Assignment in Credit Transactions to be submitted on Saturday, 12 September 2015.

1. Define letters of credit

2. Who are the parties involved and their roles
3. Case digest
a. 216 SCRA 257 Prudential Bank vs IAC
b. 443 SCRA 307 Transfield Phil Inc vs Luzon Hydro Corp
c. 228 SCRA 357 Bank of America vs CA
d. 286 SCRA 257 Paper Products vs CA
e. 21 SCRA 359 National Marketing Corp vs Atlas Trading Devt Corp
f. 196 SCRA 576 Feati Bank vs CA
g. 35 SCRA 256 BPI vs De Reny Fabric Industries Inc
Note: Use yellow paper
A commercial letter of credit is a contractual agreement between a bank, known as the issuing bank, on behalf of one of
its customers, authorizing another bank, known as the advising or confirming bank, to make payment to the beneficiary
A letter of credit is a document from a bank guaranteeing that a seller will receive payment in full as long as certain
delivery conditions have been met. In the event that the buyer is unable to make payment on the purchase, the bank will
cover the outstanding amount.
They are often used in international transactions to ensure that payment will be received where the buyer and seller may
not know each other and are operating in different countries. In this case the seller is exposed to a number of risks such
as credit risk, and legal riskcaused by the distance, differing laws and difficulty in knowing each party personally. A letter of
credit provides the seller with a guarantee that they will get paid as long as certain delivery conditions have been met. For
this reason the use of letters of credit has become a very important aspect of international trade.
The bank that writes the letter of credit will act on behalf of the buyer and make sure that all delivery conditions have been
met before making the payment to the seller. Most letters of credit are governed by rules promulgated by the International
Chamber of Commerceknown as Uniform Customs and Practice for Documentary Credits. Letters of credit are typically
used by importing and exporting companies particularly for large purchases and will often negate the need by the buyer to
pay a deposit before delivery is made.
They are also used in land development to ensure that approved public facilities (streets, sidewalks, storm water ponds,
etc.) will be built. The parties to a letter of credit are the supplier, usually called the "beneficiary", "the issuing bank", of
whom the buyer is a client, and sometimes an advising bank, of whom the beneficiary is a client. Almost all letters of credit
are irrevocable, i.e., cannot be amended or canceled without mutual consent of all parties.
Letters of credit accomplish their purpose by substituting the credit of the bank for that of the customer, for the purpose of
facilitating trade. There are basically two types: commercial and standby. The commercial letter of credit is the primary
payment mechanism for a transaction, whereas the standby letter of credit is a secondary payment mechanism.
Commercial Letter of Credit
Commercial letters of credit have been used for centuries to facilitate payment in international trade. Their use will
continue to increase as the global economy evolves.
Letters of credit used in international transactions are governed by the International Chamber of Commerce Uniform
Customs and Practice for Documentary Credits. The general provisions and definitions of the International Chamber of
Commerce are binding on all parties. Domestic collections in the United States are governed by the Uniform Commercial
Code.
A commercial letter of credit is a contractual agreement between a bank, known as the issuing bank, on behalf of one of
its customers, authorizing another bank, known as the advising or confirming bank, to make payment to the beneficiary.
The issuing bank, on the request of its customer, opens the letter of credit. The issuing bank makes a commitment to
honor drawings made under the credit. The beneficiary is normally the provider of goods and/or services. Essentially, the
issuing bank replaces the bank's customer as the payor.
Elements of a Letter of Credit
A payment undertaking given by a bank (issuing bank)
On behalf of a buyer (applicant)
To pay a seller (beneficiary) for a given amount of money
On presentation of specified documents representing the supply of goods
Within specified time limits
Documents must conform to terms and conditions set out in the letter of credit
Documents to be presented at a specified place
Beneficiary
The beneficiary is entitled to payment as long as he can provide the documentary evidence required by the letter of credit.

The letter of credit is a distinct and separate transaction from the contract on which it is based. All parties deal in
documents and not in goods. The issuing bank is not liable for performance of the underlying contract between the
customer and beneficiary. The issuing bank's obligation to the buyer, is to examine all documents to insure that they meet
all the terms and conditions of the credit. Upon requesting demand for payment the beneficiary warrants that all conditions
of the agreement have been complied with. If the beneficiary (seller) conforms to the letter of credit, the seller must be
paid by the bank.
Issuing Bank
The issuing bank's liability to pay and to be reimbursed from its customer becomes absolute upon the completion of the
terms and conditions of the letter of credit. Under the provisions of the Uniform Customs and Practice for Documentary
Credits, the bank is given a reasonable amount of time after receipt of the documents to honor the draft.
The issuing banks' role is to provide a guarantee to the seller that if compliant documents are presented, the bank will pay
the seller the amount due and to examine the documents, and only pay if these documents comply with the terms and
conditions set out in the letter of credit.
Typically the documents requested will include a commercial invoice, a transport document such as a bill of lading or
airway bill and an insurance document; but there are many others. Letters of credit deal in documents, not goods.
Advising Bank
An advising bank, usually a foreign correspondent bank of the issuing bank will advise the beneficiary. Generally, the
beneficiary would want to use a local bank to insure that the letter of credit is valid. In addition, the advising bank would be
responsible for sending the documents to the issuing bank. The advising bank has no other obligation under the letter of
credit. If the issuing bank does not pay the beneficiary, the advising bank is not obligated to pay.
Confirming Bank
The correspondent bank may confirm the letter of credit for the beneficiary. At the request of the issuing bank, the
correspondent obligates itself to insure payment under the letter of credit. The confirming bank would not confirm the
credit until it evaluated the country and bank where the letter of credit originates. The confirming bank is usually the
advising bank.
Letter of Credit Characteristics
Negotiability
Letters of credit are usually negotiable. The issuing bank is obligated to pay not only the beneficiary, but also any bank
nominated by the beneficiary. Negotiable instruments are passed freely from one party to another almost in the same way
as money. To be negotiable, the letter of credit must include an unconditional promise to pay, on demand or at a definite
time. The nominated bank becomes a holder in due course. As a holder in due course, the holder takes the letter of credit
for value, in good faith, without notice of any claims against it. A holder in due course is treated favorably under the UCC.
The transaction is considered a straight negotiation if the issuing bank's payment obligation extends only to the
beneficiary of the credit. If a letter of credit is a straight negotiation it is referenced on its face by "we engage with you" or
"available with ourselves". Under these conditions the promise does not pass to a purchaser of the draft as a holder in due
course.
Revocability
Letters of credit may be either revocable or irrevocable. A revocable letter of credit may be revoked or modified for any
reason, at any time by the issuing bank without notification. A revocable letter of credit cannot be confirmed. If a
correspondent bank is engaged in a transaction that involves a revocable letter of credit, it serves as the advising bank.
Once the documents have been presented and meet the terms and conditions in the letter of credit, and the draft is
honored, the letter of credit cannot be revoked. The revocable letter of credit is not a commonly used instrument. It is
generally used to provide guidelines for shipment. If a letter of credit is revocable it would be referenced on its face.
The irrevocable letter of credit may not be revoked or amended without the agreement of the issuing bank, the confirming
bank, and the beneficiary. An irrevocable letter of credit from the issuing bank insures the beneficiary that if the required
documents are presented and the terms and conditions are complied with, payment will be made. If a letter of credit is
irrevocable it is referenced on its face.
Transfer and Assignment
The beneficiary has the right to transfer or assign the right to draw, under a credit only when the credit states that it is
transferable or assignable. Credits governed by the Uniform Commercial Code (Domestic) maybe transferred an unlimited
number of times. Under the Uniform Customs Practice for Documentary Credits (International) the credit may be
transferred only once. However, even if the credit specifies that it is nontransferable or nonassignable, the beneficiary may
transfer their rights prior to performance of conditions of the credit.
Sight and Time Drafts
All letters of credit require the beneficiary to present a draft and specified documents in order to receive payment. A draft
is a written order by which the party creating it, orders another party to pay money to a third party. A draft is also called a
bill of exchange.
There are two types of drafts: sight and time. A sight draft is payable as soon as it is presented for payment. The bank is
allowed a reasonable time to review the documents before making payment.
A time draft is not payable until the lapse of a particular time period stated on the draft. The bank is required to accept the
draft as soon as the documents comply with credit terms. The issuing bank has a reasonable time to examine those
documents. The issuing bank is obligated to accept drafts and pay them at maturity.

Standby Letter of Credit

The standby letter of credit serves a different function than the commercial letter of credit. The commercial letter of credit
is the primary payment mechanism for a transaction. The standby letter of credit serves as a secondary payment
mechanism. A bank will issue a standby letter of credit on behalf of a customer to provide assurances of his ability to
perform under the terms of a contract between the beneficiary. The parties involved with the transaction do not expect that
the letter of credit will ever be drawn upon.
The standby letter of credit assures the beneficiary of the performance of the customer's obligation. The beneficiary is
able to draw under the credit by presenting a draft, copies of invoices, with evidence that the customer has not performed
its obligation. The bank is obligated to make payment if the documents presented comply with the terms of the letter of
credit.
Standby letters of credit are issued by banks to stand behind monetary obligations, to insure the refund of advance
payment, to support performance and bid obligations, and to insure the completion of a sales contract. The credit has an
expiration date.
The standby letter of credit is often used to guarantee performance or to strengthen the credit worthiness of a customer. In
the above example, the letter of credit is issued by the bank and held by the supplier. The customer is provided open
account terms. If payments are made in accordance with the suppliers' terms, the letter of credit would not be drawn on.
The seller pursues the customer for payment directly. If the customer is unable to pay, the seller presents a draft and
copies of invoices to the bank for payment.
The domestic standby letter of credit is governed by the Uniform Commercial Code. Under these provisions, the bank is
given until the close of the third banking day after receipt of the documents to honor the draft.
Procedures for Using the Tool
The following procedures include a flow of events that follow the decision to use a Commercial Letter of Credit.
Procedures required to execute a Standby Letter of Credit are less rigorous. The standby credit is a domestic transaction.
It does not require a correspondent bank (advising or confirming). The documentation requirements are also less tedious.
Step-by-step process:
Buyer and seller agree to conduct business. The seller wants a letter of credit to guarantee payment.
Buyer applies to his bank for a letter of credit in favor of the seller.
Buyer's bank approves the credit risk of the buyer, issues and forwards the credit to its correspondent bank
(advising or confirming). The correspondent bank is usually located in the same geographical location as the
seller (beneficiary).
Advising bank will authenticate the credit and forward the original credit to the seller (beneficiary).
Seller (beneficiary) ships the goods, then verifies and develops the documentary requirements to support the
letter of credit. Documentary requirements may vary greatly depending on the perceived risk involved in dealing
with a particular company.
Seller presents the required documents to the advising or confirming bank to be processed for payment.
Advising or confirming bank examines the documents for compliance with the terms and conditions of the letter of
credit.
If the documents are correct, the advising or confirming bank will claim the funds by:
o Debiting the account of the issuing bank.
o Waiting until the issuing bank remits, after receiving the documents.
o Reimburse on another bank as required in the credit.
Advising or confirming bank will forward the documents to the issuing bank.
Issuing bank will examine the documents for compliance. If they are in order, the issuing bank will debit the
buyer's account.
Issuing bank then forwards the documents to the buyer.
Standard Forms of Documentation
When making payment for product on behalf of its customer, the issuing bank must verify that all documents and drafts
conform precisely to the terms and conditions of the letter of credit. Although the credit can require an array of documents,
the most common documents that must accompany the draft include:
Commercial Invoice
The billing for the goods and services. It includes a description of merchandise, price, FOB origin, and name and address
of buyer and seller. The buyer and seller information must correspond exactly to the description in the letter of credit.
Unless the letter of credit specifically states otherwise, a generic description of the merchandise is usually acceptable in
the other accompanying documents.
Bill of Lading
A document evidencing the receipt of goods for shipment and issued by a freight carrier engaged in the business of
forwarding or transporting goods. The documents evidence control of goods. They also serve as a receipt for the
merchandise shipped and as evidence of the carrier's obligation to transport the goods to their proper destination.
Warranty of Title
A warranty given by a seller to a buyer of goods that states that the title being conveyed is good and that the transfer is

rightful. This is a method of certifying clear title to product transfer. It is generally issued to the purchaser and issuing bank
expressing an agreement to indemnify and hold both parties harmless.
Letter of Indemnity
Specifically indemnifies the purchaser against a certain stated circumstance. Indemnification is generally used to guaranty
that shipping documents will be provided in good order when available.
Common Defects in Documentation
About half of all drawings presented contain discrepancies. A discrepancy is an irregularity in the documents that causes
them to be in non-compliance to the letter of credit. Requirements set forth in the letter of credit cannot be waived or
altered by the issuing bank without the express consent of the customer. The beneficiary should prepare and examine all
documents carefully before presentation to the paying bank to avoid any delay in receipt of payment. Commonly found
discrepancies between the letter of credit and supporting documents include:
Letter of Credit has expired prior to presentation of draft.
Bill of Lading evidences delivery prior to or after the date range stated in the credit.
Stale dated documents.
Changes included in the invoice not authorized in the credit.
Inconsistent description of goods.
Insurance document errors.
Invoice amount not equal to draft amount.
Ports of loading and destination not as specified in the credit.
Description of merchandise is not as stated in credit.
A document required by the credit is not presented.
Documents are inconsistent as to general information such as volume, quality, etc.
Names of documents not exact as described in the credit. Beneficiary information must be exact.
Invoice or statement is not signed as stipulated in the letter of credit.
When a discrepancy is detected by the negotiating bank, a correction to the document may be allowed if it can be done
quickly while remaining in the control of the bank. If time is not a factor, the exporter should request that the negotiating
bank return the documents for corrections.
If there is not enough time to make corrections, the exporter should request that the negotiating bank send the documents
to the issuing bank on an approval basis or notify the issuing bank by wire, outline the discrepancies, and request
authority to pay. Payment cannot be made until all parties have agreed to jointly waive the discrepancy.
Tips for Exporters
Communicate with your customers in detail before they apply for letters of credit.
Consider whether a confirmed letter of credit is needed.
Ask for a copy of the application to be fax to you, so you can check for terms or conditions that may cause you
problems in compliance.
Upon first advice of the letter of credit, check that all its terms and conditions can be complied with within the
prescribed time limits.
Many presentations of documents run into problems with time-limits. You must be aware of at least three time
constraints - the expiration date of the credit, the latest shipping date and the maximum time allowed between
dispatch and presentation.
If the letter of credit calls for documents supplied by third parties, make reasonable allowance for the time this
may take to complete.
After dispatch of the goods, check all the documents both against the terms of the credit and against each other
for internal consistency.
Summary
The use of the letters of credit as a tool to reduce risk has grown substantially over the past decade. Letters of credit
accomplish their purpose by substituting the credit of the bank for that of the customer, for the purpose of facilitating trade.
The credit professional should be familiar with two types of letters of credit: commercial and standby. Commercial letters
of credit are used primarily to facilitate foreign trade. The commercial letter of credit is the primary payment mechanism for
a transaction.
The standby letter of credit serves a different function. The standby letter of credit serves as a secondary payment
mechanism. The bank will issue the credit on behalf of a customer to provide assurances of his ability to perform under
the terms of a contract.
Upon receipt of the letter of credit, the credit professional should review all items carefully to insure that what is expected
of the seller is fully understood and that he can comply with all the terms and conditions. When compliance is in question,
the buyer should be requested to amend the credit.
2. Who are the parties involved in a Letter of Credit LC

In this article, let us discuss about the parties involved in a letter of credit.
Who are the parties involved in an LC Letter of Credit.
The major parties involved in a letter of credit are discussed below. We can classify mainly eight main parties involved in a
Letter of Credit.
Applicant of Letter of Credit.
Applicant is one of the main parties involved in a Letter of Credit. Who is an applicant under Letter of credit?
Applicant is the party who opens Letter of Credit. Normally, buyer of goods is the Applicant who opens letter of credit.
Letter of credit is opened as per his instruction and necessary payment is arranged to open Letter of credit with his bank.
The applicant arranges to open letter of credit with his bank as per the terms and conditions of Purchase order and
business contract between buyer and seller. So Applicant is one of the major parties involved in a Letter of credit.
LC Issuing Bank
Issuing Bank is one of the other main parties involved in an LC. Who is an Issuing Bank under Letter of credit?
Issuing Bank is the bank who opens letter of credit. Letter of credit is created by issuing bank who takes responsibility to
pay amount on receipt of documents from supplier of goods (beneficiary under LC).
Beneficiary party
Beneficiary is one of the main parties under letter of credit. Beneficiary of Letter of credit gets the benefit under Letter of
credit. Beneficiary is the party under letter of credit who receives amount under letter of credit. The LC is opened on
Beneficiary partys favor. Beneficiary party under letter of credit submits all required documents with is bank in accordance
with the terms and conditions under LC.
Advising Bank
Advising bank is another party involved under LC. Advising bank, as a part of letter of credit takes responsibility to
communicate with necessary parties under letter of credit and other required authorities. The advising bank is the party
who sends documents under Letter of Credit to opening bank.
Confirming Bank
Confirming bank is one of the other parties involved in Letter of Credit. Confirming bank as a party of letter of credit
confirms and guarantee to undertake the responsibility of payment or negotiation acceptance under the credit.
Negotiating Bank
Negotiating bank is one of the main parties involved under Letter of Credit.
Negotiating Bank, who negotiates documents delivered to bank by beneficiary of LC. Negotiating bank is the bank who
verifies documents and confirms the terms and conditions under LC on behalf of beneficiary to avoid discrepancies
Reimbursing Bank
Reimbursing Bank is one of the parties involved in an LC. Reimbursing bank is the party who authorized to honor the the
reimbursement claim of negotiation/ payment/ acceptance.
Second Beneficiary
Second beneficiary is one of the other parties involved in Letter of Credit.
Second beneficiary who represent the first beneficiary or original beneficiary in their absence, where in the credits belongs
to original beneficiary is transferable as per terms.
I have explained above 8 main parties involved in Letter of Credit. However, some of the parties in letter of credit
mentioned above may act as functions of one or more parties under Letter of Credit.
Applicant
Applicant is the buyer of the goods or services supplied by the seller. Letter of credit is opened by the issuing bank as per
applicant's request. However, applicant does not belong one of the parties to a letter of credit transaction. This is because
of the fact that letters of credit are separate transactions from the sale or other contract on which they may be based.

Beneficiary
Beneficiary is the seller of the goods or the provider of the services in a standard commercial letter of credit transaction.
Letter of credit is opened by the issuing bank in favor of the beneficiary.
Issuing Bank
Issuing Bank is the bank that issues a letter of credit at the request of an applicant or its own behalf. Issuing bank
undertakes to honor a complying presentation of the beneficiary without recourse.
Nominated Bank
Nominated bank is the bank with which the credit is available or any bank in the case of a credit available with any bank.
Advising Bank
Advising bank is the bank that advises the credit at the request of the issuing bank. An advising bank that is not a
confirming bank advises the credit and any amendmend without any obligation to honor.
Confirming Bank
Confirming bank is the bank that adds its confirmation to a credit upon the issuing bank's authorization or request.
Confirming bank may or may not add its confirmation to a letter of credit. This decision is up to confirming bank only.
However, once it adds its confirmation to the credit confirming is irrevocably bound to honor or negotiate as of the time it
adds its confirmation to the credit. Even if the issuing bank fails to honor, confirming bank must pay to the beneficiary.
Reimbursing Bank
Reimbursing Bank shall mean the bank instructed and/or authorized to provide reimbursement pursuant to a
reimbursement authorization issued by the issuing bank.
Prudential Bank v Intermediate Appellate Court and Anacleto Chi G.R. No. 74886 December 8, 1992
MARCH 15, 2014LEAVE A COMMENT
Through a letter of credit, the bank merely substitutes its own promise to pay for one of its customers who in
return promises to pay the bank the amount of funds mentioned in the letter of credit plus credit or commitment
fees mutually agreed upon.
Facts: Philippine Rayon Mills, Inc.(PRMI) entered into a contract with Nissho Co., Ltd. of Japan for the importation of
textile machineries under a 5-year deferred payment plan. To effect the payment, PRMI applied for a commercial letter of
credit with the Prudential Bank and Trust Company in favor of Nissho. Prudential Bank opened Letter of Credit No. DPP63762 for $128,548.78 Against this letter of credit, drafts were drawn and issued by Nissho, which were all paid by the
Prudential Bank through its correspondent in Japan, the Bank of Tokyo, Ltd. Two of the original drafts were accepted by
PRMI through its president, Anacleto R. Chi, while the others were not. Upon the arrival of the machineries, the Prudential
Bank indorsed the shipping documents to the PRMI which accepted delivery of the same. To enable PRMI to take delivery
of the machineries, it executed, by prior arrangement with the Prudential Bank, a trust receipt which was signed by
Anacleto R. Chi in his capacity as President of PRMI company
At the back of the trust receipt was printed a form to be accomplished by 2 sureties who, by the very terms and conditions
thereof, were to be jointly and severally liable to the Prudential Bank should the PRMI fail to pay the total amount or any
portion of the drafts issued by Nissho and paid for by Prudential Bank. . PRMI was able to take delivery of the textile
machineries and installed the same at its factory site. Chi argued that presentment for acceptance was necessary to make
PRMI liable. The trial court ruled that that presentment for acceptance was an indispensable requisite for Philippine
Rayons liability on the drafts to attach.
Issue : Whether or not presentment for acceptance was needed in order for PRMI to be liable under the draft.
HELD : Presentment for acceptance is defined an the production of a bill of exchange to a drawee for
acceptance. Acceptance, however, was not even necessary in the first place because the drafts which were eventually
issued were sight drafts. Even if these were not sight drafts, thereby necessitating acceptance, it would be the Bank (Bank
of America) and not Philippine Rayon which had to accept the same for the latter was not the drawee.
The trial court and the public respondent, therefore, erred in ruling that presentment for acceptance was an indispensable
requisite for Philippine Rayons liability on the drafts to attach. Contrary to both courts pronouncements, Philippine Rayon
immediately became liable upon Bank of Americas payment on the letter of credit. Such is the essence of the letter of
credit issued by the petitioner. A different conclusion would violate the principle upon which commercial letters of credit are
founded because in such a case, both the beneficiary and the issuer, Nissho Company Ltd. and the petitioner,

respectively, would be placed at the mercy of Philippine Rayon even if the latter had already received the imported
machinery and the petitioner had fully paid for it.
In fact, there was no need for acceptance as the issued drafts are sight drafts. Presentment for acceptance is necessary
only in the cases expressly provided for in Section 143 of the Negotiable Instruments Law (NIL).
In the instant case then, the drawee was necessarily the herein the Bank of America. It was to the latter that the drafts
were presented for payment.

Negotiable Instruments Case Digest: Prudential Bank V. IAC (1992)

G.R. No. 74886 December 8, 1992
Lessons Applicable: Presentment for acceptance (Negotiable Instrument Law)
FACTS:

August 8, 1962: Philippine Rayon Mills, Inc.(PRMI) entered into a contract with Nissho Co., Ltd. of Japan for the
importation of textile machineries under a 5-year deferred payment plan

To effect the payment, PRMI applied for a commercial letter of credit with the PrudentialBank and Trust Company
in favor of Nissho.

Prudential Bank opened Letter of Credit No. DPP-63762 for $128,548.78

Against this letter of credit, drafts were drawn and issued by Nissho, which were all paid by the Prudential
Bank through its correspondent in Japan, the Bank of Tokyo, Ltd.

2 of these drafts were accepted by PRMI through its president, Anacleto R. Chi, while the others
were not

Upon the arrival of the machineries, the Prudential Bank indorsed the shipping documents to the PRMI which
accepted delivery of the same.

To enable PRMI to take delivery of the machineries, it executed, by prior arrangement with the Prudential
Bank, a trust receipt which was signed by Anacleto R. Chi in his capacity as President of PRMI company

At the back of the trust receipt is a printed form to be accomplished by 2 sureties who, by the very terms
and conditions thereof, were to be jointly and severally liable to the Prudential Bank should the PRMI fail to pay the
total amount or any portion of the drafts issued by Nissho and paid for by Prudential Bank.

The PRMI was able to take delivery of the textile machineries and installed the same at its factory site

1967: PRMI ceased business operation

December 29, 1969: PRMI's factory was leased by Yupangco Cotton Mills for an annual rental of P200K T

January 3, 1973: lease was renewed

January 5, 1974: all the textile machineries in PRMI's factory were sold to AIC Development Corporation for
P300K

The PRMI's obligation from the letter of credit and the trust receipt remained unpaid and unliquidated despite
repeated demands

October 3, 1974: present action for the collection of the principal amount of P956,384.95 was filed on
against PRMI and Anacleto R. Chi.

RTC: PRMI ordered to pay for the 2 drafts which were accepted the 10 were not yet accepted and for Chi it was
dismissed

CA: Affirmed

relationship governed by specific contracts: application for letters of credit, the promissory note, the drafts
and the trust receipt

acceptance of the drafts by Philippine Rayon was indispensable to make the latter liable
ISSUE: W/N presentment for acceptance of the drafts was indispensable to make PRMI liable
HELD: NO. Petition GRANTED. Philippine Rayon Mills, Inc. liable on the 12 drafts. Anacleto R. Chi (as guarantor)
secondarily liable on the trust receipt

letter of credit

an engagement by a bank or other person made at the request of a customer that the issuer will honor
drafts or other demands for payment upon compliance with the conditions specified in the credit.

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

affording celerity and certainty of payment

In the instant case

drawee (to whom drafts were presented for payment) = Prudential Bank

no need for acceptance as the issued drafts are sight drafts

NOTE: sight drafts vs. after sight drafts
Presentment for acceptance is necessary only in the cases expressly provided for in
Section 143 of the Negotiable Instruments Law (NIL).
Sec. 143. When presentment for acceptance must be made. - Presentment for acceptance must be made:
(a) Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary in order to
fix the maturity of the instrument; or
(b) Where the bill expressly stipulates that it shall be presented for acceptance; or
(c) Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee.
In no other case is presentment for acceptance necessary in order to render any party to the bill liable.

acceptance of a bill

signification by the drawee of his assent to the order of the drawer

may be done in writing by the drawee in:

the bill itself, or

a separate instrument

PRMI immediately became liable upon Prudential Bank's payment - essence of the letter of credit issued by
the Prudential Bank

trust receipt

banker advances money to an intending importer

banker takes the full title to the goods at the very beginning until the goods are sold and the vendee is
called upon to pay for them

any transaction by and between an entruster, and entrustee, whereby the entruster, who owns or holds
absolute title or security interests' over certain specified goods, documents or instruments, releases the same to the
possession of the entrustee upon the latter's execution and delivery to the entruster of a signed document called the
"trust receipt" wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for
the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to
the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receiptor
the goods, instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and
conditions specified in the trusts receipt, or for other purposes substantially equivalent to any one of the following

Transfield Philippines vs Luzon Hydro Electric Corp. GR No 146717, Nov 22, 2004
MARCH 15, 2014LEAVE A COMMENT
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.
Facts: Transfield Philippines (Transfield) entered into a turn-key contract with Luzon Hydro Corp. (LHC).Under the
contract, Transfield were to construct a hydro-electric plants in Benguet and Ilocos. Transfield was given the sole
responsibility for the design, construction, commissioning, testing and completion of the Project. The contract provides for
a period for which the project is to be completed and also allows for the extension of the period provided that the
extension is based on justifiable grounds such as fortuitous event. In order to guarantee performance by Transfield, two
stand-by letters of credit were required to be opened. During the construction of the plant, Transfield requested for
extension of time citing typhoon and various disputes delaying the construction. LHC did not give due course to the
extension of the period prayed for but referred the matter to arbitration committee. Because of the delay in the
construction of the plant, LHC called on the stand-by letters of credit because of default. However, the demand was
objected by Transfield on the ground that there is still pending arbitration on their request for extension of time.
Issue: Whether or not LHC can collect from the letters of credit despite the pending arbitration case
Held: Transfields 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.
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.
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.
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.
Transfield Philippines vs Luzon Hydro Electric Corp.
(GR No 146717, Nov 22, 2004, Tinga)Transfield entered into a turn-key contract with Luzon Hydro Corp. (LHC).Under the
contract, Transfield were to construct a hydro-electric plants inBenguet and Ilocos. The contract provides for a period for
which the projectis to be completed and also allows for the extension of the period providedthat the extension is based on
justifiable grounds such as fortuitous event.In order to guarantee performance by Transfield, two stand-by letters of credit
were required to be opened. During the construction of the plant,Transfield requested for extension of time citing fortuitous
events broughtabout by typhoon, barricades and demonstration. LHC did not give duecourse to the extension of the
period prayed for but referred the matter toarbitration committee.In the meanwhile, because of the delay in the
construction of the plant, LHCcalled on the stand-by letters of credit because of default. However, thedemand was
objected by Transfield on the ground that there is still pendingarbitration on their request for extension of time. LHC
invoked the independence principle. On the other hand, Transfield claims fraud on thepart of LHC on calling the stand-by
letters of credit.Under the independence principle, a LC accommodation is entirely distinctand separate, independent
agreement. It is not supposed to be affected bythe main contract upon which it rests.The court held for the LHC. Following
the independence principle, evengranting that there is still issue to be resolved arising from the turn-keyproject. This issue
is not supposed to affect the obligation of the bank to paythe letter of credit in question. The court stressed that a LC
accommodationis intended to benefit not only the beneficiary therein but the applicantthereon. On the issue of fraud, the
SC held that there is nothing in the turn-key contract which states that all issues between the parties must beresolved first
before LHC can call on the stand-by LC but the contractprovides that if Transfield defaults, then LHC can call on these
stand-by LC.
G.R. No. 105395 December 10, 1993
BANK OF AMERICA, NT & SA,
petitioners,vs.
COURT OF APPEALS, INTER-RESIN INDUSTRIAL CORPORATION, FRANCISCOTRAJANO, JOHN DOE AND JANE
DOE,
respondents.
FACTS : Bank of America received an Irrevocable Letter of Credit issued bu Bank of Ayudhya for the Account of
General Chemicals Ltd., Inc. for the sale of plastic ropes andagricultural files with Bank of America as advising bank
and Inter-Resin Industrial Corp. asbeneficiary.Upon receipt of the letter advice with letter of credit by Inter- Resin told Bank
of America toconfirm said letter of credit, but the bank did not confirm such. Bank of America explainedthat there was no
need for confirmation.Inter-Resin made a partial availment of the Letter of Credit after presentment of
the requireddocuments to Bank of America. After confirmation of all the documents BA issued a check infavor of IR. BA
advice Bank of Ayudhya of IRs availment under the letter of credit and askedfor the corresponding reimbursement.IR
presented documents for the second availment under the same LC but BA stopped theprocessing of such after they
received a telex from Bank of Ayudhya delaring that the LCfraudulent. BA sued IR for the recovery of the first LC payment.
ISSUE: Whether or not Bank of America may recover what it has paid under the letter of credit to Inter-Resin?
HELD: In fine, we hold that First, given the factual findings of the courts below, we conclude that petitioner Bank
of America has acted merely as a notifying bank and did not assume the responsibility of a confirming bank ; and Second,
petitioner bank, as a negotiating bank is entitled to recover on Inter-Resin'spartial availment as beneficiary of the
letter of credit which has been disowned by the alleged issuer bank. 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.
To break the impasse, the buyer may be required tocontract a bank to issue a letter of credit in favor of the seller so that,
by virtue of the latter of credit, the issuing bank can authorize the seller to draw drafts and engage to pay them upontheir
presentment simultaneously with the tender of documents required by the letter of credit.

The buyer and the seller agree on what documents are to be presented for payment, but ordinarily they are documents
of title evidencing or attesting to the shipment of the goods to the buyer. There would at least be three (3) parties: (a) the
buyer who procures the letter of credit and obliges himself to reimburse the issuing bank upon receipts of the documents
of title; (b)the bank issuing the letter of credit, which undertakes to pay the seller upon receipt of the draft and proper
document of titles and to surrender the documents to the buyer upon reimbursement; and, (c) the seller who in
compliance with the contract of sale ships the goods to the buyer and delivers the documents of title and draft to the
issuing bank to recover payment. The number of the parties, not infrequently and almost invariably in international trade
practice, may be increased. Thus, the services of an advising (notifying) bank may be utilized to convey to the seller the
existence of the credit; or, of a confirming bank which will end credence to the letter of credit issued by a lesser known
issuing bank; or, of a paying bank which undertakes to encash the drafts drawn by the exporter. Further, instead of going
to the place of the issuing bank to claim payment, the buyer may approach another bank, termed the negotiating bank, to
have the draft discounted. It cannot seriously be disputed, looking at this case, that Bank of America has, in fact, only
been an advising, not confirming, bank, and this much is clearly evident, among other things, by the provisions of
the letter of credit itself, the petitioner bank's letter of advice, its request for payment of advising fee, and the admission of
Inter-Resin that it has paid the same. That Bank of America has asked Inter-Resin to submit documents required by the
letter of credit and eventually has paid the proceeds thereof, did not obviously make it a confirming bank. The fact, too,
that the draft required by the letter of credit is to be drawn under the account of General Chemicals (buyer) only means
the same had to be presented to Bank of Ayudhya (issuing bank) for payment. It may be significant to recall that the
letter of credit is an engagement of the issuing bank, not the advising bank, to pay the draft. As an advising or notifying
bank, Bank of America did not incur any obligation more than just notifying Inter-Resin of the letter of credit issued in its
favor, let alone to confirm the letter of credit.
The bare statement of the bank employees, aforementioned, in responding to the inquiry made by Atty. Tanay, InterResin's representative, on the authenticity of the letter of credit certainly did not have the effect of novating the letter of
credit and Bank of America's letter of advise,
nor can it justify the conclusion that the bank must now assume total liability on the letter of credit. Indeed, Inter-Resin
itself cannot claim to have been all that freefrom fault. As the seller, the issuance of the letter of credit should
have obviously been agreat concern to it.
It would have, in fact, been strange if it did not, prior to the letter of credit, enter into a contract, or negotiated at the very
least, with General Chemicals.
In the ordinary course of business, the perfection of contract precedes the issuance of a letter of credit.
FIRST DIVISION
[G.R. No. 116863. February 12, 1998]
KENG HUA PAPER PRODUCTS CO. INC., petitioner, vs. COURT OF APPEALS; REGIONAL TRIAL COURT OF
MANILA, BR. 21; and SEA-LAND SERVICE, INC., respondents.
DECISION
PANGANIBAN, J.:
What is the nature of a bill of lading? When does a bill of lading become binding on a consignee? Will an alleged
overshipment justify the consignees refusal to receive the goods described in the bill of lading? When may interest be
computed on unpaid demurrage charges?
Statement of the Case
These are the main questions raised in this petition assailing the Decision [1] of the Court of Appeals [2] promulgated on
May 20, 1994 in C.A.-G.R. CV No. 29953 affirming in toto the decision[3] dated September 28, 1990 in Civil Case No. 8533269 of the Regional Trial Court of Manila, Branch 21. The dispositive portion of the said RTC decision reads:
WHEREFORE, the Court finds by preponderance of evidence that Plaintiff has proved its cause of action and
right to relief. Accordingly, judgment is hereby rendered in favor of the Plaintiff and against Defendant, ordering
the Defendant to pay plaintiff:
1. The sum of P67,340.00 as demurrage charges, with interest at the legal rate from the date of the extrajudicial demand
until fully paid;
2. A sum equivalent to ten (10%) percent of the total amount due as Attorneys fees and litigation expenses.
Send copy to respective counsel of the parties.
SO ORDERED.[4]
The Facts
The factual antecedents of this case as found by the Court of Appeals are as follows:
Plaintiff (herein private respondent), a shipping company, is a foreign corporation licensed to do business in the
Philippines. On June 29, 1982, plaintiff received at its Hong Kong terminal a sealed container, Container No.
SEAU 67523, containing seventy-six bales of unsorted waste paper for shipment to defendant (herein
petitioner), Keng Hua Paper Products, Co. in Manila. A bill of lading (Exh. A) to cover the shipment was issued
by the plaintiff.
On July 9, 1982, the shipment was discharged at the Manila International Container Port. Notices of arrival were
transmitted to the defendant but the latter failed to discharge the shipment from the container during the free

time period or grace period. The said shipment remained inside the plaintiffs container from the moment the
free time period expired on July 29, 1982 until the time when the shipment was unloaded from the container on
November 22, 1983, or a total of four hundred eighty-one (481) days. During the 481-day period, demurrage
charges accrued. Within the same period, letters demanding payment were sent by the plaintiff to the defendant
who, however, refused to settle its obligation which eventually amounted to P67,340.00. Numerous demands
were made on the defendant but the obligation remained unpaid. Plaintiff thereafter commenced this civil action
for collection and damages.
In its answer, defendant, by way of special and affirmative defense, alleged that it purchased fifty (50) tons of
waste paper from the shipper in Hong Kong, Ho Kee Waste Paper, as manifested in Letter of Credit No. 824858
(Exh. 7. p. 110. Original Record) issued by Equitable Banking Corporation, with partial shipment permitted; that
under the letter of credit, the remaining balance of the shipment was only ten (10) metric tons as shown in
Invoice No. H-15/82 (Exh. 8, p. 111, Original Record); that the shipment plaintiff was asking defendant to accept
was twenty (20) metric tons which is ten (10) metric tons more than the remaining balance; that if defendant
were to accept the shipment, it would be violating Central Bank rules and regulations and custom and tariff
laws; that plaintiff had no cause of action against the defendant because the latter did not hire the former to
carry the merchandise; that the cause of action should be against the shipper which contracted the plaintiffs
services and not against defendant; and that the defendant duly notified the plaintiff about the wrong shipment
through a letter dated January 24, 1983 (Exh. D for plaintiff, Exh. 4 for defendant, p. 5. Folder of Exhibits).
As previously mentioned, the RTC found petitioner liable for demurrage, attorneys fees and expenses of
litigation. The petitioner appealed to the Court of Appeals, arguing that the lower court erred in (1) awarding the sum
of P67,340 in favor of the private respondent, (2) rejecting petitioners contention that there was overshipment, (3) ruling
that petitioners recourse was against the shipper, and (4) computing legal interest from date of extrajudicial demand. [5]
Respondent Court of Appeals denied the appeal and affirmed the lower courts decision in toto. In a subsequent
resolution,[6] it also denied the petitioners motion for reconsideration.
Hence, this petition for review.[7]
The Issues
In its memorandum, petitioner submits the following issues:
I. Whether or not petitioner had accepted the bill of lading;
II. Whether or not the award of the sum of P67,340.00 to private respondent was proper;
III. Whether or not petitioner was correct in not accepting the overshipment;
IV. Whether or not the award of legal interest from the date of private respondents extrajudicial demand was proper; [8]
In the main, the case revolves around the question of whether petitioner was bound by the bill of lading. We shall,
thus, discuss the above four issues as they intertwine with this main question.
The Courts Ruling
The petition is partly meritorious. We affirm petitioners liability for demurrage, but modify the interest rate thereon.
Main Issue: Liability Under the Bill of Lading
A bill of lading serves two functions. First, it is a receipt for the goods shipped. Second, it is a contract by which three
parties, namely, the shipper, the carrier, and the consignee undertake specific responsibilities and assume stipulated
obligations.[9] A bill of lading delivered and accepted constitutes the contract of carriage even though not signed,
[10]
because the (a)cceptance of a paper containing the terms of a proposed contract generally constitutes an acceptance
of the contract and of all of its terms and conditions of which the acceptor has actual or constructive notice. [11] In a nutshell,
the acceptance of a bill of lading by the shipper and the consignee, with full knowledge of its contents, gives rise to the
presumption that the same was a perfected and binding contract. [12]
In the case at bar, both lower courts held that the bill of lading was a valid and perfected contract between the
shipper (Ho Kee), the consignee (Petitioner Keng Hua), and the carrier (Private Respondent Sea-Land). Section 17 of the
bill of lading provided that the shipper and the consignee were liable for the payment of demurrage charges for the failure
to discharge the containerized shipment beyond the grace period allowed by tariff rules. Applying said stipulation, both
lower courts found petitioner liable. The aforementioned section of the bill of lading reads:
17. COOPERAGE FINES. The shipper and consignee shall be liable for, indemnify the carrier and ship and hold
them harmless against, and the carrier shall have a lien on the goods for, all expenses and charges for mending
cooperage, baling, repairing or reconditioning the goods, or the van, trailers or containers, and all expenses
incurred in protecting, caring for or otherwise made for the benefit of the goods, whether the goods be damaged
or not, and for any payment, expense, penalty fine, dues, duty, tax or impost, loss, damage,
detention, demurrage, or liability of whatsoever nature, sustained or incurred by or levied upon the carrier or the
ship in connection with the goods or by reason of the goods being or having been on board, or because of
shippers failure to procure consular or other proper permits, certificates or any papers that may be required at
any port or place or shippers failure to supply information or otherwise to comply with all laws, regulations and
requirements of law in connection with the goods of from any other act or omission of the shipper or
consignee: (Underscoring supplied.)
Petitioner contends, however, that it should not be bound by the bill of lading because it never gave its consent
thereto. Although petitioner admits physical acceptance of the bill of lading, it argues that its subsequent actions belie the
finding that it accepted the terms and conditions printed therein. [13] Petitioner cites as support the Notice of Refused or On

Hand Freight it received on November 2, 1982 from private respondent, which acknowledged that petitioner declined to
accept the shipment. Petitioner adds that it sent a copy of the said notice to the shipper on December 29, 1982. Petitioner
points to its January 24, 1983 letter to the private respondent, stressing that its acceptance of the bill of lading would be
tantamount to an act of smuggling as the amount it had imported (with full documentary support) was only (at that time)
for 10,000 kilograms and not for 20,313 kilograms as stated in the bill of lading and could lay them vulnerable to legal
sanctions for violation of customs and tariff as well as Central Bank laws. [14] Petitioner further argues that the demurrage
was a consequence of the shippers mistake of shipping more than what was bought. The discrepancy in the amount of
waste paper it actually purchased, as reflected in the invoice vis--vis the excess amount in the bill of lading, allegedly
justifies its refusal to accept the shipment.[15]
Petitioner Bound by the Bill of Lading
We are not persuaded. Petitioner admits that it received the bill of lading immediately after the arrival of the
shipment[16] on July 8, 1982.[17] Having been afforded an opportunity to examine the said document, petitioner did not
immediately object to or dissent from any term or stipulation therein. It was only six months later, on January 24, 1983,
that petitioner sent a letter to private respondent saying that it could not accept the shipment. Petitioners inaction for such
a long period conveys the clear inference that it accepted the terms and conditions of the bill of lading. Moreover, said
letter spoke only of petitioners inability to use the delivery permit, i.e. to pick up the cargo, due to the shippers failure to
comply with the terms and conditions of the letter of credit, for which reason the bill of lading and other shipping
documents were returned by the banks to the shipper.[18] The letter merely proved petitioners refusal to pick up the cargo,
not its rejection of the bill of lading.
Petitioners reliance on the Notice of Refused or On Hand Freight, as proof of its nonacceptance of the bill of lading,
is of no consequence. Said notice was not written by petitioner; it was sent by private respondent to petitioner in
November 1982, or four months after petitioner received the bill of lading. If the notice has any legal significance at all, it is
to highlight petitioners prolonged failure to object to the bill of lading. Contrary to petitioners contention, the notice and the
letter support not belie the findings of the two lower courts that the bill of lading was impliedly accepted by petitioner.
As aptly stated by Respondent Court of Appeals:
In the instant case, (herein petitioner) cannot and did not allege non-receipt of its copy of the bill of lading from
the shipper. Hence, the terms and conditions as well as the various entries contained therein were brought to its
knowledge. (Herein petitioner) accepted the bill of lading without interposing any objection as to its
contents. This raises the presumption that (herein petitioner) agreed to the entries and stipulations imposed
therein.
Moreover, it is puzzling that (herein petitioner) allowed months to pass, six (6) months to be exact, before
notifying (herein private respondent) of the wrong shipment. It was only on January 24, 1983 that (herein
petitioner) sent (herein private respondent) such a letter of notification (Exh D for plaintiff, Exh. 4 for defendant;
p. 5, Folder of Exhibits). Thus, for the duration of those six months (herein private respondent never knew the
reason for (herein petitioners) refusal to discharge the shipment.
After accepting the bill of lading, receiving notices of arrival of the shipment, failing to object thereto, (herein
petitioner) cannot now deny that it is bound by the terms in the bill of lading. If it did not intend to be bound,
(herein petitioner) would not have waited for six months to lapse before finally bringing the matter to (herein
private respondents attention.The most logical reaction in such a case would be to immediately verify the matter
with the other parties involved. In this case, however, (herein petitioner) unreasonably detained (herein private
respondents) vessel to the latters prejudice.[19]
Petitioners attempt to evade its obligation to receive the shipment on the pretext that this may cause it to violate customs,
tariff and central bank laws must likewise fail. Mere apprehension of violating said laws, without a clear demonstration that
taking delivery of the shipment has become legally impossible, [20] cannot defeat the petitioners contractual obligation and
liability under the bill of lading.
In any event, the issue of whether petitioner accepted the bill of lading was raised for the first time only in petitioners
memorandum before this Court. Clearly, we cannot now entertain an issue raised for the very first time on appeal, in
deference to the well-settled doctrine that (a)n issue raised for the first time on appeal and not raised timely in the
proceedings in the lower court is barred by estoppel. Questions raised on appeal must be within the issues framed by the
parties and, consequently, issues not raised in the trial court cannot be raised for the first time on appeal. [21]
In the case at bar, the prolonged failure of petitioner to receive and discharge the cargo from the private respondents
vessel constitutes a violation of the terms of the bill of lading. It should thus be liable for demurrage to the former.
In The Apollon,[22] Justice Story made the following relevant comment on the nature of demurrage:
In truth, demurrage is merely an allowance or compensation for the delay or detention of a vessel. It is often a
matter of contract, but not necessarily so. The very circumstance that in ordinary commercial voyages, a
particular sum is deemed by the parties a fair compensation for delays, is the very reason why it is, and ought to
be, adopted as a measure of compensation, in cases ex delicto. What fairer rule can be adopted than that
which founds itself upon mercantile usage as to indemnity, and fixes a recompense upon the deliberate
consideration of all the circumstances attending the usual earnings and expenditures in common voyages? It
appears to us that an allowance, by way of demurrage, is the true measure of damages in all cases of mere
detention, for that allowance has reference to the ships expenses, wear and tear, and common employment. [23]
Amount of Demurrage Charges

Petitioner argues that it is not obligated to pay any demurrage charges because, prior to the filing of the complaint,
private respondent made no demand for the sum of P67,340.Moreover, private respondents loss and prevention manager,
Loi Gillera, demanded P50,260, but its counsel, Sofronio Larcia, subsequently asked for a different amount of P37,800.
Petitioners position is puerile. The amount of demurrage charges in the sum of P67,340 is a factual conclusion of the
trial court that was affirmed by the Court of Appeals and, thus, binding on this Court. [24] Besides such factual finding is
supported by the extant evidence. [25] The apparent discrepancy was a result of the variance of the dates when the two
demands were made. Necessarily, the longer the cargo remained unclaimed, the higher the demurrage. Thus, while in his
letter dated April 24, 1983, [26] private respondents counsel demanded payment of only P37,800, the additional demurrage
incurred by petitioner due to its continued refusal to receive delivery of the cargo ballooned to P67,340 by November 22,
1983. The testimony of Counsel Sofronio Larcia as regards said letter of April 24, 1983 elucidates, viz:
Q Now, after you sent this letter, do you know what happened?
A Defendant continued to refuse to take delivery of the shipment and the shipment stayed at the port for a longer
period.
Q So, what happened to the shipment?
A The shipment incurred additional demurrage charges which amounted to P67,340.00 as of November 22, 1983 or
more than a year after - almost a year after the shipment arrived at the port.
Q So, what did you do?
A We requested our collection agency to pursue the collection of this amount. [27]
Bill of Lading Separate from
Other Letter of Credit Arrangements
In a letter of credit, there are three distinct and independent contracts: (1) the contract of sale between the buyer and
the seller, (2) the contract of the buyer with the issuing bank, and(3) the letter of credit proper in which the bank promises
to pay the seller pursuant to the terms and conditions stated therein. Few things are more clearly settled in law than that
the three contracts which make up the letter of credit arrangement are to be maintained in a state of perpetual separation.
[28]
A transaction involving the purchase of goods may also require, apart from a letter of credit, a contract of transportation
specially when the seller and the buyer are not in the same locale or country, and the goods purchased have to be
transported to the latter.
Hence, the contract of carriage, as stipulated in the bill of lading in the present case, must be treated independently
of the contract of sale between the seller and the buyer, and the contract for the issuance of a letter of credit between the
buyer and the issuing bank. Any discrepancy between the amount of the goods described in the commercial invoice in the
contract of sale and the amount allowed in the letter of credit will not affect the validity and enforceability of the contract of
carriage as embodied in the bill of lading. As the bank cannot be expected to look beyond the documents presented to it
by the seller pursuant to the letter of credit, [29] neither can the carrier be expected to go beyond the representations of the
shipper in the bill of lading and to verify their accuracy vis--vis the commercial invoice and the letter of credit. Thus, the
discrepancy between the amount of goods indicated in the invoice and the amount in thebill of lading cannot negate
petitioners obligation to private respondent arising from the contract of transportation. Furthermore, private respondent, as
carrier, had no knowledge of the contents of the container. The contract of carriage was under the arrangement known as
Shippers Load And Count, and the shipper was solely responsible for the loading of the container while the carrier was
oblivious to the contents of the shipment. Petitioners remedy in case of overshipment lies against the seller/shipper, not
against the carrier.
Payment of Interest
Petitioner posits that it first knew of the demurrage claim of P67,340 only when it received, by summons, private
respondents complaint. Hence, interest may not be allowed to run from the date of private respondents extrajudicial
demands on March 8, 1983 for P50,260 or on April 24, 1983 for P37,800, considering that, in both cases, there was no
demand for interest.[30]We agree.
Jurisprudence teaches us:
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of
damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall
be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable
certainty.Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the
time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is
made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual
base for the computation of legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest,
whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit. [31]
The case before us involves an obligation not arising from a loan or forbearance of money; thus, pursuant to Article
2209 of the Civil Code, the applicable interest rate is six percent per annum. Since the bill of lading did not specify the
amount of demurrage, and the sum claimed by private respondent increased as the days went by, the total amount
demanded cannot be deemed to have been established with reasonable certainty until the trial court rendered its
judgment. Indeed, (u)nliquidated damages or claims, it is said, are those which are not or cannot be known until definitely

ascertained, assessed and determined by the courts after presentation of proof. [32] Consequently, the legal interest rate is
six percent, to be computed from September 28, 1990, the date of the trial courts decision. And in accordance
with Philippine Natonal Bank[33] and Eastern Shipping,[34] the rate of twelve percent per annum shall be charged on the
total then outstanding, from the time the judgment becomes final and executory until its satisfaction.
Finally, the Court notes that the matter of attorneys fees was taken up only in the dispositive portion of the trial courts
decision. This falls short of the settled requirement that the text of the decision should state the reason for the award of
attorneys fees, for without such justification, its award would be a conclusion without a premise, its basis being improperly
left to speculation and conjecture.[35]
WHEREFORE, the assailed Decision is hereby AFFIRMED with the MODIFICATION that the legal interest of six
percent per annum shall be computed from September 28, 1990 until its full payment before finality of judgment. The rate
of interest shall be adjusted to twelve percent per annum, computed from the time said judgment became final and
executory until full satisfaction. The award of attorneys fees is DELETED.
SO ORDERED.
Davide, Jr., (Chairman), Bellosillo, Vitug, and Quisumbing, JJ., concur.

G.R. No. L-21979, National Marketing Corporation v. Atlas Trading Development Corp. and Alto Surety and Insurance Co,
21 SCRA 359
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
September 29, 1967
G.R. No. L-21979
NATIONAL MARKETING CORPORATION, plaintiff-appellant,
vs.
ATLAS TRADING DEVELOPMENT CORPORATION and the ALTO SURETY and INSURANCE CO., INC., defendantsappellees.
Tomas P. Matic, Jr. for plaintiff-appellant.
Domingo T. Zavalla for defendants-appellees.
FERNANDO, J.:
What is to be determined in this appeal is the correctness of a lower court decision absolving from liability defendants
Atlas Trading Development Corporation (hereinafter referred to as Atlas) and Alto Surety & Insurance Company
(hereinafter referred to as Alto), the former under a contract for the sale of galvanized steel sheets and the latter under a
performance bond.
While the plaintiff-appellant is the National Marketing Corporation, the action was originally started by its predecessor
Philippine Relief and Trade Rehabilitation Administration (hereinafter referred to as the Pratra). In its complaint dated June
14, 1950, it alleged: On July 21, 1948, defendant Atlas offered to sell to the plaintiff 8,000 metric tons of galvanized sheets
at the price of U.S. $247 per ton of 1,000 kilos, CIF Manila, to be shipped beginning August, 1948; [[1]] on July 24, 1948,
the plaintiff made an order and agreed to purchase the galvanized sheets offered by defendant Atlas with the condition
that the seller should furnish a performance bond in favor of the plaintiff in the amount of P100,000.00; [[2]] on August 5,
1948, the plaintiff and defendant Atlas as sales brokers for West India Commercial Corp. of New York City, N.Y., U.S.A.
executed a contract of purchase and sale wherein the said defendant obligated itself to sell 8,000 metric tons of
galvanized steel sheets, at the price of U. S. $247 per ton of 1,000 kilos CIF Manila; [[3]] under the aforementioned contract,
defendant Atlas obligated itself to furnish in favor of Pratra a performance bond in the sum of P100,000.00 to guarantee
the faithful compliance of all the terms and conditions of the said contract, with defendant Alto as surety; [[4]] in compliance
with its undertakings in the contract, the plaintiff on August 26,1948, opened a letter of credit with the Philippine National
Bank for the amount of U.S. $1,976,000.00 in favor of the West India Commercial Corp. of New York, United States. [[5]]
Neither defendant Atlas nor its supposed principal the West India Commercial Corp. of New York delivered the 8,000
metric tons of galvanized steel sheets involved in the contract. [[6]] The aforementioned contract having provided that in
case of violation of any of its terms and conditions, the buyer will be entitled to recover liquidated damages in the amount
of 20% of the total contractual value of the merchandise therein described, U. S. $1,976,000.00, 20% of which is U. S.
$395,200.00 or P790,400.00,[[7]] plaintiff sought to recover the same from Atlas. It likewise prayed that defendant Alto be
condemned to pay the plaintiff the amount of P100,000.00, the amount of the performance bond.
In the answer of defendant Atlas, filed on July 15, 1950, it admitted making the offer, adding however that plaintiff was duly
informed that it was acting in its representative capacity; [[8]] that an order to purchase the galvanized steel sheets was in
fact made by plaintiff;[[9]] that such a contract of purchase and sale as set forth in paragraph 4 of the complaint was in fact
executed, although the date of the execution was not on August 5, 1948 but on August 21, 1948, with the further
allegation that its terms and conditions were "modified, altered and supplemented by another agreement dated August 20,
1948;" that while there was opened on August 26, 1948, a letter of credit for the amount of U. S. $1,976,000.00 in favor of

West India Commercial Company of New York, U.S.A. by the Philippine National Bank, acting on plaintiff's application,
such letter of credit being in favor of the beneficiary, West India Commercial Company of New York, New York, U. S. A., it
could not be utilized in view of what was considered "serious discrepancies between the terms of the said letter of credit
and the contract;" no delivery of the 8,000 metric tons of galvanized steel sheets, was made as there was no obligation to
do so, but even if it arose, "delivery was made impossible by the prior rescission of the contracts by plaintiff." [[10]] It further
set up five special defenses and a counterclaim for P100,000.00.
Defendant Alto denied the allegations of the complaint on the ground that it had no knowledge or information sufficient to
form a belief as to what was therein contained except the execution of the bond for and on behalf of the West India
Commercial Corporation of New York to guarantee the latter's performance of its obligation, if any, under the contract
which, having been executed and acknowledged on August 21, 1948 and not on August 5, 1948 as alleged, could not be
the basis of any obligation. On the assumption however that the latter contract could be the one referred to in the bond, it
alleged that it did so for and on behalf of the West India Commercial Corporation of New York to guarantee the
performance of its obligation, if any, and that it never incurred any obligation at all under the contract which was the basis
of the complaint "as it was never a party to it, nor did it authorize anyone to obligate it in any manner whatsoever," and
that plaintiff "having discharged the West India Commercial Corporation of New York from liability on said contract,
[defendant Alto] is and must likewise be discharged, the obligation of the surety being merely accessory to that of the
principal."
After trial, the lower court promulgated a decision on July 29, 1962 dismissing the complaint. In absolving defendant Atlas,
it held that it "was duly authorized to act as agent or broker of the West India Commercial Company in entering into the
contract of purchase and sale."[[11]] Even if its liability could be held to be direct, the Pratra, having demanded payment of
damages from West India Commercial Corporation and not from it, waived whatever claim it might have against Atlas. The
above circumstances taken in connection with what the lower court found to be a discrepancy in the letter of credit in favor
of the West India Commercial Corporation, which it held to be a condition precedent for the obligation of the latter under
such contract to arise, such discrepancy consisting of no period of grace of 60 days for delivery having been provided for,
although subsequently corrected but only after the first delivery was "already impossible physically for the West India
Commercial Company to make on time" led it to conclude that for all legal intents and purposes, such contract of
purchase and sale "had not been operative up to the time it was rescinded by the Pratra on September 23, 1948, due to
the failure of the latter to perform the condition precedent of establishing a sufficient letter of credit." [[12]] No liability could
therefore attach to defendant Atlas.
The same conclusion was reached as far as defendant Alto was concerned. Thus: "As to the defendant Alto Surety, we
hold that judgment cannot be rendered against it. Alto Surety posted its bond for the West India Commercial Corporation
and not for the defendant Atlas. And as the West India Commercial Corporation is not a party in this suit, there is nothing
for the Alto Surety to answer. The case against the Alto Surety and Insurance Co., Inc., is also dismissed." [[13]]
The facts as found by the lower court are in accordance with the evidence. The law as applied cannot be characterized as
erroneous. The judgment must be affirmed.
It being undisputed that no such delivery of the 8,000 metric tons of galvanized steel sheets contracted for was ever
made, the decisive question is whether liability could be deemed to have arisen. If the answer were in the affirmative, the
next question would be, who is to be held accountable? Defendant Atlas was absolved from any responsibility by the
lower court. It justified the non-delivery because of the discrepancy between what was provided for in the contract of the
purchase and sale[[14]] and the letter of credit[[15]] which under the contract had to be opened. As noted in the Brief
submitted by Atty. Domingo Zavalla for defendant Atlas, distinguished for its clarity and lucidity the failure of the letter of
credit to comply with what was agreed upon "is very apparent and noticeable." Under the contract, the shipment of the
galvanized steel sheets could be made during a period from August, 1948 to February, 1949 with a grace of 60 days, i.e.,
"all shipments within 60 days of the above schedule would be accepted as good delivery." [[16]] The letter of credit on the
other hand did not provide for such a period of grace of 60 days for late shipment. The corrected letter of credit was
received by the West India Commercial Corporation only on September 7, 1948. As the first shipment was supposed to
have been made in August, it was impossible for the West India Commercial Corporation to make it on time. Under the
above circumstances the correctness of the assertion in a radiogram of West India Commercial Corporation sent to
defendant Atlas stating that serious discrepancy "from contract" would prevent it from "using letter of credit in present
form" cannot be denied.
In a decision of this Court,[[17]] it was held that the failure to open a letter of credit within a period agreed upon suffices to
prevent a binding juridical tie from being created. That case, dealing with offer and acceptance, reiterated the principle
that to bind the offer or, "the offeree must comply with the conditions of the offer." The situation before us deals with a
perfected contract. Here the time element does not enter into the failure of one party to live up to the terms of the contract.
What was manifest was the discrepancy between what was agreed upon in the contract and the letter of credit, the
effectivity of which requires that "all conditions contained [in it] be strictly complied with, however, onerous they may
be."[[18]] The above principle is deemed "absolutely necessary for the protection of the banking and mercantile
community." There is a New York Supreme Court decision to the effect that a "material variance between the letter of
credit and the sales agreement would excuse non-performance by the seller." [[19]]
Plaintiff-appellant must have been mindful of the force and applicability of the above controlling principle. In its Brief, it
sought to avoid its application by alleging that by its very nature "a letter of credit cannot contain all the particulars nor can
it embody all the agreements previously entered into by the parties for the terms and conditions of their agreement are

already contained in separate documents."[[20]] Plaintiff-appellant would then allege that no such period of allowance or
grace for the late shipment was provided for because the same was already embodied in the contract of purchase and
sale, Exhibit C.[[21]] Such an argument is far from persuasive. An authoritative excerpt from Zollman on Banks and
Banking argues to the contrary. Thus: "Where, therefore, legal relations arise from a letter of credit, such letter contains
the entire contract of the parties, and their resulting obligations should be measured by its provisions. It
constitutes the complete agreement, and is independent of the contract of sale between the buyer and the seller, and is
unaffected by any breach of contract on the part of the seller or the buyer or by any controversy which may arise between
the buyer and seller or by any other transaction between the buyer and seller." [[22]]
It follows then that the lower court was correct in holding that no liability was incurred under the contract of purchase and
sale because of such failure to make the delivery. Such being the case, the question of whether or not defendant Atlas,
which acted as a sales broker, could be held liable for the alleged breach need not be passed upon.
As for the surety, defendant Alto, the judgment must likewise be affirmed for the obvious reason that as no accountability
of the principal arose from the failure to make the delivery of the galvanized steel sheets, it was equally exempt from
liability.
WHEREFORE, the judgment appealed from is affirmed. Without pronouncement as to costs.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro and Angeles, JJ., concur.
Bengzon, J.P., J., is on leave.

Feati Bank and Trust Company v Court of Appeals G.R. No. 94209 April 30, 1991
MARCH 15, 2014LEAVE A COMMENT
In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or transmit to the
beneficiary the existence of the letter of credit.
A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft under the letter
of credit. Its liability is dependent upon the stage of the negotiation. If before negotiation, it has no liability with
respect to the seller but after negotiation, a contractual relationship will then prevail between the negotiating
bank and the seller.
In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller and its liability
is a primary one as if the correspondent bank itself had issued the letter of credit.
Facts: Bernardo Villaluz entered into a contract of sale with Axel Christiansen in which Villaluz agreed to deliver to
Christiansen 2,000 cubic meters of lauan logs at $27.00 per cubic meter FOB. On the arrangements made and upon the
instructions of consignee, Hanmi Trade Development, Ltd., the Security Pacific National Bank of Los Angeles, California
issued an irrevocable letter of credit available at sight in favor of Villaluz for the sum of $54,000.00, the total purchase
price of the lauan logs.
The letter of credit was mailed to the Feati Bank and Trust Company with the instruction to the latter that it forward the
enclosed letter of credit to the beneficiary. The letter of credit also provided that the draft to be drawn is on Security
Pacific National Bank and that it be accompanied by certain documents. The logs were thereafter loaded on a vessel but
Christiansen refused to issue the certification required in paragraph 4 of the letter of credit, despite repeated requests by
the private respondent. The logs however were still shipped and received by consignee, to whom Christiansen sold the
logs. Because of the absence of the certification by Christiansen, the Feati Bank and Trust company refused to advance
the payment on the letter of credit until such credit lapsed. Since the demands by Villaluz for Christiansen to execute the
certification proved futile, he filed an action for mandamus and specific performance against Christiansen and Feati Bank
and Trust Company before the Court of First Instance of Rizal. Christiansen however left the Philippines and Villaluz filed
an amended complaint making Feati Bank and Trust Company.
Issue: Whether or not Feati Bank is liable for Releasing the funds to Christiansen
Held: In commercial transactions involving letters of credit, the functions assumed by a correspondent bank are classified
according to the obligations taken up by it. The correspondent bank may be called a notifying bank, a negotiating bank, or
a confirming bank.
In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or transmit to the beneficiary
the existence of the letter of credit.
A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft under the letter of credit.
Its liability is dependent upon the stage of the negotiation. If before negotiation, it has no liability with respect to the seller
but after negotiation, a contractual relationship will then prevail between the negotiating bank and the seller.
In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller and its liability is a
primary one as if the correspondent bank itself had issued the letter of credit.
In this case, the letter merely provided that the petitioner forward the enclosed original credit to the beneficiary.
(Records, Vol. I, p. 11) Considering the aforesaid instruction to the petitioner by the issuing bank, the Security Pacific
National Bank, it is indubitable that the petitioner is only a notifying bank and not a confirming bank as ruled by the courts
below.
A notifying bank is not a privy to the contract of sale between the buyer and the seller, its relationship is only with that of
the issuing bank and not with the beneficiary to whom he assumes no liability. It follows therefore that when the petitioner

refused to negotiate with the private respondent, the latter has no cause of action against the petitioner for the
enforcement of his rights under the letter.
Since the Feati was only a notifying bank, its responsibility was solely to notify and/or transmit the documentary of credit
to the private respondent and its obligation ends there.
At the most, when the petitioner extended the loan to the private respondent, it assumed the character of a negotiating
bank. Even then, the petitioner will still not be liable, for a negotiating bank before negotiation has no contractual
relationship with the seller. Whether therefore the petitioner is a notifying bank or a negotiating bank, it cannot be held
liable. Absent any definitive proof that it has confirmed the letter of credit or has actually negotiated with Feati, the refusal
by the petitioner to accept the tender of the private respondent is justified.

G.R. No. L-24821 October 16, 1970

BANK OF THE PHILIPPINE ISLANDS,
plaintiff-appellee,vs.
DE RENY FABRIC INDUSTRIES, INC., AURORA T. TUYO and AURORA CARCERENYalias AURORA C. GONZALES,
defendants-appellants.
FACTS : De Reny Fabric Industries, Inc. applied to the Bank for four (4) irrevocablecommercial letters of credit to cover
the purchase by the corporation of goods from itsAmerican supplier, the J.B. Distributing Company.As each shipment
arrived in the Philippines, the De Reny Fabric Industries, Inc. made partialpayments to the Bank amounting. Further
payments were, however, subsequentlydiscontinued by the corporation when it became established, as a result of a
chemical testconducted by the National Science Development Board, that the goods that arrived in Manilawere colored
chalks instead of dyestuffs.The corporation also refused to take possession of these goods, and for this reason, theBank
caused them to be deposited with a bonded warehouse paying therefor the amount of P12,609.64 up to the filing of its
complaint with the court.ISSUE : Whether or not De Reny fabrics is liable under the letter of Credit?HLED :
Under the terms of their Commercial Letter of Credit Agreements with theBank, the appellants agreed that the
Bank shall not be responsible
for the "existence,character, quality, quantity, conditions, packing, value, or delivery of the property purportingto be
represented by documents; for any difference in character, quality, quantity, condition,or value of the property from that
expressed in documents," or for "partial or incompleteshipment, or failure or omission to ship any or all of the property
referred to in the Credit," aswell as "for any deviation from instructions, delay, default or fraud by the shipper or
anyoneelse in connection with the property the shippers or vendors and ourselves [purchasers] or any of us."
Having agreed to these terms, the appellants have, therefore, no recoursebut to comply with their covenant
.
But even without the stipulation recited above, the appellants cannot shift the burden of lossto the Bank on account of the
violation by their vendor of its prestation.It was uncontrovertibly proven by
the Bank
during the trial below that banks, in providingfinancing in international business transactions such as those entered into by
the appellants,
do not deal with the property to be exported or shipped to the importer, but deal onlywith documents
.The existence of a custom in international banking and financing circles negating any dutyon the part of a bank to verify
whether what has been described in letters of credits or draftsor shipping documents actually tallies with what was loaded
aboard ship, having beenpositively proven as a fact, the appellants are bound by this established usage. They were,after
all, the ones who tapped the facilities afforded by the Bank in order to engage in international business.