LETTERS OF CREDIT- Negotiable Instruments
1. Buyerprocures the letter of credit and obliges himself to reimburse the
NATURE AND IMPORTANCE
> 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 the 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 to contract a bank to issue a
letter of credit, the issuing bank can authorize the seller to raw drafts and
engage to pay them upon their presentment simultaneously with the tender of
documents required by the letter of credit. The buyer and 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
> Once the letter of credit is established, the seller ships the goods to the
buyer and in the process secures the required shipping documents and documents
of title. To get paid, the seller executes a draft and presents it together with the
required documents to the issuing bank
> The issuing bank redeems the draft and pays cash to the seller if it finds
that the documents submitted by the seller conform with what the letter of
credit requires. The bank then obtains possession of the documents upon paying the
seller. The transaction is completed when the buyer reimburses the issuing bank
and acquires the documents entitling him to the goods. The seller gets paid only if
he delivers the documents of title over the goods while the buyer acquires the
said documents and control over the goods only after reimbursing the bank.
INDEPENDENCE PRINCIPLE
> What characterizes letters of credit, as distinguished from other accessory
contract, is the ENGAGEMENT OF THE ISSUING BANK TO PAY THE
SELLER ONCE THE DRAFT AND THE REQUIRED SHIPPING
DOCUMENTS ARE PRESENTED TO IT. In turn, this arrangement
ASSURES THE SELLER OF PROMPT PAYMENT, INDEPENDENT OF
ANY BREACH OF THE MAIN SALES CONTRACT.
LAWS GOVERNING A LETTER OF CREDIT TRANSACTION
> Uniform Customs and Practice for Documentary Credits (UCP) issued by the
International Chamber of Commerce
PARTIES TO A LETTER OF CREDIT TRANSACTION
issuing bank upon receipt of the documents of title. He is the one initiating the
operation of the transaction as buyer of the merchandise and also of the credit
instrument. His contract with the bank which is to issue the instrument and is
represented by the Commercial Credit Agreement form which he signs,
supported by the mutually made promises contained in the agreement
2. Opening bankusually the buyers bank which issues the letter of credit and
undertakes to pay the seller upon receipt of the draft and proper documents of
titles to surrender the documents to the buyer upon reimbursement. As it is the
one issuing the instrument, it should be a strong bank, well known and well
regarded in international trading circles.
3. Sellerin 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. He is also the beneficiary of the credit instrument because the instrument
is addressed to him and is in his favor. While the bank cannot compel the
seller to ship the goods and avail of the benefits of the instruments, however, the
seller may recover from the bank the value of his shipment is made within the terms
of the instrument, even though he hasnt given the bank any direct consideration
for the banks promises contained in the instrument
4. Correspondent bank/advising bankto convey to the seller the existence
of the credit or a confirming bank which will lend credence to the letter of
credit issued by the lesser known issuing bank or paying bank which undertakes to
encash the drafts drawn by the exporter. Furthermore, another bank known as
the negotiating bank may be approached by the buyer to have the draft
discounted instead of going to the place of the issuing bank to claim payment
RESPONSIBILITIES OF BANKS IN COMMERCIAL CREDIT TRANSACTIONS
> If the beneficiary is to be advised by the issuing bank by cable, the services
of an ADVISING OR NOTIFYING BANK must always be utilized
> The responsibility of the NOTIFYING BANK is merely to convey or
transmit to the seller or beneficiary the existence of the credit. However, if the
beneficiary requires that the obligation of the issuing bank shall also be made the
obligation of the bank to himself, there is what is known as a CONFIRMED
COMMERCIAL CREDIT and the bank notifying the beneficiary of the credit
shall become a CONFIRMING BANK. In this case, the liability of the confirming
bank is primary and it is as if the credit were issued by the issuing and confirming
banks jointly, thus giving the beneficiary or a holder for value of drafts drawn under
the credit, the right to proceed against either or both banks, the moment the credit
instrument has been breached.
> The paying bank on which the drafts are to be drawn it may be the issuing
bank or the advising bank. If the beneficiary is to draw and receive payment
in his own currency, the advising bank may be indicated as the paying bank
also. When the draft is to be paid in this manner, the paying bank assumes no
responsibility but merely pays the beneficiary and debits the payment
immediately to the account which the issuing bank has with it. IF THE
ISSUING BANK HAS NO ACCOUNT WITH THE PAYING BANK, the paying
bank reimburses itself by drawing a bill of exchange on the issuing bank, in dollars,
for the equivalent of the local currency paid to the beneficiary, at the buyeing rate
for dollar exchange. The beneficiary is entirely out of the transaction because
his draft is completely discharged by the payment, and the credit arrangement
between the paying bank and issuing bank
doesnt concern him.
> If the draft contemplated by the credit instrument, is to be drawn on the issuing
bank or on other designated banks not in the city of the seller, any bank in
the city of the seller which buys or discounts the draft of the beneficiary
becomes a negotiating bank. As a rule, whenever, the facilities of an advising or
notifying bank are used, the beneficiary is apt to offer his drafts to the advising
bank for negotiation, thus giving the advising bank the character of a
negotiating bank becomes an endorser and bona fide holder of the drafts and
within the protection of the credit instrument. It is also protected by the
drawers signature, as the drawers contingent
liability, as drawer, continues until discharged by the actual payment of the bills of
exchange.
LIABILITY IN COMMERCIAL CREDIT TRANSACTIONS
> A commercial bank which departs from what has been stipulated under the letter of
credit, as when it accepts a faulty tender, acts on its own risk, and it may not
thereafter be able to recover from the buyer or issuing bank, as the case may
be, the money thus paid to the beneficiary
> In the case of a discounting arrangement, wherein a negotiating bank pays the draft
of a beneficiary of a letter of credit in order to save such beneficiary from the
hardship of presenting the documents directly to the issuing bank, the negotiating
bank can seek reimbursement of what has been paid to the beneficiary who
as drawer of the draft continues to assume a contingent liability thereon.
Thus, the negotiating bank has the ordinary right of recourse against the seller or
beneficiary in the event of dishonor by the issuing bank.
PROTOTYPE EXPORT TRANSACTION
1. PROFORMA INVOICEall the particulars for the proposed shipment
which are then known to the buyer
2. PRICE QUOTATION FAS AND CIFFAS stands for free along side which
means that the seller will be responsible for the cost and risks of the goods
along side an overseas vessel at the stated location: the buyer bears the costs
and risks from that point. CIF on the other hand means cost, freight and
insurance, that in exchange for this stated price, the seller undertakes not
only to supply the goods but also to obtain and pay for insurance and bear the
freight charges to the stated pointy.
3. BUYERS PURCHASE ORDER
4. LETTER OF CREDIT
a. One way for a seller to be assured of payment is to ship goods under a negotiable
bill of lading and arrange for a bank in buyers city to hold the bill of lading
until the buyer pays the draft in the usual foreign sale this arrangement for
securing payment of the price is not adequate
b. In some situations, sellers may need assurance of payment even before the
time of payment. This problem arises in contracts which call for the
manufacture of goods to the buyers specifications.
c. Although the proforma invoice may not specify, the seller will expect the
letter of credit to be confirmed by the local bank in its location. But why
does a local bank confirm rather than issue a letter of credit? The bank that
issues the letter of credit needs assurance that it will be reimbursed by the buyer, on
whose behalf it pays the seller. The buyers bank can take steps to minimize or
remove the hazards. It will receive the negotiable bill of lading controlling the
goods which will provide security for the customers obligation to reimburse
the bank; in addition, the buyers own bank can judge in the light of its knowledge
of his financial standing whether added security is needed and can insist on such
security before it issues the letter of credit
d. To meet the sellers letter of credit requirements, the buyer will request its
bank to arrange for the issuance of a letter of credit which will comply with the terms
of the proforma invoice. The buyer will then sign a detailed application and
agreement for commercial credit prepared by the bank. The issuing bank, after
approving the buyers credit standing transmits a letter of credit by cable to the
confirming bank. This confirming bank will then deliver to seller a document
advising the latter that the issuing bank opened a letter of credit in its favor and
adding the confirming banks confirmation. In this arrangement, the seller is
assured of payment of its sight drafts drawn on the confirming bank in the amount of
the total amount of the sale, provided it presents the documents called for
in the letter of credit. An examination of the letter of credit will also reveal
that the bill of lading is to be consigned to the order of the buyers bank, thereby
giving the bank control over the goods, with the consequent security for its
claim against the buyer.
5. ACCEPTANE; SHIPMENT
a. On the receipt of the confirmed letter of credit, the seller will send the order
acknowledgment. This document will repeat the description and price of the
goods which has also appeared on the proforma invoice and states the number
and expiration date of the letter of credit.
b. Further, the arrival of the letter of credit is the go-signal for the seller to send the
goods. The seller then prepares the COMMERCIAL INVOICE which provides a
complete record of the transaction and is an important source of information
to such interested parties as a bank discounting a draft or an
underwriting extending issuance.
c. As the time of shipment approaches, the seller will contact its forwarder
and give its shipping instructions. It will inform that to comply with the
requirements of the letter of credit, the bill of lading must be made to the
order of the issuing bank. It will also send copies of the commercial invoice, a
packing list, and a Shippers export declaration. When the forwarder receives
these documents, he takes over all further documentation as the agent of the
shipper, the latter merely has to dispatch the goods from the factory in
accordance with the forwarders instructions.
d. The seller will then send the truck to the pier where they are delivered to the
ocean carriers receiving clerk who signs the dock receipt. The dock receipt
is a form supplied by the ocean carrier which contains information relevant to the
shipping of the bearings such as the number of the pier, and the name of the ship.
The dock receipt is NON-NEGOTIABLE and serves as a temporary receipt for
the goods until they are loaded on board.
e. The ocean carrier is soon ready to receive the cargo. When the goods are
loaded on board, the steamship line issues a bill of lading which, to comply with the
letter of credit, is CONSIGNED TO ORDER OF THE ISSUING BANK. The bill of
lading is initially prepared by the forwarder on a form supplied by the ocean
carrier, it sets forth the markings and numbers of the packages, description of
the goods, and the number and weight of the packages. On its dorsal side, it will
state that the goods are received for shipment, but a statement FREIGHT
PREPAID ON BOARD is initiated by a representative of the steamship line
after loading. The forwarder then delivers the bill of lading and the commercial
invoice to the seller.
6. INSURANCE
7. PAYMENT; THE DRAFT.
a. The confirming bank stated in their letter that the estimated CIF price
would be available by your drafts on us at sight when accompanied by the listed
documents
b. Seller accordingly draws a sight draft on the confirming bank. The sight
draft together with the commercial invoice, insurance certificate, full set of
bills of lading, and the packing list are presented to the confirming bank.
When the bank receives these documents, it issues its bank draft to sellers
order and transmits the documents by air mail to issuing bank, which will
reimburse the confirming bank.
c. The documents, sent by airmail, will reach the buyers bank well ahead
of the ocean shipment. The time for release of the documents to buyer and
reimbursement to the bank will depend upon the arrangement which was made
between the bank and buyer when the letter of
credit was initially established.
d. If the buyer plans to resell the goods, he may not be able to reimburse the
bank until the goods arrive and he resells the goods. In this event, the
issuing bank may need to take further steps to secure its claim against the buyer.
STANDBY LETTERS OF CREDIT OR GUARANTEES
HISTORY AND PURPOSE
> Sometime ago, it is common in international dealings to require the
furnishing of a cash deposit as security, but with the expansion of
international trade this became prohibitively expensive for the counterparty
and in due course gave way to a more convenient safeguard, the provision of a
written undertaking by a bank in favor of the buyer or employer payable on demand
> Demand guarantees as substitute for cash are designed to provide the beneficiary
with a speedy monetary remedy against the counterparty to the underlying
contract and to that end are primary in form and documentary in character.
> The demand guarantee is expressed to be payable solely on presentation
of a written demand and any other specified documents. Accordingly, any demand
within the maximum amount stated must in principle be paid by the guarantor,
regardless whether the underlying contract has in fact been broken and
regardless of the loss actually suffered by the beneficiary
A CONCISE DEFINITION: DEMAND GUARANTEES
> Undertaking given for payment of a stated or maximum sum of money on
presentation to the party giving the undertaking of a demand or payment and
such other documents as may be specified in the guarantee within the
period and in conformity with the other conditions of the guarantee
> Procured by the seller in favor of the buyer for the latter to be paid in case the
seller doesnt comply with contract provisions. The economic burder is upon the
party who breaches the contract
> Employed typically in construction contracts and contracts for
international sale of goods
> Demand guarantees are intended to safeguard the other party against non-
performance or late or defective performance by the supplier or contractor
GUARANTEE STRUCTURES AND TERMINOLOGY: DIRECT (3RD
PARTY) GUARANTEES
> Involves a minimum of three parties
1. Account party/principalparty to the underlying contract whose
performance is required to be covered by the guarantee and who gives
instruction for its
2. Issuer/guarantorthe bank or other party issuing the guarantee on behalf
of the customer the principal
3. The beneficiarythe other party to the underlying contract, in whose favor the
guarantee is issued
> Usually the guarantee in the 3-party structure is the principals bank and
carries on business in the same country as the principal, whilst the beneficiary carries
on business in a foreign country
> Known as direct guarantees because the guarantee is issued to directly by the
principals bank, not by the local bank in the beneficiarys country
PRINCIPAL TYPES OF DEMAND GUARANTEES
1. Tender or bid guarantee
a. Where tenders are invited it is often a condition of consideration of the
tender that the tenderer undertakes to sign the contract if its awarded to him, to
procure the issue of any performance or other guarantee required by the guarantee
and not to modify or withdraw his tender in the meantime
b. Purposesafeguard the beneficiary against breach of such an undertaking
c. If the tenderer is successful and fails to sign the contract and to furnish the
requisite performance or other guarantee, or withdraws his tender before its
expiry, the beneficiary can call upon the guarantor to pay a specified sum designed
to compensate him for the trouble and
expense he suffered in reawarding the contract, as well as any additional cost of
the contract
2. Performance guarantee
a. Guarantee of the central performance of the contract from commencement to
completion
b. Given for a specified percentage of the contract sum
c. But there are stages in the relationship between the parties which
precede and follow the central performance, and there may be distinct
segments of liability to be covered within that performance
3. Advance payment or repayment guarantee
a. Underlying contract may entitle the principal to payment of stated sums in
advance of performance
b. The advance payment guarantee is designed to secure the beneficiarys right
to repayment of the advance if the performance to which it relates is not furnished
4. Retention guarantee
a. Construction contracts usually provide for stage payments against
architects or engineers certificate and for a specified percentage of the amount
certified in each certificate to be retained by the employer for a specified period of
time as safeguard against defects
b. The employer may be willing to release such retention moneys against
a retention guarantee securing repayment of the released retention moneys
if defects are later found or if the contractor fails to complete the contract
5. Maintenance or warranty guarantee
a. Construction contracts usually provide that on completion part of the retention
moneys are to be retained for a specified period to cover the cost of any
defects or malfunction which become manifest during that period
GUARANTEES NOT GUARANTEED BY UNDERLYING CONTRACT
> Not all guarantees are meant to be in favor of a party in the underlying contract
> For example are customs guarantees which are issued to the customs to cover
any duty that may become payable when imported goods which would be
exempt from duty if reexported within a specified time are not in fact reexported
within that time
THE LEGAL NATURE OF A DEMAND GUARANTEE
> A demand guarantee is an abstract payment undertaking that is, a promise
of payment which, though intended to preserve the beneficiary from loss
in connection with the underlying transaction is detached from the
underlying contract between principal and beneficiary and is in form a
primary undertaking between the guarantor and beneficiary which becomes
binding solely by virtue of its issue
> A secondary guarantee is both secondary in form and intent. The intention
of the parties is that the guarantor will be called upon to pay only if the principal
defaults in performance, and then only to the extent of the principals liability
and subject to any defenses available to the principal
> A documentary credit is both primary in intent and form. The parties to the
underlying contract intend that the bank issuing the credit is a to be the first port
of call for payment, and this is the effect of the agreement between them.
Whereas in the case of a suretyship guarantee, the beneficiary cannot look to
the guarantor without establishing default by the principal, the reverse is true
of the documentary credit. The parties have designated payment by the bank
as the primary payment method and only if it fails without fault on the part of the
beneficiary is entitled to > DEMAND GUARANTEE STANDS BETWEEN
THE SURETYSHIP GUARANTEE AND THE DOCUMENTARY CREDIT
SECONDARY IN INTENT AND PRIMARY IN FORM. Performance is
due in the first instance from the principal, and the guarantee is intended to
be resorted to only if the principal has failed to perform. But though this is the intent
of the parties, the guarantee isnt in form linked to default under the underlying
contract, nor there is any question of performance to hold the beneficiary
harmless up to the agreed maximum; and the sole condition of the guarantors
payment liability is the presentation of a demand and other documents specified
in the guarantee in the manner of and within the period of the guarantee
> THE GUARANTOR HAS NO CONCERN WITH THE UNDERLYING
CONTRACT AND IF DEMAND IS DULY PRESENTED, PAYMENT MUST BE
MADE DESPITE ALLEGATIONS BY THE PRINCIPAL HAS FULLY
PERFORMED THE CONTRACTIN THE ABSENCE OF ESTABLISHED
FRAUD OR OTHER EVENT CONSTITUTING GROUND FOR NON-
PAYMENT
STANDBY LETTERS OF CREDIT
> Undertaking primary in form but intended to be used only as a fallback in the event
of default by the principal under the underlying contract
> Standby credit in legal perspective is simply another term for demand guarantees
> The standby credit has developed into an all-purpose financial support instrument
embracing a much wider range of uses than the normal demand guarantee.
Thus, standby credits are used to support financial and non-financial
obligations of the principal and to provide credit enhancement for the primary
financial undertaking
KEY ELEMENTS IN A DEMAND GUARANTEE
1. The parties
2. A reference to the underlying contract
3. The amount or maximum amount of the guarantee and any agreement for
reduction or increase
4. The currency of payment
5. The documents, if any, to be presented for the purpose of a demand or of
reduction or expiry
6. The expiry date or other expiry provisions as well as any agreement for
extension
> Where it is intended that the guarantee shall not commence until presentation
of a particular document, this fact should be specified
> Direct guarantee: principal, guarantor, and beneficiary should be identified
> Indirect guarantee: principal, instructing party, beneficiary, and counter-
guarantee
> Central to the demand guarantee is its documentary character: the rights and
obligations it creates are to be determined solely from the terms of the guarantee
and from any document presented in accordance with the guarantee, without
the need to ascertain external facts
DISTINCT NATURE OF CONTRACTUAL RELATIONSHIPS
> Guarantors commitment to the beneficiary arises solely by virtue of the issue
of the guarantee and his duty to pay is conditioned only on presentation of demand
and other specified documents in conformity with the terms and within the
duration of the guarantee
> Principal is not concerned with the contract between the guarantor and beneficiary
> Beneficiary has no concern with the contract between the principal and guarantor
> The relationship of principal and guarantor has an internal mandatethe
guarantor is obliged to act in accordance with the terms of the contract,
failing which he may forfeit his right to reimbursement but those terms are of
no concern to the beneficiary, whose right to payment depends solely on his
acting on conformity with the terms of the guarantee
> In indirect contracts, there is an additional mandate which has 2 facetsthe
mandate from the instructing party to the guarantor as to the issue of the
guarantee, which the guarantor as mandatory must comply with if he accepts
the instruction; and two, the counter-guarantee which the guarantor exacts from
the instructing party as a precondition of issuing the guarantee and which is separate
from the mandate
1. Abstract character of the payment undertakingbinding solely by virtue
of issue of the guarantee, subject to the beneficiary not rejecting it
2. Independence of the guarantee from the underlying transaction
> Guarantee is separate from that contract and the rights and obligations
created by the guarantee are independent of those arising under the underlying
contract
> In the absence of established fraud by the beneficiary, the guarantor is
not entitled to refuse payment and the principal is not entitled to have
payment restrained merely because of a dispute between the principal and
beneficiary
3. Independence of the guarantee from the principal-guarantor relationship
the guarantee is separate from the contract between the principal and the
guarantor is not entitled to invoke a breach of that contract
4. Documentary character of guaranteeamount and duration of the duty to pay,
the conditions of payment and termination of payment obligation depend solely
on the terms of the guarantee itself and presentation of required documents
5. Requirement of compliance of the demand with the terms of the guarantee
6. Guarantors duty of examination limited to apparent good order of the
document
7. Guarantors duty limited the exercise of good faith and reasonable care
8. Independence of counter-guarantee from guarantee
9. Independence of counter-guarantee from mandate received from instructing
party
 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,
1respondents.
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)8 each in the
amount of US$8,988,907.00.9
In the course of the construction of the project, petitioner sought various EOT to
complete the Project. The extensions were requested allegedly due to several factors
which prevented the completion of the Project on target date, such as force majeure
occasioned by typhoon Zeb, barricades and demonstrations. LHC denied the
requests, however. This gave rise to a series of legal actions between the parties
which culminated in the instant petition.
The first of the actions was a Request for Arbitration which LHC filed before the
Construction Industry Arbitration Commission (CIAC) on 1 June 1999.10 This was
followed by another Request for Arbitration, this time filed by petitioner before the
International Chamber of Commerce (ICC)11 on 3 November 2000. In both
arbitration proceedings, the common issues presented were: [1) whether typhoon Zeb
and any of its associated events constituted force majeure to justify the extension of
time sought by petitioner; and [2) whether LHC had the right to terminate the
Turnkey Contract for failure of petitioner to complete the Project on target date.
Meanwhile, foreseeing that LHC would call on the Securities pursuant to the
pertinent provisions of the Turnkey Contract,12 petitionerin two separate 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 substitutes thereof and ordering respondent banks to cease and desist from
the delay.16 transferring, paying or in any manner disposing of the Securities.

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.
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.

Refuting petitioner's contentions, LHC claimed that petitioner had no right to restrain WHETHER OR NOT PETITIONER WILL SUFFER GRAVE
its call on and use of the Securities as payment for liquidated damages. It averred that AND IRREPARABLE DAMAGE IN THE EVENT 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 A. LHC IS ALLOWED TO CALL AND DRAW ON,
responsibility to investigate the authenticity or accuracy of the certificates or the AND ANZ BANK AND SECURITY BANK ARE
declarant's capacity or entitlement to so certify. ALLOWED TO RELEASE, THE REMAINING
BALANCE OF THE SECURITIES PRIOR TO THE
In its Resolution dated 28 November 2000, the Court of Appeals issued a temporary RESOLUTION OF THE DISPUTES BETWEEN
restraining order, enjoining LHC from calling on the Securities or any renewals or 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.
22
On 25 August 2003, petitioner filed a Supplement to the Petition 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.46 A careful perusal of the
Turnkey Contract reveals the intention of the parties to make the Securities
answerable for the liquidated damages occasioned by any delay on the part of
petitioner. The call upon the Securities, while not an exclusive remedy on the part of
LHC, is certainly an alternative recourse available to it upon the happening of the
contingency for which the Securities have been proffered. Thus, even without the use
of the "independence principle," the Turnkey Contract itself bestows upon LHC the
right to call on the Securities in the event of default.
Next, petitioner invokes the "fraud exception" principle. It avers that 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.55 Indeed, the Turnkey Contract is plain and unequivocal in that it
conferred upon LHC the right to draw upon the Securities in case of default, as
provided in Clause 4.2.5, in relation to Clause 8.7.2, thus:
4.2.5 The Employer shall give the Contractor seven days' notice of
calling upon any of the Securities, stating the nature of the default
for which the claim on any of the Securities is to be made,
provided that no notice will be required if the Employer calls upon
any of the Securities for the payment of Liquidated Damages for
Delay or for failure by the Contractor to renew or extend the
Securities within 14 days of their expiration in accordance with
Clause 4.2.2.56
8.7.2 The Employer may, without prejudice to any other method of
recovery, deduct the amount of such damages from any monies
due, or to become due, to the Contractor and/or by drawing on the
Security.57
The pendency of the arbitration proceedings would not per se make 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 employerthe very purpose of the
preliminary injunction has expired, any declaration upholding the propriety of the
writ would be entirely useless as there would be no actual case or controversy
between the parties insofar as the preliminary injunction is concerned.
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.

In the instant case, the consummation of the act sought to be restrained had rendered SO ORDERED.
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. 04-332
wherein 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
G.R. No. 94209 April 30, 1991
FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING
CORPORATION), petitioner,
vs.
THE COURT OF APPEALS, and BERNARDO E. VILLALUZ, respondents.
Pelaez, Adriano & Gregorio for petitioner.
Ezequiel S. Consulta for private respondent.
GUTIERREZ, JR., J.:
This is a petition for review seeking the reversal of the decision of the Court of
Appeals dated June 29, 1990 which affirmed the decision of the Regional Trial Court
of Rizal dated October 20, 1986 ordering the defendants Christiansen and the
petitioner, to pay various sums to respondent Villaluz, jointly and severally.
The facts of the case are as follows:
On June 3, 1971, Bernardo E. Villaluz agreed to sell to the then defendant Axel
Christiansen 2,000 cubic meters of lauan logs at $27.00 per cubic meter FOB.
After inspecting the logs, Christiansen issued purchase order No. 76171.
On the arrangements made and upon the instructions of the consignee, Hanmi Trade
Development, Ltd., de Santa Ana, California, the Security Pacific National Bank of
Los Angeles, California issued Irrevocable Letter of Credit No. IC-46268 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 (now Citytrust)
with the instruction to the latter that it "forward the enclosed letter of credit to the
beneficiary." (Records, Vol. I, p. 11)
The letter of credit further provided that the draft to be drawn is on Security Pacific
National Bank and that it be accompanied by the following documents:
1. Signed Commercial Invoice in four copies showing the number
of the purchase order and certifying that
a. All terms and conditions of the purchase order have
been complied with and that all logs are fresh cut and
quality equal to or better than that described in H.A.
Christiansen's telex #201 of May 1, 1970, and that all logs
have been marked "BEV-EX."
b. One complete set of documents, including 1/3 original
bills of lading was airmailed to Consignee and Parties to
be advised by Hans-Axel Christiansen, Ship and
Merchandise Broker.
c. One set of non-negotiable documents was airmailed to
Han Mi Trade Development Company and one set to
Consignee and Parties to be advised by Hans-Axel
Christiansen, Ship and Merchandise Broker.
2. Tally sheets in quadruplicate.
3. 2/3 Original Clean on Board Ocean Bills of Lading with
Consignee and Parties to be advised by Hans Axel Christiansen,
showing Freight Prepaid and marked Notify:
Han Mi Trade Development Company, Ltd., Santa Ana, California.
Letter of Credit No. 46268 dated June 7, 1971
Han Mi Trade Development Company, Ltd., P.O. Box 10480, Santa
Ana, California 92711 and Han Mi Trade Development Company,
Ltd., Seoul, Korea.
4. Certification from Han-Axel Christiansen, Ship and
Merchandise Broker, stating that logs have been approved prior to
shipment in accordance with terms and conditions of
corresponding purchase Order. (Record, Vol. 1 pp. 11-12)
Also incorporated by reference in the letter of credit is the Uniform Customs and
Practice for Documentary Credits (1962 Revision).
The logs were thereafter loaded on the vessel "Zenlin Glory" which was chartered by
Christiansen. Before its loading, the logs were inspected by custom inspectors Nelo
Laurente, Alejandro Cabiao, Estanislao Edera from the Bureau of Customs (Records,
Vol. I, p. 124) and representatives Rogelio Cantuba and Jesus Tadena of the Bureau
of Forestry (Records, Vol. I, pp. 16-17) all of whom certified to the good condition
and exportability of the logs.
After the loading of the logs was completed, the Chief Mate, Shao Shu Wang issued
a mate receipt of the cargo which stated the same are in good condition (Records,
Vol. I, p. 363). However, Christiansen refused to issue the certification as required in
paragraph 4 of the letter of credit, despite several requests made by the private
respondent.
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.
The letter of credit lapsed on June 30, 1971, (extended, however up to July 31, 1971)
without the private respondent receiving any certification from Christiansen.
The persistent refusal of Christiansen to issue the certification prompted the private
respondent to bring the matter before the Central Bank. In a memorandum dated
August 16, 1971, the Central Bank ruled that:
. . . pursuant to the Monetary Board Resolution No. 1230 dated
August 3, 1971, in all log exports, the certification of the lumber
inspectors of the Bureau of Forestry . . . shall be considered final
for purposes of negotiating documents. Any provision in any letter
of credit covering log exports requiring certification of buyer's
agent or representative that said logs have been approved for
shipment as a condition precedent to negotiation of shipping
documents shall not be allowed. (Records, Vol. I, p. 367)
Meanwhile, the logs arrived at Inchon, Korea and were received by the consignee,
Hanmi Trade Development Company, to whom Christiansen sold the logs for the
amount of $37.50 per cubic meter, for a net profit of $10 per cubic meter. Hanmi
Trade Development Company, on the other hand sold the logs to Taisung Lumber
Company at Inchon, Korea. (Rollo, p. 39)
Since the demands by the private respondent for Christiansen to execute the
certification proved futile, Villaluz, on September 1, 1971, instituted an action for
mandamus and specific performance against Christiansen and the Feati Bank and
Trust Company (now Citytrust) before the then Court of First Instance of Rizal. The
petitioner was impleaded as defendant before the lower court only to afford complete
relief should the court a quo order Christiansen to execute the required certification.
The complaint prayed for the following:
1. Christiansen be ordered to issue the certification required of him
under the Letter of Credit;
2. Upon issuance of such certification, or, if the court should find it
unnecessary, FEATI BANK be ordered to accept negotiation of the
Letter of Credit and make payment thereon to Villaluz;
3. Order Christiansen to pay damages to the plaintiff. (Rollo, p. 39)
On or about 1979, while the case was still pending trial, Christiansen left the
Philippines without informing the Court and his counsel. Hence, Villaluz, filed an
amended complaint to make the petitioner solidarily liable with Christiansen.
The trial court, in its order dated August 29, 1979, admitted the amended complaint.
After trial, the lower court found:
The liability of the defendant CHRISTIANSEN is beyond dispute,
and the plaintiffs right to demand payment is absolute. Defendant
CHRISTIANSEN having accepted delivery of the logs by having
them loaded in his chartered vessel the "Zenlin Glory" and
shipping them to the consignee, his buyer Han Mi Trade in Inchon,
South Korea (Art. 1585, Civil Code), his obligation to pay the
purchase order had clearly arisen and the plaintiff may sue and
recover the price of the goods (Art. 1595, Id).
The Court believes that the defendant CHRISTIANSEN acted in
bad faith and deceit and with intent to defraud the plaintiff,
reflected in and aggravated by, not only his refusal to issue the
certification that would have enabled without question the plaintiff
to negotiate the letter of credit, but his accusing the plaintiff in his
answer of fraud, intimidation, violence and deceit. These
accusations said defendant did not attempt to prove, as in fact he
left the country without even notifying his own lawyer. It was to
the Court's mind a pure swindle.
The defendant Feati Bank and Trust Company, on the other hand,
must be held liable together with his (sic) co-defendant for having,
by its wrongful act, i.e., its refusal to negotiate the letter of credit in
the absence of CHRISTIANSEN's certification (in spite of the
Central Bank's ruling that the requirement was illegal), prevented
payment to the plaintiff. The said letter of credit, as may be seen on
its face, is irrevocable and the issuing bank, the Security Pacific
National Bank in Los Angeles, California, undertook by its terms
that the same shall be honored upon its presentment. On the other
hand, the notifying bank, the defendant Feati Bank and Trust
Company, by accepting the instructions from the issuing bank,
itself assumed the very same undertaking as the issuing bank under
the terms of the letter of credit.
xxx xxx xxx
The Court likewise agrees with the plaintiff that the defendant
BANK may also be held liable under the principles and laws on
both trust and estoppel. When the defendant BANK accepted its
 role as the notifying and negotiating bank for and in behalf of the
issuing bank, it in effect accepted a trust reposed on it, and became
a trustee in relation to plaintiff as the beneficiary of the letter of
credit. As trustee, it was then duty bound to protect the interests of
the plaintiff under the terms of the letter of credit, and must be held
liable for damages and loss resulting to the plaintiff from its failure
to perform that obligation.
Furthermore, when the defendant BANK assumed the role of a
notifying and negotiating BANK it in effect represented to the
plaintiff that, if the plaintiff complied with the terms and
conditions of the letter of credit and presents the same to the
BANK together with the documents mentioned therein the said
BANK will pay the plaintiff the amount of the letter of credit. The
Court is convinced that it was upon the strength of this letter of
credit and this implied representation of the defendant BANK that
the plaintiff delivered the logs to defendant CHRISTIANSEN,
considering that the issuing bank is a foreign bank with whom
plaintiff had no business connections and CHRISTIANSEN had
not offered any other Security for the payment of the logs.
Defendant BANK cannot now be allowed to deny its commitment
and liability under the letter of credit:
A holder of a promissory note given because of gambling
who indorses the same to an innocent holder for value and
who assures said party that the note has no legal defect, is
in estoppel from asserting that there had been an illegal
consideration for the note, and so, he has to pay its value.
(Rodriguez v. Martinez, 5 Phil. 67).
The defendant BANK, in insisting upon the certification of
defendant CHRISTIANSEN as a condition precedent to
negotiating the letter of credit, likewise in the Court's opinion acted
in bad faith, not only because of the clear declaration of the Central
Bank that such a requirement was illegal, but because the BANK,
with all the legal counsel available to it must have known that the
condition was void since it depended on the sole will of the debtor,
the defendant CHRISTIANSEN. (Art. 1182, Civil Code) (Rollo,
pp. 29-31)
On the basis of the foregoing the trial court on October 20, 1986, ruled in favor of
the private respondent. The dispositive portion of its decision reads:
WHEREFORE, judgment is hereby rendered for the plaintiff,
ordering the defendants to pay the plaintiff, jointly and severally,
the following sums:
a) $54,000.00 (US), or its peso equivalent at the prevailing rate as
of the time payment is actually made, representing the purchase
price of the logs;
b) P17,340.00, representing government fees and charges paid by
plaintiff in connection with the logs shipment in question;
c) P10,000.00 as temperate damages (for trips made to Bacolod
and Korea).
All three foregoing sums shall be with interest thereon at 12% per
annum from September 1, 1971, when the complaint was filed,
until fully paid:
d) P70,000.00 as moral damages;
e) P30,000.00 as exemplary damages; and
f) P30,000.00 as attorney's fees and litigation expense.
(Rollo, p. 28)
The petitioner received a copy of the decision on November 3, 1986. Two days
thereafter, or on November 5, 1986, it filed a notice of appeal.
On November 10, 1986, the private respondent filed a motion for the immediate
execution of the judgment on the ground that the appeal of the petitioner was
frivolous and dilatory.
The trial court ordered the immediate execution of its judgment upon the private
respondent's filing of a bond.
The petitioner then filed a motion for reconsideration and a motion to suspend the
implementation of the writ of execution. Both motions were, however, denied. Thus,
petitioner filed before the Court of Appeals a petition for certiorari and prohibition
with preliminary injunction to enjoin the immediate execution of the judgment.
The Court of Appeals in a decision dated April 9, 1987 granted the petition and
nullified the order of execution, the dispositive portion of the decision states:
WHEREFORE, the petition for certiorari is granted. Respondent
Judge's order of execution dated December 29, 1986, as well as his
order dated January 14, 1987 denying the petitioner's urgent
motion to suspend the writ of execution against its properties are
hereby annulled and set aside insofar as they are sought to be
enforced and implemented against the petitioner Feati Bank &
 Trust Company, now Citytrust Banking Corporation, during the
pendency of its appeal from the adverse decision in Civil Case No.
15121. However, the execution of the same decision against
defendant Axel Christiansen did not appeal said decision may
proceed unimpeded. The Sheriff s levy on the petitioner's
properties, and the notice of sale dated January 13, 1987 (Annex
M), are hereby annulled and set aside. Rollo p. 44)
A motion for reconsideration was thereafter filed by the private respondent. The
Court of Appeals, in a resolution dated June 29, 1987 denied the motion for
reconsideration.
In the meantime, the appeal filed by the petitioner before the Court of Appeals was
given due course. In its decision dated June 29, 1990, the Court of Appeals affirmed
the decision of the lower court dated October 20, 1986 and ruled that:
1. Feati Bank admitted in the "special and negative defenses"
section of its answer that it was the bank to negotiate the letter of
credit issued by the Security Pacific National Bank of Los Angeles,
California. (Record, pp. 156, 157). Feati Bank did notify Villaluz
of such letter of credit. In fact, as such negotiating bank, even
before the letter of credit was presented for payment, Feati Bank
had already made an advance payment of P75,000.00 to Villaluz in
anticipation of such presentment. As the negotiating bank, Feati
Bank, by notifying Villaluz of the letter of credit in behalf of the
issuing bank (Security Pacific), confirmed such letter of credit and
made the same also its own obligation. This ruling finds support in
the authority cited by Villaluz:
A confirmed letter of credit is one in which the notifying bank
gives its assurance also that the opening bank's obligation will be
performed. In such a case, the notifying bank will not simply
transmit but will confirm the opening bank's obligation by making
it also its own undertaking, or commitment, or guaranty or
obligation. (Ward & Hatfield, 28-29, cited in Agbayani,
Commercial Laws, 1978 edition, p. 77).
Feati Bank argues further that it would be considered as the
negotiating bank only upon negotiation of the letter of credit. This
stance is untenable. Assurance, commitments or guaranties
supposed to be made by notifying banks to the beneficiary of a
letter of credit, as defined above, can be relevant or meaningful
only with respect to a future transaction, that is, negotiation.
Hence, even before actual negotiation, the notifying bank, by the
mere act of notifying the beneficiary of the letter of credit, assumes
as of that moment the obligation of the issuing bank.
2. Since Feati Bank acted as guarantor of the issuing bank, and in
effect also of the latter's principal or client, i.e. Hans Axel-
Christiansen. (sic) Such being the case, when Christiansen refused
to issue the certification, it was as though refusal was made by
Feati Bank itself. Feati Bank should have taken steps to secure the
certification from Christiansen; and, if the latter should still refuse
to comply, to hale him to court. In short, Feati Bank should have
honored Villaluz's demand for payment of his logs by virtue of the
irrevocable letter of credit issued in Villaluz's favor and guaranteed
by Feati Bank.
3. The decision promulgated by this Court in CA-G.R. Sp No.
11051, which contained the statement "Since Villaluz" draft was
not drawn strictly in compliance with the terms of the letter of
credit, Feati Bank's refusal to negotiate it was justified," did not
dispose of this question on the merits. In that case, the question
involved was jurisdiction or discretion, and not judgment. The
quoted pronouncement should not be taken as a preemptive
judgment on the merits of the present case on appeal.
4. The original action was for "Mandamus and/or specific
performance." Feati Bank may not be a party to the transaction
between Christiansen and Security Pacific National Bank on the
one hand, and Villaluz on the other hand; still, being guarantor or
agent of Christiansen and/or Security Pacific National Bank which
had directly dealt with Villaluz, Feati Bank may be sued properly
on specific performance as a procedural means by which the relief
sought by Villaluz may be entertained. (Rollo, pp. 32-33)
The dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, the decision appealed from is affirmed; and
accordingly, the appeal is hereby dismissed. Costs against the
petitioner. (Rollo, p. 33)
Hence, this petition for review.
The petitioner interposes the following reasons for the allowance of the petition.
First Reason
THE RESPONDENT COURT ERRONEOUSLY CONCLUDED
FROM THE ESTABLISHED FACTS AND INDEED, WENT
AGAINST THE EVIDENCE AND DECISION OF THIS
HONORABLE COURT, THAT PETITIONER BANK IS LIABLE
ON THE LETTER OF CREDIT DESPITE PRIVATE
 RESPONDENTS NON-COMPLIANCE WITH THE TERMS
THEREOF,
Second Reason
THE RESPONDENT COURT COMMITTED AN ERROR OF
LAW WHEN IT HELD THAT PETITIONER BANK, BY
NOTIFYING PRIVATE RESPONDENT OF THE LETTER OF
CREDIT, CONFIRMED SUCH CREDIT AND MADE THE
SAME ALSO ITS OBLIGATION AS GUARANTOR OF THE
ISSUING BANK.
Third Reason
THE RESPONDENT COURT LIKEWISE COMMITTED AN
ERROR OF LAW WHEN IT AFFIRMED THE TRIAL COURT'S
DECISION. (Rollo, p. 12)
The principal issue in this case is whether or not
a correspondent bank is
to be held liable under the letter of credit despite non-compliance
by the beneficiary with the terms thereof?
The petition is impressed with merit.
It is a settled rule in commercial transactions involving letters of credit that the
documents tendered must strictly conform to the terms of the letter of credit. The
tender of documents by the beneficiary (seller) must include all documents required
by the letter. A correspondent bank which departs from what has been stipulated
under the letter of credit, as when it accepts a faulty tender, acts on its own risks and
it may not thereafter be able to recover from the buyer or the issuing bank, as the
case may be, the money thus paid to the beneficiary Thus the rule of strict
compliance.
In the United States, commercial transactions involving letters of credit are governed
by the rule of strict compliance. In the Philippines, the same holds true. The same
rule must also be followed.
The case of Anglo-South America Trust Co. v. Uhe et al. (184 N.E. 741 [1933])
expounded clearly on the rule of strict compliance.
We have heretofore held that these letters of credit are to be strictly
complied with which documents, and shipping documents must be
followed as stated in the letter. There is no discretion in the bank or
trust company to waive any requirements. The terms of the letter
constitutes an agreement between the purchaser and the bank. (p.
743)
Although in some American decisions, banks are granted a little discretion to accept
a faulty tender as when the other documents may be considered immaterial or
superfluous, this theory could lead to dangerous precedents. Since a bank deals only
with documents, it is not in a position to determine whether or not the documents
required by the letter of credit are material or superfluous. The mere fact that the
document was specified therein readily means that the document is of vital
importance to the buyer.
Moreover, the incorporation of the Uniform Customs and Practice for Documentary
Credit (U.C.P. for short) in the letter of credit resulted in the applicability of the said
rules in the governance of the relations between the parties.
And even if the U.C.P. was not incorporated in the letter of credit, we have already
ruled in the affirmative as to the applicability of the U.C.P. in cases before us.
In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the observance
of the U.C.P. in this jurisdiction is justified by Article 2 of the Code of Commerce.
Article 2 of the Code of Commerce enunciates that in the absence of any particular
provision in the Code of Commerce, commercial transactions shall be governed by
the usages and customs generally observed.
There being no specific provision which governs the legal complexities arising from
transactions involving letters of credit not only between the banks themselves but
also between banks and seller and/or buyer, the applicability of the U.C.P. is
undeniable.
The pertinent provisions of the U.C.P. (1962 Revision) are:
Article 3.
An irrevocable credit is a definite undertaking on the part of the
issuing bank and constitutes the engagement of that bank to the
beneficiary and bona fide holders of drafts drawn and/or
documents presented thereunder, that the provisions for payment,
acceptance or negotiation contained in the credit will be duly
fulfilled, provided that all the terms and conditions of the credit
are complied with.
An irrevocable credit may be advised to a beneficiary through
another bank (the advising bank) without engagement on the part
of that bank, but when an issuing bank authorizes or requests
another bank to confirm its irrevocable credit and the latter does
 so, such confirmation constitutes a definite undertaking of the
confirming bank. . . .
Article 7.
Banks must examine all documents with reasonable care to
ascertain that they appear on their face to be in accordance with the
terms and conditions of the credit,"
Article 8.
Payment, acceptance or negotiation against documents which
appear on their face to be in accordance with the terms and
conditions of a credit by a bank authorized to do so, binds the party
giving the authorization to take up documents and reimburse the
bank which has effected the payment, acceptance or negotiation.
(Emphasis Supplied)
Under the foregoing provisions of the U.C.P., the bank may only negotiate, accept or
pay, if the documents tendered to it are on their face in accordance with the terms
and conditions of the documentary credit. And since a correspondent bank, like the
petitioner, principally deals only with documents, the absence of any document
required in the documentary credit justifies the refusal by the correspondent bank to
negotiate, accept or pay the beneficiary, as it is not its obligation to look beyond the
documents. It merely has to rely on the completeness of the documents tendered by
the beneficiary.
In regard to the ruling of the lower court and affirmed by the Court of Appeals that
the petitioner is not a notifying bank but a confirming bank, we find the same
erroneous.
The trial court wrongly mixed up the meaning of an irrevocable credit with that of a
confirmed credit. In its decision, the trial court ruled that the petitioner, in accepting
the obligation to notify the respondent that the irrevocable credit has been
transmitted to the petitioner on behalf of the private respondent, has confirmed the
letter.
The trial court appears to have overlooked the fact that an irrevocable credit is not
synonymous with a confirmed credit. These types of letters have different meanings
and the legal relations arising from there varies. A credit may be an irrevocable
credit and at the same time a confirmed credit or vice-versa.
An irrevocable credit refers to the duration of the letter of credit. What is simply
means is that the issuing bank may not without the consent of the beneficiary (seller)
and the applicant (buyer) revoke his undertaking under the letter. The issuing bank
does not reserve the right to revoke the credit. On the other hand, a confirmed letter
of credit pertains to the kind of obligation assumed by the correspondent bank. In
this case, the correspondent bank gives an absolute assurance to the beneficiary that
it will undertake the issuing bank's obligation as its own according to the terms and
conditions of the credit. (Agbayani, Commercial Laws of the Philippines, Vol. 1, pp.
81-83)
Hence, the mere fact that a letter of credit is irrevocable does not necessarily imply
that the correspondent bank in accepting the instructions of the issuing bank has also
confirmed the letter of credit. Another error which the lower court and the Court of
Appeals made was to confuse the obligation assumed by the petitioner.
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.
(Kronman and Co., Inc. v. Public National Bank of New York, 218 N.Y.S. 616
[1926]; Shaterian, Export-Import Banking, p. 292, cited in Agbayani, Commercial
Laws of the Philippines, Vol. 1, p. 76). 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. (Scanlon v. First
National Bank of Mexico, 162 N.E. 567 [1928]; Shaterian, Export-Import Banking,
p. 293, cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76)
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. (Shaterian, Export-Import Banking, p. 294, cited in
Agbayani Commercial Laws of the Philippines, Vol. 1, p. 77)
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.
If the petitioner was a confirming bank, then a categorical declaration should have
been stated in the letter of credit that the petitioner is to honor all drafts drawn in
conformity with the letter of credit. What was simply stated therein was the
instruction that the petitioner forward the original letter of credit to the beneficiary.
Since the petitioner was only a notifying bank, its responsibility was solely to notify
and/or transmit the documentary of credit to the private respondent and its obligation
ends there.
The notifying bank may suggest to the seller its willingness to negotiate, but this fact
alone does not imply that the notifying bank promises to accept the draft drawn
under the documentary credit.
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. (See
Kronman and Co., Inc. v. Public National Bank of New York, supra)
In order that the petitioner may be held liable under the letter, there should be proof
that the petitioner confirmed the letter of credit.
The records are, however, bereft of any evidence which will disclose that the
petitioner has confirmed the letter of credit. The only evidence in this case, and upon
which the private respondent premised his argument, is the P75,000.00 loan extended
by the petitioner to him.
The private respondent relies on this loan to advance his contention that the letter of
credit was confirmed by the petitioner. He claims that the loan was granted by the
petitioner to him, "in anticipation of the presentment of the letter of credit."
The proposition advanced by the private respondent has no basis in fact or law. That
the loan agreement between them be construed as an act of confirmation is rather far-
fetched, for it depends principally on speculative reasoning.
As earlier stated, there must have been an absolute assurance on the part of the
petitioner that it will undertake the issuing bank's obligation as its own. Verily, the
loan agreement it entered into cannot be categorized as an emphatic assurance that it
will carry out the issuing bank's obligation as its own.
The loan agreement is more reasonably classified as an isolated transaction
independent of the documentary credit.
Of course, it may be presumed that the petitioner loaned the money to the private
respondent in anticipation that it would later be paid by the latter upon the receipt of
the letter. Yet, we would have no basis to rule definitively that such "act" should be
construed as an act of confirmation.
The private respondent no doubt was in need of money in loading the logs on the
ship "Zenlin Glory" and the only way to satisfy this need was to borrow money from
the petitioner which the latter granted. From these circumstances, a logical
conclusion that can be gathered is that the letter of credit was merely to serve as a
collateral.
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.
The case of Scanlon v. First National Bank (supra) perspicuously explained the
relationship between the seller and the negotiating bank, viz:
It may buy or refuse to buy as it chooses. Equally, it must be true
that it owes no contractual duty toward the person for whose
benefit the letter is written to discount or purchase any draft drawn
against the credit. No relationship of agent and principal, or of
trustee and cestui, between the receiving bank and the beneficiary
of the letter is established. (P.568)
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 the private respondent, the refusal by the petitioner to
accept the tender of the private respondent is justified.
In regard to the finding that the petitioner became a "trustee in relation to the plaintiff
(private respondent) as the beneficiary of the letter of credit," the same has no legal
basis.
A trust has been defined as the "right, enforceable solely in equity, to the beneficial
enjoyment of property the legal title to which is vested to another." (89 C.J.S. 712)
The concept of a trust presupposes the existence of a specific property which has
been conferred upon the person for the benefit of another. In order therefore for the
trust theory of the private respondent to be sustained, the petitioner should have had
in its possession a sum of money as specific fund advanced to it by the issuing bank
and to be held in trust by it in favor of the private respondent. This does not obtain in
this case.
The mere opening of a letter of credit, it is to be noted, does not involve a specific
appropriation of a sum of money in favor of the beneficiary. It only signifies that the
beneficiary may be able to draw funds upon the letter of credit up to the designated
amount specified in the letter. It does not convey the notion that a particular sum of
money has been specifically reserved or has been held in trust.
What actually transpires in an irrevocable credit is that the correspondent bank does
not receive in advance the sum of money from the buyer or the issuing bank. On the
contrary, when the correspondent bank accepts the tender and pays the amount stated
in the letter, the money that it doles out comes not from any particular fund that has
been advanced by the issuing bank, rather it gets the money from its own funds and
then later seeks reimbursement from the issuing bank.
Granting that a trust has been created, still, the petitioner may not be considered a
trustee. As the petitioner is only a notifying bank, its acceptance of the instructions of
the issuing bank will not create estoppel on its part resulting in the acceptance of the
trust. Precisely, as a notifying bank, its only obligation is to notify the private
respondent of the existence of the letter of credit. How then can such create estoppel
when that is its only duty under the law?
We also find erroneous the statement of the Court of Appeals that the petitioner
"acted as a guarantor of the issuing bank and in effect also of the latter's principal or
client, i.e., Hans Axel Christiansen."
It is a fundamental rule that an irrevocable credit is independent not only of the
contract between the buyer and the seller but also of the credit agreement between
the issuing bank and the buyer. (See Kingdom of Sweden v. New York Trust Co., 96
N.Y.S. 2d 779 [1949]). The relationship between the buyer (Christiansen) and the
issuing bank (Security Pacific National Bank) is entirely independent from the letter
of credit issued by the latter.
The contract between the two has no bearing as to the non-compliance by the buyer
with the agreement between the latter and the seller. Their contract is similar to that
of a contract of services (to open the letter of credit) and not that of agency as was
intimated by the Court of Appeals. The unjustified refusal therefore by Christiansen
to issue the certification under the letter of credit should not likewise be charged to
the issuing bank.
As a mere notifying bank, not only does the petitioner not have any contractual
relationship with the buyer, it has also nothing to do with the contract between the
issuing bank and the buyer regarding the issuance of the letter of credit.
The theory of guarantee relied upon by the Court of Appeals has to necessarily fail.
The concept of guarantee vis-a-vis the concept of an irrevocable credit are
inconsistent with each other.
In the first place, the guarantee theory destroys the independence of the bank's
responsibility from the contract upon which it was opened. In the second place, the
nature of both contracts is mutually in conflict with each other. In contracts of
guarantee, the guarantor's obligation is merely collateral and it arises only upon the
default of the person primarily liable. On the other hand, in an irrevocable credit the
bank undertakes a primary obligation. (See National Bank of Eagle Pass, Tex v.
American National Bank of San Francisco, 282 F. 73 [1922])
The relationship between the issuing bank and the notifying bank, on the contrary, is
more similar to that of an agency and not that of a guarantee. It may be observed that
the notifying bank is merely to follow the instructions of the issuing bank which is to
notify or to transmit the letter of credit to the beneficiary. (See Kronman v. Public
National Bank of New York, supra). Its commitment is only to notify the beneficiary.
It does not undertake any assurance that the issuing bank will perform what has been
mandated to or expected of it. As an agent of the issuing bank, it has only to follow
the instructions of the issuing bank and to it alone is it obligated and not to buyer
with whom it has no contractual relationship.
In fact the notifying bank, even if the seller tenders all the documents required under
the letter of credit, may refuse to negotiate or accept the drafts drawn thereunder and
it will still not be held liable for its only engagement is to notify and/or transmit to
the seller the letter of credit.
Finally, even if we assume that the petitioner is a confirming bank, the petitioner
cannot be forced to pay the amount under the letter. As we have previously
explained, there was a failure on the part of the private respondent to comply with
the terms of the letter of credit.
The failure by him to submit the certification was fatal to his case.1wphi1 The
U.C.P. which is incorporated in the letter of credit ordains that the bank may only pay
the amount specified under the letter if all the documents tendered are on their face
in compliance with the credit. It is not tasked with the duty of ascertaining the reason
or reasons why certain documents have not been submitted, as it is only concerned
with the documents. Thus, whether or not the buyer has performed his responsibility
towards the seller is not the bank's problem.
We are aware of the injustice committed by Christiansen on the private respondent
but we are deciding the controversy on the basis of what the law is, for the law is not
meant to favor only those who have been oppressed, the law is to govern future
relations among people as well. Its commitment is to all and not to a single
individual. The faith of the people in our justice system may be eroded if we are to
decide not what the law states but what we believe it should declare. Dura lex sed
lex.
Considering the foregoing, the materiality of ruling upon the validity of the
certificate of approval required of the private respondent to submit under the letter of
credit, has become insignificant.
In any event, we affirm the earlier ruling of the Court of Appeals dated April 9, 1987
in regard to the petition before it for certiorari and prohibition with preliminary
injunction, to wit:
There is no merit in the respondent's contention that the
certification required in condition No. 4 of the letter of credit was
 "patently illegal." At the time the letter of credit was issued there
was no Central Bank regulation prohibiting such a condition in the
letter of credit. The letter of credit (Exh. C) was issued on June 7,
1971, more than two months before the issuance of the Central
Bank Memorandum on August 16, 1971 disallowing such a
condition in a letter of credit. In fact the letter of credit had already
expired on July 30, 1971 when the Central Bank memorandum was
issued. In any event, it is difficult to see how such a condition
could be categorized as illegal or unreasonable since all that
plaintiff Villaluz, as seller of the logs, could and should have done
was to refuse to load the logs on the vessel "Zenlin Glory", unless
Christiansen first issued the required certification that the logs had
been approved by him to be in accordance with the terms and
conditions of his purchase order. Apparently, Villaluz was in too
much haste to ship his logs without taking all due precautions to
assure that all the terms and conditions of the letter of credit had
been strictly complied with, so that there would be no hitch in its
negotiation. (Rollo, p. 8)

WHEREFORE, the COURT RESOLVED to GRANT the petition and hereby

NULLIFIES and SETS ASIDE the decision of the Court of Appeals dated June 29,
1990. The amended complaint in Civil Case No. 15121 is DISMISSED.

SO ORDERED.
TRUST RECEIPTS LAW
Q: What is the loan and security feature of the trust
receipt transaction?
A: A trust receipt arrangement is endowed with its own distinctive features
and characteristics. Under that set-up, a bank extends a loan covered by
the Letter of Credit, with the trust receipt as a security for the loan. In
other words, the transaction involves a loan feature represented by the
letter of credit, and a security feature which is in the covering trust receipt.
A trust receipt, therefore, is a security agreement, pursuant to which a
bank acquires a "security interest" in the goods. It secures an
indebtedness and there can be no such thing as security interest that
secures no obligation. (Sps. Vintola vs. Insular Bank of Asia and America,
G.R. No. 73271, May 29, 1987)
Q: Who is the owner of the articles subject of the TR?
A: The entrustee. A trust receipt has two features, the loan and security
features. The loan is brought about by the fact that the entruster financed
the importation or purchase of the goods under TR. Until and unless this
loan is paid, the obligation to pay subsists. If the entrustee is made to
appear as the owner, it was but an artificial expedient, more of legal
fiction than fact, for if it were really so, it could dispose of the goods in any
manner that it wants, which it cannot do. To consider the entrustee as the
true owner from the inception of the transaction would be to disregard the
loan feature thereof. (Rosario Textile Mills Corp. v. Home Bankers
Savings and Trust Company, G.R. No. 137232. June 29, 2005)
Q: What is the penal sanction if offender is a
corporation?
A: The Trust Receipts Law recognizes the impossibility of imposing the
penalty of imprisonment on a corporation. Hence, if the entrustee is a
corporation, the law makes the officers or employees or other persons
responsible for the offense liable to suffer the penalty of imprisonment.
The reason is obvious, corporations, partnerships, associations and other
juridical entities cannot be put to jail. Hence, the criminal liability falls on
the human agent responsible for the violation of the Trust Receipts Law.
(Ong vs. CA, G.R. No. 119858, April 29, 2003)
Q: In the event of default by the entrustee on his
obligation under the trust receipt agreement, is it
absolutely necessary for the entruster to cancel the
trust and take possession of the goods to be able to
enforce his right thereunder?
A: The law uses the word "may" in granting to the entruster the right to
cancel the trust and take possession of the goods. Consequently, the
entrustee has the discretion to avail of such right or seek any alternative
action, such as a third party claim or a separate civil action which it
deems best to protect its right, at any time upon default or failure of the
entrustee to comply with any of the terms and conditions of the trust
agreement. (South City Homes, Inc. v. BA Finance Corporation, G.R. No.
135462, Dec. 7, 2001)
Q. What is the effect of novation of a trust agreement?
A. Where the entruster and entrustee entered into an agreement which
provides for conditions incompatible with the trust receipt agreement, the
obligation under the trust receipt is extinguished. Hence, the breach in the
subsequent agreement does not give rise to a criminal liability under P.D.
115 but only civil liability. (Philippine Bank v. Ong, G.R. No. 133176, Aug.
8, 2002)
Q: Can deposits in a savings account opened by the
buyer subsequent to the TR transaction be applied to
outstanding obligations under the TR account?
A: No, the receipt of the bank of a sum of money without reference to the
trust receipt obligation does not obligate the bank to apply the money
received against the trust receipt obligation. Neither does compensation
arise because compensation is not proper when one of the debts consists
in civil liability arising from criminal. (Metropolitan Bank and Trust Co. v.
Tonda, G.R. No. 134436, Aug. 16, 2000).
Read this post in conjunction with Letters of Credit. A trust receipt is is a security
transaction intended to help finance importers or dealers in merchandise by allowing
them to obtain delivery of the goods under certain agreements. It embodies a security
transaction where an entruster (a bank) lends money to an entrustee (a borrower) in
order to purchase goods but with the entruster having a lien over all or part of the
security while the entrustee is obliged to pay the entrustee the amount owed him.
This amount comes from the proceeds of the sale of the goods; the remaining balance
goes to the entrustee. If the goods aren't sold in accordance to the terms and
conditions of the trust receipt they must be turned over to the entruster.
Elements and Obligations
1.) Entrustee
A person who takes possession of goods, documents or instruments under a trust
receipts transaction, and any of his successors-in-interest for the purpose(s) specified
in the trust receipt agreement. Simply put, the borrower. He is bound to hold the
goods in trust for the entrustor and return them if unsold or, if sold, turn over the
amount owed to the entruster (and can keep what's left.) Failure to turn over the
money the entrustee owes the entruster is treated as estafa under the Revised Penal
Code and will be punished accordingly.
There is no contract of agency established when a trust receipt is executed. An
agreement between the entruster and entrustee can be changed (by a Memorandum of
Agreement, for instance) if the new terms and conditions are incompatible with the
old ones. A breach of the new agreement has only a civil liability and no criminal
liability. (Pilipinas Bank vs. Ong, GR 133176, August 8, 2002.)
Regarding the release of goods, they may also be released under the following
instances:
1.) Their sale/procurement of their sale
2.) Their loading, unloading, shipment or transshipment or otherwise handling them
in a way preliminary or necessary for their sale
3.) Their manufacture/processing for the purpose of ultimate sale (in this case, the
entruster retains ownership over the goods in their original or processed form until
the entruster has fully complied with his obligations under the trust receipts

2.) Entruster

The person who has title over the goods, documents or instrument in the transaction,
including his successors-in-interest for the same purposes (a.k.a. the bank.) It
releases the goods to the trustee when the trustee executes the trust receipt. The
nature of its title is that of a security interest. The entruster is, by legal fiction, the
owner of the goods until paid by the entrustee. The entruster can't mortgage the
property because it doesn't have free disposal of the goods (because of the trust
receipt) and can't be responsible as a principal or seller under any sale or contract to
sell the entrustee makes. It also bears the loss after the goods are delivered to it.

3.) Goods

Includes chattels and personal property other than money, things in action or things
attached to land in order to become part of the real property.

4.) Security Interest

A property interest in goods, documents or instruments to secure the performance of

some obligations of the entrustee or some third persons to the entruster and includes
title (which is either absolute or not) whenever the title is is substance taken or
retained for security only.
PRESIDENTIAL DECREE No. 115 January 29, 1973
PROVIDING FOR THE REGULATION OF TRUST RECEIPTS TRANSACTIONS
WHEREAS, the utilization of trust receipts, as a convenient business device to assist
importers and merchants solve their financing problems, had gained popular
acceptance in international and domestic business practices, particularly in
commercial banking transactions;
WHEREAS, there is no specific law in the Philippines that governs trust receipt
transactions, especially the rights and obligations of the parties involved therein and
the enforcement of the said rights in case of default or violation of the terms of the
trust receipt agreement;
WHEREAS, the recommendations contained in the report on the financial system
which have been accepted, with certain modifications by the monetary authorities
included, among others, the enactment of a law regulating the trust receipt
transactions;
NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines,
by virtue of the powers vested in me by the Constitution, as Commander-in-Chief of
all the Armed Forces of the Philippines, and pursuant to Proclamation No. 1081,
dated September 21, 1972, and General Order No. 1, dated September 22, 1972, as
amended, and in order to effect the desired changes and reforms in the social,
economic, and political structure of our society, do hereby order and decree and
make as part of the law of the land the following:
Section 1. Short Title. This Decree shall be known as the Trust Receipts Law.
Section 2. Declaration of Policy. It is hereby declared to be the policy of the state (a)
to encourage and promote the use of trust receipts as an additional and convenient
aid to commerce and trade; (b) to provide for the regulation of trust receipts
transactions in order to assure the protection of the rights and enforcement of
obligations of the parties involved therein; and (c) to declare the misuse and/or
misappropriation of goods or proceeds realized from the sale of goods, documents or
instruments released under trust receipts as a criminal offense punishable under
Article Three hundred and fifteen of the Revised Penal Code.
Section 3. Definition of terms. As used in this Decree, unless the context otherwise
requires, the term
(a) "Document" shall mean written or printed evidence of title to goods.
(b) "Entrustee" shall refer to the person having or taking possession of goods,
documents or instruments under a trust receipt transaction, and any successor in
interest of such person for the purpose or purposes specified in the trust receipt
agreement.
(c) "Entruster" shall refer to the person holding title over the goods, documents, or
instruments subject of a trust receipt transaction, and any successor in interest of
such person.
(d) "Goods" shall include chattels and personal property other than: money, things in
action, or things so affixed to land as to become a part thereof.
(e) "Instrument" means any negotiable instrument as defined in the Negotiable
Instrument Law; any certificate of stock, or bond or debenture for the payment of
money issued by a public or private corporation, or any certificate of deposit,
participation certificate or receipt, any credit or investment instrument of a sort
marketed in the ordinary course of business or finance, whereby the entrustee, after
the issuance of the trust receipt, appears by virtue of possession and the face of the
instrument to be the owner. "Instrument" shall not include a document as defined in
this Decree.
(f) "Purchase" means taking by sale, conditional sale, lease, mortgage, or pledge,
legal or equitable.
(g) "Purchaser" means any person taking by purchase.
(h) "Security Interest" means a property interest in goods, documents or instruments
to secure performance of some obligations of the entrustee or of some third persons
to the entruster and includes title, whether or not expressed to be absolute, whenever
such title is in substance taken or retained for security only.
(i) "Person" means, as the case may be, an individual, trustee, receiver, or other
fiduciary, partnership, corporation, business trust or other association, and two more
persons having a joint or common interest.
(j) "Trust Receipt" shall refer to the written or printed document signed by the
entrustee in favor of the entruster containing terms and conditions substantially
complying with the provisions of this Decree. No further formality of execution or
authentication shall be necessary to the validity of a trust receipt.
(k) "Value" means any consideration sufficient to support a simple contract.
Section 4. What constitutes a trust receipt transaction. A trust receipt transaction,
within the meaning of this Decree, is any transaction by and between a person
referred to in this Decree as the entruster, and another person referred to in this
Decree as 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 a "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 receipt or the goods,
documents or instruments themselves if they are unsold or not otherwise disposed of,
in accordance with the terms and conditions specified in the trust receipt, or for other
purposes substantially equivalent to any of the following:
1. In the case of goods or documents, (a) to sell the goods or procure their sale; or (b)
to manufacture or process the goods with the purpose of ultimate sale: Provided,
That, in the case of goods delivered under trust receipt for the purpose of
manufacturing or processing before its ultimate sale, the entruster shall retain its title
over the goods whether in its original or processed form until the entrustee has
complied fully with his obligation under the trust receipt; or (c) to load, unload, ship
or tranship or otherwise deal with them in a manner preliminary or necessary to their
sale; or
2. In the case of instruments,
a) to sell or procure their sale or exchange; or
b) to deliver them to a principal; or
c) to effect the consummation of some transactions involving delivery to a depository
or register; or
d) to effect their presentation, collection or renewal
The sale of goods, documents or instruments by a person in the business of selling
goods, documents or instruments for profit who, at the outset of the transaction, has,
as against the buyer, general property rights in such goods, documents or
instruments, or who sells the same to the buyer on credit, retaining title or other
interest as security for the payment of the purchase price, does not constitute a trust
receipt transaction and is outside the purview and coverage of this Decree.
Section 5. Form of trust receipts; contents. A trust receipt need not be in any
particular form, but every such receipt must substantially contain (a) a description of
the goods, documents or instruments subject of the trust receipt; (2) the total invoice
value of the goods and the amount of the draft to be paid by the entrustee; (3) an
undertaking or a commitment of the entrustee (a) to hold in trust for the entruster the
goods, documents or instruments therein described; (b) to dispose of them in the
manner provided for in the trust receipt; and (c) to turn over the proceeds of the sale
of the goods, documents or instruments to the entruster to the extent of the amount
owing to the entruster or as appears in the trust receipt or to return the goods,
documents or instruments in the event of their non-sale within the period specified
therein.
The trust receipt may contain other terms and conditions agreed upon by the parties
in addition to those hereinabove enumerated provided that such terms and conditions
shall not be contrary to the provisions of this Decree, any existing laws, public policy
or morals, public order or good customs.
Section 6. Currency in which a trust receipt may be denominated. A trust receipt may
be denominated in the Philippine currency or any foreign currency acceptable and
eligible as part of international reserves of the Philippines, the provisions of existing
law, executive orders, rules and regulations to the contrary notwithstanding:
Provided, however, That in the case of trust receipts denominated in foreign
currency, payment shall be made in its equivalent in Philippine currency computed at
the prevailing exchange rate on the date the proceeds of sale of the goods, documents
or instruments held in trust by the entrustee are turned over to the entruster or on
such other date as may be stipulated in the trust receipt or other agreements executed
between the entruster and the entrustee.
Section 7. Rights of the entruster. The entruster shall be entitled to the proceeds from
the sale of the goods, documents or instruments released under a trust receipt to the
entrustee to the extent of the amount owing to the entruster or as appears in the trust
receipt, or to the return of the goods, documents or instruments in case of non-sale,
and to the enforcement of all other rights conferred on him in the trust receipt
provided such are not contrary to the provisions of this Decree.
The entruster may cancel the trust and take possession of the goods, documents or
instruments subject of the trust or of the proceeds realized therefrom at any time
upon default or failure of the entrustee to comply with any of the terms and
conditions of the trust receipt or any other agreement between the entruster and the
entrustee, and the entruster in possession of the goods, documents or instruments
may, on or after default, give notice to the entrustee of the intention to sell, and may,
not less than five days after serving or sending of such notice, sell the goods,
documents or instruments at public or private sale, and the entruster may, at a public
sale, become a purchaser. The proceeds of any such sale, whether public or private,
shall be applied (a) to the payment of the expenses thereof; (b) to the payment of the
expenses of re-taking, keeping and storing the goods, documents or instruments; (c)
to the satisfaction of the entrustee's indebtedness to the entruster. The entrustee shall
receive any surplus but shall be liable to the entruster for any deficiency. Notice of
sale shall be deemed sufficiently given if in writing, and either personally served on
the entrustee or sent by post-paid ordinary mail to the entrustee's last known business
address.
Section 8. Entruster not responsible on sale by entrustee. The entruster holding a
security interest shall not, merely by virtue of such interest or having given the
entrustee liberty of sale or other disposition of the goods, documents or instruments
under the terms of the trust receipt transaction be responsible as principal or as
vendor under any sale or contract to sell made by the entrustee.
Section 9. Obligations of the entrustee. The entrustee shall (1) hold the goods,
documents or instruments in trust for the entruster and shall dispose of them strictly
in accordance with the terms and conditions of the trust receipt; (2) receive the
proceeds in trust for the entruster and turn over the same to the entruster to the extent
of the amount owing to the entruster or as appears on the trust receipt; (3) insure the
goods for their total value against loss from fire, theft, pilferage or other casualties;
(4) keep said goods or proceeds thereof whether in money or whatever form, separate
and capable of identification as property of the entruster; (5) return the goods,
documents or instruments in the event of non-sale or upon demand of the entruster;
and (6) observe all other terms and conditions of the trust receipt not contrary to the
provisions of this Decree.
Section 10. Liability of entrustee for loss. The risk of loss shall be borne by the
entrustee. Loss of goods, documents or instruments which are the subject of a trust
receipt, pending their disposition, irrespective of whether or not it was due to the
fault or negligence of the entrustee, shall not extinguish his obligation to the entruster
for the value thereof.
Section 11. Rights of purchaser for value and in good faith. Any purchaser of goods
from an entrustee with right to sell, or of documents or instruments through their
customary form of transfer, who buys the goods, documents, or instruments for value
and in good faith from the entrustee, acquires said goods, documents or instruments
free from the entruster's security interest.
Section 12. Validity of entruster's security interest as against creditors. The entruster's
security interest in goods, documents, or instruments pursuant to the written terms of
a trust receipt shall be valid as against all creditors of the entrustee for the duration of
the trust receipt agreement.
Section 13. Penalty clause. The failure of an entrustee to turn over the proceeds of
the sale of the goods, documents or instruments covered by a trust receipt to the
extent of the amount owing to the entruster or as appears in the trust receipt or to
return said goods, documents or instruments if they were not sold or disposed of in
accordance with the terms of the trust receipt shall constitute the crime of estafa,
punishable under the provisions of Article Three hundred and fifteen, paragraph one
(b) of Act Numbered Three thousand eight hundred and fifteen, as amended,
otherwise known as the Revised Penal Code. If the violation or offense is committed
by a corporation, partnership, association or other juridical entities, the penalty
provided for in this Decree shall be imposed upon the directors, officers, employees
or other officials or persons therein responsible for the offense, without prejudice to
the civil liabilities arising from the criminal offense.
Section 14. Cases not covered by this Decree. Cases not provided for in this Decree
shall be governed by the applicable provisions of existing laws.
Section 15. Separability clause. If any provision or section of this Decree or the
application thereof to any person or circumstance is held invalid, the other provisions
or sections hereof and the application of such provisions or sections to other persons
or circumstances shall not be affected thereby.
Section 16. Repealing clause. All Acts inconsistent with this Decree are hereby
repealed.
Section 17. This Decree shall take effect immediately.
Done in the City of Manila, this 29th day of January, in the year of Our Lord,
nineteen hundred and seventy-three.