SPECIAL COMMERCIAL LAW - LETTER OF CREDIT CASE DIGESTS

7/28/2019 SPECIAL COMMERCIAL LAW - LETTER OF CREDIT CASE DIGESTS

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SPCL - LETTER OF CREDIT- CASE DIGEST

I. BPI vs. DE RENY FABRICINDUSTRIES

FACTS:

Four irrevocable letters of credit were

applied to BPI by DE RENY FABRICINDUSTRIES (DRFI) for the purchase ofvarious colors of dyestuffs from J.B.DISTRIBUTING, an American supplier.

BPI approved and executed the samewith the corresponding Letter of Credit(L/C) Agreement.

L/Cs were forwarded by BPI to itsCorrespondent Bank (CB) in the U.S.

In this set-up CB shall pay thepurchase price to the supplier J.B.DISTRIBUTING upon the latterspresentation of required documents.

J.B. DISTRIBUTING did present thedocuments and CB paid them.

The problem arose when DRFI, uponthe arrival of shipment in Manila,discovered that those delivered onlycontained colored chalks.

DRFI stopped the payment of issuedL/Cs to BPI on the ground that it is CBof BPI has the responsibility to checkfirst if what is to be shipped conformto what was stipulated under L/C.

ISSUE: WON the applicant DRFI can shift theburden of loss to issuing bank BPI on accountof the violation by the seller-beneficiary J.B.DISTRIBUTINGs prestation.

HELD:

SC ruled in the negative.

DRFI has to comply with L/Cagreement which states that the bankshall not be responsible for theexistence, character, quality,quantity, conditions, packing, value, ordelivery of the property.

Also, DRFI cannot shift the burden ofloss to BPI on account of the vendorsprestation.

BPI undisputedly proven by BPI that inproviding financing in internationalbusiness transactions such as thatentered into with DRFI, banks do notdeal with the property to be exportedor shipped to the importer, but dealonly with documents.

BPI introduced as evidence a provisionunder the Uniform Customs and

Practices for CommercialDocumentary Credits.

The use of the same as evidence wasjustified by the Article 2 of the Code ofCommerce In the absence of anyparticular provision in the COC,commercial transactions shall begoverned by usage and customs.

Under the evidence presented, it was

stated that in documentary creditoperations, all parties concerned dealin documents not in goods. Payment,negotiation or acceptance againstdocuments in accordance with theterms and conditions of credit by thebank authorized to do so, binds theparty giving the authorization to takeup the documents and reimburse thebank making payment, negotiationand acceptance.

The existence of a custom ininternational baking and financingcircles negating any duty on the partof the bank to verify whether what hasbeen described in the L/Cs, drafts orshipping documents actually talliedwith what has been loaded aboard aship.

DIANA ABIGAIL M. DIESTRO SECTION 3-B 1ST SEMESTER AY 2013-2014


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Bank is not required to investigate ifthe contract underlying credit hasbeen fulfilled or not.

DRFI is bound by the establishedusage.

II. PHILIPPINE VIRGINIA TOBACCOADMINISTRATION (PVTA) vs. DE

LOS ANGELES

FACTS:

Respondent Timoteo Sevilla,proprietor and General Manager of thePhilippine Associated Resources (PAR)together with two other entities,namely, the Nationwide Agro-Industrial Development Corp. and theConsolidated Agro-Producers Inc. wereawarded in a public bidding the rightto import Virginia leaf tobacco forblending purposes and exportation bythem of PVTA and farmer's low-gradetobacco.

Subsequently, the other two entitiesassigned their rights to PVTA andrespondent remained the only privateentity accorded the privilege.

In their contract respondent Sevillapurchased from petitioner and actuallyexported 2,101.470 kilos of tobacco,

paying the PVTA the sum ofP2,482,938.50 and leaving a balanceof P3,713,908.91.

Before respondent Sevilla could importthe counterpart blending Virginiatobacco, Republic Act No. 4155 waspassed and took effect on June 20, 1964, authorizing the PVTA to grantimport privileges at the ratio of 4 to 1instead of 9 to 1 and to dispose of allits tobacco stock at the best priceavailable.

Subject contract which was alreadyamended because of the prevailingexport or world market price underwhich respondent will be exporting ata loss; further amended to grantrespondent the privileges underaforesaid law, subject to the followingconditions: (1) that on the 2,101.470kilos already purchased, and exported,the purchase price of about P3.00 akilo was maintained; (2) that theunpaid balance of P3,713,908.91 was

to be liquidated by paying PVTA thesum of P4.00 for every kilo of importedVirginia blending tobacco and; (3) thatrespondent Sevilla would open anirrevocable letter of credit No. 6232with the Prudential Bank and Trust Co.in favor of the PVTA to secure the

payment of said balance, drawableupon the release from the Bureau of



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SPCL - LETTER OF CREDIT- CASE DIGESTCustoms of the imported Virginiablending tobacco.

While respondent was trying tonegotiate the reduction of theprocurement cost which attempt wasdenied, petitioner prepared two draftsto be drawn against said letter ofcredit for amounts which have alreadybecome due and demandable.Respondent then filed a complaint fordamages with preliminary injunctionagainst the petitioner in the amount ofP5,000,000.00.

Petitioner filed an answer withcounterclaim, admitting the executionof the contract. It alleged howeverthat respondent, violated the terms

thereof by causing the issuance of thepreliminary injunction to prevent theformer from drawing from the letter ofcredit for amounts due and payableand thus caused petitioner additionaldamage of 6% per annum.

Philippine Virginia TobaccoAdministration seeks to annul and setaside Orders of respondent Judge ofthe Court of First Instance of Rizal,Branch IV (Quezon City) in Civil CaseNo. Q-10351 and prays that the Writ of

Preliminary Injunction (that may be)issued by this Court enjoiningenforcement of the aforesaid Ordersbe made permanent.

AS PRAYED FOR, the PrudentialBank & Trust Company ishereby directed to release anddeliver to the herein plaintiff,

Timoteo A. Sevilla, the amountof P800,000.00 in its custodyrepresenting the marginal

deposit of the Letters of Creditwhich said bank has issued infavor of the defendant, uponfiling by the plaintiff of a bondin the um of P800,000.00, toanswer for whatever damagethat the defendant PVTA andthe Prudential Bank & TrustCompany may suffer by reasonof this order.

ISSUE: WON the court can order an IssuingBank to release the funds pertaining to theirrevocable L/Cs in favor of the applicant.

HELD:

The petition is impressed with merit.

In issuing the Order of July 17, 1967,respondent Judge violated theirrevocability of the letter of creditissued by respondent Bank in favor ofpetitioner. An irrevocable letter ofcredit caretaker.2 during its lifetimebe cancelled or modified Without the

express permission of theConsequently, if the finding agricul-the trial on the merits is thatrespondent Sevilla has alleged unpaidbalance due the petitioner, suchunpaid obligation would be unsecured.

The sole object of a preliminaryinjunction is to preserve the statusquo until the merit can be heard. It isthe last actual peaceable uncontestedstatus which precedes the pendingcontroversy .

Injury is considered irreparable if it isof such constant and frequentrecurrence that no fair or reasonableredress can be had therefor in a courtof law (Allundorff v. Abrahanson, 38Phil. 585) or where there is nostandard c,irrency which their amountcan be measured with reasonableaccuracy, that is, it is not susceptibleof mathematical computation (SSC v.Bayona, et al., L-13555, May 30,

1962).

Any alleged damage suffered or mightpossibly be suffered by respondentSevilla refers to expected profits andclaimed by him in this complaint asdamages in the amount of FIVE MillionPesos (P5,000,000.00), a damage thatcan be measured, susceptible ofmathematical computation, not



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SPCL - LETTER OF CREDIT- CASE DIGESTirreparable, nor do they necessitatethe issuance of the Order of November3, 1967.

Conversely, there is truth inpetitioner's claim that it will suffergreater damage than that suffered by

respondent Sevilla if the Order ofNovember 3, 1967 is not annulled.Petitioner's stock if not made availableto other parties will require warehousestorage and servicing fees in theamount of P4,704,236.00 yearly ormore than P9,000.000.00 in two yearstime.

Orders are ANNULLED and SET ASIDE;and the preliminary injunctions shouldcontinue until the termination of Case

III. INSULAR BANK OF ASIA &AMERICA (IBAA)vs. IAC

FACTS:

PHILAMLIFE (beneficiary) granted 2loans to SPS. MENDOZA (applicant) tofinance the construction of theirhouse.

This transaction is under amortizationsover a period of 5 years.

PHILAMLIFE required that theamortizations be guaranteed by anirrevocable standby L/C (SLOC) of acommercial bank.

SPS. MENDOZA applied to IBAA(issuing bank) for the issuance of 2SLOCs in favor of PHILAMLIFE for thetotal amount of P600,000.

SLOCs were also secured by a realestate mortgage for the same amountover the property of SPS. MENDOZA.



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SPS. MENDOZA failed to pay their firstamortization so PHILAMLIFE drawn onthe SLOC from IBAA.

Later, upon another default inamortization payment, PHILAMLIFEdemanded the entire amount of SLOCfrom IBAA.

IBAA refused to pay under the SLOCSon the ground that SPS. MENDOZAspartial payments entitled them torefund which has the effect ofreducing their liability as a guarantor.

On the other hand, PHILAMLIFE andSPS. MENDOZA disagree on theground that IBAA has an original andprimary obligation under the SLOCSwhich cannot be reduced by the

payments made by the SPS.

ISSUE: WON liability of Issuing Bank can bereduced by partial payments rendered by theapplicant to the beneficiary as a guarantor.

HELD:

SC ruled in the negative.

In construing the terms of a Letter ofCredit, as in other contracts, it is theintention of the parties that mustgovern.

Letters of credit and contracts for theissuance of such letters are subject tothe same rules of construction as areordinary commercial contracts. Theyare to receive a reasonable and not atechnical construction and althoughusage and custom cannot controlexpress terms in letters of credit, theyare to be construed with reference toall the surrounding facts andcircumstances, to the particular andoften varying terms in which they maybe expressed, the circumstances andintention of the parties to them, andthe usages of the particular trade ofbusiness contemplated.

Unequivocally, the subject standbyLetters of Credit secure the paymentof any obligation of the Mendozas to

Philam Life including all interests,surcharges and expenses thereon butnot to exceed P600,000.00. But whilethey are a security arrangement, theyare not converted thereby intocontracts of guaranty. That wouldmake them ultra vires rather than aletter of credit, which is within thepowers of a bank (Section 74[e], RA337, General Banking Act).

The standby L/Cs are, "in effect anabsolute undertaking to pay themoney advanced or the amount forwhich credit is given on the faith ofthe instrument.

They are primary obligations and notaccessory contracts. Being separateand independent agreements, the

payments made by the Mendozascannot be added in computing IBAA'sliability under its own standby lettersof credit.

Payments made by the Mendozasdirectly to Philam Life are incompliance with their own prestationunder the loan agreements.

And although these payments couldresult in the reduction of the actual

amount which could ultimately becollected from IBAA, the latter'sseparate undertaking under its L/Csremains.

Both the Trial Court and the AppellateCourt found, as a fact, that there stillremains a balance on the loan,Pursuant to its absolute undertakingunder the L/Cs, therefore, IBAA cannotescape the obligation to pay PhilamLife for this unexpended balance. The

Appellate Court found it to beP222,000.00, arrived at by the TrialCourt and adopted by the AppellateCourt, as follows:

As found by the Appellate Court,however, the amount payable shouldnot exceed P296,294,05 (P600,000.00less P303,705.95, the total amount



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SPCL - LETTER OF CREDIT- CASE DIGESTfound by the Appellate Court to havebeen paid by IBAA to Philam Life).

IV. FEATI BANK & TRUST CO. vs.CA

FACTS:

CHRISTIANSEN issued a purchaseorder to buy certain type of logsfrom VILLALUZ for the price of 27dollars per cubic meter FOB.

CHRISTIANSEN sold the logs toHANMI TRADE OF CALIFORNIA(HANMI)

HANMI instructed the SECURITYPACIFIC BANK OF CALIFORNIA(SPBC) to issue irrevocable L/C infavor of VILLALUZ.

SPBC then mailed the irrevocableL/C to its correspondent bank FEATIBANK instructing the same toforward the enclosed letter tobeneficiary VILLALUZ.

Under the L/C agreement, the draftis to be drawn to SPBC and that itshall be accompanied by certaindocuments.

One of the documents required isthe certification by CHRISTIANSEN(direct buyer) that the goods werein good order condition.

But upon loading of the logs and its

inspection, CHRISTIANSEN refusedto issue the same.

Nevertheless, the logs wereshipped and received by HANMI asits consignee.

With absence of the certification,FEATI BANK refused to advance thepayment on the L/C until the creditlapsed.

VILLALUZ then filed an action formandamus against CHRISTIANSENand FEATI BANK.

But since CHRISTIANSEN left thePhilippines, in an amendedcomplaint, FEATI was alleged to besolidarily liable withCHIRSTIANSEN.

ISSUE: WON FEATI BANK should be heldsolidarily liable with CHIRSTIANSEN forlatters non-compliance with the requireddocuments under the L/C

HELD:

NO. It is a settled rule in commercialtransactions involving letters of creditthat the documents tendered must

strictly conform to the terms of theletter of credit.

The tender of documents by thebeneficiary (seller) must include alldocuments required by the letter.

A correspondent bank which departsfrom what has been stipulated underthe letter of credit, as when it accepts

a faulty tender, acts on its own risksand it may not thereafter be able torecover from the buyer or the issuingbank, as the case may be, the moneythus paid to the beneficiary Thus therule of strict compliance.

In the United States, commercialtransactions involving letters of creditare governed by the rule of strictcompliance. In the Philippines, thesame holds true. The same rule must

also be followed.

Under the foregoing provisions of theU.C.P., the bank may only negotiate,accept or pay, if the documentstendered to it are on their face inaccordance with the terms andconditions of the documentary credit.And since a correspondent bank, likethe petitioner, principally deals only



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SPCL - LETTER OF CREDIT- CASE DIGESTwith documents, the absence of anydocument required in thedocumentary credit justifies therefusal by the correspondent bank tonegotiate, accept or pay thebeneficiary, as it is not its obligation tolook beyond the documents. It merelyhas to rely on the completeness of thedocuments tendered by thebeneficiary.

Also, In regard to the ruling of thelower court and affirmed by the Courtof Appeals that the petitioner is not anotifying bank but a confirming bank,we find the same erroneous.

The trial court appears to haveoverlooked the fact that an irrevocable

credit is not synonymous with aconfirmed credit.

An irrevocable credit refers to theduration of the letter of credit. What issimply means is that the issuing bankmay not without the consent of thebeneficiary (seller) and the applicant(buyer) revoke his undertaking underthe letter. The issuing bank does notreserve the right to revoke the credit.On the other hand, a confirmed letter

of credit pertains to the kind ofobligation assumed by thecorrespondent bank. In this case, thecorrespondent bank gives an absoluteassurance to the beneficiary that it willundertake the issuing bank'sobligation as its

own according to the terms andconditions 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 notnecessarily imply that thecorrespondent bank in accepting theinstructions of the issuing bank hasalso confirmed the letter of credit.

In commercial transactions involvingletters of credit, the functionsassumed by a correspondent bank are

classified according to the obligationstaken up by it.

In case of a notifying bank, thecorrespondent bank assumes noliability except to notify and/ortransmit to the beneficiary the

existence of the letter of credit.

A negotiating bank, on the other hand,is a correspondent bank which buys ordiscounts a draft under the letter ofcredit. Its liability is dependent uponthe stage of the negotiation. If beforenegotiation, it has no liability withrespect to the seller but afternegotiation, a contractual relationshipwill then prevail between thenegotiating bank and the seller.

In the case of a confirming bank, thecorrespondent bank assumes a directobligation to the seller and its liabilityis a primary one as if thecorrespondent bank itself had issuedthe letter of credit.

In this case, the letter merely providedthat the petitioner "forward theenclosed original credit to thebeneficiary." It is indubitable that the

petitioner is only a notifying bank andnot a confirming bank as ruled by thecourts below.

If the petitioner was a confirmingbank, then a categorical declarationshould have been stated in the letterof credit that the petitioner is to honorall drafts drawn in conformity with theletter of credit.

Since the petitioner was only anotifying bank, its responsibility wassolely to notify and/or transmit thedocumentary of credit to the privaterespondent and its obligation endsthere.

The notifying bank may suggest to theseller its willingness to negotiate, butthis fact alone does not imply that the



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SPCL - LETTER OF CREDIT- CASE DIGESTnotifying bank promises to accept thedraft drawn under the documentarycredit.

A notifying bank is not a privy to thecontract of sale between the buyerand the seller, its relationship is only

with that of the issuing bank and notwith the beneficiary to whom heassumes no liability. It followstherefore that when the petitionerrefused to negotiate with the privaterespondent, the latter has no cause ofaction against the petitioner for theenforcement of his rights under theletter.

The loan agreement is morereasonably classified as an isolated

transaction independent of thedocumentary credit.

Whether therefore the petitioner is anotifying bank or a negotiating bank, itcannot be held liable. Absent anydefinitive proof that it has confirmedthe letter of credit or has actuallynegotiated with the privaterespondent, the refusal by thepetitioner to accept the tender of theprivate respondent is justified.

In regard to the finding that the

petitioner became a "trustee inrelation to the plaintiff (privaterespondent) as the beneficiary of theletter of credit," the same has no legalbasis.

A trust has been defined as the "right,enforceable solely in equity, to thebeneficial enjoyment of property thelegal title to which is vested toanother." (89 C.J.S. 712)

The concept of a trust presupposesthe existence of a specific propertywhich has been conferred upon theperson for the benefit of another. Inorder therefore for the trust theory ofthe private respondent to besustained, the petitioner should havehad in its possession a sum of moneyas specific fund advanced to it by theissuing bank and to be held in trust by

it in favor of the private respondent.This does not obtain in this case.

The mere opening of a letter of credit,it is to be noted, does not involve aspecific appropriation of a sum ofmoney in favor of the beneficiary. It

only signifies that the beneficiary maybe able to draw funds upon the letterof credit up to the designated amountspecified in the letter. It does notconvey the notion that a particularsum of money has been specificallyreserved or has been held in trust.

What actually transpires in anirrevocable credit is that thecorrespondent bank does not receivein advance the sum of money from the

buyer or the issuing bank. On thecontrary, when the correspondentbank accepts the tender and

pays the amount stated in the letter,the money that it doles out comes notfrom any particular fund that has beenadvanced by the issuing bank, ratherit gets the money from its own fundsand then later seeks reimbursement

from the issuing bank.

Granting that a trust has beencreated, still, the petitioner may notbe considered a trustee. As thepetitioner is only a notifying bank, itsacceptance of the instructions of theissuing bank will not create estoppelon its part resulting in the acceptanceof the trust. Precisely, as a notifyingbank, its only obligation is to notify theprivate respondent of the existence of

the letter of credit. How then can suchcreate estoppel when that is its onlyduty under the law?

We also find erroneous the statementof the Court of Appeals that thepetitioner "acted as a guarantor of theissuing bank and in effect also of thelatter's principal or client, i.e., HansAxel Christiansen."



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It is a fundamental rule that anirrevocable credit is independent notonly of the contract between thebuyer and the seller but also of thecredit agreement between the issuingbank and the buyer. (See Kingdom ofSweden v. New York Trust Co., 96N.Y.S. 2d 779 [1949]). The relationshipbetween the buyer (Christiansen) andthe issuing bank (Security PacificNational Bank) is entirely independentfrom the letter of credit issued by thelatter.

The contract between the two has nobearing as to the non-compliance bythe buyer with the agreementbetween the latter and the seller.

Their contract is similar to that of a

contract of services (to open the letterof credit) and not that of agency aswas intimated by the Court of Appeals.

The unjustified refusal therefore byChristiansen to issue the certificationunder the letter of credit should notlikewise be charged to the issuingbank.

As a mere notifying bank, not onlydoes the petitioner not have anycontractual relationship with the

buyer, it has also nothing to do withthe contract between the issuing bankand the buyer regarding the issuanceof the letter of credit.

The theory of guarantee relied uponby the Court of Appeals has tonecessarily fail. The concept ofguarantee vis-a-vis the concept of anirrevocable credit are inconsistent with

each other. In the first place, the guarantee theory

destroys the independence of thebank's responsibility from the contractupon which it was opened. In thesecond place, the nature of bothcontracts is mutually in conflict witheach other. In contracts of guarantee,the guarantor's obligation is merelycollateral and it arises only upon the

default of the person primarily liable.On the other hand, in an irrevocablecredit the bank undertakes a primaryobligation. (See National Bank of EaglePass, Tex v. American National Bank ofSan Francisco, 282 F. 73 [1922])

The relationship between the issuingbank and the notifying bank, on thecontrary, is more similar to that of anagency and not that of a guarantee. Itmay be observed that the notifyingbank is merely to follow theinstructions of the issuing bank whichis to notify or to transmit the letter ofcredit to the beneficiary. (SeeKronman v. Public National Bank ofNew York, supra). Its commitment isonly to notify the beneficiary. It does

not undertake any assurance that theissuing bank will perform what hasbeen mandated to or expected of it.As an agent of the issuing bank, it hasonly to follow the instructions of theissuing bank and to it alone is itobligated and not to buyer with whomit has no contractual relationship.

In fact the notifying bank, even if theseller tenders all the documentsrequired under the letter of credit,

may refuse to negotiate or accept thedrafts drawn thereunder and it will stillnot be held liable for its onlyengagement is to notify and/ortransmit to the seller the letter ofcredit.

Finally, even if we assume that thepetitioner is a confirming bank, thepetitioner cannot be forced to pay theamount under the letter. As we havepreviously explained, there was a

failure on the part of the privaterespondent to comply with the termsof the letter of credit.

V. PRUDENTIAL BANK & TRUSTCO. V. IAC

FACTS:



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Philippine Rayon Mills (PRM-BA)entered into a contract withNISSHIO Co. of Japan (SB) for theimportation of textile machineriesunder a 5-year deferred paymentplan.

PRM applied for commercial letter

with PRUDENTIAL BANK in favor ofNISSHIO. It was later approved.

PRUDENTIAL BANK through itscorrespondent bank in Japan, paidNISSHIO, after the latter drawn andissued drafts against the letter ofcredit.

PRUDENTIAL BANK indorsed theshipping documents to PRM uponarrival of the machineries.

To be able to take the delivery ofthe machineries, PRM executed, by

prior arrangement with thePRUDENTIAL BANK, a trust receiptsigned by Anacleto R. Chi in hiscapacity as president of PRM.

PRM obtained the delivery and hadthe machineries installed in itsfactory site.

But later, PRM ceased itsoperations and the machinerieswere sold to AIC DevelopmentCorporation

PURUDENTIAL BANK filed an action

to collect the principal amountbecause PRMs obligation under theL/C remained unpaid.

Lower Court Ruling: Insofar as theamount involved in the draft whichwas not presented and accepted byPRM, PRUDENTIAL BANK was not

justified to unilaterally pay toNISSHIO.

ISSUE: 1. WON presentment for acceptanceof the drafts was indispensable before PRMcan be held liable thereon.

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

3. Whether private respondent Chi isjointly and severally liable with PhilippineRayon for the obligation sought to beenforced and if not, whether he may beconsidered a guarantor; in the lattersituation, whether the case should havebeen dismissed on the ground of lack of

cause of action as there was no priorexhaustion of Philippine Rayon's properties.

HELD:

A letter of credit is defined as anengagement by a bank or otherperson made at the request of acustomer that the issuer will honordrafts or other demands for paymentupon compliance with the conditionsspecified in the credit.

Through a letter of credit, the bankmerely substitutes its own promise topay for one of its customers who inreturn promises to pay the bank theamount of funds mentioned in the

letter of credit plus credit orcommitment fees mutually agreedupon.

In the instant case then, the draweewas necessarily the herein petitioner.It was to the latter that the drafts werepresented for payment.

In fact, there was no need foracceptance as the issued drafts aresight drafts. Presentment foracceptance is necessary only in thecases expressly provided for in Section143 of the Negotiable Instruments Law(NIL). 13 The said section reads:

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

(a) Where the bill is payable after

sight, or in any other case, wherepresentment for acceptance isnecessary in order to fix the maturityof the instrument; or(b) Where the bill expressly stipulatesthat it shall be presented foracceptance; or(c) Where the bill is drawn payableelsewhere than at the residence orplace of business of the drawee.



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In no other case is presentment foracceptance necessary in order torender any party to the bill liable.

Obviously then, sight drafts do notrequire presentment for acceptance.

Corollarily, they are, pursuant to

Section 7 of the NIL, payable ondemand. Section 7 provides:

Sec. 7. When payable on demand. An instrument is payable on demand(a) When so it is expressed to bepayable on demand, or at sight, or on

presentation; or(b) In which no time for payment inexpressed.

Where an instrument is issued,accepted, or indorsed when overdue,it is, as regards the person so issuing,accepting, or indorsing it, payable ondemand.

Paragraph 8 of the Trust Receiptwhich reads: "My/our liability forpayment at maturity of any accepteddraft, bill of exchange orindebtedness shall not beextinguished or modified" does not,contrary to the holding of the publicrespondent, contemplate prioracceptance by Philippine Rayon, butby the petitioner. Acceptance,however, was not even necessary inthe first place because the draftswhich were eventually issued weresight drafts And even if these werenot sight drafts, thereby necessitatingacceptance, it would be the petitioner and not Philippine Rayon whichhad to accept the same for the latterwas not the drawee. Presentment foracceptance is defined an theproduction of a bill of exchange to adrawee for acceptance.

The trial court and the publicrespondent, therefore, erred in ruling

that presentment for acceptance wasan indispensable requisite forPhilippine Rayon's liability on thedrafts to attach.

Contrary to both courts'pronouncements, Philippine Rayon

immediately became liable thereonupon petitioner's payment thereof.Such is the essence of the letter ofcredit issued by the petitioner. Adifferent conclusion would violate theprinciple upon which commercialletters of credit are founded becausein such a case, both the beneficiaryand the issuer, Nissho Company Ltd.and the petitioner, respectively, wouldbe placed at the mercy of PhilippineRayon even if the latter had already

received the imported machinery andthe petitioner had fully paid for it.

The trial court and the publicrespondent likewise erred indisregarding the trust receipt and innot holding that Philippine Rayon wasliable thereon.

Under P.D. No. 115, otherwise known

an the Trust Receipts Law, "anytransaction by and between a personreferred to in this Decree as theentruster, and another personreferred to in this Decree as theentrustee, whereby the entruster,who owns or holds absolute title orsecurity interests' over certainspecified goods, documents orinstruments, releases the same to thepossession of the entrustee upon thelatter's execution and delivery to the

entruster of a signed document calledthe "trust receipt" wherein theentrustee binds himself to hold thedesignated goods, documents orinstruments in trust for the entrusterand to sell or otherwise dispose of thegoods, documents or instruments withthe obligation to turn over to theentruster the proceeds thereof to theextent of the amount owing to the



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SPCL - LETTER OF CREDIT- CASE DIGESTentruster or as appears in the trustreceipt or the goods, instrumentsthemselves if they are unsold or nototherwise disposed of, in accordancewith the terms and conditionsspecified in the trusts receipt, or forother purposes substantiallyequivalent to any one of the following:. . ."

It is alleged in the complaint thatprivate respondents "not only havepresumably put said machinery togood use and have profited by itsoperation and/or disposition but veryrecent information that (sic) reachedplaintiff bank that defendants alreadysold the machinery covered by thetrust receipt to Yupangco CottonMills," and that "as trustees of the

property covered by the trustreceipt, . . . and therefore acting infiduciary (sic) capacity, defendantshave willfully violated their duty toaccount for the whereabouts of themachinery covered by the trustreceipt or for the proceeds of anylease, sale or other disposition of thesame that they may have made,notwithstanding demands therefor;defendants have fraudulentlymisapplied or converted to their own

use any money realized from thelease, sale, and other disposition ofsaid machinery." 23 While there is nospecific prayer for the delivery to thepetitioner by Philippine Rayon of theproceeds of the sale of the machinerycovered by the trust receipt, suchrelief is covered by the general prayerfor "such

further and other relief as may be just

and equitable on the premises."24

And although it is true that thepetitioner commenced a criminalaction for the violation of the TrustReceipts Law, no legal obstacleprevented it from enforcing the civilliability arising out of the trust, receiptin a separate civil action. UnderSection 13 of the Trust Receipts Law,the failure of an entrustee to turnover the proceeds of the sale of

goods, documents or instrumentscovered by a trust receipt to theextent of the amount owing to theentruster or as appear in the trustreceipt or to return said goods,documents or instruments if theywere not sold or disposed of inaccordance with the terms of the trustreceipt shall constitute the crime ofestafa, punishable under theprovisions of Article 315, paragraph1(b) of the Revised Penal Code. 25Under Article 33 of the Civil Code, acivil action for damages, entirelyseparate and distinct from thecriminal action, may be brought bythe injured party in cases ofdefamation, fraud and physicalinjuries. Estafa falls under fraud.

We also conclude, for the reasonhereinafter discussed, and not for thatadduced by the public respondent,that private respondent Chi'ssignature in the dorsal portion of thetrust receipt did not bind himsolidarily with Philippine Rayon.

Petitioner insists that by virtue of theclear wording of the statement,specifically the clause ". . . we jointlyand severally agree andundertake . . .," and the concluding

sentence on exhaustion, Chi's liabilitytherein is solidary.

Our own reading of the questionedsolidary guaranty clause yields noother conclusion than that theobligation of Chi is only that of aguarantor. This is further bolstered bythe last sentence which speaks ofwaiver of exhaustion, which,nevertheless, is ineffective in thiscase because the space therein for

the party whose property may not beexhausted was not filled up. UnderArticle 2058 of the Civil Code, thedefense of exhaustion (excussion)may be raised by a guarantor beforehe may be held liable for theobligation. Petitioner likewise



13/34


14/34

SPCL - LETTER OF CREDIT- CASE DIGESTISSUES:

1. WON BANK OF AMERICA haswarranted the genuineness andauthenticity of the letter of credit and,corollarily, whether it has actedmerely as an advising bank or as aconfirming bank;

2. WON Bank of America may recoveragainst Inter-Resin under the draftexecuted in its partial availment of theletter of credit. 8

HELD:

The first issue raised with thepetitioner, i.e., that it has in thisinstance merely been advising bank, isoutrightly rejected by Inter-Resin and

is thus sought to be discarded forhaving been raised only on appeal. Wecannot agree. The crucial point ofdispute in this case is whether underthe "letter of credit," Bank of Americahas incurred any liability to the"beneficiary"

thereof, an issue that largely isdependent on the bank's participationin that transaction; as a mere advisingor notifying bank, it would not be

liable, but as a confirming bank, hadthis been the case, it could beconsidered as having incurred thatliability.

It cannot seriously be disputed,looking at this case, that Bank ofAmerica has, in fact, only been anadvising, not confirming, bank, andthis much is clearly evident, amongother things, by the provisions of theletter of credit itself, the petitionerbank's letter of advice, its request for

payment of advising fee, and theadmission of Inter-Resin that it haspaid the same.

That Bank of America has asked Inter-Resin to submit documents requiredby the letter of credit and eventuallyhas paid the proceeds thereof, did notobviously make it a confirming bank.

The fact, too, that the draft requiredby the letter of credit is to be drawn

under the account of GeneralChemicals (buyer) only means thesame had to be presented to Bank ofAyudhya (issuing bank) for payment. Itmay be significant to recall that theletter of credit is an engagement ofthe issuing bank, not the advisingbank, to pay the draft.

Article 18 of the U.C.P. states that:"Banks assume no liability orresponsibility for the consequencesarising out of the delay and/or loss intransit of any messages, letters ordocuments, or for delay, mutilation orother errors arising in the transmissionof any telecommunication . . ."

As advising bank, Bank of America isbound only to check the "apparentauthenticity" of the letter of credit,

which it did.

29

Clarifying its meaning,Webster's Ninth New CollegiateDictionary 30 explains that the word"APPARENT suggests appearance tounaided senses that is not or may notbe borne out by more rigorousexamination or greater knowledge."

May Bank of America then recoverwhat it has paid under the letter ofcredit when the corresponding draftfor partial availment thereunder andthe required documents were later

negotiated with it by Inter-Resin? The answer is yes. This kind of

transaction is what is commonlyreferred to as a discountingarrangement. This time, Bank ofAmerica has

acted independently as a negotiatingbank, thus saving Inter-Resin from thehardship of presenting the documentsdirectly to Bank of Ayudhya to recover

payment. (Inter-Resin, of course, couldhave chosen other banks with which tonegotiate the draft and thedocuments.)

As a negotiating bank, Bank ofAmerica has a right to recourseagainst the issuer bank and untilreimbursement is obtained, Inter-Resin, as the drawer of the draft,



15/34


16/34

SPCL - LETTER OF CREDIT- CASE DIGESTEKMAN to finance the purchase of 5units of hydraulic loaders.

The L/C will expire sometime inFebruary but it was extended untilOctober (about 10 months)

The first batch of loaders were

delivered by EKMAN on time and FAREAST paid it.

The second batch was deliveredbeyond the expiration of the L/C.

Despite the late delivery (5 monthsdelay), FAR EAST still paid EKMANupon its presentation of stipulateddocuments.

FAR EAST then demanded RODZSEN

for reimbursement.

RODZSEN refused, instead, it offeredto return he last batch of loaders.

ISSUE: WON RODZSEN can refuse to payFAR EAST despite its payment beyond theexpiration of L/C.

HELD:

NO. Be that was it may, We agree with CA

that RODSZEN should pay respondentFAR EAST for the amount the latterexpended for the equipment belatedlydelivered by EKMAN and voluntarilyreceipt and kept by RODSZEN.

FAR EAST right to recovery isanchored not upon the inefficaciousL/C but on Article 2142, NCC.

Certain lawful, voluntary and unilateralacts give rise to the juridical relationof quasi-contract to the end that noone shall be unjustly enriched orbenefitted at the expense of another.

Equitable considerations behoove usto allow recovery.

True, it erred in paying EKMAN butRODZSEN is not without fault in thetransaction. It had voluntarily receivedand kept the loaders since October1979.

Although RODZSEN claimed that it

accepted the delivery because it wasbound to receive it

under the companys trust receiptarrangement with FAR EAST.

Granting that it is bound by sucharrangement, we note its unexplainedinaction for almost 4 years with regardto the status of the ownership andpossession of the loaders.

Also, it only formalized its return of the

2 pieces of equipment only after FAREAST demanded payment, whichhappened 3 years after the delivery.

When both parties to the transactionare mutually negligent in theperformance of their obligations, thefault of one cancels the negligence ofthe other.

In this case the rights and obligationsmay be determined equitably underthe law proscribing unjust enrichment.

An IB which paid the beneficiary of anexpired L/C can recover paymentfrom an AB which obtained the goodsfrom the beneficiary to prevent unjustenrichment.



17/34


VIII. RELIANCE COMMODITIES, INC.V. DAEWOO INDUSTRIAL CO.

FACTS:

RELIANCE (BA) and DAEWOO (SB)entered into two contract of sale forthe shipment and delivery of foundrypig iron provided that a L/C shall covertheir second transaction.

Under the first contract Daewoo fellshort of certain metric tons.

Under the second contract, the 2,000metric tons was completely deliveredby Daewoo.

But upon RELIANCEs applicaton forL/C, it was denied by the CHINA

BANKING CORP. because it hasexceeded its foreign exchangeallocation.

Because of such, DAEWOO was forcedto sell the foundry pig irons to anotherbuyer at a lower price.

RELIANCE filed an action for damagesagainst DAEWOO for the recovery ofP226K+ representing the value of theshort delivery of more than 135 metrictons of foundry pig iron under theirfirst contract.

DAEWOO filed a counterclaim allegingthat RELIANCE was guilty of breach ofcontract for its failure to open a L/Cunder the second contract.

TC ruled that RELIANCE is entitled toshort delivery price and orderedDAEWOO to pay the amount. BUT italso held that RELIANCE is liable forbreach of contract for its failure to

open a L/C so it also awardeddamaged in favor of DAEWOO.

ISSUE: WON RELIANCE is liable for breach ofcontract.

HELD:

We agree with the Court of Appealsthat Reliance and Daewoo, havingreached "a meeting of minds" inrespect of the subject matter of thecontract (2000 metric tons of foundrypig iron with a specified chemicalcomposition), the price thereof (US$380,600.00), and other principalprovisions, "they had a perfectedcontract."

The failure of Reliance to open, theappropriate L/C did not prevent the

birth of that contract, and neither didsuch failure extinguish that contract .

The L/C provided for in that contractwas the mode or mechanism by whichpayment was to be effected byReliance of the price of the pig iron.

In undertaking to accept or pay thedrafts presented to it by thebeneficiary according to the tenor ofan L/C, and only later on beingreimbursed by the account party, theissuing bank in effect extends a loan

to the account party. This loan feature, combined with the

bank's undertaking to accept thebeneficiary's drafts drawn on thebank, constitutes the L/C as a mode ofpayment.

Logically, before the issuing bankopen an L/C, it will take steps toensure that it would indeed bereimbursed when the time comes.Before an L/C can be opened, specificlegal requirements must be complied

with. The Central Bank of the Philippines

has established the followingrequirements for opening a letter ofcredit:

importers shall submit to thecommercial bank the followingdocuments:



18/34

SPCL - LETTER OF CREDIT- CASE DIGESTa) the dulyaccomplished L/Capplication;

b) firmoffer/proformainvoice which shallcontaininformation on thespecific quantity ofthe importation,unit cost and totalcost, completedescription/specification of thecommodity and thePhilippine StandardCommodityClassification

statistical code;

c)permits/clearancesfrom theappropriategovernmentagencies,wheneverapplicable; and

d) duly

accomplishedImport Entry

Declaration (IED)form which shallserve as basis forpayment ofadvance duties asrequired under PD1853. 11 (Emphasis

supplied)

The need for permits or clearancesfrom appropriate governmentagencies arises when regulatedcommodities are to be imported.Certain commodities are classified as"regulated commodities" for purposesof their importation, "for reasons ofpublic health and safety, national

security, international commitments,and development/rationalization oflocal industry." The petitioner in theinstant case entered into a transactionto import foundry pig iron, a regulatedcommodity.

In respect of the importation of thisparticular commodity, the Iron andSteel Authority (ISA) is thegovernment agency designated toissue the permit or clearance. Prior tothe issuance of such permit orclearance, ISA asks the buyer/importerto comply with particularrequirements, such as to show theavailability of foreign exchangeallocations. The issuance of an L/Cbecomes, among other things, anindication of compliance by the

buyer/importer with his owngovernment's regulations relating toimports and to payment thereof.

The records shows that the opening ofthe L/C in the instant case becamevery difficult because Reliance hadexhausted its dollar allocation.Reliance knew that it had alreadyexceeded its dollar allocation for theyear 1980 when it entered into the 31

July 1980 transaction with Daewoo.

As a rule, when the importer hasexceeded its foreign exchangeallocation, his application would bedenied. However, ISA could reconsidersuch application on a case to casebasis.

Thus, in the instant case, ISA requiredReliance to support its application bysubmitting purchase orders from end-users for the same quantity the latter

wished to import. As earlier noted,Reliance was able to present purchase

orders for only 900 metric tons of thesubject pig iron.

For having exceeded its foreignexchange allocation before it entered



19/34

SPCL - LETTER OF CREDIT- CASE DIGESTinto the 31 July 1980 contract withDaewoo, petitioner Reliance can holdonly itself responsible. for havingfailed to secure end-users purchaseorders equivalent to 2,000 metrictons, only Reliance should be heldresponsible.

Daewoo rejected Reliance's proposedreduced tonnage. It had the right todemand compliance with the terms ofthe basic contract and had no duty toaccept any unilateral modification ofthat contract.

We believe and so hold that failure ofa buyer seasonably to furnish anagreed letter of credit is a breach ofthe contract between buyer and seller.Where the buyer fails to open a letter

of credit as stipulated, the seller orexporter is entitled to claim damagesfor such breach. Damages for failureto open a commercial credit may, inappropriate cases, include the loss ofprofit which the seller wouldreasonably have made had thetransaction been carried out. 19

Petition for Review is hereby DENIED.

IX. ABAD v. CA

FACTS:

TOMOCO Inc. purchased to OREGONIndustries a Skagit Yarder withaccessories.

TOMOCO applied for domestic L/C andgranted by Philippine Commercial

Bank (PCB) in favor of OREGON. TOMOCO signed and delivered to PCBa trust receipt rendering the requiredmarginal deposit.

At the back of the trust receipt, it wasstipulated by Ramon ABAD (guarantor)that he is jointly and severally liablethereon with TOMOCO.

PCB then paid OREGON for themachineries.

But no other payment was madeeither by TOMOCO or ABAD to PCB.

PCB sued them. TOMOCO did not deny it liability but it

averred that inasmuch as it paid MD toPCB in amount of 28K, it should bededucted from its principal obligation,leaving only a balance of 52K.

Lower court ordered both TOMOCOand ABAD to pay PCB.

ABAD appealed, alleging that the MDmade must be first deducted beforecomputing their balance. If not, PCBwill unjustly enrich themselves.

ISSUE: WON MD must first be deducted fromthe entire indebtedness before computingother charges.

HELD:

The petition is impressed with merit.

The nature and mercantile usage of atrust receipt was explained in the caseof PNB vs. General Acceptance &Finance Corporation, et al., G.R. No. L-

30751, 24 May 1988 and Vintola vs.Insular Bank of Asia and America, 150SCRA 578, as follows:. . . . A trust receipt is considered as asecurity transaction intended to aid infinancing importers and retail dealerswho do not have sufficient funds orresources to finance the importationor purchase of merchandise, and whomay not be able to acquire creditexcept through utilization, as collatera



20/34

SPCL - LETTER OF CREDIT- CASE DIGESTof the merchandise imported orpurchased, ... . The bank does notbecome the real owner of the

goods. It is merely the holder of asecurity title for the advances it hadmade to the importer. The goods theimporter had purchased through thebank financing, remain the importer'sproperty and he holds it at his ownrisk. The trust receipt arrangementdoes not convert the bank into aninvestor; it remains a lender andcreditor. This is so because the bankhad previously extended a loan whichthe letter of credit represents to theimporter, and by that loan, theimporter should be the real owner ofthe goods. If under the trust receipt,the bank is made to appear as theowner, it was but an artificialexpedient, more of a legal fiction thanfact, for if it were so, it could disposeof the goods in any manner it wants,which it cannot do, just to giveconsistency with the purpose of thetrust receipt of giving a strongersecurity for the loan obtained by theimporter. To consider the bank as thetrue owner from the inception of thetransaction would be to disregard theloan feature involved.

. . . . A letter of credit-trust receiptarrangement is endowed with its owndistinctive features and characteristics.Under that set-up, a bank extends a loancovered by the letter of credit, with thetrust receipt as a security for the loan. Inother words, the transaction involves aloan feature represented by the letter ofcredit, and a security feature which is inthe covering trust receipt. . . . .

A trust receipt, therefore, is a securityagreement, pursuant to which a bankacquires a "security interest" in thegoods. It secures an indebtedness andthere can be no such thing as securityinterest that secures no obligation.

The marginal deposit requirement is aCentral Bank measure to cut offexcess currency liquidity which wouldcreate inflationary pressure. It is a

collateral security given by the debtor,and is supposed to be returned to himupon his compliance with his securedobligation.

Consequently, the bank pays nointerest on the marginal deposit,unlike an ordinary bank deposit whichearns interest in the bank. As a matterof fact, the marginal depositrequirement for letters of credit hasbeen

discontinued, except in those caseswhere the applicant for a letter ofcredit is not known tothe bank or does not maintain a goodcredit standing therein.

It is only fair then that the importer's

marginal deposit (if one was made, asin this case), should be set off againsthis debt, for while the importer earnsno interest on his marginal deposit,the bank, apart from being able to usesaid deposit for its own purposes, alsoearns interest on the money it loanedto the importer. It would be onerous tocompute interest and other chargeson the face value of the letter of creditwhich the bank issued, without firstcrediting or setting off the marginal

deposit which the importer paid to thebank.

Compensation is proper and shouldtake effect by operation of lawbecause the requisites in Article 1279of the Civil Code are present andshould extinguish both debts to theconcurrent amount (Art. 1290, CivilCode). Although Abad is only a surety,he may set up compensation asregards what the creditor owes theprincipal debtor, TOMCO (Art. 1280,

Civil Code). It is not farfetched to assume that the

bank used TOMCO's marginal depositto partially fund the P80,000 letter ofcredit it issued to TOMCO, hence, theinterests and other charges on saidletter of credit should be levied onlyon the balance of P52,000 which wasthe portion that was actually funded orloaned by the bank from its own



21/34

SPCL - LETTER OF CREDIT- CASE DIGESTfunds. Requiring the importer to payinterest on the entire letter of creditwithout deducting first him marginaldeposit, would be a clear case ofunjust enrichment by the bank.

Petition for review is granted.

X. CONSOLIDATED BANK & TRUSTCO. V. COURT OF APPEALS

FACTS:

CONTINENTAL Cement Corp. andGregory T. LIM obtained fromCONSOLIDATED BANK and Trust Co. aL/C.

CONTINENTAL paid a MD of P320K+ toCONSOLIDATED BANK.

L/C was used for the purchase about500K liters of bunker fuel oil fromPETROPHIL Corp. which the latterdelivered to CONTINENTALs plant in

Bulacan. To support the transaction, a trust

receipt was executed byCONTINENTAL with LIM as itssignatory.

Later, CONSOLIDATED BANK filed acomplaint for sum of money withapplication for preliminary attachmentclaiming that CONTINENTAL and LIMfailed to turn over the goods coveredby the trust receipt or the proceedsthereof.

In answer, CONTINENTAL and LIMaverred that the transaction betweenthem was a simple loan and not atrust receipt transaction AND that theamount claimed by CONSOLIDATEDBANK from them did not take intoaccount payments already made bythem (MD).

Also, LIM denied personal liability inthe transaction.



22/34


ISSUE:1. WON the MD must be deducted first.2. WON the transaction is one of simple loanor that of trust receipt.

HELD:

The petition must be denied. CONSOLIDATED BANKs contention

that the marginal deposit made byCONTINENTAL should not be deductedoutright from the amount of the letterof credit is untenable.

Petitioner argues that the marginaldeposit should be considered onlyafter computing the principal plusaccrued interests and other charges.

However, to sustain petitioner on thisscore would be to countenance a clear

case of unjust enrichment, for while amarginal deposit earns no interest infavor of the debtor-depositor, the

bank is not only able to use the samefor its own purposes, interest-free, butis also able to earn interest on themoney loaned to respondentCorporation.

Indeed, it would be onerous tocompute interest and other chargeson the face value of the letter of credit

which the petitioner issued, withoutfirst crediting or setting off themarginal deposit which therespondent Corporation paid to it.

Compensation is proper and shouldtake effect by operation of lawbecause the requisites in Article 1279of the Civil Code are present andshould extinguish both debts to theconcurrent amount.i

Hence, the interests and other chargeson the subject letter of credit should

be computed only on the balance ofP681,075.93, which was the portionactually loaned by the bank torespondent Corporation.

Petitioner has also failed to convinceus that its transaction with respondentCorporation is really a trust receipttransaction instead of merely a simpleloan, as found by the lower court andthe Court of Appeals.

The recent case of Colinares v. Courtof Appealsii appears to be foursquarewith the facts obtaining in the case atbar. There, we found that inasmuchas the debtor received the goodssubject of the trust receipt before thetrust receipt itself was entered intothe transaction in question was asimple loan and not a trust receiptagreement. Prior to the date ofexecution of the trust receiptownership over the goods was alreadytransferred to the debtor. Thissituation is inconsistent with whatnormally obtains in a pure trustreceipt transaction, wherein the goodsbelong in ownership to the bank andare only released to the importer intrust after the loan is granted.

In the case at bar, as in Colinares, thedelivery to respondent Corporation ofthe goods subject of the trust receiptoccurred long before the trust receiptitself was executed. More specificallydelivery of the bunker fuel oil torespondent Corporations Bulacanplant commenced on July 7, 1982 andwas completed by July 19, 1982Further, the oil was used up byrespondent Corporation in its normaoperations by August, 1982.

On the other hand, the subject trustreceipt was

only executed nearly two months afterfull delivery of the oil was made torespondent Corporation, or onSeptember 2, 1982.

The danger in characterizing a simpleloan as a trust receipt transaction wasexplained in Colinares, to wit:

The Trust Receipts Law does not seek toenforce payment of the loan, rather itpunishes the dishonesty and abuse oconfidence in the handling of money ogoods to the prejudice of another regardlessof whether the latter is the owner. Here, it iscrystal clear that on the part of Petitionersthere was neither dishonesty nor abuse ofconfidence in the handling of money to theprejudice of PBC. Petitioners continually



23/34

SPCL - LETTER OF CREDIT- CASE DIGESTendeavored to meet their obligations, asshown by several receipts issued by PBCacknowledging payment of the loan.

The practice of banks of makingborrowers sign trust receipts tofacilitate collection of loans andplace them under the threats of

criminal prosecution should theybe unable to pay it may be unjustand inequitable, if notreprehensible. Such agreementsare contracts of adhesion whichborrowers have no option but tosign lest their loan bedisapproved. The resort to thisscheme leaves poor and haplessborrowers at the mercy of banks,and is prone to misinterpretation,as had happened in this case.

Eventually, PBC showed its truecolors and admitted that it wasonly after collection of the money,as manifested by its Affidavit ofDesistance.

Similarly, respondent Corporationcannot be said to have beendishonest in its dealings withpetitioner. Neither has it beenshown that it has evaded paymentof its obligations. Indeed, it

continually endeavored to meetthe same, as shown by the variousreceipts issued by petitioneracknowledging payment on theloan. Certainly, the payment ofthe sum of P1,832,158.38 on aloan with a principal amount ofonly P681,075.93 negates anybadge of dishonesty, abuse ofconfidence or mishandling of fundson the part of respondentCorporation, which are the

gravamen of a trust receiptviolation. Furthermore,respondent Corporation is not animporter which acquired thebunker fuel oil for re-sale; itneeded the oil for its ownoperations. More importantly, atno time did title over the oil passto petitioner, but directly torespondent Corporation to which

the oil was directly delivered longbefore the trust receipt wasexecuted.

The fact that ownership of the oibelonged to respondentCorporation, through its PresidentGregory Lim, was acknowledged

by petitioners own account officeron the witness stand, By alindications, then, it is apparentthat there was really no trustreceipt transaction that took placeEvidently, respondent Corporationwas required to sign the trustreceipt simply to facilitatecollection by petitioner of the loanit had extended to the former.

Finally, we are not convinced that

respondent Gregory T. Lim and hisspouse should be personally liableunder the subject trust receiptPetitioners argument thatrespondent Corporation andrespondent Lim and his spouse areone and the same cannot besustained. The transactions suedupon were clearly entered into byrespondent Lim in his capacity asExecutive Vice President ofrespondent Corporation. We

stress the hornbook law thatcorporate personality is a shieldagainst personal liability of itsofficers. Thus, we agree thatrespondents Gregory T. Lim andhis spouse cannot be madepersonally liable since respondentLim entered into and signed thecontract clearly in his officiacapacity as Executive VicePresident. The personality of thecorporation is separate and

distinct from the personscomposing it.iii

Petition for Review is DENIED.



24/34


XI. MWSS v. DAWAY

FACTS:

MWSS granted MAYNILAD a 20-yearConcession Agreement to manage andrepair existing MWSS water deliveryand sewerage in the West ZoneService Area

As a concessionare, MAYNILADundertook to pay concession fees(payment for the right given by thegovernment) on dates agreed uponwhich consisted mostly of foreignloans of MWSS.

MAYNILAD was required under theirconcession agreement (SEC. 69) to putup a bond, bank guarantee or other

security acceptable to MWSS to secureits obligation. MAYNILAD then arranged a 3-year

facility with a number of foreign banksled by CITICORP Intl Ltd. for theissuance of irrevocable SLOC in favorof MWSS for its full and promptcompliance.

To be able to recover losses itallegedly incurred and will be incurringas a result of peso depreciationagainst US dollar, MAYNILAD

requested MWSS for a mechanism. MWSS denied the request so

MAYNILAD issued a Force MajeureNotice and unilaterally suspended thepayment of concession fees undertheir agreement.

MOA was then entered into betweenMWSS and MAYNILAD in order to savethe concession agreement wherein itallowed MAYNILAD to recover itslosses.

But another Force Majeure Notice was

filed by MAYNILAD to which MWSScannot agree anymore.

It was said that peso depreciationcaused MAYNILAD to file notice ofearly termination of their agreement.

MWSS then filed a notice to CITICORPthat it will draw $98M on the SLOC.

But at that time, MAYNILAD wascurrently undergoing rehabilitation so

it contended that CorporationRehabilitation prohibited such.

ISSUE:1. WON the rules on corporate

rehabilitation bar recovery of theSLOC.

2. WON SLOC is a guaranty.

HELD:

First, the claim is not one against thedebtor but against an entity thatrespondent Maynilad has procured toanswer for its non-performance ofcertain terms and conditions of theConcession Agreement, particularlythe payment of concession fees.

Secondly, Sec. 6 (b) of Rule 4 of theInterim Rules does not enjoin theenforcement of all claims againstguarantors and sureties, but onlythose claims against guarantorsand sureties who are notsolidarily liable with the debtorRespondent Maynilads claim that thebanks are not solidarily liable with thedebtor does not find support in

jurisprudence.

We held in Feati Bank & TrustCompany v. Court of Appeals1 that theconcept of guarantee vis--vis theconcept of an irrevocable letter ofcredit are inconsistent with eachother. In contracts of guarantee, theguarantors obligation is merelycollateral and it arises only upon thedefault of the person primarily liableOn the other hand, in an irrevocableletter of credit, the bank undertakes aprimary obligation. We have alsodefined a letter of credit as anengagement by a bank or otherperson made at the request of acustomer that the issuer shall honordrafts or other demands of paymentupon compliance with the conditionsspecified in the credit.

Letters of credit are in effect absolute

1



25/34

SPCL - LETTER OF CREDIT- CASE DIGESTundertakings to pay the moneyadvanced or the amount for whichcredit is given on the faith of theinstrument. They are primaryobligations and not accessorycontracts and while they are securityarrangements, they are not convertedthereby into contracts of guaranty.

What distinguishes letters of creditfrom other accessory contracts, is theengagement of the issuing bank topay the seller once the draft and otherrequired shipping documents are

presented to it.2 They are definiteundertakings to pay at sight once the

documents stipulated therein arepresented.

We have accepted, in Feati Bank andTrust Company v. Court of Appeals3

and Bank of America NT & SA v. Courtof Appeals,4 to the extent that theyare pertinent, the application in our

jurisdiction of the international creditregulatory set of rules known as theUniform Customs and Practice forDocumentary Credits (U.C.P) issued bythe International Chamber ofCommerce, which we said in Bank ofthe Philippine Islands v. Nery5 was

justified under Art. 2 of the Code ofCommerce, which states:

Acts of commerce, whetherthose who execute them bemerchants or not, and whetherspecified in this Code or not shouldbe governed by the provisionscontained in it; in their absence, bythe usages of commerce generally

observed in each place; and in theabsence of both rules, by those ofthe civil law.

2

3

4

5

The prohibition under Sec 6 (b) of Rule4 of the Interim Rules does not applyto herein petitioner as the prohibitionis on the enforcement of claimsagainst guarantors or sureties of thedebtors whose obligations are notsolidary with the debtor. Theparticipating banks obligation aresolidary with respondent Maynilad inthat it is a primary, direct, definite andan absolute undertaking to pay and isnot conditioned on the priorexhaustion of the debtors assets

These are the same characteristics ofa surety or solidary obligor.

Being solidary, the claims againstthem can be pursued separately fromand independently of the rehabilitationcase, as held in Traders Royal Bank v.

Court of Appeals6 and reiterated inPhilippine Blooming Mills, Inc. v. Courtof Appeals,7 where we said thatproperty of the surety cannot be takeninto custody by the rehabilitationreceiver (SEC) and said surety can besued separately to enforce his liabilityas surety for the debts or obligationsof the debtor. The debts or obligationsfor which a surety may be liableinclude future debts, an amount whichmay not be known at the time the

surety is given.

The terms of the Irrevocable StandbyLetter of Credit do not show that theobligations of the banks are notsolidary with those of respondentMaynilad. On the contrary, it is issuedat the request of and for the accountof Maynilad Water Services, Inc., infavor of the Metropolitan Waterworksand Sewerage System, as a bond forthe full and prompt performance of

the obligations by the concessionaireunder the Concession Agreement8 andherein petitioner is authorized by thebanks to draw on it by the simple actof delivering to the agent a written

6

7

8

http://sc.judiciary.gov.ph/jurisprudence/2003/oct2003/142381.htmhttp://sc.judiciary.gov.ph/jurisprudence/2003/oct2003/142381.htmhttp://sc.judiciary.gov.ph/jurisprudence/2003/oct2003/142381.htmhttp://sc.judiciary.gov.ph/jurisprudence/2003/oct2003/142381.htm


26/34

SPCL - LETTER OF CREDIT- CASE DIGESTcertification substantially in the formAnnex B of the Letter of Credit. Itprovides further in Sec. 6, that for aslong as the Standby Letter of Credit isvalid and subsisting, the Banks shallhonor any written Certification madeby MWSS in accordance with Sec. 2, ofthe Standby Letter of Credit regardlessof the date on which the event givingrise to such Written Certificationarose.9

The public respondent, therefore,exceeded his jurisdiction, in holdingthat he was competent to act on theobligation of the banks under theLetter of Credit under the argumentthat this was not a solidary obligationwith that of the debtor. Being asolidary obligation, the letter of credit

is excluded from the jurisdiction ofthe rehabilitation court and thereforein enjoining petitioner fromproceeding against the SLOC to whichit had a clear right under the law andthe terms of said SLOC.

Petition for certiorari is GRANTED.

9



27/34

i

XII. TRANSFIELD PHILIPPINES INC. V. LUZON HYDRO CORP.

FACTS:

TRANSFIELD and LUZON HYDRO entered into a turn key contract.

TRANSFIELD is the contractor for 79 megawatt hydro electric power and given thesole power and discretion for the construction of the project

To secure the obligation of TRANSFIELD, it opened 2 SLOC from ANZ BANK and SBC

in favor of LUZON HYDRO.

But later on, some circumstances prevented TRANSFIELD to complete the project.

TRANSFIELD requested LUZON HYDRO for extensions but it was denied.

As TRANSFIELD defaulted on its obligation, LUZON HYDRO served notice to

TRANSFIELD that it will go after the security banks.

To prevent this, TRANFIELD filed an injunction.

But the TC ruled that LUZON HYDRO was allowed to draw on the securities for

liquidated damages being an independent contract.

It further ruled that banks are mere custodian of the funds and as such they are

obligated to transfer it to the beneficiary.

TRANSFIELD appealed contending that it is premature for LUZON HYDRO to draw

against SLOC because the issue is not yet resolved with regard to its default.

OTOH, LUZON HYDRO averred that securities are independent from the main

contract between the as shown in the face of the SLOCs.

It provided that the banls have no responsibility to investigate the authenticity or

accuracy of

the certificate of the declarants capacity or entitlement to so certify.

ISSUES: WON LUZON HYDRO may draw against the SLOC regardless of the pending

issue on the main contract.

HELD:

At the core of the present controversy is the applicability of the independenceprinciple and fraud exception rule in letters of credit. Thus, a discussion of thenature and use of letters of credit, also referred to simply as credits, wouldprovide a better perspective of the case.


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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 ofdocuments that show he has taken affirmative steps to comply with the salesagreement. In the standby type, the credit is payable upon certification of a party'snonperformance of the agreement. The documents that accompany the

beneficiary's draft tend to show that the applicant has not performed. Thebeneficiary of a commercial credit must demonstrate by documents that he hasperformed his contract. The beneficiary of the standby credit must certify that hisobligor has not performed the contract.[32]

Thus, the engagement of the issuing bank is to pay the seller or beneficiary of thecredit once the draft and the required documents are presented to it.

The so-called independence principle assures the seller or the beneficiary ofprompt payment independent of any breach of the main contract and precludesthe issuing bank from determining whether the main contract is actuallyaccomplished 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 orsuperimposed thereon, nor do they assume any liability or responsibility for thedescription, quantity, weight, quality, condition, packing, delivery, value orexistence of the goods represented by any documents, or for the good faith or actsand/or omissions, solvency, performance or standing of the consignor, the carriers,or the insurers of the goods, or any other person whomsoever. [39]

Given the nature of letters of credit, petitioners argumentthat it is only theissuing bank that may invoke the independence principle on letters of creditdoesnot impress this Court. To say that the independence principle may only beinvoked by the issuing banks would render nugatory the purpose for which theletters of credit are used in commercial transactions. As it is, the independencedoctrine works to the benefit of both the issuing bank and the beneficiary.

Letters of credit are employed by the parties desiring to enter into commercialtransactions, not for the benefit of the issuing bank but mainly for the benefit ofthe parties to the original transactions. With the letter of credit from the issuingbank, the party who applied for and obtained it may confidently present the letterof credit to the beneficiary as a security to convince the beneficiary to enter intothe business transaction. On the other hand, the other party to the businesstransaction, i.e., the beneficiary of the letter of credit, can be rest assured of beingempowered to call on the letter of credit as a security in case the commercialtransaction does not push through, or the applicant fails to perform his part of the

transaction. It is for this reason that the party who is entitled to the proceeds ofthe letter of credit is appropriately called beneficiary.

Petitioners argument that any dispute must first be resolved by the parties,whether through negotiations or arbitration, before the beneficiary is entitled tocall on the letter of credit in essence would convert the letter of credit into a mereguarantee. Jurisprudence has laid down a clear distinction between a letter ofcredit and a guarantee in that the settlement of a dispute between the parties isnot a pre-requisite for the release of funds under a letter of credit. In other words,the argument is incompatible with the very nature of the letter of credit. If a letter
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of credit is drawable only after settlement of the dispute on the contract enteredinto by the applicant and the beneficiary, there would be no practical andbeneficial use for letters of credit in commercial transactions.

Next, petitioner invokes the fraud exception principle. It avers that LHCs call onthe Securities is wrongful because it fraudulently misrepresented to ANZ Bank andSBC 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 fraudexception exists when the beneficiary, for the purpose of drawing on the credit,fraudulently presents to the confirming bank, documents that contain, expressly orby implication, material representations of fact that to his knowledge are untrue.In such a situation, petitioner insists, injunction is recognized as a remedy availableto it.

Citing Dolans treatise on letters of credit, petitioner argues that the independenceprinciple is not without limits and it is important to fashion those limits in light of theprinciples purpose, which is to serve the commercial function of the credit. If it does notserve those functions, application of the principle is not warranted, and the commonlawprinciples of contract should apply.

It is worthy of note that the propriety of LHCs call on the Securities is largelyintertwined with the fact of default which is the self-same issue pending resolution beforethe arbitral tribunals. To be able to declare the call on the Securities wrongful orfraudulent, it is imperative to resolve, among others, whether petitioner was in fact guiltyof delay in the performance of its obligation. Unfortunately for petitioner, this Court isnot called upon to rule upon the issue of defaultsuch issue having been submitted bythe parties to the jurisdiction of the arbitral tribunals pursuant to the terms embodied intheir agreement.[47]

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

XIII. BANK OF COMMERCE V SERRANO

FACTS:

VIA MODA as represented by SERRANO obtained an export packing loan from BANK

OF COMMERCE

The loan was secured by a deed of assignment over an irrevocable transferable

letter of credit.

Serrano then executed a promisory note in favor of BANK OF COMMERCE.

VIA MODA opened an irrevocable L/C for the purchase and importation of fabric

and textile porducts from tiger ear fabric. A trust receipt was executed to secure the purchase

Under the trust receipt, VIA MODA agreed to hold the goods in trust in favor of

SERRANO as VIA MODAs property to sell the same for the latters account.

Later, VIA MODA shipped the goods covered by the trust receipt to its consignee im

New Jersey, USA.

The consignee then sent an Export Letter of Credit issued by BANK OF NEWYORK in

favor of BANK OF COMMERCE.
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The REGL OPERATIONS OFFICER of BOC signed the export declarations to show

consent to the shipments

BANK OF COMMERCE demanded VIA MODA to pay them. But the latter refused.

VIA MODA was charged with estafa under Art. 315 RPC in rel. to PD 115.

TC found Tererisita Serrano guilty of estafa.

She appealed and later acquitted BUT bound by the court to be liable with respect

to the loan secured by a trust receipt.

ISSUE:

1. WHETHER RESPONDENT IS JOINTLY AND SEVERALLY LIABLE WITH VIA MODAUNDER THE GUARANTEE CLAUSE OF LC NO. [BCZ-940051]

(EXHIBIT A) SECURED BY TRUST RECEIPT NO. [94-22221] (EXHIBIT C).12

2. WHETHER THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN

DELETING THE CIVIL LIABILITY OF RESPONDENT SERRANO IN ITS DECISION

HELD:

Petitioner contends that the Court of Appeals made a manifestly mistakeninference from its findings or a misapprehension of facts and overlooked a vitalpiece of evidence on record, particularly, the Guarantee Clause of the Letter ofCredit secured by the Trust Receipt. Petitioner further alleges that the saidGuarantee Clause provides that the liability of respondent is joint and solidary;hence, she should be held liable on the obligation.

A letter of credit is a separate document from a trust receipt. While the trustreceipt may have been executed as a security on the letter of credit, still the twodocuments involve different undertakings and obligations.

A letter of credit is an engagement by a bank or other person made at the requestof a customer that the issuer will honor drafts or other demands for payment uponcompliance with the conditions specified in the credit.

Through a letter of credit, the bank merely substitutes its own promise to pay forthe promise to pay of one of its customers who in return promises to pay the bankthe amount of funds mentioned in the letter of credit plus credit or commitmentfees mutually agreed upon.14

By contrast, a trust receipt transaction is one where the entruster, who holds anabsolute title or security interests over certain goods, documents or instruments,released the same to the entrustee, who executes a trust receipt binding himself tohold the goods, documents or instruments in trust for the entruster and to sell orotherwise dispose of the goods, documents and instruments with the obligation toturn over to the entruster the proceeds thereof to the extent of the amount owingto the entruster, or as appears in the trust receipt, or return the goods, documentsor instruments themselves if they are unsold, or not otherwise disposed of, inaccordance with the terms and conditions specified in the trust receipt.15
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However, the question of the liability of respondent based on the Guarantee Clauseof the Letter of Credit, was not raised either at the trial court or before the Court ofAppeals. A question that was never raised in the courts below cannot be allowed tobe raised for the first time on appeal without offending basic rules of fair play,

justice and due process. Such an issue was not brought to the fore either in thetrial court or the appellate court, and would have been disregarded by the lattertribunal for the reasons previously stated. With more reason, the same does not

deserve consideration by this Court.16

On the second issue, the Court of Appeals held that respondent Serrano cannot beheld civilly liable under the trust receipt since she was not made personally liablenor was she a guarantor therein. The parties stipulated during the pre-trial thatrespondent Serrano executed the trust receipt in representation of Via Moda, Inc.,which has a separate personality from Serrano, and petitioner BOC failed to showsufficient reason to justify the piercing of the veil of corporate fiction. It thus ruledthat this was not Serranos personal obligation but that of Via Moda and there wasno basis of finding her solidarily liable with Via Moda.17

Worthy of mention at this point is the Court of Appeals finding that there was nomisappropriation or conversion by the respondent of the proceeds of the sale inthe goods, subject of the trust receipt since the proceeds were actually received bypetitioner but the latter applied the same to Via Modas other obligations under theexport packing loan. It further stated that such application of payment to anotherobligation was done by petitioner on its own and should not create a criminalliability on the part of respondent who did not take part nor had any knowledgethereof. It is on this premise that the respondent was acquitted of the crimecharged.18

Incidentally, petitioner urged this Court to review the factual findings of the casedue to contradictory findings of the trial court and the Court of Appeals arising

from misappreciation of facts by the Court of Appeals. Such plea must berejected.l^vvphi1.netIt is a well established rule that in an appeal via certiorari,only questions of law may be raised,19 and we find petitioners avermentsinsufficient to disregard this well-entrenched rule. This Court does not, of itself,automatically delve into the record of a case to determine the facts anew wherethere is disagreement between the findings of fact by the trial court and by theCourt of Appeals. When the disagreement is merely on the probative value of theevidence, i.e., which is more credible of two versions, we limit our review to onlyascertaining if the findings of the Court of Appeals are supported by the records.So long as the findings of the appellate court are consistent with and not palpablycontrary to the evidence on record, we shall decline to make a review on theprobative value of such evidence. The findings of fact of the Court of Appeals, and

not those of the trial court, will be considered final and conclusive, even in thisCourt.20 In this case, we find no cogent reason to disturb the foregoing factualfindings of the Court of Appeals.

At any rate, petitioner BOC is not precluded from filing a separate civil actionagainst the responsible party where the abovementioned issues could be properlyresolved or determined. The issues raised by herein petitioner involve adetermination of facts and require the admission and examination of additionalevidence for its resolution. That cannot be done in a petition for review oncertiorari by merely appealing the civil aspect of an acquittal in a criminal case.
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WHEREFORE, the petition is DENIED for lack of merit.

XIV. LANDBANK V. MONETS EXPORT

FACTS:

LBP and MONET executed an Export Packing Credit Line Agreement whereby the

latter is given a credit line which was secured by the proceeds of the export letters

of credit, the continuing guarantee of the sps. Tagle, and third party mortgage by

Mendigoria.

The credit line agreement was renewed and amended several times until it was

increased to 5M.

Later MONET continuously refused to pay LBP despite repeated demands.

The loan ballooned to 11M

LBP filed to the RT

Documents

SPECIAL COMMERCIAL LAW - LETTER OF CREDIT CASE DIGESTS