G.R. No.
146717 November 22, 2004 In the course of the construction of the project, petitioner sought various EOT
TRANSFIELD PHILIPPINES, INC., petitioner,
vs. LUZON HYDRO CORPORATION, AUSTRALIA and NEW ZEALAND
BANKING GROUP LIMITED and SECURITY BANK
CORPORATION, respondents.
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)7and
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
to complete the Project. The extensions were requested allegedly due to several
factors which prevented the completion of the Project on target date, such as
force majeure occasioned by typhoon Zeb, barricades and demonstrations. LHC
denied the requests, however. This gave rise to a series of legal actions between
the parties which culminated in the instant petition.
The first of the actions was a Request for Arbitration which LHC filed before the
Construction Industry Arbitration Commission (CIAC) on 1 June 1999.10 This
was followed by another Request for Arbitration, this time filed by petitioner
before the International Chamber of Commerce (ICC)11 on 3 November 2000. In
both arbitration proceedings, the common issues presented were: [1) whether
typhoon Zeb and any of its associated events constituted force majeure to justify
the extension of time sought by petitioner; and [2) whether LHC had the right
to terminate the Turnkey Contract for failure of petitioner to complete the
Project on target date.
Meanwhile, foreseeing that LHC would call on the Securities pursuant to the
pertinent provisions of the Turnkey Contract,12 petitionerin two separate
letters13 both dated 10 August 2000advised respondent banks of the
arbitration proceedings already pending before the CIAC and ICC in connection
with its alleged default in the performance of its obligations. Asserting that LHC
had no right to call on the Securities until the resolution of disputes before the
arbitral tribunals, petitioner warned respondent banks that any transfer,
release, or disposition of the Securities in favor of LHC or any person claiming
under LHC would constrain it to hold respondent banks liable for liquidated
damages.
As petitioner had anticipated, on 27 June 2000, LHC sent notice to petitioner
that pursuant to Clause 8.214 of the Turnkey Contract, it failed to comply with
its obligation to complete the Project. Despite the letters of petitioner, however,
both banks informed petitioner that they would pay on the Securities if and
when LHC calls on them.15
LHC asserted that additional extension of time would not be warranted;
accordingly it declared petitioner in default/delay in the performance of its
obligations under the Turnkey Contract and demanded from petitioner the
payment of US$75,000.00 for each day of delay beginning 28 June 2000 until
actual completion of the Project pursuant to Clause 8.7.1 of the Turnkey
Contract. At the same time, LHC served notice that it would call on the securities
for the payment of liquidated damages for the delay.16
On 5 November 2000, petitioner as plaintiff filed a Complaint for Injunction,
with prayer for temporary restraining order and writ of preliminary injunction,
against herein respondents as defendants before the Regional Trial Court (RTC)
of Makati.17 Petitioner sought to restrain respondent LHC from calling on the
Securities and respondent banks from transferring, paying on, or in any manner
disposing of the Securities or any renewals or substitutes thereof. The RTC
issued a seventy-two (72)-hour temporary restraining order on the same day.
The case was docketed as Civil Case No. 00-1312 and raffled to Branch 148 of
the RTC of Makati.
After appropriate proceedings, the trial court issued an Order on 9 November
2000, extending the temporary restraining order for a period of seventeen (17)
days or until 26 November 2000.18
The RTC, in its Order19 dated 24 November 2000, denied petitioner's
application for a writ of preliminary injunction. It ruled that petitioner had no
legal right and suffered no irreparable injury to justify the issuance of the writ.
Employing the principle of "independent contract" in letters of credit, the trial
court ruled that LHC should be allowed to draw on the Securities for liquidated
damages. It debunked petitioner's contention that the principle of "independent
contract" could be invoked only by respondent banks since according to it
respondent LHC is the ultimate beneficiary of the Securities. The trial court
further ruled that the banks were mere custodians of the funds and as such they
were obligated to transfer the same to the beneficiary for as long as the latter
could submit the required certification of its claims.
Dissatisfied with the trial court's denial of its application for a writ of
preliminary injunction, petitioner elevated the case to the Court of Appeals via
a Petition for Certiorari under Rule 65, with prayer for the issuance of a
temporary restraining order and writ of preliminary injunction.20 Petitioner
submitted to the appellate court that LHC's call on the Securities was premature
considering that the issue of its default had not yet been resolved with finality
by the CIAC and/or the ICC. It asserted that until the fact of delay could be
established, LHC had no right to draw on the Securities for liquidated damages.
Refuting petitioner's contentions, LHC claimed that petitioner had no right to
restrain its call on and use of the Securities as payment for liquidated damages.
It averred that the Securities are independent of the main contract between
them as shown on the face of the two Standby Letters of Credit which both
provide that the banks have no responsibility to investigate the authenticity or
accuracy of the certificates or the declarant's capacity or entitlement to so
certify.
In its Resolution dated 28 November 2000, the Court of Appeals issued a
temporary restraining order, enjoining LHC from calling on the Securities or any
renewals or substitutes thereof and ordering respondent banks to cease and
desist from transferring, paying or in any manner disposing of the Securities.
However, the appellate court failed to act on the application for preliminary
injunction until the temporary restraining order expired on 27 January 2001.
Immediately thereafter, representatives of LHC trooped to ANZ Bank and
withdrew the total amount of US$4,950,000.00, thereby reducing the balance in
ANZ Bank to US$1,852,814.00.
On 2 February 2001, the appellate court dismissed the petition for certiorari.
The appellate court expressed conformity with the trial court's decision that
LHC could call on the Securities pursuant to the first principle in credit law that
the credit itself is independent of the underlying transaction and that as long as
the beneficiary complied with the credit, it was of no moment that he had not
complied with the underlying contract. Further, the appellate court held that
even assuming that the trial court's denial of petitioner's application for a writ
of preliminary injunction was erroneous, it constituted only an error of
judgment which is not correctible by certiorari, unlike error of jurisdiction.
Undaunted, petitioner filed the instant Petition for Review raising the following
issues for resolution:
WHETHER THE "INDEPENDENCE PRINCIPLE" ON LETTERS OF
CREDIT MAY BE INVOKED BY A BENEFICIARY THEREOF WHERE THE
BENEFICIARY'S CALL THEREON IS WRONGFUL OR FRAUDULENT.
WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE
SECURITIES BEFORE THE RESOLUTION OF PETITIONER'S AND LHC'S
DISPUTES BY THE APPROPRIATE TRIBUNAL.
WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN
RELEASING THE AMOUNTS DUE UNDER THE SECURITIES DESPITE
BEING NOTIFIED THAT LHC'S CALL THEREON IS WRONGFUL.
WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND
IRREPARABLE DAMAGE IN THE EVENT THAT:
A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ BANK
AND SECURITY BANK ARE ALLOWED TO RELEASE, THE
REMAINING BALANCE OF THE SECURITIES PRIOR TO THE
RESOLUTION OF THE DISPUTES BETWEEN PETITIONER AND
LHC.
B. LHC DOES NOT RETURN THE AMOUNTS IT HAD
WRONGFULLY DRAWN FROM THE SECURITIES.21
Petitioner contends that the courts below improperly relied on the
"independence principle" on letters of credit when this case falls squarely
within the "fraud exception rule." Respondent LHC deliberately misrepresented
the supposed existence of delay despite its knowledge that the issue was still
pending arbitration, petitioner continues.
Petitioner asserts that LHC should be ordered to return the proceeds of the
Securities pursuant to the principle against unjust enrichment and that, under
the premises, injunction was the appropriate remedy obtainable from the
competent local courts.
On 25 August 2003, petitioner filed a Supplement to the Petition 22 and
Supplemental Memorandum,23 alleging that in the course of the proceedings in
the ICC Arbitration, a number of documentary and testimonial evidence came
out through the use of different modes of discovery available in the ICC
Arbitration. It contends that after the filing of the petition facts and admissions
were discovered which demonstrate that LHC knowingly misrepresented that
petitioner had incurred delays notwithstanding its knowledge and admission
that delays were excused under the Turnkey Contractto be able to draw
against the Securities. Reiterating that fraud constitutes an exception to the
independence principle, petitioner urges that this warrants a ruling from this
Court that the call on the Securities was wrongful, as well as contrary to law and
basic principles of equity. It avers that it would suffer grave irreparable damage
if LHC would be allowed to use the proceeds of the Securities and not ordered
to return the amounts it had wrongfully drawn thereon.
In its Manifestation dated 8 September 2003,24 LHC contends that the
supplemental pleadings filed by petitioner present erroneous and misleading
information which would change 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 credit
does 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. 52It
must be shown that the invasion of the right sought to be protected is material
and substantial, that the right of complainant is clear and unmistakable and that
there is an urgent and paramount necessity for the writ to prevent serious
damage.53 Moreover, an injunctive remedy may only be resorted to when there
is a pressing necessity to avoid injurious consequences which cannot be
remedied under any standard compensation.54
In the instant case, petitioner failed to show that it has a clear and unmistakable
right to restrain LHC's call on the Securities which would justify the issuance of
preliminary injunction. By petitioner's own admission, the right of LHC to call
on the Securities was contractually rooted and subject to the express
stipulations in the Turnkey Contract.55Indeed, the Turnkey Contract is plain and
unequivocal in that it conferred upon LHC the right to draw upon the Securities
in case of default, as provided in Clause 4.2.5, in relation to Clause 8.7.2, thus:
4.2.5 The Employer shall give the Contractor seven days' notice of
calling upon any of the Securities, stating the nature of the default for
which the claim on any of the Securities is to be made, provided that no
notice will be required if the Employer calls upon any of the Securities
for the payment of Liquidated Damages for Delay or for failure by the
Contractor to renew or extend the Securities within 14 days of their
expiration in accordance with Clause 4.2.2.56
8.7.2 The Employer may, without prejudice to any other method of
recovery, deduct the amount of such damages from any monies due, or
to become due, to the Contractor and/or by drawing on the Security.57
The pendency of the arbitration proceedings would not per se make LHC's
draws on the Securities wrongful or fraudulent for there was nothing in the
Contract which would indicate that the parties intended that all disputes
regarding delay should first be settled through arbitration before LHC would be
allowed to call upon the Securities. It is therefore premature and absurd to
conclude that the draws on the Securities were outright fraudulent given the
fact that the ICC and CIAC have not ruled with finality on the existence of default.
Nowhere in its complaint before the trial court or in its pleadings filed before
the appellate court, did petitioner invoke the fraud exception rule as a ground
to justify the issuance of an injunction.58 What petitioner did assert before the
courts below was the fact that LHC's draws on the Securities would be
premature and without basis in view of the pending disputes between them.
Petitioner should not be allowed in this instance to bring into play the fraud
exception rule to sustain its claim for the issuance of an injunctive relief.
Matters, theories or arguments not brought out in the proceedings below will
ordinarily not be considered by a reviewing court as they cannot be raised for
the first time on appeal.59 The lower courts could thus not be faulted for not
applying the fraud exception rule not only because the existence of fraud was
fundamentally interwoven with the issue of default still pending before the
arbitral tribunals, but more so, because petitioner never raised it as an issue in
its pleadings filed in the courts below. At any rate, petitioner utterly failed to
show that it had a clear and unmistakable right to prevent LHC's call upon the
Securities.
Of course, prudence should have impelled LHC to await resolution of the
pending issues before the arbitral tribunals prior to taking action to enforce the
Securities. But, as earlier stated, the Turnkey Contract did not require LHC to do
so and, therefore, it was merely enforcing its rights in accordance with the tenor
thereof. Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith. 60 More
importantly, pursuant to the principle of autonomy of contracts embodied in
Article 1306 of the Civil Code,61petitioner 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.
In the instant case, the consummation of the act sought to be restrained had
rendered the instant petition mootfor any declaration by this Court as to
propriety or impropriety of the non-issuance of injunctive relief could have no
practical effect on the existing controversy.65 The other issues raised by
petitioner particularly with respect to its right to recover the amounts
wrongfully drawn on the Securities, according to it, could properly be threshed
out in a separate proceeding.
One final point. LHC has charged petitioner of forum-shopping. It raised the
charge on two occasions. First, in its Counter-Manifestation dated 29 June
200466 LHC alleges that petitioner presented before this Court the same claim
for money which it has filed in two other proceedings, to wit: ICC Case No.
11264/TE/MW and Civil Case No. 04-332 before the RTC of Makati. LHC argues
that petitioner's acts constitutes forum-shopping which should be punished by
the dismissal of the claim in both forums. Second, in its Comment to Petitioner's
Motion for Leave to File Addendum to Petitioner's Memorandum dated 8
October 2004, LHC alleges that by maintaining the present appeal and at the
same time pursuing Civil Case No. 04-332wherein petitioner pressed for
judgment on the issue of whether the funds LHC drew on the Securities should
be returnedpetitioner resorted to forum-shopping. In both instances,
however, petitioner has apparently opted not to respond to the charge.
Forum-shopping is a very serious charge. It exists when a party repetitively
avails of several judicial remedies in different courts, simultaneously or
successively, all substantially founded on the same transactions and the same
essential facts and circumstances, and all raising substantially the same issues
either pending in, or already resolved adversely, by some other court. 67 It may
also consist in the act of a party against whom an adverse judgment has been
rendered in one forum, of seeking another and possibly favorable opinion in
another forum other than by appeal or special civil action of certiorari, or the
institution of two or more actions or proceedings grounded on the same cause
on the supposition that one or the other court might look with favor upon the
other party.68 To determine whether a party violated the rule against forum-
shopping, the test applied is whether the elements of litis pendentia are present
or whether a final judgment in one case will amount to res judicata in
another.69 Forum-shopping constitutes improper conduct and may be punished
with summary dismissal of the multiple petitions and direct contempt of
court.70
Considering the seriousness of the charge of forum-shopping and the severity
of the sanctions for its violation, the Court will refrain from making any
definitive ruling on this issue until after petitioner has been given ample
opportunity to respond to the charge.
WHEREFORE, the instant petition is DENIED, with costs against petitioner.
Petitioner is hereby required to answer the charge of forum-shopping within
fifteen (15) days from notice.
SO ORDERED.