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Bank of America V.

CA cash to the seller if it finds that the documents submitted by


the seller conform with what the letter of credit requires. The
letter of credit is a financial device developed to facilitate bank then obtains possession of the documents upon paying
commercial transactions. Banks play different roles in such the seller. The transaction is completed when the buyer
transactions, each of which carries different rights and reimburses the issuing bank and acquires the documents
liabilities; if a bank is an advising bank based on the entitling him to the goods. Under this arrangement, the seller
provisions in the letter of credit, and other documents gets paid only if he delivers the documents of title over the
presented as evidence, it incurs no liability under the letter goods, while the buyer acquires said documents and control
of credit as its only role is to inform a possible client of the over the goods only after reimbursing the bank.
existence of the letter of credit, nothing more.
One of the types of letters of credit is the commercial letter
Facts: of credit, as in this case. A commercial letter of credit is a
contractual agreement between a bank, known as the issuing
Bank of America entered into an Irrevocable Letter of Credit
bank, on behalf of one of its customers, authorizing another
purportedly issued by Bank of Ayudhya for the account of
bank, known as the advising or confirming bank, to make
General Chemicals Ltd. to cover the sale of plastic ropes and
payment to the beneficiary. The issuing bank, on the request
agricultural files, with Bank of America as the advising bank
of its customer, opens the letter of credit. The issuing bank
and Inter-Resin as the beneficiary. Bank of America wrote
makes a commitment to honor drawings made under the
Inter-Resin of the foregoing and transmitted the letter of
credit. The beneficiary is normally the provider of goods
credit. Inter-Resin then sought to confirm the letter of credit,
and/or services.
but Bank of America they did not explained that there was
no need for confirmation because the letter would not be Essentially, the issuing bank replaces the bank's customer as
transmitted if it were not genuine. the payor.
Relying on this, Inter-Resin sought to avail of the letter of What makes letters of credit attractive is the independence
credit, using it to ship rope to General Chemicals. Bank of of the engagement of the issuing bank to pay the seller of the
America then issued checks in favor of Inter-Resin, after draft and the presentment of required shipping documents
which it informed Bank of Ayudhya of the availment of the from any breach of the main sales contract.
letter of credit, seeking reimbursement in the process. Bank
of Ayudhya declared the letter of credit fraudulent, so Bank The bank determines compliance only by the examination of
of America stopped the processing of Inter-Resin's shipping documents, without looking at the main contract.
documents.
In modern commerce, the rights and liabilities of banks in
Issue: 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
Whether or not Bank of America incurred any liability to the the issuing bank, it may be liable for the letter of credit as it
beneficiary (Inter-Resin) under the letter of credit. 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
Ruling:
inform the seller of the existence of the credit. Indicia of its
NO.Bank of America merely acted as an advising bank. A role as an advising bank can be found on the letter of credit
letter of credit is a financial device developed by merchants itself (e.g. the draft that will be used for payment would be
to facilitate commercial transactions. It was developed as an partly the engagement of the Bank of Ayudhya, which is the
attempt to satisfy the seemingly irreconcilable interests of a issuing bank), a letter of advice (and related fees that were
seller, who refuses to part with his goods before he is paid, paid by Inter- Resin), and a letter expressly stating that Bank
and a buyer, who wants to have control of the goods before of America has no engagement under the letter of credit).
paying. Given this, it is not liable on the letter of credit.

To break the impasse, the buyer (here, General Chemicals) PRUDENTIAL BANK v. IAC, PHILIPPINE RAYON
may be required to contract a bank to issue a letter of credit MILLS INC., ANACLETO R. CHI
in favor of the seller so that, by virtue of the letter, the issuing
G.R. No. 74886, December 8, 1992, DAVIDE, JR. J.
bank (here, Bank of Ayudhya) can authorize the seller (here,
Inter-Resin) to draw drafts and engage to pay them upon Liability on a letter of credit is created through the honouring
presentment along with tender of documents required by the of drafts or other demands for payment upon compliance
letter of credits (such documents are those evidencing the with the conditions specified in the credit.
shipment). Once the credit is established, the seller ships the
goods to the buyer and in the process the required shipping When this occurs, a bank substitutes its own promise to pay
documents. To get paid, the seller executes a draft and (and would later pay a certain seller) in place of a customer
presents it together with the required documents to the (who would ‘reimburse’ the bank).
issuing bank. The issuing bank redeems the draft and pays
Facts: A letter of credit, though possibly used as collateral, is an
undertaking in itself, distinct from the other contracts related
Philippine Rayon Mills (PRMI) entered into a contract with to it (e.g. sale). A breach in a related contract generally does
Nissho Co., Ltd of Japan for the importation of textile not create liability in other contracts —one such exception
machineries. PRMI applied for a commercial letter of credit to this rule is when a corresponding bank takes the role of a
(LOC) with Prudential Bank and Trust Company in favor of confirming bank in the transaction, as the bank assumes a
Nissho. Against this LOC, sight drafts were drawn and direct and primary obligation as if it had issued the letter of
issued by Nissho, which were all paid by the Prudential Bank credit.
through its correspondent in Japan, the Bank of Tokyo.
These drafts were accepted by PRMI through its president, Facts:
Anacleto Chi. Upon arrival of machineries, Prudential Bank
indorsed the shipping documents to PRMI, which accepted Bernando Villaluz agreed to sell to Axel Christiansen lauan
delivery of the same. logs. Upon inspecting the logs, Christiansen issued a
purchase order. To pay for the logs, upon the instructions of
PRMI executed, by prior arrangement with PB, a trust the consignee, Hanmi Trade Development, the Security
receipt (TC) which was signed by Anacleto Chi in his Pacific National Bank of Los Angeles (SPNB) issued an
capacity as President. At the back of the trust receipt is a Irrevocable Letter of Credit available at sight in favor of
printed form to be accomplished by 2 sureties who are jointly Villaluz for the purchase price of the logs. The letter of credit
and severally liable to the PB should PRMI fail to pay the was mailed to Feati Bank and Trust Company (Feati Bank)
total amount or any portion of the drafts. with the instruction that it be forwarded to the beneficiary.

PRMI ceased business operation. The obligation of PRMI The draft would be drawn on SPNB, and that for it to be
from the LOC and TC remained unpaid and unliquidated. honored, it must be accompanied with several documents,
Demands were made but yielded no result. including a certification from Christiansen stating that the
logs have been approved before shipment in line with the
Prudential Bank then instituted an action for collection purchase order.
against PRMI and Analceto Chi.
The logs were loaded on the shipping vessel and inspected
Issue: by customs inspectors, who all certified the good condition
and exportability of the logs. Notwithstanding the favorable
Whether PRMI is liable on the basis of the letter of credit.
conditions, Christiansen refused to issue the certification
Ruling: required by the letter of credit in spite of requests made by
Villaluz. Without the certification, Feati Bank refused to
YES. A letter of credit is an engagement by a bank or other advance the payment on the letter of credit. As Christiansen
person made at the request of a customer that the issuer will kept up his refusal to issue the needed certification, the letter
honor drafts or other demands for payment upon compliance of the credit lapsed, while the logs reached their consignee.
with the conditions specified in the credit. Through a LOC,
the bank merely substitutes its own promise to pay for one Villaluz then filed a case against Christiansen and Feati
of its customers who in return promised to pay the bank the Bank in order to compel the execution of the required
amount of funds mentioned (in this case, PRMI, in order to certification, and to hold the two liable-- in particular, Feati
make purchases with Nissho). Bank for releasing the funds to Christiansen in spite of non-
compliance with the requirements in the letter of credit.
In this case, the drawee (the bank that would honor the
drafts) was Prudential Bank. It was to Prudential Bank that Issue(s):
the drafts were presented for payment-- in this case, sight
Whether Feati Bank is liable under the letter of credit despite
drafts payable on demand (the presentment).
non-compliance with its terms.
When the sight drafts were presented, based on the
Ruling:
engagement in the letter of credit, Prudential Bank would
make payments to the seller, Nissho, and would be NO. Two things should be considered here (per BPI v Nery,
reimbursed by the buyer, PRMI. In this regard, PRMI is Art. 2 of Code of Commerce, and the Uniform Customs and
liable on the basis of the letter of credit. Practice for Documentary Credits):

First, in commercial transactions involving letters of credit,


the functions assumed by correspondent banks depend on the
FEATI BANK and TRUST COMPANY v. COURT OF
obligations taken up by them. If the bank is a notifying bank,
APPEALS and BERNARDO E. VILLALUZ
its only obligation is to transmit to the beneficiary the
G.R. No. 94209, April 30, 1991, GUTIERREZ, Jr. J. 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 Facts:
if prior to negotiation, there is no liability to the seller but
after that, it would breach its contract with the seller. If a MWSS granted Maynilad, under a Concession Agreement, a
confirming bank, the correspondent bank assumes a direct twenty-year period to conduct various services for the
and primary obligation to assume the obligation as if the existing MWSS water delivery and sewerage services in the
corresponding bank had issued the letter of credit. West Zone Service Area, for which Maynilad undertook to
pay the corresponding concession fees on the dates agreed
Second, a letter of credit (especially an irrevocable letter of upon in the said agreement. Among the means they relied
credit) is a contract independent from the contract between upon are foreign loans. To secure Maynilad's performance
the buyer and the seller, and the credit agreement between of obligations under the agreement,
the issuing bank and the buyer.
Maynilad was required to put up a bond, bank guarantee, or
Breaches and liabilities in one contract may not affect the other security acceptable to MWSS. To meet this
other contracts. That is, while it provides security for requirement, Maynilad arranged for a three-year credit
commercial transactions, it is not an accessory contract (such facility with foreign banks, led by Citicorp International
as a guaranty)-- it is a contract with obligations within itself, Ltd., for the issuance of an Irrevocable Standby Letter of
some of which are related to those in other contracts (e.g. the Credit in favor of MWSS.
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 Months after the arrangement, Maynilad and MWSS had
can be used as part of the means of payment). difficulties negotiating possible solutions to Maynilad's
supposed losses given the PHP's depreciation against the
Treating the contract as an accessory destroys the USD, even leading to unilateral suspension of payment of
independence of the banks responsibility from the contract concession fees. They eventually reached an agreement.
upon which it was opened.
In spite of that agreement, Maynilad served upon MWSS a
Bank's sole involvement is that of a notifying bank. It Notice of Event of Termination, claiming that MWSS failed
forwarded the letter of credit from SPNB to the beneficiary to comply with its obligations under the Concession
(the seller). Villaluz claims that Feati is a confirming bank, Agreement and their agreed-upon amendments.
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 MWSS challenged this, leading to an award in favor of
credit (characterizing it as a confirmation and as an MWSS.
accessory).
As a result, MWSS submitted a written notice to Citicorp, as
However, the law requires that the undertaking be agent of the foreign banks, that by virtue of Maynilad's
absolutely spelled out in order for a bank to be considered failure to perform its obligations under the Concession
confirming. Neither can Feati be considered a negotiating agreement, it would draw on the mentioned letter of credit.
bank with liability, as there did not seem to be any Prior to this, Maynilad filed a petition for rehabilitation
negotiation that would create a contractual relationship. which resulted in Stay Orders that would conflict with the
Without these, it does appear that Feati Bank really only letter of credit.
advised Villaluz of the letter of credit, and entered into no
Issue:
other obligation with him. It is not privy to whatever
agreements Villaluz may have had with Christiansen. Whether MWSS may draw on the letter of credit in spite of
Apparently, Villaluz had a contract akin to one with services the stay order.
with Christiansen, which the latter breached when he refused
to issue the certification. However, his unjustified refusal is Ruling:
a matter between the two men, and not the bank.
YES. As stated in Feati Bank v. CA, an irrevocable letter of
MWSS v. HON. REYNALDO DAWAY and credit is not a guaranty-- that is, not an accessory contract,
MAYNILAD WATER SERVICES but a primary obligation by a bank or other person made at
the request of a customer that the issuer shall honor drafts or
G.R. No. 160732, June 21, 2004, AZCUNA, J. other demands of payment upon compliance with conditions
specified in the credit. What distinguishes a letter of credit
Except when a letter of credit specifically stipulates
from other accessory contracts is that an issuing bank is to
otherwise, the obligation of the banks issuing letters of credit
pay the seller upon presentment of the draft and required
are solidary with that of the person or entity requesting for
shipping documents. In effect, an undertaking to pay at sight
its issuance, since a letter of credit constitutes a direct,
conditioned upon delivery of the required documents.
primary, absolute and definite undertaking to pay the
beneficiary upon the presentation of the set of documents This should be read alongside the rule on rehabilitation stay
required therein. orders. Stay orders prevent the enforcement of claims
against the debtor, and guarantees and sureties who are not beneficiary of the letter of credit(export or seller)-- here,
solidarily liable with the debtor. Reliance agrees to pay Daewoo based on the terms of the
contract; the account party and the issuing bank (the
The claim is one against the participating banks. Based on Application)-- Reliance tried to apply to Chinabank for the
the letter of credit (in fact, explicit in its terms), they have a letter of credit, and had the letter of credit been approved,
primary, direct, definite and absolute undertaking to pay that they would reimburse the bank for amounts paid by that bank
is not conditioned on prior exhaustion of pursuant to the letter of credit; and the issuing bank and the
beneficiary, in order to support the contract; finally, the
the debtor's assets: a surety. As such, the doctrine in Traders
account party and the beneficiary to, inter alia, pay certain
Royal Bank v CA applies: the claims can be pursued
monies to each other. Other parties may be included, but the
separately from and independently of the rehabilitation case.
foregoing are indispensable. Note that these relationships
represent different obligations that have separate lifespans.
RELIANCE COMMODITIES v. DAEWOO
This case is centered on the contractual relation between the
INDUSTRIAL CO., LTD.
importer and exporter (the first one). Although the contract
G.R. No. L-100831, December 17, 1993, FELICIANO, J. refers to a letter of credit, it was not meant to be a condition
precedent-- only a mode of payment. The contract had
Letters of credit transactions are composed of at least three already been perfected. Consequently, the rights and
distinct relationships concretized in a contract or set thereof. obligations embodied in the contract now arise regardless of
Such relationships may form obligations that exist and are the failure of the application for the letter of credit-- it was
enforceable separately. enforceable.
Facts: The letter of credit was the mechanism of payment for the
pig iron. When an issuing bank undertakes to accept or pay
Reliance Commodities and Daewoo entered into a contract
the drafts presented, the bank in effect issues a loan to the
of sale under the terms of which Daewoo would ship and
account party. This feature, along with the bank's
deliver foundry pig iron. Pursuant to this, Daewoo shipped
undertaking to accept the beneficiary's drafts drawn on the
from Korea the said stock, but when the cargo arrived in
bank, is what makes a letter of credit a mode of payment.
Manila, it came out short.

Months later, another set of contracts were made, with the


final contract including a provision on payment through an CHARLES LEE, CHUA SIOK SUY, MARIANO SIO,
irrevocable letter of credit in favor of Daewoo. To ALFONSO YAP, RICHARD VELASCO and
accomplish this, Reliance filed with Chinabank an ALFONSO CO v. CA, PHILIPPINE BANK OF
application for a letter of credit in favor of Daewoo. Such COMMUNICATIONS
was endorsed to the Iron and Steel Authority for approval,
but was denied. Because of the denial, Reliance had to G.R. No. 117914, February 1, 2002, DE LEON, JR, J.
submit purchase orders from end-users to support its
A letter of credit is not a negotiable instrument, which does
application for a letter of credit, but did not make its target.
not allow the pertinent presumptions to apply, but
Daewoo rejected the proposed letter of credit.
instruments issued in conjunction with a letter of credit, such
As it turned out, the failure of Reliance to open the letter of as bank drafts, may be negotiable.
credit was due to its exceeding its foreign exchange
Facts:
allocation. Daewoo was forced to sell the pig iron to another
buyer at a lower price in order to recoup some of its losses, Charles Lee, as President of MICO Metals (MICO) wrote
and then requested payment for the amount represented by private respondent Philippine Bank of Communications
the short delivery. The request failed, leading to an action for (PBCom) requesting for a grant of a discounting loan/credit
damages with the trial court. line in the sum of three million pesos for the purpose of
carrying out MICO’s line of business as well as to maintain
Issue:
its volume of business. On the same day, Charles Lee
Whether or not the failure of Reliance (an importer) to open requested for another discounting loan/credit line of three
a letter of credit on the terms agreed upon makes it liable to million pesos from PBCom for the purpose of opening letters
Daewoo (exporter) for damages. of credit and trust receipts. The proceeds of the loans were
credited to their checking account with the Philippine Bank
Ruling: of Communications (PBCom). Lee and several other officers
of the company executed surety agreements as part of the
YES. A letter of credit transaction is a composite of at least
security for the loans.
three distinct but intertwined relationships being concretized
in the contract: the account party or buyer or importer to the
Sometime after, MICO then filed applications for domestic Via Moda International, represented by Teresita Serrano,
and foreign letters of credit. When the applications were obtained an export packing loan from Bank of Commerce
approved, trust receipts were executed in favor of PBCom, (BOC), secured by a Deed of Assignment over an
and in the case of the foreign letters of credit, bills of lading irrevocable transferable letter of credit. Serrano executed in
and commercial invoices. These facilities were availed of by favor of BOC a promissory note for the amount of the loan.
their beneficiaries, and drafts were issued and later accepted Afterward, Via Moda opened a deposit account for the loan's
by MICO. proceeds.

MICO was eventually unable to repay their debts, leading to Sometime after, BOC issued to Via Moda the subject
foreclosure of a real estate mortgage also used as security, irrevocable letter of credit for the purchase and importation
but that was not enough to completely pay the obligation of fabric and textile products from Tiger East Fabric Co. Ltd.
(there were still remaining trust receipts liabilities, for of Taiwan. To secure the release of the goods covered,
example). PBCom then demanded settlement with Lee and Serrano, in representation of Via Moda, executed a trust
the other sureties, but they refused to acknowledge their receipt covering the shipment. The goods were shipped by
obligations. Aggrieved, PBCom filed a complaint with Via Moda to its proper consignee. However, the proceeds of
prayer for writ of preliminary attachment before the RTC of the goods were not credited to the trust receipt, but were
Manila. Failure of delivery was one of the defences applied to the export packing loan.
considered by the RTC in ruling in favour of MICO.
BOC then sent a demand letter to Via Moda for the payment
In the CA, the Court relied on two presumptions to overturn of the obligation on the trust receipts, or return of the goods
the ruling: (1) that a negotiable instrument is deemed prima covered. The demand was not heeded, leading to an estafa
facie issued for valuable consideration and every person case against Serrano. After an RTC ruling in favor of BOC,
whose signature appears thereon is a party for value, and (2) the CA acquitted Serrano and said that she was not civilly
that an instrument sets out the true agreement of the parties liable.
thereto and that it was executed for valuable consideration.
Issue:
Issue:
Whether Serrano is civilly liable based on the non-payment
Whether the CA erred in treating the letters of credit and trust of the trust receipt.
receipts as negotiable instruments.
Ruling:
Ruling:
NO. A letter of credit is a separate document from a trust
YES. Two presumptions were established by PBCom when receipt. While the trust receipt may have been executed as
it presented several documents, including letters of credit, security on the letter of credit, the two documents involve
trust receipts, and drafts. First, that a negotiable instrument different undertakings and obligations. The former is an
is deemed prima facie issued for valuable consideration and engagement by a bank or other person made at the request of
that every person whose signature appears thereon to be a a customer that the issuer will honor drafts or other demands
party for value. While letters of credit and trust receipts are for payment upon compliance with the conditions specified
not negotiable instruments, bank drafts executed in in the credit. In contrast, the latter is one where the entruster,
connection with letters of credit, which are distinct who holds an absolute title or security interests over certain
instruments, are negotiable. Second, that sufficient goods, documents or instruments, released the same to the
consideration was given in a contract. entrustee, who executes a trust receipt binding himself to
hold the goods, documents or instruments in trust for the
The documents allowed these presumptions to arise entruster and to sell or otherwise dispose of the goods,
(particularly on the drafts, since they were negotiable documents and instruments with the obligation to turn over
instruments), creating not merely a prima facie case but to the entruster the proceeds thereof to the extent of the
actual proof of a solidary obligation between MICO and Lee amount owing to the entruster, or as appears in the trust
(as well as the other sureties that signed). They establish that receipt, or return the goods, documents or instruments
the agreements were availed of, and the proceeds were themselves if they are unsold, or not otherwise disposed of,
delivered to MICO. in accordance with the terms and conditions specified in the
trust receipt.
BANK OF COMMERCE v. TERESITA S. SERRANO
To BOC, Serrano has to account for two obligations: the
G.R. No. 151895, February 16, 2005, QUISUMBING, J.
guarantee clause in the letter of credit, and the trust receipt.
A letter of credit is a distinct from a trust receipt, creating In the case of the former, the issue was never raised until the
separate obligations and liabilities. SC, and was not considered by it. In the case of the latter,
there was nothing on the trust receipt that showed that
Facts: 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 Ruling:
piercing of the veil of corporate fiction, the obligation on the
trust receipt could not pertain to her. NO. First, the letter of credit agreements show that the
parties agreed that BPI shall not be responsible for
Moreover, the SC agreed with the CA in finding that there differences in character, quality, quantity, condition or value
was no misappropriation or conversion by Serrano of the of the property from that expressed in their documents (here,
proceeds of the sale in the good subject of the trust receipt the dyestuff). Second, absent such provision, Art. 10 of the
because it was BOC that unilaterally applied the proceeds to Uniform Customs and Practices for Commercial
the export packing loan. It should not create liability on Documentary Credits Fixed for the Thirteenth Congress of
Serrano who did not take part or have any knowledge International Chamber of Commerce, of which the
thereof. Hence, Serrano is not liable. Philipines is a signatory, states that in documentary credit
operations, all parties concerned deal in documents and not
BANK OF THE PHILIPPINE ISLANDS v. DE RENY in goods. The bank is not required to verify the goods
FABRIC INDUSTRIES themselves-- the bank was only tapped in order to allow
engagement in international business. Such is a custom
G.R. No. L-24821, October 16, 1970, CASTRO, J.
applicable to commercial transactions that will apply
In the absence of provision in our local laws, letters of credit regardless of the lack of provision in the contract and in our
are governed by established usage and customs in commerce laws.
(e.g. Uniform Customs and Practices for Commercial
BPI cannot be liable on the agreement due to both contract
Documentary Credits Fixed for the Thirteenth Congress of
provisions and a custom taken as part of our law
International Chamber of Commerce).

Facts:
INSULAR BANK of ASIA and AMERICA v.
De Reny Fabric Industries, through its president and
INTERMEDIATE APPELLATE COURT, THE
secretary, applied to BPI for four irrevocable commercial
PHILIPPINE AMERICAN LIFE INSURANCE CO.,
letters of credit to cover the purchase by the corporation of
SPS. MENDOZA
dyestuffs of various colors from, JB. The applications were
approved, and the letters of credit were executed. Under G.R. No. 74834, November 17, 1988, MELENCIO-
these agreements, the president and secretary bound HERRERA, J.
themselves personally as joint and solidary debtors with the
corporation. A standby letter of credit is a definite undertaking to pay a
money advanced or an amount for which credit is given on
By virtue of these transactions, BPI issued irrevocable the faith of the instrument—in effect, a security, but not an
commercial letters of credit addressed to its correspond accessory contract. They are distinct obligations from the
banks in the US, with instructions to inform the American original loan which they secure.
supplier that they have been authorized to negotiate the
latter's sight drafts up to the amounts mentioned therein, Facts:
respectively, if accompanied, upon presentation, by a full set
of negotiable clean "on board" ocean bills of lading, The spouses Mendoza obtained two loans from Philam Life
covering the dyestuff. JB availed of these facilities; with to finance the construction of their house. To secure
those availments, the correspondent banks then debited payments, Philam Life required that amortizations be
BPI's account with them. guaranteed by an irrevocable standby letter of credit of a
commerical bank, leading the Mendozas to apply for the
When the shipments arrived in the Philippines, De Reny issuance of two such letters of credit from Insular Bank of
made partial payments but these were discontinued when it Asia and America. Such letters of credit were in turn secured
turned out the goods were actually colored chalk instead of by a real estate mortgage in favor of the spouses' property.
dyestuff. De Reny refused to take possession of the goods,
leading to BPI depositing the same in a bonded warehouse, The Mendozas failed to pay their loan, so that Philam Life
and the present case for collection. One of De Reny's informed Insular Bank that it was declaring both loans as
defenses is that BPI has the duty to take the necessary entirely due and demandable, and demanded their payment.
precautions to insure that the goods shipped under the IBAA contested the propriety of calling in the entire loan, so
covering letters of credit conformed with the item appearing Philam Life desisted and resumed availing of the letters of
therein. Any losses that accrued should be burdened by BPI. credit by drawing on them for five more amoritzations.

Issue: As time passed, the Mendozas still defaulted on their


amortization, leading to another declaration that the entire
Whether BPI insures that the goods shipped conform to the balance be immediately due and demandable. Philam Life
letters of credit. also demanded payment from Insular Bank, but it argued that
it was a mere guarantor of the Mendozas, and that its Transfield filed the same with the International Chamber of
obligation was much less than what Philam Life demanded. Commerce (ICC).
It even demanded a refund as the Mendozas made partial
payments that reduced their liability. Foreseeing that LHC would call on the securities, Transfield
advised ANZ Bank and SBC (banks) of the arbitration
While this went on, the real estate mortgage was foreclosed. proceedings, and that LHC had no right to call on the
Soon after, Philam Life sued the spouses and Insular Bank securities until resolution of the disputes. Transfield warned
for the recovery of the supposed balance. the banks that any transfer or release of the securities in favor
of LHC would make the banks liable for damages
Issue:
LHC sent notice to Transfield that it failed to comply with
Whether or not partial payments made by the principal its obligation to complete the project. LHC then declared
debtors (Mendoza spouses) would reduce the liability of the Transfield in default/delay. LHC served notice that it would
guarantor (Insular Bank) under the terms of the standby call on the securities for the payment of damages for the
letter of credit. delay. In response, Transfield filed a comlaint for injunction,
seeking to restrain LHC from calling on the securities.
Ruling:
Issue:
NO. In construing the terms of a letter of credit, as in other
contracts, it is the intention of the parties that must govern, Whether the beneficiary may call on the letters of credit.
also considering the usages of the particular trade of business
contemplated. The standby letter of credit secures the Ruling:
payment of any obligation of the debtor to the creditor.
However, while they are security arrangements, they are not YES. To start, there is a distinction between a commercial
contracts of guaranty. Rather, they are primary, independent credit and a standby credit. The former is a letter of credit
contracts that underline absolute undertakings to pay the that refers to the payment of money under a contract of sale,
money advanced or the amount for which credit is given on and is payable upon presentation by the seller beneficiary of
the faith of the instrument. documents that show he has taken affirmative steps to
comply with the sales agreement. Meanwhile, the latter is an
Because of this, partial payments made by the Mendozas undertaking to pay for non-performance of an agreement,
cannot be used in computing Insular Bank's liability under and is payable upon showing that the principal obligor has
its own standby letter of credit. Their obligation is distinct not performed the related contract. Such letters of credit are
from the Mendoza's, although they are related. separate contracts from the contracts by which they are
based, even if such contracts are referenced in the credit (the
TRANSFIELD PHILIPPINES INC. v. LUZON HYDRO independence principle).
CORPORATION, AUSTRALIA and NEW ZEALAND
BANKING GROUP LIMITED and SECURITY BANK The letter of credit in this case is a standby letter of credit.
CORPORATION By its nature, it is practically ministerial for LHC to call on
the securities upon Transfield's default. To require a prior
G.R. No. 146717, November 22, 2004, TINGA, J. negotiation or arbitration would be to convert the same into
a guarantee, which is not the nature of a letter of credit. Note
A standby letter of credit, while a security arrangement, is
that the securities admit their liability.
not an accessory contract such as guaranty. Obligations to
pay arise upon proof that the principal obligor has failed to Moreover, LHC's right is not only rooted in the law and
meet his obligation, without need of other proceedings. usages in business, but the contract itself. All in all,
Transfield cannot pursue the injunction.
Facts:
VIRGINIA TOBACCO ADMINISTRATIONv.HON.
Transfield and Luzon Hydro Corporation (LHC) entered into
WALFRIDO DE LOS ANGELES, Judge of the Court of
a Turnkey contract whereby Transfield undertook to
First Instance of Rizal, Branch IV (Quezon City) and
construct a hydro-electric power station (project). To secure
TIMOTEO A. SEVILLA, doing business under the name
performance of its obligation, Transfield opened in favor of
and style of PHILIPPINE ASSOCIATED RESOURCES
LHC 2 standby letters ofcredit (securities), one with
and PRUDENTIAL BANK AND TRUST COMPANY
Australia and New Zealand Banking Group Limited (ANZ
Bank) and one with Security Bank Corporation (SBC). G.R. No.L-27829, August 19, 1988, Paras, J.
Transfield sought various extensions of time to complete the An irrevocable letter of credit cannot, during its lifetime, be
project, due to factors such as force majeure occasioned by cancelled or modified without the express permission of the
typhoon Zeb, barricades and demonstrations. LHC denied beneficiary.
the requests. LHC filed before the Construction Industry
Arbitration Commission (CIAC) a Request for Arbitration.
Facts: NO. Since Featiwas only a notifying bank, its responsibility
was solely to notify and/or transmit the documentary of
Timoteo Sevilla, proprietor and General Manager of the credit to the private respondent and its obligation ends there.
Philippine Associated Resources (PAR) entered into a
contract for the importation of kilos of Virginia leaf tobacco The notifying bank may suggest to the seller its willingness
and Farmer’s tobacco. Due to prevailing export or world to negotiate, but this fact alone does not imply that the
market price under which Sevilla will be exporting at a loss, notifying bank promises to accept the draft drawn under the
the parties agreed that Sevilla shall open an irrevocable letter documentary credit.
of credit with the Prudential Bank and Trust Co. (Prudential
Bank) in favor of Philippine Virginia Tobacco
Administration (PVTA)
A notifying bank is not a privy to the contract of sale
While Sevilla was trying to negotiate the reduction of the between the buyer and the seller, its relationship is only with
procurement cost of the PVTA tobacco already exported, that of the issuing bank and not with the beneficiary to whom
PVTA prepared two (2) drafts to be drawn against the said he assumes no liability.
letter of credit for the amounts which have become due and
In order that the petitioner may be held liable under the letter,
payable. Sevilla filed an injunction against the release of
there should be proof that the petitioner confirmed the letter
funds with Prudential Bank which was not granted byJudge
of credit.
Delos Angeles. Consequently, Judge Delos Angeles issued
an order directing Prudential Bank to make the questioned The records are, however, bereft of any evidence which will
release of funds from the letters of credit. disclose that the petitioner has confirmed the letter of credit.
Issue: There must have been an absolute assurance on the part of
the petitioner that it will undertake the issuing bank's
Whether the respondent judgeacted with grave abuse of
obligation as its own
discretion in releasing the funds from the letters of credit.
RELIANCE COMMODITIES, INC.v.DAEWOO
Ruling:
INDUSTRIAL CO., LTD.
YES. Respondent Judge violated the irrevocability of the
G.R. No.L-100831, December 17, 1993, Feliciano, J.
letter of credit issued by respondent Bank in favor of
petitioner. An irrevocable letter of credit cannot during its The primary purpose of the letter of credit is to substitute for
lifetime be cancelled or modified Without the express and therefore support the agreement of the buyer/importer to
permission of the beneficiary (Miranda and Garrovilla, pay money under a contract or other arrangement. It creates
Principles of Money Credit and Banking, Revised Edition, in the seller/exporter a secure expectation of payment.
p. 291). Consequently, if the finding the trial on the merits is
that respondent Sevilla has alleged unpaid balance due the Issue:
petitioner, such unpaid obligation would be unsecured.
Whether the failure of an importer (Reliance) to open a letter
of credit as a condition for another contract make it liable.

Feati Bank V. CA PART 2 Ruling:

The correspondent bank may be called a notifying bank, a YES.A letter of credit transaction may be seen to be a
negotiating bank, or a confirming bank.In case of a notifying composite of at least three (3) distinct but intertwined
bank, the correspondent bank assumes no liability except to relationships being concretized in a contract:
notify and/or transmit to the beneficiary the existence of the
(a) One contract relationship links the party applying for the
letter of credit.A negotiating bank, on the other hand, is a
L/C (the account party or buyer or importer) and the party
correspondent bank which buys or discounts a draft under
for whose benefit the L/C is issued (the beneficiary or seller
the letter of credit. In the case of a confirming bank, the
or exporter). In this contract, the account party, here
correspondent bank assumes a direct obligation to the seller
Reliance, agrees, among other things and subject to the terms
and its liability is a primary one as if the correspondent bank
and conditions of the contract, to pay money to the
itself had issued the letter of credit
beneficiary, here Daewoo.
Issue:
(b) A second contract relationship is between the account
Whether a correspondent bank should be held liable under party and the issuing bank. Under this contract, (sometimes
the letter of credit despite non-compliance by the beneficiary called the "Application and Agreement" or the
with the terms thereof. "Reimbursement Agreement"), the account party among
other things, applies to the issuing bank for a specified L/C
Ruling:
and agrees to reimburse the bank for amounts paid by that Facts:
bank pursuant to the L/C.
Rodzssen Supply Inc. applied for and obtained an
(c) The third contract relationship is established between the irrevocable Letter of Credit from Far East Bank and Trust
issuing bank and the beneficiary, in order to support the Company Inc. in favor of Ekman and Company Inc., in order
contract. to finance the purchase of five (5) units of hydraulic loaders
in the amount of P190,000. For the first three (3) hydraulic
We believe and so hold that failure of a buyer seasonably to loaders that were delivered, the bank paid the amount
furnish an agreed letter of credit is a breach of the contract specified in the letter of credit. Five months after the
between buyer and seller. Where the buyer fails to open a expiration of the L/C, Far East paid Ekman the amount of
letter of credit as stipulated, the seller or exporter is entitled the last two (2) hydraulic loaders which were voluntarily
to claim damages for such breach. Damages for failure to received by Rodzssen. After four years (4), Far East sought
open a commercial credit may, in appropriate cases, include for the payment of the 2 hydraulic loaders against Rodzssen
the loss of profit which the seller would reasonably have but to no avail. Hence, it filed a complaint to recover its
made had the transaction been carried out value. Rodzssen contended that Far East acted in bad faith
when it paid Ekman for the 2 hydraulic loaders from Ekman
PRUDENTIAL BANK
in spite of the expiration of the L/C. Hence, Rodzssen was
Issue: no longer bound to reimburse Far East under the subject L/C.

Whether or not the presentment for acceptance of the drafts Issue:


was indispensable to make Philippine Rayon liable.
Whether or not it is proper for a banking institution to pay a
Ruling: letter of credit which has long expired or been cancelled.

NO. A letter of credit is defined as an engagement by a bank Ruling:


or other person made at the request of a customer that the
NO. The subject Letter of Credit had become invalid upon
issuer will honor drafts or other demands for payment upon
the lapse of the period fixed therein. Thus, respondent should
compliance with the conditions specified in the credit.
not have paid Ekman; it was not obliged to do so. In the same
Through a letter of credit, the bank merely substitutes its
vein, of no moment was Ekmans presentation, within the
own promise to pay for one of its customers who in return
prescribed period, of all the documents necessary for
promises to pay the bank the amount of funds mentioned in
collection, as the Letter of Credit had already expired and
the letter of credit plus credit or commitment fees mutually
had in fact been cancelled.
agreed upon. In the instant case then, the drawee was
necessarily the herein petitioner. It was to the latter that the Indeed, equitable considerations behoove us to allow
drafts were presented for payment. In fact, there was no need recovery by respondent. True, it erred in paying Ekman, but
for acceptance as the issued drafts are sight drafts. petitioner itself was not without fault in the transaction. It
Presentment for acceptance is necessary only in the cases must be noted that the latter had voluntarily received and
expressly provided for in Section 143 of the Negotiable kept the loaders since October 1979.
Instruments Law (NIL).
Petitioner claims that it accepted the late delivery of the
A different conclusion would violate the principle upon equipment, only because it was bound to accept it under the
which commercial letters of credit are founded because in company’s trust receipt arrangement with respondent bank.
such a case, both the beneficiary and the issuer, Nissho
Company Ltd. and the petitioner, respectively, would be Granting that petitioner was bound under such arrangement
placed at the mercy of Philippine Rayon even if the latter had to accept the late delivery of the equipment, we note its
already received the imported machinery and the petitioner unexplained inaction for almost four years with regard to the
had fully paid for it. 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
RODZSSEN SUPPLY CO. INC. v. FAR EAST BANK &
that it formalized its offer to return the two pieces of
TRUST CO.
equipment only after respondents demand for payment,
When both parties to a transaction are mutually negligent in which came more than three years after it accepted delivery
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.
MARPHIL EXPORT CORPORATION and IRENEO Allied Bank, and to award it actual, moral and exemplary
LIM, Petitioners, - versus - ALLIED BANKING damages, and attorney's fees.
CORPORATION, substituted by PHILIPPINE
NATIONAL BANK, Respondent. G.R. No. 187922, RTC granted Marphil's complaint for declaratory relief, and
September 21, 2016, THIRD DIVISION, JARDELEZA, declared PN No. 4202 void. On appeal, CA upheld the
J. nullity of PN No. 4202 but held petitioners liable for the
amount of Pl,913,763.45, the amount equal to the face value
FACTS: 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
Marphil is a domestic company engaged in the exportation because it was not a confirming bank and did not undertake
of cuttlefish, cashew nuts and similar agricultural products. to assume the obligation of Nanyang Bank to Marphil as its
To finance its purchase and export of these products, Allied own. At most, it could only be a discounting bank which
Bank granted Marphil a credit line from which Marphil bought drafts under the letter of credit.
availed of several loans evidenced by promissory notes
(PN). These loans were in the nature of advances to finance ISSUE:
the exporter's working capital requirements and export bills.
Irrevocable letters of credits served as collaterals for the Whether or not the debit memo made by Allied Bank against
loans obtained to pay export bills. Allied Bank purchases the the account of Marphil is valid.
drafts for the letters of credit from Marphil, credits the
RULING:
amount to the latter's credit line and deducts from the total
amount of Marphil's existing loans from Allied Bank. In The debit memo is valid.
turn, Allied Bank required Marphil, through its authorized
signatories Lim and Rebecca Lim So, to execute a Letter of a. Allied Bank as correspondent bank in LIC No. 21970
Agreement where they undertake to reimburse Allied Bank
The Court affirms the finding of both the RTC and CA that
in the event the export bills/drafts covering the letters of
Allied Bank is not a confirming bank, which undertakes
credit are refused by the drawee.
Nanyang Bank's obligation as issuing bank, but at most,
The transaction involved in this petition is the export of buys the drafts drawn by Marphil as exporter at a discount.
cashew nuts to Intan Trading Ltd. Hongkong (Intan) in Hong
In order to consider a correspondent bank as a confirming
Kong. Upon application of Intan, Nanyang Commercial
bank, it must have assumed a direct obligation to the seller
Bank (Nanyang Bank), a bank based in China, issued
as if it had issued the letter of credit itself. If the
irrevocable letters of credit with Marphil as beneficiary and
correspondent bank was a confirming bank, then a
Allied Bank as correspondent bank.
categorical declaration should have been stated in the letter
When Intan placed a second order for cashew nuts, Marphil of credit that the correspondent bank is to honor all drafts
availed additional loans in their credit line evidenced by PN drawn in conformity with the letter of credit." Thus, if we
No. 2463 and PN No. 2730. Similar to the previous were to hold Allied Bank liable to Marphil (which would
transaction, Intan applied for and opened L/C No. 21970 result in a finding that the former' s debit from the latter's
with Nanyang Bank in the amount of US$185,000.00, with account is wrong) based on the rule of strict compliance, it
Marphil as the beneficiary and Allied Bank as correspondent must be because Allied Bank acted as confirming bank under
bank. After receiving the export documents including the the language of L/C No. 21970.
draft issued by Marphil, Allied Bank credited Marphil in the
In finding that Allied Bank, as correspondent bank, did not
amount of Pl,913,763.45, the peso value of the amount in the
act as confirming bank, the CA reviewed the instructions of
letter of credit.
Nanyang Bank to Allied Bank in L/C No. 21970. It found
However, on July 2, 1988, Allied Bank informed Marphil that based on the instructions, there is nothing to support
that it received a cable from Nanyang Bank noting some Marphil's argument that Allied Bank undertook, as its own,
discrepancies in the shipping documents. Consequently, Nanyang Bank's obligations in the letter of credit:
Nanyang Bank refused to reimburse Allied Bank the amount
In the instant case, the letter of Nanyang to Allied provided
the latter had credited in Marphil' s credit line. In its debit
the following instructions: 1) the negotiating bank is kindly
memo, Allied Bank informed Marphil of the dishonor of L/C
requested to forward all documents to Nanyang in one lot; 2)
No. 21970 and that it was reversing the earlier credit entry
in reimbursement for the negotiation(s), Nanyang shall remit
of Pl,913,763.45. Lim was made to sign a blank promissory
cover to Allied upon receipt of documents in compliance
note, PN No. 4202, on to cover for the amount.
with the terms and conditions of the credit; 3) the drafts
Marphil filed a Complaint for declaratory relief and damages drawn must be marked "drawn under Nanyang Commercial
against Allied Bank (Declaratory Relief Case) in the RTC. Bank"; and 4) to advise beneficiary.
In its Complaint, Marphil asked the court to declare PN No.
From the above-instructions, it is clear that Allied did not
4202 void, to declare as fully paid its other obligations to
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 debiting the amount, Allied Bank informed Marphil twice of
only be a discounting bank which bought the drafts under the Nanyang Bank's refusal to honor the tender of documents on
L/C. L/C No. 21970. Thirdly, it immediately informed Marphil
that it was debiting the amount of the dishonored draft from
Having been established that Allied Bank is not a confirming the credit line.
bank and therefore not obliged to honor the draft upon
submission of stipulated documents in the letter of credit, the In sum, the Court affirmed that Allied Bank is not a
issue that must now be resolved is the validity of debit memo confirming bank under L/C No. 21970. In any case, whether
it made against the Marphil account. Allied Bank is directly liable as confirming bank will not
affect Marphil's obligation to reimburse Allied Bank the
b. Allied Bank's right to reimbursement under the Letter amount of Pl ,913,763.45 because its liability to refund the
Agreement amount arose under an independent contract, i.e. the Letter
Agreement. And while Allied Bank is the debtor of Marphil
It must be remembered that a Letter Agreement was
for the amount it credited under the draft, the obligation
executed by Marphil and Allied Bank. The Letter of
under the Letter Agreement made Allied Bank the creditor
Agreement is a contract between Marphil and Allied Bank
of Marphil for the same amount. Being debtor and creditor
where the latter agreed to purchase the draft and credit the
of each other, Allied Bank was entitled to legal
former its value on the undertaking that Allied Bank will be
compensation by debiting the amount, which did not result
reimbursed in case the draft is dishonored. This obligation is
in any loss to Marphil.
direct, and is independent, not only from the obligation
under the draft, but also from the obligation under L/C No. Bank of America v. CA PART 2
21970. The Letter Agreement simply creates a separate
obligation on Marphil' s part to refund the amount of the Issue:
proceeds, in case of dishonor. As an independent obligation,
Marphil is bound to fulfill this obligation to reimburse Allied Whether Bank of America may recover the amount it paid to
Bank. Inter-Resin for the latter’s partial availment of the disowned
letter of credit.
However, a conflict arose because instead of waiting for
Marphil's own initiative to return the amount, Allied Bank Ruling:
on its own debited from the former's credit line.
YES.Bringing the letter of credit to the attention of the seller
c. Allied Bank's right to debit Marphil 's account is the primordial obligation of an advising bank. The view
that Bank of America should have first checked the
In this case, when Allied Bank credited the amount authenticity of the letter of credit with bank of Ayudhya, by
of.Pl,913,763.45 to Marphil' s account, it became the debtor using advanced mode of business communications, before
of Marphil. However, once Nanyang Bank dishonored the dispatching the same to Inter-Resin finds no real support in
export documents and draft for L/C No. 21970, Marphil U.C.P. Article 18 of the U.C.P. states that: "Banks assume
became the debtor of Allied Bank for the amount by virtue no liability or responsibility for the consequences arising out
of its obligation to reimburse the bank under the Letter of the delay and/or loss in transit of any messages, letters or
Agreement. This obligation consisting of sum of money documents, or for delay, mutilation or other errors arising in
became demandable upon notice of the dishonor by Nanyang the transmission of any telecommunication…" As advising
Bank. Thus, legal compensation may take place between the bank, Bank of America is bound only to check the "apparent
two debts. authenticity" of the letter of credit, which it did. Clarifying
its meaning, Webster's Ninth New Collegiate Dictionary
In Associated Bank vs. Tan, the Court nevertheless explains that the word "APPARENT suggests appearance to
emphasized that while the bank has the right to set off, the unaided senses that is not or may not be borne out by more
exercise of such right must be consistent with the required rigorous examination or greater knowledge."
degree of diligence from banks, i.e., highest degree of care.
Thus, the question that needs to be resolved now is whether May Bank of America then recover what it has paid under
Allied Bank properly exercised its right to set off. 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
The Court ruled that Allied Bank properly exercised its right
discounting arrangement. This time, Bank of America has
to set off. Firstly, having signed the Letter Agreement,
acted independently as a negotiating bank, thus saving Inter-
Marphil expressly undertook that in case of dishonor of the
Resin from the hardship of presenting the documents directly
draft for the letter of the credit, it· will refund to Allied Bank
to Bank of Ayudhya to recover payment. (Inter-Resin, of
whatever the latter has credited in its favor. This places
course, could have chosen other banks with which to
Marphil on its guard that the dishonor will create an
negotiate the draft and the documents.) As a negotiating
obligation to refund the amount credited. Secondly, prior to
bank, Bank of America has a right to recourse against the
issuer bank and until reimbursement is obtained, Inter-Resin, The Court finds merit in the contention of Land Bank that,
as the drawer of the draft, continues to assume a contingent as the issuing bank in the Beautilike transaction involving an
liability thereon. import letter of credit, it only deals in documents and it is not
involved in the contract between the parties. The relationship
While bank of America has indeed failed to allege material between the beneficiary and the issuer of a letter of credit is
facts in its complaint that might have likewise warranted the not strictly contractual, because both privity and a meeting
application of the Negotiable Instruments Law and possible of the minds are lacking.
then allowed it to even go after the indorsers of the draft, this
failure, nonetheless, does not preclude petitioner bank's right Thus, upon receipt by Land Bank of the documents of title
(as negotiating bank) of recovery from Inter-Resin itself. which conform with what the letter of credit requires, it is
Inter-Resin admits having received from bank of America on duty bound to pay the seller, as it did in this case.
the letter of credit and in having executed the corresponding Consequently, it was error for the trial court and for the
draft. The payment to Inter-Resin has given, as aforesaid, Court of Appeals to grant opportunity losses to the
Bank of America the right of reimbursement from the respondents on this account.
issuing bank, Bank of Ayudhya which, in turn, would then
seek indemnification from the buyer (the General Chemicals PHILIPPINE NATIONAL BANK v.SAN MIGUEL
of Thailand). Since Bank of Ayudhya disowned the letter of CORPORATION
credit, however, Bank of America may now turn to Inter-
G.R. No. 186063, January 15, 2014, Peralta, J.
Resin for restitution.
The engagement of the issuing bank is to pay the seller or
LAND BANK OF THE PHILIPPINES v. MONETS
beneficiary of the credit once the draft and the required
EXPORT AND MANUFACTURING CORPORATION,
documents are presented to it. The so-called "independence
SPOUSES VICENTE V. TAGLE, SR. and MA.
principle" assures the seller or the beneficiary of prompt
CONSUELO G. TAGLE
payment independent of any breach of the main contract and
G.R. No. 161865, March 10, 2005, Ynares-Santiago, J. precludes the issuing bank from determining whether the
main contract is actually accomplished or not.
“The so-called independence principle assures the seller or
the beneficiary of prompt payment independent of any Facts:
breach of the main contract and precludes the issuing bank
San Miguel Corporation (SMC) entered into an exclusive
from determining whether the main contract is actually
dealership agreement with and Rodolfo R. Goroza wherein
accomplished or not.”
the latter was given the right to trade, deal, market or
Facts: otherwise sell its various beer products.

Land Bank of the Philippines (Land Bank) and Monets Consequently, to secure a credit line with SMC, Goroza
Export and Manufacturing Corporation (Monet) executed an must apply for a letter of credit which he obtained from
Export Packing Credit Line Agreementunder the latter was Philippine National Bank. Upon presentment of required
given a credit line secured, among others, by the proceeds of invoices and official receipts of Goroza’s purchases of SMC
its export letters of credit from Wishbone Trading products, the amount of the credit line was released for
Corporation. When Monet failed to pay for its obligations payment to SMC. Subsequently, Goroza was able to secure
with the Land Bank, the latter filed a complaint for collection a revolving credit line with PNB which enabled it to pay for
of sum of money. However, Monet countered that Land his credit purchases with SMC. However, Goroza started to
Bank failed to protect Monet’s interest when it paid the become delinquent with his accounts. SMC demanded
suppliers despite discrepancies in the shipment vis--vis the payment for the balance with Goroza and
order specifications.
PNB but to no avail. Hence, SMC filed an action for
Issue: collection of sum of money with the Regional Trial Court
(RTC) against them.
Whether or not Monet is entitled to opportunity losses based
on Land Bank’s unauthorized payment on behalf of Monet. The RTC ordered Goroza to pay SMC for the said amount
without prejudice to the decision against PNB in a separate
Ruling: trial of the case. PNB now contends that by virtue of the RTC
decision finding Gorozaliable to pay the entire amount
NO. As regards to the Beautilike account, the trial court and sought to be recovered by SMC, has settled the obligation of
the Court of Appeals erred in holding that Land Bank failed both Goroza and PNB, and that there is no longer any ground
to protect Monet’s interest when it paid the suppliers despite to hold PNB for trial and make a separate judgment against
discrepancies in the shipment vis—vis the order it. However, the Court of Appeals (CA) ruled that
specifications of Monet. proceedings against PNB may continue in the RTC, despite
the trial court's complete adjudication of relief in favor of Klockner's reason for refusing payment so that it may refer
SMC. Hence, this petition was filed. the matter to NSC. City Trust insisted that a demand for
payment must be made from Klockner since the documents
Issue: "were found in compliance with LC terms and conditions."
HSBC replied on the same day stating that in accordance
Whether the adjudication of Goroza’s liability against SMC
with CityTrust's instruction in its Collection Order, HSBC
also settled the obligation of PNB.
treated the transaction as a matter under URC 322. Thus, it
Ruling: demanded payment from Klockner which unfortunately
refused payment for unspecified reasons. It then noted that
NO. In a letter of credit transaction, such as in this case, under URC 322, Klockner has no duty to provide a reason
where the credit is stipulated as irrevocable, there is a for the refusal.
definite undertaking by the issuing bank to pay the
beneficiary provided that the stipulated documents are Klockner continued to refuse payment and HSBC notified
presented and the conditions of the credit are complied with. CityTrust in a cablegram that should Klockner still refuse to
Precisely, the independence principle liberates the issuing accept the bill, it will return the full set of documents to City
bank from the duty of ascertaining compliance by the parties Trust with all the charges for the account of the drawer.
in the main contract. As the principle's nomenclature clearly
HSBC then returned the documents to City Trust. In a letter
suggests, the obligation under the letter of credit is
accompanying the returned documents, HSBC stated that it
independent of the related and originating contract. In brief,
considered itself discharged of its duty under the transaction.
the letter of credit is separate and distinct from the
In response, CityTrust sent a cablegram to HSBC stating that
underlying transaction.
it is "no longer possible for beneficiary to wait for you to get
In other words, PNB cannot evade responsibility on the sole paid by applicant." It explained that since the documents
ground that the RTC judgment found Goroza liable and required under the Letter of Credit have been properly sent
ordered him to pay the amount sought to be recovered by to HSBC, Citytrust demanded payment from it. CityTrust
SMC. PNB's liability, if any, under the letter of credit is yet also stated, for the first time in all of its correspondence with
to be determined. 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
HONGKONG CASE Klockner to pay, it opted to return the documents.
FACTS:
Unable to collect from HSBC, NSC filed a complaint against
Respondent National Steel Corporation (NSC) entered into it for collection of sum of money (Complaint). HSBC filed
an Export Sales Contract (the Contract) with Klockner East its Answer denying any liability under the Letter of Credit.
Asia Limited (Klockner). NSC sold 1,200 metric tons of It argued in its Answer that CityTrust modified the
prime cold rolled coils to Klockner. In accordance with the obligation when it stated in its Collection Order that the
requirements in the Contract, Klockner applied for an transaction is subject to URC 322 and not under UCP 400.
irrevocable letter of credit with HSBC in favor of NSC as the
RTC Makati rendered a decision (RTC Decision) declaring
beneficiary in the amount of US$468,000. HSBC issued an
that HSBC is not liable to pay NSC the amount stated in the
irrevocable and onsight letter of credit no. HKH 239409 (the
Letter of Credit. It ruled that the applicable law is URC 322
Letter of Credit) in favor of NSC. The Letter of Credit stated
as it was the law which CityTrust intended to apply to the
that it is governed by the International Chamber of
transaction. Under URC 322, HSBC has no liability to pay
Commerce Uniform Customs and Practice for Documentary when Klockner refused payment.
Credits, Publication No. 400 (UCP 400). Under UCP 400,
HSBC as the issuing bank, has the obligation to immediately The CA found that it is UCP 400 and not URC 322 which
pay NSC upon presentment of the documents listed in the governs the transaction. According to the CA, the terms of
Letter of Credit. the Letter of Credit clearly stated that UCP 400 shall apply.
Further, the CA explained that even if the Letter of Credit
NSC coursed the collection of its payment from Klockner
did not state that UCP 400 governs, it nevertheless finds
through City Trust Banking Corporation (City Trust). City
application as this Court has consistently recognized it under
Trust sent a collection order (Collection Order) to HSBC
Philippine jurisdiction. Thus, applying UCP 400 and
respecting the collection of payment from Klockner. The
principles concerning letters of credit, the CA explained that
Collection Order also contained the following statement:
the obligation of the issuing bank is to pay the seller or
"Subject to Uniform Rules for the Collection of Commercial
beneficiary of the credit once the draft and the required
Paper Publication No. 322."
documents are properly presented. Under the independence
HSBC sent a cablegram advising that Klockner had refused principle, the issuing bank's obligation to pay under the letter
payment. CityTrust requested HSBC to inform it of
of credit is separate from the compliance of the parties in the HSBC, as the issuing bank of a letter of credit, undertook
main contract. certain obligations dictated by the terms of the Letter of
Credit itself and by UCP 400.
ISSUE:
URC 322 is a set of norms compiled by the ICC. A bank
The central question in this case is who among the parties acting in accordance with the terms of URC 322 merely
bears the liability to pay the amount stated in the Letter of facilitates collection. Its duty is to forward the letter of credit
Credit. This requires a determination of which between UCP and the required documents from the entity seeking payment
400 and URC 322 governs the transaction. The obligations to another entity which has the duty to pay. The bank incurs
of the parties under the proper applicable rule will, in turn, no obligation other than as a collecting agent. This is
determine their liability. different in the case of an issuing bank acting in accordance
with UCP 400. In this case, the issuing bank has the duty to
RULING:
pay the amount stated in the letter of credit upon due
UCP 400 shall govern and hence, HSBC is liable to pay the presentment.
amount stated in the LC.
HSBC claims that while UCP 400 applies to letters of credit,
Article 2 of the Code of Commerce states that acts of it is also common for beneficiaries of such letters to seek
commerce are governed by their provisions, by the usages collection under URC 322. HSBC further claims that URC
and customs generally observed in the particular place and, 322 is an accepted custom in commerce. However, HSBC
in the absence of both rules, by civil law. failed to present evidence to prove that URC 322 constitutes
custom and usage recognized in commerce. Neither was
The International Chamber of Commerce (ICC) drafted a set there sufficient evidence to prove that beneficiaries under a
of rules to govern transactions involving letters of credit. letter of credit commonly resort to collection under URC 322
This set of rules is known as the Uniform Customs and as a matter of industry practice.
Practice for Documentary Credits (UCP). Since its first
issuance in 1933, the UCP has seen several revisions, the The entire system of letters of credit rely on the assurance
latest of which was in 2007, known as the UCP 600. that upon presentment of the proper documents, the
However, for the period relevant to this case, the prevailing beneficiary has an enforceable right and the issuing bank a
version is the 1993 revision called the UCP 400. demandable obligation, to pay the amount agreed upon. Any
law or custom governing letters of credit should have, at its
For the purpose of clarity, letters of credit are governed core, an emphasis on the imperative that issuing banks
primarily by their own provisions, by laws specifically respect their obligation to pay and that seller-beneficiaries
applicable to them, and by usage and custom. Consistent may reasonably expect payment in accordance with the
with the rulings in several cases, usage and custom refers to terms of a letter of credit.
UCP 400. When the particular issues are not covered by the
provisions of the letter of credit, by laws specifically Having arrived at the applicability of UCP 400, the
applicable to them and by UCP 400, our general civil law Independence Principle can now be applied in this case.
finds suppletory application. 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
Applying this set of laws and rules, this Court rules that
particular conditions stipulated in the documents or
HSBC is liable under the provisions of the Letter of Credit,
superimposed thereon..." Thus, as long as the proper
in accordance with usage and custom as embodied in UCP
documents are presented, the issuing bank has an obligation
400, and under the provisions of general civil law.
to pay even if the buyer should later on refuse payment.
The Letter of Credit categorically stated that it is subject to Hence, Klockner's refusal to pay carries no effect
UCP 400, to wit: whatsoever on HSBC's obligation to pay under the Letter of
Credit. To allow HSBC to refuse to honor the Letter of
Except so far as otherwise expressly stated, this Credit simply because it could not collect first from
documentary credit is subject to uniform Customs and Klockner is to countenance a breach of the Independence
Practice for Documentary Credits (1983 Revision), Principle.
International Chamber of Commerce Publication No. 400.
Further, as a bank, HSBC has the duty to observe the highest
From the moment that HSBC agreed to the terms of the degree of diligence. Thus, upon receipt of City Trust's
Letter of Credit - which states that UCP 400 applies - its Collection Order with the Letter of Credit, HSBC had the
actions in connection with the transaction automatically obligation to carefully examine the documents it received.
became bound by the rules set in UCP 400. Even assuming Had it observed the standard of care expected of it, HSBC
that URC 322 is an international custom that has been would have discovered that the Letter of Credit is the very
recognized in commerce, this does not change the fact that same document which it issued upon the request of
Klockner, its client. Had HSBC taken the time to perform its RTC decision on the ground that IBAA’s liability was not
duty with the highest degree of diligence, it would have been reduced by the payments made by the Mendozas.
alerted by the fact that the documents presented to it
corresponded with the documents stated in the Letter of Issue:
Credit, to which HSBC freely and knowingly agreed. HSBC
Whether or not the partial payments made by the principal
ought to have noticed the discrepancy between City Trust's
obligors (respondent MENDOZAS) would have the
request for collection under URC 322 and the terms of the
corresponding effect of reducing the liability of the
Letter of Credit. Regardless of any error that City Trust may
petitioner as guarantor or surety under the terms of the
have committed, the standard of care expected of HSBC
standby LCs in question.
dictates that it should have made a separate determination of
the significance of the presentment of the Letter of Credit Ruling:
and the attached documents. A bank exercising the
appropriate degree of diligence would have, at the very least, NO. The terms of the subject Irrevocable Standby Letters of
inquired if NSC was seeking payment under the Letter of Credit read, in part, as follows: This credit secures the
Credit or merely seeking collection under URC 322. In payment of any obligation of the accounteeto you under that
failing to do so, HSBC fell below the standard of care Loan Agreement hereto attached xxx.
imposed upon it.
Unequivocally, the subject standby Letters of Credit secure
INSULAR BANK OF ASIA & AMERICA (NOW the payment of any obligation of the Mendozas to Philam
PHILIPPINE COMMERCIAL INTERNATIONAL Life including all interests, surcharges and expenses thereon.
BANK)v.HON. INTERMEDIATE APPELLATE But while they are a security arrangement, they are not
COURT, THE PHILIPPINE AMERICAN LIFE converted thereby into contracts of guaranty. That would
INSURANCE CO., SPS. BEN MENDOZA & JUANITA make them ultra vires rather than a letter of credit, which is
M. MENDOZA within the powers of a bank (Section 74[e], RA 337, General
Banking Act). The standby L/Cs are, "in effect an absolute
G.R. No. 74834, November 17, 1988, Melencio-Herrera, undertaking to pay the money advanced or the amount for
J. which credit is given on the faith of the instrument."
(Scribner v. Rutherford, 22 N.W. 670, 65 Iowa 551; Duval
Letters of credit and contracts for the issuance of such letters
v. Trask,, 12 Mass. 154, cited in 38 CJS, Sec. 7, p. 1142).
are subject to the same rules of construction as are ordinary
commercial contracts. They are to receive a reasonable and They are primary obligations and not accessory contracts.
not a technical construction and although usage and custom Being separate and independent agreements, the payments
cannot control express terms in letters of credit, they are to made by the Mendozas cannot be added in computing
be construed with reference to all the surrounding facts and IBAA's liability under its own standby letters of credit.
circumstances, to the particular and often varying terms in Payments made by the Mendozas directly to Philam Life are
which they may be expressed, the circumstances and in compliance with their own prestation under the loan
intention of the parties to them, and the usages of the agreements. And although these payments could result in the
particular trade of business contemplated. reduction of the actual amount which could ultimately be
collected from IBAA, the latter's separate undertaking under
Facts:
its L/Cs remains
Spouses Ben and Juanita Mendoza obtained two (2) loans
TRANSFIELD PHILIPPINES, INC. v. LUZON
from Philippine American Life Insurance Co. (Philam Life)
HYDRO CORPORATION, AUSTRALIA and NEW
to finance the construction of their residential house. To
ZEALAND BANKING GROUP LIMITED and
secure payment,Philam Life required that amortizations be
SECURITY BANK CORPORATION
guaranteed by an irrevocable standby letter of credit of a
commercial bank (LCs).Thus, the Mendozas contracted with G.R. No. 146717, November 22, 2004, TINGA, J.
Insular Bank of Asia and America (IBAA) for the issuance
of two (2) irrevocable standby Letters of Credit in favor of The independent nature of the letter of credit may be: (a)
Philam Life. Spouses Mendoza were able to pay initially but independence in toto where the credit is independent from
subsequently became delinquent for the remaining balance. the justification aspect and is a separate obligation from the
underlying agreement like for instance a typical standby; or
IBAA and contended that the payment made by the spouses (b) independence may be only as to the justification aspect
reduced its liability pursuant to the LCs. Nonetheless, Phil like in a commercial letter of credit or repayment standby,
Am Life filed a complaint for collection of sum of money which is identical with the same obligations under the
against the spouses and IBAA before the Regional Trial underlying agreement. In both cases the payment may be
Court (RTC) which rendered a decision extinguishing the enjoined if in the light of the purpose of the credit the
liability of IBAA to the extent of the payment made by payment of the credit would constitute fraudulent abuse of
IBAA. The Court of Appeals (CA) however, reversed the the credit.
Issue: Respondent banks had squarely raised the independence
principle to justify their releases of the amounts due under
Whether or not LHC may call and draw on the standby LCs the Securities. Owing to the nature and purpose of the
prior to the resolution of disputes between the LHC and standby letters of credit, this Court rules that the respondent
Transfield subject of arbitration. banks were left with little or no alternative but to honor the
credit and both of them in fact submitted that it was
Ruling:
ministerial for them to honor the call for payment.
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 FEATI BANK & TRUST COMPANY (now
letter of credit in essence would convert the letter of credit CITYTRUST BANKING CORPORATION) v. THE
into a mere guarantee. Jurisprudence has laid down a clear COURT OF APPEALS, and BERNARDO E.
distinction between a letter of credit and a guarantee in that VILLALUZ
the settlement of a dispute between the parties is not a pre-
requisite for the release of funds under a letter of credit. In G.R. No. 94209, April 30, 1991, Gutierrez, Jr., J.
other words, the argument is incompatible with the very
nature of the letter of credit. If a letter of credit is drawable It is a settled rule in commercial transactions involving
only after settlement of the dispute on the contract entered letters of credit that the documents tendered must strictly
into by the applicant and the beneficiary, there would be no conform to the terms of the letter of credit. The tender of
practical and beneficial use for letters of credit in documents by the beneficiary (seller) must include all
commercial transactions. documents required by the letter. A correspondent bank
which departs from what has been stipulated under the letter
Because parties and courts should not confuse the different of credit, as when it accepts a faulty tender, acts on its own
functions of the surety contract on the one hand and the risks and it may not thereafter be able to recover from the
standby credit on the other, the distinction between surety buyer or the issuing bank, as the case may be, the money thus
contracts and credits merits some reflection. The two paid to the beneficiary Thus the rule of strict compliance.
commercial devices share a common purpose. Both ensure
against the obligors nonperformance. They function, Issue:
however, in distinctly different ways.
Whether a correspondent bank should be held liable under
The standby credit has different expectations. He reasonably the letter of credit despite non-compliance by the beneficiary
expects that he will receive cash in the event of with the terms thereof.
nonperformance, that he will receive it promptly, and that he
Ruling:
will receive it before any litigation with the obligor (the
applicant) over the nature of the applicants performance NO. The incorporation of the Uniform Customs and Practice
takes place. The standby credit has this opposite effect for Documentary Credit (U.C.P. for short) in
of the surety contract: it reverses the financial burden of the letter of credit resulted in the applicability of the said
parties during litigation. rules in the governance of the relations between the parties.
And even if the U.C.P. was not incorporated in the letter of
In the surety contract setting, there is no duty to indemnify
credit, we have already ruled in the affirmative as to the
the beneficiary until the beneficiary establishes the fact of
applicability of the U.C.P. in cases before us.
the obligors performance. The beneficiary may have to
establish that fact in litigation. During the litigation, the In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we
surety holds the money and the beneficiary bears most of the pronounced that the observance of the U.C.P. in this
cost of delay in performance. In the standby credit case, jurisdiction is justified by Article 2 of the Code of
however, the beneficiary avoids that litigation burden and Commerce. Article 2 of the Code of Commerce enunciates
receives his money promptly upon presentation of the that in the absence of any particular provision in the Code of
required documents. Commerce, commercial transactions shall be governed by
the usages and customs generally observed
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 There being no specific provision which governs the legal
credit by allowing him to draw thereon. The situation itself complexities arising from transactions involving letters of
emasculates petitioners posture that LHC cannot invoke the credit not only between the banks themselves but also
independence principle and highlights its puerility, more so between banks and seller and/or buyer, the applicability of
in this case where the banks concerned were impleaded as the U.C.P. is undeniable.
parties by petitioner itself.
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.