FIRST DIVISION dyestuffs from the United States, which however turned out to be mere colored chalk upon
arrival and inspection thereof at the port of Manila.
[G.R. No. L-24821. October 16, 1970.]
BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellee, vs. DE RENY
FABRIC INDUSTRIES, INC., AURORA T. TUYO and AURORA
CARCERENY alias AURORA C. GONZALES, defendants-appellants.
Aviado & Aranda for plaintiff-appellee.
S. Emiliano Calma for defendants-appellants.
SYLLABUS
1. COMMERCIAL LAW; LETTERS OF CREDIT; TERMS OF COMMERCIAL LETTER OF
CREDIT AGREEMENTS, BINDING. — Where appellants agreed, under the terms of the
Commercial Letter of Credit Agreements, that the Bank shall not be responsible for the
existence, character, quality, quantity, conditions, packing, value or delivery of the property
purporting to be represented by the documents; nor, for any difference in character, quality,
quantity, condition, or value of the property from that expressed in documents, or for partial or
incomplete shipment, etc., said appellants have no recourse but to comply with the covenant.
2. ID.; ID.; CUSTOMS AND USAGES IN INTERNATIONAL BANKING AND FINANCIAL
CIRCLES. — Where it is proven as a fact that a custom exists to the effect that a bank is not
duty bound to verify whether what has been described in the letters of credit or drafts or shipping
documents actually tallies with what was loaded aboard the ship, appellants cannot shift the
burden of loss to the bank arising from the violation by their vendor of its presentation. Article 10
of the Uniform Customs and Practices for Documentary Credits Fixed for the Thirteenth
Congress of International Chamber of Commerce to which the Philippines is a signatory nation
provides that, "in documentary credit operations, all parties concerned deal in documents and
not in goods. Payment, negotiation or acceptance against documents in accordance with the
terms and conditions of a credit by a Bank authorized to do so binds the party giving the
authorization to-take up the documents and reimburse the Bank making the payment,
negotiation or acceptance."
DECISION
CASTRO, J.:
This is an appeal from the decision of the Court of First Instance of Manila ordering the
defendants-appellants to pay to the Bank of the Philippine Islands (hereinafter referred to as the
Bank), jointly and severally, the value of the credit it extended to them in several letters of credit
which the Bank opened at the behest of the defendants-appellants to finance their importation of
The record shows that on four (4) different occasions in 1961, the De Reny Fabric Industries,
Inc., a Philippine corporation through its co-defendants-appellants, Aurora Carcereny, alias
Aurora C. Gonzales, and Aurora T. Tuyo, president and secretary, respectively of the
corporation, applied to the Bank for four (4) irrevocable commercial letters of credit to cover the
purchase by the corporation of goods described in the covering L/C applications as "dyestuffs of
various colors" from its American supplier, the J.B. Distributing Company. All the applications of
the corporation were approved, and the corresponding Commercial L/C Agreements were
executed pursuant to banking procedures. Under these agreements, the aforementioned officers
of the corporation bound themselves personally as joint and solidary debtors with the
corporation. Pursuant to banking regulations then in force, the corporation delivered to the Bank
peso marginal deposits as each letter of credit was opened.
The dates and amounts of the L/Cs applied for and approved as well as the peso marginal
deposits made were, respectively, as follows:
Date Application Amount Marginal
& L/C No Deposit
Oct. 10, 1961 61/1413 $57,658.38 P 43,407.33
Oct. 23, 1961 61/1483 $25,867.34 19,473.64
Oct. 30, 1961 61/1495 $19,408.39 14,610.88
Nov. 10, 1961 61/1564 $26,687.64 20,090.90
TOTAL $129,621.75 P97,582.75
By virtue of the foregoing transactions, the Bank issued irrevocable commercial letters of credit
addressed to its correspondent banks in the United States, with uniform instructions for them to
notify the beneficiary thereof, the J.B. Distributing Company, that they have been authorized to
negotiate the latter's sight drafts up to the amounts mentioned therein, respectively, if
accompanied, upon presentation, by a full set of negotiable clean "on board" ocean bills of
lading, covering the merchandise appearing in the L/Cs, that is, dyestuffs of various colors.
Consequently, the J.B. Distributing Company drew upon, presented to and negotiated with these
banks, its sight drafts covering the amounts of the merchandise ostensibly being exported by it,
together with clean bills of lading, and collected the full value of the drafts up to the amounts
appearing in the L/Cs as above indicated. These correspondent banks then debited the account
of the Bank of the Philippine Islands with them up to the full value of the drafts presented by the
J.B. Distributing Company, plus commission thereon, and, thereafter, endorsed and forwarded
all documents to the Bank of the Philippine Islands.
In the meantime, as each shipment (covered by the abovementioned letters of credit) arrived in
the Philippines, the De Reny Fabric Industries, Inc. made partial payments to the Bank
amounting, in the aggregate, to P90,000. Further payments were, however, subsequently
discontinued by the corporation when it became established, as a result of a chemical test
conducted by the National Science Development Board, that the goods that arrived in Manila
were colored chalks instead of dyestuffs.
The corporation also refused to take possession of these goods, and for this reason, the Bank
caused them to be deposited with a bonded warehouse paying therefor the amount of
P12,609.64 up to the filing of its complaint with the court below on December 10, 1962.
On October 24, 1963 the lower court rendered its decision ordering the corporation and its co-
defendants (the herein appellants) to pay to the plaintiff-appellee the amount of P291,807.46,
with interest thereon, as provided for in the L/C Agreements, at the rate of 7% per annum from
October 31, 1962 until fully paid, plus costs.
shipping documents actually tallies with what was loaded aboard ship, having been positively
proven as a fact, the appellants are bound by this established usage. They were, after all, the
ones who tapped the facilities afforded by the Bank in order to engage in international business.
ACCORDINGLY, the judgment a quo is affirmed, at defendants-appellants' cost. This is without
prejudice to the Bank, in proper proceedings in the court below in this same case, proving and
being reimbursed additional expenses, if any, it has incurred by virtue of the continued storage
of the goods in question up to the time this decision becomes final and executory.
Reyes, J.B.L., Actg. C.J., Dizon, Makalintal, Zaldivar, Fernando, Teehankee, Barredo, Villamor
and Makasiar, JJ., concur.

It is the submission of the defendants-appellants that it was the duty of the foreign Concepcion, C.J., is on official leave.
correspondent banks of the Bank of the Philippine Islands to take the necessary precaution to
insure that the goods shipped under the covering L/Cs conformed with the item appearing
||| (Bank of the Philippine Islands v. De Reny Fabric Industries, Inc., G.R. No. L-24821, [October
therein, and, that the foregoing banks having failed to perform this duty, no claim for recoupment
against the defendants-appellants, arising from the losses incurred for the non-delivery or 16, 1970], 146 PHIL 269-275)
defective delivery of the articles ordered, could accrue.

We can appreciate the sweep of the appellants' argument, but we also find that it is nestled
hopelessly inside a salient where the valid contract between the parties and the internationally
accepted customs of the banking trade must prevail. 1

Under the terms of their Commercial Letter of Credit Agreements with the Bank, the appellants
agreed that the Bank shall not be responsible for the "existence, character, quality, quantity,
conditions, packing, value, or delivery of the property purporting to be represented by
documents; for any difference in character, quality, quantity, condition, or value of the property
from that expressed in documents," or for "partial or incomplete shipment, or failure or omission
to ship any or all of the property referred to in the Credit," as well as "for any deviation from
instructions, delay, default or fraud by the shipper or anyone else in connection with the property
the shippers or vendors and ourselves [purchasers] or any of us." Having agreed to these terms,
the appellants have, therefore, no recourse but to comply with their covenant. 2

But even without the stipulation recited above, the appellants cannot shift the burden of loss to
the Bank on account of the violation by their vendor of its prestation.

It was uncontrovertibly proven by the Bank during the trial below that banks, in providing
financing in international business transactions such as those entered into by the appellants, do
not deal with the property to be exported or shipped to the importer, but deal only with
documents. The Bank introduced in evidence a provision contained in the "Uniform Customs
and Practices for Commercial Documentary Credits Fixed for the Thirteenth Congress of
International Chamber of Commerce," to which the Philippines is a signatory nation. Article 10
thereof provides:

"In documentary credit operations, all parties

concerned deal in documents and not in goods.—Payment,
negotiation or acceptance against documents in accordance with
the terms and conditions of a credit by a Bank authorized to do so
binds the party giving the authorization to take up the documents
and reimburse the Bank making the payment, negotiation or
acceptance."

The existence of a custom in international banking and financing circles negating any duty on
the part of a bank to verify whether what has been described in letters of credits or drafts or
 THIRD DIVISION
[G.R. No. 94209. April 30, 1991.]
FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING
CORPORATION), petitioner, vs. THE COURT OF APPEALS, and
BERNARDO E. VILLALUZ, respondents.
Pelaez, Adriano & Gregorio for petitioner.
Ezequiel S. Consulta for private respondent.
SYLLABUS
1. COMMERCIAL LAW; BANKING LAWS; LETTER OF CREDIT; DOCUMENTS TENDERED
MUST STRICTLY CONFORM TO THE TERMS OF LETTER OF CREDIT. — It is a settled rule
in commercial transactions involving letters of credit that the documents tendered must strictly
conform to the terms of the letter of credit. The tender of documents by the beneficiary (seller)
must include all documents required by the letter. A correspondent bank which departs from
what has been stipulated under the letter of credit, as when it accepts a faulty tender, acts on its
own risks and it may not thereafter be able to recover from the buyer or the issuing bank, as the
case may be, the money thus paid to the beneficiary. Thus the rule of strict compliance.
2. ID.; ID.; ID.; UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDIT
(U.C.P.); APPLICABILITY JUSTIFIED BY ARTICLE 2 OF THE CODE OF COMMERCE. —
Moreover, the incorporation of the Uniform Customs and Practice for Documentary Credit
(U.C.P. for short) in the letter of credit resulted in the applicability of the said rules in the
governance of the relations between the parties. And even if the U.C.P. was not incorporated in
the letter of credit, we have already ruled in the affirmative as to the applicability of the U.C.P. in
cases before us. In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the
observance of the U.C.P. in this jurisdiction is justified by Article 2 of the Code of Commerce.
Article 2 of the Code of Commerce enunciates that in the absence of any particular provision in
the Code of commerce, commercial transactions shall be governed by the usages and customs
generally observed. There being no specific provision which governs the legal complexities
arising from transactions involving letters of credit not only between the banks themselves but
also between banks and seller and/or buyer, the applicability of the U.C.P. is undeniable.
3. ID.; ID.; ID.; IRREVOCABLE CREDIT AND CONFIRMED LETTER OF CREDIT,
DIFFERENTIATED.— An irrevocable credits refers to the duration of the letter of credit. What it
simply means is that the issuing bank may not without the consent of the beneficiary (seller) and
the applicant (buyer) revoke his undertaking under the letter. The issuing bank does not reserve
the right to revoke the credit. On the other hand, a confirmed letter of credit pertains to the kind
of obligation assumed by the correspondent bank. In this case, the correspondent bank gives an
absolute assurance of the beneficiary that it will undertake the issuing bank's obligation as its
own according to the terms and conditions of the credit. (Agbayani, Commercial Laws of the
Philippines, Vol. 1, pp. 81-83) Hence, the mere fact that a letter of credit is irrevocable does not
necessarily imply that the correspondent bank in accepting the instructions of the issuing bank
has also confirmed the letter of credit.
4. ID.; ID.; ID.; CLASSIFICATIONS OF CORRESPONDENT BANK'S FUNCTIONS. — In
commercial transactions involving letters of credit, the functions assumed by a correspondent
bank are classified according to the obligations taken up by it. The correspondent bank may be
called a notifying bank, a negotiating bank, or a confirming bank. In case of a notifying bank, the
correspondent bank assumes no liability except to notify and/or transmit to the beneficiary the
existence of the letter of credit. (Kronman and Co., Inc. v. Public National Bank of New York,
218 N.Y.S. 616 [1926]; Shaterian, Export-Import Banking, p. 292, cited in Agbayani, Commercial
Laws of the Philippines, Vol. 1, p. 76) A negotiating bank, on the other hand, is a correspondent
bank which buys or discounts a draft under the letter of credit. Its liability is dependent upon the
stage of the negotiation. If before negotiation, it has no liability with respect to the seller but after
negotiation, a contractual relationship will then prevail between the negotiating bank and the
seller. (Scanlon v. First National Bank of Mexico, 162 N.E. 567 [1928]; Shaterian, Export-Import
Banking, p. 293, cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76) In the
case of a confirming bank, the correspondent bank assumes a direct obligation to the seller and
its liability is a primary one as if the correspondent bank itself had issued the letter of credit.
(Shaterian, Export-Import Banking, p. 294, cited in Agbayani, Commercial Laws of the
Philippines, Vol. 1, p. 77)
5.  ID.; ID.; ID.; ID.; NOTIFYING BANK; CASE AT BAR. — In this case, the letter merely
provided that the petitioner "forward the enclosed original credit to the beneficiary." Considering
the aforesaid instruction to the petitioner by the issuing bank, the Security Pacific National Bank,
it is indubitable that the petitioner is only a notifying bank and not a confirming bank as ruled by
the courts below. A notifying bank is not privy to the contract of sale between the buyer and the
seller, its relationship is only with that of the issuing bank and not with the beneficiary to whom
he assumes no liability. It follows therefore that when the petitioner refused to negotiate with the
private respondent, the latter has no cause of action against the petitioner for the enforcement of
his rights under the letter. (See Kronman and Co., Inc. v. Public National Bank of New York,
supra)
6. CIVIL LAW; OBLIGATIONS AND CONTRACT; TRUST; EXPLAINED. — A trust has been
defined as the "right, enforceable solely in equity, to the beneficial enjoyment of property the
legal title to which is vested to another." The concept of a trust presupposes the existence of a
specific property which has been conferred upon the person for the benefit of another. In order
therefore for the trust theory of the private respondent to be sustained, the petitioner should
have had in its possession a sum of money as specific fund advanced to it by the issuing bank
and to be held in trust by it in favor of the private respondent. This does not obtain in this case.
7. ID.; ID.; ID.; A LETTER OF CREDIT DOES NOT CONVEY THAT A SUM OF MONEY IS
BEING HELD IN TRUST. — The mere opening of a letter of credit, it is to be noted, does not
involve a specific appropriation of a sum of money in favor of the beneficiary. It only signifies that
the beneficiary may be able to draw funds upon the letter of credit up to the designated amount
specified in the letter. It does not convey the notion that a particular sum of money has been
specifically reserved or has been held in trust.
8. ID.; ID.; GUARANTY; INCONSISTENT WITH AN IRREVOCABLE CREDIT. — The theory of
guarantee relied upon the by the Court of Appeals has to necessarily fail. The concept of
guarantee vis-a-vis the concept of an irrevocable credit are inconsistent with each other. In the
first place, the guarantee theory destroys the independence of the bank's responsibility from the
contract upon which it was opened. In the second place, the nature of both contracts is mutually
in conflict with each other. In contracts of guarantee, the guarantor's obligation is merely
collateral and it arises only upon the default of the person primarily liable. On the other hand, in
an irrevocable credit the bank undertakes a primary obligation. (See National Bank of Eagle
Pass, Tex. v. American National Bank of San Francisco, 282 F. 73 [1922])
9. ID.; ID.; AGENCY; RELATIONSHIP BETWEEN ISSUING BANK AND NOTIFYING BANK IS
SIMILAR TO AGENCY. — The relationship between the issuing bank and the notifying bank, on
the contrary, is more similar to that of an agency and not that of a guarantee. It may be observed
that the notifying bank is merely to follow the instructions of the issuing bank which is to notify or
to transmit the letter of credit to the beneficiary. (See Kronman v. Public National Bank of New
York, supra). Its commitment is only to notify the beneficiary. It does not undertake any
assurance that the issuing bank will perform what has been mandated to or expected of it. As an
agent of the issuing bank, it has only to follow the instructions of the issuing bank and to it alone
is it obligated and not to the buyer with whom it has no contractual relationship.
10. STATUTORY CONSTRUCTION; CONTROVERSY IS DECIDED ON WHAT THE LAW IS;
LAW IS ALSO TO GOVERN FUTURE RELATIONS AMONG PEOPLE. — We are aware of the
injustice committed by Christiansen on the private respondent but we are deciding the
controversy on the basis of what the law is, for the law is not meant to favor only those who have
been oppressed, the law is to govern future relations among people as well. Its commitment is to
all and not to a single individual. The faith of the people in our justice system may be eroded if
we are to decide not what the law states but what we believe it should declare. Dura lex sed lex.
DECISION
GUTIERREZ, JR., J p:
This is a petition for review seeking the reversal of the decision of the Court of Appeals dated
June 29, 1990 which affirmed the decision of the Regional Trial Court of Rizal dated October 20,
1986 ordering the defendants Christiansen and the petitioner, to pay various sums to
respondent Villaluz, jointly and severally.
The facts of the case are as follows:
On June 3, 1971, Bernardo E. Villaluz agreed to sell to the then defendant Axel Christiansen
2,000 cubic meters of lauan logs at $27.00 per cubic meter FOB.
After inspecting the logs, Christiansen issued purchase order No. 76171.
On the arrangements made and upon the instructions of the consignee, Hanmi Trade
Development, Ltd., de Santa Ana, California, the Security Pacific National Bank of Los Angeles,
California issued Irrevocable Letter of Credit No. IC-46268 available at sight in favor of Villaluz
for the sum of $54,000.00, the total purchase price of the lauan logs.
The letter of credit was mailed to the Feati Bank and Trust Company (now Citytrust) with the
instruction to the latter that it "forward the enclosed letter of credit to the beneficiary." (Records,
Vol. I, p. 11)
The letter of credit further provided that the draft to be drawn is on Security Pacific National
Bank and that it be accompanied by the following documents:
"1. Signed Commercial Invoice in four copies showing the number of the
purchase order and certifying that —
a. All terms and conditions of the purchase order
have been complied with and that all logs are fresh cut and
quality equal to or better than that described in H.A.
Christiansen's telex #201 of May 1, 1970, and that all logs have
been marked "BEV-EX".
b. One complete set of documents, including 1/3
original bills of lading was airmailed to Consignee and Parties
to be advised by Hans-Axel Christiansen, Ship and
Merchandise Broker. cdll
c. One set of non-negotiable documents was
airmailed to Han Mi Trade Development Company and one set
to Consignee and Parties to be advised by Hans-Axel
Christiansen, Ship and Merchandise Broker.
2. Tally sheets in quadruplicate.
3. 2/3 Original Clean on Board Ocean Bills of Lading with Consignee and
Parties to be advised by Hans Axel Christiansen, showing Freight
Prepaid and marked Notify:
Han Mi Trade Development Company, Ltd., Santa Ana, California.
Letter of Credit No. 46268 dated June 7, 1971.
Han Mi Trade Development Company, Ltd., P.O. Box 10480, Santa Ana,
California 92711 and Han Mi Trade Development Company, Ltd., Seoul,
Korea.
4. Certification from Han-Axel Christiansen, Ship and Merchandise
Broker, stating that logs have been approved prior to shipment in
accordance with terms and conditions of corresponding purchase Order.
(Record, Vol. 1 pp. 11-12)
Also incorporated by reference in the letter of credit is the Uniform Customs and Practice for
Documentary Credits (1962 Revision).
The logs were thereafter loaded on the vessel "Zenlin Glory" which was chartered by
Christiansen. Before its loading, the logs were inspected by custom inspectors Nelo Laurente,
Alejandro Cabiao, Estanislao Edera from the Bureau of Customs (Records, Vol. I, p. 124) and
representatives Rogelio Cantuba and Jesus Tadena of the Bureau of Forestry (Records, Vol. I,
pp. 16-17) all of whom certified to the good condition and exportability of the logs.
After the loading of the logs was completed, the Chief Mate, Shao Shu Wang issued a mate
receipt of the cargo which stated the same are in good condition (Records, Vol. I, p. 363).
However, Christiansen refused to issue the certification as required in paragraph 4 of the letter
of credit, despite several requests made by the private respondent.
Because of the absence of the certification by Christiansen, the Feati Bank and Trust Company
refused to advance the payment on the letter of credit.
The letter of credit lapsed on June 30, 1971, (extended, however up to July 31, 1971) without
the private respondent receiving any certification from Christiansen. LLpr
The persistent refusal of Christiansen to issue the certification prompted the private respondent
to bring the matter before the Central Bank. In a memorandum dated August 16, 1971, the
Central Bank ruled that:
". . . pursuant to the Monetary Board Resolution No. 1230 dated August
3, 1971, in all log exports, the certification of the lumber inspectors of the
Bureau of Forestry . . . shall be considered final for purposes of
negotiating documents. Any provision in any letter of credit covering log
exports requiring certification of buyer's agent or representative that said
logs have been approved for shipment as a condition precedent to
negotiation of shipping documents shall not be allowed." (Records, Vol. I,
p. 367)
Meanwhile, the logs arrived at Inchon, Korea and were received by the consignee, Hamni Trade
Development Company, to whom Christiansen sold the logs for the amount of $37.50 per cubic
meter, for a net profit of $10 per cubic meter. Hanmi Trade Development Company, on the other
hand sold the logs to Taisung Lumber Company at Inchon, Korea. (Rollo, p. 39)
Since the demands by the private respondent for Christiansen to execute the certification proved
futile, Villaluz, on September 1, 1971, instituted an action for mandamus and specific
performance against Christiansen and the Feati Bank and Trust Company (now Citytrust) before
the then Court of First Instance of Rizal. The petitioner was impleaded as defendant before the
lower court only to afford complete relief should the court a quo order Christiansen to execute
xxx xxx xxx
the required certification.
The complaint prayed for the following:
1. Christiansen be ordered to issue the certification required of him under
the Letter of Credit;
2. Upon issuance of such certification, or, if the court should find it
unnecessary, FEATI BANK be ordered to accept negotiation of the Letter
of Credit and make payment thereon to Villaluz;
3. Order Christiansen to pay damages to the plaintiff. (Rollo, p. 39)
On or about 1979, while the case was still pending trial, Christiansen left the Philippines without
informing the Court and his counsel. Hence, Villaluz, filed an amended complaint to make the
petitioner solidarily liable with Christiansen.
The trial court, in its order dated August 29, 1979, admitted the amended complaint.
After trial, the lower court found:
"The liability of the defendant CHRISTIANSEN is beyond dispute, and the
plaintiff's right to demand payment is absolute. Defendant
CHRISTIANSEN having accepted delivery of the logs by having them
loaded in his chartered vessel the 'Zenlin Glory' and shipping them to the
consignee, his buyer Han Mi Trade in Inchon, South Korea (Art. 1585,
Civil Code), his obligation to pay the purchase order had clearly arisen
and the plaintiff may sue and recover the price of the goods (Art. 1595,
id). prLL
"The Court believes that the defendant CHRISTIANSEN acted in bad
faith and deceit and with intent to defraud the plaintiff, reflected in and
aggravated by, not only his refusal to issue the certification that would
have enabled without question the plaintiff to negotiate the letter of credit,
but his accusing the plaintiff in his answer of fraud, intimidation, violence
and deceit. These accusations said defendant did not attempt to prove,
as in fact he left the country without ever notifying his own lawyer. It was
to the Court's mind a pure swindle.
"The defendant Feati Bank and Trust Company, on the other hand, must
be held liable together with his (sic) co-defendant for having, by its
wrongful act, i.e., its refusal to negotiate the letter of credit in the absence
of CHRISTIANSEN's certification (in spite of the Central Bank's ruling that
the requirement was illegal), prevented payment to the plaintiff. The said
letter of credit, as may be seen on its face, is irrevocable and the issuing
bank, the Security Pacific National Bank in Los Angeles, California,
undertook by its terms that the same shall be honored upon its
presentment. On the other hand, the notifying bank, the defendant Feati
Bank and Trust Company, by accepting the instructions from the issuing
bank, itself assumed the very same undertaking as the issuing bank
under the terms of the letter of credit.
"The Court likewise agrees with the plaintiff that the defendant BANK may
also be held liable under the principles and laws on both trust and
estoppel. When the defendant BANK accepted its role as the notifying
and negotiating bank for and in behalf of the issuing bank, it in effect
accepted a trust reposed on it, and became a trustee in relation to plaintiff
as the beneficiary of the letter of credit. As trustee, it was then duty bound
to protect the interests of the plaintiff under the terms of the letter of
credit, and must be held liable for damage and loss resulting to the
plaintiff from its failure to perform that obligation.
"Furthermore, when the defendant BANK assumed the role of a notifying
and negotiating BANK it in effect represented to the plaintiff that, if the
plaintiff complied with the terms and conditions of the letter of credit and
presents the same to the BANK together with the documents mentioned
therein the said BANK will pay the plaintiff the amount of the letter of
credit. The Court is convinced that it was upon the strength of this letter
of credit and this implied representation of the defendant BANK that the
plaintiff delivered the logs to defendant CHRISTIANSEN, considering that
the issuing bank is a foreign bank with whom plaintiff had no business
connections and CHRISTIANSEN had not offered any other Security for
the payment of the logs. Defendant BANK cannot now be allowed to deny
its commitment and liability under the letter of credit: Cdpr
'A holder of a promissory note given because of
gambling who indorses the same to an innocent holder for
value and who assures said party that the note has no legal
defect, is in estoppel from asserting that there had been an
 illegal consideration for the note, and so, he has to pay its
value.' (Rodriguez v. Martinez, 5 Phil. 67).'
"The defendant BANK, in insisting upon the certification of defendant
CHRISTIANSEN as a condition precedent to negotiating the letter of
credit, likewise in the Court's opinion acted in bad faith, not only because
of the clear declaration of the Central Bank that such a requirement was
illegal, but because the BANK with all the legal counsel available to it,
must have known that the condition was void since it depended on the
sole will of the debtor, the defendant CHRISTIANSEN. (Art. 1182, Civil
Code)" (Rollo, pp. 29-31)
On the basis of the foregoing the trial court on October 20, 1986, ruled in favor of the private
respondent. The dispositive portion of its decision reads:
'WHEREFORE, judgment is hereby rendered for the plaintiff, ordering the
defendants to pay the plaintiff, jointly and severally, the following sums:
"a) $54,000.00 (US), or its peso equivalent at the
prevailing rate as of the time payment is actually made,
representing the purchase price of the logs;
"b) P17,340.00, representing government fees and
charges paid by plaintiff in connection with the logs shipment in
question;
"c) P10,000.00 as temperate damages (for trips
made to Bacolod and Korea).
"All three foregoing sums shall be with interest thereon at 12% per annum
from September 1, 1971, when the complaint was filed, until fully paid:
"d) P70,000.00 as moral damages;
"e) P30,000.00 as exemplary damages; and
"f) P30,000.00 as attorney's fees and litigation
expense." (Rollo, p. 28)
The petitioner received a copy of the decision on November 3, 1986. Two days thereafter, or on
November 5, 1986, it filed a notice of appeal.
On November 10, 1986, the private respondent filed a motion for the immediate execution of the
judgment on the ground that the appeal of the petitioner was frivolous and dilatory.
The trial court ordered the immediate execution of its judgment upon the private respondent's
filing of a bond.
The petitioner then filed a motion for reconsideration and a motion to suspend the
implementation of the writ of execution. Both motions were, however, denied. Thus, petitioner
filed before the Court of Appeals a petition for certiorari and prohibition with preliminary
injunction to enjoin the immediate execution of the judgment. LibLex
The Court of Appeals in a decision dated April 9, 1987 granted the petition and nullified the order
of execution, the dispositive portion of the decision states:
"WHEREFORE, the petition for certiorari is granted. Respondent Judge's
order of execution dated December 29, 1986, as well as his order dated
January 14, 1987 denying the petitioner's urgent motion to suspend the
writ of execution against its properties are hereby annulled and set aside
insofar as they are sought to be enforced and implemented against the
petitioner Feati Bank & Trust Company, now Citytrust Banking
Corporation, during the pendency of its appeal from the adverse decision
in Civil Case No. 15121. However, the execution of the same decision
against defendant Axel Christiansen who did not appeal said decision
may proceed unimpeded. The Sheriff's levy on the petitioner's properties,
and the notice of sale dated January 13, 1987 (Annex M), are hereby
annulled and set aside. (Rollo, p. 44)
A motion for reconsideration was thereafter filed by the private respondent. The Court of
Appeals, in a resolution dated June 29, 1987 denied the motion for reconsideration.
In the meantime, the appeal filed by the petitioner before the Court of Appeals was given due
course. In its decision dated June 29, 1990, the Court of Appeals affirmed the decision of the
lower court dated October 20, 1986 and ruled that:
1. Feati Bank admitted in the "special and negative defenses" section of
its answer that it was the bank to negotiate the letter of credit issued by
the Security Pacific National Bank of Los Angeles, California. (Record,
pp. 156, 157). Feati Bank did notify Villaluz of such letter of credit. In fact,
as such negotiating bank, even before the letter of credit was presented
for payment, Feati Bank had already made an advance payment of
P75,000.00 to Villaluz in anticipation of such presentment. As the
negotiating bank, Feati Bank, by notifying Villaluz of the letter of credit in
behalf of the issuing bank (Security Pacific), confirmed such letter of
credit and made the same also its own obligation. This ruling finds
support in the authority cited by Villaluz:
"A confirmed letter of credit is one in which the notifying bank gives its
assurance also that the opening bank's obligation will be performed. In
such a case, the notifying bank will not simply transmit but will confirm the
opening bank's obligation by making it also its own undertaking, or
commitment, or guaranty or obligation." (Ward & Harfield, 28-29, cited in
Agbayani, Commercial Laws, 1978 edition, p. 77). LLphil
Feati Bank argues further that it would be considered as the negotiating
bank only upon negotiation of the letter of credit. This stance is
untenable. Assurance, commitments or guaranties supposed to be made
by notifying banks to the beneficiary of a letter of credit, as defined
above, can be relevant or meaningful only with respect to a future
transaction, that is, negotiation. Hence, even before actual negotiation,
the notifying bank, by the mere act of notifying the beneficiary of the letter
of credit, assumes as of that moment the obligation of the issuing bank.
 2. Since Feati Bank acted as guarantor of the issuing bank and in effect Third Reason
also of the latter's principal or client, i.e. Hans Axel-Christiansen. (sic)
Such being the case, when Christiansen refused to issue the certification,
THE RESPONDENT COURT LIKEWISE COMMITTED AN ERROR OF
it was as though refusal was made by Feati Bank Itself Feati Bank should
LAW WHEN IT AFFIRMED THE TRIAL COURT'S DECISION. (Rollo, p.
have taken steps to secure the certification from Christiansen; and, if the
12)
latter should still refuse to comply, to hale him to court. In short, Feati
Bank should have honored Villaluz's demand for payment of his logs by
virtue of the irrevocable letter of credit issued in Villaluz's favor and The principal issue in this case is whether or not a correspondent bank is to be held liable under
guaranteed by Feati Bank. the letter of credit despite non-compliance by the beneficiary with the terms thereof? llcd

3. The decision promulgated by this Court in CA-G.R. Sp No. 11051, The petition is impressed with merit.
which contained the statement "Since Villaluz' draft was not drawn strictly
in compliance with the terms of the letter of credit, Feati Bank's refusal to
It is a settled rule in commercial transactions involving letters of credit that the documents
negotiate it was justified," did not dispose of this question on the merits.
tendered must strictly conform to the terms of the letter of credit. The tender of documents by
In that case, the question involved was jurisdiction or discretion, and not
the beneficiary (seller) must include all documents required by the letter. A correspondent bank
judgment. The quoted pronouncement should not be taken as a
which departs from what has been stipulated under the letter of credit, as when it accepts a
preemptive judgment on the merits of the present case on appeal.
faulty tender, acts on its own risks and it may not thereafter be able to recover from the buyer or
the issuing bank, as the case may be, the money thus paid to the beneficiary. Thus the rule of
4. The original action was for "mandamus and/ or specific performance." strict compliance.
Feati Bank may not be a party to the transaction between Christiansen
and Security Pacific National Bank on the one hand, and Villaluz on the
In the United States, commercial transactions involving letters of credit are governed by the rule
other hand; still, being guarantor or agent of Christiansen and or Security
of strict compliance. In the Philippines, the same holds true. The same rule must also be
Pacific National Bank which had directly dealt with Villaluz, Feati Bank
followed.
may be sued properly on specific performance as a procedural means by
which the relief sought by Villaluz may be entertained. (Rollo, pp. 32-33)
The case of Anglo-South American Trust Co. v. Uhe et al. (184 N.E. 741 [1933]) expounded
clearly on the rule of strict compliance.
The dispositive portion of the decision of the Court of Appeals reads:

"We have heretofore held that these letters of credit are to be strictly
WHEREFORE, the decision appealed from is affirmed; and accordingly,
complied with, which documents, and shipping documents must be
the appeal is hereby dismissed. Costs against the petitioner. (Rollo. p.
followed as stated in the letter. There is no discretion in the bank or trust
33)
company to waive any requirements. The terms of the letter constitutes
an agreement between the purchaser and the bank." (p. 743)
Hence, this petition for review.
Although in some American decisions, banks are granted a little discretion to accept a faulty
The petitioner interposes the following reasons for the allowance of the petition. tender as when the other documents may be considered immaterial or superfluous, this theory
could lead to dangerous precedents. Since a bank deals only with documents, it is not in a
position to determine whether or not the documents required by the letter of credit are material
First Reason
or superfluous. The mere fact that the document was specified therein readily means that the
document is of vital importance to the buyer.
THE RESPONDENT COURT ERRONEOUSLY CONCLUDED FROM
THE ESTABLISHED FACTS AND INDEED, WENT AGAINST THE
Moreover, the incorporation of the Uniform Customs and Practice for Documentary Credit
EVIDENCE AND DECISION OF THIS HONORABLE COURT, THAT
(U.C.P. for short) in the letter of credit resulted in the applicability of the said rules in the
PETITIONER BANK IS LIABLE ON THE LETTER OF CREDIT DESPITE
governance of the relations between the parties.
PRIVATE RESPONDENT'S NON-COMPLIANCE WITH THE TERMS
THEREOF.
And even if the U.C.P. was not incorporated in the letter of credit, we have already ruled in the
affirmative as to the applicability of the U.C.P. in cases before us.
Second Reason

In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the observance of the
THE RESPONDENT COURT COMMITTED AN ERROR OF LAW WHEN
U.C.P. in this jurisdiction is justified by Article 2 of the Code of Commerce. Article 2 of the Code
IT HELD THAT PETITIONER BANK, BY NOTIFYING PRIVATE
of Commerce enunciates that in the absence of any particular provision in the Code of
RESPONDENT OF THE LETTER OF CREDIT, CONFIRMED SUCH
Commerce, commercial transactions shall be governed by the usages and customs generally
CREDIT AND MADE THE SAME ALSO ITS OBLIGATION AS
observed.
GUARANTOR OF THE ISSUING BANK.
There being no specific provision which governs the legal complexities arising from transactions
involving letters of credit not only between the banks themselves but also between banks and
seller and or buyer, the applicability of the U.C.P. is undeniable. LibLex
The pertinent provisions of the U.C.P. (1962 Revision) are:
Article 3.
"An irrevocable credit is a definite undertaking on the part of the issuing
bank and constitutes the engagement of that bank to the beneficiary and
bona fide holders of drafts drawn and or documents presented
thereunder, that the provisions for payment, acceptance or negotiation
contained in the credit will be duly fulfilled, provided that all the terms and
conditions of the credit are complied with.
"An irrevocable credit may be advised to a beneficiary through another
bank (the advising bank) without engagement on the part of that bank,
but when an issuing bank authorizes or requests another bank to confirm
its irrevocable credit and the latter does so, such confirmation constitutes
a definite undertaking of the confirming bank . . ."
Article 7.
"Banks must examine all documents with reasonable care to ascertain
that they appear on their face to be in accordance with the terms and
conditions of the credit."
Article 8.
"Payment, acceptance or negotiation against documents which appear on
their face to be in accordance with the terms and conditions of a credit by
a bank authorized to do so, binds the party giving the authorization to
take up documents and reimburse the bank which has effected the
payment, acceptance or negotiation." (Emphasis Supplied)
Under the foregoing provisions of the U.C.P., the bank may only negotiate, accept or pay, if the
documents tendered to it are on their face in accordance with the terms and conditions of the
documentary credit. And since a correspondent bank, like the petitioner, principally deals only
with documents, the absence of any document required in the documentary credit justifies the
refusal by the correspondent bank to negotiate, accept or pay the beneficiary, as it is not its
obligation to look beyond the documents. It merely has to rely on the completeness of the
documents tendered by the beneficiary.
In regard to the ruling of the lower court and affirmed by the Court of Appeals that the petitioner
is not a notifying bank but a confirming bank, we find the same erroneous.
The trial court wrongly mixed up the meaning of an irrevocable credit with that of a confirmed
credit. In its decision, the trial court ruled that the petitioner, in accepting the obligation to notify
the respondent that the irrevocable credit has been transmitted to the petitioner on behalf of the
private respondent, has confirmed the letter.
The trial court appears to have overlooked the fact that an irrevocable credit is not synonymous
with a confirmed credit. These types of letters have different meanings and the legal relations
arising from there varies. A credit may be an irrevocable credit and at the same time a confirmed
credit or vice-versa. cdphil
An irrevocable credit refers to the duration of the letter of credit. What is simply means is that the
issuing bank may not without the consent of the beneficiary (seller) and the applicant (buyer)
revoke his undertaking under the letter. The issuing bank does not reserve the right to revoke
the credit. On the other hand, a confirmed letter of credit pertains to the kind of obligation
assumed by the correspondent bank. In this case, the correspondent bank gives an absolute
assurance to the beneficiary that it will undertake the issuing bank's obligation as its own
according to the terms and conditions of the credit. (Agbayani, Commercial Laws of the
Philippines, Vol. 1, pp. 81-83)
Hence, the mere fact that a letter of credit is irrevocable does not necessarily imply that the
correspondent bank in accepting the instructions of the issuing bank has also confirmed the
letter of credit. Another error which the lower court and the Court of Appeals made was to
confuse the obligation assumed by the petitioner.
In commercial transactions involving letters of credit, the functions assumed by a correspondent
bank are classified according to the obligations taken up by it. The correspondent bank may be
called a notifying bank, a negotiating bank, or a confirming bank.
In case of a notifying bank, the correspondent bank assumes no liability except to notify and or
transmit to the beneficiary the existence of the letter of credit. (Kronman and Co., Inc. v. Public
National Bank of New York, 218 N.Y.S. 616 [1926]; Shaterian, Export-Import Banking, p. 292,
cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76) A negotiating bank, on the
other hand, is a correspondent bank which buys or discounts a draft under the letter of credit. Its
liability is dependent upon the stage of the negotiation. If before negotiation, it has no liability
with respect to the seller but after negotiation, a contractual relationship will then prevail
between the negotiating bank and the seller. (Scanlon v. First National Bank of Mexico, 162 N.E.
667 [1928]; Shaterian, Export-Import Banking, p. 293, cited in Agbayani, Commercial Laws of
the Philippines, Vol. 1, p. 76)
In the case of a confirming bank, the correspondent bank assumes a direct obligation to the
seller and its liability is a primary one as if the correspondent bank itself had issued the letter of
credit. (Shaterian, Export-Import Banking, p. 294, cited in Agbayani Commercial Laws of the
Philippines, Vol. 1, p. 77)
In this case, the letter merely provided that the petitioner "forward the enclosed original credit to
the beneficiary." (Records, Vol. I, p. 11) Considering the aforesaid instruction to the petitioner by
the issuing bank, the Security Pacific National Bank, it is indubitable that the petitioner is only a
notifying bank and not a confirming bank as ruled by the courts below. cdphil
If the petitioner was a confirming bank, then a categorical declaration should have been stated in
the letter of credit that the petitioner is to honor all drafts drawn in conformity with the letter of
credit. What was simply stated therein was the instruction that the petitioner forward the original
letter of credit to the beneficiary.
Since the petitioner was only a notifying bank, its responsibility was solely to notify and or
transmit the documentary of credit to the private respondent and its obligation ends there.
The notifying bank may suggest to the seller its willingness to negotiate, but this fact alone does
not imply that the notifying bank promises to accept the draft drawn under the documentary
credit.
A notifying bank is not a privy to the contract of sale between the buyer and the seller, its
relationship is only with that of the issuing bank and not with the beneficiary to whom he
assumes no liability. It follows therefore that when the petitioner refused to negotiate with the
private respondent, the latter has no cause of action against the petitioner for the enforcement of
his rights under the letter. (See Kronman and Co., Inc. v. Public National Bank of New York,
supra)
In order that the petitioner may be held liable under the letter, there should be proof that the
petitioner confirmed the letter of credit.
The records are, however, bereft of any evidence which will disclose that the petitioner has
confirmed the letter of credit The only evidence in this case, and upon which the private
respondent premised his argument, is the P75,000.00 loan extended by the petitioner to him.
The private respondent relies on this loan to advance his contention that the letter of credit was
confirmed by the petitioner. He claims that the loan was granted by the petitioner to him, "in
anticipation of the presentment of the letter of credit."
The proposition advanced by the private respondent has no basis in fact or law. That the loan
agreement between them be construed as an act of confirmation is rather far-fetched, for it
depends principally on speculative reasoning.
As earlier stated, there must have been an absolute assurance on the part of the petitioner that
it will undertake the issuing bank's obligation as its own. Verily, the loan agreement it entered
into cannot be categorized as an emphatic assurance that it will carry out the issuing bank's
obligation as its own.
The loan agreement is more reasonably classified as an isolated transaction independent of the
documentary credit.
Of course, it may be presumed that the petitioner loaned the money to the private respondent in
anticipation that it would later be paid by the latter upon the receipt of the letter. Yet, we would
have no basis to rule definitively that such "act" should be construed as an act of confirmation.
The private respondent no doubt was in need of money in loading the logs on the ship "Zenlin
Glory" and the only way to satisfy this need was to borrow money from the petitioner which the
latter granted. From these circumstances, a logical conclusion that can be gathered is that the
letter of credit was merely to serve as a collateral.
At the most, when the petitioner extended the loan to the private respondent, it assumed the
character of a negotiating bank. Even then, the petitioner will still not be liable, for a negotiating
bank before negotiation has no contractual relationship with the seller.
The case of Scanlon v. First National Bank (supra) perspicuously explained the relationship
between the seller and the negotiating bank, viz:
"It may buy or refuse to buy as it chooses. Equally, it must be true that it
owes no contractual duty toward the person for whose benefit the letter is
written to discount or purchase any draft drawn against the credit. No
relationship of agent and principal, or of trustee and cestui, between the
receiving bank and the beneficiary of the letter is established." (P. 568)
Whether therefore the petitioner is a notifying bank or a negotiating bank, it cannot be held
liable. Absent any definitive proof that it has confirmed the letter of credit or has actually
negotiated with the private respondent, the refusal by the petitioner to accept the tender of the
private respondent is justified.
In regard to the finding that the petitioner became a "trustee in relation to the plaintiff (private
respondent) as the beneficiary of the letter of credit," the same has no legal basis.
A trust has been defined as the "right, enforceable solely in equity, to the beneficial enjoyment of
property the legal title to which is vested to another." (89 C.J.S. 712)
The concept of a trust presupposes the existence of a specific property which has been
conferred upon the person for the benefit of another. In order therefore for the trust theory of the
private respondent to be sustained, the petitioner should have had in its possession a sum of
money as specific fund advanced to it by the issuing bank and to be held in trust by it in favor of
the private respondent. This does not obtain in this case. LibLex
The mere opening of a letter of credit, it is to be noted, does not involve a specific appropriation
of a sum of money in favor of the beneficiary. It only signifies that the beneficiary may be able to
draw funds upon the letter of credit up to the designated amount specified in the letter. It does
not convey the notion that a particular sum of money has been specifically reserved or has been
held in trust.
What actually transpires in an irrevocable credit is that the correspondent bank does not receive
in advance the sum of money from the buyer or the issuing bank. On the contrary, when the
correspondent bank accepts the tender and pays the amount stated in the letter, the money that
it doles out comes not from any particular fund that has been advanced by the Issuing bank,
rather it gets the money from its own funds and then later seeks reimbursement from the issuing
bank.
Granting that a trust has been created, still, the petitioner may not be considered a trustee. As
the petitioner is only a notifying bank, its acceptance of the instructions of the issuing bank will
not create estoppel on its part resulting in the acceptance of the trust. Precisely, as a notifying
bank, its only obligation is to notify the private respondent of the existence of the letter of credit.
How then can such create estoppel when that is its only duty under the law?
We also find erroneous the statement of the Court of Appeals that the petitioner "acted as a
guarantor of the issuing bank and in effect also of the latter's principal or client, i.e., Hans Axel
Christiansen."
It is a fundamental rule that an irrevocable credit is independent not only of the contract between
the buyer and the seller but also of the credit agreement between the issuing bank and the
buyer. (See Kingdom of Sweden v. New York Trust Co., 96 N.Y.S. 2d 779 [1949]) The
relationship between the buyer (Christiansen) and the issuing bank (Security Pacific National
Bank) is entirely independent from the letter of credit issued by the latter.
The contract between the two has no bearing as to the noncompliance by the buyer with the
agreement between the latter and the seller. Their contract is similar to that of a contract of
services (to open the letter of credit) and not that of agency as was intimated by the Court of
Appeals. The unjustified refusal therefore by Christiansen to issue the certification under the
letter of credit should not likewise be charged to the issuing bank.
As a mere notifying bank, not only does the petitioner not have any contractual relationship with
the buyer, it has also nothing to do with the contract between the issuing bank and the buyer
regarding the issuance of the letter of credit. LibLex
The theory of guarantee relied upon by the Court of Appeals has to necessarily fail. The concept
of guarantee vis-a-vis the concept of an irrevocable credit are inconsistent with each other.
In the first place, the guarantee theory destroys the independence of the bank's responsibility
from the contract upon which it was opened. In the second place, the nature of both contracts is
mutually in conflict with each other. In contracts of guarantee, the guarantor's obligation is
merely collateral and it arises only upon the default of the person primarily liable. On the other
hand, in an irrevocable credit the bank undertakes a primary obligation. (See National Bank of
Eagle Pass, Tex v. American National Bank of San Francisco, 282 F. 73 [1922])
"There is no merit in the respondent's contention that the certification
required in condition No. 4 of the letter of credit was "patently illegal." At
the time the letter of credit was issued there was no Central Bank
regulation prohibiting such a condition in the letter of credit. The letter of
credit (Exh. C) was issued on June 7, 1971, more than two months
before the issuance of the Central Bank Memorandum on August 16,
1971 disallowing such a condition in a letter of credit. In fact the letter of
credit had already expired on July 30, 1971 when the Central Bank
memorandum was issued. In any event, it is difficult to see how such a
condition could be categorized as illegal or unreasonable since all that
plaintiff Villaluz, as seller of the logs, could and should have done was to
refuse to load the logs on the vessel "Zenlin Glory", unless Christiansen
first issued the required certification that the logs had been approved by
him to be in accordance with the terms and conditions of his purchase
order. Apparently, Villaluz was in too much haste to ship his logs without
taking all due precautions to assure that all the terms and conditions of
the letter of credit had been strictly complied with, so that there would be
no hitch in its negotiation." (Rollo, p. 8)

The relationship between the issuing bank and the notifying bank, on the contrary, is more WHEREFORE, the COURT RESOLVED to GRANT the petition and hereby NULLIFIES and
similar to that of an agency and not that of a guarantee. It may be observed that the notifying SETS ASIDE the decision of the Court of Appeals dated June 29, 1990. The amended complaint
bank is merely to follow the instructions of the issuing bank which is to notify or to transmit the in Civil Case No. 15121 is DISMISSED.
letter of credit to the beneficiary. (See Kronman v. Public National Bank of New York, supra). Its
commitment is only to notify the beneficiary. It does not undertake any assurance that the
issuing bank will perform what has been mandated to or expected of it. As an agent of the SO ORDERED.
issuing bank, it has only to follow the instructions of the issuing bank and to it alone is it
obligated and not to buyer with whom it has no contractual relationship.
Feliciano, Bidin and Davide, Jr., JJ., concur.

In fact the notifying bank, even if the seller tenders all the documents required under the letter of
Fernan, C.J., took no part.
credit, may refuse to negotiate or accept the drafts drawn thereunder and it will still not be held
liable for its only engagement is to notify and or transmit to the seller the letter of credit.
||| (Feati Bank & Trust Co. v. Court of Appeals, G.R. No. 94209, [April 30, 1991], 273 PHIL 832-
855)
Finally, even if we assume that the petitioner is a confirming bank, the petitioner cannot be
forced to pay the amount under the letter. As we have previously explained, there was a failure
on the part of the private respondent to comply with the terms of the letter of credit.

The failure by him to submit the certification was fatal to his case. The U.C.P. which is
incorporated in the letter of credit ordains that the bank may only pay the amount specified
under the letter if all the documents tendered are on their face in compliance with the credit. It is
not tasked with the duty of ascertaining the reason or reasons why certain documents have not
been submitted, as it is only concerned with the documents. Thus, whether or not the buyer has
performed his responsibility towards the seller is not the bank's problem.

We are aware of the injustice committed by Christiansen on the private respondent but we are
deciding the controversy on the basis of what the law is, for the law is not meant to favor only
those who have been oppressed, the law is to govern future relations among people as well. Its
commitment is to all and not to a single individual. The faith of the people in our justice system
may be eroded if we are to decide not what the law states but what we believe it should declare.
Dura lex sed lex. llcd

Considering the foregoing, the materiality of ruling upon the validity of the certificate of approval
required of the private respondent to submit under the letter of credit, has become insignificant.

In any event, we affirm the earlier ruling of the Court of Appeals dated April 9, 1987 in regard to
the petition before it for certiorari and prohibition with preliminary injunction, to wit:
 SECOND DIVISION
[G.R. No. 146717. November 22, 2004.]
TRANSFIELD PHILIPPINES, INC., petitioner, vs. LUZON HYDRO
CORPORATION, AUSTRALIA and NEW ZEALAND BANKING GROUP
LIMITED and SECURITY BANK CORPORATION, respondents.
DECISION
TINGA, J p:
Subject of this case is the letter of credit which has evolved as the ubiquitous and most
important device in international trade. A creation of commerce and businessmen, the letter of
credit is also unique in the number of parties involved and its supranational character.
Petitioner has appealed from the Decision 1 of the Court of Appeals in CA-G.R. SP No. 61901
entitled "Transfield Philippines, Inc. v. Hon. Oscar Pimentel, et al.," promulgated on 31 January
2001. 2
On 26 March 1997, petitioner and respondent Luzon Hydro Corporation (hereinafter, LHC)
entered into a Turnkey Contract 3 whereby petitioner, as Turnkey Contractor, undertook to
construct, on a turnkey basis, a seventy (70)-Megawatt hydro-electric power station at the Bakun
River in the provinces of Benguet and Ilocos Sur (hereinafter, the Project). Petitioner was given
the sole responsibility for the design, construction, commissioning, testing and completion of the
Project. 4
The Turnkey Contract provides that: (1) the target completion date of the Project shall be on 1
June 2000, or such later date as may be agreed upon between petitioner and respondent LHC
or otherwise determined in accordance with the Turnkey Contract; and (2) petitioner is entitled to
claim extensions of time (EOT) for reasons enumerated in the Turnkey Contract, among which
are variations, force majeure, and delays caused by LHC itself. 5 Further, in case of dispute, the
parties are bound to settle their differences through mediation, conciliation and such other
means enumerated under Clause 20.3 of the Turnkey Contract. 6
To secure performance of petitioner's obligation on or before the target completion date, or such
time for completion as may be determined by the parties' agreement, petitioner opened in favor
of LHC two (2) standby letters of credit both dated 20 March 2000 (hereinafter referred to as "the
Securities"), to wit: Standby Letter of Credit No. E001126/8400 with the local branch of
respondent Australia and New Zealand Banking Group Limited (ANZ Bank) 7 and Standby
Letter of Credit No. IBDIDSB-00/4 with respondent Security Bank Corporation (SBC) 8 each in
the amount of US$8,988,907.00. 9
In the course of the construction of the project, petitioner sought various EOT to complete the
Project. The extensions were requested allegedly due to several factors which prevented the
completion of the Project on target date, such as force majeure occasioned by typhoon Zeb,
barricades and demonstrations. LHC denied the requests, however. This gave rise to a series of
legal actions between the parties which culminated in the instant petition.
The first of the actions was a Request for Arbitration which LHC filed before the Construction
Industry Arbitration Commission (CIAC) on 1 June 1999. 10 This was followed by another
Request for Arbitration, this time filed by petitioner before the International Chamber of
Commerce (ICC) 11 on 3 November 2000. In both arbitration proceedings, the common issues
presented were: [1] whether typhoon Zeb and any of its associated events constituted force
majeure to justify the extension of time sought by petitioner; and [2] whether LHC had the right
to terminate the Turnkey Contract for failure of petitioner to complete the Project on target date.
CcHDSA
Meanwhile, foreseeing that LHC would call on the Securities pursuant to the pertinent provisions
of the Turnkey Contract, 12 petitioner — in two separate letters 13 both dated 10 August 2000
— advised respondent banks of the arbitration proceedings already pending before the CIAC
and ICC in connection with its alleged default in the performance of its obligations. Asserting that
LHC had no right to call on the Securities until the resolution of disputes before the arbitral
tribunals, petitioner warned respondent banks that any transfer, release, or disposition of the
Securities in favor of LHC or any person claiming under LHC would constrain it to hold
respondent banks liable for liquidated damages.
As petitioner had anticipated, on 27 June 2000, LHC sent notice to petitioner that pursuant to
Clause 8.2 14 of the Turnkey Contract, it failed to comply with its obligation to complete the
Project. Despite the letters of petitioner, however, both banks informed petitioner that they would
pay on the Securities if and when LHC calls on them. 15
LHC asserted that additional extension of time would not be warranted; accordingly it declared
petitioner in default/delay in the performance of its obligations under the Turnkey Contract and
demanded from petitioner the payment of US$75,000.00 for each day of delay beginning 28
June 2000 until actual completion of the Project pursuant to Clause 8.7.1 of the Turnkey
Contract. At the same time, LHC served notice that it would call on the securities for the
payment of liquidated damages for the delay. 16
On 5 November 2000, petitioner as plaintiff filed a Complaint for Injunction, with prayer for
temporary restraining order and writ of preliminary injunction, against herein respondents as
defendants before the Regional Trial Court (RTC) of Makati. 17 Petitioner sought to restrain
respondent LHC from calling on the Securities and respondent banks from transferring, paying
on, or in any manner disposing of the Securities or any renewals or substitutes thereof. The RTC
issued a seventy-two (72)-hour temporary restraining order on the same day. The case was
docketed as Civil Case No. 00-1312 and raffled to Branch 148 of the RTC of Makati.
After appropriate proceedings, the trial court issued an Order on 9 November 2000, extending
the temporary restraining order for a period of seventeen (17) days or until 26 November 2000.
18
The RTC, in its Order 19 dated 24 November 2000, denied petitioner's application for a writ of
preliminary injunction. It ruled that petitioner had no legal right and suffered no irreparable injury
to justify the issuance of the writ. Employing the principle of "independent contract" in letters of
credit, the trial court ruled that LHC should be allowed to draw on the Securities for liquidated
damages. It debunked petitioner's contention that the principle of "independent contract" could
be invoked only by respondent banks since according to it respondent LHC is the ultimate
beneficiary of the Securities. The trial court further ruled that the banks were mere custodians of
the funds and as such they were obligated to transfer the same to the beneficiary for as long as
the latter could submit the required certification of its claims.
Dissatisfied with the trial court's denial of its application for a writ of preliminary injunction,
petitioner elevated the case to the Court of Appeals via a Petition for Certiorari under Rule 65,
with prayer for the issuance of a temporary restraining order and writ of preliminary injunction.
20 Petitioner submitted to the appellate court that LHC's call on the Securities was premature
considering that the issue of its default had not yet been resolved with finality by the CIAC
and/or the ICC. It asserted that until the fact of delay could be established, LHC had no right to
draw on the Securities for liquidated damages.
Refuting petitioner's contentions, LHC claimed that petitioner had no right to restrain its call on
and use of the Securities as payment for liquidated damages. It averred that the Securities are
independent of the main contract between them as shown on the face of the two Standby
Letters of Credit which both provide that the banks have no responsibility to investigate the
authenticity or accuracy of the certificates or the declarant's capacity or entitlement to so certify.
In its Resolution dated 28 November 2000, the Court of Appeals issued a temporary restraining
order, enjoining LHC from calling on the Securities or any renewals or substitutes thereof and
ordering respondent banks to cease and desist from transferring, paying or in any manner
disposing of the Securities.
However, the appellate court failed to act on the application for preliminary injunction until the
temporary restraining order expired on 27 January 2001. Immediately thereafter, representatives
of LHC trooped to ANZ Bank and withdrew the total amount of US$4,950,000.00, thereby
reducing the balance in ANZ Bank to US$1,852,814.00.
On 2 February 2001, the appellate court dismissed the petition for certiorari. The appellate court
expressed conformity with the trial court's decision that LHC could call on the Securities
pursuant to the first principle in credit law that the credit itself is independent of the underlying
transaction and that as long as the beneficiary complied with the credit, it was of no moment that
he had not complied with the underlying contract. Further, the appellate court held that even
assuming that the trial court's denial of petitioner's application for a writ of preliminary injunction
was erroneous, it constituted only an error of judgment which is not correctible by certiorari,
unlike error of jurisdiction.
Undaunted, petitioner filed the instant Petition for Review raising the following issues for
resolution:
WHETHER THE "INDEPENDENCE PRINCIPLE" ON LETTERS OF
CREDIT MAY BE INVOKED BY A BENEFICIARY THEREOF WHERE
THE BENEFICIARY'S CALL THEREON IS WRONGFUL OR
FRAUDULENT.
WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE
SECURITIES BEFORE THE RESOLUTION OF PETITIONER'S AND
LHC'S DISPUTES BY THE APPROPRIATE TRIBUNAL. HAaScT
WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN
RELEASING THE AMOUNTS DUE UNDER THE SECURITIES DESPITE
BEING NOTIFIED THAT LHC'S CALL THEREON IS WRONGFUL.
WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND
IRREPARABLE DAMAGE IN THE EVENT THAT:
A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ
BANK AND SECURITY BANK ARE ALLOWED TO
RELEASE, THE REMAINING BALANCE OF THE
SECURITIES PRIOR TO THE RESOLUTION OF
THE DISPUTES BETWEEN PETITIONER AND
LHC.
B. LHC DOES NOT RETURN THE AMOUNTS IT HAD
WRONGFULLY DRAWN FROM THE SECURITIES.
21
Petitioner contends that the courts below improperly relied on the "independence principle" on
letters of credit when this case falls squarely within the "fraud exception rule." Respondent LHC
deliberately misrepresented the supposed existence of delay despite its knowledge that the
issue was still pending arbitration, petitioner continues.
Petitioner asserts that LHC should be ordered to return the proceeds of the Securities pursuant
to the principle against unjust enrichment and that, under the premises, injunction was the
appropriate remedy obtainable from the competent local courts.
On 25 August 2003, petitioner filed a Supplement to the Petition 22 and Supplemental
Memorandum, 23 alleging that in the course of the proceedings in the ICC Arbitration, a number
of documentary and testimonial evidence came out through the use of different modes of
discovery available in the ICC Arbitration. It contends that after the filing of the petition facts and
admissions were discovered which demonstrate that LHC knowingly misrepresented that
petitioner had incurred delays — notwithstanding its knowledge and admission that delays were
excused under the Turnkey Contract — to be able to draw against the Securities. Reiterating
that fraud constitutes an exception to the independence principle, petitioner urges that this
warrants a ruling from this Court that the call on the Securities was wrongful, as well as contrary
to law and basic principles of equity. It avers that it would suffer grave irreparable damage if
LHC would be allowed to use the proceeds of the Securities and not ordered to return the
amounts it had wrongfully drawn thereon.
In its Manifestationdated 8 September 2003, 24 LHC contends that the supplemental pleadings
filed by petitioner present erroneous and misleading information which would change petitioner's
theory on appeal.
In yet another Manifestation dated 12 April 2004, 25 petitioner alleges that on 18 February 2004,
the ICC handed down its Third Partial Award, declaring that LHC wrongfully drew upon the
Securities and that petitioner was entitled to the return of the sums wrongfully taken by LHC for
liquidated damages.
LHC filed a Counter-Manifestation dated 29 June 2004, 26 stating that petitioner's Manifestation
dated 12 April 2004 enlarges the scope of its Petition for Review of the 31 January 2001
Decision of the Court of Appeals. LHC notes that the Petition for Review essentially dealt only
with the issue of whether injunction could issue to restrain the beneficiary of an irrevocable letter
of credit from drawing thereon. It adds that petitioner has filed two other proceedings, to wit: (1)
ICC Case No. 11264/TE/MW, entitled "Transfield Philippines Inc. v. Luzon Hydro Corporation,"
in which the parties made claims and counterclaims arising from petitioner's
performance/misperformance of its obligations as contractor for LHC; and (2) Civil Case No. 04-
332, entitled "Transfield Philippines, Inc. v. Luzon Hydro Corporation" before Branch 56 of the
RTC of Makati, which is an action to enforce and obtain execution of the ICC's partial award
mentioned in petitioner's Manifestation of 12 April 2004.
In its Comment to petitioner's Motion for Leave to File Addendum to Petitioner's Memorandum,
LHC stresses that the question of whether the funds it drew on the subject letters of credit
should be returned is outside the issue in this appeal. At any rate, LHC adds that the action to
enforce the ICC's partial award is now fully within the Makati RTC's jurisdiction in Civil Case No.
04-332. LHC asserts that petitioner is engaged in forum-shopping by keeping this appeal and at
the same time seeking the suit for enforcement of the arbitral award before the Makati court.
Respondent SBC in its Memorandum, dated 10 March 2003 27 contends that the Court of
Appeals correctly dismissed the petition for certiorari. Invoking the independence principle, SBC
argues that it was under no obligation to look into the validity or accuracy of the certification
submitted by respondent LHC or into the latter's capacity or entitlement to so certify. It adds that
the act sought to be enjoined by petitioner was already fait accompli and the present petition
would no longer serve any remedial purpose.
In a similar fashion, respondent ANZ Bank in its Memorandum dated 13 March 2003 28 posits
that its actions could not be regarded as unjustified in view of the prevailing independence
principle under which it had no obligation to ascertain the truth of LHC's allegations that
petitioner defaulted in its obligations. Moreover, it points out that since the Standby Letter of
Credit No. E001126/8400 had been fully drawn, petitioner's prayer for preliminary injunction had
been rendered moot and academic.
At the core of the present controversy is the applicability of the "independence principle" and
"fraud exception rule" in letters of credit. Thus, a discussion of the nature and use of letters of
credit, also referred to simply as "credits," would provide a better perspective of the case.
The letter of credit evolved as a mercantile specialty, and the only way to understand all its
facets is to recognize that it is an entity unto itself. The relationship between the beneficiary and
the issuer of a letter of credit is not strictly contractual, because both privity and a meeting of the
minds are lacking, yet strict compliance with its terms is an enforceable right. Nor is it a third-
party beneficiary contract, because the issuer must honor drafts drawn against a letter
regardless of problems subsequently arising in the underlying contract. Since the bank's
customer cannot draw on the letter, it does not function as an assignment by the customer to the
beneficiary. Nor, if properly used, is it a contract of suretyship or guarantee, because it entails a
primary liability following a default. Finally, it is not in itself a negotiable instrument, because it is
not payable to order or bearer and is generally conditional, yet the draft presented under it is
often negotiable. 29
In commercial transactions, a letter of credit is a financial device developed by merchants as a
convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly
irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a
buyer, who wants to have control of the goods before paying. 30 The use of credits in
commercial transactions serves to reduce the risk of nonpayment of the purchase price under
the contract for the sale of goods. However, credits are also used in non-sale settings where
they serve to reduce the risk of nonperformance. Generally, credits in the non-sale settings have
come to be known as standby credits. 31
There are three significant differences between commercial and standby credits. First,
commercial credits involve the payment of money under a contract of sale. Such credits become
payable upon the presentation by the seller-beneficiary of documents that show he has taken
affirmative steps to comply with the sales agreement. In the standby type, the credit is payable
upon certification of a party's nonperformance of the agreement. The documents that
accompany the beneficiary's draft tend to show that the applicant has not performed. The
beneficiary of a commercial credit must demonstrate by documents that he has performed his
contract. The beneficiary of the standby credit must certify that his obligor has not performed the
contract. 32
By definition, a letter of credit is a written instrument whereby the writer requests or authorizes
the addressee to pay money or deliver goods to a third person and assumes responsibility for
payment of debt therefor to the addressee. 33 A letter of credit, however, changes its nature as
different transactions occur and if carried through to completion ends up as a binding contract
between the issuing and honoring banks without any regard or relation to the underlying contract
or disputes between the parties thereto. 34
Since letters of credit have gained general acceptability in international trade transactions, the
ICC has published from time to time updates on the Uniform Customs and Practice (UCP) for
Documentary Credits to standardize practices in the letter of credit area. The vast majority of
letters of credit incorporate the UCP. 35 First published in 1933, the UCP for Documentary
Credits has undergone several revisions, the latest of which was in 1993. 36
In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc., 37 this Court ruled that the
observance of the UCP is justified by Article 2 of the Code of Commerce which provides that in
the absence of any particular provision in the Code of Commerce, commercial transactions shall
be governed by usages and customs generally observed. More recently, in Bank of America, NT
& SA v. Court of Appeals, 38 this Court ruled that there being no specific provisions which
govern the legal complexities arising from transactions involving letters of credit, not only
between or among banks themselves but also between banks and the seller or the buyer, as the
case may be, the applicability of the UCP is undeniable. IaSAHC
Article 3 of the UCP provides that credits, by their nature, are separate transactions from the
sales or other contract(s) on which they may be based and banks are in no way concerned with
or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in
the credit. Consequently, the undertaking of a bank to pay, accept and pay draft(s) or negotiate
and/or fulfill any other obligation under the credit is not subject to claims or defenses by the
applicant resulting from his relationships with the issuing bank or the beneficiary. A beneficiary
can in no case avail himself of the contractual relationships existing between the banks or
between the applicant and the issuing bank.
Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once
the draft and the required documents are presented to it. The so-called "independence principle"
assures the seller or the beneficiary of prompt payment independent of any breach of the main
contract and precludes the issuing bank from determining whether the main contract is actually
accomplished or not. Under this principle, banks assume no liability or responsibility for the form,
sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the
general and/or particular conditions stipulated in the documents or superimposed thereon, nor
do they assume any liability or responsibility for the description, quantity, weight, quality,
condition, packing, delivery, value or existence of the goods represented by any documents, or
for the good faith or acts and/or omissions, solvency, performance or standing of the consignor,
the carriers, or the insurers of the goods, or any other person whomsoever. 39
The independent nature of the letter of credit may be: (a) independence in toto where the credit
is independent from the justification aspect and is a separate obligation from the underlying
agreement like for instance a typical standby; or (b) independence may be only as to the
justification aspect like in a commercial letter of credit or repayment standby, which is identical
with the same obligations under the underlying agreement. In both cases the payment may be
enjoined if in the light of the purpose of the credit the payment of the credit would constitute
fraudulent abuse of the credit. 40
Can the beneficiary invoke the independence principle? Because parties and courts should not confuse the different functions of
the surety contract on the one hand and the standby credit on the other,
the distinction between surety contracts and credits merits some
Petitioner insists that the independence principle does not apply to the instant case and
reflection. The two commercial devices share a common purpose. Both
assuming it is so, it is a defense available only to respondent banks. LHC, on the other hand,
ensure against the obligor's nonperformance. They function, however, in
contends that it would be contrary to common sense to deny the benefit of an independent
distinctly different ways.
contract to the very party for whom the benefit is intended. As beneficiary of the letter of credit,
LHC asserts it is entitled to invoke the principle.
Traditionally, upon the obligor's default, the surety undertakes to
complete the obligor's performance, usually by hiring someone to
As discussed above, in a letter of credit transaction, such as in this case, where the credit is
complete that performance. Surety contracts, then, often involve costs of
stipulated as irrevocable, there is a definite undertaking by the issuing bank to pay the
determining whether the obligor defaulted (a matter over which the surety
beneficiary provided that the stipulated documents are presented and the conditions of the credit
and the beneficiary often litigate) plus the cost of performance. The
are complied with. 41 Precisely, the independence principle liberates the issuing bank from the
benefit of the surety contract to the beneficiary is obvious. He knows that
duty of ascertaining compliance by the parties in the main contract. As the principle's
the surety, often an insurance company, is a strong financial institution
nomenclature clearly suggests, the obligation under the letter of credit is independent of the
that will perform if the obligor does not. The beneficiary also should
related and originating contract. In brief, the letter of credit is separate and distinct from the
understand that such performance must await the sometimes lengthy and
underlying transaction.
costly determination that the obligor has defaulted. In addition, the
surety's performance takes time.
Given the nature of letters of credit, petitioner's argument — that it is only the issuing bank that
may invoke the independence principle on letters of credit — does not impress this Court. To
The standby credit has different expectations. He reasonably expects that
say that the independence principle may only be invoked by the issuing banks would render
he will receive cash in the event of nonperformance, that he will receive it
nugatory the purpose for which the letters of credit are used in commercial transactions. As it is,
promptly, and that he will receive it before any litigation with the obligor
the independence doctrine works to the benefit of both the issuing bank and the beneficiary.
(the applicant) over the nature of the applicant's performance takes place.
The standby credit has this opposite effect of the surety contract: it
Letters of credit are employed by the parties desiring to enter into commercial transactions, not reverses the financial burden of parties during litigation.
for the benefit of the issuing bank but mainly for the benefit of the parties to the original
transactions. With the letter of credit from the issuing bank, the party who applied for and
In the surety contract setting, there is no duty to indemnify the beneficiary
obtained it may confidently present the letter of credit to the beneficiary as a security to convince
until the beneficiary establishes the fact of the obligor's performance. The
the beneficiary to enter into the business transaction. On the other hand, the other party to the
beneficiary may have to establish that fact in litigation. During the
business transaction, i.e., the beneficiary of the letter of credit, can be rest assured of being
litigation, the surety holds the money and the beneficiary bears most of
empowered to call on the letter of credit as a security in case the commercial transaction does
the cost of delay in performance.
not push through, or the applicant fails to perform his part of the transaction. It is for this reason
that the party who is entitled to the proceeds of the letter of credit is appropriately called
"beneficiary." In the standby credit case, however, the beneficiary avoids that litigation
burden and receives his money promptly upon presentation of the
required documents. It may be that the applicant has, in fact, performed
Petitioner's argument that any dispute must first be resolved by the parties, whether through
and that the beneficiary's presentation of those documents is not rightful.
negotiations or arbitration, before the beneficiary is entitled to call on the letter of credit in
In that case, the applicant may sue the beneficiary in tort, in contract, or
essence would convert the letter of credit into a mere guarantee. Jurisprudence has laid down a
in breach of warranty; but, during the litigation to determine whether the
clear distinction between a letter of credit and a guarantee in that the settlement of a dispute
applicant has in fact breached the obligation to perform, the beneficiary,
between the parties is not a pre-requisite for the release of funds under a letter of credit. In other
not the applicant, holds the money. Parties that use a standby credit and
words, the argument is incompatible with the very nature of the letter of credit. If a letter of credit
courts construing such a credit should understand this allocation of
is drawable only after settlement of the dispute on the contract entered into by the applicant and
burdens. There is a tendency in some quarters to overlook this distinction
the beneficiary, there would be no practical and beneficial use for letters of credit in commercial
between surety contracts and standby credits and to reallocate burdens
transactions.
by permitting the obligor or the issuer to litigate the performance question
before payment to the beneficiary. 42
Professor John F. Dolan, the noted authority on letters of credit, sheds more light on the issue:
While it is the bank which is bound to honor the credit, it is the beneficiary who has the right to
The standby credit is an attractive commercial device for many of the ask the bank to honor the credit by allowing him to draw thereon. The situation itself
same reasons that commercial credits are attractive. Essentially, these emasculates petitioner's posture that LHC cannot invoke the independence principle and
credits are inexpensive and efficient. Often they replace surety contracts, highlights its puerility, more so in this case where the banks concerned were impleaded as
which tend to generate higher costs than credits do and are usually parties by petitioner itself.
triggered by a factual determination rather than by the examination of
documents. HTCISE
Respondent banks had squarely raised the independence principle to justify their releases of the
amounts due under the Securities. Owing to the nature and purpose of the standby letters of
credit, this Court rules that the respondent banks were left with little or no alternative but to
honor the credit and both of them in fact submitted that it was "ministerial" for them to honor the
call for payment. 43
Furthermore, LHC has a right rooted in the Contract to call on the Securities. The relevant
provisions of the Contract read, thus:
4.2.1. In order to secure the performance of its obligations under this
Contract, the Contractor at its cost shall on the Commencement Date
provide security to the Employer in the form of two irrevocable and
confirmed standby letters of credit (the "Securities"), each in the amount
of US$8,988,907, issued and confirmed by banks or financial institutions
acceptable to the Employer. Each of the Securities must be in form and
substance acceptable to the Employer and may be provided on an
annually renewable basis. 44
8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor
shall pay to the Employer by way of liquidated damages ("Liquidated
Damages for Delay") the amount of US$75,000 for each and every day
or part of a day that shall elapse between the Target Completion Date
and the Completion Date, provided that Liquidated Damages for Delay
payable by the Contractor shall in the aggregate not exceed 20% of the
Contract Price. The Contractor shall pay Liquidated Damages for Delay
for each day of the delay on the following day without need of demand
from the Employer.
8.7.2 The Employer may, without prejudice to any other method of
recovery, deduct the amount of such damages from any monies due, or
to become due to the Contractor and/or by drawing on the Security." 45
A contract once perfected, binds the parties not only to the fulfillment of what has been
expressly stipulated but also to all the consequences which according to their nature, may be in
keeping with good faith, usage, and law. 46 A careful perusal of the Turnkey Contract reveals
the intention of the parties to make the Securities answerable for the liquidated damages
occasioned by any delay on the part of petitioner. The call upon the Securities, while not an
exclusive remedy on the part of LHC, is certainly an alternative recourse available to it upon the
happening of the contingency for which the Securities have been proffered. Thus, even without
the use of the "independence principle," the Turnkey Contract itself bestows upon LHC the right
to call on the Securities in the event of default.
Next, petitioner invokes the "fraud exception" principle. It avers that LHC's call on the Securities
is wrongful because it fraudulently misrepresented to ANZ Bank and SBC that there is already a
breach in the Turnkey Contract knowing fully well that this is yet to be determined by the arbitral
tribunals. It asserts that the "fraud exception" exists when the beneficiary, for the purpose of
drawing on the credit, fraudulently presents to the confirming bank, documents that contain,
expressly or by implication, material representations of fact that to his knowledge are untrue. In
such a situation, petitioner insists, injunction is recognized as a remedy available to it. ICTHDE
Citing Dolan's treatise on letters of credit, petitioner argues that the independence principle is
not without limits and it is important to fashion those limits in light of the principle's purpose,
which is to serve the commercial function of the credit. If it does not serve those functions,
application of the principle is not warranted, and the commonlaw principles of contract should
apply.
It is worthy of note that the propriety of LHC's call on the Securities is largely intertwined with the
fact of default which is the self-same issue pending resolution before the arbitral tribunals. To be
able to declare the call on the Securities wrongful or fraudulent, it is imperative to resolve,
among others, whether petitioner was in fact guilty of delay in the performance of its obligation.
Unfortunately for petitioner, this Court is not called upon to rule upon the issue of default — such
issue having been submitted by the parties to the jurisdiction of the arbitral tribunals pursuant to
the terms embodied in their agreement. 47
Would injunction then be the proper remedy to restrain the alleged wrongful draws on the
Securities?
Most writers agree that fraud is an exception to the independence principle. Professor Dolan
opines that the untruthfulness of a certificate accompanying a demand for payment under a
standby credit may qualify as fraud sufficient to support an injunction against payment. 48 The
remedy for fraudulent abuse is an injunction. However, injunction should not be granted unless:
(a) there is clear proof of fraud; (b) the fraud constitutes fraudulent abuse of the independent
purpose of the letter of credit and not only fraud under the main agreement; and (c) irreparable
injury might follow if injunction is not granted or the recovery of damages would be seriously
damaged. 49
In its complaint for injunction before the trial court, petitioner alleged that it is entitled to a total
extension of two hundred fifty-three (253) days which would move the target completion date. It
argued that if its claims for extension would be found meritorious by the ICC, then LHC would
not be entitled to any liquidated damages. 50
Generally, injunction is a preservative remedy for the protection of one's substantive right or
interest; it is not a cause of action in itself but merely a provisional remedy, an adjunct to a main
suit. The issuance of the writ of preliminary injunction as an ancillary or preventive remedy to
secure the rights of a party in a pending case is entirely within the discretion of the court taking
cognizance of the case, the only limitation being that this discretion should be exercised based
upon the grounds and in the manner provided by law. 51
Before a writ of preliminary injunction may be issued, there must be a clear showing by the
complaint that there exists a right to be protected and that the acts against which the writ is to be
directed are violative of the said right. 52 It must be shown that the invasion of the right sought
to be protected is material and substantial, that the right of complainant is clear and
unmistakable and that there is an urgent and paramount necessity for the writ to prevent serious
damage. 53 Moreover, an injunctive remedy may only be resorted to when there is a pressing
necessity to avoid injurious consequences which cannot be remedied under any standard
compensation. 54
In the instant case, petitioner failed to show that it has a clear and unmistakable right to restrain
LHC's call on the Securities which would justify the issuance of preliminary injunction. By
petitioner's own admission, the right of LHC to call on the Securities was contractually rooted
and subject to the express stipulations in the Turnkey Contract. 55 Indeed, the Turnkey Contract
is plain and unequivocal in that it conferred upon LHC the right to draw upon the Securities in
case of default, as provided in Clause 4.2.5, in relation to Clause 8.7.2, thus:
4.2.5 The Employer shall give the Contractor seven days' notice of calling
upon any of the Securities, stating the nature of the default for which the
claim on any of the Securities is to be made, provided that no notice will
be required if the Employer calls upon any of the Securities for the
payment of Liquidated Damages for Delay or for failure by the Contractor
to renew or extend the Securities within 14 days of their expiration in
accordance with Clause 4.2.2. 56
 8.7.2 The Employer may, without prejudice to any other method of
recovery, deduct the amount of such damages from any monies due, or
to become due, to the Contractor and/or by drawing on the Security. 57
The pendency of the arbitration proceedings would not per se make LHC's draws on the
Securities wrongful or fraudulent for there was nothing in the Contract which would indicate that
the parties intended that all disputes regarding delay should first be settled through arbitration
before LHC would be allowed to call upon the Securities. It is therefore premature and absurd to
conclude that the draws on the Securities were outright fraudulent given the fact that the ICC
and CIAC have not ruled with finality on the existence of default.
Nowhere in its complaint before the trial court or in its pleadings filed before the appellate court,
did petitioner invoke the fraud exception rule as a ground to justify the issuance of an injunction.
58 What petitioner did assert before the courts below was the fact that LHC's draws on the
Securities would be premature and without basis in view of the pending disputes between them.
Petitioner should not be allowed in this instance to bring into play the fraud exception rule to
sustain its claim for the issuance of an injunctive relief. Matters, theories or arguments not
brought out in the proceedings below will ordinarily not be considered by a reviewing court as
they cannot be raised for the first time on appeal. 59 The lower courts could thus not be faulted
for not applying the fraud exception rule not only because the existence of fraud was
fundamentally interwoven with the issue of default still pending before the arbitral tribunals, but
more so, because petitioner never raised it as an issue in its pleadings filed in the courts below.
At any rate, petitioner utterly failed to show that it had a clear and unmistakable right to prevent
LHC's call upon the Securities.
Of course, prudence should have impelled LHC to await resolution of the pending issues before
the arbitral tribunals prior to taking action to enforce the Securities. But, as earlier stated, the
Turnkey Contract did not require LHC to do so and, therefore, it was merely enforcing its rights
in accordance with the tenor thereof. Obligations arising from contracts have the force of law
between the contracting parties and should be complied with in good faith. 60 More importantly,
pursuant to the principle of autonomy of contracts embodied in Article 1306 of the Civil Code, 61
petitioner could have incorporated in its Contract with LHC, a proviso that only the final
determination by the arbitral tribunals that default had occurred would justify the enforcement of
the Securities. However, the fact is petitioner did not do so; hence, it would have to live with its
inaction.
With respect to the issue of whether the respondent banks were justified in releasing the
amounts due under the Securities, this Court reiterates that pursuant to the independence
principle the banks were under no obligation to determine the veracity of LHC's certification that
default has occurred. Neither were they bound by petitioner's declaration that LHC's call thereon
was wrongful. To repeat, respondent banks' undertaking was simply to pay once the required
documents are presented by the beneficiary.
At any rate, should petitioner finally prove in the pending arbitration proceedings that LHC's
draws upon the Securities were wrongful due to the non-existence of the fact of default, its right
to seek indemnification for damages it suffered would not normally be foreclosed pursuant to
general principles of law.
Moreover, in a Manifestation, 62 dated 30 March 2001, LHC informed this Court that the subject
letters of credit had been fully drawn. This fact alone would have been sufficient reason to
dismiss the instant petition. HAICTD
Settled is the rule that injunction would not lie where the acts sought to be enjoined have already
become fait accompli or an accomplished or consummated act. 63 In Ticzon v. Video Post
Manila, Inc. 64 this Court ruled that where the period within which the former employees were
prohibited from engaging in or working for an enterprise that competed with their former
employer — the very purpose of the preliminary injunction — has expired, any declaration
upholding the propriety of the writ would be entirely useless as there would be no actual case or
controversy between the parties insofar as the preliminary injunction is concerned.
In the instant case, the consummation of the act sought to be restrained had rendered the
instant petition moot — for any declaration by this Court as to propriety or impropriety of the non-
issuance of injunctive relief could have no practical effect on the existing controversy. 65 The
other issues raised by petitioner particularly with respect to its right to recover the amounts
wrongfully drawn on the Securities, according to it, could properly be threshed out in a separate
proceeding.
One final point. LHC has charged petitioner of forum-shopping. It raised the charge on two
occasions. First, in its Counter-Manifestation dated 29 June 2004 66 LHC alleges that petitioner
presented before this Court the same claim for money which it has filed in two other
proceedings, to wit: ICC Case No. 11264/TE/MW and Civil Case No. 04-332 before the RTC of
Makati. LHC argues that petitioner's acts constitutes forum-shopping which should be punished
by the dismissal of the claim in both forums. Second, in its Comment to Petitioner's Motion for
Leave to File Addendum to Petitioner's Memorandum dated 8 October 2004, LHC alleges that
by maintaining the present appeal and at the same time pursuing Civil Case No. 04-332 —
wherein petitioner pressed for judgment on the issue of whether the funds LHC drew on the
Securities should be returned — petitioner resorted to forum-shopping. In both instances,
however, petitioner has apparently opted not to respond to the charge.
Forum-shopping is a very serious charge. It exists when a party repetitively avails of several
judicial remedies in different courts, simultaneously or successively, all substantially founded on
the same transactions and the same essential facts and circumstances, and all raising
substantially the same issues either pending in, or already resolved adversely, by some other
court. 67 It may also consist in the act of a party against whom an adverse judgment has been
rendered in one forum, of seeking another and possibly favorable opinion in another forum other
than by appeal or special civil action of certiorari, or the institution of two or more actions or
proceedings grounded on the same cause on the supposition that one or the other court might
look with favor upon the other party. 68 To determine whether a party violated the rule against
forum-shopping, the test applied is whether the elements of litis pendentia are present or
whether a final judgment in one case will amount to res judicata in another. 69 Forum-shopping
constitutes improper conduct and may be punished with summary dismissal of the multiple
petitions and direct contempt of court. 70
Considering the seriousness of the charge of forum-shopping and the severity of the sanctions
for its violation, the Court will refrain from making any definitive ruling on this issue until after
petitioner has been given ample opportunity to respond to the charge.
WHEREFORE, the instant petition is DENIED, with costs against petitioner.
Petitioner is hereby required to answer the charge of forum-shopping within fifteen (15) days
from notice.
SO ORDERED.
Puno, Austria-Martinez, Callejo, Sr. and Chico-Nazario, JJ ., concur.
||| (Transfield Philippines, Inc. v. Luzon Hydro Corp., G.R. No. 146717, [November 22, 2004],
485 PHIL 699-731)
 FIRST DIVISION
[G.R. No. 160732. June 21, 2004.]
METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM,
petitioner, vs. HON. REYNALDO B. DAWAY, in his capacity as
Presiding Judge of the Regional Trial Court of Quezon City, Branch
90 and MAYNILAD WATER SERVICES, INC., respondents.
DECISION
AZCUNA, J p:
On November 17, 2003, the Regional Trial Court (RTC) of Quezon City, Branch 90, made a
determination that the Petition for Rehabilitation with Prayer for Suspension of Actions and
Proceedings filed by Maynilad Water Services, Inc. (Maynilad) conformed substantially to the
provisions of Sec. 2, Rule 4 of the Interim Rules of Procedure on Corporate Rehabilitation
(Interim Rules). It forthwith issued a Stay Order 1 which states, in part, that the court was
thereby:
xxx xxx xxx
2. Staying enforcement of all claims, whether for money or otherwise and
whether such enforcement is by court action or otherwise,
against the petitioner, its guarantors and sureties not solidarily
liable with the petitioner;
3. Prohibiting the petitioner from selling, encumbering, transferring, or
disposing in any manner any of its properties except in the
ordinary course of business;
4. Prohibiting the petitioner from making any payment of its liabilities,
outstanding as at the date of the filing of the petition;
xxx xxx xxx
Subsequently, on November 27, 2003, public respondent, acting on two Urgent Ex Parte
motions 2 filed by respondent Maynilad, issued the herein questioned Order 3 which stated that
it thereby:
"1. DECLARES that the act of MWSS in commencing on November 24,
2003 the process for the payment by the banks of US$98 million out of
the US$120 million standby letter of credit so the banks have to make
good such call/drawing of payment of US$98 million by MWSS not later
than November 27, 2003 at 10:00 P.M. or any similar act for that matter,
is violative of the above-quoted sub-paragraph 2.) of the dispositive
portion of this Court's Stay Order dated November 17, 2003.
2. ORDERS MWSS through its officers/officials to withdraw under pain of
contempt the written certification/notice of draw to Citicorp International
Limited dated November 24, 2003 and DECLARES void any payment by
the banks to MWSS in the event such written certification/notice of draw
is not withdrawn by MWSS and/or MWSS receives payment by virtue of
the aforesaid standby letter of credit."
Aggrieved by this Order, petitioner Manila Waterworks & Sewerage System (MWSS) filed this
petition for review by way of certiorari under Rule 65 of the Rules of Court questioning the
legality of said order as having been issued without or in excess of the lower court's jurisdiction
or that the court a quo acted with grave abuse of discretion amounting to lack or excess of
jurisdiction. 4
Antecedents of the Case
On February 21, 1997, MWSS granted Maynilad under a Concession Agreement a twenty-year
period to manage, operate, repair, decommission and refurbish the existing MWSS water
delivery and sewerage services in the West Zone Service Area, for which Maynilad undertook to
pay the corresponding concession fees on the dates agreed upon in said agreement 5 which,
among other things, consisted of payments of petitioner's mostly foreign loans.
To secure the concessionaire's performance of its obligations under the Concession Agreement,
Maynilad was required under Section 6.9 of said contract to put up a bond, bank guarantee or
other security acceptable to MWSS.
In compliance with this requirement, Maynilad arranged on July 14, 2000 for a three-year facility
with a number of foreign banks, led by Citicorp International Limited, for the issuance of an
Irrevocable Standby Letter of Credit 6 in the amount of US$120,000,000 in favor of MWSS for
the full and prompt performance of Maynilad's obligations to MWSS as aforestated.
Sometime in September 2000, respondent Maynilad requested MWSS for a mechanism by
which it hoped to recover the losses it had allegedly incurred and would be incurring as a result
of the depreciation of the Philippine Peso against the US Dollar. Failing to get what it desired,
Maynilad issued a Force Majeure Notice on March 8, 2001 and unilaterally suspended the
payment of the concession fees. In an effort to salvage the Concession Agreement, the parties
entered into a Memorandum of Agreement (MOA) 7 on June 8, 2001 wherein Maynilad was
allowed to recover foreign exchange losses under a formula agreed upon between them.
Sometime in August 2001 Maynilad again filed another Force Majeure Notice and, since MWSS
could not agree with the terms of said Notice, the matter was referred on August 30, 2001 to the
Appeals Panel for arbitration. This resulted in the parties agreeing to resolve the issues through
an amendment of the Concession Agreement on October 5, 2001, known as Amendment No. 1,
8 which was based on the terms set down in MWSS Board of Trustees Resolution No. 457-
2001, as amended by MWSS Board of Trustees Resolution No. 487-2001, 9 which provided
inter alia for a formula that would allow Maynilad to recover foreign exchange losses it had
incurred or would incur under the terms of the Concession Agreement.
As part of this agreement, Maynilad committed, among other things, to:
 a) infuse the amount of UD$80.0 million as additional funding support In support of the first issue, petitioner maintains that as a matter of law, the US$120 Million
from its stockholders; Standby Letter of Credit and Performance Bond are not property of the estate of the debtor
Maynilad and, therefore, not subject to the in rem rehabilitation jurisdiction of the trial court.
b) resume payment of the concession fees; and
Petitioner argues that a call made on the Standby Letter of Credit does not involve any asset of
Maynilad but only assets of the banks. Furthermore, a call on the Standby Letter of Credit
c) mutually seek the dismissal of the cases pending before the Court of
cannot also be considered a "claim" falling under the purview of the stay order as alleged by
Appeals and with Minor Dispute Appeals Panel.
respondent as it is not directed against the assets of respondent Maynilad.

However, on November 5, 2002, Maynilad served upon MWSS a Notice of Event of Termination,
Petitioner concludes that the public respondent erred in declaring and holding that the
claiming that MWSS failed to comply with its obligations under the Concession Agreement and
commencement of the process for the payment of US$98 million is a violation of the order
Amendment No. 1 regarding the adjustment mechanism that would cover Maynilad's foreign
issued on November 17, 2003.
exchange losses. On December 9, 2002, Maynilad filed a Notice of Early Termination of the
concession, which was challenged by MWSS. This matter was eventually brought before the
Appeals Panel on January 7, 2003 by MWSS. 10 On November 7, 2003, the Appeals Panel Respondent Maynilad's Case
ruled that there was no Event of Termination as defined under Art. 10.2 (ii) or 10.3 (iii) of the
Concession Agreement and that, therefore, Maynilad should pay the concession fees that had
Respondent Maynilad seeks to refute this argument by alleging that:
fallen due.

a) the order objected to was strictly and precisely worded and issued after carefully
The award of the Appeals Panel became final on November 22, 2003. MWSS, thereafter,
considering/evaluating the import of the arguments and documents referred to by Maynilad,
submitted a written notice 11 on November 24, 2003, to Citicorp International Limited, as agent
MWSS and/or creditors Chinatrust Commercial Bank and Suez in relation to admissions,
for the participating banks, that by virtue of Maynilad's failure to perform its obligations under the
pleadings and/or pertinent records 13 and that public respondent had the authority to issue the
Concession Agreement, it was drawing on the Irrevocable Standby Letter of Credit and thereby
same;
demanded payment in the amount of US$98,923,640.15.

b) public respondent never considered nor held that the Performance bond or assets of the
Prior to this, however, Maynilad had filed on November 13, 2003, a petition for rehabilitation
issuing banks are part or property of the estate of respondent Maynilad subject to rehabilitation
before the court a quo which resulted in the issuance of the Stay Order of November 17, 2003
and which respondent Maynilad has not and has never claimed to be; 14
and the disputed Order of November 27, 2003. 12

Petitioner's Case
Petitioner hereby raises the following issues:
1. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR
AND/OR ACT PATENTLY WITHOUT JURISDICTION OR IN
EXCESS OF JURISDICTION OR WITH GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION IN CONSIDERING THE PERFORMANCE
BOND OR ASSETS OF THE ISSUING BANKS AS PART OR
PROPERTY OF THE ESTATE OF THE PRIVATE
RESPONDENT MAYNILAD SUBJECT TO REHABILITATION.
c) what is relevant is not whether the performance bond or assets of the issuing banks are part
of the estate of respondent Maynilad but whether the act of petitioner in commencing the
process for the payment by the banks of US$98 million out of the US$120 million performance
bond is covered and/or prohibited under sub-paragraphs 2.) and 4.) of the stay order dated
November 17, 2003; HATICc
d) the jurisdiction of public respondent extends not only to the assets of respondent Maynilad but
also over persons and assets of "all those affected by the proceedings . . . upon publication of
the notice of commencement; 15 " and
e) the obligations under the Standby Letter of Credit are not solidary and are not exempt from
the coverage of the stay order.

2. DID THE HONORABLE PRESIDING JUDGE ACT WITH LACK OR
EXCESS OF JURISDICTION OR COMMIT A GRAVE ERROR
OF LAW IN HOLDING THAT THE PERFORMANCE BOND
OBLIGATIONS OF THE BANKS WERE NOT SOLIDARY IN
NATURE.
3. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR IN
ALLOWING MAYNILAD TO IN EFFECT SEEK A REVIEW OR
APPEAL OF THE FINAL AND BINDING DECISION OF THE
APPEALS PANEL.
Our Ruling
We will discuss the first two issues raised by petitioner as these are interrelated and make up
the main issue of the petition before us which is, did the rehabilitation court sitting as such, act in
excess of its authority or jurisdiction when it enjoined herein petitioner from seeking the payment
of the concession fees from the banks that issued the Irrevocable Standby Letter of Credit in its
favor and for the account of respondent Maynilad?
The public respondent relied on Sec. 1, Rule 3 of the Interim Rules on Corporate Rehabilitation
to support its jurisdiction over the Irrevocable Standby Letter of Credit and the banks that issued
it. The section reads in part "that jurisdiction over those affected by the proceedings is
considered acquired upon the publication of the notice of commencement of proceedings in a
newspaper of general circulation" and goes further to define rehabilitation as an in rem
proceeding. This provision is a logical consequence of the in rem nature of the proceedings,
where jurisdiction is acquired by publication and where it is necessary that the assets of the
debtor come within the court's jurisdiction to secure the same for the benefit of creditors. The
reference to "all those affected by the proceedings" covers creditors or such other persons or
entities holding assets belonging to the debtor under rehabilitation which should be reflected in
its audited financial statements. The banks do not hold any assets of respondent Maynilad that
would be material to the rehabilitation proceedings nor is Maynilad liable to the banks at this
point.
Respondent Maynilad's Financial Statement as of December 31, 2001 and 2002 do not show
the Irrevocable Standby Letter of Credit as part of its assets or liabilities, and by respondent
Maynilad's own admission it is not. In issuing the clarificatory order of November 27, 2003,
enjoining petitioner from claiming from an asset that did not belong to the debtor and over which
it did not acquire jurisdiction, the rehabilitation court acted in excess of its jurisdiction.
Respondent Maynilad insists, however, that it is Sec. 6(b), Rule 4 of the Interim Rules that
supports its claim that the commencement of the process to draw on the Standby Letter of
Credit is an enforcement of claim prohibited by and under the Interim Rules and the order of
public respondent.
Respondent Maynilad would persuade us that the above provision justifies a leap to the
conclusion that such an enforcement is prohibited by said section because it is a "claim against
the debtor, its guarantors and sureties not solidarily liable with the debtor" and that there is
nothing in the Standby Letter of Credit nor in law nor in the nature of the obligation that would
show or require the obligation of the banks to be solidary with the respondent Maynilad.
We disagree.
First, the claim is not one against the debtor but against an entity that respondent Maynilad has
procured to answer for its non-performance of certain terms and conditions of the Concession
Agreement, particularly the payment of concession fees.
Secondly, Sec. 6(b) of Rule 4 of the Interim Rules does not enjoin the enforcement of all claims
against guarantors and sureties, but only those claims against guarantors and sureties who are
not solidarily liable with the debtor. Respondent Maynilad's claim that the banks are not solidarily
liable with the debtor does not find support in jurisprudence.
We held in Feati Bank & Trust Company v. Court of Appeals 16 that the concept of guarantee
vis-à-vis the concept of an irrevocable letter of credit are inconsistent with each other. The
guarantee theory destroys the independence of the bank's responsibility from the contract upon
which it was opened and the nature of both contracts is mutually in conflict with each other. In
contracts of guarantee, the guarantor's obligation is merely collateral and it arises only upon the
default of the person primarily liable. On the other hand, in an irrevocable letter of credit, the
bank undertakes a primary obligation. We have also defined a letter of credit as an engagement
by a bank or other person made at the request of a customer that the issuer shall honor drafts or
other demands of payment upon compliance with the conditions specified in the credit. 17
Letters of credit were developed for the purpose of insuring to a seller payment of a definite
amount upon the presentation of documents 18 and is thus a commitment by the issuer that the
party in whose favor it is issued and who can collect upon it will have his credit against the
applicant of the letter, duly paid in the amount specified in the letter. 19 They are in effect
absolute undertakings to pay the money advanced or the amount for which credit is given on the
faith of the instrument. They are primary obligations and not accessory contracts and while they
are security arrangements, they are not converted thereby into contracts of guaranty. 20 What
distinguishes letters of credit from other accessory contracts, is the engagement of the issuing
bank to pay the seller once the draft and other required shipping documents are presented to it.
21 They are definite undertakings to pay at sight once the documents stipulated therein are
presented.
Letters of Credits have long been and are still governed by the provisions of the Uniform
Customs and Practice for Documentary Credits of the International Chamber of Commerce. In
the 1993 Revision it provides in Art. 2 that "the expressions Documentary Credit(s) and Standby
Letter(s) of Credit mean any arrangement, however made or described, whereby a bank acting
at the request and on instructions of a customer or on its own behalf is to make payment against
stipulated document(s)" and Art. 9 thereof defines the liability of the issuing banks on an
irrevocable letter of credit as a "definite undertaking of the issuing bank, provided that the
stipulated documents are presented to the nominated bank or the issuing bank and the terms
and conditions of the Credit are complied with, to pay at sight if the Credit provides for sight
payment." 22
We have accepted, in Feati Bank and Trust Company v. Court of Appeals 23 and Bank of
America NT & SA v. Court of Appeals, 24 to the extent that they are pertinent, the application in
our jurisdiction of the international credit regulatory set of rules known as the Uniform Customs
and Practice for Documentary Credits (U.C.P) issued by the International Chamber of
Commerce, which we said in Bank of the Philippine Islands v. Nery 25 was justified under Art. 2
of the Code of Commerce, which states:
"Acts of commerce, whether those who execute them be merchants or
not, and whether specified in this Code or not should be governed by the
provisions contained in it; in their absence, by the usages of commerce
generally observed in each place; and in the absence of both rules, by
those of the civil law."
The prohibition under Sec. 6(b) of Rule 4 of the Interim Rules does not apply to herein petitioner
as the prohibition is on the enforcement of claims against guarantors or sureties of the debtors
whose obligations are not solidary with the debtor. The participating banks' obligation are
solidary with respondent Maynilad in that it is a primary, direct, definite and an absolute
undertaking to pay and is not conditioned on the prior exhaustion of the debtor's assets. These
are the same characteristics of a surety or solidary obligor.
Being solidary, the claims against them can be pursued separately from and independently of
the rehabilitation case, as held in Traders Royal Bank v. Court of Appeals 26 and reiterated in
Philippine Blooming Mills, Inc. v. Court of Appeals, 27 where we said that property of the surety
cannot be taken into custody by the rehabilitation receiver (SEC) and said surety can be sued
separately to enforce his liability as surety for the debts or obligations of the debtor. The debts or
obligations for which a surety may be liable include future debts, an amount which may not be
known at the time the surety is given.
The terms of the Irrevocable Standby Letter of Credit do not show that the obligations of the
banks are not solidary with those of respondent Maynilad. On the contrary, it is issued at the
request of and for the account of Maynilad Water Services, Inc., in favor of the Metropolitan
Waterworks and Sewerage System, as a bond for the full and prompt performance of the
obligations by the concessionaire under the Concession Agreement 28 and herein petitioner is
authorized by the banks to draw on it by the simple act of delivering to the agent a written
certification substantially in the form Annex "B" of the Letter of Credit. It provides further in Sec.
6, that for as long as the Standby Letter of Credit is valid and subsisting, the Banks shall honor
any written Certification made by MWSS in accordance with Sec. 2, of the Standby Letter of
Credit regardless of the date on which the event giving rise to such Written Certification arose.
29
Taking into consideration our own rulings on the nature of letters of credit and the customs and
usage developed over the years in the banking and commercial practice of letters of credit, we
hold that except when a letter of credit specifically stipulates otherwise, the obligation of the
banks issuing letters of credit are solidary with that of the person or entity requesting for its
issuance, the same being a direct, primary, absolute and definite undertaking to pay the
beneficiary upon the presentation of the set of documents required therein.
The public respondent, therefore, exceeded his jurisdiction, in holding that he was competent to
act on the obligation of the banks under the Letter of Credit under the argument that this was not
a solidary obligation with that of the debtor. Being a solidary obligation, the letter of credit is
excluded from the jurisdiction of the rehabilitation court and therefore in enjoining petitioner from
proceeding against the Standby Letters of Credit to which it had a clear right under the law and
the terms of said Standby Letter of Credit, public respondent acted in excess of his jurisdiction.
Additional Issues
It is true that the stay order is immediately executory. It is also true, however, that the Standby
Letter of Credit and the banks that issued it were not within the jurisdiction of the rehabilitation
court. The call on the Standby Letter of Credit, therefore, could not be considered a violation of
the Stay Order.
3. Respondent's claim that the filing of the petition pre-empts the original jurisdiction of the lower
court is without merit. The purpose of the initial hearing is to determine whether the petition for
rehabilitation has merit or not. The propriety of the stay order as well as the clarificatory order
had already been passed upon in the hearing previously had for that purpose. The determination
of whether the public respondent was correct in enjoining the petitioner from drawing on the
Standby Letter of Credit will have no bearing on the determination to be made by public
respondent whether the petition for rehabilitation has merit or not. Our decision on the instant
petition does not pre-empt the original jurisdiction of the rehabilitation court.
WHEREFORE, the petition for certiorari is GRANTED. The Order of November 27, 2003 of the
Regional Trial Court of Quezon City, Branch 90, is hereby declared NULL AND VOID and SET
ASIDE. The status quo Order herein previously issued is hereby LIFTED. In view of the urgency
attending this case, this decision is immediately executory.

No costs.
We proceed to consider the other issues raised in the oral arguments and included in the parties'
memoranda:
SO ORDERED. AIaSTE
1. Respondent Maynilad argues that petitioner had a plain, speedy and adequate remedy under
the Interim Rules itself which provides in Sec. 12, Rule 4 that the court may on motion or motu Davide, Jr., C .J ., Panganiban and Carpio, JJ ., concur.
proprio, terminate, modify or set conditions for the continuance of the stay order or relieve a
claim from coverage thereof. We find, however, that the public respondent had already
Ynares-Santiago, J ., is on leave.
accomplished this during the hearing set for the two Urgent Ex Parte motions filed by
respondent Maynilad on November 21 and 24, 2003, 30 where the parties including the
creditors, Suez and Chinatrust Commercial "presented their respective arguments." 31 The ||| (Metropolitan Waterworks and Sewerage System v. Daway, G.R. No. 160732, [June 21,
public respondent then ruled, "after carefully considering/evaluating the import of the arguments 2004], 476 PHIL 659-678)
and documents referred to by Maynilad, MWSS and/or the creditors Chinatrust Commercial
Bank and Suez in relation to the admissions, the pleadings, and/or pertinent portions of the
records, this court is of the considered and humble view that the issue must perforce be
resolved in favor of Maynilad." 32 Hence to pursue their opposition before the same court would
result in the presentation of the same arguments and issues passed upon by public respondent.

Furthermore, Sec. 5, Rule 3 of the Interim Rules would preclude any other effective remedy
questioning the orders of the rehabilitation court since they are immediately executory and a
petition for review or an appeal therefrom shall not stay the execution of the order unless
restrained or enjoined by the appellate court." In this situation, it had no other remedy but to
seek recourse to us through this petition for certiorari.

In Silvestre v. Torres and Oben, 33 we said that it is not enough that a remedy is available to
prevent a party from making use of the extraordinary remedy of certiorari but that such remedy
be an adequate remedy which is equally beneficial, speedy and sufficient, not only a remedy
which at some time in the future may offer relief but a remedy which will promptly relieve the
petitioner from the injurious acts of the lower tribunal. It is the inadequacy — not the mere
absence — of all other legal remedies and the danger of failure of justice without the writ, that
must usually determine the propriety of certiorari. 34

2. Respondent Maynilad argues that by commencing the process for payment under the
Standby Letter of Credit, petitioner violated an immediately executory order of the court and,
therefore, comes to Court with unclean hands and should therefore be denied any relief.