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G.R. No.

74834 November 17, 1988 INSULAR BANK OF ASIA & AMERICA v IAC FACTS: The Mendoza spouses obtained 2 loans from Philam Life amounting to P600k. To secure payment, Philam Life required that amortizations be guaranteed by an irrevocable standby letter of credit of a commercial bank. The Mendozas contracted with Insular Bank of Asia and America (IBAA) for the issuance of 2 irrevocable standby Letters of Credit (L/Cs) in favor of Philam Life for the total amount of P600k. These L/Cs were, in turn, secured by a real estate mortgage on the property of the Mendozas in favor of IBAA. Later, the Mendozas executed PNs in favor of IBAA and authorized IBAA "to sell at public or private sale such securities or things for the purpose of applying their proceeds to such payments" of many particular obligation or obligations" the Mendozas may have to IBAA. The Mendozas failed to pay so Philam Life demanded payment from IBAA. Philam Life demanded payment from IBAA but the latter took the position that, as a guarantor of the Mendozas who are the principal debtors, its remaining outstanding obligation under the two (2) standby L/Cs was less than what was claimed by Philam Life. According to the IBAA, they made an overpayment of 52,520.76. Later, the Real Estate Mortgage, was foreclosed by, and sold at public auction for P775,000.00, to petitioner IBAA as the lone and highest bidder. ISSUE: W/N the direct and partial payments made by the the Mendozas would reduce the liability of IBAA under the terms of the standby LCs HELD: No. RATIO: IBAA stresses that it has no more liability to Philam Life under the two (2) standby Letters of Credit and, instead, is entitled to a refund. Whereas Philam Life and the Mendoza spouses separately maintain that IBAA's obligation under said two (2) L/Cs is original and primary and is not reduced by the direct payments made by the Mendozas to Philam Life. In construing the terms of a Letter of Credit, as in other contracts, it is the intention of the parties that must govern. Letters of credit and contracts for the issuance of such letters are subject to the same rules of construction as are ordinary commercial contracts. They are to receive a reasonable and not a technical construction and although usage and custom cannot control express terms in letters of credit, they are to be construed

with reference to all the surrounding facts and circumstances, to the particular and often varying terms in which they may be expressed, the circumstances and intention of the parties to them, and the usages of the particular trade of business contemplated. In this case, the Irrevocable Standby Letters of Credit secured the payment of any obligation of the Mendozas to Philam Life including all interests, surcharges and expenses thereon but not to exceed P600,000.00 are, "in effect an absolute undertaking 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. Being separate and independent agreements, the payments made by the Mendozas cannot be added in computing IBAA's liability under its own standby letters of credit. Payments made by the Mendozas directly to Philam Life are in compliance with their own prestation under the loan agreements. And although these payments could result in the reduction of the actual amount which could ultimately be collected from IBAA, the latter's separate undertaking under its L/Cs remains.