FIRST DIVISION

[G.R. No. 160732. June 21, 2004]

METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM,
petitioner, vs. HON. REYNALDO B. DAWAY, IN HIS CAPACITY AS
PRESIDING JUDGE OF THE REGIONAL TRIAL COURT OF
QUEZON CITY, BRANCH 90 AND MAYNILAD WATER SERVICES,
INC., respondents.
D E C I S I O N
AZCUNA, J.:
On November 17, 2003, the Regional Trial Court (RTC) of Quezon
City, Branch 90, made a determination that the Petition for
Rehabilitation with Prayer for Suspension of Actions and Proceedings
filed by Maynilad Water Services, Inc. (Maynilad) conformed
substantially to the provisions of Sec. 2, Rule 4 of the Interim Rules of
Procedure on Corporate Rehabilitation (Interim Rules). It forthwith
issued a Stay Order which states, in part, that the court was thereby:
2. Staying enforcement of all claims, whether for money or otherwise
and whether such enforcement is by court action or otherwise, against
the petitioner, its guarantors and sureties not solidarily liable with the
petitioner;
3. Prohibiting the petitioner from selling, encumbering, transferring, or
disposing in any manner any of its properties except in the ordinary
course of business;
4. Prohibiting the petitioner from making any payment of its liabilities,
outstanding as at the date of the filing of the petition;
Subsequently, on November 27, 2003, public respondent, acting on
two Urgent Ex Parte motions filed by respondent Maynilad, issued the
herein questioned Order which stated that it thereby:
1. DECLARES that the act of MWSS in commencing on
November 24, 2003 the process for the payment by the banks of
US$98 million out of the US$120 million standby letter of credit so the
banks have to make good such call/drawing of payment of US$98
million by MWSS not later than November 27, 2003 at 10:00 P. M. or
any similar act for that matter, is violative of the above-quoted sub-
paragraph 2.) of the dispositive portion of this Courts Stay Order
dated November 17, 2003.
2. ORDERS MWSS through its officers/officials to withdraw
under pain of contempt the written certification/notice of draw to
Citicorp International Limited dated November 24, 2003 and
DECLARES void any payment by the banks to MWSS in the event
such written certification/notice of draw is not withdrawn by MWSS
and/or MWSS receives payment by virtue of the aforesaid standby
letter of credit.
Aggrieved by this Order, petitioner Manila Waterworks & Sewerage
System (MWSS) filed this petition for review by way of certiorari under
Rule 65 of the Rules of Court questioning the legality of said order as
having been issued without or in excess of the lower courts
jurisdiction or that the court a quo acted with grave abuse of discretion
amounting to lack or excess of jurisdiction.
ANTECEDENTS OF THE CASE
On February 21, 1997, MWSS granted Maynilad under a Concession
Agreement a twenty-year period to manage, operate, repair,
decommission and refurbish the existing MWSS water delivery and
sewerage services in the West Zone Service Area, for which Maynilad
undertook to pay the corresponding concession fees on the dates
agreed upon in said agreement which, among other things, consisted
of payments of petitioners mostly foreign loans.
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, Maynilad arranged on July 14,
2000 for a three-year facility with a number of foreign banks, led by
Citicorp International Limited, for the issuance of an Irrevocable
Standby Letter of Credit in the amount of US$120,000,000 in favor of
MWSS for the full and prompt performance of Maynilads obligations
to MWSS as aforestated.
Sometime in September 2000, respondent Maynilad requested
MWSS for a mechanism by which it hoped to recover the losses it had
allegedly incurred and would be incurring as a result of the
depreciation of the Philippine Peso against the US Dollar. Failing to
get what it desired, Maynilad issued a Force Majeure Notice on March
8, 2001 and unilaterally suspended the payment of the concession
fees. In an effort to salvage the Concession Agreement, the parties
entered into a Memorandum of Agreement (MOA) on June 8, 2001
wherein Maynilad was allowed to recover foreign exchange losses
under a formula agreed upon between them. Sometime in August
2001 Maynilad again filed another Force Majeure Notice and, since
MWSS could not agree with the terms of said Notice, the matter was
referred on August 30, 2001 to the Appeals Panel for arbitration. This
resulted in the parties agreeing to resolve the issues through an
amendment of the Concession Agreement on October 5, 2001, known
as Amendment No. 1, which was based on the terms set down in
MWSS Board of Trustees Resolution No. 457-2001, as amended by
MWSS Board of Trustees Resolution No. 487-2001, which provided
inter alia for a formula that would allow Maynilad to recover foreign
exchange losses it had incurred or would incur under the terms of the
Concession Agreement.
As part of this agreement, Maynilad committed, among other things,
to:
a) infuse the amount of UD$80.0 million as additional funding support
from its stockholders;
b) resume payment of the concession fees; and
c) mutually seek the dismissal of the cases pending before the Court
of Appeals and with Minor Dispute Appeals Panel.
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. This matter was eventually brought before the
Appeals Panel on January 7, 2003 by MWSS. On November 7, 2003,
the Appeals Panel ruled that there was no Event of Termination as
defined under Art. 10.2 (ii) or 10.3 (iii) of the Concession Agreement
and that, therefore, Maynilad should pay the concession fees that had
fallen due.
The award of the Appeals Panel became final on November 22, 2003.
MWSS, thereafter, submitted a written notice on November 24, 2003,
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, however, Maynilad had filed on November 13, 2003, a
petition for rehabilitation before the court a quo which resulted in the
issuance of the Stay Order of November 17, 2003 and the disputed
Order of November 27, 2003.
PETITIONERS CASE
Petitioner hereby raises the following issues:
1. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR
AND/OR ACT PATENTLY WITHOUT JURISDICTION OR IN
EXCESS OF JURISDICTION OR WITH GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION IN CONSIDERING THE PERFORMANCE BOND
OR ASSETS OF THE ISSUING BANKS AS PART OR PROPERTY
OF THE ESTATE OF THE PRIVATE RESPONDENT MAYNILAD
SUBJECT TO REHABILITATION.
2. DID THE HONORABLE PRESIDING JUDGE ACT WITH LACK OR
EXCESS OF JURISDICTION OR COMMIT A GRAVE ERROR OF
LAW IN HOLDING THAT THE PERFORMANCE BOND
OBLIGATIONS OF THE BANKS WERE NOT SOLIDARY IN
NATURE.
3. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR IN
ALLOWING MAYNILAD TO IN EFFECT SEEK A REVIEW OR
APPEAL OF THE FINAL AND BINDING DECISION OF THE
APPEALS PANEL.
In support of the first issue, petitioner maintains that as a matter of
law, the US$120 Million Standby Letter of Credit and Performance
Bond are not property of the estate of the debtor Maynilad and,
therefore, not subject to the in rem rehabilitation jurisdiction of the
trial court.
Petitioner argues that a call made on the Standby Letter of Credit
does not involve any asset of Maynilad but only assets of the banks.
Furthermore, a call on the Standby Letter of Credit cannot also be
considered a claim falling under the purview of the stay order as
alleged by respondent as it is not directed against the assets of
respondent Maynilad.
Petitioner concludes that the public respondent erred in declaring and
holding that the commencement of the process for the payment of
US$98 million is a violation of the order issued on November 17,
2003.
RESPONDENT MAYNILADS CASE
Respondent Maynilad seeks to refute this argument by alleging that:
a) the order objected to was strictly and precisely worded and
issued after carefully considering/evaluating the import of the
arguments and documents referred to by Maynilad, MWSS and/or
creditors Chinatrust Commercial Bank and Suez in relation to
admissions, pleadings and/or pertinent records and that public
respondent had the authority to issue the same;
b) public respondent never considered nor held that the
Performance bond or assets of the issuing banks are part or property
of the estate of respondent Maynilad subject to rehabilitation and
which respondent Maynilad has not and has never claimed to be;
c) what is relevant is not whether the performance bond or
assets of the issuing banks are part of the estate of respondent
Maynilad but whether the act of petitioner in commencing the process
for the payment by the banks of US$98 million out of the US$120
million performance bond is covered and/or prohibited under sub-
paragraphs 2.) and 4.) of the stay order dated November 17, 2003;
d) the jurisdiction of public respondent extends not only to the
assets of respondent Maynilad but also over persons and assets of
all those affected by the proceedings x x x upon publication of the
notice of commencement; and
e) the obligations under the Standby Letter of Credit are not
solidary and are not exempt from the coverage of the stay order.
OUR RULING
We will discuss the first two issues raised by petitioner as these are
interrelated and make up the main issue of the petition before us
which is, did the rehabilitation court sitting as such, act in excess of its
authority or jurisdiction when it enjoined herein petitioner from seeking
the payment of the concession fees from the banks that issued the
Irrevocable Standby Letter of Credit in its favor and for the account of
respondent Maynilad?
The public respondent relied on Sec. 1, Rule 3 of the Interim Rules on
Corporate Rehabilitation to support its jurisdiction over the Irrevocable
Standby Letter of Credit and the banks that issued it. The section
reads in part that jurisdiction over those affected by the proceedings
is considered acquired upon the publication of the notice of
commencement of proceedings in a newspaper of general circulation
and goes further to define rehabilitation as an in rem proceeding. This
provision is a logical consequence of the in rem nature of the
proceedings, where jurisdiction is acquired by publication and where it
is necessary that the assets of the debtor come within the courts
jurisdiction to secure the same for the benefit of creditors. The
reference to all those affected by the proceedings covers creditors or
such other persons or entities holding assets belonging to the debtor
under rehabilitation which should be reflected in its audited financial
statements. The banks do not hold any assets of respondent
Maynilad that would be material to the rehabilitation proceedings nor
is Maynilad liable to the banks at this point.
Respondent Maynilads Financial Statement as of December 31, 2001
and 2002 do not show the Irrevocable Standby Letter of Credit as part
of its assets or liabilities, and by respondent Maynilads own
admission it is not. In issuing the clarificatory order of November 27,
2003, enjoining petitioner from claiming from an asset that did not
belong to the debtor and over which it did not acquire jurisdiction, the
rehabilitation court acted in excess of its jurisdiction.
Respondent Maynilad insists, however, that it is Sec. 6 (b), Rule 4 of
the Interim Rules that supports its claim that the commencement of
the process to draw on the Standby Letter of Credit is an enforcement
of claim prohibited by and under the Interim Rules and the order of
public respondent.
Respondent Maynilad would persuade us that the above provision
justifies a leap to the conclusion that such an enforcement is
prohibited by said section because it is a claim against the debtor, its
guarantors and sureties not solidarily liable with the debtor and that
there is nothing in the Standby Letter of Credit nor in law nor in the
nature of the obligation that would show or require the obligation of
the banks to be solidary with the respondent Maynilad.
We disagree.
First, the claim is not one against the debtor but against an entity that
respondent Maynilad has procured to answer for its non-performance
of certain terms and conditions of the Concession Agreement,
particularly the payment of concession fees.
Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the
enforcement of all claims against guarantors and sureties, but only
those claims against guarantors and sureties who are not
solidarily liable with the debtor. Respondent Maynilads claim that
the banks are not solidarily liable with the debtor does not find support
in jurisprudence.
We held in Feati Bank & Trust Company v. Court of Appeals that the
concept of guarantee vis--vis the concept of an irrevocable letter of
credit are inconsistent with each other. The guarantee theory
destroys the independence of the banks responsibility from the
contract upon which it was opened and the nature of both contracts is
mutually in conflict with each other. In contracts of guarantee, the
guarantors obligation is merely collateral and it arises only upon the
default of the person primarily liable. On the other hand, in an
irrevocable letter of credit, the bank undertakes a primary obligation.
We have also defined a letter of credit as an engagement by a bank
or other person made at the request of a customer that the issuer
shall honor drafts or other demands of payment upon compliance with
the conditions specified in the credit.
Letters of credit were developed for the purpose of insuring to a seller
payment of a definite amount upon the presentation of documents and
is thus a commitment by the issuer that the party in whose favor it is
issued and who can collect upon it will have his credit against the
applicant of the letter, duly paid in the amount specified in the letter.
They are in effect absolute undertakings to pay the money advanced
or the amount for which credit is given on the faith of the instrument.
They are primary obligations and not accessory contracts and while
they are security arrangements, they are not converted thereby into
contracts of guaranty. 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.
Letters of Credits have long been and are still governed by the
provisions of the Uniform Customs and Practice for Documentary
Credits of the International Chamber of Commerce. In the 1993
Revision it provides in Art. 2 that the expressions Documentary
Credit(s) and Standby Letter(s) of Credit mean any arrangement,
however made or described, whereby a bank acting at the request
and on instructions of a customer or on its own behalf is to make
payment against stipulated document(s) and Art. 9 thereof defines
the liability of the issuing banks on an irrevocable letter of credit as a
definite undertaking of the issuing bank, provided that the stipulated
documents are presented to the nominated bank or the issuing bank
and the terms and conditions of the Credit are complied with, to pay at
sight if the Credit provides for sight payment.
We have accepted, in Feati Bank and Trust Company v. Court of
Appeals and Bank of America NT & SA v. Court of Appeals, to the
extent that they are pertinent, the application in our jurisdiction of the
international credit regulatory set of rules known as the Uniform
Customs and Practice for Documentary Credits (U.C.P) issued by the
International Chamber of Commerce, which we said in Bank of the
Philippine Islands v. Nery was justified under Art. 2 of the Code of
Commerce, which states:
Acts of commerce, whether those who execute them be merchants or
not, and whether specified in this Code or not should be governed by
the provisions contained in it; in their absence, by the usages of
commerce generally observed in each place; and in the absence of
both rules, by those of the civil law.
The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does
not apply to herein petitioner as the prohibition is on the enforcement
of claims against guarantors or sureties of the debtors whose
obligations are not solidary with the debtor. The participating banks
obligation are solidary with respondent Maynilad in that it is a primary,
direct, definite and an absolute undertaking to pay and is not
conditioned on the prior exhaustion of the 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, as held in Traders
Royal Bank v. Court of Appeals and reiterated in Philippine Blooming
Mills, Inc. v. Court of Appeals, where we said that property of the
surety cannot be taken into custody by the rehabilitation receiver
(SEC) and said surety can be sued separately to enforce his liability
as surety for the debts or obligations of the debtor. The debts or
obligations for which a surety may be liable include future debts, an
amount which may not be known at the time the surety is given.
The terms of the Irrevocable Standby Letter of Credit do not show that
the obligations of the banks are not solidary with those of respondent
Maynilad. On the contrary, it is issued at the request of and for the
account of Maynilad Water Services, Inc., in favor of the Metropolitan
Waterworks and Sewerage System, as a bond for the full and prompt
performance of the obligations by the concessionaire under the
Concession Agreement and herein petitioner is authorized by the
banks to draw on it by the simple act of delivering to the agent a
written certification substantially in the form Annex B of the Letter of
Credit. It provides further in Sec. 6, that for as long as the Standby
Letter of Credit is valid and subsisting, the Banks shall honor any
written Certification made by MWSS in accordance with Sec. 2, of the
Standby Letter of Credit regardless of the date on which the event
giving rise to such Written Certification arose.
Taking into consideration our own rulings on the nature of letters of
credit and the customs and usage developed over the years in the
banking and commercial practice of letters of credit, we hold that
except when a letter of credit specifically stipulates otherwise, the
obligation of the banks issuing letters of credit are solidary with that of
the person or entity requesting for its issuance, the same being a
direct, primary, absolute and definite undertaking to pay the
beneficiary upon the presentation of the set of documents required
therein.
The public respondent, therefore, exceeded his jurisdiction, in holding
that he was competent to act on the obligation of the banks under the
Letter of Credit under the argument that this was not a solidary
obligation with that of the debtor. Being a solidary obligation, the
letter of credit is excluded from the jurisdiction of the rehabilitation
court and therefore in enjoining petitioner from proceeding against the
Standby Letters of Credit to which it had a clear right under the law
and the terms of said Standby Letter of Credit, public respondent
acted in excess of his jurisdiction.
ADDITIONAL ISSUES
We proceed to consider the other issues raised in the oral arguments
and included in the parties memoranda:
1. Respondent Maynilad argues that petitioner had a plain,
speedy and adequate remedy under the Interim Rules itself which
provides in Sec. 12, Rule 4 that the court may on motion or motu
proprio, terminate, modify or set conditions for the continuance of the
stay order or relieve a claim from coverage thereof. We find,
however, that the public respondent had already accomplished this
during the hearing set for the two Urgent Ex Parte motions filed by
respondent Maynilad on November 21 and 24, 2003, where the
parties including the creditors, Suez and Chinatrust Commercial
presented their respective arguments. The public respondent then
ruled, after carefully considering/evaluating the import of the
arguments and documents referred to by Maynilad, MWSS and/or the
creditors Chinatrust Commercial Bank and Suez in relation to the
admissions, the pleadings, and/or pertinent portions of the records,
this court is of the considered and humble view that the issue must
perforce be resolved in favor of Maynilad. Hence to pursue their
opposition before the same court would result in the presentation of
the same arguments and issues passed upon by public respondent.
Furthermore, Sec. 5, Rule 3 of the Interim Rules would preclude any
other effective remedy questioning the orders of the rehabilitation
court since they are immediately executory and a petition for review or
an appeal therefrom shall not stay the execution of the order unless
restrained or enjoined by the appellate court. In this situation, it had
no other remedy but to seek recourse to us through this petition for
certiorari.
In Silvestre v. Torres and Oben, we said that it is not enough that a
remedy is available to prevent a party from making use of the
extraordinary remedy of certiorari but that such remedy be an
adequate remedy which is equally beneficial, speedy and sufficient,
not only a remedy which at some time in the future may offer relief but
a remedy which will promptly relieve the petitioner from the injurious
acts of the lower tribunal. It is the inadequacy -- not the mere absence
-- of all other legal remedies and the danger of failure of justice
without the writ, that must usually determine the propriety of certiorari.
2. Respondent Maynilad argues that by commencing the process
for payment under the Standby Letter of Credit, petitioner violated an
immediately executory order of the court and, therefore, comes to
Court with unclean hands and should therefore be denied any relief.
It is true that the stay order is immediately executory. It is also true,
however, that the Standby Letter of Credit and the banks that issued it
were not within the jurisdiction of the rehabilitation court. The call on
the Standby Letter of Credit, therefore, could not be considered a
violation of the Stay Order.
3. Respondents claim that the filing of the petition pre-empts the
original jurisdiction of the lower court is without merit. The purpose of
the initial hearing is to determine whether the petition for rehabilitation
has merit or not. The propriety of the stay order as well as the
clarificatory order had already been passed upon in the hearing
previously had for that purpose. The determination of whether the
public respondent was correct in enjoining the petitioner from drawing
on the Standby Letter of Credit will have no bearing on the
determination to be made by public respondent whether the petition
for rehabilitation has merit or not. Our decision on the instant petition
does not pre-empt the original jurisdiction of the rehabilitation court.
WHEREFORE, the petition for certiorari is GRANTED. The Order of
November 27, 2003 of the Regional Trial Court of Quezon City,
Branch 90, is hereby declared NULL AND VOID and SET ASIDE.
The status quo Order herein previously issued is hereby LIFTED. In
view of the urgency attending this case, this decision is immediately
executory.
No costs.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Panganiban, and Carpio, JJ., concur.
Ynares-Santiago, J., on leave.
SECOND DIVISION
[G.R. NO. 117913. February 1, 2002]
CHARLES LEE, CHUA SIOK SUY, MARIANO SIO, ALFONSO YAP,
RICHARD VELASCO and ALFONSO CO, petitioners, vs. COURT OF
APPEALS and PHILIPPINE BANK OF COMMUNICATIONS,
respondents.
[G.R. NO. 117914. February 1, 2002]
MICO METALS CORPORATION, petitioner, vs. COURT OF
APPEALS and PHILIPPINE BANK OF COMMUNICATIONS,
respondents.
D E C I S I O N
DE LEON, JR., J:
Before us is the joint and consolidated petition for review of the
Decisioni[1] dated June 15, 1994 of the Court of Appeals in CA-G.R.
CV No. 27480 entitled, Philippine Bank of Communications vs. Mico
Metals Corporation, Charles Lee, Chua Siok Suy, Mariano Sio,
Alfonso Yap, Richard Velasco and Alfonso Co, which reversed the
decision of the Regional Trial Court (RTC) of Manila, Branch 55
dismissing the complaint for a sum of money filed by private
respondent Philippine Bank of Communications against herein
petitioners, Mico Metals Corporation (MICO, for brevity), Charles Lee,
Chua Siok Suy,ii[2] Mariano Sio, Alfonso Yap, Richard Velasco and
Alfonso Co.iii[3] The dispositive portion of the said Decision of the
Court of Appeals, reads:
WHEREFORE, the decision of the Regional Trial Court is hereby
reversed and in lieu thereof, a new one is entered:
a) Ordering the defendants-appellees jointly and severally to pay
plaintiff PBCom the sum of Five million four hundred fifty-one
thousand six hundred sixty-three pesos and ninety centavos
(P5,451,663.90) representing defendants-appellees unpaid
obligations arising from ordinary loans granted by the plaintiff plus
legal interest until fully paid.
b) Ordering defendants-appellees jointly and severally to pay PBCom
the sum of Four hundred sixty-one thousand six hundred pesos and
sixty-six centavos (P46 1,600.66) representing defendants-appellees
unpaid obligations arising from their letters of credit and trust receipt
transactions with plaintiff PBCom plus legal interest until fully paid.
c) Ordering defendants-appellees jointly and severally to pay PBCom
the sum of P50,000.00 as attorneys fees.
No pronouncement as to costs.
The facts of the case are as follows:
On March 2, 1979, Charles Lee, as President of MICO wrote private
respondent Philippine Bank of Communications (PBCom) requesting
for a grant of a discounting loan/credit line in the sum of Three Million
Pesos (P3,000,000.00) for the purpose of carrying out MICOs line of
business as well as to maintain its volume of business.
On the same day, Charles Lee requested for another discounting
loan/credit line of Three Million Pesos (P3,000,000.00) from PBCom
for the purpose of opening letters of credit and trust receipts.
In connection with the requests for discounting loan/credit lines,
PBCom was furnished by MICO the following resolution which was
adopted unanimously by MICOs Board of Directors:
RESOLVED, that the President, Mr. Charles Lee, and the Vice-
President and General Manager, Mr. Mariano A. Sio, singly or jointly,
be and they are duly authorized and empowered for and in behalf of
this Corporation to apply for, negotiate and secure the approval of
commercial loans and other banking facilities and accommodations,
such as, but not limited to discount loans, letters of credit, trust
receipts, lines for marginal deposits on foreign and domestic letters of
credit, negotiate out-of-town checks, etc. from the Philippine Bank of
Communications, 216 Juan Luna, Manila in such sums as they shall
deem advantageous, the principal of all of which shall not exceed the
total amount of TEN MILLION PESOS (P10,000,000.00), Philippine
Currency, plus any interests that may be agreed upon with said Bank
in such loans and other credit lines of the same kind and such further
terms and conditions as may, upon granting of said loans and other
banking facilities, be imposed by the Bank; and to make, execute,
sign and deliver any contracts of mortgage, pledge or sale of one,
some or all of the properties of the Company, or any other
agreements or documents of whatever nature or kind, including the
signing, indorsing, cashing, negotiation and execution of promissory
notes, checks, money orders or other negotiable instruments, which
may be necessary and proper in connection with said loans and other
banking facilities, or with their amendments, renewals and extensions
of payment of the whole or any part thereof.iv[4]
On March 26, 1979, MICO availed of the first loan of One Million
Pesos (P1,000,000.00) from PBCom. Upon maturity of the loan,
MICO caused the same to be renewed, the last renewal of which was
made on May 21, 1982 under Promissory Note BNA No. 26218.v[5]
Another loan of One Million Pesos (P1,000,000.00) was availed of by
MICO from PBCom which was likewise later on renewed, the last
renewal of which was made on May 21, 1982 under Promissory Note
BNA No. 26219.vi[6] To complete MICOs availment of Three Million
Pesos (P3,000,000.00) discounting loan/credit line with PBCom,
MICO availed of another loan from PBCom in the sum of One Million
Pesos (P1,000,000.00) on May 24, 1979. As in previous loans, this
was rolled over or renewed, the last renewal of which was made on
May 25, 1982 under Promissory Note BNA No. 26253.vii[7]
As security for the loans, MICO through its Vice-President and
General Manager, Mariano Sio, executed on May 16, 1979 a Deed of
Real Estate Mortgage over its properties situated in Pasig, Metro
Manila covered by Transfer Certificates of Title (TCT) Nos. 11248 and
11250.
On March 26, 1979 Charles Lee, Chua Siok Suy, Mariano Sio,
Alfonso Yap and Richard Velasco, in their personal capacities
executed a Surety Agreementviii[8] in favor of PBCom whereby the
petitioners jointly and severally, guaranteed the prompt payment on
due dates or at maturity of overdrafts, promissory notes, discounts,
drafts, letters of credit, bills of exchange, trust receipts, and other
obligations of every kind and nature, for which MICO may be held
accountable by PBCom. It was provided, however, that the liability of
the sureties shall not at any one time exceed the principal amount of
Three Million Pesos (P3,000,000.00) plus interest, costs, losses,
charges and expenses including attorneys fees incurred by PBCom in
connection therewith.
On July 14, 1980, petitioner Charles Lee, in his capacity as president
of MICO, wrote PBCom and applied for an additional loan in the sum
of Four Million Pesos (P4,000,000.00). The loan was intended for the
expansion and modernization of the companys machineries. Upon
approval of the said application for loan, MICO availed of the
additional loan of Four Million Pesos (P4,000,000.00) as evidenced by
Promissory Note TA No. 094.ix[9]
As per agreement, the proceeds of all the loan availments were
credited to MICOs current checking account with PBCom. To induce
the PBCom to increase the credit line of MICO, Charles Lee, Chua
Siok Suy, Mariano Sio, Alfonso Yap, Richard Velasco and Alfonso Co
(hereinafter referred to as petitioners-sureties), executed another
surety agreementx[10] in favor of PBCom on July 28, 1980, whereby
they jointly and severally guaranteed the prompt payment on due
dates or at maturity of overdrafts, promissory notes, discounts, drafts,
letters of credit, bills of exchange, trust receipts and all other
obligations of any kind and nature for which MICO may be held
accountable by PBCom. It was provided, however, that their liability
shall not at any one time exceed the sum of Seven Million Five
Hundred Thousand Pesos (P7,500,000.00) including interest, costs,
charges, expenses and attorneys fees incurred by MICO in
connection therewith.
On July 29, 1980, MICO furnished PBCom with a notarized
certification issued by its corporate secretary, Atty. P.B. Barrera, that
Chua Siok Suy was duly authorized by the Board of Directors to
negotiate on behalf of MICO for loans and other credit availments
from PBCom. Indicated in the certification was the following resolution
unanimously approved by the Board of Directors:
RESOLVED, AS IT IS HEREBY RESOLVED, That Mr. Chua Siok Suy
be, as he is hereby authorized and empowered, on behalf of MICO
METALS CORPORATION from time to time, to borrow money and
obtain other credit facilities, with or without security, from the
PHILIPPINE BANK OF COMMUNICATIONS in such amount(s) and
under such terms and conditions as he may determine, with full power
and authority to execute, sign and deliver such contracts, instruments
and papers in connection therewith, including real estate and chattel
mortgages, pledges and assignments over the properties of the
Corporation; and to renew and/or extend and/or roll-over and/or
reavail of the credit facilities granted thereunder, either for lesser or
for greater amount(s), the intention being that such credit facilities and
all securities of whatever kind given as collaterals therefor shall be a
continuing security.
RESOLVED FURTHER, That said bank is hereby authorized,
empowered and directed to rely on the authority given hereunder, the
same to continue in full force and effect until written notice of its
revocation shall be received by said Bank.xi[11]
On July 2, 1981, MICO filed with PBCom an application for a domestic
letter of credit in the sum of Three Hundred Forty-Eight Thousand
Pesos (P348,000.00).xii[12] The corresponding irrevocable letter of
credit was approved and opened under LC No. L-16060.xiii[13]
Thereafter, the domestic letter of credit was negotiated and accepted
by MICO as evidenced by the corresponding bank draft issued for the
purpose.xiv[14] After the supplier of the merchandise was paid, a trust
receipt upon MICOs own initiative, was executed in favor of
PBCom.xv[15]
On September 14, 1981, MICO applied for another domestic letter of
credit with PBCom in the sum of Two Hundred Ninety Thousand
Pesos (P290,000.00).xvi[16] The corresponding irrevocable letter of
credit was issued on September 22, 1981 under LC No. L-
16334.xvii[17] After the beneficiary of the said letter of credit was paid
by PBCom for the price of the merchandise, the goods were delivered
to MICO which executed a corresponding trust receiptxviii[18] in favor
of PBCom.
On November 10, 1981, MICO applied for authority to open a foreign
letter of credit in favor of Ta Jih Enterprises Co., Ltd.,xix[19] and thus,
the corresponding letter of creditxx[20] was then issued by PBCom
with a cable sent to the beneficiary, Ta Jih Enterprises Co., Ltd.
advising that said beneficiary may draw funds from the account of
PBCom in its correspondent banks New York Office.xxi[21] PBCom
also informed its corresponding bank in Taiwan, the Irving Trust
Company, of the approved letter of credit. The correspondent bank
acknowledged PBComs advice through a confirmation letterxxii[22]
and by debiting from PBComs account with the said correspondent
bank the sum of Eleven Thousand Nine Hundred Sixty US Dollars
($11 ,960.00).xxiii[23] As in past transactions, MICO executed in favor
of PBCom a corresponding trust receipt.xxiv[24]
On January 4, 1982, MICO applied, for authority to open a foreign
letter of credit in the sum of One Thousand Nine Hundred US Dollars
($1,900.00), with PBCom.xxv[25] Upon approval, the corresponding
letter of credit denominated as LC No. 62293xxvi[26] was issued
whereupon PBCom advised its correspondent bank and
MICOxxvii[27] of the same. Negotiation and proper acceptance of the
letter of credit were then made by MICO. Again, a corresponding trust
receiptxxviii[28] was executed by MICO in favor of PBCom.
In all the transactions involving foreign letters of credit, PBCom turned
over to MICO the necessary documents such as the bills of lading and
commercial invoices to enable the latter to withdraw the goods from
the port of Manila.
On May 21, 1982 MICO obtained from PBCom another loan in the
sum of Three Hundred Seventy-Seven Thousand Pesos
(P377,000.00) covered by Promissory Note BA No. 7458.xxix[29]
Upon maturity of all credit availments obtained by MICO from PBCom,
the latter made a demand for payment.xxx[30] For failure of petitioner
MICO to pay the obligations incurred despite repeated demands,
private respondent PBCom extrajudicially foreclosed MICOs real
estate mortgage and sold the said mortgaged properties in a public
auction sale held on November 23, 1982. Private respondent PBCom
which emerged as the highest bidder in the auction sale, applied the
proceeds of the purchase price at public auction of Three Million
Pesos (P3,000,000.00) to the expenses of the foreclosure, interest
and charges and part of the principal of the loans, leaving an unpaid
balance of Five Million Four Hundred Forty-One Thousand Six
Hundred Sixty-Three Pesos and Ninety Centavos (P5,441,663.90)
exclusive of penalty and interest charges. Aside from the unpaid
balance of Five Million Four Hundred Forty-One Thousand Six
Hundred Sixty-Three Pesos and Ninety Centavos (P5,441,663.90),
MICO likewise had another standing obligation in the sum of Four
Hundred Sixty-One Thousand Six Hundred Pesos and Six Centavos
(P461,600.06) representing its trust receipts liabilities to private
respondent. PBCom then demanded the settlement of the aforesaid
obligations from herein petitioners-sureties who, however, refused to
acknowledge their obligations to PBCom under the surety
agreements. Hence, PBCom filed a complaint with prayer for writ of
preliminary attachment before the Regional Trial Court of Manila,
which was raffled to Branch 55, alleging that MICO was no longer in
operation and had no properties to answer for its obligations. PBCom
further alleged that petitioner Charles Lee has disposed or concealed
his properties with intent to defraud his creditors. Except for MICO
and Charles Lee, the sheriff of the RTC failed to serve the summons
on herein petitioners-sureties since they were all reportedly abroad at
the time. An alias summons was later issued but the sheriff was not
able to serve the same to petitioners Alfonso Co and Chua Siok Suy
who was already sickly at the time and reportedly in Taiwan where he
later died.
Petitioners (MICO and herein petitioners-sureties) denied all the
allegations of the complaint filed by respondent PBCom, and alleged
that: a) MICO was not granted the alleged loans and neither did it
receive the proceeds of the aforesaid loans; b) Chua Siok Suy was
never granted any valid Board Resolution to sign for and in behalf of
MICO; c) PBCom acted in bad faith in granting the alleged loans and
in releasing the proceeds thereof; d) petitioners were never advised of
the alleged grant of loans and the subsequent releases therefor, if
any; e) since no loan was ever released to or received by MICO, the
corresponding real estate mortgage and the surety agreements
signed concededly by the petitioners-sureties are null and void.
The trial court gave credence to the testimonies of herein petitioners
and dismissed the complaint filed by PBCom. The trial court likewise
declared the real estate mortgage and its foreclosure null and void. In
ruling for herein petitioners, the trial court said that PBCom failed to
adequately prove that the proceeds of the loans were ever delivered
to MICO. The trial court pointed out, among others, that while PBCom
claimed that the proceeds of the Four Million Pesos (P4,000,000.00)
loan covered by promissory note TA 094 were deposited to the
current account of petitioner MICO, PBCom failed to produce the
ledger account showing such deposit. The trial court added that while
PBCom may have loaned to MICO the other sums of Three Hundred
Forty-Eight Thousand Pesos (P348,000.00) and Two Hundred Ninety
Thousand Pesos (P290,000.00), no proof has been adduced as to the
existence of the goods covered and paid by the said amounts. Hence,
inasmuch as no consideration ever passed from PBCom to MICO, all
the documents involved therein, such as the promissory notes, real
estate mortgage including the surety agreements were all void or
nonexistent for lack of cause or consideration. The trial court said that
the lack of proof as regards the existence of the merchandise covered
by the letters of credit bolstered the claim of herein petitioners that no
purchases of the goods were really made and that the letters of credit
transactions were simply resorted to by the PBCom and Chua Siok
Suy to accommodate the latter in his financial requirements.
The Court of Appeals reversed the ruling of the trial court, saying that
the latter committed an erroneous application and appreciation of the
rules governing the burden of proof. Citing Section 24 of the
Negotiable Instruments Law which provides that Every negotiable
instrument is deemed prima facie to have been issued for
valuable consideration and every person whose signature
appears thereon to have become a party thereto for value, the
Court of Appeals said that while the subject promissory notes and
letters of credit issued by the PBCom made no mention of delivery of
cash, it is presumed that said negotiable instruments were issued for
valuable consideration. The Court of Appeals also cited the case of
Gatmaitan vs. Court of Appealsxxxi[31] which holds that "there is a
presumption that an instrument sets out the true agreement of
the parties thereto and that it was executed for valuable
consideration. The appellate court noted and found that a notarized
Certification was issued by MICOs corporate secretary, P.B. Barrera,
that Chua Siok Suy, was duly authorized by the Board of Directors of
MICO to borrow money and obtain credit facilities from PBCom.
Petitioners filed a motion for reconsideration of the challenged
decision of the Court of Appeals but this was denied in a Resolution
dated November 7, 1994 issued by its Former Second Division.
Petitioners-sureties then filed a petition for review on certiorari with
this Court, docketed as G.R. No. 117913, assailing the decision of the
Court of Appeals. MICO likewise filed a separate petition for review on
certiorari, docketed as G.R. No. 117914, with this Court assailing the
same decision rendered by the Court of Appeals. Upon motion filed by
petitioners, the two (2) petitions were consolidated on January 11,
1995.xxxii[32]
Petitioners contend that there was no proof that the proceeds of the
loans or the goods under the trust receipts were ever delivered to and
received by MICO. But the record shows otherwise. Petitioners-
sureties further contend that assuming that there was delivery by
PBCom of the proceeds of the loans and the goods, the contracts
were executed by an unauthorized person, more specifically Chua
Siok Suy who acted fraudulently and in collusion with PBCom to
defraud MICO.
The pertinent issues raised in the consolidated cases at bar are: a)
whether or not the proceeds of the loans and letters of credit
transactions were ever delivered to MICO, and b) whether or not the
individual petitioners, as sureties, may be held liable under the two (2)
Surety Agreements executed on March 26, 1979 and July 28, 1980.
In civil cases, the party having the burden of proof must establish his
case by preponderance of evidence.xxxiii[33] Preponderance of
evidence means evidence which is more convincing to the court as
worthy of belief than that which is offered in opposition thereto.
Petitioners contend that the alleged promissory notes, trust receipts
and surety agreements attached to the complaint filed by PBCom did
not ripen into valid and binding contracts inasmuch as there is no
evidence of the delivery of money or loan proceeds to MICO or to any
of the petitioners-sureties. Petitioners claim that under normal banking
practice, borrowers are required to accomplish promissory notes in
blank even before the grant of the loans applied for and such
documents become valid written contracts only when the loans are
actually released to the borrower.
We are not convinced.
During the trial of an action, the party who has the burden of proof
upon an issue may be aided in establishing his claim or defense by
the operation of a presumption, or, expressed differently, by the
probative value which the law attaches to a specific state of facts. A
presumption may operate against his adversary who has not
introduced proof to rebut the presumption. The effect of a legal
presumption upon a burden of proof is to create the necessity of
presenting evidence to meet the legal presumption or the prima facie
case created thereby, and which if no proof to the contrary is
presented and offered, will prevail. The burden of proof remains
where it is, but by the presumption the one who has that burden is
relieved for the time being from introducing evidence in support of his
averment, because the presumption stands in the place of evidence
unless rebutted.
Under Section 3, Rule 131 of the Rules of Court the following
presumptions, among others, are satisfactory if uncontradicted: a)
That there was a sufficient consideration for a contract and b) That a
negotiable instrument was given or indorsed for sufficient
consideration. As observed by the Court of Appeals, a similar
presumption is found in Section 24 of the Negotiable Instruments Law
which provides that every negotiable instrument is deemed prima
facie to have been issued for valuable consideration and every person
whose signature appears thereon to have become a party for value.
Negotiable instruments which are meant to be substitutes for money,
must conform to the following requisites to be considered as such a) it
must be in writing; b) it must be signed by the maker or drawer; c) it
must contain an unconditional promise or order to pay a sum certain
in money; d) it must be payable on demand or at a fixed or
determinable future time; e) it must be payable to order or bearer; and
f) where it is a bill of exchange, the drawee must be named or
otherwise indicated with reasonable certainty. Negotiable instruments
include promissory notes, bills of exchange and checks. Letters of
credit and trust receipts are, however, not negotiable instruments. But
drafts issued in connection with letters of credit are negotiable
instruments.
Private respondent PBCom presented the following documentary
evidence to prove petitioners credit availments and liabilities:
1) Promissory Note No. BNA 26218 dated May 21, 1982 in the
sum of P1,000,000.00 executed by MICO in favor of PBCom.
2) Promissory Note No. BNA 26219 dated May 21, 1982 in the
sum of P1,000,000.00 executed by MICO in favor of PBCom.
3) Promissory Note No. BNA 26253 dated May 25, 1982 in the
sum of P1,000,000.00 executed by MICO in favor of PBCom.
4) Promissory Note No. BNA 7458 dated May 21, 1982 in the
sum of P377,000.00 executed by MICO in favor of PBCom.
5) Promissory Note No. TA 094 dated July 29, 1980 in the
sum of P4,000.000.00 executed by MICO in favor of PBCom.
6) Irrevocable letter of credit No. L-16060 dated July 2,1981
issued in favor of Perez Battery Center for account of Mico Metals
Corp.
7) Draft dated July 2, 1981 in the sum of P348,000.00 issued by
Perez Battery Center, beneficiary of irrevocable Letter of Credit No.
No. L-16060 and accepted by MICO Metals corporation.
8) Letter dated July 2, 1981 from Perez Battery Center
addressed to private respondent PBCom showing that proceeds of
the irrevocable letter of credit No. L- 16060 was received by Mr.
Moises Rosete, representative of Perez Battery Center.
9) Trust receipt dated July 2, 1981 executed by MICO in favor of
PBCom covering the merchandise purchased under Letter of Credit
No. 16060.
10) Irrevocable letter of credit No. L-16334 dated September 22,
1981 issued in favor of Perez Battery Center for account of MICO
Metals Corp.
11) Draft dated September 22, 1981 in the sum of P290,000.00
issued by Perez Battery Center and accepted by MICO.
12) Letter dated September 17, 1981 from Perez Battery
addressed to PBCom showing that the proceeds of credit no. L-16344
was received by Mr. Moises Rosete, a representative of Perez Battery
Center.
13) Trust Receipt dated September 22, 1981 executed by MICO in
favor of PBCom covering the merchandise under Letter of Credit No.
L-16334.
14) Irrevocable Letter of Credit no. 61873 dated November 10,
1981 for US$11,960.00 issued by PBCom in favor of TA JIH
Enterprises Co. Ltd., through its correspondent bank, Irving Trust
Company of Taipei, Taiwan.
15) Trust Receipt dated December 15, 9181 executed by MICO in
favor of PBCom showing that possession of the merchandise covered
by Irrevocable Letter of Credit no. 61873 was released by PBCom to
MICO.
16) Letters dated March 2, 1979 from MICO signed by its
president, Charles Lee, showing that MICO sought credit line from
PBCom in the form of loans, letters of credit and trust receipt in the
sum of P7,500,000.00.
17) Letter dated July 14, 1980 from MICO signed by its president,
Charles Lee, showing that MICO requested for additional financial
assistance in the sum of P4,000,000.00.
18) Board resolution dated March 6, 1979 of MICO authorizing
Charles Lee and Mariano Sio singly or jointly to act and sign for and in
behalf of MICO relative to the obtention of credit facilities from
PBCom.
19) Duly notarized Deed of Mortgage dated May 16, 1979
executed by MICO in favor of PBCom over MICO s real properties
covered by TCT Nos. 11248 and 11250 located in Pasig.
20) Duly notarized Surety Agreement dated March 26, 1979
executed by herein petitioners Charles Lee, Mariano Sio, Alfonso
Yap, Richard Velasco and Chua Siok Suy in favor of PBCom.
21) Duly notarized Surety Agreement dated July 28, 1980
executed by herein petitioners Charles Lee, Mariano Sio, Alfonso
Yap, Richard Velasco and Chua Siok Suy in favor of PBCom.
22) Duly notarized certification dated July 28, 1980 issued by
MICO s corporate secretary, Mr. P.B. Barrera, attesting to the
adoption of a board resolution authorizing Chua Siok Suy to sign, for
and in behalf of MICO, all the necessary documents including
contracts, loan instruments and mortgages relative to the obtention of
various credit facilities from PBCom.
The above-cited documents presented have not merely created a
prima facie case but have actually proved the solidary obligation of
MICO and the petitioners, as sureties of MICO, in favor of respondent
PBCom. While the presumption found under the Negotiable
Instruments Law may not necessarily be applicable to trust receipts
and letters of credit, the presumption that the drafts drawn in
connection with the letters of credit have sufficient consideration.
Under Section 3(r), Rule 131 of the Rules of Court there is also a
presumption that sufficient consideration was given in a contract.
Hence, petitioners should have presented credible evidence to rebut
that presumption as well as the evidence presented by private
respondent PBCom. The letters of credit show that the pertinent
materials/merchandise have been received by MICO. The drafts
signed by the beneficiary/suppliers in connection with the
corresponding letters of credit proved that said suppliers were paid by
PBCom for the account of MICO. On the other hand, aside from their
bare denials petitioners did not present sufficient and competent
evidence to rebut the evidence of private respondent PBCom.
Petitioner MICO did not proffer a single piece of evidence, apart from
its bare denials, to support its allegation that the loan transactions,
real estate mortgage, letters of credit and trust receipts were issued
allegedly without any consideration.
Petitioners-sureties, for their part, presented the By-Lawsxxxiv[34] of
Mico Metals Corporation (MICO) to prove that only the president of
MICO is authorized to borrow money, arrange letters of credit,
execute trust receipts, and promissory notes and consequently, that
the loan transactions, letters of credit, promissory notes and trust
receipts, most of which were executed by Chua Siok Suy in
representation of MICO were not allegedly authorized and hence, are
not binding upon MICO. A perusal of the By-Laws of MICO, however,
shows that the power to borrow money for the company and issue
mortgages, bonds, deeds of trust and negotiable instruments or
securities, secured by mortgages or pledges of property belonging to
the company is not confined solely to the president of the corporation.
The Board of Directors of MICO can also borrow money, arrange
letters of credit, execute trust receipts and promissory notes on behalf
of the corporation.xxxv[35] Significantly, this power of the Board of
Directors according to the by-laws of MICO, may be delegated to any
of its standing committee, officer or agent.xxxvi[36] Hence, PBCom
had every right to rely on the Certification issued by MICO's corporate
secretary, P.B. Barrera, that Chua Siok Suy was duly authorized by its
Board of Directors to borrow money and obtain credit facilities in
behalf of MICO from PBCom.
Petitioners-sureties also presented a letter of their counsel dated
October 9, 1982, addressed to private respondent PBCom purportedly
to show that PBCom knew that Chua Siok Suy allegedly used the
credit and good names of the petitioner-sureties for his benefit, and
that petitioner-sureties were made to sign blank documents and were
furnished copies of the same. The letter, however, is in fact merely a
reply of petitioners-sureties counsel to PBComs demand for payment
of MICOs obligations, and appears to be an inconsequential piece of
self-serving evidence.
In addition to the foregoing, MICO and petitioners-sureties cited the
decision of the trial court which stated that there was no proof that the
proceeds of the loans were ever delivered to MICO. Although the
private respondents witness, Mr. Gardiola, testified that the proceeds
of the loans were deposited in MICOs current account with PBCom,
his testimony was allegedly not supported by any bank record, note or
memorandum. A careful scrutiny of the record including the transcript
of stenographic notes reveals, however, that although private
respondent PBCom was willing to produce the corresponding account
ledger showing that the proceeds of the loans were credited to
MICOs current account with PBCom, MICO in fact vigorously
objected to the presentation of said document. That point is shown in
the testimony of PBComs witness, Gardiola, thus:
Q: Now, all of these promissory note Exhibits I and J which as
you have said previously (sic) availed originally by defendant Mico
Metals Corp. sometime in 1979, my question now is, do you know
what happened to the proceeds of the original availment?
A: Well, it was credited to the current account of Mico Metals
Corp.
Q: Why did it was credited to the proceeds to the account of Mico
Metals Corp? (sic)
A: Well, that is our understanding.
ATTY. DURAN:
Your honor, may we be given a chance to object, the best evidence is
the so-called current account...
COURT:
Can you produce the ledger account?
A: Yes, Your Honor, I will bring.
COURT:
The ledger or record of the current account of Mico Metals Corp.
A: Yes, Your Honor.
ATTY. ACEJAS:
Your Honor, these are a confidential record, and they might not be
disclosed without the consent of the person concerned. (sic)
ATTY. SANTOS:
Well, you are the one who is asking that.
ATTY. DURAN:
Your Honor, Im precisely want to show for the ... (sic)
COURT:
But the amount covered by the current account of defendant Mico
Metals Corp. is the subject matter of this case.
xxx xxx xxx
Q: Are those availments were release? (sic)
A: Yes, Your Honor, to the defendant corporation.
Q: By what means?
A: By the credit to their current account.
ATTY. ACEJAS:
We object to that, your Honor, because the disclose is the secrecy of
the bank deposit. (sic)
xxx xxx xxx
Q: Before the recess Mr. Gardiola, you stated that the proceeds
of the three (3) promissory notes were credited to the accounts of
Mico Metals Corporation, now do you know what kind of current
account was that which you are referring to?
ATTY. ACEJAS:
Objection your Honor, that is the disclose of the deposit of defendant
Mico Metals Corporation and it cannot disclosed without the authority
of the depositor. (sic)xxxvii[37]
That proceeds of the loans which were originally availed of in 1979
were delivered to MICO is bolstered by the fact that more than a year
later, specifically on July 14, 1980, MICO through its president,
petitioner-surety Charles Lee, requested for an additional loan of Four
Million Pesos (P4,000,000.00) from PBCom. The fact that MICO was
requesting for an additional loan implied that it has already availed of
earlier loans from PBCom.
Petitioners allege that PBCom presented no evidence that it remitted
payments to cover the domestic and foreign letters of credit.
Petitioners placed much reliance on the erroneous decision of the trial
court which stated that private respondent PBCom allegedly failed to
prove that it actually made payments under the letters of credit since
the bank drafts presented as evidence show that they were made in
favor of the Bank of Taiwan and First Commercial Bank.
Petitioners allegations are untenable.
Modern letters of credit are usually not made between natural
persons. They involve bank to bank transactions. Historically, the
letter of credit was developed to facilitate the sale of goods between,
distant and unfamiliar buyers and sellers. It was an arrangement
under which a bank, whose credit was acceptable to the seller, would
at the instance of the buyer agree to pay drafts drawn on it by the
seller, provided that certain documents are presented such as bills of
lading accompanied the corresponding drafts. Expansion in the use of
letters of credit was a natural development in commercial
banking.xxxviii[38] Parties to a commercial letter of credit include (a)
the buyer or the importer, (b) the seller, also referred to as beneficiary,
(c) the opening bank which is usually the buyers bank which actually
issues the letter of credit, (d) the notifying bank which is the
correspondent bank of the opening bank through which it advises the
beneficiary of the letter of credit, (e) negotiating bank which is usually
any bank in the city of the beneficiary. The services of the notifying
bank must always be utilized if the letter of credit is to be advised to
the beneficiary through cable, (f) the paying bank which buys or
discounts the drafts contemplated by the letter of credit, if such draft is
to be drawn on the opening bank or on another designated bank not
in the city of the beneficiary. As a rule, whenever the facilities of the
opening bank are used, the beneficiary is supposed to present his
drafts to the notifying bank for negotiation and (g) the confirming bank
which, upon the request of the beneficiary, confirms the letter of credit
issued by the opening bank.
From the foregoing, it is clear that letters of credit, being usually bank
to bank transactions, involve more than just one bank. Consequently,
there is nothing unusual in the fact that the drafts presented in
evidence by respondent bank were not made payable to PBCom. As
explained by respondent bank, a draft was drawn on the Bank of
Taiwan by Ta Jih Enterprises Co., Ltd. of Taiwan, supplier of the
goods covered by the foreign letter of credit. Having paid the supplier,
the Bank of Taiwan then presented the bank draft for reimbursement
by PBComs correspondent bank in Taiwan, the Irving Trust Company
which explains the reason why on its face, the draft was made
payable to the Bank of Taiwan. Irving Trust Company accepted and
endorsed the draft to PBCom. The draft was later transmitted to
PBCom to support the latters claim for payment from MICO. MICO
accepted the draft upon presentment and negotiated it to PBCom.
Petitioners further aver that MICO never requested that legal
possession of the merchandise be transferred to PBCom by way of
trust receipts. Petitioners insist that assuming that MICO transferred
possession of the merchandise to PBCom by way of trust receipts, the
same would be illegal since PBCom, being a banking institution, is not
authorized by law to engage in the business of importing and selling
goods.
A trust receipt is considered as a security transaction intended to aid
in financing importers and retail dealers who do not have sufficient
funds or resources to finance the importation or purchase of
merchandise, and who may not be able to acquire credit except
through utilization, as collateral of the merchandise imported or
purchased.xxxix[39] A trust receipt, therefor, is a document of security
pursuant to which a bank acquires a security interest in the goods
under trust receipt. Under a letter of credit-trust receipt arrangement,
a bank extends a loan covered by a letter of credit, with the trust
receipt as a security for the loan. The transaction involves a loan
feature represented by a letter of credit, and a security feature which
is in the covering trust receipt which secures an indebtedness.
Petitioners averments with regard to the second issue are no less
incredulous. Petitioners contend that the letters of credit, surety
agreements and loan transactions did not ripen into valid and binding
contracts since no part of the proceeds of the loan transactions were
delivered to MICO or to any of the petitioners-sureties. Petitioners-
sureties allege that Chua Siok Suy was the beneficiary of the
proceeds of the loans and that the latter made them sign the surety
agreements in blank. Thus, they maintain that they should not be held
accountable for any liability that might arise therefrom.
It has not escaped our notice that it was petitioner-surety Charles Lee,
as president of MICO Metals Corporation, who first requested for a
discounting loan of Three Million Pesos (P3,000,000.00) from PBCom
as evidenced by his letter dated March 2, 1979.xl[40] On the same
day, Charles Lee, as President of MICO, requested for a Letter of
Credit and Trust Receipt line in the sum of Three Million Pesos
(P3,000,000.00).xli[41] Still, on the same day, Charles Lee again as
President of MICO, wrote another letter to PBCOM requesting for a
financing line in the sum of One Million Five Hundred Thousand
Pesos (P1,500,000.00) to be used exclusively as marginal deposit for
the opening of MICOs foreign and local letters of credit with
PBCom.xlii[42] More than a year later, it was also Charles Lee, again
in his capacity as president of MICO, who asked for an additional loan
in the sum of Four Million Pesos (P4,000,000.00). The claim therefore
of petitioners that it was Chua Siok Suy, in connivance with the
respondent PBCom, who applied for and obtained the loan
transactions and letters of credit strains credulity considering that
even the Deed of the Real Estate Mortgage in favor of PBCom was
executed by petitioner-surety Mariano Sio in his capacity as general
manager of MICOxliii[43] to secure the loan accommodations
obtained by MICO from PBCom.
Petitioners-sureties allege that they were made to sign the surety
agreements in blank by Chua Siok Suy. Petitioner Alfonso Yap, the
corporate treasurer, for his part testified that he signed booklets of
checks, surety agreements and promissory notes in blank; that he
signed the documents in blank despite his misgivings since Chua Siok
Suy assured him that the transaction can easily be taken cared of
since Chua Siok Suy personally knew the Chairman of the Board of
PBCom; that he was not receiving salary as treasurer of Mico Metals
and since Chua Siok Suy had a direct hand in the management of
Malayan Sales Corporation, of which Yap is an employee, he (Yap)
signed the documents in blank as consideration for his continued
employment in Malayan Sales Corporation. Petitioner Antonio Co
testified that he worked as office manager for MICO from 1978-1982.
As office manager, he was the one in charge of transacting business
like purchasing, selling and paying the salary of the employees. He
was also in charge of the handling of documents pertaining to surety
agreements, trust receipts and promissory notes;xliv[44] that when he
first joined MICO Metals Corporation, he was able to read the by-laws
of the corporation and he came to know that only the chairman and
the president can borrow money in behalf of the corporation; that
Chua Siok Suy once called him up and told him to secure an invoice
so that a credit line can be opened in the bank with a local letter of
credit; that when the invoice was secured, he (Co) brought it together
with the application for a credit line to Chua Siok Suy, and that he
questioned the authority of Chua Siok Suy pointing out that he (Co) is
not empowered to sign the document inasmuch as only the latter, as
president, was authorized to do so. However, Chua Siok Suy
allegedly just said that he had already talked with the Chairman of the
Board of PBCom; and that Chua Siok Suy reportedly said that he
needed the money to finance a project that he had with the Taipei
government. Co also testified that he knew of the application for
domestic letter of credit in the sum of Three Hundred Forty-Eight
Thousand Pesos (P348,000.00); and that a certain Moises Rosete
was authorized to claim the check covering the Three Hundred Forty-
Eight Thousand Pesos (P348,000.00) from PBCom; and that after
claiming the check Rosete brought it to Perez Battery Center for
indorsement after which the same was deposited to the personal
account of Chua Siok Suy.xlv[45]
We consider as incredible and unacceptable the claim of petitioners-
sureties that the Board of Directors of MICO was so careless about
the business affairs of MICO as well as about their own personal
reputation and money that they simply relied on the say so of Chua
Siok Suy on matters involving millions of pesos. Under Section 3 (d),
Rule 131 of the Rules of Court, it is presumed that a person takes
ordinary care of his concerns. Hence, the natural presumption is that
one does not sign a document without first informing himself of its
contents and consequences. Said presumption acquires greater force
in the case at bar where not only one but several documents were
executed at different times and at different places by the petitioner
sureties and Chua Siok Suy as president of MICO.
MICO and herein petitioners-sureties insist that Chua Siok Suy was
not duly authorized to negotiate for loans in behalf of MICO from
PBCom. Petitioners allegation, however, is belied by the July 28,
1980 Certification issued by the corporate secretary of PBCom, Atty.
P.B. Barrera, that MICO's Board of Directors gave Chua Siok Suy full
authority to negotiate for loans in behalf of MICO with PBCom. In fact,
the Certification even provided that Chua Siok Suys authority
continues until and unless PBCom is notified in writing of the
withdrawal thereof by the said Board. Notably, petitioners failed to
contest the genuineness of the said Certification which is notarized
and to show any written proof of any alleged withdrawal of the said
authority given by the Board of Directors to Chua Siok Suy to
negotiate for loans in behalf of MICO.
There was no need for PBCom to personally inform the petitioners-
sureties individually about the terms of the loans, letters of credit and
other loan documents. The petitioners-sureties themselves happen to
comprise the Board of Directors of MICO, which gave full authority to
Chua Siok Suy to negotiate for loans in behalf of MICO. Notice to
MICOs authorized representative, Chua Siok Suy, was notice to
MICO. The Certification issued by PBComs corporate secretary, Atty.
P.B. Barrera, indicated that Chua Siok Suy had full authority to
negotiate and sign the necessary documents, in behalf of MICO for
loans from PBCom. Respondent PBCom therefore had the right to
rely on the said notarized Certification of MICOs Corporate Secretary.
Anent petitioners-sureties contention that they obtained no
consideration whatsoever on the surety agreements, we need only
point out that the consideration for the sureties is the very
consideration for the principal obligor, MICO, in the contracts of loan.
In the case of Willex Plastic Industries Corporation vs. Court of
Appeals,xlvi[46] we ruled that the consideration necessary to support
a surety obligation need not pass directly to the surety, a
consideration moving to the principal alone being sufficient. For a
guarantor or surety is bound by the same consideration that makes
the contract effective between the parties thereto. It is not necessary
that a guarantor or surety should receive any part or benefit, if such
there be, accruing to his principal.
Petitioners placed too much reliance on the rule in evidence that the
burden of proof does not shift whereas the burden of going forward
with the evidence does pass from party to party. It is true that said rule
is not changed by the fact that the party having the burden of proof
has introduced evidence which established prima facie his assertion
because such evidence does not shift the burden of proof; it merely
puts the adversary to the necessity of producing evidence to meet the
prima facie case. Where the defendant merely denies, either generally
or otherwise, the allegations of the plaintiffs pleadings, the burden of
proof continues to rest on the plaintiff throughout the trial and does not
shift to the defendant until the plaintiffs evidence has been presented
and duly offered. The defendant has then no burden except to
produce evidence sufficient to create a state of equipoise between his
proof and that of the plaintiff to defeat the latter, whereas the plaintiff
has the burden, as in the beginning, of establishing his case by a
preponderance of evidence.xlvii[47] But where the defendant has
failed to present and marshall evidence sufficient to create a state of
equipoise between his proof and that of plaintiff, the prima facie case
presented by the plaintiff will prevail.
In the case at bar, respondent PBCom, as plaintiff in the trial court,
has in fact presented sufficient documentary and testimonial evidence
that proved by preponderance of evidence its subject collection case
against the defendants who are the petitioners herein. In view of all
the foregoing, the Court of Appeals committed no reversible error in
its appealed Decision.
WHEREFORE, the assailed Decision of the Court of Appeals in CA-
G.R. CV No. 27480 entitled, Philippine Bank of Communications vs.
Mico Metals Corporation, Charles Lee, Chua Siok Suy, Mariano Sio,
Alfonso Yap, Richard Velasco and Alfonso Co, is AFFIRMED in toto.
Costs against the petitioners.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Quisumbing, and Buena, JJ.,
concur.
SECOND DIVISION
[G.R. No. 146717. November 22, 2004]
TRANSFIELD PHILIPPINES, INC., petitioner, vs. LUZON HYDRO
CORPORATION, AUSTRALIA and NEW ZEALAND BANKING
GROUP LIMITED and SECURITY BANK CORPORATION,
respondents.
D E C I S I O N
TINGA, J.:
Subject of this case is the letter of credit which has evolved as the
ubiquitous and most important device in international trade. A creation
of commerce and businessmen, the letter of credit is also unique in
the number of parties involved and its supranational character.
Petitioner has appealed from the Decision[1] of the Court of Appeals
in CA-G.R. SP No. 61901 entitled Transfield Philippines, Inc. v. Hon.
Oscar Pimentel, et al., promulgated on 31 January 2001.[2]
On 26 March 1997, petitioner and respondent Luzon Hydro
Corporation (hereinafter, LHC) entered into a Turnkey Contract[3]
whereby petitioner, as Turnkey Contractor, undertook to construct, on
a turnkey basis, a seventy (70)-Megawatt hydro-electric power station
at the Bakun River in the provinces of Benguet and Ilocos Sur
(hereinafter, the Project). Petitioner was given the sole responsibility
for the design, construction, commissioning, testing and completion of
the Project.[4]
The Turnkey Contract provides that: (1) the target completion date of
the Project shall be on 1 June 2000, or such later date as may be
agreed upon between petitioner and respondent LHC or otherwise
determined in accordance with the Turnkey Contract; and (2)
petitioner is entitled to claim extensions of time (EOT) for reasons
enumerated in the Turnkey Contract, among which are variations,
force majeure, and delays caused by LHC itself.[5] Further, in case of
dispute, the parties are bound to settle their differences through
mediation, conciliation and such other means enumerated under
Clause 20.3 of the Turnkey Contract.[6]
To secure performance of petitioners obligation on or before the
target completion date, or such time for completion as may be
determined by the parties agreement, petitioner opened in favor of
LHC two (2) standby letters of credit both dated 20 March 2000
(hereinafter referred to as the Securities), to wit: Standby Letter of
Credit No. E001126/8400 with the local branch of respondent
Australia and New Zealand Banking Group Limited (ANZ Bank)[7] and
Standby Letter of Credit No. IBDIDSB-00/4 with respondent Security
Bank Corporation (SBC)[8] each in the amount of
US$8,988,907.00.[9]
In the course of the construction of the project, petitioner sought
various EOT to complete the Project. The extensions were requested
allegedly due to several factors which prevented the completion of the
Project on target date, such as force majeure occasioned by typhoon
Zeb, barricades and demonstrations. LHC denied the requests,
however. This gave rise to a series of legal actions between the
parties which culminated in the instant petition.
The first of the actions was a Request for Arbitration which LHC filed
before the Construction Industry Arbitration Commission (CIAC) on 1
June 1999.[10] This was followed by another Request for Arbitration,
this time filed by petitioner before the International Chamber of
Commerce (ICC)[11] on 3 November 2000. In both arbitration
proceedings, the common issues presented were: [1) whether
typhoon Zeb and any of its associated events constituted force
majeure to justify the extension of time sought by petitioner; and [2)
whether LHC had the right to terminate the Turnkey Contract for
failure of petitioner to complete the Project on target date.
Meanwhile, foreseeing that LHC would call on the Securities pursuant
to the pertinent provisions of the Turnkey Contract,[12] petitionerin
two separate letters[13] both dated 10 August 2000advised
respondent banks of the arbitration proceedings already pending
before the CIAC and ICC in connection with its alleged default in the
performance of its obligations. Asserting that LHC had no right to call
on the Securities until the resolution of disputes before the arbitral
tribunals, petitioner warned respondent banks that any transfer,
release, or disposition of the Securities in favor of LHC or any person
claiming under LHC would constrain it to hold respondent banks liable
for liquidated damages.
As petitioner had anticipated, on 27 June 2000, LHC sent notice to
petitioner that pursuant to Clause 8.2[14] of the Turnkey Contract, it
failed to comply with its obligation to complete the Project. Despite the
letters of petitioner, however, both banks informed petitioner that they
would pay on the Securities if and when LHC calls on them.[15]
LHC asserted that additional extension of time would not be
warranted; accordingly it declared petitioner in default/delay in the
performance of its obligations under the Turnkey Contract and
demanded from petitioner the payment of US$75,000.00 for each day
of delay beginning 28 June 2000 until actual completion of the Project
pursuant to Clause 8.7.1 of the Turnkey Contract. At the same time,
LHC served notice that it would call on the securities for the payment
of liquidated damages for the delay.[16]
On 5 November 2000, petitioner as plaintiff filed a Complaint for
Injunction, with prayer for temporary restraining order and writ of
preliminary injunction, against herein respondents as defendants
before the Regional Trial Court (RTC) of Makati.[17] Petitioner sought
to restrain respondent LHC from calling on the Securities and
respondent banks from transferring, paying on, or in any manner
disposing of the Securities or any renewals or substitutes thereof. The
RTC issued a seventy-two (72)-hour temporary restraining order on
the same day. The case was docketed as Civil Case No. 00-1312
and raffled to Branch 148 of the RTC of Makati.
After appropriate proceedings, the trial court issued an Order on 9
November 2000, extending the temporary restraining order for a
period of seventeen (17) days or until 26 November 2000.[18]
The RTC, in its Order[19] dated 24 November 2000, denied
petitioners application for a writ of preliminary injunction. It ruled that
petitioner had no legal right and suffered no irreparable injury to justify
the issuance of the writ. Employing the principle of independent
contract in letters of credit, the trial court ruled that LHC should be
allowed to draw on the Securities for liquidated damages. It debunked
petitioners contention that the principle of independent contract
could be invoked only by respondent banks since according to it
respondent LHC is the ultimate beneficiary of the Securities. The trial
court further ruled that the banks were mere custodians of the funds
and as such they were obligated to transfer the same to the
beneficiary for as long as the latter could submit the required
certification of its claims.
Dissatisfied with the trial courts denial of its application for a writ of
preliminary injunction, petitioner elevated the case to the Court of
Appeals via a Petition for Certiorari under Rule 65, with prayer for the
issuance of a temporary restraining order and writ of preliminary
injunction.[20] Petitioner submitted to the appellate court that LHCs
call on the Securities was premature considering that the issue of its
default had not yet been resolved with finality by the CIAC and/or the
ICC. It asserted that until the fact of delay could be established, LHC
had no right to draw on the Securities for liquidated damages.
Refuting petitioners contentions, LHC claimed that petitioner had no
right to restrain its call on and use of the Securities as payment for
liquidated damages. It averred that the Securities are independent of
the main contract between them as shown on the face of the two
Standby Letters of Credit which both provide that the banks have no
responsibility to investigate the authenticity or accuracy of the
certificates or the declarants capacity or entitlement to so certify.
In its Resolution dated 28 November 2000, the Court of Appeals
issued a temporary restraining order, enjoining LHC from calling on
the Securities or any renewals or substitutes thereof and ordering
respondent banks to cease and desist from transferring, paying or in
any manner disposing of the Securities.
However, the appellate court failed to act on the application for
preliminary injunction until the temporary restraining order expired on
27 January 2001. Immediately thereafter, representatives of LHC
trooped to ANZ Bank and withdrew the total amount of
US$4,950,000.00, thereby reducing the balance in ANZ Bank to
US$1,852,814.00.
On 2 February 2001, the appellate court dismissed the petition for
certiorari. The appellate court expressed conformity with the trial
courts decision that LHC could call on the Securities pursuant to the
first principle in credit law that the credit itself is independent of the
underlying transaction and that as long as the beneficiary complied
with the credit, it was of no moment that he had not complied with the
underlying contract. Further, the appellate court held that even
assuming that the trial courts denial of petitioners application for a
writ of preliminary injunction was erroneous, it constituted only an
error of judgment which is not correctible by certiorari, unlike error of
jurisdiction.
Undaunted, petitioner filed the instant Petition for Review raising the
following issues for resolution:
WHETHER THE INDEPENDENCE PRINCIPLE ON LETTERS OF
CREDIT MAY BE INVOKED BY A BENEFICIARY THEREOF
WHERE THE BENEFICIARYS CALL THEREON IS WRONGFUL OR
FRAUDULENT.
WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE
SECURITIES BEFORE THE RESOLUTION OF PETITIONERS AND
LHCS DISPUTES BY THE APPROPRIATE TRIBUNAL.
WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN
RELEASING THE AMOUNTS DUE UNDER THE SECURITIES
DESPITE BEING NOTIFIED THAT LHCS CALL THEREON IS
WRONGFUL.
WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND
IRREPARABLE DAMAGE IN THE EVENT THAT:
A. LHC IS ALLOWED TO CALL AND DRAW ON, AND
ANZ BANK AND SECURITY BANK ARE ALLOWED
TO RELEASE, THE REMAINING BALANCE OF THE
SECURITIES PRIOR TO THE RESOLUTION OF THE
DISPUTES BETWEEN PETITIONER AND LHC.
B. LHC DOES NOT RETURN THE AMOUNTS IT HAD
WRONGFULLY DRAWN FROM THE
SECURITIES.[21]
Petitioner contends that the courts below improperly relied on the
independence principle on letters of credit when this case falls
squarely within the fraud exception rule. Respondent LHC
deliberately misrepresented the supposed existence of delay despite
its knowledge that the issue was still pending arbitration, petitioner
continues.
Petitioner asserts that LHC should be ordered to return the proceeds
of the Securities pursuant to the principle against unjust enrichment
and that, under the premises, injunction was the appropriate remedy
obtainable from the competent local courts.
On 25 August 2003, petitioner filed a Supplement to the Petition[22]
and Supplemental Memorandum,[23] alleging that in the course of the
proceedings in the ICC Arbitration, a number of documentary and
testimonial evidence came out through the use of different modes of
discovery available in the ICC Arbitration. It contends that after the
filing of the petition facts and admissions were discovered which
demonstrate that LHC knowingly misrepresented that petitioner had
incurred delays notwithstanding its knowledge and admission that
delays were excused under the Turnkey Contractto be able to draw
against the Securities. Reiterating that fraud constitutes an exception
to the independence principle, petitioner urges that this warrants a
ruling from this Court that the call on the Securities was wrongful, as
well as contrary to law and basic principles of equity. It avers that it
would suffer grave irreparable damage if LHC would be allowed to
use the proceeds of the Securities and not ordered to return the
amounts it had wrongfully drawn thereon.
In its Manifestation dated 8 September 2003,[24] LHC contends that
the supplemental pleadings filed by petitioner present erroneous and
misleading information which would change petitioners theory on
appeal.
In yet another Manifestation dated 12 April 2004,[25] petitioner alleges
that on 18 February 2004, the ICC handed down its Third Partial
Award, declaring that LHC wrongfully drew upon the Securities and
that petitioner was entitled to the return of the sums wrongfully taken
by LHC for liquidated damages.
LHC filed a Counter-Manifestation dated 29 June 2004,[26] stating
that petitioners Manifestation dated 12 April 2004 enlarges the scope
of its Petition for Review of the 31 January 2001 Decision of the Court
of Appeals. LHC notes that the Petition for Review essentially dealt
only with the issue of whether injunction could issue to restrain the
beneficiary of an irrevocable letter of credit from drawing thereon. It
adds that petitioner has filed two other proceedings, to wit: (1) ICC
Case No. 11264/TE/MW, entitled Transfield Philippines Inc. v. Luzon
Hydro Corporation, in which the parties made claims and
counterclaims arising from petitioners performance/misperformance
of its obligations as contractor for LHC; and (2) Civil Case No. 04-332,
entitled Transfield Philippines, Inc. v. Luzon Hydro Corporation
before Branch 56 of the RTC of Makati, which is an action to enforce
and obtain execution of the ICCs partial award mentioned in
petitioners Manifestation of 12 April 2004.
In its Comment to petitioners Motion for Leave to File Addendum to
Petitioners Memorandum, LHC stresses that the question of whether
the funds it drew on the subject letters of credit should be returned is
outside the issue in this appeal. At any rate, LHC adds that the action
to enforce the ICCs partial award is now fully within the Makati RTCs
jurisdiction in Civil Case No. 04-332. LHC asserts that petitioner is
engaged in forum-shopping by keeping this appeal and at the same
time seeking the suit for enforcement of the arbitral award before the
Makati court.
Respondent SBC in its Memorandum, dated 10 March 2003[27]
contends that the Court of Appeals correctly dismissed the petition for
certiorari. Invoking the independence principle, SBC argues that it
was under no obligation to look into the validity or accuracy of the
certification submitted by respondent LHC or into the latters capacity
or entitlement to so certify. It adds that the act sought to be enjoined
by petitioner was already fait accompli and the present petition would
no longer serve any remedial purpose.
In a similar fashion, respondent ANZ Bank in its Memorandum dated
13 March 2003[28] posits that its actions could not be regarded as
unjustified in view of the prevailing independence principle under
which it had no obligation to ascertain the truth of LHCs allegations
that petitioner defaulted in its obligations. Moreover, it points out that
since the Standby Letter of Credit No. E001126/8400 had been fully
drawn, petitioners prayer for preliminary injunction had been rendered
moot and academic.
At the core of the present controversy is the applicability of the
independence principle and fraud exception rule in letters of credit.
Thus, a discussion of the nature and use of letters of credit, also
referred to simply as credits, would provide a better perspective of
the case.
The letter of credit evolved as a mercantile specialty, and the only way
to understand all its facets is to recognize that it is an entity unto itself.
The relationship between the beneficiary and the issuer of a letter of
credit is not strictly contractual, because both privity and a meeting of
the minds are lacking, yet strict compliance with its terms is an
enforceable right. Nor is it a third-party beneficiary contract, because
the issuer must honor drafts drawn against a letter regardless of
problems subsequently arising in the underlying contract. Since the
banks customer cannot draw on the letter, it does not function as an
assignment by the customer to the beneficiary. Nor, if properly used,
is it a contract of suretyship or guarantee, because it entails a primary
liability following a default. Finally, it is not in itself a negotiable
instrument, because it is not payable to order or bearer and is
generally conditional, yet the draft presented under it is often
negotiable.[29]
In commercial transactions, a letter of credit is a financial device
developed by merchants as a convenient and relatively safe mode of
dealing with sales of goods to satisfy the seemingly irreconcilable
interests of a seller, who refuses to part with his goods before he is
paid, and a buyer, who wants to have control of the goods before
paying.[30] The use of credits in commercial transactions serves to
reduce the risk of nonpayment of the purchase price under the
contract for the sale of goods. However, credits are also used in non-
sale settings where they serve to reduce the risk of nonperformance.
Generally, credits in the non-sale settings have come to be known as
standby credits.[31]
There are three significant differences between commercial and
standby credits. First, commercial credits involve the payment of
money under a contract of sale. Such credits become payable upon
the presentation by the seller-beneficiary of documents that show he
has taken affirmative steps to comply with the sales agreement. In the
standby type, the credit is payable upon certification of a party's
nonperformance of the agreement. The documents that accompany
the beneficiary's draft tend to show that the applicant has not
performed. The beneficiary of a commercial credit must demonstrate
by documents that he has performed his contract. The beneficiary of
the standby credit must certify that his obligor has not performed the
contract.[32]
By definition, a letter of credit is a written instrument whereby the
writer requests or authorizes the addressee to pay money or deliver
goods to a third person and assumes responsibility for payment of
debt therefor to the addressee.[33] A letter of credit, however,
changes its nature as different transactions occur and if carried
through to completion ends up as a binding contract between the
issuing and honoring banks without any regard or relation to the
underlying contract or disputes between the parties thereto.[34]
Since letters of credit have gained general acceptability in
international trade transactions, the ICC has published from time to
time updates on the Uniform Customs and Practice (UCP) for
Documentary Credits to standardize practices in the letter of credit
area. The vast majority of letters of credit incorporate the UCP.[35]
First published in 1933, the UCP for Documentary Credits has
undergone several revisions, the latest of which was in 1993.[36]
In Bank of the Philippine Islands v. De Reny Fabric Industries,
Inc.,[37] this Court ruled that the observance of the UCP is justified by
Article 2 of the Code of Commerce which provides that in the absence
of any particular provision in the Code of Commerce, commercial
transactions shall be governed by usages and customs generally
observed. More recently, in Bank of America, NT & SA v. Court of
Appeals,[38] this Court ruled that there being no specific provisions
which govern the legal complexities arising from transactions involving
letters of credit, not only between or among banks themselves but
also between banks and the seller or the buyer, as the case may be,
the applicability of the UCP is undeniable.
Article 3 of the UCP provides that credits, by their nature, are
separate transactions from the sales or other contract(s) on which
they may be based and banks are in no way concerned with or bound
by such contract(s), even if any reference whatsoever to such
contract(s) is included in the credit. Consequently, the undertaking of
a bank to pay, accept and pay draft(s) or negotiate and/or fulfill any
other obligation under the credit is not subject to claims or defenses
by the applicant resulting from his relationships with the issuing bank
or the beneficiary. A beneficiary can in no case avail himself of the
contractual relationships existing between the banks or between the
applicant and the issuing bank.
Thus, the engagement of the issuing bank is to pay the seller or
beneficiary of the credit once the draft and the required documents
are presented to it. The so-called independence principle assures
the seller or the beneficiary of prompt payment independent of any
breach of the main contract and precludes the issuing bank from
determining whether the main contract is actually accomplished or
not. Under this principle, banks assume no liability or responsibility
for the form, sufficiency, accuracy, genuineness, falsification or legal
effect of any documents, or for the general and/or particular conditions
stipulated in the documents or superimposed thereon, nor do they
assume any liability or responsibility for the description, quantity,
weight, quality, condition, packing, delivery, value or existence of the
goods represented by any documents, or for the good faith or acts
and/or omissions, solvency, performance or standing of the consignor,
the carriers, or the insurers of the goods, or any other person
whomsoever.[39]
The independent nature of the letter of credit may be: (a)
independence in toto where the credit is independent from the
justification aspect and is a separate obligation from the underlying
agreement like for instance a typical standby; or (b) independence
may be only as to the justification aspect like in a commercial letter of
credit or repayment standby, which is identical with the same
obligations under the underlying agreement. In both cases the
payment may be enjoined if in the light of the purpose of the credit the
payment of the credit would constitute fraudulent abuse of the
credit.[40]
Can the beneficiary invoke the independence principle?
Petitioner insists that the independence principle does not apply to the
instant case and assuming it is so, it is a defense available only to
respondent banks. LHC, on the other hand, contends that it would be
contrary to common sense to deny the benefit of an independent
contract to the very party for whom the benefit is intended. As
beneficiary of the letter of credit, LHC asserts it is entitled to invoke
the principle.
As discussed above, in a letter of credit transaction, such as in this
case, 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. As the principles nomenclature
clearly suggests, the obligation under the letter of credit is
independent of the related and originating contract. In brief, the letter
of credit is separate and distinct from the underlying transaction.
Given the nature of letters of credit, petitioners argumentthat it is
only the issuing bank that may invoke the independence principle on
letters of creditdoes not impress this Court. 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. As it is, the independence doctrine
works to the benefit of both the issuing bank and the beneficiary.
Letters of credit are employed by the parties desiring to enter into
commercial transactions, not for the benefit of the issuing bank but
mainly for the benefit of the parties to the original transactions. With
the letter of credit from the issuing bank, the party who applied for and
obtained it may confidently present the letter of credit to the
beneficiary as a security to convince the beneficiary to enter into the
business transaction. On the other hand, the other party to the
business transaction, i.e., the beneficiary of the letter of credit, can be
rest assured of being empowered to call on the letter of credit as a
security in case the commercial transaction 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 of the 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 to call on the letter of credit in essence would
convert the letter of credit into a mere guarantee. Jurisprudence has
laid down a clear distinction between a letter of credit and a guarantee
in that the settlement of a dispute between the parties is not 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 of credit is drawable only after settlement of the
dispute on the contract entered into by the applicant and the
beneficiary, there would be no practical and beneficial use for letters
of credit in commercial transactions.
Professor John F. Dolan, the noted authority on letters of credit, sheds
more light on the issue:
The standby credit is an attractive commercial device for many of the
same reasons that commercial credits are attractive. Essentially,
these credits are inexpensive and efficient. Often they replace surety
contracts, which tend to generate higher costs than credits do and are
usually triggered by a factual determination rather than by the
examination of documents.
Because parties and courts should not confuse the different functions
of the surety contract on the one hand and the standby credit on the
other, the distinction between surety contracts and credits merits
some reflection. The two commercial devices share a common
purpose. Both ensure against the obligors nonperformance. They
function, however, in distinctly different ways.
Traditionally, upon the obligors default, the surety undertakes to
complete the obligors performance, usually by hiring someone to
complete that performance. Surety contracts, then, often involve
costs of determining whether the obligor defaulted (a matter over
which the surety and the beneficiary often litigate) plus the cost of
performance. The benefit of the surety contract to the beneficiary is
obvious. He knows that the surety, often an insurance company, is a
strong financial institution that will perform if the obligor does not. The
beneficiary also should understand that such performance must await
the sometimes lengthy and costly determination that the obligor has
defaulted. In addition, the suretys performance takes time.
The standby credit has different expectations. He reasonably expects
that he will receive cash in the event of nonperformance, that he will
receive it promptly, and that he will receive it before any litigation with
the obligor (the applicant) over the nature of the applicants
performance takes place. The standby credit has this opposite effect
of the surety contract: it reverses the financial burden of parties during
litigation.
In the surety contract setting, there is no duty to indemnify the
beneficiary until the beneficiary establishes the fact of the obligors
performance. The beneficiary may have to establish that fact in
litigation. During the litigation, the surety holds the money and the
beneficiary bears most of the cost of delay in performance.
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 beneficiarys 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. Parties
that use a standby credit and courts construing such a credit should
understand this allocation of burdens. There is a tendency in some
quarters to overlook this distinction between surety contracts and
standby credits and to reallocate burdens by permitting the obligor or
the issuer to litigate the performance question before payment to the
beneficiary.[42]
While it is the bank which is bound to honor the credit, it is the
beneficiary who has the right to ask the bank to honor the credit by
allowing him to draw thereon. The situation itself emasculates
petitioners posture that LHC cannot invoke the independence
principle and highlights its puerility, more so in this case where the
banks concerned were impleaded as parties by petitioner itself.
Respondent banks had squarely raised the independence principle to
justify their releases of the amounts due under the Securities. Owing
to the nature and purpose of the standby letters of credit, this Court
rules that the respondent banks were left with little or no alternative
but to honor the credit and both of them in fact submitted that it was
ministerial for them to honor the call for payment.[43]
Furthermore, LHC has a right rooted in the Contract to call on the
Securities. The relevant provisions of the Contract read, thus:
4.2.1. In order to secure the performance of its obligations under this
Contract, the Contractor at its cost shall on the Commencement Date
provide security to the Employer in the form of two irrevocable and
confirmed standby letters of credit (the Securities), each in the
amount of US$8,988,907, issued and confirmed by banks or financial
institutions acceptable to the Employer. Each of the Securities must
be in form and substance acceptable to the Employer and may be
provided on an annually renewable basis.[44]
8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor
shall pay to the Employer by way of liquidated damages (Liquidated
Damages for Delay) the amount of US$75,000 for each and every
day or part of a day that shall elapse between the Target Completion
Date and the Completion Date, provided that Liquidated Damages for
Delay payable by the Contractor shall in the aggregate not exceed
20% of the Contract Price. The Contractor shall pay Liquidated
Damages for Delay for each day of the delay on the following day
without need of demand from the Employer.
8.7.2 The Employer may, without prejudice to any other method of
recovery, deduct the amount of such damages from any monies due,
or to become due to the Contractor and/or by drawing on the
Security.[45]
A contract once perfected, binds the parties not only to the fulfillment
of what has been expressly stipulated but also to all the
consequences which according to their nature, may be in keeping with
good faith, usage, and law.[46] A careful perusal of the Turnkey
Contract reveals the intention of the parties to make the Securities
answerable for the liquidated damages occasioned by any delay on
the part of petitioner. The call upon the Securities, while not an
exclusive remedy on the part of LHC, is certainly an alternative
recourse available to it upon the happening of the contingency for
which the Securities have been proffered. Thus, even without the use
of the independence principle, the Turnkey Contract itself bestows
upon LHC the right to call on the Securities in the event of default.
Next, petitioner invokes the fraud exception principle. It avers that
LHCs call on the Securities is wrongful because it fraudulently
misrepresented to ANZ Bank and SBC that there is already a breach
in the Turnkey Contract knowing fully well that this is yet to be
determined by the arbitral tribunals. It asserts that the fraud
exception exists when the beneficiary, for the purpose of drawing on
the credit, fraudulently presents to the confirming bank, documents
that contain, expressly or by implication, material representations of
fact that to his knowledge are untrue. In such a situation, petitioner
insists, injunction is recognized as a remedy available to it.
Citing Dolans treatise on letters of credit, petitioner argues that the
independence principle is not without limits and it is important to
fashion those limits in light of the principles purpose, which is to serve
the commercial function of the credit. If it does not serve those
functions, application of the principle is not warranted, and the
commonlaw principles of contract should apply.
It is worthy of note that the propriety of LHCs call on the Securities is
largely intertwined with the fact of default which is the self-same issue
pending resolution before the arbitral tribunals. To be able to declare
the call on the Securities wrongful or fraudulent, it is imperative to
resolve, among others, whether petitioner was in fact guilty of delay in
the performance of its obligation. Unfortunately for petitioner, this
Court is not called upon to rule upon the issue of defaultsuch issue
having been submitted by the parties to the jurisdiction of the arbitral
tribunals pursuant to the terms embodied in their agreement.[47]
Would injunction then be the proper remedy to restrain the alleged
wrongful draws on the Securities?
Most writers agree that fraud is an exception to the independence
principle. Professor Dolan opines that the untruthfulness of a
certificate accompanying a demand for payment under a standby
credit may qualify as fraud sufficient to support an injunction against
payment.[48] The remedy for fraudulent abuse is an injunction.
However, injunction should not be granted unless: (a) there is clear
proof of fraud; (b) the fraud constitutes fraudulent abuse of the
independent purpose of the letter of credit and not only fraud under
the main agreement; and (c) irreparable injury might follow if
injunction is not granted or the recovery of damages would be
seriously damaged.[49]
In its complaint for injunction before the trial court, petitioner alleged
that it is entitled to a total extension of two hundred fifty-three (253)
days which would move the target completion date. It argued that if
its claims for extension would be found meritorious by the ICC, then
LHC would not be entitled to any liquidated damages.[50]
Generally, injunction is a preservative remedy for the protection of
ones substantive right or interest; it is not a cause of action in itself
but merely a provisional remedy, an adjunct to a main suit. The
issuance of the writ of preliminary injunction as an ancillary or
preventive remedy to secure the rights of a party in a pending case is
entirely within the discretion of the court taking cognizance of the
case, the only limitation being that this discretion should be exercised
based upon the grounds and in the manner provided by law.[51]
Before a writ of preliminary injunction may be issued, there must be a
clear showing by the complaint that there exists a right to be protected
and that the acts against which the writ is to be directed are violative
of the said right.[52] It must be shown that the invasion of the right
sought to be protected is material and substantial, that the right of
complainant is clear and unmistakable and that there is an urgent and
paramount necessity for the writ to prevent serious damage.[53]
Moreover, an injunctive remedy may only be resorted to when there is
a pressing necessity to avoid injurious consequences which cannot be
remedied under any standard compensation.[54]
In the instant case, petitioner failed to show that it has a clear and
unmistakable right to restrain LHCs call on the Securities which would
justify the issuance of preliminary injunction. By petitioners own
admission, the right of LHC to call on the Securities was contractually
rooted and subject to the express stipulations in the Turnkey
Contract.[55] Indeed, the Turnkey Contract is plain and unequivocal in
that it conferred upon LHC the right to draw upon the Securities in
case of default, as provided in Clause 4.2.5, in relation to Clause
8.7.2, thus:
4.2.5 The Employer shall give the Contractor seven days notice of
calling upon any of the Securities, stating the nature of the default for
which the claim on any of the Securities is to be made, provided that
no notice will be required if the Employer calls upon any of the
Securities for the payment of Liquidated Damages for Delay or for
failure by the Contractor to renew or extend the Securities within 14
days of their expiration in accordance with Clause 4.2.2.[56]
8.7.2 The Employer may, without prejudice to any other method of
recovery, deduct the amount of such damages from any monies due,
or to become due, to the Contractor and/or by drawing on the
Security.[57]
The pendency of the arbitration proceedings would not per se make
LHCs draws on the Securities wrongful or fraudulent for there was
nothing in the Contract which would indicate that the parties intended
that all disputes regarding delay should first be settled through
arbitration before LHC would be allowed to call upon the Securities. It
is therefore premature and absurd to conclude that the draws on the
Securities were outright fraudulent given the fact that the ICC and
CIAC have not ruled with finality on the existence of default.
Nowhere in its complaint before the trial court or in its pleadings filed
before the appellate court, did petitioner invoke the fraud exception
rule as a ground to justify the issuance of an injunction.[58] What
petitioner did assert before the courts below was the fact that LHCs
draws on the Securities would be premature and without basis in view
of the pending disputes between them. Petitioner should not be
allowed in this instance to bring into play the fraud exception rule to
sustain its claim for the issuance of an injunctive relief. Matters,
theories or arguments not brought out in the proceedings below will
ordinarily not be considered by a reviewing court as they cannot be
raised for the first time on appeal.[59] The lower courts could thus not
be faulted for not applying the fraud exception rule not only because
the existence of fraud was fundamentally interwoven with the issue of
default still pending before the arbitral tribunals, but more so, because
petitioner never raised it as an issue in its pleadings filed in the courts
below. At any rate, petitioner utterly failed to show that it had a clear
and unmistakable right to prevent LHCs call upon the Securities.
Of course, prudence should have impelled LHC to await resolution of
the pending issues before the arbitral tribunals prior to taking action to
enforce the Securities. But, as earlier stated, the Turnkey Contract did
not require LHC to do so and, therefore, it was merely enforcing its
rights in accordance with the tenor thereof. Obligations arising from
contracts have the force of law between the contracting parties and
should be complied with in good faith.[60] More importantly, pursuant
to the principle of autonomy of contracts embodied in Article 1306 of
the Civil Code,[61] petitioner could have incorporated in its Contract
with LHC, a proviso that only the final determination by the arbitral
tribunals that default had occurred would justify the enforcement of
the Securities. However, the fact is petitioner did not do so; hence, it
would have to live with its inaction.
With respect to the issue of whether the respondent banks were
justified in releasing the amounts due under the Securities, this Court
reiterates that pursuant to the independence principle the banks were
under no obligation to determine the veracity of LHCs certification
that default has occurred. Neither were they bound by petitioners
declaration that LHCs call thereon was wrongful. To repeat,
respondent banks undertaking was simply to pay once the required
documents are presented by the beneficiary.
At any rate, should petitioner finally prove in the pending arbitration
proceedings that LHCs draws upon the Securities were wrongful due
to the non-existence of the fact of default, its right to seek
indemnification for damages it suffered would not normally be
foreclosed pursuant to general principles of law.
Moreover, in a Manifestation,[62] dated 30 March 2001, LHC informed
this Court that the subject letters of credit had been fully drawn. This
fact alone would have been sufficient reason to dismiss the instant
petition.
Settled is the rule that injunction would not lie where the acts sought
to be enjoined have already become fait accompli or an accomplished
or consummated act.[63] In Ticzon v. Video Post Manila, Inc.[64] this
Court ruled that where the period within which the former employees
were prohibited from engaging in or working for an enterprise that
competed with their former employerthe very purpose of the
preliminary injunction has expired, any declaration upholding the
propriety of the writ would be entirely useless as there would be no
actual case or controversy between the parties insofar as the
preliminary injunction is concerned.
In the instant case, the consummation of the act sought to be
restrained had rendered the instant petition mootfor any declaration
by this Court as to propriety or impropriety of the non-issuance of
injunctive relief could have no practical effect on the existing
controversy.[65] The other issues raised by petitioner particularly with
respect to its right to recover the amounts wrongfully drawn on the
Securities, according to it, could properly be threshed out in a
separate proceeding.
One final point. LHC has charged petitioner of forum-shopping. It
raised the charge on two occasions. First, in its Counter-
Manifestation dated 29 June 2004[66] LHC alleges that petitioner
presented before this Court the same claim for money which it has
filed in two other proceedings, to wit: ICC Case No. 11264/TE/MW
and Civil Case No. 04-332 before the RTC of Makati. LHC argues that
petitioners acts constitutes forum-shopping which should be punished
by the dismissal of the claim in both forums. Second, in its Comment
to Petitioners Motion for Leave to File Addendum to Petitioners
Memorandum dated 8 October 2004, LHC alleges that by maintaining
the present appeal and at the same time pursuing Civil Case No. 04-
332wherein petitioner pressed for judgment on the issue of whether
the funds LHC drew on the Securities should be returnedpetitioner
resorted to forum-shopping. In both instances, however, petitioner has
apparently opted not to respond to the charge.
Forum-shopping is a very serious charge. It exists when a party
repetitively avails of several judicial remedies in different courts,
simultaneously or successively, all substantially founded on the same
transactions and the same essential facts and circumstances, and all
raising substantially the same issues either pending in, or already
resolved adversely, by some other court.[67] It may also consist in the
act of a party against whom an adverse judgment has been rendered
in one forum, of seeking another and possibly favorable opinion in
another forum other than by appeal or special civil action of certiorari,
or the institution of two or more actions or proceedings grounded on
the same cause on the supposition that one or the other court might
look with favor upon the other party.[68] To determine whether a party
violated the rule against forum-shopping, the test applied is whether
the elements of litis pendentia are present or whether a final judgment
in one case will amount to res judicata in another.[69] Forum-
shopping constitutes improper conduct and may be punished with
summary dismissal of the multiple petitions and direct contempt of
court.[70]
Considering the seriousness of the charge of forum-shopping and the
severity of the sanctions for its violation, the Court will refrain from
making any definitive ruling on this issue until after petitioner has been
given ample opportunity to respond to the charge.
WHEREFORE, the instant petition is DENIED, with costs against
petitioner.
Petitioner is hereby required to answer the charge of forum-shopping
within fifteen (15) days from notice.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario,
JJ., concur.