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Transfield Philippines, Inc. vs. Luzon Hydro Corporation

*
G.R. No. 146717. November 22, 2004.

TRANSFIELD PHILIPPINES, INC., petitioner, vs. LUZON


HYDRO CORPORATION, AUSTRALIA and NEW
ZEALAND BANKING GROUP LIMITED and SECURITY
BANK CORPORATION, respondents.

Commercial Law; Banks and Banking; Letters of Credit;


Standby Credits; Words and Phrases; 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; Generally, credits
in non-sale settings have come to be known as standby credits.—
The letter of credit evolved as a mercantile specialty, and the only
way to understand all its facets is to recognize that it is an entity
unto itself. The relationship between the beneficiary and the
issuer of a letter of credit is not strictly contractual, because both
privity and a meeting of the minds are lacking, yet strict
compliance with its terms is an enforceable right. Nor is it a third-
party beneficiary contract, because the issuer must honor drafts
drawn against a letter regardless of problems subsequently
arising in the underlying contract. Since the bank’s customer
cannot draw on the letter, it does not function as an assignment
by the customer to the beneficiary. Nor, if properly used, is it a
contract of suretyship or guarantee, because it entails a primary
liability following a default. Finally, it is not in itself a negotiable
instrument, because it is not payable to order or bearer and is
generally conditional, yet the draft presented under it is often
negotiable. 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. 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.
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However, credits are also used in non-sale settings where they


serve to reduce the risk of nonperfor-

_______________

* SECOND DIVISION.

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mance. Generally, credits in the non-sale settings have come to be


known as standby credits.
Same; Same; Same; Same; Commercial Credits and Standby
Credits, Distinguished.—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.
Same; Same; Same; A letter of credit 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.—By definition, a letter of
credit is a written instrument whereby the writer requests or
authorizes the addressee to pay money or deliver goods to a third
person and assumes responsibility for payment of debt therefor to
the addressee. 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.
Same; Same; Same; Uniform Customs and Practice (UCP) for
Documentary Credits; Since letters of credit have gained general
acceptability in international trade transactions, the International
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Chamber of Commerce (ICC) has published from time to time


updates on the Uniform Customs and Practice for Documentary
Credits to standardize practices in the letter of credit area; 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.—Since
letters of credit have gained general acceptability in international
trade transactions, the ICC

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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. First published in 1933, the UCP for
Documentary Credits has undergone several revisions, the latest
of which was in 1993. In Bank of the Philippine Islands v. De
Reny Fabric Industries, Inc., 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, 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.
Same; Same; Same; “Independence Principle”; Under the
“independence principle,” banks assume no liability or
responsibility for the form, sufficiency, accuracy, genuineness,
falsification or legal effect of any documents, or for the general
and/or particular conditions stipulated in the documents or
superimposed thereon, nor do they assume any liability or
responsibility for the description, quantity, weight, quality,
condition, packing, delivery, value or existence of the goods
represented by any documents, or for the good faith or acts and/or
omissions, solvency, performance or standing of the consignor, the
carriers, or the insurers of the goods, or any other person
whomsoever.—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
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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

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beneficiary of prompt payment independent of any breach of the


main contract and precludes the issuing bank from determining
whether the main contract is actually accomplished or not. Under
this principle, banks assume no liability or responsibility for the
form, sufficiency, accuracy, genuineness, falsification or legal
effect of any documents, or for the general and/or particular
conditions stipulated in the documents or superimposed thereon,
nor do they assume any liability or responsibility for the
description, quantity, weight, quality, condition, packing,
delivery, value or existence of the goods represented by any
documents, or for the good faith or acts and/or omissions,
solvency, performance or standing of the consignor, the carriers,
or the insurers of the goods, or any other person whomsoever.
Same; Same; Same; Same; 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; or (b) independence
may be only as to the justification aspect, though 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.—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
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light of the purpose of the credit the payment of the credit would
constitute fraudulent abuse of the credit.
Same; Same; Same; Same; The independence principle
liberates the issuing bank from the duty of ascertaining
compliance by the parties in the main contract; As it is, the
independence doctrine works to the benefit of both the issuing bank
and the beneficiary.—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.
Precisely, the independence principle liberates the issuing bank
from the duty of ascertaining compliance by

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the parties in the main contract. As the principle’s nomenclature


clearly suggests, the obligation under the letter of credit is
independent of the related and originating contract. In brief, the
letter of credit is separate and distinct from the underlying
transaction. Given the nature of letters of credit, petitioner’s
argument—that it is only the issuing bank that may invoke the
independence principle on letters of credit—does not impress this
Court. To say that the independence principle may only be
invoked by the issuing banks would render nugatory the purpose
for which the letters of credit are used in commercial
transactions. As it is, the independence doctrine works to the
benefit of both the issuing bank and the beneficiary.
Same; Same; Same; Same; 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
prerequisite for the release of funds under a letter of credit.—
Petitioner’s argument that any dispute must first be resolved by
the parties, whether through negotiations or arbitration, before
the beneficiary is entitled to call on the letter of credit in essence
would convert the letter of credit into a mere guarantee.
Jurisprudence has laid down a clear distinction between a letter
of credit and a guarantee in that the settlement of a dispute
between the parties is not a pre-requisite for the release of funds
under a letter of credit. In other words, the argument is
incompatible with the very nature of the letter of credit. If a letter
of credit is drawable only after settlement of the dispute on the

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contract entered into by the applicant and the beneficiary, there


would be no practical and beneficial use for letters of credit in
commercial transactions.
Same; Same; Same; Same; Owing to the nature and purpose
of standby letters of credit, banks are left with little or no
alternative but to honor the credit or the call for payment.—While
it is the bank which is bound to honor the credit, it is the
beneficiary who has the right to ask the bank to honor the credit
by allowing him to draw thereon. The situation itself emasculates
petitioner’s posture that LHC cannot invoke the independence
principle and highlights its puerility, more so in this case where
the banks concerned were impleaded as parties by petitioner
itself. Respondent banks had squarely raised the independence
principle to justify their releases of the amounts due under the
Securities. Owing to the nature and purpose of the standby letters
of credit, this Court rules that the

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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.
Same; Same; Same; Same; Contracts; 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.— 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. A careful perusal of
the Turnkey Contract reveals the intention of the parties to make
the Securities answerable for the liquidated damages occasioned
by any delay on the part of petitioner. The call upon the
Securities, while not an exclusive remedy on the part of LHC, is
certainly an alternative recourse available to it upon the
happening of the contingency for which the Securities have been
proffered. Thus, even without the use of the “independence
principle,” the Turnkey Contract itself bestows upon LHC the
right to call on the Securities in the event of default.
Same; Same; Same; Same; Injunction; Requisites; Most
writers agree that fraud is an exception to the independence
principle; The remedy for fraudulent abuse is an injunction.—
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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
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.
Same; Same; Same; Same; Same; 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.—Generally,
injunction is a preservative remedy for the protection of one’s
substantive right or interest;

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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. 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. 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. 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.
Same; Same; Same; Same; It is premature and absurd to
conclude that the draws on the Securities were outright fraudulent

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where the International Chamber of Commerce and the


Construction Industry Authority Commission have not ruled with
finality on the existence of default.—The pendency of the
arbitration proceedings would not per se make LHC’s draws on
the Securities wrongful or fraudulent for there was nothing in the
Contract which would indicate that the parties intended that all
disputes regarding delay should first be settled through
arbitration before LHC would be allowed to call upon the
Securities. It is therefore premature and absurd to conclude that
the draws on the Securities were outright fraudulent given the
fact that the ICC and CIAC have not ruled with finality on the
existence of default.
Same; Same; Same; Same; Actions; Appeals; Pleadings and
Practice; 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.—
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.
What petitioner did assert before the courts below was the fact
that LHC’s draws on the Securities would be premature and
without basis in view of the

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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. The lower courts
could thus not be faulted for not applying the fraud exception rule
not only because the existence of fraud was fundamentally
interwoven with the issue of default still pending before the
arbitral tribunals, but more so, because petitioner never raised it
as an issue in its pleadings filed in the courts below. At any rate,
petitioner utterly failed to show that it had a clear and
unmistakable right to prevent LHC’s call upon the Securities.
Same; Same; Same; Same; Obligations and Contracts;
Obligations arising from contracts have the force of law between
the contracting parties and should be complied with in good faith.
— Prudence should have impelled LHC to await resolution of the

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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.
More importantly, pursuant to the principle of autonomy of
contracts embodied in Article 1306 of the Civil Code, 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.
Actions; Injunction; 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.—In a
Manifestation, 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. In Ticzon v. Video Post
Manila, Inc. this Court ruled that where the period within which
the former employees were

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prohibited from engaging in or working for an enterprise that


competed with their former employer—the very purpose of the
preliminary injunction—has expired, any declaration upholding
the propriety of the writ would be entirely useless as there would
be no actual case or controversy between the parties insofar as the
preliminary injunction is concerned. In the instant case, the
consummation of the act sought to be restrained had rendered the
instant petition moot—for 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 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.

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Same; Pleadings and Practice; Forum Shopping; 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 the issue until the party alleged to have
committed forum shopping has been given ample opportunity 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. 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. 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. Forum Shopping constitutes
improper conduct and may be punished with summary dismissal
of the multiple petitions and direct contempt of court. 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.

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Transfield Philippines, Inc. vs. Luzon Hydro Corporation

PETITION for review on certiorari of a decision of the


Court of Appeals.

The facts are stated in the opinion of the Court.


          Romulo, Mabanta, Buenaventura, Sayoc and Delos
Angeles and M. B. Tomacruz & Associates Law Offices for
petitioner.
     Castro, Yan Binas, Ortile, Samillano & Mangrobang
for respondent Security Bank.
          Quasha, Ancheta, Peña & Nolasco for respondent
ANZ Bank.
          Sycip, Salazar, Hernandez & Gatmaitan for
respondent LHC.

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TINGA, J.:

Subject of this case is the letter of credit which has evolved


as the ubiquitous and most important device in
international trade. A creation of commerce and
businessmen, the letter of credit is also unique in the
number of parties involved and its supranational 1
character.
Petitioner has appealed from the Decision of the Court
of Appeals in CA-G.R. SP No. 61901 entitled “Transfield
Philippines, Inc. v. Hon. Oscar 2
Pimentel, et al.,”
promulgated on 31 January 2001.
On 26 March 1997, petitioner and respondent Luzon
Hydro Corporation3 (hereinafter, LHC) entered into a
Turnkey Contract whereby petitioner, as Turnkey
Contractor, undertook to construct, on a turnkey basis, a
seventy (70)-Megawatt hydro-electric power station at the
Bakun River in the prov-

_______________

1 Penned by Justice Candido V. Rivera, concurred in by Justices


Conchita Carpio-Morales and Rebecca de Guia-Salvador.
2 Rollo, pp. 52-61.
3 Id., at pp. 62-252.

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inces of Benguet and Ilocos Sur (hereinafter, the Project).


Petitioner was given the sole responsibility for the design,
construction,
4
commissioning, testing and completion of the
Project.
The Turnkey Contract provides that: (1) the target
completion date of the Project shall be on 1 June 2000, or
such later date as may be agreed upon between petitioner
and respondent LHC or otherwise determined in
accordance with the Turnkey Contract; and (2) petitioner is
entitled to claim extensions of time (EOT) for reasons
enumerated in the Turn-key Contract, among which are5
variations, force majeure, and delays caused by LHC itself.
Further, in case of dispute, the parties are bound to settle
their differences through mediation, conciliation and such
other means
6
enumerated under Clause 20.3 of the Turnkey
Contract.
To secure performance of petitioner’s obligation on or
before the target completion date, or such time for
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completion as may be determined by the parties’


agreement, petitioner opened in favor of LHC two (2)
standby letters of credit both dated 20 March 2000
(hereinafter referred to as “the Securities”), to wit: Standby
Letter of Credit No. E001126/8400 with

_______________

4 Id., at pp. 75-76.


5 Clause 1.1, Volume II of the Turnkey Contract, Rollo, p. 81.
6 20.3 Dispute Resolution.
If at anytime any dispute or difference shall arise between the
Employer and the Contractor in connection with or arising out of this
Contract or the carrying out of the Works, the parties together shall in
good faith exert all efforts to resolve such dispute or difference by
whatever means they deem appropriate, including conciliation, mediation
and seeking the assistance of technical, accounting or other experts. At
the request of any party, the chief executives of the Employer and the
Contractor shall meet in a good-faith effort to reach an amicable
settlement of the dispute or difference. Any dispute or difference that the
parties are unable to resolve within a reasonable time may, at the option
of either party, be referred to arbitration in accordance with Clause 20.4.
(Id., at p. 179)

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Transfield Philippines, Inc. vs. Luzon Hydro Corporation

the local branch of respondent Australia


7
and New Zealand
Banking Group Limited (ANZ Bank) and Standby Letter of
Credit No. IBDIDSB-00/4
8
with respondent Security Bank
Corporation (SBC)
9
each in the amount of
US$8,988,907.00.
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 Construction10 Industry
Arbitration Commission (CIAC) on 1 June 1999. This was
followed by another Request for Arbitration, this time filed
by petitioner 11 before the International Chamber of
Commerce (ICC) on 3 November 2000. In both arbitration
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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 pursuant12
to the pertinent provisions of the 13
Turnkey Contract, petitioner—in two separate letters
both dated 10 August 2000—advised respondent banks of
the arbitration

_______________

7 Annex “C”, Rollo, pp. 254-256.


8 Annex “D”, Id., at pp. 257-259.
9 Clause 4.2.1, Volume II of the Turnkey Contract, Id., at p. 94.
10 Id., at pp. 261-265.
11 Id., at pp. 359-382.
12 Turnkey Contract, Clause 4.2.5, Rollo, p. 94, in relation to Clause
8.7.1., Rollo, p. 132.
13 Annex “H”, Rollo, pp. 287-289; Annex “H-1”, Rollo, pp. 320-322.

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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, 14
LHC
sent notice to petitioner that pursuant to Clause 8.2 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 15would
pay on the Securities if and when LHC calls on them.
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
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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
16
for the payment of liquidated damages for the
delay.

_______________

14 Clause 8.2. Time for Completion. The Contractor shall complete all
the Works, including the Tests on Completion, in accordance with the
Program on or before the Target Completion Date. (Rollo, p. 125)
15 Vol. 1, Rollo, pp. 355-357.
16 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 Liq

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On 5 November 2000, petitioner as plaintiff filed a


Complaint for Injunction, with prayer for temporary
restraining order and writ of preliminary injunction,
against herein respondents as defendants 17
before the
Regional Trial Court (RTC) of Makati. 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 18period of seventeen (17) days or
until 26 November 2000.19
The RTC, in its Order dated 24 November 2000, denied
petitioner’s application for a writ of preliminary injunction.
It ruled that petitioner had no legal right and suffered no
irreparable injury to justify the issuance of the writ.
Employing the principle of “independent contract” in letters
of credit, the trial court ruled that LHC should be allowed
to draw on the Securities for liquidated damages. It
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debunked petitioner’s contention that the principle of


“independent contract” could be invoked only by respondent
banks since according to it respondent LHC is the ultimate
beneficiary of the Securities. The trial court further ruled
that the banks were mere custodians of the funds and as
such they were obligated to transfer the same to the
beneficiary for as long as the latter could submit the
required certification of its claims.

_______________

uidated Damages for Delay for each day of the delay on the following
day without need of demand from the Employer.
17 Annex “L”, Rollo, pp. 383-402.
18 Annex “N”, Id., at pp. 406-409.
19 Annex “O”, Id., at pp. 412-423.

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Transfield Philippines, Inc. vs. Luzon Hydro Corporation

Dissatisfied with the trial court’s denial of its application


for a writ of preliminary injunction, petitioner elevated the
case to the Court of Appeals via a Petition for Certiorari
under Rule 65, with prayer for the issuance of a temporary 20
restraining order and writ of preliminary injunction.
Petitioner submitted to the appellate court that LHC’s call
on the Securities was premature considering that the issue
of its default had not yet been resolved with finality by the
CIAC and/or the ICC. It asserted that until the fact of
delay could be established, LHC had no right to draw on
the Securities for liquidated damages.
Refuting petitioner’s contentions, LHC claimed that
petitioner had no right to restrain its call on and use of the
Securities as payment for liquidated damages. It averred
that the Securities are independent of the main contract
between them as shown on the face of the two Standby
Letters of Credit which both provide that the banks have
no responsibility to investigate the authenticity or accuracy
of the certificates or the declarant’s capacity or entitlement
to so certify.
In its Resolution dated 28 November 2000, the Court of
Appeals issued a temporary restraining order, enjoining
LHC from calling on the Securities or any renewals or
substitutes thereof and ordering respondent banks to cease
and desist from transferring, paying or in any manner
disposing of the Securities.
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However, the appellate court failed to act on the


application for preliminary injunction until the temporary
restraining order expired on 27 January 2001. Immediately
thereafter, representatives of LHC trooped to ANZ Bank
and withdrew the total amount of US$4,950,000.00,
thereby reducing the balance in ANZ Bank to
US$1,852,814.00.
On 2 February 2001, the appellate court dismissed the
petition for certiorari. The appellate court expressed
conformity with the trial court’s decision that LHC could
call on the Se-

_______________

20 Docketed as CA-G.R. SP No. 61901.

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322 SUPREME COURT REPORTS ANNOTATED


Transfield Philippines, Inc. vs. Luzon Hydro Corporation

curities pursuant to the first principle in credit law that


the credit itself is independent of the underlying
transaction and that as long as the beneficiary complied
with the credit, it was of no moment that he had not
complied with the underlying contract. Further, the
appellate court held that even assuming that the trial
court’s denial of petitioner’s application for a writ of
preliminary injunction was erroneous, it constituted only
an error of judgment which is not correctible by certiorari,
unlike error of jurisdiction.
Undaunted, petitioner filed the instant Petition for
Review raising the following issues for resolution:
WHETHER THE “INDEPENDENCE PRINCIPLE” ON
LETTERS OF CREDIT MAY BE INVOKED BY A
BENEFICIARY THEREOF WHERE THE
BENEFICIARY’S CALL THEREON IS WRONGFUL OR
FRAUDULENT.

WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON


THE SECURITIES BEFORE THE RESOLUTION OF
PETITIONER’S AND LHC’S DISPUTES BY THE
APPROPRIATE TRIBUNAL.
WHETHER ANZ BANK AND SECURITY BANK ARE
JUSTIFIED IN RELEASING THE AMOUNTS DUE UNDER
THE SECURITIES DESPITE BEING NOTIFIED THAT LHC’S
CALL THEREON IS WRONGFUL.

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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 21HAD
WRONGFULLY DRAWN FROM THE SECURITIES.

_______________

21 Rollo, pp. 25-26.

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Transfield Philippines, Inc. vs. Luzon Hydro Corporation

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 22
August 2003, petitioner filed a Supplement
23
to the
Petition and Supplemental Memorandum, alleging that
in the course of the proceedings in the ICC Arbitration, a
number of documentary and testimonial evidence came out
through the use of different modes of discovery available in
the ICC Arbitration. It contends that after the filing of the
petition facts and admissions were discovered which
demonstrate that LHC knowingly misrepresented that
petitioner had incurred delays—notwithstanding its
knowledge and admission that delays were excused under
the Turnkey Contract—to 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
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the proceeds of the Securities and not ordered to return the


amounts it had wrongfully drawn thereon. 24
In its Manifestation dated 8 September 2003, LHC
contends that the supplemental pleadings filed by
petitioner

_______________

22 Vol. II; Id., at pp. 2-78.


23 Id., at pp. 79-92.
24 Id., at pp. 95-98.

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324 SUPREME COURT REPORTS ANNOTATED


Transfield Philippines, Inc. vs. Luzon Hydro Corporation

present erroneous and misleading information which would


change petitioner’s theory on appeal. 25
In yet another Manifestation dated 12 April 2004,
petitioner alleges that on 18 February 2004, the ICC
handed down its Third Partial Award, declaring that LHC
wrongfully drew upon the Securities and that petitioner
was entitled to the return of the sums wrongfully taken by
LHC for liquidated damages. 26
LHC filed a Counter-Manifestation dated 29 June 2004,
stating that petitioner’s Manifestation dated 12 April 2004
enlarges the scope of its Petition for Review of the 31
January 2001 Decision of the Court of Appeals. LHC notes
that the Petition for Review essentially dealt only with the
issue of whether injunction could issue to restrain the
beneficiary of an irrevocable letter of credit from drawing
thereon. It adds that petitioner has filed two other
proceedings, to wit: (1) ICC Case No. 11264/TE/MW,
entitled “Transfield Philippines Inc. v. Luzon Hydro
Corporation,” in which the parties made claims and
counterclaims arising from petitioner’s
performance/misperformance of its obligations as
contractor for LHC; and (2) Civil Case No. 04-332, entitled
“Transfield Philippines, Inc. v. Luzon Hydro Corporation”
before Branch 56 of the RTC of Makati, which is an action
to enforce and obtain execution of the ICC’s partial award
mentioned in petitioner’s Manifestation of 12 April 2004.
In its Comment to petitioner’s Motion for Leave to File
Addendum to Petitioner’s Memorandum, LHC stresses that
the question of whether the funds it drew on the subject
letters of credit should be returned is outside the issue in
this appeal. At any rate, LHC adds that the action to
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enforce the ICC’s partial award is now fully within the


Makati RTC’s jurisdiction in Civil Case No. 04-332. LHC
asserts that petitioner is engaged in forum shopping by
keeping this appeal and at the

_______________

25 Id., at pp. 109-113.


26 Id., at pp. 666-671.

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Transfield Philippines, Inc. vs. Luzon Hydro Corporation

same time seeking the suit for enforcement of the arbitral


award before the Makati court.
Respondent
27
SBC in its Memorandum, dated 10 March
2003 contends that the Court of Appeals correctly
dismissed the petition for certiorari. Invoking the
independence principle, SBC argues that it was under no
obligation to look into the validity or accuracy of the
certification submitted by respondent LHC or into the
latter’s capacity or entitlement to so certify. It adds that
the act sought to be enjoined by petitioner was already fait
accompli and the present petition would no longer serve
any remedial purpose.
In a similar fashion, respondent 28
ANZ Bank in its
Memorandum dated 13 March 2003 posits that its actions
could not be regarded as unjustified in view of the
prevailing independence principle under which it had no
obligation to ascertain the truth of LHC’s allegations that
petitioner defaulted in its obligations. Moreover, it points
out that since the Standby Letter of Credit No.
E001126/8400 had been fully drawn, petitioner’s prayer for
preliminary injunction had been rendered moot and
academic.
At the core of the present controversy is the applicability
of the “independence principle” and “fraud exception rule”
in letters of credit. Thus, a discussion of the nature and use
of letters of credit, also referred to simply as “credits,”
would provide a better perspective of the case.
The letter of credit evolved as a mercantile specialty,
and the only way to understand all its facets is to recognize
that it is an entity unto itself. The relationship between the
beneficiary and the issuer of a letter of credit is not strictly
contractual, because both privity and a meeting of the
minds are lacking, yet strict compliance with its terms is
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an enforceable right. Nor is it a third-party beneficiary


contract, because the issuer must honor drafts drawn
against a letter regardless of

_______________

27 Id., at pp. 598-607.


28 Id., at pp. 619-630.

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Transfield Philippines, Inc. vs. Luzon Hydro Corporation

problems subsequently arising in the underlying contract.


Since the bank’s customer cannot draw on the letter, it
does not function as an assignment by the customer to the
beneficiary. Nor, if properly used, is it a contract of
suretyship or guarantee, because it entails a primary
liability following a default. Finally, it is not in itself a
negotiable instrument, because it is not payable to order or
bearer and is generally conditional,
29
yet the draft presented
under it is often negotiable.
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, 30who wants to have control of the goods before
paying. 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
31
settings have come to be known as standby
credits.
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 be-

_______________

29 Joseph, Letters of Credit: The Developing Concepts and Financing


Functions, 94 BANKING LAW JOURNAL 850-851 [1977] cited in M.
KURKELA, LETTERS OF CREDIT UNDER INTERNATIONAL TRADE
LAW, 321 (1985).

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30 Bank of America v. Court of Appeals, G.R. No. 105395, 10 December


1993, 228 SCRA 357 citing William S. Shaterian, EXPORT-IMPORT
BANKING: THE INSTRUMENTS AND OPERATIONS UTILIZED BY
AMERICAN EXPORTERS AND IMPORTERS AND THEIR BANKS IN
FINANCING FOREIGN TRADE, 284-374 (1947).
31 E&H Partners v. Broadway Nat’l. Bank, 39 F. Supp. 2d 275, (United
States Circuit Court, S.D. New York) No. 96 Civ. 7098 (RLC), 19 October
1998 <http://www.westlaw.com>.

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Transfield Philippines, Inc. vs. Luzon Hydro Corporation

come 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
32
certify that his obligor has not performed the
contract.
By definition, a letter of credit is a written instrument
whereby the writer requests or authorizes the addressee to
pay money or deliver goods to a third person and assumes
responsibility
33
for payment of debt therefor to the
addressee. 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
34
contract or disputes between the parties
thereto.
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. The35
vast majority of
letters of credit incorporate the UCP. First published in
1933, the UCP for Documentary Credits has undergone 36
several revisions, the latest of which was in 1993.

_______________

32 J. DOLAN, THE LAW OF LETTERS OF CREDIT, REVISED Ed.


(2000).
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33 24 A WORDS AND PHRASES 590, Permanent Edition.


34 Ibid.
35 JACKSON & DAVEY, INTERNATIONAL ECONOMIC
RELATIONS, 53 (2nd ed.).
36 ICC Publication No. 500.

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328 SUPREME COURT REPORTS ANNOTATED


Transfield Philippines, Inc. vs. Luzon Hydro Corporation

In Bank of the37 Philippine Islands v. De Reny Fabric


Industries, Inc., 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,
38
in Bank of America, NT
& SA v. Court of Appeals, 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, falsifica-

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_______________

37 146 Phil. 269; 35 SCRA 256 (1970).


38 G.R. No. 105395, 10 December 1993, 228 SCRA 357.

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Transfield Philippines, Inc. vs. Luzon Hydro Corporation

tion 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 39the insurers of the goods, or any
other person whomsoever.
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 40the credit would constitute
fraudulent abuse of the credit.
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
pre-

_______________

39 Article 15, UCP.

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40 KURKELA, LETTERS OF CREDIT UNDER INTERNATIONAL


TRADE LAW, 286-287 (1985).

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Transfield Philippines, Inc. vs. Luzon Hydro Corporation

41
sented and the conditions of the credit are complied with.
Precisely, the independence principle liberates the issuing
bank from the duty of ascertaining compliance by the
parties in the main contract. As the principle’s
nomenclature clearly suggests, the obligation under the
letter of credit is independent of the related and originating
contract. In brief, the letter of credit is separate and
distinct from the underlying transaction.
Given the nature of letters of credit, petitioner’s
argument—that it is only the issuing bank that may invoke
the independence principle on letters of credit—does not
impress this Court. To say that the independence principle
may only be invoked by the issuing banks would render
nugatory the purpose for which the letters of credit are
used in commercial transactions. As it is, the independence
doctrine works to the benefit of both the issuing bank and
the beneficiary.
Letters of credit are employed by the parties desiring to
enter into commercial transactions, not for the benefit of
the issuing bank but mainly for the benefit of the parties to
the original transactions. With the letter of credit from the
issuing bank, the party who applied for and obtained it
may confidently present the letter of credit to the
beneficiary as a security to convince the beneficiary to
enter into the business transaction. On the other hand, the
other party to the business transaction, i.e., the beneficiary
of the letter of credit, can be rest assured of being
empowered to call on the letter of credit as a security in
case the commercial transaction does not push through, or
the applicant fails to perform his part of the transaction. It
is for this reason that the party who is entitled to the
proceeds of the letter of credit is appropriately called
“beneficiary.”
Petitioner’s argument that any dispute must first be
resolved by the parties, whether through negotiations or
arbitration, before the beneficiary is entitled to call on the
letter

_______________

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41 Art. 10, UCP.

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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 prerequisite for the release of funds under a letter of
credit. In other words, the argument is incompatible with
the very nature of the letter of credit. If a letter of credit is
drawable only after settlement of the dispute on the
contract entered into by the applicant and the beneficiary,
there would be no practical and beneficial use for letters of
credit in commercial transactions.
Professor John F. Dolan, the noted authority on letters
of credit, sheds more light on the issue:

The standby credit is an attractive commercial device for many of


the same reasons that commercial credits are attractive.
Essentially, these credits are inexpensive and efficient. Often they
replace surety contracts, which tend to generate higher costs than
credits do and are usually triggered by a factual determination
rather than by the examination of documents.
Because parties and courts should not confuse the different
functions of the surety contract on the one hand and the standby
credit on the other, the distinction between surety contracts and
credits merits some reflection. The two commercial devices share
a common purpose. Both ensure against the obligor’s
nonperformance. They function, however, in distinctly different
ways.
Traditionally, upon the obligor’s default, the surety undertakes
to complete the obligor’s performance, usually by hiring someone
to complete that performance. Surety contracts, then, often
involve costs of determining whether the obligor defaulted (a
matter over which the surety and the beneficiary often litigate)
plus the cost of performance. The benefit of the surety contract to
the beneficiary is obvious. He knows that the surety, often an
insurance company, is a strong financial institution that will
perform if the obligor does not. The beneficiary also should
understand that such performance must await the sometimes
lengthy and costly determination that the obligor has defaulted.
In addition, the surety’s performance takes time.

332

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The standby credit has different expectations. He reasonably


expects that he will receive cash in the event of nonperformance,
that he will receive it promptly, and that he will receive it before
any litigation with the obligor (the applicant) over the nature of
the applicant’s performance takes place. The standby credit has
this opposite effect of the surety contract: it reverses the financial
burden of parties during litigation.
In the surety contract setting, there is no duty to indemnify the
beneficiary until the beneficiary establishes the fact of the
obligor’s performance. The beneficiary may have to establish that
fact in litigation. During the litigation, the surety holds the
money and the beneficiary bears most of the cost of delay in
performance.
In the standby credit case, however, the beneficiary avoids that
litigation burden and receives his money promptly upon
presentation of the required documents. It may be that the
applicant has, in fact, performed and that the beneficiary’s
presentation of those documents is not rightful. In that case, the
applicant may sue the beneficiary in tort, in contract, or in breach
of warranty; but, during the litigation to determine whether the
applicant has in fact breached the obligation to perform, the
beneficiary, not the applicant, holds the money. Parties that use a
standby credit and courts construing such a credit should
understand this allocation of burdens. There is a tendency in
some quarters to overlook this distinction between surety
contracts and standby credits and to reallocate burdens by
permitting the obligor or the issuer to litigate
42
the performance
question before payment to the beneficiary.

While it is the bank which is bound to honor the credit, it is


the beneficiary who has the right to ask the bank to honor
the credit by allowing him to draw thereon. The situation
itself emasculates petitioner’s posture that LHC cannot
invoke the independence principle and highlights its
puerility, more so in this case where the banks concerned
were impleaded as parties by petitioner itself.
Respondent banks had squarely raised the independence
principle to justify their releases of the amounts due under
the Securities. Owing to the nature and purpose of the

_______________

42 Supra note 32 at pp. 1-27.

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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”
43
for them to honor the call for
payment.
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 44
be provided on an annually
renewable basis.
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
45
and/or by drawing on the
Security.”

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,46
may be in keeping with good faith, usage, and law. A
careful perusal

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_______________

43 Rollo, pp. 604 and 624.


44 Italics supplied; Id., at p. 94.
45 Italics supplied; Id., at p. 132.
46 Art. 1315, Civil Code.

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Transfield Philippines, Inc. vs. Luzon Hydro Corporation

of the Turnkey Contract reveals the intention of the parties


to make the Securities answerable for the liquidated
damages occasioned by any delay on the part of petitioner.
The call upon the Securities, while not an exclusive remedy
on the part of LHC, is certainly an alternative recourse
available to it upon the happening of the contingency for
which the Securities have been proffered. Thus, even
without the use of the “independence principle,” the
Turnkey Contract itself bestows upon LHC the right to call
on the Securities in the event of default.
Next, petitioner invokes the “fraud exception” principle.
It avers that LHC’s call on the Securities is wrongful
because it fraudulently misrepresented to ANZ Bank and
SBC that there is already a breach in the Turnkey Contract
knowing fully well that this is yet to be determined by the
arbitral tribunals. It asserts that the “fraud exception”
exists when the beneficiary, for the purpose of drawing on
the credit, fraudulently presents to the confirming bank,
documents that contain, expressly or by implication,
material representations of fact that to his knowledge are
untrue. In such a situation, petitioner insists, injunction is
recognized as a remedy available to it.
Citing Dolan’s treatise on letters of credit, petitioner
argues that the independence principle is not without
limits and it is important to fashion those limits in light of
the principle’s purpose, which is to serve the commercial
function of the credit. If it does not serve those functions,
application of the principle is not warranted, and the
common law principles of contract should apply.
It is worthy of note that the propriety of LHC’s call on
the Securities is largely intertwined with the fact of default
which is the self-same issue pending resolution before the
arbitral tribunals. To be able to declare the call on the
Securities wrongful or fraudulent, it is imperative to
resolve, among others, whether petitioner was in fact guilty

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of delay in the performance of its obligation. Unfortunately


for petitioner,
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Transfield Philippines, Inc. vs. Luzon Hydro Corporation

this Court is not called upon to rule upon the issue of


default—such issue having been submitted by the parties
to the jurisdiction of the arbitral tribunals
47
pursuant to the
terms embodied in their agreement.
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 48fraud
sufficient to support an injunction against payment. The
remedy for fraudulent abuse is an injunction. However,
injunction should not be granted unless: (a) there is clear
proof of fraud; (b) the fraud constitutes fraudulent abuse of
the independent purpose of the letter of credit and not only
fraud under the main agreement; and (c) irreparable injury
might follow if injunction is not granted49
or the recovery of
damages would be seriously damaged.
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, 50then
LHC would not be entitled to any liquidated damages.
Generally, injunction is a preservative remedy for the
protection of one’s substantive right or interest; it is not a
cause of action in itself but merely a provisional remedy, an
adjunct to a main suit. The issuance of the writ of
preliminary injunction as an ancillary or preventive
remedy to secure the rights of a party in a pending case is
entirely within the discretion of

_______________

47 Clause 20.4.1, Turnkey Contract, Rollo, p. 179.


48 Supra note 32 at pp. 2-63.
49 M. KURKELA, LETTERS OF CREDIT UNDER INTERNATIONAL
TRADE LAW, 309 (1985).
50 Rollo, p. 391.

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the court taking cognizance of the case, the only limitation


being that this discretion should be exercised based
51
upon
the grounds and in the manner provided by law.
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
which52 the writ is to be directed are violative of the said
right. 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
53
necessity for the writ to
prevent serious damage. Moreover, an injunctive remedy
may only be resorted to when there is a pressing necessity
to avoid injurious consequences which
54
cannot be remedied
under any standard compensation.
In the instant case, petitioner failed to show that it has
a clear and unmistakable right to restrain LHC’s call on
the Securities which would justify the issuance of
preliminary injunction. By petitioner’s own admission, the
right of LHC to call on the Securities was contractually
rooted and subject 55
to the express stipulations in the
Turnkey Contract. Indeed, the Turnkey Contract is plain
and unequivocal in that it conferred upon LHC the right to
draw upon the Securities in case

_______________

51 Batangas Laguna Tayabas Bus Company, Inc. v. Bitanga, 415 Phil.


43; 362 SCRA 635, 651 (2001).
52 Shin v. Court of Appeals, G.R. No. 113627, 6 February 2001, 351
SCRA 257.
53 Zabat v. Court of Appeals, G.R. No. 122089, 23 August 2000, 338
SCRA 551; Philippine Economic Zone Authority v. Vianzon, G.R. No.
131020, 20 July 2000, 336 SCRA 309; Valencia v. Court of Appeals, G.R.
No. 119118, 19 February 2001, 352 SCRA 72; Crystal v. Cebu
International School, G.R. No. 135433, 4 April 2001, 356 SCRA 296; Ong
Ching Kian Chuan v. Court of Appeals, 415 Phil. 365; 363 SCRA 145
(2001).
54 Philippine National Bank v. Ritratto Group, Inc., 414 Phil. 494; 362
SCRA 216 (2001).
55 Rollo, p. 31.

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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 days56 of
their expiration in accordance with Clause 4.2.2.
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 57
the Contractor and/or by drawing on the Security.”

The pendency of the arbitration proceedings would not per


se make LHC’s draws on the Securities wrongful or
fraudulent for there was nothing in the Contract which
would indicate that the parties intended that all disputes
regarding delay should first be settled through arbitration
before LHC would be allowed to call upon the Securities. It
is therefore premature and absurd to conclude that the
draws on the Securities were outright fraudulent given the
fact that the ICC and CIAC have not ruled with finality on
the existence of default.
Nowhere in its complaint before the trial court or in its
pleadings filed before the appellate court, did petitioner
invoke the fraud exception 58rule as a ground to justify the
issuance of an injunction. What petitioner did assert
before the courts below was the fact that LHC’s draws on
the Securities would be premature and without basis in
view of the pending disputes between them. Petitioner
should not be allowed in

_______________

56 Italics supplied; Id., at pp. 94-95.


57 Id., at p. 132.
58 Vide Annex “L”, Rollo. pp. 392-399; Petition for Certiorari, CA Rollo,
pp. 7-43.

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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 59court as they cannot be raised for the first time
on appeal. The lower courts could thus not be faulted for
not applying the fraud exception rule not only because the
existence of fraud was fundamentally interwoven with the
issue of default still pending before the arbitral tribunals,
but more so, because petitioner never raised it as an issue
in its pleadings filed in the courts below. At any rate,
petitioner utterly failed to show that it had a clear and
unmistakable right to prevent LHC’s call upon the
Securities.
Of course, prudence should have impelled LHC to await
resolution of the pending issues before the arbitral
tribunals prior to taking action to enforce the Securities.
But, as earlier stated, the Turnkey Contract did not require
LHC to do so and, therefore, it was merely enforcing its
rights in accordance with the tenor thereof. Obligations
arising from contracts have the force of law between the
contracting
60
parties and should be complied with in good
faith. More importantly, pursuant to the principle of
autonomy
61
of contracts embodied in Article 1306 of the Civil
Code, 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

_______________

59 Salafranca v. Philamlife Village Homeowners Association, Inc., 360


Phil. 652; 300 SCRA 469 (1998); Ruby Industrial Corporation v. Court of
Appeals, 348 Phil. 480; 284 SCRA 445 (1998); Victorias Milling Co., Inc. v.
Court of Appeals, 389 Phil. 184; 333 SCRA 663 (2000).
60 Article 1159, Civil Code.
61 Art. 1306. The contracting parties may establish such stipulations,
clauses, terms and conditions as they may deem convenient, provided they
are not contrary to law, morals, good customs, public order, or public
policy.

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Transfield Philippines, Inc. vs. Luzon Hydro Corporation

Securities. However, the fact is petitioner did not do so;


hence, it would have to live with its inaction.
With respect to the issue of whether the respondent
banks were justified in releasing the amounts due under
the Securities, this Court reiterates that pursuant to the
independence principle the banks were under no obligation
to determine the veracity of LHC’s certification that default
has occurred. Neither were they bound by petitioner’s
declaration that LHC’s call thereon was wrongful. To
repeat, respondent banks’ undertaking was simply to pay
once the required documents are presented by the
beneficiary.
At any rate, should petitioner finally prove in the
pending arbitration proceedings that LHC’s draws upon
the Securities were wrongful due to the non-existence of
the fact of default, its right to seek indemnification for
damages it suffered would not normally be foreclosed
pursuant to general principles of law.
62
Moreover, in a Manifestation, 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 become63 fait
accompli or an accomplished or 64consummated act. In
Ticzon v. Video Post Manila, Inc. this Court ruled that
where the period within which the former employees were
prohibited from engaging in or working for an enterprise
that competed with their former employer—the very
purpose of the preliminary

_______________

62 Rollo, p. 493.
63 Aznar Brothers Realty Company v. Court of Appeals, G.R. No.
128102, 7 March 2000, 327 SCRA 359; Soriano v. Court of Appeals, 416
Phil. 226; 363 SCRA 725 (2001); Rodil Enterprises v. Court of Appeals,
G.R. No. 129609, 29 November 2001, 371 SCRA 79; Unionbank of the
Philippines v. Court of Appeals, 370 Phil. 837; 311 SCRA 795 (1999).
64 389 Phil. 20; 333 SCRA 472 (2000).

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Transfield Philippines, Inc. vs. Luzon Hydro Corporation

injunction—has expired, any declaration upholding the


propriety of the writ would be entirely useless as there
would be no actual case or controversy between the parties
insofar as the preliminary injunction is concerned.
In the instant case, the consummation of the act sought
to be restrained had rendered the instant petition moot—
for any declaration by this Court as to propriety or
impropriety of the non-issuance of injunctive relief 65could
have no practical effect on the existing controversy. The
other issues raised by petitioner particularly with respect
to its right to recover the amounts wrongfully drawn on the
Securities, according to it, could properly be threshed out in
a separate proceeding.
One final point. LHC has charged petitioner of forum
shopping. It raised the charge on two occasions.
66
First, in its
Counter-Manifestation dated 29 June 2004 LHC alleges
that petitioner presented before this Court the same claim
for money which it has filed in two other proceedings, to
wit: ICC Case No. 11264/TE/MW and Civil Case No. 04-332
before the RTC of Makati. LHC argues that petitioner’s
acts constitutes forum shopping which should be punished
by the dismissal of the claim in both forums. Second, in its
Comment to Petitioner’s Motion for Leave to File Addendum
to Petitioner’s Memorandum dated 8 October 2004, LHC
alleges that by maintaining the present appeal and at the
same time pursuing Civil Case No. 04-332—wherein
petitioner pressed for judgment on the issue of whether the
funds LHC drew on the Securities should be returned—
petitioner 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

_______________

65 BLACK’S LAW DICTIONARY, p. 1008, citing Leonhart v.


McCormick, D.C. Pa., 395 F. Supp. 1073.
66 Vol. II, Rollo, pp. 666-669.

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founded on the same transactions and the same essential


facts and circumstances, and all raising substantially the
same issues either pending 67 in, or already resolved
adversely, by some other court. 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 or68the other court might look with
favor upon the other party. 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
69
in one case will amount to res
judicata in another. Forum shopping constitutes improper
conduct and may be punished with summary dismissal 70
of
the multiple petitions and direct contempt of court.
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.

_______________

67 Tantoy, Sr. v. Court of Appeals, G.R. No. 141427, April 20, 2001, 357
SCRA 329.
68 Bangko Silangan Development Bank v. Court of Appeals, 412 Phil.
755; 360 SCRA 422 (2001).
69 Tirona v. Alejo, G.R. No. 129313, October 10, 2001, 367 SCRA 17;
Manalo v. Court of Appeals, G.R. No. 141297, October 8, 2001, 366 SCRA
752.
70 Tantoy, Sr. v. Court of Appeals, supra note 67; Caviles v. Seventeenth
Division, Court of Appeals, G.R. No. 126857, September 18, 2002, 389
SCRA 306.

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National Power Corporation vs. Alonzo-Legasto

SO ORDERED.

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          Puno (Chairman), Austria-Martinez, Callejo, Sr.


and Chico-Nazario, JJ., concur.

Petition denied.

Notes.—Being a product of international commerce, it is


not uncommon to find a dearth of national law that can
adequately provide for the governance of letters of credit.
(Bank of America, NT & SA vs. Court of Appeals, 228 SCRA
357 [1993])
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. (Salafranca v. Philamlife (Pamplona) Village
Homeowners Association, Inc., 300 SCRA 469 [1998])

——o0o——

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