LETTERS OF CREDIT release, or disposition of the Securities in favor of LHC

or any person claiming under LHC would constrain it

1. TRANSFIELD PHILIPPINES INC v LUZON HYDRO to hold respondent banks liable for liquidated
CORP damages.
FACTS: Petitioner and respondent Luzon Hydro LHC sent notice to petitioner that pursuant to Clause
Corporation (hereinafter, LHC) entered into a Turnkey 8.214 of the Turnkey Contract, it failed to comply with
Contract whereby petitioner, as Turnkey Contractor, its obligation to complete the Project. Despite the
undertook to construct, on a turnkey basis, a seventy letters of petitioner, however, both banks informed
(70)-Megawatt hydro-electric power station at the petitioner that they would pay on the Securities if and
Bakun River in the provinces of Benguet and Ilocos Sur when LHC calls on them.
(hereinafter, the Project). Petitioner was given the
sole responsibility for the design, construction, LHC asserted that additional extension of time would
commissioning, testing and completion of the Project. not be warranted; accordingly it declared petitioner in
default/delay in the performance of its obligations
The Turnkey Contract provides that: (1) the target under the Turnkey Contract and demanded from
completion date of the Project shall be on 1 June petitioner the payment of US$75,000.00 for each day
2000, or such later date as may be agreed upon of delay beginning 28 June 2000 until actual
between petitioner and respondent LHC or otherwise completion of the Project pursuant to Clause 8.7.1 of
determined in accordance with the Turnkey Contract; the Turnkey Contract. At the same time, LHC served
and (2) petitioner is entitled to claim extensions of notice that it would call on the securities for the
time (EOT) for reasons enumerated in the Turn-key payment of liquidated damages for the delay.
Contract, among which are variations, force majeure,
and delays caused by LHC itself. Further, in case of ISSUE: W/N the “independence principle” on letters of
dispute, the parties are bound to settle their credit may be invoked by a beneficiary thereof where
differences through mediation, conciliation and such the beneficiary’s call thereon is wrongful or
other means enumerated under Clause 20.3 of the fraudulent.
Turnkey Contract.
RULING: YES. The so-called “independence principle”
To secure performance of petitioner’s obligation on or assures the seller or the beneficiary of prompt
before the target completion date, or such time for payment independent of any breach of the main
completion as may be determined by the parties’ contract and precludes the issuing bank from
agreement, petitioner opened in favor of LHC two (2) determining whether the main contract is actually
standby letters of credit both dated 20 March 2000 accomplished or not. Under this principle, banks
(hereinafter referred to as “the Securities”). assume no liability or responsibility for the form,
sufficiency, accuracy, genuineness, falsification or
In the course of the construction of the project, legal effect of any documents, or for the general
petitioner sought various EOT to complete the Project. and/or particular conditions stipulated in the
The extensions were requested allegedly due to documents or superimposed thereon, nor do they
several factors which prevented the completion of the assume any liability or responsibility for the
Project on target date, such as force majeure description, quantity, weight, quality, condition,
occasioned by typhoon Zeb, barricades and packing, delivery, value or existence of the goods
demonstrations. LHC denied the requests, however. represented by any documents, or for the good faith
This gave rise to a series of legal actions between the or acts and/or omissions, solvency, performance or
parties which culminated in the instant petition. standing of the consignor, the carriers, or the insurers
Foreseeing that LHC would call on the Securities of the goods, or any other person whomsoever.
pursuant to the pertinent provisions of the Turnkey In a letter of credit transaction, such as in this case,
Contract, petitioner—in two separate letters both where the credit is stipulated as irrevocable, there is a
dated 10 August 2000—advised respondent banks of definite undertaking by the issuing bank to pay the
the arbitration proceedings already pending before beneficiary provided that the stipulated documents
the CIAC and ICC in connection with its alleged default are presented and the conditions of the credit are
in the performance of its obligations. Asserting that complied with. Precisely, the independence principle
LHC had no right to call on the Securities until the liberates the issuing bank from the duty of
resolution of disputes before the arbitral tribunals, ascertaining compliance by the parties in the main
petitioner warned respondent banks that any transfer,
contract. As the principle’s nomenclature clearly Maynilad should pay the concession fees that had
suggests, the obligation under the letter of credit is fallen due.
independent of the related and originating contract. In The award of the Appeals Panel became final. MWSS,
brief, the letter of credit is separate and distinct from thereafter, submitted a written notice to Citicorp Int’l
the underlying transaction. Ltd, as agent for the participating banks, that by virtue
of Maynilads failure to perform its obligations under
the Concession Agreement, it was drawing on the
2. MWSS vs. DAWAY AND MAYNILAD Irrevocable Standby Letter of Credit and thereby
demanded payment.
FACTS: MWSS granted Maynilad under a Concession Prior to this, however, Maynilad had filed on a petition
Agreement to manage, operate, repair, decommission for rehabilitation before the RTC of Quezon City which
and refurbish the existing MWSS water delivery and resulted in the issuance of the Stay Order and the
sewerage services in the West Zone Service Area, for disputed Order of November 27, 2003.
which Maynilad undertook to pay the corresponding
concession fees which, among other things, consisted ISSUE: WON the rehabilitation court sitting as such,
of payments of petitioners mostly foreign loans. act in excess of its authority or jurisdiction when it
To secure the concessionaires performance of its enjoined herein petitioner from seeking the payment
obligations, Maynilad was required under Section 6.9 of the concession fees from the banks that issued the
of said contract to put up a bond, bank guarantee or Irrevocable Standby Letter of Credit in its favor
other security acceptable to MWSS.
In compliance with this requirement, Maynilad HELD: YES
arranged for a three-year facility with a number of First, the claim is not one against the debtor but
foreign banks, led by Citicorp Int’l Ltd., for the against an entity that respondent Maynilad has
issuance of an Irrevocable Standby Letter of Credit in procured to answer for its non-performance of certain
favor of MWSS for the full and prompt performance of terms and conditions of the Concession Agreement,
Maynilads obligations to MWSS as aforestated. particularly the payment of concession fees.
Later, the parties agreed to resolve the issues
between them [Maynilad is asking for a mechanism by Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does
which it hoped to recover the losses it had allegedly not enjoin the enforcement of all claims against
incurred and would be incurring as a result of the guarantors and sureties, but only those claims against
depreciation of the Philippine Peso against the US guarantors and sureties who are not solidarily liable
Dollar and in filing to get what it desired, Maynilad with the debtor. Respondent Maynilads claim that the
unilaterally suspended the payment of the concession banks are not solidarily liable with the debtor does not
fees] through an amendment of the Concession find support in jurisprudence.
Agreement which was based on the terms set down in
MWSS Board of Trustees Resolution which provided Letters of credit were developed for the purpose of
inter alia for a formula that would allow Maynilad to insuring to a seller payment of a definite amount upon
recover foreign exchange losses it had incurred or the presentation of documents and is thus a
would incur under the terms of the Concession commitment by the issuer that the party in whose
Agreement. favor it is issued and who can collect upon it will have
his credit against the applicant of the letter, duly paid
However Maynilad served upon MWSS a Notice of in the amount specified in the letter They are in effect
Event of Termination, claiming that MWSS failed to absolute undertakings to pay the money advanced or
comply with its obligations under the Concession the amount for which credit is given on the faith of the
Agreement and its Amendment regarding the instrument. They are primary obligations and not
adjustment mechanism that would cover Maynilads accessory contracts and while they are security
foreign exchange losses. Maynilad filed a Notice of arrangements, they are not converted thereby into
Early Termination of the concession, which was contracts of guaranty. What distinguishes letters of
challenged by MWSS. This matter was eventually credit from other accessory contracts, is the
brought before the Appeals Panel by MWSS. the engagement of the issuing bank to pay the seller once
Appeals Panel ruled that there was no Event of the draft and other required shipping documents are
Termination as defined under Art. 10.2 (ii) or 10.3 (iii) presented to it. They are definite undertakings to pay
of the Concession Agreement and that, therefore,
at sight once the documents stipulated therein are 3. Prudential Bank v IAC
presented.
FACTS: Philippine Rayon Mills, Inc.(PRMI) entered into
The prohibition under Sec 6 (b) of Rule 4 of the Interim a contract with Nissho Co., Ltd. of Japan for the
Rules does not apply to herein petitioner as the importation of textile machineries. To effect the
prohibition is on the enforcement of claims against payment, PRMI applied for a commercial letter of
guarantors or sureties of the debtors whose credit with the Prudential Bank and Trust Company in
obligations are not solidary with the debtor. The favor of Nissho.
participating banks obligation are solidary with Prudential Bank opened a Letter of Credit. Against this
respondent Maynilad in that it is a primary, direct, letter of credit, drafts were drawn and issued by
definite and an absolute undertaking to pay and is not Nissho, which were all paid by the Prudential Bank
conditioned on the prior exhaustion of the debtors through its correspondent in Japan, the Bank of Tokyo.
assets. These are the same characteristics of a surety Two of these drafts were accepted by PRMI, while the
or solidary obligor. And being solidary, the claims others were not.
against them can be pursued separately from and
independently of the rehabilitation case. Later, PRMI ceased business operation. The PRMI's
obligation from the letter of credit remained unpaid
The terms of the Irrevocable Standby Letter of Credit and unliquidated despite repeated demands.
do not show that the obligations of the banks are not
solidary with those of respondent Maynilad. On the An action for collection was filed against PRMI. The
contrary, it is issued at the request of and for the lower court ruled that acceptance of the drafts by
account of Maynilad in favor of the MWSS as a bond Philippine Rayon was indispensable to make the latter
for the full and prompt performance of the obligations liable.
by the concessionaire under the Concession
Agreement and herein MWSS is authorized by the ISSUE: W/N presentment for acceptance of the drafts
banks to draw on it by the simple act of delivering to was indispensable to make PRMI liable
the agent a written certification substantially in the RULING: NO. Presentment for acceptance is not
form of the Letter of Credit. required for sight drafts.
Taking into consideration our own rulings on the
nature of letters of credit and the customs and usage A letter of credit is defined as an engagement by a
developed over the years in the banking and bank or other person made at the request of a
commercial practice of letters of credit, we hold that customer that the issuer will honor drafts or other
except when a letter of credit specifically stipulates demands for payment upon compliance with the
otherwise, the obligation of the banks issuing letters conditions specified in the credit. Through a letter of
of credit are solidary with that of the person or entity credit, the bank merely substitutes its own promise to
requesting for its issuance, the same being a direct, pay for the promise to pay of one of its customers
primary, absolute and definite undertaking to pay the who in return promises to pay the bank the amount of
beneficiary upon the presentation of the set of funds mentioned in the letter of credit plus credit or
documents required therein. commitment fees mutually agreed upon.
In the instant case then, the drawee was necessarily
The public respondent, therefore, exceeded his the herein petitioner. It was to the latter that the
jurisdiction, in holding that he was competent to act drafts were presented for payment. In fact, there was
on the obligation of the banks under the Letter of no need for acceptance as the issued drafts are sight
Credit under the argument that this was not a solidary drafts.
obligation with that of the debtor. Being a solidary
obligation, the letter of credit is excluded from the Presentment for acceptance is necessary only in the
jurisdiction of the rehabilitation court and therefore in cases expressly provided for in Section 143 of the
enjoining petitioner from proceeding against the Negotiable Instruments Law (NIL).
Standby Letters of Credit to which it had a clear right
“SEC. 143. When presentment for acceptance
under the law and the terms of said Standby Letter of
must be made.
Credit, public respondent acted in excess of his
jurisdiction. Presentment for acceptance must be made:
 (a) Where the bill is payable after sight, or in In the instant case, the opening of the letter of credit
any other case where presentment for in favor of Daewoo was an obligation of Reliance and
acceptance is necessary in order to fix the the performance of that obligation by Reliance was a
maturity of the instrument; or condition for enforcement of the reciprocal obligation
of Daewoo to ship the subject matter of the contract –
(b) Where the bill expressly stipulates that it the foundry pig iron – to Reliance. But the contract
shall be presented for acceptance; or itself between Reliance and Daewoo had already
(c) Where the bill is drawn payable elsewhere sprung into legal existence and was enforceable.
than at the residence or place of business of Thus the failure of a buyer seasonably to furnish an
the drawee. agreed letter of credit is a breach of he contract
In no other case is presentment for acceptance between buyer and seller. Where the buyer fails to
necessary in order to render any party to the bill open a letter of credit as stipulated, the seller or
liable.” Obviously then, sight drafts do not require exporter is entitled to claim damages for such breach.
presentment for acceptance. 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
4. Reliance Commodities vs Daewoo Industrial co. transaction been carried out.

Facts: Reliance Commodities, Inc. (Reliance) and Once the credit is established, the seller ships the
Daewoo Industrial Co Ltd (Daewoo) entered into a goods to the buyer and in the process secures the
contract of sale where Reliance undertook to ship and required shipping documents or documents of title. To
deliver to Daewoo 2,000 tons of foundry pig iron. First get paid, the seller executes a draft and pays cash to
contract was consummated and completed but the seller if it finds that the documents submitted by
Daewoo fell short of 135.655 metric tons. Second the seller conform with what the letter of credit
contract for 2,000 metric tons was also perfected. requires. The bank then obtains possession of the
However, Reliance’s application for a letter of credit documents upon paying the seller. The transaction is
was denied by the China Banking Corporation, and it completed when the buyer reimburses the issuing
was shown later that the reason for this is that it has bank and acquires the documents entitling him to the
exceeded its foreign exchange allocation. goods. Under this arrangement, the seller gets paid
only if he delivers the documents of title over the
Because of the failure of Reliance to comply with its goods, while the goods only after reimbursing the
undertaking under the contract, Daewoo was forced bank.
to sell the foundry pig irons to another buyer at a
lower price. Reliance filed an action for damages Doctrine: The failure of a buyer seasonably to furnish
against Daewoo for the recovery of P226,370.48 an agreed letter of credit is a breach of the contract
representing the value of the short delivery of 135.655 between buyer and seller. Where the buyer fails to
metric tons of foundry pig iron under the first open a letter of credit as stipulated, the seller or
contract. Daewoo filed a counterclaim, contending exporter is entitled to claim damages for such breach.
that Reliance was guilty of breach of contract when it
failed to open a letter of credit as required in the 5. Bank of America, NT and SA v. Court of Appeals
second contract.
FACTS:
Issue: W/N Reliance is liable for breach of contract by Bank of America received by registered mail
failing to obtain the letter of credit an irrevocable letter of credit purportedly issued by
Bank of Ayudhya Samyek Branch, for the account of
Rulinng: Yes. Daewoo is liable for damages because
General Chemicals, Ltd., of Thailand in the amount of
the contract to deliver the goods were already
$2,782,000.00 to cover the sale of plastic ropes and
perfected. The opening of an L/C upon application of
agricultural files, with Bank of America as the advising
Reliance was not a condition precedent for the birth of
bank and Inter-Resin Industrial Corporation as
the obligation of Reliance to purchase foundry pig iron
beneficiary.
from Daewoo. As a rule, the failure of to open the
Bank of America notified Inter-Resin of the
appropriate letter of credit did not prevent the birth
letter of credit. Upon request by Inter-Resin for Bank
of the contract, and neither did such failure extinguish
of America to confirm the letter of credit by sending
the contract.
its lawyer, the latter refused although one of its As an advising or notifying bank, Bank of America did
employees explained to Inter-Resin that there was no not incur any obligation more than just notifying Inter-
need for confirmation because the letter of credit is Resin of the letter of credit issued in its favor, let alone
genuine. to confirm the letter of credit.
Inter-Resin therefore twice sought availment
under the letter of credit. Bank of America issued Bringing the letter of credit to the attention of the
P10,219,093 in the first availment upon being satisfied seller is the primordial obligation of an advising bank.
of the documents submitted by Inter-Resin. The same The view that Bank of America should have first
documents were to Bank of Ayudha for checked the authenticity of the letter of credit with
reimbursement. Bank of Ayudhya, by using advanced mode of business
On the request of second availment, Bank of communications, before dispatching the same to
America stopped the processing upon being informed Inter-Resin finds no real support in the UCP.
by Bank of Ayudhya that the letter of credit was
fraudulent. Further, upon conducting an examination As advising bank, Bank of America is bound only to
of the vans sent by Inter-Resin, it found out that they check the “apparent authenticity” of the letter of
contain not ropes but plastic strips, wrappers, rags credit, which it did.
and waste materials.
Bank of America sued Inter-Resin for recovery May Bank of America then recover what it has paid
of the money it gave under the first availment, under the letter of credit when the corresponding
considering the letter of credit has been disowned by draft for partial availment thereunder and the
Bank of Ayudhya. However, the trial court ruled in required documents therefore were later negotiated
favor of Inter-Resin which was affirmed by the Court with it by Inter-Resin? The answer is yes.
of Appeals.
This kind of transaction is what is commonly referred
Issue: to as a discounting arrangement. This time, Bank of
Whether or not, Bank of America, under the America, has acted independently as a negotiating
letter of credit, is an advising bank or a confirming bank, thus saving Inter-Resin from the hardship of
bank, and if it can recover thereof from Inter-Resin the presenting the documents directly to Bank of Ayudhya
amount it has paid. to recover payment. As a negotiating bank, Bank of
America has a right of recourse against the issuer bank
Held: Advising Bank and can recover! and until reimbursement is obtained, Inter-Resin, as
It ruled that the crucial point of dispute in this the drawer of the draft, continues to assume a
case is whether, under the “letter of credit,” Bank of contingent liability thereon.
America has incurred any liability to the “beneficiary”
thereof, an issue that largely is dependent on the 6. ASIAN TERMINALS, INC. vs. PHILAM INSURANCE
bank’s participation in that transaction: as a mere CO., INC
advising or notifying bank, it would not be liable, but FACTS:
as a confirming bank, had this been the case, it could On April 15, 1995, Nichimen Corporation shipped to
be considered as having incurred that liability. Universal Motors Corporation 219 packages
containing 120 units of brand new Nissan Pickup Truck
It cannot seriously be disputed, looking at this case, Double Cab 4×2 model, without engine, tires and
that Bank of America has, in fact, only been an batteries, on board the vessel S/S Calayan Iris from
advising, not confirming, bank, and this much is Japan to Manila. The shipment, which had a declared
clearly evident, among other things, by the provisions value of US$81,368 or P29,400,000, was insured with
of the letter of credit itself, the petitioner bank’s letter Philam against all risks under the marine Policy no.
of advice, its request for payment of advising fee, and 708-8006717-4. The carrying vessel arrived at the port
the admission of Inter-Resin that it has paid the same. of manila on April 20, 1995, and when the shipment
That Bank of America has asked Inter-Resin to submit was unloaded by the staff of ATI, it was found that the
documents required by the letter of credit and package marked as 03-245-42K/1 was in bad order.
eventually has paid the proceeds thereof, did not The Turn Over Survey of bad order cargoes dated April
obviously make it a confirming bank. 21, 1995 identified two packages, labelled 03-245-
42K/1 and 03/237/7CK/2, as being dented and broken.
Thereafter, the cargoes were stored for temporary
safekeeping inside CFS Warehouse in Pier No. 5. On payment by the insurer to the insured operates as an
May 11, 1995, the shipment was withdrawn by R.F. equitable assignment to the insurer of all the
Revilla Customs Brokerage, Inc., the authorized broker remedies that the insured may have against the third
of Universal Motors, and delivered to the latter’s party whose negligence or wrongful act caused the
warehouse in Mandaluyong City. Upon the request of loss. The right of subrogation is not dependent upon,
Universal Motors, a bad order survey was conducted nor does it grow out of, any privity of contract. It
on the cargoes and it was found that one Frame Axle accrues simply upon payment by the insurance
Sub without LWR was deeply dented on the buffle company of the insurance claim. The doctrine of
plate while six Frame Assembly with Bush were subrogation has its roots in equity. It is designed to
deformed and misaligned. Owing to the extent of the promote and accomplish justice; and is the mode that
damage to said cargoes, Universal Motors declared equity adopts to compel the ultimate payment of a
them a total loss. On August 4, 1995, Universal Motors debt by one who, in justice, equity, and good
filed a formal claim for damages in the amount of conscience, ought to pay.
P643,963.84 against Westwind, ATI and R.F. Revilla
Customs Brokerage, Inc. When Universal Motors’ 7. FEATI (now CITYTRUST BANKING CORPORATION)
demands remained unheeded, it sought reparation vs CA G.R. No. 94209 April 30, 1991
from and was compensated in the sum of P633,957.15 FACTS:
by Philam. Accordingly, Universal Motors issued a Bernardo E. Villaluz agreed to sell to Axel
Subrogation Receipt dated November 15, 1995 in Christiansen 2,000 cubic meters of lauan logs. After
favor of Philam. On January 18, 1996, Philam, as inspecting the logs, Christiansen issued a purchase
subrogee of Universal Motors, filed a Complaint for order for said logs. On the arrangements made and
damages against Westwind, ATI and R.F. Revilla upon the instructions of the consignee, Hanmi Trade
Customs Brokerage, Inc. before the Regional Trial Development, the Security Pacific National Bank of Los
Court of Makati City. The trial court rendered Angeles, California issued Irrevocable Letter of Credit
judgment in favour of Philam which ruling was available at sight in favor of Villaluz. The letter of
affirmed by the Court of Appeals modifying the credit was mailed to the Feati Bank with the
amount to be paid by Westwind and ATI. instruction to the latter that it "forward the enclosed
letter of credit to the beneficiary” and the draft to be
ISSUE: Whether or not Philam may claim against drawn is on Security Pacific National Bank and that it
Westwind and ATI as a subrogee be accompanied by the following documents, among
HELD: YES. others: Certification from Han-Axel Christiansen, Ship
The Court holds that petitioner Philam has adequately and Merchandise Broker, stating that logs have been
established the basis of its claim against petitioners approved prior to shipment in accordance with terms
ATI and Westwind. Philam, as insurer, was subrogated and conditions of corresponding purchase Order.
to the rights of the consignee, Universal Motors
Corporation, pursuant to the Subrogation receipt The logs were thereafter loaded on the vessel
executed by the latter in favour of the former. The of Christiansen After the loading of the logs was
right of subrogation accrues simply upon payment by completed, the Chief Mate, Shao Shu Wang issued a
the insurance company of the insurance claim. mate receipt of the cargo which stated the same are in
good condition. However, Christiansen refused to
Petitioner Philam’s action finds support in Article issue the certification as required in paragraph 4 of
2207 of the Civil Code which provides that if the the letter of credit, despite several requests made by
plaintiff’s property has been insured, and he has the private respondent. Because of the absence of the
received indemnity from the insurance company for certification by Christiansen, the Feati Bank and Trust
the injury or loss arising out of the wrong or breach of Company refused to advance the payment on the
contract complained of, the insurance company shall letter of credit. The letter of credit lapsed without the
be subrogated to the rights of the insured against the private respondent receiving any certification from
wrongdoer or the person who has violated the Christiansen. Since the demands by the private
contract. respondent for Christiansen to execute the
certification proved futile, Villaluz, on September 1,
In Malayan Insurance Co., Inc. vs. Alberto, the Court 1971, instituted an action for mandamus and specific
explained the effect of payment by the insurer of the performance against Christiansen and the Feati Bank
insurance claim in this wise: We have held that and Trust Company (now Citytrust) before the then
Court of First Instance of Rizal. On or about 1979, seller and its liability is a primary one as if the
while the case was still pending trial, Christiansen left correspondent bank itself had issued the letter of
the Philippines without informing the Court and his credit.
counsel. Hence, Villaluz, filed an amended complaint
to make the petitioner solidarily liable with In this case, the letter merely provided that
Christiansen. the petitioner "forward the enclosed original credit to
the beneficiary." Considering the aforesaid instruction
ISSUE: WON FEATI Bank may be held solidarily liable in to the petitioner by the issuing bank, the Security
the LoC arrangement for non-compliance by Axel? Pacific National Bank, it is indubitable that the
petitioner is only a notifying bank and not a
HELD: confirming bank as ruled by the courts below. A
No. It is a settled rule in commercial notifying bank is not a privy to the contract of sale
transactions involving letters of credit that the between the buyer and the seller, its relationship is
documents tendered must strictly conform to the only with that of the issuing bank and not with the
terms of the letter of credit. The tender of documents beneficiary to whom he assumes no liability. It follows
by the beneficiary (seller) must include all documents therefore that when the petitioner refused to
required by the letter. A correspondent bank which negotiate with the private respondent, the latter has
departs from what has been stipulated under the no cause of action against the petitioner for the
letter of credit, as when it accepts a faulty tender, acts enforcement of his rights under the letter. In order
on its own risks and it may not thereafter be able to that the petitioner may be held liable under the letter,
recover from the buyer or the issuing bank, as the there should be proof that the petitioner confirmed
case may be, the money thus paid to the beneficiary the letter of credit. At the most, when the petitioner
Thus the rule of strict compliance. An irrevocable extended the loan to the private respondent, it
credit refers to the duration of the letter of credit. assumed the character of a negotiating bank. Even
What is simply means is that the issuing bank may not then, the petitioner will still not be liable, for a
without the consent of the beneficiary (seller) and the negotiating bank before negotiation has no
applicant (buyer) revoke his undertaking under the contractual relationship with the seller. Whether
letter. The issuing bank does not reserve the right to therefore the petitioner is a notifying bank or a
revoke the credit. On the other hand, a confirmed negotiating bank, it cannot be held liable. Absent any
letter of credit pertains to the kind of obligation definitive proof that it has confirmed the letter of
assumed by the correspondent bank. In this case, the credit or has actually negotiated with the private
correspondent bank gives an absolute assurance to respondent, the refusal by the petitioner to accept the
the beneficiary that it will undertake the issuing bank's tender of the private respondent is justified.
obligation as its own according to the terms and
conditions of the credit. 8. BELMAN COMPAÑIA INCORPORADA vs CENTRAL
BANK OF THE PHILIPPINES
In commercial transactions involving letters of G. R. L-10195; November 29, 1958
credit, the functions assumed by a correspondent
bank are classified according to the obligations taken FACTS: The petitioner won a bid to supply the
up by it. The correspondent bank may be called a Philippine Government 1000 reams of onion skin
notifying bank, a negotiating bank, or a confirming paper. It applied to the Philippine National Bank for a
bank. In case of a notifying bank, the correspondent letter of credit in the sum of $4,300.00 to pay its
bank assumes no liability except to notify and/or American supplier based in California. In September
transmit to the beneficiary the existence of the letter 21, 1950, PNB approved and granted the application of
of credit. A negotiating bank, on the other hand, is a the letter of credit, through its correspondent bank in
correspondent bank which buys or discounts a draft the US Crocker First National Bank, paid the payee the
under the letter of credit. Its liability is dependent sum of $4,300 on or before October 19, 1950. On April
upon the stage of the negotiation. If before 26, 1951, the petitioner paid PNB and whose payment
negotiation, it has no liability with respect to the seller was assessed with an excise tax of 17% due to the
but after negotiation, a contractual relationship will passage of the RA 601 which imposes 17% special
then prevail between the negotiating bank and the excise tax on foreign currency exchange. RA 601 was
seller. In the case of a confirming bank, the enacted on March 28, 1951. The petitioner paid under
correspondent bank assumes a direct obligation to the protest and sought to claim a refund contending that
the contract of letter of credit was perfected and Government of the country where such letter of credit
consummated on its approval which is before the was granted.
enactment of RA 601. Hence, the assessed excise tax
was invalid. Respondent contends that the grant or The draft authorized by the letter of credit applied for
approval on an application for a letter of credit for an by Belman and granted by the CBP stated that it must
amount payable in foreign currency is only an be drawn and presented or negotiated in San
executory contract, in the sense that until payment, Francisco, California, U.S.A., not later than October
return, or settlement of the amount paid and delivered 19,1950. It may be presumed that payment was made
by, or collected from the bank in foreign currency be on or before such date. And since Republic Act No. 601
made by the debtor, the contract is not executed or imposing such tax took effect only on March 28, 1951,
consummated. it was not subject to excise tax.

ISSUE: Whther or not the special excise tax assessed

is valid. 9. Johannes Schuback and Sons vs. Court of Appeals

RULING: NO. An irrevocable letter of credit Facts:

granted by a bank, which authorizes a creditor in a Sometime in 1981, PHILIPPINE SJ INDUSTRIAL
foreign country to draw upon a debtor of another and TRADING established contact with plaintiff 3 through
to negotiate the draft through the agent or the Philippine Consulate General in Hamburg, West
correspondent bank or any bank in the country of the Germany, because he wanted to purchase MAN bus
creditor, is a consummated contract, when the agent spare parts from Germany.
or correspondent bank or any bank in the country of
the creditor pays or delivers to the latter the amount in Plaintiff immediately ordered the items needed by
foreign currency, as authorized by the bank in the defendant from Schuback Hamburg to enable
country of the debtor in compliance with the letter of defendant to avail of the old prices. Plaintiff reminded
credit granted by it. It is the date of the payment of the defendant to open the letter of credit to avoid delay in
amount in foreign currency to the creditor in his shipment and payment of interest . Defendant replied,
country by the agent or correspondent bank of the mentioning, among others, the difficulty he was
bank in the country of the debtor that turns from encountering in securing: the required dollar
executory to executed or consummated contract. It is allocations and applying for the letter of credit,
not the date of payment by the debtor to the bank in procuring a loan and looking for a partner-financier,
his country of the amount of foreign exchange sold and of finding ways 'to proceed with our orders.
that makes the contract executed or consummated, Defendant replied that he did not make any valid
because the bank may grant the debtor extension of Purchase Order and that there was no definite
time to pay such debt. The contention of Belman that contract between him and plaintiff . Demand letters
as there was a meeting of the minds and of contracting sent to defendant by plaintiff's counsel dated March
parties as to price and object of the contract upon the 22, 1983 and June 9, 1983 were to no avail (Exhs R and
approval or grant of an application for a letter of credit S).
for an amount payable in payable in foreign currency is
that the contract was a valid and executed contract of Consequently, petitioner filed a complaint for
sale of foreign exchange. True, there was such a recovery of actual or compensatory damages,
contract in the sense that one party who has unearned profits, interest, attorney's fees and costs
performed his part may compel the other to perform against private respondent. CA ruled that there was
his. Still until payment be made in foreign currency of no perfection of contract since there was no meeting
the amount applied for in the letter of credit and of the minds as to the price between the last week of
approved and granted by the bank, the same is not an December 1981 and the first week of January 1982
executed or consummated contract. The payment of and defendant failed to open an irrevocable letter of
the amount in foreign currency to the creditor by the credit.
bank or its agent or correspondent is necessary to
Issue: Whether or not a contract of sale was
consummate the contract. Hence the date of such
perfected despite of a failure to open a letter of
payment or delivery of the amount in foreign currency
credit
to the creditor determines whether such amount of
foreign currency is subject to the tax imposed by the Ruling:
Yes. On the part of the buyer, the situation reveals Keng Hua alleged that it purchased waste paper from
that private respondent failed to open an irrevocable the shipper in Hong Kong, Ho Kee Waste Paper, as
letter of credit without recourse in favor of Johannes manifested in a Letter of Credit issued by Equitable
Schuback of Hamburg, Germany. This omission, Banking Corporation. His contentions were: 1) Under
however. does not prevent the perfection of the the letter of credit, the remaining balance of the
contract between the parties, for the opening of the shipment was only ten (10) metric tons but the
letter of credit is not to be deemed a suspensive shipment Shipping Company was asking defendant to
condition. The facts herein do not show that accept was twenty (20) metric tons. 2) That Shipping
petitioner reserved title to the goods until private company had no cause of action against Keng Hua
respondent had opened a letter of credit. Petitioner, because the latter did not hire the former to carry the
in the course of its dealings with private respondent, merchandise; That the cause of action should be
did not incorporate any provision declaring their against the shipper which contracted the Shipping
contract of sale without effect until after the Company’s services and not against defendant.
fulfillment of the act of opening a letter of credit.
Issue: WON the contract of carriage in a bill of lading
The opening of a etter of credit in favor of a vendor is should be treated independently.
only a mode of payment. It is not among the Ruling: Yes. In a letter of credit, there are three
essential requirements of a contract of sale distinct and independent contracts: (1) the contract of
enumerated in Article 1305 and 1474 of the Civil sale between the buyer and the seller, (2) the contract
Code, the absence of any of which will prevent the of the buyer with the issuing bank, and (3) the letter of
perfection of the contract from taking place. credit proper in which the bank promises to pay the
To adopt the Court of Appeals' ruling that the seller pursuant to the terms and conditions stated
contract of sale was dependent on the opening of a therein. These three are to be maintained in perpetual
letter of credit would be untenable from a pragmatic separation. (From the book: The undertaking of the
point of view because private respondent would not bank to pay, accept, and pay drafts or negotiate
be able to avail of the old prices which were open to and/or fulfill any obligation under the credit is not
him only for a limited period of time. This explains subject to claims or defenses by the applicant
why private respondent immediately placed the resulting from his relationship with the issuing bank or
order with petitioner which, in turn promptly the beneficiary. In the same manner, the beneficiary
contacted its trading partner in Germany. As can, in no case, avail himself of the contractual
succinctly stated by petitioner, "it would have been relationships existing between the banks or between
impossible for respondent to avail of the said old the applicant and the issuing bank.)
prices since the perfection of the contract would The contract of carriage, as stipulated in the bill of
arise much later, or after the end of the year 1981, or lading in the present case, must be treated
when he finally opens the letter of credit. independently of the contract of sale between the
seller and the buyer, and the contract for the issuance
of a letter of credit between the buyer and the issuing
10. Keng Hua Paper Products vs. CA
bank. Any discrepancy between the amount of the
Facts: Sea-Land Service, a shipping company, is a goods described in the commercial invoice in the
foreign corporation licensed to do business in the contract of sale and the amount allowed in the letter
Philippines. Shipping Company received at its Hong of credit will not affect the validity and enforceability
Kong terminal a sealed container of “unsorted waste of the contract of carriage as embodied in the bill of
paper” for shipment to Keng Hua Paper Products, Co. lading. Remedy of alleged overshipment lies against
in Manila. A bill of lading to cover the shipment was the shipper and not against the carrier. The carrier
issued by Shipping Company. Notices of arrival were cannot be expected to go beyond the representation
transmitted to Keng Hua but the latter failed to of the shipper in the bill of lading and to verify their
discharge the shipment from the container during the accuracy vis-à-vis the contract of sale and the letter of
“free time” period or grace period. The said shipment credit. Carrier had no knowledge of the contents of
remained inside the Shipping Company’s container the container.
from the moment the free time period expired until
Nature of bill of lading: A bill of lading serves two
the time when the shipment was unloaded from the
functions. First, it is a receipt for the goods shipped.
container. During the said period, demurrage charges
Second, it is a contract by which three parties, namely,
accrued.
the shipper, the carrier, and the consignee undertake check the "apparent authenticity" of the letter of
specific responsibilities and assume stipulated credit.
obligations. A “bill of lading delivered and accepted
constitutes the contract of carriage even though not Bank of America has only been an advising, bank by
signed,” because the “(a)cceptance of a paper the provisions of the letter of credit itself. Its letter of
containing the terms of a proposed contract generally advice, its request for payment of advising fee, and
constitutes an acceptance of the contract and of all of the admission of Inter-Resin that it has paid the same.
its terms and conditions of which the acceptor has That Bank of America has asked Inter-Resin to submit
actual or constructive notice.” documents required by the letter of credit and
eventually has paid the proceeds thereof, did not
11. BANK OF AMERICA NT&SA VS CA obviously make it a confirming bank. The fact that the
FACTS: draft required by the letter of credit is to be drawn
Petitioner received an Irrevocable Letter of under the account of General Chemicals (buyer) only
Credit issued by Bank of Ayudhya for the account of means the same had to be presented to Bank of
General Chemicals, Ltd., of Thailand to cover the sale Ayudhya (issuing bank) for payment. It may be
of plastic ropes and "agricultural files," with the significant to recall that the letter of credit is an
petitioner as advising bank and private respondent engagement of the issuing bank, not the advising
Inter-Resin Industrial Corporation as beneficiary. bank, to pay the draft.
Petitioner, however, did not confirm the letter. As an advising or notifying bank, Bank of America did
Reynaldo Dueñas, bank employee in charge of letters not incur any obligation more than just notifying Inter-
of credit, explained that there was no need for Resin of the letter of credit issued in its favor, let alone
confirmation because the letter would not have been to confirm the letter of credit. The bare statement of
transmitted if it were not genuine. the bank employees on the authenticity of the letter
Inter-Resin sought 2 availments under the of credit certainly did not have the effect of novating
letter of credit by submitting to Petitioner the the letter of credit and Bank of America's letter of
necessary documents asked and issued in favor of advise, nor can it justify the conclusion that the bank
Inter-Resin a Cashier's Check for the first availment. must now assume total liability on the letter of credit.
Petitioner wrote Bank of Ayudhya advising the latter Indeed, Inter-Resin itself cannot claim to have been all
of the availment and sought the corresponding that free from fault. As the seller, the issuance of the
reimbursement. letter of credit should have obviously been a great
Upon receipt of a telex from the Bank of concern to it. It would have, in fact, been strange if it
Ayudhya declaring the letter of credit fraudulent, Bank did not, prior to the letter of credit, enter into a
of America stopped the processing of Inter-Resin's contract, or negotiated at the every least, with
documents and requested assistance in determining General Chemicals. In the ordinary course of business,
the authenticity of the letter of credit. Bank of the perfection of contract precedes the issuance of a
America kept Inter-Resin informed of the letter of credit.
developments. It was discovered that the vans
exported by Inter-Resin did not contain ropes waste 12. Bank of the Philippine Islands vs De Reny Fabrics
materials. Bank of America sued Inter-Resin for the
35 SCRA 256
recovery of the peso equivalent of the draft for partial
availment of the now disowned letter of credit. On the
Facts: De Reny Fabric Industries, Inc. (De Reny) applied
other hand, Inter-Resin claimed that not only was it
for, and was granted, four (4) irrevocable commercial
entitled to retain the amount given on the first
letters of credit with the Bank of Philippine Islands
shipment but also to the balance covering the second
(BPI). The letter of credits was used to cover the
shipment.
purchase of goods by De Reny from its American
supplier, the J.B. Distributing Company. As each
ISSUE: Whether or not Petitioner merely acted as an
shipment arrived in the Philippines, the De Reny Fabric
advising bank and not a confirming bank.
Industries, Inc. made partial payments to the Bank
RULING: YES
amounting to 12,000. Further payments were,
Bringing the letter of credit to the attention of the
however, subsequently discontinued by the
seller is the primordial obligation of an advising bank.
corporation when it became established, as a result of
As advising bank, Bank of America is bound only to
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 FACTS: The Spouses Mendoza obtained two loans
goods, and for this reason, the Bank caused them to from Philam Life totalling PhP 600,000. The loans
be deposited with a bonded warehouse paying (together with a 14% nominal interest rate) were to be
therefor the amount of P12,609.64 up to the filing of liquidated in equal amortizations over a period of 5
its complaint with the court. years. To secure payment, Philam Life required that
the said amortizations be guaranteed by an
Issue: Whether or not De Reny fabrics is liable under irrevocable standby letter of credit (L/C) of a
the letter of Credit commercial bank. As such, the Spouses Mendoza
contracted with Insular Bank for the issuance of two
Ruling: NO. Even without the stipulation recited irrevocable standby L/C in favor of Philam Life for the
above, the appellants cannot shift the burden of loss total amount of PhP 600,000. These L/Cs were, in turn,
to the Bank on account of the violation by their secured by a real estate mortgage on the property of
vendor of its prestation. It was uncontrovertibly the spouses in favor of Insular Bank.
proven by the Bank during the trial below that banks,
in providing financing in international business The Mendozas failed to pay Philam Life the
transactions such as those entered into by the amortizations that fell due on 11 June 1978, thus,
appellants, do not deal with the property to be Philam Life informed Insular Bank that it was declaring
exported or shipped to the importer, but deal only both loans "entirely due and demandable", and
with documents. The existence of a custom in demanded the payment of PhP492,996.30. Insular
international banking and financing circles negating Bank contested the propriety of calling in the entire
any duty on the part of a bank to verify whether what loan, and philam life desisted. However, the spouses
has been described in letters of credits or drafts or once again defaulted on their amortization, causing
shipping documents actually tallies with what was Philam Life to declare the remaining PhP 274,779.56
loaded aboard ship, having been positively proven as a entirely due and demandable again. By way of
fact, the appellants are bound by this established defense, Insular Bank claimed that, as a mere
usage. They were, after all, the ones who tapped the guarantor of the spouses, its remaining obligation
facilities afforded by the Bank in order to engage in under the two standby L/Cs were only PhP30,100.60.
international business. Later, the bank even claimed that it made an
overpayment to Philam Life, and demanded a refund
Under the terms of their Commercial Letter of Credit of the same.
Agreements with the Bank, the appellants agreed that
the Bank shall not be responsible for the “existence, Philam life filed a suit against the spouses and Insular
character, quality, quantity, conditions, packing, value, Bank for the recovery of the amount of the loan
or delivery of the property purporting to be allegedly still owed to them. The trial court ruled that
represented by documents; for any difference in Insular Bank, "as surety", was discharged of its liability
character, quality, quantity, condition, or value of the to the extent of the payment made by the spouses, as
property from that expressed in documents,” or for the principal debtors, to Philam Life.
“partial or incomplete shipment, or failure or omission
to ship any or all of the property referred to in the Upon appeal of Philam Life and the spouses, the
Credit,” as well as “for any deviation from instructions, appellate court reversed the lower court's decision,
delay, default or fraud by the shipper or anyone else and ruled that insular bank's liability was not reduced
in connection with the property the shippers or by virtue of the payments made by Mendoza.
vendors and ourselves [purchasers] or any of us.”
Having agreed to these terms, the appellants have, ISSUE:
therefore, no recourse but to comply with their
covenant. Whether the partial payments made by the Spouses
Mendoza would have the effect of reducing the
liability of the Insular Bank as guarantor or surety
under the terms of the standby L/C in question.
13. INSULAR BANK OF ASIA & AMERICA vs. IAC
G.R. No. L-74834 RULING:
November 17, 1988
NO, the partial payments made will not reduce the concession contract. Upon certification of the non-
liability of Insular Bank. performance of Maynilad obligation, the MWSS
moved to collect from Citicorp on the standby letters
Unequivocally, the subject standby Letters of Credit of credit issued. Maynilad filed for corporate
secure the payment of any obligation of the Mendozas rehabilitation. Judge Daway stayed the payment of the
to Philam Life including all interests, surcharges and letter of credit by Citicorp pursuant to Sec 6 (b) of Rule
expenses thereon but not to exceed P600,000.00. But 4 of the Interim Rules on Corporate Rehabilitation.
while they are a security arrangement, they are not Issue: Whether or not the payment of the standby of
converted thereby into contracts of guaranty. They letter of credit can be stayed by filing of a petition for
are primary obligations and not accessory contracts. rehabilitation
Being separate and independent agreements, the Held: No. The prohibition under Sec 6 (b) of Rule 4 of
payments made by the Mendozas cannot be added in the Interim Rules does not apply to the the standby
computing IBBA's liability under its own standby letter of credit issued by the bank as the former
letters of credit. Payments made by the Mendozas prohibition is on the enforcement of claims against
directly to Philam Life are in compliance with their guarantors or sureties of the debtors whose
own prestation under the loan agreements. And obligations are not solidary with the debtor.
although these payments could result in the reduction The participating bank’s obligation under the letter of
of the actual amount which could ultimately be credit are solidary with respondent Maynilad in that it
collected from IBAA, the latter's separate undertaking is a primary, direct, definite and an absolute
under its L/Cs remains. undertaking to pay and is not conditioned on the prior
exhaustion of the debtors assets. These are the same
The amount of P222,000.00 as found by the trial characteristics of a surety or solidary obligor. And
court, therefore, considered as "any obligation of the being solidary, the claims against them can be pursued
accountee" under the L/Cs will still have to be paid by separately from and independently of the
Insular Bank under the explicit terms thereof, which rehabilitation case.
the bank had itself supplied. Letters of credit are Issuing banks under the letters of credit are not
strictly construed to the end that the rights of those equivalent to guarantors. The concept of guarantee
directly parties to them may be preserved and their vis-à-vis the concept of an irrevocable letter of credit
interest safeguarded. Like any other writing, it will be are inconsistent with each other. The guarantee
construed most strongly against the writer and so as theory destroys the independence of the bank’s
to be reasonable and consistent with honest responsibility from the contract upon which it was
intentions 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
14. MWSS vs. Hon Daway, 432 SCRA 559 (2004) only upon the default of the person primarily liable.
Letters of credit On the other hand, in an irrevocable letter of credit,
Facts: Maynilad obtained a 20-year concession to the bank undertakes a primary obligation. We have
manage, repair, refurbish, and upgrade existing also defined a letter of credit as an engagement by a
Metropolitan Waterworks and Sewerage System bank or other person made at the request of a
(MWSS) water delivery and sewerage services in customer that the issuer shall honor drafts or other
Metro Manila’s west zone. Maynilad, under the demands of payment upon compliance with the
concession agreement undertook to pay concession conditions specified in the credit.
fees and its foreign loans. To secure its obligations, A Standby Letter of Credit is not a guaranty because
Maynilad was required under Section 6.9 of the under a Standby Letter of Credit, the bank undertakes
concession contract to put up a bond, bank guarantee a primary obligation. On the other hand, a guarantor
or other security acceptable to MWSS. Pursuant to undertakes a collateral obligation which arises only
this requirement, Maynilad arranged on for a three- upon the debtor’s default. A Standby Letter of Credit
year facility with a number of foreign banks led by is a primary obligation and not an accessory contract.
Citicorp Intl for the issuance of an irrevocable standby
letter of credit (SLC) in the amount of $ 120 million in 15. Philippine Virginia Tobacco Administration v Judge
favor of MWSS for the full and prompt payment of Delos Santos G.R. No. L-27829 August 19, 1988
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
Doctrine: An irrevocable letter of credit cannot, 16. LBP vs. Monet's Export and Manufacuring
during its lifetime, be cancelled or modified without Corporation
the express permission of the beneficiary.
Facts: The Philippine Virginia Tobacco Administration Facts: Land Bank of the Philippines (Land Bank), and
(PVTA) and Timoteo Sevilla, Gen. manager of Monet’s Export and Manufacturing Corporation
Philippine Associated Resources (PAR), entered into a (Monet) executed an Export Packing Credit Line
contract for the importation of Virginia leaf tobacco Agreement under which Monet was given a credit line
and a counterpart exportation of tobacco and of in the amount of P250,000.00, secured by the
farmer’s and tobacco at P3.00 a kilo. In accordance proceeds of its export letters of credit, the continuing
with their contract Sevilla purchased from PVZTA and guaranty of the spouses Vicente V. Tagle, Sr. and Ma.
exported tobacco, paying the PVTA and leaving some Consuelo G. Tagle. The credit line agreement was
balance. Before respondent Sevilla could import the renewed and amended several times until it was
counterpart blending Virginia tobacco, Republic Act increased to P5,000,000.00. Subsequently, Monet
No. 4155 was passed and took effect on June 20, 1 appointed Land Bank as an assignor to demand,
964, authorizing the PVTA to grant import privileges at collect and receive the proceeds of the export letters
the ratio of 4 to 1 instead of 9 to 1 and to dispose of of credit of their clients at a oan value of 80%.
all its tobacco stock at the best price available. One of Monet’s, Wishbone Trading Company of
Hong Kong (Wishbone), drew the amount of
Because of the prevailing export or world market price US$38,768.40 on the letter of credit. However,
under which Sevilla will be exporting at a loss, the Landbank was not able to collect from Wishbone.
agreement was further amended to require Sevilla
Monet alleged as a consequence that they are not
would open an irrevocable letter of credit with the
liable for the letter of credit as Land Bank failed and
Prudential Bank and Trust Co. (Prudential) in favor of
refused to collect the receivables on their export letter
the PVTA to secure the payment of said balance,
of credit against Wishbone.
drawable upon the release from the Bureau of
Customs of the imported Virginia blending tobacco. Issue: Whether or not the failure of Landbank to
While Sevilla was trying to negotiate the reduction of collect from Wishbone Trading Company of Hong
the procurement cost of PVTA tobacco already Kong absolves Monet from liability.
exported which attempt was denied by PVTA and also
by the Office of the President. PVTA attempted to Held: No. Monet is still liable notwithstanding
collect from the letter of Credit with Landbank’s failure to collect. Land Bank that, as the
Prudential. Sevilla filed an injunction for the release of issuing bank in the transaction involving an import
funds with Prudential in the sala of Judge Delos letter of credit, is independent from its function as an
Santos. Judge Delos Santos issued the injunction agent of the spouses. As the issuer of the letter of
order and in a subsequent petition, ordered the funds credit, it only deals in documents and it is not involved
of the letter of credit released to Sevilla. in the contract between the parties. The relationship
between the beneficiary and the issuer of a letter of
credit is not strictly contractual, because both privity
Issue: WON Respondent Judge acted with grave and a meeting of the minds are lacking. Thus, upon
abuse of discretion in releasing the funds to the receipt by Land Bank of the documents of title which
applicant of the letter of credit. conform with what the letter of credit requires, it is
duty bound to pay the seller, as it did in this case.
Held: Yes. Judge Delos Santos violated the
The engagement of the issuing bank is to pay the
irrevocability of the letter of credit issued by
seller or beneficiary of the credit once the draft and
respondent Bank in favor of petitioner. An irrevocable
the required documents are presented to it. The so-
letter of credit cannot, during its lifetime, be
called “independence principle” assures the seller or
cancelled or modified Without the express
the beneficiary of prompt payment independent of
permission of the beneficiary. Consequently, if the
any breach of the main contract and precludes the
finding the trial on the merits is that respondent
issuing bank from determining whether the main
Sevilla has ailieged unpaid balance due the petitioner,
contract is actually accomplished or not.
such unpaid obligation would be unsecured.
However, Monet’s liabilities are mitigated as the
bank failed to exercised the required diligence in its
collection. In transactions involving its export letters of purchased through the bank financing, remain the
credit, such as the Wishbone account, Land Bank importer’s property and he holds it at his own risk.
should have exercised the requisite degree of The trust receipt arrangement does not convert the
diligence in collecting the amount due to the former. bank into an investor; it remains a lender and creditor.
A trust receipt, is a security agreement, pursuant to
17. Abad vs. Court of AppealsG.R. No. 42735. January which a bank acquires a ‘security interest’ in the
22, 1990 goods. It secures an indebtedness and there can be
On October 31, 1963, TOMCO, Inc., now known as no such thing as security interest that secures no
Southeast Timber Co. (Phils.), Inc., applied for, and obligation.” The marginal deposit requirement is a
was granted by the Philippine Commercial and Central Bank measure to cut off excess currency
Industrial Bank (PCIB) a domestic letter of credit for liquidity which would create inflationary pressure. It is
P80,000 in favor of its supplier, Oregon Industries, a collateral security given by the debtor, and is
Inc., to pay for one Skagit Yarder. PCIB paid to Oregon supposed to be returned to him upon his compliance
Industries the cost of the machinery against a bill of with his secured obligation. Consequently, the bank
exchange for P80,000 with date of maturity on pays no interest on the marginal deposit, unlike an
January 4, 1964. After making the required marginal ordinary bank deposit which earns interest in the
deposit of P28,000 on November 5, 1963, TOMCO, Inc. bank. As a matter of fact, the marginal deposit
signed and delivered to the bank a trust receipt requirement for letters of credit has been
acknowledging receipt of the merchandise in trust for discontinued, except in those cases where the
the bank, with the obligation to hold the same in applicant for a letter of credit is not known to the
storage as property of PCIB, with a right to sell the bank or does not maintain a good credit standing
same for cash provided that the entire proceeds therein. It is not farfetched to assume that the bank
thereof are turned over to the bank, to be applied used TOMCO’s marginal deposit to partially fund the
against acceptance and any other indebtedness of P80,000 letter of credit it issued to TOMCO, hence, the
TOMCO. In consideration of the release to TOMCO, interests and other charges on said letter of credit
Inc. by PCIB of the machinery covered by the trust should be levied only on the balance of P52,000 which
receipt, petitioner Ramon Abad signed an undertaking was the portion that was actually funded or loaned by
whereby he promised to pay the obligation jointly and the bank from its own funds. Requiring the importer
severally with TOMCO, Inc. Except for TOMCO’s to pay interest on the entire letter of credit without
marginal deposit in the bank, no payment has been deducting first his marginal deposit, would be a clear
made to PCIB by either TOMCO, Inc. or Abad. case of unjust enrichment by the bank.
Consequently, the bank sued petitioners. PCIB
presented in evidence a “Statement of Draft Drawn”
showing that TOMCO was obligated to it in the total 18. RCBC V Alfa RTW Manufacturing Corp. 368 SCRA
sum of P125,766.13 as of August 26, 1970. TOMCO did 611 (2001)
not deny its liability to PCIB under the letter of credit Facts: Alfa RTW Manufacturing Corporation
but it alleged that inasmuch as it made a marginal (Alfa RTW), on separate instances, was granted by the
deposit of P28,000, this amount should have been plaintiff Rizal Commercial Banking Corporation (RCBC)
deducted from its principal obligation, leaving a four Letters of Credit to facilitate its purchase of raw
balance of P52,000 only, on which the bank should materials for its garments business. Corresponding
have computed the interest, bank charges, and bills of exchange of various amounts were drawn, and
attorney’s fees. charged to the account of Alfa RTW. Alfa, in turn,
Issue: Whether or not the marginal deposit be had executed four Trust Receipts stipulating that it
deducted against the LOC had received in trust for the RCBC the goods and
Held: Yes. A trust receipt is considered as a security merchandise described therein, and which were
transaction intended to aid in financing importers and purchased with the drawings upon the letters of
retail dealers who do not have sufficient funds or credit.
resources to finance the importation or purchase of When the obligations upon the said
merchandise, and who may not be able to acquire commercial documents became due, the plaintiff
credit except through utilization, as collateral of the demanded payment of the defendants’ undertakings,
merchandise imported or purchased. The bank does citing two Comprehensive Surety Agreements which
not become the real owner of the goods. It is merely were signed by Alfa Integrated Textile Mills and its
the holder of a security title for the advances it had officers to guarantee jointly and severally, punctual
made to the importer. The goods the importer had
payment at maturity to RCBC, together with any and Decision, in accordance with the formula indicated
all expenses of collection, etc., above.
RCBC filed against Alfa RTW a complaint for 19. Bank of Commerce (BOC) v. Teresita S. Serrano
sum of money. It was awarded P18,961,372.43, with [451 SCRA 484, Feb. 16, 2005]
legal interest until fully paid. The proceeds from the
sale of defendant Alfa’s ready to wear apparel, in the FACTS: Serrano is the Gen. Mgr. and Treasurer of Via
sum of P73,133.70, should be deducted from the Moda International, Inc., a domestic business entity
principal obligation of P18,961,372.43. However, upon primarily engaged in the import and export of textile
appeal, the CA modified the RTC decision by materials and fabrics. Via Moda(VM), represented by
decreasing the award from P18,961.372.43 to Serrano, obtained an export packing loan from
P3,060,406.25. petitioner in the amount of $50k which was secured
Issue: What is the agreement entered into by a Deed of Assignment over Irrevocable
by the parties? Transferable Letter of Credit(LOC). Serrano executed
Ruling: The case now before us involves an a promissory note in favor of BOC w/ a date of
obligation arising from a letter of credit-trust receipt maturity on July 14, 1994. VM then opened a deposit
transaction. Under this arrangement, a bank extends account for the proceeds of the said loan. BOC issued
to a borrower a loan covered by the letter of credit, an Irrevocable LOC in the amount of $56.7k for the
with the trust receipt as security of the loan. A trust purchase and importation of fabric and textile
receipt is "a security transaction intended to aid in products from Tiger Ear Fabric Co. Ltd. of Taiwan.
financing importers and retail dealers who do not Serrano, in representation of VM secured the release
have sufficient funds or resources to finance the of the goods covered with a trust receipt. Under the
importation or purchase of merchandise, and who terms of the trust receipt, VM agreed to hold the
may not be able to acquire credit except thru goods in trust for petitioner as the latter’s property
utilization, as collateral, of the merchandise imported and to sell the same for the latter’s account. In case
or purchased." of sale, the proceeds are to be remitted to the bank
In contracts contained in trust receipts, the as soon as it is received, but not later than the
contracting parties may establish agreements, terms maturity date. The goods covered by the trust receipt
and conditions they may deem advisable, provided were shipped by Via Moda to its consignee in New
they are not contrary to law, morals or public order. In Jersey, USA, who sent an Export LOC issued by the
the case at bar, there are specific amounts of interest, Bank of New York, in favor of BOC. The Regional
service charges and penalties agreed upon by the Operations Officer of BOC signed the export
parties. declarations to show consent to the shipment. The
The Court of Appeals awarded only the sum of total value of the entrusted goods which were shipped
P3,060,406.25 as it was the amount prayed for in the per export declaration was $81.9k. The proceeds of
complaint. However, sixteen years have already the entrusted goods sold were not credited to the
lapsed from the filing of the complaint up to the time trust receipt but, were applied by the bank to the
the CA decided the case. The computed interest in principal, penalties and interest of the export packing
1982 would no longer be true in 1998. What the loan. The excess ₱472k was applied to the trust
Appellate Court should have done then was to receipt, leaving a balance of ₱1.4m as of Nov. 15,
compute the total amount due in accordance with the 1994.
rules of thumb laid down by this Court in Eastern On Nov. 16, 1994, petitioner sent a demand letter to
Shipping Lines, Inc., the resulting formula of which is VM to pay the said amount plus interest and penalty
as follows: charges, or to return the goods covered by the Trust
TOTAL AMOUNT DUE = principal + interest + Receipt w/in 5 days from receipt. The demand was not
service charge + penalty + interest on interest heeded. As of Dec. 15, 1998, the outstanding balance
Attorney’s fees is 10% of the total amount of VM was ₱4.7m. RTC charged Serrano with estafa
computed as of finality of judgment under Article 315 (b) of the RPC, CA reversed. Hence
Total amount due as of the date of finality of this petition.
judgment will earn an interest of 12% per
annum until fully paid. ISSUE: WON Serrano is jointly and severally liable w/
Thus, the amount payable should be Via Moda under the guarantee clause of the letters of
computed by the trial court, upon finality of this credit, secured by a trust receipt.
HELD: No. A letter of credit is a separate document
from a trust receipt. While the trust receipt may have
been executed as a security on the letter of credit, still
the two documents involve different undertakings and
obligations. A letter of credit is an engagement by a
bank or other person made at the request of a
customer that the issuer will honor drafts or other
demands for payment upon compliance with the
conditions specified in the credit. Through a 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.
By contrast, a trust receipt transaction is one where
the entruster, who holds an absolute title or security
interests over certain goods, documents or
instruments, released the same to the entrustee, who
executes a trust receipt binding himself to hold the
goods, documents or instruments in trust for the
entruster and to sell or otherwise dispose of the
goods, documents and instruments with the obligation
to turn over to the entruster the proceeds thereof to
the extent of the amount owing to the entruster, or as
appears in the trust receipt, or return the goods,
documents or instruments themselves if they are
unsold, or not otherwise disposed of, in accordance
with the terms and conditions specified in the trust
receipt.
There was no misappropriation or conversion by the
respondent of the proceeds of the sale in the goods,
subject of the trust receipt since the proceeds were
actually received by petitioner but the latter applied
the same to Via Moda’s other obligations under the
export packing loan. It further stated that such
application of payment to another obligation was
done by petitioner on its own and should not create a
criminal liability on the part of respondent who did
not take part nor had any knowledge thereof. It is on
this premise that the respondent was acquitted of the
crime charged.
[Sorry kung mahaba, but yun important kasi sa case na
ito is the difference between an LOC and a trust
receipt.]