Letter Of Credit.docx

FIRST DIVISION [G.R. No. L-24821. October 16, 1970.] BANK OF THE PHILIPPINE ISLANDS, Plaintiff-Appellee, v. DE RENY FABRIC INDUSTRIES, INC., AURORA T. TUYO and AURORA CARCERENY alias AURORA C. GONZALES, Defendants-Appellants. Aviado & Aranda for Plaintiff-Appellee. S. Emiliano Calma, for Defendants-Appellants.

SYLLABUS

1. COMMERCIAL LAW; LETTERS OF CREDIT; TERMS OF COMMERCIAL LETTER OF CREDIT AGREEMENTS, BINDING. — Where appellants agreed, under the terms of the Commercial Letter of Credit Agreements, that the Bank shall not be responsible for the existence, character, quality, quantity, conditions, packing, value or delivery of the property purporting to be represented by the documents; nor, for any difference in character, quality, quantity, condition, or value of the property from that expressed in documents, or for partial or incomplete shipment, etc., said appellants have no recourse but to comply with the covenant. 2. ID.; ID.; CUSTOMS AND USAGES IN INTERNATIONAL BANKING AND FINANCIAL CIRCLES. — Where it is proven as a fact that a custom exists to the effect that a bank is not duty bound to verify whether what has been described in the letters of credit or drafts or shipping documents actually tallies with what was loaded aboard the ship, appellants cannot shift the burden of loss to the bank arising from the violation by their vendor of its presentation. Article 10 of the Uniform Customs and Practices for Documentary Credits Fixed for the Thirteenth Congress of International Chamber of Commerce to which the Philippines is a signatory nation provides that, "in documentary credit operations, all parties concerned deal in documents and not in goods. Payment, negotiation or acceptance against documents in accordance with the terms and conditions of a credit by a Bank authorized to do so binds the party giving the authorization to-take up the documents and reimburse the Bank making the payment, negotiation or acceptance."

DECISION

CASTRO, J.:

This is an appeal from the decision of the Court of First Instance of Manila ordering the defendants-appellants to pay to the Bank of the Philippine Islands (hereinafter referred to as the Bank), jointly and severally, the value of the credit it extended to them in several letters of credit which the Bank opened at the behest of the defendants-appellants to finance their importation of dyestuffs from the United States, which however turned out to be mere colored chalk upon arrival and inspection thereof at the port of Manila. The record shows that on four (4) different occasions in 1961, the De Reny Fabric Industries, Inc., a Philippine corporation through its co-defendants-appellants, Aurora Carcereny, alias Aurora C. Gonzales, and Aurora T. Tuyo, president and secretary, respectively of the corporation, applied to the Bank for four (4) irrevocable commercial letters of credit to cover the purchase by the corporation of goods described in the covering L/C applications as "dyestuffs of various colors" from its American supplier, the J.B. Distributing Company. All the applications of the corporation were approved, and the corresponding Commercial L/C Agreements were executed pursuant to banking procedures. Under these agreements, the aforementioned officers of the corporation bound themselves personally as joint and solidary debtors with the corporation. Pursuant to banking regulations then in force, the corporation delivered to the Bank peso marginal deposits as each letter of credit was opened. The dates and amounts of the L/Cs applied for and approved as well as the peso marginal deposits made were, respectively, as follows:chanrob1es virtual 1aw library Date Application Amount Marginal & L/C No Deposit Oct. 10, 1961 61/1413 $57,658.38 P 43,407.33 Oct. 23, 1961 61/1483 $25,867.34 19,473.64

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Oct. 30, 1961 61/1495 $19,408.39 14,610.88 Nov. 10, 1961 61/1564 $26,687.64 20,090.90 TOTAL $129,621.75 P97,582.75 By virtue of the foregoing transactions, the Bank issued irrevocable commercial letters of credit addressed to its correspondent banks in the United States, with uniform instructions for them to notify the beneficiary thereof, the J.B. Distributing Company, that they have been authorized to negotiate the latter’s sight drafts up to the amounts mentioned therein, respectively, if accompanied, upon presentation, by a full set of negotiable clean "on board" ocean bills of lading, covering the merchandise appearing in the L/Cs, that is, dyestuffs of various colors. Consequently, the J.B. Distributing Company drew upon, presented to and negotiated with these banks, its sight drafts covering the amounts of the merchandise ostensibly being exported by it, together with clean bills of lading, and collected the full value of the drafts up to the amounts appearing in the L/Cs as above indicated. These correspondent banks then debited the account of the Bank of the Philippine Islands with them up to the full value of the drafts presented by the J.B. Distributing Company, plus commission thereon, and, thereafter, endorsed and forwarded all documents to the Bank of the Philippine Islands. In the meantime, as each shipment (covered by the abovementioned letters of credit) arrived in the Philippines, the De Reny Fabric Industries, Inc. made partial payments to the Bank amounting, in the aggregate, to P90,000. Further payments were, however, subsequently discontinued by the corporation when it became established, as a result of a chemical test conducted by the National Science Development Board, that the goods that arrived in Manila were colored chalks instead of dyestuffs. The corporation also refused to take possession of these goods, and for this reason, the Bank caused them to be deposited with a bonded warehouse paying therefor the amount of P12,609.64 up to the filing of its complaint with the court below on December 10, 1962. On October 24, 1963 the lower court rendered its decision ordering the corporation and its co-defendants (the herein appellants) to pay to the plaintiff-appellee the amount of P291,807.46, with interest thereon, as provided for in the L/C Agreements, at the rate of 7% per annum from October 31, 1962 until fully paid, plus costs. It is the submission of the defendants-appellants that it was the duty of the foreign correspondent banks of the Bank of the Philippine Islands to take the necessary precaution to insure that the goods shipped under the covering L/Cs conformed with the item appearing therein, and, that the foregoing banks having failed to perform this duty, no claim for recoupment against the defendants-appellants, arising from the losses incurred for the non-delivery or defective delivery of the articles ordered, could accrue. We can appreciate the sweep of the appellants’ argument, but we also find that it is nestled hopelessly inside a salient where the valid contract between the parties and the internationally accepted customs of the banking trade must prevail. 1 Under the terms of their Commercial Letter of Credit Agreements with the Bank, the appellants agreed that the Bank shall not be responsible for the "existence, character, quality, quantity, conditions, packing, value, or delivery of the property purporting to be represented by documents; for any difference in character, quality, quantity, condition, or value of the property from that expressed in documents," or for "partial or incomplete shipment, or failure or omission to ship any or all of the property referred to in the Credit," as well as "for any deviation from instructions, delay, default or fraud by the shipper or anyone else in connection with the property the shippers or vendors and ourselves [purchasers] or any of us." Having agreed to these terms, the appellants have, therefore, no recourse but to comply with their covenant. 2 But even without the stipulation recited above, the appellants cannot shift the burden of loss to the Bank on account of the violation by their vendor of its prestation. It was uncontrovertibly proven by the Bank during the trial below that banks, in providing financing in international business transactions such as those entered into by the appellants, do not deal with the property to be exported or shipped to the importer, but deal only with documents. The Bank introduced in evidence a provision contained in the "Uniform Customs and Practices for Commercial Documentary Credits Fixed for the Thirteenth Congress of International Chamber of Commerce," to which the Philippines is a signatory nation. Article 10 thereof provides:jgc:chanrobles.com.ph "In documentary credit operations, all parties concerned deal in documents and not in goods.—Payment, negotiation or acceptance against documents in accordance with the terms and conditions of a credit by a Bank authorized to do so binds the party giving the authorization to take up the documents and reimburse the Bank making the payment, negotiation or acceptance."cralaw virtua1aw library The existence of a custom in international banking and financing circles negating any duty on the part of a bank to verify whether what has been described in letters of credits or drafts or shipping documents actually tallies with what was loaded aboard ship, having been positively proven as a fact, the appellants are bound by this established usage. They were, after all, the ones who tapped the facilities afforded by the Bank in order to engage in international business. ACCORDINGLY, the judgment a quo is affirmed, at defendants-appellants’ cost. This is without prejudice to the Bank, in proper

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proceedings in the court below in this same case, proving and being reimbursed additional expenses, if any, it has incurred by virtue of the continued storage of the goods in question up to the time this decision becomes final and executory. Reyes, J.B.L., Actg. C.J., Dizon, Makalintal, Zaldivar, Fernando, Teehankee, Barredo, Villamor and Makasiar, JJ., concur. Concepcion, C.J., is on official leave. Endnotes:

1. The power of our courts to accept in evidence, international custom as evidence of a general practice accepted as law, may be said to be derived from both Constitutional as well as statutory sources. Section 3, Article II of the Constitution provides that "The Philippines renounces war as an instrument of national policy, and adopts the generally accepted principles of international law as a part of the law of the Nation." Art. 9 of the New Civil Code provides that "No court or judge shall decline to render judgment by reason of the silence, obscurity or insufficiency of the law," and Art. 12 of the same Code provides that "A custom must be proved as a fact, according to the rules of evidence." The Code of Commerce, in its Article 2, likewise provides that "Acts of commerce, whether those who execute them be merchants or not, and whether specified in this Code or not, should be governed by the provisions contained in it, in their absence, by the usages of commerce generally observed in each place; and in the absence of both rules, by those of the civil law." "Those acts contained in this Code and all others of analogous character, shall be deemed acts of commerce." It must be noted that certain principles governing the issuance, acceptance and payment of letters of credit are specifically provided for in the Code of Commerce. 2. Article 12 of the Commercial Letter of Credit Agreement provides, inter alia: "The users of the Credit shall be deemed our agents and we assume all risks of their acts or omissions. Neither you nor your correspondents shall be responsible: for the existence, character, quality, quantity, condition, packing, value, or delivery of the property purporting to be represented by documents; for any difference in character, quality, quantity, condition, or value of the property from that expressed in documents; . . . for partial or incomplete shipment, or failure or omission to ship any or all of the property referred to in the Credit; . . . for any deviation from instructions, delay, default or fraud by the shipper or anyone else in connection with the property or the shipping thereof; . . . for any breach of contract between the shipper or vendors and ourselves or any of us; . . . We are responsible to you for all obligations imposed upon you with respect to the Credit or the relative drafts, documents or property. In furtherance and extension and not in limitation of the specific provisions hereinbefore set forth, we agree that any action taken by you or by any correspondent of yours under or in connection with the Credit or the relative drafts, documents or property, if taken in good faith, shall be binding on us and shall not put you or your correspondent under any resulting liability to us; and we make like agreement as to any inaction or omission, unless in breach of good faith."

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SECOND DIVISION [G.R. No. L-27829. August 19, 1988.] PHILIPPINE VIRGINIA TOBACCO ADMINISTRATION, Petitioner, v. 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, Respondents. Lorenzo F. Miravite for respondent Timoteo Sevilla. Ferrer & Rañada Law Office for respondent Prudential Bank & Trust Co.

SYLLABUS

1. MERCANTILE LAW; LETTERS OF CREDIT; IRREVOCABLE LETTER OF CREDIT CANNOT BE CANCELLED WITHOUT EXPRESS PERMISSION OF BENEFICIARY. — 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). 2. REMEDIAL LAW; CIVIL PROCEDURE; MOTIONS IN GENERAL; REQUIREMENTS; MOTION WITHOUT REQUIRED 3-DAY NOTICE IS WORTHLESS. — Section 4 of Rule 15 of the Revised Rules of Court requires that notice of a motion be served by the applicant to all parties concerned at least three days before the hearing thereof; Section 5 of the same Rule which provides that the notice shall be directed to the parties concerned, and shall state the time and place for the hearing of the motion; and Section 6 of the same Rule which requires proof of service of the notice thereof, except when the Court is satisfied that the rights of the adverse party or parties are not affected, (Sunga v. Lacson, L-26055, April 29, 1968, 23 SCRA 393) A motion which does not meet the requirements of Sections 4 and 5 of Rule 15 of the Revised Rules of Court is considered a worthless piece of paper which the Clerk has no right to receive and the respondent court a quo has no authority to act thereon. (Vda. de A. Zarias v. Maddela, 38 SCRA 35; Cledera v. Sarmiento, 39 SCRA 552; and Sacdalan v. Bautista, 56 SCRA 175). 3. ID.; PROVISIONAL REMEDIES; PRELIMINARY INJUNCTION; NOT GRANTED WITHOUT NOTICE; EXCEPTION. — Section 5 of Rule 58 requires notice to the defendant before a preliminary injunction is granted unless it shall appear from facts shown by affidavits or by the verified complaint that great or irreparable injury would result to the applicant before the matter can be heard on notice. 4. ID.; ID.; ID.; ID.; IRREPARABLE INJURY AS REASON FOR ISSUANCE OF PRELIMINARY MANDATORY INJUNCTION, DEFINED. — Injury is considered irreparable if it is of such constant and frequent recurrence that no fair or reasonable redress can be had therefor in a court of law (Allundorff v. Abrahanson, 38 Phil. 585) or where there is no standard by which their amount can be measured with reasonable accuracy, that is, it is not susceptible of mathematical computation (SSC v. Bayona, Et Al., L-13555, May 30, 1962). 5. ID.; ID.; ID.; ID.; HEARING IS ESSENTIAL TO LEGALITY OF ISSUANCE OF PRELIMINARY INJUNCTION. — Once the, application is filed with the Judge, the latter must cause an Order to be served on the defendant, requiring him to show cause at a given time and place why the injunction should not be granted. The hearing is essential to the legality of the issuance of a preliminary injunction. It is an abuse of discretion on the part of the court to issue an injunction without hearing the parties and receiving evidence thereon (Associated Watchmen and Security Union, Et. Al. v. United States Lines, Et Al., 101 Phil. 895). 6. ID.; ID.; ID.; PRELIMINARY MANDATORY INJUNCTION; FACTS REQUIRED TO BE SHOWN BEFORE ISSUANCE OF WRIT. — The discretionary power of the trial court to issue a preliminary mandatory injunction is not absolute as the issuance of the writ is the exception rather than the rule. The party applying for it must show a clear legal right the violation of which is so recent as to make its vindication an urgent one (Police Commission v. Bello, 37 SCRA 230). It is granted only on a showing that (a) the invasion of the right is material and substantial; (b) the right of the complainant is clear and unmistakable; and (c) there is an urgent and permanent necessity for the writ to prevent serious damages (Pelejo v. Court of Appeals, 117 SCRA 665). 7. ID.; ID.; ID.; ID.; INSTANCES WHEN PRELIMINARY MANDATORY INJUNCTIONS MAY BE ISSUED PRIOR TO FINAL HEARING. — It has always been said that it is improper to issue a writ of preliminary mandatory injunction prior to the final hearing except in cases of extreme urgency, where the right of petitioner to the writ is very clear; where considerations of relative inconvenience bear strongly in complainant’s favor; where there is a willful and unlawful invasion of plaintiffs right against his protest and remonstrance, the injury being a contributing one, and there the effect of the mandatory injunctions is rather to re-establish and maintain a pre-existing continuing relation between the parties, recantly and arbitrarily interrupted by the defendant, than to establish a new relation (Alvaro v. Zapata, 118 SCRA 722; Lemi v. Valencia, February 28, 1963, 7 SCRA 469; Com. of Customs v. Cloribel, L-20266, January 31, 1967, 19 SCRA 234). 8. ID.; ID.; ID.; ID.; PRELIMINARY MANDATORY INJUNCTION BASED ON UNESTABLISHED ASSUMPTIONS IS VOID. — In the case at bar

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there appears no urgency for the issuance of the writs of preliminary mandatory injunctions in the Orders of July 17, 1967 and November 3, 1967; much less was there a clear legal right of respondent Sevilla that has been violated by petitioner. Indeed, it was an abuse of discretion on the part of respondent Judge to order the dissolution of the letter of credit on the basis of assumptions that cannot be established except by a hearing on the merits nor was there a showing that R.A. 4155 applies retroactively to respondent in this case, modifying his importation exportation contract with petitioner. 9. ID.; ID.; ID.; ID.; PRELIMINARY MANDATORY INJUNCTION IS IMPROPER IF IT DISPOSES OF ISSUE IN CONTROVERSY. — There is merit in petitioner’s contention that the question of exclusiveness of the award is an issue raised by the pleadings and therefore a matter of controversy, hence a preliminary mandatory injunction directing petitioner to issue respondent Sevilla a certificate of authority to import Virginia leaf tobacco and at the same time restraining petitioner from issuing a similar certificate of authority to others is premature and improper. 10. ID.; ID.; ID.; ID.; ID.; SOLE SUBJECT OF WRIT IS TO PRESERVE STATUS QUO UNTIL MERIT OF CASE IS HEARD. — The sole object of a preliminary injunction is to preserve the status quo until the merit can be heard. It is the last actual peaceable uncontested status which precedes the pending controversy (Rodulfo v. Alfonso, L-144, 76 Phil. 225), in the instant case, before the Case No. Q-10351 was filed in the Court of First Instance of Rizal. Consequently, instead of operating to preserve the status quo until the parties’ rights can be fairly and fully investigated and determined (De los Reyes v. Elepano, Et Al., 93 Phil. 239), the Orders of July 17, 1966 and March 3, 1967 serve to disturb the status quo. 11. ID.; ID.; ID.; FILING OF INSUFFICIENT BOND DOES NOT DISSOLVE UNCONDITIONALLY AN INJUNCTION. — The filing of an insufficient or defective bond does not dissolve absolutely and unconditionally an injunction. The remedy in a proper case is to order party to file a sufficient bond (Municipality of La Trinidad v. CFI of Baguio-Benguet, Br. I, 123 SCRA 81).

DECISION

PARAS, J.:

In these petition and supplemental petition for Certiorari, Prohibition and Mandamus with Preliminary Injunction, petitioner Philippine Virginia Tobacco Administration seeks to annul and set aside the following Orders of respondent Judge of the Court of First Instance of Rizal, Branch IV (Quezon City) in Civil Case No. Q-10351 and prays that the Writ of Preliminary Injunction (that may be) issued by this Court enjoining enforcement of the aforesaid Orders be made permanent. (Petition, Rollo, pp. 1-9)chanrobles.com : virtual law library They are:chanrob1es virtual 1aw library The Order of July 17, 1967:jgc:chanrobles.com.ph "AS PRAYED FOR, the Prudential Bank & Trust Company is hereby directed to release and deliver to the herein plaintiff, Timoteo A. Sevilla, the amount of P800,000.00 in its custody representing the marginal deposit of the Letters of Credit which said bank has issued in favor of the defendant, upon filing by the plaintiff of a bond in the sum of P800,000.00, to answer for whatever damage that the defendant PVTA and the Prudential Bank & Trust Company may suffer by reason of this order." (Annex "A," Rollo, p. 12) The Order of November 3, 1967:jgc:chanrobles.com.ph "IN VIEW OF THE FOREGOING, the petition under consideration is granted, as follows: (a) the defendant PVTA is hereby ordered to issue the corresponding certificate of Authority to the plaintiff, allowing him to export the remaining balance of his tobacco quota at the current world market price and to make the corresponding import of American high-grade tobacco; (b) the defendant PVTA is hereby restrained from issuing any Certificate of Authority to export or import to any persons and/or entities while the right of the plaintiff to the balance of his quota remains valid, effective and in force; and (c) defendant PVTA is hereby enjoined from opening public bidding to sell its Virginia leaf tobacco during the effectivity of its contract with the plaintiff. "x

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x

"In order to protect the defendant from whatever damage it may sustain by virtue of this order, the plaintiff is hereby directed to file a bond in the sum of P20,000.00." (Annex "K," Rollo, pp. 4-5) The Order of March 16, 1968:jgc:chanrobles.com.ph "WHEREFORE, the motion for reconsideration of the defendant against the order of November 3, 1967 is hereby DENIED." (Annex "M," Rollo, p. 196) The facts of the case are as follows:chanrob1es virtual 1aw library Respondent Timoteo Sevilla, proprietor and General Manager of the Philippine Associated Resources (PAR) together with two other entities, namely, the Nationwide Agro-Industrial Development Corp. and the Consolidated Agro-Producers Inc. were awarded in a

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public bidding the right to import Virginia leaf tobacco for blending purposes and exportation by them of PVTA and farmer’s low-grade tobacco at a rate of one (1) kilo of imported tobacco for every nine (9) kilos of leaf tobacco actually exported. Subsequently, the other two entities assigned their rights to PVTA and respondent remained the only private entity accorded the privilege.chanrobles virtual lawlibrary The contract entered into between the petitioner and respondent Sevilla was for the importation of 85 million kilos of Virginia leaf tobacco and a counterpart exportation of 2.53 million kilos of PVTA and 5.1 million kilos of farmer’s and or PVTA at P3.00 a kilo. (Annex "A," p. 55 and Annex "B," Rollo, p. 59) In accordance with their contract respondent Sevilla purchased from petitioner and actually exported 2,101.470 kilos of tobacco, paying the PVTA the sum of P2,482,938.50 and leaving a balance of P3,713,908.91. Before respondent Sevilla could import the counterpart blending Virginia tobacco, amounting to 525,560 kilos, Republic Act No. 4155 was passed and took effect on June 20, 1964, authorizing the PVTA to grant import privileges at the ratio of 4 to 1 instead of 9 to 1 and to dispose of all its tobacco stock at the best price available. Thus, on September 14, 1965 subject contract which was already amended on December 14, 1963 because of the prevailing export or world market price under which respondent will be exporting at a loss, (Complaint, Rollo, p. 3) was further amended to grant respondent the privileges under aforesaid law, subject to the following conditions: (1) that on the 2,101.470 kilos already purchased, and exported, the purchase price of about P3.00 a kilo was maintained; (2) that the unpaid balance of P3,713,908.91 was to be liquidated by paying PVTA the sum of P4.00 for every kilo of imported Virginia blending tobacco and, (3) that respondent Sevilla would open an irrevocable letter of credit No. 6232 with the Prudential Bank and Trust Co. in favor of the PVTA to secure the payment of said balance, drawable upon the release from the Bureau of Customs of the imported Virginia blending tobacco. While respondent was trying to negotiate the reduction of the procurement cost of the 2,101.479 kilos of PVTA tobacco already exported which attempt was denied by petitioner and also by the Office of the President, petitioner prepared two drafts to be drawn against said letter of credit for amounts which have already become due and demandable. Respondent then filed a complaint for damages with preliminary injunction against the petitioner in the amount of P5,000,000.00. Petitioner filed an answer with counterclaim, admitting the execution of the contract. It alleged however that respondent violated the terms thereof by causing the issuance of the preliminary injunction to prevent the former from drawing from the letter of credit for amounts due and payable and thus caused petitioner additional damage of 6% per annum. A writ of preliminary injunction was issued by respondent judge enjoining petitioner from drawing against the letter of credit. On motion of respondent, Sevilla, the lower court dismissed the complaint on April 19, 1967 without prejudice and lifted the writ of preliminary injunction but petitioner’s motion for reconsideration was granted on June 5, 1967 and the Order of April 19, 1967 was set aside. On July 1, 1967 Sevilla filed an urgent motion for reconsideration of the Order of June 5, 1967 praying that the Order of dismissal be reinstated. But pending the resolution of respondent’s motion and without notice to the petitioner, respondent judge issued the assailed Order of July 17, 1967 directing the Prudential Bank & Trust Co. to make the questioned release of funds from the Letter of Credit. Before petitioner could file a motion for reconsideration of said order, respondent Sevilla was able to secure the release of P300,000.00 and the rest of the amount. Hence this petition, followed by the supplemental petition when respondent filed with the lower court an urgent ex-parte petition for the issuance of preliminary mandatory and preventive injunction which was granted in the resolution of respondent Judge on November 3, 1967, above quoted. On March 16, 1968, respondent Judge denied petitioner’s motion for reconsideration. (Supp. Petition, Rollo, pp. 128-130)chanroblesvirtualawlibrary Pursuant to the resolution of July 21, 1967, the Supreme Court required respondent to file an answer to the petition within 10 days from notice thereof and upon petitioner’s posting a bond of fifty thousand pesos (P50,000.00), a writ of preliminary mandatory injunction was issued enjoining respondent Judge from enforcing and implementing his Order of July 17, 1967 and private respondents Sevilla and Prudential Bank and Trust Co. from complying with and implementing said order. The writ further provides that in the event that the said order had already been complied with and implemented, said respondents are ordered to return and make available the amounts that might have been released and taken delivery of by respondent Sevilla. (Rollo, pp. 16-17) In its answer, respondent bank explained that when it received the Order of the Supreme Court to stop the release of P800,000.00 it had already released the same in obedience to an earlier Order of the lower Court which was reiterated with an admonition in a subsequent Order. (Annex "C," Rollo, pp. 37-38) A Manifestation to that effect has already been filed by respondent bank (Rollo, pp. 19-20) which was noted by this Court in the resolution of August 1, 1967, a copy of which was sent to the Secretary of Justice. (Rollo, p. 30) Before respondent Sevilla could file his answer, petitioner filed a motion to declare him and respondent bank in contempt of court for having failed to comply with the resolution to this court of July 21, 1967 to the effect that the assailed order has already been implemented but respondents failed to return and make available the amounts that had been released and taken delivery of by respondent Sevilla. (Rollo, pp. 100-102) In his answer to the petition, respondent Sevilla claims that petitioner demanded from him a much higher price for Grades D and E tobacco than from the other awardees; that petitioner violated its contract by granting indiscriminately to numerous buyers the right to export and import tobacco while his agreement is being implemented, thereby depriving respondent of his exclusive right to import the Virginia leaf tobacco for blending purposes and that respondent Judge did not abuse his discretion in ordering the release of the amount of P800,000.00 from the Letter of Credit, upon his posting a bond for the same amount. He argued further that the granting of said preliminary injunction is within the sound discretion of the court with or without notice to the adverse party when the facts and the law are clear as in the instant case. He insists that petitioner cannot claim from him a price higher than the other awardees and that petitioner has no more right to the sum in controversy as the latter has already been overpaid when computed not at the price of tobacco provided in the contract which is inequitable and therefore null and void but at the price fixed for the other

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awardees. (Answer of Sevilla, Rollo, pp. 105-111) In its Answer to the Motion for Contempt, respondent bank reiterates its allegations in the Manifestation and Answer which it filed in this case. (Rollo, pp. 113-114) In his answer, (Rollo, pp. 118-119) to petitioner’s motion to declare him in contempt, respondent Sevilla explains that when he received a copy of the Order of this Court, he had already disbursed the whole amount withdrawn, to settle his huge obligations. Later he filed a supplemental answer in compliance with the resolution of this Court of September 15, 1967 requiring him to state in detail the amounts allegedly disbursed by him out of the withdrawn funds. (Rollo, pp. 121-123) Pursuant to the resolution of the Supreme Court on April 25, 1968, a Writ of Preliminary Injunction was issued upon posting of a surety bond in the amount of twenty thousand pesos (P20,000.00) restraining respondent Judge from enforcing and implementing his orders of November 3, 1967 and March 16, 1968 in Civil Case No. Q-10351 of the Court of First Instance of Rizal (Quezon City).chanrobles virtual lawlibrary Respondent Sevilla filed an answer to the supplemental petition (Rollo, pp. 216-221) and so did respondent bank (Rollo, p. 225). Thereafter, all the parties filed their respective memoranda (Memo for Petitioners, Rollo, pp. 230-244; for Resp. Bank, pp. 246-247; and for Respondents, Rollo, pp. 252-257). Petitioners filed a rejoinder (rollo, pp. 259-262) and respondent Sevilla filed an Amended Reply Memorandum (Rollo, pp. 266-274). Thereafter the case was submitted for decision in September, 1968 (Rollo, p. 264). Petitioner has raised the following issues:chanrob1es virtual 1aw library 1. Respondent Judge acted without or in excess of jurisdiction or with grave abuse of discretion when he issued the Order of July 17, 1967, for the following reasons: (a) the letter of credit issued by respondent bank is irrevocable; (b) said Order was issued without notice and (c) said order disturbed the status quo of the parties and is tantamount to prejudicing the case on the merits. (Rollo, pp. 79) 2. Respondent Judge likewise acted without or in excess of jurisdiction or with grave abuse of discretion when he issued the Order of November 3, 1967 which has exceeded the proper scope and function of a Writ of Preliminary Injunction which is to preserve the status quo and cannot therefore assume without hearing on the merits, that the award granted to respondent is exclusive; that the action is for specific performance and that the contract is still in force; that the conditions of the contract have already been complied with to entitle the party to the issuance of the corresponding Certificate of Authority to import American high grade tobacco; that the contract is still existing; that the parties have already agreed that the balance of the quota of respondent will be sold at current world market price and that petitioner has been overpaid. 3. The alleged damages suffered and to be suffered by respondent Sevilla are not irreparable, thus lacking in one essential prerequisite to be established before a Writ of Preliminary Injunction may be issued. The alleged damages to be suffered are loss of expected profits which can be measured and therefore reparable. 4. Petitioner will suffer greater damages than those alleged by respondent if the injunction is not dissolved. Petitioner stands to lose warehousing storage and servicing fees amounting to P4,704.236.00 yearly or P392,019.66 monthly, not to mention the loss of opportunity to take advantage of any beneficial change in the price of tobacco. 5. The bond fixed by the lower court in the amount of P20,000.00 is grossly inadequate. (Rollo, pp. 128-151) The petition is impressed with merit.cralawnad In issuing the Order of July 17, 1967, 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 after the trial on the merits is that respondent Sevilla has an unpaid balance due the petitioner, such unpaid obligation would be unsecured. In the issuance of the aforesaid Order, respondent Judge likewise violated: Section 4 of Rule 15 of the Revised Rules of Court which requires that notice of a motion be served by the applicant to all parties concerned at least three days before the hearing thereof; Section 5 of the same Rule which provides that the notice shall be directed to the parties concerned, and shall state the time and place for the hearing of the motion; and Section 6 of the same Rule which requires proof of service of the notice thereof, except when the Court is satisfied that the rights of the adverse party or parties are not affected, (Sunga v. Lacson, L-26055, April 29, 1968, 23 SCRA 393) A motion which does not meet the requirements of Sections 4 and 5 of Rule 15 of the Revised Rules of Court is considered a worthless piece of paper which the Clerk has no right to receive and the respondent court a quo has no authority to act thereon. (Vda. de A. Zarias v. Maddela, 38 SCRA 35; Cledera v. Sarmiento, 39 SCRA 552; and Sacdalan v. Bautista, 56 SCRA 175). The three-day notice required by law in the filing of a motion is intended not for the movant’s benefit but to avoid surprises upon the opposite party and to give the latter time to study and meet the arguments of the motion. (J.M. Tuason and Co., Inc. v. Magdangal, L-15539, 4 SCRA 84). More specifically, Section 5 of Rule 58 requires notice to the defendant before a preliminary injunction is granted unless it shall appear from facts shown by affidavits or by the verified complaint that great or irreparable injury would result to the applicant before the matter can be heard on notice. Once the, application is filed with the Judge, the latter must cause an Order to be served on the defendant, requiring him to show cause at a given time and place why the injunction should not be granted. The hearing is essential to

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the legality of the issuance of a preliminary injunction. It is an abuse of discretion on the part of the court to issue an injunction without hearing the parties and receiving evidence thereon (Associated Watchmen and Security Union, Et. Al. v. United States Lines, Et Al., 101 Phil. 896). In the issuance of the Order of November 3, 1967, with notice and hearing notwithstanding the discretionary power of the trial court to issue a preliminary mandatory injunction is not absolute as the issuance of the writ is the exception rather than the rule. The party applying for it must show a clear legal right the violation of which is so recent as to make its vindication an urgent one (Police Commission v. Bello, 37 SCRA 230). It is granted only on a showing that (a) the invasion of the right is material and substantial; (b) the right of the complainant is clear and unmistakable; and (c) there is an urgent and permanent necessity for the writ to prevent serious damages (Pelejo v. Court of Appeals, 117 SCRA 665). In fact, it has always been said that it is improper to issue a writ of preliminary mandatory injunction prior to the final hearing except in cases of extreme urgency, where the right of petitioner to the writ is very clear; where considerations of relative inconvenience bear strongly in complainant’s favor; where there is a willful and unlawful invasion of plaintiffs right against his protest and remonstrance, the injury being a contributing one, and there the effect of the mandatory injunctions is rather to re-establish and maintain a pre-existing continuing relation between the parties, recantly and arbitrarily interrupted by the defendant, than to establish a new relation (Alvaro v. Zapata, 118 SCRA 722; Lemi v. Valencia, February 28, 1963, 7 SCRA 469; Com. of Customs v. Cloribel, L-20266, January 31, 1967, 19 SCRA 234.chanrobles virtual lawlibrary In the case at bar there appears no urgency for the issuance of the writs of preliminary mandatory injunctions in the Orders of July 17, 1967 and November 3, 1967; much less was there a clear legal right of respondent Sevilla that has been violated by petitioner. Indeed, it was an abuse of discretion on the part of respondent Judge to order the dissolution of the letter of credit on the basis of assumptions that cannot be established except by a hearing on the merits nor was there a showing that R.A. 4155 applies retroactively to respondent in this case, modifying his importation exportation contract with petitioner. Furthermore, a writ of preliminary injunction’s enjoining any withdrawal from Letter of Credit 6232 would have been sufficient to protect the rights of respondent Sevilla should the finding be that he has no more unpaid obligations to petitioner. Similarly, there is merit in petitioner’s contention that the question of exclusiveness of the award is an issue raised by the pleadings and therefore a matter of controversy, hence a preliminary mandatory injunction directing petitioner to issue respondent Sevilla a certificate of authority to import Virginia leaf tobacco and at the same time restraining petitioner from issuing a similar certificate of authority to others is premature and improper. The sole object of a preliminary injunction is to preserve the status quo until the merit can be heard. It is the last actual peaceable uncontested status which precedes the pending controversy (Rodulfo v. Alfonso, L-144, 76 Phil. 225), in the instant case, before the Case No. Q-10351 was filed in the Court of First Instance of Rizal. Consequently, instead of operating to preserve the status quo until the parties’ rights can be fairly and fully investigated and determined (De los Reyes v. Elepano, Et Al., 93 Phil. 239), the Orders of July 17, 1966 and March 3, 1967 serve to disturb the status quo. Injury is considered irreparable if it is of such constant and frequent recurrence that no fair or reasonable redress can be had therefor in a court of law (Allundorff v. Abrahanson, 38 Phil. 585) or where there is no standard by which their amount can be measured with reasonable accuracy, that is, it is not susceptible of mathematical computation (SSC v. Bayona, Et Al., L-13555, May 30, 1962). Any alleged damage suffered or might possibly be suffered by respondent Sevilla refers to expected profits and claimed by him in this complaint as damages in the amount of FIVE Million Pesos (P5,000,000.00), a damage that can be measured, susceptible of mathematical computation, not irreparable, nor do they necessitate the issuance of the Order of November 3, 1967. Conversely, there is truth in petitioner’s claim that it will suffer greater damage than that suffered by respondent Sevilla if the Order of November 3, 1967 is not annulled. Petitioner’s stock if not made available to other parties will require warehouse storage and servicing fees in the amount of P4,704,236.00 yearly or more than P9,000,000.00 in two years time. Parenthetically, the alleged insufficiency of a bond fixed by the Court is not by itself an adequate reason for the annulment of the three assailed Orders. The filing of an insufficient or defective bond does not dissolve absolutely and unconditionally an injunction. The remedy in a proper case is to order party to file a sufficient bond (Municipality of La Trinidad v. CFI of Baguio-Benguet, Br. I, 123 SCRA 81). However, in the instant case this remedy is not sufficient to cure the defects already adverted to.cralawnad PREMISES CONSIDERED, the petition is given due course and the assailed Orders of July 17, 1967 and November 3, 1967 and March 16, 1968 are ANNULLED and SET ASIDE; and the preliminary injunctions issued by this Court should continue until the termination of Case No. Q-10351 on the merits. SO ORDERED. Melencio-Herrera (Chairperson) and Padilla, JJ., concur. Sarmiento, J., no part; related to the respondent within the sixth degree of affinity.

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SECOND DIVISION [G.R. No. 74834. November 17, 1988.] INSULAR BANK OF ASIA & AMERICA (NOW PHILIPPINE COMMERCIAL INTERNATIONAL BANK), Petitioner, v. HON. INTERMEDIATE APPELLATE COURT THE PHILIPPINE AMERICAN LIFE INSURANCE CO., SPS. BEN MENDOZA & JUANITA M. MENDOZA, Respondents. Balili, Parado, Cavada & Maamo for Petitioner. Romulo, Mabanta, Buenaventura, Sayoc & Delos Angeles for respondent Spouses Mendozas. Francisco, Zulueta & Associates for respondent Philam Life.

SYLLABUS

1. COMMERCIAL LAW; GENERAL BANKING ACT; LETTER OF CREDIT; TERMS THEREOF CONSTRUED, GUIDED BY THE INTENTION OF THE PARTIES. — "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." (International Banking Corp. v. Irving National Bank, CCA N.Y. 283 F. 103, affirming DC 274 F. 122; Old Colong Trust Co. v. Lawyers’ Title and Trust Co. CAA NY, 297 F. 152, cited in Vol. 72, CJS sec. 178, pp. 387-388). 2. ID.; ID.; ID.; UNEQUIVOCAL TERMS OF THE LETTERS OF CREDIT SECURED PAYMENT OF ANY OBLIGATION OF ACCOUNTEE. — 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 not to exceed P600,000.00. 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). 3. ID.; ID.; STANDBY L/CS, ABSOLUTE SEPARATE AND INDEPENDENT AGREEMENTS. — 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. 4. ID.; ID.; LETTERS OF CREDIT; STRICTLY CONSTRUED AGAINST THE WRITER. — The amount of P222,000.00, therefore, considered as "any obligation of the accountee" under the L/Cs will still have to be paid by IBAA under the explicit terms thereof, which IBAA had itself supplied. Letters of credit are strictly construed to the end that the rights of those directly parties to them may be preserved and their interest safeguarded (Moss v. Old Colony Trust Co., 140 N.E. 803, 246 Mass. 138, 152). Like any other writing, it will be construed most strongly against the writer and so as to be reasonable and consistent with honest intentions. On the whole, the construction will be generally a strict one (Lamborn v. National Park Bank of New York, 208 N.Y.S. 428, 212 App. Div. 25, affirming Id., 204 N Y.S. 557, 123 Misc. 211, affirmed Id., 148 N.E. 664, 240 N.Y. 520). As found by the Appellate Court, however, the amount payable should not exceed P296,294.05 (P600,000.00 less P303,705.95, the total amount found by the Appellate Court to have been paid by IBAA to Philam Life). 5. REMEDIAL LAW; APPEAL; SUPREME COURT’S JURISDICTION LIMITED TO REVIEWING ERRORS OF LAW COMMITTED BY LOWER COURTS. — Whether or not documentary evidence was disregarded by the Appellate Court regarding the amount actually paid by IBAA to Philam Life, or P303,705.95 (not P342,127.05 as found by the Trial Court), questions a finding of fact, which should be accorded not only respect but even finality. It is not the function of this Court to analyze or weigh such evidence all over again, its jurisdiction being limited to reviewing errors of law that might have been committed by lower Courts. 6. ID.; CIVIL PROCEDURE; PLEADING AND PRACTICE; COURTS NOT REQUIRED TO RESOLVE ALL ISSUES RAISED IN PLEADINGS. — The third issue faults respondent Appellate Court with having passed sub-silencio over certain points raised by petitioner IBAA in his Brief sustaining the Decision of the Trial Court. It is accepted judicial practice, however, that Courts are not required to resolve all issues raised in pleadings unless necessary for the resolution of the case. Apparently, respondent Appellate Court deemed it unnecessary to pass upon those points.

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7. CIVIL LAW; ATTORNEY’S FEES; AWARD, REASONABLE. — The award of attorney’s fees of P25,000.00 appears reasonable under the circumstances of the case specially considering that in the foreclosure of the mortgage in its favor IBAA charged the Mendozas attorney’s fees in the amount of P86,477.20.

DECISION

MELENCIO-HERRERA, J.:

An appeal by certiorari under Rule 45 of the Rules of Court by petitioner, the Insular Bank of Asia and America (IBAA) [now the Philippine Commercial International Bank], from the judgment of the public respondent, then the Intermediate Appellate Court, ** in CA-G.R. CV No. 03224. Briefly, the antecedent facts disclose that sometime in 1976 and 1977 respondent spouses Ben S. Mendoza and Juanita M. Mendoza (the Mendozas, for brevity), obtained two (2) loans from respondent Philippine American Life Insurance Co. (Philam Life) in the total amount of P600,000.00 to finance the construction of their residential house at Mandaue City. The said loans, with a 14% nominal interest rate, were to be liquidated in equal amortizations over a period of five (5) years from March 1977 to March 1982. To secure payment, Philam Life required that amortizations be guaranteed by an irrevocable standby letter of credit of a commercial bank. Thus, the Mendozas contracted with petitioner Insular Bank of Asia and America (IBAA) for the issuance of two (2) irrevocable standby Letters of Credit in favor of Philam Life for the total amount of P600,000.00. The first L/C for P500,000.00 was to expire on 1 October 1981 (Exhibit "7", IBAA), and the second for P100,000.00 on 1 January 1982 (Exhibit "8", IBAA). These two (2) irrevocable standby L/Cs were, in turn, secured by a real estate mortgage for the same amount on the property of Respondent Spouses in favor of IBAA. On 11 May 1977, the Mendozas executed a promissory note (No. L-562/77) in favor of IBAA promising to pay the sum of P100,000.00 plus 19% p.a. interest on 31 May 1979. Again, on 3 June 1977, Respondent Spouses executed another Promissory Note (No. 564/77) binding themselves to pay IBAA P100,000.00 plus 19% p.a. interest on 23 June 1979. Both Notes authorized IBAA "to sell at public or private sale such securities or things for the purpose of applying their proceeds to such payments" of "any particular obligation or obligations" the Mendozas may have to IBAA. (Exhibits "34" and "35" — IBAA, Annex "D" p. 131, Rollo) The Mendozas failed to pay Philam Life the amortization that fell due on 1 June 1978 so that Philam Life informed IBAA that it was declaring both loans as "entirely due and demandable" and demanded payment of P492,996.30 (Exhibit "H"). However, because IBAA contested the propriety of calling in the entire loan, Philam Life desisted and resumed availing of the L/Cs by drawing-on them for five (5) more amortizations. On 7 September 1979, because the Mendozas defaulted on their amortization due on 1 September 1979, Philam Life again informed IBAA that it was declaring the entire balance outstanding on both loans, including liquidated damages, "immediately due and payable." Philam Life then demanded the payment of P274,779.56 from IBAA but the latter took the position that, as a mere guarantor of the Mendozas who are the principal debtors, its remaining outstanding obligation under the two (2) standby L/Cs was only P30,100.60. Later, IBAA corrected the latter amount and showed instead an overpayment arrived at as follows:chanrob1es virtual 1aw library Limit of Liability P600,000.00 Less:chanrob1es virtual 1aw library a) Payment of Mendozas P280,293.11 b) Payment of IBAA 372 127.05 P652,520.76 __________ __________ Overpayment by IBAA (P52,520.76) ========= On 21 April 1980 the Real Estate Mortgage, which secured the two (2) standby L/Cs, was extrajudicially foreclosed by, and sold at public auction for P775,000.00, to petitioner IBAA as the lone and highest bidder (Exhibit "17 - Mendoza"). The bid price of P775,000.00 by petitioner IBAA was arrived at as follows:chanrob1es virtual 1aw library Principal (unpaid advances under the 2 standby LCs) plus interest & charges P432,386.07 Add:chanrob1es virtual 1aw library

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a) Stipulated Attorney’s fees (20%) P 86,477.20 b) Principals (clean loans) plus accrued interest under P/Ns Nos. 562/77 and 564/77 P255,346.95 c) Expenses of foreclosure P 772.20 __________ TOTAL P775,000.42 ========= On a date that does not appear of record, Philam Life filed suit against Respondent Spouses and IBAA before the Regional Trial Court of Manila, Branch XXXXI, for the recovery of the sum of P274,779.56, the amount allegedly still owing under the loan. After trial, said Court rendered a Decision finding that IBAA had paid Philam Life only P342,127.05 and not P372,227.65, as claimed by IBAA, because of a stale IBAA Manager’s check in the amount of P30,100.60, which had to be deducted. With this deduction, the Trial Court arrived at the following computation:chanrob1es virtual 1aw library Limit of Liability of IBAA Less: P600,000.00 a) Payment by Mendozas P280,293.11 b) Payment by IBAA P342.127 .05 P622,420.16 __________ __________ Overpayment by IBAA P 22,420.16 ========= Thus, the Trial Court ruled:jgc:chanrobles.com.ph "ACCORDINGLY, judgment is hereby rendered ordering:jgc:chanrobles.com.ph "(1) Defendants-spouses Ben S. Mendoza and Juanita M. Mendoza to pay plaintiff Philippine American Life Insurance Company the sum of P322,000.00 plus 2% per month as penalty interest from September 12, 1979 until the whole amount is fully paid, P10,000 as attorney’s fees, and costs. "(2) Plaintiff Philippine American Life Insurance Company to refund the sum of P22,420.16 to the defendant Insular Bank of Asia and America plus legal interest from March 31, 1980 until the whole amount is fully paid; and "(3) Dismissal of the counterclaim and crossclaim filed by the defendants-spouses against the plaintiff and the defendant IBAA, as well as the counterclaim filed by defendant IBAA against the plaintiff." (pp. 28-29, Rollo) In so deciding, the Trial Court took the position that IBAA, "as surety," was discharged of its liability to the extent of the payment made by the Mendozas, as the principal debtors, to the creditor, Philam Life. Both Philam Life and Respondent Spouses appealed to respondent Appellate Court, which reversed the Trial Court and ruled instead that IBAA’s liability was not reduced by virtue of the payments made by the Mendozas. Accordingly, the Appellate Court decreed:jgc:chanrobles.com.ph "WHEREFORE, premises considered, judgment is hereby rendered ordering:chanrob1es virtual 1aw library 1. Defendants-appellant spouses Ben S. Mendoza and Juanita M. Mendoza and defendant-appellee IBM to pay jointly and severally plaintiff-appellant Philamlife, the sum of P222,000.00 plus 2% per month as penalty interest from September 12, 1979 until the whole amount is fully paid; plus P25,000.00, as attorney’s fees, and costs; however, defendant-appellee IBAA shall only be liable up to the amount of P296,294.05; 2. Dismissal of the claim by the IBAA for a refund of P22,420.16 from the Phil-American Life Insurance Co.; and 3. Dismissal of the counterclaim and cross-claim filed by the defendant-spouses against the plaintiff and the defendant IBAA, as well as the counterclaim filed by defendant IBAA against the plaintiff.

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"No special pronouncement as to costs in this instance." (p. 51, Rollo). Availing of the instant Petition, IBAA seeks a reversal of the aforesaid judgment and the affirmance instead of that of the Trial Court. We resolved to give due course. The issues addressed, as posited by IBAA, are:jgc:chanrobles.com.ph "1. 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. "2. Whether or not respondent Intermediate Appellate Court is collect in disregarding a documentary evidence (O.R. No. 74323, Exhibit 28-IBAA) showing the amount paid by petitioner and which was admitted as evidence without objection on the part of the counsel for the respondent Philam. "3. Whether or not the Intermediate Appellate Court is correct in passing sub-silencio the following points raised by the petitioner in its Brief to sustain the decision of the Trial Court on some other grounds. a. Effective rate of interest imposed by respondent Philam exceeded the allowable ceiling; b. Respondent Philam has no right to call in at one time the two standby letters of credit; c. Respondent Philam failed to follow the condition in the two (2) standby letters of credit:chanrob1es virtual 1aw library which could have otherwise altered the result of the decision. "4. Whether or not the award of attorney’s fees to respondent Philam is proper in so far as petitioner is affected." (p. 15, Rollo) The pivotal issue is the first one. IBAA stresses that it has no more liability to Philam Life under the two (2) standby Letters of Credit and, instead, is entitled to a refund. Whereas Philam Life and the Mendoza spouses separately maintain that IBAA’s obligation under said two (2) L/Cs is original and primary and is not reduced by the direct payments made by the Mendozas to Philam Life. 1. In construing the terms of a Letter of Credit, as in other contracts, it is the intention of the parties that must govern. "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." (International Banking Corp. v. Irving National Bank, CCA N.Y. 283 F. 103, affirming DC 274 F. 122; Old Colong Trust Co. v. Lawyers’ Title and Trust Co. CAA NY, 297 F. 152, cited in Vol. 72, CJS sec. 178, pp. 387-388). The terms of the subject Irrevocable Standby Letters of Credit read, in part, as follows:jgc:chanrobles.com.ph "This credit secures the payment of any obligation of the accountee to you under that Loan Agreement hereto attached as Annex ‘A’ and made a part hereof, including those pertaining to (a) surcharges on defaulted installments, (b) increased interest charges (in the event the law should authorize this increase), and (c) liabilities connected with taxes stipulated to be for Accountee’s account; provided, however, that our maximum liabilities hereunder shall not exceed the amount of P500,000.00 (P100,000.00 for the other LC). "Each drawing under this credit shall be available at any time after one (1) day from due date of the obligations therein secured. Each drawing under this credit shall be accomplished by your signed statement in duplicate that the amount drawn represents payment due and unpaid by the accountee. — (pp. 11-12, Decision, pp. 38-39, Rollo). [Emphasis ours]. 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 not to exceed P600,000.00. 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). 1 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. Both the Trial Court and the Appellate Court found, as a fact, that there still remains a balance on the loan. Pursuant to its absolute undertaking under the L/Cs, therefore, IBAA cannot escape the obligation to pay Philam Life for this unexpended balance. The Appellate Court found it to be P222,000.00, arrived at by the Trial Court and adopted by the Appellate Court, as follows:jgc:chanrobles.com.ph

12

". . . In the summary of application of payments (Exhibit `KK’) the plaintiff applied P1,918.00 as commitment fee, P4,397.66 as surcharges, P199,683.40 as interests, and P320,000.00 on the principal. The P58,000.00 which is covered by OR No. 74396 was also applied `against the total loan.’ Since plaintiff applied P376,000.00 against the total indebtedness of P600,000.00 there still remains an outstanding balance on the principal P322,000.00 (should be P222,000.00) aside from the agreed penalty interest until the whole amount is fully paid . . ." (Decision, Trial Court, p. 50, Rollo) The amount of P222,000.00, therefore, considered as "any obligation of the accountee" under the L/Cs will still have to be paid by IBAA under the explicit terms thereof, which IBAA had itself supplied. Letters of credit are strictly construed to the end that the rights of those directly parties to them may be preserved and their interest safeguarded (Moss v. Old Colony Trust Co., 140 N.E. 803, 246 Mass. 138, 152). Like any other writing, it will be construed most strongly against the writer and so as to be reasonable and consistent with honest intentions. On the whole, the construction will be generally a strict one (Lamborn v. National Park Bank of New York, 208 N.Y.S. 428, 212 App. Div. 25, affirming Id., 204 N Y.S. 557, 123 Misc. 211, affirmed Id., 148 N.E. 664, 240 N.Y. 520). As found by the Appellate Court, however, the amount payable should not exceed P296,294.05 (P600,000.00 less P303,705.95, the total amount found by the Appellate Court to have been paid by IBAA to Philam Life). 2. The second issue as to whether or not documentary evidence was disregarded by the Appellate Court regarding the amount actually paid by IBAA to Philam Life, or P303,705.95 (not P342,127.05 as found by the Trial Court), questions a finding of fact, which should be accorded not only respect but even finality. It is not the function of this Court to analyze or weigh such evidence all over again, its jurisdiction being limited to reviewing errors of law that might have been committed by lower Courts. 3. The third issue faults respondent Appellate Court with having passed sub-silencio over certain points raised by petitioner IBAA in his Brief sustaining the Decision of the Trial Court. It is accepted judicial practice, however, that Courts are not required to resolve all issues raised in pleadings unless necessary for the resolution of the case. Apparently, respondent Appellate Court deemed it unnecessary to pass upon those points. Be that as it may, suffice it to state:chanrob1es virtual 1aw library a) It is a matter of common knowledge in lending procedures that the nominal interest is different from the effective rate of interest and that the discounting interest scheme as well as the principal amortization scheme are practices commonly resorted to by lending institutions. If IBAA disagreed with the computation scheme adopted by Philam Life, which could have been detected in the early stages of the controversy, IBAA could have interposed its objections. b) The right to call in at one time the two standby L/Cs was specifically provided for in the Loan Agreement, which was specifically made an integral part of the L/Cs. Section 8 thereof read:jgc:chanrobles.com.ph ". . . 8. The Lender shall have the right to declare the entire balance of the loans and all obligations of the borrower to the lender as immediately due and payable in case the borrower fails for any reason to comply with any payment or other obligations of the Lender." (p. 248, Rollo) c) The omission by Philam Life to draw the required drafts on the standby L/Cs can be explained by the fact that all the drafts were pre-prepared, pre-dated and pre-accepted by the Mendozas. Philam Life, therefore, could not have complied to the letter with the provision in the L/Cs that drawings therefrom were to be made by drafts for each due and unpaid amortization. Besides, the acceleration of the entire balance of the loan was sufficient notice of dishonor of the pre-drawn and pre-accepted drafts. 4. Coming now to the award of attorney’s fees of P25,000.00 the same appears reasonable under the circumstances of the case specially considering that in the foreclosure of the mortgage in its favor IBAA charged the Mendozas attorney’s fees in the amount of P86,477.20, supra. As to the liability of the Mendozas to IBAA, it bears recalling that the Mendozas, upon their application for the opening and issuance of the Irrevocable Standby Letters of Credit in favor of Philam Life, had executed a Real Estate Mortgage as security to IBAA for any payment that the latter may remit to Philam Life on the strength of said Letters of Credit; and that IBAA had recovered from the Mendozas the amount of P432,386.07 when it foreclosed on the mortgaged property of said spouses in the concept of "principal (unpaid advances under the 2 standby LCs plus interest and charges)." In addition, IBAA had recovered P255,364.95 representing its clear loans to the Mendozas plus accrued interest besides the fact that it now has the foreclosed property. As between IBAA and the Mendozas, therefore, there has been full liquidation. The remaining obligation of P222,000.00 on the loan of the Mendozas, therefore, is now IBAA’s sole responsibility to pay to Philam Life by virtue of its absolute and irrevocable undertaking under the standby L/Cs. Specially so, since the promissory notes executed by the Mendozas in favor of IBAA authorized the sale of the mortgaged security "for the purpose of applying their proceeds to . . . payments" of their obligations to IBAA. WHEREFORE, the Decision of respondent Intermediate Appellate Court, dated 20 December 1985, is hereby MODIFIED. Petitioner IBAA (now the Philippine Commercial International Bank) shall pay Philippine American Life Insurance Company the sum of P222,000.00 plus 2% per month as penalty interest from 12 September 1979 until the whole amount is fully paid, but in no case to exceed P296,294.05, plus P25,000.00 as attorney’s fees. No costs. SO ORDERED. Paras, Sarmiento and Regalado, JJ., concur. Padilla, J., no part in the deliberations.

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Endnotes:

** Penned by Justice Ramon B. Britanico and concurred in Justices Porfirio V. Sison, Abdulwahid A. Bidin and Marcelino Veloso. 1. "Section 74. No bank or banking institution shall enter directly or indirectly, into any contract of guaranty or surety, or shall guarantee the interest or principal of any obligation of any person, partnership, association, corporation or other entity. The provisions of this section shall, however, not apply to the following:chanrob1es virtual 1aw library (a) . . . (e) letters of credit transaction, including standby arrangements: x

x

x

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THIRD DIVISION [G.R. No. 94209. April 30, 1991.] FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING CORPORATION), Petitioner, v. THE COURT OF APPEALS, and BERNARDO E. VILLALUZ, Respondents. Palaez, Adriano & Gregorio for Petitioner. Ezequiel S. Consulta for Private Respondent.

SYLLABUS

1. COMMERCIAL LAW; BANKING LAWS; LETTER OF CREDIT; DOCUMENTS TENDERED MUST STRICTLY CONFORM TO THE TERMS OF LETTER OF CREDIT. — 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. 2. ID.; ID.; ID.; UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDIT (U.C.P.); APPLICABILITY JUSTIFIED BY ARTICLE 2 OF THE CODE OF COMMERCE. — Moreover, the incorporation of the Uniform Customs and Practice for Documentary Credit (U.C.P. for short) in the letter of credit resulted in the applicability of the said rules in the governance of the relations between the parties. And even if the U.C.P. was not incorporated in the letter of credit, we have already ruled in the affirmative as to the applicability of the U.C.P. in cases before us. In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the observance of the U.C.P. in this jurisdiction is justified by Article 2 of the Code of Commerce. Article 2 of the Code of Commerce enunciates that in the absence of any particular provision in the Code of commerce, commercial transactions shall be governed by the usages and customs generally observed. There being no specific provision which governs the legal complexities arising from transactions involving letters of credit not only between the banks themselves but also between banks and seller and/or buyer, the applicability of the U.C.P. is undeniable. 3. ID.; ID.; ID.; IRREVOCABLE CREDIT AND CONFIRMED LETTER OF CREDIT, DIFFERENTIATED. — An irrevocable credits refers to the duration of the letter of credit. What it simply means is that the issuing bank may not without the consent of the beneficiary (seller) and the applicant (buyer) revoke his undertaking under the letter. The issuing bank does not reserve the right to revoke the credit. On the other hand, a confirmed letter of credit pertains to the kind of obligation assumed by the correspondent bank. In this case, the correspondent bank gives an absolute assurance of the beneficiary that it will undertake the issuing bank’s obligation as its own according to the terms and conditions of the credit. (Agbayani, Commercial Laws of the Philippines, Vol. 1, pp. 81-83) Hence, the mere fact that a letter of credit is irrevocable does not necessarily imply that the correspondent bank in accepting the instructions of the issuing bank has also confirmed the letter of credit. 4. ID.; ID.; ID.; CLASSIFICATIONS OF CORRESPONDENT BANK’S FUNCTIONS. — In commercial transactions involving letters of credit, the functions assumed by a correspondent bank are classified according to the obligations taken up by it. The correspondent bank may be called a notifying bank, a negotiating bank, or a confirming bank. In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or transmit to the beneficiary the existence of the letter of credit. (Kronman and Co., Inc. v. Public National Bank of New York, 218 N.Y.S. 616 [1926]; Shaterian, Export-Import Banking, p. 292, cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76) A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft under the letter of credit. Its liability is dependent upon the stage of the negotiation. If before negotiation, it has no liability with respect to the seller but after negotiation, a contractual relationship will then prevail between the negotiating bank and the seller. (Scanlon v. First National Bank of Mexico, 162 N.E. 567 [1928]; Shaterian, Export-Import Banking, p. 293, cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76) In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller and its liability is a primary one as if the correspondent bank itself had issued the letter of credit. (Shaterian, Export-Import Banking, p. 294, cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 77) 5. ID.; ID.; ID.; ID.; NOTIFYING BANK; CASE AT BAR. — In this case, the letter merely provided that the petitioner "forward the enclosed original credit to the beneficiary." (Records, Vol. I, p. 11) Considering the aforesaid instruction to the petitioner by the issuing bank, the Security Pacific National Bank, it is indubitable that the petitioner is only a notifying bank and not a confirming bank as ruled by the courts below. A notifying bank is not a privy to the contract of sale between the buyer and the seller, its relationship is only with that of the issuing bank and not with the beneficiary to whom he assumes no liability. It follows therefore that when the petitioner refused to negotiate with the private respondent, the latter has no cause of action against the petitioner for the enforcement of his rights under the letter. (See Kronman and Co., Inc. v. Public National Bank of New York, supra)

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6. CIVIL LAW; OBLIGATIONS AND CONTRACT; TRUST; EXPLAINED. — A trust has been defined as the "right, enforceable solely in equity, to the beneficial enjoyment of property the legal title to which is vested to another." The concept of a trust presupposes the existence of a specific property which has been conferred upon the person for the benefit of another. In order therefore for the trust theory of the private respondent to be sustained, the petitioner should have had in its possession a sum of money as specific fund advanced to it by the issuing bank and to be held in trust by it in favor of the private Respondent. This does not obtain in this case. 7. ID.; ID.; ID.; A LETTER OF CREDIT DOES NOT CONVEY THAT A SUM OF MONEY IS BEING HELD IN TRUST. — The mere opening of a letter of credit, it is to be noted, does not involve a specific appropriation of a sum of money in favor of the beneficiary. It only signifies that the beneficiary may be able to draw funds upon the letter of credit up to the designated amount specified in the letter. It does not convey the notion that a particular sum of money has been specifically reserved or has been held in trust. 8. ID.; ID.; GUARANTY; INCONSISTENT WITH AN IRREVOCABLE CREDIT. — The theory of guarantee relied upon the by the Court of Appeals has to necessarily fail. The concept of guarantee vis-a-vis the concept of an irrevocable credit are inconsistent with each other. In the first place, the guarantee theory destroys the independence of the bank’s responsibility from the contract upon which it was opened. In the second place, the nature of both contracts is mutually in conflict with each other. In contracts of guarantee, the guarantor’s obligation is merely collateral and it arises only upon the default of the person primarily liable. On the other hand, in an irrevocable credit the bank undertakes a primary obligation. (See National Bank of Eagle Pass, Tex. v. American National Bank of San Francisco, 282 F. 73 [1922]) 9. ID.; ID.; AGENCY; RELATIONSHIP BETWEEN ISSUING BANK AND NOTIFYING BANK IS SIMILAR TO AGENCY. — The relationship between the issuing bank and the notifying bank, on the contrary, is more similar to that of an agency and not that of a guarantee. It may be observed that the notifying bank is merely to follow the instructions of the issuing bank which is to notify or to transmit the letter of credit to the beneficiary. (See Kronman v. Public National Bank of New York, supra). Its commitment is only to notify the beneficiary. It does not undertake any assurance that the issuing bank will perform what has been mandated to or expected of it. As an agent of the issuing bank, it has only to follow the instructions of the issuing bank and to it alone is it obligated and not to the buyer with whom it has no contractual relationship. 10. STATUTORY CONSTRUCTION; CONTROVERSY IS DECIDED ON WHAT THE LAW IS; LAW IS ALSO TO GOVERN FUTURE RELATIONS AMONG PEOPLE. — We are aware of the injustice committed by Christiansen on the private respondent but we are deciding the controversy on the basis of what the law is, for the law is not meant to favor only those who have been oppressed, the law is to govern future relations among people as well. Its commitment is to all and not to a single individual. The faith of the people in our justice system may be eroded if we are to decide not what the law states but what we believe it should declare. Dura lex sed lex.

DECISION

GUTIERREZ, JR., J.:

This is a petition for review seeking the reversal of the decision of the Court of Appeals dated June 29, 1990 which affirmed the decision of the Regional Trial Court of Rizal dated October 20, 1986 ordering the defendants Christiansen and the petitioner, to pay various sums to respondent Villaluz, jointly and severally. The facts of the case are as follows:chanrob1es virtual 1aw library On June 3, 1971, Bernardo E. Villaluz agreed to sell to the then defendant Axel Christiansen 2,000 cubic meters of lauan logs at $27.00 per cubic meter FOB. After inspecting the logs, Christiansen issued purchase order No. 76171. On the arrangements made and upon the instructions of the consignee, Hanmi Trade Development, Ltd., de Santa Ana, California, the Security Pacific National Bank of Los Angeles, California issued Irrevocable Letter of Credit No. IC-46268 available at sight in favor of Villaluz for the sum of $54,000.00, the total purchase price of the lauan logs. The letter of credit was mailed to the Feati Bank and Trust Company (now Citytrust) with the instruction to the latter that it "forward the enclosed letter of credit to the beneficiary." (Records, Vol. I, p. 11) The letter of credit further provided that the draft to be drawn is on Security Pacific National Bank and that it be accompanied by the following documents:jgc:chanrobles.com.ph "1. Signed Commercial Invoice in four copies showing the number of the purchase order and certifying that — a. All terms and conditions of the purchase order have been complied with and that all logs are fresh cut and quality equal to or better than that described in H.A. Christiansen’s telex #201 of May 1, 1970, and that all logs have been marked "BEV-EX." b. One complete set of documents, including 1/3 original bills of lading was airmailed to Consignee and Parties to be advised by

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Hans-Axel Christiansen, Ship and Merchandise Broker.chanroblesvirtualawlibrary c. One set of non-negotiable documents was airmailed to Han Mi Trade Development Company and one set to Consignee and Parties to be advised by Hans-Axel Christiansen, Ship and Merchandise Broker. 2. Tally sheets in quadruplicate. 3. 2/3 Original Clean on Board Ocean Bills of Lading with Consignee and Parties to be advised by Hans Axel Christiansen, showing Freight Prepaid and marked Notify:chanrob1es virtual 1aw library Han Mi Trade Development Company, Ltd., Santa Ana, California. Letter of Credit No. 46268 dated June 7, 1971. Han Mi Trade Development Company, Ltd., P.O. Box 10480, Santa Ana, California 92711 and Han Mi Trade Development Company, Ltd., Seoul, Korea. 4. Certification from Han-Axel Christiansen, Ship and Merchandise Broker, stating that loge have been approved prior to shipment in accordance with terms and conditions of corresponding purchase Order. (Record, Vol. 1 pp. 11-12) Also incorporated by reference in the letter of credit is the Uniform Customs and Practice for Documentary Credits (1962 Revision). The logs were thereafter loaded on the vessel "Zenlin Glory" which was chartered by Christiansen. Before its loading, the logs were inspected by custom inspectors Nelo Laurente, Alejandro Cabiao, Estanislao Edera from the Bureau of Customs (Records, Vol. I, p. 124) and representatives Rogelio Cantuba and Jesus Tadena of the Bureau of Forestry (Records, Vol. I, pp. 16-17) all of whom certified to the good condition and exportability of the logs. After the loading of the logs was completed, the Chief Mate, Shao Shu Wang issued a mate receipt of the cargo which stated the same are in good condition (Records, Vol. I, p. 363). However, Christiansen refused to issue the certification as required in paragraph 4 of the letter of credit, despite several requests made by the private Respondent. Because of the absence of the certification by Christiansen, the Feati Bank and Trust Company refused to advance the payment on the letter of credit. The letter of credit lapsed on June 30, 1971, (extended, however up to July 31, 1971) without the private respondent receiving any certification from Christiansen.chanrobles law library : red The persistent refusal of Christiansen to issue the certification prompted the private respondent to bring the matter before the Central Bank. In a memorandum dated August 16, 1971, the Central Bank ruled that:jgc:chanrobles.com.ph ". . . pursuant to the Monetary Board Resolution No. 1230 dated August 3, 1971, in all log exports, the certification of the lumber inspectors of the Bureau of Forestry . . . shall be considered final for purposes of negotiating documents. Any provision in any letter of credit covering log exports requiring certification of buyer’s agent or representative that said logs have been approved for shipment as a condition precedent to negotiation of shipping documents shall not be allowed." (Records, Vol. I, p. 367) Meanwhile, the logs arrived at Inchon, Korea and were received by the consignee, Hamni Trade Development Company, to whom Christiansen sold the logs for the amount of $37.50 per cubic meter, for a net profit of $10 per cubic meter. Hanmi Trade Development Company, on the other hand sold the logs to Taisung Lumber Company at Inchon, Korea. (Rollo, p. 39) Since the demands by the private respondent for Christiansen to execute the certification proved futile, Villaluz, on September 1, 1971, instituted an action for mandamus and specific performance against Christiansen and the Feati Bank and Trust Company (now Citytrust) before the then Court of First Instance of Rizal. The petitioner was impleaded as defendant before the lower court only to afford complete relief should the court a quo order Christiansen to execute the required certification. The complaint prayed for the following:chanrob1es virtual 1aw library 1. Christiansen be ordered to issue the certification required of him under the Letter of Credit; 2. Upon issuance of such certification, or, if the court should find it unnecessary, FEATI BANK be ordered to accept negotiation of the Letter of Credit and make payment thereon to Villaluz; 3. Order Christiansen to pay damages to the plaintiff. (Rollo, p. 39) On or about 1979, while the case was still pending trial, Christiansen left the Philippines without informing the Court and his counsel. Hence, Villaluz, filed an amended complaint to make the petitioner solidarily liable with Christiansen. The trial court, in its order dated August 29, 1979, admitted the amended complaint.

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After trial, the lower court found:jgc:chanrobles.com.ph "The liability of the defendant CHRISTIANSEN is beyond dispute, and the plaintiffs right to demand payment is absolute. Defendant CHRISTIANSEN having accepted delivery of the logs by having them loaded in his chartered vessel the ‘Zenlin Glory’ and shipping them to the consignee, his buyer Han Mi Trade in Inchon, South Korea (Art. 1585, Civil Code), his obligation to pay the purchase order had clearly arisen and the plaintiff may sue and recover the price of the goods (Art. 1595, id).chanrobles.com.ph : virtual law library "The Court believes that the defendant CHRISTIANSEN acted in bad faith and deceit and with intent to defraud the plaintiff, reflected in and aggravated by, not only his refusal to issue the certification that would have enabled without question the plaintiff to negotiate the letter of credit, but his accusing the plaintiff in his answer of fraud. intimidation, violence and deceit. These accusations said defendant did not attempt to prove, as in fact he left the country without ever notifying his own lawyer. It was to the Court’s mind a pure swindle. "The defendant Feati Bank and Trust Company, on the other hand, must be held liable together with his (sic) co-defendant for having, by its wrongful act, i.e., its refusal to negotiate the letter of credit in the absence of CHRISTIANSEN’s certification (in spite of the Central Bank’s ruling that the requirement was illegal), prevented payment to the plaintiff. The said letter of credit, as may be seen on its face, is irrevocable and the issuing bank, the Security Pacific National Bank in Los Angeles, California, undertook by its terms that the same shall be honored upon its presentment. On the other hand, the notifying bank, the defendant Feati Bank and Trust Company, by accepting the instructions from the issuing bank, itself assumed the very same undertaking as the issuing bank under the terms of the letter of credit. x

x

x

"The Court likewise agrees with the plaintiff that the defendant BANK may also be held liable under the principles and laws on both trust and estoppel. When the defendant BANK accepted its role as the notifying and negotiating bank for and in behalf of the issuing bank, it in effect accepted a trust reposed on it, and became a trustee i relation to plaintiff as the beneficiary of the letter of credit. As trustee, it was then duty bound to protect the interests of the plaintiff under the terms of the letter of credit, and must be held liable for damage and loss resulting to the plaintiff from its failure to perform that obligation. "Furthermore, when the defendant BANK assumed the role of a notifying and negotiating BANK it in effect represented to the plaintiff that, if the plaintiff complied with the terms and conditions of the letter of credit and presents the same to the BANK together with the documents mentioned therein the said BANK will pay the plaintiff the amount of the letter of credit. The Court is convinced that it was upon the strength of this letter of credit and this implied representation of the defendant BANK that the plaintiff delivered the logs to defendant CHRISTIANSEN, considering that the issuing bank is a foreign bank with whom plaintiff had no business connections and CHRISTIANSEN had not offered any other Security for the payment of the logs. Defendant BANK cannot now be allowed to deny its commitment and liability under the letter of credit:chanrobles virtual lawlibrary ‘A holder of a promissory note given because of gambling who indorses the same to an innocent holder for value and who assures said party that the note has no legal defect, is in estoppel from asserting that there had been an illegal consideration for the note, and so, he has to pay its value.’ (Rodriguez v. Martinez, 5 Phil. 67).’ "The defendant BANK, in insisting upon the certification of defendant CHRISTIANSEN as a condition precedent to negotiating the letter of credit, likewise in the Court’s opinion acted in bad faith, not only because of the clear declaration of the Central Bank that such a requirement was illegal, but because the BANK with all the legal counsel available to it, must have known that the condition was void since it depended on the sole will of the debtor, the defendant CHRISTIANSEN. (Art. 1182, Civil Code)" (Rollo, pp. 29-31) On the basis of the foregoing the trial court on October 20, 1986, ruled in favor of the private Respondent. The dispositive portion of its decision reads:chanrob1es virtual 1aw library ‘WHEREFORE, judgment is hereby rendered for the plaintiff, ordering the defendants to pay the plaintiff, jointly and severally, the following sums:jgc:chanrobles.com.ph "a) $54,000.00 (US), or its peso equivalent at the prevailing rate as of the time payment is actually made, representing the purchase price of the logs; "b) P17,340.00, representing government fees and charges paid by plaintiff in connection with the logs shipment in question; "c) P10,000.00 as temperate damages (for trips made to Bacolod and Korea). "All three foregoing sums shall be with interest thereon at 12% per annum from September 1, 1971, when the complaint was filed, until fully paid:jgc:chanrobles.com.ph "d) P70,000.00 as moral damages; "e) P30,000.00 as exemplary damages; and

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"f) P30,000.00 as attorney’s fees and litigation expense." (Rollo, p. 28) The petitioner received a copy of the decision on November 3, 1986. Two days thereafter, or on November 5, 1986, it filed a notice of appeal. On November 10, 1986, the private respondent filed a motion for the immediate execution of the judgment on the ground that the appeal of the petitioner was frivolous and dilatory. The trial court ordered the immediate execution of its judgment upon the private respondent’s filing of a bond. The petitioner then filed a motion for reconsideration and a motion to suspend the implementation of the writ of execution. Both motions were, however, denied. Thus, petitioner filed before the Court of Appeals a petition for certiorari and prohibition with preliminary injunction to enjoin the immediate execution of the judgment.chanrobles.com:cralaw:red The Court of Appeals in a decision dated April 9, 1987 granted the petition and nullified the order of execution, the dispositive portion of the decision states:jgc:chanrobles.com.ph "WHEREFORE, the petition for certiorari is granted. Respondent Judge’s order of execution dated December 29, 1986, as well as his order dated January 14, 1987 denying the petitioner’s urgent motion to suspend the writ of execution against its properties are hereby annulled and set aside insofar as they are sought to be enforced and implemented against the petitioner Feati Bank & Trust Company, now Citytrust Banking Corporation, during the pendency of its appeal from the adverse decision in Civil Case No. 15121. However, the execution of the same decision against defendant Axel Christiansen who did not appeal said decision may proceed unimpeded. The Sheriffs levy on the petitioner’s properties, and the notice of sale dated January 13, 1987 (Annex M), are hereby annulled and set aside. (Rollo, p. 44) A motion for reconsideration was thereafter filed by the private Respondent. The Court of Appeals, in a resolution dated June 29, 1987 denied the motion for reconsideration. In the meantime, the appeal filed by the petitioner before the Court of Appeals was given due course. In its decision dated June 29, 1990, the Court of Appeals affirmed the decision of the lower court dated October 20, 1986 and ruled that:chanrob1es virtual 1aw library 1. Feati Bank admitted in the "special and negative defenses" section of its answer that it was the bank to negotiate the letter of credit issued by the Security Pacific National Bank of Los Angeles, California. (Record, pp. 156, 157). Feati Bank did notify Villaluz of such letter of credit. In fact, as such negotiating bank, even before the letter of credit was presented for payment, Feati Bank had already made an advance payment of P75,000.00 to Villaluz in anticipation of such presentment. As the negotiating bank, Feati Bank, by notifying Villaluz of the letter of credit in behalf of the issuing bank (Security Pacific), confirmed such letter of credit and made the same also its own obligation. This ruling finds support in the authority cited by Villaluz:jgc:chanrobles.com.ph "A confirmed letter of credit is one in which the notifying bank gives its assurance also that the opening bank’s obligation will be performed. In such a case, the notifying bank will not simply transmit but will confirm the opening bank’s obligation by making it also its own undertaking, or commitment, or guaranty or obligation." (Ward & Harfield, 28-29, cited in Agbayani, Commercial Laws, 1978 edition, p. 77).chanrobles law library Feati Bank argues further that it would be considered as the negotiating bank only upon negotiation of the letter of credit. This stance is untenable. Assurance, commitments or guaranties supposed to be made by notifying banks to the beneficiary of a letter of credit, as defined above, can be relevant or meaningful only with respect to a future transaction, that is, negotiation. Hence, even before actual negotiation, the notifying bank, by the mere act of notifying the beneficiary of the letter of credit, assumes as of that moment the obligation of the issuing bank. 2. Since Feati Bank acted as guarantor of the issuing bank and in effect also of the latter’s principal or client, i.e. Hans AxelChristiansen. (sic) Such being the case, when Christiansen refused to issue the certification, it was as though refusal was made by Feati Bank Itself Feati Bank should have taken steps to secure the certification from Christiansen; and, if the latter should still refuse to comply, to hale him to court. In short, Feati Bank should have honored Villaluz’s demand for payment of his logs by virtue of the irrevocable letter of credit issued in Villaluz’s favor and guaranteed by Feati Bank. 3. The decision promulgated by this Court in CA-G.R. Sp No. 11051, which contained the statement "Since Villaluz’ draft was not drawn strictly in compliance with the terms of the letter of credit, Feati Bank’s refusal to negotiate it was justified," did not dispose of this question on the merits. In that case, the question involved was jurisdiction or discretion, and not judgment. The quoted pronouncement should not be taken as a preemptive judgment on the merits of the present case on appeal. 4. The original action was for "mandamus and/ or specific performance." Feati Bank may not be a party to the transaction between Christiansen and Security Pacific National Bank on the one hand, and Villaluz on the other hand; still, being guarantor or agent of Christiansen and or Security Pacific National Bank which had directly dealt with Villaluz, Feati Bank may be sued properly on specific performance as a procedural means by which the relief sought by Villaluz may be entertained. (Rollo, pp. 32-33) The dispositive portion of the decision of the Court of Appeals reads:chanrob1es virtual 1aw library

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WHEREFORE, the decision appealed from is affirmed; and accordingly, the appeal is hereby dismissed. Costs against the petitioner. (Rollo. p. 33) Hence, this petition for review. The petitioner interposes the following reasons for the allowance of the petition. First Reason THE RESPONDENT COURT ERRONEOUSLY CONCLUDED FROM THE ESTABLISHED FACTS AND INDEED, WENT AGAINST THE EVIDENCE AND DECISION OF THIS HONORABLE COURT, THAT PETITIONER BANK IS LIABLE ON THE LETTER OF CREDIT DESPITE PRIVATE RESPONDENTS NON-COMPLIANCE WITH THE TERMS THEREOF. Second Reason THE RESPONDENT COURT COMMITTED AN ERROR OF LAW WHEN IT HELD THAT PETITIONER BANK, BY NOTIFYING PRIVATE RESPONDENT OF THE LETTER OF CREDIT, CONFIRMED SUCH CREDIT AND MADE THE SAME ALSO ITS OBLIGATION AS GUARANTOR OF THE ISSUING BANK. Third Reason THE RESPONDENT COURT LIKEWISE COMMITTED AN ERROR OF LAW WHEN IT AFFIRMED THE TRIAL COURT’S DECISION. (Rollo, p. 12) The principal issue in this case is whether or not a correspondent bank is to be held liable under the letter of credit despite noncompliance by the beneficiary with the terms thereof?chanrobles lawlibrary : rednad The petition is impressed with merit. It is a settled rule in commercial transactions involving letters of credit that the documents tendered must strictly conform to the terms of the letter of credit. The tender of documents by the beneficiary (seller) must include all documents required by the letter. A correspondent bank which departs from what has been stipulated under the letter of credit, as when it accepts a faulty tender, acts on its own risks and it may not thereafter be able to recover from the buyer or the issuing bank, as the case may be, the money thus paid to the beneficiary. Thus the rule of strict compliance. In the United States, commercial transactions involving letters of credit are governed by the rule of strict compliance. In the Philippines, the same holds true. The same rule must also be followed. The case of Anglo-South American Trust Co. v. Uhe Et. Al. (184 N.E. 741 [1933]) expounded clearly on the rule of strict compliance. "We have heretofore held that these letters of credit are to be strictly complied with, which documents, and shipping documents must be followed as stated in the letter. There is no discretion in the bank or trust company to waive any requirements. The terms of the letter constitutes an agreement between the purchaser and the bank." (p. 743) Although in some American decisions, banks are granted a little discretion to accept a faulty tender as when the other documents may be considered immaterial or superfluous, this theory could lead to dangerous precedents. Since a bank deals only with documents, it is not in a position to determine whether or not the documents required by the letter of credit are material or superfluous. The mere fact that the document was specified therein readily means that the document is of vital importance to the buyer. Moreover, the incorporation of the Uniform Customs and Practice for Documentary Credit (U.C.P. for short) in the letter of credit resulted in the applicability of the said rules in the governance of the relations between the parties. And even if the U.C.P. was not incorporated in the letter of credit, we have already ruled in the affirmative as to the applicability of the U.C.P. in cases before us. In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the observance of the U.C.P. in this jurisdiction is justified by Article 2 of the Code of Commerce. Article 2 of the Code of Commerce enunciates that in the absence of any particular provision in the Code of Commerce, commercial transactions shall be governed by the usages and customs generally observed. There being no specific provision which governs the legal complexities arising from transactions involving letters of credit not only between the banks themselves but also between banks and seller and or buyer, the applicability of the U.C.P. is undeniable.chanrobles.com:cralaw:red The pertinent provisions of the U.C.P. (1962 Revision) are:chanrob1es virtual 1aw library Article 3.

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"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. "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 . . ."cralaw virtua1aw library 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."cralaw virtua1aw library Article 8. "Payment, acceptance or negotiation against documents which appear on their face to be in accordance with the terms and conditions of a credit by a bank authorized to do so, binds the party giving the authorization to take up documents and reimburse the bank which has effected the payment, acceptance or negotiation." (Emphasis Supplied) Under the foregoing provisions of the U.C.P., the bank may only negotiate, accept or pay, if the documents tendered to it are on their face in accordance with the terms and conditions of the documentary credit. And since a correspondent bank, like the petitioner, principally deals only with documents, the absence of any document required in the documentary credit justifies the refusal by the correspondent bank to negotiate, accept or pay the beneficiary, as it is not its obligation to look beyond the documents. It merely has to rely on the completeness of the documents tendered by the beneficiary. In regard to the ruling of the lower court and affirmed by the Court of Appeals that the petitioner is not a notifying bank but a confirming bank, we find the same erroneous. The trial court wrongly mixed up the meaning of an irrevocable credit with that of a confirmed credit. In its decision, the trial court ruled that the petitioner, in accepting the obligation to notify the respondent that the irrevocable credit has been transmitted to the petitioner on behalf of the private respondent, has confirmed the letter. The trial court appears to have overlooked the fact that an irrevocable credit is not synonymous with a confirmed credit. These types of letters have different meanings and the legal relations arising from there varies. A credit may be an irrevocable credit and at the same time a confirmed credit or vice-versa.chanrobles virtual lawlibrary An irrevocable credit refers to the duration of the letter of credit. What is simply means is that the issuing bank may not without the consent of the beneficiary (seller) and the applicant (buyer) revoke his undertaking under the letter. The issuing bank does not reserve the right to revoke the credit. On the other hand, a confirmed letter of credit pertains to the kind of obligation assumed by the correspondent bank. In this case, the correspondent bank gives an absolute assurance to the beneficiary that it will undertake the issuing bank’s obligation as its own according to the terms and conditions of the credit. (Agbayani, Commercial Laws of the Philippines, Vol. 1, pp. 81-83) Hence, the mere fact that a letter of credit is irrevocable does not necessarily imply that the correspondent bank in accepting the instructions of the issuing bank has also confirmed the letter of credit. Another error which the lower court and the Court of Appeals made was to confuse the obligation assumed by the petitioner. In commercial transactions involving letters of credit, the functions assumed by a correspondent bank are classified according to the obligations taken up by it. The correspondent bank may be called a notifying bank, a negotiating bank, or a confirming bank. In case of a notifying bank, the correspondent bank assumes no liability except to notify and or transmit to the beneficiary the existence of the letter of credit. (Kronman and Co., Inc. v. Public National Bank of New York, 218 N.Y.S. 616 [1926]; Shaterian, Export-Import Banking, p. 292, cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76) A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft under the letter of credit. Its liability is dependent upon the stage of the negotiation. If before negotiation, it has no liability with respect to the seller but after negotiation, a contractual relationship will then prevail between the negotiating bank and the seller. (Scanlon v. First National Bank of Mexico, 162 N.E. 667 [1928]; Shaterian, Export-Import Banking, p. 293, cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76) In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller and its liability is a primary one as if the correspondent bank itself had issued the letter of credit. (Shaterian, Export-Import Banking, p. 294, cited in Agbayani Commercial Laws of the Philippines, Vol. 1, p. 77) In this case, the letter merely provided that the petitioner "forward the enclosed original credit to the beneficiary." (Records, Vol. I, p. 11) Considering the aforesaid instruction to the petitioner by the issuing bank, the Security Pacific National Bank, it is indubitable that the petitioner is only a notifying bank and not a confirming bank as ruled by the courts below.chanrobles virtual lawlibrary If the petitioner was a confirming bank, then a categorical declaration should have been stated in the letter of credit that the

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petitioner is to honor all drafts drawn in conformity with the letter of credit. What was simply stated therein was the instruction that the petitioner forward the original letter of credit to the beneficiary. Since the petitioner was only a notifying bank, its responsibility was solely to notify and or transmit the documentary of credit to the private respondent and its obligation ends there. The notifying bank may suggest to the seller its willingness to negotiate, but this fact alone does not imply that the notifying bank promises to accept the draft drawn under the documentary credit. A notifying bank is not a privy to the contract of sale between the buyer and the seller, its relationship is only with that of the issuing bank and not with the beneficiary to whom he assumes no liability. It follows therefore that when the petitioner refused to negotiate with the private respondent, the latter has no cause of action against the petitioner for the enforcement of his rights under the letter. (See Kronman and Co., Inc. v. Public National Bank of New York, supra) In order that the petitioner may be held liable under the letter, there should be proof that the petitioner confirmed the letter of credit. The records are, however, bereft of any evidence which will disclose that the petitioner has confirmed the letter of credit The only evidence in this case, and upon which the private respondent premised his argument, is the P75,000.00 loan extended by the petitioner to him. The private respondent relies on this loan to advance his contention that the letter of credit was confirmed by the petitioner. He claims that the loan was granted by the petitioner to him, "in anticipation of the presentment of the letter of credit."cralaw virtua1aw library The proposition advanced by the private respondent has no basis in fact or law. That the loan agreement between them be construed as an act of confirmation is rather far-fetched, for it depends principally on speculative reasoning. As earlier stated, there must have been an absolute assurance on the part of the petitioner that it will undertake the issuing bank’s obligation as its own. Verily, the loan agreement it entered into cannot be categorized as an emphatic assurance that it will carry out the issuing bank’s obligation as its own. The loan agreement is more reasonably classified as an isolated transaction independent of the documentary credit. Of course, it may be presumed that the petitioner loaned the money to the private respondent in anticipation that it would later be paid by the latter upon the receipt of the letter. Yet, we would have no basis to rule definitively that such "act" should be construed as an act of confirmation. The private respondent no doubt was in need of money in loading the logs on the ship "Zenlin Glory" and the only way to satisfy this need was to borrow money from the petitioner which the latter granted. From these circumstances, a logical conclusion that can be gathered is that the letter of credit was merely to serve as a collateral. At the most, when the petitioner extended the loan to the private respondent, it assumed the character of a negotiating bank. Even then, the petitioner will still not be liable, for a negotiating bank before negotiation has no contractual relationship with the seller. The case of Scanlon v. First National Bank (supra) perspicuously explained the relationship between the seller and the negotiating bank, viz:chanrob1es virtual 1aw library It may buy or refuse to buy as it chooses. Equally, it must be true that it owes no contractual duty toward the person for whose benefit the letter is written to discount or purchase any draft drawn against the credit. No relationship of agent and principal, or of trustee and cestui, between the receiving bank and the beneficiary of the letter is established." (P. 568) Whether therefore the petitioner is a notifying bank or a negotiating bank, it cannot be held liable. Absent any definitive proof that it has confirmed the letter of credit or has actually negotiated with the private respondent, the refusal by the petitioner to accept the tender of the private respondent is justified. In regard to the finding that the petitioner became a "trustee in relation to the plaintiff (private respondent) as the beneficiary of the letter of credit," the same has no legal basis. A trust has been defined as the "right, enforceable solely in equity, to the beneficial enjoyment of property the legal title to which is vested to another." (89 C.J.S. 712) The concept of a trust presupposes the existence of a specific property which has been conferred upon the person for the benefit of another. In order therefore for the trust theory of the private respondent to be sustained, the petitioner should have had in its possession a sum of money as specific fund advanced to it by the issuing bank and to be held in trust by it in favor of the private Respondent. This does not obtain in this case.chanrobles.com:cralaw:red The mere opening of a letter of credit, it is to be noted, does not involve a specific appropriation of a sum of money in favor of the

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beneficiary. It only signifies that the beneficiary may be able to draw funds upon the letter of credit up to the designated amount specified in the letter. It does not convey the notion that a particular sum of money has been specifically reserved or has been held in trust. What actually transpires in an irrevocable credit is that the correspondent bank does not receive in advance the sum of money from the buyer or the issuing bank. On the contrary, when the correspondent bank accepts the tender and pays the amount stated in the letter, the money that it doles out comes not from any particular fund that has been advanced by the Issuing bank, rather it gets the money from its own funds and then later seeks reimbursement from the issuing bank. Granting that a trust has been created, still, the petitioner may not be considered a trustee. As the petitioner is only a notifying bank, its acceptance of the instructions of the issuing bank will not create estoppel on its part resulting in the acceptance of the trust. Precisely, as a notifying bank, its only obligation is to notify the private respondent of the existence of the letter of credit. How then can such create estoppel when that is its only duty under the law? We also find erroneous the statement of the Court of Appeals that the petitioner "acted as a guarantor of the issuing bank and in effect also of the latter’s principal or client, i.e., Hans Axel Christiansen."cralaw virtua1aw library It is a fundamental rule that an irrevocable credit is independent not only of the contract between the buyer and the seller but also of the credit agreement between the issuing bank and the buyer. (See Kingdom of Sweden v. New York Trust Co., 96 N.Y.S. 2d 779 [1949]) The relationship between the buyer (Christiansen) and the issuing bank (Security Pacific National Bank) is entirely independent from the letter of credit issued by the latter. The contract between the two has no bearing as to the noncompliance by the buyer with the agreement between the latter and the seller. Their contract is similar to that of a contract of services (to open the letter of credit) and not that of agency as was intimated by the Court of Appeals. The unjustified refusal therefore by Christiansen to issue the certification under the letter of credit should not likewise be charged to the issuing bank. As a mere notifying bank, not only does the petitioner not have any contractual relationship with the buyer, it has also nothing to do with the contract between the issuing bank and the buyer regarding the issuance of the letter of credit.chanrobles.com:cralaw:red The theory of guarantee relied upon by the Court of Appeals has to necessarily fail. The concept of guarantee vis-a-vis the concept of an irrevocable credit are inconsistent with each other. In the first place, the guarantee theory destroys the independence of the bank’s responsibility from the contract upon which it was opened. In the second place, the nature of both contracts is mutually in conflict with each other. In contracts of guarantee, the guarantor’s obligation is merely collateral and it arises only upon the default of the person primarily liable. On the other hand, in an irrevocable credit the bank undertakes a primary obligation. (See National Bank of Eagle Pass, Tex v. American National Bank of San Francisco, 282 F. 73 [1922]) The relationship between the issuing bank and the notifying bank, on the contrary, is more similar to that of an agency and not that of a guarantee. It may be observed that the notifying bank is merely to follow the instructions of the issuing bank which is to notify or to transmit the letter of credit to the beneficiary. (See Kronman v. Public National Bank of New York, supra). Its commitment is only to notify the beneficiary. It does not undertake any assurance that the issuing bank will perform what has been mandated to or expected of it. As an agent of the issuing bank, it has only to follow the instructions of the issuing bank and to it alone is it obligated and not to buyer with whom it has no contractual relationship. In fact the notifying bank, even if the seller tenders all the documents required under the letter of credit, may refuse to negotiate or accept the drafts drawn thereunder and it will still not be held liable for its only engagement is to notify and or transmit to the seller the letter of credit. Finally, even if we assume that the petitioner is a confirming bank, the petitioner cannot be forced to pay the amount under the letter. As we have previously explained, there was a failure on the part of the private respondent to comply with the terms of the letter of credit. The failure by him to submit the certification was fatal to his case. The U.C.P. which is incorporated in the letter of credit ordains that the bank may only pay the amount specified under the letter if all the documents tendered are on their face in compliance with the credit. It is not tasked with the duty of ascertaining the reason or reasons why certain documents have not been submitted, as it is only concerned with the documents. Thus, whether or not the buyer has performed his responsibility towards the seller is not the bank’s problem. We are aware of the injustice committed by Christiansen on the private respondent but we are deciding the controversy on the basis of what the law is, for the law is not meant to favor only those who have been oppressed, the law is to govern future relations among people as well. Its commitment is to all and not to a single individual. The faith of the people in our justice system may be eroded if we are to decide not what the law states but what we believe it should declare. Dura lex sed lex.chanrobles lawlibrary : rednad Considering the foregoing, the materiality of ruling upon the validity of the certificate of approval required of the private respondent to submit under the letter of credit, has become insignificant.

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In any event, we affirm the earlier ruling of the Court of Appeals dated April 9, 1987 in regard to the petition before it for certiorari and prohibition with preliminary injunction, to wit:jgc:chanrobles.com.ph "There is no merit in the respondent’s contention that the certification required in condition No. 4 of the letter of credit was "patently illegal." At the time the letter of credit was issued there was no Central Bank regulation prohibiting such a condition in the letter of credit. The letter of credit (Exh. C) was issued on June 7, 1971, more than two months before the issuance of the Central Bank Memorandum on August 16, 1971 disallowing such a condition in a letter of credit. In fact the letter of credit had already expired on July 30, 1971 when the Central Bank memorandum was issued. In any event, it is difficult to see how such a condition could be categorized as illegal or unreasonable since all that plaintiff Villaluz, as seller of the logs, could and should have done was to refuse to load the logs on the vessel "Zenlin Glory", unless Christiansen first issued the required certification that the logs had been approved by him to be in accordance with the terms and conditions of his purchase order. Apparently, Villaluz was in too much haste to ship his logs without taking all due precautions to assure that all the terms and conditions of the letter of credit had been strictly complied with, so that there would be no hitch in its negotiation." (Rollo, p. 8) WHEREFORE, the COURT RESOLVED to GRANT the petition and hereby NULLIFIES and SETS ASIDE the decision of the Court of Appeals dated June 29, 1990. The amended complaint in Civil Case No. 15121 is DISMISSED. SO ORDERED. Feliciano, Bidin and Davide, Jr., JJ., concur. Fernan, C.J., took no part.

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THIRD DIVISION [G.R. No. 74886. December 8, 1992.] PRUDENTIAL BANK, Petitioner, v. INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON MILLS INC. and ANACLETO R. CHI, Respondents.

SYLLABUS

1. COMMERCIAL LAW; NEGOTIABLE INSTRUMENTS; LETTER OF CREDIT; CONSTRUED. — 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 the promise to pay of 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. 2. ID.; ID.; ID.; PRESENTMENT FOR ACCEPTANCE, NOT NECESSARY IN CASE AT BAR. — The transaction in the case at bar stemmed from Philippine Rayon’s application for a commercial letter of credit with the petitioner in the amount of $128,548.78 to cover the former’s contract to purchase and import loom and textile machinery from Nissho Company, Ltd. of Japan under a five-year deferred payment plan. Petitioner approved the application. The drawee was necessarily the herein petitioner. It was to the latter that the drafts were presented for payment. There was no need for acceptance as the issued drafts are sight drafts. They are, pursuant to Section 7 of the Negotiable Instruments Law (NIL), payable on demand. Presentment for acceptance is defined as the production of a bill of exchange to a drawee for acceptance. Contrary to both courts’ pronouncements, Philippine Rayon immediately became liable thereon upon petitioner’s payment thereof. Such is the essence of the letter of credit issued by the petitioner. A different conclusion would violate the principle upon which commercial letters of credit are founded because in such a case, both the beneficiary and the issuer, Nissho Company Ltd. and the petitioner, respectively, would be placed at the mercy of Philippine Rayon even if the latter had already received the imported machinery and the petitioner had fully paid for it. Presentment for acceptance is necessary only in the cases expressly provided for in Section 143 of the Negotiable Instruments Law (NIL). 3. ID.; ID.; ACCEPTANCE OF A BILL, EXPLAINED. — The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer; this may be done in writing by the drawee in the bill itself, or in a separate instrument. 4. ID.; TRUST RECEIPTS LAW (P.D. 115), TRUST RECEIPT TRANSACTION, DEFINED. — Under P.D. No. 115, otherwise known as the Trust Receipts Law, which took effect on 29 January 1973, a trust receipt transaction is defined as "any transaction by and between a person referred to in this Decree as the entruster, and another person referred to in this Decree as the entrustee, whereby the entruster, who owns or holds absolute title or security interests over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latter’s execution and delivery to the entruster of a signed document called the trust receipt wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt, or for other purposes substantially equivalent to any one of the following: . . ."cralaw virtua1aw library 5. ID.; ID.; VIOLATIONS THEREOF; PENDENCY OF CRIMINAL ACTION, NOT A LEGAL OBSTACLE TO A SEPARATE CIVIL ACTION. — Although petitioner commenced a criminal action for the violation of the Trust Receipts Law, no legal obstacle prevented it from enforcing the civil liability arising out of the trust receipt in a separate civil action. Under Section 13 of the Trust Receipts Law, the failure of an entrustee to turn over the proceeds of the sale of goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article 315, paragraph 1(b) of the Revised Penal Code. Under Article 33 of the Civil Code, a civil action for damages, entirely separate and distinct from the criminal action, may be brought by the injured party in cases of defamation, fraud and physical injuries. Estafa falls under fraud. 6. ID.; ID.; ID.; PENALTY WHEN VIOLATION COMMITTED BY JURIDICAL ENTITIES. — A close examination of Sec. 13 of P.D. No. 115 reveals that the penalty referred to therein which shall be imposed upon the directors, officers, employees or other officials or persons of the corporation, partneship, association or other judicial utility is imprisonment, the duration of which would depend on the amount of the fraud as provided for in Article 315 of the Revised Penal Code. The reason for this is obvious: corporations, partnerships, associations and other juridical entities cannot be put in jail. However, it is these entities which are made liable for the civil liability arising from the criminal offense. This is the import of the clause "without prejudice to the civil liabilities arising from the criminal offense."cralaw virtua1aw library

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7. CIVIL LAW; CONTRACTS; GUARANTY; VALIDITY THEREOF. — The attestation by witnesses and the acknowledgment before a notary public are not required by law to make a party liable on the instrument. The rule is that contracts shall be obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity are present; however, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that it be proved in a certain way, that requirement is absolute and indispensable. With respect to a guaranty, which is a promise to answer for the debt or default of another, the law merely requires that it, or some note or memorandum thereof, be in writing. Otherwise, it would be unenforceable unless ratified. While the acknowledgment of a surety before a notary public is required to make the same a public document, under Article 1358 of the Civil Code, a contract of guaranty does not have to appear in a public document. 8. ID.; ID.; ID.; DEFENSE OF EXECUTION; NOT A CONDITION SINE QUA NON FOR THE INSTITUTION OF ACTION AGAINST GUARANTOR. — Under Article 2058 of the Civil Code, the defense of exhaustion (excussion) may be raised by a guarantor before he may be held liable for the obligation. However, excussion is not a condition sine qua non for the institution of an action against the guarantor. In Southern Motors, Inc. v. Barbosa (99 Phil. 263, 268 [1956]), this Court stated: "4. Although an ordinary personal guarantor — not a mortgagor or pledgor — may demand the aforementioned exhaustion, the creditor may, prior thereto, secure a judgment against said guarantor, who shall be entitled, however, to a deferment of the execution of said judgment against him until after the properties of the principal debtor shall have been exhausted to satisfy the obligation involved in the case."cralaw virtua1aw library 9. ID.; ID.; CONTRACT OF ADHESION; CONSTRUCTION THEREOF. — Any doubt as to the import or true intent of the solidary guaranty clause should be resolved against the petitioner. The trust receipt, together with the questioned solidary guaranty clause, is on a form drafted and prepared solely by the petitioner; Chi’s participation therein is limited to the affixing of his signature thereon. It is, therefore, a contract of adhesion; as such, it must be strictly construed against the party responsible for its preparation. 10. REMEDIAL LAW; CIVIL PROCEDURE; PERMISSIVE JOINDER OF PARTIES; RATIONALE. — There was then nothing procedurally objectionable in impleading private respondent Chi as a co-defendant in Civil Case No. Q-19312 before the trial court. Section 6, Rule 3 of the Rules of Court on permissive joinder of parties explicitly allows it. This is the equity rule relating to multifariousness. It is based on trial convenience and is designed to permit the joinder of plaintiffs or defendants whenever there is a common question of law or fact. It will save the parties unnecessary work, trouble and expense. 11. CIVIL LAW; CONTRACTS; GUARANTY; GUARANTOR; LIABILITY IN CASE AT BAR. — Chi’s liability is limited to the principal obligation in the trust receipt plus all the accessories thereof including judicial costs; with respect to the latter, he shall only be liable for those costs incurred after being judicially required to pay. Interest and damages, being accessories of the principal obligation, should also be paid; these, however, shall run only from the date of the filing of the complaint. Attorney’s fees may even be allowed in appropriate cases. In the instant case, the attorney’s fees to be paid by Chi cannot be the same as that to be paid by Philippine Rayon since it is only the trust receipt that is covered by the guaranty and not the full extent of the latter’s liability. All things considered, he can be held liable for the sum of P10,000.00 as attorney’s fees in favor of the petitioner.

DECISION

DAVIDE, JR., J.:

Petitioner seeks to review and set aside the decision 1 of public respondent Intermediate Appellate Court (now Court of Appeals), dated 10 March 1986, in AC-G.R. No. 66733 which affirmed in toto the 15 June 1978 decision of Branch 9 (Quezon City) of the then Court of First Instance (now Regional Trial Court) of Rizal in Civil Case No. Q-19312. The latter involved an action instituted by the petitioner for the recovery of a sum of money representing the amount paid by it to the Nissho Company Ltd. of Japan for textile machinery imported by the defendant, now private respondent, Philippine Rayon Mills, Inc. (hereinafter Philippine Rayon), represented by co-defendant Anacleto R. Chi. The facts which gave rise to the instant controversy are summarized by the public respondent as follows:jgc:chanrobles.com.ph "On August 8, 1962, Defendant-Appellant Philippine Rayon Mills, Inc. entered into a contract with Nissho Co., Ltd. of Japan for the importation of textile machineries under a five-year deferred payment plan (Exhibit B, Plaintiff’s Folder of Exhibits, p. 2). To effect payment for said machineries, the defendant-appellant applied for a commercial letter of credit with the Prudential Bank and Trust Company in favor of Nissho. By virtue of said application, the Prudential Bank opened Letter of Credit No. DPP-63762 for $128,548.78 (Exhibit A, Ibid., p. 1). Against this letter of credit, drafts, were drawn and issued by Nissho (Exhibits X, X-1 to X-11, Ibid., pp. 65, 66 to 76), which were all paid by the Prudential Bank through its correspondent in Japan, the Bank of Tokyo, Ltd. As indicated on their faces, two of these drafts (Exhibits X and X-1, Ibid., pp. 65-66) were accepted by the defendant-appellant through its president, Anacleto R. Chi, while the others were not (Exhibits X-2 to X-11, Ibid., pp. 66 to 76). Upon the arrival of the machineries, the Prudential Bank indorsed the shipping documents to the defendant-appellant which accepted delivery of the same. To enable the defendant-appellant to take delivery of the machineries, it executed, by prior arrangement with the Prudential Bank, a trust receipt which was signed by Anacleto R. Chi in his capacity as President (sic) of defendant-appellant company (Exhibit C, Ibid., p. 13). At the back of the trust receipt is a printed form to be accomplished by two sureties who, by the very terms and conditions thereof, were to be jointly and severally liable to the Prudential Bank should the defendant-appellant fail to pay the total amount or any

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portion of the drafts issued by Nissho and paid for by Prudential Bank. The defendant-appellant was able to take delivery of the textile machineries and installed the same at its factory site at 69 Obudan Street, Quezon City. Sometime in 1967, the defendant-appellant ceased business operation (sic). On December 29, 1969, Defendant-Appellant’s factory was leased by Yupangco Cotton Mills for an annual rental of P300,000.00 (Exhibit I, Ibid., p. 22). The lease was renewed on January 3, 1973 (Exhibit J, Ibid., p. 26). On January 5, 1974, all the textile machineries in the defendant-appellant’s factory were sold to AIC Development Corporation for P300,000.00 (Exhibit K, Ibid., p. 29) The obligation of the defendant-appellant arising from the letter of credit and the trust receipt remained unpaid and unliquidated. Repeated formal demands (Exhibits U, V, and W, Ibid., pp. 62, 63, 64) for the payment of the said trust receipt yielded no result. Hence, the present action for the collection of the principal amount of P956,384.95 was filed on October 3, 1974 against the defendant-appellant and Anacleto R. Chi. In their respective answers, the defendants interposed identical special defenses, viz., the complaint states no cause of action; if there is, the same has prescribed; and the plaintiff is guilty of laches." 2 On 15 June 1978, the trial court rendered its decision the dispositive portion of which reads:jgc:chanrobles.com.ph "WHEREFORE, judgment is hereby rendered sentencing the defendant Philippine Rayon Mills, Inc. to pay plaintiff the sum of P153,645.22, the amounts due under Exhibits "X" & "X-1", with interest at 6% per annum beginning September 15, 1974 until fully paid.chanrobles law library Insofar as the amounts involved in drafts Exhs. "X" (sic) to "X-11", inclusive, the same not having been accepted by defendant Philippine Rayon Mills, Inc., plaintiff’s cause of action thereon has not accrued, hence, the instant case is premature. Insofar as defendant Anacleto R. Chi is concerned, the case is dismissed. Plaintiff is ordered to pay defendant Anacleto R. Chi the sum of P20,000.00 as attorney’s fees. With costs against defendant Philippine Rayon Mills, Inc. SO ORDERED." 3 Petitioner appealed the decision to the then Intermediate Appellate Court. In urging the said court to reverse or modify the decision, petitioner alleged in its Brief that the trial court erred in (a) disregarding its right to reimbursement from the private respondents for the entire unpaid balance of the imported machines, the total amount of which was paid to the Nissho Company Ltd., thereby violating the principle of the third party payor’s right to reimbursement provided for in the second paragraph of Article 1236 of the Civil Code and under the rule against unjust enrichment; (b) refusing to hold Anacleto R. Chi, as the responsible officer of defendant corporation, liable under Section 13 of P.D. No 115 for the entire unpaid balance of the imported machines covered by the bank’s trust receipt (Exhibit "C"); (c) finding that the solidary guaranty clause signed by Anacleto R. Chi is not a guaranty at all; (d) controverting the judicial admissions of Anacleto R. Chi that he is at least a simple guarantor of the said trust receipt obligation; (e) contravening, based on the assumption that Chi is a simple guarantor, Articles 2059, 2060 and 2062 of the Civil Code and the related evidence and jurisprudence which provide that such liability had already attached; (f) contravening the judicial admissions of Philippine Rayon with respect to its liability to pay the petitioner the amounts involved in the drafts (Exhibits "X", "X-1" to "X-11"); and (g) interpreting "sight" drafts as requiring acceptance by Philippine Rayon before the latter could be held liable thereon. 4 In its decision, public respondent sustained the trial court in all respects. As to the first and last assigned errors, it rules that the provision on unjust enrichment, Article 2142 of the Civil Code, applies only if there is no express contract between the parties and there is a clear showing that the payment is justified. In the instant case, the relationship existing between the petitioner and Philippine Rayon is governed by specific contracts, namely the application for letters of credit, the promissory note, the drafts and the trust receipt. With respect to the last ten (10) drafts (Exhibits "X-2" to "X-11") which had not been presented to and were not accepted by Philippine Rayon, petitioner was not justified in unilaterally paying the amounts stated therein. The public respondent did not agree with the petitioner’s claim that the drafts were sight drafts which did not require presentment for acceptance to Philippine Rayon because paragraph 8 of the trust receipt presupposes prior acceptance of the drafts. Since the ten (10) drafts were not presented and accepted, no valid demand for payment can be made.chanrobles law library Public respondent also disagreed with the petitioner’s contention that private respondent Chi is solidarily liable with Philippine Rayon pursuant to Section 13 of P.D. No. 115 and based on his signature on the solidary guaranty clause at the dorsal side of the trust receipt. As to the first contention, the public respondent ruled that the civil liability provided for in said Section 13 attaches only after conviction. As to the second, it expressed misgivings as to whether Chi’s signature on the trust receipt made the latter automatically liable thereon because the so-called solidary guaranty clause at the dorsal portion of the trust receipt is to be signed not by one (1) person alone, but by two (2) persons; the last sentence of the same is incomplete and unsigned by witnesses; and it is not acknowledged before a notary public. Besides, even granting that it was executed and acknowledged before a notary public, Chi cannot be held liable therefor because the records fail to show that petitioner had either exhausted the properties of Philippine Rayon or had resorted to all legal remedies as required in Article 2058 of the Civil Code. As provided for under Articles 2052 and 2054 of the Civil Code, the obligation of a guarantor is merely accessory and subsidiary, respectively. Chi’s liability would therefore arise only when the principal debtor fails to comply with his obligation. 5 Its motion to reconsider the decision having been denied by the public respondent in its Resolution of 11 June 1986, 6 petitioner filed the instant petition on 31 July 1986 submitting the following legal issues:jgc:chanrobles.com.ph

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"I. WHETHER OR NOT THE RESPONDENT APPELLATE COURT GRIEVOUSLY ERRED IN DENYING PETITIONER’S CLAIM FOR FULL REIMBURSEMENT AGAINST THE PRIVATE RESPONDENTS FOR THE PAYMENT PETITIONER MADE TO NISSHO CO. LTD. FOR THE BENEFIT OF PRIVATE RESPONDENT UNDER ART. 1283 OF THE NEW CIVIL CODE OF THE PHILIPPINES AND UNDER THE GENERAL PRINCIPLE AGAINST UNJUST ENRICHMENT; II. WHETHER OR NOT RESPONDENT CHI IS SOLIDARILY LIABLE UNDER THE TRUST RECEIPT (EXH. C); III. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS OF RESPONDENT CHI HE IS LIABLE THEREON AND TO WHAT EXTENT; IV. WHETHER OR NOT RESPONDENT CHI IS MERELY A SIMPLE GUARANTOR; AND IF SO, HAS HIS LIABILITY AS SUCH ALREADY ATTACHED; V. WHETHER OR NOT AS THE SIGNATORY AND RESPONSIBLE OFFICER OF RESPONDENT PHIL. RAYON RESPONDENT CHI IS PERSONALLY LIABLE PURSUANT TO THE PROVISION OF SECTION 13, P.D. 115; VI. WHETHER OR NOT RESPONDENT PHIL. RAYON IS LIABLE TO THE PETITIONER UNDER THE TRUST RECEIPT (EXH. C); VII. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS RESPONDENT PHIL. RAYON IS LIABLE TO THE PETITIONER UNDER THE DRAFTS (EXHS. X, X-1 TO X-11) AND TO WHAT EXTENT; VIII. WHETHER OR NOT SIGHT DRAFTS REQUIRE PRIOR ACCEPTANCE FROM RESPONDENT PHIL. RAYON BEFORE THE LATTER BECOMES LIABLE TO PETITIONER." 7 In the Resolution of 12 March 1990, 8 this Court gave due course to the petition after the filing of the Comment thereto by private respondent Anacleto Chi and of the Reply to the latter by the petitioner; both parties were also required to submit their respective memoranda which they subsequently complied with. As We see it, the issues may be reduced as follows:chanrob1es virtual 1aw library 1. Whether presentment for acceptance of the drafts was indispensable to make Philippine Rayon liable thereon; 2. Whether Philippine Rayon is liable on the basis of the trust receipt; 3. Whether private respondent Chi is jointly and severally liable with Philippine Rayon for the obligation sought to be enforced and if not, whether he may be considered a guarantor; in the latter situation, whether the case should have been dismissed on the ground of lack of cause of action as there was no prior exhaustion of Philippine Rayon’s properties.chanrobles virtual lawlibrary Both the trial court and the public respondent ruled that Philippine Rayon could be held liable for the two (2) drafts, Exhibits "X" and "X-1", because only these appear to have been accepted by the latter after due presentment. The liability for the remaining ten (10) drafts (Exhibits "X-2" to "X-11" inclusive) did not arise because the same were not presented for acceptance. In short, both courts concluded that acceptance of the drafts by Philippine Rayon was indispensable to make the latter liable thereon. We are unable to agree with this proposition. The transaction in the case at bar stemmed from Philippine Rayon’s application for a commercial letter of credit with the petitioner in the amount of $128,548.78 to cover the former’s contract to purchase and import loom and textile machinery from Nissho Company, Ltd. of Japan under a five-year deferred payment plan. Petitioner approved the application. As correctly ruled by the trial court in its Order of 6 March 1975: 9 ". . . By virtue of said Application and Agreement for Commercial Letter of Credit, plaintiff bank 10 was under obligation to pay through its correspondent bank in Japan the drafts that Nisso (sic) Company, Ltd., periodically drew against said letter of credit from 1963 to 1968, pursuant to plaintiff’s contract with the defendant Philippine Rayon Mills, Inc. In turn, defendant Philippine Rayon Mills, Inc., was obligated to pay plaintiff bank the amounts of the drafts drawn by Nisso (sic) Company, Ltd. against said plaintiff bank together with any accruing commercial charges, interest, etc. pursuant to the terms and conditions stipulated in the Application and Agreement of Commercial Letter of Credit Annex "A." "cralaw virtua1aw library 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. 11 Through a letter of credit, the bank merely substitutes its own promise to pay for the promise to pay of one of its customers who in return promises to pay the bank the amount of funds mentioned in the letter of credit plus credit or commitment fees mutually agreed upon. 12 In the instant case then, the drawee was necessarily the herein petitioner. It was to the latter that the drafts were presented for payment. In fact, there was no need for acceptance as the issued drafts are sight drafts. Presentment for acceptance is necessary only in the cases expressly provided for in Section 143 of the Negotiable Instruments Law (NIL). 13 The said section reads:jgc:chanrobles.com.ph "SECTION 143. When presentment for acceptance must be made. — Presentment for acceptance must be made:chanrob1es virtual 1aw library (a) Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary in order to fix the maturity of the instrument; or

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(b) Where the bill expressly stipulates that it shall be presented for acceptance; or (c) Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee. In no other case is presentment for acceptance necessary in order to render any party to the bill liable."cralaw virtua1aw library Obviously then, sight drafts do not require presentment for acceptance. The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer; 14 this may be done in writing by the drawee in the bill itself, or in a separate instrument. 15 The parties herein agree, and the trial court explicitly ruled, that the subject drafts are sight drafts. Said the latter:chanrobles law library : red ". . . In the instant case the drafts being at sight, they are supposed to be payable upon acceptance unless plaintiff bank has given the Philippine Rayon Mills Inc. time within which to pay the same. The first two drafts (Annexes C & D, Exh. X & X-1) were duly accepted as indicated on their face (sic), and upon such acceptance should have been paid forthwith. These two drafts were not paid and although Philippine Rayon Mills ought to have paid the same, the fact remains that until now they are still unpaid." 16 Corollarily, they are, pursuant to Section 7 of the NIL, payable on demand. Section 7 provides:jgc:chanrobles.com.ph "SECTION 7. When payable on demand. — An instrument is payable on demand — (a) When so it is expressed to be payable on demand, or at sight, or on presentation; or (b) In which no time for payment is expressed. Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing, accepting, or indorsing it, payable on demand." (Emphasis supplied) Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment at maturity of any accepted draft, bill of exchange or indebtedness shall not be extinguished or modified" 17 does not, contrary to the holding of the public respondent, contemplate prior acceptance by Philippine Rayon, but by the petitioner. Acceptance, however, was not even necessary in the first place because the drafts which were eventually issued were sight drafts. And even if these were not sight drafts, thereby necessitating acceptance, it would be the petitioner — and not Philippine Rayon — which had to accept the same for the latter was not the drawee. Presentment for acceptance is defined as the production of a bill of exchange to a drawee for acceptance. 18 The trial court and the public respondent, therefore, erred in ruling that presentment for acceptance was an indispensable requisite for Philippine Rayon’s liability on the drafts to attach. Contrary to both courts’ pronouncements, Philippine Rayon immediately became liable thereon upon petitioner’s payment thereof. Such is the essence of the letter of credit issued by the petitioner. A different conclusion would violate the principle upon which commercial letter of credit are founded because in such a case, both the beneficiary and the issuer. Nissho Company Ltd. and the petitioner, respectively, would be placed at the mercy of Philippine Rayon even if the latter had already received the imported machinery and the petitioner had fully paid for it. The typical setting and purpose of a letter of credit are described in Hibernia Bank and Trust Co. v. J. Aron & Co., Inc., 19 thus:jgc:chanrobles.com.ph "Commercial letters of credit have come into general use in international sales transactions where much time necessarily elapses between the sale and the receipt by a purchaser of the merchandise, during which interval great price changes may occur. Buyers and sellers struggle for the advantage of position. The seller is desirous of being paid as surely and as soon as possible, realizing that the vendee at a distant point has it in his power to reject on trivial grounds merchandise on arrival, and cause considerable hardship to the shipper. Letters of credit meet this condition by affording celerity and certainty of payment. Their purpose is to insure to a seller payment of a definite amount upon presentation of documents. The bank deals only with documents. It has nothing to do with the quality of the merchandise. Disputes as to the merchandise shipped may arise and be litigated later between vendor and vendee, but they may not impede acceptance of drafts and payment by the issuing bank when the proper documents are presented."cralaw virtua1aw library The trial court and the public respondent likewise erred in disregarding the trust receipt and in not holding that Philippine Rayon was liable thereon. In People v. Yu Chi Ho, 20 this Court explains the nature of a trust receipt by quoting In re Dunlap Carpet Co., 21 thus:jgc:chanrobles.com.ph "By this arrangement a banker advances money to an intending importer, and thereby lends the aid of capital, of credit, or of business facilities and agencies abroad, to the enterprise of foreign commerce. Much of this trade could hardly be carried on by any other means, and therefore it is of the first importance that the fundamental factor in the transaction, the banker’s advance of money and credit, should receive the amplest protection. Accordingly, in order to secure that the banker shall be repaid at the critical point — that is, when the imported goods finally reach the hands of the intended vendee — the banker takes the full title to the goods at the very beginning; he takes it as soon as the goods are bought and settled for by his payments or acceptances in the foreign country, and he continues to hold that title as his indispensable security until the goods are sold in the United States and the vendee is called upon to pay for them. This security is not an ordinary pledge by the importer to the banker, for the importer has never owned the goods, and moreover he is not able to deliver the possession; but the security is the complete title vested originally in the bankers, and this characteristic of the transaction has again and again been recognized and protected by the Courts. Of

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course, the title is at bottom a security title, as it has sometimes been called, and the banker is always under the obligation to reconvey; but only after his advances have been fully repaid and after the importer has fulfilled the other terms of the contract."cralaw virtua1aw library As further stated in National Bank v. Vuida e Hijos de Angel Jose, 22 trust receipts:jgc:chanrobles.com.ph ". . . [I]n a certain manner. . . partake of the nature of a conditional sale as provided by the Chattel Mortgage Law, that is, the importer becomes absolute owner of the imported merchandise as soon as he has paid its price. The ownership of the merchandise continues to be vested in the owner thereof or in the person who has advanced payment, until he has been paid in full, or if the merchandise has already been sold, the proceeds of the sale should be turned over to him by the importer or by his representative or successor in interest."cralaw virtua1aw library Under P.D. No. 115, otherwise known as the Trust Receipts Law, which took effect on 29 January 1973, a trust receipt transaction is defined as "any transaction by and between a person referred to in this Decree as the entruster, and another person referred to in this Decree as the entrustee, whereby the entruster, who owns or holds absolute title or security interests over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latter’s execution and delivery to the entruster of a signed document called the trust receipt wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt, or for other purposes substantially equivalent to any one of the following: . . . ."cralaw virtua1aw library It is alleged in the complaint that private respondents "not only have presumably put said machinery to good use and have profited by its operation and/or disposition but very recent information that (sic) reached plaintiff bank that defendants already sold the machinery covered by the trust receipt to Yupangco Cotton Mills," and that "as trustees of the property covered by the trust receipt, . . . and therefore acting in fiduciary (sic) capacity, defendants have willfully violated their duty to account for the whereabouts of the machinery covered by the trust receipt or for the proceeds of any lease; sale or other disposition of the same that they may have made, notwithstanding demands therefor; defendants have fraudulently misapplied or converted to their own use any money realized from the lease, sale, and other disposition of said machinery." 23 While there is no specific prayer for the delivery to the petitioner by Philippine Rayon of the proceeds of the sale of the machinery covered by the trust receipt, such relief is covered by the general prayer for "such further and other relief as may be just and equitable on the premises." 24 And although it is true that the petitioner commenced a criminal action for the violation of the Trust Receipts Law, no legal obstacle prevented it from enforcing the civil liability arising out of the trust receipt in a separate civil action. Under Section 13 of the Trust Receipts Law, the failure of an entrustee to turn over the proceeds of the sale of goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article 315, paragraph 1(b) of the Revised Penal Code. 25 Under Article 33 of the Civil Code, a civil action for damages, entirely separate and distinct from the criminal action, may be brought by the injured party in cases of defamation, fraud and physical injuries. Estafa falls under fraud.chanroblesvirtualawlibrary We also conclude, for the reason hereinafter discussed, and not for that adduced by the public respondent, that private respondent Chi’s signature in the dorsal portion of the trust receipt did not bind him solidarily with Philippine Rayon. The statement at the dorsal portion of the said trust receipt, which petitioner describes as a "solidary guaranty clause", reads:jgc:chanrobles.com.ph "In consideration of the PRUDENTIAL BANK AND TRUST COMPANY complying with the foregoing, we jointly and severally agree and undertake to pay on demand to the PRUDENTIAL BANK AND TRUST COMPANY all sums of money which the said PRUDENTIAL BANK AND TRUST COMPANY may call upon us to pay arising out of or pertaining to, and/or in any event connected with the default of and/or non-fulfillment in any respect of the undertaking of the aforesaid:chanrob1es virtual 1aw library PHILIPPINE RAYON MILLS, INC. We further agree that the PRUDENTIAL BANK AND TRUST COMPANY does not have to take any steps or exhaust its remedy against aforesaid:chanrob1es virtual 1aw library before making demand on me/us. (Sgd.) Anacleto R. Chi ANACLETO R. CHI" 26 Petitioner insists that by virtue of the clear wording of the statement, specifically the clause." . . we jointly and severally agree and undertake . . .," and the concluding sentence on exhaustion, Chi’s liability therein is solidary. In holding otherwise, the public respondent ratiocinates as follows:jgc:chanrobles.com.ph "With respect to the second argument, we have our misgivings as to whether the mere signature of defendant-appellee Chi of (sic) the guaranty agreement, Exhibit "C-1", will make it an actionable document. It should be noted that Exhibit "C-1" was prepared and

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printed by the plaintiff-appellant. A perusal of Exhibit "C-1" shows that it was to be signed and executed by two persons. It was signed only by defendant-appellee Chi. Exhibit "C-1" was to be witnessed by two persons, but no one signed in that capacity. The last sentence of the guaranty clause is incomplete Furthermore, the plaintiff-appellant also failed to have the purported guarantee clause acknowledged before a notary public. All these show that the alleged guaranty provision was disregarded and, therefore, not consummated. But granting arguendo that the guaranty provision in Exhibit "C-1" was fully executed and acknowledged still defendant-appellee chi cannot be held liable thereunder because the records show that the plaintiff-appellant had neither exhausted the property of the defendant-appellant nor had it resorted to all legal remedies against the said defendant-appellant as provided in Article 2058 of the Civil Code. The obligation of a guarantor is merely accessory under Article 2052 of the Civil Code and subsidiary under Article 2054 of the Civil Code. Therefore, the liability of the defendant-appellee arises only when the principal debtor fails to comply with his obligation." 27 Our own reading of the questioned solidary guaranty clause yields no other conclusion than that the obligation of Chi is only that of a guarantor. This is further bolstered by the last sentence which speaks of waiver of exhaustion, which, nevertheless, is ineffective in this case because the space therein for the party whose property may not be exhausted was not filled up. Under Article 2058 of the Civil Code, the defense of exhaustion (excussion) may be raised by a guarantor before he may be held liable for the obligation. Petitioner likewise admits that the questioned provision is a solidary guaranty clause, thereby clearly distinguishing it from a contract of surety. It, however, described the guaranty as solidary between the guarantors; this would have been correct if two (2) guarantors had signed it. The clause "we jointly and severally agree and undertake" refers to the undertaking of the two (2) parties who are to sign it or to the liability existing between themselves. It does not refer to the undertaking between either one or both of them on the one hand and the petitioner on the other with respect to the liability described under the trust receipt. Elsewise stated, their liability is not divisible as between them, i.e., it can be enforced to its full extent against any one of them. Furthermore, any doubt as to the import or true intent of the solidary guaranty clause should be resolved against the petitioner. The trust receipt, together with the questioned solidary guaranty clause, is on a form drafted and prepared solely by the petitioner; Chi’s participation therein is limited to the affixing of his signature thereon. It is, therefore, a contract of adhesion; 28 as such, it must be strictly construed against the party responsible for its preparation. 29 Neither can We agree with the reasoning of the public respondent that this solidary guaranty clause was effectively disregarded simply because it was not signed and witnessed by two (2) persons and acknowledged before a notary public. While indeed, the clause ought to have been signed by two (2) guarantors, the fact that it was only Chi who signed the same did not make his act an idle ceremony or render the clause totally meaningless. By his signing, Chi became the sole guarantor. The attestation by witnesses and the acknowledgment before a notary public are not required by law to make a party liable on the instrument. The rule is that contracts shall be obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity are present; however, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that it be proved in a certain way, that requirement is absolute and indispensable. 30 With respect to a guaranty, 31 which is a promise to answer for the debt or default of another, the law merely requires that it, or some note or memorandum thereof, be in writing. Otherwise, it would be unenforceable unless ratified. 32 While the acknowledgment of a surety before a notary public is required to make the same a public document, under Article 1358 of the Civil Code, a contract of guaranty does not have to appear in a public document. And now to the other ground relied upon by the petitioner as basis for the solidary liability of Chi, namely the criminal proceedings against the latter for the violation of P.C. No. 115. Petitioner claims that because of the said criminal proceedings, Chi would be answerable for the civil liability arising therefrom pursuant to Section 13 of P.D. No. 115. Public respondent rejected this claim because such civil liability presupposes prior conviction as can be gleaned from the phrase "without prejudice to the civil liability arising from the criminal offense." Both are wrong. The said section reads:jgc:chanrobles.com.ph "SECTION 13. Penalty Clause. — The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article Three hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code. If the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense."cralaw virtua1aw library A close examination of the quoted provision reveals that it is the last sentence which provides for the correct solution. It is clear that if the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense. The penalty referred to is imprisonment, the duration of which would depend on the amount of the fraud as provided for in Article 315 of the Revised Penal Code. The reason for this is obvious: corporations, partnerships, associations and other juridical entities cannot be put in jail. However, it is these entities which are made liable for the civil liability arising from the criminal offense. This is the import of the clause "without prejudice to the civil liabilities arising from the criminal offense." And, as We stated earlier, since that violation of a trust receipt constitutes fraud under Article 33 of the Civil Code, petitioner was acting well within its rights in filing an independent civil action to enforce the civil liability arising therefrom against Philippine Rayon. The remaining issue to be resolved concerns the propriety of the dismissal of the case against private respondent Chi. The trial court

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based the dismissal, and the respondent Court its affirmance thereof, on the theory that Chi is not liable on the trust receipt in any capacity — either as surety or as guarantor — because his signature at the dorsal portion thereof was useless; and even if he could be bound by such signature as a simple guarantor, he cannot, pursuant to Article 2058 of the Civil Code, be compelled to pay until after petitioner has exhausted and resorted to all legal remedies against the principal debtor, Philippine Rayon. The records fail to show that petitioner had done so. 33 Reliance is thus placed on Article 2058 of the Civil Code which provides:jgc:chanrobles.com.ph "ARTICLE 2058. The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor."cralaw virtua1aw library Simply stated, there is as yet no cause of action against Chi. We are not persuaded. Excussion is not a condition sine qua non for the institution of an action against a guarantor. In Southern Motors, Inc. v. Barbosa, 34 this Court stated:jgc:chanrobles.com.ph "4. Although an ordinary personal guarantor — not a mortgagor or pledgor — may demand the aforementioned exhaustion, the creditor may, prior thereto, secure a judgment against said guarantor, who shall be entitled, however, to a deferment of the execution of said judgment against him until after the properties of the principal debtor shall have been exhausted to satisfy the obligation involved in the case."cralaw virtua1aw library There was then nothing procedurally objectionable in impleading private respondent Chi as a co-defendant in Civil Case No. Q-19312 before the trial court. As a matter of fact, Section 6, Rule 3 of the Rules of Court on permissive joinder of parties explicitly allows it. It reads:jgc:chanrobles.com.ph "SECTION 6. Permissive joinder of parties. — All persons in whom or against whom any right to relief in respect to or arising out of the same transaction or series of transactions is alleged to exist, whether jointly, severally, or in the alternative, may, except as otherwise provided in these rules, join as plaintiffs or be joined as defendants in one complaint, where any gotten of law or fact common to all such plaintiffs or to all such defendants may arise in the action; but the court may make such orders as may be just to prevent any plaintiff or defendant from being embarrassed or put to expense in connection with any proceedings in which he may have no interest."cralaw virtua1aw library This is the equity rule relating to multifariousness. It is based on trial convenience and is designed to permit the joinder of plaintiffs or defendants whenever there is a common question of law or fact. It will save the parties unnecessary work, trouble and expense. 35 However, Chi’s liability is limited to the principal obligation in the trust receipt plus all the accessories thereof including judicial costs; with respect to the latter, he shall only be liable for those costs incurred after being judicially required to pay. 36 Interest and damages, being accessories of the principal obligation, should also be paid; these, however, shall run only from the date of the filing of the complaint. Attorney’s fees may even be allowed in appropriate cases. 37 In the instant case, the attorney’s fees to be paid by Chi cannot be the same as that to be paid by Philippine Rayon since it is only the trust receipt that is covered by the guaranty and not the full extent of the latter’s liability. All things considered, he can be held liable for the sum of P10,000.00 as attorney’s fees in favor of the petitioner. Thus, the trial court committed grave abuse of discretion in dismissing the complaint as against private respondent Chi and condemning petitioner to pay him P20,000 00 as attorney’s fees. In the light of the foregoing, it would no longer be necessary to discuss the other issues raised by the petitioner. WHEREFORE, the instant Petition is hereby GRANTED. The appealed Decision of 10 March 1986 of the public respondent in AC-G.R. CV No. 66733 and, necessarily, that of Branch 9 (Quezon City) of the then Court of First Instance of Rizal in Civil Case No. Q-19312 are hereby REVERSED and SET ASIDE and another is hereby entered:chanrob1es virtual 1aw library 1. Declaring private respondent Philippine Rayon Mills, Inc. liable on the twelve drafts in question (Exhibits "X", "X-1" to "X-11", inclusive) and on the trust receipt (Exhibit "C’), and ordering it to pay petitioner: (a) the amounts due thereon in the total sum of P956,384.95 as of 15 September 1974, with interest thereon at six percent (6%) per annum from 16 September 1974 until it is fully paid, less whatever may have been applied thereto by virtue of foreclosure of mortgages, if any; (b) a sum equal to ten percent (10%) of the aforesaid amount as attorney’s fees; and (c) the costs. 2. Declaring private respondent Anacleto R. Chi secondarily liable on the trust receipt and ordering him to pay the face value thereof, with interest at the legal rate, commencing from the date of the filing of the complaint in Civil Case No Q-19312 until the same is fully paid as well as the costs and attorney’s fees in the sum of P10,000.00 if the writ of execution for the enforcement of the above awards against Philippine Rayon Mills, Inc. is returned unsatisfied. Costs against private respondents. SO ORDERED. Gutierrez, Jr., Bidin, Romero and Melo, JJ., concur.

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Endnotes:

1. Rollo, 39-47; per Associate Justice Crisolito Pascual, concurred in by Associate Justices Jose C. Campos, Jr. and Serafin E. Camilon. 2. Rollo, 39-41. 3. Rollo, 81-83. 4. Brief for Appellant, 1-4; Rollo, 85, et seq. 5. Rollo, 45-46. 6. Id., 48. 7. Rollo, 16. 8. Id., 131. 9. Record on Appeal, 123. 10. Herein petitioner. 11. Black’s Law Dictionary, Fifth ed., 813; DAVIDSON, KNOWLES, FORSYTHE AND JESPERSEN, Business Law, Principles and Cases, 1984 ed., 390. 12. ROSE, Money and Capital Markets, 1983 ed., 692. 13. Act No. 2031. 14. Section 132, NIL. 15. Sections 133 and 134, Id. 16. Rollo, 66. 17. Id., 17. 18. AGBAYANI, A.F., Commercial Laws of the Philippines, 1987 ed., vol. 1, 409, citing Windham Bank v. Norton, 22 Conn, 213, 56 Am. Dec. 397. 19. 134 Misc. 18, 21-22, 233 N.Y.S. 486, 490-491, cited in Johnston v. State Bank, 195 N.W. 2d 126, 130-131 (Iowa 1972), and excerpted in CORMAN, Commercial Law, Cases and Materials, 1976 ed., 622. 20. 53 Phil. 874, 876-877 [1928]; see also, Samo v. People, 115 Phil. 346 [1962]. 21. 206 Fed., 726. 22. 63 Phil. 814, 821 [1936]. 23. Record on Appeal, 6-7. 24. Id., 9. 25. Even before P.D. No. 115, these acts covered by Section 13 were already considered as estafa; see People v. Yu Chai Ho, supra.; Samo v. People, supra.; Robles v. Court of Appeals, 199 SCRA 195 [1991]. 26. Record on Appeal, 43. 27. Rollo, 45-46. 28. Sweet Lines, Inc. v. Teves, 83 SCRA 361 [1978]; Angeles v. Calasanz, 135 SCRA 323 [1985]. 29. Western Guaranty Corp. v. Court of Appeals, 187 SCRA 652 [1990]; BPI Credit Corp. v. Court of Appeals, 204 SCRA 601 [1991]. 30. Article 1356, Civil Code.

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31. Article 2047 of the Civil Code defines it as follows:jgc:chanrobles.com.ph "By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so."cralaw virtua1aw library 32. Article 1403 (2)(b), Civil Code. 33. Rollo, 75. 34. 99 Phil. 263, 268 [1956]. 35. FRANCISCO, V.J., The Revised Rules of Court, vol. I, 1973 ed., 258. 36. Second paragraph, Article 2055, Civil Code; see National Marketing Corp. v. Marquez, 26 SCRA 722 [1969]; Republic v. Pal-Fox Lumber Co., Inc., 43 SCRA 365 [1972]. 37. Plaridel Surety & Insurance Co., Inc. v. P.L. Galang Machinery Co., Inc., 100 Phil. 679 [1957]; Philippine National Bank v. Luzon Surety Co., Inc., 68 SCRA 207 [1975].

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THIRD DIVISION [G.R. No. 105395. December 10, 1993.] BANK OF AMERICA, NT & SA, Petitioner, v. COURT OF APPEALS, INTER-RESIN INDUSTRIAL CORPORATION, FRANCISCO TRAJANO, JOHN DOE AND JANE DOE, Respondents. Agcaoili & Associates for Petitioner. Valenzuela Law Center, Victor Fernandez and Ramon M. Guevara for Private Respondents.

SYLLABUS

1. COMMERCIAL LAW; CODE OF COMMERCE; LETTERS OF CREDITS; DEFINED AND CONSTRUED. — A letter of credit is a financial device developed by merchants as a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying. To break the impasse, the buyer may be required to contract a bank to issue a letter of credit in favor of the seller so that, by virtue of the letter of credit, the issuing bank can authorize the seller to draw drafts and engage to pay them upon their presentment simultaneously with the tender of documents required by the letter of credit. The buyer and the seller agree on what documents are to be presented for payment, but ordinarily they are documents of title evidencing or attesting to the shipment of the goods to the buyer. Once the credit is established, the seller ships the goods to the buyer and in the process secures the required shipping documents or documents of title. To get paid, the seller executes a draft and presents it together with the required documents to the issuing bank. The issuing bank redeems the draft and pays cash to the seller if it finds that the documents submitted by the seller conform with what the letter of credit requires. The bank then obtains possession of the documents upon paying the seller. The transaction is completed when the buyer reimburses the issuing bank and acquires the documents entitling him to the goods. Under this arrangement, the seller gets paid only if he delivers the documents of title over the goods, while the buyer acquires the said documents and control over the goods only after reimbursing the bank. 2. ID.; ID.; ID.; DISTINGUISHED. — What characterizes letters of credit, as distinguished from other accessory contracts, is the engagement of the issuing bank to pay the seller once the draft and the required shipping documents are presented to it. In turn, this arrangement assures the seller of prompt payment, independent of any breach of the main sales contract. By this so-called "independence principle," the bank determines compliance with the letter of credit only by examining the shipping documents presented; it is precluded from determining whether the main contract is actually accomplished or not. 3. ID.; ID.; ID.; PARTIES THERETO. — There would at least be three (3) parties: (a) the buyer, who procures the letter of credit and obliges himself to reimburse the issuing bank upon receipt of the documents of title; (b) the bank issuing the letter of credit, which undertakes to pay the seller upon receipt of the draft and proper documents of titles and to surrender the documents to the buyer upon reimbursement; and, (c) the seller, who in compliance with the contract of sale ships the goods to the buyer and delivers the documents of title and draft to the issuing bank to recover payment. The number of the parties, not infrequently and almost invariably in international trade practice, may be increased. Thus, the services of an advising (notifying) bank may be utilized to convey to the seller the existence of the credit; or, of a confirming bank which will lend credence to the letter of credit issued by a lesser known issuing bank; or, of a paying bank which undertakes to encash the drafts drawn by the exporter. Further, instead of going to the place of the issuing bank to claim payment, the buyer may approach another bank, termed the negotiating bank, to have the draft discounted. 4. ID.; ID.; ID.; UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS (U.C.P.); APPLICATION TO PHILIPPINE CODE OF COMMERCE. — Being a product of international commerce, the impact of this commercial instrument transcends national boundaries, and it is thus not uncommon to find a dearth of national law that can adequately provide for its governance. This country is no exception. Our own Code of Commerce basically introduces only its concept under Articles 567-572, inclusive, thereof. It is no wonder then why great reliance has been placed on commercial usage and practice, which, in any case, can be justified by the universal acceptance of the autonomy of contracts rule. The rules were later developed into what is now known as the Uniform Customs and Practice for Documentary Credits ("U.C.P.") issued by the International Chamber of Commerce. It is by no means a complete text by itself, for, to be sure, there are other principles, which, although part of lex mercatoria, are not dealt with in the U.C.P. In FEATI Bank and Trust Company v. Court of Appeals, (G.R. No. 94209, prom. 30 April 1991; 196 SCRA 576) the Supreme Court have accepted, to the extent of their pertinency, the application in our jurisdiction of this international commercial credit regulatory set of rules. In Bank of Phil. Islands v. De Nery, (G.R. No. L-24821, 16 October 1970; 35 SCRA 256) the Court has said that the observance of the U.C.P. is justified by Article 2 of the Code of Commerce which expresses that, in the absence of any particular provision in the Code of Commerce, commercial transactions shall be governed by usages and customs generally observed. The Court have further observed that there being no specific provisions which govern the legal complexities arising from transactions involving letters of credit not only between or among banks themselves but also between banks and the seller or the buyer, as the

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case may be, the applicability of the U.C.P. is undeniable. 5. ID.; ID.; ID.; ADVISING OR NOTIFYING BANK; CONSTRUED; CASE AT BAR. — The crucial point of dispute in this case is whether under the "letter of credit," Bank of America has incurred any liability to the "beneficiary" thereof, an issue that largely is dependent on the bank’s participation in that transaction; as a mere advising or notifying bank, it would not be liable, but as a confirming bank, had this been the case, it could be considered as having incurred that liability. Bank of America has, only been an advising, not confirming, bank, and this much is clearly evident, among other things, by the provisions of the letter of credit itself, the petitioner bank’s letter of advice, its request for payment of advising fee, and the admission of Inter-Resin that it has paid the same. That Bank of America has asked Inter-Resin to submit documents required by the letter of credit and eventually has paid the proceeds thereof, did not obviously make it a confirming bank. The fact, too, that the draft required by the letter of credit is to be drawn under the account of General Chemicals (buyer) only means that the same had to be presented to Bank of Ayudhya (issuing bank) for payment. It may be significant to recall that the letter of credit is an engagement of the issuing bank, not the advising bank, to pay the draft. No less important is that Bank of America’s letter of 11 March 1981 has expressly stated that" [t]he enclosure is solely an advise of credit opened by the abovementioned correspondent and conveys no engagement by us." This written reservation by Bank of America in limiting its obligation only to being an advising bank is in consonance with the provisions of U.C.P. As an advising or notifying bank, Bank of America did not incur any obligation more than just notifying Inter-Resin of the letter of credit issued in its favor, let alone to confirm the letter of credit. 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. 6. ID.; ID.; ID.; ID.; RIGHT OF RECOURSE, WHEN AVAILABLE. — 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 therefor 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 of 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. 7. ID.; ID.; ID.; NATURE OF OPERATION. — In the operation of a letter of credit, the involved banks deal only with documents and not on goods described in those documents.

DECISION

VITUG, J.:

A "fiasco," involving an irrevocable letter of credit, has found the distressed parties coming to court as adversaries in seeking a definition of their respective rights or liabilities thereunder. On 05 March 1981, petitioner Bank of America, NT & SA, Manila, received by registered mail an Irrevocable Letter of Credit No. 20272/81 purportedly issued by Bank of Ayudhya, Samyaek Branch, for the account of General Chemicals, Ltd., of Thailand in the amount of US$2,782,000.00 to cover the sale of plastic ropes and "agricultural files," with the petitioner as advising bank and private respondent Inter-Resin Industrial Corporation as beneficiary.chanrobles.com : virtual law library On 11 March 1981, Bank of America wrote Inter-Resin informing the latter of the foregoing and transmitting, along with the bank’s communication, the letter of credit. Upon receipt of the letter-advice with the letter of credit, Inter-Resin sent Atty. Emiliano Tanay to Bank of America to have the letter of credit confirmed. The bank did not. Reynaldo Dueñas, bank employee in charge of letters of credit, however, explained to Atty. Tanay that there was no need for confirmation because the letter of credit would not have been transmitted if it were not genuine. Between 26 March to 10 April 1981, Inter-Resin sought to make a partial availment under the letter of credit by submitting to Bank of America invoices, covering the shipment of 24,000 bales of polyethylene rope to General Chemicals valued at US$1,320,600.00, the corresponding packing list, export declaration and bill of lading. Finally, after being satisfied that Inter-Resin’s documents conformed with the conditions expressed in the letter of credit, Bank of America issued in favor of Inter-Resin a Cashier’s Check for P10,219,093.20, "the Peso equivalent of the draft (for) US$1,320,600.00 drawn by Inter-Resin, after deducting the costs for documentary stamps, postage and mail insurance." 1 The check was picked up by Inter-Resin’s Executive Vice-President Barcelina Tio. On 10 April 1981, Bank of America wrote Bank of Ayudhya advising the latter of the availment under the letter of credit and sought the corresponding reimbursement therefor. Meanwhile, Inter-Resin, through Ms. Tio, presented to Bank of America the documents for the second availment under the same letter of credit consisting of a packing list, bill of lading, invoices, export declaration and bills in set, evidencing the second shipment of goods. Immediately upon receipt of a telex from Bank of Ayudhya declaring the letter of credit fraudulent, 2 Bank of America

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stopped the processing of Inter-Resin’s documents and sent a telex to its branch office in Bangkok, Thailand, requesting assistance in determining the authenticity of the letter of credit. 3 Bank of America kept Inter-resin informed of the developments. Sensing a fraud, Bank of America sought the assistance of the National Bureau of Investigation (NBI). With the help of the staff of the Philippine Embassy at Bangkok, as well as the police and customs personnel of Thailand, the NBI agents, who were sent to Thailand, discovered that the vans exported by Inter-Resin did not contain ropes but plastic strips, wrappers, rags and waste materials. Here at home, the NBI also investigated Inter-Resin’s President Francisco Trajano and Executive Vice President Barcelina Tio, who, thereafter, were criminally charged for estafa through falsification of commercial documents. The case, however, was eventually dismissed by the Rizal Provincial Fiscal who found no prima facie evidence to warrant prosecution.chanrobles law library : red Bank of America sued Inter-Resin for the recovery of P10,219,093.20 the peso equivalent of the draft for US$320,600.00 on the partial availment of the now disowned letter of credit. On the other hand, Inter-Resin claimed that not only was it entitled to retain P10,219,093.20 on its first shipment but also to the balance US$1,461,400.00 covering the second shipment. On 28 June 1989, the trial court ruled for Inter-Resin, 4 holding that: (a) Bank of America made assurances that enticed Inter-Resin to send the merchandise to Thailand; (b) the telex declaring the letter of credit fraudulent was unverified and self-serving, hence hearsay, but even assuming that the letter of credit was fake, "the fault should be borne by the BA which was careless and negligent" 5 for failing to utilize its modern means of communication to verify with Bank of Ayudhya in Thailand the authenticity of the letter of credit before sending the same to Inter-Resin; (c) the loading of plastic products into the vans were under strict supervision, inspection and verification of government officers who have in their favor the presumption of regularity in the performance of official functions; and (d) Bank of America failed to prove the participation of Inter-Resin or its employees in the alleged fraud as, in fact, the complaint for estafa through falsification of documents was dismissed by the Provincial Fiscal of Rizal. 6 On appeal, the Court of Appeals 7 sustained the trial court; hence, this present recourse by petitioner Bank of America. The following issues are raised by Bank of America: (a) whether it has warranted the genuineness and authenticity of the letter of credit and, corollarily, whether it has acted merely as an advising bank or as a confirming bank; (b) whether Inter-Resin has actually shipped the ropes specified by the letter of credit; and, (c) following the dishonor of the letter of credit by Bank of Ayudhya, whether Bank of America may recover against Inter-Resin under the draft executed in its partial availment of the letter of credit. 8chanrobles lawlibrary : rednad In rebuttal, Inter-Resin holds that: (a) Bank of America cannot, on appeal, belatedly raise the issue of being only an advising bank; (b) the findings of the trial court that the ropes have actually been shipped is binding on the Court; and, (c) Bank of America cannot recover from Inter-Resin because the drawer of the letter of credit is the Bank of Ayudhya and not Inter-Resin. If only to understand how the parties, in the first place, got themselves into the mess, it may be well to start by recalling how, in its modern use, a letter of credit is employed in trade transactions. A letter of credit is a financial device developed by merchants as a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying. 9 To break the impasse, the buyer may be required to contract a bank to issue a letter of credit in favor of the seller so that, by virtue of the letter of credit, the issuing bank can authorize the seller to draw drafts and engage to pay them upon their presentment simultaneously with the tender of documents required by the letter of credit. 10 The buyer and the seller agree on what documents are to be presented for payment, but ordinarily they are documents of title evidencing or attesting to the shipment of the goods to the buyer. Once the credit is established, the seller ships the goods to the buyer and in the process secures the required shipping documents or documents of title. To get paid, the seller executes a draft and presents it together with the required documents to the issuing bank. The issuing bank redeems the draft and pays cash to the seller if it finds that the documents submitted by the seller conform with what the letter of credit requires. The bank then obtains possession of the documents upon paying the seller. The transaction is completed when the buyer reimburses the issuing bank and acquires the documents entitling him to the goods. Under this arrangement, the seller gets paid only if he delivers the documents of title over the goods, while the buyer acquires the said documents and control over the goods only after reimbursing the bank.cralawnad What characterizes letters of credit, as distinguished from other accessory contracts, is the engagement of the issuing bank to pay the seller once the draft and the required shipping documents are presented to it. In turn, this arrangement assures the seller of prompt payment, independent of any breach of the main sales contract. By this so-called "independence principle," the bank determines compliance with the letter of credit only by examining the shipping documents presented; it is precluded from determining whether the main contract is actually accomplished or not. 11 There would at least be three (3) parties: (a) the buyer, 12 who procures the letter of credit and obliges himself to reimburse the issuing bank upon receipt of the documents of title; (b) the bank issuing the letter of credit, 13 which undertakes to pay the seller upon receipt of the draft and proper documents of titles and to surrender the documents to the buyer upon reimbursement; and, (c) the seller, 14 who in compliance with the contract of sale ships the goods to the buyer and delivers the documents of title and draft to the issuing bank to recover payment. The number of the parties, not infrequently and almost invariably in international trade practice, may be increased. Thus, the services of an advising (notifying) bank 15 may be utilized to convey to the seller the existence of the credit; or, of a confirming bank 16 which will lend credence to the letter of credit issued by a lesser known issuing bank; or, of a paying bank 17 which undertakes to

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encash the drafts drawn by the exporter. Further, instead of going to the place of the issuing bank to claim payment, the buyer may approach another bank, termed the negotiating bank, 18 to have the draft discounted.chanrobles lawlibrary : rednad Being a product of international commerce, the impact of this commercial instrument transcends national boundaries, and it is thus not uncommon to find a dearth of national law that can adequately provide for its governance. This country is no exception. Our own Code of Commerce basically introduces only its concept under Articles 567-572, inclusive, thereof. It is no wonder then why great reliance has been placed on commercial usage and practice, which, in any case, can be justified by the universal acceptance of the autonomy of contracts rule. The rules were later developed into what is now known as the Uniform Customs and Practice for Documentary Credits ("U.C.P.") issued by the International Chamber of Commerce. It is by no means a complete text by itself, for, to be sure, there are other principles, which, although part of lex mercatoria, are not dealt with in the U.C.P. In FEATI Bank and Trust Company v. Court of Appeals, 19 we have accepted, to the extent of their pertinency, the application in our jurisdiction of this international commercial credit regulatory set of rules. 20 In Bank of Phil. Islands v. De Nery, 21 we have said that the observance of the U.C.P. is justified by Article 2 of the Code of Commerce which expresses that, in the absence of any particular provision in the Code of Commerce, commercial transactions shall be governed by usages and customs generally observed. We have further observed that there being no specific provisions which govern the legal complexities arising from transactions involving letters of credit not only between or among banks themselves but also between banks and the seller or the buyer, as the case may be, the applicability of the U.C.P. is undeniable. The first issue raised by the petitioner, i.e., that it has in this instance merely been an advising bank, is outrightly rejected by InterResin and is thus sought to be discarded for having been raised only on appeal. We cannot agree. The crucial point of dispute in this case is whether under the "letter of credit," Bank of America has incurred any liability to the "beneficiary" thereof, an issue that largely is dependent on the bank’s participation in that transaction; as a mere advising or notifying bank, it would not be liable, but as a confirming bank, had this been the case, it could be considered as having incurred that liability. 22cralawnad In Insular Life Assurance Co. Ltd. Employees Association- Natu v. Insular Life Assurance Co., Ltd., 23 the Court said: Where the issues already raised also rest on other issues not specifically presented, as long as the latter issues bear relevance and close relation to the former and as long as they arise from matters on record, the court has the authority to include them in its discussion of the controversy and to pass upon them just as well. In brief, in those cases where questions not particularly raised by the parties surface as necessary for the complete adjudication of the rights and obligations of the parties, and such questions fall within the issues already framed by the parties, the interests of justice dictate that the court should consider and resolve them. The rule that only issues or theories raised in the initial proceedings may be taken up by a party thereto on appeal should only refer to independent, not concomitant matters, to support or oppose the cause of action or defense. The evil that is sought to be avoided, i.e., surprise to the adverse party, is in reality not existent on matters that are properly litigated in the lower court and appear on record. It cannot seriously be disputed, looking at this case, that Bank of America has, in fact, only been an advising, not confirming, bank, and this much is clearly evident, among other things, by the provisions of the letter of credit itself, the petitioner bank’s letter of advice, its request for payment of advising fee, and the admission of Inter-Resin that it has paid the same. That Bank of America has asked Inter-Resin to submit documents required by the letter of credit and eventually has paid the proceeds thereof, did not obviously make it a confirming bank. The fact, too, that the draft required by the letter of credit is to be drawn under the account of General Chemicals (buyer) only means that the same had to be presented to Bank of Ayudhya (issuing bank) for payment. It may be significant to recall that the letter of credit is an engagement of the issuing bank, not the advising bank, to pay the draft.chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph No less important is that Bank of America’s letter of 11 March 1981 has expressly stated that" [t]he enclosure is solely an advise of credit opened by the abovementioned correspondent and conveys no engagement by us." 24 This written reservation by Bank of America in limiting its obligation only to being an advising bank is in consonance with the provisions of U.C.P. As an advising or notifying bank, Bank of America did not incur any obligation more than just notifying Inter-Resin of the letter of credit issued in its favor, let alone to confirm the letter of credit. 25 The bare statement of the bank employee, aforementioned, in responding to the inquiry made by Atty. Tanay, Inter-Resin’s representative, on the authenticity of the letter of credit certainly did not have the effect of novating the letter of credit and Bank of America’s letter of advise, 26 nor can it justify the conclusion that the bank must now assume total liability on the letter of credit. Indeed, Inter-Resin itself cannot claim to have been all that free from fault. As the seller, the issuance of the letter of credit should have obviously been a great concern to it. 27 It would have, in fact, been strange if it did not, prior to the letter of credit, enter into a contract, or negotiated at the very least, with General Chemicals. 28 In the ordinary course of business, the perfection of contract precedes the issuance of a letter of credit. Bringing the letter of credit to the attention of the seller is the primordial obligation of an advising bank. The view that Bank of America should have first checked the authenticity of the letter of credit with Bank of Ayudhya, by using advanced mode of business communications, before dispatching the same to Inter-Resin finds no real support in U.C.P. Article 18 of the U.C.P. states that: "Banks assume no liability or responsibility for the consequences arising out of the delay and/or loss in transit of any messages, letters or documents, or for delay, mutilation or other errors arising in the transmission of any telecommunication . . ." As advising bank, Bank of America is bound only to check the "apparent authenticity" of the letter of credit, which it did. 29 Clarifying its meaning, Webster’s Ninth New Collegiate Dictionary 30 explains that the word "APPARENT suggests appearance to unaided senses that is not or may not be borne out by more rigorous examination or greater knowledge." chanrobles.com : virtual law library 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 therefor were later negotiated with it by Inter-Resin? The answer is yes. This kind of

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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 of recourse against the issuer bank and until reimbursement is obtained, Inter-Resin, as the drawer of the draft, continues to assume a contingent liability thereon. 31 While Bank of America has indeed failed to allege material facts in its complaint that might have likewise warranted the application of the Negotiable Instruments Law and possibly then allowed it to even go after the indorsers of the draft, this failure, 32 nonetheless, does not preclude petitioner bank’s right (as a negotiating bank) of recovery from Inter-Resin itself. Inter-Resin admits having received P10,219.093.20 from Bank of America on the letter of credit transaction and in having executed the corresponding draft. That 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, could then seek indemnification from the buyer (the General Chemicals of Thailand). Since Bank of Ayudhya disowned the letter of credit, however, Bank of America may now turn to Inter-Resin for restitution. "Between the seller and the negotiating bank there is the usual relationship existing between a drawer and purchaser of drafts. Unless drafts drawn in pursuance of the credit are indicated to be without recourse therefore, the negotiating bank has the ordinary right of recourse against the seller in the event of dishonor by the issuing bank . . . The fact that the correspondent and the negotiating bank may be one and the same does not affect its rights and obligations in either capacity, although a special agreement is always a possibility . . ." 33chanrobles law library : red The additional ground raised by the petitioner, i.e., that Inter-Resin sent waste instead of its products, is really of no consequence. In the operation of a letter of credit, the involved banks deal only with documents and not on goods described in those documents. 34 The other issues raised in the instant petition, for instance, whether or not Bank of Ayudhya did issue the letter of credit and whether or not the main contract of sale that has given rise to the letter of credit has been breached, are not relevant to this controversy. They are matters, instead, that can only be of concern to the herein parties in an appropriate recourse against those who, unfortunately, are not impleaded in these proceedings. In fine, we hold that — First, given the factual findings of the courts below, we conclude that petitioner Bank of America has acted merely as a notifying bank and did not assume the responsibility of a confirming bank; and Second, petitioner bank, as a negotiating bank, is entitled to recover on Inter-Resin’s partial availment as beneficiary of the letter of credit which has been disowned by the alleged issuer bank. No judgment of civil liability against the other defendants, Francisco Trajano and other unidentified parties, can be made, in this instance, there being no sufficient evidence to warrant any such finding. WHEREFORE, the assailed decision is SET ASIDE, and respondent Inter-Resin Industrial Corporation is ordered to refund to petitioner Bank of America NT & SA the amount of P10,219,093.20 with legal interest from the filing of the complaint until fully paid.chanrobles.com:cralaw:red No costs. SO ORDERED. Feliciano, Bidin, Romero and Melo, JJ., concur. Endnotes:

1. Decision in Civil Case No. 41021 of Regional Trial Court, Branch 134, Makati. p.15. 2. The Bank of Ayudhya expressed impossibility of availment against the above- mentioned letter of credit because the same had been issued, for the account of Siam Union Metal L.P. (not General Chemicals of Thailand), for a different amount covering "zinc highgrade," and in favor of Electrolytic Zinc Co. of Australasia Ltd. (not Inter Resin) (Exh. "Q," Record p. 27). 3. The Bank of America, Bangkok, in an answer to the inquiry of the Bank of America, Manila, stated that General Chemicals of Thailand received the bill of lading but denied having ordered them. However, Bank of America, Bangkok, doubted that it could hold the merchandise in favor of Bank of America, Manila, as it did not have the documents (Exhs. "R" and "R-1," Record, pp. 28-29). 4. The dispositive portion reads: "WHEREFORE, in view of the foregoing, judgment is hereby rendered as follows: 1. ordering the dismissal of the complaint for lack of merit; 2. defendants’ counterclaim with the Court found to be tenable and meritorious; 3. plaintiff BA is hereby ordered to pay the defendants the Peso equivalent of US$1,461,400.00 with interests counted from April 21, 1981, until fully paid; 4. plaintiff is hereby ordered to pay the defendants attorney’s fees in the amount of P30,000.00; 5. ordering the dissolution and lifting of the attachment issued by the Court against defendants’ properties’ and 6. with costs against plaintiff"

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(Decision in Civil Case No. 41021, p. 209). 5. Decision in Civil Case No. 41021, p. 21. 6. Decision in Civil Case No. 41021, pp. 23-24. 7. CA-G.R. CV No. 24236, prom. 28 January 1992; Lapeña, Jr., ponente, Guingona and Santiago, concurring. 8. Petition, pp. 13-14. 9. See extensive discussions in William S. Shaterian, Export-Import Banking: The Instruments and Operations Utilized by American Exporters and Importers and their Banks in Financing Foreign Trade (The Ronald Press Company: New York, 1947, pp. 284-374), James J. White and Robert S. Summers (eds) Uniform Commercial Code (West Publishing Co.: St. Paul, 1988) pp. 806-883, and John H. Jackson and William J. Davey Legal Problems of International Economic Relations: Cases, Materials and Text on the National and International Economic Relations, 2nd Ed. (West Publishing Co., St. Paul, pp. 52-63). 10. Article 10 of the U.C.P. defines an irrevocable letter of credit as one that "constitutes a definite undertaking of the issuing bank, provided that the stipulated documents are presented and that the terms and conditions of the credit are complied with: i. if the credit provides for sight payment — to pay, or that payment will be made; ii. if the credit provides for deferred payment — to pay, or that payment will be made, on the date(s) determinable in accordance with the stipulations of the credit; iii. if the credit provides for acceptance — to accept drafts drawn by the beneficiary if the credit stipulates that they are to be drawn on the issuing bank, or to be responsible for their acceptance and payment at maturity if the credit stipulates that they are to be drawn on the applicant for the credit or any other drawee stipulated in the credit; iv. if the credit provides for negotiation — to pay without recourse to drawers and/or bona fide holders, draft(s) drawn by the beneficiary, at sight or at a tenor, on the applicant for the credit or on any other drawee stipulated in the credit other than the issuing bank itself, or to provide for negotiation by another bank and to pay, as above, if such negotiation is not effected."cralaw virtua1aw library 11. Article 17 of the U.C.P. states: "Banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the general and/or particular conditions stipulated in the documents or superimposed thereon; nor do they assume any liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any documents, or for the good faith or acts and/or omissions, solvency, performance or standing of the consignor, the carriers, or the insurers of the goods, or any other person whomsoever."cralaw virtua1aw library According to White and Summers, op. cit.: ". . . Bankers . . . (describe) the transaction between the bank and the beneficiary as a ‘paper transaction.’ By that they mean the bank issuer’s agent should be able to sit with a necktie and a white shirt at a desk in a bank and by looking at papers that are presented to him determine whether the bank is obliged to make payment or not. He is not obligated and, indeed, is foreclosed from donning his overalls and going into the field to determine whether the underlying contract has been performed. This is the principal reason why careful courts and lawyers state that the letter of credit is not a guarantee. In a typical guarantee the guarantor will agree to make payments if, and only if, the customer has failed to fulfill his obligation on the underlying contract. If his obligation has been avoided because of the acts of the beneficiary, typically there would be no obligation to guarantee and thus no duty on the guarantor to pay. Letters of credit are different, and they are explicitly and consciously designed to be different in this respect. In effect, the beneficiary under a letter of credit has bargained for the right to be paid and thus often to be the defendant instead of the plaintiff in the ensuing litigation on the underlying contract, to be sued at home instead of being a plaintiff abroad . . ."cralaw virtua1aw library 12. "The buyer of the merchandise, who is also the buyer of the credit instrument, is the party who initiates the operation. His contract is with the bank which is to issue the instrument and is represented by the Commercial Credit of Agreement form which he signs, supported by the mutually made promises contained in the Agreement" (Shaterian, op. cit. pp. 291-292). 13. "The Opening Bank, usually the buyer’s bank, is the bank which actually issues the instrument. It is also known as the Issuing Bank. The selection of the opening bank is important. It should be a strong bank, well known and well regarded in international trading circles. This is the reason . . . smaller banks do not attempt to issue their own commercial credit instruments but take advantage of the facilities of . . . much larger, stronger, and better known correspondent banks . . . The purposes of commercial credit may not be readily accomplished unless the opening bank is well known and well regarded" (Shaterian, op. cit., p. 292). 14. "The seller of the merchandise is called the Beneficiary of the credit instrument. The instrument is addressed to him and is in his favor. It is the written contract of the bank which has created the instrument. While the bank cannot compel the beneficiary to ship and avail himself of the benefits of the instrument, the seller may recover from the bank the value of his shipment if made within the terms of the instrument, even though he has not given the bank any direct consideration for the bank’s promises contained in the instrument. By a stretch of imagination, and in order to support the instrument as a two-sided contract, supported by mutually given considerations, the courts seem to hold that the commission paid or to be paid by the buyer to the bank is also the consideration flowing from the seller to the bank" (Shaterian, op. cit., p. 292). 15. "Whenever the instrument is not delivered to the buyer and by him mailed to the beneficiary, the opening bank will advise the existence of the credit to the beneficiary through its correspondent bank operating in the same locality as the seller. Such correspondent bank becomes the Notifying Bank. The services of a notifying bank must always be utilized if the credit is to be advised to the beneficiary by cable . . ." (Shaterian, op. cit., p. 292).

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16. "Whenever the beneficiary stipulates that the obligation of the opening bank shall also be made the obligation of a bank to himself, we have what is known as a confirmed commercial credit and the bank local to the beneficiary becomes the Confirming Bank. In view of the fact that commercial credits issued by American banks in favor of foreign sellers are invariably issued only by . . . larger well known banks, no seller requests that they be confirmed by another bank. The standing of the . . . opening bank is good enough. But many foreign banks are not particularly strong or well known, compared with . . . banks issuing these credit instruments. Indeed, many banks operating abroad are only known through the Banker’s Almanac.’They serve a useful purpose in their own small communities and perhaps maintain dollars account with the larger . . . banks. But their names are quite meaningless to the . . . exporter, and when the foreign buyer offers to his . . . seller a credit instrument issued by such a bank, the seller may not receive the protection and other facilities which an instrument issued by a large, strong, and well known bank will give him. To overcome this, he requests that the credit as issued by the local bank of the foreign buyer be confirmed by a well known . . . bank, which will turn out to be (a) . . . bank with which the local bank of the buyer carries a dollar account. The liability of the confirming bank is a primary one and is not contingent in any sense of the word. It is as if the credit were issued by the opening and confirming banks jointly, thus giving the beneficiary or a holder for value of drafts drawn under the credit, the right to proceed against either or both banks, the moment the credit instrument has been breached. The confirming bank receives a commission for its confirmation from the opening bank which the opening bank, in turn, passes on to the buyer of the merchandise" (Shaterian, op. cit., pp. 294295). 17. "The Paying Bank is the bank on which the drafts are to be drawn. It may be the opening bank, it may be a bank other than the opening bank and not in the city of the beneficiary, or it may be a bank in the city of the beneficiary, usually the advising bank. If the beneficiary is to draw and receive payment in his own currency, the notifying bank will be indicated as the paying bank also. When the draft is to be paid in this manner, the paying bank assumes no responsibility but merely pays the beneficiary and debits the payment immediately to the account which the opening bank has with it. If the opening bank maintains no account with the paying bank, the paying bank reimburses itself by drawing a bill of exchange on the opening bank, in dollars, for the equivalent of the local currency paid to the beneficiary, at its buying rate for dollar exchange. The beneficiary is entirely out of the transaction because his draft is completely discharged by payment, and the credit arrangement between the paying bank and the opening bank does not concern him" (Shaterian, op. cit., pp. 293-294). 18. "If the draft contemplated by the credit instrument is to be drawn on the opening bank or on another designated bank not in the city of the seller, any bank in the city of the seller which buys or discounts the draft of the beneficiary becomes a Negotiating Bank. As a rule, whenever the facilities of a notifying bank are used, the beneficiary is apt to offer his drafts to the notifying bank for negotiation, thus giving the notifying bank the character of a negotiating bank also. By negotiating the beneficiary’s drafts, the negotiating bank becomes "an endorser and bona fide holder" of the drafts and within the protection of the credit instrument. It is also protected by the drawer’s signature, as the drawer’s contingent liability, as drawer, continues until discharged by the actual payment of the bills of exchange" (Shaterian, op. cit., p. 293). 19. G.R. No. 94209, prom. 30 April 1991; 196 SCRA 576. 20. "The Uniform Customs and Practices for documentary credits were first published in 1933. The current version was adopted by the International Chamber of Commerce Council in 1983 and published as Publication No. 400 in July of that year. This current version has the blessing of the United Nations Commission on International Trade Law (UNCITRAL). The Uniform Customs and Practices are not ‘law’ because of the act of any legislature or court, but because they have been explicitly and implicitly made part of the contract of letters of credit . . . [M]any of the letters of credit in the United States are governed by the Uniform Customs and Practices and not by the UCC (Uniform Commercial Code) . . . "In general, the UCP is much more detailed than the UCC. It clearly shows the tracks of many bankers and bank lawyers walking back and forth across its surface . . . "Every lawyer who deals at any time with a letter of credit should have read the UCP at least once. The lawyer who deals routinely with such letters or who advises a bank or beneficiary in a circumstance where litigation is threatened or commenced should look more closely at the UCP." (White and Summers, op. cit., pp. 881-883). 21. No. L-24821, 16 October 1970; 35 SCRA 256. 22. See Feati Bank v. Court of Appeals, 196 SCRA 576. 23. 76 SCRA 61; see also Roman Catholic Archbishop v. Court of Appeals, 198 SCRA 300; Macenas v. Court of Appeals, 180 SCRA 83; Sociedad Europea de Financiacion v. Court of Appeals, 193 SCRA 105; Lianga Lumber Co. v. Lianga Timber Co., Inc. 76 SCRA 223. 24. Exh. "C," Records, p.17. 25. "The banks involved charge a modest commission for their various services. The higher the risk that the bank assumes, the higher the commission (e.g., to confirm an L/C is riskier than merely transmitting an advice of credit) (Jackson and Davey, op. cit, p. 53). 26. See Art. 1878 (9) and (11) of the Civil Code, respectively, provides that a special power of attorney is required" [T]o bind the principal to render some service without compensation" and" [T]o obligate the principal as a guarantor or surety." Art. 1887 states that "the agent shall act in accordance with the instructions of the principal." Moreover, Art. 1888 enjoins the agent from carrying

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out "an agency if its execution would manifestly result in loss or damage to the principal."cralaw virtua1aw library 27. In fact, Inter-Resin’s pro forma invoice (Exh. "A") sent to General Chemicals, on the basis of which the letter of credit was apparently issued, demanded for a confirmed and irrevocable letter of credit. 28. The suspicion that no contract of sale was perfected between Inter-Resin and General Chemicals may find support in the absence of a written memorandum of the sale or any other document showing that General Chemicals ordered the goods, and the Comment of Inter-Resin detailing the material events of this case but, surprisingly, failed to categorically state or show that such contract was consented to by the parties. 29. Article 8 of U.C.P. states: "A credit may be advised to a beneficiary through another bank (the advising bank) without engagement on the part of the advising bank, but that bank shall take reasonable care to check the apparent authenticity of the credit which it advises. (Revised 1983, ICC No. 400; reproduced in Jackson and Davey, op. cit., p. 54); TSN, 13 May 1982, Darley Wijiesekara on cross-examination. 30. 1983 ed., p. 96. 31. See Shaterian, op. cit., p. 293. 32. In this respect, its belated theory before us and in its motion for reconsideration of the assailed decision should be rejected for being iniquitous under the circumstances. In fact, Bank of America has failed to present the draft and, more substantially, Inter-Resin has not been afforded full opportunity to refute by evidence this new argument of Bank of America. In short, we find the records insufficient to arrive at a just determination on this fact that can allow us to apply the Negotiable Instruments Law thereon. 33. Philip W. Thayer, "Irrevocable Credits in International Commerce: Their Legal Effects," Columbia Law Review (1937), vol. 37, pp. 1357-1358. 34. "Both in the application form for import credits and in the regulations governing our export credits, it is definitely provided that the banks involved shall not be responsible for the genuineness of the documents submitted under commercial credits. It the buyer of merchandise has sufficient confidence in the integrity of the seller to provide payment to the seller against shipping documents to be tendered to the bank by the seller, as provided by the credit instrument, it follows that the same confidence should extend to the tendering of genuine documents. If the seller is dishonest, he need not attempt to defraud the buyer by the tender of forged documents. He can obtain the desired evil end with less opportunity for prompt detection by shipping inferior goods or no goods at all. The carrier does not pry into the cases and packages to make sure that the merchandise is, in fact, as described in the bill of lading and invoices which are prepared by the shipper. The tender of forged documents for the purpose of obtaining money is a crime and the seller who commits such crime is prosecuted and jailed. ". . . Neither can the interested banks assume responsibility for the character or quality of the goods shipped nor for the terms of the sale contract not incorporated and made part of the credit instrument. How could they? While the parties to the sale contract may be experts as to the involved merchandise the banks are not, generally speaking, sufficiently versed in the fine points of each and every class of merchandise which they finance. Even assuming the bank has men in its employ who can qualify as experts in certain lines of merchandising, it would not wish to extend this sort of service without adequate compensation but such service is not a banking function. ". . . Because of this the credit should describe the goods in general terms only and the buyer should trust that the seller will ship the exact merchandise ordered. If the buyer is not satisfied with the moral standing of the seller, he should not open the credit but buy on open account basis, or subject the draft terms with the additional requirement that the draft need not be paid until after the buyer has had an opportunity to examine the goods to make sure that he has received exactly what he ordered" (Sh

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Republic of the Philippines SUPREME COURT Manila THIRD DIVISION

G.R. No. L-100831 December 17, 1993 RELIANCE COMMODITIES, INC., petitioner, vs. DAEWOO INDUSTRIAL CO., LTD., respondent. Ongkiko & Dizon Law Offices for petitioner. Lao, Veloso-Lao & Lao for private respondent.

FELICIANO, J.: On 9 January 1980, petitioner Reliance Commodities, Inc. ("reliance") and private respondent Daewoo Industrial Co., Ltd. ("Daewoo") entered into a contract of sale under the terms of which the latter undertook to ship and deliver to the former 2,000 metric tons of foundry pig iron for the price of US$404,000.00. Pursuant to this contract, Daewoo shipped from Pohang, Republic of Korea, 2,000 metric tons of foundry pig iron on board the M/S Aurelio III under Bill of Lading No. PIP-1 for carriage to and delivery in Manila to its consignee, Reliance. The shipment was fully paid for. Upon arrival in Manila, the subject cargo was found to be short of 135.655 metric tons as only 1,864.345 metric tons were discharged and delivered to Reliance. On 2 May 1980, another contract was entered into between the same parties for the purchase of another 2,000 metric tons of foundry pig iron. Daewoo acknowledged the short shipment of 135.655 metric tons under the 9 January 1980 contract and, to compensate Reliance therefor, bound itself to reduce the price by US$1 to US$2 per metric ton of pig iron for succeeding orders. This undertaking was made part of the 2 May 1980 contract. However, that contract was not consummated and was later superseded by still another contract dated 31 July 1980. The 31 July 1980 contract read as follows: CONFIRMATION OF ORDER SALES NOTE No. HSB-SN/S001-R To Messrs: Reliance Commodities, Inc. 161, 9th Street, 10th Avenue Caloocan City Reference: HSB-PI/8019-R Contracted through: Order No.: Commodity: Foundry Pig Iron Spec.: JIS G 2202 Class 1-1C Quantity: 2,000MT Price: US $190.30/MT C&F Manila Amount: US $380,600.00 Packing: Bare Loose Shipment: August Destination: Manila Payment: By an irrevocable of sight letter of credit in favor of Daewoo Industrial Co., Ltd., 541 5th Street, namdaemunro, Jung-Gu, Seoul, Korea. Remarks: Other terms and conditions as per attached sheet. We confirm our sales as specified herein. Subject to the terms and conditions set forth herein, this confirmation of order ("the Contract") constitutes a contract between Daewoo Industrial Co. Ltd. ("Seller") and the addressee ("Buyer"). Other terms and conditions of the Contract are on the back hereof. If you find anything herein not in order, please let us know immediately, if necessary by telex, cable or telegram. Kindly sign and return the duplicate after confirming the above.

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Read and agreed to: Name of addressee: Daewoo Industrial Co., Ltd. By: (SGD) MR SAMUEL CHUASON By: (SGD) JA-HYUNG RYU Date: July 31, 1980 Date: July 31, 19801 The attached sheet referred to above set out the following: Reliance Commodities, Inc. Our Reference No. HSB-PI/SO19-R 1. Invoicing: Actual Weight 2. Chemical Composition (%): Carbon: 3.30 min. (aiming 3.80 min.) Silicon: 2.21-2.60 (aiming 2.60) Manganese: 0.30-1.00 Phosphorous: 0.45 max. (aiming 0.25 max.) Sulfur: 0.05 max. 3. Quantity Tolerance: +10 percent of total quantity should be allowed. 4. Unit Weight: 5 kgs. + 1 kg. (one notch) 5. Broken pieces of twenty (20%) percent should be allowed. 6. All disputes, controversies, or differences which may arise between the parties, out of or in relation to or in connection with this contract, or for the breach thereof, shall be finally settled by arbitration in Korea in accordance with the rules and regulations of Korea commercial arbitration association or in the Philippines in accordance with the Philippine arbitration rules. 7. Letter of credit should be opened on or before August 7, 1980. 8. Other terms and conditions, if necessary, are to be solved later by mutual agreement. 9. Mill sheets and copies of non-negotiable documents to be sent to buyer by airmail immediately after shipment. 10. This Sales Note No. HSB-SN/S001R cancels Sales Note No. HSB-SN/8001 dated May 2, 1980.2 On August 1, 1980, Reliance, through its Mrs. Samuel Chuason, filed with the China Banking Corporation, an application for a Letter of Credit (L/C) in favor of Daewoo covering the amount of US$380,600.00. The application was endorsed to the Iron and Steel Authority (ISA) or approval but the application was denied. Reliance was instead asked to submit purchase orders from end-users to support its application for a Letter of Credit. However, Reliance was not able to raise purchase orders for 2,000 metric tons. Reliance alleges that it was able to raise purchase orders for 1,900 metric tons. 3 Daewoo, upon the other hand, contends that Reliance was only able to raise purchase orders for 900 metric tons. 4 An examination of the exhibits 5 presented by Reliance in the trial court shows that only purchase orders for 900 metric tons were stamped "Received" by the ISA. The other purchase orders for 1,000 metric tons allegedly sent by prospective end users to Reliance were not shown to have been duly sent and exhibited to the ISA. Whatever the exact amount of the purchase orders was, Daewoo rejected the proposed L/C for the reason that the covered quantity fell short of the contracted tonnage. Thus, Reliance withdrew the application for the L/C on 14 August 1980. Subsequently, Daewoo leaned that the failure of Reliance to open the L/C as stipulated in the 31 July 1980 contract was due to the fact that as early as May 1980, Reliance has already exceeded its foreign exchange allocation for 1980. Because of the failure of Reliance to comply with its undertaking under the 31 July 1980 contract, Daewoo was compelled to sell the 2,000 metric tons to another buyer at a lower price, to cut losses and expenses Daewoo had begun to incur due to its inability to ship the 2000 metric tons to Reliance under their contract. On 3 September 1980, Reliance, through its counsel, wrote Daewoo requesting payment of the amount of P226,370.48, representing the value of the short delivery of 135.655 metric tons of foundry pig iron under the contract of 9 January 1980. Not being heeded, Reliance filed an action for damages against Daewoo with the trial court. Daewoo responded, inter alia, with a counterclaim for damages, contending that Reliance was guilty of breach of contract when it failed to open an L/C as required in the 31 July 1980 contract. After trial, the trial court ruled that:

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(1) the 31 July 1980 contract did not extinguish Daewoo's obligation for short delivery pursuant to the 9 January 1980 contract and must therefore pay Reliance P226,370.48 representing the value of the short delivered goods plus interest and attorney's fees; and (2) Reliance is in turn liable for breach of contract for its failure to open a letter of credit in favor of Daewoo pursuant to the 31 July 1980 contract and must therefore pay the latter P331,920.97 as actual damages with legal interest plus attorney's fees. Reliance appealed the second part of the trial court's judgment. Public respondent Court of Appeals found no merit in the appeal and in affirming the decision of the trial court ruled that: 1) the trial court's finding that Reliance could not have opened the Letter of Credit in favor of Daewoo because it had already exhausted its foreign exchange allocation at the time of its application, was amply supported by evidence; and 2) the opening of a letter of credit is not such a future and uncertain event as to make it a suspensive condition within the contemplation of law; but, only mode of payment agreed upon by the parties, and a standard mode at that when one of the parties to the transaction is a foreigner and the consideration is payable in foreign exchange. In the present Petition for Review, Reliance assails the award of damages in favor of Daewoo. Reliance contends a) that its failure to open a Letter of Credit was due to the failure of Daewoo to accept the purchase orders for 1,900 metric tons instead of 2,000 metric tons; b) that the opening of the Letter of Credit was a condition precedent to the effectivity of the contract between Reliance and Daewoo; and c) that since such condition had not occurred, the contract never came into existence and, therefore, Reliance should not have been held liable for damages. The issue before us is whether or not the failure of an importer (Reliance) to open a letter of credit on the date agreed upon makes him liable to the exporter (Daewoo) for damages. In addressing this issue, it is useful to recall the nature of a Letter of Credit, and the mechanics involved in applying for a Letter of Credit. The nature of a letter of credit was extensively discussed in Bank of America, NT & SA v. Court of Appeals, et al. 6by Vitug, J. in the following terms: A letter of credit is a financial device developed by merchants as a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying. To break the impasse, the buyer may be required to contract a bank to issue a letter of credit in favor of the seller so that, by virtue of the letter of credit, the issuing bank can authorize the seller to draw drafts and engage to pay them upon their presentment simultaneously with the tender of documents required by the letter of credit. The buyer and seller agree on what documents are to be presented for payment, but ordinarily they are documents of title evidencing or attesting to the shipment of the goods to the buyer. Once the credit is established, the seller ships the goods to the buyer and in the process secures the required shipping documents or documents of title. To get paid, the seller executes a draft and pays cash to the seller if it finds that the documents submitted by the seller conform with what the letter of credit requires. The bank then obtains possession of the documents upon paying the seller. The transaction is completed when the buyer reimburses the issuing bank and acquires the documents entitling him to the goods. Under this arrangement, the seller gets paid only if he delivers the documents of title over the goods, while the goods only after reimbursing the bank. 7 (footnotes omitted) A letter of credit is one of the modes of payment, set out in Sec. 8, Central Bank Circular No. 1389, "Consolidated Foreign Exchange Rules and Regulations," dated 13 April 1993, by which commercial banks sell foreign exchange to service payments for, e.g., commodity imports. 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. 8 It creates in the seller/exporter a secure expectation of payment. A letter of credit transaction may thus 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.

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(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, under (a) above, of the account party and the beneficiary to, inter alia, pay certain monies to the latter. Certain other parties may be added to the foregoing, but the above three are the indispensable ones. The issue raised in the Petition at bar relates principally to the first component contractual relation above: that between account party or importer Reliance and beneficiary or exporter Daewoo. Examining the actual terms of that relationship as set out in the 31 July 1980 contract quoted earlier (and not simply the summary inaccurately rendered by the trial court), the Court considers that under that instrument, the opening of an L/C upon application of Reliance was not a condition precedent for the birth of the obligation of Reliance to purchase foundry pig iron from Daewoo. We agree with the Court of Appeals that Reliance and Daewoo, having reached "a meeting of minds" in respect of the subject matter of the contract (2000 metric tons of foundry pig iron with a specified chemical composition), the price thereof (US $380,600.00), and other principal provisions, "they had a perfected contract." 9 The failure of Reliance to open, the appropriate L/C did not prevent the birth of that contract, and neither did such failure extinguish that contract. The opening of the L/C in favor of Daewoo was an obligation of Reliance and the performance of that obligation by Reliance was a condition of enforcement of the reciprocal obligation of Daewoo to ship the subject matter of the contract — the foundry pig iron — to Reliance. But the contract itself between Reliance and Daewoo had already sprung into legal existence and was enforceable. The L/C provided for in that contract was the mode or mechanism by which payment was to be effected by Reliance of the price of the pig iron. In undertaking to accept or pay the drafts presented to it by the beneficiary according to the tenor of an L/C, and only later on being reimbursed by the account party, the issuing bank in effect extends a loan to the account party. This loan feature, combined with the bank's undertaking to accept the beneficiary's drafts drawn on the bank, constitutes the L/C as a mode of payment. 10 Logically, before the issuing bank open an L/C, it will take steps to ensure that it would indeed be reimbursed when the time comes. Before an L/C can be opened, specific legal requirements must be complied with. The Central Bank of the Philippines has established the following requirements for opening a letter of credit: All L/C's must be opened on or before the date of shipment with maximum validity of one (1) year. Likewise, only one L/C should be opened for each import transaction. for purposes of opening an L/C, importers shall submit to the commercial bank the following documents: a) the duly accomplished L/C application; b) firm offer/proforma invoice which shall contain information on the specific quantity of the importation, unit cost and total cost, complete description/specification of the commodity and the Philippine Standard Commodity Classification statistical code; c) permits/clearances from the appropriate government agencies, whenever applicable; and d) duly accomplished Import Entry Declaration (IED) form which shall serve as basis for payment of advance duties as required under PD 1853. 11 (Emphasis supplied) The need for permits or clearances from appropriate government agencies arises when regulated commodities are to be imported. 12 Certain commodities are classified as "regulated commodities" for purposes of their importation, "for reasons of public health and safety, national security, international commitments, and development/rationalization of local industry." 13 The petitioner in the instant case entered into a transaction to import foundry pig iron, a regulated commodity. In respect of the importation of this particular commodity, the Iron and Steel Authority (ISA) is the government agency designated to issue the permit or clearance. 14 Prior to the issuance of such permit or clearance, ISA asks the buyer/importer to comply with particular requirements, such as to show the availability of foreign exchange allocations. The issuance of an L/C becomes, among other things, an indication of compliance by the buyer/importer with his own government's regulations relating to imports and to payment thereof. 15 The records shows that the opening of the L/C in the instant case became very difficult because Reliance had exhausted its dollar allocation. Reliance knew that it had already exceeded its dollar allocation for the year 1980 when it entered into the 31 July 1980 transaction with Daewoo. 16 As a rule, when the importer has exceeded its foreign exchange allocation, his application would be denied. However, ISA could reconsider such application on a case to case basis. 17 Thus, in the instant case, ISA required Reliance to support its application by submitting purchase orders from end-users for the same quantity the latter wished to import. As earlier noted, Reliance was able to present purchase orders for only 900 metric tons of the subject pig iron. 18 For having exceeded its foreign exchange allocation before it entered into the 31 July 1980 contract with Daewoo, petitioner Reliance can hold only itself

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responsible. for having failed to secure end-users purchase orders equivalent to 2,000 metric tons, only Reliance should be held responsible. Daewoo rejected Reliance's proposed reduced tonnage. It had the right to demand compliance with the terms of the basic contract and had no duty to accept any unilateral modification of that contract. Compliance with Philippine legal requirements was the duty of Reliance; it is not disputed that ISA's requirements were legal and valid, and not arbitrary or capricious. Compliance with such requirements, like keeping within one's dollar allocation and complying with the requirements of ISA, were within the control of Reliance and not of Daewoo. The Court is compelled to agree with the Court of Appeals that the non-opening of the L/C was due to the failure of Reliance to comply with its duty under the contract. We believe and so hold that failure of a buyer seasonably to furnish an agreed letter of credit is a breach of he 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. 19 We hold, further, that the Court of Appeals committed no reversible error when it ruled that the damages incurred by Daewoo were sufficiently proved with the testimony of Mr. Ricardo Fernandez and "the various documentary evidence showing the loss suffered by the defendant when it was compelled to sell the subject goods at a lower price." 20 WHEREFORE, in view of the foregoing, the Petition for Review is hereby DENIED for lack of merit and the decision of the Court of Appeals dated 8 February 1991 is hereby AFFIRMED. Costs against petitioner. SO ORDERED. Bidin, Romero, Melo and Vitug, JJ., concur.

# Footnotes 1 As quoted in the Court of Appeals decision; Rollo pp. 47-48. 2 Id., Rollo pp. 48-49. 3 TSN, 16 December 1992, direct Examination of Mr. Samuel Chuason, p. 40. 4 TSN, 25 April 1986, Cross Examination of Ms. Nancy Solinap, pp. 11-12. 5 Records, Exhibits I to I-4 for then-plaintiff Reliance Commodities, Inc., pp. 195-199. 6 G.R. No. 105395, promulgated December 10, 1993. 7 Id. 8 Ryan, "General Principles and Classifications of Letters of Credit", in Letters of Credit (1981), p. 12. 9 Decision of the Court of Appeals, p. 11; Villamor v. Court of Appeals, 202 SCRA 607 (191); Edca Publishing & Distributing Corporation v. Santos, 184 SCRA 614 (1990). 10 Sia v. People, 121 SCRA 655 (1983); Vintola v. Insular Bank of Asia & America, 150 SCRA 578 (1987); Abad v. CA, 181 SCRA 195 (1990). 11 Section 9, CB Circular No. 1389, "Consolidated Foreign Exchange Rules and Regulations", 13 April 1993. 12 Section 7, id. 13 Section 6, Chapter II Foreign Trade Transactions, id. 14 Item No. 19, Section 8, CB Circular No. 1029, "Consolidated Rules and Regulations to Govern Import Transactions", 15 October 1984. 15 Kramer, d'Arlin, Root, International Trade: Theory, Policy, Practice (1959), p. 603. 16 TSN, 16 December 1982, p. 39.

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17 TSN, 25 April 1986, p. 26. 18 TSN, 25 April 1986, pp. 11-12. 19 Such is the rule in many jurisdictions and in the practice of international trade; see chap. 21, "The Finance of Export", in C.M. Schmitthoff, The Export Trade — The Law and Practice of International Trade, (1962), Stevens & Sons Limited, London. 20 Decision of the Court of Appeals, p. 13.

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SECOND DIVISION [G.R. NO. 146717 : November 22, 2004] TRANSFIELD PHILIPPINES, INC., Petitioner, v. LUZON HYDRO CORPORATION, AUSTRALIA and NEW ZEALAND BANKING GROUP LIMITED and SECURITY BANK CORPORATION, Respondents. DECISION TINGA, J.: Subject of this case is the letter of credit which has evolved as the ubiquitous and most important device in international trade. A creation of commerce and businessmen, the letter of credit is also unique in the number of parties involved and its supranational character. Petitioner has appealed from the Decision1 of the Court of Appeals in CA-G.R. SP No. 61901 entitled "Transfield Philippines, Inc. v. Hon. Oscar Pimentel, et al.," promulgated on 31 January 2001.2 On 26 March 1997, petitioner and respondent Luzon Hydro Corporation (hereinafter, LHC) entered into a Turnkey Contract3 whereby petitioner, as Turnkey Contractor, undertook to construct, on a turnkey basis, a seventy (70)-Megawatt hydroelectric power station at the Bakun River in the provinces of Benguet and Ilocos Sur (hereinafter, the Project). Petitioner was given the sole responsibility for the design, construction, commissioning, testing and completion of the Project.4 The Turnkey Contract provides that: (1) the target completion date of the Project shall be on 1 June 2000, or such later date as may be agreed upon between petitioner and respondent LHC or otherwise determined in accordance with the Turnkey Contract; and (2) petitioner is entitled to claim extensions of time (EOT) for reasons enumerated in the Turnkey Contract, among which are variations, force majeure, and delays caused by LHC itself.5 Further, in case of dispute, the parties are bound to settle their differences through mediation, conciliation and such other means enumerated under Clause 20.3 of the Turnkey Contract. 6 To secure performance of petitioner's obligation on or before the target completion date, or such time for completion as may be determined by the parties' agreement, petitioner opened in favor of LHC two (2) standby letters of credit both dated 20 March 2000 (hereinafter referred to as "the Securities"), to wit: Standby Letter of Credit No. E001126/8400 with the local branch of respondent Australia and New Zealand Banking Group Limited (ANZ Bank)7 and Standby Letter of Credit No. IBDIDSB-00/4 with respondent Security Bank Corporation (SBC)8 each in the amount of US$8,988,907.00.9 In the course of the construction of the project, petitioner sought various EOT to complete the Project. The extensions were requested allegedly due to several factors which prevented the completion of the Project on target date, such as force majeure occasioned by typhoon Zeb, barricades and demonstrations. LHC denied the requests, however. This gave rise to a series of legal actions between the parties which culminated in the instant petition. The first of the actions was a Request for Arbitration which LHC filed before the Construction Industry Arbitration Commission (CIAC) on 1 June 1999.10 This was followed by another Request for Arbitration, this time filed by petitioner before the International Chamber of Commerce (ICC)11 on 3 November 2000. In both arbitration proceedings, the common issues presented were: [1) whether typhoon Zeb and any of its associated events constituted force majeure to justify the extension of time sought by petitioner; and [2) whether LHC had the right to terminate the Turnkey Contract for failure of petitioner to complete the Project on target date. Meanwhile, foreseeing that LHC would call on the Securities pursuant to the pertinent provisions of the Turnkey Contract,12 petitioner in two separate letters13 both dated 10 August 2000 advised respondent banks of the arbitration proceedings already pending before the CIAC and ICC in connection with its alleged default in the performance of its obligations. Asserting that LHC had no right to call on the Securities until the resolution of disputes before the arbitral tribunals, petitioner warned respondent banks that any transfer, release, or disposition of the Securities in favor of LHC or any person claiming under LHC would constrain it to hold respondent banks liable for liquidated damages. As petitioner had anticipated, on 27 June 2000, LHC sent notice to petitioner that pursuant to Clause 8.2 14 of the Turnkey Contract, it failed to comply with its obligation to complete the Project. Despite the letters of petitioner, however, both banks informed petitioner that they would pay on the Securities if and when LHC calls on them.15 LHC asserted that additional extension of time would not be warranted; accordingly it declared petitioner in default/delay in the performance of its obligations under the Turnkey Contract and demanded from petitioner the payment of US$75,000.00 for each

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day of delay beginning 28 June 2000 until actual completion of the Project pursuant to Clause 8.7.1 of the Turnkey Contract. At the same time, LHC served notice that it would call on the securities for the payment of liquidated damages for the delay. 16 On 5 November 2000, petitioner as plaintiff filed a Complaint for Injunction, with prayer for temporary restraining order and writ of preliminary injunction, against herein respondents as defendants before the Regional Trial Court (RTC) of Makati. 17 Petitioner sought to restrain respondent LHC from calling on the Securities and respondent banks from transferring, paying on, or in any manner disposing of the Securities or any renewals or substitutes thereof. The RTC issued a seventy-two (72)-hour temporary restraining order on the same day. The case was docketed as Civil Case No. 00-1312 and raffled to Branch 148 of the RTC of Makati. After appropriate proceedings, the trial court issued an Order on 9 November 2000, extending the temporary restraining order for a period of seventeen (17) days or until 26 November 2000. 18 The RTC, in its Order19 dated 24 November 2000, denied petitioner's application for a writ of preliminary injunction. It ruled that petitioner had no legal right and suffered no irreparable injury to justify the issuance of the writ. Employing the principle of "independent contract" in letters of credit, the trial court ruled that LHC should be allowed to draw on the Securities for liquidated damages. It debunked petitioner's contention that the principle of "independent contract" could be invoked only by respondent banks since according to it respondent LHC is the ultimate beneficiary of the Securities. The trial court further ruled that the banks were mere custodians of the funds and as such they were obligated to transfer the same to the beneficiary for as long as the latter could submit the required certification of its claims. Dissatisfied with the trial court's denial of its application for a writ of preliminary injunction, petitioner elevated the case to the Court of Appeals via a Petition for Certiorari under Rule 65, with prayer for the issuance of a temporary restraining order and writ of preliminary injunction.20 Petitioner submitted to the appellate court that LHC's call on the Securities was premature considering that the issue of its default had not yet been resolved with finality by the CIAC and/or the ICC. It asserted that until the fact of delay could be established, LHC had no right to draw on the Securities for liquidated damages. Refuting petitioner's contentions, LHC claimed that petitioner had no right to restrain its call on and use of the Securities as payment for liquidated damages. It averred that the Securities are independent of the main contract between them as shown on the face of the two Standby Letters of Credit which both provide that the banks have no responsibility to investigate the authenticity or accuracy of the certificates or the declarant's capacity or entitlement to so certify. In its Resolution dated 28 November 2000, the Court of Appeals issued a temporary restraining order, enjoining LHC from calling on the Securities or any renewals or substitutes thereof and ordering respondent banks to cease and desist from transferring, paying or in any manner disposing of the Securities. However, the appellate court failed to act on the application for preliminary injunction until the temporary restraining order expired on 27 January 2001. Immediately thereafter, representatives of LHC trooped to ANZ Bank and withdrew the total amount of US$4,950,000.00, thereby reducing the balance in ANZ Bank to US$1,852,814.00. On 2 February 2001, the appellate court dismissed the petition for certiorari . The appellate court expressed conformity with the trial court's decision that LHC could call on the Securities pursuant to the first principle in credit law that the credit itself is independent of the underlying transaction and that as long as the beneficiary complied with the credit, it was of no moment that he had not complied with the underlying contract. Further, the appellate court held that even assuming that the trial court's denial of petitioner's application for a writ of preliminary injunction was erroneous, it constituted only an error of judgment which is not correctible by certiorari , unlike error of jurisdiction. Undaunted, petitioner filed the instant Petition for Review raising the following issues for resolution: WHETHER THE "INDEPENDENCE PRINCIPLE" ON LETTERS OF CREDIT MAY BE INVOKED BY A BENEFICIARY THEREOF WHERE THE BENEFICIARY'S CALL THEREON IS WRONGFUL OR FRAUDULENT. WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE SECURITIES BEFORE THE RESOLUTION OF PETITIONER'S AND LHC'S DISPUTES BY THE APPROPRIATE TRIBUNAL. WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN RELEASING THE AMOUNTS DUE UNDER THE SECURITIES DESPITE BEING NOTIFIED THAT LHC'S CALL THEREON IS WRONGFUL. WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND IRREPARABLE DAMAGE IN THE EVENT THAT: A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ BANK AND SECURITY BANK ARE ALLOWED TO RELEASE, THE REMAINING BALANCE OF THE SECURITIES PRIOR TO THE RESOLUTION OF THE DISPUTES BETWEEN PETITIONER AND LHC. B. LHC DOES NOT RETURN THE AMOUNTS IT HAD WRONGFULLY DRAWN FROM THE SECURITIES. 21

50

Petitioner contends that the courts below improperly relied on the "independence principle" on letters of credit when this case falls squarely within the "fraud exception rule." Respondent LHC deliberately misrepresented the supposed existence of delay despite its knowledge that the issue was still pending arbitration, petitioner continues. Petitioner asserts that LHC should be ordered to return the proceeds of the Securities pursuant to the principle against unjust enrichment and that, under the premises, injunction was the appropriate remedy obtainable from the competent local courts. On 25 August 2003, petitioner filed a Supplement to the Petition 22 and Supplemental Memorandum,23alleging that in the course of the proceedings in the ICC Arbitration, a number of documentary and testimonial evidence came out through the use of different modes of discovery available in the ICC Arbitration. It contends that after the filing of the petition facts and admissions were discovered which demonstrate that LHC knowingly misrepresented that petitioner had incurred delays' notwithstanding its knowledge and admission that delays were excused under the Turnkey Contract to be able to draw against the Securities. Reiterating that fraud constitutes an exception to the independence principle, petitioner urges that this warrants a ruling from this Court that the call on the Securities was wrongful, as well as contrary to law and basic principles of equity. It avers that it would suffer grave irreparable damage if LHC would be allowed to use the proceeds of the Securities and not ordered to return the amounts it had wrongfully drawn thereon. In its Manifestation dated 8 September 2003, 24 LHC contends that the supplemental pleadings filed by petitioner present erroneous and misleading information which would change petitioner's theory on appeal. In yet another Manifestation dated 12 April 2004,25 petitioner alleges that on 18 February 2004, the ICC handed down its Third Partial Award, declaring that LHC wrongfully drew upon the Securities and that petitioner was entitled to the return of the sums wrongfully taken by LHC for liquidated damages. LHC filed a Counter-Manifestation dated 29 June 2004,26 stating that petitioner's Manifestation dated 12 April 2004 enlarges the scope of its Petition for Review of the 31 January 2001 Decision of the Court of Appeals. LHC notes that the Petition for Review essentially dealt only with the issue of whether injunction could issue to restrain the beneficiary of an irrevocable letter of credit from drawing thereon. It adds that petitioner has filed two other proceedings, to wit: (1) ICC Case No. 11264/TE/MW, entitled "Transfield Philippines Inc. v. Luzon Hydro Corporation," in which the parties made claims and counterclaims arising from petitioner's performance/misperformance of its obligations as contractor for LHC; and (2) Civil Case No. 04-332, entitled "Transfield Philippines, Inc. v. Luzon Hydro Corporation" before Branch 56 of the RTC of Makati, which is an action to enforce and obtain execution of the ICC's partial award mentioned in petitioner's Manifestation of 12 April 2004. In its Comment to petitioner's Motion for Leave to File Addendum to Petitioner's Memorandum, LHC stresses that the question of whether the funds it drew on the subject letters of credit should be returned is outside the issue in this appeal. At any rate, LHC adds that the action to enforce the ICC's partial award is now fully within the Makati RTC's jurisdiction in Civil Case No. 04-332. LHC asserts that petitioner is engaged in forum-shopping by keeping this appeal and at the same time seeking the suit for enforcement of the arbitral award before the Makati court. Respondent SBC in its Memorandum, dated 10 March 2003 27 contends that the Court of Appeals correctly dismissed the petition for certiorari . Invoking the independence principle, SBC argues that it was under no obligation to look into the validity or accuracy of the certification submitted by respondent LHC or into the latter's capacity or entitlement to so certify. It adds that the act sought to be enjoined by petitioner was already fait accompli and the present petition would no longer serve any remedial purpose. In a similar fashion, respondent ANZ Bank in its Memorandum dated 13 March 200328 posits that its actions could not be regarded as unjustified in view of the prevailing independence principle under which it had no obligation to ascertain the truth of LHC's allegations that petitioner defaulted in its obligations. Moreover, it points out that since the Standby Letter of Credit No. E001126/8400 had been fully drawn, petitioner's prayer for preliminary injunction had been rendered moot and academic. At the core of the present controversy is the applicability of the "independence principle" and "fraud exception rule" in letters of credit. Thus, a discussion of the nature and use of letters of credit, also referred to simply as "credits," would provide a better perspective of the case. The letter of credit evolved as a mercantile specialty, and the only way to understand all its facets is to recognize that it is an entity unto itself. The relationship between the beneficiary and the issuer of a letter of credit is not strictly contractual, because both privity and a meeting of the minds are lacking, yet strict compliance with its terms is an enforceable right. Nor is it a third-party beneficiary contract, because the issuer must honor drafts drawn against a letter regardless of problems subsequently arising in the underlying contract. Since the bank's customer cannot draw on the letter, it does not function as an assignment by the customer to the beneficiary. Nor, if properly used, is it a contract of suretyship or guarantee, because it entails a primary liability following a default. Finally, it is not in itself a negotiable instrument, because it is not payable to order or bearer and is generally conditional, yet the draft presented under it is often negotiable.29 In commercial transactions, a letter of credit is a financial device developed by merchants as a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying. 30 The use of credits in commercial transactions serves to reduce the risk of nonpayment of the purchase price under the contract for the sale of goods. However, credits are also used in

51

non-sale settings where they serve to reduce the risk of nonperformance. Generally, credits in the non-sale settings have come to be known as standby credits.31 There are three significant differences between commercial and standby credits. First, commercial credits involve the payment of money under a contract of sale. Such credits become payable upon the presentation by the seller-beneficiary of documents that show he has taken affirmative steps to comply with the sales agreement. In the standby type, the credit is payable upon certification of a party's nonperformance of the agreement. The documents that accompany the beneficiary's draft tend to show that the applicant has not performed. The beneficiary of a commercial credit must demonstrate by documents that he has performed his contract. The beneficiary of the standby credit must certify that his obligor has not performed the contract. 32 By definition, a letter of credit is a written instrument whereby the writer requests or authorizes the addressee to pay money or deliver goods to a third person and assumes responsibility for payment of debt therefor to the addressee.33 A letter of credit, however, changes its nature as different transactions occur and if carried through to completion ends up as a binding contract between the issuing and honoring banks without any regard or relation to the underlying contract or disputes between the parties thereto.34 Since letters of credit have gained general acceptability in international trade transactions, the ICC has published from time to time updates on the Uniform Customs and Practice (UCP) for Documentary Credits to standardize practices in the letter of credit area. The vast majority of letters of credit incorporate the UCP.35 First published in 1933, the UCP for Documentary Credits has undergone several revisions, the latest of which was in 1993.36 In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc., 37 this Court ruled that the observance of the UCP is justified by Article 2 of the Code of Commerce which provides that in the absence of any particular provision in the Code of Commerce, commercial transactions shall be governed by usages and customs generally observed. More recently, in Bank of America, NT & SA v. Court of Appeals,38 this Court ruled that there being no specific provisions which govern the legal complexities arising from transactions involving letters of credit, not only between or among banks themselves but also between banks and the seller or the buyer, as the case may be, the applicability of the UCP is undeniable. Article 3 of the UCP provides that credits, by their nature, are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the credit. Consequently, the undertaking of a bank to pay, accept and pay draft(s) or negotiate and/or fulfill any other obligation under the credit is not subject to claims or defenses by the applicant resulting from his relationships with the issuing bank or the beneficiary. A beneficiary can in no case avail himself of the contractual relationships existing between the banks or between the applicant and the issuing bank. Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once the draft and the required documents are presented to it. The so-called "independence principle" assures the seller or the beneficiary of prompt payment independent of any breach of the main contract and precludes the issuing bank from determining whether the main contract is actually accomplished or not. Under this principle, banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the general and/or particular conditions stipulated in the documents or superimposed thereon, nor do they assume any liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any documents, or for the good faith or acts and/or omissions, solvency, performance or standing of the consignor, the carriers, or the insurers of the goods, or any other person whomsoever.39 The independent nature of the letter of credit may be: (a) independence in toto where the credit is independent from the justification aspect and is a separate obligation from the underlying agreement like for instance a typical standby; or (b) independence may be only as to the justification aspect like in a commercial letter of credit or repayment standby, which is identical with the same obligations under the underlying agreement. In both cases the payment may be enjoined if in the light of the purpose of the credit the payment of the credit would constitute fraudulent abuse of the credit. 40 Can the beneficiary invoke the independence principle?chanroblesvirtualawlibrary Petitioner insists that the independence principle does not apply to the instant case and assuming it is so, it is a defense available only to respondent banks. LHC, on the other hand, contends that it would be contrary to common sense to deny the benefit of an independent contract to the very party for whom the benefit is intended. As beneficiary of the letter of credit, LHC asserts it is entitled to invoke the principle. As discussed above, in a letter of credit transaction, such as in this case, where the credit is stipulated as irrevocable, there is a definite undertaking by the issuing bank to pay the beneficiary provided that the stipulated documents are presented and the conditions of the credit are complied with.41 Precisely, the independence principle liberates the issuing bank from the duty of ascertaining compliance by the parties in the main contract. As the principle's nomenclature clearly suggests, the obligation under the letter of credit is independent of the related and originating contract. In brief, the letter of credit is separate and distinct from the underlying transaction. Given the nature of letters of credit, petitioner's argument that it is only the issuing bank that may invoke the independence principle on letters of credit does not impress this Court. To say that the independence principle may only be invoked by the issuing

52

banks would render nugatory the purpose for which the letters of credit are used in commercial transactions. As it is, the independence doctrine works to the benefit of both the issuing bank and the beneficiary. Letters of credit are employed by the parties desiring to enter into commercial transactions, not for the benefit of the issuing bank but mainly for the benefit of the parties to the original transactions. With the letter of credit from the issuing bank, the party who applied for and obtained it may confidently present the letter of credit to the beneficiary as a security to convince the beneficiary to enter into the business transaction. On the other hand, the other party to the business transaction, i.e., the beneficiary of the letter of credit, can be rest assured of being empowered to call on the letter of credit as a security in case the commercial transaction does not push through, or the applicant fails to perform his part of the transaction. It is for this reason that the party who is entitled to the proceeds of the letter of credit is appropriately called "beneficiary." Petitioner's argument that any dispute must first be resolved by the parties, whether through negotiations or arbitration, before the beneficiary is entitled to call on the letter of credit in essence would convert the letter of credit into a mere guarantee. Jurisprudence has laid down a clear distinction between a letter of credit and a guarantee in that the settlement of a dispute between the parties is not a pre-requisite for the release of funds under a letter of credit. In other words, the argument is incompatible with the very nature of the letter of credit. If a letter of credit is drawable only after settlement of the dispute on the contract entered into by the applicant and the beneficiary, there would be no practical and beneficial use for letters of credit in commercial transactions. Professor John F. Dolan, the noted authority on letters of credit, sheds more light on the issue: The standby credit is an attractive commercial device for many of the same reasons that commercial credits are attractive. Essentially, these credits are inexpensive and efficient. Often they replace surety contracts, which tend to generate higher costs than credits do and are usually triggered by a factual determination rather than by the examination of documents. Because parties and courts should not confuse the different functions of the surety contract on the one hand and the standby credit on the other, the distinction between surety contracts and credits merits some reflection. The two commercial devices share a common purpose. Both ensure against the obligor's nonperformance. They function, however, in distinctly different ways. Traditionally, upon the obligor's default, the surety undertakes to complete the obligor's performance, usually by hiring someone to complete that performance. Surety contracts, then, often involve costs of determining whether the obligor defaulted (a matter over which the surety and the beneficiary often litigate) plus the cost of performance. The benefit of the surety contract to the beneficiary is obvious. He knows that the surety, often an insurance company, is a strong financial institution that will perform if the obligor does not. The beneficiary also should understand that such performance must await the sometimes lengthy and costly determination that the obligor has defaulted. In addition, the surety's performance takes time. The standby credit has different expectations. He reasonably expects that he will receive cash in the event of nonperformance, that he will receive it promptly, and that he will receive it before any litigation with the obligor (the applicant) over the nature of the applicant's performance takes place. The standby credit has this opposite effect of the surety contract: it reverses the financial burden of parties during litigation. In the surety contract setting, there is no duty to indemnify the beneficiary until the beneficiary establishes the fact of the obligor's performance. The beneficiary may have to establish that fact in litigation. During the litigation, the surety holds the money and the beneficiary bears most of the cost of delay in performance. In the standby credit case, however, the beneficiary avoids that litigation burden and receives his money promptly upon presentation of the required documents. It may be that the applicant has, in fact, performed and that the beneficiary's presentation of those documents is not rightful. In that case, the applicant may sue the beneficiary in tort, in contract, or in breach of warranty; but, during the litigation to determine whether the applicant has in fact breached the obligation to perform, the beneficiary, not the applicant, holds the money. Parties that use a standby credit and courts construing such a credit should understand this allocation of burdens. There is a tendency in some quarters to overlook this distinction between surety contracts and standby credits and to reallocate burdens by permitting the obligor or the issuer to litigate the performance question before payment to the beneficiary. 42 While it is the bank which is bound to honor the credit, it is the beneficiary who has the right to ask the bank to honor the credit by allowing him to draw thereon. The situation itself emasculates petitioner's posture that LHC cannot invoke the independence principle and highlights its puerility, more so in this case where the banks concerned were impleaded as parties by petitioner itself. Respondent banks had squarely raised the independence principle to justify their releases of the amounts due under the Securities. Owing to the nature and purpose of the standby letters of credit, this Court rules that the respondent banks were left with little or no alternative but to honor the credit and both of them in fact submitted that it was "ministerial" for them to honor the call for payment.43 Furthermore, LHC has a right rooted in the Contract to call on the Securities. The relevant provisions of the Contract read, thus: 4.2.1. In order to secure the performance of its obligations under this Contract, the Contractor at its cost shall on the Commencement Date provide security to the Employer in the form of two irrevocable and confirmed standby letters of credit (the

53

"Securities"), each in the amount of US$8,988,907, issued and confirmed by banks or financial institutions acceptable to the Employer. Each of the Securities must be in form and substance acceptable to the Employer and may be provided on an annually renewable basis.44 8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to the Employer by way of liquidated damages ("Liquidated Damages for Delay") the amount of US$75,000 for each and every day or part of a day that shall elapse between the Target Completion Date and the Completion Date, provided that Liquidated Damages for Delay payable by the Contractor shall in the aggregate not exceed 20% of the Contract Price. The Contractor shall pay Liquidated Damages for Delay for each day of the delay on the following day without need of demand from the Employer. 8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount of such damages from any monies due, or to become due to the Contractor and/or by drawing on the Security."45 A contract once perfected, binds the parties not only to the fulfillment of what has been expressly stipulated but also to all the consequences which according to their nature, may be in keeping with good faith, usage, and law. 46 A careful perusal of the Turnkey Contract reveals the intention of the parties to make the Securities answerable for the liquidated damages occasioned by any delay on the part of petitioner. The call upon the Securities, while not an exclusive remedy on the part of LHC, is certainly an alternative recourse available to it upon the happening of the contingency for which the Securities have been proffered. Thus, even without the use of the "independence principle," the Turnkey Contract itself bestows upon LHC the right to call on the Securities in the event of default. Next, petitioner invokes the "fraud exception" principle. It avers that LHC's call on the Securities is wrongful because it fraudulently misrepresented to ANZ Bank and SBC that there is already a breach in the Turnkey Contract knowing fully well that this is yet to be determined by the arbitral tribunals. It asserts that the "fraud exception" exists when the beneficiary, for the purpose of drawing on the credit, fraudulently presents to the confirming bank, documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue. In such a situation, petitioner insists, injunction is recognized as a remedy available to it. Citing Dolan's treatise on letters of credit, petitioner argues that the independence principle is not without limits and it is important to fashion those limits in light of the principle's purpose, which is to serve the commercial function of the credit. If it does not serve those functions, application of the principle is not warranted, and the commonlaw principles of contract should apply. It is worthy of note that the propriety of LHC's call on the Securities is largely intertwined with the fact of default which is the selfsame issue pending resolution before the arbitral tribunals. To be able to declare the call on the Securities wrongful or fraudulent, it is imperative to resolve, among others, whether petitioner was in fact guilty of delay in the performance of its obligation. Unfortunately for petitioner, this Court is not called upon to rule upon the issue of default'such issue having been submitted by the parties to the jurisdiction of the arbitral tribunals pursuant to the terms embodied in their agreement. 47 Would injunction then be the proper remedy to restrain the alleged wrongful draws on the Securities?chanroblesvirtualawlibrary Most writers agree that fraud is an exception to the independence principle. Professor Dolan opines that the untruthfulness of a certificate accompanying a demand for payment under a standby credit may qualify as fraud sufficient to support an injunction against payment.48 The remedy for fraudulent abuse is an injunction. However, injunction should not be granted unless: (a) there is clear proof of fraud; (b) the fraud constitutes fraudulent abuse of the independent purpose of the letter of credit and not only fraud under the main agreement; and (c) irreparable injury might follow if injunction is not granted or the recovery of damages would be seriously damaged.49 In its complaint for injunction before the trial court, petitioner alleged that it is entitled to a total extension of two hundred fiftythree (253) days which would move the target completion date. It argued that if its claims for extension would be found meritorious by the ICC, then LHC would not be entitled to any liquidated damages. 50 Generally, injunction is a preservative remedy for the protection of one's substantive right or interest; it is not a cause of action in itself but merely a provisional remedy, an adjunct to a main suit. The issuance of the writ of preliminary injunction as an ancillary or preventive remedy to secure the rights of a party in a pending case is entirely within the discretion of the court taking cognizance of the case, the only limitation being that this discretion should be exercised based upon the grounds and in the manner provided by law.51 Before a writ of preliminary injunction may be issued, there must be a clear showing by the complaint that there exists a right to be protected and that the acts against which the writ is to be directed are violative of the said right. 52 It must be shown that the invasion of the right sought to be protected is material and substantial, that the right of complainant is clear and unmistakable and that there is an urgent and paramount necessity for the writ to prevent serious damage. 53 Moreover, an injunctive remedy may only be resorted to when there is a pressing necessity to avoid injurious consequences which cannot be remedied under any standard compensation.54 In the instant case, petitioner failed to show that it has a clear and unmistakable right to restrain LHC's call on the Securities which would justify the issuance of preliminary injunction. By petitioner's own admission, the right of LHC to call on the Securities was

54

contractually rooted and subject to the express stipulations in the Turnkey Contract.55 Indeed, the Turnkey Contract is plain and unequivocal in that it conferred upon LHC the right to draw upon the Securities in case of default, as provided in Clause 4.2.5, in relation to Clause 8.7.2, thus: 4.2.5 The Employer shall give the Contractor seven days' notice of calling upon any of the Securities, stating the nature of the default for which the claim on any of the Securities is to be made, provided that no notice will be required if the Employer calls upon any of the Securities for the payment of Liquidated Damages for Delay or for failure by the Contractor to renew or extend the Securities within 14 days of their expiration in accordance with Clause 4.2.2.56 8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount of such damages from any monies due, or to become due, to the Contractor and/or by drawing on the Security. 57 The pendency of the arbitration proceedings would not per se make LHC's draws on the Securities wrongful or fraudulent for there was nothing in the Contract which would indicate that the parties intended that all disputes regarding delay should first be settled through arbitration before LHC would be allowed to call upon the Securities. It is therefore premature and absurd to conclude that the draws on the Securities were outright fraudulent given the fact that the ICC and CIAC have not ruled with finality on the existence of default. Nowhere in its complaint before the trial court or in its pleadings filed before the appellate court, did petitioner invoke the fraud exception rule as a ground to justify the issuance of an injunction. 58 What petitioner did assert before the courts below was the fact that LHC's draws on the Securities would be premature and without basis in view of the pending disputes between them. Petitioner should not be allowed in this instance to bring into play the fraud exception rule to sustain its claim for the issuance of an injunctive relief. Matters, theories or arguments not brought out in the proceedings below will ordinarily not be considered by a reviewing court as they cannot be raised for the first time on appeal. 59The lower courts could thus not be faulted for not applying the fraud exception rule not only because the existence of fraud was fundamentally interwoven with the issue of default still pending before the arbitral tribunals, but more so, because petitioner never raised it as an issue in its pleadings filed in the courts below. At any rate, petitioner utterly failed to show that it had a clear and unmistakable right to prevent LHC's call upon the Securities. Of course, prudence should have impelled LHC to await resolution of the pending issues before the arbitral tribunals prior to taking action to enforce the Securities. But, as earlier stated, the Turnkey Contract did not require LHC to do so and, therefore, it was merely enforcing its rights in accordance with the tenor thereof. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. 60 More importantly, pursuant to the principle of autonomy of contracts embodied in Article 1306 of the Civil Code,61 petitioner could have incorporated in its Contract with LHC, a proviso that only the final determination by the arbitral tribunals that default had occurred would justify the enforcement of the Securities. However, the fact is petitioner did not do so; hence, it would have to live with its inaction. With respect to the issue of whether the respondent banks were justified in releasing the amounts due under the Securities, this Court reiterates that pursuant to the independence principle the banks were under no obligation to determine the veracity of LHC's certification that default has occurred. Neither were they bound by petitioner's declaration that LHC's call thereon was wrongful. To repeat, respondent banks' undertaking was simply to pay once the required documents are presented by the beneficiary. At any rate, should petitioner finally prove in the pending arbitration proceedings that LHC's draws upon the Securities were wrongful due to the non-existence of the fact of default, its right to seek indemnification for damages it suffered would not normally be foreclosed pursuant to general principles of law. Moreover, in a Manifestation,62 dated 30 March 2001, LHC informed this Court that the subject letters of credit had been fully drawn. This fact alone would have been sufficient reason to dismiss the instant petition. Settled is the rule that injunction would not lie where the acts sought to be enjoined have already become fait accompli or an accomplished or consummated act.63 In Ticzon v. Video Post Manila, Inc.64this Court ruled that where the period within which the former employees were prohibited from engaging in or working for an enterprise that competed with their former employer the very purpose of the preliminary injunction 'has expired, any declaration upholding the propriety of the writ would be entirely useless as there would be no actual case or controversy between the parties insofar as the preliminary injunction is concerned. In the instant case, the consummation of the act sought to be restrained had rendered the instant petition moot for any declaration by this Court as to propriety or impropriety of the non-issuance of injunctive relief could have no practical effect on the existing controversy.65 The other issues raised by petitioner particularly with respect to its right to recover the amounts wrongfully drawn on the Securities, according to it, could properly be threshed out in a separate proceeding. One final point. LHC has charged petitioner of forum-shopping. It raised the charge on two occasions. First, in its CounterManifestation dated 29 June 200466 LHC alleges that petitioner presented before this Court the same claim for money which it has filed in two other proceedings, to wit: ICC Case No. 11264/TE/MW and Civil Case No. 04-332 before the RTC of Makati. LHC argues that petitioner's acts constitutes forum-shopping which should be punished by the dismissal of the claim in both forums. Second, in its Comment to Petitioner's Motion for Leave to File Addendum to Petitioner's Memorandum dated 8 October 2004, LHC alleges that by maintaining the present appeal and at the same time pursuing Civil Case No. 04-332 wherein petitioner pressed for judgment on

55

the issue of whether the funds LHC drew on the Securities should be returned petitioner resorted to forum-shopping. In both instances, however, petitioner has apparently opted not to respond to the charge. Forum-shopping is a very serious charge. It exists when a party repetitively avails of several judicial remedies in different courts, simultaneously or successively, all substantially founded on the same transactions and the same essential facts and circumstances, and all raising substantially the same issues either pending in, or already resolved adversely, by some other court. 67 It may also consist in the act of a party against whom an adverse judgment has been rendered in one forum, of seeking another and possibly favorable opinion in another forum other than by appeal or special civil action of certiorari , or the institution of two or more actions or proceedings grounded on the same cause on the supposition that one or the other court might look with favor upon the other party.68 To determine whether a party violated the rule against forum-shopping, the test applied is whether the elements of litis pendentia are present or whether a final judgment in one case will amount to res judicata in another.69 Forum-shopping constitutes improper conduct and may be punished with summary dismissal of the multiple petitions and direct contempt of court.70 Considering the seriousness of the charge of forum-shopping and the severity of the sanctions for its violation, the Court will refrain from making any definitive ruling on this issue until after petitioner has been given ample opportunity to respond to the charge. WHEREFORE, the instant petition is DENIED, with costs against petitioner. Petitioner is hereby required to answer the charge of forum-shopping within fifteen (15) days from notice. SO ORDERED. Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur. Endnotes:

1

Penned by Justice Candido V. Rivera, concurred in by Justices Conchita Carpio-Morales and Rebecca de Guia-Salvador.

2

Rollo, pp. 52-61.

3

Id. at 62-252.

4

Id. at 75-76.

5

Clause 1.1, Volume II of the Turnkey Contract, Rollo, p. 81.

6

20.3 Dispute Resolution.

If at anytime any dispute or difference shall arise between the Employer and the Contractor in connection with or arising out of this Contract or the carrying out of the Works, the parties together shall in good faith exert all efforts to resolve such dispute or difference by whatever means they deem appropriate, including conciliation, mediation and seeking the assistance of technical, accounting or other experts. At the request of any party, the chief executives of the Employer and the Contractor shall meet in a good-faith effort to reach an amicable settlement of the dispute or difference. Any dispute or difference that the parties are unable to resolve within a reasonable time may, at the option of either party, be referred to arbitration in accordance with Clause 20.4. (Id. at 179) 7

Annex "C," Rollo, pp. 254-256.

8

Annex "D," Id. at 257-259.

9

Clause 4.2.1, Volume II of the Turnkey Contract, Id. at 94.

10

Id. at 261-265.

11

Id. at 359-382.

12

Turnkey Contract, Clause 4.2.5, Rollo, p. 94, in relation to Clause 8.7.1., Rollo, p. 132.

13

Annex "H," Rollo, pp. 287-289; Annex "H-1," Rollo, pp. 320-322.

14

Clause 8.2. Time for Completion.

56

The Contractor shall complete all the Works, including the Tests on Completion, in accordance with the Program on or before the Target Completion Date. (Rollo, p. 125) 15

Vol. 1, Rollo, pp. 355-357.

16

8.7.1. If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to the Employer by way of liquidated damages ("Liquidated Damages for Delay") the amount of US$75,000 for each and every day or part of a day that shall elapse between the Target Completion Date and the Completion Date, provided that Liquidated Damages for Delay payable by the Contractor shall in the aggregate not exceed 20% of the Contract Price. The Contractor shall pay Liquidated Damages for Delay for each day of the delay on the following day without need of demand from the Employer. 17

Annex "L," Rollo, pp. 383-402.

18

Annex "N," Id. at 406-409.

19

Annex "O," Id. at 412-423.

20

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

21

Rollo, pp. 25-26.

22

Vol. II; Id. at 2-78.

23

Id. at 79-92.

24

Id. at 95-98

25

Id. at 109-113.

26

Id. at 666-671.

27

Id. at 598-607.

28

Id. at 619-630.

29

Joseph, Letters of Credit: The Developing Concepts and Financing Functions, 94 Banking Law Journal 850-851 [1977] cited in M. Kurkela, Letters of Credit under International Trade Law, 321 (1985). 30

Bank of America v. Court of Appeals, G.R. No. 105395, 10 December 1993, 228 SCRA 357 citing William S. Shaterian, Export-Import Banking: The Instruments and Operations Utilized by American Exporters and Importers and Their Banks in Financing Foreign Trade, 284-374 (1947). 31

E&H Partners v. Broadway Nat'l Bank, 39 F. Supp. 2d 275, (United States Circuit Court, S.D. New York) No. 96 Civ. 7098 (RLC), 19 October 1998 . 32

J. Dolan, The Law of Letters of Credit, Revised Ed. (2000).

33

24 A Words and Phrases 590, Permanent Edition.

34

Ibid.

35

Jackson & Davey, International Economic Relations, 53 (2nd ed.).

36

ICC Publication No. 500.

37

146 Phil. 269 (1970).

38

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

39

Article 15, UCP.

40

Kurkela, Letters of Credit Under International Trade Law, 286-287 (1985).

41

Art. 10, UCP.

57

42

Supra note 32 at 1-27.

43

Rollo, pp. 604 and 624.

44

Underscoring supplied; Id. at 94.

45

Underscoring supplied; Id. at 132.

46

Art. 1315, Civil Code.

47

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

48

Supra note 32 at 2-63.

49

M. Kurkela, Letters of Credit Under International Trade Law, 309 (1985).

50

Rollo, p. 391.

51

Batangas Laguna Tayabas Bus Company, Inc. v. Bitanga, 415 Phil. 43.

52

Shin v. Court of Appeals, G.R. No. 113627, 6 February 2001, 351 SCRA 257.

53

Zabat v. Court of Appeals, G.R. No. 122089, 23 August 2000, 338 SCRA 551; Philippine Economic Zone Authority v. Vianzon, G.R. No. 131020, 20 July 2000, 336 SCRA 309; Valencia v. Court of Appeals, G.R. No. 119118, 19 February 2001, 352 SCRA 72; Crystal v. Cebu International School, G.R. No. 135433, 4 April 2001, 356 SCRA 296; Ong Ching Kian Chuan v. Court of Appeals, 415 Phil. 365 (2001). 54

Philippine National Bank v. Ritratto Group, Inc., 414 Phil. 494 (2001).

55

Rollo, p. 31.

56

Underscoring supplied; Id. at 94-95.

57

Id. at 132.

58

Vide Annex "L," Rollo. pp. 392-399; Petition for Certiorari, CA Rollo, pp. 7-43.

59

Salafranca v. Philamlife Village Homeowners Association, Inc., 360 Phil. 652; Ruby Industrial Corporation v. Court of Appeals, 348 Phil. 480; Victorias Milling Co., Inc. v. Court of Appeals, 389 Phil. 184. 60

Article 1159, Civil Code.

61

Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. 62

Rollo, p. 493.

63

Aznar Brothers Realty Company v. Court of Appeals, G.R. No. 128102, 7 March 2000, 327 SCRA 359; Soriano v. Court of Appeals, 416 Phil. 226 (2001); Rodil Enterprises v. Court of Appeals, G.R. No. G.R. No. 129609, 29 November 2001, 371 SCRA 79; Unionbank of the Philippines v. Court of Appeals, 370 Phil. 837 (1999). 64

389 Phil. 20 (2000).

65

Black's Law Dictionary, p. 1008, citing Leonhart v. McCormick, D.C. Pa., 395 F. Supp. 1073.

66

Vol. II, Rollo, pp. 666-669.

67

Tantoy, Sr. v. Court of Appeals, G.R. No. 141427, April 20, 2001, 357 SCRA 329.

68

Bangko Silangan Development Bank v. Court of Appeals, 412 Phil. 755 (2001).

69

Tirona v. Alejo, G.R. No. 129313, October 10, 2001, 367 SCRA 17; Manalo v. Court of Appeals, G.R. No. 141297, October 8, 2001, 366 SCRA 752.

58

70

Tantoy, Sr. v. Court of Appeals, supra note 67.; Caviles v. Seventeenth Division, Court of Appeals, G.R. No. 126857, September 18, 2002, 389 SCRA 306.

59

60