 13, PD NO. 115 IN
RELATION TO ARTICLE 315 PARAGRAPH (I) (B) NOTWITHSTANDING THE NOVATION OF THE
SO-CALLED TRUST RECEIPT CONVERTING THE TRUSTOR-TRUSTEE RELATIONSHIP TO
CREDITOR-DEBTOR SITUATION.

In its Comment of 22 January 1990, the Office of the Solicitor General urged us to deny the petition
for lack of merit.

On 28 February 1990 Petitioners filed a Motion to Dismiss the case on the ground that they had
already fully paid PBC on 2 February 1990 the amount of ₱70,000 for the balance of the loan,
including interest and other charges, as evidenced by the different receipts issued by PBC, 24 and
that the PBC executed an Affidavit of desistance.25

We required the Solicitor General to comment on the Motion to Dismiss.

In its Comment of 30 July 1990, the Solicitor General opined that payment of the loan was akin to a
voluntary surrender or plea of guilty which merely serves to mitigate Petitioners’ culpability, but
does not in any way extinguish their criminal liability.

In the Resolution of 13 August 1990, we gave due course to the Petition and required the parties to
file their respective memoranda.
 Cred Trans | 4

The parties subsequently filed their respective memoranda.

It was only on 18 May 1999 when this case was assigned to the ponente. Thereafter, we required
the parties to move in the premises and for Petitioners to manifest if they are still interested in the
further prosecution of this case and inform us of their present whereabouts and whether their bail
bonds are still valid.

Petitioners submitted their Compliance.

The core issues raised in the petition are the denial by the Court of Appeals of Petitioners’ Motion
for New Trial and the true nature of the contract between Petitioners and the PBC. As to the latter,
Petitioners assert that it was an ordinary loan, not a trust receipt agreement under the Trust
Receipts Law.

The grant or denial of a motion for new trial rests upon the discretion of the judge. New trial may
be granted if: (1) errors of law or irregularities have been committed during the trial prejudicial to
the substantial rights of the accused; or (2) new and material evidence has been discovered which
the accused could not with reasonable diligence have discovered and produced at the trial, and
which, if introduced and admitted, would probably change the judgment. 26

For newly discovered evidence to be a ground for new trial, such evidence must be (1) discovered
after trial; (2) could not have been discovered and produced at the trial even with the exercise of
reasonable diligence; and (3) material, not merely cumulative, corroborative, or impeaching, and of
such weight that, if admitted, would probably change the judgment.27 It is essential that the
offering party exercised reasonable diligence in seeking to locate the evidence before or during trial
but nonetheless failed to secure it.28

We find no indication in the pleadings that the Disclosure Statement is a newly discovered
evidence.

Petitioners could not have been unaware that the two-page document exists. The Disclosure
Statement itself states, "NOTICE TO BORROWER: YOU ARE ENTITLED TO A COPY OF THIS PAPER
WHICH YOU SHALL SIGN."29 Assuming Petitioners’ copy was then unavailable, they could have
compelled its production in court,30 which they never did. Petitioners have miserably failed to
establish the second requisite of the rule on newly discovered evidence.

Petitioners themselves admitted that "they searched again their voluminous records, meticulously
and patiently, until they discovered this new and material evidence" only upon learning of the
Court of Appeals’ decision and after they were "shocked by the penalty imposed."31 Clearly, the
alleged newly discovered evidence is mere forgotten evidence that jurisprudence excludes as a
ground for new trial.32

However, the second issue should be resolved in favor of Petitioners.

Section 4, P.D. No. 115, the Trust Receipts Law, defines a trust receipt transaction as any
transaction by and between a person referred to as the entruster, and another person referred to
as the entrustee, whereby the entruster who owns or holds absolute title or security interest over
certain specified goods, documents or instruments, releases the same to the possession of the
 Cred Trans | 5

entrustee upon the latter’s execution and delivery to the entruster of a signed document called a
"trust receipt" wherein the entrustee binds himself to hold the designated goods, documents or
instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of
the amount owing to the entruster or as appears in the trust receipt or the goods, documents or
instruments themselves if they are unsold or not otherwise disposed of, in accordance with the
terms and conditions specified in the trust receipt.

There are two possible situations in a trust receipt transaction. The first is covered by the provision
which refers to money received under the obligation involving the duty to deliver it (entregarla) to
the owner of the merchandise sold. The second is covered by the provision which refers to
merchandise received under the obligation to "return" it (devolvera) to the owner. 33

Failure of the entrustee to turn over the proceeds of the sale of the goods, covered by the trust
receipt to the entruster or to return said goods if they were not disposed of in accordance with the
terms of the trust receipt shall be punishable as estafa under Article 315 (1) of the Revised Penal
Code,34 without need of proving intent to defraud.

A thorough examination of the facts obtaining in the case at bar reveals that the transaction
intended by the parties was a simple loan, not a trust receipt agreement.

Petitioners received the merchandise from CM Builders Centre on 30 October 1979. On that day,
ownership over the merchandise was already transferred to Petitioners who were to use the
materials for their construction project. It was only a day later, 31 October 1979, that they went to
the bank to apply for a loan to pay for the merchandise.

This situation belies what normally obtains in a pure trust receipt transaction where goods are
owned by the bank and only released to the importer in trust subsequent to the grant of the loan.
The bank acquires a "security interest" in the goods as holder of a security title for the advances it
had made to the entrustee.35 The ownership of the merchandise continues to be vested in the
person who had advanced payment until he has been paid in full, or if the merchandise has already
been sold, the proceeds of the sale should be turned over to him by the importer or by his
representative or successor in interest.36 To secure that the bank shall be paid, it takes full title to
the goods at the very beginning and continues to hold that title as his indispensable security until
the goods are sold and the vendee is called upon to pay for them; hence, the importer has never
owned the goods and is not able to deliver possession.37 In a certain manner, trust receipts partake
of the nature of a conditional sale where the importer becomes absolute owner of the imported
merchandise as soon as he has paid its price.38

Trust receipt transactions are intended to aid in financing importers and retail dealers who do not
have sufficient funds or resources to finance the importation or purchase of merchandise, and who
may not be able to acquire credit except through utilization, as collateral, of the merchandise
imported or purchased.39

The antecedent acts in a trust receipt transaction consist of the application and approval of the
letter of credit, the making of the marginal deposit and the effective importation of goods through
the efforts of the importer.40
 Cred Trans | 6

PBC attempted to cover up the true delivery date of the merchandise, yet the trial court took notice
even though it failed to attach any significance to such fact in the judgment. Despite the Court of
Appeals’ contrary view that the goods were delivered to Petitioners previous to the execution of
the letter of credit and trust receipt, we find that the records of the case speak volubly and this fact
remains uncontroverted. It is not uncommon for us to peruse through the transcript of the
stenographic notes of the proceedings to be satisfied that the records of the case do support the
conclusions of the trial court.41 After such perusal Grego Mutia, PBC’s credit investigator, admitted
thus:

ATTY. CABANLET: (continuing)

Q Do you know if the goods subject matter of this letter of credit and trust receipt agreement were
received by the accused?

A Yes, sir

Q Do you have evidence to show that these goods subject matter of this letter of credit and trust
receipt were delivered to the accused?

A Yes, sir.

Q I am showing to you this charge invoice, are you referring to this document?

A Yes, sir.

xxx

Q What is the date of the charge invoice?

A October 31, 1979.

COURT:

Make it of record as appearing in Exhibit D, the zero in 30 has been superimposed with numeral
1.42

During the cross and re-direct examinations he also impliedly admitted that the transaction was
indeed a loan. Thus:

Q In short the amount stated in your Exhibit C, the trust receipt was a loan to the accused you
admit that?

A Because in the bank the loan is considered part of the loan.

xxx

RE-DIRECT BY ATTY. CABANLET:

 Cred Trans | 7

ATTY. CABANLET (to the witness)

Q What do you understand by loan when you were asked?

A Loan is a promise of a borrower from the value received. The borrower will pay the bank on a
certain specified date with interest43

Such statement is akin to an admission against interest binding upon PBC.

Petitioner Veloso’s claim that they were made to believe that the transaction was a loan was also
not denied by PBC. He declared:

Q Testimony was given here that that was covered by trust receipt. In short it was a special kind of
loan.1âwphi1 What can you say as to that?

A I don’t think that would be a trust receipt because we were made to understand by the manager
who encouraged us to avail of their facilities that they will be granting us a loan 44

PBC could have presented its former bank manager, Cayo Garcia Tuiza, who contracted with
Petitioners, to refute Veloso’s testimony, yet it only presented credit investigator Grego Mutia.
Nowhere from Mutia’s testimony can it be gleaned that PBC represented to Petitioners that the
transaction they were entering into was not a pure loan but had trust receipt implications.

The Trust Receipts Law does not seek to enforce payment of the loan, rather it punishes the
dishonesty and abuse of confidence in the handling of money or goods to the prejudice of another
regardless of whether the latter is the owner.45 Here, it is crystal clear that on the part of
Petitioners there was neither dishonesty nor abuse of confidence in the handling of money to the
prejudice of PBC. Petitioners continually endeavored to meet their obligations, as shown by several
receipts issued by PBC acknowledging payment of the loan.

The Information charges Petitioners with intent to defraud and misappropriating the money for
their personal use. The mala prohibita nature of the alleged offense notwithstanding, intent as a
state of mind was not proved to be present in Petitioners’ situation. Petitioners employed no
artifice in dealing with PBC and never did they evade payment of their obligation nor attempt to
abscond. Instead, Petitioners sought favorable terms precisely to meet their obligation.

Also noteworthy is the fact that Petitioners are not importers acquiring the goods for re-sale,
contrary to the express provision embodied in the trust receipt. They are contractors who obtained
the fungible goods for their construction project. At no time did title over the construction
materials pass to the bank, but directly to the Petitioners from CM Builders Centre. This impresses
upon the trust receipt in question vagueness and ambiguity, which should not be the basis for
criminal prosecution in the event of violation of its provisions.46

The practice of banks of making borrowers sign trust receipts to facilitate collection of loans and
place them under the threats of criminal prosecution should they be unable to pay it may be unjust
and inequitable, if not reprehensible. Such agreements are contracts of adhesion which borrowers
have no option but to sign lest their loan be disapproved. The resort to this scheme leaves poor and
hapless borrowers at the mercy of banks, and is prone to misinterpretation, as had happened in
 Cred Trans | 8

this case. Eventually, PBC showed its true colors and admitted that it was only after collection of
the money, as manifested by its Affidavit of Desistance.

WHEREFORE, the challenged Decision of 6 March 1989 and the Resolution of 16 October 1989 of
the Court of Appeals in CA-GR. No. 05408 are REVERSED and SET ASIDE. Petitioners are hereby
ACQUITTED of the crime charged, i.e., for violation of P.D. No. 115 in relation to Article 315 of the
Revised Penal Code.

No costs.

SO ORDERED.
 Cred Trans | 9

G.R. No. 137232 June 29, 2005

ROSARIO TEXTILE MILLS CORPORATION and EDILBERTO YUJUICO, petitioners,

vs.
HOME BANKERS SAVINGS AND TRUST COMPANY, respondent.

DECISION

SANDOVAL-GUTIERREZ, J.:

For our resolution is the petition for review on certiorari assailing the Decision1 of the Court of
Appeals dated March 31, 1998 in CA-G.R. CV No. 48708 and its Resolution dated January 12, 1999.

The facts of the case as found by the Court of Appeals are:

"Sometime in 1989, Rosario Textile Mills Corporation (RTMC) applied from Home Bankers Savings &
Trust Co. for an Omnibus Credit Line for ₱10 million. The bank approved RTMC’s credit line but for
only ₱8 million. The bank notified RTMC of the grant of the said loan thru a letter dated March 2,
1989 which contains terms and conditions conformed by RTMC thru Edilberto V. Yujuico. On March
3, 1989, Yujuico signed a Surety Agreement in favor of the bank, in which he bound himself jointly
and severally with RTMC for the payment of all RTMC’s indebtedness to the bank from 1989 to
1990. RTMC availed of the credit line by making numerous drawdowns, each drawdown being
covered by a separate promissory note and trust receipt. RTMC, represented by Yujuico, executed
in favor of the bank a total of eleven (11) promissory notes.

Despite the lapse of the respective due dates under the promissory notes and notwithstanding the
bank’s demand letters, RTMC failed to pay its loans. Hence, on January 22, 1993, the bank filed a
complaint for sum of money against RTMC and Yujuico before the Regional Trial Court, Br. 16,
Manila.

In their answer (OR, pp. 44-47), RTMC and Yujuico contend that they should be absolved from
liability. They claimed that although the grant of the credit line and the execution of the suretyship
agreement are admitted, the bank gave assurance that the suretyship agreement was merely a
formality under which Yujuico will not be personally liable. They argue that the importation of raw
materials under the credit line was with a grant of option to them to turn-over to the bank the
imported raw materials should these fail to meet their manufacturing requirements. RTMC offered
to make such turn-over since the imported materials did not conform to the required specifications.
However, the bank refused to accept the same, until the materials were destroyed by a fire which
gutted down RTMC’s premises.

For failure of the parties to amicably settle the case, trial on the merits proceeded. After the trial,
the Court a quorendered a decision in favor of the bank, the decretal part of which reads:

‘WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered in favor of plaintiff and against
defendants who are ordered to pay jointly and severally in favor of plaintiff, inclusive of stipulated
30% per annum interest and penalty of 3% per month until fully paid, under the following
promissory notes:
 Cred Trans | 10

90-1116 6-20-90 ₱737,088.25 9-18-90

(maturity)

90-1320 7-13-90 ₱650,000.00 10-11-90

90-1334 7-17-90 ₱422,500.00 10-15-90

90-1335 7-17-90 ₱422,500.00 10-15-90

90-1347 7-18-90 ₱795,000.00 10-16-90

90-1373 7-20-90 ₱715,900.00 10-18-90

90-1397 7-27-90 ₱773,500.00 10-20-90

90-1429 7-26-90 ₱425,750.00 10-24-90

90-1540 8-7-90 ₱720,984.00 11-5-90

90-1569 8-9-90 ₱209,433.75 11-8-90

90-0922 5-28-90 ₱747,780.00 8-26-90

The counterclaims of defendants are hereby DISMISSED.

SO ORDERED." (OR, p. 323; Rollo, p. 73)."2

Dissatisfied, RTMC and Yujuico, herein petitioners, appealed to the Court of Appeals, contending
that under the trust receipt contracts between the parties, they merely held the goods described
therein in trust for respondent Home Bankers Savings and Trust Company (the bank) which owns
the same. Since the ownership of the goods remains with the bank, then it should bear the loss.
With the destruction of the goods by fire, petitioners should have been relieved of any obligation to
pay.

The Court of Appeals, however, affirmed the trial court’s judgment, holding that the bank is merely
the holder of the security for its advance payments to petitioners; and that the goods they
purchased, through the credit line extended by the bank, belong to them and hold said goods at
their own risk.

Petitioners then filed a motion for reconsideration but this was denied by the Appellate Court in its
Resolution dated January 12, 1999.

Hence, this petition for review on certiorari ascribing to the Court of Appeals the following errors:

"I
 Cred Trans | 11

THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE ACTS OF THE
PETITIONERS-DEFENDANTS WERE TANTAMOUNT TO A VALID AND EFFECTIVE TENDER OF THE
GOODS TO THE RESPONDENT-PLAINTIFF.

II

THE HONORABLE COURT OF APPEALS ERRED IN NOT APPLYING THE DOCTRINE OF ‘RES PERIT
DOMINO’ IN THE CASE AT BAR CONSIDERING THE VALID AND EFFECTIVE TENDER OF THE DEFECTIVE
RAW MATERIALS BY THE PETITIONERS-DEFENDANTS TO THE RESPONDENT-PLAINTIFF AND THE
EXPRESS STIPULATION IN THEIR CONTRACT THAT OWNERSHIP OF THE GOODS REMAINS WITH THE
RESPONDENT-PLAINTIFF.

III

THE HONORABLE COURT OF APPEALS VIOLATED ARTICLE 1370 OF THE CIVIL CODE AND THE LONG-
STANDING JURISPRUDENCE THAT ‘INTENTION OF THE PARTIES IS PRIMORDIAL’ IN ITS FAILURE TO
UPHOLD THE INTENTION OF THE PARTIES THAT THE SURETY AGREEMENT WAS A MERE FORMALITY
AND DID NOT INTEND TO HOLD PETITIONER YUJUICO LIABLE UNDER THE SAME SURETY
AGREEMENT.

IV

ASSUMING ARGUENDO THAT THE SURETYSHIP AGREEMENT WAS VALID AND EFFECTIVE, THE
HONORABLE COURT OF APPEALS VIOLATED THE BASIC LEGAL PRECEPT THAT A SURETY IS NOT
LIABLE UNLESS THE DEBTOR IS HIMSELF LIABLE.

THE HONORABLE COURT OF APPEALS VIOLATED THE PURPOSE OF TRUST RECEIPT LAW IN HOLDING
THE PETITIONERS LIABLE TO THE RESPONDENT."

The above assigned errors boil down to the following issues: (1) whether the Court of Appeals erred
in holding that petitioners are not relieved of their obligation to pay their loan after they tried to
tender the goods to the bank which refused to accept the same, and which goods were
subsequently lost in a fire; (2) whether the Court of Appeals erred when it ruled that petitioners are
solidarily liable for the payment of their obligations to the bank; and (3) whether the Court of
Appeals violated the Trust Receipts Law.

On the first issue, petitioners theorize that when petitioner RTMC imported the raw materials
needed for its manufacture, using the credit line, it was merely acting on behalf of the bank, the
true owner of the goods by virtue of the trust receipts. Hence, under the doctrine of res perit
domino, the bank took the risk of the loss of said raw materials. RTMC’s role in the transaction was
that of end user of the raw materials and when it did not accept those materials as they did not
meet the manufacturing requirements, RTMC made a valid and effective tender of the goods to the
bank. Since the bank refused to accept the raw materials, RTMC stored them in its warehouse.
When the warehouse and its contents were gutted by fire, petitioners’ obligation to the bank was
accordingly extinguished.
 Cred Trans | 12

Petitioners’ stance, however, conveniently ignores the true nature of its transaction with the bank.
We recall that RTMC filed with the bank an application for a credit line in the amount of ₱10
million, but only ₱8 million was approved. RTMC then made withdrawals from this credit line and
issued several promissory notes in favor of the bank. In banking and commerce, a credit line is "that
amount of money or merchandise which a banker, merchant, or supplier agrees to supply to a
person on credit and generally agreed to in advance."3 It is the fixed limit of credit granted by a
bank, retailer, or credit card issuer to a customer, to the full extent of which the latter may avail
himself of his dealings with the former but which he must not exceed and is usually intended to
cover a series of transactions in which case, when the customer’s line of credit is nearly exhausted,
he is expected to reduce his indebtedness by payments before making any further drawings. 4

It is thus clear that the principal transaction between petitioner RTMC and the bank is a contract of
loan. RTMC used the proceeds of this loan to purchase raw materials from a supplier abroad. In
order to secure the payment of the loan, RTMC delivered the raw materials to the bank as
collateral. Trust receipts were executed by the parties to evidence this security arrangement.
Simply stated, the trust receipts were mere securities.

In Samo vs. People,5 we described a trust receipt as "a security transaction intended to aid in
financing importers and retail dealers who do not have sufficient funds or resources to finance the
importation or purchase of merchandise, and who may not be able to acquire credit except through
utilization, as collateral, of the merchandise imported or purchased."6

In Vintola vs. Insular Bank of Asia and America,7 we elucidated further that "a trust receipt,
therefore, is a security agreement, pursuant to which a bank acquires a ‘security interest’ in the
goods. It secures an indebtedness and there can be no such thing as security interest that secures
no obligation."8 Section 3 (h) of the Trust Receipts Law (P.D. No. 115) defines a "security interest"
as follows:

"(h) Security Interest means a property interest in goods, documents, or instruments to secure
performance of some obligation of the entrustee or of some third persons to the entruster and
includes title, whether or not expressed to be absolute, whenever such title is in substance taken or
retained for security only."

Petitioners’ insistence that the ownership of the raw materials remained with the bank is
untenable. In Sia vs. People,9 Abad vs. Court of Appeals,10 and PNB vs. Pineda,11 we held that:

"If under the trust receipt, the bank is made to appear as the owner, it was but an artificial
expedient, more of legal fiction than fact, for if it were really so, it could dispose of the goods in any
manner it wants, which it cannot do, just to give consistency with purpose of the trust receipt of
giving a stronger security for the loan obtained by the importer. To consider the bank as the true
owner from the inception of the transaction would be to disregard the loan feature thereof..." 12

Thus, petitioners cannot be relieved of their obligation to pay their loan in favor of the bank.

Anent the second issue, petitioner Yujuico contends that the suretyship agreement he signed does
not bind him, the same being a mere formality.

We reject petitioner Yujuico’s contentions for two reasons.

 Cred Trans | 13

First, there is no record to support his allegation that the surety agreement is a "mere formality;"
and

Second, as correctly held by the Court of Appeals, the Suretyship Agreement signed by petitioner
Yujuico binds him. The terms clearly show that he agreed to pay the bank jointly and severally with
RTMC. The parole evidence rule under Section 9, Rule 130 of the Revised Rules of Court is in point,
thus:

"SEC. 9. Evidence of written agreements. – When the terms of an agreement have been reduced in
writing, it is considered as containing all the terms agreed upon and there can be, between the
parties and their successors in interest, no evidence of such terms other than the contents of the
written agreement.

However, a party may present evidence to modify, explain, or add to the terms of the written
agreement if he puts in issue in his pleading:

(a) An intrinsic ambiguity, mistake, or imperfection in the written agreement;

(b) The failure of the written agreement to express the true intent and agreement of the
parties thereto;

(c) The validity of the written agreement; or

(d) The existence of other terms agreed to by the parties or their successors in interest after
the execution of the written agreement.

x x x."

Under this Rule, the terms of a contract are rendered conclusive upon the parties and
evidence aliunde is not admissible to vary or contradict a complete and enforceable agreement
embodied in a document.13 We have carefully examined the Suretyship Agreement signed by
Yujuico and found no ambiguity therein. Documents must be taken as explaining all the terms of
the agreement between the parties when there appears to be no ambiguity in the language of said
documents nor any failure to express the true intent and agreement of the parties. 14

As to the third and final issue – At the risk of being repetitious, we stress that the contract between
the parties is a loan. What respondent bank sought to collect as creditor was the loan it granted to
petitioners. Petitioners’ recourse is to sue their supplier, if indeed the materials were defective.

WHEREFORE, the petition is DENIED. The assailed Decision and Resolution of the Court of Appeals
in CA-G.R. CV No. 48708 are AFFIRMED IN TOTO. Costs against petitioners.

SO ORDERED.
 Cred Trans | 14

G.R. No. 166884 June 13, 2012

LAND BANK OF THE PHILIPPINES, Petitioner,

vs.
LAMBERTO C. PEREZ, NESTOR C. KUN, MA. ESTELITA P. ANGELES-PANLILIO, and NAPOLEON O.
GARCIA, Respondents.

DECISION

BRION, J.:

Before this Court is a petition for review on certiorari,1 under Rule 45 of the Rules of Court, assailing
the decision2 dated January 20, 2005 of the Court of Appeals in CA-G.R. SP No. 76588. In the
assailed decision, the Court of Appeals dismissed the criminal complaint for estafa against the
respondents, Lamberto C. Perez, Nestor C. Kun, Ma. Estelita P. Angeles-Panlilio and Napoleon
Garcia, who allegedly violated Article 315, paragraph 1(b) of the Revised Penal Code, in relation
with Section 13 of Presidential Decree No. (P.D.) 115 – the "Trust Receipts Law."

Petitioner Land Bank of the Philippines (LBP) is a government financial institution and the official
depository of the Philippines.3 Respondents are the officers and representatives of Asian
Construction and Development Corporation (ACDC), a corporation incorporated under Philippine
law and engaged in the construction business.4

On June 7, 1999, LBP filed a complaint for estafa or violation of Article 315, paragraph 1(b) of the
Revised Penal Code, in relation to P.D. 115, against the respondents before the City Prosecutor’s
Office in Makati City. In the affidavit-complaint5 of June 7, 1999, the LBP’s Account Officer for the
Account Management Development, Edna L. Juan, stated that LBP extended a credit
accommodation to ACDC through the execution of an Omnibus Credit Line Agreement
(Agreement)6 between LBP and ACDC on October 29, 1996. In various instances, ACDC used the
Letters of Credit/Trust Receipts Facility of the Agreement to buy construction materials. The
respondents, as officers and representatives of ACDC, executed trust receipts 7 in connection with
the construction materials, with a total principal amount of ₱52,344,096.32. The trust receipts
matured, but ACDC failed to return to LBP the proceeds of the construction projects or the
construction materials subject of the trust receipts. LBP sent ACDC a demand letter, 8 dated May 4,
1999, for the payment of its debts, including those under the Trust Receipts Facility in the amount
of ₱66,425,924.39. When ACDC failed to comply with the demand letter, LBP filed the affidavit-
complaint.

The respondents filed a joint affidavit9 wherein they stated that they signed the trust receipt
documents on or about the same time LBP and ACDC executed the loan documents; their
signatures were required by LBP for the release of the loans. The trust receipts in this case do not
contain (1) a description of the goods placed in trust, (2) their invoice values, and (3) their maturity
dates, in violation of Section 5(a) of P.D. 115. Moreover, they alleged that ACDC acted as a
subcontractor for government projects such as the Metro Rail Transit, the Clark Centennial
Exposition and the Quezon Power Plant in Mauban, Quezon. Its clients for the construction
projects, which were the general contractors of these projects, have not yet paid them; thus, ACDC
had yet to receive the proceeds of the materials that were the subject of the trust receipts and
 Cred Trans | 15

were allegedly used for these constructions. As there were no proceeds received from these clients,
no misappropriation thereof could have taken place.

On September 30, 1999, Makati Assistant City Prosecutor Amador Y. Pineda issued a
Resolution10 dismissing the complaint. He pointed out that the evidence presented by LBP failed to
state the date when the goods described in the letters of credit were actually released to the
possession of the respondents. Section 4 of P.D. 115 requires that the goods covered by trust
receipts be released to the possession of the entrustee after the latter’s execution and delivery to
the entruster of a signed trust receipt. He adds that LBP’s evidence also fails to show the date when
the trust receipts were executed since all the trust receipts are undated. Its dispositive portion
reads:

WHEREFORE, premises considered, and for insufficiency of evidence, it is respectfully

recommended that the instant complaints be dismissed, as upon approval, the same are hereby
dismissed.11

LBP filed a motion for reconsideration which the Makati Assistant City Prosecutor denied in his
order of January 7, 2000.12

On appeal, the Secretary of Justice reversed the Resolution of the Assistant City Prosecutor. In his
resolution of August 1, 2002,13 the Secretary of Justice pointed out that there was no question that
the goods covered by the trust receipts were received by ACDC. He likewise adopted LBP’s
argument that while the subjects of the trust receipts were not mentioned in the trust receipts,
they were listed in the letters of credit referred to in the trust receipts. He also noted that the trust
receipts contained maturity dates and clearly set out their stipulations. He further rejected the
respondents’ defense that ACDC failed to remit the payments to LBP due to the failure of the
clients of ACDC to pay them. The dispositive portion of the resolution reads:

WHEREFORE, the assailed resolution is REVERSED and SET ASIDE. The City Prosecutor of Makati City
is hereby directed to file an information for estafa under Art. 315 (1) (b) of the Revised Penal Code
in relation to Section 13, Presidential Decree No. 115 against respondents Lamberto C. Perez,
Nestor C. Kun, [Ma. Estelita P. Angeles-Panlilio] and Napoleon O. Garcia and to report the action
taken within ten (10) days from receipt hereof.14

The respondents filed a motion for reconsideration of the resolution dated August 1, 2002, which
the Secretary of Justice denied.15 He rejected the respondents’ submission that Colinares v. Court of
Appeals16 does not apply to the case. He explained that in Colinares, the building materials were
delivered to the accused before they applied to the bank for a loan to pay for the merchandise;
thus, the ownership of the merchandise had already been transferred to the entrustees before the
trust receipts agreements were entered into. In the present case, the parties have already entered
into the Agreement before the construction materials were delivered to ACDC.

Subsequently, the respondents filed a petition for review before the Court of Appeals.

After both parties submitted their respective Memoranda, the Court of Appeals promulgated the
assailed decision of January 20, 2005.17 Applying the doctrine in Colinares, it ruled that this case did
not involve a trust receipt transaction, but a mere loan. It emphasized that construction materials,
 Cred Trans | 16

the subject of the trust receipt transaction, were delivered to ACDC even before the trust receipts
were executed. It noted that LBP did not offer proof that the goods were received by ACDC, and
that the trust receipts did not contain a description of the goods, their invoice value, the amount of
the draft to be paid, and their maturity dates. It also adopted ACDC’s argument that since no
payment for the construction projects had been received by ACDC, its officers could not have been
guilty of misappropriating any payment. The dispositive portion reads:

WHEREFORE, in view of the foregoing, the Petition is GIVEN DUE COURSE. The assailed Resolutions
of the respondent Secretary of Justice dated August 1, 2002 and February 17, 2003, respectively in
I.S. No. 99-F-9218-28 are hereby REVERSED and SET ASIDE.18

LBP now files this petition for review on certiorari, dated March 15, 2005, raising the following
error:

THE COURT OF APPEALS GRAVELY ERRED WHEN IT REVERSED AND SET ASIDE THE RESOLUTIONS OF
THE HONORABLE SECRETARY OF JUSTICE BY APPLYING THE RULING IN THE CASE OF COLINARES V.
COURT OF APPEALS, 339 SCRA 609, WHICH IS NOT APPLICABLE IN THE CASE AT BAR.19

On April 8, 2010, while the case was pending before this Court, the respondents filed a motion to
dismiss.20 They informed the Court that LBP had already assigned to Philippine Opportunities for
Growth and Income, Inc. all of its rights, title and interests in the loans subject of this case in a Deed
of Absolute Sale dated June 23, 2005 (attached as Annex "C" of the motion). The respondents also
stated that Avent Holdings Corporation, in behalf of ACDC, had already settled ACDC’s obligation to
LBP on October 8, 2009. Included as Annex "A" in this motion was a certification21 issued by the
Philippine Opportunities for Growth and Income, Inc., stating that it was LBP’s successor-in-interest
insofar as the trust receipts in this case are concerned and that Avent Holdings Corporation had
already settled the claims of LBP or obligations of ACDC arising from these trust receipts.

We deny this petition.

The disputed transactions are not trust receipts.

Section 4 of P.D. 115 defines a trust receipt transaction in this manner:

Section 4. What constitutes a trust receipt transaction. A trust receipt transaction, within the
meaning of this Decree, is any transaction by and between a person referred to in this Decree as
the entruster, and another person referred to in this Decree as entrustee, whereby the entruster,
who owns or holds absolute title or security interests over certain specified goods, documents or
instruments, releases the same to the possession of the entrustee upon the latter's execution and
delivery to the entruster of a signed document called a "trust receipt" wherein the entrustee binds
himself to hold the designated goods, documents or instruments in trust for the entruster and to
sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over
to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as
appears in the trust receipt or the goods, documents or instruments themselves if they are unsold
or not otherwise disposed of, in accordance with the terms and conditions specified in the trust
receipt, or for other purposes substantially equivalent to any of the following:
 Cred Trans | 17

1. In the case of goods or documents, (a) to sell the goods or procure their sale; or (b) to
manufacture or process the goods with the purpose of ultimate sale: Provided, That, in the case of
goods delivered under trust receipt for the purpose of manufacturing or processing before its
ultimate sale, the entruster shall retain its title over the goods whether in its original or processed
form until the entrustee has complied fully with his obligation under the trust receipt; or (c) to load,
unload, ship or tranship or otherwise deal with them in a manner preliminary or necessary to their
sale[.]

There are two obligations in a trust receipt transaction. The first is covered by the provision that
refers to money under the obligation to deliver it (entregarla) to the owner of the merchandise
sold. The second is covered by the provision referring to merchandise received under the obligation
to return it (devolvera) to the owner. Thus, under the Trust Receipts Law,22 intent to defraud is
presumed when (1) the entrustee fails to turn over the proceeds of the sale of goods covered by
the trust receipt to the entruster; or (2) when the entrustee fails to return the goods under trust, if
they are not disposed of in accordance with the terms of the trust receipts.23

In all trust receipt transactions, both obligations on the part of the trustee exist in the alternative –
the return of the proceeds of the sale or the return or recovery of the goods, whether raw or
processed.24 When both parties enter into an agreement knowing that the return of the goods
subject of the trust receipt is not possible even without any fault on the part of the trustee, it is not
a trust receipt transaction penalized under Section 13 of P.D. 115; the only obligation actually
agreed upon by the parties would be the return of the proceeds of the sale transaction. This
transaction becomes a mere loan,25 where the borrower is obligated to pay the bank the amount
spent for the purchase of the goods.

Article 1371 of the Civil Code provides that "[i]n order to judge the intention of the contracting
parties, their contemporaneous and subsequent acts shall be principally considered." Under this
provision, we can examine the contemporaneous actions of the parties rather than rely purely on
the trust receipts that they signed in order to understand the transaction through their intent.

We note in this regard that at the onset of these transactions, LBP knew that ACDC was in the
construction business and that the materials that it sought to buy under the letters of credit were
to be used for the following projects: the Metro Rail Transit Project and the Clark Centennial
Exposition Project.26 LBP had in fact authorized the delivery of the materials on the construction
sites for these projects, as seen in the letters of credit it attached to its complaint. 27 Clearly, they
were aware of the fact that there was no way they could recover the buildings or constructions for
which the materials subject of the alleged trust receipts had been used. Notably, despite the
allegations in the affidavit-complaint wherein LBP sought the return of the construction
materials,28 its demand letter dated May 4, 1999 sought the payment of the balance but failed to
ask, as an alternative, for the return of the construction materials or the buildings where these
materials had been used.29

The fact that LBP had knowingly authorized the delivery of construction materials to a construction
site of two government projects, as well as unspecified construction sites, repudiates the idea that
LBP intended to be the owner of those construction materials. As a government financial
institution, LBP should have been aware that the materials were to be used for the construction of
an immovable property, as well as a property of the public domain. As an immovable property, the
 Cred Trans | 18

ownership of whatever was constructed with those materials would presumably belong to the
owner of the land, under Article 445 of the Civil Code which provides:

Article 445. Whatever is built, planted or sown on the land of another and the improvements or
repairs made thereon, belong to the owner of the land, subject to the provisions of the following
articles.

Even if we consider the vague possibility that the materials, consisting of cement, bolts and
reinforcing steel bars, would be used for the construction of a movable property, the ownership of
these properties would still pertain to the government and not remain with the bank as they would
be classified as property of the public domain, which is defined by the Civil Code as:

Article 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges
constructed by the State, banks, shores, roadsteads, and others of similar character;

(2) Those which belong to the State, without being for public use, and are intended for some
public service or for the development of the national wealth.

In contrast with the present situation, it is fundamental in a trust receipt transaction that the
person who advanced payment for the merchandise becomes the absolute owner of said
merchandise and continues as owner until he or she is paid in full, or if the goods had already been
sold, the proceeds should be turned over to him or to her.30

Thus, in concluding that the transaction was a loan and not a trust receipt, we noted in Colinares
that the industry or line of work that the borrowers were engaged in was construction. We pointed
out that the borrowers were not importers acquiring goods for resale.31 Indeed, goods sold in retail
are often within the custody or control of the trustee until they are purchased. In the case of
materials used in the manufacture of finished products, these finished products – if not the raw
materials or their components – similarly remain in the possession of the trustee until they are sold.
But the goods and the materials that are used for a construction project are often placed under the
control and custody of the clients employing the contractor, who can only be compelled to return
the materials if they fail to pay the contractor and often only after the requisite legal proceedings.
The contractor’s difficulty and uncertainty in claiming these materials (or the buildings and
structures which they become part of), as soon as the bank demands them, disqualify them from
being covered by trust receipt agreements.

Based on these premises, we cannot consider the agreements between the parties in this case to
be trust receipt transactions because (1) from the start, the parties were aware that ACDC could
not possibly be obligated to reconvey to LBP the materials or the end product for which they were
used; and (2) from the moment the materials were used for the government projects, they became
public, not LBP’s, property.

Since these transactions are not trust receipts, an action for estafa should not be brought against
the respondents, who are liable only for a loan. In passing, it is useful to note that this is the threat
held against borrowers that Retired Justice Claudio Teehankee emphatically opposed in his dissent
in People v. Cuevo,32 restated in Ong v. CA, et al.:33
 Cred Trans | 19

The very definition of trust receipt x x x sustains the lower court’s rationale in dismissing the
information that the contract covered by a trust receipt is merely a secured loan. The goods
imported by the small importer and retail dealer through the bank’s financing remain of their own
property and risk and the old capitalist orientation of putting them in jail for estafa for non-
payment of the secured loan (granted after they had been fully investigated by the bank as good
credit risks) through the fiction of the trust receipt device should no longer be permitted in this day
and age.

As the law stands today, violations of Trust Receipts Law are criminally punishable, but no criminal
complaint for violation of Article 315, paragraph 1(b) of the Revised Penal Code, in relation with
P.D. 115, should prosper against a borrower who was not part of a genuine trust receipt
transaction.

Misappropriation or abuse of confidence is absent in this case.

Even if we assume that the transactions were trust receipts, the complaint against the respondents
still should have been dismissed. The Trust Receipts Law punishes the dishonesty and abuse of
confidence in the handling of money or goods to the prejudice of another, regardless of whether
the latter is the owner or not. The law does not singularly seek to enforce payment of the loan, as
"there can be no violation of [the] right against imprisonment for non-payment of a debt."34

In order that the respondents "may be validly prosecuted for estafa under Article 315, paragraph
1(b) of the Revised Penal Code,35 in relation with Section 13 of the Trust Receipts Law, the following
elements must be established: (a) they received the subject goods in trust or under the obligation
to sell the same and to remit the proceeds thereof to [the trustor], or to return the goods if not
sold; (b) they misappropriated or converted the goods and/or the proceeds of the sale; (c) they
performed such acts with abuse of confidence to the damage and prejudice of Metrobank; and (d)
demand was made on them by [the trustor] for the remittance of the proceeds or the return of the
unsold goods."36

In this case, no dishonesty or abuse of confidence existed in the handling of the construction
materials.

In this case, the misappropriation could be committed should the entrustee fail to turn over the
proceeds of the sale of the goods covered by the trust receipt transaction or fail to return the goods
themselves. The respondents could not have failed to return the proceeds since their allegations
that the clients of ACDC had not paid for the projects it had undertaken with them at the time the
case was filed had never been questioned or denied by LBP. What can only be attributed to the
respondents would be the failure to return the goods subject of the trust receipts.

We do not likewise see any allegation in the complaint that ACDC had used the construction
materials in a manner that LBP had not authorized. As earlier pointed out, LBP had authorized the
delivery of these materials to these project sites for which they were used. When it had done so,
LBP should have been aware that it could not possibly recover the processed materials as they
would become part of government projects, two of which (the Metro Rail Transit Project and the
Quezon Power Plant Project) had even become part of the operations of public utilities vital to
public service. It clearly had no intention of getting these materials back; if it had, as a primary
 Cred Trans | 20

government lending institution, it would be guilty of extreme negligence and incompetence in not
foreseeing the legal complications and public inconvenience that would arise should it decide to
claim the materials. ACDC’s failure to return these materials or their end product at the time these
"trust receipts" expired could not be attributed to its volition. No bad faith, malice, negligence or
breach of contract has been attributed to ACDC, its officers or representatives. Therefore, absent
any abuse of confidence or misappropriation on the part of the respondents, the criminal
proceedings against them for estafa should not prosper.

In Metropolitan Bank,37 we affirmed the city prosecutor’s dismissal of a complaint for violation of
the Trust Receipts Law. In dismissing the complaint, we took note of the Court of Appeals’ finding
that the bank was interested only in collecting its money and not in the return of the goods. Apart
from the bare allegation that demand was made for the return of the goods (raw materials that
were manufactured into textiles), the bank had not accompanied its complaint with a demand
letter. In addition, there was no evidence offered that the respondents therein had
misappropriated or misused the goods in question.

The petition should be dismissed because the OSG did not file it and the civil liabilities have already
been settled.

The proceedings before us, regarding the criminal aspect of this case, should be dismissed as it does
not appear from the records that the complaint was filed with the participation or consent of the
Office of the Solicitor General (OSG). Section 35, Chapter 12, Title III, Book IV of the Administrative
Code of 1987 provides that:

Section 35. Powers and Functions. — The Office of the Solicitor General shall represent the
Government of the Philippines, its agencies and instrumentalities and its officials and agents in any
litigation, proceedings, investigation or matter requiring the services of lawyers. x x x It shall have
the following specific powers and functions:

(1) Represent the Government in the Supreme Court and the Court of Appeals in all criminal
proceedings; represent the Government and its officers in the Supreme Court, the Court of Appeals
and all other courts or tribunals in all civil actions and special proceedings in which the Government
or any officer thereof in his official capacity is a party. (Emphasis provided.)

In Heirs of Federico C. Delgado v. Gonzalez,38 we ruled that the preliminary investigation is part of a
criminal proceeding. As all criminal proceedings before the Supreme Court and the Court of Appeals
may be brought and defended by only the Solicitor General in behalf of the Republic of the
Philippines, a criminal action brought to us by a private party alone suffers from a fatal defect. The
present petition was brought in behalf of LBP by the Government Corporate Counsel to protect its
private interests. Since the representative of the "People of the Philippines" had not taken any part
of the case, it should be dismissed.1âwphi1

On the other hand, if we look at the mandate given to the Office of the Government Corporate
Counsel, we find that it is limited to the civil liabilities arising from the crime, and is subject to the
control and supervision of the public prosecutor. Section 2, Rule 8 of the Rules Governing the
Exercise by the Office of the Government Corporate Counsel of its Authority, Duties and Powers as
 Cred Trans | 21

Principal Law Office of All Government Owned or Controlled Corporations, filed before the Office of
the National Administration Register on September 5, 2011, reads:

Section 2. Extent of legal assistance – The OGCC shall represent the complaining GOCC in all stages
of the criminal proceedings. The legal assistance extended is not limited to the preparation of
appropriate sworn statements but shall include all aspects of an effective private prosecution
including recovery of civil liability arising from the crime, subject to the control and supervision of
the public prosecutor.

Based on jurisprudence, there are two exceptions when a private party complainant or offended
party in a criminal case may file a petition with this Court, without the intervention of the OSG: (1)
when there is denial of due process of law to the prosecution, and the State or its agents refuse to
act on the case to the prejudice of the State and the private offended party; 39 and (2) when the
private offended party questions the civil aspect of a decision of the lower court.40

In this petition, LBP fails to allege any inaction or refusal to act on the part of the OSG, tantamount
to a denial of due process. No explanation appears as to why the OSG was not a party to the case.
Neither can LBP now question the civil aspect of this decision as it had already assigned ACDC’s
debts to a third person, Philippine Opportunities for Growth and Income, Inc., and the civil liabilities
appear to have already been settled by Avent Holdings Corporation, in behalf of ACDC. These facts
have not been disputed by LBP. Therefore, we can reasonably conclude that LBP no longer has any
claims against ACDC, as regards the subject matter of this case, that would entitle it to file a civil or
criminal action.

WHEREFORE, we DENY the petition and AFFIRM the January 20, 2005 decision of the Court of
Appeals in CA-G.R. SP No. 76588. No costs.

SO ORDERED.
 Cred Trans | 22

G.R. No. 74886 December 8, 1992

PRUDENTIAL BANK, petitioner,

vs.
INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON MILLS, INC. and ANACLETO R.
CHI, respondents.

DAVIDE, JR., J.:

Petitioner seeks to review and set aside the decision 1 of public respondent; Intermediate Appellate
Court (now Court of Appeals), dated 10 March 1986, in AC-G.R. No. 66733 which affirmed in
toto the 15 June 1978 decision of Branch 9 (Quezon City) of the then Court of First Instance (now
Regional Trial Court) of Rizal in Civil Case No. Q-19312. The latter involved an action instituted by
the petitioner for the recovery of a sum of money representing the amount paid by it to the Nissho
Company Ltd. of Japan for textile machinery imported by the defendant, now private respondent,
Philippine Rayon Mills, Inc. (hereinafter Philippine Rayon), represented by co-defendant Anacleto R.
Chi.

The facts which gave rise to the instant controversy are summarized by the public respondent as
follows:

On August 8, 1962, defendant-appellant Philippine Rayon Mills, Inc. entered into a

contract with Nissho Co., Ltd. of Japan for the importation of textile machineries
under a five-year deferred payment plan (Exhibit B, Plaintiff's Folder of Exhibits, p 2).
To effect payment for said machineries, the defendant-appellant applied for a
commercial letter of credit with the Prudential Bank and Trust Company in favor of
Nissho. By virtue of said application, the Prudential Bank opened Letter of Credit No.
DPP-63762 for $128,548.78 (Exhibit A, Ibid., p. 1). Against this letter of credit, drafts
were drawn and issued by Nissho (Exhibits X, X-1 to X-11, Ibid., pp. 65, 66 to 76),
which were all paid by the Prudential Bank through its correspondent in Japan, the
Bank of Tokyo, Ltd. As indicated on their faces, two of these drafts (Exhibit X and X-
1, Ibid., pp. 65-66) were accepted by the defendant-appellant through its president,
Anacleto R. Chi, while the others were not (Exhibits X-2 to X-11, Ibid., pp. 66 to 76).

Upon the arrival of the machineries, the Prudential Bank indorsed the shipping
documents to the defendant-appellant which accepted delivery of the same. To
enable the defendant-appellant to take delivery of the machineries, it executed, by
prior arrangement with the Prudential Bank, a trust receipt which was signed by
Anacleto R. Chi in his capacity as President (sic) of defendant-appellant company
(Exhibit C, Ibid., p. 13).

At the back of the trust receipt is a printed form to be accomplished by two sureties
who, by the very terms and conditions thereof, were to be jointly and severally liable
to the Prudential Bank should the defendant-appellant fail to pay the total amount
or any portion of the drafts issued by Nissho and paid for by Prudential Bank. The
 Cred Trans | 23

defendant-appellant was able to take delivery of the textile machineries and

installed the same at its factory site at 69 Obudan Street, Quezon City.

Sometime in 1967, the defendant-appellant ceased business operation (sic). On

December 29, 1969, defendant-appellant's factory was leased by Yupangco Cotton
Mills for an annual rental of P200,000.00 (Exhibit I, Ibid., p. 22). The lease was
renewed on January 3, 1973 (Exhibit J, Ibid., p. 26). On January 5, 1974, all the textile
machineries in the defendant-appellant's factory were sold to AIC Development
Corporation for P300,000.00 (Exhibit K, Ibid., p. 29).

The obligation of the defendant-appellant arising from the letter of credit and the
trust receipt remained unpaid and unliquidated. Repeated formal demands (Exhibits
U, V, and W, Ibid., pp. 62, 63, 64) for the payment of the said trust receipt yielded no
result Hence, the present action for the collection of the principal amount of
P956,384.95 was filed on October 3, 1974 against the defendant-appellant and
Anacleto R. Chi. In their respective answers, the defendants interposed identical
special defenses, viz., the complaint states no cause of action; if there is, the same
has prescribed; and the plaintiff is guilty of laches. 2

On 15 June 1978, the trial court rendered its decision the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered sentencing the defendant Philippine

Rayon Mills, Inc. to pay plaintiff the sum of P153,645.22, the amounts due under
Exhibits "X" & "X-1", with interest at 6% per annum beginning September 15, 1974
until fully paid.

Insofar as the amounts involved in drafts Exhs. "X" (sic) to "X-11", inclusive, the same
not having been accepted by defendant Philippine Rayon Mills, Inc., plaintiff's cause
of action thereon has not accrued, hence, the instant case is premature.

Insofar as defendant Anacleto R. Chi is concerned, the case is dismissed. Plaintiff is

ordered to pay defendant Anacleto R. Chi the sum of P20,000.00 as attorney's fees.

With costs against defendant Philippine Rayon Mills, Inc.

SO ORDERED. 3

Petitioner appealed the decision to the then Intermediate Appellate Court. In urging the said court
to reverse or modify the decision, petitioner alleged in its Brief that the trial court erred in (a)
disregarding its right to reimbursement from the private respondents for the entire unpaid balance
of the imported machines, the total amount of which was paid to the Nissho Company Ltd., thereby
violating the principle of the third party payor's right to reimbursement provided for in the second
paragraph of Article 1236 of the Civil Code and under the rule against unjust enrichment; (b)
refusing to hold Anacleto R. Chi, as the responsible officer of defendant corporation, liable under
Section 13 of P.D No 115 for the entire unpaid balance of the imported machines covered by the
bank's trust receipt (Exhibit "C"); (c) finding that the solidary guaranty clause signed by Anacleto R.
Chi is not a guaranty at all; (d) controverting the judicial admissions of Anacleto R. Chi that he is at
least a simple guarantor of the said trust receipt obligation; (e) contravening, based on the
 Cred Trans | 24

assumption that Chi is a simple guarantor, Articles 2059, 2060 and 2062 of the Civil Code and the
related evidence and jurisprudence which provide that such liability had already attached; (f)
contravening the judicial admissions of Philippine Rayon with respect to its liability to pay the
petitioner the amounts involved in the drafts (Exhibits "X", "X-l" to "X-11''); and (g) interpreting
"sight" drafts as requiring acceptance by Philippine Rayon before the latter could be held liable
thereon. 4

In its decision, public respondent sustained the trial court in all respects. As to the first and last
assigned errors, it ruled that the provision on unjust enrichment, Article 2142 of the Civil Code,
applies only if there is no express contract between the parties and there is a clear showing that the
payment is justified. In the instant case, the relationship existing between the petitioner and
Philippine Rayon is governed by specific contracts, namely the application for letters of credit, the
promissory note, the drafts and the trust receipt. With respect to the last ten (10) drafts (Exhibits
"X-2" to "X-11") which had not been presented to and were not accepted by Philippine Rayon,
petitioner was not justified in unilaterally paying the amounts stated therein. The public
respondent did not agree with the petitioner's claim that the drafts were sight drafts which did not
require presentment for acceptance to Philippine Rayon because paragraph 8 of the trust receipt
presupposes prior acceptance of the drafts. Since the ten (10) drafts were not presented and
accepted, no valid demand for payment can be made.

Public respondent also disagreed with the petitioner's contention that private respondent Chi is
solidarily liable with Philippine Rayon pursuant to Section 13 of P.D. No. 115 and based on his
signature on the solidary guaranty clause at the dorsal side of the trust receipt. As to the first
contention, the public respondent ruled that the civil liability provided for in said Section 13
attaches only after conviction. As to the second, it expressed misgivings as to whether Chi's
signature on the trust receipt made the latter automatically liable thereon because the so-called
solidary guaranty clause at the dorsal portion of the trust receipt is to be signed not by one (1)
person alone, but by two (2) persons; the last sentence of the same is incomplete and unsigned by
witnesses; and it is not acknowledged before a notary public. Besides, even granting that it was
executed and acknowledged before a notary public, Chi cannot be held liable therefor because the
records fail to show that petitioner had either exhausted the properties of Philippine Rayon or had
resorted to all legal remedies as required in Article 2058 of the Civil Code. As provided for under
Articles 2052 and 2054 of the Civil Code, the obligation of a guarantor is merely accessory and
subsidiary, respectively. Chi's liability would therefore arise only when the principal debtor fails to
comply with his obligation. 5

Its motion to reconsider the decision having been denied by the public respondent in its Resolution
of 11 June 1986, 6 petitioner filed the instant petition on 31 July 1986 submitting the following legal
issues:

I. WHETHER OR NOT THE RESPONDENT APPELLATE COURT GRIEVOUSLY ERRED IN

DENYING PETITIONER'S CLAIM FOR FULL REIMBURSEMENT AGAINST THE PRIVATE
RESPONDENTS FOR THE PAYMENT PETITIONER MADE TO NISSHO CO. LTD. FOR THE
BENEFIT OF PRIVATE RESPONDENT UNDER ART. 1283 OF THE NEW CIVIL CODE OF
THE PHILIPPINES AND UNDER THE GENERAL PRINCIPLE AGAINST UNJUST
ENRICHMENT;
 Cred Trans | 25

II. WHETHER OR NOT RESPONDENT CHI IS SOLIDARILY LIABLE UNDER THE TRUST
RECEIPT (EXH. C);

III. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS OF RESPONDENT

CHI HE IS LIABLE THEREON AND TO WHAT EXTENT;

IV. WHETHER OR NOT RESPONDENT CHI IS MERELY A SIMPLE GUARANTOR; AND IF

SO; HAS HIS LIABILITY AS SUCH ALREADY ATTACHED;

V. WHETHER OR NOT AS THE SIGNATORY AND RESPONSIBLE OFFICER OF

RESPONDENT PHIL. RAYON RESPONDENT CHI IS PERSONALLY LIABLE PURSUANT TO
THE PROVISION OF SECTION 13, P.D. 115;

VI. WHETHER OR NOT RESPONDENT PHIL. RAYON IS LIABLE TO THE PETITIONER

UNDER THE TRUST RECEIPT (EXH. C);

VII. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS RESPONDENT

PHIL. RAYON IS LIABLE TO THE PETITIONER UNDER THE DRAFTS (EXHS. X, X-1 TO X-
11) AND TO WHAT EXTENT;

VIII. WHETHER OR NOT SIGHT DRAFTS REQUIRE PRIOR ACCEPTANCE FROM

RESPONDENT PHIL. RAYON BEFORE THE LATTER BECOMES LIABLE TO PETITIONER. 7

In the Resolution of 12 March 1990, 8 this Court gave due course to the petition after the filing of
the Comment thereto by private respondent Anacleto Chi and of the Reply to the latter by the
petitioner; both parties were also required to submit their respective memoranda which they
subsequently complied with.

As We see it, the issues may be reduced as follows:

1. Whether presentment for acceptance of the drafts was

indispensable to make Philippine Rayon liable thereon;

2. Whether Philippine Rayon is liable on the basis of the trust receipt;

3. Whether private respondent Chi is jointly and severally liable with

Philippine Rayon for the obligation sought to be enforced and if not,
whether he may be considered a guarantor; in the latter situation,
whether the case should have been dismissed on the ground of lack of
cause of action as there was no prior exhaustion of Philippine Rayon's
properties.

Both the trial court and the public respondent ruled that Philippine Rayon could be held liable for
the two (2) drafts, Exhibits "X" and "X-1", because only these appear to have been accepted by the
latter after due presentment. The liability for the remaining ten (10) drafts (Exhibits "X-2" to "X-11"
inclusive) did not arise because the same were not presented for acceptance. In short, both courts
concluded that acceptance of the drafts by Philippine Rayon was indispensable to make the latter
liable thereon. We are unable to agree with this proposition. The transaction in the case at bar
 Cred Trans | 26

stemmed from Philippine Rayon's application for a commercial letter of credit with the petitioner in
the amount of $128,548.78 to cover the former's contract to purchase and import loom and textile
machinery from Nissho Company, Ltd. of Japan under a five-year deferred payment plan. Petitioner
approved the application. As correctly ruled by the trial court in its Order of 6 March 1975: 9

. . . By virtue of said Application and Agreement for Commercial Letter of Credit,

plaintiff bank 10 was under obligation to pay through its correspondent bank in Japan
the drafts that Nisso (sic) Company, Ltd., periodically drew against said letter of
credit from 1963 to 1968, pursuant to plaintiff's contract with the defendant
Philippine Rayon Mills, Inc. In turn, defendant Philippine Rayon Mills, Inc., was
obligated to pay plaintiff bank the amounts of the drafts drawn by Nisso (sic)
Company, Ltd. against said plaintiff bank together with any accruing commercial
charges, interest, etc. pursuant to the terms and conditions stipulated in the
Application and Agreement of Commercial Letter of Credit Annex "A".

A letter of credit is defined as an engagement by a bank or other person made at the request of a
customer that the issuer will honor drafts or other demands for payment upon compliance with the
conditions specified in the credit. 11Through a letter of credit, the bank merely substitutes its own
promise to pay for one of its customers who in return promises to pay the bank the amount of
funds mentioned in the letter of credit plus credit or commitment fees mutually agreed upon. 12 In
the instant case then, the drawee was necessarily the herein petitioner. It was to the latter that the
drafts were presented for payment. In fact, there was no need for acceptance as the issued drafts
are sight drafts. Presentment for acceptance is necessary only in the cases expressly provided for in
Section 143 of the Negotiable Instruments Law (NIL). 13 The said section reads:

Sec. 143. When presentment for acceptance must be made. — Presentment for
acceptance must be made:

(a) Where the bill is payable after sight, or in any other

case, where presentment for acceptance is necessary
in order to fix the maturity of the instrument; or

(b) Where the bill expressly stipulates that it shall be

presented for acceptance; or

(c) Where the bill is drawn payable elsewhere than at

the residence or place of business of the drawee.

In no other case is presentment for acceptance necessary in order to render any

party to the bill liable.

Obviously then, sight drafts do not require presentment for acceptance.

The acceptance of a bill is the signification by the drawee of his assent to the order of the
drawer; 14 this may be done in writing by the drawee in the bill itself, or in a separate instrument. 15

The parties herein agree, and the trial court explicitly ruled, that the subject, drafts are sight drafts.
Said the latter:
 Cred Trans | 27

. . . In the instant case the drafts being at sight, they are supposed to be payable
upon acceptance unless plaintiff bank has given the Philippine Rayon Mills Inc. time
within which to pay the same. The first two drafts (Annexes C & D, Exh. X & X-1)
were duly accepted as indicated on their face (sic), and upon such acceptance should
have been paid forthwith. These two drafts were not paid and although Philippine
Rayon Mills
ought to have paid the same, the fact remains that until now they are still unpaid. 16

Corollarily, they are, pursuant to Section 7 of the NIL, payable on demand. Section 7 provides:

Sec. 7. When payable on demand. — An instrument is payable on demand —

(a) When so it is expressed to be payable on demand,

or at sight, or on presentation; or

(b) In which no time for payment in expressed.

Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards

the person so issuing, accepting, or indorsing it, payable on demand. (emphasis
supplied)

Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment at maturity of
any accepted draft, bill of exchange or indebtedness shall not be extinguished or
modified" 17 does not, contrary to the holding of the public respondent, contemplate prior
acceptance by Philippine Rayon, but by the petitioner. Acceptance, however, was not even
necessary in the first place because the drafts which were eventually issued were sight
drafts And even if these were not sight drafts, thereby necessitating acceptance, it would be
the petitioner — and not Philippine Rayon — which had to accept the same for the latter
was not the drawee. Presentment for acceptance is defined an the production of a bill of
exchange to a drawee for acceptance. 18The trial court and the public respondent,
therefore, erred in ruling that presentment for acceptance was an indispensable requisite
for Philippine Rayon's liability on the drafts to attach. Contrary to both courts'
pronouncements, Philippine Rayon immediately became liable thereon upon petitioner's
payment thereof. Such is the essence of the letter of credit issued by the petitioner. A
different conclusion would violate the principle upon which commercial letters of credit are
founded because in such a case, both the beneficiary and the issuer, Nissho Company Ltd.
and the petitioner, respectively, would be placed at the mercy of Philippine Rayon even if
the latter had already received the imported machinery and the petitioner had fully paid for
it. The typical setting and purpose of a letter of credit are described in Hibernia Bank and
Trust Co.vs. J. Aron & Co., Inc., 19 thus:

Commercial letters of credit have come into general use in international sales
transactions where much time necessarily elapses between the sale and the receipt
by a purchaser of the merchandise, during which interval great price changes may
occur. Buyers and sellers struggle for the advantage of position. The seller is desirous
of being paid as surely and as soon as possible, realizing that the vendee at a distant
point has it in his power to reject on trivial grounds merchandise on arrival, and
 Cred Trans | 28

cause considerable hardship to the shipper. Letters of credit meet this condition by
affording celerity and certainty of payment. Their purpose is to insure to a seller
payment of a definite amount upon presentation of documents. The bank deals only
with documents. It has nothing to do with the quality of the merchandise. Disputes
as to the merchandise shipped may arise and be litigated later between vendor and
vendee, but they may not impede acceptance of drafts and payment by the issuing
bank when the proper documents are presented.

The trial court and the public respondent likewise erred in disregarding the trust receipt and in not
holding that Philippine Rayon was liable thereon. In People vs. Yu Chai Ho, 20 this Court explains the
nature of a trust receipt by quoting In re Dunlap Carpet Co., 21 thus:

By this arrangement a banker advances money to an intending importer, and

thereby lends the aid of capital, of credit, or of business facilities and agencies
abroad, to the enterprise of foreign commerce. Much of this trade could hardly be
carried on by any other means, and therefore it is of the first importance that the
fundamental factor in the transaction, the banker's advance of money and credit,
should receive the amplest protection. Accordingly, in order to secure that the
banker shall be repaid at the critical point — that is, when the imported goods finally
reach the hands of the intended vendee — the banker takes the full title to the
goods at the very beginning; he takes it as soon as the goods are bought and settled
for by his payments or acceptances in the foreign country, and he continues to hold
that title as his indispensable security until the goods are sold in the United States
and the vendee is called upon to pay for them. This security is not an ordinary pledge
by the importer to the banker, for the importer has never owned the goods, and
moreover he is not able to deliver the possession; but the security is the complete
title vested originally in the bankers, and this characteristic of the transaction has
again and again been recognized and protected by the courts. Of course, the title is
at bottom a security title, as it has sometimes been called, and the banker is always
under the obligation to reconvey; but only after his advances have been fully repaid
and after the importer has fulfilled the other terms of the contract.

As further stated in National Bank vs. Viuda e Hijos de Angel Jose, 22 trust receipts:

. . . [I]n a certain manner, . . . partake of the nature of a conditional sale as provided

by the Chattel Mortgage Law, that is, the importer becomes absolute owner of the
imported merchandise as soon an he has paid its price. The ownership of the
merchandise continues to be vested in the owner thereof or in the person who has
advanced payment, until he has been paid in full, or if the merchandise has already
been sold, the proceeds of the sale should be turned over to him by the importer or
by his representative or successor in interest.

Under P.D. No. 115, otherwise known an the Trust Receipts Law, which took effect on 29 January
1973, a trust receipt transaction is defined as "any transaction by and between a person referred to
in this Decree as the entruster, and another person referred to in this Decree as the entrustee,
whereby the entruster, who owns or holds absolute title or security interests' over certain specified
goods, documents or instruments, releases the same to the possession of the entrustee upon the
 Cred Trans | 29

latter's execution and delivery to the entruster of a signed document called the "trust receipt"
wherein the entrustee binds himself to hold the designated goods, documents or instruments in
trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments
with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount
owing to the entruster or as appears in the trust receipt or the goods, instruments themselves if
they are unsold or not otherwise disposed of, in accordance with the terms and conditions
specified in the trusts receipt, or for other purposes substantially equivalent to any one of the
following: . . ."

It is alleged in the complaint that private respondents "not only have presumably put said
machinery to good use and have profited by its operation and/or disposition but very recent
information that (sic) reached plaintiff bank that defendants already sold the machinery covered by
the trust receipt to Yupangco Cotton Mills," and that "as trustees of the property covered by the
trust receipt, . . . and therefore acting in fiduciary (sic) capacity, defendants have willfully violated
their duty to account for the whereabouts of the machinery covered by the trust receipt or for the
proceeds of any lease, sale or other disposition of the same that they may have made,
notwithstanding demands therefor; defendants have fraudulently misapplied or converted to their
own use any money realized from the lease, sale, and other disposition of said machinery." 23 While
there is no specific prayer for the delivery to the petitioner by Philippine Rayon of the proceeds of
the sale of the machinery covered by the trust receipt, such relief is covered by the general prayer
for "such further and other relief as may be just and equitable on the premises." 24 And although it
is true that the petitioner commenced a criminal action for the violation of the Trust Receipts Law,
no legal obstacle prevented it from enforcing the civil liability arising out of the trust, receipt in a
separate civil action. Under Section 13 of the Trust Receipts Law, the failure of an entrustee to turn
over the proceeds of the sale of goods, documents or instruments covered by a trust receipt to the
extent of the amount owing to the entruster or as appear in the trust receipt or to return said
goods, documents or instruments if they were not sold or disposed of in accordance with the terms
of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article
315, paragraph 1(b) of the Revised Penal Code. 25 Under Article 33 of the Civil Code, a civil action
for damages, entirely separate and distinct from the criminal action, may be brought by the injured
party in cases of defamation, fraud and physical injuries. Estafa falls under fraud.

We also conclude, for the reason hereinafter discussed, and not for that adduced by the public
respondent, that private respondent Chi's signature in the dorsal portion of the trust receipt did not
bind him solidarily with Philippine Rayon. The statement at the dorsal portion of the said trust
receipt, which petitioner describes as a "solidary guaranty clause", reads:

In consideration of the PRUDENTIAL BANK AND TRUST COMPANY complying with the
foregoing, we jointly and severally agree and undertake to pay on demand to the
PRUDENTIAL BANK AND TRUST COMPANY all sums of money which the said
PRUDENTIAL BANK AND TRUST COMPANY may call upon us to pay arising out of or
pertaining to, and/or in any event connected with the default of and/or non-
fulfillment in any respect of the undertaking of the aforesaid:

PHILIPPINE RAYON MILLS, INC.

 Cred Trans | 30

We further agree that the PRUDENTIAL BANK AND TRUST COMPANY does not have
to take any steps or exhaust its remedy against aforesaid:

before making demand on me/us.

(
S
g
d
.
)
A
n
a
c
l
e
t
o
R
.
C
h
i
A
N
A
C
L
E
T
O
R
.
C
H
I

2
6

Petitioner insists that by virtue of the clear wording of the statement, specifically the clause ". . . we
jointly and severally agree and undertake . . .," and the concluding sentence on exhaustion, Chi's
liability therein is solidary.

In holding otherwise, the public respondent ratiocinates as follows:

 Cred Trans | 31

With respect to the second argument, we have our misgivings as to whether the
mere signature of defendant-appellee Chi of (sic) the guaranty agreement, Exhibit
"C-1", will make it an actionable document. It should be noted that Exhibit "C-1" was
prepared and printed by the plaintiff-appellant. A perusal of Exhibit "C-1" shows that
it was to be signed and executed by two persons. It was signed only by defendant-
appellee Chi. Exhibit "C-1" was to be witnessed by two persons, but no one signed in
that capacity. The last sentence of the guaranty clause is incomplete. Furthermore,
the plaintiff-appellant also failed to have the purported guarantee clause
acknowledged before a notary public. All these show that the alleged guaranty
provision was disregarded and, therefore, not consummated.

But granting arguendo that the guaranty provision in Exhibit "C-1" was fully executed
and acknowledged still defendant-appellee Chi cannot be held liable thereunder
because the records show that the plaintiff-appellant had neither exhausted the
property of the defendant-appellant nor had it resorted to all legal remedies against
the said defendant-appellant as provided in Article 2058 of the Civil Code. The
obligation of a guarantor is merely accessory under Article 2052 of the Civil Code and
subsidiary under Article 2054 of the Civil Code. Therefore, the liability of the
defendant-appellee arises only when the principal debtor fails to comply with his
obligation. 27

Our own reading of the questioned solidary guaranty clause yields no other conclusion than that
the obligation of Chi is only that of a guarantor. This is further bolstered by the last sentence which
speaks of waiver of exhaustion, which, nevertheless, is ineffective in this case because the space
therein for the party whose property may not be exhausted was not filled up. Under Article 2058 of
the Civil Code, the defense of exhaustion (excussion) may be raised by a guarantor before he may
be held liable for the obligation. Petitioner likewise admits that the questioned provision is
a solidary guaranty clause, thereby clearly distinguishing it from a contract of surety. It, however,
described the guaranty as solidary between the guarantors; this would have been correct if two (2)
guarantors had signed it. The clause "we jointly and severally agree and undertake" refers to the
undertaking of the two (2) parties who are to sign it or to the liability existing between themselves.
It does not refer to the undertaking between either one or both of them on the one hand and the
petitioner on the other with respect to the liability described under the trust receipt. Elsewise
stated, their liability is not divisible as between them, i.e., it can be enforced to its full extent
against any one of them.

Furthermore, any doubt as to the import, or true intent of the solidary guaranty clause should be
resolved against the petitioner. The trust receipt, together with the questioned solidary guaranty
clause, is on a form drafted and prepared solely by the petitioner; Chi's participation therein is
limited to the affixing of his signature thereon. It is, therefore, a contract of adhesion; 28 as such, it
must be strictly construed against the party responsible for its preparation. 29

Neither can We agree with the reasoning of the public respondent that this solidary guaranty clause
was effectively disregarded simply because it was not signed and witnessed by two (2) persons and
acknowledged before a notary public. While indeed, the clause ought to have been signed by two
(2) guarantors, the fact that it was only Chi who signed the same did not make his act an idle
ceremony or render the clause totally meaningless. By his signing, Chi became the sole guarantor.
 Cred Trans | 32

The attestation by witnesses and the acknowledgement before a notary public are not required by
law to make a party liable on the instrument. The rule is that contracts shall be obligatory in
whatever form they may have been entered into, provided all the essential requisites for their
validity are present; however, when the law requires that a contract be in some form in order that
it may be valid or enforceable, or that it be proved in a certain way, that requirement is absolute
and indispensable. 30 With respect to a guaranty, 31 which is a promise to answer for the debt or
default of another, the law merely requires that it, or some note or memorandum thereof, be in
writing. Otherwise, it would be unenforceable unless ratified. 32 While the acknowledgement of a
surety before a notary public is required to make the same a public document, under Article 1358 of
the Civil Code, a contract of guaranty does not have to appear in a public document.

And now to the other ground relied upon by the petitioner as basis for the solidary liability of Chi,
namely the criminal proceedings against the latter for the violation of P.D. No. 115. Petitioner
claims that because of the said criminal proceedings, Chi would be answerable for the civil liability
arising therefrom pursuant to Section 13 of P.D. No. 115. Public respondent rejected this claim
because such civil liability presupposes prior conviction as can be gleaned from the phrase "without
prejudice to the civil liability arising from the criminal offense." Both are wrong. The said section
reads:

Sec. 13. Penalty Clause. — The failure of an entrustee to turn over the proceeds of
the sale of the goods, documents or instruments covered by a trust receipt to the
extent of the amount owing to the entruster or as appears in the trust receipt or to
return said goods, documents or instruments if they were not sold or disposed of in
accordance with the terms of the trust receipt shall constitute the crime of estafa,
punishable under the provisions of Article Three hundred and fifteen, paragraph one
(b) of Act Numbered Three thousand eight hundred and fifteen, as amended,
otherwise known as the Revised Penal Code. If the violation or offense is committed
by a corporation, partnership, association or other juridical entities, the penalty
provided for in this Decree shall be imposed upon the directors, officers, employees
or other officials or persons therein responsible for the offense, without prejudice to
the civil liabilities arising from the criminal offense.

A close examination of the quoted provision reveals that it is the last sentence which provides for
the correct solution. It is clear that if the violation or offense is committed by a corporation,
partnership, association or other juridical entities, the penalty shall be imposed upon the directors,
officers, employees or other officials or persons therein responsible for the offense. The penalty
referred to is imprisonment, the duration of which would depend on the amount of the fraud as
provided for in Article 315 of the Revised Penal Code. The reason for this is obvious: corporations,
partnerships, associations and other juridical entities cannot be put in jail. However, it is these
entities which are made liable for the civil liability arising from the criminal offense. This is the
import of the clause "without prejudice to the civil liabilities arising from the criminal offense." And,
as We stated earlier, since that violation of a trust receipt constitutes fraud under Article 33 of the
Civil Code, petitioner was acting well within its rights in filing an independent civil action to enforce
the civil liability arising therefrom against Philippine Rayon.

The remaining issue to be resolved concerns the propriety of the dismissal of the case against
private respondent Chi. The trial court based the dismissal, and the respondent Court its affirmance
 Cred Trans | 33

thereof, on the theory that Chi is not liable on the trust receipt in any capacity — either as surety or
as guarantor — because his signature at the dorsal portion thereof was useless; and even if he
could be bound by such signature as a simple guarantor, he cannot, pursuant to Article 2058 of the
Civil Code, be compelled to pay until
after petitioner has exhausted and resorted to all legal remedies against the principal debtor,
Philippine Rayon. The records fail to show that petitioner had done so 33 Reliance is thus placed on
Article 2058 of the Civil Code which provides:

Art. 2056. The guarantor cannot be compelled to pay the creditor unless the latter
has exhausted all the property of the debtor, and has resorted to all the legal
remedies against the debtor.

Simply stated, there is as yet no cause of action against Chi.

We are not persuaded. Excussion is not a condition sine qua non for the institution of an action
against a guarantor. In Southern Motors, Inc. vs. Barbosa, 34 this Court stated:

4. Although an ordinary personal guarantor — not a mortgagor or pledgor — may

demand the aforementioned exhaustion, the creditor may, prior thereto, secure a
judgment against said guarantor, who shall be entitled, however, to a deferment of
the execution of said judgment against him until after the properties of the principal
debtor shall have been exhausted to satisfy the obligation involved in the case.

There was then nothing procedurally objectionable in impleading private respondent Chi as a co-
defendant in Civil Case No. Q-19312 before the trial court. As a matter of fact, Section 6, Rule 3 of
the Rules of Court on permissive joinder of parties explicitly allows it. It reads:

Sec. 6. Permissive joinder of parties. — All persons in whom or against whom any
right to relief in respect to or arising out of the same transaction or series of
transactions is alleged to exist, whether jointly, severally, or in the alternative, may,
except as otherwise provided in these rules, join as plaintiffs or be joined as
defendants in one complaint, where any question of law or fact common to all such
plaintiffs or to all such defendants may arise in the action; but the court may make
such orders as may be just to prevent any plaintiff or defendant from being
embarrassed or put to expense in connection with any proceedings in which he may
have no interest.

This is the equity rule relating to multifariousness. It is based on trial convenience and is designed
to permit the joinder of plaintiffs or defendants whenever there is a common question of law or
fact. It will save the parties unnecessary work, trouble and expense. 35

However, Chi's liability is limited to the principal obligation in the trust receipt plus all the
accessories thereof including judicial costs; with respect to the latter, he shall only be liable for
those costs incurred after being judicially required to pay. 36 Interest and damages, being
accessories of the principal obligation, should also be paid; these, however, shall run only from the
date of the filing of the complaint. Attorney's fees may even be allowed in appropriate cases. 37
 Cred Trans | 34

In the instant case, the attorney's fees to be paid by Chi cannot be the same as that to be paid by
Philippine Rayon since it is only the trust receipt that is covered by the guaranty and not the full
extent of the latter's liability. All things considered, he can be held liable for the sum of P10,000.00
as attorney's fees in favor of the petitioner.

Thus, the trial court committed grave abuse of discretion in dismissing the complaint as against
private respondent Chi and condemning petitioner to pay him P20,000.00 as attorney's fees.

In the light of the foregoing, it would no longer necessary to discuss the other issues raised by the
petitioner

WHEREFORE, the instant Petition is hereby GRANTED.

The appealed Decision of 10 March 1986 of the public respondent in AC-G.R. CV No. 66733
and, necessarily, that of Branch 9 (Quezon City) of the then Court of First Instance of Rizal in
Civil Case No. Q-19312 are hereby REVERSED and SET ASIDE and another is hereby entered:

1. Declaring private respondent Philippine Rayon Mills, Inc. liable on

the twelve drafts in question (Exhibits "X", "X-1" to "X-11", inclusive)
and on the trust receipt (Exhibit "C"), and ordering it to pay
petitioner: (a) the amounts due thereon in the total sum of
P956,384.95 as of 15 September 1974, with interest thereon at six
percent (6%) per annum from 16 September 1974 until it is fully paid,
less whatever may have been applied thereto by virtue of foreclosure
of mortgages, if any; (b) a sum equal to ten percent (10%) of the
aforesaid amount as attorney's fees; and (c) the costs.

2. Declaring private respondent Anacleto R. Chi secondarily liable on

the trust receipt and ordering him to pay the face value thereof, with
interest at the legal rate, commencing from the date of the filing of
the complaint in Civil Case No. Q-19312 until the same is fully paid as
well as the costs and attorney's fees in the sum of P10,000.00 if the
writ of execution for the enforcement of the above awards against
Philippine Rayon Mills, Inc. is returned unsatisfied.

Costs against private respondents.

SO ORDERED.
 Cred Trans | 35

G.R. No. 105395 December 10, 1993

BANK OF AMERICA, NT & SA, petitioners,

vs.
COURT OF APPEALS, INTER-RESIN INDUSTRIAL CORPORATION, FRANCISCO TRAJANO, JOHN DOE
AND JANE DOE, respondents.

Agcaoili & Associates for petitioner.

Valenzuela Law Center, Victor Fernandez and Ramon Guevarra for private respondents.

VITUG, J.:

A "fiasco," involving an irrevocable letter of credit, has found the distressed parties coming to court
as adversaries in seeking a definition of their respective rights or liabilities thereunder.

On 05 March 1981, petitioner Bank of America, NT & SA, Manila, received by registered mail an
Irrevocable Letter of Credit No. 20272/81 purportedly issued by Bank of Ayudhya, Samyaek Branch,
for the account of General Chemicals, Ltd., of Thailand in the amount of US$2,782,000.00 to cover
the sale of plastic ropes and "agricultural files," with the petitioner as advising bank and private
respondent Inter-Resin Industrial Corporation as beneficiary.

On 11 March 1981, Bank of America wrote Inter-Resin informing the latter of the foregoing and
transmitting, along with the bank's communication,
the latter of credit. Upon receipt of the letter-advice with the letter of credit, Inter-Resin sent Atty.
Emiliano Tanay to Bank of America to have the letter of credit confirmed. The bank did not.
Reynaldo Dueñas, bank employee in charge of letters of credit, however, explained to Atty. Tanay
that there was no need for confirmation because the letter of credit would not have been
transmitted if it were not genuine.

Between 26 March to 10 April 1981, Inter-Resin sought to make a partial availment under the letter
of credit by submitting to Bank of America invoices, covering the shipment of 24,000 bales of
polyethylene rope to General Chemicals valued at US$1,320,600.00, the corresponding packing list,
export declaration and bill of lading. Finally, after being satisfied that Inter-Resin's documents
conformed with the conditions expressed in the letter of credit, Bank of America issued in favor of
Inter-Resin a Cashier's Check for P10,219,093.20, "the Peso equivalent of the draft (for)
US$1,320,600.00 drawn by Inter-Resin, after deducting the costs for documentary stamps, postage
and mail issuance." 1 The check was picked up by Inter-Resin's Executive Vice-President Barcelina
Tio. On 10 April 1981, Bank of America wrote Bank of Ayudhya advising the latter of the availment
under the letter of credit and sought the corresponding reimbursement therefor.

Meanwhile, Inter-Resin, through Ms. Tio, presented to Bank of America the documents for the
second availment under the same letter of credit consisting of a packing list, bill of lading, invoices,
export declaration and bills in set, evidencing the second shipment of goods. Immediately upon
receipt of a telex from the Bank of Ayudhya declaring the letter of credit fraudulent, 2 Bank of
America stopped the processing of Inter-Resin's documents and sent a telex to its branch office in
 Cred Trans | 36

Bangkok, Thailand, requesting assistance in determining the authenticity of the letter of

credit. 3 Bank of America kept Inter-Resin informed of the developments. Sensing a fraud, Bank of
America sought the assistance of the National Bureau of Investigation (NBI). With the help of the
staff of the Philippine Embassy at Bangkok, as well as the police and customs personnel of Thailand,
the NBI agents, who were sent to Thailand, discovered that the vans exported by Inter-Resin did
not contain ropes but plastic strips, wrappers, rags and waste materials. Here at home, the NBI also
investigated Inter-Resin's President Francisco Trajano and Executive Vice President Barcelina Tio,
who, thereafter, were criminally charged for estafa through falsification of commercial documents.
The case, however, was eventually dismissed by the Rizal Provincial Fiscal who found no prima
facieevidence to warrant prosecution.

Bank of America sued Inter-Resin for the recovery of P10,219,093.20, the peso equivalent of the
draft for US$1,320,600.00 on the partial availment of the now disowned letter of credit. On the
other hand, Inter-Resin claimed that not only was it entitled to retain P10,219,093.20 on its first
shipment but also to the balance US$1,461,400.00 covering the second shipment.

On 28 June 1989, the trial court ruled for Inter-Resin, 4 holding that:
(a) Bank of America made assurances that enticed Inter-Resin to send the merchandise to Thailand;
(b) the telex declaring the letter of credit fraudulent was unverified and self-serving, hence,
hearsay, but even assuming that the letter of credit was fake, "the fault should be borne by the BA
which was careless and negligent" 5 for failing to utilize its modern means of communication to
verify with Bank of Ayudhya in Thailand the authenticity of the letter of credit before sending the
same to Inter-Resin; (c) the loading of plastic products into the vans were under strict supervision,
inspection and verification of government officers who have in their favor the presumption of
regularity in the performance of official functions; and (d) Bank of America failed to prove the
participation of Inter-Resin or its employees in the alleged fraud as, in fact, the complaint for estafa
through falsification of documents was dismissed by the Provincial Fiscal of Rizal.6

On appeal, the Court of Appeals 7 sustained the trial court; hence, this present recourse by
petitioner Bank of America.

The following issues are raised by Bank of America: (a) whether it has warranted the genuineness
and authenticity of the letter of credit and, corollarily, whether it has acted merely as an advising
bank or as a confirming bank; (b) whether Inter-Resin has actually shipped the ropes specified by
the letter of credit; and (c) following the dishonor of the letter of credit by Bank of Ayudhya,
whether Bank of America may recover against Inter-Resin under the draft executed in its partial
availment of the letter of credit.8

In rebuttal, Inter-Resin holds that: (a) Bank of America cannot, on appeal, belatedly raise the issue
of being only an advising bank; (b) the findings of the trial court that the ropes have actually been
shipped is binding on the Court; and, (c) Bank of America cannot recover from Inter-Resin because
the drawer of the letter of credit is the Bank of Ayudhya and not Inter-Resin.

If only to understand how the parties, in the first place, got themselves into the mess, it may be
well to start by recalling how, in its modern use, a letter of credit is employed in trade transactions.
 Cred Trans | 37

A letter of credit is a financial device developed by merchants as a convenient and relatively safe
mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who
refuses to part with his goods before he is paid, and a buyer, who wants to have control of the
goods before paying. 9 To break the impasse, the buyer may be required to contract a bank to issue
a letter of credit in favor of the seller so that, by virtue of the latter of credit, the issuing bank can
authorize the seller to draw drafts and engage to pay them upon their presentment simultaneously
with the tender of documents required by the letter of credit. 10 The buyer and the seller agree on
what documents are to be presented for payment, but ordinarily they are documents of title
evidencing or attesting to the shipment of the goods to the buyer.

Once the credit is established, the seller ships the goods to the buyer and in the process secures the
required shipping documents or documents of title. To get paid, the seller executes a draft and
presents it together with the required documents to the issuing bank. The issuing bank redeems
the draft and pays cash to the seller if it finds that the documents submitted by the seller conform
with what the letter of credit requires. The bank then obtains possession of the documents upon
paying the seller. The transaction is completed when the buyer reimburses the issuing bank and
acquires the documents entitling him to the goods. Under this arrangement, the seller gets paid
only if he delivers the documents of title over the goods, while the buyer acquires said documents
and control over the goods only after reimbursing the bank.

What characterizes letters of credit, as distinguished from other accessory contracts, is the
engagement of the issuing bank to pay the seller of the draft and the required shipping documents
are presented to it. In turn, this arrangement assures the seller of prompt payment, independent of
any breach of the main sales contract. By this so-called "independence principle," the bank
determines compliance with the letter of credit only by examining the shipping documents
presented; it is precluded from determining whether the main contract is actually accomplished or
not. 11

There would at least be three (3) parties: (a) the buyer, 12 who procures the letter of credit and
obliges himself to reimburse the issuing bank upon receipts of the documents of title; (b) the bank
issuing the letter of credit, 13 which undertakes to pay the seller upon receipt of the draft and
proper document of titles and to surrender the documents to the buyer upon reimbursement; and,
(c) the seller, 14 who in compliance with the contract of sale ships the goods to the buyer and
delivers the documents of title and draft to the issuing bank to recover payment.

The number of the parties, not infrequently and almost invariably in international trade practice,
may be increased. Thus, the services of an advising (notifying) bank 15 may be utilized to convey to
the seller the existence of the credit; or, of a confirming bank 16 which will lend credence to the
letter of credit issued by a lesser known issuing bank; or, of a paying bank, 17 which undertakes to
encash the drafts drawn by the exporter. Further, instead of going to the place of the issuing bank
to claim payment, the buyer may approach another bank, termed the negotiating bank, 18 to have
the draft discounted.

Being a product of international commerce, the impact of this commercial instrument transcends
national boundaries, and it is thus not uncommon to find a dearth of national law that can
adequately provide for its governance. This country is no exception. Our own Code of Commerce
basically introduces only its concept under Articles 567-572, inclusive, thereof. It is no wonder then
 Cred Trans | 38

why great reliance has been placed on commercial usage and practice, which, in any case, can be
justified by the universal acceptance of the autonomy of contract rules. The rules were later
developed into what is now known as the Uniform Customs and Practice for Documentary Credits
("U.C.P.") issued by the International Chamber of Commerce. It is by no means a complete text by
itself, for, to be sure, there are other principles, which, although part of lex mercatoria, are not
dealt with the U.C.P.

In FEATI Bank and Trust Company v. Court of Appeals, 19 we have accepted, to the extent of their
pertinency, the application in our jurisdiction of this international commercial credit regulatory set
of rules. 20 In Bank of Phil. Islands v. De Nery, 21 we have said that the observances of the U.C.P. is
justified by Article 2 of the Code of Commerce which expresses that, in the absence of any
particular provision in the Code of Commerce, commercial transactions shall be governed by usages
and customs generally observed. We have further observed that there being no specific provisions
which govern the legal complexities arising from transactions involving letters of credit not only
between or among banks themselves but also between banks and the seller or the buyer, as the
case may be, the applicability of the U.C.P. is undeniable.

The first issue raised with the petitioner, i.e., that it has in this instance merely been advising bank,
is outrightly rejected by Inter-Resin and is thus sought to be discarded for having been raised only
on appeal. We cannot agree. The crucial point of dispute in this case is whether under the "letter of
credit," Bank of America has incurred any liability to the "beneficiary" thereof, an issue that largely
is dependent on the bank's participation in that transaction; as a mere advising or notifying bank, it
would not be liable, but as a confirming bank, had this been the case, it could be considered as
having incurred that liability. 22

In Insular Life Assurance Co. Ltd. Employees Association — Natu vs. Insular Life Assurance Co.,
Ltd., 23 the Court said: Where the issues already raised also rest on other issues not specifically
presented, as long as the latter issues bear relevance and close relation to the former and as long
as they arise from the matters on record, the court has the authority to include them in its
discussion of the controversy and to pass upon them just as well. In brief, in those cases where
questions not particularly raised by the parties surface as necessary for the complete adjudication
of the rights and obligations of the parties, the interests of justice dictate that the court should
consider and resolve them. The rule that only issues or theories raised in the initial proceedings
may be taken up by a party thereto on appeal should only refer to independent, not concomitant
matters, to support or oppose the cause of action or defense. The evil that is sought to be
avoided, i.e., surprise to the adverse party, is in reality not existent on matters that are properly
litigated in the lower court and appear on record.

It cannot seriously be disputed, looking at this case, that Bank of America has, in fact, only been an
advising, not confirming, bank, and this much is clearly evident, among other things, by the
provisions of the letter of credit itself, the petitioner bank's letter of advice, its request for payment
of advising fee, and the admission of Inter-Resin that it has paid the same. That Bank of America
has asked Inter-Resin to submit documents required by the letter of credit and eventually has paid
the proceeds thereof, did not obviously make it a confirming bank. The fact, too, that the draft
required by the letter of credit is to be drawn under the account of General Chemicals (buyer) only
means the same had to be presented to Bank of Ayudhya (issuing bank) for payment. It may be
 Cred Trans | 39

significant to recall that the letter of credit is an engagement of the issuing bank, not the advising
bank, to pay the draft.

No less important is that Bank of America's letter of 11 March 1981 has expressly stated that "[t]he
enclosure is solely an advise of credit opened by the abovementioned correspondent and conveys
no engagement by us." 24This written reservation by Bank of America in limiting its obligation only
to being an advising bank is in consonance with the provisions of U.C.P.

As an advising or notifying bank, Bank of America did not incur any obligation more than just
notifying Inter-Resin of the letter of credit issued in its favor, let alone to confirm the letter of
credit. 25 The bare statement of the bank employees, aforementioned, in responding to the inquiry
made by Atty. Tanay, Inter-Resin's representative, on the authenticity of the letter of credit
certainly did not have the effect of novating the letter of credit and Bank of America's letter of
advise, 26 nor can it justify the conclusion that the bank must now assume total liability on the letter
of credit. Indeed, Inter-Resin itself cannot claim to have been all that free from fault. As the seller,
the issuance of the letter of credit should have obviously been a great concern to it. 27 It would
have, in fact, been strange if it did not, prior to the letter of credit, enter into a contract, or
negotiated at the every least, with General Chemicals. 28 In the ordinary course of business, the
perfection of contract precedes the issuance of a letter of credit.

Bringing the letter of credit to the attention of the seller is the primordial obligation of an advising
bank. The view that Bank of America should have first checked the authenticity of the letter of
credit with bank of Ayudhya, by using advanced mode of business communications, before
dispatching the same to Inter-Resin finds no real support in U.C.P. Article 18 of the U.C.P. states
that: "Banks assume no liability or responsibility for the consequences arising out of the delay
and/or loss in transit of any messages, letters or documents, or for delay, mutilation or other errors
arising in the transmission of any telecommunication . . ." As advising bank, Bank of America is
bound only to check the "apparent authenticity" of the letter of credit, which it did. 29 Clarifying its
meaning, Webster's Ninth New Collegiate Dictionary 30 explains that the word "APPARENT suggests
appearance to unaided senses that is not or may not be borne out by more rigorous examination or
greater knowledge."

May Bank of America then recover what it has paid under the letter of credit when the
corresponding draft for partial availment thereunder and the required documents were later
negotiated with it by Inter-Resin? The answer is yes. This kind of transaction is what is commonly
referred to as a discounting arrangement. This time, Bank of America has acted independently as a
negotiating bank, thus saving Inter-Resin from the hardship of presenting the documents directly to
Bank of Ayudhya to recover payment. (Inter-Resin, of course, could have chosen other banks with
which to negotiate the draft and the documents.) As a negotiating bank, Bank of America has a
right to recourse against the issuer bank and until reimbursement is obtained, Inter-Resin, as the
drawer of the draft, continues to assume a contingent liability thereon. 31

While bank of America has indeed failed to allege material facts in its complaint that might have
likewise warranted the application of the Negotiable Instruments Law and possible then allowed it
to even go after the indorsers of the draft, this failure, 32/ nonetheless, does not preclude
petitioner bank's right (as negotiating bank) of recovery from Inter-Resin itself. Inter-Resin admits
having received P10,219,093.20 from bank of America on the letter of credit and in having executed
 Cred Trans | 40

the corresponding draft. The payment to Inter-Resin has given, as aforesaid, Bank of America the
right of reimbursement from the issuing bank, Bank of Ayudhya which, in turn, would then seek
indemnification from the buyer (the General Chemicals of Thailand). Since Bank of Ayudhya
disowned the letter of credit, however, Bank of America may now turn to Inter-Resin for
restitution.

Between the seller and the negotiating bank there is the usual relationship existing
between a drawer and purchaser of drafts. Unless drafts drawn in pursuance of the
credit are indicated to be without recourse therefore, the negotiating bank has the
ordinary right of recourse against the seller in the event of dishonor by the issuing
bank . . . The fact that the correspondent and the negotiating bank may be one and
the same does not affect its rights and obligations in either capacity, although a
special agreement is always a possibility . . . 33

The additional ground raised by the petitioner, i.e., that Inter-Resin sent waste instead of its
products, is really of no consequence. In the operation of a letter of credit, the involved banks deal
only with documents and not on goods described in those documents. 34

The other issues raised in then instant petition, for instance, whether or not Bank of Ayudhya did
issue the letter of credit and whether or not the main contract of sale that has given rise to the
letter of credit has been breached, are not relevant to this controversy. They are matters, instead,
that can only be of concern to the herein parties in an appropriate recourse against those, who,
unfortunately, are not impleaded in these proceedings.

In fine, we hold that —

First, given the factual findings of the courts below, we conclude that petitioner Bank of America
has acted merely as a notifying bank and did not assume the responsibility of a confirming bank;
and

Second, petitioner bank, as a negotiating bank, is entitled to recover on Inter-Resin's partial

availment as beneficiary of the letter of credit which has been disowned by the alleged issuer bank.

No judgment of civil liability against the other defendants, Francisco Trajano and other unidentified
parties, can be made, in this instance, there being no sufficient evidence to warrant any such
finding.

WHEREFORE, the assailed decision is SET ASIDE, and respondent Inter-Resin Industrial Corporation
is ordered to refund to petitioner Bank of America NT & SA the amount of P10,219,093.20 with
legal interest from the filing of the complaint until fully paid.

No costs.

SO ORDERED.
 Cred Trans | 41

G.R. No. 183486

THE HONGKONG & SHANGHAI BANKING CORPORATION, LIMITED, Petitioner,

vs.
NATIONAL STEEL CORPORATION and CITYTRUST BANKING CORPORATION (NOW BANK OF THE
PHILIPPINE ISLANDS), Respondents.

DECISION

JARDELEZA, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court. Petitioner The
Hongkong & Shanghai Banking Corporation, Limited (HSBC) filed this petition to assail the Decision
of the Court of Appeals (CA) dated November 19, 2007 (Assailed Decision) which reversed the
ruling of the Regional Trial Court, Branch 62 of Makati City (RTC Makati) and its Resolution denying
HSBC's Motion for Reconsideration dated June 23, 2008 (Assailed Resolution).

The Facts

Respondent National Steel Corporation (NSC) entered into an Export Sales Contract (the Contract)
with Klockner East Asia Limited (Klockner) on October 12, 1993. 1 NSC sold 1,200 metric tons of
prime cold rolled coils to Klockner under FOB ST Iligan terms. In accordance with the requirements
in the Contract, Klockner applied for an irrevocable letter of credit with HSBC in favor of NSC as the
beneficiary in the amount of US$468,000. On October 22, 1993, HSBC issued an irrevocable and
onsight letter of credit no. HKH 239409 (the Letter of Credit) in favor of NSC.2 The Letter of Credit
stated that it is governed by the International Chamber of Commerce Uniform Customs and
Practice for Documentary Credits, Publication No. 400 (UCP 400). Under UCP 400, HSBC as the
issuing bank, has the obligation to immediately pay NSC upon presentment of the documents listed
in the Letter of Credit.3 These documents are: (1) one original commercial invoice; (2) one packing
list; (3) one non-negotiable copy of clean on board ocean bill of lading made out to order, blank
endorsed marked 'freight collect and notify applicant;' (4) copy of Mill Test Certificate made out 'to
whom it may concern;' (5) copy of beneficiary's telex to applicant (Telex No. 86660 Klock HX)
advising shipment details including DIC No., shipping marks, name of vessel, port of shipment, port
of destination, bill of lading date, sailing and ETA dates, description of goods, size, weight, number
of packages and value of goods latest two days after shipment date; and (6) beneficiary's certificate
certifying that (a) one set of non-negotiable copies of documents (being those listed above) have
been faxed to applicant (FAX No. 5294987) latest two days after shipment date; and (b) one set of
documents including one copy each of invoice and packing list, 3/3 original bills of lading plus one
non-negotiable copy and three original Mill Test Certificates have been sent to applicant by air
courier service latest two days after shipment date. 4

The Letter of Credit was amended twice to reflect changes in the terms of delivery. On November 2,
1993, the Letter of Credit was first amended to change the delivery terms from FOB ST Iligan to FOB
ST Manila and to increase the amount to US$488,400.5 It was subsequently amended on November
18, 1993 to extend the expiry and shipment date to December 8, 1993.6 On November 21, 1993,
NSC, through Emerald Forwarding Corporation, loaded and shipped the cargo of prime cold rolled
 Cred Trans | 42

coils on board MV Sea Dragon under China Ocean Shipping Company Bill of Lading No. HKG 266001.
The cargo arrived in Hongkong on November 25, 1993.7

NSC coursed the collection of its payment from Klockner through CityTrust Banking Corporation
(CityTrust). NSC had earlier obtained a loan from CityTrust secured by the proceeds of the Letter of
Credit issued by HSBC.8

On November 29, 1993, CityTrust sent a collection order (Collection Order) to HSBC respecting the
collection of payment from Klockner. The Collection Order instructed as follows: (1) deliver
documents against payment; (2) cable advice of non-payment with reason; (3) cable advice
payment; and (4) remit proceeds via TELEX. 9 The Collection Order also contained the following
statement: "Subject to Uniform Rules for the Collection of Commercial Paper Publication No.
322." 10 Further, the Collection Order stated that proceeds should be remitted to Standard
Chartered Bank of Australia, Ltd., Offshore Branch Manila (SCB-M) which was, in turn, in charge of
remitting the amount to CityTrust. 11 On the same date, CityTrust also presented to HSBC the
following documents: (1) Letter of Credit; (2) Bill of Lading; (3) Commercial Invoice; ( 4) Packing List;
(5) Mill Test Certificate; (6) NSC's TELEX to Klockner on shipping details; (7) Beneficiary's Certificate
of facsimile transmittal of documents; (8) Beneficiary's Certificate of air courier transmittal of
documents; and (9) DHL Receipt No. 669988911 and Certificate of Origin. 12

On December 2, 1993, HSBC sent a cablegram to CityTrust acknowledging receipt of the Collection
Order. It also stated that the documents will be presented to "the drawee against payment subject
to UCP 322 [Uniform Rules for Collection (URC) 322] as instructed ... " 13 SCB-M then sent a
cablegram to HSBC requesting the latter to urgently remit the proceeds to its account. It further
asked that HSBC inform it "if unable to pay" 14 and of the "reasons thereof." 15 Neither CityTrust nor
SCB-M objected to HSBC's statement that the collection will be handled under the Uniform Rules
for Collection (URC 322).

On December 7, 1993, HSBC responded to SCB-M and sent a cablegram where it repeated that "this
bill is being handled subject to [URC] 322 as instructed by [the] collecting bank." 16 It also informed
SCB-M that it has referred the matter to Klockner for payment and that it will revert upon the
receipt of the amount. 17 On December 8, 1993, the Letter of Credit expired.18

On December 10, 1993, HSBC sent another cablegram to SCB-M advising it that Klockner had
refused payment. It then informed SCB-M that it intends to return the documents to NSC with all
the banking charges for its account. 19In a cablegram dated December 14, 1993, CityTrust requested
HSBC to inform it of Klockner's reason for refusing payment so that it may refer the matter to
NSC.20 HSBC did not respond and CityTrust thus sent a follow-up cablegram to HSBC on December
17, 1993. In this cablegram, CityTrust insisted that a demand for payment must be made from
Klockner since the documents "were found in compliance with LC terms and conditions." 21 HSBC
replied on the same day stating that in accordance with CityTrust's instruction in its Collection
Order, HSBC treated the transaction as a matter under URC 322. Thus, it demanded payment from
Klockner which unfortunately refused payment for unspecified reasons. It then noted that under
URC 322, Klockner has no duty to provide a reason for the refusal. Hence, HSBC requested for
further instructions as to whether it should continue to press for payment or return the
documents.22 CityTrust responded that as advised by its client, HSBC should continue to press for
payment.23
 Cred Trans | 43

Klockner continued to refuse payment and HSBC notified CityTrust in a cablegram dated January 7,
1994, that should Klockner still refuse to accept the bill by January 12, 1994, it will return the full
set of documents to CityTrust with all the charges for the account of the drawer. 24

Meanwhile, on January 12, 1994, CityTrust sent a letter to NSC stating that it executed NSC's
instructions "to send, ON COLLECTION BASIS, the export documents ... "25 CityTrust also explained
that its act of sending the export documents on collection basis has been its usual practice in
response to NSC's instructions in its transactions.26

NSC responded to this in a letter dated January 18, 1994.27 NSC expressed its disagreement with
CityTrust's contention that it sent the export documents to HSBC on collection basis. It highlighted
that it "negotiated with CityTrust the export documents pertaining to LC No. HKH 239409 of HSBC
and it was CityTrust, which wrongfully treated the negotiation, as 'on collection basis."' 28 NSC
further claimed that CityTrust used its own mistake as an excuse against payment under the Letter
of Credit. Thus, NSC argued that CityTrust remains liable under the Letter of Credit. It also stated
that it presumes that CityTrust has preserved whatever right of reimbursement it may have against
HSBC. 29

On January 13, 1994, CityTrust notified HSBC that it should continue to press for payment and to
hold on to the document until further notice. 30

However, Klockner persisted in its refusal to pay. Thus, on February 17, 1994, HSBC returned the
documents to CityTrust. 31 In a letter accompanying the returned documents, HSBC stated that it
considered itself discharged of its duty under the transaction. It also asked for payment of handling
charges.32 In response, CityTrust sent a cablegram to HSBC dated February 21, 1994 stating that it is
"no longer possible for beneficiary to wait for you to get paid by applicant."33 It explained that since
the documents required under the Letter of Credit have been properly sent to HSBC, Citytrust
demanded payment from it. CityTrust also stated, for the first time in all of its correspondence with
HSBC, that "re your previous telexes, ICC Publication No. 322 is not applicable." 34 HSBC responded
in cablegram dated February 28, 1994.35 It insisted that CityTrust sent documents which clearly
stated that the collection was being made under URC 322. Thus, in accordance with its instructions,
HSBC, in the next three months, demanded payment from Klockner which the latter eventually
refused. Hence, HSBC stated that it opted to return the documents. It then informed CityTrust that
it considered the transaction closed save for the latter's obligation to pay the handling charges.36

Disagreeing with HSBC' s position, CityTrust sent a cablegram dated March 9, 1994. 37 It insisted that
HSBC should pay it in accordance with the terms of the Letter of Credit which it issued on October
22, 1993. Under the Letter of Credit, HSBC undertook to reimburse the presenting bank under "ICC
400 upon the presentment of all necessary documents."38 CityTrust also stated that the reference
to URC 322 in its Collection Order was merely in fine print. The Collection Order itself was only pro-
forma. CityTrust emphasized that the reference to URC 322 has been "obviously superseded by our
specific instructions to 'deliver documents against payment/cable advice non-payment with
reason/cable advice payment/remit proceeds via telex' which was typed in on said
form."39 CityTrust also claimed that the controlling document is the Letter of Credit and not the
mere fine print on the Collection Order.40HSBC replied on March 10, 1994.41 It argued that CityTrust
clearly instructed it to collect payment under URC 322, thus, CityTrust can no longer claim a
 Cred Trans | 44

contrary position three months after it made its request. HSBC repeated that the transaction is
closed except for CityTrust's obligation to pay for the expenses which HSBC incurred.42

Meanwhile, on March 3, 1994, NSC sent a letter to HSBC where it, for the first time, demanded
payment under the Letter of Credit. 43 On March 11, 1994, the NSC sent another letter to HSBC
through the Office of the Corporate Counsel which served as its final demand. These demands were
made after approximately four months from the expiration of the Letter of Credit.

Unable to collect from HSBC, NSC filed a complaint against it for collection of sum of money
(Complaint)44 docketed as Civil Case No. 94-2122 (Collection Case) of the RTC Makati. In its
Complaint, NSC alleged that it coursed the collection of the Letter of Credit through CityTrust.
However, notwithstanding CityTrust's complete presentation of the documents in accordance with
the requirements in the Letter of Credit, HSBC unreasonably refused to pay its obligation in the
amount of US$485,767.93.45

HSBC filed its Answer46 on January 6, 1995. HSBC denied any liability under the Letter of Credit. It
argued in its Answer that CityTrust modified the obligation when it stated in its Collection Order
that the transaction is subject to URC 322 and not under UCP 400. 47 It also filed a Motion to Admit
Attached Third-Party Complaint48 against CityTrust on November 21, 1995.49 It claimed that
CityTrust instructed it to collect payment under URC 322 and never raised that it intended to collect
under the Letter of Credit.50 HSBC prayed that in the event that the court finds it liable to NSC,
CityTrust should be subrogated in its place and be made directly liable to NSC. 51 The RTC Makati
granted the motion and admitted the third party complaint. CityTrust filed its Answer52 on January
8, 1996. CityTrust denied that it modified the obligation. It argued that as a mere agent, it cannot
modify the terms of the Letter of Credit without the consent of all the parties. 53 Further, it
explained that the supposed instruction that the transaction is subject to URC 322 was merely in
fine print in a pro forma document and was superimposed and pasted over by a large pink sticker
with different remittance instructions.54

After a full-blown trial,55 the RTC Makati rendered a decision (RTC Decision) dated February 23,
2000.56 It found that HSBC is not liable to pay NSC the amount stated in the Letter of Credit. It ruled
that the applicable law is URC 322 as it was the law which CityTrust intended to apply to the
transaction. Under URC 322, HSBC has no liability to pay when Klockner refused payment. The
dispositive portion states -

WHEREFORE, premises considered, judgment is hereby rendered as follows:

1. Plaintiffs Complaint against HSBC is DISMISSED; and, HSBC's Counterclaims against NSC
are DENIED.

2. Ordering Third-Party Defendant CityTrust to pay Third-Party Plaintiff HSBC the following:

2.1 US$771.21 as actual and consequential damages; and

2.2 Pl00,000 as attorney's fees.

3. No pronouncement as to costs.
 Cred Trans | 45

SO ORDERED.57

NSC and CityTrust appealed the RTC Decision before the CA. In its Assailed Decision dated
November 19, 2007,58the CA reversed the RTC Makati. The CA found that it is UCP 400 and not URC
322 which governs the transaction. According to the CA, the terms of the Letter of Credit clearly
stated that UCP 400 shall apply. Further, the CA explained that even if the Letter of Credit did not
state that UCP 400 governs, it nevertheless finds application as this Court has consistently
recognized it under Philippine jurisdiction. Thus, applying UCP 400 and principles concerning letters
of credit, the CA explained that the obligation of the issuing bank is to pay the seller or beneficiary
of the credit once the draft and the required documents are properly presented. Under the
independence principle, the issuing bank's obligation to pay under the letter of credit is separate
from the compliance of the parties in the main contract. The dispositive portion held -

WHEREFORE, in view of the foregoing, the assailed decision is hereby REVERSED and SET ASIDE.
HSBC is ordered to pay its obligation under the irrevocable letter of credit in the amount of
US$485,767.93 to NSC with legal interest of six percent (6%) per annum from the filing of the
complaint until the amount is fully paid, plus attorney's fees equivalent to 10% of the principal.
Costs against appellee HSBC.

SO ORDERED.59

HSBC filed a Motion for Reconsideration of the Assailed Decision which the CA denied in its Assailed
Resolution dated June 23, 2008.60

Hence, HSBC filed this Petition for Review on Certiorari61 before this Court, seeking a reversal of the
CA' s Assailed Decision and Resolution. In its petition, HSBC contends that CityTrust's order to
collect under URC 322 did not modify nor contradict the Letter of Credit. In fact, it is customary
practice in commercial transactions for entities to collect under URC 322 even if there is an
underlying letter of credit. Further, CityTrust acted as an agent of NSC in collecting payment and as
such, it had the authority to instruct HSBC to proceed under URC 322 and not under UCP 400.
Having clearly and expressly instructed HSBC to collect under URC 322 and having fully intended the
transaction to proceed under such rule as shown by the series of correspondence between
CityTrust and HSBC, CityTrust is estopped from now claiming that the collection was made under
UCP 400 in accordance with the Letter of Credit.

NSC, on the other hand, claims that HSBC's obligation to pay is clear from the terms of the Letter of
Credit and under UCP 400. It asserts that the applicable rule is UCP 400 and HSBC has no basis to
argue that CityTrust's presentment of the documents allowed HSBC to vary the terms of their
agreement. 62

The Issues

The central question in this case is who among the parties bears the liability to pay the amount
stated in the Letter of Credit. This requires a determination of which between UCP 400 and URC
322 governs the transaction. The obligations of the parties under the proper applicable rule will, in
turn, determine their liability.

The Ruling of the Court

 Cred Trans | 46

We uphold the CA.

The nature of a letter of credit

A letter of credit is a commercial instrument developed to address the unique needs of certain
commercial transactions. It is recognized in our jurisdiction and is sanctioned under Article 567 63 of
the Code of Commerce and in numerous jurisprudence defining a letter of credit, the principles
relating to it, and the obligations of parties arising from it.

In Bank of America, NT & SA v. Court of Appeals,64 this Court defined a letter of credit as " ... a
financial device developed by merchants as a convenient and relatively safe mode of dealing with
sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with
his goods before he is paid, and a buyer, who wants to have control of the goods before
paying."65 Through a letter of credit, a buyer obtains the credit of a third party, usually a bank, to
provide assurance of payment.66

This, in turn, convinces a seller to part with his or her goods even before he or she is paid, as he or
she is insured by the third party that he or she will be paid as soon as he or she presents the
documents agreed upon. 67

A letter of credit generally arises out of a separate contract requiring the assurance of payment of a
third party. In a transaction involving a letter of credit, there are usually three transactions and
three parties. The first transaction, which constitutes the underlying transaction in a letter of credit,
is a contract of sale between the buyer and the seller. The contract may require that the buyer
obtain a letter of credit from a third party acceptable to the seller. The obligations of the parties
under this contract are governed by our law on sales.

The second transaction is the issuance of a letter of credit between the buyer and the issuing bank.
The buyer requests the issuing bank to issue a letter of credit naming the seller as the beneficiary.
In this transaction, the issuing bank undertakes to pay the seller upon presentation of the
documents identified in the letter of credit. The buyer, on the other hand, obliges himself or herself
to reimburse the issuing bank for the payment made. In addition, this transaction may also include
a fee for the issuing bank's services. 68 This transaction constitutes an obligation on the part of the
issuing bank to perform a service in consideration of the buyer's payment. The obligations of the
parties and their remedies in cases of breach are governed by the letter of credit itself and by our
general law on obligations, as our civil law finds suppletory application in commercial documents. 69

The third transaction takes place between the seller and the issuing bank. The issuing bank issues
the letter of credit for the benefit of the seller. The seller may agree to ship the goods to the buyer
even before actual payment provided that the issuing bank informs him or her that a letter of credit
has been issued for his or her benefit. This means that the seller can draw drafts from the issuing
bank upon presentation of certain documents identified in the letter of credit. The relationship
between the issuing bank and the seller is not strictly contractual since there is no privity of
contract nor meeting of the minds between them. 70 It also does not constitute a stipulation pour
autrui in favor of the seller since the issuing bank must honor the drafts drawn against the letter of
credit regardless of any defect in the underlying contract.71 Neither can it be considered as an
assignment by the buyer to the seller-beneficiary as the buyer himself cannot draw on the
 Cred Trans | 47

letter. 72 From its inception, only the seller can demand payment under the letter of credit. It is also
not a contract of suretyship or guaranty since it involves primary liability in the event of
default. 73 Nevertheless, while the relationship between the seller-beneficiary and the issuing bank
is not strictly contractual, strict payment under the terms of a letter of credit is an enforceable
right. 74 This enforceable right finds two legal underpinnings. First, letters of credit, as will be
further explained, are governed by recognized international norms which dictate strict compliance
with its terms. Second, the issuing bank has an existing agreement with the buyer to pay the seller
upon proper presentation of documents. Thus, as the law on obligations applies even in
commercial documents, 75 the issuing bank has a duty to the buyer to honor in good faith its
obligation under their agreement. As will be seen in the succeeding discussion, this transaction is
also governed by international customs which this Court has recognized in this jurisdiction. 76

In simpler terms, the various transactions that give rise to a letter of credit proceed as follows:
Once the seller ships the goods, he or she obtains the documents required under the letter of
credit. He or she shall then present these documents to the issuing bank which must then pay the
amount identified under the letter of credit after it ascertains that the documents are complete.
The issuing bank then holds on to these documents which the buyer needs in order to claim the
goods shipped. The buyer reimburses the issuing bank for its payment at which point the issuing
bank releases the documents to the buyer. The buyer is then able to present these documents in
order to claim the goods. At this point, all the transactions are completed. The seller received
payment for his or her performance of his obligation to deliver the goods. The issuing bank is
reimbursed for the payment it made to the seller. The buyer received the goods purchased.

Owing to the complexity of these contracts, there may be a correspondent bank which facilitates
the ease of completing the transactions. A correspondent bank may be a notifying bank, a
negotiating bank or a confirming bank depending on the nature of the obligations assumed. 77 A
notifying bank undertakes to inform the seller-beneficiary that a letter of credit exists. It may also
have the duty of transmitting the letter of credit. As its obligation is limited to this duty, it assumes
no liability to pay under the letter of credit. 78 A negotiating bank, on the other hand, purchases
drafts at a discount from the seller-beneficiary and presents them to the issuing bank for
payment. 79 Prior to negotiation, a negotiating bank has no obligation. A contractual relationship
between the negotiating bank and the seller-beneficiary arises only after the negotiating bank
purchases or discounts the drafts. 80 Meanwhile, a confirming bank may honor the letter of credit
issued by another bank or confirms that the letter of credit will be honored by the issuing bank. 81 A
confirming bank essentially insures that the credit will be paid in accordance with the terms of the
letter of credit.82 It therefore assumes a direct obligation to the seller-beneficiary. 83

Parenthetically, when banks are involved in letters of credit transactions, the standard of care
imposed on banks engaged in business imbued with public interest applies to them. Banks have the
duty to act with the highest degree of diligence in dealing with clients. 84 Thus, in dealing with the
parties in a letter of credit, banks must also observe this degree of care.

The value of letters of credit in commerce hinges on an important aspect of such a commercial
transaction. Through a letter of credit, a seller-beneficiary is assured of payment regardless of the
status of the underlying transaction. International contracts of sales are perfected and
consummated because of the certainty that the seller will be paid thus making him or her willing to
part with the goods even prior to actual receipt of the amount agreed upon. The legally
 Cred Trans | 48

demandable obligation of an issuing bank to pay under the letter of credit, and the enforceable
right of the seller-beneficiary to demand payment, are indispensable essentials for the system of
letters of credit, if it is to serve its purpose of facilitating commerce. Thus, a touchstone of any law
or custom governing letters of credit is an emphasis on the imperative that issuing banks respect
their obligation to pay, and that seller-beneficiaries may reasonably expect payment, in accordance
with the terms of a letter of credit.

Rules applicable to letters of credit

Letters of credit are defined and their incidences regulated by Articles 567 to 57285 of the Code of
Commerce. These provisions must be read with Article 286 of the same code which states that acts
of commerce are governed by their provisions, by the usages and customs generally observed in
the particular place and, in the absence of both rules, by civil law. In addition, Article 50 87 also
states that commercial contracts shall be governed by the Code of Commerce and special laws and
in their absence, by general civil law.

The International Chamber of Commerce (ICC)88 drafted a set of rules to govern transactions
involving letters of credit. This set of rules is known as the Uniform Customs and Practice for
Documentary Credits (UCP). Since its first issuance in 1933, the UCP has seen several revisions, the
latest of which was in 2007, known as the UCP 600. However, for the period relevant to this case,
the prevailing version is the 1993 revision called the UCP 400. Throughout the years, the UCP has
grown to become the worldwide standard in transactions involving letters of credit. 89 It has enjoyed
near universal application with an estimated 95% of worldwide letters of credit issued subject to
the UCP.90

In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,91 this Court applied a provision
from the UCP in resolving a case pertaining to a letter of credit transaction. This Court explained
that the use of international custom in our jurisdiction is justified by Article 2 of the Code of
Commerce which provides that acts of commerce are governed by, among others, usages and
customs generally observed. Further, in Feati Bank & Trust Company v. Court of Appeals,92 this
Court ruled that the UCP should be applied in cases where the letter of credit expressly states that
it is the governing rule.93 This Court also held in Feati that the UCP applies even if it is not
incorporated into the letter of the credit.94 The application of the UCP in Bank of Philippine
Islands and in Feati was further affirmed in Metropolitan Waterworks and Sewerage System v.
Daway95 where this Court held that "[l]etters of credit have long been and are still governed by the
provisions of the Uniform Customs and Practice for Documentary Credit[s] of the International
Chamber of Commerce."96 These precedents highlight the binding nature of the UCP in our
jurisdiction.

Thus, for the purpose of clarity, letters of credit are governed primarily by their own
provisions, 97 by laws specifically applicable to them, 98 and by usage and custom. 99 Consistent with
our rulings in several cases, 100 usage and custom refers to UCP 400. When the particular issues
are not covered by the provisions of the letter of credit, by laws specifically applicable to them and
by UCP 400, our general civil law finds suppletory app1ication.101
 Cred Trans | 49

Applying this set of laws and rules, this Court rules that HSBC is liable under the provisions of the
Letter of Credit, in accordance with usage and custom as embodied in UCP 400, and under the
provisions of general civil law.

HSBC 's Liability

The Letter of Credit categorically stated that it is subject to UCP 400, to wit:

Except so far as otherwise expressly stated, this documentary credit is subject to uniform Customs
and Practice for Documentary Credits (1983 Revision), International Chamber of Commerce
Publication No. 400.102

From the moment that HSBC agreed to the terms of the Letter of Credit - which states that UCP 400
applies - its actions in connection with the transaction automatically became bound by the rules set
in UCP 400. Even assuming that URC 322 is an international custom that has been recognized in
commerce, this does not change the fact that HSBC, as the issuing bank of a letter of credit,
undertook certain obligations dictated by the terms of the Letter of Credit itself and by UCP 400.
In Feati, this Court applied UCP 400 even when there is no express stipulation in the letter of credit
that it governs the transaction. 103 On the strength of our ruling in Feati, we have the legal duty to
apply UCP 400 in this case independent of the parties' agreement to be bound by it.

UCP 400 states that an irrevocable credit payable on sight, such as the Letter of Credit in this case,
constitutes a definite undertaking of the issuing bank to pay, provided that the stipulated
documents are presented and that the terms and conditions of the credit are complied
with. 104 Further, UCP 400 provides that an issuing bank has the obligation to examine the
documents with reasonable care. 105 Thus, when CityTrust forwarded the Letter of Credit with the
attached documents to HSBC, it had the duty to make a determination of whether its obligation to
pay arose by properly examining the documents.

In its petition, HSBC argues that it is not UCP 400 but URC 322 that should govern the
transaction. 106 URC 322 is a set of norms compiled by the ICC. 107 It was drafted by international
experts and has been adopted by the ICC members. Owing to the status of the ICC and the
international representation of its membership, these rules have been widely observed by
businesses throughout the world. It prescribes the collection procedures, technology, and
standards for handling collection transactions for banks. 108 Under the facts of this case, a bank
acting in accordance with the terms of URC 322 merely facilitates collection. Its duty is to forward
the letter of credit and the required documents from the entity seeking payment to another entity
which has the duty to pay. The bank incurs no obligation other than as a collecting agent. This is
different in the case of an issuing bank acting in accordance with UCP 400. In this case, the issuing
bank has the duty to pay the amount stated in the letter of credit upon due presentment. HSBC
claims that while UCP 400 applies to letters of credit, it is also common for beneficiaries of such
letters to seek collection under URC 322. HSBC further claims that URC 322 is an accepted custom
in commerce. 109 HSBC's argument is without merit. We note that HSBC failed to present evidence
to prove that URC 322 constitutes custom and usage recognized in commerce. Neither was there
sufficient evidence to prove that beneficiaries under a letter of credit commonly resort to collection
under URC 322 as a matter of industry practice. HSBC claims that the testimony of its witness Mr.
Lincoln MacMahon (Mr. MacMahon) suffices for this purpose. 110However, Mr. MacMahon was not
 Cred Trans | 50

presented as an expert witness capable of establishing the existing banking and commercial
practice relating to URC 322 and letters of credit. Thus, this Court cannot hold that URC 322 and
resort to it by beneficiaries of letters of credit are customs that

demand application in this case.111

HSBC's position that URC 322 applies, thus allowing it, the issuing bank, to disregard the Letter of
Credit, and merely demand collection from Klockner cannot be countenanced. Such an argument
effectively asks this Court to give imprimatur to a practice that undermines the value and reliability
of letters of credit in trade and commerce. The entire system of letters of credit rely on the
assurance that upon presentment of the proper documents, the beneficiary has an enforceable
right and the issuing bank a demandable obligation, to pay the amount agreed upon. Were a party
to the transaction allowed to simply set this aside by the mere invocation of another set of norms
related to commerce - one that is not established as a custom that is entitled to recognition by this
Court - the sanctity of letters of credit will be jeopardized. To repeat, any law or custom governing
letters of credit should have, at its core, an emphasis on the imperative that issuing banks respect
their obligation to pay and that seller-beneficiaries may reasonably expect payment in accordance
with the terms of a letter of credit. Thus, the CA correctly ruled, to wit:

At this juncture, it is significant to stress that an irrevocable letter of credit cannot, during its
lifetime, be cancelled or modified without the express permission of the beneficiary. Not even
partial payment of the obligation by the applicant-buyer would amend or modify the obligation of
the issuing bank. The subsequent correspondences of [CityTrust] to HSBC, thus, could not in any
way affect or amend the letter of credit, as it was not a party thereto. As a notifying bank, it has
nothing to do with the contract between the issuing bank and the buyer regarding the issuance of
the letter of credit. 112 (Citations omitted)

The provisions in the Civil Code and our jurisprudence apply suppletorily in this case. 113 When a
party knowingly and freely binds himself or herself to perform an act, a juridical tie is created and
he or she becomes bound to fulfill his or her obligation. In this case, HSBC's obligation arose from
two sources. First, it has a contractual duty to Klockner whereby it agreed to pay NSC upon due
presentment of the Letter of Credit and the attached documents. Second, it has an obligation to
NSC to honor the Letter of Credit. In complying with its obligation, HSBC had the duty to perform all
acts necessary. This includes a proper examination of the documents presented to it and making a
judicious inquiry of whether CityTrust, in behalf of NSC, made a due presentment of the Letter of
Credit.

Further, as a bank, HSBC has the duty to observe the highest degree of diligence. In all of its
transactions, it must exercise the highest standard of care and must fulfill its obligations with
utmost fidelity to its clients. Thus, upon receipt of CityTrust's Collection Order with the Letter of
Credit, HSBC had the obligation to carefully examine the documents it received. Had it observed the
standard of care expected of it, HSBC would have discovered that the Letter of Credit is the very
same document which it issued upon the request of Klockner, its client. Had HSBC taken the time to
perform its duty with the highest degree of diligence, it would have been alerted by the fact that
the documents presented to it corresponded with the documents stated in the Letter of Credit, to
which HSBC freely and knowingly agreed. HSBC ought to have noticed the discrepancy between
CityTrust's request for collection under URC 322 and the terms of the Letter of Credit.
 Cred Trans | 51

Notwithstanding any statements by CityTrust in the Collection Order as to the applicable rules,
HSBC had the independent duty of ascertaining whether the presentment of the Letter of Credit
and the attached documents gave rise to an obligation which it had to Klockner (its client) and NSC
(the beneficiary). Regardless of any error that CityTrust may have committed, the standard of care
expected of HSBC dictates that it should have made a separate detennination of the significance of
the presentment of the Letter of Credit and the attached documents. A bank exercising the
appropriate degree of diligence would have, at the very least, inquired if NSC was seeking payment
under the Letter of Credit or merely seeking collection under URC 322. In failing to do so, HSBC fell
below the standard of care imposed upon it.

This Court therefore rules that CityTrust's presentment of the Letter of Credit with the attached
documents in behalf of NSC, constitutes due presentment.1avvphi1 Under the terms of the Letter
of Credit, HSBC undertook to pay the amount of US$485,767.93 upon presentment of the Letter of
Credit and the required documents.114 In accordance with this agreement, NSC, through CityTrust,
presented the Letter of Credit and the following documents: (1) Letter of Credit; (2) Bill of Lading;
(3) Commercial Invoice; (4) Packing List; (5) Mill Test Certificate; (6) NSC's TELEX to Klockner on
shipping details; (7) Beneficiary's Certificate of facsimile transmittal of documents; (8) Beneficiary's
Certificate of air courier transmittal of documents; and (9) DHL Receipt No. 669988911 and
Certificate of Origin.115

In transactions where the letter of credit is payable on sight, as in this case, the issuer must pay
upon due presentment. This obligation is imbued with the character of definiteness in that not
even the defect or breach in the underlying transaction will affect the issuing bank's liability. 116 This
is the Independence Principle in the law on letters of credit. Article 17 of UCP 400 explains that
under this principle, an issuing bank assumes no liability or responsibility "for the form, sufficiency,
accuracy, genuineness, falsification or legal effect of any documents, or for the general and/or
particular conditions stipulated in the documents or superimposed thereon ... " Thus, as long as the
proper documents are presented, the issuing bank has an obligation to pay even if the buyer should
later on refuse payment. Hence, Klockner's refusal to pay carries no effect whatsoever on HSBC's
obligation to pay under the Letter of Credit. To allow HSBC to refuse to honor the Letter of Credit
simply because it could not collect first from Klockner is to countenance a breach of the
Independence Principle.

HSBC's persistent refusal to comply with its obligation notwithstanding due presentment
constitutes delay contemplated in Article 1169 of the Civil Code. 117 This provision states that a
party to an obligation incurs in delay from the time the other party makes a judicial or extrajudicial
demand for the fulfillment of the obligation. We rule that the due presentment of the Letter of
Credit and the attached documents is tantamount to a demand. HSBC incurred in delay when it
failed to fulfill its obligation despite such a demand.

Under Article 1170 of the Civil Code, 118 a party in delay is liable for damages. The extent of these
damages pertains to the pecuniary loss duly proven. 119 In this case, such damage refers to the
losses which NSC incurred in the amount of US$485,767.93 as stated in the Letter of Credit. We also
award interest as indemnity for the damages incurred in the amount of six percent (6%) from the
date of NSC's extrajudicial demand. 120 An interest in the amount of six percent (6%) is also
awarded from the time of the finality of this decision until full payment. 121
 Cred Trans | 52

Having been remiss in its obligations under the applicable law, rules and jurisprudence, HSBC only
has itself to blame for its consequent liability to NSC.

However, this Court finds that there is no basis for the CA's grant of attorney's fees in favor of NSC.
Article 2208 of the Civil Code122 enumerates the grounds for the award of attorney's fees. This
Court has explained that the award of attorney's fees is an exception rather than the rule. 123 The
winning party is not automatically entitled to attorney's fees as there should be no premium on the
right to litigate. 124 While courts may exercise discretion in granting attorney's fees, this Court has
stressed that the grounds used as basis for its award must approximate as closely as possible the
enumeration in Article 2208. 125 Its award must have sufficient factual and legal
justifications. 126 This Court rules that none of the grounds stated in Article 2208 are present in this
case. NSC has not cited any specific ground nor presented any particular fact to warrant the award
of attorney's fees.

CityTrust's Liability

When NSC obtained the services of CityTrust in collecting under the Letter of Credit, it constituted
CityTrust as its agent. Article 1868 of the Civil Code states that a contract of agency exists when a
person binds himself or herself "to render some service or to do something in representation or on
behalf of another, with the consent or authority of the latter." In this case, CityTrust bound itself to
collect under the Letter of Credit in behalf of NSC.

One of the obligations of an agent is to carry out the agency in accordance with the instructions of
the principal. 127In ascertaining NSC's instructions to CityTrust, its letter dated January 18, 1994 is
determinative. In this letter, NSC clearly stated that it "negotiated with CityTrust the export
documents pertaining to LC No. HKH 239409 of HSBC and it was CityTrust which wrongfully treated
the negotiation as 'on collection basis."' 128 HSBC persistently communicated with CityTrust and
consistently repeated that it will proceed with collection under URC 322. At no point did CityTrust
correct HSBC or seek clarification from NSC. In insisting upon its course of action, CityTrust failed to
act in accordance with the instructions given by NSC, its principal. Nevertheless while this Court
recognizes that CityTrust committed a breach of its obligation to NSC, this carries no implications
on the clear liability of HSBC. As this Court already mentioned, HSBC had a separate obligation that
it failed to perform by reason of acts independent of CityTrust's breach of its obligation under its
contract of agency. If CityTrust has incurred any liability, it is to its principal NSC. However, NSC has
not raised any claim against CityTrust at any point in these proceedings. Thus, this Court cannot
make any finding of liability against CityTrust in favor of NSC.

WHEREFORE, in view of the foregoing, the Assailed Decision dated November 19, 2007
is AFFIRMED to the extent that it orders HSBC to pay NSC the amount of US$485,767.93. HSBC is
also liable to pay legal interest of six percent (6%) per annum from the time of extrajudicial
demand. An interest of six percent (6%) is also awarded from the time of the finality of this decision
until the amount is fully paid. We delete the award of attorney's fees. No pronouncement as to
cost.

SO ORDERED.