Bank of America V.
CA cash to the seller if it finds that the documents submitted by
letter of credit is a financial device developed to facilitate
commercial transactions. Banks play different roles in such
transactions, each of which carries different rights and
liabilities; if a bank is an advising bank based on the
provisions in the letter of credit, and other documents
presented as evidence, it incurs no liability under the letter
of credit as its only role is to inform a possible client of the
existence of the letter of credit, nothing more.
Facts:
Bank of America entered into an Irrevocable Letter of Credit
purportedly issued by Bank of Ayudhya for the account of
General Chemicals Ltd. to cover the sale of plastic ropes and
agricultural files, with Bank of America as the advising bank
and Inter-Resin as the beneficiary. Bank of America wrote
Inter-Resin of the foregoing and transmitted the letter of
credit. Inter-Resin then sought to confirm the letter of credit,
but Bank of America they did not explained that there was
no need for confirmation because the letter would not be
transmitted if it were not genuine.
Relying on this, Inter-Resin sought to avail of the letter of
credit, using it to ship rope to General Chemicals. Bank of
America then issued checks in favor of Inter-Resin, after
which it informed Bank of Ayudhya of the availment of the
letter of credit, seeking reimbursement in the process. Bank
of Ayudhya declared the letter of credit fraudulent, so Bank
of America stopped the processing of Inter-Resin's
documents.
Issue:
Whether or not Bank of America incurred any liability to the
beneficiary (Inter-Resin) under the letter of credit.
Ruling:
NO.Bank of America merely acted as an advising bank. A
letter of credit is a financial device developed by merchants
to facilitate commercial transactions. It was developed as an
attempt to satisfy the seemingly irreconcilable interests of a
seller, who refuses to part with his goods before he is paid,
and a buyer, who wants to have control of the goods before
paying.
To break the impasse, the buyer (here, General Chemicals)
may be required to contract a bank to issue a letter of credit
in favor of the seller so that, by virtue of the letter, the issuing
bank (here, Bank of Ayudhya) can authorize the seller (here,
Inter-Resin) to draw drafts and engage to pay them upon
presentment along with tender of documents required by the
letter of credits (such documents are those evidencing the
shipment). Once the credit is established, the seller ships the
goods to the buyer and in the process the required shipping
documents. 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
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.
One of the types of letters of credit is the commercial letter
of credit, as in this case. A commercial letter of credit is a
contractual agreement between a bank, known as the issuing
bank, on behalf of one of its customers, authorizing another
bank, known as the advising or confirming bank, to make
payment to the beneficiary. The issuing bank, on the request
of its customer, opens the letter of credit. The issuing bank
makes a commitment to honor drawings made under the
credit. The beneficiary is normally the provider of goods
and/or services.
Essentially, the issuing bank replaces the bank's customer as
the payor.
What makes letters of credit attractive is the independence
of the engagement of the issuing bank to pay the seller of the
draft and the presentment of required shipping documents
from any breach of the main sales contract.
The bank determines compliance only by the examination of
shipping documents, without looking at the main contract.
In modern commerce, the rights and liabilities of banks in
letters of credit depend on its role in the transaction. In this
case, the conflict is on the role of Bank of America. If it is
the issuing bank, it may be liable for the letter of credit as it
handles payment of the draft to the seller. If it is an advising
bank, it is not liable on the transaction as its sole role is to
inform the seller of the existence of the credit. Indicia of its
role as an advising bank can be found on the letter of credit
itself (e.g. the draft that will be used for payment would be
partly the engagement of the Bank of Ayudhya, which is the
issuing bank), a letter of advice (and related fees that were
paid by Inter- Resin), and a letter expressly stating that Bank
of America has no engagement under the letter of credit).
Given this, it is not liable on the letter of credit.
PRUDENTIAL BANK v. IAC, PHILIPPINE RAYON
MILLS INC., ANACLETO R. CHI
G.R. No. 74886, December 8, 1992, DAVIDE, JR. J.
Liability on a letter of credit is created through the honouring
of drafts or other demands for payment upon compliance
with the conditions specified in the credit.
When this occurs, a bank substitutes its own promise to pay
(and would later pay a certain seller) in place of a customer
(who would ‘reimburse’ the bank).
Facts:
Philippine Rayon Mills (PRMI) entered into a contract with
Nissho Co., Ltd of Japan for the importation of textile
machineries. PRMI applied for a commercial letter of credit
(LOC) with Prudential Bank and Trust Company in favor of
Nissho. Against this LOC, sight drafts were drawn and
issued by Nissho, which were all paid by the Prudential Bank
through its correspondent in Japan, the Bank of Tokyo.
These drafts were accepted by PRMI through its president,
Anacleto Chi. Upon arrival of machineries, Prudential Bank
indorsed the shipping documents to PRMI, which accepted
delivery of the same.
PRMI executed, by prior arrangement with PB, a trust
receipt (TC) which was signed by Anacleto Chi in his
capacity as President. At the back of the trust receipt is a
printed form to be accomplished by 2 sureties who are jointly
and severally liable to the PB should PRMI fail to pay the
total amount or any portion of the drafts.
PRMI ceased business operation. The obligation of PRMI
from the LOC and TC remained unpaid and unliquidated.
Demands were made but yielded no result.
Prudential Bank then instituted an action for collection
against PRMI and Analceto Chi.
Issue:
Whether PRMI is liable on the basis of the letter of credit.
Ruling:
YES. A letter of credit is an engagement by a bank or other
person made at the request of a customer that the issuer will
honor drafts or other demands for payment upon compliance
with the conditions specified in the credit. Through a LOC,
the bank merely substitutes its own promise to pay for one
of its customers who in return promised to pay the bank the
amount of funds mentioned (in this case, PRMI, in order to
make purchases with Nissho).
In this case, the drawee (the bank that would honor the
drafts) was Prudential Bank. It was to Prudential Bank that
the drafts were presented for payment-- in this case, sight
drafts payable on demand (the presentment).
When the sight drafts were presented, based on the
engagement in the letter of credit, Prudential Bank would
make payments to the seller, Nissho, and would be
reimbursed by the buyer, PRMI. In this regard, PRMI is
liable on the basis of the letter of credit.
FEATI BANK and TRUST COMPANY v. COURT OF
APPEALS and BERNARDO E. VILLALUZ
G.R. No. 94209, April 30, 1991, GUTIERREZ, Jr. J.
A letter of credit, though possibly used as collateral, is an
undertaking in itself, distinct from the other contracts related
to it (e.g. sale). A breach in a related contract generally does
not create liability in other contracts —one such exception
to this rule is when a corresponding bank takes the role of a
confirming bank in the transaction, as the bank assumes a
direct and primary obligation as if it had issued the letter of
credit.
Facts:
Bernando Villaluz agreed to sell to Axel Christiansen lauan
logs. Upon inspecting the logs, Christiansen issued a
purchase order. To pay for the logs, upon the instructions of
the consignee, Hanmi Trade Development, the Security
Pacific National Bank of Los Angeles (SPNB) issued an
Irrevocable Letter of Credit available at sight in favor of
Villaluz for the purchase price of the logs. The letter of credit
was mailed to Feati Bank and Trust Company (Feati Bank)
with the instruction that it be forwarded to the beneficiary.
The draft would be drawn on SPNB, and that for it to be
honored, it must be accompanied with several documents,
including a certification from Christiansen stating that the
logs have been approved before shipment in line with the
purchase order.
The logs were loaded on the shipping vessel and inspected
by customs inspectors, who all certified the good condition
and exportability of the logs. Notwithstanding the favorable
conditions, Christiansen refused to issue the certification
required by the letter of credit in spite of requests made by
Villaluz. Without the certification, Feati Bank refused to
advance the payment on the letter of credit. As Christiansen
kept up his refusal to issue the needed certification, the letter
of the credit lapsed, while the logs reached their consignee.
Villaluz then filed a case against Christiansen and Feati
Bank in order to compel the execution of the required
certification, and to hold the two liable-- in particular, Feati
Bank for releasing the funds to Christiansen in spite of non-
compliance with the requirements in the letter of credit.
Issue(s):
Whether Feati Bank is liable under the letter of credit despite
non-compliance with its terms.
Ruling:
NO. Two things should be considered here (per BPI v Nery,
Art. 2 of Code of Commerce, and the Uniform Customs and
Practice for Documentary Credits):
First, in commercial transactions involving letters of credit,
the functions assumed by correspondent banks depend on the
obligations taken up by them. If the bank is a notifying bank,
its only obligation is to transmit to the beneficiary the
existence of the letter of credit. If a negotiating bank, it
purchases and discounts drafts under the letter of credit, and
it would be liable depending on the stage of the negotiation
if prior to negotiation, there is no liability to the seller but
after that, it would breach its contract with the seller. If a
confirming bank, the correspondent bank assumes a direct
and primary obligation to assume the obligation as if the
corresponding bank had issued the letter of credit.
Second, a letter of credit (especially an irrevocable letter of
credit) is a contract independent from the contract between
the buyer and the seller, and the credit agreement between
the issuing bank and the buyer.
Breaches and liabilities in one contract may not affect the
other contracts. That is, while it provides security for
commercial transactions, it is not an accessory contract (such
as a guaranty)-- it is a contract with obligations within itself,
some of which are related to those in other contracts (e.g. the
letter of credit is used in order to facilitate a sale, but the
letter of credit is not the sale contract-- it is a contract that
can be used as part of the means of payment).
Treating the contract as an accessory destroys the
independence of the banks responsibility from the contract
upon which it was opened.
Bank's sole involvement is that of a notifying bank. It
forwarded the letter of credit from SPNB to the beneficiary
(the seller). Villaluz claims that Feati is a confirming bank,
that it would carry out SPNB's obligation as if it is own since
there was a prior loan agreement that anticipated the letter of
credit (characterizing it as a confirmation and as an
accessory).
However, the law requires that the undertaking be
absolutely spelled out in order for a bank to be considered
confirming. Neither can Feati be considered a negotiating
bank with liability, as there did not seem to be any
negotiation that would create a contractual relationship.
Without these, it does appear that Feati Bank really only
advised Villaluz of the letter of credit, and entered into no
other obligation with him. It is not privy to whatever
agreements Villaluz may have had with Christiansen.
Apparently, Villaluz had a contract akin to one with services
with Christiansen, which the latter breached when he refused
to issue the certification. However, his unjustified refusal is
a matter between the two men, and not the bank.
MWSS v. HON. REYNALDO DAWAY and
MAYNILAD WATER SERVICES
G.R. No. 160732, June 21, 2004, AZCUNA, J.
Except when a letter of credit specifically stipulates
otherwise, the obligation of the banks issuing letters of credit
are solidary with that of the person or entity requesting for
its issuance, since a letter of credit constitutes a direct,
primary, absolute and definite undertaking to pay the
beneficiary upon the presentation of the set of documents
required therein.
Facts:
MWSS granted Maynilad, under a Concession Agreement, a
twenty-year period to conduct various services for the
existing MWSS water delivery and sewerage services in the
West Zone Service Area, for which Maynilad undertook to
pay the corresponding concession fees on the dates agreed
upon in the said agreement. Among the means they relied
upon are foreign loans. To secure Maynilad's performance
of obligations under the agreement,
Maynilad was required to put up a bond, bank guarantee, or
other security acceptable to MWSS. To meet this
requirement, Maynilad arranged for a three-year credit
facility with foreign banks, led by Citicorp International
Ltd., for the issuance of an Irrevocable Standby Letter of
Credit in favor of MWSS.
Months after the arrangement, Maynilad and MWSS had
difficulties negotiating possible solutions to Maynilad's
supposed losses given the PHP's depreciation against the
USD, even leading to unilateral suspension of payment of
concession fees. They eventually reached an agreement.
In spite of that agreement, Maynilad served upon MWSS a
Notice of Event of Termination, claiming that MWSS failed
to comply with its obligations under the Concession
Agreement and their agreed-upon amendments.
MWSS challenged this, leading to an award in favor of
MWSS.
As a result, MWSS submitted a written notice to Citicorp, as
agent of the foreign banks, that by virtue of Maynilad's
failure to perform its obligations under the Concession
agreement, it would draw on the mentioned letter of credit.
Prior to this, Maynilad filed a petition for rehabilitation
which resulted in Stay Orders that would conflict with the
letter of credit.
Issue:
Whether MWSS may draw on the letter of credit in spite of
the stay order.
Ruling:
YES. As stated in Feati Bank v. CA, an irrevocable letter of
credit is not a guaranty-- that is, not an accessory contract,
but a primary obligation by a bank or other person made at
the request of a customer that the issuer shall honor drafts or
other demands of payment upon compliance with conditions
specified in the credit. What distinguishes a letter of credit
from other accessory contracts is that an issuing bank is to
pay the seller upon presentment of the draft and required
shipping documents. In effect, an undertaking to pay at sight
conditioned upon delivery of the required documents.
This should be read alongside the rule on rehabilitation stay
orders. Stay orders prevent the enforcement of claims
against the debtor, and guarantees and sureties who are not
solidarily liable with the debtor.
The claim is one against the participating banks. Based on
the letter of credit (in fact, explicit in its terms), they have a
primary, direct, definite and absolute undertaking to pay that
is not conditioned on prior exhaustion of
the debtor's assets: a surety. As such, the doctrine in Traders
Royal Bank v CA applies: the claims can be pursued
separately from and independently of the rehabilitation case.
RELIANCE COMMODITIES v. DAEWOO
INDUSTRIAL CO., LTD.
G.R. No. L-100831, December 17, 1993, FELICIANO, J.
Letters of credit transactions are composed of at least three
distinct relationships concretized in a contract or set thereof.
Such relationships may form obligations that exist and are
enforceable separately.
Facts:
Reliance Commodities and Daewoo entered into a contract
of sale under the terms of which Daewoo would ship and
deliver foundry pig iron. Pursuant to this, Daewoo shipped
from Korea the said stock, but when the cargo arrived in
Manila, it came out short.
Months later, another set of contracts were made, with the
final contract including a provision on payment through an
irrevocable letter of credit in favor of Daewoo. To
accomplish this, Reliance filed with Chinabank an
application for a letter of credit in favor of Daewoo. Such
was endorsed to the Iron and Steel Authority for approval,
but was denied. Because of the denial, Reliance had to
submit purchase orders from end-users to support its
application for a letter of credit, but did not make its target.
Daewoo rejected the proposed letter of credit.
As it turned out, the failure of Reliance to open the letter of
credit was due to its exceeding its foreign exchange
allocation. Daewoo was forced to sell the pig iron to another
buyer at a lower price in order to recoup some of its losses,
and then requested payment for the amount represented by
the short delivery. The request failed, leading to an action for
damages with the trial court.
Issue:
Whether or not the failure of Reliance (an importer) to open
a letter of credit on the terms agreed upon makes it liable to
Daewoo (exporter) for damages.
Ruling:
YES. A letter of credit transaction is a composite of at least
three distinct but intertwined relationships being concretized
in the contract: the account party or buyer or importer to the
beneficiary of the letter of credit(export or seller)-- here,
Reliance agrees to pay Daewoo based on the terms of the
contract; the account party and the issuing bank (the
Application)-- Reliance tried to apply to Chinabank for the
letter of credit, and had the letter of credit been approved,
they would reimburse the bank for amounts paid by that bank
pursuant to the letter of credit; and the issuing bank and the
beneficiary, in order to support the contract; finally, the
account party and the beneficiary to, inter alia, pay certain
monies to each other. Other parties may be included, but the
foregoing are indispensable. Note that these relationships
represent different obligations that have separate lifespans.
This case is centered on the contractual relation between the
importer and exporter (the first one). Although the contract
refers to a letter of credit, it was not meant to be a condition
precedent-- only a mode of payment. The contract had
already been perfected. Consequently, the rights and
obligations embodied in the contract now arise regardless of
the failure of the application for the letter of credit-- it was
enforceable.
The letter of credit was the mechanism of payment for the
pig iron. When an issuing bank undertakes to accept or pay
the drafts presented, the bank in effect issues a loan to the
account party. This feature, along with the bank's
undertaking to accept the beneficiary's drafts drawn on the
bank, is what makes a letter of credit a mode of payment.
CHARLES LEE, CHUA SIOK SUY, MARIANO SIO,
ALFONSO YAP, RICHARD VELASCO and
ALFONSO CO v. CA, PHILIPPINE BANK OF
COMMUNICATIONS
G.R. No. 117914, February 1, 2002, DE LEON, JR, J.
A letter of credit is not a negotiable instrument, which does
not allow the pertinent presumptions to apply, but
instruments issued in conjunction with a letter of credit, such
as bank drafts, may be negotiable.
Facts:
Charles Lee, as President of MICO Metals (MICO) wrote
private respondent Philippine Bank of Communications
(PBCom) requesting for a grant of a discounting loan/credit
line in the sum of three million pesos for the purpose of
carrying out MICO’s line of business as well as to maintain
its volume of business. On the same day, Charles Lee
requested for another discounting loan/credit line of three
million pesos from PBCom for the purpose of opening letters
of credit and trust receipts. The proceeds of the loans were
credited to their checking account with the Philippine Bank
of Communications (PBCom). Lee and several other officers
of the company executed surety agreements as part of the
security for the loans.
Sometime after, MICO then filed applications for domestic
and foreign letters of credit. When the applications were
approved, trust receipts were executed in favor of PBCom,
and in the case of the foreign letters of credit, bills of lading
and commercial invoices. These facilities were availed of by
their beneficiaries, and drafts were issued and later accepted
by MICO.
MICO was eventually unable to repay their debts, leading to
foreclosure of a real estate mortgage also used as security,
but that was not enough to completely pay the obligation
(there were still remaining trust receipts liabilities, for
example). PBCom then demanded settlement with Lee and
the other sureties, but they refused to acknowledge their
obligations. Aggrieved, PBCom filed a complaint with
prayer for writ of preliminary attachment before the RTC of
Manila. Failure of delivery was one of the defences
considered by the RTC in ruling in favour of MICO.
In the CA, the Court relied on two presumptions to overturn
the ruling: (1) that a negotiable instrument is deemed prima
facie issued for valuable consideration and every person
whose signature appears thereon is a party for value, and (2)
that an instrument sets out the true agreement of the parties
thereto and that it was executed for valuable consideration.
Issue:
Whether the CA erred in treating the letters of credit and trust
receipts as negotiable instruments.
Ruling:
YES. Two presumptions were established by PBCom when
it presented several documents, including letters of credit,
trust receipts, and drafts. First, that a negotiable instrument
is deemed prima facie issued for valuable consideration and
that every person whose signature appears thereon to be a
party for value. While letters of credit and trust receipts are
not negotiable instruments, bank drafts executed in
connection with letters of credit, which are distinct
instruments, are negotiable. Second, that sufficient
consideration was given in a contract.
The documents allowed these presumptions to arise
(particularly on the drafts, since they were negotiable
instruments), creating not merely a prima facie case but
actual proof of a solidary obligation between MICO and Lee
(as well as the other sureties that signed). They establish that
the agreements were availed of, and the proceeds were
delivered to MICO.
BANK OF COMMERCE v. TERESITA S. SERRANO
G.R. No. 151895, February 16, 2005, QUISUMBING, J.
A letter of credit is a distinct from a trust receipt, creating
separate obligations and liabilities.
Facts:
Via Moda International, represented by Teresita Serrano,
obtained an export packing loan from Bank of Commerce
(BOC), secured by a Deed of Assignment over an
irrevocable transferable letter of credit. Serrano executed in
favor of BOC a promissory note for the amount of the loan.
Afterward, Via Moda opened a deposit account for the loan's
proceeds.
Sometime after, BOC issued to Via Moda the subject
irrevocable letter of credit for the purchase and importation
of fabric and textile products from Tiger East Fabric Co. Ltd.
of Taiwan. To secure the release of the goods covered,
Serrano, in representation of Via Moda, executed a trust
receipt covering the shipment. The goods were shipped by
Via Moda to its proper consignee. However, the proceeds of
the goods were not credited to the trust receipt, but were
applied to the export packing loan.
BOC then sent a demand letter to Via Moda for the payment
of the obligation on the trust receipts, or return of the goods
covered. The demand was not heeded, leading to an estafa
case against Serrano. After an RTC ruling in favor of BOC,
the CA acquitted Serrano and said that she was not civilly
liable.
Issue:
Whether Serrano is civilly liable based on the non-payment
of the trust receipt.
Ruling:
NO. A letter of credit is a separate document from a trust
receipt. While the trust receipt may have been executed as
security on the letter of credit, the two documents involve
different undertakings and obligations. The former is 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. In contrast, the latter is one where the entruster,
who holds an absolute title or security interests over certain
goods, documents or instruments, released the same to the
entrustee, who executes a trust receipt binding himself to
hold the goods, documents or instruments in trust for the
entruster and to sell or otherwise dispose of the goods,
documents and 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 return the goods, documents or instruments
themselves if they are unsold, or not otherwise disposed of,
in accordance with the terms and conditions specified in the
trust receipt.
To BOC, Serrano has to account for two obligations: the
guarantee clause in the letter of credit, and the trust receipt.
In the case of the former, the issue was never raised until the
SC, and was not considered by it. In the case of the latter,
there was nothing on the trust receipt that showed that
Serrano was personally liable, or that she guaranteed the
obligation. Serrano merely represented Via Moda, which has
a separate personality from her. Without reason to justify the
piercing of the veil of corporate fiction, the obligation on the
trust receipt could not pertain to her.
Moreover, the SC agreed with the CA in finding that there
was no misappropriation or conversion by Serrano of the
proceeds of the sale in the good subject of the trust receipt
because it was BOC that unilaterally applied the proceeds to
the export packing loan. It should not create liability on
Serrano who did not take part or have any knowledge
thereof. Hence, Serrano is not liable.
BANK OF THE PHILIPPINE ISLANDS v. DE RENY
FABRIC INDUSTRIES
G.R. No. L-24821, October 16, 1970, CASTRO, J.
In the absence of provision in our local laws, letters of credit
are governed by established usage and customs in commerce
(e.g. Uniform Customs and Practices for Commercial
Documentary Credits Fixed for the Thirteenth Congress of
International Chamber of Commerce).
Facts:
De Reny Fabric Industries, through its president and
secretary, applied to BPI for four irrevocable commercial
letters of credit to cover the purchase by the corporation of
dyestuffs of various colors from, JB. The applications were
approved, and the letters of credit were executed. Under
these agreements, the president and secretary bound
themselves personally as joint and solidary debtors with the
corporation.
By virtue of these transactions, BPI issued irrevocable
commercial letters of credit addressed to its correspond
banks in the US, with instructions to inform the American
supplier that they have been authorized to negotiate the
latter's sight drafts up to the amounts mentioned therein,
respectively, if accompanied, upon presentation, by a full set
of negotiable clean "on board" ocean bills of lading,
covering the dyestuff. JB availed of these facilities; with
those availments, the correspondent banks then debited
BPI's account with them.
When the shipments arrived in the Philippines, De Reny
made partial payments but these were discontinued when it
turned out the goods were actually colored chalk instead of
dyestuff. De Reny refused to take possession of the goods,
leading to BPI depositing the same in a bonded warehouse,
and the present case for collection. One of De Reny's
defenses is that BPI has the duty to take the necessary
precautions to insure that the goods shipped under the
covering letters of credit conformed with the item appearing
therein. Any losses that accrued should be burdened by BPI.
Issue:
Whether BPI insures that the goods shipped conform to the
letters of credit.
Ruling:
NO. First, the letter of credit agreements show that the
parties agreed that BPI shall not be responsible for
differences in character, quality, quantity, condition or value
of the property from that expressed in their documents (here,
the dyestuff). Second, absent such provision, Art. 10 of the
Uniform Customs and Practices for Commercial
Documentary Credits Fixed for the Thirteenth Congress of
International Chamber of Commerce, of which the
Philipines is a signatory, states that in documentary credit
operations, all parties concerned deal in documents and not
in goods. The bank is not required to verify the goods
themselves-- the bank was only tapped in order to allow
engagement in international business. Such is a custom
applicable to commercial transactions that will apply
regardless of the lack of provision in the contract and in our
laws.
BPI cannot be liable on the agreement due to both contract
provisions and a custom taken as part of our law
INSULAR BANK of ASIA and AMERICA v.
INTERMEDIATE APPELLATE COURT, THE
PHILIPPINE AMERICAN LIFE INSURANCE CO.,
SPS. MENDOZA
G.R. No. 74834, November 17, 1988, MELENCIO-
HERRERA, J.
A standby letter of credit is a definite undertaking to pay a
money advanced or an amount for which credit is given on
the faith of the instrument—in effect, a security, but not an
accessory contract. They are distinct obligations from the
original loan which they secure.
Facts:
The spouses Mendoza obtained two loans from Philam Life
to finance the construction of their house. To secure
payments, Philam Life required that amortizations be
guaranteed by an irrevocable standby letter of credit of a
commerical bank, leading the Mendozas to apply for the
issuance of two such letters of credit from Insular Bank of
Asia and America. Such letters of credit were in turn secured
by a real estate mortgage in favor of the spouses' property.
The Mendozas failed to pay their loan, so that Philam Life
informed Insular Bank that it was declaring both loans as
entirely due and demandable, and demanded their payment.
IBAA contested the propriety of calling in the entire loan, so
Philam Life desisted and resumed availing of the letters of
credit by drawing on them for five more amoritzations.
As time passed, the Mendozas still defaulted on their
amortization, leading to another declaration that the entire
balance be immediately due and demandable. Philam Life
also demanded payment from Insular Bank, but it argued that
it was a mere guarantor of the Mendozas, and that its
obligation was much less than what Philam Life demanded.
It even demanded a refund as the Mendozas made partial
payments that reduced their liability.
While this went on, the real estate mortgage was foreclosed.
Soon after, Philam Life sued the spouses and Insular Bank
for the recovery of the supposed balance.
Issue:
Whether or not partial payments made by the principal
debtors (Mendoza spouses) would reduce the liability of the
guarantor (Insular Bank) under the terms of the standby
letter of credit.
Ruling:
NO. In construing the terms of a letter of credit, as in other
contracts, it is the intention of the parties that must govern,
also considering the usages of the particular trade of business
contemplated. The standby letter of credit secures the
payment of any obligation of the debtor to the creditor.
However, while they are security arrangements, they are not
contracts of guaranty. Rather, they are primary, independent
contracts that underline absolute undertakings to pay the
money advanced or the amount for which credit is given on
the faith of the instrument.
Because of this, partial payments made by the Mendozas
cannot be used in computing Insular Bank's liability under
its own standby letter of credit. Their obligation is distinct
from the Mendoza's, although they are related.
TRANSFIELD PHILIPPINES INC. v. LUZON HYDRO
CORPORATION, AUSTRALIA and NEW ZEALAND
BANKING GROUP LIMITED and SECURITY BANK
CORPORATION
G.R. No. 146717, November 22, 2004, TINGA, J.
A standby letter of credit, while a security arrangement, is
not an accessory contract such as guaranty. Obligations to
pay arise upon proof that the principal obligor has failed to
meet his obligation, without need of other proceedings.
Facts:
Transfield and Luzon Hydro Corporation (LHC) entered into
a Turnkey contract whereby Transfield undertook to
construct a hydro-electric power station (project). To secure
performance of its obligation, Transfield opened in favor of
LHC 2 standby letters ofcredit (securities), one with
Australia and New Zealand Banking Group Limited (ANZ
Bank) and one with Security Bank Corporation (SBC).
Transfield sought various extensions of time to complete the
project, due to factors such as force majeure occasioned by
typhoon Zeb, barricades and demonstrations. LHC denied
the requests. LHC filed before the Construction Industry
Arbitration Commission (CIAC) a Request for Arbitration.
Transfield filed the same with the International Chamber of
Commerce (ICC).
Foreseeing that LHC would call on the securities, Transfield
advised ANZ Bank and SBC (banks) of the arbitration
proceedings, and that LHC had no right to call on the
securities until resolution of the disputes. Transfield warned
the banks that any transfer or release of the securities in favor
of LHC would make the banks liable for damages
LHC sent notice to Transfield that it failed to comply with
its obligation to complete the project. LHC then declared
Transfield in default/delay. LHC served notice that it would
call on the securities for the payment of damages for the
delay. In response, Transfield filed a comlaint for injunction,
seeking to restrain LHC from calling on the securities.
Issue:
Whether the beneficiary may call on the letters of credit.
Ruling:
YES. To start, there is a distinction between a commercial
credit and a standby credit. The former is a letter of credit
that refers to the payment of money under a contract of sale,
and is payable upon presentation by the seller beneficiary of
documents that show he has taken affirmative steps to
comply with the sales agreement. Meanwhile, the latter is an
undertaking to pay for non-performance of an agreement,
and is payable upon showing that the principal obligor has
not performed the related contract. Such letters of credit are
separate contracts from the contracts by which they are
based, even if such contracts are referenced in the credit (the
independence principle).
The letter of credit in this case is a standby letter of credit.
By its nature, it is practically ministerial for LHC to call on
the securities upon Transfield's default. To require a prior
negotiation or arbitration would be to convert the same into
a guarantee, which is not the nature of a letter of credit. Note
that the securities admit their liability.
Moreover, LHC's right is not only rooted in the law and
usages in business, but the contract itself. All in all,
Transfield cannot pursue the injunction.
VIRGINIA TOBACCO ADMINISTRATIONv.HON.
WALFRIDO DE LOS ANGELES, Judge of the Court of
First Instance of Rizal, Branch IV (Quezon City) and
TIMOTEO A. SEVILLA, doing business under the name
and style of PHILIPPINE ASSOCIATED RESOURCES
and PRUDENTIAL BANK AND TRUST COMPANY
G.R. No.L-27829, August 19, 1988, Paras, J.
An irrevocable letter of credit cannot, during its lifetime, be
cancelled or modified without the express permission of the
beneficiary.
Facts:
Timoteo Sevilla, proprietor and General Manager of the
Philippine Associated Resources (PAR) entered into a
contract for the importation of kilos of Virginia leaf tobacco
and Farmer’s tobacco. Due to prevailing export or world
market price under which Sevilla will be exporting at a loss,
the parties agreed that Sevilla shall open an irrevocable letter
of credit with the Prudential Bank and Trust Co. (Prudential
Bank) in favor of Philippine Virginia Tobacco
Administration (PVTA)
While Sevilla was trying to negotiate the reduction of the
procurement cost of the PVTA tobacco already exported,
PVTA prepared two (2) drafts to be drawn against the said
letter of credit for the amounts which have become due and
payable. Sevilla filed an injunction against the release of
funds with Prudential Bank which was not granted byJudge
Delos Angeles. Consequently, Judge Delos Angeles issued
an order directing Prudential Bank to make the questioned
release of funds from the letters of credit.
Issue:
Whether the respondent judgeacted with grave abuse of
discretion in releasing the funds from the letters of credit.
Ruling:
YES. Respondent Judge violated the irrevocability of the
letter of credit issued by respondent Bank in favor of
petitioner. An irrevocable letter of credit cannot during its
lifetime be cancelled or modified Without the express
permission of the beneficiary (Miranda and Garrovilla,
Principles of Money Credit and Banking, Revised Edition,
p. 291). Consequently, if the finding the trial on the merits is
that respondent Sevilla has alleged unpaid balance due the
petitioner, such unpaid obligation would be unsecured.
Feati Bank V. CA PART 2
The correspondent bank may be called a notifying bank, a
negotiating bank, or a confirming bank.In case of a notifying
bank, the correspondent bank assumes no liability except to
notify and/or transmit to the beneficiary the existence of the
letter of credit.A negotiating bank, on the other hand, is a
correspondent bank which buys or discounts a draft under
the letter of credit. 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
Issue:
Whether a correspondent bank should be held liable under
the letter of credit despite non-compliance by the beneficiary
with the terms thereof.
Ruling:
NO. Since Featiwas 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.
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.
There must have been an absolute assurance on the part of
the petitioner that it will undertake the issuing bank's
obligation as its own
RELIANCE COMMODITIES, INC.v.DAEWOO
INDUSTRIAL CO., LTD.
G.R. No.L-100831, December 17, 1993, Feliciano, J.
The primary purpose of the letter of credit is to substitute for
and therefore support the agreement of the buyer/importer to
pay money under a contract or other arrangement. It creates
in the seller/exporter a secure expectation of payment.
Issue:
Whether the failure of an importer (Reliance) to open a letter
of credit as a condition for another contract make it liable.
Ruling:
YES.A letter of credit transaction may be seen to be a
composite of at least three (3) distinct but intertwined
relationships being concretized in a contract:
(a) One contract relationship links the party applying for the
L/C (the account party or buyer or importer) and the party
for whose benefit the L/C is issued (the beneficiary or seller
or exporter). In this contract, the account party, here
Reliance, agrees, among other things and subject to the terms
and conditions of the contract, to pay money to the
beneficiary, here Daewoo.
(b) A second contract relationship is between the account
party and the issuing bank. Under this contract, (sometimes
called the "Application and Agreement" or the
"Reimbursement Agreement"), the account party among
other things, applies to the issuing bank for a specified L/C
and agrees to reimburse the bank for amounts paid by that
bank pursuant to the L/C.
(c) The third contract relationship is established between the
issuing bank and the beneficiary, in order to support the
contract.
We believe and so hold that failure of a buyer seasonably to
furnish an agreed letter of credit is a breach of the contract
between buyer and seller. Where the buyer fails to open a
letter of credit as stipulated, the seller or exporter is entitled
to claim damages for such breach. Damages for failure to
open a commercial credit may, in appropriate cases, include
the loss of profit which the seller would reasonably have
made had the transaction been carried out
PRUDENTIAL BANK
Issue:
Whether or not the presentment for acceptance of the drafts
was indispensable to make Philippine Rayon liable.
Ruling:
NO. 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.
Through a letter of credit, the bank merely substitutes its
own promise to pay for one of its customers who in return
promises to pay the bank the amount of funds mentioned in
the letter of credit plus credit or commitment fees mutually
agreed upon. 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).
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.
RODZSSEN SUPPLY CO. INC. v. FAR EAST BANK &
TRUST CO.
When both parties to a transaction are mutually negligent in
the performance of their obligations, the fault of one cancels
the negligence of the other. Thus, their rights and obligations
may be determined equitably. No one shall enrich oneself at
the expense of another.
Facts:
Rodzssen Supply Inc. applied for and obtained an
irrevocable Letter of Credit from Far East Bank and Trust
Company Inc. in favor of Ekman and Company Inc., in order
to finance the purchase of five (5) units of hydraulic loaders
in the amount of P190,000. For the first three (3) hydraulic
loaders that were delivered, the bank paid the amount
specified in the letter of credit. Five months after the
expiration of the L/C, Far East paid Ekman the amount of
the last two (2) hydraulic loaders which were voluntarily
received by Rodzssen. After four years (4), Far East sought
for the payment of the 2 hydraulic loaders against Rodzssen
but to no avail. Hence, it filed a complaint to recover its
value. Rodzssen contended that Far East acted in bad faith
when it paid Ekman for the 2 hydraulic loaders from Ekman
in spite of the expiration of the L/C. Hence, Rodzssen was
no longer bound to reimburse Far East under the subject L/C.
Issue:
Whether or not it is proper for a banking institution to pay a
letter of credit which has long expired or been cancelled.
Ruling:
NO. The subject Letter of Credit had become invalid upon
the lapse of the period fixed therein. Thus, respondent should
not have paid Ekman; it was not obliged to do so. In the same
vein, of no moment was Ekmans presentation, within the
prescribed period, of all the documents necessary for
collection, as the Letter of Credit had already expired and
had in fact been cancelled.
Indeed, equitable considerations behoove us to allow
recovery by respondent. True, it erred in paying Ekman, but
petitioner itself was not without fault in the transaction. It
must be noted that the latter had voluntarily received and
kept the loaders since October 1979.
Petitioner claims that it accepted the late delivery of the
equipment, only because it was bound to accept it under the
company’s trust receipt arrangement with respondent bank.
Granting that petitioner was bound under such arrangement
to accept the late delivery of the equipment, we note its
unexplained inaction for almost four years with regard to the
status of the ownership or possession of the loaders.
Bewildering was its lack of action to validate the ownership
and possession of the loaders, as well as its stolidity over the
purported failed sales transaction. Significant too is the fact
that it formalized its offer to return the two pieces of
equipment only after respondents demand for payment,
which came more than three years after it accepted delivery
MARPHIL EXPORT CORPORATION and IRENEO
LIM, Petitioners, - versus - ALLIED BANKING
CORPORATION, substituted by PHILIPPINE
NATIONAL BANK, Respondent. G.R. No. 187922,
September 21, 2016, THIRD DIVISION, JARDELEZA,
J.
FACTS:
Marphil is a domestic company engaged in the exportation
of cuttlefish, cashew nuts and similar agricultural products.
To finance its purchase and export of these products, Allied
Bank granted Marphil a credit line from which Marphil
availed of several loans evidenced by promissory notes
(PN). These loans were in the nature of advances to finance
the exporter's working capital requirements and export bills.
Irrevocable letters of credits served as collaterals for the
loans obtained to pay export bills. Allied Bank purchases the
drafts for the letters of credit from Marphil, credits the
amount to the latter's credit line and deducts from the total
amount of Marphil's existing loans from Allied Bank. In
turn, Allied Bank required Marphil, through its authorized
signatories Lim and Rebecca Lim So, to execute a Letter of
Agreement where they undertake to reimburse Allied Bank
in the event the export bills/drafts covering the letters of
credit are refused by the drawee.
The transaction involved in this petition is the export of
cashew nuts to Intan Trading Ltd. Hongkong (Intan) in Hong
Kong. Upon application of Intan, Nanyang Commercial
Bank (Nanyang Bank), a bank based in China, issued
irrevocable letters of credit with Marphil as beneficiary and
Allied Bank as correspondent bank.
When Intan placed a second order for cashew nuts, Marphil
availed additional loans in their credit line evidenced by PN
No. 2463 and PN No. 2730. Similar to the previous
transaction, Intan applied for and opened L/C No. 21970
with Nanyang Bank in the amount of US$185,000.00, with
Marphil as the beneficiary and Allied Bank as correspondent
bank. After receiving the export documents including the
draft issued by Marphil, Allied Bank credited Marphil in the
amount of Pl,913,763.45, the peso value of the amount in the
letter of credit.
However, on July 2, 1988, Allied Bank informed Marphil
that it received a cable from Nanyang Bank noting some
discrepancies in the shipping documents. Consequently,
Nanyang Bank refused to reimburse Allied Bank the amount
the latter had credited in Marphil' s credit line. In its debit
memo, Allied Bank informed Marphil of the dishonor of L/C
No. 21970 and that it was reversing the earlier credit entry
of Pl,913,763.45. Lim was made to sign a blank promissory
note, PN No. 4202, on to cover for the amount.
Marphil filed a Complaint for declaratory relief and damages
against Allied Bank (Declaratory Relief Case) in the RTC.
In its Complaint, Marphil asked the court to declare PN No.
4202 void, to declare as fully paid its other obligations to
Allied Bank, and to award it actual, moral and exemplary
damages, and attorney's fees.
RTC granted Marphil's complaint for declaratory relief, and
declared PN No. 4202 void. On appeal, CA upheld the
nullity of PN No. 4202 but held petitioners liable for the
amount of Pl,913,763.45, the amount equal to the face value
of L/C No. 21970. The CA found that Allied Bank is not
directly liable for the Pl,913,763.45 under L/C No. 21970
because it was not a confirming bank and did not undertake
to assume the obligation of Nanyang Bank to Marphil as its
own. At most, it could only be a discounting bank which
bought drafts under the letter of credit.
ISSUE:
Whether or not the debit memo made by Allied Bank against
the account of Marphil is valid.
RULING:
The debit memo is valid.
a. Allied Bank as correspondent bank in LIC No. 21970
The Court affirms the finding of both the RTC and CA that
Allied Bank is not a confirming bank, which undertakes
Nanyang Bank's obligation as issuing bank, but at most,
buys the drafts drawn by Marphil as exporter at a discount.
In order to consider a correspondent bank as a confirming
bank, it must have assumed a direct obligation to the seller
as if it had issued the letter of credit itself. If the
correspondent bank was a confirming bank, then a
categorical declaration should have been stated in the letter
of credit that the correspondent bank is to honor all drafts
drawn in conformity with the letter of credit." Thus, if we
were to hold Allied Bank liable to Marphil (which would
result in a finding that the former' s debit from the latter's
account is wrong) based on the rule of strict compliance, it
must be because Allied Bank acted as confirming bank under
the language of L/C No. 21970.
In finding that Allied Bank, as correspondent bank, did not
act as confirming bank, the CA reviewed the instructions of
Nanyang Bank to Allied Bank in L/C No. 21970. It found
that based on the instructions, there is nothing to support
Marphil's argument that Allied Bank undertook, as its own,
Nanyang Bank's obligations in the letter of credit:
In the instant case, the letter of Nanyang to Allied provided
the following instructions: 1) the negotiating bank is kindly
requested to forward all documents to Nanyang in one lot; 2)
in reimbursement for the negotiation(s), Nanyang shall remit
cover to Allied upon receipt of documents in compliance
with the terms and conditions of the credit; 3) the drafts
drawn must be marked "drawn under Nanyang Commercial
Bank"; and 4) to advise beneficiary.
From the above-instructions, it is clear that Allied did not
undertake to assume the obligation of Nanyang to Marphil
as its own, as if it had itself issued the L/C. At most, it can
only be a discounting bank which bought the drafts under the
L/C.
Having been established that Allied Bank is not a confirming
bank and therefore not obliged to honor the draft upon
submission of stipulated documents in the letter of credit, the
issue that must now be resolved is the validity of debit memo
it made against the Marphil account.
b. Allied Bank's right to reimbursement under the Letter
Agreement
It must be remembered that a Letter Agreement was
executed by Marphil and Allied Bank. The Letter of
Agreement is a contract between Marphil and Allied Bank
where the latter agreed to purchase the draft and credit the
former its value on the undertaking that Allied Bank will be
reimbursed in case the draft is dishonored. This obligation is
direct, and is independent, not only from the obligation
under the draft, but also from the obligation under L/C No.
21970. The Letter Agreement simply creates a separate
obligation on Marphil' s part to refund the amount of the
proceeds, in case of dishonor. As an independent obligation,
Marphil is bound to fulfill this obligation to reimburse Allied
Bank.
However, a conflict arose because instead of waiting for
Marphil's own initiative to return the amount, Allied Bank
on its own debited from the former's credit line.
c. Allied Bank's right to debit Marphil 's account
In this case, when Allied Bank credited the amount
of.Pl,913,763.45 to Marphil' s account, it became the debtor
of Marphil. However, once Nanyang Bank dishonored the
export documents and draft for L/C No. 21970, Marphil
became the debtor of Allied Bank for the amount by virtue
of its obligation to reimburse the bank under the Letter
Agreement. This obligation consisting of sum of money
became demandable upon notice of the dishonor by Nanyang
Bank. Thus, legal compensation may take place between the
two debts.
In Associated Bank vs. Tan, the Court nevertheless
emphasized that while the bank has the right to set off, the
exercise of such right must be consistent with the required
degree of diligence from banks, i.e., highest degree of care.
Thus, the question that needs to be resolved now is whether
Allied Bank properly exercised its right to set off.
The Court ruled that Allied Bank properly exercised its right
to set off. Firstly, having signed the Letter Agreement,
Marphil expressly undertook that in case of dishonor of the
draft for the letter of the credit, it· will refund to Allied Bank
whatever the latter has credited in its favor. This places
Marphil on its guard that the dishonor will create an
obligation to refund the amount credited. Secondly, prior to
debiting the amount, Allied Bank informed Marphil twice of
Nanyang Bank's refusal to honor the tender of documents on
L/C No. 21970. Thirdly, it immediately informed Marphil
that it was debiting the amount of the dishonored draft from
the credit line.
In sum, the Court affirmed that Allied Bank is not a
confirming bank under L/C No. 21970. In any case, whether
Allied Bank is directly liable as confirming bank will not
affect Marphil's obligation to reimburse Allied Bank the
amount of Pl ,913,763.45 because its liability to refund the
amount arose under an independent contract, i.e. the Letter
Agreement. And while Allied Bank is the debtor of Marphil
for the amount it credited under the draft, the obligation
under the Letter Agreement made Allied Bank the creditor
of Marphil for the same amount. Being debtor and creditor
of each other, Allied Bank was entitled to legal
compensation by debiting the amount, which did not result
in any loss to Marphil.
Bank of America v. CA PART 2
Issue:
Whether Bank of America may recover the amount it paid to
Inter-Resin for the latter’s partial availment of the disowned
letter of credit.
Ruling:
YES.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, 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. Clarifying
its meaning, Webster's Ninth New Collegiate Dictionary
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.
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, nonetheless, does not preclude petitioner bank's right
(as negotiating bank) of recovery from Inter-Resin itself.
Inter-Resin admits having received 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.
LAND BANK OF THE PHILIPPINES v. MONETS
EXPORT AND MANUFACTURING CORPORATION,
SPOUSES VICENTE V. TAGLE, SR. and MA.
CONSUELO G. TAGLE
G.R. No. 161865, March 10, 2005, Ynares-Santiago, J.
“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.”
Facts:
Land Bank of the Philippines (Land Bank) and Monets
Export and Manufacturing Corporation (Monet) executed an
Export Packing Credit Line Agreementunder the latter was
given a credit line secured, among others, by the proceeds of
its export letters of credit from Wishbone Trading
Corporation. When Monet failed to pay for its obligations
with the Land Bank, the latter filed a complaint for collection
of sum of money. However, Monet countered that Land
Bank failed to protect Monet’s interest when it paid the
suppliers despite discrepancies in the shipment vis--vis the
order specifications.
Issue:
Whether or not Monet is entitled to opportunity losses based
on Land Bank’s unauthorized payment on behalf of Monet.
Ruling:
NO. As regards to the Beautilike account, the trial court and
the Court of Appeals erred in holding that Land Bank failed
to protect Monet’s interest when it paid the suppliers despite
discrepancies in the shipment vis—vis the order
specifications of Monet.
The Court finds merit in the contention of Land Bank that,
as the issuing bank in the Beautilike transaction involving an
import letter of credit, it only deals in documents and it is not
involved in the contract between the parties. 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.
Thus, upon receipt by Land Bank of the documents of title
which conform with what the letter of credit requires, it is
duty bound to pay the seller, as it did in this case.
Consequently, it was error for the trial court and for the
Court of Appeals to grant opportunity losses to the
respondents on this account.
PHILIPPINE NATIONAL BANK v.SAN MIGUEL
CORPORATION
G.R. No. 186063, January 15, 2014, Peralta, J.
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.
Facts:
San Miguel Corporation (SMC) entered into an exclusive
dealership agreement with and Rodolfo R. Goroza wherein
the latter was given the right to trade, deal, market or
otherwise sell its various beer products.
Consequently, to secure a credit line with SMC, Goroza
must apply for a letter of credit which he obtained from
Philippine National Bank. Upon presentment of required
invoices and official receipts of Goroza’s purchases of SMC
products, the amount of the credit line was released for
payment to SMC. Subsequently, Goroza was able to secure
a revolving credit line with PNB which enabled it to pay for
his credit purchases with SMC. However, Goroza started to
become delinquent with his accounts. SMC demanded
payment for the balance with Goroza and
PNB but to no avail. Hence, SMC filed an action for
collection of sum of money with the Regional Trial Court
(RTC) against them.
The RTC ordered Goroza to pay SMC for the said amount
without prejudice to the decision against PNB in a separate
trial of the case. PNB now contends that by virtue of the RTC
decision finding Gorozaliable to pay the entire amount
sought to be recovered by SMC, has settled the obligation of
both Goroza and PNB, and that there is no longer any ground
to hold PNB for trial and make a separate judgment against
it. However, the Court of Appeals (CA) ruled that
proceedings against PNB may continue in the RTC, despite
the trial court's complete adjudication of relief in favor of
SMC. Hence, this petition was filed.
Issue:
Whether the adjudication of Goroza’s liability against SMC
also settled the obligation of PNB.
Ruling:
NO. 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 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.
In other words, PNB cannot evade responsibility on the sole
ground that the RTC judgment found Goroza liable and
ordered him to pay the amount sought to be recovered by
SMC. PNB's liability, if any, under the letter of credit is yet
to be determined.
HONGKONG CASE
FACTS:
Respondent National Steel Corporation (NSC) entered into
an Export Sales Contract (the Contract) with Klockner East
Asia Limited (Klockner). NSC sold 1,200 metric tons of
prime cold rolled coils to Klockner. In accordance with the
requirements in the Contract, Klockner applied for an
irrevocable letter of credit with HSBC in favor of NSC as the
beneficiary in the amount of US$468,000. HSBC issued an
irrevocable and onsight letter of credit no. HKH 239409 (the
Letter of Credit) in favor of NSC. The Letter of Credit stated
that it is governed by the International Chamber of
Commerce Uniform Customs and Practice for Documentary
Credits, Publication No. 400 (UCP 400). Under UCP 400,
HSBC as the issuing bank, has the obligation to immediately
pay NSC upon presentment of the documents listed in the
Letter of Credit.
NSC coursed the collection of its payment from Klockner
through City Trust Banking Corporation (City Trust). City
Trust sent a collection order (Collection Order) to HSBC
respecting the collection of payment from Klockner. The
Collection Order also contained the following statement:
"Subject to Uniform Rules for the Collection of Commercial
Paper Publication No. 322."
HSBC sent a cablegram advising that Klockner had refused
payment. CityTrust requested HSBC to inform it of
Klockner's reason for refusing payment so that it may refer
the matter to NSC. City Trust insisted that a demand for
payment must be made from Klockner since the documents
"were found in compliance with LC terms and conditions."
HSBC replied on the same day stating that in accordance
with CityTrust's instruction in its Collection Order, HSBC
treated the transaction as a matter under URC 322. Thus, it
demanded payment from Klockner which unfortunately
refused payment for unspecified reasons. It then noted that
under URC 322, Klockner has no duty to provide a reason
for the refusal.
Klockner continued to refuse payment and HSBC notified
CityTrust in a cablegram that should Klockner still refuse to
accept the bill, it will return the full set of documents to City
Trust with all the charges for the account of the drawer.
HSBC then returned the documents to City Trust. In a letter
accompanying the returned documents, HSBC stated that it
considered itself discharged of its duty under the transaction.
In response, CityTrust sent a cablegram to HSBC stating that
it is "no longer possible for beneficiary to wait for you to get
paid by applicant." It explained that since the documents
required under the Letter of Credit have been properly sent
to HSBC, Citytrust demanded payment from it. CityTrust
also stated, for the first time in all of its correspondence with
HSBC, that "re your previous telexes, ICC Publication No.
322 is not applicable." HSBC insisted that CityTrust sent
documents which clearly stated that the collection was being
made under URC 322. Thus, with the continued refusal of
Klockner to pay, it opted to return the documents.
Unable to collect from HSBC, NSC filed a complaint against
it for collection of sum of money (Complaint). HSBC filed
its Answer denying any liability under the Letter of Credit.
It argued in its Answer that CityTrust modified the
obligation when it stated in its Collection Order that the
transaction is subject to URC 322 and not under UCP 400.
RTC Makati rendered a decision (RTC Decision) declaring
that HSBC is not liable to pay NSC the amount stated in the
Letter of Credit. It ruled that the applicable law is URC 322
as it was the law which CityTrust intended to apply to the
transaction. Under URC 322, HSBC has no liability to pay
when Klockner refused payment.
The CA found that it is UCP 400 and not URC 322 which
governs the transaction. According to the CA, the terms of
the Letter of Credit clearly stated that UCP 400 shall apply.
Further, the CA explained that even if the Letter of Credit
did not state that UCP 400 governs, it nevertheless finds
application as this Court has consistently recognized it under
Philippine jurisdiction. Thus, applying UCP 400 and
principles concerning letters of credit, the CA explained that
the obligation of the issuing bank is to pay the seller or
beneficiary of the credit once the draft and the required
documents are properly presented. Under the independence
principle, the issuing bank's obligation to pay under the letter
of credit is separate from the compliance of the parties in the
main contract.
ISSUE:
The central question in this case is who among the parties
bears the liability to pay the amount stated in the Letter of
Credit. This requires a determination of which between UCP
400 and URC 322 governs the transaction. The obligations
of the parties under the proper applicable rule will, in turn,
determine their liability.
RULING:
UCP 400 shall govern and hence, HSBC is liable to pay the
amount stated in the LC.
Article 2 of the Code of Commerce states that acts of
commerce are governed by their provisions, by the usages
and customs generally observed in the particular place and,
in the absence of both rules, by civil law.
The International Chamber of Commerce (ICC) drafted a set
of rules to govern transactions involving letters of credit.
This set of rules is known as the Uniform Customs and
Practice for Documentary Credits (UCP). Since its first
issuance in 1933, the UCP has seen several revisions, the
latest of which was in 2007, known as the UCP 600.
However, for the period relevant to this case, the prevailing
version is the 1993 revision called the UCP 400.
For the purpose of clarity, letters of credit are governed
primarily by their own provisions, by laws specifically
applicable to them, and by usage and custom. Consistent
with the rulings in several cases, usage and custom refers to
UCP 400. When the particular issues are not covered by the
provisions of the letter of credit, by laws specifically
applicable to them and by UCP 400, our general civil law
finds suppletory application.
Applying this set of laws and rules, this Court rules that
HSBC is liable under the provisions of the Letter of Credit,
in accordance with usage and custom as embodied in UCP
400, and under the provisions of general civil law.
The Letter of Credit categorically stated that it is subject to
UCP 400, to wit:
Except so far as otherwise expressly stated, this
documentary credit is subject to uniform Customs and
Practice for Documentary Credits (1983 Revision),
International Chamber of Commerce Publication No. 400.
From the moment that HSBC agreed to the terms of the
Letter of Credit - which states that UCP 400 applies - its
actions in connection with the transaction automatically
became bound by the rules set in UCP 400. Even assuming
that URC 322 is an international custom that has been
recognized in commerce, this does not change the fact that
HSBC, as the issuing bank of a letter of credit, undertook
certain obligations dictated by the terms of the Letter of
Credit itself and by UCP 400.
URC 322 is a set of norms compiled by the ICC. A bank
acting in accordance with the terms of URC 322 merely
facilitates collection. Its duty is to forward the letter of credit
and the required documents from the entity seeking payment
to another entity which has the duty to pay. The bank incurs
no obligation other than as a collecting agent. This is
different in the case of an issuing bank acting in accordance
with UCP 400. In this case, the issuing bank has the duty to
pay the amount stated in the letter of credit upon due
presentment.
HSBC claims that while UCP 400 applies to letters of credit,
it is also common for beneficiaries of such letters to seek
collection under URC 322. HSBC further claims that URC
322 is an accepted custom in commerce. However, HSBC
failed to present evidence to prove that URC 322 constitutes
custom and usage recognized in commerce. Neither was
there sufficient evidence to prove that beneficiaries under a
letter of credit commonly resort to collection under URC 322
as a matter of industry practice.
The entire system of letters of credit rely on the assurance
that upon presentment of the proper documents, the
beneficiary has an enforceable right and the issuing bank a
demandable obligation, to pay the amount agreed upon. Any
law or custom governing letters of credit should have, at its
core, an emphasis on the imperative that issuing banks
respect their obligation to pay and that seller-beneficiaries
may reasonably expect payment in accordance with the
terms of a letter of credit.
Having arrived at the applicability of UCP 400, the
Independence Principle can now be applied in this case.
Article 17 of UCP 400 explains that under this principle, an
issuing bank assumes 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..." Thus, as long as the proper
documents are presented, the issuing bank has an obligation
to pay even if the buyer should later on refuse payment.
Hence, Klockner's refusal to pay carries no effect
whatsoever on HSBC's obligation to pay under the Letter of
Credit. To allow HSBC to refuse to honor the Letter of
Credit simply because it could not collect first from
Klockner is to countenance a breach of the Independence
Principle.
Further, as a bank, HSBC has the duty to observe the highest
degree of diligence. Thus, upon receipt of City Trust's
Collection Order with the Letter of Credit, HSBC had the
obligation to carefully examine the documents it received.
Had it observed the standard of care expected of it, HSBC
would have discovered that the Letter of Credit is the very
same document which it issued upon the request of
Klockner, its client. Had HSBC taken the time to perform its
duty with the highest degree of diligence, it would have been
alerted by the fact that the documents presented to it
corresponded with the documents stated in the Letter of
Credit, to which HSBC freely and knowingly agreed. HSBC
ought to have noticed the discrepancy between City Trust's
request for collection under URC 322 and the terms of the
Letter of Credit. Regardless of any error that City Trust may
have committed, the standard of care expected of HSBC
dictates that it should have made a separate determination of
the significance of the presentment of the Letter of Credit
and the attached documents. A bank exercising the
appropriate degree of diligence would have, at the very least,
inquired if NSC was seeking payment under the Letter of
Credit or merely seeking collection under URC 322. In
failing to do so, HSBC fell below the standard of care
imposed upon it.
INSULAR BANK OF ASIA & AMERICA (NOW
PHILIPPINE COMMERCIAL INTERNATIONAL
BANK)v.HON. INTERMEDIATE APPELLATE
COURT, THE PHILIPPINE AMERICAN LIFE
INSURANCE CO., SPS. BEN MENDOZA & JUANITA
M. MENDOZA
G.R. No. 74834, November 17, 1988, Melencio-Herrera,
J.
Letters of credit and contracts for the issuance of such letters
are subject to the same rules of construction as are ordinary
commercial contracts. They are to receive a reasonable and
not a technical construction and although usage and custom
cannot control express terms in letters of credit, they are to
be construed with reference to all the surrounding facts and
circumstances, to the particular and often varying terms in
which they may be expressed, the circumstances and
intention of the parties to them, and the usages of the
particular trade of business contemplated.
Facts:
Spouses Ben and Juanita Mendoza obtained two (2) loans
from Philippine American Life Insurance Co. (Philam Life)
to finance the construction of their residential house. To
secure payment,Philam Life required that amortizations be
guaranteed by an irrevocable standby letter of credit of a
commercial bank (LCs).Thus, the Mendozas contracted with
Insular Bank of Asia and America (IBAA) for the issuance
of two (2) irrevocable standby Letters of Credit in favor of
Philam Life. Spouses Mendoza were able to pay initially but
subsequently became delinquent for the remaining balance.
IBAA and contended that the payment made by the spouses
reduced its liability pursuant to the LCs. Nonetheless, Phil
Am Life filed a complaint for collection of sum of money
against the spouses and IBAA before the Regional Trial
Court (RTC) which rendered a decision extinguishing the
liability of IBAA to the extent of the payment made by
IBAA. The Court of Appeals (CA) however, reversed the
RTC decision on the ground that IBAA’s liability was not
reduced by the payments made by the Mendozas.
Issue:
Whether or not the partial payments made by the principal
obligors (respondent MENDOZAS) would have the
corresponding effect of reducing the liability of the
petitioner as guarantor or surety under the terms of the
standby LCs in question.
Ruling:
NO. The terms of the subject Irrevocable Standby Letters of
Credit read, in part, as follows: This credit secures the
payment of any obligation of the accounteeto you under that
Loan Agreement hereto attached xxx.
Unequivocally, the subject standby Letters of Credit secure
the payment of any obligation of the Mendozas to Philam
Life including all interests, surcharges and expenses thereon.
But while they are a security arrangement, they are not
converted thereby into contracts of guaranty. That would
make them ultra vires rather than a letter of credit, which is
within the powers of a bank (Section 74[e], RA 337, General
Banking Act). The standby L/Cs are, "in effect an absolute
undertaking to pay the money advanced or the amount for
which credit is given on the faith of the instrument."
(Scribner v. Rutherford, 22 N.W. 670, 65 Iowa 551; Duval
v. Trask,, 12 Mass. 154, cited in 38 CJS, Sec. 7, p. 1142).
They are primary obligations and not accessory contracts.
Being separate and independent agreements, the payments
made by the Mendozas cannot be added in computing
IBAA's liability under its own standby letters of credit.
Payments made by the Mendozas directly to Philam Life are
in compliance with their own prestation under the loan
agreements. And although these payments could result in the
reduction of the actual amount which could ultimately be
collected from IBAA, the latter's separate undertaking under
its L/Cs remains
TRANSFIELD PHILIPPINES, INC. v. LUZON
HYDRO CORPORATION, AUSTRALIA and NEW
ZEALAND BANKING GROUP LIMITED and
SECURITY BANK CORPORATION
G.R. No. 146717, November 22, 2004, TINGA, J.
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.
Issue:
Whether or not LHC may call and draw on the standby LCs
prior to the resolution of disputes between the LHC and
Transfield subject of arbitration.
Ruling:
Yes. 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.
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.
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.
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.
FEATI BANK & TRUST COMPANY (now
CITYTRUST BANKING CORPORATION) v. THE
COURT OF APPEALS, and BERNARDO E.
VILLALUZ
G.R. No. 94209, April 30, 1991, Gutierrez, Jr., J.
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.
Issue:
Whether a correspondent bank should be held liable under
the letter of credit despite non-compliance by the beneficiary
with the terms thereof.
Ruling:
NO. The incorporation of the Uniform Customs and Practice
for Documentary Credit (U.C.P. for short) in
the letter of credit resulted in the applicability of the said
rules in the governance of the relations between the parties.
And even if the U.C.P. was not incorporated in the letter of
credit, we have already ruled in the affirmative as to the
applicability of the U.C.P. in cases before us.
In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we
pronounced that the observance of the U.C.P. in this
jurisdiction is justified by Article 2 of the Code of
Commerce. Article 2 of the Code of Commerce enunciates
that in the absence of any particular provision in the Code of
Commerce, commercial transactions shall be governed by
the usages and customs generally observed
There being no specific provision which governs the legal
complexities arising from transactions involving letters of
credit not only between the banks themselves but also
between banks and seller and/or buyer, the applicability of
the U.C.P. is undeniable.
The pertinent provisions of the U.C.P. (1962 Revision) are:
Article 3.An irrevocable credit is a definite undertaking on
the part of the issuing bank and constitutes the engagement
of that bank to the beneficiary and bona fide holders of drafts
drawn and/or documents presented thereunder, that the
provisions for payment, acceptance or negotiation contained
in the credit will be duly fulfilled, provided that all the terms
and conditions of the credit are complied with.

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.

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.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.