G.R. No. 94209 April 30, 1991 FEATI BANK & TRUST COMPANY vs.

THE COURT OF APPEALS, and BERNARDO E. VILLALUZ DOCTRINE OF STRICT COMPLIANCE Facts: On June 3, 1971, Bernardo E. Villaluz agreed to sell to the then defendant Axel Christiansen 2,000 cubic meters of lauan logs at $27.00 per cubic meter FOB. After inspecting the logs, Christiansen issued purchase order No. 76171. Upon the instruction of the consignee, Hanmi Trade Development, the Security Pacific National Bank of Los Angeles, California issued Irrevocable Letter of Credit in favor of Villaluz for the sum of $54,000.00, the total purchase price of the lauan logs.The instruction to the petitioner bank is to pay the draft upon compliance of all the documentary requirements which includes, inter alia, the certification issued by the buyer Christiansen. After the goods were inspected by the Bureau of Forestry personnel as in good condition and after the same were shipped to Korea, Christiansen refused to issue a certification. As a result, petitioner FEATI bank disallowed the payment of Letter of Credit. Aggrieved Christiansen filed an action for specific performance against Christiansen and FEATI BANK to compel Christiansen to issue the certification and order the BANK to pay the letter of credit upon issuance of said certification. However, while the action was pending, the buyer Christiansen left the Philippines without informing the court and his counsel. The RTC and CA ruled in favor of Bernardo Villaluz and ordered FEATI bank to pay the purchase price and damages. The basis of such decision was that the FEATI bank by confirming the letter of credit assumed that the obligation of the issuing bank would be performed. Also, the BANK acted as TRUSTEE and GUARANTOR when it accepted the letter of Credit. Hence the petition was brought before the Supreme Court. ISSUE: Whether or not a correspondent bank is to be held liable under the letter of credit despite noncompliance by the beneficiary with the terms thereof. Held: It is a settled rule in commercial transactions involving letters of credit that the documents tendered must strictly conform to the terms of the letter of credit. The tender of documents by the beneficiary (seller) must include all documents required by the letter. A correspondent bank which departs from what has been stipulated under the letter of credit, as when it accepts a faulty tender, acts on its own risks and it may not thereafter be able to recover from the buyer or the issuing bank, as the case may be, the money thus paid to the beneficiary Thus the rule of strict compliance. The absence of any document required in the documentary credit justifies the refusal by the correspondent bank to negotiate, accept or pay the beneficiary, as it is not its obligation to look beyond the documents. It merely has to rely on the completeness of the documents tendered by the beneficiary. The pertinent provisions of the U.C.P. (1962 Revision) are: Article 3.An irrevocable credit is a definite undertaking on the part of the issuing bank and constitutes the engagement of that bank to the beneficiary and bona fide holders of drafts drawn and/or documents presented thereunder, that the provisions for payment, acceptance or negotiation contained in the credit will be duly fulfilled, provided that all the terms and conditions of the credit are complied with. Article 7.Banks must examine all documents with reasonable care to ascertain that they appear on their face to be in accordance with the terms and conditions of the credit," IRREVOCABLE LETTER OF CREDIT vs. CONFIRMED LETTER OF CREDIT An irrevocable credit refers to the duration of the letter of credit. What is simply means is that the issuing bank may not without the consent of the beneficiary (seller) and the applicant (buyer) revoke his undertaking under the letter. The issuing bank does not reserve the right to revoke the credit. On the other hand, a confirmed letter of credit pertains to the kind of obligation assumed by the correspondent bank. In this case, the correspondent bank gives an absolute assurance to the beneficiary that it will undertake the issuing bank's obligation as its own according to the terms and conditions of the credit. (Agbayani, Commercial Laws of the Philippines, Vol. 1, pp. 81-83) Hence, the mere fact that a letter of credit is irrevocable does not necessarily imply that the correspondent bank in accepting the instructions of the issuing bank has also confirmed the letter of credit. Another error which the lower court and the Court of Appeals made was to confuse the obligation assumed by the petitioner.

NOTIFYING, NEGOTIATING AND CONFIRMING BANK In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or transmit to the beneficiary the existence of the letter of credit; A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft under the letter of credit. Its liability is dependent upon the stage of the negotiation. If before negotiation, it has no liability with respect to the seller but after negotiation, a contractual relationship will then prevail between the negotiating bank and the seller; In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller and its liability is a primary one as if the correspondent bank itself had issued the letter of credit

In this case, the letter merely provided that the petitioner "forward the enclosed original credit to the beneficiary." Considering the aforesaid instruction to the petitioner by the issuing bank, the Security Pacific National Bank, it is indubitable that the petitioner is only a notifying bank and not a confirming bank as ruled by the courts below. If the petitioner was a confirming bank, then a categorical declaration should have been stated in the letter of credit that the petitioner is to honor all drafts drawn in conformity with the letter of credit. What was simply stated therein was the instruction that the petitioner forward the original letter of credit to the beneficiary. Since the petitioner was only a notifying bank, its responsibility was solely to notify and/or transmit the documentary of credit to the private respondent and its obligation ends there. A notifying bank is not a privy to the contract of sale between the buyer and the seller, its relationship is only with that of the issuing bank and not with the beneficiary to whom he assumes no liability. It follows therefore that when the petitioner refused to negotiate with the private respondent, the latter has no cause of action against the petitioner for the enforcement of his rights under the letter. Acted as trustee in relation to the plaintiff The concept of a trust presupposes the existence of a specific property which has been conferred upon the person for the benefit of another. In order therefore for the trust theory of the private respondent to be sustained, the petitioner should have had in its possession a sum of money as specific fund advanced to it by the issuing bank and to be held in trust by it in favor of the private respondent. This does not obtain in this case. What actually transpires in an irrevocable credit is that the correspondent bank does not receive in advance the sum of money from the buyer or the issuing bank. On the contrary, when the correspondent bank accepts the tender and pays the amount stated in the letter, the money that it doles out comes not from any particular fund that has been advanced by the issuing bank, rather it gets the money from its own funds and then later seeks reimbursement from the issuing bank. Acted as a guarantor of the issuing bank It is a fundamental rule that an irrevocable credit is independent not only of the contract between the buyer and the seller but also of the credit agreement between the issuing bank and the buyer The relationship between the buyer (Christiansen) and the issuing bank (Security Pacific National Bank) is entirely independent from the letter of credit issued by the latter. Finally, even if we assume that the petitioner is a confirming bank, the petitioner cannot be forced to pay the amount under the letter. As we have previously explained, there was a failure on the part of the private respondent to comply with the terms of the letter of credit. The failure by him to submit the certification was fatal to his case. The U.C.P. which is incorporated in the letter of credit ordains that the bank may only pay the amount specified under the letter if all the documents tendered are on their face in compliance with the credit. It is not tasked with the duty of ascertaining the reason or reasons why certain documents have not been submitted, as it is only concerned with the documents. Thus, whether or not the buyer has performed his responsibility towards the seller is not the bank's problem.

G.R. No. L-24821 October 16, 1970 BPI vs. DE RENY FABRIC INDUSTRIES, INC., et al

DOCTRINE OF INEPENDENCE
Facts: The record shows that on four (4) different occasions in 1961, the De Reny Fabric Industries, Inc., a Philippine corporation through its president and secretary Aurora C. Gonzales and Aurora T. Tuyo, respectively, applied to the Bank for four (4) irrevocable commercial letters of credit to cover the purchase by the corporation of goods described in the covering L/C applications as "dyestuffs of various colors" from its American supplier, the J.B. Distributing Company. Under these agreements, the aforementioned officers of the corporation bound themselves personally as joint and solidary debtors with the corporation. By virtue of the foregoing transactions , BPI then issued irrevocable commercial letters of credit addressed to its correspondent banks in the United States, with uniform instructions for them to notify the beneficiary thereof, the J.B. Distributing Company, that they have been authorized to negotiate the latter's sight drafts up to the amounts mentioned the respectively upon presentation, beneficiary is able to present a full set of negotiable clean "on board" ocean bills of lading covering the merchandise appearing in the LCs that is, dyestuffs of various colors. Consequently, the J.B. Distributing Company drew upon, presented to and negotiated with the correspomdmt bank and collected the full value of the drafts up to the amounts appearing in the L/Cs as above indicated. These correspondent banks then debited the account of the Bank of the Philippine Islands with them up to the full value of the drafts presented by the J.B. Distributing Company, plus commission thereon, and, thereafter, endorsed and forwarded all documents to the Bank of the Philippine Islands. As the shipment arrived, De reny made partial payment until the time when they discovered by laboratory chemical test that the shipments are colored chalks and not dyestuffs. The corporation also refused to take possession of these goods, and for this reason, the Bank, On Decmeber 10, 1962, filed a complaint before the lower court. The respondent argued that it is the duty of the foreign correspondent bank to take the necessary precaution to insure that the goods shipped conformed with the item appearing in the letter of credit. October 24, 1963 the lower court rendered its decision ordering the corporation and its codefendants to pay to the plaintiff-appellee the amount of P291,807.46, with interest thereon. Issue: Whether or not it is the duty of the foreign correspondent bank to insure that the goods shipped conformed with the item appearing in the letter of credit. Whether or not De Reny is liable for the payment of the goods. Held: Under the terms of their Commercial Letter of Credit Agreements with the Bank, the appellants agreed that the Bank shall not be responsible for the "existence, character, quality, quantity, conditions, packing, value, or delivery of the property purporting to be represented by documents; for any difference in character, quality, quantity, condition, or value of the property from that expressed in documents," or for "partial or incomplete shipment, or failure or omission to ship any or all of the property referred to in the Credit," as well as "for any deviation from instructions, delay, default or fraud by the shipper or anyone else in connection with the property the shippers or vendors and ourselves [purchasers] or any of us." Having agreed to these terms, the appellants have, therefore, no recourse but to comply with their covenant. But even without the stipulation recited above, the appellants cannot shift the burden of loss to the Bank on account of the violation by their vendor of its prestation. The existence of a custom in international banking and financing circles negates any duty on the part of a bank to verify whether what has been described in letters of credits or drafts or shipping documents actually tallies with what was loaded aboard ship. Under Article 10 Uniform Customs and Practices for Commercial Documentary Credits it provides that banks, in providing financing in international business transactions such as those entered into by the appellants, do not deal with the property to be exported or shipped to the importer, but deal only with documents.

The relationship of the buyer and the bank is separate and distinct from the relationship of the buyer and seller in the main contract; the bank is not required to investigate if the contract underlying the LC has been fulfilled or not because in transactions involving LC, banks deal only with documents and not goods. In effect, the buyer has no course of action against the issuing bank.
G.R. No. 146717 November 22, 2004

TRANSFIELD PHILIPPINES, INC., vs. LUZON HYDRO CORPORATION, et al.

FRAUD EXCEPTION PRINCIPLE Facts:

On March 26, 1997, Petitioner and respondent entered into a trunkey agreement whereby petitioner undertook to construct a seventy (70)-Megawatt hydro-electric power station at the Bakun River in the provinces of Benguet and Ilocos Sur. To secure the performance, Transfield issued a two (2) standby letters of credit with AZN Bank and Security Bank Corporation. In the course of the construction of the project, petitioner sought various EOT to complete the Project because of typhoon Zeb and demonstration, But this was denied by LHC. The parties went on arbitration proceedings and the common issues presented were: [1) whether typhoon Zeb and any of its associated events constituted force majeure to justify the extension of time sought by petitioner; and [2) whether LHC had the right to terminate the Turnkey Contract for failure of petitioner to complete the Project on target date. Meanwhile, while the arbitration proceedings were pending and in anticipation that LHC would call on the securities, advised the bank not to release the securities until the arbitration proceedings is already terminated. On 5 November 2000, petitioner as plaintiff filed a Complaint for Injunction with prayer for temporary restraining order and writ of preliminary injunction in RTC Makati to restrain respondent LHC from calling on the Securities and respondent banks from transferring, paying on, or in any manner disposing of the Securities or any renewals or substitutes thereof. . The RTC denied the petition. On appeal to the CA, the appellate court also denied the injunction invoking the independent principle of Letter of Credit. Petitioner argued that the independence principle cannot be invoked by a beneficiary as it can only be invoked by the Bank and that what is applicable is the fraud exception principle Issue: Whether or not injunction is proper to restrain the calling of the securities by LHC? Held:
The relationship between the beneficiary and the issuer of a letter of credit is not strictly contractual, because both privity and a meeting of the minds are lacking, yet strict compliance with its terms is an enforceable right. Nor is it a third-party beneficiary contract, because the issuer must honor drafts drawn against a letter regardless of problems subsequently arising in the underlying contract. Since the bank's customer cannot draw on the letter, it does not function as an assignment by the customer to the beneficiary. Nor, if properly used, is it a contract of suretyship or guarantee, because it entails a primary liability following a default. Finally, it is not in itself a negotiable instrument, because it is not payable to order or bearer and is generally conditional, yet the draft presented under it is often negotiable. There are three significant differences between commercial and standby credits . First, commercial credits involve the payment of money under a contract of sale. Such credits become payable upon the presentation by the seller-beneficiary of documents that show he has taken affirmative steps to comply with the sales agreement. In the standby type, the credit is payable upon certification of a party's nonperformance of the agreement. The documents that accompany the beneficiary's draft tend to show that the applicant has not performed. The beneficiary of a commercial credit must demonstrate by documents that he has performed his contract. The beneficiary of the standby credit must certify that his obligor has not performed the contract. Can the beneficiary invoke the independence principle?Where the credit is stipulated as irrevocable, there is a definite undertaking by the issuing bank to pay the beneficiary provided that the stipulated documents are presented and the conditions of the credit are complied with.41 Precisely, the independence principle liberates the issuing bank from the duty of ascertaining compliance by the parties in the main contract. To say that the independence principle may only be invoked by the issuing banks would render nugatory the purpose for which the letters of credit are used in commercial transactions. In the standby credit case, however, the beneficiary avoids that litigation burden and receives his money promptly upon presentation of the required documents. It may be that the applicant has, in fact, performed and that the beneficiary's presentation of those documents is not rightful. In that case, the applicant may sue the beneficiary in tort, in contract, or in breach of warranty; but, during the litigation to determine whether the applicant has in fact breached the obligation to perform, the beneficiary, not the applicant, holds the money. A careful perusal of the Turnkey Contract reveals the intention of the parties to make the Securities answerable for the liquidated damages occasioned by any delay on the part of petitioner. The call upon the Securities, while not an exclusive remedy on the part of LHC, is certainly an alternative recourse available to it upon the happening of the contingency for

which the Securities have been proffered. Thus, even without the use of the "independence principle," the Turnkey Contract itself bestows upon LHC the right to call on the Securities in the event of default.

Before a writ of preliminary injunction may be issued, there must be a clear showing by the complaint that there exists a right to be protected and that the acts against which the writ is to be directed are violative of the said right. It must be shown that the invasion of the right sought to be protected is material and substantial, that the right of complainant is clear and unmistakable and that there is an urgent and paramount necessity for the writ to prevent serious damage.
In the instant case, petitioner failed to show that it has a clear and unmistakable right to restrain LHC's call on the Securities which would justify the issuance of preliminary injunction. By petitioner's own admission, the right of LHC to call on the Securities was contractually rooted and subject to the express stipulations in the Turnkey Contract The pendency of the arbitration proceedings would not per se make LHC's draws on the Securities wrongful or fraudulent for there was nothing in the Contract which would indicate that the parties intended that all disputes regarding delay should first be settled through arbitration before LHC would be allowed to call upon the Securities. It is therefore premature and absurd to conclude that the draws on the Securities were outright fraudulent given the fact that the ICC and CIAC have not ruled with finality on the existence of default. Most writers agree that fraud is an exception to the independence principle. Professor Dolan opines that the untruthfulness of a certificate accompanying a demand for payment under a standby credit may qualify as fraud sufficient to support an injunction against payment.48 The remedy for fraudulent abuse is an injunction. However, injunction should not be granted unless: (a) there is clear proof of fraud; (b) the fraud constitutes fraudulent abuse of the independent purpose of the letter of credit and not only fraud under the main agreement; and (c) irreparable injury might follow if injunction is not granted or the recovery of damages would be seriously damaged.

G.R. No. 160732 June 21, 2004 METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner, vs.HON. REYNALDO B. DAWAY & Maynilad Facts: On February 21, 1997, MWSS granted Maynilad under a Concession Agreement a twenty-year period to manage, operate, repair, decommission and refurbish the existing MWSS water delivery and sewerage services in the West Zone Service Area. To secure the concessionaires performance of its obligations under the Concession Agreement, Maynilad was required under Section 6.9 of said contract to put up a bond, bank guarantee or other security acceptable to MWSS. In compliance with this requirement, on July 14, 2000, Maynilad arranged for a three-year facility with a Citicorp International Limited, for the issuance of an Irrevocable Standby Letter of Credit in the amount of US$120,000,000 in favor of MWSS for the full and prompt performance of Maynilads obligations to MWSS Sometime in 2000, Maynilad experienced losses due to depreciation of pesos against the US dollar. So Maynilad ask for a mechanism for it to recover the said losses. Failing to get what it desired. Maynilad issued a a force Majeure Notice on March 8, 2001 and unilaterally suspended the payment of the concession fees. In an effort to save the concession agreement, the parties agreed to resolve the controversy through an amendment of the concession which would allow maynilad to recover its losses. However, on November 5, 2002, Maynilad served upon MWSS a Notice of Event of Termination, claiming that MWSS failed to comply with its obligations under the Concession Agreement and Amendment No. 1 regarding the adjustment mechanism that would cover Maynilads foreign exchange losses. On December 9, 2002, Maynilad filed a Notice of Early Termination of the concession, which was challenged by MWSS. The matter was then brought to the appeals panel which ruled that there was no early notice of termination as provided in the amendment. Therefore, Maynilad should pay the concession fee. On November 24, 2003, MWSS, thereafter, submitted a written notice to Citicorp International Limited, as agent for the participating banks, that by virtue of Maynilads failure to perform its obligations under the Concession Agreement, it was drawing on the Irrevocable Standby Letter of Credit and thereby demanded payment in the amount of US$98,923,640.15. Prior to this, Maynilad had filed on November 13, 2003, a petition for rehabilitation before the court a quowhich resulted in the issuance of the Stay Order of November 17, 2003 and the disputed Order of November 27, 2003. MWSS then filed before the Supreme Court a petition for certiorari questioning the order of the rehabilitation court. MWSS argued that the prohibition under the stay order is not applicable to the standby letter of credit. Issue: Whether or not the rehabiltaion court acted in excess of its jurisdiction when it issued the stay order for
MWSS to process the drawing of the amount subject of the stand by letter of credit. Held: First, the claim is not one against the debtor but against an entity that respondent Maynilad has procured to answer for its non-performance of certain terms and conditions of the Concession Agreement, particularly the payment of concession fees. Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the enforcement of all claims against guarantors and sureties, but only those claims against guarantors and sureties who are not solidarily liable with the debtor . Respondent Maynilads claim that the banks are not solidarily liable with the debtor does not find support in jurisprudence. Letters of credit were developed for the purpose of insuring to a seller payment of a definite amount upon the presentation of documents. They are in effect absolute undertakings to pay the money advanced or the amount for which credit is given on the faith of the instrument. What distinguishes letters of credit from other accessory contracts is the engagement of the issuing bank to pay the seller once the draft and other required shipping documents are presented to it. They are definite undertakings to pay at sight once the documents stipulated therein are presented. The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to herein petitioner as the prohibition is on the enforcement of claims against guarantors or sureties of the debtors whose obligations are not solidary with the debtor. The participating banks obligation are solidary with respondent Maynilad in that it is a primary, direct, definite and an absolute undertaking to pay and is not conditioned on the prior exhaustion of the debtors assets. These are the same characteristics of a surety or solidary obligor. Being solidary, the claims against them can be pursued separately from and independently of the rehabilitation case. We hold that except when a letter of credit specifically stipulates otherwise, the obligation of the banks issuing letters of credit are solidary with that of the person or entity requesting for its issuance, the same being a direct, primary, absolute and definite undertaking to pay the beneficiary upon the presentation of the set of documents required therein.