SPCL Letters of Credit

SPECIAL COMMERCIAL LAWS A. LETTER OF CREDIT

civil law review

1. Bank of the Philippine Islands . De Ren! Fa"#i$ Ind%st#ies& In$.& '( SCRA )(' *1+,-. ). Philippine /i#0inia To"a$$o Ad1inist#ation . De los An0eles& 123 SCRA (3' *1+44. '. Ins%la# Bank of Asia and A1e#i$a . IAC& 12, SCRA 3(- *1+44. 3. Feati Bank and T#%st Co1pan! . Co%#t of Appeals& 1+2 SCRA (,2 *1++1. (. P#%dential Bank and T#%st Co1pan! . IAC& )12 SCRA )(, *1++). 2. Bank of A1e#i$a . Co%#t of Appeals& ))4 SCRA '(, *1++'. ,. Relian$e Co11odities& In$. /. Dae5oo Ind%st#ial Co.& Ltd.& ))4 SCRA (3( *1++'. 4. Rod6ssen S%ppl! Co1pan!& In$. . Fa# East Bank and T#%st Co1pan!& '(, SCRA 214 *)--1. +. A"ad . Co%#t of Appeals& 141 SCRA 1+1 *1++-. 1-. MWSS . 7on. Da5a!& 3') SCRA ((+ *)--3. 11. T#ansfield Philippines& In$. . L%6on 7!d#o Co#p.& 33' SCRA '-, *)--3. 1). Bank of Co11e#$e . Se##ano& 3(1 SCRA 343 *)--(. 1'. Land Bank of the Philippines . Monet8s E9po#t and Man%fa$t%#in0 Co#p. 3(' SCRA 1,' *)--(.

Page 1 of 21

SPCL Letters of Credit

civil law review

1. Bank of the Philippine Islands . De Ren! Fa"#i$ Ind%st#ies& In$.& '( SCRA )(' *1+,-. FACTS: -On four (4) diffierent occasions in 1961, the De Reny Fabric ndustries, nc!, a Phi"i##ine cor#oration, a##"ied to the $an% for four (4) irre&ocab"e co''ercia" "etters of credit to co&er the #urchase by the cor#oration of goods described in the co&ering ()* a##"ications as +dyestuffs of &arious co"ors+ fro' its ,'erican su##"ier, the -!$! Distributing *o'#any! -,"" the a##"ications of the cor#oration .ere a##ro&ed, and the corres#onding *o''ercia" ()* ,gree'ents .ere e/ecuted #ursuant to ban%ing #rocedures! -Pursuant to ban%ing regu"ations then in force, the cor#oration de"i&ered to the $an% #eso 'argina" de#osits as each "etter of credit .as o#ened! -$y &irtue of the foregoing transactions, the $an% issued irre&ocab"e co''ercia" "etters of credit addressed to its corres#ondent ban%s in the 0nited 1tates, .ith unifor' instructions for the' to notify the beneficiary thereof, the -$! Distributing *o'#any, that they ha&e been authori2ed to negotiate the "atter3s sight drafts u# to the a'ounts 'entioned therein, res#ecti&e"y, if acco'#anied, u#on #resentation, by a fu"" set of negotiab"e c"ean +on board+ ocean bi""s of "ading, co&ering the 'erchandise a##earing in the ()*s, that is, dyestuffs of &arious co"ors, *onse4uent"y, the -!$! Distributing *o'#any dre. u#on, #resented to and negotiated .ith these ban%s, its sight drafts co&ering the a'ounts of the 'erchandise ostensib"y being e/#orted by it, together .ith c"ean bi""s of "ading, and co""ected the fu"" &a"ue of the drafts u# to the a'ounts a##earing in the () *s as abo&e indicated! -5hese corres#ondent ban%s then debited the account of the $an% of the Phi"i##ine s"ands .ith the' u# to the fu"" &a"ue of th drafts #resented by the -!$! Distributing *o'#any, thereafter, endorsed and for.arded a"" docu'ents to the $an% of the Phi"i##ine s"ands! - n the 'eanti'e, as each shi#'ent (co&ered by the abo&e-'entioned "etters of credit) arri&ed in the Phi"i##ines, the De Reny Fabric ndustries, nc! 'ade #artia" #ay'ents to the $an% a'ounting, in the aggregate, to P96,666! -Further #ay'ents .ere, ho.e&er, subse4uent"y discontinued by the cor#oration .hen it beca'e estab"ished, as a resu"t of a che'ica" test conducted by the 7ationa" 1cience De&e"o#'ent $oard, that the goods that arri&ed in 8ani"a .ere co"ored cha"%s instead of dyestuffs! -5he cor#oration a"so refused to ta%e #ossession of these goods, and for this reason, the $an% caused the' to be de#osited .ith a bonded .arehouse #aying therefor the a'ount of P12,669!64 u# to the fi"ing of its co'#"aint .ith the court be"o. on Dece'ber 16, 1962! LOWER COURT: Ordered the cor#oration and its co-defendants (the herein a##e""ants) to #ay $P the a'ount of the (* agree'ent! DEFENSE OF DE RENY: t .as the duty of the foreign corres#ondent ban%s of the $an% of the Phi"i##ine s"ands to ta%e the necessary #recautions to insure that the goods shi##ed under the co&ering ()*s confor'ed .ith the ite' a##earing therein, and, that the foreign ban%s ha&ing fai"ed to #erfor' this duty, no c"ai' for recou#'ent against the defendantsPage 2 of 21

SPCL Letters of Credit

civil law review

a##e""ants, arising fro' the "osses incurred for the non-de"i&ery or defecti&e de"i&ery of the artic"es ordered, cou"d accrue!

HELD: 0nder the ter's of their *o''ercia" (etter of *redit ,gree'ents .ith the $an%, the a##e""ants agreed that the $an% sha"" not be res#onsib"e for the +e/istence, chancier, 4ua"ity, 4uantity, conditions, #ac%ing, &a"ue, or de"i&ery of the #ro#erty #ur#orting to be re#resented by docu'ents, for any difference in character, 4ua"ity, 4uantity, condition, or &a"ue of the #ro#erty front that e/#ressed in docu'ents,+ or for +#artia" or inco'#"ete shi#'ent, or fai"ure or o'ission to shi# 'y or a"" of the #ro#erty referred to in the *redit,+ as .e"" as +for any de&iation fro' instructions, de"ay, defau"t or fraud by the shi##er or inyone e"se in connection .ith the #ro#erty or the shi##ing thereof,+ and +for any breach of contract bet.een the shi##ers or &endors and ourse"&es, 9#urchasers: or any of us!+ ;a&ing agreed to these ter's, the a##e""ants ha&e, therefore, no recourse but to co'#"y .ith their co&enant to the ru"es of e&idence!+ 5he *ode of *o''erce, in its ,rtic"e 2, "i%e.ise #ro&ides that +,cts of co''erce, .hether those .ho e/ecute the' be 'erchants or not, and .hether s#ecified in this *ode or not, shou"d be go&erned by the #ro&isions contained in it, in their absence, b) the usages of co''erce genera""y obser&ed in each #"ace, and in the absence of both ru"es, by those of the ci&i" "a.+ +5hose acts contained in this *ode and a"" Others of ana"ogous character, sha"" be dee'ed acts of co''erce!+ t 'ust be noted that certain #rinci#"es go&erning the issuance, acce#tance and #ay'ent of "etters of credit arc s#ecifica""y #ro&ided for in the *ode of *o''erce! $ut e&en .ithout the sti#u"ation recited abo&e, the a##e""ants cannot shift the burden of "oss to the $an% on account of the &io"ation by their &endor of its #restation! $an%s, in #ro&iding financing in internationa" business transactions such as those entered into by the a##e""ants, do not deal with the property to be exported or shipped to the importer, but deal only with documents. 5he $an% introduced in e&idence a #ro&ision contained in the +0nifor' *usto's and Practices for *o''ercia" Docu'entary *redits Fi/ed for the 5hirteenth *ongress of nternationa" *ha'ber of *o''erce,+ to .hich the Phi"i##ines is a signatory nation! ,rtic"e 16 thereof #ro&ides< + ts docu'entary credit o#erations, a"" #arties concerned dea" in docu'ents and not in goods! #ay'ent, negotiation or acce#tance against docu'ents in accordance .ith the ter's and conditions of a credit by a $an% authori2ed to do so binds the #arty gi&ing the authori2ation to ta%e u# the docu'ents and rei'bursed the $an% 'a%ing the #ay'ent, negotiation or acce#tance!+ 5he e/istence of a custo' in internationa" ban%ing and financing circ"es negating any duty on the #art of a ban% to &erify .hether .hat has been described in "etters of credits or drafts or shi##ing docu'ents actua""y ta""ies .ith .hat .as "oaded aboard shi#, ha&ing been #ositi&e"y #ro&en as a fact, the a##e""ants 'e bound by this estab"ished usage! 5hey .ere, after a"", the ones .ho ta##ed the faci"ities afforded by the $an% in order to engage in internationa" business!

Page = of 21

SPCL Letters of Credit

civil law review

-5i'oteo 1e&i""a, #ro#rietor and >enera" 8anager of the Phi"i##ine ,ssociated Resources (P,R) .as a.arded in a #ub"ic bidding the right to i'#ort ?irginia "eaf tobacco for b"ending #ur#oses and e/#ortation by the' of P?5, and far'er3s "o.-grade tobacco at a rate of one (1) %i"o of i'#orted tobacco for e&ery nine (9) %i"os of "eaf tobacco actua""y e/#orted! -$efore 1e&i""a cou"d i'#ort the counter#art b"ending ?irginia tobacco, Re#ub"ic ,ct 7o! 41@@ .as #assed and too% effect on -une 26, 1964, authori2ing the P?5, to grant i'#ort #ri&i"eges at the ratio of 4 to instead of 9 to 1 and to dis#ose of a"" its tobacco stoc% at the best #rice a&ai"ab"e! -5hus, on 1e#te'ber 14, 196@ subAect contract .hich .as a"ready a'ended on Dece'ber 14, 196= because of the #re&ai"ing e/#ort or .or"d 'ar%et #rice under .hich res#ondent .i"" be e/#orting at a "oss, .as further a'ended to grant res#ondent the #ri&i"eges under aforesaid "a., subAect to conditions, one of .hich is that res#ondent 1e&i""a .ou"d o#en an irre&ocab"e "etter of credit 7o! 62=2 .ith the Prudentia" $an% and 5rust *o! in fa&or of the P?5, to secure the #ay'ent of said ba"ance, dra.ab"e u#on the re"ease fro' the $ureau of *usto's of the i'#orted ?irginia b"ending tobacco! -Bhi"e Re&i""a .as trying to negotiate the reduction of the #rocure'ent cost of the 2,161!4C9 %i"os of P?5, tobacco a"ready e/#orted .hich atte'#t .as denied by #etitioner and a"so by the Office of the President, #etitioner #re#ared t.o drafts to be dra.n against said "etter of credit for a'ounts .hich ha&e a"ready beco'e due and de'andab"e! -1e&i""a then fi"ed a co'#"aint for da'ages .ith #re"i'inary inAunction! -5he (o.er *ourt dis'issed the co'#"aint and "ifted the #re"i'inary inAunction issued! -1e&i""a fi"ed an urgent 8otion for Reconsideration! -Pending Reso"ution, res#ondent Audge issued the assai"ed Order of -u"y 1C, 196C directing the Prudentia" $an% D 5rust *o! to 'a%e the 4uestioned re"ease of funds fro' the (etter of *redit! $efore #etitioner cou"d fi"e a 'otion for reconsideration of said order, res#ondent 1e&i""a .as ab"e to secure the re"ease of P=66,666!66 and the rest of the a'ount!

ISSUE: 1! Res#ondent -udge acted .ithout or in e/cess of Aurisdiction or .ith gra&e abuse of discretion .hen he issued the Order of -u"y 1C, 196C, on the ground< (a) the "etter of credit issued by res#ondent ban% is irre&ocab"eE ///

HELD: n issuing the Order of -u"y 1C, 196C, res#ondent -udge &io"ated the irre&ocabi"ity of the "etter of credit issued by res#ondent $an% in fa&or of #etitioner! ,n irre&ocab"e "etter of credit cannot during its "ifeti'e be cance""ed or 'odified .ithout the e/#ress #er'ission of the beneficiary!
Page 4 of 21

SPCL Letters of Credit

civil law review

'. Ins%la# Bank of Asia : A1e#i$a s. IAC, 167 SCRA 450 (1988) FACTS: -1o'eti'e in 19C6 and 19CC s#ouses $en 1! 8endo2a and -uanita 8! 8endo2a (the 8endo2as, for bre&ity), obtained t.o (2) "oans fro' Phi"i##ine ,'erican (ife nsurance *o! (Phi"a' (ife) in the tota" a'ount of P666,666!66 to finance the construction of their residentia" house at 8andaue *ity! 5he said "oans, .ith a 14F no'ina" interest rate, .ere to be "i4uidated in e4ua" a'orti2ations o&er a #eriod of fi&e (@) years! -5o secure #ay'ent, Phi"a' (ife re4uired that a'orti2ations be guaranteed by an irre&ocab"e standby "etter of credit of a co''ercia" ban%! 5hus, the 8endo2as contracted .ith #etitioner nsu"ar $an% of ,sia and ,'erica ( $,,) for the issuance of t.o (2) irre&ocab"e standby (etters of *redit in fa&or of Phi"a' (ife for the tota" a'ount of P666,666!66! -5hese t.o (2) irre&ocab"e standby ()*s .ere, in turn, secured by a rea" estate 'ortgage for the sa'e a'ount on the #ro#erty of Res#ondent 1#ouses in fa&or of $,,! -5he 8endo2as fai"ed to #ay Phi"a' (ife the a'orti2ation that fe"" due on -une 19CG so that Phi"a' (ife infor'ed $,, that it .as dec"aring both "oans as +entire"y due and de'andab"e+ and de'anded #ay'ent of P492,996!=6! ;o.e&er, because $,, contested the #ro#riety of ca""ing in the entire "oan, Phi"a' (ife desisted and resu'ed a&ai"ing of the ()*s by dra.ing on the' for fi&e (@) 'ore a'orti2ations! -$ecause the 8endo2as defau"ted again on their a'orti2ation due on, Phi"a' (ife again infor'ed $,, that it .as dec"aring the entire ba"ance outstanding on both "oans, inc"uding "i4uidated da'ages, +i''ediate"y due and #ayab"e!+ Phi"a' (ife then de'anded the #ay'ent of P2C4,CC9!@6 fro' $,, but the "atter too% the #osition that, as a 'ere guarantor of the 8endo2as .ho are the #rinci#a" debtors, its re'aining outstanding ob"igation under the t.o (2) standby ()*s .as on"y P=6,166!66! (ater, $,, corrected the "atter and de'anded refund because the #artia" #ay'ent by 8endo2as ha&e the effect of reducing its "iabi"ity as guarantor or surety under the ter's of the standby ()*s in 4uestion! -5he rea" Hstate 8ortgage, .hich secured the t.o (2) standby ()*s, .as e/traAudicia""y forec"osed by, and so"d at #ub"ic auction to #etitioner $,, as the "one and highest bidder! TRIAL COURT: 5ria" *ourt too% the #osition that $,,, +as surety,+ .as discharged of its "iabi"ity to the e/tent of the #ay'ent 'ade by the 8endo2as, as the #rinci#a" debtors, to the creditor, Phi"a' (ife! COURT OF APPEALS: Re&ersed the 5ria" *ourt and ru"ed instead that $,,3s "iabi"ity .as not reduced by &irtue of the #ay'ents 'ade by the 8endo2as!

ISSUE: Bhether or not the #artia" #ay'ents 'ade by the #rinci#a" ob"igors (res#ondent 8H7DOI,1) .ou"d ha&e the corres#onding effect of reducing the "iabi"ity of the #etitioner as guarantor or surety under the ter's of the standby (*s in 4uestion!
Page @ of 21

SPCL Letters of Credit

civil law review

HELD: n construing the ter's of a (etter of *redit, as in other contracts, it is the intention of the #arties that 'ust go&ern! +(etters of credit and contracts for the issuance of such "etters are subAect to the sa'e ru"es of construction as are ordinary co''ercia" contracts! 5hey are to recei&e a reasonab"e and not a technica" construction and a"though usage and custo' cannot contro" e/#ress ter's in "etters of credit, they are to be construed .ith reference to a"" the surrounding facts and circu'stances, to the #articu"ar and often &arying ter's in .hich they 'ay be e/#ressed, the circu'stances and intention of the #arties to the', and the usages of the #articu"ar trade of business conte'#"ated!+ 0ne4ui&oca""y, the subAect standby (etters of *redit secure the #ay'ent of any ob"igation of the 8endo2as to Phi"a' (ife inc"uding a"" interests, surcharges and e/#enses thereon but not to e/ceed P666,666!66! $ut .hi"e they are a security arrange'ent, they are not con&erted thereby into contracts of guaranty! 5hat .ou"d 'a%e the' u"tra &ires rather than a "etter of credit, .hich is .ithin the #o.ers of a ban%! 5he standby ()*s are, +in effect an abso"ute underta%ing to #ay the 'oney ad&anced or the a'ount for .hich credit is gi&en on the faith of the instru'ent!+ 5hey are #ri'ary ob"igations and not accessory contracts! $eing se#arate and inde#endent agree'ents, the #ay'ents 'ade by the 8endo2as cannot be added in co'#uting $,,3s "iabi"ity under its o.n standby "etters of credit! Pay'ents 'ade by the 8endo2as direct"y to Phi"a' (ife are in co'#"iance .ith their o.n #restation under the "oan agree'ent! ,s to the "iabi"ity of the 8endo2as to $,,, it bears reca""ing that the 8endo2as, u#on their a##"ication for the o#ening and issuance of the rre&ocab"e 1tandby (etters of *redit in fa&or of Phi"a' (ife, had e/ecuted a Rea" Hstate 8ortgage as security to $,, for any #ay'ent that the "atter 'ay re'it to Phi"a' (ife on the strength of said (etters of *reditE and that $,, had reco&ered fro' the 8endo2as the a'ount of P4=2,=G6!6C .hen it forec"osed on the 'ortgaged #ro#erty of said s#ouses in the conce#t of +#rinci#a" (un#aid ad&ances under the 2 standby (*s #"us interest and charges)!+ n addition, $,, had reco&ered P2@@,=64!9@ re#resenting its c"ean "oans to the 8endo2as #"us accrued interest besides the fact that it no. has the forec"osed #ro#erty! ,s bet.een $,, and the 8endo2as, therefore, there has been fu"" "i4uidation! 5he re'aining ob"igation of P222,666!66 on the "oan of the 8endo2as, therefore, is no. $,,3s so"e res#onsibi"ity to #ay to Phi"a' (ife by &irtue of its abso"ute and irre&ocab"e underta%ing under the standby ()*s! 1#ecia""y so, since the #ro'issory notes e/ecuted by the 8endo2as in fa&or of $,, authori2ed the sa"e of the 'ortgaged security +for the #ur#ose of a##"ying their #roceeds to / / / #ay'ents+ of their ob"igations to $,,!

3. Feati Bank : T#%st Co1pan! s. Co%#t of Appeals& 1+2 SCRA (,2 *1++1. FACTS: -$ernardo H! ?i""a"u2 agreed to se"" to the then defendant ,/e" *hristiansen 2,666 cubic 'eters of "auan "ogs at J2C!66 #er cubic 'eter FO$! -,fter ins#ecting the "ogs, *hristiansen issued #urchase order! -On the arrange'ents 'ade and u#on the instructions of the consignee, ;an'i 5rade De&e"o#'ent, (td!, de 1anta ,na, *a"ifornia, the 1ecurity Pacific 7ationa" $an% of (os ,nge"es, *a"ifornia issued rre&ocab"e (etter of *redit a&ai"ab"e at sight in fa&or of ?i""a"u2 for the su' of J@4,666!66, the tota" #urchase #rice of the "auan "ogs! -5he "etter of credit .as 'ai"ed to the Feati $an% and 5rust *o'#any (no. *itytrust) .ith the instruction to the "atter that it +for.ard the enc"osed "etter of credit to the beneficiary!K 5he "etter of credit further #ro&ided that the
Page 6 of 21

SPCL Letters of Credit

civil law review

draft to be dra.n is on 1ecurity Pacific 7ationa" $an% and that it be acco'#anied by the docu'ents s#ecified therein! ,"so incor#orated by reference is the 0nifor' *usto's and Practice for Docu'entary *redits)! -5he "ogs .ere thereafter "oaded on the &esse" +Ien"in >"ory+ .hich .as chartered by *hristiansen! $efore its "oading, the "ogs .ere ins#ected by custo' ins#ectors, a"" of .ho' certified to the good condition and e/#ortsbi"ity of the "ogs, and the "oading .as co'#"eted! -;o.e&er, *hristiansen refused to issue the certification as re4uired in #aragra#h 4 of the "etter of credit, des#ite se&era" re4uests 'ade by the #ri&ate res#ondent!$ecause of the absence of the certification by *hristiansen, the Feati $an% and 5rust *o'#any refused to ad&ance the #ay'ent on the "etter of credit! -8ean.hi"e, the "ogs arri&ed at nchon, Lorea and .ere recei&ed by the consignee, ;an'i 5rade De&e"o#'ent *o'#any, to .ho' *hristiansen so"d the "ogs and obtained #rofit! ;an'i 5rade De&e"o#'ent *o'#any, on the other hand so"d the "ogs to 5aisung (u'ber *o'#any at nchon, Lorea! -1ince the de'ands by the #ri&ate res#ondent for *hristiansen to e/ecute the certification #ro&ed futi"e, ?i""a"u2, instituted an action for 'anda'us and s#ecific #erfor'ance against *hristiansen and the Feati $an% and 5rust *o'#any (no. *itytrust)!5he #etitioner .as i'#"eaded as defendant before the "o.er court on"y to afford co'#"ete re"ief shou"d the court a 4uo order *hristiansen to e/ecute the re4uired certifica tion! -Bhi"e the case .as sti"" #ending tria", *hristiansen "eft the Phi"i##ines .ithout infor'ing the *ourt and his counse"! ;ence, ?i""a"u2, fi"ed an a'ended co'#"aint 'a%e the #etitioner so"idari"y "iab"e .ith *hristiansen! ISSUE: Bhether or not a corres#ondent ban% is to be he"d "iab"e under the "etter of credit des#ite non-co'#"iance by the beneficiary .ith the ter's thereon! HELD: Commercial transactions involving letter of credits are governed by the rule on strict compliance-- t is a sett"ed ru"e in co''ercia" transactions in&o"&ing "etters of credit that the docu'ents tendered 'ust strict"y confor' to the ter's of the "etter of credit! 5he tender of docu'ents by the beneficiary (se""er) 'ust inc"ude a"" docu'ents re4uired by the "etter! , corres#ondent ban% .hich de#arts fro' .hat has been sti#u"ated under the "etter of credit, as .hen it acce#ts a fau"ty tender, acts on its o.n ris%s and it 'ay not thereafter be ab"e to reco&er fro' the buyer or the issuing ban%, as the case 'ay be, the 'oney thus #aid to the beneficiary! 5hus the ru"e of strict co'#"iance! n the 0nited 1tates, co''ercia" transactions in&o"&ing "etters of credit are go&erned by the ru"e of strict co'#"iance! n the Phi"i##ines, the sa'e ho"ds true! 5he-sa'e ru"e 'ust a"so be fo""o.ed! ,"though in so'e ,'erican decisions, ban%s are granted a "itt"e discretion to acce#t a fau"ty tender as .hen the other docu'ents 'ay be considered i''ateria" or su#erf"uous, this theory cou"d "ead to dangerous #recedents! 1ince a ban% dea"s on"y .ith docu'ents, it is not in a #osition to deter'ine .hether or not the docu'ents re4uired by the "etter of credit ,re 'ateria" or su#erf"uous! 5he 'ere fact that the docu'ent .as s#ecified therein readi"y 'eans that the docu'ent is of &ita" i'#ortance to the buyer!

Page C of 21

SPCL Letters of Credit

civil law review

Phi"i##ine Rayon 8i""s, nc! entered into a contract .ith 7issho *o!, (td! of -a#an for the i'#ortation of te/ti"e 'achineries under a fi&e-year deferred #ay'ent #"an! Rayon a##"ied for a co''ercia" "etter of credit .ith the Prudentia" $an% and 5rust *o'#any in fa&or of 7issho! $y &irtue of said a##"ication, the Prudentia" $an% o#ened 0tter of *redit ,gainst this "etter of credit, drafts .ere dra.n and issued by 7issho, .hich .ere a"" #aid by the Prudentia" $an% through its corres#ondent in -a#an, the $an% of 5o%yo, (td! ,s indicated on their faces, t.o of these drafts .ere acce#ted by the Rayon through its #resident, ,nac"eto R! *hi, .hi"e the others .ere not! 0#on the arri&a" of the 'achineries, the Prudentia" $an% indorsed the shi##ing docu'ents to Rayon .hich acce#ted de"i&ery of the sa'e! 5o enab"e Rayon to ta%e de"i&ery of the 'achineries, it e/ecuted, by #rior arrange'ent .ith the Prudentia" $an%, a trust recei#t .hich .as signed by ,nac"eto R! *hi in his ca#acity as President ! ,t the bac% of the trust recei#t is a #rinted for' to be acco'#"ished by t.o sureties .ho, by the &ery ter's and conditions thereof, .ere to be Aoint"y and se&era""y "iab"e to the Prudentia" $an% shou"d the Rayon fai" to #ay the tota" a'ount or any #ortion of the drafts issued by 7issho and #aid for by Prudentia" $an%! 5he defendant-a##e""ant .as ab"e to ta%e de"i&ery of the te/ti"e 'achineries and insta""ed the sa'e at its factory site at 69 Obudan 1treet, Mue2on *ity! 1ubse4uent"y, Rayon ceased business o#eration! ,"" the te/ti"e 'achineries in its factory .ere so"d to , * De&e"o#'ent *or#oration! 5he ob"igation of Rayon arising fro' the "etter of credit and the trust recei#t re'ained un#aid and un"i4uidated! Re#eated for'a" de'ands for the #ay'ent of the said trust recei#t yie"ded no resu"t!

TC< -Ordered Phi"i##ine Rayon to #ay, ho.e&er disregarded the "atter drafts as those drafts .ere not acce#ted by Rayon! Prudentia" $an%< 5ria" *ourt erred in inter#reting NsightK drafts as re4uiring acce#tance by Rayon before it cou"d be he"d "iab"e thereon!

CA< -1ustained the 5ria" *ourt! 5he "ast drafts .hich had not been #resented and acce#ted by Rayon, #rudentia" $an% .as not Austified in uni"atera""y #aying the a'ounts therein!
Page G of 21

SPCL Letters of Credit

civil law review

ISSUE: Bhether or not sight drafts re4uire #rior acce#tance before Rayon can be he"d "iab"e thereon! HELD: Letters of Credit; Presentment for acceptance not required for sight drafts.-- , "etter of credit is defined as an engage'ent by a ban% or other #erson 'ade at the re4uest of a custo'er that the issuer .i"" honor drafts or other de'ands for #ay'ent u#on co'#"iance .ith the conditions s#ecified in the credit!11 5hrough a "etter of credit, the ban% 'ere"y substitutes its o.n #ro'ise to #ay for the #ro'ise to #ay of one of its custo'ers .ho in return #ro'ises to #ay the ban% the a'ount of funds 'entioned in the "etter of credit #"us credit or co''it'ent fees 'utua""y agreed u#on! n the instant case then, the dra.ee .as necessari"y the herein #etitioner! t .as to the "atter that the drafts .ere #resented for #ay'ent! n fact, there .as no need for acce#tance as the issued drafts are sight drafts! Present'ent for acce#tance is necessary on"y in the cases e/#ress"y #ro&ided for in 1ection 14= of the 7egotiab"e nstru'ents (a. (7 ()!1= 5he said section reads< +1H*! 14=! Bhen #resent'ent for acce#tance 'ust be 'ade!-Present'ent for acce#tance 'ust be 'ade< (a) Bhere the bi"" is #ayab"e after sight, or in any other ease, .here #resent'ent for acce#tance is necessary in order to fi/ the 'aturity of the instru'entE or (b)Bhere the bi"" e/#ress"y sti#u"ates that it sha"" be #resented for acce#tanceE (c) Bhere the bi"" is dra.n #ayab"e e"se.here than at the residence or #"ace of business of the dra.ee! n no other case is #resent'ent for acce#tance necessary in order to render any #arty to the bi"" "iab"e!+ Ob&ious"y then, sight drafts do not re4uire #resent'ent for acce#tance! Present'ent is not a condition sine 4ua non for rei'burse'ent!

2. Bank of A1e#i$a& ;T : SA . Co%#t of Appeals& ))4 SCRA '(, *1++'. FACTS: $an% of ,'erica, 75 D 1,, 8ani"a, recei&ed by registered 'ai" art rre&ocab"e (etter of *redit #ur#orted"y issued by $an% of ,yudhya, 1arnyae% $ranch, for the account of >enera" *he'ica"s, (td!, of 5hai"and in the a'ount to co&er the sa"e of P"astic ro#es and +agricu"tura" fi"es,+ .ith the $an% of ,'erica as ad&ising ban% and nter-Resin ndustria" *or#oration as beneficiary! 0#on recei#t of the "etter-ad&ice .ith the "etter of credit, nter-Resin sent its "a.yer to $an% of ,'erica to ha&e the "etter of credit confir'ed! 5he ban% did not! 5he ban% e'#"oyee in charge of "etters of credit, ho.e&er, e/#"ained to that there .as no need for confir'ation because the "etter of credit .ou"d not ha&e been trans'itted if it .ere not genuine! nter-Resin sought to 'a%e a #artia" a&ai"'ent under the "etter of credit by sub'itting to $an% of ,'erica in&oices, co&ering the shi#'ent of 24,666 ba"es of #o"yethy"ene ro#e to >enera" *he'ica"s &a"ued at 01J1,=26,666!66, the corres#onding #ac%ing "ist, e/#ort dec"aration and bi"" of "ading! Fina""y, after being satisfied that nter-Resin3s docu'ents confor'ed .ith the conditions e/#ressed in the "etter of credit, $an% of ,'erica issued in fa&or of nter-Resin a *ashier3s *hec% the #eso e4ui&a"ent of the draft!

Page 9 of 21

SPCL Letters of Credit

civil law review

$an% of ,'erica .rote $an% of ,yudhya ad&ising the "atter of the a&ai"'ent under the "etter of credit and sought the corres#onding rei'bursernent therefor! 8ean.hi"e, nter-Resin, #resented to $an% of ,'erica the docu'ents for the second a&ai"'ent under the sa'e "etter of credit! ''ediate"y u#on recei#t of a te"e/ fro' $an% of ,yudhya dec"aring the "etter of credit fraudu"ent, $an% of ,'erica sto##ed the #rocessing of nter-Resin3s docu'ents and sent a te"e/ to its branch office in $ang%o%, 5hai"and, re4uesting assistance in deter'ining the authenticity of the "etter of credit! $an% of ,'erica sued nter-Resin for the reco&ery of the #eso e4ui&a"ent of the draft on the #artia" a&ai"'ent of the no. diso.ned "etter of credit!

TC< -Ru"ed for nter-Resin, ho"ding that (c) $an% of ,'erica cannot reco&er fro' nter-Resin because the dra.er of the "etter of credit is the $an% of ,yudhya and not nter-Resin, that $an% of ,'erica 'ade assurances that enticed nter-Resin and the 'erchandise to 5hai"andE CA: !1ustained the 5ria" *ourt!

ISSUE: Bhether or not the $an% of ,'erica acted 'ere"y as an ad&ising ban% or a confir'ing ban%, coro""ari"y, $an% of ,'erica can reco&er fro' nter-Resin!

HELD: t cannot serious"y be dis#uted, "oo%ing at this case, that $an% of ,'erica has, in fact, on"y been an ad&ising, not confir'ing, ban%, and this 'uch is c"ear"y e&ident, a'ong other things, by the #ro&isions of the "etter of credit itse"f, the #etitioner ban%3s "etter of ad&ice, its re4uest for #ay'ent of ad&ising fee, and the ad'ission of nterResin that it has #aid the sa'e! 5hat $an% of ,'erica has as%ed nter-Resin to sub'it docu'ents re4uired by the "etter of credit and e&entua""y has #aid the #roceeds thereof, did not ob&ious"y 'a%e it a confir'ing ban%! 5he fact, too, that the draft re4uired by the "etter of credit is to be dra.n under the account of >enera" *he'ica"s (buyer) on"y 'eans that the sa'e had to be #resented to $an% of ,yudhya (issuing, ban%) for #ay'ent! t 'ay be significant to reca"" that the "etter of credit is an engage'ent of the issuing ban%, not the ad&ising ban%, to #ay the draft! 7o "ess i'#ortant is that $an% of ,'erica3s "etter of 11 8arch 19G1 has e/#ress"y stated that +9t:he enc"osure is so"e"y an ad&ise of credit o#ened by the abo&e'entioned corres#ondent and con&eys no engage'ent by us!+ 5his .ritten reser&ation by $an% of ,'erica in "i'iting its ob"igation on"y to being an ad&ising ban% is in consonance .ith the #ro&isions of 0!*!P! ,s an ad&ising or notifying ban%, $an% of ,'enca did not incur any ob"igation 'ore than Aust notifying nter-Resin of the "etter of credit issued in its fa&or, "et a"one to confir' the "etter of credit! 5he bare state'ent of the ban% e'#"oyee, afore'entioned, in res#onding to the in4uiry 'ade by ,tty! 5anay, nter-Resin3s re#resentati&e, on the authenticity of the "etter of credit certain"y did not ha&e the effect of no&ating the "etter of credit and $an% of
Page 16 of 21

SPCL Letters of Credit

civil law review

,'erica3s "etter of ad&ise, nor can it Austify the conc"usion that the ban% 'ust no. assu'e tota" "iabi"ity on the "etter of credit! ndeed, nter-Resin itse"f cannot c"ai' to ha&e been a"" that free fro' fau"t! ,s the se""er, the issuance of the "etter of credit shou"d ha&e ob&ious"y been a great concern to it! t .ou"d ha&e, in fact, been strange if it did not, #rior to the "etter of credit, enter into a contract, or negotiated at the &ery "east, .ith >enera" *he'ica"s! n the ordinary course, of business, the #erfection of contract #recedes the issuance of a "etter of credit!

,. Relian$e Co11odities& In$. /. Dae5oo Ind%st#ial Co.& Ltd.& ))4 SCRA (3( *1++'. F"#$%: -Re"iance *o''odities and Dae.oo ndustria" entered into a contract of sa"e of foundry #ig iron! - Pursuant to this, Dae.oo shi##ed fro' Pohang, Re#ub"ic of Lorea, 2,666 'etric tons of foundry #ig iron for de"i&ery to its consignee Re"iance!5he shi#'ent .as fu""y #aid for! - 0#on arri&a" in 8ani"a, the cargo .as found to be short of 1=@!6@@ 'etric tons! - 1ubse4uent"y, another contract .as entered into bet.een the sa'e #arties for the #urchase of another 2,666 'etric tons of foundry #ig iron! -Dae.oo ac%no."edged the short shi#'ent, and to co'#ensate Re"iance therefore, bound itse"f to reduce the #rice! -5he agree'ent .as 'ade #art of the subse4uent contract, ho.e&er, that contract .as not consu''ated and .as "ater su#erseded by sti"" another contract! - Re"iance fi"ed .ith the *hina $an%ing *or#oration, an a##"ication for a "etter of credit in fa&or of Dae.oo! -5he a##"ication .as endorsed to the ron 1tee" ,uthority ( 1,) for a##ro&a", but the a##"ication .as denied! - Re"iance .as instead as%ed to sub'it #urchase orders fro' end-users to su##ort its a##"ication for a "etter of credit! -;o.e&er, Re"iance .as not ab"e to raise #urchase orders for 2,666 'etric tons! Re"iance a""eges that it .as ab"e to raise #urchase orders for 1,966 'etric tons! -Dae.oo, u#on the other hand, contends that re"iance .as on"y ab"e to raise #urchase orders for 966 'etric tons! -,n e/a'ination of the e/hibits3 #resented by Re"iance in the tria" court sho.s that on"y #urchase orders for 966 'etric tons .ere sta'#ed +Recei&ed+ by the 1,! 5he other #urchase orders for 1,666 'etric tons a""eged"y sent by #ros#ecti&e end-users to Re"iance .ere not sho.n to ha&e been du"y sent and e/hibited to the 1,! Bhate&er the e/act a'ount of the #urchase orders .as, Dae.oo reAected the #ro#osed ()* for the reason that the goods co&ered fe"" short of the contracted tonnage! 5hus, Re"iance .ithdre. the a##"ication for the ()*! -1ubse4uent"y, Dae.oo "earned that the fai"ure of Re"iance to o#en the (* .as due to the fact that Re"iance had a"ready e/ceeded its foreign e/change a""ocation!

Page 11 of 21

SPCL Letters of Credit

civil law review

-$ecause of the fai"ure of Re"iance to co'#"y .ith its underta%ing, Dae.oo .as co'#e""ed to se"" the 2,666 'etric tons to another buyer at a "o.er #rice, to cut "osses and e/#enses Dae.oo had begun to incur due to its inabi"ity to shi# the 2666 'etric tons to Re"iance under their contract! -Re"iance, through its counse", .rote Dae.oo re4uesting of the a'ount of P226,=C6!4G, re#resenting the &a"ue of the short de"i&ery of 1=@!6@@ 'etric tons of foundry #ig iron under the 1 st contract! -7ot being heeded, Re"iance fi"ed an action for da'ages against Dae.oo .ith the tria" court! Dae.oo res#onded, inter a"ia, .ith a counterc"ai' for da'ages, contending that Re"iance .as gui"ty of breach of contract .hen it fai"ed to o#en and ()* as re4uired in the =1 -u"y 19G6 contract!

TC< -Re"iance is in turn "iab"e for breach of contract for its fai"ure to o#en a "etter of credit in fa&or of Dae.oo #ursuant to their contract and 'ust therefore #ay the "atter actua" da'ages .ith "ega" interest #"us attorney3s fees! CA< - ,ffir'ed 5*

ISSUE: -Bhether or not the fai"ure of an i'#orter (Re"iance) to o#en a "etter of credit on the date agreed u#on 'a%es hi' "iab"e to the e/#orter (Dae.oo) for da'ages! HELD: - ailure of !eliance to open the appropriate letter of credit did not prevent the birth of the contract and neither did such failure extinguish that contract. O Re"iance and Dae.oo, ha&ing reached +a 'eeting of 'inds+ in res#ect of the subAect 'atter of the contract (2666 'etric of foundry #ig iron .ith a s#ecified che'ica" co'#osition), the #rice thereof (01 J=G6,666!66), and other #rinci#a" #ro&isions,+they had a #erfected contract,fai"ure of Re"iance to o#en, the a##ro#riate ()* did not #re&ent the birth of that contract, and neither did the fai"ure e/tinguish that contract! 5he o#ening of the ()* in fa&or of Dae.oo .as an ob"igation of Re"iance and the #erfor'ance of that ob"igation by Re"iance .as a condition for enforce'ent of the reci#roca" ob"igation of Dae.oo to shi# the subAect 'atter of the contract-the foundry #ig iron-to Re"iance! $ut the contract itse"f bet.een Re"iance and Dae.oo had a"ready s#rung into "ega" e/istence and .as enforceab"e! Fai"ure of a buyer seasonab"y to furnish an agreed "etter of credit is a breach of the contract bet.een buyer and se""er! Bhere the buyer fai"s to o#en a "etter of credit as sti#u"ated, the se""er or e/#orter is entit"ed to c"ai' da'ages for such breach! Da'ages for fai"ure to o#en a co''ercia" credit 'ay, in a##ro#riate ca#es, inc"ude the "oss of #rofit .hich the se""er .ou"d reasonab"y ha&e 'ade had the transaction been carried out! 4. Rod6ssen S%ppl! Co1pan!& In$. . Fa# East Bank and T#%st Co1pan!& '(, SCRA 214 *)--1. FACTS: -Rod2ssen 1u##"y o#ened an irre&ocab"e "etter =6-day do'estic "etter of credit fro' Far Hast $an% and 5rust in fa&or of H%'an and *o'#any, nc! for the #urchase of fi&e units of hydrau"ic "oadersE subse4uent a'end'ents e/tended the &a"idity of the said (* for eight 'onths!
Page 12 of 21

SPCL Letters of Credit

civil law review

-For the first three hydrau"ic "oaders that .ere de"i&ered, the $an% #aid for the a'ount s#ecified in the "etter of credit! -5he "ast t.o hydrau"ic "oaders .ere de"i&ered "ate, ne&erthe"ess, Rod2ssen acce#ted the sa'e! -0#on H%'anPs #resentation of docu'ents, F$5* #aid e&en if it .as no "onger bound to do so, because the "etter of credit has a"ready e/#ired fi&e 'onths ago! -F$5* de'anded #ay'ent fro' Rod2ssen! -Rod2ssen refused to #ay and instead offered to return the "ast t.o #ieces of e4ui#'ent!

TC "&' CA< - Ordered Rod2ssen to #ay F$5*!

ISSUE: 1! Bhether or not it is #ro#er for a ban%ing institution to #ay a "etter of credit .hich has "ong e/#ired or been cance""ed! 2! Bhether or not Rod2ssen is "iab"e to rei'burse F$5*!

HELD: 1! 5he subAect (etter of *redit had beco'e in&a"id u#on the "a#se of the #eriod fi/ed therein! 5hus, F$5* shou"d not ha&e #aid H%'anE it .as not ob"iged to do so! n the sa'e &ein, of no 'o'ent .as H%'anPs #resentation, .ithin the #rescribed #eriod, of a"" the docu'ents necessary for co""ection, as the (etter of *redit had a"ready e/#ired and had in fact been cance""ed! 2! $e that as it 'ay, .e agree .ith the *, that Rod2ssen shou"d #ay F$5* the a'ount the "atter e/#ended for the e4ui#'ent be"ated"y de"i&ered by H%'an and &o"untari"y recei&ed and %e#t by #etitioner! F$5*Ps right to see% reco&ery fro' #etitioner is anchored, not u#on the inefficacious (etter of *redit, but on ,rtic"e 2142 of the *i&i" *ode .hich reads as fo""o.s< "Certain lawful, voluntary and unilateral acts give rise to the #uridical relation of quasi-contract to the end that no one shall be un#ustly enriched or benefited at the expense of another.$ ndeed, e4uitab"e considerations behoo&e us to a""o. reco&ery by F$5*! 5rue, it erred in #aying H%'an, but Rod2ssen itse"f .as not .ithout fau"t in the transaction! t 'ust be noted that the "atter had &o"untari"y recei&ed and %e#t the "oaders! Bhen both #arties to a transaction are 'utua""y neg"igent in the #erfor'ance of their ob"igations, the fau"t of one cance"s the neg"igence of the other and, as in this case, their rights and ob"igations 'ay be deter'ined e4uitab"y under the "a. #roscribing unAust enrich'ent!
Page 1= of 21

SPCL Letters of Credit

civil law review

- 5O8*O, nc!a##"ied for, and .as granted by the Phi"i##ine *o''ercia" and ndustria" $an% (hereafter ca""ed +P* $+), a do'estic "etter of credit in fa&or of its su##"ier, Oregon ndustries, nc!, to #ay for one 1%agit Qarder .ith accessories! P* $ #aid to Oregon ndustries the cost of the 'achinery against a bi"" of e/change ! -,fter 'a%ing the re4uired 'argina" de#osit, 5O8*O, nc! signed and de"i&ered to the ban% a trust recei#t ac%no."edging recei#t of the 'erchandise in trust for the ban%, .ith the ob"igation +to ho"d the sa'e in storage+ as #ro#erty of P* $, .ith a right to se"" the sa'e for cash #ro&ided that the entire #roceeds thereof are turned o&er to the ban%, to be a##"ied against acce#tance(s) and any other indebtedness of 5O8*O, nc! - n consideration of the re"ease to 5O8*O, nc! by P* $ of the 'achinery co&ered by the trust recei#t, Ra'on ,bad signed an underta%ing entit"ed, +Deed of *ontinuing >uaranty+ a##earing on the bac% of the trust recei#t, .hereby he Pro'ised to #ay the ob"igation Aoint"y and se&era""y .ith 5O8*O, nc! -H/ce#t for 5O8*OPs P2G,666 'argina" de#osit in the ban%, no #ay'ent has been 'ade to P* $ by either 5O8*O, nc! or its surety, ,bad, on the PG6,666 "etter of credit! -*onse4uent"y, the ban% sued 5O8*O, nc! and ,bad -5O8*O did not deny its "iabi"ity to P* $ under the "etter of credit but it a""eged that inas'uch as it 'ade a 'argina" de#osit the sa'e shou"d ha&e been deducted fro' its #rinci#a" ob"igation, on .hich the ban% shou"d ha&e co'#uted the interest, ban% charges, and attorney3s fees!

TC< -in fa&or of P* $ ordering 5O8*O and ,$,D to #ay Aoint"y and se&era""y to P* $ .ith the 'argina" de#osit sti"" inc"uded in the co'#utation of the ob"igation! CA< - ,ffir'ed in toto decision of 5*!

ISSUE: - Bhether or not the 'argina" de#osit #aid for shou"d first be deducted fro' its #rinci#a" before co'#uting interests and other charges!

HELD: - 5he 'argina" de#osit re4uire'ent is a *entra" $an% 'easure to cut off e/cess currency "i4uidity .hich .ou"d create inf"ationary #ressure! t is a co""atera" security gi&en by the debtor, and is su##osed to be returned to hi' u#on his co'#"iance .ith his secured ob"igation! *onse4uent"y, the ban% #ays no interest on the 'argina" de#osit, un"i%e an ordinary ban% de#osit .hich earns interest in the ban%! ,s a 'atter of fact, the 'argina" de#osit
Page 14 of 21

SPCL Letters of Credit

civil law review

re4uire'ent for "etters of credit has been discontinued, e/ce#t in those cases .here the a##"icant for a "etter of credit is not %no.n to the ban% or does not 'aintain a good credit standing therein! - t is on"y fair then that the 'argina" de#osit (if one .as 'ade, as in this case), shou"d be set off against his debt, for .hi"e the i'#orter earns no interest on his 'argina" de#osit, the ban%, a#art fro' being ab"e to use said de#osit for its o.n #ur#oses, a"so earns interest on the 'oney it "oaned to the i'#orter! t .ou"d be onerous to co'#ute interest and other charges on the face &a"ue of the "etter of credit .hich the ban% issued, .ithout first crediting or setting off the 'argina" de#osit .hich the i'#orter #aid to the ban%! 5o a""o. such .ou"d be a c"ear case of unAust enrich'ent!

1-. MWSS . 7on. Da5a!& 3') SCRA ((+ *)--3. FACTS: - 8B11 granted 8ayni"ad a 26- year #eriod to 'anage, o#erate, re#air, deco''ission and refurbish the e/isting 8B11 .ater de"i&ery and se.erage ser&ices in the .est 2one ser&ice area, for .hich 8ayni"ad undertoo% to #ay the corres#onding concession fees on the date agreed u#on in the said agree'ent .hich consisted of the #ay'ents of 8B11P foreign "oans! - 5o secure the concessionairePs #erfor'ance of itPs ob"igation under the *oncession ,gree'ent, 8ayni"ad .as re4uired to #ut u# a bond, ban% guarantee or other security acce#tab"e to 8B11! - n co'#"iance .ith this re4uire'ent, 8ayni"ad arranged for a = year faci"ity .ith a nu'ber of foreign ban%s, "ed by *iticor# nternationa" (i'ited for the issuance of an irre&ocab"e 1tandby (etter of *redit for the fu"" and #ro'#t #erfor'ance of 8ayni"adPs ob"igations under 8B11! - ,s a resu"t, of the de#reciation of the Phi"i##ine Peso against 01 do""ar, 8ayni"ad incurred "osses and issued a force 'aAeure notice and uni"atera""y sus#end #ay'ent of the concession fees! - n an effort to sa"&age the concession agree'ent, the #arties entered into a 8e'orandu' of ,gree'ent .herein 8ayni"ad .as a""o.ed to reco&er foreign e/change "osses under a for'u"a agreed u#on bet.een the'! - 8ayni"ad fi"ed again another force 'aAeure notice and since 8B11 cou"d not agree .ith the ter's of the notice, the sa'e .as referred to the ,##ea"s Pane" for arbitration! - 7e. ter' .as agreed u#on! - Prior to that 8ayni"ad had fi"ed a #etition for rehabi"itation! - R5* issued an order staying the enforce'ent of the c"ai's and sto##ing #ay'ent of "iabi"ities, because it is under rehabi"itation! t effecti&e"y sto##ed the co''encing #rocess of #ay'ent by the ban% to 8B11! - Bhen 8B11 de'anded #ay'ent and co''enced dra.ing on the irre&ocab"e standby "etter of credit, another order .as issued by the R5* dec"aring such act of 8B11 as &io"ati&e of stay order ear"ier issued! - ,ggrie&ed, 8B11 fi"ed this #etition for re&ie. by .ay of certiorari under ru"e 6@!

Page 1@ of 21

SPCL Letters of Credit

civil law review

-Bhether or not *ourt has the authority to issue order enAoining 8B11 fro' #roceeding against the 1tand-by (etter of *redit!

HELD: -Letters of credit are in effect absolute underta%ings 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 into contracts of guaranty.& (etters of credit .ere de&e"o#ed for the #ur#ose of insuring to a se""er #ay'ent of a definite a'ount u#on the #resentation of docu'ents and is thus a co''it'ent by the issuer that the #arty in .hose fa&or it is issued and .ho can co""ect u#on it .i"" ha&e his credit against the a##"icant of the "etter, du"y #aid in the a'ount s#ecified in the "etter! 5hey are in effect abso"ute underta%ings to #ay the 'oney ad&anced or the a'ount for .hich credit is gi&en on the faith of the instru'ent! 5hey are #ri'ary ob"igations and not accessory contracts and .hi"e they are security arrange'ents, they are not con&erted thereby into contracts of guaranty! Bhat distinguishes "etters of credit fro' other accessory contracts is the engage'ent of the issuing ban% to #ay the se""er once draft and other re4uired shi##ing docu'ents are #resented to it! 5hey are definite underta%ings to #ay at sight once the docu'ents sti#u"ated therein are #resented! -'he obligation of the ban%s 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 underta%ing to pay the beneficiary upon the presentation of the set of documents required therein. - (eing a solidary obligation, the letter of credit is excluded from the #urisdiction of the rehabilitation and therefore in en#oining )*++ from proceeding against the +tandby Letters of Credit to which it had a clear right under the law and the terms of said +tandby Letter of credit, ,on. -away acted in excess of his #urisdiction

11. T#ansfield Philippines& In$. . L%6on 7!d#o Co#p.& 33' SCRA '-, *)--3. FACTS: -5ransfie"d and (u2on ;ydro *or#oration entered into a 5urn%ey contract .hereby 5ransfie"d, as turn%ey contractor, undertoo% to construct, on a turn%ey basis, a se&enty 8ega.att ;ydro-H"ectric #o.er station at the $a%un Ri&er in the #ro&inces of $enguet and "ocos 1ur! -5ransfie"d .as gi&en the so"e res#onsibi"ity for the design, construction, co''issioning, testing and co'#"etion of the #roAect! -5he turn%ey contract entit"ed 5ransfie"d to c"ai' e/tensions of ti'e for reasons enu'erated in the turn%ey contract, a'ong .hich are &ariations, force 'aAeure and de"ays caused by (;* itse"f! -5o secure #erfor'ance of 5ransfie"dPs ob"igation on or before target co'#"etion date, 5ransfie"d o#ened in fa&or of (;* t.o stand-by "etters of credit! - n the course of construction of the #roAect, 5ransfie"d sought &arious e/tension of ti'e to co'#"ete the #roAect! 5he e/tensions .ere re4uested a""eged"y due to se&era" factors .hich #re&ented the co'#"etion of the #roAect on
Page 16 of 21

SPCL Letters of Credit

civil law review

the target date, such as force 'aAeure occasioned by ty#hoon Ieb, barricades and de'onstration! (;* denied the re4uests! -,rbitration #roceeding .ere initiated! -,sserting that (;* had no right to ca"" on the securities unti" the reso"ution of dis#utes before the arbitration tribuna"s, 5ransfie"d .arned the ban%s that any transfer, re"ease or dis#osition of the securities in fa&or of (;* .ou"d constrain it to ho"d the' "iab"e for da'ages! -Des#ite .arning, ho.e&er, the ban%s infor'ed 5ransfie"d that they .ou"d #ay on the securities if and .hen (;* ca""s on the'! -1ubse4uent"y, (;* dec"ared 5ransfie"d in defau"t and de'anded #ay'ent for the de"ay unti" actua" co'#"etion of the #roAect #ursuant to the turn%ey contract! -,"so, (;* ser&ed notice that it .ou"d ca"" on the securities for #ay'ent of "i4uidated da'ages for the de"ay! -;ence, 5ransfie"d fi"ed a co'#"aint for inAunction against (;* and the ban%s!

ISSUES: 1! Bhether or not it is on"y the issuing ban% that 'ay in&o%e the inde#endence #rinci#"e on "etters of credit! 2! Bhether or not there is necessity of reso"&ing first any dis#ute by the #arties before the beneficiary is entit"ed to ca"" on the "etter of credit! =! Bhether or not inAunction is the #ro#er re'edy to restrain .rongfu" dra.s on the securities! 4! Bhether the ban%s .ere Austified in re"easing the a'ounts due under the securities!

HELD: - (etters of credit are a"so used in non-sa"e settings .here they ser&e to reduce the ris% of non-#erfor'ance! (etters of credit in non-sa"e settings are %no.n as standby "etters of credit! 5here are three significant differences bet.een co''ercia" and standby credits! First, co''ercia" credits in&o"&e the #ay'ent of 'oney under a contract of sa"e! 1uch credits beco'e #ayab"e u#on the #resentation by the se""er-beneficiary of docu'ents that sho. he has ta%en affir'ati&e ste#s to co'#"y .ith the sa"es agree'ent! n the standby ty#e, the credit is #ayab"e u#on certification of a #arty3s non#erfor'ance of the agree'ent! 5he docu'ents that acco'#any the beneficiary3s draft tend to sho. that the a##"icant has not #erfor'ed! 5he beneficiary of a co''ercia" credit 'ust de'onstrate by docu'ents that he has #erfor'ed his contract! 5he beneficiary of the standby credit 'ust certify that his ob"igor has not #erfor'ed the contract! - ,s beneficiary of the "etter of credit, (;* is entit"ed to in&o%e the #rinci#"e!

- 5he so-ca""ed Ninde#endence #rinci#"eK assures the se""er or the beneficiary of #ro'#t #ay'ent inde#endent of any breach of the 'ain contract and #rec"udes the issuing ban% fro' deter'ining .hether the 'ain contract is
Page 1C of 21

SPCL Letters of Credit

civil law review

actua""y acco'#"ished or not! 0nder this #rinci#"e, ban%s assu'e no "iabi"ity or res#onsibi"ity for the for', sufficiency, accuracy, genuineness, fa"sification or "ega" effect of any docu'ents, or for the genera" and)or #articu"ar conditions sti#u"ated in the docu'ents or su#eri'#osed thereon, nor do they assu'e any "iabi"ity or res#onsibi"ity for the descri#tion, 4uantity, .eight, 4ua"ity, condition, #ac%ing, de"i&ery, &a"ue or e/istence of the goods re#resented by any docu'ents, or for the good faith or acts and)or o'issions, so"&ency, #erfor'ance or standing of the consignor, the carriers, or the insurers of the goods, or any other #erson .ho'soe&er! 5he inde#endent nature of the "etter of credit 'ay be< (a) inde#endence in toto .here the credit is inde#endent fro' the Austification as#ect and is a se#arate ob"igation fro' the under"ying agree'ent "i%e for instance a ty#ica" standbyE or (b) inde#endence 'ay be on"y as to the Austification as#ect "i%e in a co''ercia" "etter of credit or re#ay'ent standby, .hich is identica" .ith the sa'e ob"igations under the under"ying agree'ent! n both cases the #ay'ent 'ay be enAoined if in the "ight of the #ur#ose of the credit the #ay'ent of the credit .ou"d constitute fraudu"ent abuse of the credit! -5he Nfraud e/ce#tion #rinci#"eK is an e/ce#tion to the inde#endence #rinci#"e! 5he untruthfu"ness of a certificate acco'#anying a de'and for #ay'ent under a standby "etter of credit 'ay 4ua"ify as fraud sufficient to su##ort an inAunction against #ay'ent! 5he re'edy for fraudu"ent abuse is an inAunction! ;o.e&er, inAunction shou"d not be granted un"ess< (a) there is a c"ear #roof of fraudE (b) the fraud constitutes fraudu"ent abuse of the inde#endent #ur#ose of the "etter of credit and not on"y fraud in the 'ain agree'entE and (=) irre#arab"e inAury 'ight fo""o. if inAunction is not granted or the reco&ery of da'ages .ou"d be serious"y da'aged!

-Bhere the a##"icant entered into a 5urn%ey contract .hereby it undertoo% to construct, on a turn%ey basis, a se&enty (C6) 'ega.att hydro e"ectric #o.er station, the #erfor'ance of .hich is secured by a standby "etter of credit, the resort to arbitration by the a##"icant) contractor to arbitration to deter'ine if the "atter is gui"ty of de"ay does not #rec"ude the beneficiary to dra. on the "etter of credit u#on the issuance of certificate of defau"t because .hether or not the issuance of certification of defau"t a'ounted to fraud .as not raised in the "o.er court and the #arties did not sti#u"ate that a"" dis#ute regarding de"ay shou"d first be sett"ed through arbitration before the beneficiary .ou"d be a""o.ed to ca"" u#on the "etter of credit! f dra.ing u#on the "etter of credit .as .rongfu" due to the non-e/istent of the fact of defau"t, the right of the a##"icant to see% inde'nification for da'ages it suffered .ou"d not nor'a""y be forec"osed #ursuant to genera" #rinci#"e of "a.!

1). Bank of Co11e#$e . Se##ano& 3(1 SCRA 343 *)--(.

FACTS: - ?ia 8oda nternationa", through 1errano, obtained an e/#ort #ac%ing "oan fro', $an% of *o''erce ($O*) secured by a Deed of ,ssign'ent o&er rre&ocab"e 5ransferab"e (etter of *redit! 1errano e/ecuted in fa&or of $O* Pro'issory 7ote! ?ia 8oda then o#ened a de#osit account for the #roceeds of the said "oan!

Page 1G of 21

SPCL Letters of Credit

civil law review

-$O* issued to ?ia 8oda, rre&ocab"e (etter of *redit for the #urchase and i'#ortation of fabric and te/ti"e #roducts fro' 5iger Har Fabric *o! (td! of 5ai.an! 5o secure the re"ease of the goods co&ered, 1errano, in re#resentation of ?ia 8oda, e/ecuted 5rust Recei#t ! -0nder the ter's of the trust recei#t, ?ia 8oda agreed to ho"d the goods in trust for $O* as the "atterPs #ro#erty and to se"" the sa'e for the "atterPs account! n case of sa"e, the #roceeds are to be re'itted to the ban% as soon as it is recei&ed, but not "ater than the 'aturity date! 1aid #roceeds are to be a##"ied to the re"ati&e acce#tances, .ith interest and #ena"ty or in the a"ternati&e, to return the goods in case of non-sa"e! -5he goods co&ered by the trust recei#t .ere shi##ed by ?ia 8oda to its consignee in 7e. -ersey, 01,, .ho sent an H/#ort (etter of *redit issued by the $an% of 7e. Qor%, in fa&or of $O*! 5he Regiona" O#erations Officer of $O* signed the e/#ort dec"arations to sho. consent to the shi#'ent! 5he #roceeds of the entrusted goods so"d .ere not credited to the trust recei#t but, .ere a##"ied by the ban% to the #rinci#a", #ena"ties and interest of the e/#ort #ac%ing "oan! 5he e/cess .as a##"ied to the trust recei#t, "ea&ing a ba"ance! - $O* sent a de'and "etter to ?ia 8oda to #ay the said a'ount #"us interest and #ena"ty charges, or to return the goods co&ered by 5rust Recei#t .ithin @ days fro' recei#t! -5he de'and .as not heeded! -1errano .as charged .ith the cri'e of estafa under ,rtic"e =1@ (b) of the Re&ised Pena" *ode in re"ation to Presidentia" Decree 7o! 11@!

TC< -1errano gui"ty and ordered to #ay ci&i" "iabi"ity to $O*! CA< -Re&ersed the decision of 5*!

ISSUE: - Bhether or not 1errano is Aoint"y and se&era""y "iab"e .ith ?ia 8oda under the guarantee of the (etter of *redit secured by the 5rust Recei#t! HELD: - , "etter of credit is a se#arate docu'ent fro' a trust recei#t! Bhi"e the trust recei#t 'ay ha&e been e/ecuted as a security on the "etter of credit, sti"" the t.o docu'ents in&o"&e different underta%ings and ob"igations! , "etter of credit is an engage'ent by a ban% or other #erson 'ade at the re4uest of a custo'er that the issuer .i"" honor drafts or other de'ands for #ay'ent u#on co'#"iance .ith the conditions s#ecified in the credit! 5hrough a "etter of credit, the ban% 'ere"y substitutes its o.n #ro'ise to #ay for the #ro'ise to #ay of one of its custo'ers .ho in return #ro'ises to #ay the ban% the a'ount of funds 'entioned in the "etter of credit #"us credit or co''it'ent fees 'utua""y agreed u#on! $y contrast, a trust recei#t transaction is one .here the entruster, .ho ho"ds an abso"ute tit"e or security interests o&er certain goods, docu'ents or instru'ents, re"eased the sa'e to the entrustee, .ho e/ecutes a trust recei#t binding hi'se"f to ho"d the goods, docu'ents or instru'ents in trust for the entruster and to se"" or other.ise dis#ose of the goods, docu'ents and instru'ents .ith the ob"igation to turn
Page 19 of 21

SPCL Letters of Credit

civil law review

o&er to the entruster the #roceeds thereof to the e/tent of the a'ount o.ing to the entruster, or as a##ears in the trust recei#t, or return the goods, docu'ents or instru'ents the'se"&es if they are unso"d, or not other.ise dis#osed of, in accordance .ith the ter's and conditions s#ecified in the trust recei#t! - 1errano cannot be he"d ci&i""y "iab"e under the trust recei#t since she .as not 'ade #ersona""y "iab"e nor .as she a guarantor therein! 5he #arties sti#u"ated during the #re-tria" that res#ondent 1errano e/ecuted the trust recei#t in re#resentation of ?ia 8oda, nc!, .hich has a se#arate #ersona"ity fro' 1errano, and #etitioner $O* fai"ed to sho. sufficient reason to Austify the #iercing of the &ei" of cor#orate fiction! t thus ru"ed that this .as not 1erranoPs #ersona" ob"igation but that of ?ia 8oda and there .as no basis of finding her so"idari"y "iab"e .ith ?ia 8oda!

1'. Land Bank of the Philippines . Monet8s E9po#t and Man%fa$t%#in0 Co#p. 3(' SCRA 1,' *)--(. FACTS: - (and $an% of the Phi"i##ines ((and $an%), and 8onet3s H/#ort and 8anufacturing *or#oration (8onet) e/ecuted an H/#ort Pac%ing *redit (ine ,gree'ent under .hich 8onet .as gi&en a credit "ine in the a'ount of P2@6,666!66, secured by the #roceeds of its e/#ort "etters of credit, the continuing guaranty of the s#ouses ?icente ?! 5ag"e, 1r! and 8a! *onsue"o >! 5ag"e, and the third #arty 'ortgage! -5he credit "ine agree'ent .as rene.ed and a'ended se&era" ti'es unti" it .as increased to P@,666,666!66! -O.ing to the continued fai"ure and refusa" of 8onet, not.ithstanding re#eated de'ands, to #ay its indebtedness to (and $an%, .hich ha&e ba""ooned to P11,464,246!19 a co'#"aint for co""ection of su' of 'oney .ith #rayer for #re"i'inary attach'ent .as fi"ed by (and $an%! DEFENSE OF (ONET AND TA)LE SPOUSES: - (and $an% fai"ed and refused to co""ect the recei&ab"es on their e/#ort "etter of credit against Bishbone 5rading *o'#any, .hi"e it 'ade unauthori2ed #ay'ent on their i'#ort "etter of credit to $eauti"i%e (i'ited .hich serious"y da'aged the business interests of 8onet! LC AND CA< - (and $an% .as res#onsib"e for the 'is'anage'ent of the Bishbone and $eauti"i%e accounts of 8onet! 5hat because of the non- co""ection and unauthori2ed #ay'ent 'ade by (and $an% on beha"f of 8onet and considering that the "atter cou"d no "onger dra. fro' its credit "ine .ith (and $an%, it suffered fro' "ac% of financia" resources sufficient to buy the needed 'ateria"s to fi"" u# the standing orders fro' its custo'ers! ISSUE: - Bhether or not fau"t or acts of 'is'anage'ent can be attributed to (and $an% re"ati&e to 8onet3s i'#ort "etter of credit

HELD:
Page 26 of 21

SPCL Letters of Credit

civil law review

- 'he engagement of the issuing ban% is to pay the seller or beneficiary of the credit once the draft and the required documents are presented to it. 'he so-called .independence principle assures the seller or the beneficiary of prompt payment independent of an! "#ea$h of the 1ain $ont#a$t and p#e$l%des the iss%in0 "ank f#o1 dete#1inin0 5hethe# the 1ain $ont#a$t is a$t%all! a$$o1plished o# not. ,ccording"y, .e find 'erit in the contention of (and $an% that, as the issuing ban% in the $eauti"i%e transaction in&o"&ing an i'#ort "etter of credit, it on"y dea"s in docu'ents and it is not in&o"&ed in the contract bet.een the #arties! 5he re"ationshi# bet.een the beneficiary and the issuer of a "etter of credit is not strict"y contractua", because both #ri&ity and a 'eeting of the 'inds are "ac%ing! 5hus, u#on recei#t by (and $an% of the docu'ents of tit"e .hich confor' to .hat the "etter of credit re4uires, it is duty bound to #ay the se""er, as it did in this case! -5hus, no fau"t or acts of 'is'anage'ent can be attributed to (and $an% re"ati&e to 8onet3s i'#ort "etter of credit

Page 21 of 21