Republic of the Philippines

SUPREME COURT
Manila
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.

DECISION

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 Decision1 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 Contract3 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 petitioner's 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)8each 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 letters13 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 8.214 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 Order19 dated 24 November 2000, denied petitioner's 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 petitioner's
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 court's 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
LHC's 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 petitioner's 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
declarant's 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 court's 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 court's
denial of petitioner's 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 BENEFICIARY'S CALL
THEREON IS WRONGFUL OR FRAUDULENT.
WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE SECURITIES
BEFORE THE RESOLUTION OF PETITIONER'S AND LHC'S 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 LHC'S
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 Petition22 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 petitioner's 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 petitioner's
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 petitioner's 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 ICC's partial award
mentioned in petitioner's Manifestation of 12 April 2004.

In its Comment to petitioner's Motion for Leave to File Addendum to Petitioner's

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 ICC's partial award is now fully within the
Makati RTC's 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 200327 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 latter's 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
200328 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 LHC's 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,
petitioner's 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 bank's customer cannot draw on the letter, it does not
function as an assignment by the customer to the beneficiary. Nor, if properly used, is it
a contract of suretyship or guarantee, because it entails a primary liability following a
default. Finally, it is not in itself a negotiable instrument, because it is not payable to
order or bearer and is generally conditional, yet the draft presented under it is often
negotiable.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 principle's 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, petitioner's 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."
Petitioner's 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 obligor's
nonperformance. They function, however, in distinctly different ways.
Traditionally, upon the obligor's default, the surety undertakes to complete the
obligor's 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 surety's
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 applicant's 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 obligor's 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 beneficiary's
presentation of those documents is not rightful. In that case, the applicant may
sue the beneficiary in tort, in contract, or in breach of warranty; but, during the
litigation to determine whether the applicant has in fact breached the obligation
to perform, the beneficiary, not the applicant, holds the money. 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 petitioner's 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.46A 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 LHC's 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 Dolan's 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
principle's 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 LHC's 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 one's 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 LHC's call on the Securities which would justify the issuance of preliminary
injunction. By petitioner's own admission, the right of LHC to call on the Securities was
contractually rooted and subject to the express stipulations in the Turnkey
Contract.55Indeed, 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 LHC's draws on the
Securities wrongful or fraudulent for there was nothing in the Contract which would
indicate that the parties intended that all disputes regarding delay should first be settled
through arbitration before LHC would be allowed to call upon the Securities. It is
therefore premature and absurd to conclude that the draws on the Securities were
outright fraudulent given the fact that the ICC and CIAC have not ruled with finality on
the existence of default.
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 LHC's 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 LHC's 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
LHC's certification that default has occurred. Neither were they bound by petitioner's
declaration that LHC's 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
LHC's 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 EMPLOYER the 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 200466 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 petitioner's acts constitutes forum-shopping
which should be punished by the dismissal of the claim in both forums. Second, in its
Comment to Petitioner's Motion for Leave to File Addendum to Petitioner's
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.