Letters_of_credit_law_cases.doc

Letters of Credit Law Cases 2.) Bank of Philippine Islands v De Reny Fabric Industries G.R. No. L-24821 October 16, 1970 Doctrine: 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. Having been positively proven as a fact, the appellants are bound by this established usage. Facts: De Reny Fabric Industries, Inc. (De Reny) applied for, and was granted, four (4) irrevocable commercial letters of credit with the Bank of Philippine Islands (BPI). The letter of credits was used to cover the purchase of goods by De Reny from its American supplier, the J.B. Distributing Company. As each shipment arrived in the Philippines, the De Reny Fabric Industries, Inc. made partial payments to the Bank amounting to 12,000. 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 there for the amount of P12,609.64 up to the filing of its complaint with the court. Issue: Whether or not De Reny fabrics is liable under the letter of Credit Held: 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 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. 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. 3.) Feati Bank & Trust Company vs. Court of Appeals, 196 SCRA 576 (1991) FACTS:

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.-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 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 City trust) with the instruction to the latter that it "forward the enclosed letter of credit to the beneficiary.” 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 documents specified therein. Also incorporated by reference is the Uniform Customs and Practice for Documentary Credits).-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, all of whom certified to the good condition and exports ability of the logs, and the loading was completed. 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.Meanwhile, the logs arrived at Inchon, Korea and were received by the consignee, Hanmi Trade Development Company, to whom Christiansen sold the logs and obtained profit. Hanmi Trade Development Company, on the other hand sold the logs to Taisung Lumber Company at Inchon, Korea.Since the demands by the private respondent for Christiansen to execute the certification proved futile, Villaluz, instituted an action for mandamus and specific performance against Christiansen and the Feati Bank and Trust Company (now City trust).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 certifica tion. While the case was still pending trial, Christiansen left the Philippines without informing the Court and his counsel. Hence, Villaluz, filed an amended complaint make the petitioner solidarily liable with Christiansen. ISSUE: Whether or not a correspondent bank is to be held liable under the letter of credit despite noncompliance by the beneficiary with the terms thereon. HELD: Commercial transactions involving letter of credits are governed by the rule on strict compliance-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. 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.

4.) Transfield Philippines vs Luzon Hydro Electric Corp. GR No 146717, Nov 22, 2004 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. Facts: Transfield Philippines (Transfield) entered into a turn-key contract with Luzon Hydro Corp. (LHC).Under the contract, Transfield were to construct a hydro-electric plants in Benguet and Ilocos. Transfield was given the sole responsibility for the design, construction, commissioning, testing and completion of the Project. The contract provides for a period for which the project is to be completed and also allows for the extension of the period provided that the extension is based on justifiable grounds such as fortuitous event. In order to guarantee performance by Transfield, two stand-by letters of credit were required to be opened. During the construction of the plant, Transfield requested for extension of time citing typhoon and various disputes delaying the construction. LHC did not give due course to the extension of the period prayed for but referred the matter to arbitration committee. Because of the delay in the construction of the plant, LHC called on the stand-by letters of credit because of default. However, the demand was objected by Transfield on the ground that there is still pending arbitration on their request for extension of time. Issue: Whether or not LHC can collect from the letters of credit despite the pending arbitration case Held: Transfield’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. 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. 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. 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.

5.) Metropolitan Waterworks and Sewerage System V. Hon. Reynaldo B. Daway G.R. No. 160732. June 21, 2004 The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to the standby letter of credit issued by the bank as the former prohibition is on the enforcement of claims against guarantors or sureties of the debtors whose obligations are not solidary with the debtor. The concept of guarantee vis-à-vis the concept of an irrevocable letter of credit is inconsistent with each other. The guarantee theory destroys the independence of the bank’s responsibility from the contract upon which it was opened and the nature of both contracts is mutually in conflict with each other. A Standby Letter of Credit is not a guaranty because under a Standby Letter of Credit, the bank undertakes a primary obligation. On the other hand, a guarantor undertakes a collateral obligation which arises only upon the debtor’s default. A Standby Letter of Credit is a primary obligation and not an accessory contract. Facts: Maynilad obtained a 20-year concession to manage, repair, refurbish, and upgrade existing Metropolitan Waterworks and Sewerage System (MWSS) water delivery and sewerage services in Metro Manila’s west zone. Maynilad, under the concession agreement undertook to pay concession fees and itsforeign loans. To secure its obligations, Maynilad was required under Section 9 of the concession contract to put up a bond, bank guarantee or other security acceptable to MWSS. Pursuant to this requirement, Maynilad arranged on for a three-year facility with a number of foreign banks led by Citicorp Intl for the issuance of an irrevocable standby letter of credit (SLC) in the amount of $ 120 million in favor of MWSS for the full and prompt payment of Maynilad’s obligations to MWSS. Due to devaluation of the peso and other business reversals of Maynilad, MWSS filed a notice of early termination of the concession contract. Upon certification of the non performance of Maynilad obligation, the MWSS moved to collect from Citicorp on the standby letters of credit issued. Maynilad filed for corporate rehabilitation. Judge Daway stayed the payment of the letter of credit by Citicorp pursuant to Sec 6 (b) of Rule 4 of the Interim Rules on Corporate Rehabilitation.

Issue: Whether or not the payment of the standby of letter of credit can be stayed by filing of a petition for rehabilitation Held: No. The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to the standby letter of credit issued by the bank as the former prohibition is on the enforcement of claims against guarantors or sureties of the debtors whose obligations are not solidary with the debtor. The participating bank’s obligation under the letter of credit are solidary with respondent Maynilad in that it is a primary, direct, definite and an absolute undertaking to pay and is not conditioned on the prior exhaustion of the debtors assets. These are the same characteristics of a surety or solidary obligor. And being solidary, the claims against them can be pursued separately from and independently of the rehabilitation case. Issuing banks under the letters of credit are not equivalent to guarantors. The concept of guarantee visà-vis the concept of an irrevocable letter of credit is inconsistent with each other. The guarantee theory destroys the independence of the bank’s responsibility from the contract upon which it was opened and 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 letter of credit, the bank undertakes a primary obligation. We have also defined a letter of credit as an engagement by a bank or other person made at the request of a customer that the issuer shall honor drafts or other demands of payment upon compliance with the conditions specified in the credit. A Standby Letter of Credit is not a guaranty because under a Standby Letter of Credit, the bank undertakes a primary obligation. On the other hand, a guarantor undertakes a collateral obligation which arises only upon the debtor’s default. A Standby Letter of Credit is a primary obligation and not an accessory contract.

6.) Bank of America NT & SA v Court of Appeals and Francisco et. al G.R. No. 105395 December 10, 1993 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 receipts 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 document 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. Facts : Bank of America received an Irrevocable Letter of Credit issued by Bank of Ayudhya for the Account of General Chemicals Ltd., Inc. for the sale of plastic ropes and agricultural files. Under the letter of credit, Bank of America acted as an advising bank and Inter-Resin Industrial Corp. (IR) acted as the beneficiary. Upon receipt of the letter advice, Inter- Resin told Bank of America to confirm the letter of credit.

Notwithstanding such instruction, Bank of America failed to confirm the letter of credit. Inter-Resin made a partial availment of the Letter of Credit after presentment of the required documents to Bank of America. After confirmation of all the documents Bank of America issued a check in favor of IR. BA advised Bank of Ayudhya of IR’s availment under the letter of credit and asked for the corresponding reimbursement. IR presented documents for the second availment under the same letter of credit. However, BA stopped the processing of such after they received a telex from Bank of Ayudhya declaring that the LC fraudulent. BA sued IR for the recovery of the first LC payment. The IR contended that Bank of America should have first checked the authenticity of the letter of credit with bank of Ayudhya Issue: Whether or not Bank of America may recover what it has paid under the letter of credit to InterResin Held : May Bank of America then recover what it has paid under the letter of credit when the corresponding draft 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 receipts 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 document 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 services of an advising (notifying) bank 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, which undertakes to encash the drafts drawn by the exporter. Further, instead of going to the place of the issuing bank to claim payment, the buyer may approach another bank, termed the negotiating bank, 18 to have the draft discounted. 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. As a negotiating bank, Bank of America has a right to recourse against the issuer bank and until reimbursement is obtained, Inter-Resin, as the drawer of the draft, continues to assume a contingent liability thereon. Furthermore, 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 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.

6. Bank of America, NT & SA v. Court of Appeals, 228 SCRA 357 (1993) FACTS: Bank of America, NT & SA, Manila, received by registered mail art Irrevocable Letter of Credit purportedly issued by Bank of Ayudhya, Sarnyaek Branch, for the account of General Chemicals, Ltd., of Thailand in the amount to cover the sale of Plastic ropes and "agricultural files," with the Bank of America as advising bank and Inter-Resin Industrial Corporation as beneficiary. Upon receipt of the letter-advice with the letter of credit, Inter-Resin sent its lawyer to Bank of America to have the letter of credit confirmed. The bank did not. The bank employee in charge of letters of credit, however, explained to that there was no need for confirmation because the letter of credit would not have been transmitted if it were not genuine. 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 the peso equivalent of the draft. 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, InterResin, presented to Bank of America the documents for the second availment under the same letter of credit. Immediately upon receipt of a telex from Bank of Ayudhya declaring the letter of credit fraudulent, Bank of America stopped the processing of Inter-Resin's documents and sent a telex to its branch office in Bangkok, Thailand, requesting assistance in determining the authenticity of the letter of credit. Bank of America sued Inter-Resin for the recovery of the peso equivalent of the draft on the partial availment of the now disowned letter of credit.

Trial Court: Ruled for Inter-Resin, holding that (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, that Bank of America made assurances that enticed Inter-Resin and the merchandise to Thailand; Court of Appeals: Sustained the Trial Court. ISSUE: Whether or not the Bank of America acted merely as an advising bank or a confirming bank, corollarily, Bank of America can recover from Inter-Resin. HELD: 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. 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 Amenca 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. 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, 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. 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. In the ordinary course, of business, the perfection of contract precedes the issuance of a letter of credit.