Republic of the Philippines Folder of Exhibits, p 2).
To effect payment for said
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 74886 December 8, 1992
PRUDENTIAL BANK, petitioner,
vs.
INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON
MILLS, INC. and ANACLETO R. CHI, respondents.
DAVIDE, JR., J.:
Petitioner seeks to review and set aside the decision 1 of public
respondent; Intermediate Appellate Court (now Court of Appeals),
dated 10 March 1986, in AC-G.R. No. 66733 which affirmed in
toto the 15 June 1978 decision of Branch 9 (Quezon City) of the
then Court of First Instance (now Regional Trial Court) of Rizal in
Civil Case No. Q-19312. The latter involved an action instituted by
the petitioner for the recovery of a sum of money representing the
amount paid by it to the Nissho Company Ltd. of Japan for textile
machinery imported by the defendant, now private respondent,
Philippine Rayon Mills, Inc. (hereinafter Philippine Rayon),
represented by co-defendant Anacleto R. Chi.
The facts which gave rise to the instant controversy are
summarized by the public respondent as follows:
On August 8, 1962, defendant-appellant Philippine Rayon
Mills, Inc. entered into a contract with Nissho Co., Ltd. of
Japan for the importation of textile machineries under a
five-year deferred payment plan (Exhibit B, Plaintiff's
machineries, the defendant-appellant applied for a
commercial letter of credit with the Prudential Bank and
Trust Company in favor of Nissho. By virtue of said
application, the Prudential Bank opened Letter of Credit
No. DPP-63762 for $128,548.78 (Exhibit A, Ibid., p. 1).
Against this letter of credit, drafts were drawn and issued
by Nissho (Exhibits X, X-1 to X-11, Ibid., pp. 65, 66 to 76),
which were all paid by the Prudential Bank through its
correspondent in Japan, the Bank of Tokyo, Ltd. As
indicated on their faces, two of these drafts (Exhibit X and
X-1, Ibid., pp. 65-66) were accepted by the defendant-
appellant through its president, Anacleto R. Chi, while the
others were not (Exhibits X-2 to X-11, Ibid., pp. 66 to 76).
Upon the arrival of the machineries, the Prudential Bank
indorsed the shipping documents to the defendant-
appellant which accepted delivery of the same. To enable
the defendant-appellant to take delivery of the
machineries, it executed, by prior arrangement with the
Prudential Bank, a trust receipt which was signed by
Anacleto R. Chi in his capacity as President (sic) of
defendant-appellant company (Exhibit C, Ibid., p. 13).
At the back of the trust receipt is a printed form to be
accomplished by two sureties who, by the very terms and
conditions thereof, were to be jointly and severally liable
to the Prudential Bank should the defendant-appellant fail
to pay the total amount or any portion of the drafts issued
by Nissho and paid for by Prudential Bank. The defendant-
appellant was able to take delivery of the textile
machineries and installed the same at its factory site at 69
Obudan Street, Quezon City.
Sometime in 1967, the defendant-appellant ceased
business operation (sic). On December 29, 1969,
1
 defendant-appellant's factory was leased by Yupangco
Cotton Mills for an annual rental of P200,000.00 (Exhibit
I, Ibid., p. 22). The lease was renewed on January 3, 1973
(Exhibit J, Ibid., p. 26). On January 5, 1974, all the textile
machineries in the defendant-appellant's factory were sold
to AIC Development Corporation for P300,000.00 (Exhibit
K, Ibid., p. 29).
The obligation of the defendant-appellant arising from the
letter of credit and the trust receipt remained unpaid and
unliquidated. Repeated formal demands (Exhibits U, V, and
W, Ibid., pp. 62, 63, 64) for the payment of the said trust
receipt yielded no result Hence, the present action for the
collection of the principal amount of P956,384.95 was filed
on October 3, 1974 against the defendant-appellant and
Anacleto R. Chi. In their respective answers, the
defendants interposed identical special defenses, viz., the
complaint states no cause of action; if there is, the same
has prescribed; and the plaintiff is guilty of laches. 2
On 15 June 1978, the trial court rendered its decision the
dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered sentencing the
defendant Philippine Rayon Mills, Inc. to pay plaintiff the
sum of P153,645.22, the amounts due under Exhibits "X" &
"X-1", with interest at 6% per annum beginning September
15, 1974 until fully paid.
Insofar as the amounts involved in drafts Exhs. "X" (sic) to
"X-11", inclusive, the same not having been accepted by
defendant Philippine Rayon Mills, Inc., plaintiff's cause of
action thereon has not accrued, hence, the instant case is
premature.
Insofar as defendant Anacleto R. Chi is concerned, the case
is dismissed. Plaintiff is ordered to pay defendant Anacleto
R. Chi the sum of P20,000.00 as attorney's fees.
With costs against defendant Philippine Rayon Mills, Inc.
SO ORDERED. 3
Petitioner appealed the decision to the then Intermediate
Appellate Court. In urging the said court to reverse or modify the
decision, petitioner alleged in its Brief that the trial court erred in
(a) disregarding its right to reimbursement from the private
respondents for the entire unpaid balance of the imported
machines, the total amount of which was paid to the Nissho
Company Ltd., thereby violating the principle of the third party
payor's right to reimbursement provided for in the second
paragraph of Article 1236 of the Civil Code and under the rule
against unjust enrichment; (b) refusing to hold Anacleto R. Chi, as
the responsible officer of defendant corporation, liable under
Section 13 of P.D No 115 for the entire unpaid balance of the
imported machines covered by the bank's trust receipt (Exhibit
"C"); (c) finding that the solidary guaranty clause signed by
Anacleto R. Chi is not a guaranty at all; (d) controverting the
judicial admissions of Anacleto R. Chi that he is at least a simple
guarantor of the said trust receipt obligation; (e) contravening,
based on the assumption that Chi is a simple guarantor, Articles
2059, 2060 and 2062 of the Civil Code and the related evidence
and jurisprudence which provide that such liability had already
attached; (f) contravening the judicial admissions of Philippine
Rayon with respect to its liability to pay the petitioner the
amounts involved in the drafts (Exhibits "X", "X-l" to "X-11''); and
(g) interpreting "sight" drafts as requiring acceptance by
Philippine Rayon before the latter could be held liable thereon. 4
In its decision, public respondent sustained the trial court in all
respects. As to the first and last assigned errors, it ruled that the
2
provision on unjust enrichment, Article 2142 of the Civil Code,
applies only if there is no express contract between the parties and
there is a clear showing that the payment is justified. In the instant
case, the relationship existing between the petitioner and
Philippine Rayon is governed by specific contracts, namely the
application for letters of credit, the promissory note, the drafts and
the trust receipt. With respect to the last ten (10) drafts (Exhibits
"X-2" to "X-11") which had not been presented to and were not
accepted by Philippine Rayon, petitioner was not justified in
unilaterally paying the amounts stated therein. The public
respondent did not agree with the petitioner's claim that the drafts
were sight drafts which did not require presentment for
acceptance to Philippine Rayon because paragraph 8 of the trust
receipt presupposes prior acceptance of the drafts. Since the ten
(10) drafts were not presented and accepted, no valid demand for
payment can be made.
Public respondent also disagreed with the petitioner's contention
that private respondent Chi is solidarily liable with Philippine
Rayon pursuant to Section 13 of P.D. No. 115 and based on his
signature on the solidary guaranty clause at the dorsal side of the
trust receipt. As to the first contention, the public respondent
ruled that the civil liability provided for in said Section 13 attaches
only after conviction. As to the second, it expressed misgivings as
to whether Chi's signature on the trust receipt made the latter
automatically liable thereon because the so-called solidary
guaranty clause at the dorsal portion of the trust receipt is to be
signed not by one (1) person alone, but by two (2) persons; the
last sentence of the same is incomplete and unsigned by witnesses;
and it is not acknowledged before a notary public. Besides, even
granting that it was executed and acknowledged before a notary
public, Chi cannot be held liable therefor because the records fail
to show that petitioner had either exhausted the properties of
Philippine Rayon or had resorted to all legal remedies as required
in Article 2058 of the Civil Code. As provided for under Articles
2052 and 2054 of the Civil Code, the obligation of a guarantor is
merely accessory and subsidiary, respectively. Chi's liability would
therefore arise only when the principal debtor fails to comply with
his obligation. 5
Its motion to reconsider the decision having been denied by the
public respondent in its Resolution of 11 June 1986, 6 petitioner
filed the instant petition on 31 July 1986 submitting the following
legal issues:
I. WHETHER OR NOT THE RESPONDENT
APPELLATE COURT GRIEVOUSLY ERRED IN
DENYING PETITIONER'S CLAIM FOR FULL
REIMBURSEMENT AGAINST THE PRIVATE
RESPONDENTS FOR THE PAYMENT PETITIONER
MADE TO NISSHO CO. LTD. FOR THE BENEFIT OF
PRIVATE RESPONDENT UNDER ART. 1283 OF THE
NEW CIVIL CODE OF THE PHILIPPINES AND UNDER
THE GENERAL PRINCIPLE AGAINST UNJUST
ENRICHMENT;
II. WHETHER OR NOT RESPONDENT CHI IS
SOLIDARILY LIABLE UNDER THE TRUST RECEIPT
(EXH. C);
III. WHETHER OR NOT ON THE BASIS OF THE
JUDICIAL ADMISSIONS OF RESPONDENT CHI HE IS
LIABLE THEREON AND TO WHAT EXTENT;
IV. WHETHER OR NOT RESPONDENT CHI IS
MERELY A SIMPLE GUARANTOR; AND IF SO; HAS
HIS LIABILITY AS SUCH ALREADY ATTACHED;
V. WHETHER OR NOT AS THE SIGNATORY AND
RESPONSIBLE OFFICER OF RESPONDENT PHIL.
RAYON RESPONDENT CHI IS PERSONALLY LIABLE
3
 PURSUANT TO THE PROVISION OF SECTION 13, P.D.
115;
VI. WHETHER OR NOT RESPONDENT PHIL. RAYON
IS LIABLE TO THE PETITIONER UNDER THE TRUST
RECEIPT (EXH. C);
VII. WHETHER OR NOT ON THE BASIS OF THE
JUDICIAL ADMISSIONS RESPONDENT PHIL. RAYON
IS LIABLE TO THE PETITIONER UNDER THE
DRAFTS (EXHS. X, X-1 TO X-11) AND TO WHAT
EXTENT;
VIII. WHETHER OR NOT SIGHT DRAFTS REQUIRE
PRIOR ACCEPTANCE FROM RESPONDENT PHIL.
RAYON BEFORE THE LATTER BECOMES LIABLE TO
PETITIONER. 7
In the Resolution of 12 March 1990, 8 this Court gave due course
to the petition after the filing of the Comment thereto by private
respondent Anacleto Chi and of the Reply to the latter by the
petitioner; both parties were also required to submit their
respective memoranda which they subsequently complied with.
As We see it, the issues may be reduced as follows:
1. Whether presentment for acceptance of the drafts
was indispensable to make Philippine Rayon liable
thereon;
2. Whether Philippine Rayon is liable on the basis of the
trust receipt;
3. Whether private respondent Chi is jointly and
severally liable with Philippine Rayon for the obligation
sought to be enforced and if not, whether he may be
considered a guarantor; in the latter situation, whether
the case should have been dismissed on the ground of
lack of cause of action as there was no prior exhaustion
of Philippine Rayon's properties.
Both the trial court and the public respondent ruled that
Philippine Rayon could be held liable for the two (2) drafts,
Exhibits "X" and "X-1", because only these appear to have been
accepted by the latter after due presentment. The liability for the
remaining ten (10) drafts (Exhibits "X-2" to "X-11" inclusive) did
not arise because the same were not presented for acceptance. In
short, both courts concluded that acceptance of the drafts by
Philippine Rayon was indispensable to make the latter liable
thereon. We are unable to agree with this proposition. The
transaction in the case at bar stemmed from Philippine Rayon's
application for a commercial letter of credit with the petitioner in
the amount of $128,548.78 to cover the former's contract to
purchase and import loom and textile machinery from Nissho
Company, Ltd. of Japan under a five-year deferred payment plan.
Petitioner approved the application. As correctly ruled by the trial
court in its Order of 6 March 1975: 9
. . . By virtue of said Application and Agreement for
Commercial Letter of Credit, plaintiff bank 10 was
under obligation to pay through its correspondent
bank in Japan the drafts that Nisso (sic) Company,
Ltd., periodically drew against said letter of credit
from 1963 to 1968, pursuant to plaintiff's contract
with the defendant Philippine Rayon Mills, Inc. In
turn, defendant Philippine Rayon Mills, Inc., was
obligated to pay plaintiff bank the amounts of the
drafts drawn by Nisso (sic) Company, Ltd. against
said plaintiff bank together with any accruing
commercial charges, interest, etc. pursuant to the
terms and conditions stipulated in the Application
4
 and Agreement of Commercial Letter of Credit
Annex "A".
A letter of credit is defined as an engagement by a bank or other
person made at the request of a customer that the issuer will
honor drafts or other demands for payment upon compliance with
the conditions specified in the credit. 11Through a letter of credit,
the bank merely substitutes its own promise to pay for one of its
customers who in return promises to pay the bank the amount of
funds mentioned in the letter of credit plus credit or commitment
fees mutually agreed upon. 12 In the instant case then, the drawee
was necessarily the herein petitioner. It was to the latter that the
drafts were presented for payment. In fact, there was no need for
acceptance as the issued drafts are sight drafts. Presentment for
acceptance is necessary only in the cases expressly provided for in
Section 143 of the Negotiable Instruments Law (NIL). 13 The said
section reads:
Sec. 143. When presentment for acceptance must be
made. — Presentment for acceptance must be made:
(a) Where the bill is payable after sight, or
in any other case, where presentment for
acceptance is necessary in order to fix the
maturity of the instrument; or
(b) Where the bill expressly stipulates
that it shall be presented for acceptance;
or
(c) Where the bill is drawn payable
elsewhere than at the residence or place
of business of the drawee.
In no other case is presentment for acceptance
necessary in order to render any party to the bill
liable.
Obviously then, sight drafts do not require presentment for
acceptance.
The acceptance of a bill is the signification by the drawee of his
assent to the order of the drawer; 14 this may be done in writing by
the drawee in the bill itself, or in a separate instrument. 15
The parties herein agree, and the trial court explicitly ruled, that
the subject, drafts are sight drafts. Said the latter:
. . . In the instant case the drafts being at sight, they
are supposed to be payable upon acceptance unless
plaintiff bank has given the Philippine Rayon Mills
Inc. time within which to pay the same. The first two
drafts (Annexes C & D, Exh. X & X-1) were duly
accepted as indicated on their face (sic), and upon
such acceptance should have been paid forthwith.
These two drafts were not paid and although
Philippine Rayon Mills
ought to have paid the same, the fact remains that
until now they are still unpaid. 16
Corollarily, they are, pursuant to Section 7 of the NIL, payable on
demand. Section 7 provides:
Sec. 7. When payable on demand. — An instrument is
payable on demand —
(a) When so it is expressed to be
payable on demand, or at sight, or
on presentation; or
5
 (b) In which no time for payment in
expressed.
Where an instrument is issued, accepted, or
indorsed when overdue, it is, as regards the person
so issuing, accepting, or indorsing it, payable on
demand. (emphasis supplied)
Paragraph 8 of the Trust Receipt which reads: "My/our
liability for payment at maturity of any accepted draft, bill
of exchange or indebtedness shall not be extinguished or
modified" 17 does not, contrary to the holding of the public
respondent, contemplate prior acceptance by Philippine
Rayon, but by the petitioner. Acceptance, however, was not
even necessary in the first place because the drafts which
were eventually issued were sight drafts And even if these
were not sight drafts, thereby necessitating acceptance, it
would be the petitioner — and not Philippine Rayon —
which had to accept the same for the latter was not the
drawee. Presentment for acceptance is defined an the
production of a bill of exchange to a drawee for
acceptance. 18The trial court and the public respondent,
therefore, erred in ruling that presentment for acceptance
was an indispensable requisite for Philippine Rayon's
liability on the drafts to attach. Contrary to both courts'
pronouncements, Philippine Rayon immediately became
liable thereon upon petitioner's payment thereof. Such is
the essence of the letter of credit issued by the petitioner. A
different conclusion would violate the principle upon which
commercial letters of credit are founded because in such a
case, both the beneficiary and the issuer, Nissho Company
Ltd. and the petitioner, respectively, would be placed at the
mercy of Philippine Rayon even if the latter had already
received the imported machinery and the petitioner had
fully paid for it. The typical setting and purpose of a letter
of credit are described in Hibernia Bank and Trust
Co.vs. J. Aron & Co., Inc., 19 thus:
Commercial letters of credit have come into general
use in international sales transactions where much
time necessarily elapses between the sale and the
receipt by a purchaser of the merchandise, during
which interval great price changes may occur.
Buyers and sellers struggle for the advantage of
position. The seller is desirous of being paid as
surely and as soon as possible, realizing that the
vendee at a distant point has it in his power to reject
on trivial grounds merchandise on arrival, and cause
considerable hardship to the shipper. Letters of
credit meet this condition by affording celerity and
certainty of payment. Their purpose is to insure to a
seller payment of a definite amount upon
presentation of documents. The bank deals only
with documents. It has nothing to do with the
quality of the merchandise. Disputes as to the
merchandise shipped may arise and be litigated
later between vendor and vendee, but they may not
impede acceptance of drafts and payment by the
issuing bank when the proper documents are
presented.
The trial court and the public respondent likewise erred in
disregarding the trust receipt and in not holding that Philippine
Rayon was liable thereon. In People vs. Yu Chai Ho, 20 this Court
explains the nature of a trust receipt by quoting In re Dunlap
Carpet Co., 21 thus:
By this arrangement a banker advances money to an
intending importer, and thereby lends the aid of
capital, of credit, or of business facilities and
agencies abroad, to the enterprise of foreign
6
 commerce. Much of this trade could hardly be
carried on by any other means, and therefore it is of
the first importance that the fundamental factor in
the transaction, the banker's advance of money and
credit, should receive the amplest protection.
Accordingly, in order to secure that the banker shall
be repaid at the critical point — that is, when the
imported goods finally reach the hands of the
intended vendee — the banker takes the full title to
the goods at the very beginning; he takes it as soon
as the goods are bought and settled for by his
payments or acceptances in the foreign country, and
he continues to hold that title as his indispensable
security until the goods are sold in the United States
and the vendee is called upon to pay for them. This
security is not an ordinary pledge by the importer to
the banker, for the importer has never owned the
goods, and moreover he is not able to deliver the
possession; but the security is the complete title
vested originally in the bankers, and this
characteristic of the transaction has again and again
been recognized and protected by the courts. Of
course, the title is at bottom a security title, as it has
sometimes been called, and the banker is always
under the obligation to reconvey; but only after his
advances have been fully repaid and after the
importer has fulfilled the other terms of the
contract.
As further stated in National Bank vs. Viuda e Hijos de Angel
Jose, 22 trust receipts:
. . . [I]n a certain manner, . . . partake of the nature of
a conditional sale as provided by the Chattel
Mortgage Law, that is, the importer becomes
absolute owner of the imported merchandise as
soon an he has paid its price. The ownership of the
merchandise continues to be vested in the owner
thereof or in the person who has advanced payment,
until he has been paid in full, or if the merchandise
has already been sold, the proceeds of the sale
should be turned over to him by the importer or by
his representative or successor in interest.
Under P.D. No. 115, otherwise known an the Trust Receipts Law,
which took effect on 29 January 1973, a trust receipt transaction is
defined as "any transaction by and between a person referred to in
this Decree as the entruster, and another person referred to in this
Decree as the entrustee, whereby the entruster, who owns or
holds absolute title or security interests' over certain specified
goods, documents or instruments, releases the same to the
possession of the entrustee upon the latter's execution and
delivery to the entruster of a signed document called the "trust
receipt" wherein the entrustee binds himself to hold the
designated goods, documents or instruments in trust for the
entruster and to sell or otherwise dispose of the goods, documents
or instruments with the obligation to turn over to the entruster
the proceeds thereof to the extent of the amount owing to the
entruster or as appears in the trust receipt or the goods,
instruments themselves if they are unsold or not otherwise
disposed of, in accordance with the terms and conditions specified
in the trusts receipt, or for other purposes substantially equivalent
to any one of the following: . . ."
It is alleged in the complaint that private respondents "not only
have presumably put said machinery to good use and have
profited by its operation and/or disposition but very recent
information that (sic) reached plaintiff bank that defendants
already sold the machinery covered by the trust receipt to
Yupangco Cotton Mills," and that "as trustees of the property
covered by the trust receipt, . . . and therefore acting in fiduciary
(sic) capacity, defendants have willfully violated their duty to
7
account for the whereabouts of the machinery covered by the trust
receipt or for the proceeds of any lease, sale or other disposition of
the same that they may have made, notwithstanding demands
therefor; defendants have fraudulently misapplied or converted to
their own use any money realized from the lease, sale, and other
disposition of said machinery." 23 While there is no specific prayer
for the delivery to the petitioner by Philippine Rayon of the
proceeds of the sale of the machinery covered by the trust receipt,
such relief is covered by the general prayer for "such further and
other relief as may be just and equitable on the premises." 24 And
although it is true that the petitioner commenced a criminal action
for the violation of the Trust Receipts Law, no legal obstacle
prevented it from enforcing the civil liability arising out of the
trust, receipt in a separate civil action. Under Section 13 of the
Trust Receipts Law, the failure of an entrustee to turn over the
proceeds of the sale of goods, documents or instruments covered
by a trust receipt to the extent of the amount owing to the
entruster or as appear 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 315,
paragraph 1(b) of the Revised Penal Code. 25 Under Article 33 of
the Civil Code, a civil action for damages, entirely separate and
distinct from the criminal action, may be brought by the injured
party in cases of defamation, fraud and physical injuries. Estafa
falls under fraud.
We also conclude, for the reason hereinafter discussed, and not for
that adduced by the public respondent, that private respondent
Chi's signature in the dorsal portion of the trust receipt did not
bind him solidarily with Philippine Rayon. The statement at the
dorsal portion of the said trust receipt, which petitioner describes
as a "solidary guaranty clause", reads:
In consideration of the PRUDENTIAL BANK AND
TRUST COMPANY complying with the foregoing, we
jointly and severally agree and undertake to pay on
demand to the PRUDENTIAL BANK AND TRUST
COMPANY all sums of money which the said
PRUDENTIAL BANK AND TRUST COMPANY may call
upon us to pay arising out of or pertaining to, and/or
in any event connected with the default of and/or
non-fulfillment in any respect of the undertaking of
the aforesaid:
PHILIPPINE RAYON MILLS, INC.
We further agree that the PRUDENTIAL BANK AND
TRUST COMPANY does not have to take any steps or
exhaust its remedy against aforesaid:
before making demand on me/us.
Petitioner insists that by virtue of the clear wording of the
statement, specifically the clause ". . . we jointly and severally
agree and undertake . . .," and the concluding sentence on
exhaustion, Chi's liability therein is solidary.
In holding otherwise, the public respondent ratiocinates as
follows:
With respect to the second argument, we have our
misgivings as to whether the mere signature of defendant-
appellee Chi of (sic) the guaranty agreement, Exhibit "C-1",
will make it an actionable document. It should be noted that
Exhibit "C-1" was prepared and printed by the plaintiff-
appellant. A perusal of Exhibit "C-1" shows that it was to be
signed and executed by two persons. It was signed only by
defendant-appellee Chi. Exhibit "C-1" was to be witnessed
by two persons, but no one signed in that capacity. The last
8
 sentence of the guaranty clause is incomplete.
Furthermore, the plaintiff-appellant also failed to have the
purported guarantee clause acknowledged before a notary
public. All these show that the alleged guaranty provision
was disregarded and, therefore, not consummated.
But granting arguendo that the guaranty provision in
Exhibit "C-1" was fully executed and acknowledged still
defendant-appellee Chi cannot be held liable thereunder
because the records show that the plaintiff-appellant had
neither exhausted the property of the defendant-appellant
nor had it resorted to all legal remedies against the said
defendant-appellant as provided in Article 2058 of the Civil
Code. The obligation of a guarantor is merely accessory
under Article 2052 of the Civil Code and subsidiary under
Article 2054 of the Civil Code. Therefore, the liability of the
defendant-appellee arises only when the principal debtor
fails to comply with his obligation. 27
Our own reading of the questioned solidary guaranty clause yields
no other conclusion than that the obligation of Chi is only that of
a guarantor. This is further bolstered by the last sentence which
speaks of waiver of exhaustion, which, nevertheless, is ineffective
in this case because the space therein for the party whose
property may not be exhausted was not filled up. Under Article
2058 of the Civil Code, the defense of exhaustion (excussion) may
be raised by a guarantor before he may be held liable for the
obligation. Petitioner likewise admits that the questioned
provision is a solidary guaranty clause, thereby clearly
distinguishing it from a contract of surety. It, however, described
the guaranty as solidary between the guarantors; this would have
been correct if two (2) guarantors had signed it. The clause "we
jointly and severally agree and undertake" refers to the
undertaking of the two (2) parties who are to sign it or to the
liability existing between themselves. It does not refer to the
undertaking between either one or both of them on the one hand
and the petitioner on the other with respect to the liability
described under the trust receipt. Elsewise stated, their liability is
not divisible as between them, i.e., it can be enforced to its full
extent against any one of them.
Furthermore, any doubt as to the import, or true intent of the
solidary guaranty clause should be resolved against the petitioner.
The trust receipt, together with the questioned solidary guaranty
clause, is on a form drafted and prepared solely by the petitioner;
Chi's participation therein is limited to the affixing of his signature
thereon. It is, therefore, a contract of adhesion; 28 as such, it must
be strictly construed against the party responsible for its
preparation. 29
Neither can We agree with the reasoning of the public respondent
that this solidary guaranty clause was effectively disregarded
simply because it was not signed and witnessed by two (2)
persons and acknowledged before a notary public. While indeed,
the clause ought to have been signed by two (2) guarantors, the
fact that it was only Chi who signed the same did not make his act
an idle ceremony or render the clause totally meaningless. By his
signing, Chi became the sole guarantor. The attestation by
witnesses and the acknowledgement before a notary public are
not required by law to make a party liable on the instrument. The
rule is that contracts shall be obligatory in whatever form they
may have been entered into, provided all the essential requisites
for their validity are present; however, when the law requires that
a contract be in some form in order that it may be valid or
enforceable, or that it be proved in a certain way, that requirement
is absolute and indispensable. 30 With respect to a
guaranty, 31 which is a promise to answer for the debt or default of
another, the law merely requires that it, or some note or
memorandum thereof, be in writing. Otherwise, it would be
unenforceable unless ratified. 32 While the acknowledgement of a
surety before a notary public is required to make the same a public
9
document, under Article 1358 of the Civil Code, a contract of
guaranty does not have to appear in a public document.
And now to the other ground relied upon by the petitioner as basis
for the solidary liability of Chi, namely the criminal proceedings
against the latter for the violation of P.D. No. 115. Petitioner claims
that because of the said criminal proceedings, Chi would be
answerable for the civil liability arising therefrom pursuant to
Section 13 of P.D. No. 115. Public respondent rejected this claim
because such civil liability presupposes prior conviction as can be
gleaned from the phrase "without prejudice to the civil liability
arising from the criminal offense." Both are wrong. The said
section reads:
Sec. 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.
A close examination of the quoted provision reveals that it is the
last sentence which provides for the correct solution. It is clear
that if the violation or offense is committed by a corporation,
partnership, association or other juridical entities, the penalty
shall be imposed upon the directors, officers, employees or other
officials or persons therein responsible for the offense. The
penalty referred to is imprisonment, the duration of which would
depend on the amount of the fraud as provided for in Article 315
of the Revised Penal Code. The reason for this is obvious:
corporations, partnerships, associations and other juridical
entities cannot be put in jail. However, it is these entities which are
made liable for the civil liability arising from the criminal offense.
This is the import of the clause "without prejudice to the civil
liabilities arising from the criminal offense." And, as We stated
earlier, since that violation of a trust receipt constitutes fraud
under Article 33 of the Civil Code, petitioner was acting well
within its rights in filing an independent civil action to enforce the
civil liability arising therefrom against Philippine Rayon.
The remaining issue to be resolved concerns the propriety of the
dismissal of the case against private respondent Chi. The trial
court based the dismissal, and the respondent Court its affirmance
thereof, on the theory that Chi is not liable on the trust receipt in
any capacity — either as surety or as guarantor — because his
signature at the dorsal portion thereof was useless; and even if he
could be bound by such signature as a simple guarantor, he
cannot, pursuant to Article 2058 of the Civil Code, be compelled to
pay until
after petitioner has exhausted and resorted to all legal remedies
against the principal debtor, Philippine Rayon. The records fail to
show that petitioner had done so 33 Reliance is thus placed on
Article 2058 of the Civil Code which provides:
Art. 2056. The guarantor cannot be compelled to pay the
creditor unless the latter has exhausted all the property of the
debtor, and has resorted to all the legal remedies against the
debtor.
Simply stated, there is as yet no cause of action against Chi.
10
We are not persuaded. Excussion is not a condition sine qua
non for the institution of an action against a guarantor. In Southern
Motors, Inc. vs. Barbosa, 34 this Court stated:
4. Although an ordinary personal guarantor — not a
mortgagor or pledgor — may demand the aforementioned
exhaustion, the creditor may, prior thereto, secure a
judgment against said guarantor, who shall be entitled,
however, to a deferment of the execution of said judgment
against him until after the properties of the principal debtor
shall have been exhausted to satisfy the obligation involved
in the case.
There was then nothing procedurally objectionable in impleading
private respondent Chi as a co-defendant in Civil Case No. Q-19312
before the trial court. As a matter of fact, Section 6, Rule 3 of the
Rules of Court on permissive joinder of parties explicitly allows it.
It reads:
Sec. 6. Permissive joinder of parties. — All persons in whom
or against whom any right to relief in respect to or arising
out of the same transaction or series of transactions is
alleged to exist, whether jointly, severally, or in the
alternative, may, except as otherwise provided in these
rules, join as plaintiffs or be joined as defendants in one
complaint, where any question of law or fact common to all
such plaintiffs or to all such defendants may arise in the
action; but the court may make such orders as may be just to
prevent any plaintiff or defendant from being embarrassed
or put to expense in connection with any proceedings in
which he may have no interest.
This is the equity rule relating to multifariousness. It is based on
trial convenience and is designed to permit the joinder of plaintiffs
or defendants whenever there is a common question of law or fact.
It will save the parties unnecessary work, trouble and expense. 35
However, Chi's liability is limited to the principal obligation in the
trust receipt plus all the accessories thereof including judicial
costs; with respect to the latter, he shall only be liable for those
costs incurred after being judicially required to pay. 36 Interest and
damages, being accessories of the principal obligation, should also
be paid; these, however, shall run only from the date of the filing of
the complaint. Attorney's fees may even be allowed in appropriate
cases.37
In the instant case, the attorney's fees to be paid by Chi cannot be
the same as that to be paid by Philippine Rayon since it is only the
trust receipt that is covered by the guaranty and not the full extent
of the latter's liability. All things considered, he can be held liable
for the sum of P10,000.00 as attorney's fees in favor of the
petitioner.
Thus, the trial court committed grave abuse of discretion in
dismissing the complaint as against private respondent Chi and
condemning petitioner to pay him P20,000.00 as attorney's fees.
In the light of the foregoing, it would no longer necessary to
discuss the other issues raised by the petitioner
WHEREFORE, the instant Petition is hereby GRANTED.
The appealed Decision of 10 March 1986 of the public
respondent in AC-G.R. CV No. 66733 and, necessarily, that
of Branch 9 (Quezon City) of the then Court of First
Instance of Rizal in Civil Case No. Q-19312 are hereby
REVERSED and SET ASIDE and another is hereby entered:
1. Declaring private respondent Philippine Rayon Mills,
Inc. liable on the twelve drafts in question (Exhibits "X",
"X-1" to "X-11", inclusive) and on the trust receipt
(Exhibit "C"), and ordering it to pay petitioner: (a) the
amounts due thereon in the total sum of P956,384.95 as
11
 of 15 September 1974, with interest thereon at six
percent (6%) per annum from 16 September 1974 until
it is fully paid, less whatever may have been applied
thereto by virtue of foreclosure of mortgages, if any; (b)
a sum equal to ten percent (10%) of the aforesaid
amount as attorney's fees; and (c) the costs.

2. Declaring private respondent Anacleto R. Chi

secondarily liable on the trust receipt and ordering him
to pay the face value thereof, with interest at the legal
rate, commencing from the date of the filing of the
complaint in Civil Case No. Q-19312 until the same is
fully paid as well as the costs and attorney's fees in the
sum of P10,000.00 if the writ of execution for the
enforcement of the above awards against Philippine
Rayon Mills, Inc. is returned unsatisfied.

Costs against private respondents.

SO ORDERED.

12
 Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 105395 December 10, 1993
BANK OF AMERICA, NT & SA, petitioners,
vs.
COURT OF APPEALS, INTER-RESIN INDUSTRIAL
CORPORATION, FRANCISCO TRAJANO, JOHN DOE AND
JANE DOE, respondents.
Agcaoili & Associates for petitioner.
Valenzuela Law Center, Victor Fernandez and Ramon Guevarra
for private respondents.
VITUG, J.:
A "fiasco," involving an irrevocable letter of credit, has found the
distressed parties coming to court as adversaries in seeking a
definition of their respective rights or liabilities thereunder.
On 05 March 1981, petitioner Bank of America, NT & SA, Manila,
received by registered mail an Irrevocable Letter of Credit No.
20272/81 purportedly issued by Bank of Ayudhya, Samyaek
Branch, for the account of General Chemicals, Ltd., of Thailand in
the amount of US$2,782,000.00 to cover the sale of plastic ropes
and "agricultural files," with the petitioner as advising bank and
private respondent Inter-Resin Industrial Corporation as
beneficiary.
On 11 March 1981, Bank of America wrote Inter-Resin informing
the latter of the foregoing and transmitting, along with the bank's
communication,
the latter of credit. Upon receipt of the letter-advice with the letter
of credit, Inter-Resin sent Atty. Emiliano Tanay to Bank of America
to have the letter of credit confirmed. The bank did not. Reynaldo
Dueñas, bank employee in charge of letters of credit, however,
explained to Atty. Tanay that there was no need for confirmation
because the letter of credit would not have been transmitted if it
were not genuine.
Between 26 March to 10 April 1981, Inter-Resin sought to make a
partial availment under the letter of credit by submitting to Bank of
America invoices, covering the shipment of 24,000 bales of
polyethylene rope to General Chemicals valued at
US$1,320,600.00, the corresponding packing list, export
declaration and bill of lading. Finally, after being satisfied that Inter-
Resin's documents conformed with the conditions expressed in the
letter of credit, Bank of America issued in favor of Inter-Resin a
Cashier's Check for P10,219,093.20, "the Peso equivalent of the
draft (for) US$1,320,600.00 drawn by Inter-Resin, after deducting
the costs for documentary stamps, postage and mail
issuance." 1 The check was picked up by Inter-Resin's Executive
Vice-President Barcelina Tio. On 10 April 1981, Bank of America
wrote Bank of Ayudhya advising the latter of the availment under
the letter of credit and sought the corresponding reimbursement
therefor.
Meanwhile, Inter-Resin, through Ms. Tio, presented to Bank of
America the documents for the second availment under the same
letter of credit consisting of a packing list, bill of lading, invoices,
export declaration and bills in set, evidencing the second shipment
of goods. Immediately upon receipt of a telex from the Bank of
Ayudhya declaring the letter of credit fraudulent, 2 Bank of America
stopped the processing of Inter-Resin's documents and sent a
telex to its branch office in Bangkok, Thailand, requesting
assistance in determining the authenticity of the letter of
credit. 3 Bank of America kept Inter-Resin informed of the
13
developments. Sensing a fraud, Bank of America sought the
assistance of the National Bureau of Investigation (NBI). With the
help of the staff of the Philippine Embassy at Bangkok, as well as
the police and customs personnel of Thailand, the NBI agents, who
were sent to Thailand, discovered that the vans exported by Inter-
Resin did not contain ropes but plastic strips, wrappers, rags and
waste materials. Here at home, the NBI also investigated Inter-
Resin's President Francisco Trajano and Executive Vice President
Barcelina Tio, who, thereafter, were criminally charged for estafa
through falsification of commercial documents. The case, however,
was eventually dismissed by the Rizal Provincial Fiscal who found
no prima facieevidence to warrant prosecution.
Bank of America sued Inter-Resin for the recovery of
P10,219,093.20, the peso equivalent of the draft for
US$1,320,600.00 on the partial availment of the now disowned
letter of credit. On the other hand, Inter-Resin claimed that not only
was it entitled to retain P10,219,093.20 on its first shipment but
also to the balance US$1,461,400.00 covering the second
shipment.
On 28 June 1989, the trial court ruled for Inter-Resin, 4 holding that:
(a) Bank of America made assurances that enticed Inter-Resin to
send the merchandise to Thailand; (b) the telex declaring the letter
of credit fraudulent was unverified and self-serving, hence,
hearsay, but even assuming that the letter of credit was fake, "the
fault should be borne by the BA which was careless and
negligent" 5 for failing to utilize its modern means of communication
to verify with Bank of Ayudhya in Thailand the authenticity of the
letter of credit before sending the same to Inter-Resin; (c) the
loading of plastic products into the vans were under strict
supervision, inspection and verification of government officers who
have in their favor the presumption of regularity in the performance
of official functions; and (d) Bank of America failed to prove the
participation of Inter-Resin or its employees in the alleged fraud as,
in fact, the complaint for estafa through falsification of documents
was dismissed by the Provincial Fiscal of Rizal.6
On appeal, the Court of Appeals 7 sustained the trial court; hence,
this present recourse by petitioner Bank of America.
The following issues are raised by Bank of America: (a) whether it
has warranted the genuineness and authenticity of the letter of
credit and, corollarily, whether it has acted merely as an advising
bank or as a confirming bank; (b) whether Inter-Resin has actually
shipped the ropes specified by the letter of credit; and (c) following
the dishonor of the letter of credit by Bank of Ayudhya, whether
Bank of America may recover against Inter-Resin under the draft
executed in its partial availment of the letter of credit.8
In rebuttal, Inter-Resin holds that: (a) Bank of America cannot, on
appeal, belatedly raise the issue of being only an advising bank;
(b) the findings of the trial court that the ropes have actually been
shipped is binding on the Court; and, (c) Bank of America cannot
recover from Inter-Resin because the drawer of the letter of credit
is the Bank of Ayudhya and not Inter-Resin.
If only to understand how the parties, in the first place, got
themselves into the mess, it may be well to start by recalling how,
in its modern use, a letter of credit is employed in trade
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. 9 To break the
impasse, the buyer may be required to contract a bank to issue a
letter of credit in favor of the seller so that, by virtue of the latter of
credit, the issuing bank can authorize the seller to draw drafts and
engage to pay them upon their presentment simultaneously with
the tender of documents required by the letter of credit. 10 The
buyer and the seller agree on what documents are to be presented
for payment, but ordinarily they are documents of title evidencing
or attesting to the shipment of the goods to the buyer.
14
Once the credit is established, the seller ships the goods to the
buyer and in the process secures the required shipping documents
or 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. Under
this arrangement, the seller gets paid only if he delivers the
documents of title over the goods, while the buyer acquires said
documents and control over the goods only after reimbursing the
bank.
What characterizes letters of credit, as distinguished from other
accessory contracts, is the engagement of the issuing bank to pay
the seller of 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. By this so-called "independence principle," the bank
determines compliance with the letter of credit only by examining
the shipping documents presented; it is precluded from
determining whether the main contract is actually accomplished or
not. 11
There would at least be three (3) parties: (a) the buyer, 12 who
procures the letter of credit and obliges himself to reimburse the
issuing bank upon receipts of the documents of title; (b) the bank
issuing the letter of credit, 13 which undertakes to pay the seller
upon receipt of the draft and proper document of titles and to
surrender the documents to the buyer upon reimbursement; and,
(c) the seller, 14 who in compliance with the contract of sale ships
the goods to the buyer and delivers the documents of title and draft
to the issuing bank to recover payment.
The number of the parties, not infrequently and almost invariably in
international trade practice, may be increased. Thus, the services
of an advising (notifying) bank 15 may be utilized to convey to the
seller the existence of the credit; or, of a confirming bank 16 which
will lend credence to the letter of credit issued by a lesser known
issuing bank; or, of a paying bank, 17 which undertakes to encash
the drafts drawn by the exporter. Further, instead of going to the
place of the issuing bank to claim payment, the buyer may
approach another bank, termed the negotiating bank, 18 to have the
draft discounted.
Being a product of international commerce, the impact of this
commercial instrument transcends national boundaries, and it is
thus not uncommon to find a dearth of national law that can
adequately provide for its governance. This country is no
exception. Our own Code of Commerce basically introduces only
its concept under Articles 567-572, inclusive, thereof. It is no
wonder then why great reliance has been placed on commercial
usage and practice, which, in any case, can be justified by the
universal acceptance of the autonomy of contract rules. The rules
were later developed into what is now known as the Uniform
Customs and Practice for Documentary Credits ("U.C.P.") issued
by the International Chamber of Commerce. It is by no means a
complete text by itself, for, to be sure, there are other principles,
which, although part of lex mercatoria, are not dealt with the U.C.P.
In FEATI Bank and Trust Company v. Court of Appeals, 19 we have
accepted, to the extent of their pertinency, the application in our
jurisdiction of this international commercial credit regulatory set of
rules. 20 In Bank of Phil. Islands v. De Nery, 21 we have said that the
observances of the U.C.P. is justified by Article 2 of the Code of
Commerce which expresses that, in the absence of any particular
provision in the Code of Commerce, commercial transactions shall
be governed by usages and customs generally observed. We have
further observed 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 U.C.P. is undeniable.
15
The first issue raised with the petitioner, i.e., that it has in this
instance merely been advising bank, is outrightly rejected by Inter-
Resin and is thus sought to be discarded for having been raised
only on appeal. We cannot agree. The crucial point of dispute in
this case is whether under the "letter of credit," Bank of America
has incurred any liability to the "beneficiary" thereof, an issue that
largely is dependent on the bank's participation in that transaction;
as a mere advising or notifying bank, it would not be liable, but as
a confirming bank, had this been the case, it could be considered
as having incurred that liability. 22
In Insular Life Assurance Co. Ltd. Employees Association — Natu
vs. Insular Life Assurance Co., Ltd., 23 the Court said: Where the
issues already raised also rest on other issues not specifically
presented, as long as the latter issues bear relevance and close
relation to the former and as long as they arise from the matters on
record, the court has the authority to include them in its discussion
of the controversy and to pass upon them just as well. In brief, in
those cases where questions not particularly raised by the parties
surface as necessary for the complete adjudication of the rights
and obligations of the parties, the interests of justice dictate that
the court should consider and resolve them. The rule that only
issues or theories raised in the initial proceedings may be taken up
by a party thereto on appeal should only refer to independent, not
concomitant matters, to support or oppose the cause of action or
defense. The evil that is sought to be avoided, i.e., surprise to the
adverse party, is in reality not existent on matters that are properly
litigated in the lower court and appear on record.
It cannot seriously be disputed, looking at this case, that Bank of
America has, in fact, only been an advising, not confirming, bank,
and this much is clearly evident, among other things, by the
provisions of the letter of credit itself, the petitioner bank's letter of
advice, its request for payment of advising fee, and the admission
of Inter-Resin that it has paid the same. That Bank of America has
asked Inter-Resin to submit documents required by the letter of
credit and eventually has paid the proceeds thereof, did not
obviously make it a confirming bank. The fact, too, that the draft
required by the letter of credit is to be drawn under the account of
General Chemicals (buyer) only means the same had to be
presented to Bank of Ayudhya (issuing bank) for payment. It may
be significant to recall that the letter of credit is an engagement of
the issuing bank, not the advising bank, to pay the draft.
No less important is that Bank of America's letter of 11 March 1981
has expressly stated that "[t]he enclosure is solely an advise of
credit opened by the abovementioned correspondent and conveys
no engagement by us." 24This written reservation by Bank of
America in limiting its obligation only to being an advising bank is in
consonance with the provisions of U.C.P.
As an advising or notifying bank, Bank of America did not incur any
obligation more than just notifying Inter-Resin of the letter of credit
issued in its favor, let alone to confirm the letter of credit. 25 The
bare statement of the bank employees, aforementioned, in
responding to the inquiry made by Atty. Tanay, Inter-Resin's
representative, on the authenticity of the letter of credit certainly did
not have the effect of novating the letter of credit and Bank of
America's letter of advise, 26 nor can it justify the conclusion that the
bank must now assume total liability on the letter of credit. Indeed,
Inter-Resin itself cannot claim to have been all that free from fault.
As the seller, the issuance of the letter of credit should have
obviously been a great concern to it. 27 It would have, in fact, been
strange if it did not, prior to the letter of credit, enter into a contract,
or negotiated at the every least, with General Chemicals. 28 In the
ordinary course of business, the perfection of contract precedes
the issuance of a letter of credit.
Bringing the letter of credit to the attention of the seller is the
primordial obligation of an advising bank. The view that Bank of
America should have first checked the authenticity of the letter of
credit with bank of Ayudhya, by using advanced mode of business
communications, before dispatching the same to Inter-Resin finds
no real support in U.C.P. Article 18 of the U.C.P. states that:
"Banks assume no liability or responsibility for the consequences
arising out of the delay and/or loss in transit of any messages,
16
letters or documents, or for delay, mutilation or other errors arising
in the transmission of any telecommunication . . ." As advising
bank, Bank of America is bound only to check the "apparent
authenticity" of the letter of credit, which it did. 29 Clarifying its
meaning, Webster's Ninth New Collegiate Dictionary 30 explains
that the word "APPARENT suggests appearance to unaided
senses that is not or may not be borne out by more rigorous
examination or greater knowledge."
May Bank of America then recover what it has paid under the letter
of credit when the corresponding draft for partial availment
thereunder and the required documents were later negotiated with
it by Inter-Resin? The answer is yes. This kind of transaction is
what is commonly referred to as a discounting arrangement. This
time, Bank of America has acted independently as a negotiating
bank, thus saving Inter-Resin from the hardship of presenting the
documents directly to Bank of Ayudhya to recover payment. (Inter-
Resin, of course, could have chosen other banks with which to
negotiate the draft and the documents.) As a negotiating bank,
Bank of America has a right to recourse against the issuer bank
and until reimbursement is obtained, Inter-Resin, as the drawer of
the draft, continues to assume a contingent liability thereon. 31
While bank of America has indeed failed to allege material facts in
its complaint that might have likewise warranted the application of
the Negotiable Instruments Law and possible then allowed it to
even go after the indorsers of the draft, this failure, 32/
nonetheless, does not preclude petitioner bank's right (as
negotiating bank) of recovery from Inter-Resin itself. Inter-Resin
admits having received P10,219,093.20 from bank of America on
the letter of credit and in having executed the corresponding draft.
The payment to Inter-Resin has given, as aforesaid, Bank of
America the right of reimbursement from the issuing bank, Bank of
Ayudhya which, in turn, would then seek indemnification from the
buyer (the General Chemicals of Thailand). Since Bank of Ayudhya
disowned the letter of credit, however, Bank of America may now
turn to Inter-Resin for restitution.
Between the seller and the negotiating bank there is
the usual relationship existing between a drawer and
purchaser of drafts. Unless drafts drawn in
pursuance of the credit are indicated to be without
recourse therefore, the negotiating bank has the
ordinary right of recourse against the seller in the
event of dishonor by the issuing bank . . . The fact
that the correspondent and the negotiating bank may
be one and the same does not affect its rights and
obligations in either capacity, although a special
agreement is always a possibility . . . 33
The additional ground raised by the petitioner, i.e., that Inter-Resin
sent waste instead of its products, is really of no consequence. In
the operation of a letter of credit, the involved banks deal only with
documents and not on goods described in those documents. 34
The other issues raised in then instant petition, for instance,
whether or not Bank of Ayudhya did issue the letter of credit and
whether or not the main contract of sale that has given rise to the
letter of credit has been breached, are not relevant to this
controversy. They are matters, instead, that can only be of concern
to the herein parties in an appropriate recourse against those, who,
unfortunately, are not impleaded in these proceedings.
In fine, we hold that —
First, given the factual findings of the courts below, we conclude
that petitioner Bank of America has acted merely as a notifying
bank and did not assume the responsibility of a confirming bank;
and
Second, petitioner bank, as a negotiating bank, is entitled to
recover on Inter-Resin's partial availment as beneficiary of the
letter of credit which has been disowned by the alleged issuer
bank.
17
No judgment of civil liability against the other defendants, number of parties involved and its supranational
Francisco Trajano and other unidentified parties, can be made, in character.
this instance, there being no sufficient evidence to warrant any
such finding. Petitioner has appealed from the Decision[1] of the
Court of Appeals in CA-G.R. SP No. 61901
WHEREFORE, the assailed decision is SET ASIDE, and entitled Transfield Philippines, Inc. v. Hon. Oscar
respondent Inter-Resin Industrial Corporation is ordered to refund
to petitioner Bank of America NT & SA the amount of
Pimentel, et al., promulgated on 31 January 2001.[2]
P10,219,093.20 with legal interest from the filing of the complaint On 26 March 1997, petitioner and respondent Luzon
until fully paid. Hydro Corporation (hereinafter, LHC) entered into a
No costs.
Turnkey Contract[3] whereby petitioner, as Turnkey
Contractor, undertook to construct, on a turnkey basis, a
SO ORDERED. seventy (70)-Megawatt hydro-electric power station at
the Bakun River in the provinces of Benguet and Ilocos
SECOND DIVISION Sur (hereinafter, the Project). Petitioner was given the
sole responsibility for the design, construction,
commissioning, testing and completion of the Project.[4]
[G.R. No. 146717. November 22, 2004] 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
TRANSFIELD PHILIPPINES, INC., petitioner, petitioner and respondent LHC or otherwise determined
vs. LUZON HYDRO CORPORATION, in accordance with the Turnkey Contract; and (2)
AUSTRALIA and NEW ZEALAND BANKING petitioner is entitled to claim extensions of time (EOT) for
GROUP LIMITED and SECURITY BANK reasons enumerated in the Turnkey Contract, among
which are variations, force majeure, and delays caused
CORPORATION, respondents.
by LHC itself.[5] Further, in case of dispute, the parties
DECISION are bound to settle their differences through mediation,
conciliation and such other means enumerated under
TINGA, J.:
Clause 20.3 of the Turnkey Contract.[6]
Subject of this case is the letter of credit which has To secure performance of petitioners obligation on or
evolved as the ubiquitous and most important device in before the target completion date, or such time for
international trade. A creation of commerce and completion as may be determined by the parties
businessmen, the letter of credit is also unique in the agreement, petitioner opened in favor of LHC two (2)
18
standby letters of credit both dated 20 March 2000
(hereinafter referred to as the Securities), to wit: Standby
Letter of Credit No. E001126/8400 with the local branch
of respondent Australia and New Zealand Banking
Group Limited (ANZ Bank)[7] and Standby Letter of Credit
No. IBDIDSB-00/4 with respondent Security Bank
Corporation (SBC)[8] each in the amount of
US$8,988,907.00. [9]
In the course of the construction of the project,
petitioner sought various EOT to complete the Project.
The extensions were requested allegedly due to several
factors which prevented the completion of the Project on
target date, such as force majeure occasioned by
typhoon Zeb, barricades and demonstrations. LHC
denied the requests, however. This gave rise to a series
of legal actions between the parties which culminated in
the instant petition.
The first of the actions was a Request for Arbitration
which LHC filed before the Construction Industry
Arbitration Commission (CIAC) on 1 June 1999.[10] This
was followed by another Request for Arbitration, this time
filed by petitioner before the International Chamber of
Commerce (ICC)[11] on 3 November 2000. In both
arbitration proceedings, the common issues presented
were: [1) whether typhoon Zeb and any of its associated
events constituted force majeure to justify the extension
of time sought by petitioner; and [2) whether LHC had
the right to terminate the Turnkey Contract for failure of
petitioner to complete the Project on target date.
Meanwhile, foreseeing that LHC would call on the
Securities pursuant to the pertinent provisions of the
Turnkey Contract,[12] petitionerin two separate
letters[13] both dated 10 August 2000advised respondent
banks of the arbitration proceedings already pending
before the CIAC and ICC in connection with its alleged
default in the performance of its obligations. Asserting
that LHC had no right to call on the Securities until the
resolution of disputes before the arbitral tribunals,
petitioner warned respondent banks that any transfer,
release, or disposition of the Securities in favor of LHC or
any person claiming under LHC would constrain it to hold
respondent banks liable for liquidated damages.
As petitioner had anticipated, on 27 June 2000, LHC
sent notice to petitioner that pursuant to Clause 8.2[14] of
the Turnkey Contract, it failed to comply with its
obligation to complete the Project. Despite the letters of
petitioner, however, both banks informed petitioner that
they would pay on the Securities if and when LHC calls
on them.[15]
LHC asserted that additional extension of time would
not be warranted; accordingly it declared petitioner in
default/delay in the performance of its obligations under
the Turnkey Contract and demanded from petitioner the
payment of US$75,000.00 for each day of delay
beginning 28 June 2000 until actual completion of the
Project pursuant to Clause 8.7.1 of the Turnkey Contract.
At the same time, LHC served notice that it would call on
the securities for the payment of liquidated damages for
the delay.[16]
On 5 November 2000, petitioner as plaintiff filed
a Complaint for Injunction, with prayer for temporary
restraining order and writ of preliminary injunction,
19
against herein respondents as defendants before the
Regional Trial Court (RTC) of Makati.[17] Petitioner sought
to restrain respondent LHC from calling on the Securities
and respondent banks from transferring, paying on, or in
any manner disposing of the Securities or any renewals
or substitutes thereof. The RTC issued a seventy-two
(72)-hour temporary restraining order on the same day.
The case was docketed as Civil Case No. 00-1312 and
raffled to Branch 148 of the RTC of Makati.
After appropriate proceedings, the trial court issued
an Order on 9 November 2000, extending the temporary
restraining order for a period of seventeen (17) days or
until 26 November 2000.[18]
The RTC, in its Order[19] dated 24 November 2000,
denied petitioners application for a writ of preliminary
injunction. It ruled that petitioner had no legal right and
suffered no irreparable injury to justify the issuance of
the writ. Employing the principle of independent contract
in letters of credit, the trial court ruled that LHC should be
allowed to draw on the Securities for liquidated
damages. It debunked petitioners contention that the
principle of independent contract could be invoked only
by respondent banks since according to it respondent
LHC is the ultimate beneficiary of the Securities. The trial
court further ruled that the banks were mere custodians
of the funds and as such they were obligated to transfer
the same to the beneficiary for as long as the latter could
submit the required certification of its claims.
Dissatisfied with the trial courts denial of its
application for a writ of preliminary injunction, petitioner
elevated the case to the Court of Appeals via a Petition
for Certiorari under Rule 65, with prayer for the issuance
of a temporary restraining order and writ of preliminary
injunction.[20] Petitioner submitted to the appellate court
that LHCs call on the Securities was premature
considering that the issue of its default had not yet been
resolved with finality by the CIAC and/or the ICC. It
asserted that until the fact of delay could be established,
LHC had no right to draw on the Securities for liquidated
damages.
Refuting petitioners contentions, LHC claimed that
petitioner had no right to restrain its call on and use of
the Securities as payment for liquidated damages. It
averred that the Securities are independent of the main
contract between them as shown on the face of the two
Standby Letters of Credit which both provide that the
banks have no responsibility to investigate the
authenticity or accuracy of the certificates or the
declarants capacity or entitlement to so certify.
In its Resolution dated 28 November 2000, the Court
of Appeals issued a temporary restraining order,
enjoining LHC from calling on the Securities or any
renewals or substitutes thereof and ordering respondent
banks to cease and desist from transferring, paying or in
any manner disposing of the Securities.
However, the appellate court failed to act on the
application for preliminary injunction until the temporary
restraining order expired on 27 January 2001.
Immediately thereafter, representatives of LHC trooped
to ANZ Bank and withdrew the total amount of
US$4,950,000.00, thereby reducing the balance in ANZ
Bank to US$1,852,814.00.
20
 On 2 February 2001, the appellate court dismissed
the petition for certiorari. The appellate court expressed
conformity with the trial courts decision that LHC could
call on the Securities pursuant to the first principle in
credit law that the credit itself is independent of the
underlying transaction and that as long as the beneficiary
complied with the credit, it was of no moment that he had
not complied with the underlying contract. Further, the
appellate court held that even assuming that the trial
courts denial of petitioners application for a writ of
preliminary injunction was erroneous, it constituted only
an error of judgment which is not correctible by certiorari,
unlike error of jurisdiction.
Undaunted, petitioner filed the instant Petition for
Review raising the following issues for resolution:
WHETHER THE INDEPENDENCE PRINCIPLE ON
LETTERS OF CREDIT MAY BE INVOKED BY A
BENEFICIARY THEREOF WHERE THE BENEFICIARYS
CALL THEREON IS WRONGFUL OR FRAUDULENT.
WHETHER LHC HAS THE RIGHT TO CALL AND DRAW
ON THE SECURITIES BEFORE THE RESOLUTION OF
PETITIONERS AND LHCS DISPUTES BY THE
APPROPRIATE TRIBUNAL.
WHETHER ANZ BANK AND SECURITY BANK ARE
JUSTIFIED IN RELEASING THE AMOUNTS DUE UNDER
THE SECURITIES DESPITE BEING NOTIFIED THAT
LHCS CALL THEREON IS WRONGFUL.
WHETHER OR NOT PETITIONER WILL SUFFER GRAVE
AND IRREPARABLE DAMAGE IN THE EVENT THAT:
A. LHC IS ALLOWED TO CALL AND DRAW ON,
AND ANZ BANK AND SECURITY BANK ARE
ALLOWED TO RELEASE, THE REMAINING
BALANCE OF THE SECURITIES PRIOR TO
THE RESOLUTION OF THE DISPUTES
BETWEEN PETITIONER AND LHC.
B. LHC DOES NOT RETURN THE AMOUNTS IT
HAD WRONGFULLY DRAWN FROM THE
SECURITIES.[21]
Petitioner contends that the courts below improperly
relied on the independence principle on letters of credit
when this case falls squarely within the fraud exception
rule. Respondent LHC deliberately misrepresented the
supposed existence of delay despite its knowledge that
the issue was still pending arbitration, petitioner
continues.
Petitioner asserts that LHC should be ordered to
return the proceeds of the Securities pursuant to the
principle against unjust enrichment and that, under the
premises, injunction was the appropriate remedy
obtainable from the competent local courts.
On 25 August 2003, petitioner filed a Supplement to
the Petition[22] and Supplemental
Memorandum,[23] alleging that in the course of the
proceedings in the ICC Arbitration, a number of
documentary and testimonial evidence came out through
the use of different modes of discovery available in the
ICC Arbitration. It contends that after the filing of the
petition facts and admissions were discovered which
21
demonstrate that LHC knowingly misrepresented that
petitioner had incurred delays notwithstanding its
knowledge and admission that delays were excused
under the Turnkey Contractto be able to draw against the
Securities. Reiterating that fraud constitutes an exception
to the independence principle, petitioner urges that this
warrants a ruling from this Court that the call on the
Securities was wrongful, as well as contrary to law and
basic principles of equity. It avers that it would suffer
grave irreparable damage if LHC would be allowed to
use the proceeds of the Securities and not ordered to
return the amounts it had wrongfully drawn thereon.
In its Manifestation dated 8 September 2003,[24] LHC
contends that the supplemental pleadings filed by
petitioner present erroneous and misleading information
which would change petitioners theory on appeal.
In yet another Manifestation dated 12 April
2004, petitioner alleges that on 18 February 2004, the
[25]
ICC handed down its Third Partial Award, declaring that
LHC wrongfully drew upon the Securities and that
petitioner was entitled to the return of the sums
wrongfully taken by LHC for liquidated damages.
LHC filed a Counter-Manifestation dated 29 June
2004,[26] stating that petitioners Manifestation dated 12
April 2004 enlarges the scope of its Petition for
Review of the 31 January 2001 Decision of the Court of
Appeals. LHC notes that the Petition for
Review essentially dealt only with the issue of whether
injunction could issue to restrain the beneficiary of an
irrevocable letter of credit from drawing thereon. It adds
that petitioner has filed two other proceedings, to wit: (1)
ICC Case No. 11264/TE/MW, entitled Transfield
Philippines Inc. v. Luzon Hydro Corporation, in which the
parties made claims and counterclaims arising from
petitioners performance/misperformance of its
obligations as contractor for LHC; and (2) Civil Case No.
04-332, entitled Transfield Philippines, Inc. v. Luzon
Hydro Corporation before Branch 56 of the RTC of
Makati, which is an action to enforce and obtain
execution of the ICCs partial award mentioned in
petitioners Manifestation of 12 April 2004.
In its Comment to petitioners Motion for Leave to File
Addendum to Petitioners Memorandum, LHC stresses
that the question of whether the funds it drew on the
subject letters of credit should be returned is outside the
issue in this appeal. At any rate, LHC adds that the
action to enforce the ICCs partial award is now fully
within the Makati RTCs jurisdiction in Civil Case No. 04-
332. LHC asserts that petitioner is engaged in forum-
shopping by keeping this appeal and at the same time
seeking the suit for enforcement of the arbitral award
before the Makati court.
Respondent SBC in its Memorandum, dated 10
March 2003[27] contends that the Court of Appeals
correctly dismissed the petition for certiorari. Invoking the
independence principle, SBC argues that it was under no
obligation to look into the validity or accuracy of the
certification submitted by respondent LHC or into the
latters capacity or entitlement to so certify. It adds that
the act sought to be enjoined by petitioner was
already fait accompli and the present petition would no
longer serve any remedial purpose.
22
 In a similar fashion, respondent ANZ Bank in
its Memorandum dated 13 March 2003[28] posits that its
actions could not be regarded as unjustified in view of
the prevailing independence principle under which it had
no obligation to ascertain the truth of LHCs allegations
that petitioner defaulted in its obligations. Moreover, it
points out that since the Standby Letter of Credit No.
E001126/8400 had been fully drawn, petitioners prayer
for preliminary injunction had been rendered moot and
academic.
At the core of the present controversy is the
applicability of the independence principle and fraud
exception rule in letters of credit. Thus, a discussion of
the nature and use of letters of credit, also referred to
simply as credits, would provide a better perspective of
the case.
The letter of credit evolved as a mercantile specialty,
and the only way to understand all its facets is to
recognize that it is an entity unto itself. The relationship
between the beneficiary and the issuer of a letter of
credit is not strictly contractual, because both privity and
a meeting of the minds are lacking, yet strict compliance
with its terms is an enforceable right. Nor is it a third-
party beneficiary contract, because the issuer must
honor drafts drawn against a letter regardless of
problems subsequently arising in the underlying contract.
Since the banks customer cannot draw on the letter, it
does not function as an assignment by the customer to
the beneficiary. Nor, if properly used, is it a contract of
suretyship or guarantee, because it entails a primary
liability following a default. Finally, it is not in itself a
negotiable instrument, because it is not payable to order
or bearer and is generally conditional, yet the draft
presented under it is often negotiable.[29]
In commercial transactions, a letter of credit is a
financial device developed by merchants as a convenient
and relatively safe mode of dealing with sales of goods
to satisfy the seemingly irreconcilable interests of a
seller, who refuses to part with his goods before he is
paid, and a buyer, who wants to have control of the
goods before paying.[30] The use of credits in commercial
transactions serves to reduce the risk of nonpayment of
the purchase price under the contract for the sale of
goods. However, credits are also used in non-sale
settings where they serve to reduce the risk of
nonperformance. Generally, credits in the non-sale
settings have come to be known as standby credits.[31]
There are three significant differences between
commercial and standby credits. First, commercial
credits involve the payment of money under a contract of
sale. Such credits become payable upon the
presentation by the seller-beneficiary of documents that
show he has taken affirmative steps to comply with the
sales agreement. In the standby type, the credit is
payable upon certification of a party's nonperformance of
the agreement. The documents that accompany the
beneficiary's draft tend to show that the applicant has not
performed. The beneficiary of a commercial credit must
demonstrate by documents that he has performed his
contract. The beneficiary of the standby credit must
certify that his obligor has not performed the contract.[32]
By definition, a letter of credit is a written instrument
whereby the writer requests or authorizes the addressee
23
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
24
the insurers of the goods, or any other person
whomsoever.[39]
The independent nature of the letter of credit may be:
(a) independence in toto where the credit is independent
from the justification aspect and is a separate obligation
from the underlying agreement like for instance a typical
standby; or (b) independence may be only as to the
justification aspect like in a commercial letter of credit or
repayment standby, which is identical with the same
obligations under the underlying agreement. In both
cases the payment may be enjoined if in the light of the
purpose of the credit the payment of the credit would
constitute fraudulent abuse of the credit.[40]
Can the beneficiary invoke the independence
principle?
Petitioner insists that the independence principle
does not apply to the instant case and assuming it is so,
it is a defense available only to respondent banks. LHC,
on the other hand, contends that it would be contrary to
common sense to deny the benefit of an independent
contract to the very party for whom the benefit is
intended. As beneficiary of the letter of credit, LHC
asserts it is entitled to invoke the principle.
As discussed above, in a letter of credit transaction,
such as in this case, where the credit is stipulated as
irrevocable, there is a definite undertaking by the issuing
bank to pay the beneficiary provided that the stipulated
documents are presented and the conditions of the credit
are complied with.[41] Precisely, the independence
principle liberates the issuing bank from the duty of
ascertaining compliance by the parties in the main
contract. As the principles nomenclature clearly
suggests, the obligation under the letter of credit is
independent of the related and originating contract. In
brief, the letter of credit is separate and distinct from the
underlying transaction.
Given the nature of letters of credit, petitioners
argumentthat it is only the issuing bank that may invoke
the independence principle on letters of creditdoes not
impress this Court. To say that the independence
principle may only be invoked by the issuing banks
would render nugatory the purpose for which the letters
of credit are used in commercial transactions. As it is, the
independence doctrine works to the benefit of both the
issuing bank and the beneficiary.
Letters of credit are employed by the parties desiring
to enter into commercial transactions, not for the benefit
of the issuing bank but mainly for the benefit of the
parties to the original transactions. With the letter of
credit from the issuing bank, the party who applied for
and obtained it may confidently present the letter of
credit to the beneficiary as a security to convince the
beneficiary to enter into the business transaction. On the
other hand, the other party to the business
transaction, i.e., the beneficiary of the letter of credit, can
be rest assured of being empowered to call on the letter
of credit as a security in case the commercial transaction
does not push through, or the applicant fails to perform
his part of the transaction. It is for this reason that the
party who is entitled to the proceeds of the letter of credit
is appropriately called beneficiary.
25
 Petitioners argument that any dispute must first be
resolved by the parties, whether through negotiations or
arbitration, before the beneficiary is entitled to call on the
letter of credit in essence would convert the letter of
credit into a mere guarantee. Jurisprudence has laid
down a clear distinction between a letter of credit and a
guarantee in that the settlement of a dispute between the
parties is not a pre-requisite for the release of funds
under a letter of credit. In other words, the argument is
incompatible with the very nature of the letter of credit. If
a letter of credit is drawable only after settlement of the
dispute on the contract entered into by the applicant and
the beneficiary, there would be no practical and
beneficial use for letters of credit in commercial
transactions.
Professor John F. Dolan, the noted authority on
letters of credit, sheds more light on the issue:
The standby credit is an attractive commercial device for many
of the same reasons that commercial credits are attractive.
Essentially, these credits are inexpensive and efficient. Often
they replace surety contracts, which tend to generate higher
costs than credits do and are usually triggered by a factual
determination rather than by the examination of documents.
Because parties and courts should not confuse the different
functions of the surety contract on the one hand and the
standby credit on the other, the distinction between surety
contracts and credits merits some reflection. The two
commercial devices share a common purpose. Both ensure
against the obligors nonperformance. They function, however,
in distinctly different ways.
Traditionally, upon the obligors default, the surety undertakes
to complete the obligors performance, usually by hiring
someone to complete that performance. Surety contracts, then,
often involve costs of determining whether the obligor
defaulted (a matter over which the surety and the beneficiary
often litigate) plus the cost of performance. The benefit of the
surety contract to the beneficiary is obvious. He knows that the
surety, often an insurance company, is a strong financial
institution that will perform if the obligor does not. The
beneficiary also should understand that such performance must
await the sometimes lengthy and costly determination that the
obligor has defaulted. In addition, the suretys performance
takes time.
The standby credit has different expectations. He reasonably
expects that he will receive cash in the event of
nonperformance, that he will receive it promptly, and that he
will receive it before any litigation with the obligor (the
applicant) over the nature of the applicants performance takes
place. The standby credit has this opposite effect of the surety
contract: it reverses the financial burden of parties during
litigation.
In the surety contract setting, there is no duty to indemnify the
beneficiary until the beneficiary establishes the fact of the
obligors performance. The beneficiary may have to establish
that fact in litigation. During the litigation, the surety holds the
money and the beneficiary bears most of the cost of delay in
performance.
In the standby credit case, however, the beneficiary avoids that
litigation burden and receives his money promptly upon
presentation of the required documents. It may be that the
26
applicant has, in fact, performed and that the beneficiarys
presentation of those documents is not rightful. In that case,
the applicant may sue the beneficiary in tort, in contract, or in
breach of warranty; but, during the litigation to determine
whether the applicant has in fact breached the obligation to
perform, the beneficiary, not the applicant, holds the money.
Parties that use a standby credit and courts construing such a
credit should understand this allocation of burdens. There is a
tendency in some quarters to overlook this distinction between
surety contracts and standby credits and to reallocate burdens
by permitting the obligor or the issuer to litigate the
performance question before payment to the beneficiary.[42]
While it is the bank which is bound to honor the
credit, it is the beneficiary who has the right to ask the
bank to honor the credit by allowing him to draw thereon.
The situation itself emasculates petitioners posture that
LHC cannot invoke the independence principle and
highlights its puerility, more so in this case where the
banks concerned were impleaded as parties by petitioner
itself.
Respondent banks had squarely raised the
independence principle to justify their releases of the
amounts due under the Securities. Owing to the nature
and purpose of the standby letters of credit, this Court
rules that the respondent banks were left with little or no
alternative but to honor the credit and both of them in
fact submitted that it was ministerial for them to honor
the call for payment.[43]
Furthermore, LHC has a right rooted in the Contract
to call on the Securities. The relevant provisions of the
Contract read, thus:
4.2.1. In order to secure the performance of its obligations
under this Contract, the Contractor at its cost shall on the
Commencement Date provide security to the Employer in the
form of two irrevocable and confirmed standby letters of credit
(the Securities), each in the amount of US$8,988,907, issued
and confirmed by banks or financial institutions acceptable to
the Employer. Each of the Securities must be in form and
substance acceptable to the Employer and may be provided on
an annually renewable basis.[44]
8.7.1 If the Contractor fails to comply with Clause 8.2, the
Contractor shall pay to the Employer by way of liquidated
damages (Liquidated Damages for Delay) the amount of
US$75,000 for each and every day or part of a day that shall
elapse between the Target Completion Date and the
Completion Date, provided that Liquidated Damages for Delay
payable by the Contractor shall in the aggregate not exceed
20% of the Contract Price. The Contractor shall pay
Liquidated Damages for Delay for each day of the delay on the
following day without need of demand from the Employer.
8.7.2 The Employer may, without prejudice to any other
method of recovery, deduct the amount of such damages from
any monies due, or to become due to the Contractor and/or by
drawing on the Security.[45]
A contract once perfected, binds the parties not only
to the fulfillment of what has been expressly stipulated
but also to all the consequences which according to their
nature, may be in keeping with good faith, usage, and
law.[46] A careful perusal of the Turnkey Contract reveals
the intention of the parties to make the Securities
answerable for the liquidated damages occasioned by
27
any delay on the part of petitioner. The call upon the
Securities, while not an exclusive remedy on the part of
LHC, is certainly an alternative recourse available to it
upon the happening of the contingency for which the
Securities have been proffered. Thus, even without the
use of the independence principle, the Turnkey Contract
itself bestows upon LHC the right to call on the Securities
in the event of default.
Next, petitioner invokes the fraud exception principle.
It avers that LHCs call on the Securities is wrongful
because it fraudulently misrepresented to ANZ Bank and
SBC that there is already a breach in the Turnkey
Contract knowing fully well that this is yet to be
determined by the arbitral tribunals. It asserts that the
fraud exception exists when the beneficiary, for the
purpose of drawing on the credit, fraudulently presents to
the confirming bank, documents that contain, expressly
or by implication, material representations of fact that to
his knowledge are untrue. In such a situation, petitioner
insists, injunction is recognized as a remedy available to
it.
Citing Dolans treatise on letters of credit, petitioner
argues that the independence principle is not without
limits and it is important to fashion those limits in light of
the principles purpose, which is to serve the commercial
function of the credit. If it does not serve those functions,
application of the principle is not warranted, and the
commonlaw principles of contract should apply.
It is worthy of note that the propriety of LHCs call on
the Securities is largely intertwined with the fact of
default which is the self-same issue pending resolution
before the arbitral tribunals. To be able to declare the call
on the Securities wrongful or fraudulent, it is imperative
to resolve, among others, whether petitioner was in fact
guilty of delay in the performance of its obligation.
Unfortunately for petitioner, this Court is not called upon
to rule upon the issue of defaultsuch issue having been
submitted by the parties to the jurisdiction of the arbitral
tribunals pursuant to the terms embodied in their
agreement.[47]
Would injunction then be the proper remedy to
restrain the alleged wrongful draws on the Securities?
Most writers agree that fraud is an exception to the
independence principle. Professor Dolan opines that the
untruthfulness of a certificate accompanying a demand
for payment under a standby credit may qualify as fraud
sufficient to support an injunction against
payment. The remedy for fraudulent abuse is an
[48]
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]
28
 Generally, injunction is a preservative remedy for the
protection of ones substantive right or interest; it is not a
cause of action in itself but merely a provisional remedy,
an adjunct to a main suit. The issuance of the writ of
preliminary injunction as an ancillary or preventive
remedy to secure the rights of a party in a pending case
is entirely within the discretion of the court taking
cognizance of the case, the only limitation being that this
discretion should be exercised based upon the grounds
and in the manner provided by law.[51]
Before a writ of preliminary injunction may be issued,
there must be a clear showing by the complaint that
there exists a right to be protected and that the acts
against which the writ is to be directed are violative of the
said right.[52] It must be shown that the invasion of the
right sought to be protected is material and substantial,
that the right of complainant is clear and unmistakable
and that there is an urgent and paramount necessity for
the writ to prevent serious damage.[53] Moreover, an
injunctive remedy may only be resorted to when there is
a pressing necessity to avoid injurious consequences
which cannot be remedied under any standard
compensation.[54]
In the instant case, petitioner failed to show that it
has a clear and unmistakable right to restrain LHCs call
on the Securities which would justify the issuance of
preliminary injunction. By petitioners own admission, the
right of LHC to call on the Securities was contractually
rooted and subject to the express stipulations in the
Turnkey Contract.[55] Indeed, the Turnkey Contract is
plain and unequivocal in that it conferred upon LHC the
right to draw upon the Securities in case of default, as
provided in Clause 4.2.5, in relation to Clause 8.7.2,
thus:
4.2.5 The Employer shall give the Contractor seven days
notice of calling upon any of the Securities, stating the nature
of the default for which the claim on any of the Securities is to
be made, provided that no notice will be required if the
Employer calls upon any of the Securities for the payment of
Liquidated Damages for Delay or for failure by the Contractor
to renew or extend the Securities within 14 days of their
expiration in accordance with Clause 4.2.2.[56]
8.7.2 The Employer may, without prejudice to any other
method of recovery, deduct the amount of such damages from
any monies due, or to become due, to the Contractor and/or by
drawing on the Security.[57]
The pendency of the arbitration proceedings would
not per se make LHCs draws on the Securities wrongful
or fraudulent for there was nothing in the Contract which
would indicate that the parties intended that all disputes
regarding delay should first be settled through arbitration
before LHC would be allowed to call upon the Securities.
It is therefore premature and absurd to conclude that the
draws on the Securities were outright fraudulent given
the fact that the ICC and CIAC have not ruled with finality
on the existence of default.
Nowhere in its complaint before the trial court or in its
pleadings filed before the appellate court, did petitioner
invoke the fraud exception rule as a ground to justify the
issuance of an injunction.[58] What petitioner did assert
before the courts below was the fact that LHCs draws on
29
the Securities would be premature and without basis in
view of the pending disputes between them. Petitioner
should not be allowed in this instance to bring into play
the fraud exception rule to sustain its claim for the
issuance of an injunctive relief. Matters, theories or
arguments not brought out in the proceedings below will
ordinarily not be considered by a reviewing court as they
cannot be raised for the first time on appeal.[59] The lower
courts could thus not be faulted for not applying the fraud
exception rule not only because the existence of fraud
was fundamentally interwoven with the issue of default
still pending before the arbitral tribunals, but more so,
because petitioner never raised it as an issue in its
pleadings filed in the courts below. At any rate, petitioner
utterly failed to show that it had a clear and unmistakable
right to prevent LHCs call upon the Securities.
Of course, prudence should have impelled LHC to
await resolution of the pending issues before the arbitral
tribunals prior to taking action to enforce the Securities.
But, as earlier stated, the Turnkey Contract did not
require LHC to do so and, therefore, it was merely
enforcing its rights in accordance with the tenor thereof.
Obligations arising from contracts have the force of law
between the contracting parties and should be complied
with in good faith.[60] More importantly, pursuant to the
principle of autonomy of contracts embodied in Article
1306 of the Civil Code,[61] petitioner could have
incorporated in its Contract with LHC, a proviso that only
the final determination by the arbitral tribunals that
default had occurred would justify the enforcement of the
Securities. However, the fact is petitioner did not do so;
hence, it would have to live with its inaction.
With respect to the issue of whether the respondent
banks were justified in releasing the amounts due under
the Securities, this Court reiterates that pursuant to the
independence principle the banks were under no
obligation to determine the veracity of LHCs certification
that default has occurred. Neither were they bound by
petitioners declaration that LHCs call thereon was
wrongful. To repeat, respondent banks undertaking was
simply to pay once the required documents are
presented by the beneficiary.
At any rate, should petitioner finally prove in the
pending arbitration proceedings that LHCs draws upon
the Securities were wrongful due to the non-existence of
the fact of default, its right to seek indemnification for
damages it suffered would not normally be foreclosed
pursuant to general principles of law.
Moreover, in a Manifestation,[62] dated 30 March
2001, LHC informed this Court that the subject letters of
credit had been fully drawn. This fact alone would have
been sufficient reason to dismiss the instant petition.
Settled is the rule that injunction would not lie where
the acts sought to be enjoined have already become fait
accompli or an accomplished or consummated
act.[63] In Ticzon v. Video Post Manila, Inc.[64] this Court
ruled that where the period within which the former
employees were prohibited from engaging in or working
for an enterprise that competed with their former
employerthe very purpose of the preliminary injunction
has expired, any declaration upholding the propriety of
the writ would be entirely useless as there would be no
30
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. The other issues raised by petitioner
[65]
particularly with respect to its right to recover the
amounts wrongfully drawn on the Securities, according
to it, could properly be threshed out in a separate
proceeding.
One final point. LHC has charged petitioner of forum-
shopping. It raised the charge on two occasions. First, in
its Counter-Manifestation dated 29 June 2004[66] LHC
alleges that petitioner presented before this Court the
same claim for money which it has filed in two other
proceedings, to wit: ICC Case No. 11264/TE/MW and
Civil Case No. 04-332 before the RTC of Makati. LHC
argues that petitioners acts constitutes forum-shopping
which should be punished by the dismissal of the claim
in both forums. Second, in its Comment to Petitioners
Motion for Leave to File Addendum to Petitioners
Memorandum dated 8 October 2004, LHC alleges that
by maintaining the present appeal and at the same time
pursuing Civil Case No. 04-332wherein petitioner
pressed for judgment on the issue of whether the funds
LHC drew on the Securities should be returnedpetitioner
resorted to forum-shopping. In both instances, however,
petitioner has apparently opted not to respond to the
charge.
Forum-shopping is a very serious charge. It exists
when a party repetitively avails of several judicial
remedies in different courts, simultaneously or
successively, all substantially founded on the same
transactions and the same essential facts and
circumstances, and all raising substantially the same
issues either pending in, or already resolved adversely,
by some other court.[67] It may also consist in the act of a
party against whom an adverse judgment has been
rendered in one forum, of seeking another and possibly
favorable opinion in another forum other than by appeal
or special civil action of certiorari, or the institution of two
or more actions or proceedings grounded on the same
cause on the supposition that one or the other court
might look with favor upon the other party.[68] To
determine whether a party violated the rule against
forum-shopping, the test applied is whether the elements
of litis pendentia are present or whether a final judgment
in one case will amount to res judicata in
another.[69] Forum-shopping constitutes improper conduct
and may be punished with summary dismissal of the
multiple petitions and direct contempt of court.[70]
Considering the seriousness of the charge of forum-
shopping and the severity of the sanctions for its
violation, the Court will refrain from making any definitive
ruling on this issue until after petitioner has been given
ample opportunity to respond to the charge.
WHEREFORE, the instant petition is DENIED, with
costs against petitioner.
Petitioner is hereby required to answer the charge of
forum-shopping within fifteen (15) days from notice.
31
SO ORDERED. WHEREFORE, the Court finds by preponderance
of evidence that Plaintiff has proved its cause of
action and right to relief. Accordingly, judgment is
FIRST DIVISION hereby rendered in favor of the Plaintiff and
against Defendant, ordering the Defendant to pay
plaintiff:
[G.R. No. 116863. February 12, 1998]
1. The sum of P67,340.00 as demurrage charges, with
interest at the legal rate from the date of the extrajudicial
KENG HUA PAPER PRODUCTS CO. demand until fully paid;
INC., petitioner, vs. COURT OF APPEALS;
2. A sum equivalent to ten (10%) percent of the total
REGIONAL TRIAL COURT OF MANILA, BR. amount due as Attorneys fees and litigation expenses.
21; and SEA-LAND SERVICE,
INC., respondents. Send copy to respective counsel of the parties.
DECISION SO ORDERED.[4]
PANGANIBAN, J.:

What is the nature of a bill of lading? When does a bill of
lading become binding on a consignee? Will an alleged
overshipment justify the consignees refusal to receive the goods
described in the bill of lading? When may interest be computed
on unpaid demurrage charges?
Statement of the Case
These are the main questions raised in this petition
assailing the Decision[1] of the Court of Appeals[2] promulgated on
May 20, 1994 in C.A.-G.R. CV No. 29953 affirming in toto the
decision[3] dated September 28, 1990 in Civil Case No. 85-33269
of the Regional Trial Court of Manila, Branch 21. The dispositive
portion of the said RTC decision reads:
The Facts
The factual antecedents of this case as found by the Court
of Appeals are as follows:
Plaintiff (herein private respondent), a shipping
company, is a foreign corporation licensed to do
business in the Philippines. On June 29, 1982,
plaintiff received at its Hong Kong terminal a
sealed container, Container No. SEAU 67523,
containing seventy-six bales of unsorted waste
paper for shipment to defendant (herein
petitioner), Keng Hua Paper Products, Co. in
Manila. A bill of lading (Exh. A) to cover the
shipment was issued by the plaintiff.
32
On July 9, 1982, the shipment was discharged at
the Manila International Container Port. Notices
of arrival were transmitted to the defendant but
the latter failed to discharge the shipment from
the container during the free time period or grace
period. The said shipment remained inside the
plaintiffs container from the moment the free time
period expired on July 29, 1982 until the time
when the shipment was unloaded from the
container on November 22, 1983, or a total of
four hundred eighty-one (481) days. During the
481-day period, demurrage charges
accrued. Within the same period, letters
demanding payment were sent by the plaintiff to
the defendant who, however, refused to settle its
obligation which eventually amounted to
P67,340.00. Numerous demands were made on
the defendant but the obligation remained
unpaid. Plaintiff thereafter commenced this civil
action for collection and damages.
In its answer, defendant, by way of special and
affirmative defense, alleged that it purchased fifty
(50) tons of waste paper from the shipper in
Hong Kong, Ho Kee Waste Paper, as manifested
in Letter of Credit No. 824858 (Exh. 7. p.
110. Original Record) issued by Equitable
Banking Corporation, with partial shipment
permitted; that under the letter of credit, the
remaining balance of the shipment was only ten
(10) metric tons as shown in Invoice No. H-15/82
(Exh. 8, p. 111, Original Record); that the
shipment plaintiff was asking defendant to accept
was twenty (20) metric tons which is ten (10)
metric tons more than the remaining balance;
that if defendant were to accept the shipment, it
would be violating Central Bank rules and
regulations and custom and tariff laws; that
plaintiff had no cause of action against the
defendant because the latter did not hire the
former to carry the merchandise; that the cause
of action should be against the shipper which
contracted the plaintiffs services and not against
defendant; and that the defendant duly notified
the plaintiff about the wrong shipment through a
letter dated January 24, 1983 (Exh. D for plaintiff,
Exh. 4 for defendant, p. 5. Folder of Exhibits).
As previously mentioned, the RTC found petitioner liable for
demurrage, attorneys fees and expenses of litigation. The
petitioner appealed to the Court of Appeals, arguing that the
lower court erred in (1) awarding the sum of P67,340 in favor
of the private respondent, (2) rejecting petitioners contention
that there was overshipment, (3) ruling that petitioners recourse
was against the shipper, and (4) computing legal interest from
date of extrajudicial demand.[5]
Respondent Court of Appeals denied the appeal and
affirmed the lower courts decision in toto. In a subsequent
resolution,[6] it also denied the petitioners motion for
reconsideration.
Hence, this petition for review.[7]
The Issues
In its memorandum, petitioner submits the following issues:
33
I. Whether or not petitioner had accepted the bill of
lading;
II. Whether or not the award of the sum of P67,340.00 to
private respondent was proper;
III. Whether or not petitioner was correct in not accepting
the overshipment;
IV. Whether or not the award of legal interest from the date of
private respondents extrajudicial demand was proper;[8]
In the main, the case revolves around the question of
whether petitioner was bound by the bill of lading. We shall,
thus, discuss the above four issues as they intertwine with this
main question.
The Courts Ruling
The petition is partly meritorious. We affirm petitioners
liability for demurrage, but modify the interest rate thereon.
Main Issue: Liability Under the Bill of Lading
A bill of lading serves two functions. First, it is a receipt for
the goods shipped. Second, it is a contract by which three
parties, namely, the shipper, the carrier, and the consignee
undertake specific responsibilities and assume stipulated
obligations.[9] A bill of lading delivered and accepted constitutes
the contract of carriage even though not signed,[10] because the
(a)cceptance of a paper containing the terms of a proposed
contract generally constitutes an acceptance of the contract and
of all of its terms and conditions of which the acceptor has
actual or constructive notice.[11] In a nutshell, the acceptance of a
bill of lading by the shipper and the consignee, with full
knowledge of its contents, gives rise to the presumption that the
same was a perfected and binding contract.[12]
In the case at bar, both lower courts held that the bill of
lading was a valid and perfected contract between the shipper
(Ho Kee), the consignee (Petitioner Keng Hua), and the carrier
(Private Respondent Sea-Land). Section 17 of the bill of lading
provided that the shipper and the consignee were liable for the
payment of demurrage charges for the failure to discharge the
containerized shipment beyond the grace period allowed by
tariff rules. Applying said stipulation, both lower courts found
petitioner liable. The aforementioned section of the bill of lading
reads:
17. COOPERAGE FINES. The shipper and
consignee shall be liable for, indemnify the carrier
and ship and hold them harmless against, and
the carrier shall have a lien on the goods for, all
expenses and charges for mending cooperage,
baling, repairing or reconditioning the goods, or
the van, trailers or containers, and all expenses
incurred in protecting, caring for or otherwise
made for the benefit of the goods, whether the
goods be damaged or not, and for any payment,
expense, penalty fine, dues, duty, tax or impost,
loss, damage, detention, demurrage, or liability of
whatsoever nature, sustained or incurred by or
levied upon the carrier or the ship in connection
with the goods or by reason of the goods being or
having been on board, or because of shippers
failure to procure consular or other proper
permits, certificates or any papers that may be
required at any port or place or shippers failure to
34
 supply information or otherwise to comply with all
laws, regulations and requirements of law in
connection with the goods of from any other act
or omission of the shipper or
consignee: (Underscoring supplied.)
Petitioner contends, however, that it should not be bound by
the bill of lading because it never gave its consent
thereto. Although petitioner admits physical acceptance of the
bill of lading, it argues that its subsequent actions belie the
finding that it accepted the terms and conditions printed
therein.[13] Petitioner cites as support the Notice of Refused or On
Hand Freight it received on November 2, 1982 from private
respondent, which acknowledged that petitioner declined to
accept the shipment. Petitioner adds that it sent a copy of the
said notice to the shipper on December 29, 1982. Petitioner
points to its January 24, 1983 letter to the private respondent,
stressing that its acceptance of the bill of lading would be
tantamount to an act of smuggling as the amount it had
imported (with full documentary support) was only (at that time)
for 10,000 kilograms and not for 20,313 kilograms as stated in
the bill of lading and could lay them vulnerable to legal
sanctions for violation of customs and tariff as well as Central
Bank laws.[14] Petitioner further argues that the demurrage was a
consequence of the shippers mistake of shipping more than
what was bought. The discrepancy in the amount of waste
paper it actually purchased, as reflected in the invoice vis--
vis the excess amount in the bill of lading, allegedly justifies its
refusal to accept the shipment.[15]
Petitioner Bound by the Bill of Lading
We are not persuaded. Petitioner admits that it received the
bill of lading immediately after the arrival of the shipment[16] on
July 8, 1982.[17] Having been afforded an opportunity to examine
the said document, petitioner did not immediately object to or
dissent from any term or stipulation therein. It was only six
months later, on January 24, 1983, that petitioner sent a letter to
private respondent saying that it could not accept the
shipment. Petitioners inaction for such a long period conveys
the clear inference that it accepted the terms and conditions of
the bill of lading. Moreover, said letter spoke only of petitioners
inability to use the delivery permit, i.e. to pick up the cargo, due
to the shippers failure to comply with the terms and conditions of
the letter of credit, for which reason the bill of lading and other
shipping documents were returned by the banks to the
shipper.[18] The letter merely proved petitioners refusal to pick up
the cargo, not its rejection of the bill of lading.
Petitioners reliance on the Notice of Refused or On Hand
Freight, as proof of its nonacceptance of the bill of lading, is of
no consequence. Said notice was not written by petitioner; it
was sent by private respondent to petitioner in November 1982,
or four months after petitioner received the bill of
lading. If the notice has any legal significance at all, it is to
highlight petitioners prolonged failure to object to the bill of
lading. Contrary to petitioners contention, the notice and the
letter support not belie the findings of the two lower courts that
the bill of lading was impliedly accepted by petitioner.
As aptly stated by Respondent Court of Appeals:
In the instant case, (herein petitioner) cannot and
did not allege non-receipt of its copy of the bill of
lading from the shipper. Hence, the terms and
conditions as well as the various entries
contained therein were brought to its
knowledge. (Herein petitioner) accepted the bill of
lading without interposing any objection as to its
contents. This raises the presumption that (herein
petitioner) agreed to the entries and stipulations
imposed therein.
35
 Moreover, it is puzzling that (herein petitioner)
allowed months to pass, six (6) months to be
exact, before notifying (herein private
respondent) of the wrong shipment. It was only
on January 24, 1983 that (herein petitioner) sent
(herein private respondent) such a letter of
notification (Exh D for plaintiff, Exh. 4 for
defendant; p. 5, Folder of Exhibits). Thus, for the
duration of those six months (herein private
respondent never knew the reason for (herein
petitioners) refusal to discharge the shipment.
After accepting the bill of lading, receiving notices
of arrival of the shipment, failing to object thereto,
(herein petitioner) cannot now deny that it is
bound by the terms in the bill of lading. If it did
not intend to be bound, (herein petitioner) would
not have waited for six months to lapse before
finally bringing the matter to (herein private
respondents attention.The most logical reaction
in such a case would be to immediately verify the
matter with the other parties involved. In this
case, however, (herein petitioner) unreasonably
detained (herein private respondents) vessel to
the latters prejudice.[19]
Petitioners attempt to evade its obligation to receive the
shipment on the pretext that this may cause it to violate
customs, tariff and central bank laws must likewise
fail. Mere apprehension of violating said laws, without a
clear demonstration that taking delivery of the shipment
has become legally impossible, cannot defeat the
[20]
petitioners contractual obligation and liability under the
bill of lading.
In any event, the issue of whether petitioner accepted the
bill of lading was raised for the first time only in petitioners
memorandum before this Court. Clearly, we cannot now
entertain an issue raised for the very first time on appeal, in
deference to the well-settled doctrine that (a)n issue raised for
the first time on appeal and not raised timely in the proceedings
in the lower court is barred by estoppel. Questions raised on
appeal must be within the issues framed by the parties and,
consequently, issues not raised in the trial court cannot be
raised for the first time on appeal.[21]
In the case at bar, the prolonged failure of petitioner to
receive and discharge the cargo from the private respondents
vessel constitutes a violation of the terms of the bill of lading. It
should thus be liable for demurrage to the former.
In The Apollon,[22] Justice Story made the following relevant
comment on the nature of demurrage:
In truth, demurrage is merely an allowance or
compensation for the delay or detention of a
vessel. It is often a matter of contract, but not
necessarily so. The very circumstance that in
ordinary commercial voyages, a particular sum is
deemed by the parties a fair compensation for
delays, is the very reason why it is, and ought to
be, adopted as a measure of compensation, in
cases ex delicto. What fairer rule can be adopted
than that which founds itself upon mercantile
usage as to indemnity, and fixes a recompense
upon the deliberate consideration of all the
circumstances attending the usual earnings and
expenditures in common voyages? It appears to
us that an allowance, by way of demurrage, is the
true measure of damages in all cases of mere
detention, for that allowance has reference to the
36
 ships expenses, wear and tear, and common
employment. [23]
Amount of Demurrage Charges
Petitioner argues that it is not obligated to pay any
demurrage charges because, prior to the filing of the complaint,
private respondent made no demand for the sum
of P67,340.Moreover, private respondents loss and prevention
manager, Loi Gillera, demanded P50,260, but its counsel,
Sofronio Larcia, subsequently asked for a different amount
of P37,800.
Petitioners position is puerile. The amount of demurrage
charges in the sum of P67,340 is a factual conclusion of the trial
court that was affirmed by the Court of Appeals and, thus,
binding on this Court.[24] Besides such factual finding is
supported by the extant evidence.[25] The apparent discrepancy
was a result of the variance of the dates when the two demands
were made. Necessarily, the longer the cargo remained
unclaimed, the higher the demurrage. Thus, while in his letter
dated April 24, 1983,[26] private respondents counsel demanded
payment of only P37,800, the additional demurrage incurred by
petitioner due to its continued refusal to receive delivery of the
cargo ballooned to P67,340 by November 22, 1983. The
testimony of Counsel Sofronio Larcia as regards said letter of
April 24, 1983 elucidates, viz:
Q Now, after you sent this letter, do you know what happened?
A Defendant continued to refuse to take delivery of the shipment
and the shipment stayed at the port for a longer period.
Q So, what happened to the shipment?
A The shipment incurred additional demurrage charges which
amounted to P67,340.00 as of November 22, 1983 or more
than a year after - almost a year after the shipment arrived at
the port.
Q So, what did you do?
A We requested our collection agency to pursue the collection of
this amount.[27]
Bill of Lading Separate from
Other Letter of Credit Arrangements
In a letter of credit, there are three distinct and independent
contracts: (1) the contract of sale between the buyer and the
seller, (2) the contract of the buyer with the issuing bank, and(3)
the letter of credit proper in which the bank promises to pay the
seller pursuant to the terms and conditions stated therein. Few
things are more clearly settled in law than that the three
contracts which make up the letter of credit arrangement are to
be maintained in a state of perpetual separation.[28] A transaction
involving the purchase of goods may also require, apart from a
letter of credit, a contract of transportation specially when the
seller and the buyer are not in the same locale or country, and
the goods purchased have to be transported to the latter.
Hence, the contract of carriage, as stipulated in the bill of
lading in the present case, must be treated independently of the
contract of sale between the seller and the buyer, and the
contract for the issuance of a letter of credit between the buyer
and the issuing bank. Any discrepancy between the amount of
the goods described in the commercial invoice in the contract of
sale and the amount allowed in the letter of credit will not affect
the validity and enforceability of the contract of carriage as
embodied in the bill of lading. As the bank cannot be expected
to look beyond the documents presented to it by the seller
pursuant to the letter of credit,[29] neither can the carrier be
expected to go beyond the representations of the shipper in the
bill of lading and to verify their accuracy vis--vis the commercial
invoice and the letter of credit. Thus, the discrepancy between
the amount of goods indicated in the invoice and the
37
amount in thebill of lading cannot negate petitioners obligation
to private respondent arising from the contract of
transportation. Furthermore, private respondent, as carrier, had
no knowledge of the contents of the container. The contract of
carriage was under the arrangement known as Shippers Load
And Count, and the shipper was solely responsible for the
loading of the container while the carrier was oblivious to the
contents of the shipment. Petitioners remedy in case of
overshipment lies against the seller/shipper, not against the
carrier.
Payment of Interest
Petitioner posits that it first knew of the demurrage claim
of P67,340 only when it received, by summons, private
respondents complaint. Hence, interest may not be allowed to
run from the date of private respondents extrajudicial demands
on March 8, 1983 for P50,260 or on April 24, 1983 for P37,800,
considering that, in both cases, there was no demand for
interest.[30]We agree.
Jurisprudence teaches us:
2. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at
the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the
demand can be established with reasonable
certainty.Accordingly, where the demand is established
with reasonable certainty, the interest shall begin to run
from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be so reasonably established at the time
the demand is made, the interest shall begin to run only
from the date the judgment of the court is made (at which
time the quantification of damages may be deemed to
have been reasonably ascertained). The actual base for
the computation of legal interest shall, in any case, be on
the amount finally adjudged.
3. When the judgment of the court awarding a sum of
money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of
credit.[31]
The case before us involves an obligation not arising from a
loan or forbearance of money; thus, pursuant to Article 2209 of
the Civil Code, the applicable interest rate is six percent per
annum. Since the bill of lading did not specify the amount of
demurrage, and the sum claimed by private respondent
increased as the days went by, the total amount demanded
cannot be deemed to have been established with reasonable
certainty until the trial court rendered its judgment. Indeed,
(u)nliquidated damages or claims, it is said, are those which are
not or cannot be known until definitely ascertained, assessed
and determined by the courts after presentation of
proof.[32] Consequently, the legal interest rate is six percent, to be
computed from September 28, 1990, the date of the trial courts
decision. And in accordance with Philippine Natonal
Bank and Eastern Shipping, the rate of twelve percent per
[33] [34]
annum shall be charged on the total then outstanding, from the
time the judgment becomes final and executory until its
satisfaction.
38
 Finally, the Court notes that the matter of attorneys fees
was taken up only in the dispositive portion of the trial courts
decision. This falls short of the settled requirement that the text
of the decision should state the reason for the award of
attorneys fees, for without such justification, its award would be
a conclusion without a premise, its basis being improperly left to
speculation and conjecture.[35]
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.

WHEREFORE, the assailed Decision is The facts of the case are as follows:
hereby AFFIRMED with the MODIFICATION that the legal
interest of six percent per annum shall be computed from On June 3, 1971, Bernardo E. Villaluz agreed to sell to the then
September 28, 1990 until its full payment before finality of defendant Axel Christiansen 2,000 cubic meters of lauan logs at
judgment. The rate of interest shall be adjusted to twelve $27.00 per cubic meter FOB.
percent per annum, computed from the time said judgment
became final and executory until full satisfaction. The award of After inspecting the logs, Christiansen issued purchase order No.
attorneys fees is DELETED. 76171.
SO ORDERED.
On the arrangements made and upon the instructions of the
consignee, Hanmi Trade Development, Ltd., de Santa Ana,
Republic of the Philippines
California, the Security Pacific National Bank of Los Angeles,
SUPREME COURT
California issued Irrevocable Letter of Credit No. IC-46268
Manila
available at sight in favor of Villaluz for the sum of $54,000.00, the
total purchase price of the lauan logs.
THIRD DIVISION
The letter of credit was mailed to the Feati Bank and Trust
G.R. No. 94209 April 30, 1991 Company (now Citytrust) with the instruction to the latter that it
"forward the enclosed letter of credit to the beneficiary." (Records,
FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING Vol. I, p. 11)
CORPORATION), petitioner,
vs. The letter of credit further provided that the draft to be drawn is on
THE COURT OF APPEALS, and BERNARDO E. Security Pacific National Bank and that it be accompanied by the
VILLALUZ, respondents. following documents:
Pelaez, Adriano & Gregorio for petitioner. 1. Signed Commercial Invoice in four copies showing the
Ezequiel S. Consulta for private respondent. 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
39
 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)
40
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
41
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.
42
 (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
43
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
44
 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
45
 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. . .
. letter.
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 credithas been transmitted to the
petitioner on behalf of the private respondent, has confirmed the
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.
46
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
47
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.
48
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.
(SeeNational 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. The U.C.P. which is incorporated in the letter of credit
1âw phi1
ordains that the bank may only pay the amount specified under the
letter if all the documents tendered are on their face in compliance
49
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.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-24821 October 16, 1970
BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellee,
vs.
DE RENY FABRIC INDUSTRIES, INC., AURORA T. TUYO and
AURORA CARCERENY alias AURORA C.
GONZALES, defendants-appellants.
Aviado and Aranda for plaintiff-appellee.
S. Emiliano Calma for defendants-appellants.
CASTRO, J.:.
50
This is an appeal from the decision of the Court of First Instance of
Manila ordering the defendants-appellants to pay to the Bank of
the Philippine Islands (hereinafter referred to as the Bank), jointly
and severally, the value of the credit it extended to them in several
letters of credit which the Bank opened at the behest of the
defendants appellants to finance their importation of dyestuffs from
the United States, which however turned out to be mere colored
chalk upon arrival and inspection thereof at the port of Manila.
The record shows that on four (4) different occasions in 1961, the
De Reny Fabric Industries, Inc., a Philippine corporation through its
co-defendants-appellants, Aurora Carcereny alias Aurora C.
Gonzales, and Aurora T. Tuyo, president and secretary,
respectively of the corporation, applied to the Bank for four (4)
irrevocable commercial letters of credit to cover the purchase by
the corporation of goods described in the covering L/C applications
as "dyestuffs of various colors" from its American supplier, the J.B.
Distributing Company. All the applications of the corporation were
approved, and the corresponding Commercial L/C Agreements
were executed pursuant to banking procedures. Under these
agreements, the aforementioned officers of the corporation bound
themselves personally as joint and solidary debtors with the
corporation. Pursuant to banking regulations then in force, the
corporation delivered to the Bank peso marginal deposits as each
letter of credit was opened.
The dates and amounts of the L/Cs applied for and approved as
well as the peso marginal deposits made were, respectively, as
follows:.
Date Application Amount Marginal
& L/C No. Deposit
Oct. 10, 1961 61/1413 $57,658.38
P43,407.33
Oct. 23, 1961 61/1483 $25,867.34
19,473.64
Oct. 30, 1961 61/1495 $19,408.39
14,610.88
Nov. 10, 1961 61/1564 $26,687.64
20,090.90
TOTAL .... $129,621.75 P97,582.75
By virtue of the foregoing transactions, the Bank issued irrevocable
commercial letters of credit addressed to its correspondent banks
in the United States, with uniform instructions for them to notify the
beneficiary thereof, the J.B. Distributing Company, that they have
been authorized to negotiate the latter's sight drafts up to the
amounts mentioned the respectively, if accompanied, upon
presentation, by a full set of negotiable clean "on board" ocean bills
of lading covering the merchandise appearing in the LCs that is,
dyestuffs of various colors. Consequently, the J.B. Distributing
Company drew upon, presented to and negotiated with these
banks, its sight drafts covering the amounts of the merchandise
ostensibly being exported by it, together with clean bills of lading,
and collected the full value of the drafts up to the amounts
appearing in the L/Cs as above indicated. These correspondent
banks then debited the account of the Bank of the Philippine
Islands with them up to the full value of the drafts presented by the
J.B. Distributing Company, plus commission thereon, and,
thereafter, endorsed and forwarded all documents to the Bank of
the Philippine Islands.
In the meantime, as each shipment (covered by the above-
mentioned letters of credit) arrived in the Philippines, the De Reny
Fabric Industries, Inc. made partial payments to the Bank
amounting, in the aggregate, to P90,000. Further payments were,
however, subsequently discontinued by the corporation when it
became established, as a result of a chemical test conducted by
the National Science Development Board, that the goods that
arrived in Manila were colored chalks instead of dyestuffs.
51
The corporation also refused to take possession of these goods,
and for this reason, the Bank caused them to be deposited with a
bonded warehouse paying therefor the amount of P12,609.64 up
to the filing of its complaint with the court below on December 10,
1962.
On October 24, 1963 the lower court rendered its decision ordering
the corporation and its co-defendants (the herein appellants) to
pay to the plaintiff-appellee the amount of P291,807.46, with
interest thereon, as provided for in the L/C Agreements, at the rate
of 7% per annum from October 31, 1962 until fully paid, plus costs.
It is the submission of the defendants-appellants that it was the
duty of the foreign correspondent banks of the Bank of the
Philippine Islands to take the necessary precaution to insure that
the goods shipped under the covering L/Cs conformed with the
item appearing therein, and, that the foregoing banks having failed
to perform this duty, no claim for recoupment against the
defendants-appellants, arising from the losses incurred for the non-
delivery or defective delivery of the articles ordered, could accrue.
We can appreciate the sweep of the appellants' argument, but we
also find that it is nestled hopelessly inside a salient where the
valid contract between the parties and the internationally accepted
customs of the banking trade must prevail.1
Under the terms of their Commercial Letter of Credit Agreements
with the Bank, the appellants agreed that the Bank shall not be
responsible for the "existence, character, quality, quantity,
conditions, packing, value, or delivery of the property purporting to
be represented by documents; for any difference in character,
quality, quantity, condition, or value of the property from that
expressed in documents," or for "partial or incomplete shipment, or
failure or omission to ship any or all of the property referred to in
the Credit," as well as "for any deviation from instructions, delay,
default or fraud by the shipper or anyone else in connection with
the property the shippers or vendors and ourselves [purchasers] or
any of us." Having agreed to these terms, the appellants have,
therefore, no recourse but to comply with their covenant. 2
But even without the stipulation recited above, the appellants
cannot shift the burden of loss to the Bank on account of the
violation by their vendor of its prestation.
It was uncontrovertibly proven by the Bank during the trial below
that banks, in providing financing in international business
transactions such as those entered into by the appellants, do not
deal with the property to be exported or shipped to the importer,
but deal only with documents. The Bank introduced in evidence a
provision contained in the "Uniform Customs and Practices for
Commercial Documentary Credits Fixed for the Thirteenth
Congress of International Chamber of Commerce," to which the
Philippines is a signatory nation. Article 10 thereof provides: .
In documentary credit operations, all parties
concerned deal in documents and not in goods. —
Payment, negotiation or acceptance against
documents 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 the
documents and reimburse the Bank making the
payment, negotiation or acceptance.
The existence of a custom in international banking and financing
circles negating any duty on the part of a bank to verify whether
what has been described in letters of credits or drafts or shipping
documents actually tallies with what was loaded aboard ship,
having been positively proven as a fact, the appellants are bound
by this established usage. They were, after all, the ones who
tapped the facilities afforded by the Bank in order to engage in
international business.
ACCORDINGLY, the judgment a quo is affirmed, at defendants-
appellants' cost. This is without prejudice to the Bank, in proper
proceedings in the court below in this same case proving and
52
being reimbursed additional expenses, if any, it has incurred by
virtue of the continued storage of the goods in question up to the
time this decision becomes final and executory.

Reyes, J.B.L., Actg. C.J., Dizon, Makalintal, Zaldivar, Fernando,

Teehankee, Barredo, Villamor and Makasiar, JJ., concur.

Concepcion, C.J., is on leave.

53